<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 1, 1998,
REGISTRATION NO. 333-_____.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DIGITAL MICROWAVE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 3663 77-0016028
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
170 ROSE ORCHARD WAY
SAN JOSE, CALIFORNIA 95134
(408) 943-0777
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
CHARLES D. KISSNER
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
DIGITAL MICROWAVE CORPORATION
170 ROSE ORCHARD WAY
SAN JOSE, CALIFORNIA 95134
(408) 943-0777
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
COPIES TO:
BRUCE ALAN MANN, ESQ. BENJAMIN F. STEPHENS, ESQ.
MATTHEW S. CROWLEY, ESQ. MARION V. LARSON, ESQ.
VALERIE A. VILLANUEVA, ESQ. ALEJANDRO C. TORRES, ESQ.
Morrison & Foerster LLP Graham & James LLP
425 Market Street 1001 Fourth Avenue Plaza, Suite 4500
San Francisco, California 94105-2482 Seattle, Washington 98154-1065
(415) 268-7000 (206) 624-3600
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: At the effective time of the merger of the wholly owned subsidiary of
the Registrant with Innova Corporation, which shall occur as soon as practicable
after the effective date of this Registration Statement and the satisfaction of
all conditions to the closing of such merger.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: / / _______________________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act,
check the following box and list the Securities Act registration statement
number of the earlier registration statement for the same offering:
/ / ______________________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) REGISTRATION FEE (3)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 18,513,797
$0.01 par value shares $3.10 $57,392,771 $16,930.87
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the number of shares of the Common Stock of the Registrant which
may be issued to former shareholders of Innova Corporation ("Innova")
pursuant to the Merger described herein giving effect to the exercise of
outstanding warrants or other rights to purchase Innova Common Stock and
outstanding and exercisable options and shares expected to be issued
pursuant to the Innova 1990 Employee Stock Option Plan and the Innova
Director Stock Option Plan.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1) and Rule 457(c), based on the average of the
high and low sale prices of Innova Common Stock on the Nasdaq National
Market on August 28, 1998 of $3.25 and the Exchange Ratio of 1.05 shares
of the Common Stock of the Registrant for each share of Innova Common Stock
pursuant to the Merger described herein.
(3) $10,348.13 of the registration fee was previously paid pursuant to Section
14(g) of the Securities Exchange Act of 1934, as amended, in connection
with the filing of preliminary proxy materials on August 24, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
[DMC Logo/Letterhead]
September 8, 1998
TO THE STOCKHOLDERS OF
DIGITAL MICROWAVE CORPORATION:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Special Meeting") of Digital Microwave Corporation ("DMC") on October 7, 1998,
at 11:00 a.m., which will be held at DMC's executive offices located at 170 Rose
Orchard Way, San Jose, California.
The purpose of the Special Meeting is to consider and vote upon a proposal
to approve the Agreement and Plan of Reorganization and Merger dated as of July
22, 1998 (as the same may be amended, supplemented or modified, the "Merger
Agreement"), pursuant to which Innova Corporation, a Washington corporation
("Innova"), will become a wholly owned subsidiary of DMC.
Under the terms of the Merger Agreement, each outstanding share of the
common stock of Innova (the "Innova Common Stock") will be converted into the
right to receive 1.05 shares of common stock of DMC ("DMC Common Stock") and the
associated purchase rights under the DMC Rights Agreement as more fully
described in the enclosed Joint Proxy Statement/Prospectus. The Merger
Agreement also provides that options and warrants to purchase shares of Innova
Common Stock will, unless such options or warrants are exercised prior to the
effective date of the Merger, be assumed by DMC and converted into options or
warrants to purchase DMC Common Stock on substantially the same terms and
conditions as the Innova options, but adjusted to reflect the conversion ratio
in the Merger.
The DMC Board of Directors has received the opinion of its financial
advisor, CIBC Oppenheimer Corp., that as of the date of the Merger Agreement,
July 22, 1998, and based upon and subject to the factors and assumptions
described in such opinion, the exchange ratio is fair, from a financial point of
view, to DMC.
AFTER CAREFUL CONSIDERATION, DMC'S BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT. THE BOARD BELIEVES THAT THE TERMS OF THE MERGER
AGREEMENT ARE FAIR TO, AND IN THE BEST INTERESTS OF, DMC AND ITS STOCKHOLDERS,
AND UNANIMOUSLY RECOMMENDS THAT HOLDERS OF SHARES OF DMC COMMON STOCK VOTE FOR
APPROVAL OF THE ISSUANCE OF DMC COMMON STOCK PURSUANT TO THE MERGER AGREEMENT.
You do not need to attend the Special Meeting. Whether or not you plan to
attend, after reading the Joint Proxy Statement/Prospectus, please mark, date,
sign and return the enclosed proxy card in the accompanying reply envelope. If
you decide to attend the Special Meeting, please notify the Secretary of DMC if
you wish to vote in person and your proxy will not be voted.
Sincerely yours,
/s/ Charles D. Kissner
Charles D. Kissner
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
<PAGE>
DIGITAL MICROWAVE CORPORATION
170 Rose Orchard Way
San Jose, California 95134
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
- --------------------------------------------------------------------------------
The Special Meeting of Stockholders of Digital Microwave Corporation, a
Delaware corporation ("DMC"), will be held at DMC's executive offices located at
170 Rose Orchard Way, San Jose, California, on Wednesday, October 7, 1998, at
11:00 a.m., to:
1. Approve the issuance of shares of Common Stock of DMC ("DMC Common
Stock") pursuant to an Agreement and Plan of Reorganization and Merger, dated as
of July 22, 1998 (as the same may be amended, supplemented or modified, the
"Merger Agreement") by and among DMC, Iguana Merger Corp., a Washington
corporation and a wholly owned subsidiary of DMC ("Merger Sub"), and Innova
Corporation, a Washington corporation ("Innova"). The Merger is more completely
described in the accompanying Joint Proxy Statement/Prospectus, and a copy of
the Merger Agreement is attached as Appendix A thereto; and
2. Transact any other business which may properly come before the meeting
and any adjournments or postponements thereof.
The foregoing items of business are more fully described in the Joint Proxy
Statement/Prospectus that accompanies this Notice.
Stockholders of record at the close of business on August 28, 1998, will be
entitled to notice of and to vote at the Special Meeting and at any continuation
or adjournment thereof. The affirmative vote of the holders of a majority of
the shares of DMC Common Stock present, or represented, and entitled to vote at
the DMC Special Meeting is necessary for approval of the proposed issuance of
DMC Common Stock in connection with the Merger.
All stockholders are cordially invited and encouraged to attend the Special
Meeting. In any event, to ensure your representation at the Special Meeting,
please carefully read the accompanying Joint Proxy Statement/Prospectus which
describes the matters to be voted on at the Special Meeting and sign, date and
return the enclosed proxy card in the reply envelope provided. Should you
receive more than one proxy because your shares are registered in different
names and addresses, each proxy should be returned to assure that all your
shares will be voted. You retain the option to revoke your proxy at any time;
if you attend the Special Meeting and vote by ballot, your proxy will be revoked
automatically and only your vote at the Special Meeting will be counted. The
prompt return of your proxy card will assist us in preparing for the Special
Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Charles D. Kissner
Charles D. Kissner
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
San Jose, California
September 8, 1998
<PAGE>
[Innova Logo/Letterhead]
September 8, 1998
Dear Shareholder:
A Special Meeting of Shareholders (the "Special Meeting") of Innova
Corporation ("Innova") will be held on October 7, 1998 at 11:00 a.m., at the
corporate offices of Innova, located at 3325 South 116th Street, Seattle,
Washington.
At this important meeting, the holders of common stock of Innova will be
asked to approve an Agreement and Plan of Reorganization and Merger, dated as
of July 22, 1998 (as the same may be amended, supplemented or modified, the
"Merger Agreement"), by and among Digital Microwave Corporation, a Delaware
corporation ("DMC"), Iguana Merger Corp., a Washington corporation and a
wholly owned subsidiary of DMC ("Merger Sub") and Innova. Pursuant to the
Merger Agreement, Merger Sub will be merged with and into Innova, with Innova
as the surviving company, whereby Innova will become a wholly owned
subsidiary of DMC (the "Merger").
Pursuant to the Merger Agreement each share of the common stock of Innova
(the "Innova Common Stock"), outstanding prior to the time the Merger becomes
effective, will be converted into the right to receive 1.05 shares of the common
stock of DMC (the "DMC Common Stock") and the associated purchase rights under
the DMC Rights Agreement. The Merger Agreement also provides that options and
warrants to purchase shares of Innova Common Stock will, unless such options or
warrants are exercised prior to the effective date of the Merger, be assumed by
DMC and converted into options or warrants to purchase DMC Common Stock on
substantially the same terms and conditions as the Innova options and warrants,
but adjusted to reflect the conversion ratio in the Merger.
THE INNOVA BOARD OF DIRECTORS HAS RECEIVED THE OPINION OF ITS FINANCIAL
ADVISOR, HAMBRECHT & QUIST LLC, THAT AS OF THE DATE OF THE MERGER AGREEMENT,
JULY 22, 1998, AND BASED ON THE FACTORS AND ASSUMPTIONS DESCRIBED IN SUCH
OPINION, THE CONSIDERATION TO BE RECEIVED BY THE HOLDERS OF INNOVA COMMON STOCK
IS FAIR TO SUCH HOLDERS FROM A FINANCIAL POINT OF VIEW.
Approval of the Merger Agreement by the holders of a majority of the
outstanding shares of Innova Common Stock is a condition to consummation of the
Merger. The consummation of the transaction will happen only after certain
regulatory approvals are received and other conditions are satisfied or waived.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AS
BEING FAIR TO, AND IN THE BEST INTERESTS OF, INNOVA AND ITS SHAREHOLDERS AND
RECOMMENDS THAT YOU VOTE "FOR" APPROVAL AND IMPLEMENTATION OF THE MERGER
AGREEMENT. In making this recommendation, the Board of Directors has considered
numerous factors including the consideration offered by DMC.
Your vote is important regardless of the number of shares you own. Even if
you plan to attend the Special Meeting, you are urged to COMPLETE, SIGN, DATE
AND MAIL THE ENCLOSED PROXY CARD(S) at your earliest convenience. Your shares
will be voted in accordance with the instructions you give in your proxy. If no
instructions are indicated, your shares will be voted in favor of the Merger.
You retain the option to revoke your proxy at any time, or to vote your shares
personally if you attend the Special Meeting in person. Voting in person will
constitute a revocation of any prior proxy. If you do not return the proxy
card(s) and do not vote at the Special Meeting it will have the same effect as
if you voted against the Merger.
The accompanying Joint Proxy Statement/Prospectus sets forth the voting
rights of holders of Innova Common Stock with respect to the Merger.
Shareholders are urged to review carefully the attached Joint Proxy
Statement/Prospectus, which contains a detailed description of the Merger
Agreement, a copy of which is attached as Appendix A thereto, the terms and
conditions thereof and the transactions contemplated thereby. Holders of Innova
Common Stock may exercise dissenters' rights by complying with the procedural
requirements of the
<PAGE>
Washington Business Corporation Act, including making a written demand for
payment before the date of the Special Meeting and not voting in favor of the
Merger Agreement.
Promptly after the Merger, a letter of transmittal will be mailed to each
holder of record of Innova Common Stock. HOLDERS OF INNOVA COMMON STOCK SHOULD
NOT SEND IN THE CERTIFICATES REPRESENTING THEIR SHARES UNTIL THEY RECEIVE A
TRANSMITTAL FORM, WHICH WILL INCLUDE INSTRUCTIONS AS TO THE PROCEDURES TO BE
FOLLOWED IN SENDING IN SUCH CERTIFICATES.
Sincerely,
/s/ Jean-Francois Grenon
Jean-Francois Grenon
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Seattle, Washington
September 8, 1998
<PAGE>
INNOVA CORPORATION
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 21, 1998
To the Shareholders of Innova Corporation:
NOTICE IS HEREBY GIVEN that a Special Meeting of the Shareholders (the
"Special Meeting") of Innova Corporation ("Innova") will be held at the
corporate offices of Innova, located at 3325 South 116th Street, Seattle,
Washington, on October 7, 1998 at 11:00 a.m., for the following purposes, all
of which are more fully described in the accompanying Joint Proxy
Statement/Prospectus:
1. To approve and adopt the Agreement and Plan of Reorganization and
Merger dated as of July 22, 1998, (as the same may be amended,
supplemented or modified, the "Merger Agreement"), by and among
Digital Microwave Corporation, a Delaware corporation ("DMC"), Iguana
Merger Corp., a Washington corporation and a wholly owned subsidiary
of DMC ("Merger Sub"), and Innova, pursuant to which Merger Sub will
be merged with and into Innova, with Innova as the surviving company
(the "Merger"). In connection with the Merger, each outstanding share
of the common stock of Innova (the "Innova Common Stock") will be
converted into the right to receive 1.05 shares of common stock, $0.01
par value, of DMC (the "DMC Common Stock"), and the associated
purchase rights under the DMC Rights Agreement, as described in the
accompanying Joint Proxy Statement/Prospectus and in the Merger
Agreement, a copy of which is attached thereto as Appendix A. In
addition, each option or warrant to purchase shares of Innova Common
Stock will, unless such options or warrants are exercised prior to the
effective date of the Merger, be assumed by DMC and converted into an
option or warrant to purchase DMC Common Stock on substantially the
same terms and conditions as the assumed options or warrants, but
adjusted to reflect the exchange ratio in the Merger.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on August 14, 1998
as the record date for the determination of the holders of Innova Common Stock
entitled to notice of, and to vote at, the Special Meeting. THE MERGER
AGREEMENT AND OTHER MATTERS RELATED THERETO ARE MORE FULLY DESCRIBED IN THE
ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS AND THE APPENDICES THERETO, WHICH
FORM A PART OF THIS NOTICE.
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. TO
ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, HOWEVER, YOU ARE URGED TO
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE. A
POSTAGE-PAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. ANY SHAREHOLDER ATTENDING
THE SPECIAL MEETING MAY VOTE IN PERSON EVEN IF THAT SHAREHOLDER HAS RETURNED A
PROXY.
By Order of the Board of Directors,
/s/ John M. Hemingway
John M. Hemingway
SECRETARY
Seattle, Washington
September 8, 1998
<PAGE>
----------------------------------------
DIGITAL MICROWAVE CORPORATION
and
INNOVA CORPORATION
JOINT PROXY STATEMENT
----------------------------------------
DIGITAL MICROWAVE CORPORATION
PROSPECTUS
----------------------------------------
This Joint Proxy Statement/Prospectus ("Proxy Statement/Prospectus") is
being furnished to holders of common stock, $0.01 par value per share (the "DMC
Common Stock"), of Digital Microwave Corporation, a Delaware corporation
("DMC"), in connection with the solicitation of proxies by the Board of
Directors of DMC for use at the Special Meeting of Stockholders of DMC to be
held at the corporate offices of DMC, located at 170 Rose Orchard Way, San Jose,
California, on October 7, 1998 at 11:00 a.m., and at any and all adjournments
or postponements thereof (the "DMC Special Meeting").
This Proxy Statement/Prospectus also is being furnished to holders of
common stock, no par value per share (the "Innova Common Stock"), of Innova
Corporation, a Washington corporation ("Innova"), in connection with the
solicitation of proxies by the Board of Directors of Innova for use at the
Special Meeting of Shareholders of Innova to be held at the corporate offices of
Innova, located at 3325 South 116th Street, Seattle, Washington, on October 7,
1998 at 11:00 a.m., and at any and all adjournments or postponements thereof
(the "Innova Special Meeting").
This Proxy Statement/Prospectus relates to the Agreement and Plan of
Reorganization and Merger, dated as of July 22, 1998 (as the same may be
amended, supplemented or modified, the "Merger Agreement"), by and between DMC,
Iguana Merger Corp., a Washington corporation and a wholly owned subsidiary of
DMC ("Merger Sub"), and Innova. Pursuant to the Merger Agreement, Merger Sub
will be merged with and into Innova, with Innova as the surviving company (the
"Surviving Company") and a wholly owned subsidiary of DMC (the "Merger"). A
copy of the Merger Agreement is attached as Appendix A to this Proxy
Statement/Prospectus. See "The Merger" and "The Merger Agreement."
In the Merger, each outstanding share of Innova Common Stock will be
converted into the right to receive 1.05 shares of fully paid and nonassessable
DMC Common Stock and the associated purchase rights under the DMC Rights
Agreement, and cash in lieu of any fractional shares, subject to dissenters'
rights under Washington law. In addition, each option or warrant to purchase
shares of Innova Common Stock will, unless such options or warrants are
exercised prior to the effective date of the Merger, be assumed by DMC and
converted into an option or warrant to purchase DMC Common Stock on
substantially the same terms and conditions as the assumed options or warrants,
but adjusted to reflect the exchange ratio in the Merger.
DMC has filed a Registration Statement on Form S-4 (the "Registration
Statement") under the Securities Act of 1933, as amended, with the Securities
and Exchange Commission (the "Commission") covering the shares of DMC Common
Stock to be issued in connection with the Merger. This Proxy
Statement/Prospectus also constitutes the prospectus of DMC with respect to such
shares and has been filed as part of the Registration Statement. Consummation
of the Merger is subject to various conditions, including approval at the Innova
Special Meeting of the Merger Agreement by the holders of a majority of the
outstanding shares of Innova Common Stock entitled to vote thereon and approval
of the proposed issuance of shares of DMC Common Stock in connection with the
Merger by a majority of the total votes cast on such proposal at the DMC Special
Meeting.
DMC Common Stock is listed and traded on the Nasdaq National Market
("Nasdaq") under the Symbol "DMIC." On August 28, 1998, the closing sale price
for DMC Common Stock as reported on Nasdaq was $3.50 per share.
All information contained in this Proxy Statement/Prospectus with respect
to DMC has been provided by DMC. All information contained in this Proxy
Statement/Prospectus with respect to Innova has been provided by Innova. This
Proxy Statement/Prospectus and the accompanying forms of proxy are first being
mailed to stockholders of DMC and shareholders of Innova on or about September
8, 1998. Any stockholder of DMC or shareholder of Innova who has given a proxy
may revoke it at any time prior to its exercise. See "The DMC Special Meeting
- -- Record Date; Voting Rights; Proxies" and "The Innova Special Meeting --
Record Date; Voting Rights; Proxies."
SEE "RISK FACTORS" AT PAGE 11 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY BOTH DMC STOCKHOLDERS AND INNOVA SHAREHOLDERS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS SEPTEMBER 8, 1998.
<PAGE>
AVAILABLE INFORMATION
Under the rules and regulations of the Securities and Exchange Commission
(the "Commission"), the solicitation of proxies from the stockholders of DMC and
the shareholders of Innova to approve the Merger Agreement and the consummation
of the Merger constitutes an offering of the DMC Common Stock to be issued in
connection with the Merger. Accordingly, DMC has filed with the Commission the
Registration Statement under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to such offering. This Proxy
Statement/Prospectus constitutes the prospectus of DMC that is filed as part of
the Registration Statement. Other parts of the Registration Statement are
omitted from this Proxy Statement/Prospectus in accordance with the rules and
regulations of the Commission. For further information, reference is hereby
made to the Registration Statement. Statements made in this Proxy
Statement/Prospectus as to the contents of any contract, agreement or other
document are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement or
incorporated by reference herein, reference is made to the exhibit for a more
complete description of the matters involved, and each such statement shall be
deemed qualified in its entirety by such reference. The Registration Statement,
including exhibits filed as a part thereof, is available at the Commission for
inspection and copying as set forth below.
DMC and Innova are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information filed may
be inspected and copied at the Commission's Public Reference Room located at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, and
at the Commission's Regional Offices at Seven World Trade Center, Suite 1300,
New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials also can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The public may obtain information
on the operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330. The Commission maintains a web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding DMC and Innova. DMC Common Stock and Innova Common Stock are quoted on
the Nasdaq National Market. Reports and other information concerning DMC and
Innova may be inspected at the offices of the Nasdaq Stock Market at 1735 K
Street, N.W., Washington, D.C. 20006.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS
RELATING TO DMC THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. DMC WILL
PROVIDE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS
DELIVERED, INCLUDING ANY BENEFICIAL OWNER OF DMC COMMON STOCK OR INNOVA COMMON
STOCK UPON WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF ANY OR ALL SUCH
DOCUMENTS RELATING TO DMC (OTHER THAN EXHIBITS TO SUCH DOCUMENTS THAT ARE NOT
SPECIFICALLY INCORPORATED HEREIN BY REFERENCE). WRITTEN OR ORAL REQUESTS SHOULD
BE DIRECTED TO CARL A. THOMSEN, VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND
SECRETARY, AT THE CORPORATE HEADQUARTERS OF DMC, 170 ROSE ORCHARD WAY, SAN JOSE,
CALIFORNIA 95134 (TELEPHONE NUMBER (408) 943-0777). IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY REQUESTS SHOULD BE MADE BY OCTOBER 1, 1998.
COPIES OF DOCUMENTS SO REQUESTED WILL BE SENT BY FIRST CLASS MAIL, POSTAGE PAID,
WITHIN ONE BUSINESS DAY OF THE RECEIPT OF SUCH REQUEST.
i
<PAGE>
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents heretofore filed by DMC with the Commission
pursuant to the Exchange Act are hereby incorporated by reference into this
Proxy Statement/Prospectus:
1. DMC's Annual Report on Form 10-K and on Form 10-K/A for the year ended
March 31, 1998;
2. DMC's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998;
3. DMC's Current Report on Form 8-K dated July 22, 1998; and
4. The description of DMC's Common Stock contained in DMC's Registration
Statements on Form 8-A filed under the Exchange Act with the
Commission on May 29, 1987 and November 5, 1991, as amended on
December 27, 1996.
In addition, all reports and other documents filed by DMC pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to the dates of the DMC Special Meeting and the Innova Special
Meeting, with respect to such materials filed by DMC, shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of filing
of such reports and documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for the purposes of this Proxy Statement/Prospectus to
the extent that a statement contained herein, or in any other subsequently filed
document that also is or is deemed to be incorporated by reference herein,
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement/Prospectus.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROXY STATEMENT/PROSPECTUS OTHER
THAN THOSE CONTAINED HEREIN. ANY INFORMATION OR REPRESENTATIONS WITH RESPECT TO
SUCH MATTERS NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY DMC OR INNOVA. THIS PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, SECURITIES,
OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO OR
FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF AN OFFER OR PROXY
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF DMC OR
INNOVA SINCE THE DATE HEREOF OR THAT THE INFORMATION IN THIS PROXY
STATEMENT/PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
This Proxy Statement/Prospectus includes trademarks and registered
trademarks and service marks of DMC and Innova and trademarks and registered
trademarks and service marks of other companies.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
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AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
INCORPORATION OF DOCUMENTS BY REFERENCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ii
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
DMC.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Innova. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Merger Sub. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Time, Place and Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Purpose of the Special Meetings.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Votes Required; Record Date.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Dissenters' Rights of Innova Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Surrender of Stock Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Recommendations of the Boards of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Opinions of Financial Advisors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Comparative Share Prices and Dividend Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Interests of Certain Persons in the Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Comparison of Rights of DMC Stockholders and Innova Shareholders. . . . . . . . . . . . . . . . . . . . . . 6
Selected Historical Financial Data of DMC and Innova. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Selected Unaudited Pro Forma Combined Condensed Financial Data. . . . . . . . . . . . . . . . . . . . . . . 9
Comparative Per Share Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Uncertainties Associated with the Integration of Innova . . . . . . . . . . . . . . . . . . . . . . . . . .11
Substantial Expenses Resulting from the Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Risks Associated with International Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Need for Additional Line of Credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Uncertainties Associated with the Integration of Other Acquired Businesses. . . . . . . . . . . . . . . . .12
Fixed Exchange Ratio; Change in Relative Stock Prices May Change Value of Consideration Received. . . . . .12
Failure to Qualify for Pooling-of-Interests Accounting Treatment May Impact Reported Operating Results. . .13
Changes in the Rights of Innova Shareholders Will Occur . . . . . . . . . . . . . . . . . . . . . . . . . .13
Fluctuations in Quarterly Operating Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Limited Operating History of Innova; History of Significant Losses for Innova . . . . . . . . . . . . . . .14
Importance of New Products; Rapid Technological Change. . . . . . . . . . . . . . . . . . . . . . . . . . .14
Markets for the Products of DMC and Innova are Highly Competitive . . . . . . . . . . . . . . . . . . . . .14
Dependence on Component Availability, Subcontractor Performance and Key Suppliers . . . . . . . . . . . . .15
Management of Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Customer Concentration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Limitations on Use of Net Operating Loss Carryforwards. . . . . . . . . . . . . . . . . . . . . . . . . . .16
Year 2000 Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Euro Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Multiple Regulatory Environments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
No Assurance of Product Quality; Performance and Reliability. . . . . . . . . . . . . . . . . . . . . . . .18
Reliance on Key OEM Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Dependence on Key Personnel; New Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
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Importance of Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Possible Volatility of Stock Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Effect of Antitakeover Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
COMPARATIVE PER SHARE PRICES AND DIVIDEND POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
THE DMC SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Date, Time and Place. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Record Date; Voting Rights; Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Required Vote; Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
THE INNOVA SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Date, Time and Place. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Record Date; Voting Rights; Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Required Vote; Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Background of the Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Recommendation of the DMC Board; Reasons of DMC for the Merger. . . . . . . . . . . . . . . . . . . . . . .27
Recommendation of the Innova Board; Reasons of Innova for the Merger. . . . . . . . . . . . . . . . . . . .27
Opinions of CIBC Oppenheimer and Hambrecht & Quist. . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Opinion of CIBC Oppenheimer.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Opinion of Hambrecht & Quist. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
Interests of Certain Persons in the Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Employment Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Stock Option Plans and Stock Purchase Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Indemnification and Insurance.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
DMC Board.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
Regulatory Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
Resale Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
DISSENTERS' RIGHTS OF INNOVA SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
THE MERGER AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
Effective Time of the Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
Conversion of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
Innova Stock Option Plans and Stock Purchase Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
Exchange of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Representations and Warranties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
Certain Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
Director and Officer Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
Access and Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
Agreements Relating to Approval of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
Additional Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
Amendment; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
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COMPARISON OF CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
Description of DMC Capital Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
DMC Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
DMC Preferred Stock.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
DMC Stockholders' Rights Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
DMC's Transfer Agent and Registrar. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
Description of Innova Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
COMPARISON OF RIGHTS OF DMC STOCKHOLDERS AND INNOVA SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . .55
Comparison of Current Innova Shareholder Rights and Rights of DMC Stockholders Following the Merger . . . .55
Authorized Capital Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
Amendment of Bylaws.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
Voting Rights.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57
Rights Plan.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57
Liability of Shareholders.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57
Buy-Back Rights.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57
Indemnification.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57
Shareholder Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
Distributions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
Issue of Shares.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60
Dissenters' Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60
Certain Provisions Relating to Business Combinations. . . . . . . . . . . . . . . . . . . . . . . . . .60
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME. . . . . . . . . . . . . . . . . . . . . . . . . .63
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . .64
(1) Pro Forma Basis of Presentation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
(2) Pro Forma Combined Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
(3) Pro Forma Combined Statements of Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65
(4) Pro Forma Net Income Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66
DIGITAL MICROWAVE CORPORATION BUSINESS OF DMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
DMC.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
The DMC Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
Maintain Comprehensive Product Line.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
Pursue Worldwide Market Opportunities.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
Enhance Global Sales, Service and Support Organization. . . . . . . . . . . . . . . . . . . . . . . . .68
Leverage Distribution Channels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
Focus on Business Expansion into Emerging Applications. . . . . . . . . . . . . . . . . . . . . . . . .68
Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
Existing Products.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
ALTIUM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
SPECTRUM II.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
DMC Net for Open View . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
DXR 200.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
DXR 100.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
Sales, Marketing and Service. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70
Research and Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70
Manufacturing and Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70
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Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70
MANAGEMENT OF DMC AFTER THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71
Executive Officers and Directors After the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71
Security Ownership of DMC Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF DMC. . . . . . . . . . . . . . . . . . . . .75
COMPENSATION OF DIRECTORS AND CERTAIN EXECUTIVE OFFICERS OF DMC. . . . . . . . . . . . . . . . . . . . . . . .77
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77
Stock Option Exercises and Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .78
Employment and Termination Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79
Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79
Compensation Committee Interlocks and Insider Participation . . . . . . . . . . . . . . . . . . . . . . . .80
INNOVA CORPORATION BUSINESS OF INNOVA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81
Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81
Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83
Distribution Relationships. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .84
Research and Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85
Sales, Marketing and Customer Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .86
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .86
Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .87
Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .88
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .88
Facilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF INNOVA. . . . . . . .89
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91
Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997 . . . . . . . . . . . . . . .92
Net Product Sales.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92
Gross Profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92
Selling, General and Administrative Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92
Research and Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92
Other Income (Expense). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92
Year Ended December 31, 1997 Compared to the Nine Month Fiscal Period Ended December 31, 1996 . . . . . . .92
Total Revenue.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92
Gross Profit (Loss).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92
Selling, General and Administrative Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92
Research and Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .93
Other Income (Expense). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .93
Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .93
Nine Month Fiscal Period Ended December 31, 1996 Compared to the Fiscal Year Ended March 31, 1996 . . . . .93
Total Revenue.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .93
Gross Profit (Loss).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .93
Selling, General and Administrative Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .93
Research and Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94
Other Income (Expense). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94
Quarterly Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95
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CERTAIN TRANSACTIONS OF INNOVA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98
Financing Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98
Series C and C1 Financing.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98
1995 Bridge Loans.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98
1996 Bridge Loans.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .99
Series D Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .99
November 1996 Through March 1997 Bridge Financing.. . . . . . . . . . . . . . . . . . . . . . . . . . .99
Series E Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .99
1997 Bridge Loans.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Series F Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Additional Note Issuances.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Sales to Bachow Communications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Compensation to Bachow Associates for Acting CEO's Services . . . . . . . . . . . . . . . . . . . . . . . 100
Policy Concerning Transactions with Related Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
INNOVA MANAGEMENT AND EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Management of Innova. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Executive Compensation of Innova. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
General.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Stock Option Exercises and Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
PRINCIPAL SHAREHOLDERS OF INNOVA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
OTHER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
STOCKHOLDER PROPOSALS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
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<PAGE>
APPENDICES TO THE PROXY STATEMENT/PROSPECTUS
APPENDIX A -- Agreement and Plan of Reorganization and Merger
APPENDIX B -- Opinion of CIBC Oppenheimer Corp.
APPENDIX C -- Opinion of Hambrecht & Quist LLC
APPENDIX D -- Chapter 23B.13 of the Washington Business Corporation Act
APPENDIX E -- Forms of Proxy of DMC and Innova
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SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT/PROSPECTUS AND THE APPENDICES HERETO. THIS SUMMARY DOES
NOT PURPORT TO CONTAIN A COMPLETE STATEMENT OF ALL MATERIAL INFORMATION RELATING
TO THE MERGER AGREEMENT, THE MERGER, AND THE OTHER MATTERS DISCUSSED HEREIN AND
IS SUBJECT TO, AND IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS CONTAINED IN OR ATTACHED TO THIS PROXY
STATEMENT/PROSPECTUS. STOCKHOLDERS OF DMC AND SHAREHOLDERS OF INNOVA SHOULD
CAREFULLY READ THIS PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY. CERTAIN
CAPITALIZED TERMS USED IN THIS SUMMARY ARE DEFINED ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS.
THIS PROXY STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE
ACT, INCLUDING STATEMENTS REGARDING DMC'S AND INNOVA'S EXPECTATIONS, BELIEFS,
INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS PROXY STATEMENT/PROSPECTUS WITH RESPECT TO DMC ARE BASED ON
INFORMATION AVAILABLE TO DMC AS OF THE DATE HEREOF, AND ALL FORWARD-LOOKING
STATEMENTS INCLUDED IN THIS PROXY STATEMENT/PROSPECTUS WITH RESPECT TO INNOVA
ARE BASED ON INFORMATION AVAILABLE TO INNOVA AS OF THE DATE HEREOF, AND NEITHER
DMC NOR INNOVA ASSUMES ANY OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING
STATEMENTS. IT IS IMPORTANT TO NOTE THAT DMC'S AND INNOVA'S ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY ARE THE
FACTORS DETAILED IN "RISK FACTORS" BELOW.
THE COMPANIES
DMC. DMC designs, manufactures and markets advanced wireless solutions for
worldwide telephone network interconnection and access. DMC provides its
customers with a broad product line, which contains products that operate using
a variety of transmission frequencies, ranging from 0.3 GigaHertz ("GHz") to 38
GHz, and a variety of transmission capacities, typically ranging from 64
kilobits to OC-3 (155 Megabits per second). DMC'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. DMC designs its products
to meet the requirements of mobile communications networks and fixed access
networks worldwide. DMC'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.
In March 1998, DMC merged with MAS Technology Limited ("MAS"), a New
Zealand company, which designs, manufactures, markets and supports digital
microwave radio links for the worldwide telecommunications market. The
complementary product lines and distribution channels of MAS broadened the range
of wireless connection solutions that DMC offers to its customers worldwide.
DMC 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 African, Asian and Latin American countries; infrastructures are being
expanded in Europe; and personal communications services ("PCS") interconnect
networks are being constructed in the United States. DMC 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 DMC to better understand the local issues and requirements
of its customers and to address its customers' individual geographic,
regulatory, and infrastructure requirements. As a result, DMC has developed a
global sales, service and support organization, with offices in Europe, Africa,
Asia, New Zealand, Australia and the Americas. With its 33 sales or support
offices in 25 countries, DMC can respond quickly to its customers' needs and
provide prompt on-site technical support.
DMC has sold over 95,000 radios, which have been installed in over 70
countries. DMC markets its products to service providers directly, as well as
indirectly through its relationships with original equipment manufacturers
("OEMs") of base stations, such as Motorola, Inc., Siemens AG, and Northern
Telecom. Between June 30, 1997 and June 30, 1998, DMC had sold its products to
a number of service providers, including China Unicom, BellSouth, Mutiara
Telecom and SMART Communications, Inc. in the Asia/Pacific region; IONICA,
Jordan Mobile Telephone Services, and Telkom SA in Europe, the Middle East and
Africa; and Sprint PCS and Winstar Wireless in the Americas.
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DMC's strategy is to become the largest independent wireless transmission
solutions provider in the world. Its current products consist of point-to-point
microwave and millimeter wave radios ranging from capacities of 64 Kbps to 155
Mbps and frequencies of 330 MegaHertz ("MHz") to 38 GHz for worldwide voice and
data networks. DMC offers a broad range of complementary products and services
through its extensive worldwide service and support organization. Typical
applications for its products include cellular, PCS/PCN, wireless data
transport, local telephone company bypass and fixed access applications.
Important factors for its products include the continued growth of wireless data
applications, DMC's entry into the emerging synchronous market, and worldwide
deployment of fiber lines.
As used herein, the term "DMC" refers to Digital Microwave Corporation and
its subsidiaries. DMC's executive offices are located at 170 Rose Orchard Way,
San Jose, California 95134, and its telephone number at that address is (408)
943-0777.
INNOVA. Innova designs, manufactures and supports millimeter wave radios
for use as low to medium capacity wireless communication links in developed and
developing telecommunications markets. Innova's products enable
telecommunications service providers to establish reliable and cost-effective
voice, data and video communications links within their networks. Innova's
products operate in frequencies ranging from 13-38 GHz and may be used in
various applications, including cellular and PCS/PCN networks, broadband
communications, local loop services and long distance networks.
Innova's millimeter wave radio systems are designed to operate at a variety
of E1/T1 rates, are based on a common system architecture and are software
configurable. Innova's principal radio systems, the XP4, consist of an Indoor
Unit ("IDU"), which interfaces with the user's network and is digitally linked
to an Outdoor Unit ("ODU"), which transmits and receives the Radio Frequency
("RF") signal. The common embedded software platform in the IDU and ODU is
simple network management protocol ("SNMP") compliant and provides the ability
to remotely monitor and manage Innova's radios within a network using the
service provider's network management system. Innova's low-capacity, all
outdoor radio, the XP2, also utilizes the common embedded software platform, and
combines the user network interface and the transmission and receive functions
into the single outdoor unit.
Innova markets its products principally to systems integrators with a
strong regional presence in Europe, Latin America and Asia. Innova seeks to
develop strategic relationships with these systems integrators, which provide
field engineering, installation, project financing and support to service
providers. To date, Innova has entered into distribution agreements with Bosch
Telecom ("Bosch"), NERA ASA ("NERA"), Wireless, Inc. and Societe Anonyme de
Telecommunications ("SAT"). Innova also markets its products directly to
certain service providers in the U.S. and internationally. To date, Innova has
supplied products, either through distribution relationships or directly, to
Alestra (Mexico), Associated Communications (Teligent) (U.S.), Avantel (Mexico),
Bosch, Bouygues Telecom (France), Ericsson (Mexico), MobilRom (Romania), Globtel
(Slovakia), Nortel (Canada), PacBell Mobile Services (U.S.) and Telcel
(Venezuela), among others.
Innova's executive offices are located at 3325 South 116th Street, Seattle,
Washington, and its telephone number at that address is (206) 439-9121.
MERGER SUB. Merger Sub is a Washington corporation organized by DMC for
the purpose of effecting the Merger. It has no material assets and has not
engaged in any activities except in connection with the Merger. Merger Sub's
executive offices are located at 170 Rose Orchard Way, San Jose, California
95134.
THE SPECIAL MEETINGS
TIME, PLACE AND DATE. A Special Meeting of Stockholders of DMC will be
held at its executive offices located at 170 Rose Orchard Way, San Jose,
California on October 7, 1998 at 11:00 a.m. (including any and all adjournments
or postponements thereof, the "DMC Special Meeting").
A Special Meeting of Shareholders of Innova will be held at its executive
offices located at 3325 South 116th Street, Seattle, Washington, on October 7,
1998 at 11:00 a.m. (including any and all adjournments or postponements thereof,
the "Innova Special Meeting").
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<PAGE>
PURPOSE OF THE SPECIAL MEETINGS. At the DMC Special Meeting, holders of
DMC Common Stock will consider and vote upon a proposal to approve the Merger
Agreement, a copy of which is attached to this Proxy Statement/Prospectus as
Appendix A, including the issuance of the shares of DMC Common Stock pursuant to
the Merger Agreement. For a more detailed description of the proposal, see "The
Merger" and "The Merger Agreement." Stockholders of DMC will also consider and
vote upon any other matter that may properly come before the meeting.
At the Innova Special Meeting, holders of Innova Common Stock will consider
and vote upon a proposal to approve the Merger Agreement. As a result of the
Merger, Innova will become a wholly owned subsidiary of DMC. In the Merger,
each outstanding share of Innova Common Stock, will be converted into the right
to receive 1.05 shares of fully paid and nonassessable DMC Common Stock and the
associated purchase rights under the DMC Rights Agreement. Cash will be
delivered in lieu of fractional shares. Shareholders of Innova will also
consider and vote upon any other matter that may properly come before the
meeting.
VOTES REQUIRED; RECORD DATE. Consummation of the Merger requires approval
by the affirmative vote of the holders of a majority of the shares of DMC Common
Stock present, or represented, and entitled to vote at the DMC Special Meeting.
Holders of DMC Common Stock are entitled to one vote per share. Only holders of
DMC Common Stock at the close of business on August 28, 1998 (the "DMC Record
Date") are entitled to notice of and to vote at the DMC Special Meeting. See
"The DMC Special Meeting." As of the DMC Record Date, directors and executive
officers of DMC and their affiliates were beneficial owners of an aggregate of
692,790 shares of DMC Common Stock (exclusive of any shares issuable upon the
exercise of stock options remaining unexercised as of such date), or
approximately 1.48% of the 46,689,392 shares of DMC Common Stock that were
issued and outstanding as of such date. See "Management of DMC After the Merger
- -- Security Ownership of Management."
Consummation of the Merger also requires approval of the proposal to adopt
the Merger Agreement by the holders of a majority of the outstanding shares of
Innova Common Stock entitled to vote thereon. Holders of Innova Common Stock
are entitled to one vote per share. Only holders of Innova Common Stock at the
close of business on August 14, 1998 (the "Innova Record Date") are entitled to
notice of and to vote at the Innova Special Meeting. See "The Innova Special
Meeting." As of the Innova Record Date, directors and executive officers of
Innova and their affiliates were beneficial owners of an aggregate of 6,440,515
shares of Innova Common Stock (exclusive of any shares issuable upon the
exercise of stock options or warrants remaining unexercised as of such date), or
approximately 45.9% of the 14,021,858 shares of Innova Common Stock that were
issued and outstanding as of such date. In addition, two directors of Innova
are, in the aggregate, the beneficial holders of approximately 34.0% of the
Innova Common Stock outstanding (exclusive of any shares issuable upon the
exercise of stock options or warrants remaining unexercised as of such date), on
the Innova Record Date, and such directors have agreed to vote their shares in
favor of the Merger Agreement. See, "The Innova Special Meeting -- Required
Vote; Quorum."
DISSENTERS' RIGHTS OF INNOVA SHAREHOLDERS
Innova shareholders who do not vote for the Merger and give the required
notice can require Innova to purchase their shares of Innova Common Stock for
"fair value." The procedure for exercising such rights is detailed in Chapter
23B.13 of the Washington Business Corporation Act, attached hereto as Appendix
D. Innova shareholders who wish to exercise such rights should obtain legal
advice and should note that tight time-frames are stipulated for exercising such
rights. Holders of DMC Common Stock are not entitled to appraisal rights under
the Delaware General Corporation Law in connection with the Merger. See
"Dissenters' Rights of Innova Shareholders."
SURRENDER OF STOCK CERTIFICATES
DMC has authorized ChaseMellon Shareholder Services L.L.C. to act as
exchange agent (the "Exchange Agent") under the Merger Agreement. As soon as
reasonably practical after the Effective Time (as hereinafter defined) of the
Merger, the Exchange Agent will send a letter of transmittal to each Innova
shareholder. The letter of transmittal will contain instructions with respect
to the surrender of certificates representing Innova Common Stock to be
exchanged for DMC Common Stock. See "The Merger -- Conversion of Shares;
Procedures for Exchange of Certificates."
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<PAGE>
INNOVA SHAREHOLDERS SHOULD NOT FORWARD CERTIFICATES FOR INNOVA COMMON STOCK
TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. INNOVA
SHAREHOLDERS SHOULD NOT RETURN SHARE CERTIFICATES WITH THE ENCLOSED PROXY.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
THE BOARDS OF DIRECTORS OF DMC AND INNOVA HAVE EACH UNANIMOUSLY APPROVED
THE MERGER AGREEMENT. THE BOARD OF DIRECTORS OF DMC (THE "DMC BOARD") BELIEVES
THAT THE TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND IN THE BEST INTERESTS
OF, DMC AND ITS STOCKHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT HOLDERS OF SHARES
OF DMC COMMON STOCK VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT. THE BOARD OF
DIRECTORS OF INNOVA ("THE INNOVA BOARD") BELIEVES THAT THE TERMS OF THE MERGER
AGREEMENT ARE FAIR TO, AND IN THE BEST INTERESTS OF, INNOVA AND ITS
SHAREHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT HOLDERS OF SHARES OF INNOVA COMMON
STOCK VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT. THE APPROVAL OF THE MERGER
BY THE STOCKHOLDERS OF DMC AND THE SHAREHOLDERS OF INNOVA SHALL CONSTITUTE
ADOPTION OF THE MERGER AGREEMENT AND EACH OF THE TRANSACTIONS CONTEMPLATED
THEREBY, INCLUDING, WITHOUT LIMITATION, CERTAIN PROVISIONS BENEFITING DIRECTORS,
EXECUTIVE OFFICERS AND EMPLOYEES OF INNOVA, AS MORE FULLY DESCRIBED HEREIN. See
"The Merger -- Background of the Merger," "-- Recommendation of the DMC Board;
Reasons of DMC for the Merger," "-- Recommendation of the Innova Board; Reasons
of Innova for the Merger" and "-- Interests of Certain Persons in the Merger."
RISK FACTORS
In addition to the conditions to consummation of the Merger set forth below
under "The Merger Agreement -- Conditions," see "Risk Factors" below for a
discussion of certain factors pertaining to the Merger and the business of DMC
and Innova after the Merger. IN CONSIDERING WHETHER TO APPROVE THE MERGER
AGREEMENT, AS THE CASE MAY BE, DMC STOCKHOLDERS AND INNOVA SHAREHOLDERS SHOULD
CAREFULLY REVIEW AND CONSIDER THE INFORMATION CONTAINED IN "RISK FACTORS."
THE MERGER
CONVERSION OF SECURITIES. Upon consummation of the transactions
contemplated by the Merger Agreement, (i) Merger Sub will be merged with Innova,
whereby Innova will become a wholly owned subsidiary of DMC and (ii) each issued
and outstanding share of Innova Common Stock will be converted into the right to
receive 1.05 shares of fully paid and nonassessable DMC Common Stock (the
"Exchange Ratio") and the associated purchase rights under the DMC Rights
Agreement, subject to dissenters' rights under Chapter 23B.13 of the Washington
Business Corporation Act, if applicable. Fractional shares of DMC Common Stock
will not be issued in connection with the Merger. A holder of Innova Common
Stock otherwise entitled to a fractional share of DMC Common Stock will be paid
cash in lieu of such fractional share in an amount of cash (rounded up to the
nearest whole cent), without interest, equal to the product of (i) such
fraction, multiplied by (ii) the average of the last reported sales prices of
DMC Common Stock for the fifteen trading days prior to the date which is two
days prior to the Effective Time (as defined herein). See "The Merger --
Conversion of Shares; Procedures for Exchange of Certificates."
CONDITIONS TO THE MERGER; TERMINATION. The obligations of DMC and Innova
to effect the Merger are subject to the satisfaction of certain conditions,
including, among others: (i) obtaining the approval of DMC stockholders and
Innova shareholders; (ii) receipt of accountants' letters with respect to the
qualification of the Merger as a "pooling of interests"; (iii) receipt of legal
opinions with respect to the tax consequences of the Merger and other matters;
and (iv) the absence of any change in the other party which has had, or is
reasonably likely to have, individually or in the aggregate, a material adverse
effect on such party. See "The Merger Agreement -- Representations and
Warranties," "-- Conditions" and "-- Certain Covenants."
The Merger Agreement is subject to termination by either DMC or Innova if,
among other things, the Merger is not consummated by January 29, 1999. The
Merger Agreement also may be terminated by either DMC or Innova under other
circumstances, including the failure of the stockholders of DMC Common Stock to
approve the
4
<PAGE>
Merger or of the shareholders of Innova Common Stock to approve the Merger.
Under certain circumstances leading to termination of the Merger Agreement, DMC
or Innova, as the case may be, may be entitled to receive a cancellation fee or
expenses. See "The Merger Agreement -- Termination" and "-- Cancellation Fees;
Expenses."
At any time on or prior to the Merger, to the extent legally allowed, each
of DMC and Innova, without the approval of the DMC stockholders or Innova
shareholders, may waive compliance with any of the agreements or satisfaction of
any of the conditions contained in the Merger Agreement for its respective
benefit.
GOVERNMENTAL APPROVALS REQUIRED. Certain aspects of the Merger will
require notifications to, and/or approvals from, certain United States
authorities. DMC and Innova believe that all material notifications, filings
and approvals have been made or obtained, or will be made or obtained, prior to
the Effective Time, as the case may be. See "The Merger -- Regulatory
Approvals."
ACCOUNTING TREATMENT. The Merger is expected to be treated by DMC as a
"pooling of interests" transaction for accounting and financial reporting
purposes. Consummation of the Merger is conditioned upon the delivery of
letters from Arthur Andersen LLP, DMC's independent public accountants, and KPMG
Peat Marwick LLP, Innova's independent auditors, to this effect. See "The
Merger -- Accounting Treatment" and "The Merger Agreement -- Conditions."
OPINIONS OF FINANCIAL ADVISORS
CIBC Oppenheimer Corp. ("CIBC Oppenheimer") has acted as financial advisor
to DMC in connection with the Merger and has delivered a written opinion, dated
July 22, 1998, to the DMC Board to the effect that the Exchange Ratio was fair
to DMC, from a financial point of view, as of the date of such opinion.
Hambrecht & Quist LLC ("Hambrecht & Quist") has acted as financial advisor
to Innova in connection with the Merger and has delivered a written opinion,
dated July 22, 1998, to the Innova Board that the Exchange Ratio was fair to the
holders of Innova Common Stock, from a financial point of view, as of the date
of such opinion.
Copies of the written opinions of CIBC Oppenheimer and Hambrecht & Quist,
which set forth the respective assumptions made, matters considered and
limitations on the reviews undertaken, are attached as Appendices C and D,
respectively, to this Proxy Statement/Prospectus and should be carefully read in
their entirety. See "The Merger -- Opinion of CIBC Oppenheimer" and "The Merger
- -- Opinion of Hambrecht & Quist."
COMPARATIVE SHARE PRICES AND DIVIDEND POLICIES
Shares of DMC Common Stock and Innova Common Stock are listed on Nasdaq.
On July 22, 1998, the last full trading day on Nasdaq prior to the public
announcement of the proposed Merger, DMC Common Stock closed at $6.50 per share
and Innova Common Stock closed at $5.875 per share. Based on an Exchange Ratio
of 1.05, the equivalent per share value of DMC Common Stock as of such date was
$6.825.
On August 28, 1998, DMC Common Stock closed at $3.50 per share and Innova
Common Stock closed at $3.50 per share. Based on an Exchange Ratio of 1.05, the
equivalent per share value of DMC Common Stock as of such date was $3.68. See
"Comparative Per Share Prices and Dividend Policies."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Innova Board with respect to the
approval by the Innova shareholders of the Merger Agreement and the transactions
contemplated thereby, shareholders should be aware that certain members of
Innova management and the Innova Board have certain interests in the Merger that
are in addition to the interests of shareholders of Innova generally. These
interests arise from, among other things, certain employee benefit plans,
indemnification and insurance arrangements and employment agreements among DMC,
Innova and directors and certain executive officers of Innova. DMC has agreed
to offer Mr. Jean-Francois Grenon ("Mr. Grenon") an annual employment agreement,
which is renewable at the mutual consent of DMC and Mr. Grenon. Pursuant to
such agreement, Mr. Grenon will serve as President of the PDH Division of DMC at
an annual salary of $235,000. Additionally, Mr. Grenon will be entitled to
certain benefits, including an option to
5
<PAGE>
purchase 300,000 shares of DMC Common Stock. For a detailed description of such
employment agreement and benefits, see "The Merger -- Interests of Certain
Persons in the Merger -- Employment Agreement." Under the terms of the Merger
Agreement, each outstanding warrant or other right to purchase Innova Common
Stock ("Stock Purchase Right") and each stock option of Innova outstanding at
the Effective Time will be assumed by DMC and will not terminate upon the
consummation of the Merger. As of July 22, 1998, employees (or former
employees) of Innova held options to purchase an aggregate of 1,608,737 shares
of Innova Common Stock at a weighted average exercise price of $2.60 per share
(at exercise prices ranging from $0.24 to $18.75 per share). As of July 22,
1998, the two directors of Innova who will become directors of DMC at the
Effective Time (see, "The Merger -- Interests of Certain Persons in the Merger
- -- DMC Board" below), held Stock Purchase Rights for an aggregate of 1,685,665
shares of Innova Common Stock at a weighted average price of $0.34 per share (at
exercise prices ranging from $0.024 to $2.582 per share.) See "The Merger --
Interests of Certain Persons in the Merger -- Innova Stock Option Plans and
Stock Purchase Rights." In addition, for a period of six years from the
Effective Time, (i) all rights of indemnification and reimbursement of expenses
existing at the Effective Time under Innova's Articles of Incorporation, Bylaws
and applicable law in favor of officers and directors of Innova will survive;
(ii) DMC will indemnify and advance expenses to such persons to the full extent
required or permitted by Innova's Articles of Incorporation, Bylaws and
applicable law; and (iii) DMC will maintain certain officers' and directors'
liability insurance policies with respect to claims arising from facts or events
occurring before the Merger. "The Merger -- Interests of Certain Persons in the
Merger -- Indemnification and Insurance." In addition, two members of the
Innova Board will become members of the DMC Board. "The Merger -- Interests of
Certain Persons in the Merger -- DMC Board."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a "reorganization" for federal income
tax purposes and, assuming the Merger does so qualify, generally no gain or loss
will be recognized by (i) Innova shareholders (except with respect to cash
received by dissenting shareholders or in lieu of fractional shares), (ii) DMC
stockholders, (iii) DMC or (iv) Innova as a result of the Merger. Consummation
of the Merger is conditioned upon the delivery of opinions of counsel to DMC and
Innova, respectively, that the Merger will qualify as a "reorganization" within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), and that DMC and Innova each will be a party to that
reorganization within the meaning of Section 368(b) of the Code. See "The
Merger -- Certain Tax Consequences" and "The Merger Agreement -- Conditions."
COMPARISON OF RIGHTS OF DMC STOCKHOLDERS AND INNOVA SHAREHOLDERS
The rights of Innova shareholders are currently governed by the Washington
Business Corporation Act, Innova's Articles of Incorporation and Innova's
Bylaws. Upon consummation of the Merger and subject to dissenters' rights of
Innova shareholders under Washington law, Innova shareholders will become
stockholders of DMC, which is a Delaware corporation, and their rights as DMC
stockholders will be governed by the Delaware General Corporation Law, DMC's
Restated Certificate of Incorporation, DMC's Bylaws and the DMC Stockholders'
Rights Agreement (the "DMC Rights Agreement"). For a discussion of the various
differences between the rights of shareholders of Innova and stockholders of
DMC, see "Comparison of Rights of DMC Stockholders and Innova Shareholders."
6
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF DMC AND INNOVA
The following selected historical financial data of DMC and Innova have
been derived from their respective audited and unaudited historical financial
statements and should be read in conjunction with such consolidated financial
statements and the notes thereto included or incorporated by reference herein.
The consolidated financial statements for DMC for the three fiscal years ended
March 31, 1998 and for Innova for the year ended March 31, 1996, the nine month
period ended December 31, 1996, and the year ended December 31, 1997 are
included elsewhere in this Proxy Statement/Prospectus. The selected historical
financial information as of June 30, 1998 and for the three month periods ended
June 30, 1997 and 1998 for DMC and the six month periods ended June 30, 1997 and
1998 for Innova has been derived from the unaudited consolidated statements of
DMC and Innova as of and for such periods which are included elsewhere in this
Proxy Statement/Prospectus, and which, in the opinion of DMC's and Innova's
respective management, reflect all adjustments necessary for the fair
presentation of this unaudited interim financial information. The results of
operations for these interim periods are not necessarily indicative of the
results to be expected for the entire year.
DMC SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------------------------------------------ ------------------------
1994 1995 1996 1997 1998 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
HISTORICAL CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Sales . . . . . . . . . . . . . . . $ 126,236 $ 165,148 $ 172,418 $ 211,337 $ 310,490 $ 64,558 $ 53,003
Income (loss) from operations . . . (22,897) 3,734 (5,786) 17,338 20,908 6,006 (14,840)
Net income (loss) . . . . . . . . . (22,874) 2,567 (4,472) 13,790 19,878 5,810 (13,962)
Basic earnings (loss) per share . . $ (0.69) $ 0.07 $ (0.12) $ 0.36 $ 0.44 $0.14 $ (0.30)
Diluted earnings (loss) per share . $ (0.69) $ 0.07 $ (0.12) $ 0.35 $ 0.42 $0.13 $ (0.30)
Basic weighted average shares . . .
outstanding . . . . . . . . . . . 33,056 35,850 37,944 38,611 45,361 42,763 46,682
Diluted weighted average shares
outstanding . . . . . . . . . . . 33,056 35,850 37,944 39,887 47,329 44,755 46,682
<CAPTION>
MARCH 31,
------------------------------------------------------------------ JUNE 30,
1994 1995 1996 1997 1998 1998
---------- ---------- ---------- ---------- ---------- --------------------
(UNAUDITED)
HISTORICAL CONSOLIDATED BALANCE
SHEET DATA:
Working capital . . . . . . . . . . $ 18,147 $ 29,267 $ 41,528 $ 105,522 $ 130,107 $ 114,417
Total assets . . . . . . . . . . . 87,504 109,500 106,850 193,199 240,400 211,083
Total stockholders' equity. . . . . 29,697 38,016 54,887 125,307 178,494 162,490
</TABLE>
7
<PAGE>
INNOVA SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTH SIX MONTHS ENDED
YEAR ENDED MARCH 31, PERIOD ENDED YEAR ENDED JUNE 30,
-------------------------------------- DECEMBER 31, DECEMBER 31, ------------------------
1994 1995 1996 1996(1) 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
HISTORICAL CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenues . . . . . . . . . . . $ 877 $ 2,358 $ 1,962 $ 2,104 $ 36,100 $ 12,582 $ 24,957
Loss from operations . . . . . . . (5,234) (6,116) (8,816) (7,186) (1,176) (2,675) (65)
Net income (loss). . . . . . . . . (5,400) (6,318) (9,061) (7,329) (1,060) (3,013) 284
Basic and diluted earnings (loss)
per share. . . . . . . . . . . . $ (211.12) $ (13.69) $ (14.40) $ (8.27) $ (0.18) $ (3.17) $ 0.02
Cumulative basic and diluted per
share effect of change in
accounting principle(2). . . . . $ -- $ -- $ -- $ -- $ -- $ -- $ 0.01
Basic weighted average shares
outstanding. . . . . . . . . . . 26 462 629 886 5,795 949 13,867
Diluted weighted average shares
outstanding. . . . . . . . . . . 26 462 629 886 5,795 949 17,294
<CAPTION>
MARCH 31, DECEMBER 31,
-------------------------------------- ------------------------ JUNE 30,
1994 1995 1996 1996 1997 1998
---------- ---------- ---------- ---------- ---------- --------------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
HISTORICAL CONSOLIDATED BALANCE
SHEET DATA:
Working capital (deficit). . . . . $ (2,388) $ 1,815 $ 2,156 $ (289) $ 37,516 $ 32,020
Total assets . . . . . . . . . . . 2,798 5,093 6,747 7,305 56,795 64,333
Total shareholders' equity
(deficit). . . . . . . . . . . . (14,753) (21,052) (30,085) (37,360) 48,105 48,767
</TABLE>
- --------------------------------
(1) Subsequent to March 31, 1996, Innova changed its fiscal year end to
December 31.
(2) See Note 1(q) to Innova's Consolidated Financial Statements.
8
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following selected unaudited pro forma combined condensed financial
data are derived from the unaudited pro forma combined condensed financial
statements and notes thereto appearing elsewhere herein, which give effect to
the Merger as a pooling of interests, and should be read in conjunction with
such unaudited pro forma statements and notes thereto and the separate audited
consolidated financial statements and related notes thereto of DMC and Innova,
respectively, included in or attached to this Proxy Statement/Prospectus. See
"Unaudited Pro Forma Combined Condensed Financial Statements." For purposes of
the unaudited pro forma combined financial statements, DMC's consolidated
financial statements for the years ended March 31, 1996, 1997 and 1998 have been
combined with the financial statements of Innova for the year ended March 31,
1996, the nine months ended December 31, 1996 and the year ended December 31,
1997, respectively. The unaudited pro forma combined condensed statements of
income for the three month periods ended June 30, 1997 and 1998 reflect the
combination of the statements of income (loss) of DMC for the three month
periods ended June 30, 1997 and 1998 with the statements of income (loss) of
Innova for the three month periods ended March 31, 1997 and June 30, 1998,
respectively. As a result, the results of operations for Innova for the three
months ended March 31, 1998 are not included in any of the periods presented in
the unaudited pro forma combined condensed financial statements.
The unaudited pro forma information is presented for comparative purposes
only and does not purport to be indicative of the operating results or financial
position that would have occurred if the Merger had been consummated at the
beginning of the periods presented, nor is such information necessarily
indicative of the future operating results or financial position of DMC and
Innova.
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------------------------ ---------------------------
1996 1997 1998 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA:
Sales . . . . . . . . . . . . . . . . . . . $ 174,380 $ 213,441 $ 345,116 $ 69,468 $ 63,211
Income (loss) from operations . . . . . . . (14,602) 10,152 19,732 4,086 (16,359)
Net income (loss) . . . . . . . . . . . . . (13,533) 6,461 18,818 3,691 (15,481)
Basic earnings (loss) per share . . . . . . $ (0.35) $ 0.16 $ 0.37 $ 0.08 $ (0.25)
Diluted earnings (loss) per share . . . . . $ (0.35) $ 0.13 $ 0.30 $ 0.06 $ (0.25)
Basic weighted average shares
outstanding . . . . . . . . . . . . . . . 38,604 39,541 51,446 43,752 61,351
Diluted weighted average shares
outstanding . . . . . . . . . . . . . . . 38,604 50,464 62,531 57,033 61,351
<CAPTION>
JUNE 30,
1998
----------
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Working capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 142,395
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274,949
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207,215
</TABLE>
9
<PAGE>
COMPARATIVE PER SHARE DATA
The following table presents historical unaudited pro forma combined and
unaudited pro forma equivalent per share data of DMC and Innova after giving
effect to the Merger using the pooling of interests method of accounting,
assuming the Merger had been effective during all periods presented. The pro
forma equivalent data for Innova have been calculated by multiplying the DMC pro
forma combined amounts by the Exchange Ratio of 1.05. The pro forma data do not
purport to be indicative of the results of future operations or the results that
would have occurred had the Merger been consummated at the beginning of the
periods presented. The information set forth below should be read in
conjunction with the historical financial statements and notes thereto of DMC
and Innova incorporated by reference in this Proxy Statement/Prospectus, and the
unaudited pro forma combined condensed financial statements included elsewhere
in this Proxy Statement/Prospectus. Neither DMC nor Innova has paid cash
dividends for fiscal years 1996 through 1998 and the three month period ended
June 30, 1998.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED
------------------------------------------------------------ JUNE 30,
1996 1997 1998 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
HISTORICAL -- DMC COMMON STOCK
Basic earnings (loss) per share: . . . . . . $ (0.12) $ 0.36 $ 0.44 $ (0.30)
Diluted earnings (loss) per share: . . . . . $ (0.12) $ 0.35 $ 0.42 $ (0.30)
Book value per share:(1) . . . . . . . . . . $ 1.73 $ 3.38 $ 3.83 $ 3.48
<CAPTION>
NINE MONTH THREE MONTHS
YEAR ENDED PERIOD ENDED YEAR ENDED ENDED
MARCH 31, DECEMBER 31, DECEMBER 31, JUNE 30,
----------------- ----------------- ----------------- -----------------
1996 1996 1997 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
HISTORICAL -- INNOVA COMMON STOCK
Basic earnings (loss) per share: . . . . . . $ (14.40) $ (8.27) $ (0.18) $ (0.11)
Diluted earnings (loss) per share: . . . . . $ (14.40) $ (8.27) $ (0.18) $ (0.11)
Book value per share:(1) . . . . . . . . . . $ (6.87) $ (4.58) $ 3.52 $ 3.48
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------------------------------------ -----------------
1996 1997 1998 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
PRO FORMA COMBINED NET INCOME (Loss) PER DMC
SHARE
Basic earnings (loss) per share: . . . . . . $ (0.35) $ 0.16 $ 0.37 $ (0.25)
Diluted earnings (loss) per share: . . . . . $ (0.35) $ 0.13 $ 0.30 $ (0.25)
PER EQUIVALENT INNOVA SHARE
Basic earnings (loss) per share: . . . . . . $ (0.37) $ 0.17 $ 0.38 $ (0.26)
Diluted earnings (loss) per share: . . . . . $ (0.37) $ 0.13 $ 0.32 $ (0.26)
<CAPTION>
JUNE 30,
1998
-----------------
<S> <C>
PRO FORMA COMBINED BOOK VALUE PER SHARE (2)
Per DMC share: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.38
Equivalent Innova share:(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.54
</TABLE>
- -------------------------
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock and preferred stock, on an
as if converted basis, outstanding at the end of the period.
(2) The pro forma combined book value per share is computed by dividing pro
forma stockholders' equity by the pro forma number of shares of common
stock outstanding at the end of each period.
(3) The Innova equivalent pro forma combined per share amounts are calculated
by multiplying the combined pro forma per share amounts by the Exchange
Ratio of 1.05 shares of DMC Common Stock for each share of Innova Common
Stock.
10
<PAGE>
RISK FACTORS
THIS PROXY STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. DMC'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF A
VARIETY OF FACTORS, INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND
ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS PROXY
STATEMENT/PROSPECTUS. THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER
INFORMATION PRESENTED IN THIS PROXY STATEMENT/PROSPECTUS, SHOULD BE CONSIDERED
CAREFULLY.
UNCERTAINTIES ASSOCIATED WITH THE INTEGRATION OF INNOVA
The Merger involves the combination of the business of Innova with the
business of DMC. Among the factors considered by the DMC Board and the Innova
Board in connection with their approval of the Merger Agreement were the
opportunities for operating efficiencies that they expect will ultimately result
from the Merger. If the integration of the operations of Innova into DMC
following the Merger is to be successful, it will require the dedication of
management resources in order to achieve the anticipated operating efficiencies
of the Merger, which may distract attention from the day-to-day business of the
combined company. There can be no assurance that such integration will be
accomplished smoothly or successfully. No assurance can be given that
difficulties encountered in integrating the operations of Innova into DMC will
be overcome or that the benefits expected from such integration will be
realized. The difficulties of combining the operations of Innova into DMC are
exacerbated by the necessity of coordinating geographically separated
organizations, integrating personnel with disparate business backgrounds and
combining different corporate cultures. Successful integration of the two
companies' sales and marketing organizations will require the sales and
marketing personnel of each company to learn about the often technically complex
products, services and technologies of the other company. The process of
integrating operations could cause an interruption of, or loss of momentum in,
the activities of DMC's businesses, including the business acquired in the
Merger. Difficulties encountered in connection with the Merger and the
integration of the operations of Innova could have an adverse effect on the
business, results of operations or financial condition of DMC. In addition, as
commonly occurs with mergers of technology companies, during the pre-merger and
integration phases, aggressive competitors may undertake initiatives to attract
customers and to recruit key employees through various incentives which could
have a material adverse effect on the business, results of operations and
financial condition of the combined company.
SUBSTANTIAL EXPENSES RESULTING FROM THE MERGER
In connection with the Merger, DMC expects to incur a charge in the quarter
ending December 31, 1998, currently estimated to be in the range of $30 million
to $40 million, to reflect transaction-related expenses, as well as expenses
relating to the integration of the two companies, including inventory
write-downs due to duplicative product lines, costs relating to severance and
employee relocation, the elimination of duplicate systems and facilities and
other integration costs. This amount is a preliminary estimate only and is
therefore subject to change. In addition, there can be no assurance that DMC
will not incur additional charges in subsequent quarters to reflect costs
associated with the Merger. In any event, costs associated with the Merger are
expected to have a negative effect on DMC's results of operations in the quarter
ending December 31, 1998 and possibly the quarter ended March 31, 1999.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Both DMC and Innova are highly dependent on sales to customers outside the
United States. In fiscal year 1997, fiscal year 1998 and the three months ended
June 30, 1998, sales to international customers accounted for 95%, 95% and 72%,
respectively, of DMC's net sales. Through fiscal year 1997, and June 30, 1998
approximately 93% and 94%, respectively of Innova's sales have been made to
customers located outside of the United States. DMC and Innova expect that
international sales will continue to account for the majority of the net sales
of DMC and Innova for the foreseeable future. As a result, DMC and Innova are
subject to the risks of doing business internationally, including unexpected
changes in regulatory requirements, fluctuations in foreign currency exchange
rates, imposition of tariffs and other trade barriers and restrictions, the
burdens of complying with a variety of foreign laws, and general economic
conditions, including inflation. Recent events in Asia, including depreciation
of certain Asian currencies, failures of financial institutions, stock market
declines, and reduction in planned capital investment at key enterprises, have
adversely affected, and may continue to adversely affect, DMC's and Innova's
11
<PAGE>
revenues in Asian markets. These events also appear to have had an indirect
adverse effect on sales in other international markets. DMC and Innova also are
subject to general geopolitical risks, such as political and economic
instability and changes in diplomatic and trade relationships, in connection
with their international operations. Potential markets for DMC's and Innova's
products exist in developing countries that may deploy wireless communications
networks. Such countries may decline to construct wireless communications
networks, experience delays in the construction of such networks or use the
products of a competitor of DMC or Innova to construct such networks. As a
result, any demand for DMC's or Innova's products in such countries will be
similarly limited or delayed. In addition, DMC or Innova may experience more
volatile political, economic and foreign currency fluctuations in developing
countries. There can be no assurance that currency fluctuations, changes in the
rate of inflation or any of the aforementioned factors will not have a material
adverse effect on DMC's or Innova's business, financial condition or results of
operations.
NEED FOR ADDITIONAL LINE OF CREDIT
At June 30, 1998, DMC's principal sources of liquidity consisted of $21.4
million in cash and cash equivalents and short-term investments and an unsecured
$25.0 million revolving bank credit facility which expires on September 30,
1998. DMC believes that it will not be able to renew the bank credit facility
under its present terms and that it will be necessary to obtain new or
additional credit facilities to provide capital for future requirements. DMC is
currently negotiating with several different lenders for an asset based lending
line of credit in the amount of $30 to $40 million to replace the current credit
facility. DMC's management believes it will have this new line of credit in
place before the existing line of credit expires on September 30, 1998; however,
there can be no assurance that this will occur. DMC's management believes that
with the proposed new credit facility DMC will be able to meet both its working
capital and capital expenditure requirements through fiscal 1999. DMC's
management also has implemented plans to reduce DMC's cash requirements through
a combination of reductions in working capital, equipment purchases and
operating expenses. DMC's management believes that such plans combined with
existing cash balances and other sources of liquidity will enable DMC to meet
its cash requirements through fiscal 1999. However, there can be no assurance
that DMC will be able to implement these plans or that it will be able to do so
without a material adverse effect on DMC's business, financial results or
results of operations. Additionally, DMC may require additional financing from
other sources in fiscal 2000; however, there can be no assurance that DMC will
be able to obtain such additional financing in the required time frame on
commercially reasonable terms, or at all. Issuance of additional equity
securities by DMC could result in dilution to its present or future
stockholders.
UNCERTAINTIES ASSOCIATED WITH THE INTEGRATION OF OTHER ACQUIRED BUSINESSES
In March 1998, DMC acquired MAS. In connection with that transaction, DMC
has dedicated and will continue to dedicate substantial management resources in
order to achieve the anticipated operating efficiencies from integrating the two
companies. These efforts could reduce the availability of personnel to assist
in the integration of Innova with DMC. Difficulties encountered in integrating
either companies' operations could adversely affect the business, results of
operations or financial condition of DMC. Also, DMC intends to pursue
additional acquisition opportunities from time to time. The integration of any
businesses that DMC might acquire could require substantial management
resources. There can be no assurance that any such integration will be
accomplished without having a short or potentially long-term adverse effect on
the business, results of operations or financial condition of DMC or that the
benefits expected from any such integration will be fully realized.
FIXED EXCHANGE RATIO; CHANGE IN RELATIVE STOCK PRICES MAY CHANGE VALUE OF
CONSIDERATION RECEIVED
The Exchange Ratio is expressed in the Merger Agreement as a fixed ratio of
1.05 shares of DMC Common Stock for each outstanding share of Innova Common
Stock. Accordingly, the Exchange Ratio will not be adjusted in the event of any
increase or decrease in the price of either DMC Common Stock or Innova Common
Stock, although adjustments will be made in the event of stock splits, stock
dividends or other like changes with respect to DMC Common Stock. Therefore,
the value of the consideration to be received by shareholders of Innova may
change. The price of DMC Common Stock at the closing of the Merger is likely to
vary from its price at the date of this Proxy Statement/Prospectus and at the
date of the DMC Special Meeting. Such variations may be the result of changes
in the business, operations or prospects of DMC or Innova, market assessments of
the likelihood that the Merger will be consummated and the timing thereof,
regulatory considerations, general market and economic conditions and other
factors. Shareholders of Innova are urged to obtain current market quotations
for
12
<PAGE>
DMC Common Stock and Innova Common Stock. No assurance can be given as to the
market prices of DMC Common Stock or Innova Common Stock at any time before the
Effective Time or as to the market price of DMC Common Stock at any time
thereafter.
FAILURE TO QUALIFY FOR POOLING-OF-INTERESTS ACCOUNTING TREATMENT MAY IMPACT
REPORTED OPERATING RESULTS
The obligations of DMC and Innova to effect the Merger are subject to a
number of conditions, one of which is that each of them receive an opinion from
their respective independent public accountants that the Merger qualifies for
pooling-of-interests treatment under U.S. generally accepted accounting
principles ("U.S. GAAP"). Under pooling-of-interests treatment, the accounts of
DMC will be combined with those of Innova at their historical carrying amount
and DMC's financial statements for all prior periods will be restated to reflect
the accounts of DMC as if the two companies had been combined for all periods.
Nevertheless, should the Merger become or be declared unconditional in all
respects and thereafter not qualify for pooling-of-interests treatment, the
purchase method of accounting would be applied. Under that method, the
estimated fair value of the DMC Common Stock issued to effect the Merger would
be recorded as the cost of acquiring the business of Innova. That cost would be
allocated to the individual assets acquired and liabilities assumed according to
their respective fair values with the excess of the estimated fair value of DMC
Common Stock over the fair value of net assets acquired recorded as goodwill, to
be amortized over a period up to 40 years, but in all likelihood less than ten
years. The estimated fair value of the DMC Common Stock to be issued pursuant
to the Merger is substantially in excess of the amount at which the net assets
are carried in the accounts of Innova. Accordingly, purchase accounting
treatment could have a material adverse effect on the reported operating results
of the combined companies as compared to that under pooling-of-interests
treatment. See "The Merger -- Accounting Treatment" and "The Merger Agreement
- -- Conditions."
CHANGES IN THE RIGHTS OF INNOVA SHAREHOLDERS WILL OCCUR
Innova is incorporated in the State of Washington. Those shareholders of
Innova who exchange their shares of Innova Common Stock for DMC Common Stock and
whose rights as shareholders of Innova are currently governed by the Washington
Business Corporation Act, the Articles of Incorporation of Innova and the Bylaws
of Innova, will, upon the exchange of shares of Innova Common Stock, become
stockholders of DMC and their rights as stockholders of DMC will be governed by
the Delaware General Corporation Law, the Restated Certificate of Incorporation
of DMC, and the Bylaws of DMC. DMC and Innova are both currently subject to the
U.S. securities laws and the rules and regulations of Nasdaq.
Certain differences between the rights of the shareholders of Innova and
the stockholders of DMC arise from differences between the Washington Business
Corporation Act and the Delaware General Corporation Law, as well as from the
differences between the corporate governing instruments of the two companies.
These differences may have a material effect on the rights of the shareholders
of Innova to nominate, vote for and remove directors, approve certain corporate
action, receive dividends, and inspect corporate records, among other things.
See "Description of DMC Capital Stock," "Description of Innova Capital Stock"
and "Comparison of Rights of DMC Stockholders and Innova Shareholders."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The quarterly operating results of DMC and Innova can vary significantly
depending on several factors, any of which could have a material adverse effect
on DMC's business, financial condition or results of operations. In particular,
DMC's and Innova's quarterly results of operations can vary due to the volume
and timing of product orders received and delivered during the quarter, the
ability of DMC and Innova and their key suppliers to respond to changes made by
customers in their orders, and the timing of new product introductions by DMC
and Innova and their competitors. DMC's and Innova's quarterly operating
results may also vary significantly depending on other factors, including the
mix of products sold, the cost and availability of components and subsystems,
relative prices of DMC's and Innova's products, adoption of new technologies and
industry standards, competition, fluctuations in foreign currency exchange
rates, regulatory developments, and general economic conditions. In addition,
wireless infrastructure suppliers are experiencing, and are likely to continue
to experience, intense price pressure, which has resulted, and is expected to
continue to result, in downward pricing pressure on DMC's and Innova's products.
As a result, DMC and Innova have experienced, and expect to continue to
experience, declining average sales prices for
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their products. DMC's and Innova's ability to maintain their gross profit
margins depends upon their ability to continue to improve manufacturing
efficiencies, reduce material costs of products and to continue to introduce new
products and product enhancements. There can be no assurance that after the
Merger DMC or Innova will be able to offset such downward price pressure through
corresponding cost reductions. Any inability of DMC or Innova to respond to
increased price competition would have a material adverse effect on DMC's or
Innova's business, financial condition and results of operations. Since DMC's
and Innova's customers frequently negotiate supply arrangements far in advance
of delivery dates, DMC and Innova often must commit to price reductions for
their products before they are aware of how, or if, such cost reductions can be
obtained. As a result, such current or future price reduction commitments could
have, and any inability of DMC or Innova to respond to increased price
competition would have, a material adverse effect on DMC's or Innova's business,
financial condition and results of operations. The combined company may also
increase spending in response to competition or to pursue new market
opportunities. Accordingly, there can be no assurance that either DMC or Innova
will be able to sustain profitability in the future, particularly on a
quarter-to-quarter basis.
LIMITED OPERATING HISTORY OF INNOVA; HISTORY OF SIGNIFICANT LOSSES FOR INNOVA
Innova was incorporated in 1989 and was in the development stage until
mid-1996, when it began shipment of its XP4 products, its first line of
millimeter wave radios to be shipped in commercial quantities. Due to Innova's
limited operating history, among other things, there can be no assurance that
the integration of Innova into DMC will not adversely affect DMC's earnings. In
view of Innova's limited operating history, Innova remains vulnerable to a
variety of business risks generally associated with rapidly growing companies.
The likelihood of Innova's success must be considered in light of the problems,
expenses, complications and delays frequently encountered in connection with the
development of new products, markets and operations. As a result of Innova's
net losses and limited operating and sales history, period-to-period comparisons
of operating results may not be meaningful and results of operations from prior
periods may not be indicative of future results. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Innova."
IMPORTANCE OF NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE
The wireless communications market is characterized by rapidly changing
technologies and evolving industry standards. Accordingly, DMC's future
performance, and the future performance of Innova, depends on a number of
factors, including the ability of each company to identify emerging
technological trends in their target markets, to develop and to maintain
competitive products, to enhance their products by adding innovative features
that differentiate their products from those of their competitors and to
manufacture and to bring products to market quickly at cost-effective prices.
DMC and Innova believe that to remain competitive in the future they will need
to continue to develop new products, which will require the investment of
significant financial resources in new product development. There can be no
assurance, however, that DMC or Innova will successfully complete the
development of any future products, that such products will achieve market
acceptance or that such products will be capable of being manufactured at
competitive prices in sufficient volumes. In the event that such products are
not timely developed, do not gain market acceptance or are not manufacturable at
competitive prices, DMC's and Innova's business, financial condition or results
of operations could be materially adversely affected. In some instances, DMC
and Innova enter into agreements to supply products to customers where the
products are not fully developed at the time of entering into the agreement.
The failure of DMC and Innova to develop products required for timely
performance under such agreements can have a material impact on DMC's or
Innova's business, financial condition and results of operations. Although DMC
and Innova extensively test their products prior to introduction, design errors
may be discovered after initial product sampling, resulting in delays in volume
production or recalls of products sold. The occurrence of such errors could
have a material adverse effect on their respective business, financial condition
and results of operations. Any significant delay or failure to develop,
manufacture or ship new or enhanced products by either DMC or Innova could also
have a material adverse effect on their respective business, financial condition
and results of operations.
MARKETS FOR THE PRODUCTS OF DMC AND INNOVA ARE HIGHLY COMPETITIVE
The microwave interconnection and access business is a specialized segment
of the wireless telecommunications industry and is extremely competitive. DMC
and Innova expect 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 DMC's and
Innova's products. Competitors of DMC and
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Innova may have more extensive engineering, manufacturing and marketing
capabilities and substantially greater financial, technical and personnel
resources than DMC or Innova. In addition, competitors of DMC and Innova may
have greater name recognition, broader product lines, a larger installed base of
products and longer-standing customer relationships. DMC considers its primary
competitors to be L.M. Ericsson, Siemens AG, P-COM, Inc. and the Farinon
Division of Harris Corporation. In addition, other existing competitors
presently include Alcatel, Nokia, Innova, SIAE, NEC, NERA, and Northern Telecom.
Both Northern Telecom and Siemens AG have product lines that compete with those
of DMC, and are also OEMs through which DMC markets and sells its products.
Some of DMC's and Innova's largest customers could develop the capability to
manufacture products similar to those manufactured by DMC and Innova. DMC and
Innova believe that competition in their markets is based primarily on customer
service and support, breadth of product line, price and financing terms,
performance, rapid delivery, and reliability. Failure to keep pace with
technological advances would adversely affect the combined company's competitive
position and could have a material adverse effect on their respective
businesses, results of operations and financial conditions. DMC's future
success after the Merger will depend upon the ability of DMC, and Innova as a
subsidiary of DMC, to address the increasingly sophisticated needs of their
customers by enhancing 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. DMC's major contractual awards are often subject to the
receipt of firm orders, which, in turn, may be subject to many conditions,
including that the equipment purchased be competitive in the wireless
telecommunications marketplace with respect to technology, price, quality, and
other commercial concerns. In addition, because DMC's major orders often
require deliveries for periods over 12 months, such products are subject to
risks associated with obsolescence due to rapidly changing technology. There
can be no assurance that DMC will have the financial resources, technical
expertise, or marketing, sales, distribution, and customer service and support
capabilities to compete successfully. Moreover, the Merger may have the effect
of inducing certain of DMC's or Innova's competitors to enter into additional
business combinations, to accelerate product development or to engage in
aggressive price reductions or other competitive practices thereby creating even
more powerful or aggressive competitors.
DEPENDENCE ON COMPONENT AVAILABILITY, SUBCONTRACTOR PERFORMANCE AND KEY
SUPPLIERS
The manufacturing operations of DMC and Innova are highly dependent upon
the delivery of materials by outside suppliers in a timely manner. In addition,
DMC, and Innova to a lesser extent, depend in part upon subcontractors to
assemble major components and subsystems used in their products in a timely and
satisfactory manner. The failure of an outside supplier or subcontractor to
deliver such materials, components or subsystems in a timely and satisfactory
manner could have a material adverse effect on DMC's or Innova's business,
financial condition and results of operations. DMC or Innova may increase their
reliance on outside suppliers and subcontractors to provide materials,
components and subsystems. DMC does not generally enter into long-term or
volume purchase agreements with any of its suppliers, and no assurance can be
given that such materials, components and subsystems will be available in the
quantities required by DMC, if at all. The inability of DMC or Innova to
develop alternative sources of supply quickly and on a cost-effective basis
could materially impair the ability of DMC or Innova to manufacture and deliver
their products in a timely manner. There can be no assurance that DMC or Innova
will not experience material supply problems or component or subsystem delays in
the future.
MANAGEMENT OF GROWTH
Future growth of DMC's operations depends, in part, on its ability to
introduce new products and product enhancements to meet the emerging trends in
the wireless telecommunications industry. DMC has pursued, and after the Merger
will continue to pursue, growth opportunities through internal development and
acquisitions of complementary businesses and technologies. DMC is unable to
predict whether and when any prospective acquisition candidate will become
available or the likelihood that any acquisition will be completed. DMC
competes for acquisition and expansion opportunities with many entities that
have substantially greater resources than DMC. In addition, acquisitions may
involve difficulties in the retention of personnel, diversion of management's
attention, unexpected legal liabilities, and tax and accounting issues. There
can be no assurance that DMC 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 DMC or otherwise perform
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as expected. The occurrence of any of these events could have a material
adverse effect on DMC's business, financial condition or results of operation.
CUSTOMER CONCENTRATION
During any given quarter, a small number of customers may account for a
significant portion of the net sales of DMC and Innova. For the three months
ended June 30, 1998, the top three customers accounted for 17% of DMC's net
sales and two customers accounted for approximately 58% of Innova's sales of XP4
radios. At June 30, 1998, three customers accounted for approximately 23% of
DMC's $71.2 million backlog. There can be no assurance that DMC's or Innova's
current customers will continue to place orders with DMC or Innova, that orders
by existing customers will continue to be at levels of previous periods, or that
DMC or Innova will be able to obtain orders from new customers. DMC's and
Innova'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 DMC or Innova to gain additional customers could
have a material adverse effect on DMC's or Innova's business, financial
condition and results of operations.
LIMITATIONS ON USE OF NET OPERATING LOSS CARRYFORWARDS
Section 382 of the Code imposes certain limitations on the ability of a
"loss corporation" to use its net operating losses ("NOLs") to offset its future
taxable income in taxable years following an "ownership change" (including an
ownership change resulting from the issuance of stock). In general, an
ownership change occurs if the percentage (as measured by value) of the loss
corporation's stock (other than certain preferred stock) which is owned,
directly or indirectly, by one or more 5% shareholders (or certain groups of
shareholders collectively treated as a 5% shareholder) is increased by more than
50 percentage points over the lowest percentage of stock owned by such 5%
shareholders at any time during the applicable "testing period." In the event
of an ownership change, the amount of pre-change NOLs that the loss corporation
can use to offset its taxable income in a post-change taxable year will be
limited to an amount equal to the product of the "long-term tax-exempt rate"
then in effect and the value of the loss corporation's stock immediately prior
to the ownership change (without taking into account for such valuation purposes
certain capital contributions received by the loss corporation during the
two-year period preceding the ownership change) (the "Section 382 Limitation").
The long-term tax-exempt rate is an interest rate based upon certain specified
U.S. Treasury debt obligations and announced on a monthly basis by the Internal
Revenue Service (the "IRS"). In addition, if the loss corporation does not
continue its historic business or continue to use a substantial portion of its
historic assets in its business for a two-year period following an ownership
change, the Section 382 limitation would be reduced to zero, with the effect
that no portion of the pre-change NOLs would be available to offset future
taxable income (except in certain very limited circumstances).
Innova has reviewed past issuances of stock, grants of options and warrants
to acquire Innova Common Stock and issuances of debt instruments convertible
into Innova Common Stock, as well as share transfers among its shareholders, to
determine the effect of such events under Section 382 of the Code. Based on
such review, Innova believes that ownership changes occurred on both February
20, 1992 and February 13, 1995, and that as a result, the NOLs incurred by
Innova prior to such dates are subject to the Section 382 limitation. Thus, to
the extent that Innova's taxable income in a post-change taxable year exceeds
the amount of the Section 382 limitation, Innova's federal income tax liability
for such taxable year would be greater than it would otherwise be if the
pre-change NOLs were fully available to offset such taxable income. Innova
believes that the availability of the cumulative NOL incurred through February
13, 1995 will not be limited by the Section 382 limitation. However, DMC and
Innova believe that the Merger, if consummated, would constitute an ownership
change. As a result, DMC's ability to use some or all of Innova's NOLs incurred
prior to the Merger would become subject to the Section 382 limitation. As of
June 30, 1998, Innova had remaining NOLs of approximately $35.9 million.
YEAR 2000 COMPLIANCE
DMC and Innova are aware of the issues associated with the programming code
in existing computer systems as the year 2000 approaches. The "Year 2000"
problem is concerned with whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Year 2000 problem is pervasive and complex as virtually
every company's computer operation will be affected in some way. DMC's
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computer programs, which process its operational and financial transactions,
were designed and developed without considering the impact of the upcoming
change in century. In addition, some of DMC's products being shipped today are
not Year 2000 compliant. If not corrected, DMC's computer programs and products
could fail or create erroneous results by or at the Year 2000. Innova has
determined that its newly installed information management system has been
certified by Oracle Corporation to be Year 2000 compliant. Innova also has
completed an assessment of the embedded software incorporated in its products,
and has determined that it is Year 2000 compliant as well. Innova has not yet
evaluated its non-IT systems. Non-IT systems include systems or hardware
containing embedded technology such as microcontrollers. Innova believes that
the costs incurred in investigating and remedying issues related to Year 2000
compliance involving internal operations will not be material. Innova has not
yet developed a contingency plan to operate in the event that any non-compliant
critical systems are not remedied by January 1, 2000 and has not yet determined
a time table for developing such a plan.
DMC is taking steps to ensure its products and computer programs will
continue to operate on and after January 1, 2000. DMC has formed a project team
consisting of staff from its Manufacturing, Customer Service, Finance, Human
Resources, Sales, Marketing, Legal, Engineering and Information Technology
departments and is lead by a project manager. A five phase solution process has
been established consisting of (1) awareness, (2) assessment, (3) renovation,
(4) validation, and (5) implementation. This team is currently in the second
phase which includes evaluating both DMC's products and information technology
("IT") systems at greatest risk and identifying alternative solutions to
correcting the Year 2000 problem. DMC estimates that it will complete this five
phase process for all of its significant systems by December 31, 1998. DMC's
Year 2000 project team has identified its manufacturing IT system as its highest
priority and plans to install an upgrade to DMC's current manufacturing system
supplied by the vendor of that system. DMC has not yet evaluated its non-IT
systems. DMC believes that it will expend $0.5 million investigating and
remedying issues related to Year 2000 compliance involving its internal
operations. However, if systems material to DMC's operations have not been made
Year 2000 compliant by the completion of the project, the Year 2000 issue could
have a material adverse effect on DMC's financial statements. DMC has not yet
developed a contingency plan to operate in the event that any noncompliant
critical systems are not remedied by January 1, 2000. DMC expects to develop
such a contingency plan by December 31, 1998.
DMC is contacting its primary suppliers and subcontractors to determine
that they are developing plans to address processing transactions in the Year
2000 and to monitor their progress toward Year 2000 capability. The responses
received by DMC to date have indicated that steps are currently being
implemented to address this concern. Innova believes that it will not be
dependent upon any single supplier in the Year 2000, and therefore has made a
determination not to contact its primary suppliers and subcontractors to
determine that they are developing plans to address processing transactions in
the Year 2000.
Based on the steps being taken to address this issue and the progress to
date, DMC's and Innova's managements believe that the Year 2000 compliance
expenses will not have a material adverse effect on DMC's or Innova's earnings.
However, there can be no assurance that Year 2000 problems will not occur with
respect to DMC's or Innova's computer systems. Furthermore, the Year 2000
problem may impact other entities with which DMC and Innova transact business,
and DMC and Innova cannot predict the effect of the Year 2000 problem on such
entities or the resulting effect on DMC or Innova. As a result, if preventative
and/or corrective actions by DMC and Innova or those DMC and Innova do business
with are not made in a timely manner, the Year 2000 issue could have a material
adverse effect on DMC's or Innova's business, financial condition and results of
operations.
EURO CONVERSION
Beginning in January 1999, a new currency called the "euro" is scheduled to
be introduced in certain Economic and Monetary Union ("EMU") countries. During
2002, all EMU countries are expected to be operating with the euro as their
single currency. Uncertainty exists as to the effect the euro currency will
have on the marketplace. Additionally, all of the final rules and regulations
have not yet been defined and finalized by the European Commission with regard
to the euro currency. DMC has assessed the effect the euro formation will have
on its internal systems and the sale of its products. Most of DMC's European
sales and operating transactions are based primarily in U.S. dollars or UK
pounds sterling, neither of which are subject to the euro conversion. In
addition, DMC plans to upgrade its internal computer systems in early 1999 to
convert the European currency to euro. DMC's management believes that the cost
of upgrading DMC's systems in connection with the euro conversion will not be
material and that such conversion will not have a material adverse effect on
DMC's business, financial condition and results of operations. Innova has not
yet assessed the effect the euro formation will have on
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its internal systems and the sale of its products. Innova expects to take
appropriate actions based on the results of such assessment. Innova has not yet
determined the cost related to addressing this issue and there can be no
assurance that this issue and its related costs will not have a material adverse
effect on Innova's business, financial condition and results of operations.
MULTIPLE REGULATORY ENVIRONMENTS
Radio communications are subject to regulation by United States and foreign
laws and international treaties. Generally, DMC's and Innova's products must
conform to a variety of United States and international requirements established
to avoid interference among users of transmission frequencies and to permit
interconnection of telecommunications equipment. In addition, both in the
United States and internationally, DMC and Innova are affected by the allocation
and auction of the radio frequency spectrum by governmental authorities.
Historically, in many developed countries, the unavailability of frequency
spectrum has inhibited the growth of wireless telecommunications networks. In
addition, to operate in a jurisdiction, DMC and Innova must obtain regulatory
approval for their products. Each jurisdiction in which DMC and Innova market
their products has its own regulations governing radio communications. Products
that support emerging wireless telecommunications services can be marketed in a
jurisdiction only if permitted by suitable frequency allocations, auctions and
regulations, and the process of establishing new regulations is complex and
lengthy. Failure by the governmental regulatory authorities to allocate
suitable frequency spectrum or to establish suitable regulations for emerging
wireless telecommunications services could have a material adverse effect on
DMC's or Innova's business, financial condition or results of operations. There
can be no assurance that governmental authorities, both in the United States and
internationally, will allocate sufficient radio frequency spectrum for use by
the products of DMC or Innova or that DMC or Innova will be successful in
obtaining approval for their products from such authorities.
NO ASSURANCE OF PRODUCT QUALITY; PERFORMANCE AND RELIABILITY
DMC's and Innova's customers typically require demanding specifications for
quality, performance and reliability. There can be no assurance that problems
will not occur with respect to the quality, performance and reliability of the
systems or related software tools of DMC or Innova. If such problems occur, DMC
or Innova could experience increased costs, delays in or cancellations or
reschedulings of orders of shipments, delays in collecting accounts receivable
and product returns and discounts, any of which would have a material adverse
effect on DMC's or Innova's business, financial condition and results of
operations.
RELIANCE ON KEY OEM RELATIONSHIPS
DMC has informal relationships with OEM base station suppliers. Innova has
developed relationships with OEMs. See "Innova Corporation -- Business of
Innova -- Distribution Relationships." Such relationships increase DMC's and
Innova's respective ability to pursue the limited number of major contract
awards each year. In addition, such relationships are intended to provide DMC's
and Innova's customers with easier access to financing and to integrated systems
providers with a variety of equipment and service capabilities. There can be no
assurance that after the Merger DMC or Innova will continue to be able to
maintain and develop such relationships or that, if such relationships are
developed, they will be successful. In selected countries, DMC also markets its
products through independent agents and distributors.
DEPENDENCE ON KEY PERSONNEL; NEW MANAGEMENT
Due to the specialized nature of the business of DMC, DMC's future
performance is highly dependent upon the continued services of its key
engineering personnel and executive officers, including Charles D. Kissner, who
currently serves as DMC's Chairman of the Board and Chief Executive Officer.
The loss of any key personnel could have a material adverse effect on DMC's
business, financial condition and results of operations. DMC's Chief Executive
Officer, Chief Financial Officer, Senior Vice President of Operations and Senior
Vice President of Worldwide Sales, Service and Marketing joined DMC in 1995. In
addition, DMC's Treasurer and Vice President of Engineering joined DMC in 1996,
its Corporate Controller in 1997, and its President and Chief Operating Officer
in 1998. DMC's and Innova's prospects depend upon their ability to attract and
retain qualified engineering, manufacturing, marketing, sales and management
personnel for their operations. Competition for such personnel is intense and
there can be no assurance that DMC or Innova will be successful in attracting or
retaining such personnel. The failure of any key employee to perform in his or
her current position or DMC's or Innova's inability
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to attract and retain qualified personnel could have a material adverse effect
on DMC's or Innova's business, financial condition and results of operations.
See "Management of DMC after the Merger."
IMPORTANCE OF INTELLECTUAL PROPERTY
The ability of DMC and Innova to compete will depend, in part, on their
ability to obtain and enforce intellectual property protection for their
technology in the United States and internationally. DMC and Innova rely upon a
combination of trade secrets, trademarks, copyrights, patents and contractual
rights to protect their intellectual property. DMC and Innova each enter into
confidentiality and invention assignment agreements with their employees, and
each enter into non-disclosure agreements with their suppliers and appropriate
customers so as to limit access to and disclosure of their proprietary
information. There can be no assurance that any steps taken by DMC or Innova
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, DMC's or Innova'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
intellectual property of DMC or Innova 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 DMC or Innova.
The wireless telecommunications industry is characterized by numerous
allegations of patent infringement among competitors and considerable related
litigation. Accordingly, either DMC or Innova 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 DMC or Innova or
unresolved notices that DMC or Innova 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 DMC's or Innova's business, financial condition and results of
operations. In the event of an adverse result of any such litigation, DMC or
Innova 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 DMC or Innova would
be successful in such development or that any such license would be available on
commercially reasonable terms.
POSSIBLE VOLATILITY OF STOCK PRICE
Announcements of developments related to the business of DMC and Innova,
announcements by competitors, quarterly fluctuations in the financial results of
DMC and Innova and general conditions in the telecommunications industry in
which DMC and Innova compete or the national economies in which DMC and Innova
do business, and other factors could cause the price of DMC Common Stock and
Innova Common Stock to fluctuate, perhaps substantially. In addition, in recent
years the stock market has experienced extreme price fluctuations, which have
often been unrelated to the operating performance of affected companies. Such
fluctuations could have a material adverse effect on the market price of DMC
Common Stock. The value of DMC Common Stock to be issued in the Merger could be
affected by fluctuations in the market price of DMC Common Stock. See "The
Merger Agreement -- Conversion of Securities."
EFFECT OF ANTITAKEOVER PROVISIONS
Certain provisions of DMC's Restated Certificate of Incorporation and
Bylaws could discourage potential acquisition proposals and could delay or
prevent a change in control of DMC. Such provisions could diminish the
opportunities for a stockholder to participate in tender offers, including
tender offers at a price above the then current market value of DMC Common
Stock. Such provisions may also inhibit fluctuations in the market price of DMC
Common Stock that could result from takeover attempts. In addition, the DMC
Board, without further stockholder approval, may issue DMC Preferred Stock, with
such terms as the DMC Board may determine, that could have the effect of
delaying or preventing a change in control of DMC. The issuance of DMC
Preferred Stock could also adversely affect the voting power of the holders of
DMC Common Stock, including the loss of voting control to others. In addition,
the DMC Rights Plan is activated by certain change in control transactions and
DMC also is afforded the protections of Section 203 of the Delaware General
Corporation Law, each of which could delay or prevent a change in control of DMC
or could impede a merger, consolidation, takeover or other business combination
involving DMC or discourage a potential acquirer from making a tender offer or
otherwise attempting
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to obtain control of DMC. See "Description of DMC Capital Stock" and
"Comparison of Rights of DMC Stockholders and Innova Shareholders."
COMPARATIVE PER SHARE PRICES AND DIVIDEND POLICIES
Both the DMC Common Stock and the Innova Common Stock are listed and
traded on Nasdaq. DMC Common Stock has traded under the trading symbol DMIC
since May 19, 1987. Prior to that time, there was no public market for DMC
Common Stock. Innova Common Stock has traded under the symbol INVA since
August 8, 1997. Prior to that time, there was no public market for Innova
Common Stock. The following table sets forth the high and low closing sale
prices per share of DMC Common Stock and Innova Common Stock for the periods
indicated, as reported by Nasdaq:
<TABLE>
<CAPTION>
DMC INNOVA
COMMON STOCK(1)(2) CAPITAL STOCK(3)
--------------------- -------------------
HIGH LOW HIGH LOW
--------- --------- --------- -------
<S> <C> <C> <C> <C>
Calendar 1996:
First Quarter. . . . . . . . . . $ 5.50 $ 4.19 $ -- $ --
Second Quarter . . . . . . . . . 9.13 4.00 -- --
Third Quarter. . . . . . . . . . 11.94 6.13 -- --
Fourth Quarter . . . . . . . . . 14.59 10.06 -- --
Calendar 1997:
First Quarter. . . . . . . . . . $ 18.81 $ 9.63 $ -- $ --
Second Quarter. . . . . . . . . 16.00 9.63 -- --
Third Quarter. . . . . . . . . . 22.63 13.63 28.13 17.50
Fourth Quarter . . . . . . . . . 25.50 12.63 28.63 12.00
Calendar 1998:
First Quarter. . . . . . . . . . $ 21.63 $ 12.44 $19.00 $13.38
Second Quarter . . . . . . . . . 14.50 7.00 20.63 5.00
Third Quarter (through . . . . . 7.63 3.47 6.13 3.50
August 28)
</TABLE>
(1) Per share amounts for DMC Common Stock have been restated to give effect
retroactively to a stock dividend, which effected a two-for-one stock
split, in November 1997.
(2) DMC's fiscal year ends March 31 of each year. The information set forth
above is presented based on calendar year quarters.
(3) There was no public market for Innova Common Stock until August 8, 1997.
On July 22, 1998, the last trading day prior to the public announcement of
the Merger Agreement, the closing sale prices of DMC Common Stock and Innova
Common Stock as reported by Nasdaq were $6.50 per share and $5.88 per share,
respectively. Based on the Exchange Ratio of 1.05, the equivalent per share
value of DMC Common Stock as of such date was $6.83.
Because the Exchange Ratio is fixed at 1.05 and because the market price of
DMC Common Stock is subject to fluctuation, the market value of the shares of
DMC Common Stock that holders of Innova Common Stock will receive in the Merger
may increase or decrease prior to and following the Merger. HOLDERS OF DMC
COMMON STOCK AND HOLDERS OF INNOVA COMMON STOCK ARE URGED TO OBTAIN CURRENT
MARKET QUOTATIONS OF DMC COMMON STOCK AND INNOVA COMMON STOCK. NO ASSURANCE CAN
BE GIVEN AS TO THE FUTURE PRICES OR MARKETS FOR DMC COMMON STOCK OR INNOVA
COMMON STOCK.
No cash dividends have been paid on the DMC Common Stock. DMC intends to
retain all available funds and any future earnings for use in the operation of
its business and does not anticipate paying any cash dividends in the
foreseeable future. Since the initial quotation of Innova Common Stock on
Nasdaq on August 8, 1997, Innova has never declared or paid cash dividends on
the Innova Common Stock and does not anticipate paying any cash dividends in the
foreseeable future.
20
<PAGE>
THE DMC SPECIAL MEETING
DATE, TIME AND PLACE
The DMC Special Meeting will be held at the corporate offices of DMC,
located at 170 Orchard Way, San Jose, California on October 7, 1998 at
11:00 a.m.
PURPOSE
At the DMC Special Meeting, holders of DMC Common Stock will consider and
vote upon proposals to approve the issuance of shares of DMC Common Stock
pursuant to the Merger Agreement. Stockholders of DMC will also consider and
vote on any other matter that may properly come before the meeting.
Neither the Delaware General Corporation Law nor the DMC Restated
Certificate of Incorporation requires DMC to obtain stockholder approval of the
Merger, because Innova is merging with Merger Sub, a wholly owned subsidiary of
DMC, rather than with DMC itself. However, due to the number of shares of DMC
Common Stock to be issued in the Merger, Nasdaq rules require DMC to obtain
stockholder approval of the issuance of such shares. Stockholder approval of
the Merger Agreement will constitute the approval required by Nasdaq for the
issuance of DMC Common Stock in connection with the Merger.
THE DMC BOARD HAS UNANIMOUSLY APPROVED THE TERMS OF THE MERGER AGREEMENT
AND BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND IN THE BEST
INTERESTS OF, DMC AND ITS STOCKHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT HOLDERS
OF DMC COMMON STOCK VOTE FOR APPROVAL OF THE MERGER AGREEMENT. SEE "THE
MERGER -- RECOMMENDATION OF THE DMC BOARD; REASONS FOR THE MERGER."
RECORD DATE; VOTING RIGHTS; PROXIES
Only holders of record of DMC Common Stock at the close of business on
August 28, 1998 (the "DMC Record Date") are entitled to notice of and to vote at
the DMC Special Meeting. As of the DMC Record Date, there were 46,689,392
shares of DMC Common Stock issued and outstanding, each of which entitled the
holder thereof to one vote.
All shares of DMC Common Stock represented by properly executed proxies
will, unless such proxies have been previously revoked, be voted in accordance
with the instructions indicated in such proxies. IF NO INSTRUCTIONS ARE
INDICATED, SUCH SHARES OF DMC COMMON STOCK WILL BE VOTED FOR THE MERGER. DMC
does not know of any matters other than as described in the Notice of Special
Meeting that are to come before the DMC Special Meeting. If any other matter or
matters are properly presented for action at the DMC Special Meeting, the
persons named in the enclosed form of proxy and acting thereunder will have the
discretion to vote on such matters in accordance with their best judgment. A
stockholder who has given a proxy may revoke it at any time prior to its
exercise by giving written notice thereof to the Secretary of DMC, by signing
and returning a later dated proxy, or by voting in person at the DMC Special
Meeting. However, mere attendance at the DMC Special Meeting will not in and of
itself have the effect of revoking the proxy. Votes cast by proxy or in person
at the DMC Special Meeting will be tabulated by the inspector of election
appointed for the meeting.
SOLICITATION OF PROXIES
Proxies are being solicited by and on behalf of the DMC Board. DMC will
bear all expenses in connection with such solicitation. In addition to
solicitation by use of the mails, proxies may be solicited by directors,
officers and employees of DMC, in person or by telephone, telegram or other
means of communication. Such directors, officers and employees will not be
additionally compensated for, but may be reimbursed for out-of-pocket expenses
incurred in connection with, such solicitation. Arrangements have also been
made with brokerage firms, banks, custodians, nominees and fiduciaries for the
forwarding of proxy and solicitation materials to owners of DMC Common Stock
held of record for such persons, and in connection therewith such firms will be
reimbursed for reasonable expenses incurred in forwarding such materials. DMC
may retain Corporate Investor Communications, Inc. to aid in the solicitation of
proxies from its stockholders. If retained, the aggregate fees of such firm for
the
21
<PAGE>
solicitation of proxies from the stockholders of DMC are estimated to be $7,000,
plus reimbursement for out-of-pocket expenses.
REQUIRED VOTE; QUORUM
Approval of the Merger requires the affirmative vote of the holders of a
majority of the shares of DMC Common Stock present, or represented, and entitled
to vote on that proposal at the DMC Special Meeting.
For purposes of determining whether the Merger has been approved, the
inspector of election will include abstentions, but exclude broker non-votes,
from the number of shares deemed to be present, or represented, and entitled to
vote on such matter at the DMC Special Meeting. Accordingly, abstentions will
have the effect of a "NO" vote, and broker non-votes will have no effect, on the
voting on the Merger.
As of the DMC Record Date, directors and executive officers of DMC and
their affiliates were beneficial owners of an aggregate of 692,790 shares of
DMC Common Stock (exclusive of any shares issuable upon the exercise of stock
options remaining unexercised as of such date), or approximately 1.48% of the
46,689,392 shares of DMC Common Stock that were issued and outstanding as of
such date. See "Management of DMC After the Merger -- Security Ownership of DMC
Management."
THE MATTERS TO BE CONSIDERED AT THE DMC SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE STOCKHOLDERS OF DMC. ACCORDINGLY, STOCKHOLDERS ARE URGED TO
READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY
STATEMENT/PROSPECTUS AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
22
<PAGE>
THE INNOVA SPECIAL MEETING
DATE, TIME AND PLACE
The Innova Special Meeting will be held at the offices of Innova, located
at 3325 South 116th Street, Seattle, Washington on October 7, 1998 at
11:00 a.m.
PURPOSE
At the Innova Special Meeting, holders of Innova Common Stock will consider
and vote upon the Merger Agreement.
THE INNOVA BOARD HAS UNANIMOUSLY APPROVED AND ADOPTED THE MERGER AGREEMENT
AND CONCLUDED THAT ITS TERMS ARE FAIR TO, AND IN THE BEST INTERESTS OF, INNOVA
AND ITS SHAREHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT HOLDERS OF INNOVA COMMON
STOCK VOTE FOR APPROVAL OF THE MERGER AGREEMENT. SEE "THE MERGER --
RECOMMENDATION OF THE INNOVA BOARD; REASONS FOR THE MERGER."
RECORD DATE; VOTING RIGHTS; PROXIES
Only holders of record of Innova Common Stock at the close of business on
August 14, 1998 (the "Innova Record Date") are entitled to notice of and to vote
at the Innova Special Meeting. As of the Innova Record Date, there were
14,021,858 shares of Innova Common Stock issued and outstanding, each of which
entitled the holder thereof to one vote.
All shares of Innova Common Stock represented by properly executed proxies
will, unless such proxies have been previously revoked, be voted in accordance
with the instructions indicated in such proxies. Unless contrary instructions
or an alternate proxy holder are indicated, such shares of Innova Common Stock
will be voted FOR the Merger Agreement. Innova does not know of any matters
other than as described in the Notice of Special Meeting that are to come before
the Innova Special Meeting. If any other matter or matters are properly
presented for action at the Innova Special Meeting, the persons named in the
enclosed form of proxy and acting thereunder will have the discretion to vote on
such matters in accordance with their best judgment. An Innova shareholder who
has given a proxy may revoke it at any time prior to its exercise by giving
written notice thereof to the Secretary of Innova, by signing and returning a
later dated proxy, or by voting in person at the Innova Special Meeting.
However, mere attendance at the Innova Special Meeting will not in and of itself
have the effect of revoking the proxy. Votes cast by proxy or in person at the
Innova Special Meeting will be tabulated by the inspector of election appointed
for the meeting.
SOLICITATION OF PROXIES
Proxies are being solicited by and on behalf of the Innova Board. Innova
will bear all expenses in connection with such solicitation. In addition to
solicitation by use of the mails, proxies may be solicited by directors,
officers and employees of Innova, in person or by telephone, telegram or other
means of communication. Such directors, officers and employees will not be
additionally compensated for, but may be reimbursed for out-of-pocket expenses
incurred in connection with, such solicitation. Arrangements have also been
made with brokerage firms, banks, custodians, nominees and fiduciaries for the
forwarding of proxy and solicitation materials to owners of Innova Common Stock
held of record for such persons, and in connection therewith such firms will be
reimbursed for reasonable expenses incurred in forwarding such materials.
REQUIRED VOTE; QUORUM
Approval of the Merger Agreement requires the affirmative vote of the
holders of a majority of the total number of shares of Innova Common Stock
issued and outstanding and entitled to be voted (voting in person or by proxy)
at the Innova Special Meeting. For the purpose of determining whether the
Merger Agreement has been approved, no account will be taken of abstentions or
non-votes.
Innova's directors, executive officers and affiliates hold in the aggregate
approximately 45.9% of the issued and outstanding Innova Common Stock entitled
to vote at the Innova Special Meeting. Pursuant to the Merger
23
<PAGE>
Agreement, Mr. Paul Bachow ("Mr. Bachow") and Mr. V. Frank Mendicino ("Mr.
Mendicino"), both of whom are directors of Innova, have agreed to vote their
shares in favor of the Merger Agreement. Mr. Bachow and Mr. Mendicino are
the beneficial holders of 3,196,498 shares and 1,571,937 shares,
respectively, or approximately 34.0% in the aggregate, of the Innova Common
Stock outstanding (exclusive of any shares issuable upon the exercise of
stock options or warrants remaining unexercised as of such date) on the
Innova Record Date. Their agreements to so vote their shares are
irrevocable, except in the event the Innova Board withdraws its
recommendation to the Innova shareholders in favor of the Merger Agreement.
A quorum is required to be present at the Innova Special Meeting. The
holders of a majority of the votes entitled to be cast at the meeting
(represented in person or by proxy) constitute a quorum.
THE MATTERS TO BE CONSIDERED AT THE INNOVA SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE SHAREHOLDERS OF INNOVA. ACCORDINGLY, SHAREHOLDERS ARE URGED
TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY
STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
24
<PAGE>
THE MERGER
THIS SECTION OF THE PROXY STATEMENT/PROSPECTUS DESCRIBES CERTAIN ASPECTS OF
THE PROPOSED MERGER. TO THE EXTENT THAT IT RELATES TO THE MERGER AGREEMENT AND
THE TERMS OF THE MERGER, THE FOLLOWING DESCRIPTION DOES NOT PURPORT TO BE
COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT,
WHICH IS ATTACHED AS APPENDIX A TO THIS PROXY STATEMENT/PROSPECTUS AND IS
INCORPORATED HEREIN BY REFERENCE. ALL STOCKHOLDERS OF DMC AND SHAREHOLDERS OF
INNOVA ARE URGED TO READ THE MERGER AGREEMENT.
GENERAL
The Merger Agreement provides that the Merger will be consummated if the
approvals of the DMC stockholders and the Innova shareholders required therefore
are obtained and all other conditions to the Merger are satisfied or waived as
provided in the Merger Agreement. Upon consummation of the Merger, Merger Sub
will be merged with and into Innova, and Innova will become a wholly owned
subsidiary of DMC.
Upon consummation of the Merger, each outstanding share of Innova Common
Stock will be converted into the right to receive 1.05 fully paid and
nonassessable shares of DMC Common Stock and the associated purchase rights
under the DMC Rights Agreement, subject to dissenters' rights under Washington
law. Cash will be delivered in lieu of fractional shares as described in the
Merger Agreement.
Based upon the capitalization of DMC and Innova as of June 30, 1998, the
shareholders of Innova will own approximately 24% of the outstanding DMC Common
Stock following consummation of the Merger and assuming no exercise of
outstanding options to acquire DMC Common Stock or options or Stock Purchase
Rights to acquire Innova Common Stock. Such percentage could change depending
on whether and to what extent shares of DMC Common Stock and Innova Common Stock
issuable upon exercise of outstanding DMC or Innova stock options or warrants
are issued and whether any Innova shareholders perfect their statutory
dissenters' rights.
BACKGROUND OF THE MERGER
During 1996, DMC developed a strategic objective to expand its product line
and enhance its competitive position in the wireless telecommunications industry
by growth through acquisitions and strategic combinations. As part of this
growth strategy, DMC acquired (i) Granger, Inc. in May 1997 to expand its
service and support capability in the U.S. market and (ii) MAS to further expand
its product line offerings in low frequency, low capacity microwave radio
solutions.
In the Fall of 1997, economic conditions in Asia began to destabilize,
causing significant fluctuations in currency valuations for several countries
where DMC conducts business. Primarily due to such currency fluctuations, the
operating margins of the major telecommunication operators in Asia began to
deteriorate, which resulted in intense competitive pricing pressure on
infrastructure suppliers in Asia. In the beginning of 1998, DMC believes that
this pricing pressure spread to other market areas, including Europe, Latin
America, and Africa.
In order to respond to such intense pricing pressure, DMC began to
investigate its options to reduce its product costs and to improve its operating
margins. On June 22, 1998, Charles D. Kissner, Chairman and Chief Executive
Officer of DMC, initiated a meeting with Mr. Grenon, President and Chief
Executive Officer of Innova, to discuss the competitive pressures and market
conditions in the industry. The parties discussed potential synergies for new,
low-cost product offerings and worldwide distribution channels.
On June 24, 1998, DMC retained CIBC Oppenheimer to serve as DMC's financial
advisor and provide assistance in connection with the possible acquisition of
other companies. On June 25, 1998, in response to DMC's request, CIBC
Oppenheimer provided DMC with the preliminary transaction analysis for a pooling
of interests reorganization with Innova.
On June 29, 1998, during a special telephonic DMC Board meeting to review
the possible acquisition of Innova, Mr. Kissner advised the DMC Board of the
possible strategic benefits of the acquisition of Innova, and of the intention
of the management of DMC to explore such a possibility in the near future. The
DMC Board also was
25
<PAGE>
provided with a copy of the transaction analysis prepared by CIBC Oppenheimer.
The DMC Board appointed a subcommittee to review matters related to the possible
Innova transaction (the "DMC Subcommittee").
On July 2, 1998 the DMC Subcommittee met to discuss the terms of the
possible Innova transaction. Later that day, CIBC Oppenheimer, on behalf of
DMC, orally presented a possible framework to Hambrecht & Quist, as
representative of Innova, regarding a potential business combination with
Innova.
On July 8, 1998, DMC provided Innova with a preliminary draft form of a
merger agreement and discussions ensued between outside counsel for DMC and
outside counsel for Innova regarding the proposed structure and other principal
terms of the proposed merger agreement. During the week, the parties, their
legal, accounting and investment advisers discussed the structure of the
transaction.
On July 16, 1998, a confidentiality agreement was executed by the parties.
The DMC Subcommittee met to discuss the proposed transaction. Thereafter,
during the week of July 16, 1998, the senior management teams of each company
and their respective advisors met to explore the feasibility of the business
combination and nonpublic information was exchanged by DMC and Innova. During
this time, various representatives of DMC and Innova conducted due diligence
investigations on behalf of DMC and Innova, respectively. During and subsequent
to this time, CIBC Oppenheimer and Hambrecht & Quist, on behalf of the
managements of DMC and Innova, respectively, continued the negotiations
regarding a potential transaction.
On July 18, 1998, outside legal counsel for DMC and Innova, respectively,
met in Seattle, Washington to receive legal comments on the proposed merger
agreement and to negotiate changes to the agreement.
On July 19, 1998, DMC's counsel circulated a revised merger agreement. DMC
received Innova's additional comments on the revised merger agreement later that
day. Additional drafts of the reorganization agreement and related documents
were circulated on July 21 and July 22, 1998.
On July 20, 1998, the DMC Subcommittee met to discuss the proposed
transaction.
On July 21, 1998, members of the Innova Board met with Hambrecht & Quist
and outside legal counsel and considered certain terms of the proposed merger
agreement as well as, the financial and the strategic business implications of
the proposed organization, and the attendant risks and benefits.
On July 22, 1998, the Innova Board, at a meeting called for that purpose,
reviewed the fairness opinion of Hambrecht & Quist to the effect that the
consideration to be received by holders of Innova Common Stock in the proposed
Merger was fair to such holders from a financial point of view as of that date.
In reliance thereon, the Innova Board concluded that the proposed reorganization
was fair to, and in the best interests of, Innova and its shareholders.
Consequently, the Innova Board voted unanimously to approve the proposed Merger,
approved the final terms of the Merger Agreement, authorized certain officers to
execute, deliver and perform the Merger Agreement and voted to recommend that
Innova shareholders vote in favor of the Merger Agreement.
At a July 22, 1998 telephonic meeting of the DMC Board, at which
representatives from CIBC Oppenheimer and outside legal counsel were present to
advise the DMC Board, Mr. Kissner informed the DMC Board of the status of the
discussions with Innova, various proposals that had been suggested by DMC and
the final terms and conditions accepted by Innova. Mr. Kissner reviewed the
material terms of the proposed Merger Agreement which had previously been
circulated to the DMC Board. In addition to the foregoing, the DMC Board also
considered the financial and the strategic business implications of the Merger,
together with the potential risks and benefits of the transaction.
Representatives of CIBC Oppenheimer made a presentation regarding their analyses
of the proposed transaction and then provided its oral opinion, which was
subsequently confirmed in writing, that as of such date, subject to certain
assumptions, factors, limitations and other matters stated in its opinion, the
Exchange Ratio was fair, from a financial point of view, to DMC. The DMC Board
unanimously voted to approve the Merger, approved the final terms of the Merger
Agreement, authorized management to execute, deliver, and perform the Merger
Agreement and to recommend on behalf of the DMC Board to the DMC stockholders
that the DMC stockholders vote in favor of the Merger Agreement. After such
approval, DMC and Innova executed and delivered the Merger Agreement. On July
23, 1998, DMC and Innova publicly announced the execution of the Merger
Agreement.
26
<PAGE>
RECOMMENDATION OF THE DMC BOARD; REASONS OF DMC FOR THE MERGER
THE DMC BOARD HAS UNANIMOUSLY APPROVED THE TERMS OF THE MERGER AGREEMENT
AND THE MERGER, BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND
IN THE BEST INTERESTS OF, DMC AND ITS STOCKHOLDERS, AND UNANIMOUSLY RECOMMENDS
THAT HOLDERS OF SHARES OF DMC COMMON STOCK VOTE FOR APPROVAL OF THE MERGER
AGREEMENT.
The DMC Board has concluded that the financial aspects of the proposed
Merger are fair to, and in the best interests of, DMC and its stockholders. The
DMC Board also has concluded that the proposed Merger is in the best interests
of DMC and its stockholders because, among other reasons, the Merger would
further DMC's strategic objectives of enhancing its competitive position in the
wireless telecommunications industry, primarily by growth through acquisition
and expansion of its existing product line and distribution channels to provide
a full range of wireless connection products to customers worldwide. In
addition, DMC believes the Merger is a strategic step in response to the intense
global competition for short-haul, medium capacity radios, and the rapid
emergence of the synchronous, fiber-line wireless market.
The DMC Board concluded that the proposed Merger will further such
strategic objectives because of its belief that:
1. The Merger will increase DMC's ability to reduce rapidly the costs for
its plesiochronous digital hierarchy ("PDH"), medium capacity
microwave and millimeter wave radio products by combining DMC's
ability to design and implement manufacturing process improvements
with Innova's cost-efficient product design. The Merger will allow
the combined company to compete more effectively in the current market
of intense global competition for short-haul, medium capacity radios.
2. With the minimal customer overlap between DMC and Innova and DMC's
strong worldwide sales and support organization, the Merger will
enhance the combined company's market presence in the interconnection
segment of the industry.
3. The Merger will allow DMC to focus its resources more effectively on
the rapidly emerging synchronous, fiber-like wireless market. Such
focus will include DMC's previously introduced ALTIUM radio as well as
DMC's ability to more rapidly develop lower capacity synchronous
extensions to the ALTIUM product line. The DMC Board believes that
the Merger will assist DMC in establishing a significant lead over its
competition in developing products for the synchronous market.
In reaching its conclusion that the proposed Merger is fair to, and in the
best interests of, DMC and its stockholders, the DMC Board also considered,
among other factors, (i) its knowledge of the business, operations, properties,
assets, financial condition, operating results and prospects of DMC and Innova;
(ii) current industry, economic and market conditions; (iii) presentations by
DMC's management with respect to, and the fairness opinion rendered by CIBC
Oppenheimer in connection with the Merger (see " Opinion of CIBC Oppenheimer");
(iv) the terms of the Merger Agreement (see "The Merger Agreement"); (v) the
accounting and tax treatment of the Merger; and (vi) the opportunity for DMC
stockholders to participate in a larger, more diversified company.
In view of the variety of factors considered in connection with its
evaluation of the Merger, the DMC Board did not find it practicable to and did
not quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination. In addition, individual members of
the DMC Board may have given different weights to different factors.
RECOMMENDATION OF THE INNOVA BOARD; REASONS OF INNOVA FOR THE MERGER
THE INNOVA BOARD HAS UNANIMOUSLY APPROVED THE TERMS OF THE MERGER
AGREEMENT, BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND IN
THE BEST INTERESTS OF, INNOVA AND ITS SHAREHOLDERS, AND UNANIMOUSLY RECOMMENDS
THAT HOLDERS OF SHARES OF INNOVA COMMON STOCK VOTE FOR APPROVAL OF THE MERGER
AGREEMENT.
The Innova Board has concluded that the financial aspects of the proposed
Merger are fair to, and in the best interests of, Innova and its shareholders.
The Innova Board has also concluded that the proposed Merger is in
27
<PAGE>
the best interests of Innova and its shareholders because, among other reasons,
the Merger would advance Innova's current strategic objectives of expanding the
distribution network for its products, increasing sales of its products and
diversifying its product range.
The Innova Board concluded that the proposed Merger will further such
strategic objectives because of its belief that:
1. DMC's broad product line, which complements Innova's low to medium
capacity radios, would increase Innova's market presence in an
increasingly competitive market dominated by larger suppliers.
2. DMC's strong sales and marketing organization and its established
global distribution network will increase Innova's ability to sell its
low to medium capacity radios. The increased product presence and
market diversity could result in the combined company achieving
dominance as an independent supplier of microwave systems worldwide.
3. By combining with a company with greater financial resources and a
broader product line, Innova increases its ability to compete with
suppliers of complete telecommunication systems, and to withstand
fluctuations in demand in what is becoming an increasingly volatile
telecommunications equipment market.
In reaching the conclusion that the proposed Merger is fair to, and in the
best interests of, Innova and its shareholders, the Innova Board also
considered, among other factors, (i) its knowledge of the business, operations,
properties, assets, financial condition, operating results and prospects of
Innova and DMC; (ii) current industry, economic and market conditions;
(iii) presentations by Innova's management with respect to, and the analysis of
Hambrecht & Quist of, Innova, DMC and the proposed Merger (see " Opinion of
Hambrecht & Quist"); (iv) the terms of the Merger Agreement (see "The Merger
Agreement"); (v) the accounting and tax treatment of the Merger; and (vi) the
opportunity for Innova shareholders to participate in a larger, more diversified
company.
In view of the variety of factors considered in connection with the
evaluation of the proposed Merger, the Innova Board did not find it practicable
to, and did not, quantify or otherwise assign relative weights to the specific
factors considered in reaching its determination. Further, individual members
of the Innova Board may have ascribed different weight to different factors.
OPINIONS OF CIBC OPPENHEIMER AND HAMBRECHT & QUIST
Opinion of CIBC Oppenheimer. CIBC Oppenheimer has acted as financial
advisor to DMC in connection with the Merger. On July 22, 1998, CIBC
Oppenheimer delivered its oral opinion, which opinion was subsequently confirmed
in writing as of that date ("CIBC Oppenheimer Opinion"), to the DMC Board to the
effect that, subject to the assumptions, factors, limitations and other matters
set forth therein, as of the date of such opinion, the Exchange Ratio is fair,
from a financial point of view, to DMC.
THE FULL TEXT OF THE CIBC OPPENHEIMER OPINION, WHICH SETS FORTH ASSUMPTIONS
MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITS OF ITS REVIEW, IS
ATTACHED HERETO AS APPENDIX B AND IS INCORPORATED HEREIN BY REFERENCE. HOLDERS
OF DMC COMMON STOCK ARE URGED TO, AND SHOULD, READ THE CIBC OPPENHEIMER OPINION
CAREFULLY AND IN ITS ENTIRETY. THE CIBC OPPENHEIMER OPINION IS DIRECTED TO THE
DMC BOARD AND IS LIMITED TO THE FAIRNESS OF THE EXCHANGE RATIO, FROM A FINANCIAL
POINT OF VIEW, TO DMC, AND IT DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER
NOR DOES IT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER OF DMC AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE DMC SPECIAL MEETING. THE SUMMARY OF THE CIBC
OPPENHEIMER OPINION SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In connection with its opinion, CIBC Oppenheimer (i) reviewed the financial
terms and conditions of the Merger Agreement and related agreements;
(ii) reviewed the Annual Reports on Form 10-K and Annual Reports to Stockholders
for the two fiscal years ended March 31, 1998 of DMC; (iii) reviewed the Annual
Report on Form 10-K/A for the fiscal year ended December 31, 1997 of Innova and
Form S-1/A dated August 8, 1997 of Innova; (iv) reviewed the Quarterly Reports
on Form 10-Q of DMC for the fiscal year 1998; (v) reviewed the
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Quarterly Reports on Form 10-Q of Innova for the fiscal year 1997 and 1998 year
to date; (vi) reviewed certain internal financial statements and other financial
and operating data concerning DMC and Innova prepared by the managements of DMC
and Innova, respectively; (vii) reviewed certain other communications from DMC
and Innova to its stockholders, respectively; (viii) reviewed certain internal
financial and operating analyses and forecasts of (a) DMC prepared by DMC's
management and (b) Innova prepared by DMC's and Innova's managements; (ix) held
discussions with senior members of the managements of DMC and Innova regarding
the past and current business operations and financial condition and the future
prospects of their respective companies as well as the estimates of the
operating savings and other benefits and cost reductions expected by the
respective managements to be realized from the Merger and analyzed the pro forma
financial impact of the Merger on DMC's earnings per share; (x) considered the
strategic rationale and objectives for the Merger as outlined to CIBC
Oppenheimer by the managements of DMC and Innova; (xi) reviewed the reported
prices and trading activity for DMC Common Stock and Innova Common Stock and
compared certain financial and stock market information, to the extent
applicable, for DMC and Innova with similar information for other companies
whose securities are publicly traded; (xii) reviewed, to the extent publicly
available, the financial terms of certain recent business combinations in the
wireless equipment industry; and (xiii) performed such other studies and
analyses and considered such other financial, economic and market criteria as
CIBC Oppenheimer considered necessary to arrive at its opinion.
In rendering its opinion, CIBC Oppenheimer, at the direction of the DMC
Board, relied upon and assumed the accuracy and completeness of all the
financial and other information reviewed by CIBC Oppenheimer for purposes of its
opinion, without assuming responsibility for the independent verification of
such information. In that regard, CIBC Oppenheimer assumed, at the direction of
the DMC Board, that the financial forecasts prepared by the respective
managements of DMC and Innova and other information as provided or otherwise
discussed have been reasonably prepared on bases reflecting the best currently
available judgments and estimates of the competitive, operating and regulatory
environments and the related financial prospects of DMC and Innova for the
relevant periods. CIBC Oppenheimer assumes no responsibility for and expresses
no view as to such forecasts or the information or the assumptions on which they
are based. CIBC Oppenheimer has further relied upon the assurance of management
of DMC that they are unaware of any facts that would make the information
provided to CIBC Oppenheimer incomplete in any meaningful respect or misleading
in any respect. CIBC Oppenheimer has not made an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of DMC or
Innova or any of their subsidiaries, and has not been furnished with any such
evaluation or appraisal, nor did CIBC Oppenheimer make a physical inspection of
all of the properties or assets of DMC or Innova. CIBC Oppenheimer's opinion is
necessarily based on economic, market and other conditions as in effect on, and
the information made available to it as of, the date of its opinion, and CIBC
Oppenheimer has not been requested, nor has undertaken any responsibility, to
update its opinion in light of future developments. CIBC Oppenheimer has
further assumed, with the consent of the DMC Board, that (i) the representations
and warranties contained in the Merger Agreement are true and correct in all
material respects; (ii) the Merger will be consummated in accordance with the
terms described in the Merger Agreement and related agreements, without any
amendment thereto (including, among other things, that the Merger will qualify
as a tax-free reorganization pursuant to Section 368(a) of the Code and that the
Merger will be treated as a "pooling of interests" business combination in
accordance with U.S. GAAP), and without waiver by DMC of any of the conditions
to its obligation to close thereunder; and (iii) the Merger will be consummated
in a manner that complies in all material respects with the applicable
provisions of the Securities Act, the Exchange Act and all other applicable
federal and state statutes, rules and regulations.
In connection with rendering its opinion to the DMC Board, CIBC Oppenheimer
performed a variety of financial analyses, the material portions of which are
summarized below. The summary set forth below does not purport to be a complete
description of the analyses performed by CIBC Oppenheimer. In addition, CIBC
Oppenheimer believes that its analyses must be considered as a whole and that
selecting portions of such analyses and the factors considered therein, without
considering all factors and analyses, could create an incomplete view of the
analyses and the processes underlying CIBC Oppenheimer's opinion. The
preparation of a fairness opinion is a complex process involving subjective
judgments and is not susceptible to partial analysis or summary description.
CIBC Oppenheimer performed certain procedures, including each of the financial
analyses described below, and reviewed with the managements of DMC and Innova
the assumptions on which such analyses were based and other factors, including
the historical, current and projected financial results of such companies. The
forecasts provided by the managements of DMC and Innova underlying CIBC
Oppenheimer's analyses are forward looking, were not prepared with a view to
public disclosure, are not necessarily indicative of future results or values,
which may be
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significantly more or less favorable than such forecasts, and are subject to
numerous risks and uncertainties. Estimates of values of companies do not
purport to be appraisals or necessarily reflect the prices at which companies or
their securities actually may be sold.
The following is a brief summary of all material financial analyses
performed by CIBC Oppenheimer in connection with its opinion and discussed with
the DMC Board on July 22, 1998.
COMPARABLE COMPANY ANALYSIS. To obtain comparative market information and
other data, CIBC Oppenheimer compared certain historical and estimated earnings,
operating and financial data and ratios and multiples of income statement
parameters of certain other publicly traded companies deemed to be generally
comparable to Innova. The comparable companies (the "Innova Selected Companies")
selected by CIBC Oppenheimer for purposes of this analysis were: DMC, DSP
Communications Inc., LM Ericsson Telephone Co. ("LM Ericsson"), Glenayre
Technologies, Inc. ("Glenayre"), Nokia Corporation ("Nokia"), P-Com, Inc.
("P-Com") and Proxim, Inc. ("Proxim"). The Innova Selected Companies were used
in this analysis because they were deemed by CIBC Oppenheimer to operate in the
same general industry sector as Innova. Although CIBC Oppenheimer used the
Innova Selected Companies for comparison purposes, none of such companies is
directly comparable to Innova. Financial data compared included market
capitalization, firm (or "aggregate") value (defined as market capitalization
plus debt less cash), revenues, operating cash flow (defined as earnings before
interest, taxes, depreciation and amortization ("EBITDA")), operating income
(defined as earnings before interest and taxes ("EBIT")), net income, earnings
per share ("EPS"), projected EPS, gross margin, EBIT margin, net margin, EBITDA
margin, historical revenues, projected revenues and revenue and EPS growth
rates. Multiples considered included firm value to revenues, firm value to
EBITDA, firm value to EBIT and price per share to historical and projected EPS.
Projected revenues and EPS for the Innova Selected Companies were based upon the
consensus published estimates of securities analysts when available or upon
individual research analysts when consensus estimates were not available, while
the projected revenues and EPS for Innova are based on DMC's and Innova's
management estimates.
Such analyses indicated that the Innova Selected Companies traded at
multiple range of firm value to revenues for the trailing twelve months ("TTM")
ended June 30, 1998 (with the exception of LM Ericsson, Nokia and Proxim whose
results are as of March 31, 1998) of 1.1x to 5.9x with a mean of 3.1x, compared
with an implied transaction value multiple of 2.4x. The analysis also indicated
that the Innova Selected Companies traded at a multiple range of firm value to
projected 1999 revenues of 1.0x to 3.6x with a mean of 2.1x; as compared with an
implied transaction multiple of 2.2x. CIBC Oppenheimer noted that the implied
transaction multiple contemplated by the Exchange Ratio pursuant to the Merger
was within the range of multiples of the Innova Selected Companies. CIBC
Oppenheimer drew no specific conclusion from this analysis but subjectively
factored its observations from this analysis into its qualitative assessment of
the relevant facts and circumstances.
CIBC Oppenheimer also compared certain historical and estimated earnings,
operating and financial data and ratios and multiples of income statement
parameters of certain other publicly traded companies deemed to be generally
comparable to DMC. The comparable companies (the "DMC Selected Companies")
selected by CIBC Oppenheimer for purposes of this analysis were: Allen Telecom
Inc., LM Ericsson, Glenayre, Innova, Nera ASA, P-Com, Stanford
Telecommunications, Inc., and Teledata Communications Ltd. The DMC Selected
Companies were used in this analysis because they were deemed by CIBC
Oppenheimer to operate in the same general industry sector as DMC. Although
CIBC Oppenheimer used the DMC Selected Companies for comparison purposes, none
of such companies is directly comparable to DMC. Financial data compared
included market capitalization, firm value, revenues, EBITDA, EBIT, EPS,
projected EPS, gross margin, EBIT margin, EBITDA margin, net margin, historical
revenues, projected revenues and revenue and EPS growth rates. Multiples
considered included firm value to revenues, firm value to EBITDA, firm value to
EBIT and price per share to historical and projected EPS. Projected revenues and
EPS for the DMC Selected Companies were based upon the consensus published
estimates of securities analysts when available or upon individual research
analysts when consensus estimates were not available, while the projected
revenue and EPS for DMC are based on DMC's management estimates.
Such analysis indicated that the DMC Selected Companies traded at a
multiple range of firm value to revenues for the TTM ended March 31, 1998 (with
the exception of Glenayre, Innova, and P-Com whose results are as of June 30,
1998) of 0.2x to 2.8x with a mean of 1.3x, as compared with a multiple of 1.1x
for DMC. The market values of DMC Selected Companies as a multiple of projected
1998 revenues ranged from 0.2x to 2.3x with a mean of 1.2x, as compared with a
multiple of 1.3x for DMC. The analysis also indicated that the DMC Selected
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Companies traded at a multiple range of firm value to projected 1999 revenues of
0.2x to 1.9x, with a mean of 1.0x; as compared with a multiple of 1.1x for DMC.
CIBC Oppenheimer noted that DMC was trading within the range of multiples of the
DMC Selected Companies. CIBC Oppenheimer drew no specific conclusion from this
analysis but subjectively factored its observations from this analysis into its
qualitative assessment of the relevant facts and circumstances.
COMPARABLE M&A TRANSACTION ANALYSIS. CIBC Oppenheimer analyzed the
multiples of certain financial performance measures implied by the consideration
paid in eight proposed, pending or completed merger and acquisition transactions
since February 1995 involving companies in the communications sector. To the
extent that information was publicly available for these transactions, multiples
analyzed were firm transaction value (defined as transaction value plus debt
less cash) to TTM revenues. Recent communications sector transactions included
the following (acquiree/acquiror): Microwave Networks, Inc./California
Microwave, Inc.; Granger Inc./DMC; Celcore, Inc./DSC Communications Corporation;
Broadband Networks, Inc./Northern Telecom; MAS Technology Limited/DMC; Cylink
Corporation Wireless Group/P-Com; Subscriber Computing, Inc./Corsair
Communications, Inc.; and Coherent Communications Systems Corporation/Tellabs,
Inc. ("Selected Transactions"). No company or transaction used in the analysis
described herein was directly comparable to Innova or the proposed Merger.
Accordingly, the analysis of the results of the foregoing involved complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies that could affect public trading values.
Such analysis indicated that the multiple of firm transaction value to TTM
revenues ranged from 1.8x to 21.9x, with a mean and median of 7.9x and 2.8x,
respectively; as compared with a multiple of 2.4x for the Merger. CIBC
Oppenheimer also reviewed premiums paid in transactions, involving technology
companies valued between $75.0 million and $150.0 million, proposed, pending or
completed since January 1997. CIBC Oppenheimer noted that the implied premium
of 16.2% for the proposed Merger was within the range of premiums paid in such
transactions. CIBC Oppenheimer drew no specific conclusion from this analysis
but subjectively factored its observations from this analysis into its
qualitative assessment of the relevant facts and circumstances.
MARKET TRADING ANALYSIS. CIBC Oppenheimer reviewed trading activity
including the prices and volumes of Innova Common Stock and DMC Common Stock for
certain historical periods. With respect to Innova, CIBC Oppenheimer noted that
during the period from August 8, 1997 (Innova's initial public offering) through
July 17, 1998, Innova Common Stock closing prices ranged from a high of $28.63
to a low of $4.75, with an average price of $16.65. As for DMC, CIBC Oppenheimer
noted that during the period from July 17, 1997 through July 17, 1998, DMC
Common Stock closing prices ranged from a high of $25.50 to a low of $7.00 with
an average price of $15.81. CIBC Oppenheimer noted that during the period from
April 17, 1998 through July 17, 1998, Innova Common Stock closing prices ranged
from a high of $19.50 to a low of $4.75, with an average price of $10.21. For
DMC, CIBC Oppenheimer noted that during the period from April 17, 1998 through
July 17, 1998, DMC Common Stock closing prices ranged from a high of $13.31 to a
low of $7.00 with an average price of $9.40. CIBC Oppenheimer noted that during
the period from June 17, 1998 through July 17, 1998, Innova Common Stock closing
prices ranged from a high of $5.75 to a low of $4.75, with an average price of
$5.20. For DMC, CIBC Oppenheimer noted that during the period from June 17, 1998
through July 17, 1998, DMC Common Stock closing prices ranged from a high of
$7.63 to a low of $7.00 with an average price of $7.28. CIBC Oppenheimer also
observed that during the period from July 16, 1993 through July 17, 1998, DMC
Common Stock closing prices ranged from a high of $25.50 to a low of $4.00 with
an average price of $9.97. In addition, CIBC Oppenheimer compared the relative
performance of Innova Common Stock and DMC Common Stock, to the Innova Selected
Companies and DMC Selected Companies Index, respectively, and the Nasdaq
Composite Index over the periods from August 8, 1997 to July 17, 1998 and
January 2, 1998 to July 17, 1998 for Innova and for the periods from July 17,
1995 to July 17, 1998, July 17, 1997 to July 17, 1998 and January 2, 1998 to
July 17, 1998 for DMC. CIBC Oppenheimer also considered that Innova's and DMC's
high and low closing prices per share during the period August 8, 1997 (Innova's
initial public offering) to July 17, 1998 were $28.63 and $4.75 and $25.50 and
$7.00, respectively. The exchange ratios derived by comparing the respective
low to high prices and high to low prices of the Innova Common Stock and DMC
Common Stock were 0.186 to 4.089, respectively; as compared to the Exchange
Ratio of 1.05 pursuant to the Merger. The market trading analysis was performed
to provide background information and to add context to the other analyses
performed by CIBC Oppenheimer as described herein. CIBC Oppenheimer drew no
specific conclusion from this analysis but subjectively factored its
observations from this analysis into its qualitative assessment of the relevant
facts and circumstances.
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HISTORICAL EXCHANGE RATIO. CIBC Oppenheimer analyzed the historical
exchange ratio between Innova Common Stock and DMC Common Stock over two time
periods. For each time period selected, CIBC Oppenheimer calculated the high,
mean, median and low exchange ratios. The time periods selected for the analysis
ended on July 17, 1998 and included (i) last twelve months (corresponding to
Innova's public offering on August 8, 1997) and (ii) last 90 days. The ranges of
exchange ratios to each of the aforementioned time periods were 0.64x to 1.85x,
with a mean and median of 1.06x and 1.25x, respectively; and 0.64x to 1.85x,
with a mean and median of 1.03x and 1.25, respectively. CIBC Oppenheimer noted
that the Exchange Ratio pursuant to the Merger was within these ranges. CIBC
Oppenheimer drew no specific conclusion from this analysis but subjectively
factored its observations from this analysis into its qualitative assessment of
the relevant facts and circumstances.
RELATIVE CONTRIBUTION ANALYSIS. CIBC Oppenheimer analyzed the pro forma
contribution of each of DMC and Innova to the combined entity, based on a
comparison of certain financial information and projections for each company on
a stand-alone basis. Accordingly, this analysis did not consider any potential
operating savings, other benefits and cost reductions that may result from the
Merger. Such analysis included, among other things, relative contributions
determined in accordance with revenues, operating income and net income. CIBC
Oppenheimer observed that Innova would contribute a range of 12.9% to 16.7% of
1998 to 2000 historical and projected revenues, 5.9% to 25.1% of 1998 to 2000
historical and projected operating income and 7.7% to 30.8% of 1998 to 2000
historical and projected net income. On a corresponding basis, CIBC Oppenheimer
observed that DMC would contribute a range of 87.1% to 83.3% of 1998 to 2000
historical and projected revenues, 94.1% to 74.9% of 1998 to 2000 historical and
projected operating income and 92.3% to 69.2% of 1998 to 2000 historical and
projected net income. CIBC Oppenheimer observed that the above referenced pro
forma contributions by Innova to the combined company's pro forma historical and
projected operating results was consistent with the ownership position that the
current holders of Innova Common Stock are anticipated to have in the combined
company following consummation of the Merger. CIBC Oppenheimer drew no specific
conclusion from this analysis but subjectively factored its observations from
this analysis into its qualitative assessment of the relevant facts and
circumstances.
PRO FORMA MERGER IMPACT ANALYSIS. CIBC Oppenheimer analyzed certain pro
forma effects resulting from the Merger. In conducting its analysis, CIBC
Oppenheimer relied upon certain assumptions described above and the financial
forecasts provided by the managements of DMC and Innova. CIBC Oppenheimer also
discussed, without independent verification, with the managements of DMC and
Innova the estimates of the operating savings and other benefits and cost
reductions expected by the respective managements to be realized from the
Merger. Additionally, using the financial information and forecasts provided to
CIBC Oppenheimer by DMC's and Innova's respective managements, CIBC Oppenheimer
reviewed the accretion of or dilution to DMC's 1999 to 2001 pro forma projected
earnings per share resulting from the Merger. Based on this analysis, CIBC
Oppenheimer observed that the Merger would be accretive to DMC's earnings per
share in fiscal year 2000 and 2001 on the basis described herein. CIBC
Oppenheimer drew no specific conclusion from this analysis but subjectively
factored its observations from this analysis into its qualitative assessment of
the relevant facts and circumstances.
The summary set forth above sets forth the material aspects of CIBC
Oppenheimer's analyses but does not purport to be a complete description of the
analyses performed by CIBC Oppenheimer. The preparation of a fairness opinion is
a complex process and involves various determinations as to the most appropriate
and relevant methods of financial analysis and the application of these methods
to the particular circumstances and, therefore, an opinion is not necessarily
susceptible to partial analysis or summary description. The preparation of a
fairness opinion does not involve a mathematical evaluation or weighting of the
results of individual analyses performed, but requires CIBC Oppenheimer to
exercise its professional judgment in considering a wide variety of analyses
taken as a whole. CIBC Oppenheimer did not form a conclusion as to whether any
individual analysis, considered in isolation, supported or failed to support its
fairness determination. Rather, in arriving at its determination, CIBC
Oppenheimer considered each analysis in light of the other analyses and
ultimately reached its opinion based on the results of all analyses taken as a
whole. Accordingly, notwithstanding the separate factors summarized above, CIBC
Oppenheimer's analyses should be considered as a whole and that selecting
portions of the analyses or of the summary set forth above, without considering
the analysis as a whole, could create an incomplete view of processes underlying
CIBC Oppenheimer's opinion. No company or transaction used in the above
analysis for comparison is identical to DMC or Innova or the contemplated
transaction and, accordingly, an analysis of the results of the foregoing is not
purely quantitative. The analyses were prepared solely for purposes of CIBC
Oppenheimer's providing its opinion as to the fairness, from a financial point
of view, of the Exchange Ratio to DMC and do not purport to be appraisals or
necessarily reflect the prices at which businesses or securities actually may be
sold.
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Analyses based upon forecasts of future results are not necessarily indicative
of actual future results, which may be significantly more or less favorable than
suggested by such analyses. Because such analyses are inherently subject to
uncertainty, being based upon numerous factors and events beyond the control of
the parties or their respective advisors, none of DMC, Innova or CIBC
Oppenheimer or any other person assumes responsibility if future results are
materially different from those forecast. As described above, CIBC
Oppenheimer's opinion to the DMC Board was one of many factors taken into
consideration by the DMC Board in making its determination to approve the Merger
Agreement. The foregoing summary does not purport to be a complete description
of the analysis performed by CIBC Oppenheimer and is qualified by reference to
the written opinion of CIBC Oppenheimer set forth in Appendix B hereto.
DMC selected CIBC Oppenheimer as its financial advisor because CIBC
Oppenheimer is an internationally recognized investment banking firm and the
principals of CIBC Oppenheimer have substantial experience in transactions
similar to the Merger, are familiar with DMC, Innova and their respective
businesses and are familiar with the wireless communications equipment industry
in general. As part of its investment banking business, CIBC Oppenheimer is
continually engaged in the valuation of businesses and their securities in
connection with mergers, acquisitions, negotiated underwritings, competitive
biddings, secondary sales and distributions of listed and unlisted securities,
and private placements. In the ordinary course of business, CIBC Oppenheimer and
its affiliates may actively trade the securities of DMC and Innova for its own
account or for the accounts of its customers and, accordingly, may at any time
hold a long or short position in such securities. CIBC Oppenheimer, or one of
its affiliated companies, currently makes a market in the securities of DMC and
its equity research department provides published research coverage of DMC.
Pursuant to a letter agreement dated June 24, 1998 (the "CIBC
Oppenheimer Engagement Letter"), DMC engaged CIBC Oppenheimer to act as its
financial advisor in connection with the Merger. Pursuant to the terms of
the CIBC Oppenheimer Engagement Letter, DMC has agreed to pay CIBC
Oppenheimer a transaction fee, based on the average last sale price for DMC
Common Stock for the twenty trading days prior to the consummation of the
Merger, which such fee as of the execution of the Merger Agreement would be
approximately $1.6 million according to the following schedule: (i) $25,000
retainer; (ii) $250,000 upon delivery of CIBC Oppenheimer's opinion to the
DMC Board on July 22, 1998; and (iii) the balance of approximately $1.3
million upon consummation of the Merger. DMC has agreed to indemnify CIBC
Oppenheimer against certain liabilities, including certain liabilities under
United States federal securities laws.
Opinion of Hambrecht & Quist. Innova engaged Hambrecht & Quist to act as
its financial advisor in connection with the Merger and to render an opinion as
to the fairness from a financial point of view to the holders of the outstanding
shares of Common Stock of Innova of the consideration to be received by such
holders in the Merger. Hambrecht & Quist was selected by the Innova Board based
on Hambrecht & Quist's qualifications, expertise and reputation, as well as
Hambrecht & Quist's historic investment banking relationship and familiarity
with Innova. Hambrecht & Quist rendered its oral opinion (subsequently
confirmed in writing) on July 22, 1998 to the Innova Board that, as of such
date, the consideration to be received by the holders of the Innova Common Stock
in the Merger is fair to the holders of the Innova Common Stock from a financial
point of view. A COPY OF HAMBRECHT & QUIST'S OPINION DATED JULY 22, 1998, WHICH
SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED, THE SCOPE AND LIMITATIONS
OF THE REVIEW UNDERTAKEN AND THE PROCEDURES FOLLOWED BY HAMBRECHT & QUIST IS
ATTACHED AS APPENDIX C TO THIS PROXY STATEMENT/PROSPECTUS. INNOVA SHAREHOLDERS
ARE ADVISED TO READ THE OPINION IN ITS ENTIRETY. The assumptions made, matters
considered and limits of review contained in Hambrecht & Quist's written opinion
delivered July 22, 1998 were substantially the same as those contained in the
opinion attached hereto. No limitations were placed on Hambrecht & Quist by the
Innova Board with respect to the investigation made or the procedures followed
in preparing and rendering its opinion.
In its review of the Merger, and in arriving at its opinion, Hambrecht &
Quist, among other things: (i) reviewed the publicly available consolidated
financial statements of DMC for recent years and interim periods to date and
certain other relevant financial and operating data of DMC made available to
Hambrecht & Quist from published sources and from the internal records of DMC;
(ii) reviewed certain internal financial and operating information, including
certain projections, relating to DMC based upon information provided by the
management of DMC; (iii) discussed the business, financial condition and
prospects of DMC with certain of its officers; (iv) reviewed the consolidated
financial statements of Innova for recent years and interim periods to date and
certain other relevant financial and operating data of Innova made available to
Hambrecht & Quist from published sources
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and from the internal records of Innova; (v) reviewed certain internal financial
and operating information relating to Innova prepared by the management of
Innova; (vi) discussed the business, financial condition and prospects of Innova
with certain of its officers; (vii) reviewed the recent reported prices and
trading activity for the Common Stocks of DMC and Innova and compared such
information and certain financial information for DMC and Innova with similar
information for certain other companies engaged in businesses Hambrecht & Quist
considered comparable; (viii) reviewed the financial terms, to the extent
publicly available, of certain comparable merger and acquisition transactions;
(ix) reviewed the Merger Agreement; and (x) performed such other analyses and
examinations and considered such other information, financial studies, analyses
and investigations and financial, economic and market data as Hambrecht & Quist
deemed relevant.
Hambrecht & Quist did not independently verify any of the information
concerning Innova or DMC considered in connection with their review of the
Merger and, for purposes of its opinion, Hambrecht & Quist assumed and relied
upon the accuracy and completeness of all such information. In connection with
its opinion, Hambrecht & Quist did not prepare or obtain any independent
evaluation or appraisal of any of the assets or liabilities of Innova or DMC,
nor did they conduct a physical inspection of the properties and facilities of
Innova or DMC. With respect to the financial forecasts and projections used in
their analysis, Hambrecht & Quist assumed that they reflected the best currently
available estimates and judgments of the expected future financial performance
of DMC and Innova. For the purposes of their opinion, Hambrecht & Quist also
assumed that neither Innova nor DMC was a party to any pending transactions,
including external financings (other than those contemplated that have been
disclosed to Hambrecht & Quist), recapitalizations or merger discussions, other
than the Merger and those in the ordinary course of conducting their respective
businesses. For purposes of their opinion, Hambrecht & Quist assumed that the
Merger will qualify as a tax-free reorganization under the Internal Revenue Code
for the stockholders of Innova and that the Merger will be accounted for as a
pooling of interests. Hambrecht & Quist's opinion is necessarily based upon
market, economic, financial and other conditions as they existed and can be
evaluated as of the date of the opinion and any subsequent change in such
conditions would require a reevaluation of such opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The summary
of the Hambrecht & Quist analyses set forth below does not purport to be a
complete description of the presentation by Hambrecht & Quist to the Innova
Board. In arriving at its opinion, Hambrecht & Quist did not attribute any
particular weight to any analyses or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, Hambrecht & Quist believes that its analyses and the
summary set forth below must be considered as a whole and that selecting
portions of its analyses, without considering all analyses, or of the following
summary, without considering all factors and analyses, could create an
incomplete view of the processes underlying the analyses set forth in the
Hambrecht & Quist presentation to the Innova Board and its opinion. In
performing its analyses, Hambrecht & Quist made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Innova and DMC. The
analyses performed by Hambrecht & Quist (and summarized below) are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses.
Additionally, analyses relating to the values of businesses do not purport to be
appraisals or to reflect the prices at which businesses actually may be
acquired.
In performing its analyses, Hambrecht & Quist relied upon published Wall
Street projections for both Innova and DMC for calendar years 1998 and 1999
adjusted for discussions with the respective management teams ("Base Case").
The following is a brief summary of certain financial analyses performed by
Hambrecht & Quist in connection with providing its written opinion to the Innova
Board on July 22,1998:
CONTRIBUTION ANALYSIS: Hambrecht & Quist analyzed the contribution of each
of Innova and DMC to certain calendar 1998 and 1999 financial statement
categories of the pro forma combined company with no revenue or expense
adjustments. The financial statement categories included revenue, operating
income and net income. This contribution analysis was then compared to the pro
forma ownership percentage of Innova and DMC stockholders in the pro forma
post-Merger combined company (the "Combined Company"). Hambrecht & Quist
observed that, calculated on a fully-diluted basis using the treasury stock
method, Innova shareholders are
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expected to own approximately 28% of the Combined Company equity at the close of
the Merger and DMC stockholders are expected to own approximately 72% of the
Combined Company equity at the close of the Merger. Hambrecht & Quist examined
the expected contribution to the Combined Company's revenues by Innova using the
Base Case for calendar year 1998. It was estimated that Innova and DMC would
contribute approximately 15% and 85%, respectively, of the combined revenues.
For calendar year 1999, it was estimated that Innova and DMC would contribute
approximately 20% and 80%, respectively, of the combined revenues and
approximately 83% and 17%, respectively, of the combined operating income. It
was also estimated that Innova would contribute 100% of net income and that DMC
would contribute approximately 0%.
PRO FORMA MERGER ANALYSIS: Hambrecht & Quist analyzed the pro forma
impact of the Merger on the Combined Company's calendar 1998 and 1999
earnings per share ("EPS") using the Base Case of Innova's EPS in calendar
1998 and 1999 of ($0.14) and $0.30. Hambrecht & Quist observed that the Base
Case resulted in greater earnings for the combined company than for DMC as a
stand-alone company. The foregoing analysis did not assume any adjustments in
revenues or costs resulting from the operating synergies potentially realized
from the Merger. The actual results and savings achieved by the Combined
Company resulting from the Merger may vary from the projected results and
variations may be material.
PREMIUM ANALYSIS: Hambrecht & Quist compared the implied price per share
of the offer as of July 22, 1998 to similar premiums for certain technology
transactions announced since 1993. Hambrecht & Quist analyzed 35 such public
company transactions in the communications industry. Hambrecht & Quist observed
that the average one trading-day premium paid in the selected public company
technology transactions was 27%. This compared with the proposed acquisition in
which, as of July 22, 1998, the one day premium offered over the closing price
for Innova Common Stock was 16%. Hambrecht & Quist also analyzed the implied
premiums to average historical closing prices for the 1 week, 2 weeks, 1 month,
3 months, 6 months and 1 year ending July 22, 1998 using the implied offer price
based on the 1.05 exchange ratio and found that the implied premiums were 31%,
33%, 42%, 6%, (1%) and 1%, respectively.
DISCOUNTED CASH FLOW ANALYSIS: Hambrecht & Quist analyzed the theoretical
valuation of Innova based on the unleveraged discounted cash flow of the
projected financial performance estimates of Innova. However, because of the
nature of Innova's business, the absence of meaningful multi-year cash flow
projections, and the overwhelming proportion of total value that would be
ascribed to Innova's highly speculative terminal value after a five-year time
period, Hambrecht & Quist determined that this analysis did not provide
meaningful information in the context of analyzing the fairness from a financial
point of view of the Merger.
ANALYSIS OF PUBLICLY TRADED COMPARABLE COMPANIES: Hambrecht & Quist
compared selected historical and projected financial information of Innova to
publicly traded companies Hambrecht & Quist deemed to be comparable to Innova.
Such information included the ratio of market value to historical net income,
market value to book value, and market value to projected calendar year 1998 and
1999 net income. Hambrecht & Quist also examined the ratio of the enterprise
value (market value plus debt less cash) to historical revenue, historical
EBITDA, historical EBIT, and projected calendar year 1998 and 1999 revenue.
Companies deemed comparable included selected wireless communication companies
such as California Microwave, Inc., DMC, P-Com, Proxim, Inc., and SR Telecom
Inc. (the "Wireless Communication Comparables"). The foregoing multiples were
applied to historical financial results of Innova for the latest-twelve-month
("LTM") period ended March 31, 1998 and projected Base Case financial results of
Innova. Hambrecht & Quist determined average multiples for the Wireless
Communication Comparables of 1.6 times LTM revenue, 8.2 times LTM EBITDA, 11.3
times LTM EBIT, 17.6 times LTM net income, 1.4 times projected calendar year
1998 revenue, 1.1 times projected calendar year 1999 revenue, 27.4 times
projected calendar 1998 net income, 17.5 times projected calendar year 1999 net
income, and 2.1 times book value.
Based on the analysis of the Wireless Communication Comparables, Innova's
implied equity value per share applying wireless communication multiples to
historical results and the Base Case ranged from $2.41 per share to
approximately $6.21 per share. This compared with an offer in the proposed
acquisition of approximately $6.83 per share for Innova, based on the closing
price of DMC Common Stock on July 22, 1998.
ANALYSIS OF SELECTED MERGER AND ACQUISITION TRANSACTIONS: Hambrecht &
Quist compared the proposed acquisition with selected merger and acquisition
transactions. This analysis included 7 transactions involving companies in the
wireless communications industry. Such transactions included Cylink
Wireless/P-Com, Microwave Networks/Tadiran Communications, MAS Technology/DMC,
Broadband Networks/Northern Telecom,
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Celecore/DSC Communications, Microwave Networks/California Microwave, and
Western Multiplex/Glenayre (the "Wireless Communications Transactions"). In
examining the Wireless Communications Transactions, Hambrecht & Quist analyzed
certain income statement and balance sheet parameters of the acquired company
relative to the consideration offered in the Merger. The foregoing multiples
were applied to historical financial results of Innova for the twelve-month
period ended March 31, 1998. Multiples analyzed included consideration offered
to LTM revenue, LTM EBITDA, LTM EBIT, and LTM net income. The consideration
offered in the Wireless Communications Transactions was an average multiple of
1.7 times LTM revenue, 13.5 times LTM EBITDA, 15.5 times LTM EBIT, and 23.5
times LTM net income. Based on the analysis of selected merger and acquisition
transactions, Innova's implied equity per share applying multiples of the
Wireless Communications Transactions to historical results range from values
between approximately $2.02 per share and approximately $5.55 per share. This
result compared with an implied value in the proposed acquisition of
approximately $6.83 per share of Innova Common Stock, based on the closing price
of DMC Common Stock on July 22, 1998.
No company or transaction used in the above analyses is identical to Innova
or the Merger. Accordingly, an analysis of the results of the foregoing is not
mathematical; rather it involves complex considerations and judgments concerning
differences in financial and operating characteristics of the companies and
other factors that could affect the public trading values of the companies or
company to which they are compared.
The foregoing description of Hambrecht & Quist's opinion is qualified in
its entirety by reference to the full text of such opinion which is attached as
Appendix C to this Proxy Statement/ Prospectus.
Hambrecht & Quist, as part of its investment banking services, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, corporate restructurings, strategic alliances,
negotiated underwriting, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
In the past, Hambrecht & Quist has provided investment banking and other
financial advisory services to Innova and has received fees for rendering these
services. In particular, Hambrecht & Quist acted as a co-managing underwriter
in Innova's initial public offering in 1997. In the ordinary course of
business, Hambrecht & Quist may actively trade in the equity and derivative
securities of Innova and of DMC for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities. Hambrecht & Quist may in the future provide investment banking
or other financial advisory services to DMC.
Pursuant to an engagement letter dated June 29, 1998, Innova has agreed
to pay Hambrecht & Quist a fee (a "Fairness Opinion Fee") of $350,000 in
connection with the delivery of a fairness opinion that is credited against
any future fees payable in connection with the transaction. Innova has also
agreed to pay Hambrecht & Quist, in connection with its services as financial
advisor to Innova, an additional fee payable upon the closing of the Merger
(the "Transaction Fee") equal to 1.0% of the aggregate consideration received
in the Merger up to $90 million and 2.0% of the consideration greater than
$90 million. Innova also has agreed to reimburse Hambrecht & Quist for its
reasonable out-of-pocket expenses and to indemnify Hambrecht & Quist against
certain liabilities, including liabilities under the federal securities laws
or relating to or arising out of Hambrecht & Quist's engagement as financial
advisor.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the DMC Board and the Innova Board
with respect to the Merger Agreement and the transactions contemplated thereby,
stockholders of DMC and shareholders of Innova should be aware that certain
members of the Boards and managements of DMC and Innova, respectively, have
interests in the Merger that are in addition to the interests of the
stockholders of DMC and shareholders of Innova generally.
Employment Agreement. In connection with the Merger, DMC has agreed that
it will offer Mr. Grenon an annual employment agreement, which is effective as
of the Effective Time and is renewable at the mutual consent of DMC and
Mr. Grenon. Pursuant to such agreement, Mr. Grenon will serve as President of
the PDH Division of DMC at an annual salary of $235,000. As President of the
PDH Division of DMC, Mr. Grenon will report to Mr. Kissner, Chairman of the
Board and Chief Executive Officer of DMC, and will be responsible for overseeing
all PDH divisional functions and for ensuring the attainment of profit and
operations goals of such division. Mr. Grenon also will be entitled to certain
benefits, including an option to purchase 300,000 shares of DMC
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Common Stock, an automobile allowance in accordance with DMC's standard policy
for executive officers, and severance payments upon certain termination events
as described below.
Mr. Grenon's employment agreement will provide that (i) if Mr. Grenon is
terminated without cause, he shall be entitled to receive (a) severance pay for
twelve months at his normal salary; (b) the continuation of vesting of his stock
options for twelve months from the date of his termination; and (c) a proration
of his incentive bonus, if earned, for the then current fiscal year based on the
number of months he was employed during the year by DMC and (ii) if DMC is
merged or acquired in a transaction in which there is a change of control of
DMC, he shall be entitled to receive (a) severance pay for twenty-four months at
his normal salary; (b) a bonus payment equal to the average of the bonuses paid
to him by DMC in the last two fiscal years, divided by two; and (c) a proration
of his incentive bonus, if earned, for the then current fiscal year based on the
number of months he was employed during the year by DMC.
STOCK OPTION PLANS AND STOCK PURCHASE RIGHTS. Under the terms of the
Merger Agreement, DMC has agreed that all outstanding stock options of Innova
and Stock Purchase Rights as of the Effective Time of the Merger will be assumed
by DMC at such time. Such assumed options and Stock Purchase Rights shall
entitle the holder thereof to purchase that number of shares of DMC Common Stock
equal to the number (rounded down to the nearest whole number) of shares of DMC
Common Stock as the holder of such stock option or Stock Purchase Right would
have been entitled to receive pursuant to the Merger had such holder exercised
such option or Stock Purchase Right in full immediately prior to the Effective
Time (not taking into account whether or not such option or Stock Purchase Right
was in fact exercisable at that time). The exercise price for the DMC Common
Stock issuable upon the exercise of such option or Stock Purchase Right will be
at a price per share (rounded up to the nearest whole cent) equal to (i) the
aggregate exercise price for Innova Common Stock otherwise purchasable pursuant
to such stock option or Stock Purchase Right divided by (ii) the number of
shares of DMC Common Stock purchasable pursuant to such assumed option or Stock
Purchase Right. The exercise schedule of the assumed options and Stock Purchase
Rights shall continue to be determined by reference to the applicable Innova
stock option plan or the applicable terms and conditions of the Stock Purchase
Rights. See "The Merger Agreement -- Innova Stock Option Plans and Stock
Purchase Rights."
As of July 22, 1998, employees (or former employees) of Innova held options
to purchase an aggregate of 1,608,737 shares of Innova Common Stock at a
weighted average price of $2.60 per share (at exercise prices ranging from $0.24
to $18.75 per share).
As of July 22, 1998, the two directors of Innova who will become directors
of DMC at the Effective Time (see, "DMC Board" below), held Stock Purchase
Rights for an aggregate of 1,685,665 shares of Innova Common Stock at a weighted
average price of $0.34 per share (at exercise prices ranging from $0.024 to
$2.582 per share.)
INDEMNIFICATION AND INSURANCE. DMC has agreed that to the extent, if any,
not provided by an existing right under Innova's directors and officers
liability insurance policies, from and after the Effective Time, DMC and the
Surviving Company shall, to the fullest extent permitted by applicable law,
indemnify, defend and hold harmless each person who was, or had been at any time
prior to July 22, 1998, or who becomes prior to the Effective Time, a director,
officer or employee of Innova or Innova Europe Limited (the "Innova Subsidiary")
against all losses, expenses (including reasonable attorneys' fees and
expenses), claims, damages or liabilities or, subject to the provision of the
next succeeding sentence, amounts paid in settlement, arising out of actions or
omissions occurring at or prior to the Effective Time and whether asserted or
claimed prior to, at or after the Effective Time that are in whole or in part
(i) based on, or arising out of the fact that such person is or was a director,
officer or employee of Innova or the Subsidiary or (ii) based on, arising out of
or pertaining to the transactions contemplated by the Merger Agreement.
For a period of six years after the Effective Time, DMC and/or the
Surviving Company shall cause to be maintained in effect the policies of
directors' and officers' liability insurance maintained by Innova for the
benefit of those persons who are covered by such policies at the Effective Time
to the extent such policies cover acts and omissions of directors and officers
of Innova which occurred or would have occurred in the case of omissions prior
to the Effective Time, subject to certain limitations on premiums (or DMC and/or
the Surviving Company may substitute therefore policies of at least the same
coverage with respect to matters occurring prior to the Effective Time).
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To the fullest extent permitted by law, from and after the Effective Time,
all rights to indemnification existing as of July 22, 1998 in favor of the
employees, agents, directors or officers of Innova and the Innova Subsidiary
with respect to their activities as such prior to the Effective Time, as
provided for in their respective articles of incorporation or bylaws in effect
on July 22, 1998, shall survive the Merger and shall continue in full force and
effect for a period of not less than six years from the Effective Time.
Effective upon consummation of the Merger, Mr. Bachow and Mr. Mendicino,
who each will become directors of DMC, will enter into indemnification
agreements with DMC in the form entered into by DMC with its current directors
and executive officers. These agreements, among other things, provide for the
indemnification of DMC's directors and executive officers for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred by
any such person in any action or proceeding, including any action by or in the
right of DMC, arising out of such person's services as a director or executive
officer of DMC, any subsidiary of DMC or any other company or enterprise to
which such person provides services at the request of DMC to the fullest extent
permitted by applicable law.
DMC BOARD. Mr. Bachow and Mr. Mendicino, members of the Innova Board, will
become members of the DMC Board at the Effective Time. Mr. Bachow shall be
nominated by management of DMC to serve as a member of the DMC Board for a
one-year term at each of DMC's annual meetings of stockholders to be held in
1999, 2000 and 2001. Mr. Mendicino shall be nominated by management of DMC to
serve as a member of the DMC Board for a one-year term at each of DMC's annual
meetings of stockholders to be held in 1999 and 2000. However, the obligation
of DMC's management to nominate Mr. Mendicino at such meetings lapses upon the
date that Woodside Fund III, a private investment fund, liquidates or otherwise
distributes all shares of DMC Common Stock held by it. As non-employee
directors of DMC, Mr. Bachow and Mr. Mendicino will receive, based on amounts
currently provided to other non-employee directors, $1,000 in fees for
attendance at each in-person DMC Board meeting, $500 in fees for attendance at
each telephone meeting of the DMC Board and a retainer of $3,000 per quarter.
Each non-employee director of DMC receives fees of $750 for each in-person
committee meeting attended and $375 in fees for each telephone committee meeting
attended unless, in either case, such committee meeting was held in conjunction
with a DMC Board meeting. In addition, Mr. Bachow and Mr. Mendicino will be
able to participate in DMC's 1994 Stock Incentive Plan (the "1994 Incentive
Plan"), whereby each new non-employee DMC Board member, upon his or her initial
appointment or election to the DMC Board, receives an automatic option grant for
42,000 shares (as adjusted for DMC's two-for-one stock split of DMC Common Stock
in November 1997) with an exercise price equal to the fair market value of the
option shares on the grant date. In addition, each non-employee DMC Board
member receives an option grant of 14,000 shares (as adjusted for DMC's
two-for-one stock split of DMC Common Stock in November 1997) after he or she
has served on the DMC Board for at least three years. The amount of
compensation for attendance at DMC Board and committee meetings, and the number
of shares granted to non-employee DMC Board members under the 1994 Incentive
Plan, is subject to change. In addition, pursuant to DMC's 1994 Incentive Plan,
non-employee DMC Board members may elect to apply all or any portion of their
annual retainer fee and/or meeting fees otherwise payable in cash to the
acquisition of shares of DMC Common Stock. See "Management of DMC After the
Merger -- Directors and Executive Officers After the Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the anticipated material federal income
tax consequences of the Merger that are generally applicable to DMC, Innova and
Innova shareholders under the Code. This discussion does not deal with all
federal income tax considerations that may be relevant to particular Innova
shareholders in light of their particular circumstances, such as shareholders
who are dealers in securities; shareholders who are subject to the alternative
minimum tax provisions of the Code; shareholders who are foreign persons;
shareholders who acquired their shares in connection with stock option or stock
purchase plans or in other compensatory transactions; and shareholders who hold
convertible securities, warrants or options. In addition, the following
discussion does not address the tax consequences of transactions effectuated
before or after the Merger (whether or not such transactions are or were
undertaken in connection with the Merger), including transactions in which
shares of Innova Common Stock were or are acquired or transactions in which
shares of DMC Common Stock are disposed of. Furthermore, no foreign, state or
local tax considerations are addressed in this discussion.
SHAREHOLDERS OF INNOVA ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE SPECIFIC TAX CONSIDERATIONS OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL,
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER.
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The following discussion is based on the Code, applicable U.S. Treasury
Regulations, judicial authority, and administrative rulings and practice, all as
of the date of this Proxy Statement/Prospectus. The IRS is not precluded from
adopting a contrary position. In addition, there can be no assurance that
future legislative, judicial, or administrative changes or interpretations will
not adversely affect the accuracy of the statements and conclusions set forth in
this discussion. Any such changes or interpretations could be applied
retroactively and could affect the tax consequences of the Merger to DMC, Innova
and the Innova shareholders. The parties have not requested and will not
request a ruling from the IRS as to the tax consequences of the Merger.
The anticipated federal income tax consequences of the Merger are as
follows:
(i) the Merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Code, and DMC and Innova will each be a "party to a
reorganization" within the meaning of Section 368(b) of the Code;
(ii) no gain or loss will be recognized by the Innova shareholders upon
the conversion of their Innova Common Stock into shares of DMC Common Stock
pursuant to the Merger, except with respect to cash, if any, received in lieu of
fractional shares of DMC Common Stock;
(iii) an Innova shareholder will recognize gain or loss equal to the
difference between the cash received in lieu of a fractional share interest of
DMC Common Stock and such shareholder's tax basis in the fractional share for
which cash is received;
(iv) the aggregate tax basis of the shares of DMC Common Stock received
in exchange for shares of Innova Common Stock pursuant to the Merger (including
fractional shares for which cash is received) will be the same as the aggregate
tax basis for such shares of Innova Common Stock, decreased by the amount of any
tax basis allocable to the fractional share interests for which cash is
received;
(v) the holding period for shares of DMC Common Stock received in
exchange for shares of Innova Common Stock pursuant to the Merger will include
the period that such shares of Innova Common Stock were held by the Innova
shareholder, provided such shares of Innova Common Stock were held as capital
assets by the Innova shareholder at the Effective Time;
(vi) an Innova shareholder exercising his or her dissenters' rights, if
any, who receives payment for shares in cash will generally recognize capital
gain or loss (if the shares were held as a capital asset at the Effective Time)
equal to the difference between the cash received and the holder's basis in such
shares, provided the payment neither is essentially equivalent to a dividend
within the meaning of Section 302 of the Code nor has the effect of the
distribution of a dividend within the meaning of Section 356(a)(2) of the Code
(collectively, a "Dividend Equivalent Transaction"). A sale of shares pursuant
to an exercise of dissenters' rights will generally not be a Dividend Equivalent
Transaction if, as a result of such exercise, the Innova shareholder owns no
shares of DMC Common Stock (either actually or constructively within the meaning
of Section 318 of the Code); and
(vii) no gain or loss will be recognized by DMC or Innova as a result of
the Merger.
It is a condition to the consummation of the Merger that DMC receive an
opinion from its counsel, Morrison & Foerster LLP, and that Innova receive an
opinion from its counsel, Graham & James LLP, to the effect that the Merger will
constitute a "reorganization" within the meaning of Section 368(a) of the Code
and that DMC and Innova will each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code (such opinions, collectively, the "Tax
Opinions"). The Tax Opinions neither bind the IRS nor preclude the IRS from
adopting a contrary position. The Tax Opinions are subject to certain
assumptions and qualifications and the continued accuracy and completeness of
certain representations made by DMC, Merger Sub and Innova, including
representations in certificates to be delivered to counsel by the respective
managements of DMC and Innova.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for accounting
and financial reporting purposes. Under this method of accounting, the recorded
historical cost basis of the assets and liabilities of DMC and Innova will be
carried forward to the operations of the combined companies at their recorded
amounts. Results of operations of the combined companies will include income of
DMC and Innova for the entire fiscal period in which
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the combination occurs and the historical results of operations of the separate
companies for fiscal years prior to the Merger will be combined and reported as
the results of operations of the combined companies. Adjustments have been made
to the unaudited combined condensed pro forma financial statements of DMC and
Innova to eliminate certain intercompany and Merger related transactions.
Consummation of the Merger is conditioned upon receipt by each of DMC
and Innova of a letter from their respective independent public accountants
stating that, in their respective opinions, they concur with the conclusions
of the management of DMC and of Innova that the criteria for pooling of
interests for accounting purposes, which can be assessed at that time, have
been met. However, some of the conditions to be met for pooling of interests
accounting cannot be fully assessed until the passage of specified periods of
time after the Effective Time, as certain of the conditions for pooling of
interests accounting address transactions occurring within such specified
periods of time. See "The Merger Agreement -- Conditions." Certain events,
including certain transactions with respect to DMC Common Stock or Innova
Common Stock by affiliates of DMC and Innova, respectively, may prevent the
Merger from qualifying as a pooling of interests for accounting and financial
reporting purposes. For information concerning certain restrictions to be
imposed on the transferability of DMC Common Stock to be received by
affiliates in order, among other things, to ensure the availability of
pooling of interests accounting treatment, see "The Merger -- Resale
Restrictions."
REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR
Act"), and the rules promulgated thereunder by the Federal Trade Commission (the
"FTC"), the Merger cannot be consummated until notifications have been given and
certain information has been furnished to the FTC and the Antitrust Division of
the Department of Justice (the "Antitrust Division") and specified waiting
period requirements have been satisfied. DMC filed notification and report
forms under the HSR Act with the FTC and the Antitrust Division on August 19,
1998. Innova filed notification and report forms under the HSR Act with the FTC
and the Antitrust Division on August 21, 1998. Accordingly, the waiting period
under the HSR Act will expire at 11:59 p.m., Eastern Daylight Time, on
September 20, 1998.
At any time before or after consummation of the Merger, the Antitrust
Division or the FTC, or any state, could take such action under the antitrust
laws as it deems necessary or desirable in the public interest, including
seeking to enjoin the consummation of the Merger or seeking divestiture of
substantial assets of DMC or Innova. Private parties also may seek to take
legal action under the antitrust laws under certain circumstances. In addition,
non-United States governmental and regulatory authorities may seek to take
action under applicable antitrust laws. There can be no assurance that a
challenge to the Merger will not be made or, if such challenge is made, that DMC
will prevail.
The obligations of DMC and Innova to consummate the Merger are subject to
the condition that there be no preliminary or permanent injunction or other
order by any federal, state or foreign court of competent jurisdiction that
prevents consummation of the Merger, and that there be no statute, rule,
regulation, executive order, stay, decree or judgment by any court or
governmental authority that prohibits or restricts the consummation of the
Merger. See "The Merger Agreement -- Conditions." Either DMC or Innova may
terminate the Merger Agreement if any court of competent jurisdiction in the
United States or other United States governmental body shall have issued an
order, decree or ruling or taken any other action restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or any other
action shall have become final and non-appealable, provided that the party
seeking to terminate the Merger Agreement for such reason shall have used all
reasonable best efforts to remove such order, decree or ruling. See "The Merger
Agreement -- Conditions" and "The Merger Agreement -- Termination."
RESALE RESTRICTIONS
All shares of DMC Common Stock received by Innova shareholders in the
Merger will be freely transferable, except that shares of DMC Common Stock
received by persons who are deemed to be "affiliates" (as such term is defined
under the Securities Act) of Innova may be resold by them only in transactions
permitted by the resale provisions of Rule 145 promulgated under the Securities
Act or as otherwise permitted under the Securities Act. Persons who may be
deemed to be affiliates of Innova generally include individuals or entities that
control, are controlled by, or are under common control with, Innova and may
include certain officers and directors of Innova as well as principal
shareholders of Innova.
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Commission guidelines regarding qualifying for the pooling of interests
method of accounting also limit sales by affiliates of the acquiring and
acquired companies in a business combination. Commission guidelines indicate
further that the pooling of interests method of accounting generally will not
be challenged on the basis of sales by affiliates of the acquiring or acquired
company if they do not dispose of any of the shares they own or shares they
receive in connection with a merger during the period beginning thirty (30) days
before the merger and ending when financial results covering at least thirty
(30) days of combined operations have been published. See "The Merger --
Accounting Treatment."
The Merger Agreement requires Innova to use its best efforts to cause each
of its affiliates to execute a written agreement restricting the disposition by
such affiliate of the shares of DMC Common Stock to be received by such
affiliate in the Merger.
DISSENTERS' RIGHTS OF INNOVA SHAREHOLDERS
The following summary of the availability of dissenters' rights for holders
of Innova Common Stock, does not purport to be complete and is qualified in its
entirety by reference to Chapter 23B.13 of the Washington Business Corporation
Act (a copy of which is attached as Appendix D to this Proxy
Statement/Prospectus).
Any Innova shareholder contemplating the exercise of dissenters' rights is
urged to review the full text of Chapter 23B.13 of the Washington Business
Corporation Act. The procedures set forth in such Chapter must be followed
exactly or dissenters' rights may be lost.
A holder of Innova Common Stock who properly follows the procedures for
dissenting and demanding payment for his or her shares pursuant to
Chapter 23B.13 (as summarized below) may be entitled to receive in cash the
"fair value" of his or her shares in lieu of the consideration provided in the
Merger Agreement. The "fair value" of a dissenting shareholder's shares will be
the value of such shares immediately prior to the Effective Time, excluding any
appreciation or depreciation in anticipation of the Merger, unless such
exclusion would be inequitable. The "fair value" could be more than, equal to
or less than the value of the consideration the shareholder would have received
pursuant to the Merger Agreement if the shareholder had not dissented. In the
event the dissenting shareholder and the corporation cannot agree on the "fair
value" of the dissenter's Innova Common Stock, "fair value" may ultimately be
determined by a court in an appraisal proceeding.
To properly exercise dissenters' rights with respect to the Merger and to
be entitled to payment under Chapter 23B.13 of the Washington Business
Corporation Act, a holder of Innova Common Stock must, among other things,
(a) prior to the Innova Special Meeting, deliver to Innova written notice of the
shareholder's intent to demand payment for his or her shares if the Merger is
effected, (b) not vote his or her shares in favor of the Merger, and (c) upon
receipt of a dissenter's notice from the Surviving Company, timely deliver a
demand for payment, certifying whether the Innova shareholder acquired
beneficial ownership before the date of the first announcement to the news media
or to Innova shareholders of the terms of the Merger, and timely deposit the
shareholder's certificates in accordance with the terms of the dissenter's
notice. Thus, any holder of Innova Common Stock who wishes to dissent and who
executes and returns a proxy on one of the accompanying forms must specify that
such holder's shares are to be voted against the Merger or that the proxy holder
should abstain from voting such holder's shares in favor of the Merger. A vote
against the Merger is not a proper exercise of dissenters' rights. If the
shareholder returns a proxy without voting instructions, or with instructions to
vote in favor of the Merger, such holder's shares will automatically be voted in
favor of the Merger, and the shareholder will lose any dissenters' rights.
Within 10 days after the Effective Time, the Surviving Company will send a
written dissenter's notice to each holder of Innova Common Stock who satisfied
the requirements of clauses (a) and (b) above, indicating where the payment
demand must be sent and where and when share certificates must be deposited.
Such notice will include, among other things, a form of payment demand that
includes the date of the first announcement to the news media or to Innova
shareholders of the terms of the Merger and requires the person asserting
dissenters' rights to certify whether or not such person acquired beneficial
ownership of the shares before that date, and will set the date by which the
Surviving Company must receive the payment demand, which date may not be less
than thirty (30) or more than sixty (60) days after the dissenter's notice is
delivered. Innova shareholders who fail to file timely written intent to demand
payment or who vote in favor of the Merger will not be entitled to receive the
dissenter's notice and will be bound by the terms of the Merger Agreement.
Written objections to the Merger by holders of Innova Common Stock should be
addressed to John M. Hemingway, Innova Corporation, Gateway North, Building 2,
3325
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South 116th Street, Seattle, Washington 98168. Such objections must be
received by Innova prior to the Innova Special Meeting.
A beneficial shareholder may assert dissenters' rights as to shares held on
the beneficial shareholder's behalf only if (a) the beneficial shareholder
submits to Innova the record shareholder's written consent to the dissent not
later than the time the beneficial shareholder asserts dissenters' rights and
(b) the beneficial shareholder does so with respect to all shares of which such
shareholder is the beneficial shareholder or over which such shareholder has
power to direct the vote.
Within thirty (30) days after the date of the Effective Time and the date
the payment demand is received, the Surviving Company will pay each dissenter
who complied with the conditions above the amount that the Surviving Company
estimates to be the fair value of the shareholder's shares, plus accrued
interest. The payment must be accompanied by, among other things, (a) Innova's
balance sheet as of the end of a fiscal year ended not more than sixteen (16)
months before the date of payment, an income statement for that year, a
statement of changes in shareholders' equity for that year, and the latest
available interim financial statements, if any, and (b) an explanation of how
the Surviving Company estimated the fair value of the shares and how the
interest was calculated. Notwithstanding the foregoing, with respect to shares
acquired after the date of the first announcement to the news media or to
shareholders of the terms of the Merger, the Surviving Company may elect to
withhold payment of the fair value of dissenters' shares plus accrued interest
and, in such event, the Surviving Company will estimate after the Effective Time
the fair value of the shares, plus accrued interest, and will offer to pay this
amount to each dissenter who agrees to accept it in full satisfaction of the
dissenter's demand.
A dissenter may notify the Surviving Company in writing of the dissenter's
own estimate of the fair value of the dissenter's shares and the amount of
interest due and demand payment of the dissenter's estimate, less any payment
made, or, with respect to after-acquired shares for which the Surviving Company
elected to withhold payment, reject the Surviving Company's offer of the fair
value determined for such shares and demand payment of the dissenter's estimate
of the fair value of the dissenter's shares and interest due, if:
(a) The dissenter believes that the amount paid or offered is less than
the fair value of the dissenter's shares or that the interest due is
incorrectly calculated;
(b) The Surviving Company fails to make payment within sixty (60) days
after the date set for demanding payment; or
(c) The Merger is not effected, and Innova does not return the deposited
certificates or release the transfer restrictions imposed on
uncertificated shares within sixty (60) days after the date set for
demanding payment.
A dissenter will be deemed to have waived the right to demand payment
unless the dissenter notifies the Surviving Company of his or her demand in
writing within thirty (30) days after the Surviving Company makes or offers
payment for the dissenter's shares.
If a demand for payment remains unsettled, the Surviving Company will
commence a proceeding in the Superior Court of King County, Washington within
sixty (60) days after receiving the payment demand and petition the court to
determine the fair value of the shares and accrued interest. If the Surviving
Company does not commence such proceeding within the sixty (60)-day period, it
shall pay each dissenter whose demand remains unsettled the amount demanded.
The Surviving Company will make all dissenters, whether or not residents of the
State of Washington, whose demands remain unsettled parties to the proceeding as
in an action against their shares, and all parties must be served with a copy of
the petition. The Surviving Company may join as a party to the proceeding any
shareholder who claims to be a dissenter but who has not, in the Surviving
Company's opinion, complied with the provisions of Chapter 23B.13. If the court
determines that such shareholder has not complied with the provisions of
Chapter 23B.13, the shareholder shall be dismissed as a party. Each dissenter
made a party to the proceeding will be entitled to judgment (a) for the amount,
if any, by which the court finds the fair value of the shares, plus interest,
exceeds the amount paid by the Surviving Company or (b) for the fair value, plus
accrued interest, of the dissenter's after-acquired shares for which the
Surviving Company elected to withhold payment.
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If Innova, DMC and Merger Sub do not effect the Merger within sixty (60)
days after the date set for demanding payment and depositing share certificates,
then Innova shall return the deposited certificates and release any transfer
restrictions imposed on uncertificated shares.
Failure to follow the steps required by Chapter 23B.13 of the Washington
Business Corporation Act for perfecting dissenters' rights may result in the
loss of such rights.
IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF WASHINGTON LAW, ANY HOLDER
OF INNOVA COMMON STOCK WHO IS CONSIDERING DISSENTING FROM THE MERGER SHOULD
CONSULT A LEGAL ADVISOR.
Holders of DMC Common Stock are not entitled to appraisal rights under the
Delaware General Corporation Law in connection with the Merger.
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THE MERGER AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN PROVISIONS OF THE MERGER
AGREEMENT, A COPY OF WHICH IS ATTACHED AS APPENDIX A TO THIS PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE MERGER AGREEMENT.
THE MERGER
Pursuant to the Merger Agreement, and subject to the terms and conditions
thereof, at the Effective Time, Merger Sub will be merged with and into Innova,
with Innova as the Surviving Company, and the separate existence of Merger Sub
shall thereupon cease.
Effective at the Effective Time, the articles of incorporation and bylaws
of Merger Sub will be the articles of incorporation and bylaws of the Surviving
Company until duly amended. The directors of Merger Sub will be the initial
directors of the Surviving Company and the officers of Innova will be the
initial officers of the Surviving Company.
EFFECTIVE TIME OF THE MERGER
The Effective Time of the Merger will occur upon the filing of all
necessary documentation (the "Merger Documents"), together with any required
related certificates, with the Secretary of State of the State of Washington, in
such form as required by, and executed in accordance with the relevant
provisions of, Washington law. The filing of the Merger Documents will occur as
soon as practicable after the closing of the transactions contemplated by the
Merger Agreement but in no event later than three days thereafter. See "Merger
Agreement -- Conditions." The Merger Agreement may be terminated by either
party if the Merger has not been consummated on or before January 29, 1999 and
under certain other conditions. See "The Merger Agreement -- Conditions" and
"The Merger Agreement -- Termination."
CONVERSION OF SECURITIES
As a result of the Merger and without any action on the part of the holders
thereof, each share of Innova Common Stock issued and outstanding immediately
prior to the Effective Time will be converted into the right to receive 1.05
shares of fully paid and nonassessable DMC Common Stock and the associated
purchase rights under the DMC Rights Agreement, subject to any dissenters'
rights under Chapter 23B.13 of the Washington Business Corporation Act, will
cease to be outstanding, and will be canceled and retired, except as described
below.
Each holder of an Innova certificate evidencing outstanding shares of
Innova Common Stock (an "Innova Certificate") upon consummation of the Merger
will cease to have any rights with respect to such Innova Common Stock, except
the right to receive, without interest, shares of DMC Common Stock and cash in
lieu of fractional shares (as described in "The Merger Agreement -- Exchange of
Shares") upon the surrender of such Innova Certificate, subject to any
dissenters' rights under the Washington Business Corporation Act. If, prior to
the Effective Time, DMC should split or combine the shares of DMC Common Stock,
or pay a stock dividend or other stock distribution in, or in exchange of,
shares of DMC Common Stock, or engage in any similar transaction, then the
Exchange Ratio will be appropriately adjusted to reflect such split,
combination, dividend, exchange or other distribution or similar transaction.
INNOVA STOCK OPTION PLANS AND STOCK PURCHASE RIGHTS
As of the Effective Time, each of the options to acquire shares of Innova
Common Stock and each outstanding Stock Purchase Right not expired as of the
Effective Date, will be assumed by DMC and converted into an option or Stock
Purchase Right to purchase that number of shares of DMC Common Stock (rounded
down to the nearest whole number) to which the holder thereof would have been
entitled to receive under the Merger Agreement had the stock option or Stock
Purchase Right been exercised immediately prior to the Effective Time, and the
replacement option or Stock Purchase Right shall have an aggregate exercise
price equal to the aggregate exercise price for Innova Common Stock subject to
the option or Stock Purchase Right divided by the number of shares of
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DMC Common Stock purchasable under the assumed option or Stock Purchase Right,
rounded up to the nearest whole cent.
Except as described above, the assumed stock options and Stock Purchase
Rights will be subject to the same terms and conditions (including, without
limitation, vesting provisions in the case of stock options) as were applicable
to such stock options and Stock Purchase Rights immediately prior to the
Effective Time. Consummation of the Merger will not be treated as a termination
of employment for purposes of such stock options. In addition, no such option
will be converted into a stock option to purchase a partial share of DMC Common
Stock.
The assumption of such options enables participants in Innova's stock
options plans to hold options to acquire DMC Common Stock after the Merger,
although options granted under Innova's 1990 Employee Stock Option Plan
immediately accelerate and vest upon consummation of the Merger. As of July 22,
1998, there were outstanding options to purchase an aggregate of 1,678,737
shares of Innova Common Stock, at a weighted average exercise price of
approximately $2.95 per share (at exercise prices ranging from $0.24 to $18.75
per share). As of July 22, 1998, there were outstanding Stock Purchase Rights
to purchase an aggregate of 1,951,593 shares of Innova Common Stock, at a
weighted average exercise price of $0.4226 per share (at exercise prices ranging
from $0.024 to $6.96 per share).
As soon as practicable, but in no event later than sixty business days
after the Effective Time, DMC will file a registration statement on Form S-8
under the Securities Act in order to register the shares of DMC Common Stock
issuable upon exercise of the aforesaid assumed Innova stock options under the
Innova stock option plans.
EXCHANGE OF SHARES
As soon as reasonably practicable after the Effective Time, the Exchange
Agent will mail to each holder of record of Innova Common Stock (i) a letter of
transmittal and (ii) instructions for use in effecting the surrender of the
Innova Certificates in exchange for certificates representing shares of DMC
Common Stock and, in lieu of any fractional shares thereof, cash. Upon
surrender of an Innova Certificate to the Exchange Agent together with such
letter of transmittal, duly executed, and such other customary documents as may
be reasonably required pursuant to such instructions, the holder of such Innova
Certificate will be entitled to receive in exchange therefore (i) a certificate
representing that number of whole shares of DMC Common Stock, (ii) any dividends
or other distributions to which such holder is entitled to prior to the
Effective Time and (iii) a check representing the amount of cash in lieu of
fractional shares, if any, which such holder has the right to receive in respect
of the Innova Certificate so surrendered. INNOVA SHAREHOLDERS SHOULD NOT SEND
IN THEIR INNOVA CERTIFICATES UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL.
No fractional shares of DMC Common Stock will be issued pursuant to the
Merger. In lieu thereof, cash adjustments will be paid in an amount equal to
the product of (i) the fraction of a share of DMC Common Stock that would
otherwise be issuable multiplied by (ii) the average of the last reported sales
prices of a share of DMC Common Stock for the fifteen trading days prior to the
date which is two days prior to the Effective Time.
If any certificates for shares of DMC Common Stock are to be issued in a
name other than that in which the Innova Certificate surrendered in exchange
therefore is registered, the person requesting such exchange must (i) pay to DMC
or any agent designated by it any transfer or other taxes required by reason
thereof, or (ii) establish to the satisfaction of DMC or any agent designated by
it that such tax has been paid or is not applicable.
At the Effective Time, the stock transfer books of Innova will be closed
and no further transfers of shares of Innova Common Stock will be made.
Neither the Exchange Agent nor any party to the Merger Agreement is liable
to a holder of shares of Innova Common Stock for any shares of DMC Common Stock
or dividends thereon or the cash payment for fractional interests delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
In the event that any Innova Certificate has been lost, stolen or
destroyed, upon (i) the making of an affidavit of that fact by the person
claiming such Innova Certificate to be lost, stolen or destroyed, and (ii) if
required by DMC, in its reasonable discretion, the posting by such person of a
bond in such sum as DMC may direct as indemnity against any claim that may be
made against DMC with respect to such Innova Certificate, DMC will
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issue or cause to be issued in exchange for such Innova Certificate the number
of whole shares of DMC Common Stock and cash in lieu of fractional shares into
which the shares of Innova Common Stock represented by the Innova Certificate
are converted in the Merger.
Holders of Innova Common Stock are entitled to dissent from the Merger and
demand relief with respect to any such Innova Common Stock in accordance with
their statutory rights under Chapter 23B.13 of the Washington Business
Corporation Act. See "Dissenters' Rights of Innova Shareholders."
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains certain representations and warranties by
Innova relating to, among other things: (i) organization and qualification of
Innova and its Innova Subsidiary; (ii) Articles of Incorporation and Bylaws of
Innova and Memorandum of Association of the Innova Subsidiary;
(iii) capitalization; (iv) authority relative to the Merger Agreement;
(v) absence of breaches or violations of its articles of incorporation and
bylaws, agreements and instruments and law; required filings and consents;
(vi) compliance; permits; (vii) filings with the Commission; financial
statements; (viii) absence of certain changes or events; (ix) absence of
undisclosed liabilities; (x) absence of litigation; (xi) employee benefit plans;
employment agreements; (xii) employment matters; (xiii) registration statement;
joint proxy statement/prospectus; (xiv) title to property; (xv) taxes;
(xvi) environmental matters; (xvii) brokers; (xviii) full disclosure;
(xix) opinion of financial advisor; (xx) intellectual property; (xxi) interested
party transactions; (xxii) insurance; (xxiii) vote required; (xxiv) pooling
matters; and (xxv) ownership of DMC Common Stock.
The Merger Agreement also contains certain representations and warranties
by DMC and Merger Sub relating to, among other things: (i) organization and
qualification; subsidiaries; (ii) Restated Certificate of Incorporation and
Bylaws of DMC and Articles of Incorporation and Bylaws of Merger Sub;
(iii) capitalization; (iv) authority relative to the Merger Agreement; (v)
absence of breaches or violations of the articles of incorporation and bylaws of
Merger Sub or DMC's certificate of incorporation or bylaws, agreements and
instruments and law; required filings and consents; (vi) compliance; permits;
(vii) filings with the Commission; financial statements; (viii) absence of
certain changes or events; (ix) absence of undisclosed liabilities; (x) absence
of litigation; (xi) employee benefit plans; employment agreements; (xii) labor
matters; (xiii) registration statement; joint proxy statement/prospectus;
(xiv) title to property; (xv) taxes; (xvi) environmental matters;
(xvii) brokers; (xviii) full disclosure; (xix) opinion of financial advisor;
(xx) intellectual property; (xxi) interested party transactions;
(xxii) insurance; (xxiii) vote required; (xxiv) pooling matters; (xxv) DMC
Rights Agreement; and (xxvi) ownership of Innova Common Stock.
CERTAIN COVENANTS
The Merger Agreement provides that Innova and the Innova Subsidiary will,
prior to the earlier of the termination of the Merger Agreement or the Effective
Time, except as agreed to in writing by DMC, (i) conduct its business and shall
cause the business of the Innova Subsidiary to be conducted in the ordinary
course of business and in a manner consistent with past practice, and (ii) not,
except as contemplated by the Merger Agreement, (a) amend its articles of
incorporation and bylaws; (b) issue, sell, pledge, dispose of or encumber, or
authorize the issuance, sale, pledge, disposition or encumbrance of, any shares
of capital stock of any class, or any options, warrants, convertible securities
or other rights of any kind to acquire any shares of capital stock, or any other
ownership interest (including, without limitation, any phantom interest) of
Innova, the Innova Subsidiary or Innova's affiliates (except for the issuance of
(x) shares of Innova Common Stock issuable pursuant to employee stock options
under the Innova stock option plans which options were outstanding on July 22,
1998, (y) the grant of options consistent with past practice to purchase up to
100,000 shares of Innova Common Stock to newly hired employees (excluding
officers), provided that the vesting of such new options is not in any manner
accelerated by the Merger and (z) shares of Innova Common Stock pursuant to the
exercise of Stock Purchase Rights which were outstanding on July 22, 1998);
(c) sell, pledge, dispose of or encumber any assets of Innova or the Innova
Subsidiary (except for (x) sales of assets in the ordinary course of business
and in a manner substantially consistent with past practice, (y) dispositions of
obsolete, worthless or useless assets and (z) sales of immaterial assets not in
excess of $100,000); or (d) except as is contemplated by Section 5.05 of the
Merger Agreement, accelerate, amend or change the period (or permit any
acceleration, amendment or change) of exercisability of options or restricted
stock granted under Innova's employee benefit, bonus, stock option or other
employee plans (including the Innova stock option plans) or authorize cash
payments in exchange for any options granted under any of such plans.
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The Merger Agreement also provides that Innova and the Innova Subsidiary
will not, prior to the earlier of the termination of the Merger Agreement or the
Effective Time, except as agreed to in writing by DMC, (i) (a) declare, set
aside, make or pay any dividend or other distribution (whether in cash, stock or
property or any combination thereof) in respect of any of its capital stock,
except that the Innova Subsidiary may declare and pay a dividend to Innova,
(b) split, combine or reclassify any of its capital stock or issue or authorize
or propose the issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock or (c) amend the terms of,
repurchase, redeem or otherwise acquire, or permit the Innova Subsidiary to
repurchase, redeem or otherwise acquire, any of its securities or any securities
of the Innova Subsidiary, or propose to do any of the foregoing;
(ii) (a) acquire (by merger, consolidation, or acquisition of stock or assets)
any company, corporation, partnership or other business organization or division
thereof; (b) incur any indebtedness for borrowed money or issue any debt
securities or assume, guarantee (other than guarantees of bank debt of the
Innova Subsidiary entered into in the ordinary course of business) or endorse or
otherwise as an accommodation become responsible for, the obligations of any
person, or make any loans or advances, except in the ordinary course of business
consistent with past practice; (c) enter into or amend any material contract or
agreement other than in the ordinary course of business; (d) authorize any
capital expenditures or purchase of fixed assets which are, in the aggregate, in
excess of $100,000 for Innova and the Innova Subsidiary taken as a whole, or
(e) enter into or amend any contract, agreement, commitment or arrangement to
effect any of the matters prohibited by Section 4.01(f) of the Merger Agreement;
(iii) increase the compensation payable or to become payable to its officers or
employees, except for increases in salary or wages of employees of Innova or the
Innova Subsidiary who are not officers of Innova in accordance with past
practices, or grant any severance or termination pay to, or enter into any
employment or severance agreement with any director, officer (except for
officers who are terminated on an involuntary basis) or other employee of Innova
or the Innova Subsidiary, or establish, adopt, enter into or amend any
collective bargaining, bonus, profit sharing, thrift, compensation, stock
option, restricted stock, pension, retirement, deferred compensation,
employment, termination, severance or other plan, agreement, trust, fund, policy
or arrangement for the benefit of any current or former directors, officers or
employees, except, in each case, as may be required by law; (iv) take any action
to change accounting policies or procedures (including, without limitation,
procedures with respect to revenue recognition, payments of accounts payable and
collection of accounts receivable), except as required by U.S. GAAP or
applicable law; (v) make any material tax election inconsistent with past
practices or settle or compromise any material federal, state, local or foreign
tax liability or agree to an extension of a statute of limitations except to the
extent the amount of any such settlement has been reserved for on Innova's most
recent filing with the Commission; (vi) pay, discharge or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or satisfaction in
the ordinary course of business and consistent with past practice of liabilities
reflected or reserved against in the financial statements of Innova or incurred
in the ordinary course of business and consistent with past practice; or
(vii) take, or agree in writing or otherwise to take, any of the actions
described above, or any action which would make any of the representations or
warranties of Innova contained in the Merger Agreement untrue or incorrect or
prevent Innova from performing or cause Innova not to perform its covenants
under the Merger Agreement.
The Merger Agreement provides that Innova and DMC will use their respective
best efforts to cause the transactions contemplated by the Merger Agreement to
be accounted for as a pooling transaction by each party's independent certified
public accountants, by the National Association of Securities Dealers (the
"NASD") and by the Commission, respectively, and each of the parties agreed that
it will take no action that would cause such accounting treatment not to be
obtained.
The Merger Agreement provides that DMC will not, except as agreed to in
writing by Innova, until the earlier of the termination of the Merger Agreement
or the Effective Time (a) issue, sell, pledge, dispose of or encumber, or
authorize the issuance, sale, pledge, disposition or encumbrance of, any shares
of capital stock of any class, or any options, warrants, convertible securities
(except convertible debt securities) or other rights of any kind to acquire any
shares of capital stock, or any other ownership interest (including, without
limitation, any phantom interest) of DMC, any of its subsidiaries or affiliates
(other than with respect to acquisitions by DMC or grants or exercises of
options under DMC's existing stock option plans and for sales of stock pursuant
to DMC's existing stock purchase plans) pursuant to any transaction pursuant to
which any person (or group of persons) acquires more than 50% of the outstanding
shares of DMC Common Stock, whether from DMC or pursuant to a tender offer or
exchange offer or otherwise, (ii) effect a merger or other business combination
involving DMC pursuant to which any person (or group of persons) acquires more
than 50% of the outstanding shares of DMC Common Stock or the entity surviving
such merger or business combination or (iii) any other transaction pursuant to
which any person (or
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group of persons) acquires control of DMC's assets; (b) in the event that DMC
shall consider entering into any transaction involving an acquisition (whether
by purchase of assets, merger or otherwise) of a third party prior to the
Effective Time which will require approval of DMC's stockholders, agree to enter
into such transaction prior to consultation with the Innova Board; or (c) take,
or agree in writing or otherwise to take, any of the actions described above, or
any action which would make any of the representations or warranties of DMC
contained in the Merger Agreement untrue or incorrect or prevent DMC from
performing or cause DMC not to perform its covenants under the Merger Agreement.
NO SOLICITATION
The Merger Agreement provides that Innova shall not initiate, solicit or
encourage (including by way of furnishing information or assistance), or take
any other action to facilitate, any inquiries or the making of any proposal
relating to, or that may reasonably be expected to lead to, any Alternative
Transaction (as defined below), or enter into discussions or negotiate with any
person or entity in furtherance of such inquiries or to obtain an Alternative
Transaction, or agree to, or endorse, any Alternative Transaction, or authorize
or permit any of the officers, directors, employees or agents of Innova or the
Innova Subsidiary or any investment banker, financial advisor, attorney,
accountant or other representative retained by Innova or the Innova Subsidiary
to take any such action and Innova shall promptly notify DMC, subject to
confidentiality restrictions existing on July 22, 1998, of all relevant terms of
any such inquiries or proposals received by Innova or the Innova Subsidiary or
by any such officer, director, employee, agent, investment banker, financial
advisor, attorney, accountant or other representative relating to any of such
matters and if such inquiry or proposal is in writing, Innova shall promptly
deliver or cause to be delivered orally to DMC a detailed summary of such
inquiry or proposal, subject to confidentiality restrictions existing on
July 22, 1998; provided, however, that nothing in Section 4.02(a) of the Merger
Agreement prohibits the Innova Board from (i) furnishing information to, or
entering into discussions or negotiations with, any persons or entity in
connection with an unsolicited bona fide proposal by such person or entity
relating to an Alternative Transaction if, and only to the extent that (a) the
Innova Board, after duly considering the advice of Graham & James LLP determines
in good faith that such action is required for the Innova Board to comply with
its fiduciary duties to its shareholders as imposed by Washington Law and
(b) prior to furnishing such information to, or entering into discussions or
negotiations with, such person or entity Innova provides written notice to DMC
to the effect that it is furnishing information to, or entering into discussions
or negotiations with, such person or entity; or (ii) complying with Rule 14e-2
promulgated under the Exchange Act or other applicable law or other requirement
with regard to an Alternative Transaction.
DIRECTOR AND OFFICER INDEMNIFICATION
For a description of the indemnification of Innova directors and officers
pursuant to the Merger, see "The Merger -- Interests of Certain Persons in the
Merger -- Indemnification and Insurance."
ACCESS AND INFORMATION
The Merger Agreement provides that, until the Effective Time, each of
Innova and DMC, and their respective subsidiaries, shall each afford to the
other access to all of its respective properties, books, contracts, commitments
and records, and each shall furnish promptly to the other all information
concerning its respective business, properties and personnel as such other party
may reasonably request and each shall make available to the other the
appropriate individuals (including attorneys, accountants and other
professionals) for discussion of the other's business, properties and personnel
as either party may reasonably request.
The parties will hold any information which is nonpublic in confidence in
accordance with the current confidentiality agreement between the parties.
DMC and Innova will each obtain the written approval of the other prior to
issuing any press release or any other public statement with respect to the
Merger or the Merger Agreement, provided however, that a party may, without
prior written consent of the other party, issue such press release or make such
public statement as may upon the advice of counsel be required by law or the
rules and regulations of the NASD if it has used all reasonable efforts to
obtain the prior written consent of the other party.
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AGREEMENTS RELATING TO APPROVAL OF THE MERGER
The Merger Agreement provides that Innova and DMC shall call and hold their
respective stockholders' meetings as promptly as practicable for the purpose of
voting upon the approval of the Merger, and Innova and DMC shall use their
reasonable best efforts to hold such stockholders' meetings on the same day (and
at the same time of such day) and as soon as practicable after the date on which
the Registration Statement filed in connection with this Proxy
Statement/Prospectus (the "Registration Statement") becomes effective. Innova
and DMC shall use their best efforts to hold such stockholders' meetings not
later than October 21, 1998. Innova and DMC shall use their respective
reasonable best efforts to solicit from their respective stockholders proxies in
favor of the approval of the Merger and the issuance of DMC Common Stock in
connection with the Merger, respectively, and shall take all other action
necessary or advisable to secure the vote or consent of stockholders required by
the Delaware General Corporation Law with respect to DMC and the Washington
Business Corporation Act with respect to Innova and the Restated Certificate of
Incorporation and Bylaws of DMC and the Articles of Incorporation and Bylaws of
Innova to obtain such approvals, unless otherwise necessary under the applicable
fiduciary duties of the respective directors of Innova and DMC, as determined by
such directors in good faith after consultation with and based upon the advice
of outside legal counsel.
ADDITIONAL AGREEMENTS
The Merger Agreement provides that Innova and DMC will cooperate with one
another and use all reasonable efforts to take, or cause to be taken, all action
and to do, or cause to be done, all things necessary, proper or advisable to
consummate and make effective the transactions contemplated by the Merger
Agreement.
The Merger Agreement provides that Innova will provide DMC with a letter,
prior to the date the Registration Statement becomes effective, containing a
list of persons who are or may be deemed to be "affiliates" of Innova for
purposes of Rule 145 under the Securities Act ("Affiliates"). Innova has agreed
to use its best efforts to cause each of its Affiliates to deliver to DMC, prior
to the Effective Time, a written agreement in a form mutually agreeable to DMC
and Innova that such Affiliate will not sell, pledge, transfer or otherwise
dispose of any shares of DMC Common Stock, except pursuant to an effective
registration statement or in compliance with such Rule 145 or an exemption from
the registration requirements of the Securities Act. See "The Merger -- Resale
Restrictions." Innova was obligated under the Merger Agreement to use
reasonable best efforts to cause certain specified shareholders of Innova to
enter into concurrently with the execution of the Merger Agreement a shareholder
agreement with DMC to: (a) provide an irrevocable proxy to DMC to support and
vote in favor of the Merger, (b) agree, to the extent required to allow DMC to
account for the business combination to be effected by the Merger as a pooling
of interests, not to sell, transfer or assign any DMC Common Stock received by
them pursuant to the Merger until the expiration of all applicable holding
periods required under the pooling of interest accounting rules and (c) take all
actions and execute all documents reasonably requested by DMC to carry out the
foregoing matters.
The Merger Agreement provides that at the Effective Time, (i) Mr. Bachow
shall be appointed to the DMC Board and shall be nominated by management to
serve as a member of the DMC Board for a one-year term at each of the annual
meetings of DMC stockholders held in 1999, 2000 and 2001 and (ii) Mr. Mendicino
shall be appointed to the DMC Board and shall be nominated by management to
serve as a member of the DMC Board for a one-year term at each of the annual
meetings of DMC's stockholders held in 1999 and 2000; provided, however, the
obligation of DMC's management to nominate Mr. Mendicino at either or both
annual meetings of DMC's stockholders, as applicable, shall lapse upon the date
that Woodside Fund III liquidates or otherwise distributes all DMC Common Stock
held by Woodside Fund III.
CONDITIONS
The obligations of DMC and Innova to effect the Merger are subject to the
satisfaction of certain conditions, including, among others: (a) the
Registration Statement shall have been declared effective by the Commission
under the Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall have been issued by the Commission and no
proceedings for that purpose and no similar proceeding in respect of the Proxy
Statement/Prospectus shall have been initiated or threatened by the Commission;
(b) the Merger Agreement and the Merger shall have been approved and adopted by
the requisite vote of the shareholders of Innova and stockholders of DMC; (c) no
temporary restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of
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the Merger shall be in effect, and there shall not be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger, which makes the consummation of the Merger illegal;
and (d) DMC and Innova shall have received the opinions of their respective
counsel, Morrison & Foerster LLP and Graham & James LLP, in form and substance
reasonably satisfactory to each, on the basis of certain facts, representations
and assumptions set forth in such opinion, dated the Effective Time, to the
effect that the Merger will be treated for federal income tax purposes as a
Merger qualifying under the provisions of Section 368(a) of the Code and that
DMC and Innova will each be a party to the Merger within the meaning of
Section 368(b) of the Code; and (e) the waiting period (and any extension
thereof) applicable to the consummation of the Merger under the HSR Act shall
have expired or been terminated.
The obligations of DMC and Merger Sub to effect the Merger are also subject
to the following additional conditions: (a) the representations and warranties
of Innova contained in the Merger Agreement shall be true and correct in all
respects on and as of the Effective Time, except for (i) changes contemplated by
the Merger Agreement, (ii) those representations and warranties which address
matters only as of a particular date (which shall remain true and correct as of
such date) and (iii) where the failure to be true and correct would not have a
material adverse effect, with the same force and effect as if made on and as of
the Effective Time, and DMC and Merger Sub shall have received a certificate to
such effect signed by the President and Chief Financial Officer of Innova;
(b) Innova shall have performed or complied in all material respects with all
agreements and covenants required by the Merger Agreement to be performed or
complied with by it on or prior to the Effective Time, and DMC and Merger Sub
shall have received a certificate to such effect signed by the President and
Chief Financial Officer of Innova; (c) all material consents, waivers,
approvals, authorizations or orders required to be obtained, and all filings
required to be made ("Material Consents"), by Innova for the authorization,
execution and delivery of the Merger Agreement and the consummation by it of the
transactions contemplated in the Merger Agreement shall have been obtained and
made by Innova, except where the failure to receive such Material Consents would
not have a material adverse effect on Innova or DMC; (d) since July 22, 1998,
there shall have been no change in Innova or the Innova Subsidiary having, or
reasonably likely to have, individually or in the aggregate, a material adverse
effect; (e) DMC shall have received (i) an opinion of Arthur Andersen LLP,
independent public accountants, to the effect that the Merger qualifies for a
pooling of interests accounting treatment if consummated in accordance with the
Merger Agreement and (ii) a copy of the opinion referred to in Section 6.03(e)
of the Merger Agreement; (f) DMC shall have received from each person who is
identified by DMC in writing as an Affiliate, an affiliate agreement, and such
affiliate agreement shall be in full force and effect as of the Effective Time;
and (g) DMC shall have received from each specified shareholder a shareholder
agreement, and such shareholder agreement shall be in full force and effect as
of the Effective Time.
The obligations of Innova to effect the Merger are subject to the following
additional conditions: (a) the representations and warranties of DMC and Merger
Sub contained in the Merger Agreement shall be true and correct in all respects
on and as of the Effective Time, except for (i) changes contemplated by the
Merger Agreement, (ii) those representations and warranties which address
matters only as of a particular date (which shall remain true and correct as of
such date) and (iii) where the failure to be true and correct would not have a
material adverse effect, with the same force and effect as if made on and as of
the Effective Time, and Innova shall have received a certificate or certificates
to such effect signed by the President and Chief Financial Officer of each of
DMC and Merger Sub; (b) DMC and Merger Sub shall have performed or complied in
all material respects with all agreements and covenants required by the Merger
Agreement to be performed or complied with by them on or prior to the Effective
Time, and Innova shall have received a certificate or certificates to such
effect signed by the President and Chief Financial Officer of each of DMC and
Merger Sub; (c) all Material Consents required to be obtained or made by DMC and
Merger Sub for the authorization, execution and delivery of the Merger Agreement
and the consummation by them of the transactions contemplated in the Merger
Agreement shall have been obtained and made by DMC and Merger Sub, except where
the failure to receive such Material Consents would not have a material adverse
effect on Innova or DMC; (d) since July 22, 1998, there shall have been no
change in DMC or any subsidiary of DMC having or reasonably likely to have,
individually or in the aggregate, a material adverse effect; (e) Innova shall
have received (i) a letter from KPMG Peat Marwick LLP, independent auditors, to
the effect that the Merger qualifies for a pooling of interests accounting
treatment if consummated in accordance with the Merger Agreement and (ii) a copy
of the opinion referred to in Section 6.02(e) of the Merger; (f) no event that
would result in the triggering of any right or entitlement of DMC stockholders
under the DMC Rights Agreement, including a "flip-in" or "flip-over" or similar
event commonly described in such rights plans, has or will occur, including but
not limited to, as a result of the Merger Agreement, which would have or be
reasonably likely to result in a material
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adverse effect or materially change the number of outstanding equity securities
of DMC, and the rights under the DMC Rights Agreement shall not have become
nonredeemable by any action of the DMC Board; and (g) the shares of DMC Common
Stock to be issued in the Merger shall have been approved for quotation on
Nasdaq, subject only to official notice of issuance.
At the Effective Time or at any time prior thereto, to the extent legally
allowed, each of DMC and Innova, without the approval of the Innova
shareholders, may waive compliance with any of the agreements or satisfaction of
any of the conditions contained in the Merger Agreement for its respective
benefit. See " -- Amendment; Waiver."
TERMINATION
TERMINATION GENERALLY. The Merger Agreement may be terminated at any time
prior to the Effective Time and the Merger abandoned notwithstanding approval
thereof by the DMC stockholders or the Innova shareholders: (a) by mutual
written consent duly authorized by the DMC Board and the Innova Board; (b) by
either DMC or Innova if the Merger shall not have been consummated by
January 29, 1999 (provided that the right to terminate the Merger Agreement
under Section 7.01(b) of the Merger Agreement shall not be available to any
party whose failure to fulfill any obligation under the Merger Agreement has
been the cause of or resulted in the failure of the Merger to occur on or before
such date); (c) by either DMC or Innova if a court of competent jurisdiction or
governmental, regulatory or administrative agency or commission shall have
issued a non-appealable final order, decree or ruling or taken any other action,
in each case having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger, except if the party relying on such order,
decree or ruling or other action has not complied with its obligations under
Section 5.08 of the Merger Agreement; (d) by DMC or Innova, if, at the DMC
stockholders' or Innova shareholders' meetings (including any adjournment or
postponement thereof), the requisite vote of the stockholders of DMC or the
shareholders of Innova shall not have been obtained; (e) by DMC, if (i) the
Innova Board shall withdraw, modify or change its recommendation of the Merger
Agreement or the Merger in a manner adverse to DMC or shall have resolved to do
any of the foregoing; (ii) the Innova Board shall have recommended to the
shareholders of Innova an Alternative Transaction (as defined below); or (iii) a
tender offer or exchange offer for 15% or more of the outstanding shares of
Innova Common Stock is commenced (other than by DMC or an affiliate of DMC), and
the Innova Board recommends that the shareholders of Innova tender their shares
in such tender or exchange offer; or (f) by DMC or Innova, upon a breach of any
representation, warranty, covenant or agreement on the part of Innova or DMC,
respectively, set forth in the Merger Agreement such that the conditions set
forth in Section 6.02(a) or 6.02(b) of the Merger Agreement, or Section 6.03(a)
or 6.03(b) of the Merger Agreement, respectively, would not be satisfied (a
"Terminating Breach"), provided that if such Terminating Breach is curable prior
to January 29, 1999 by DMC or Innova, as the case may be, through the exercise
of its reasonable best efforts and for so long as DMC or Innova, as the case may
be, continues to exercise such reasonable best efforts, neither Innova nor the
DMC, respectively, may terminate the Merger Agreement under Section 7.01 of the
Merger Agreement.
The Merger Agreement may also be terminated at any time prior to the
Effective Time and the Merger abandoned notwithstanding approval thereof by the
DMC stockholders or the Innova shareholders: (a) by Innova, if the DMC Board
shall withdraw, modify or change its recommendation of the Merger Agreement or
the Merger, including without limitation approval of the issuance of shares of
DMC Common Stock in connection with the Merger, in a manner adverse to Innova or
shall have resolved to do any of the foregoing; (b) by Innova, if the DMC Board
shall approve any transaction described in Section 4.03(a) of the Merger
Agreement; or (c) by Innova, upon two days' prior written notice to DMC, if, as
a result of a tender offer by a party other than DMC or any of its affiliates or
any written offer or proposal with respect to an Alternative Transaction (as
defined in Section 7.03(c)) by a party other than DMC or any of its affiliates,
the Innova Board determines in good faith that the fiduciary obligations of such
directors under applicable law require that such tender offer or other written
offer or proposal be accepted; provided, however, that (i) the Innova Board
shall have been advised in writing by Graham & James LLP that notwithstanding a
binding commitment to consummate an agreement of the nature of the Merger
Agreement entered into in the proper exercise of their applicable fiduciary
duties, and notwithstanding all concessions which may be offered by DMC in
negotiations entered into pursuant to clause (ii) below, such fiduciary duties
would also require the directors to reconsider such commitment as a result of
such tender offer or other written offer or proposal; and (ii) prior to any such
termination, Innova shall, and shall cause its respective financial and legal
advisors to negotiate with DMC to make such adjustments in the terms and
conditions of the Merger Agreement as
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would enable Innova to proceed with the transactions contemplated in the Merger
Agreement; providing further that DMC and Innova acknowledge and affirm that,
notwithstanding anything contained in Section 7.01(i) of the Merger Agreement to
the contrary, DMC and Innova intend the Merger Agreement to be an exclusive
agreement and, accordingly, nothing in the Merger Agreement is intended to
constitute a solicitation of an offer or proposal for an Alternative Transaction
(as defined in Section 7.03(c)), it being acknowledged and agreed that any such
offer or proposal would interfere with the strategic advantages and benefits
that DMC and Innova anticipate deriving from the Merger and other transactions
contemplated by the Merger Agreement.
EFFECT OF TERMINATION; TERMINATION FEES. In the event of termination, the
Merger Agreement will be of no further effect and there will be no liability or
obligation on the part of either DMC or Innova or their respective affiliates,
directors, officers or stockholders except (i) as set forth in Sections 5.09,
7.03 and 8.01 of the Merger Agreement and, (ii) for a termination resulting from
a willful breach by a party to the Merger Agreement. Except as set forth in
Section 7.03 of the Merger Agreement, (a) all fees and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
shall be paid by the party incurring such expenses, if the Merger is not
consummated or (b) if the Merger is consummated, then the Surviving Company
shall pay all such fees and expenses; provided, however, that DMC and Innova
shall share equally all fees and expenses, other than attorney's fees, incurred
in relation to the printing and filing of the joint proxy statement/prospectus
(including any preliminary materials related thereto) and the Registration
Statement (including financial statements and exhibits) and any amendments or
supplements thereto.
Pursuant to Section 7.03(b) of the Merger Agreement, Innova shall pay DMC a
fee of $4,500,000 in cash (the "Fee"), plus actual, documented and reasonable
out-of-pocket expenses of DMC relating to the transactions contemplated by the
Merger Agreement (including, but not limited to, fees and expenses of DMC's
counsel, accountants and financial advisers, but excluding any discretionary
fees paid to such financial advisors), upon the earlier to occur of (a) the
termination of the Merger Agreement by DMC pursuant to Section 7.01(d) of the
Merger Agreement as a result of the failure to receive the requisite vote for
approval and adoption by the shareholders of Innova at the Innova shareholders'
meeting; (b) the termination of the Merger Agreement by DMC pursuant to
Section 7.01(e) of the Merger Agreement; (c) the termination of the Merger
Agreement by DMC pursuant to Section 7.01(f) after a breach by Innova of the
Merger Agreement; or (d) the termination of the Merger Agreement by DMC pursuant
to Section 7.01(i) regarding Innova's obligations with respect to an Alternative
Transaction. "Alternative Transaction" means either (i) a transaction pursuant
to which any person (or group of persons) other than DMC or its affiliates (a
"Third Party") acquires more than 15% of the outstanding shares of Innova Common
Stock, whether from Innova or pursuant to a tender offer or exchange offer or
otherwise, (ii) a Merger or other business combination involving Innova pursuant
to which any Third Party acquires more than 15% of the outstanding equity
securities of Innova or the entity surviving such merger or business combination
or (iii) any other transaction pursuant to which any Third Party acquires
control of assets (including for this purpose the outstanding equity securities
of subsidiaries of Innova, and the entity surviving any merger or business
combination including any of them) of Innova, any of its subsidiaries having a
fair market value (as determined by the Innova Board in good faith) equal to
more than 15% of the fair market value of all the assets of Innova and its
subsidiaries, taken as a whole, immediately prior to such transaction; provided,
however, that the term "Alternative Transaction" does not include any
acquisition of securities by a broker-dealer in connection with a bona fide
public offering of such securities.
Pursuant to Section 7.03(d) of the Merger Agreement, DMC shall pay Innova
the Fee, plus actual, documented and reasonable out-of-pocket expenses of Innova
relating to the transactions contemplated by the Merger Agreement (including,
but not limited to, fees and expenses of Innova's counsel, accountants and
financial advisors, but excluding any discretionary fees paid to such financial
advisors), upon the earlier to occur of the following events: (i) the
termination by Innova pursuant to Section 7.01(d) of the Merger Agreement as a
result of the failure to receive the requisite vote for approval and adoption by
the stockholders of DMC at the DMC stockholders' meeting; (ii) the termination
of the Merger Agreement by Innova pursuant to Section 7.01(f) of the Merger
Agreement after a breach by DMC or Merger Sub of the Merger Agreement; (iii) the
termination of the Merger Agreement by Innova pursuant to Section 7.01(g) of the
Merger Agreement, unless the DMC Board withdraws its recommendation of the
Merger Agreement or the Merger because DMC has terminated the Merger Agreement
pursuant to Section 7.01(e) of the Merger Agreement; or (iv) the termination of
the Merger Agreement by Innova pursuant to Section 7.01(h) of the Merger
Agreement.
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The Fee payable pursuant to Sections 7.03(b) or 7.03(d) of the Merger
Agreement shall be paid within one business day after the occurrence of an event
described in Section 7.03(b) or 7.03(d) of the Merger Agreement, as applicable;
provided, that, in no event shall DMC or Innova, as the case may be, be required
to pay such Fee to the other, if, immediately prior to the termination of the
Merger Agreement, the party to receive the Fee was in material breach of its
obligations under the Merger Agreement.
AMENDMENT; WAIVER
The Merger Agreement may be amended by the parties thereto by action taken
by or on behalf of their respective board of directors at any time prior to the
Effective Time; provided, however, that, after approval of the Merger by either
the shareholders of Innova or the stockholders of DMC, no amendment may be made
which by law requires further approval by such shareholders or stockholders
without such further approval. The Merger Agreement may not be amended except
by an instrument in writing signed by the parties thereto.
At the Effective Time or any time prior thereto, to the extent legally
allowed, the parties to the Merger Agreement may (i) extend the time for the
performance of any of the obligations or other acts of the other parties
thereto; (ii) waive any inaccuracies in the representations and warranties
contained in the Merger Agreement or in any document delivered pursuant thereto;
and (iii) waive compliance with any of the agreements or conditions contained in
the Merger Agreement. Any agreement on the part of a party thereto to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party.
COMPARISON OF CAPITAL STOCK
DESCRIPTION OF DMC CAPITAL STOCK
DMC COMMON STOCK. DMC is authorized to issue up to 95,000,000 shares of
DMC Common Stock, par value $0.01 per share. Holders of shares of DMC Common
Stock are entitled to one vote per share on all matters to be voted on by
stockholders. The holders of DMC Common Stock are entitled to receive such
dividends, if any, as may be declared from time to time by the DMC Board out of
funds legally available therefore. Upon liquidation or dissolution of DMC, the
holders of DMC Common Stock are entitled to share ratably in the distribution of
assets, subject to the rights of the holders of DMC Preferred Stock. Holders of
DMC Common Stock have no preemptive rights, subscription rights or conversion
rights. There are no redemption or sinking fund provisions with respect to the
DMC Common Stock. On June 30, 1998, there were 297 holders of record of DMC
Common Stock.
DMC PREFERRED STOCK. Under its Restated Certificate of Incorporation, DMC
has authority to issue 5,000,000 shares of preferred stock, $0.01 par value per
share (the "DMC Preferred Stock"), in one or more series as determined by the
DMC Board. No shares of DMC Preferred Stock are currently issued or
outstanding. The DMC Board may, without further action by the stockholders of
DMC, issue a series of DMC Preferred Stock and fix the rights and preferences of
those shares, including the dividend rights, dividend rates, conversion rights,
exchange rights, voting rights, terms of redemption, redemption price or prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series. The rights of the holders of DMC Common Stock will
be subject to, and may be adversely affected by, the rights of the holders of
any DMC Preferred Stock issued by DMC in the future.
DMC STOCKHOLDERS' RIGHTS AGREEMENT. In October 1991, DMC adopted the DMC
Rights Agreement pursuant to which one Preferred Share Purchase Right (a
"Right") was distributed for each outstanding share of DMC Common Stock. Each
Right (as adjusted to give effect to a stock dividend, which effected a
two-for-one stock split, in November 1997) entitles DMC stockholders to buy one
two-hundredth of a share of Series A Junior Participating DMC Preferred Stock at
an exercise price of $50.00 upon certain events. The Rights expire on October
23, 2001, unless earlier redeemed by DMC.
The Rights become exercisable if a person acquires 15% or more of DMC
Common Stock or announces a tender offer that would result in such person owning
15% or more of DMC Common Stock, other than a person who has reported or is
required to report beneficial ownership of DMC Common Stock on Schedule 13G
under the Exchange Act, with respect to whom the threshold is 20%. If the
Rights become exercisable, the holder of each Right (other than the person whose
acquisition triggered the exercisability of the Rights) will be entitled to
purchase,
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at the Right's then-current exercise price, a number of shares of DMC Common
Stock having a market value of twice the exercise price. In addition, if DMC
were to be acquired in a merger or business combination after the Rights became
exercisable, each Right would entitle its holder to purchase, at the Right's
then-current exercise price, stock of the acquiring company having a market
value of twice the exercise price. The Rights (as adjusted to give effect to a
stock dividend, which effected a two-for-one stock split, in November 1997) are
redeemable by DMC at a price of $0.005 per Right at any time within ten days
after a person has acquired 15% (or 20% in the case of a Schedule 13G filer) or
more of DMC Common Stock.
DMC'S TRANSFER AGENT AND REGISTRAR. DMC has appointed ChaseMellon
Shareholder Services L.L.C. as the transfer agent and registrar of the DMC
Common Stock.
DESCRIPTION OF INNOVA CAPITAL STOCK
The authorized capital stock of Innova consists of 30,000,000 shares of
Innova Common Stock and 5,000,000 shares of Innova Preferred Stock.
INNOVA COMMON STOCK. As of August 14, 1998, 14,021,858 shares of Innova
Common Stock were issued and outstanding. Holders of Innova Common Stock are
entitled to one vote per share on all matters submitted to a vote of the
shareholders and do not have the right to cumulate votes with respect to the
elections of directors. Accordingly, holders of a majority of the shares of
Innova Common Stock voting in any election of directors have the ability to
elect all of the directors standing for election. All directors hold office
until the next annual meeting of shareholders and until their successors have
been duly elected and qualified. Directors may be removed with or without cause
by the holders of a majority of the outstanding shares of Innova Common Stock.
Holders of Innova Common Stock are entitled to receive ratably any
dividends as may be declared by the Innova Board out of legally available funds,
subject to any preferences that may be afforded to any outstanding preferred
stock. Upon the liquidation, dissolution or winding up of Innova, holders of
Innova Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of any outstanding
preferred stock. Holders of Innova Common Stock have no preemptive,
subscription, redemption or conversion rights. All of the outstanding shares of
Innova Common Stock are, when issued, fully paid and nonassessable. Innova's
Articles of Incorporation and Bylaws provide for release and indemnification of
Innova's directors and officers as to certain liabilities arising from their
actions in such capacities to the fullest extent permitted by law.
PREFERRED STOCK. The Innova Board has the authority to issue 5,000,000
shares of preferred stock in one or more series and to fix the relative rights,
preferences and privileges thereof, including dividend rights, conversion
rights, voting rights, redemption terms, liquidation preferences and number of
shares constituting any series up to the maximum number of preferred stock. The
market price for Innova Common Stock, and the voting and other rights of the
holders thereof, may be adversely affected by the rights, preferences and
privileges accorded to any preferred stock issued by Innova. There are
currently no shares of preferred stock outstanding. Presently, Innova has no
plans to issue any preferred stock.
WARRANTS TO PURCHASE COMMON STOCK. As of June 30, 1998, warrants to
purchase 1,951,593 shares of Innova Common Stock were outstanding. Of these,
(i) warrants to purchase 230,372 shares of Innova Common Stock at an exercise
price of $.84 per share expire May 31, 1999, (ii) warrants to purchase 639,117
shares of Innova Common Stock at an exercise price of $.024 per share expire
February 13, 2000, (iii) warrants to purchase 565,829 shares of Innova Common
Stock at an exercise price of $.024 per share expire September 5, 2000,
(iv) warrants to purchase 172,277 shares of Innova Common Stock at an exercise
price of $2.5824 per share and warrants to purchase 322,498 shares of Innova
Common Stock at an exercise price of $.024 per share expire April 26, 2001 and
(v) a warrant to purchase 21,500 shares of Innova Common Stock at an exercise
price of $6.96 per share expires April 30, 2002. All warrants are currently
exercisable. Any warrants not exercised prior to the Effective Time will be
deemed assumed by DMC and will constitute warrants to purchase DMC Common Stock
on the same terms and conditions, subject to adjustment for the Exchange Ratio.
CERTAIN VOTING AND OTHER MATTERS OF INNOVA. Under the Washington Business
Corporation Act, shareholder approval is required in order for Innova to
participate in certain mergers and share exchanges or to sell substantially all
of its assets, and for certain other actions. Within certain limits, the
Washington Business
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Corporation Act permits a corporation's articles of incorporation to specify the
level of shareholder approval required for such transactions. Innova's Articles
of Incorporation generally require any such transaction to be approved by the
holders of a majority of the outstanding shares of Innova Common Stock.
Under Innova's Articles of Incorporation and Bylaws, special meetings of
the shareholders may be called only by the Innova Board, Innova's Chairman of
the Board, or Innova's President, or the holders of at least 25% of all the
votes entitled to be cast on any issues proposed to be considered at such
special meeting. Amendments to Innova's Articles of Incorporation must
generally be approved by the Innova Board and the holders of a majority of the
outstanding shares of Innova Common Stock.
Innova's Bylaws provide that shareholders seeking to bring business before,
or to nominate directors at, any meeting of shareholders must provide timely
notice thereof in writing. To be timely, a shareholder's notice must be
delivered to, or mailed and received at, the principal executive office of
Innova not less than seventy (70) days prior to the date of the meeting, or the
tenth day after notice of the meeting is first given to stockholders, whichever
is later if the meeting is an annual meeting or a special meeting at which
directors are to be elected. The Innova Bylaws also contain specific
requirements for the form of a shareholder's notice. These provisions may
preclude or may make it difficult for some shareholders from bringing matters
before the shareholders or from making nominations for directors. The Innova
Bylaws may be amended or repealed by the Innova Board or by the majority of the
holders of the outstanding shares of Innova Common Stock.
INNOVA'S ANTITAKEOVER RESTRICTIONS. The Washington Business Corporation
Act contains certain provisions that may have the effect of delaying, deferring
or preventing a takeover or change of control of Innova, which is not supported
by the Innova Board. Chapter 23B.19 of the Washington Business Corporation Act
prohibits Innova, with certain exceptions, from engaging in certain significant
business transactions with an "acquiring person" (defined as a person who
acquires 10% or more of Innova's voting securities without the prior approval of
the Innova Board) for a period of five (5) years after such acquisition. The
prohibited transactions include, among others, a merger with, disposition of
assets to, or issuance or redemption of stock to or from, the acquiring person,
or otherwise allowing the acquiring person to receive any disproportionate
benefit as a shareholder. Innova may not exempt itself from coverage of this
statute. Notwithstanding the foregoing, an otherwise prohibited transaction may
be consummated if such transaction is approved by a majority of the members of
the Innova Board prior to the date that the third party becomes an acquiring
person.
INNOVA'S TRANSFER AGENT AND REGISTRAR. The transfer agent and registrar
for Innova Common Stock is ChaseMellon Shareholder Services, L.L.C.
COMPARISON OF RIGHTS OF DMC STOCKHOLDERS AND INNOVA SHAREHOLDERS
The rights of DMC stockholders are currently governed by the Delaware
General Corporation Law and the Restated Certificate of Incorporation and Bylaws
of DMC (the "DMC Certificate" and the "DMC Bylaws," respectively). The rights
of Innova shareholders are currently governed by the Washington Business
Corporation Act and the Articles of Incorporation and Bylaws of Innova (the
"Innova Articles" and the "Innova Bylaws"). Accordingly, upon consummation of
the Merger, the rights of DMC stockholders and of Innova shareholders who become
DMC stockholders in the Merger will be governed by the Delaware General
Corporation Law, the DMC Certificate and the DMC Bylaws. The following is a
summary of the principal differences between the current rights of Innova
shareholders and those of DMC stockholders following the Merger.
The following summary is not intended to be complete and is qualified in
its entirety by reference to the Delaware General Corporation Law, the
Washington Business Corporation Act, the DMC Certificate, the DMC Bylaws, the
Innova Articles and the Innova Bylaws. Copies of the DMC Certificate and the
DMC Bylaws are incorporated by reference herein and will be sent to holders of
shares of DMC Common Stock and Innova Common Stock upon request of DMC's
Secretary. See "Available Information."
COMPARISON OF CURRENT INNOVA SHAREHOLDER RIGHTS AND RIGHTS OF DMC STOCKHOLDERS
FOLLOWING THE MERGER
The DMC Certificate is not being amended in connection with the Merger.
The DMC Bylaws are not being amended in connection with the Merger, other than
to increase the number of directors on the DMC Board
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<PAGE>
from seven to nine so that Mr. Bachow and Mr. Mendicino may become directors of
DMC at the Effective Time. See "Board of Directors" immediately below.
The rights of Innova shareholders under the Washington Business Corporation
Act, the Innova Articles and the Innova Bylaws prior to the Merger are
substantially the same as the rights of DMC stockholders (including Innova
shareholders who become DMC stockholders as a result of the Merger) under the
Delaware General Corporation Law, the DMC Certificate and the DMC Bylaws, with
the following principal exceptions.
AUTHORIZED CAPITAL STOCK. The capital stock of Innova consists of
30,000,000 shares of Innova Common Stock, of which 14,005,877 shares were issued
and outstanding as of June 30, 1998. The authorized capital of DMC is set forth
under "Comparison of Capital Stock -- Description of DMC Capital Stock."
BOARD OF DIRECTORS. The Innova Bylaws provide that the number of directors
that shall constitute the Innova Board shall be seven directors. Under the
Innova Bylaws, Innova directors are elected at the annual meeting of
shareholders for a one-year term. Neither the Innova Articles nor the Innova
Bylaws provide for cumulative voting for election of directors. Nominations of
persons for election to the Innova Board may be made by or at the direction of
the Innova Board, or by Innova shareholders in accordance with the procedures
set forth in the Innova Bylaws. Under the Innova Bylaws, vacancies in the
Innova Board may be filled by the affirmative vote of a majority of the
directors present at a meeting of the Innova Board at which a quorum is present,
or, if the directors in office constitute less than a quorum, by the affirmative
vote of a majority of all of the directors in office. Any director elected to
fill a vacancy shall hold office until the next meeting of shareholders at which
directors are to be elected and until his successor shall have been elected and
qualified. Pursuant to the Innova Bylaws, one or more members of the Innova
Board may be removed (with or without cause) at a special meeting of
shareholders called for that purpose.
The DMC Bylaws provide that the number of directors that shall constitute
the DMC Board shall be seven. DMC currently has seven directors. In connection
with the Merger, the DMC Bylaws will be amended to increase the number of
directors to nine. Under the DMC Bylaws, DMC directors are elected at the
annual meeting of stockholders for a one-year term. Neither the DMC Certificate
nor the DMC Bylaws provide for cumulative voting for election of directors.
Nominations of persons for election to the DMC Board may be made by or at the
direction of the DMC Board, or by DMC stockholders according to the procedures
described in the DMC Bylaws. Under the DMC Bylaws, vacancies in the DMC Board
may be filled by resolution of a majority of the DMC Board (or a sole director,
if applicable), and any director so appointed will hold office until the next
annual meeting of stockholders. The DMC Certificate and the DMC Bylaws do not
contain provisions regarding the removal of directors, and accordingly such
matter would be governed by the Delaware General Corporation Law. The Delaware
General Corporation Law provides that directors may be removed (with or without
cause) by vote of the holders of a majority of shares entitled to vote at an
election of directors.
AMENDMENT OF BYLAWS. The Innova Articles may be amended with the approval
of each voting group entitled to vote separately thereon by a majority of all
votes entitled to be cast by that voting group. The holders of the outstanding
shares of a class are entitled to vote as a separate voting group on a proposed
amendment to the Innova Articles if such amendment would increase or decrease
the aggregate number of authorized shares of the particular class; effect an
exchange of all or part of the shares of the class into shares of another class;
effect an exchange or reclassification, or create a right of exchange, of all or
part of the shares of another class into shares of the class; change the
designation, rights, preferences or limitations of all or part of the shares of
the class; change the shares of all or part of the class into a different number
of shares of the same class; create a new class of shares having rights or
preferences with respect to distributions or to dissolution that are prior,
superior or substantially equal to the shares of the class; limit or deny an
existing preemptive right of all or part of the shares of the class; or cancel
or otherwise affect the rights to distributions or dividends that have
accumulated but not yet been declared on all or part of the shares of the class.
There are no shares of preferred stock of Innova issued or outstanding.
The Innova Bylaws may be amended by the shareholders and by the Innova
Board, unless and until the power to amend such bylaws is specifically reserved
to the shareholders.
The DMC Certificate provides that any provision contained in the DMC
Certificate may be amended, altered, changed or repealed as prescribed pursuant
to the Delaware General Corporation Law. The Delaware General Corporation Law
provides that a charter amendment requires the approval of a majority of a
company's
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<PAGE>
board of directors and the approval of the holders of a majority of the voting
power of the then outstanding capital stock of such company.
The DMC Bylaws expressly provide for their amendment by either the DMC
Board or a majority of the DMC stockholders.
VOTING RIGHTS. The outstanding voting securities of Innova are the shares
of Innova Common Stock. Under the Washington Business Corporation Act, each
holder of Innova Common Stock at the record date set for a meeting of
shareholders is entitled to one vote per share owned, subject to certain
limitations. Holders of a class of stock may vote as a class if the amendment
would increase or decrease the number of authorized shares of such class or the
par value of the shares of such class, or would alter the preferences, powers,
or special rights of any class so as to affect them adversely. In no event is
cumulative voting permitted for the election of directors. For a discussion of
the voting rights of preferred stock of Innova, see "Description of Innova
Capital Stock -- Preferred Stock."
The outstanding voting securities of DMC are the shares of DMC Common
Stock. Under the Delaware General Corporation Law, each holder of DMC Common
Stock at the record date set for a meeting of stockholders is entitled to one
vote per share owned, subject to certain limitations. Under the Delaware
General Corporation Law, a corporation with stock outstanding or subscribed
ordinarily may amend its charter provided that the amendment is recommended by
the board of directors and approved by the affirmative vote of a majority of all
the votes entitled to be cast. Holders of a class of stock may vote as a class
if the amendment would increase or decrease the number of authorized shares of
such class or the par value of the shares of such class, or would alter the
preferences, powers, or special rights of any class so as to affect them
adversely. For a discussion of the voting rights of DMC Preferred Stock, see
"Comparison of Capital Stock -- Description of DMC Capital Stock."
The DMC Certificate does not provide any supermajority requirements or any
special voting rights for DMC Common Stock. However, see "Description of DMC
Capital Stock -- DMC Stockholders' Rights Agreement" regarding the DMC Rights
Agreement.
RIGHTS PLAN. Innova has not adopted a shareholders' rights plan. For a
description of DMC's Rights Agreement, see "Comparison of Capital Stock -- DMC's
Stockholders' Rights Agreement."
LIABILITY OF SHAREHOLDERS. Under the Washington Business Corporation Act,
a purchaser of a corporation's shares is not liable to the corporation or its
creditors with respect to the shares except to pay the consideration for which
the shares were authorized to be issued pursuant to Washington law or an
applicable subscription agreement.
Under the Delaware General Corporation Law, a stockholder of a dissolved
corporation, the assets of which were distributed under the Delaware General
Corporation Law, is generally not liable for any claims against the dissolved
corporation in excess of the amount distributed to him or her in dissolution.
BUY-BACK RIGHTS. The Innova Articles does not contemplate the repurchase
or redemption of shares of Innova Common Stock. Under the Washington Business
Corporation Act, any shares of Innova Common Stock repurchased by Innova are
characterized as authorized but unissued shares of Innova Common Stock rather
than treasury stock of Innova.
The DMC Certificate does not contemplate the repurchase of shares of DMC
Common Stock, but DMC is allowed to repurchase such shares pursuant to the
Delaware General Corporation Law. DMC Common Stock is not redeemable pursuant
to the DMC Certificate.
INDEMNIFICATION. Under the Washington Business Corporation Act, if
authorized by a corporation's articles of incorporation, a bylaw adopted or
ratified by the shareholders or a resolution adopted or ratified, before or
after the event, by the shareholders, a corporation has the power, subject to
certain exceptions, to indemnify subject to certain requirements a director or
officer made a party to a civil, criminal or administrative proceeding, or to
advance or reimburse expenses incurred in connection with such a proceeding.
Unless otherwise limited by the corporation's articles of incorporation,
Washington law requires corporate indemnification if the director or officer is
wholly successful on the merits of the action or otherwise. Any indemnification
of a director in a derivative action must be reported to the shareholders in
writing.
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<PAGE>
Under each of the Innova Articles and the Innova Bylaws, the corporation
indemnifies, in the manner and to the full extent permitted by law, any person
(or the estate of any person) who was or is a party to a civil, criminal or
administrative proceeding by reason of the fact that such person is or was a
director, officer or agent of the corporation. However, indemnification by the
corporation of its directors, officers and agents is not permitted with respect
to: (a) acts or omissions of a director finally adjudged to be intentional
misconduct or a knowing violation of the law; (b) conduct of a director or
officer finally adjudged to be an unlawful distribution; or (c) any transaction
with respect to which it is finally adjudged that the director or officer in
question, personally received a benefit in money, property or services to which
such director or officer was not legally entitled. Innova may also, to the full
extent permitted by law, purchase and maintain insurance on behalf of any
director, officer or agent of the corporation. The indemnification by the
corporation of its directors, officers and agents is not intended to be deemed
exclusive of any other rights to which any person seeking indemnification from
the corporation may otherwise be entitled under any agreement, vote of
shareholders or disinterested directors or otherwise, both as to action in the
director, officer or agent's official capacity and as to action in another
capacity while holding such office.
Under the Washington Business Corporation Act, directors also have a duty
of loyalty to the corporation and its shareholders. The duty of loyalty
requires that, in making a business decision, directors act in good faith and in
the honest belief that the action taken was in the best interests of the
corporation.
The Delaware General Corporation Law provides that the indemnification
provided for in the Delaware General Corporation Law shall not be deemed
exclusive of any other rights under any bylaw, agreement, vote of stockholders
or disinterested directors, or otherwise, and provides that expenses may be
advanced to officers and directors in a specific case upon receipt of an
undertaking to repay such amount if it is ultimately determined that the
indemnified party is not entitled to be indemnified. In addition, the Delaware
General Corporation Law permits the determination as to whether an officer or
director has met the applicable standard of conduct to be made in certain
circumstances by independent legal counsel.
The Delaware General Corporation Law permits a corporation to indemnify
officers, directors, employees and agents for actions taken in good faith and in
a manner they reasonably believe to be in, or not opposed to, the best interest
of the corporation, and with respect to any criminal action, which they had no
reasonable cause to believe was unlawful. The Delaware General Corporation Law
provides that a corporation may advance expenses of defense (upon receipt of a
written undertaking to reimburse the corporation if indemnification is not
appropriate) and must reimburse a successful defendant for expenses, and permits
a corporation to purchase and maintain liability insurance for its directors and
officers. The Delaware General Corporation Law provides that indemnification
may not be made for any claim, issue or matter as to which a person has been
adjudged to be liable to the corporation, unless and only to the extent a court
determines that the person is entitled to indemnity for such expenses as the
court deems proper.
The DMC Certificate provides that no director of DMC shall be liable to DMC
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to DMC or its stockholders; (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law; (iii) in
respect of certain unlawful dividend payments or stock redemptions or
repurchases; or (iv) for any transaction from which the director derived an
improper personal benefit. The effect of these provisions is to eliminate the
rights of DMC and its stockholders (through stockholders' derivative suits on
behalf of DMC) to recover monetary damages against a director for breach of
certain fiduciary duties as a director (including breaches resulting from
grossly negligent behavior), except in the situations described above. These
provisions will not limit the liability of directors under federal securities
laws.
Under the Delaware General Corporation Law, directors also have a duty of
loyalty to the corporation and its stockholders. The duty of loyalty requires
that, in making a business decision, directors act in good faith and in the
honest belief that the action taken was in the best interests of the
corporation.
Pursuant to the DMC Bylaws, DMC shall indemnify to the full extent
permitted by, and in the manner permissible under, the laws of the State of
Delaware any person made, or threatened to be made, a party to an action or
proceeding, whether criminal, civil, administrative or investigative, by reason
of the fact that he or she, or his or her testator or intestate, is or was a
director of DMC, or served any enterprise as a director or officer at the
request of DMC. Expenses incurred by a director of DMC in defending a civil or
criminal action, suit or proceeding by reason
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of the fact that he or she was a director of DMC (or was serving at DMC's
request as a director or officer of another enterprise or corporation) shall be
paid by DMC in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director to
repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by DMC as authorized by relevant sections of the
Delaware General Corporation Law.
Pursuant to the DMC Bylaws, the DMC Board has the power on behalf of DMC to
indemnify any person, other than a director, made a party to any action, suit or
proceeding by reason of the fact that he or she, or his or her testator or
intestate, is or was an officer or employee of DMC.
The indemnification provided by the DMC Bylaws is not deemed exclusive of
any other rights to which those seeking indemnification may be entitled under
the DMC Certificate, the DMC Bylaws, any agreement, vote of DMC stockholders or
disinterested directors, or otherwise, both as to actions of a director in his
or her official capacity and as to actions in another capacity while holding
such office.
SHAREHOLDER MEETINGS. Under the Washington Business Corporation Act,
Innova is required to hold an annual meeting of shareholders. The Innova Board
is empowered to select the place, day and time of such annual meeting. Special
shareholder meetings may be called by the Innova Board (or the Chairman
thereof), the President or by one or more shareholders holding shares
representing not less than 25% of all the votes entitled to be cast on any issue
proposed to be considered at a special meeting. Under the Innova Bylaws, Innova
shareholders must receive written notice of the annual meeting and any special
meeting not less than ten (10) but not more than sixty (60) days prior to such
meeting. The record date for determining the shareholders entitled to vote at
any meeting may be any date not more than seventy (70) days prior to such
meeting. Any action which may be or which is required by law to be taken at any
meeting of shareholders may be taken, without a meeting or notice of a meeting,
if one or more written consents, setting forth the action to be taken, are
signed by all of the shareholders entitled to vote or, in the place of any one
or more of such shareholders, by a person holding a valid proxy to vote with
respect to the subject matter thereof and which are delivered to Innova's
Secretary for inclusion in Innova's corporate minute book.
Under the Innova Bylaws, a quorum of shareholders exists at any meeting of
shareholders if a majority of the votes entitled to be cast is represented in
person or by proxy.
Under the Delaware General Corporation Law, DMC is required to hold an
annual meeting of stockholders. The DMC Bylaws provide that the annual meeting
shall be held on the third Thursday in July if not a legal holiday, in San Jose,
California or at such other date and place as shall be designated from time to
time by the DMC Board. Special stockholder meetings may be called only by a
majority of the DMC Board or upon written application of one or more
stockholders who hold at least 40% of the capital stock entitled to vote at such
meeting. DMC stockholders are not otherwise permitted to call a special meeting
or to require that the DMC Board call a special meeting of stockholders except
as applicable law may require. Under the DMC Bylaws, DMC stockholders must
receive written notice of any special meeting not less than ten (10) but not
more than sixty (60) days prior to such meeting. DMC stockholders are entitled
to written notice of any annual meeting not less than ten (10) days nor more
than sixty (60) days prior to such annual meeting. The record date for the
meetings of the DMC stockholders shall not be less than ten (10) days before the
date of such meetings.
Pursuant to the DMC Bylaws, the holders of a majority of the DMC Common
Stock issued and outstanding and entitled to vote at a stockholders' meeting,
present in person or represented by proxy, shall constitute a quorum at such
meeting for the transaction of business.
DISTRIBUTIONS. The Innova Board may from time to time authorize, and the
corporation may make, distributions to its shareholders to the extent permitted
by Washington law. The Washington Business Corporation Act defines
distributions as any "direct or indirect transfer of money or other property,
except its own shares, or incurrence of indebtedness by a corporation to or for
the benefit of its shareholders in respect to any of its shares."
The holders of DMC Common Stock are entitled to receive such dividends, if
any, as may be declared from time to time by the DMC Board out of funds legally
available therefore. Pursuant to the DMC Bylaws, dividends may be paid in cash,
in property, or in shares of DMC Common Stock.
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ISSUE OF SHARES. The Innova Articles authorize the issuance of up to
35,000,000 shares of two classes of stock without par value: 30,000,000 shares
of Innova Common Stock and 5,000,000 shares of preferred stock of Innova. The
Innova Board is authorized to determine the designations, relative rights and
preferences and limitations of each series of the preferred stock of Innova
issued by the corporation.
The DMC Certificate presently authorizes DMC to issue up to 95,000,000
shares of DMC Common Stock, par value $0.01 per share and 5,000,000 shares of
DMC Preferred Stock. The DMC Certificate has no restrictions on the issuance of
new shares and options. Limitations on the number of options granted under
DMC's stock plans are contained within such plans.
DISSENTERS' RIGHTS. Under the Washington Business Corporation Act, a
shareholder is entitled to dissent from, and, upon perfection of his or her
appraisal rights, to obtain the fair value of his or shares in the event of
certain corporate actions, including certain mergers, consolidations, share
exchanges, sales of all or substantially all of the assets of the corporation,
and amendments to the corporation's articles of incorporation that materially
and adversely affect shareholder rights.
Under the Delaware General Corporation Law, a stockholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to receive cash equal to the fair market value of the
shares held by such stockholder (as determined by a court of competent
jurisdiction or by agreement of the stockholder and the corporation), in lieu of
the consideration such stockholder would otherwise receive in the transaction.
The Delaware General Corporation Law does not require dissenters' rights with
respect to (a) a sale of assets; (b) a merger by a corporation, if the shares of
the corporation are either (i) listed on a national securities exchange,
(ii) designated as a national market security on an interdealer quotation system
by the NASD, (iii) held by more than 2,000 stockholders of record, (iv) shares
of the Surviving Company or (v) of a listed or widely-held corporation; or (c) a
merger in which a corporation is a Surviving Company if no vote of its
stockholders is required to approve the merger.
CERTAIN PROVISIONS RELATING TO BUSINESS COMBINATIONS. The Washington
Business Corporation Act imposes restrictions on certain transactions between a
corporation and certain significant shareholders. Chapter 23B.19 of the
Washington Business Corporation Act prohibits a "target corporation," with
certain exceptions, from engaging in certain "significant business transactions"
with an "acquiring person" who acquires 10% or more of the voting securities of
a "target corporation" for a period of five years after such acquisition, unless
the transaction or acquisition of shares is approved by a majority of the
members of the target corporation's board of directors prior to the date of the
acquisition. The prohibited transactions include, but are not limited to,
merger, share exchange or consolidation with, disposition of assets to, or
issuance or redemption of stock to or from, the "acquiring person," termination
of 5% or more of the employees of the target corporation as a result of the
"acquiring person's" acquisition of 10% or more of the shares of the
corporation, or allowing the "acquiring person" to receive any disproportionate
benefit as a shareholder. Target corporations include domestic corporations
having a class of voting securities registered pursuant to Section 12 or 15 of
the Exchange Act, or that elect to be subject to Chapter 23B.19 of the
Washington Business Corporation Act, and foreign corporations that meet
additional statutory requirements. A corporation may not "opt out" of the
statute described herein.
DMC is subject to Section 203 of the Delaware General Corporation Law
("Section 203"). Section 203 restricts certain transactions and business
combinations between a corporation and an "Interested Stockholder" owning 15% or
more of the corporation's outstanding voting stock, for a period of three years
from the date the stockholder becomes an Interested Stockholder. Subject to
certain exceptions, unless the transaction is approved by the DMC Board and the
holders of at least 66.67% of the outstanding voting stock of the corporation
(excluding shares held by the Interested Stockholder), Section 203 prohibits
significant business transactions such as a merger with, disposition of assets
to, or receipt of disproportionate financial benefits by, the Interested
Stockholder, or any other transaction that would increase the Interested
Stockholder's proportionate ownership of any class or series of the
corporation's stock. The statutory ban does not apply if, upon consummation of
the transaction in which any person becomes an Interested Stockholder, the
Interested Stockholder owns at least 85% of the outstanding voting stock of the
corporation (excluding shares held by persons who are both directors and
officers or by certain employee stock plans).
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UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
have been prepared to give effect to the Merger, using the pooling of interests
method of accounting.
The unaudited pro forma combined condensed financial statements reflect
certain assumptions deemed probable by management regarding the Merger (for
example, the share information used in the unaudited pro forma information
approximates actual share information at the Effective Time). No adjustments to
the unaudited pro forma combined condensed financial information have been made
to account for different possible results in connection with the foregoing, as
management believes that the impact on such information by the varying outcomes,
individually or in the aggregate, would not be materially different.
The unaudited pro forma combined condensed balance sheet as of June 30,
1998 gives effect to the Merger as if it had occurred on June 30, 1998, and
combines the unaudited consolidated balance sheet of DMC and the unaudited
consolidated balance sheet of Innova as of June 30, 1998. The unaudited pro
forma combined statements of income for all periods presented give effect to the
Merger as if it had occurred on April 1, 1995. Innova had a fiscal year that
ended on March 31 of each year until fiscal 1997, during which it changed its
fiscal year to end on December 31. For purposes of the pro forma statements of
income, Innova's consolidated statements of income (loss) for the fiscal year
ended March 31, 1996, the nine month period ended December 31, 1996, and the
fiscal year ended December 31, 1997 have been combined with DMC's consolidated
statements of income for each of the fiscal years ended March 31, 1996, 1997 and
1998, respectively. Additionally for purposes of the pro forma statements of
income, Innova's consolidated statements of income (loss) for the three month
periods ended March 31, 1997 and June 30, 1998 have been combined with DMC's
consolidated statements of income (loss) for the three month periods ended
June 30, 1997 and June 30, 1998, respectively (as a result, Innova's results of
operations for the three month period ended March 31, 1998 are not included in
any periods presented in the pro forma combined statements of income).
DMC and Innova estimate they will incur direct transaction costs of
approximately $4,000,000 associated with the Merger, consisting of transaction
fees for investment bankers, attorneys, accountants, financial printing and
other related charges. These nonrecurring transaction costs will be charged to
operations upon consummation of the Merger. It is expected that following the
Merger, the combined companies will incur an additional significant charge to
operations, which is currently estimated to be in the range of $30 million to
$40 million, to reflect costs associated with integrating the two companies.
This charge has not been reflected in the pro forma condensed balance sheet or
pro forma condensed statements of income. There can be no assurance that the
combined companies will not incur additional charges to reflect costs associated
with the Merger or that management will be successful in its efforts to
integrate the operations of the two companies.
Such unaudited pro forma combined condensed financial information is
presented for illustrative purposes only and is not necessarily indicative of
the financial position or results of operations that would have actually been
reported had the Merger occurred at the beginning of the periods presented, nor
is it necessarily indicative of future financial position or results of
operations. These unaudited pro forma combined financial statements are based
upon the respective historical consolidated financial statements and notes
thereto of DMC and Innova included elsewhere in this Proxy Statement/Prospectus,
and do not incorporate, nor do they assume, any benefits from cost savings or
synergies of operations of the combined companies.
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UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET(2)
JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ASSETS DMC INNOVA ADJUSTMENTS COMBINED
- -------------------------------------------------- --------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash, cash equivalents and short term investments. . $ 21,401 $ 10,569 $ -- $ 31,970
Accounts receivable, net . . . . . . . . . . . . . . 60,303 13,448 (425)(c) 73,326
Inventories. . . . . . . . . . . . . . . . . . . . . 65,981 22,670 (42)(d) 88,609
Other current assets . . . . . . . . . . . . . . . . 15,140 288 -- 15,428
-------- -------- ------- ---------
Total current assets . . . . . . . . . . . . . . 162,825 46,975 (467) 209,333
Property and equipment, net. . . . . . . . . . . . . 32,906 16,657 -- 49,563
Other assets . . . . . . . . . . . . . . . . . . . . 15,352 701 -- 16,053
-------- -------- ------- ---------
Total assets . . . . . . . . . . . . . . . . . . $211,083 $ 64,333 $ (467) $ 274,949
-------- -------- ------- ---------
-------- -------- ------- ---------
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of capital lease obligations. . . $ 128 $ 894 $ -- $ 1,022
Accounts payable . . . . . . . . . . . . . . . . . . 27,002 12,854 (425)(c) 39,431
Accrued merger costs . . . . . . . . . . . . . . . . -- -- 4,000(a) 4,000
Income taxes payable . . . . . . . . . . . . . . . . 736 -- -- 736
Accrued liabilities. . . . . . . . . . . . . . . . . 20,542 1,207 -- 21,749
-------- -------- ------- ---------
Total current liabilities. . . . . . . . . . . . 48,408 14,955 3,575 66,938
Capital lease obligations, net of current maturities 185 611 -- 796
-------- -------- ------- ---------
Total liabilities. . . . . . . . . . . . . . . . 48,593 15,566 3,575 67,734
Common stock and paid-in capital . . . . . . . . . . 159,346 90,063 -- 249,409
Other stockholders' equity . . . . . . . . . . . . . (3,829) (145) -- (3,974)
Retained earnings. . . . . . . . . . . . . . . . . . 6,973 (41,151) (4,042) (38,220)
-------- -------- ------- ---------
Total stockholders' equity . . . . . . . . . . . 162,490 48,767 (4,042)(a)(d) 207,215
-------- -------- ------- ---------
Total liabilities and equity . . . . . . . . . . $211,083 $ 64,333 $ (467) $ 274,949
-------- -------- ------- ---------
-------- -------- ------- ---------
</TABLE>
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UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME(1), (3)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
---------------------------------------------------------------------
1996 1997 1998 1997 1998
--------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . $ 174,380 $ 213,441 $ 345,116 $ 69,468 $ 63,211
Cost of sales. . . . . . . . . . . . . . . . . . . . 137,554 141,000 221,021 45,427 49,502
--------- --------- --------- -------- ---------
Gross profit . . . . . . . . . . . . . . . . . . 36,826 72,441 124,095 24,041 13,709
Operating costs and expenses:
Research and development . . . . . . . . . . . . 17,405 16,192 24,481 5,410 6,583
Selling, general and administrative. . . . . . . 34,023 46,097 65,280 14,545 16,273
Merger and reconstructuring. . . . . . . . . . . -- -- 14,602 -- 7,212
--------- --------- --------- -------- ---------
Total operating costs and expenses . . . . . . . . . 51,428 62,289 104,363 19,955 30,068
--------- --------- --------- -------- ---------
Income (loss) from operations. . . . . . . . . . . . (14,602) 10,152 19,732 4,086 (16,359)
Other income (expense) . . . . . . . . . . . . . . . (106) (1,056) 2,944 287 905
--------- --------- --------- -------- ---------
Net income (loss) before tax . . . . . . . . . . . . (14,708) 9,096 22,676 4,373 (15,454)
Provision (benefit) for income taxes . . . . . . . . (1,175) 2,635 3,858 682 27
--------- --------- --------- -------- ---------
Net income (loss). . . . . . . . . . . . . . . . . . $ (13,533) $ 6,461 $ 18,818 $ 3,691 $ (15,481)
--------- --------- --------- -------- ---------
--------- --------- --------- -------- ---------
Basic earnings (loss) per share. . . . . . . . . . . $ (0.35) $ 0.16 $ 0.37 $ 0.08 $ (0.25)
--------- --------- --------- -------- ---------
--------- --------- --------- -------- ---------
Diluted earnings (loss) per share. . . . . . . . . . $ (0.35) $ 0.13 $ 0.30 $ 0.06 $ (0.25)
--------- --------- --------- -------- ---------
--------- --------- --------- -------- ---------
Basic weighted average shares outstanding. . . . . . 38,604 39,541 51,446 43,752 61,351
--------- --------- --------- -------- ---------
--------- --------- --------- -------- ---------
Diluted weighted average shares outstanding. . . . . 38,604 50,464 62,531 57,033 61,351
--------- --------- --------- -------- ---------
--------- --------- --------- -------- ---------
</TABLE>
63
<PAGE>
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
(1) PRO FORMA BASIS OF PRESENTATION
The unaudited pro forma combined financial statements for the years ended
March 31, 1996, 1997 and 1998 reflect the combination of the financial
statements of DMC for the years ended March 31, 1996, 1997 and 1998 with the
financial statements of Innova for the year ended March 31, 1996, the nine
months ended December 31, 1996 and the year ended December 31, 1997,
respectively. The unaudited pro forma combined statements of income for the
three month periods ended June 30, 1997 and 1998 reflect the combination of the
statements of income (loss) of DMC for the three month periods ended June 30,
1997 and 1998 with the statements of income (loss) of Innova for the three month
periods ended March 31, 1997 and June 30, 1998, respectively. As a result, the
results of operations for Innova for the three months ended March 31, 1998 are
not included in any of the periods presented in the unaudited pro forma combined
financial statements. Revenue and net income (loss) of Innova for the three
month period ended March 31, 1998 were approximately $14,749,000 and $1,804,000,
respectively.
These unaudited pro forma combined financial statements reflect the
issuance of 14,706,170 shares of DMC Common Stock in exchange for an aggregate
of 14,005,877 shares of Innova Common Stock (outstanding as of June 30, 1998) in
connection with the Merger, based on the Exchange Ratio of 1.05 set forth in the
following table:
<TABLE>
<CAPTION>
<S> <C>
Innova Common Stock outstanding as of June 30, 1998............... 14,005,877
Exchange Ratio.................................................... 1.05:1.00
Number of shares of DMC Common Stock exchanged.................... 14,706,170
----------
Number of shares of DMC Common Stock Outstanding as June 30, 1998. 46,688,992
----------
Number of shares of Combined Company Common Stock outstanding at
June 30, 1998 after giving effect to the Merger................ 61,395,162
----------
----------
</TABLE>
The actual number of shares of DMC Common Stock to be issued will be
determined at the Effective Time based on the number of shares of Innova Common
Stock outstanding at that date.
(2) PRO FORMA COMBINED BALANCE SHEET
(a) DMC and Innova estimate they will incur direct transaction costs of
approximately $4,000,000 associated with the Merger, consisting of transaction
fees for investment bankers, attorneys, accountants, financial printing and
other related charges. These nonrecurring transaction costs will be charged to
operations upon consummation of the Merger. These charges have been reflected
in the unaudited pro forma combined balance sheet but have not been included in
the unaudited pro forma combined statements of income.
(b) It is expected that, following the Merger, the combined companies will
incur an additional significant charge to operations, which is currently
estimated to be in the range of $30 million to $40 million, to reflect costs
associated with integrating the two companies. This charge has not been
reflected in the pro forma combined condensed balance sheet or combined
condensed statements of income. There can be no assurance that the combined
companies will not incur additional charges to reflect costs associated with the
Merger or that management will be successful in its efforts to integrate the
operations of the two companies.
(c) Represents the elimination of the intercompany accounts payable and
accounts receivable balances at June 30, 1998.
(d) Represents the elimination of profit margin on intercompany sales for
which the inventory had not been sold through to the customer at June 30, 1998.
64
<PAGE>
(3) PRO FORMA COMBINED STATEMENTS OF INCOME
The following are the historical results of operations of DMC and Innova
and their pro forma combined amounts to reflect the Merger as if it were
effected for all periods presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
---------------------------------------- -------------------------
1996 1997 1998 1997 1998
--------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
TOTAL SALES:
DMC $ 172,418 $ 211,337 $ 310,490 $ 64,558 $ 53,003
INNOVA 1,962 2,104 $36,100 4,910 $ 10,208
LESS: INTERCOMPANY SALES -- -- (1,474) -- --
--------- --------- --------- --------- ---------
$ 174,380 $ 213,441 $ 345,116 $ 69,468 $ 63,211
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
COST OF SALES:
DMC $ 133,612 $ 137,261 $ 197,048 $ 41,346 $ 41,660
INNOVA 3,942 3,739 $25,447 4,081 $ 7,842
LESS: INTERCOMPANY SALES -- (1,474) -- --
--------- --------- --------- --------- ---------
$ 137,554 141,000 $ 221,021 $ 45,427 $ 49,502
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
RESEARCH AND DEVELOPMENT:
DMC $ 12,885 $ 13,225 $ 19,879 $ 4,299 $ 4,975
INNOVA 4,520 2,967 4,602 1,111 1,608
--------- --------- --------- --------- ---------
$ 17,405 $ 16,192 $ 24,481 $ 5,410 $ 6,583
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SELLING, GENERAL AND ADMINISTRATIVE:
DMC $ 31,707 $ 43,513 $ 58,053 $ 12,907 $ 13,996
INNOVA 2,316 2,584 7,227 1,638 2,277
--------- --------- --------- --------- ---------
$ 34,023 $ 46,097 $ 65,280 $ 14,545 $ 16,273
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
MERGER AND RESTRUCTURING
DMC -- -- 14,602 -- 7,212
INNOVA CORP. -- -- -- -- --
--------- --------- --------- --------- ---------
$ -- $ -- $ 14,602 $ -- $ 7,212
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
DMC $ 139 $ (913) $ 2,828 $ 486 $ 905
INNOVA (245) (143) 116 (199) --
--------- --------- --------- --------- ---------
$ (106) $ (1,056) $ 2,944 $ 287 $ 905
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
PROVISION (BENEFIT) FOR INCOME TAXES:
DMC $ (1,175) $ 2,635 $ 3,858 $ 682 $ 27
INNOVA -- -- -- -- --
--------- --------- --------- --------- ---------
$ (1,175) $ 2,635 $ 3,858 $ 682 $ 27
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
NET INCOME (loss):
DMC $ (4,472) $ 13,790 $ 19,878 $ 5,810 $ (13,962)
INNOVA (9,061) (7,329) (1,060) (2,119) (1,519)
--------- --------- --------- --------- ---------
$ (13,533) $ 6,461 $ 18,818 $ 3,691 $ (15,481)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
65
<PAGE>
(4) PRO FORMA NET INCOME PER SHARE
The following table reconciles the number of shares used in the pro forma
per share computations to the numbers set forth in DMC's and Innova's historical
statements of operations. The "Historical diluted shares - Innova" share
amounts below for the years ended March 31, 1997 and 1998 and the three month
period ended June 30, 1997 (which are the actual historical shares used in
Innova's per share calculations for the nine months ended December 31, 1996, the
year ended December 31, 1997 and the three months ended March 31, 1997,
respectively) have been adjusted to include certain Innova Common Stock
equivalents that were previously excluded as they were anti-dilutive given
Innova's net losses in those periods. However, for purposes of the Pro Forma
Combined Condensed Statements of Income the combined company generated positive
net income in those periods, thus the Innova Common Stock equivalents were
included in the diluted share amounts below as they were dilutive. The Innova
Common Stock equivalents included consisted of redeemable convertible preferred
stock, warrants, options to purchase Innova Common Stock and other similar
Innova Common Stock equivalents.
SHARES USED IN PRO FORMA PER SHARE CALCULATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------------ ----------------------
1996 1997 1998 1997 1998
------ ------ ------ ------- ------
(IN THOUSANDS EXCEPT CONVERSION NUMBER)
<S> <C> <C> <C> <C> <C>
SHARES USED IN CALCULATIONS:
Historical basic shares -- DMC . . . . . . . . . . . 37,944 38,611 45,361 42,763 46,682
------ ------ ------ ------ ------
Historical basic shares -- Innova. . . . . . . . . . 629 886 5,795 942 13,970
Conversion number. . . . . . . . . . . . . . . . . . 1.05 1.05 1.05 1.05 1.05
------ ------ ------ ------ ------
660 930 6,085 989 14,669
Pro forma combined basic shares. . . . . . . . . . . 38,604 39,541 51,446 43,752 61,351
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Historical diluted shares -- DMC . . . . . . . . . . 37,944 39,887 47,329 44,755 46,682
------ ------ ------ ------ ------
Historical diluted shares -- Innova. . . . . . . . . 629 10,073 14,478 11,693 13,970
Conversion number. . . . . . . . . . . . . . . . . . 1.05 1.05 1.05 1.05 1.05
------ ------ ------ ------ ------
660 10,577 15,202 12,278 14,669
Pro forma combined diluted shares. . . . . . . . . . 38,604 50,464 62,531 57,033 61,351
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
66
<PAGE>
DIGITAL MICROWAVE CORPORATION
BUSINESS OF DMC
THE FOLLOWING SECTION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES. DMC'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN, OR
INCORPORATED BY REFERENCE INTO, THIS PROXY STATEMENT/PROSPECTUS.
INTRODUCTION
DMC. DMC designs, manufactures and markets advanced wireless solutions for
worldwide telephone network interconnection and access. DMC provides its
customers with a broad product line, which contains products that operate using
a variety of transmission frequencies, ranging from 0.3 GHz to 38 GHz, and a
variety of transmission capacities, typically ranging from 64 kilobits to OC-3
(155 Megabits per second). DMC'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. DMC designs its products to meet the
requirements of mobile communications networks and fixed access networks
worldwide. DMC'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.
In March 1998, DMC merged with MAS, a New Zealand company, which designs,
manufactures, markets and supports digital microwave radio links for the
worldwide telecommunications market. The complementary product lines and
distribution channels of MAS broadened the range of wireless connection
solutions that DMC offers to its customers worldwide.
DMC 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 African, Asian and Latin American countries; infrastructures are being
expanded in Europe; and personal communications services ("PCS") interconnect
networks are being constructed in the United States. DMC 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 DMC to better understand the local issues and requirements
of its customers and to address its customers' individual geographic,
regulatory, and infrastructure requirements. As a result, DMC has developed a
global sales, service and support organization, with offices in Europe, Africa,
Asia, New Zealand, Australia and the Americas. With its 33 sales or support
offices in 25 countries, DMC can respond quickly to its customers' needs and
provide prompt on-site technical support.
DMC has sold over 95,000 radios, which have been installed in over 70
countries. DMC markets its products to service providers directly, as well as
indirectly through its relationships with original equipment manufacturers
("OEMs") of base stations, such as Motorola, Inc., Siemens AG, and Northern
Telecom. Between June 30, 1997 and June 30, 1998, DMC had sold its products to
a number of service providers, including China Unicom, BellSouth, Mutiara
Telecom and SMART Communications, Inc. in the Asia/Pacific region; IONICA,
Jordan Mobile Telephone Services, and Telkom SA in Europe, the Middle East and
Africa; and Sprint PCS and Winstar Wireless in the Americas.
THE DMC STRATEGY
DMC's strategy is to build on the strength of its current products, which
offer point-to-point solutions, and its strong customer sales, service and
support organization to become a leading provider of integrated wireless
solutions. Key elements of DMC's strategy include:
MAINTAIN COMPREHENSIVE PRODUCT LINE. DMC anticipates that the requirements
of its customers will continue to evolve as the telecommunications services
market changes and expands. In this regard, since DMC's customers often do not
know the exact frequency band and capacity needs of their networks at the time
they are awarded franchises, DMC's broad product line provides them with the
flexibility to respond to individual market needs, and to coordinate frequencies
with existing infrastructure and other significant variables. DMC believes that
67
<PAGE>
the use of standard design platforms for both hardware and software components
in its products enables DMC to quickly introduce and commercially ship new
products and product enhancements to address changing market demands. DMC
intends to continue to expand its product line in response to the varying
worldwide requirements of wireless networks.
PURSUE WORLDWIDE MARKET OPPORTUNITIES. DMC believes that the deployment of
new wireless telecommunications networks and the upgrade and expansion of
existing networks provide it with many global market opportunities. In many
emerging markets in Africa, Asia and Latin America, substantial
telecommunications networks are being built for the first time; in Europe,
infrastructures are being expanded; and, in the United States, PCS interconnect
networks are being constructed. DMC intends to continue to pursue global market
opportunities through its established worldwide sales, service and support
organization, as well as through its relationships with OEM base station
suppliers.
ENHANCE GLOBAL SALES, SERVICE AND SUPPORT ORGANIZATION. DMC believes
maintaining close proximity to its customers provides it with a competitive
advantage in securing orders and servicing its customers. Local offices provide
DMC with a better understanding of its customers' needs and enable DMC to
respond to local issues and unique local requirements. As a result, DMC has
developed a global sales, service and support organization, with offices in
Europe, Africa, Asia, New Zealand, Australia and the Americas. DMC intends to
continue to provide its customers with direct sales, service and support from
local offices.
LEVERAGE DISTRIBUTION CHANNELS. DMC 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 Northern
Telecom, as well as through its relationships with system integrators and
private labelers. DMC also markets its products through independent agents and
distributors in certain countries. DMC intends to leverage upon such
relationships and its direct worldwide presence with service providers to expand
its customer base and enhance its global presence.
FOCUS ON BUSINESS EXPANSION INTO EMERGING APPLICATIONS. DMC believes that
it can leverage its core technical competencies and its global sales, service
and support organization to enter into emerging applications including wireless
local loop, wireless data transport and alternative local telephone facilities
access. DMC intends to migrate and expand its product line from a full
point-to-point product line to offer multipoint distribution products with a
broader range of traffic handling capacities to meet emerging market demands.
PRODUCTS
DMC's principal product families include the ALTIUM, SPECTRUM II, DMC Net
for OpenView, DXR 200 and DXR 100. Each product family has characteristics
designed to meet the needs of specific markets or applications and are described
further below.
EXISTING PRODUCTS. As the following table illustrates, DMC has products
that operate at the commonly used frequencies worldwide:
68
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------
MOBILE COMMUNICATIONS NETWORKS ACCESS NETWORKS
----------------------------------------------------------------
SOUTH USA & SOUTH USA &
FREQUENCY ASIA EUROPE AMERICA CANADA ASIA EUROPE AMERICA CANADA
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2 GHz DMC -- DMC -- DMC -- -- --
- ---------------------------------------------------------------------------------
6 GHz -- -- -- DMC -- -- -- --
- ---------------------------------------------------------------------------------
7 GHz DMC DMC DMC -- DMC DMC DMC --
- ---------------------------------------------------------------------------------
8 GHz DMC DMC DMC -- DMC DMC DMC --
- ---------------------------------------------------------------------------------
10 GHz -- -- -- DMC -- -- -- --
- ---------------------------------------------------------------------------------
11 GHz -- -- -- DMC -- -- -- --
- ---------------------------------------------------------------------------------
13 GHz DMC DMC -- -- DMC DMC -- --
- ---------------------------------------------------------------------------------
15 GHz DMC DMC DMC -- DMC DMC DMC --
- ---------------------------------------------------------------------------------
18 GHz DMC DMC DMC DMC DMC DMC DMC DMC
- ---------------------------------------------------------------------------------
23 GHz -- DMC DMC DMC -- DMC DMC DMC
- ---------------------------------------------------------------------------------
26 GHz -- DMC DMC -- -- DMC DMC --
- ---------------------------------------------------------------------------------
38 GHz -- DMC DMC DMC -- DMC DMC DMC
- ---------------------------------------------------------------------------------
</TABLE>
- -----------------------------
- ---------------
DMC Commonly used and covered by DMC's products
-- Not commonly used frequencies
ALTIUM. ALTIUM, announced in March 1998, is a next-generation digital
microwave radio aimed at providing higher capacity solutions in microwave and
millimeter wave bands. SONET/SDH capable, ALTIUM can wirelessly extend or
complete SONET and SDH transport networks to complement or be an alternative to
fiber deployment. Key attributes of size, performance, and flexibility bring
benefits to both interconnect and access applications. DMC believes that it
will begin shipping its ALTIUM product before the end of fiscal 1999.
SPECTRUM II. The SPECTRUM II product family, introduced in July 1995,
offers medium capacity products, ranging from T-1 (1.5 Mbps) to DS-3 (45 Mbps),
that operate at 7, 8, 13, 15, 18, 23, 26 and 38 GHz. The SPECTRUM II product
line is smaller in size, less expensive and easier to install than previous
products. In addition, significantly more functionality is available in the
SPECTRUM II product line because of its enhanced software configurability which
provides DMC's customers with greater flexibility and control.
DMC NET FOR OPENVIEW. The latest generation solution, DMC Net for OpenView
is a versatile, interoperable network management system based on the HP OpenView
platform and is designed for use in small, medium, and large telecommunications
networks. Using Simple Network Management Protocol ("SNMP"), DMC Net for
OpenView provides customers with an increased ability to manage the hardware of
multiple vendors from a common management platform. Centralized management and
control allows for the early warning of fault conditions and the rapid diagnosis
of problems, which reduce downtime and lower the cost of maintenance. DMC Net
for OpenView, which is supported on Windows NT and will be supported on UNIX
systems, succeeds standalone network element managers sold previously under the
DMC Net name.
DXR 200. First shipped in 1994, the DXR 200 product line provides an
integrated, modular, linking solution for a wide variety of communications
systems in markets with low to medium capacity transmission requirements. The
DXR 200's integrated modular design allows it to support over 2,000 different
configurations that can incorporate multiple features in the unit to accommodate
the differing communications needs of DMC's customers, overcome difficult radio
frequency environments, accommodate multiple data speeds and support multiple
communication protocols. The DXR 200 can operate on every frequency band from
64 Kbps to 2.7GHz.
DXR 100. First shipped in 1996, the DXR 100 product line is designed to
address medium and long haul, trunking applications and capacities higher than
those addressed by the DXR 200. The DXR 100 supports these higher capacity
environments using spectrum efficient transmission techniques such as QPSK or
QAM modulation and low error rate technologies such as forward error correction
and adaptive equalization. The DXR 100 provides low to medium capacity links
for cellular applications, basic telephony transmission and customer access
applications, particularly in urban areas. The DXR 100 supports a variety of
data rates with high spectrum efficiencies and maintains signal reception in
harsh or difficult radio frequency environments.
69
<PAGE>
SALES, MARKETING AND SERVICE
DMC 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, DMC offers its products and services principally
through its own sales, service and support organization, which allows DMC to
closely monitor the needs of its customers. DMC has offices in the United
States, New Zealand, Australia, Canada, the United Kingdom, Germany, Jordan,
Mexico, Colombia, India, China, Singapore, Argentina, Brazil, Greece, Indonesia,
Malaysia, Russia, Sweden, Denmark, South Africa, Zimbabwe, Botswana and the
Philippines. DMC's local offices provide it with a better understanding of its
customers' needs and enable DMC to respond to local issues and unique local
requirements.
As of June 30, 1998, DMC employed approximately 230 people in its sales,
service and support organization, approximately 89% of whom primarily support
sales outside the United States. Sales personnel are highly trained to provide
the customer with assistance in selecting and configuring a digital microwave
system suitable for the customer's particular needs. DMC's customer service and
support personnel provide customers with training, installation, service and
maintenance of DMC's systems under contract. DMC generally offers a standard
two-year warranty for all customers on all of DMC's products other than the DXR
200 and DXR 100 product lines, for which there is generally a standard one-year
warranty for all customers. DMC provides warranty and post-warranty services
from its manufacturing locations in the United States, the United Kingdom and
New Zealand and its service centers in Mexico, Brazil, the Philippines and
Canada.
RESEARCH AND DEVELOPMENT
DMC 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 DMC's continued success.
Accordingly, DMC allocates, and intends to continue to allocate, a significant
portion of its resources to research and development efforts. During fiscal
1997, fiscal 1998 and the three months ended June 30, 1998, DMC invested
$13.2 million, $19.9 million, and $5 million, respectively on research and
development, which represents 6.3%, 6.4%, and 9.4%, respectively, of net sales.
MANUFACTURING AND SUPPLIERS
DMC's manufacturing operations consist primarily of final assembly,
customer software configuration, test and quality control of materials and
components. The manufacturing process 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. DMC has three manufacturing facilities, which presently are
located in San Jose, California, Wellington, New Zealand and Hamilton, Scotland.
DMC's manufacturing operations in San Jose, California and Wellington, New
Zealand are certified to ISO 9001, an internationally-recognized quality
standard. The manufacturing facility in Wellington, New Zealand is also
certified to ISO 14001, an internationally-recognized environmental quality
standard.
EMPLOYEES
As of June 30, 1998, DMC employed 1,096 full-time and temporary employees.
None of DMC's employees are represented by a collective bargaining agreement.
DMC's future performance will depend in large measure on its ability to attract
and retain highly skilled employees. DMC has never experienced a work stoppage
and believes its relationship with its employees to be good.
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<PAGE>
MANAGEMENT OF DMC AFTER THE MERGER
EXECUTIVE OFFICERS AND DIRECTORS AFTER THE MERGER
Pursuant to the Merger Agreement, DMC has agreed to appoint Mr. Bachow and
Mr. Mendicino, who are presently directors of Innova, to the DMC Board,
effective as of the Effective Time. DMC has agreed to nominate Mr. Bachow to
serve as a member of the DMC Board for a one-year term at each of DMC's annual
meetings of stockholders to be held in 1999, 2000 and 2001. In addition, DMC
has agreed to nominate Mr. Mendicino to serve as a member of the DMC Board for a
one-year term at each of DMC's annual meetings of stockholders to be held in
1999 and 2000. However, the obligation of DMC's management to nominate
Mr. Mendicino at such meetings lapses upon the date that Woodside Fund III, a
private investment fund liquidates or otherwise distributes all shares of DMC
Common Stock held by it. Upon the appointment of Mr. Bachow and Mr. Mendicino,
the DMC Board will consist of nine persons, seven of whom were directors of DMC
as of the date of the Merger Agreement.
Set forth below is certain information about each person who is expected to
be a member of the Board of Directors of DMC or an executive officer of DMC as
of the Effective Time, with the information expected to be true at the Effective
Time.
<TABLE>
<CAPTION>
Name Age Position
-------------------- --- --------------------------------------------
<S> <C> <C>
Charles D. Kissner 51 Chairman of the Board and Chief Executive
Officer
Sam Smookler 59 President and Chief Operating Officer
Jean-Francois Grenon 43 President of the PDH Division
Frank Carretta, Jr. 53 Senior Vice President of Worldwide Sales,
Service and Marketing
Jack Hillson 47 Senior Vice President and General Manager,
Operations
John C. Brandt 41 Corporate Controller
Carol A. Goudey 51 Treasurer and Assistant Secretary
Timothy R. Hansen 38 Vice President, New Business Development
Paul A. Kennard 47 Vice President, Engineering
Shaun McFall 38 Vice President, Corporate Marketing
John P. O'Neil 60 Vice President, Personnel
Carl A. Thomsen 53 Vice President, Chief Financial Officer and
Secretary
Richard C. Alberding 67 Director
Paul S. Bachow 47 Director
John W. Combs 51 Director
Clifford H. Higgerson 58 Director
James D. Meindl 65 Director
V. Frank Mendicino 59 Director
Billy B. Oliver 73 Director
Howard Oringer 56 Director
</TABLE>
Mr. Charles D. Kissner joined DMC as President and Chief Executive Officer
and was elected Director of DMC in July 1995 and Chairman of the Board in August
1996. He currently serves as Chairman of the Board and Chief Executive Officer
of DMC. Prior to joining DMC, he served as Vice President and General Manager
of the Microelectronics Division of M/A-COM, Inc. ("M/A-COM"), 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 Quickturn Design
Systems, Inc. ("Quickturn"), a provider of design emulation systems, Spectrian,
Inc., a supplier of linear high power amplifiers for wireless communications,
and American Medical Flight Support, Inc., a non-profit medical transportation
company.
Mr. Sam Smookler joined DMC as President and Chief Operating Officer in
January 1998. Prior to joining DMC, he served as President and Chief Operating
Officer of Signal Technology Corporation, a manufacturer of electronic
components and subsystems, from September 1997 to January 1998 and President of
East Coast Operations from February 1997 to September 1997. Prior to such time,
he served as Vice President and General
71
<PAGE>
Manager of the Interconnection Products Division of Augat Corporation, a
manufacturer of telecommunications connection products, from November 1994 to
February 1997. From February 1992 to October 1994, he served as General Manager
of a division of M/A-COM. In addition, Mr. Smookler served as Group Vice
President of Sipex Corporation, a manufacturer of hybrid semiconductors from
1986 to January 1992.
Mr. Jean-Francois Grenon joined Innova in February 1996 as its President
and Chief Executive Officer, and has served as a Director of Innova since June
1996. Mr. Grenon will cease serving in such capacity as of the Effective Time.
From March 1994 to December 1995, Mr. Grenon served as President of Microwave
Radio Corporation, Digital Radio Group, a division of California Microwave Radio
that he helped found, which develops and manufactures digital millimeter wave
radios. From April 1990 to March 1994, Mr. Grenon served as Vice President and
General Manager of Microwave Radio Corporation, a developer of microwave radio
transmission equipment.
Mr. Frank Carretta, Jr. joined DMC 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 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 of DMC in November 1996. He previously served as Vice President and
General Manager, QUANTUM/Magnum Division of DMC from December 1995 to November
1996. Prior to joining DMC, Mr. Hillson was with M/A-COM 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's Power Hybrids Division, which manufactures
transistors and amplifier modules for the wireless communications market.
Mr. John C. Brandt joined DMC as Controller in June 1997. Prior to joining
DMC, Mr. Brandt was employed with Honeywell-Measurex, a manufacturer of control
systems, from 1981 to June 1997, where he served in a variety of financial
positions, and most recently served as Operations Controller from 1988 to June
1997.
Ms. Carol A. Goudey joined DMC 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 Ungermann-Bass,
Inc., a network systems company from 1985 to 1989, and System Industries, Inc.,
a computer peripheral company, from 1984 to 1985.
Mr. Timothy R. Hansen has served as Vice President, New Business
Development of DMC since August 1996. He previously served as Vice President
and General Manager, SPECTRUM Division of DMC from February 1995 to August 1996,
and as Vice President and Program Manager of the SPECTRUM product line. He
joined DMC in August 1984 as product manager, and has held management positions
in marketing, planning, sales and order management.
Mr. Paul Kennard joined DMC as Vice President, Engineering in April 1996.
From 1989 to March 1996, Mr. Kennard was with California Microwave Corporation,
a satellite and wireless communications company, serving as Director of the
Signal Processing Technology Department until his promotion in 1994 to Vice
President of Engineering, and then to Senior Vice President of Engineering in
1995 for the Microwave Network Systems Division.
Mr. Shaun McFall has served as Vice President, Corporate Marketing of DMC
since February 1995. He joined DMC'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 England and Ferranti Industrial Electronics
PLC, in Edinburgh, Scotland, both of which are telecommunications companies.
Mr. John O'Neil joined DMC 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.
72
<PAGE>
Mr. Carl A. Thomsen joined DMC as Vice President, Chief Financial Officer
and Secretary in February 1995. Prior to joining DMC, 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.
Mr. Richard C. Alberding has served as a Director of DMC since July 1993
and served as DMC's Co-Chairman of the Board and Co-Chief Executive Officer from
September 1994 to July 1995. Mr. Alberding retired from Hewlett-Packard Company
in 1991, where he had served since 1984 as an Executive Vice President with
responsibility for worldwide company sales, support and administration
activities for measurement and computation products, as well as all
corporate-level marketing activities. He also served on the corporate Executive
Committee. Mr. Alberding is a director of Kennametal Corporation, a machine
tool company, Walker Interactive Systems, a software company, Storm Technology,
a computer peripherals company, Quickturn, SyBase, Inc., a computer database and
tools company, Digital Link Corp., a network tools company, Paging Network,
Inc., a paging services company, JLK Direct Distribution, a metalworking
consumables distribution company, and several private companies.
Mr. Paul S. Bachow has served as a Director of Innova since January 1993.
Mr. Bachow will cease serving in such capacity as of the Effective Time. He has
served as President of Bachow & Associates, Inc. a venture capital investment
company, since its formation in December 1989. Mr. Bachow also acts as
President of the General Partner of each of Paul S. Bachow Co-Investment Fund,
L.P., and Bachow Investment Partners III, L.P. Mr. Bachow serves as a director
of Deb Shops, Inc., a publicly traded company in the women's clothing business,
Anadigics, Inc., a publicly traded manufacturer of gallium arsenide chips for
use in a broad array of communications devices, Crusader Holding Corporation, a
publicly traded savings and loan, and several private companies.
Mr. John W. Combs has served as a Director of DMC since May 1997. Since
June 1993, Mr. Combs has served as President, Southwest Area for Nextel
Communications, Inc., a digital communications system provider. From March 1990
to June 1993, he served as Executive Vice President of Sales, Marketing and
Customer Care of Los Angeles Cellular Telephone Company, a provider of wireless
telecommunications services. In addition, Mr. Combs also serves as a director
of Hello Direct, Inc., a direct marketer of telecommunications products.
Mr. Clifford H. Higgerson has served as a Director of DMC since March 1984.
He also served as DMC's Chairman of the Board from July 1995 to August 1996 and
as Co-Chairman of the Board and Co-Chief Executive Officer from September 1994
to July 1995. Mr. Higgerson has been a partner with Vanguard Associates, a
private venture capital investment partnership, since July 1991 and, since 1986,
managing partner of Communications Ventures, a private venture capital
investment partnership. Mr. Higgerson also serves as a director of Advanced
Fibre Communications, Inc., a manufacturer of telecommunications systems, and
CIENA Corp. ("CIENA"), a manufacturer of light wave amplifiers and wave division
multiplexing equipment.
Dr. James D. Meindl has served as a Director of DMC since November 1995.
Since 1993, Dr. Meindl has held the Joseph M. Pettit Chaired Professorship in
Microelectronics at the Georgia Institute of Technology. Prior to his
professorship at the Georgia Institute of Technology, Dr. Meindl served as
Senior Vice President for Academic Affairs and Provost at Rensselaer Polytechnic
Institute from 1986 to 1993. Dr. Meindl serves as a director of SanDisk Corp.,
which designs, develops and markets flash memory data storage products, and
Zoran Corp., a semiconductor and related devices company.
Mr. V. Frank Mendicino has served as a Director of Innova since July 1989.
Mr. Mendicino will cease serving in such capacity as of the Effective Time.
Additionally, Mr. Mendicino has served as Innova's Chairman since February 1992.
Since 1983, Mr. Mendicino has served as a General Partner of Woodside Fund,
Woodside Fund II and Woodside Fund III, each of which is a private investment
fund. He also has served as a director for over 15 private companies.
Mr. Billy B. Oliver has served as a Director of DMC since February 1987.
Since 1985, Mr. Oliver has been a private communications consultant. Mr. Oliver
has held various engineering and management positions with AT&T, including Vice
President, Planning and Design from 1972 until 1985. Mr. Oliver is also a
director of Communications Network Enhancements, a telecommunications service
company, and CIENA.
73
<PAGE>
Mr. Howard Oringer has served as a Director of DMC since March 1998.
Mr. Oringer has been Managing Director of Communications Capital Group, a
management consulting firm, since November 1993. From February 1986 to November
1993, Mr. Oringer was the President, Chief Executive Officer and Chairman of the
Board of Directors of TeleSciences, a manufacturer of telecommunications
equipment. Mr. Oringer serves as a director of Tekelec, which designs,
manufactures and markets network switching solutions and diagnostic systems, and
Verilink Corporation, which develops, manufactures and markets access products
for telecommunications network service providers and corporate end users.
SECURITY OWNERSHIP OF DMC MANAGEMENT
As of the DMC Record Date, directors and executive officers of DMC and
their affiliates were beneficial owners of approximately 1.48% of the
outstanding shares of DMC Common Stock (exclusive of any shares issuable upon
the exercise of stock options remaining unexercised as of the DMC Record Date).
Additional information concerning voting securities of DMC and the
principal holders thereof is included in the documents filed by DMC with the
Commission under the Exchange Act. See "Available Information" and
"Incorporation of Documents by Reference."
74
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF DMC
The following table sets forth information regarding the beneficial
ownership of DMC Common Stock of DMC as of June 30, 1998, by (i) each person
known by DMC to own beneficially more than 5% of the outstanding Common Stock of
DMC; (ii) each of DMC's directors; (iii) the Chief Executive Officer and each of
the four other most highly compensated executive officers of DMC, determined for
DMC's fiscal year ended March 31, 1998; and (iv) all directors and executive
officers of DMC as a group.
<TABLE>
<CAPTION>
APPROXIMATE
SHARES PERCENT
BENEFICIALLY BENEFICIALLY
NAME OWNED(1) OWNED(2)
- --------------------------------------------- --------------- -------------
<S> <C> <C>
Kopp Investment Advisors, Inc. 5,645,355(3) 12.09%
6600 France Avenue South, Suite 672
Edina, Minnesota 55435
Nicholas-Applegate Capital Management 3,265,219(4) 6.99%
600 West Broadway, 29th Floor
San Diego, California 92101
Neville Jordan 2,583,084(5) 5.53%
c/o MAS Technology Limited
24 Bridge Street, Lower Hutt
Wellington, New Zealand
Charles D. Kissner 592,788(6) 1.25%
Richard C. Alberding 44,000(7) *
John W. Combs 44,224(8) *
Clifford H. Higgerson 607,180(9) 1.30%
James D. Meindl 38,000(10) *
Billy B. Oliver 59,824(11) *
Howard Oringer 42,000(12) *
Frank Carretta, Jr. 69,000(13) *
Jack Hillson 46,000(14) *
Paul A. Kennard 103,000(15) *
Carl A. Thomsen 123,640(16) *
All directors and executive officers as a group (17 persons) 1,959,128(17) 4.08%
- ----------------
</TABLE>
* Less than 1%
(1) To DMC's knowledge, except as set forth in the footnotes to this table, and
subject to applicable community property laws, each person named in this
table has sole voting and investment power with respect to the shares set
forth opposite such person's name.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Shares of DMC Common Stock subject to options currently
exercisable or exercisable on or before August 30, 1998, are deemed
outstanding for computing the percentage of the person holding such options
but are not deemed outstanding for computing the percentage of any other
person. On June 30, 1998, there were 46,688,992 shares of DMC Common Stock
outstanding. Options granted to directors under DMC's 1994 Incentive Plan
are immediately exercisable; however any shares purchased under such
options are subject to repurchase by DMC, upon the director's cessation of
DMC Board service prior to vesting in those shares. Such options vest, and
DMC's repurchase rights lapse, annually over a period of three years
commencing on the first anniversary of the grant date.
(3) Pursuant to a Schedule 13G, dated February 9, 1998, filed with the
Commission, Kopp Investment Advisors, Inc. ("KIA"), Kopp Holding Company
and LeRoy C. Kopp reported shared dispositive power over 4,738,355 shares
(of which KIA votes 142,000) and sole dispositive and voting power over
907,000 shares.
(4) Pursuant to a Schedule 13G, dated February 3, 1998, filed with the
Commission, Nicholas-Applegate Capital Management reported sole dispositive
power over 3,265,219 shares, sole voting power over 2,436,249 shares and
shared voting power over 1,715 shares.
75
<PAGE>
(5) Includes 64,800 shares of DMC Common Stock subject to options which are
currently exercisable or will become exercisable on or before August 30,
1998. Also includes 64,800 shares Mr. Jordan beneficially holds in
connection with the Marine-Air Systems Employee Share Trustee Limited.
(6) Includes 558,006 shares of DMC Common Stock subject to options which are
currently exercisable or will become exercisable on or before August 30,
1998. Also includes 400 shares held of record by a trust for the benefit
of Mr. Kissner's children.
(7) Includes 38,000 shares of DMC Common Stock subject to options which are
currently exercisable or will become exercisable on or before August 30,
1998, of which 28,000 are subject to repurchase rights.
(8) Includes 42,000 shares of DMC Common Stock subject to options which are
currently exercisable or will become exercisable on or before August 30,
1998, of which 42,000 are subject to repurchase rights.
(9) Includes 78,000 shares of DMC Common Stock subject to options which are
currently exercisable or will become exercisable on or before August 30,
1998, of which 28,000 are subject to repurchase rights.
(10) Includes 38,000 shares of DMC Common Stock subject to options which are
currently exercisable or will become exercisable on or before August 30,
1998, of which 28,000 are subject to repurchase rights.
(11) Includes 48,000 shares of DMC Common Stock subject to options which are
currently exercisable or will become exercisable on or before August 30,
1998, of which 28,000 are subject to repurchase rights.
(12) Includes 42,000 shares of DMC Common Stock subject to options which are
currently exercisable or will become exercisable on or before August 30,
1998, of which 42,000 are subject to repurchase rights.
(13) Includes 48,000 shares of DMC Common Stock subject to options which are
currently exercisable or will become exercisable on or before August 30,
1998.
(14) Includes 46,000 shares of DMC Common Stock subject to options which are
currently exercisable or will become exercisable on or before August 30,
1998.
(15) Includes 103,000 shares of DMC Common Stock subject to options which are
currently exercisable or will become exercisable on or before August 30,
1998.
(16) Includes 95,860 shares of DMC Common Stock subject to options which are
currently exercisable or will become exercisable on or before August 30,
1998.
(17) See Footnotes (6) through (16). Includes 1,286,338 shares of DMC Common
Stock subject to options which are currently exercisable or will become
exercisable on or before August 30, 1998, of which 196,000 are subject to
repurchase rights.
76
<PAGE>
COMPENSATION OF DIRECTORS AND CERTAIN
EXECUTIVE OFFICERS OF DMC
GENERAL
This section of the Proxy Statement/Prospectus sets forth certain summary
information concerning the compensation earned by DMC's Chief Executive Officer
and each of the four other most highly compensated executive officers of DMC for
the fiscal year ended March 31, 1998 ("DMC's Fiscal 1998"), as well as
information pertaining to the compensation of members of the DMC Board.
DMC SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
Awards
-------------------------------------------------- -------------
Securities
Fiscal Other Annual Underlying All Other
Name and Principal Position Year Salary ($) Bonus(1) ($) Compensation ($) Options(2) Compensation(3) ($)
- ------------------------------ ------ ------------ ------------ ---------------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Charles D. Kissner 1998 $380,000 $321,480 -- 100,000 $2,592
Chairman of the Board and 1997 326,009 224,400 -- 100,000 1,823
Chief Executive Officer 1996 212,500(4) 75,000(5) $197,961(6) 511,008 120
Frank Carretta, Jr. 1998 225,001 237,990 -- 40,000 2,056
Senior Vice President, 1997 216,407 129,320(7) -- 30,000 1,980
Worldwide Sales, Service 1996 103,662(8) -- -- 170,000 60
and Marketing
Jack Hillson 1998 185,000 113,178 62,581(9) 40,000 1,079
Senior Vice President and 1997 140,734 62,795(10) 58,376(11) 70,000 810
General Manager, 1996 34,575(12) -- 16,779(13) 100,000 --
Operations
Paul A. Kennard 1998 180,000 110,120 -- 40,000 1,053
Vice President, Engineering 1997 136,346 83,055(14) -- 150,000 834
1996 --(15) -- -- -- --
Carl A. Thomsen 1998 216,000 118,368 -- 40,000 2,164
Vice President, Chief 1997 188,104 80,125 -- -- 1,902
Financial Officer and 1996 175,625 -- -- 109,734 120
Secretary
</TABLE>
(1) DMC's executive officers are eligible for annual cash bonuses. Such
bonuses are generally based upon achievement of individual, as well as
corporate performance objectives determined by the Compensation Committee
of DMC.
(2) The number of options have been restated to give effect retroactively to a
stock dividend, which effected a two-for-one stock split of DMC Common
Stock in November 1997.
(3) Represents compensation paid in the form of premiums for group life
insurance.
(4) Represents Mr. Kissner's salary from his appointment as Chief Executive
Officer and President of DMC in July 1995.
(5) Represents Mr. Kissner's signing bonus.
(6) Includes a relocation expense reimbursement of $187,761.
(7) Represents (i) a $30,000 signing bonus earned in fiscal year 1996, but paid
in fiscal year 1997, and (ii) a $99,320 bonus earned in fiscal year 1997.
(8) Represents Mr. Carretta's salary from joining DMC in September 1995.
(9) Represents $35,133 in housing expenses, $15,427 in transportation expenses,
$1,680 in miscellaneous expenses and a car allowance of $10,341.
(10) Represents (i) a $10,000 signing bonus earned in fiscal year 1996, but paid
in fiscal year 1997, and (ii) a $52,795 bonus earned in fiscal year 1997.
(11) Includes $32,269 in housing expenses, $24,709 in transportation expenses,
and $1,398 in miscellaneous expenses.
(12) Represents Mr. Hillson's salary from joining DMC in January 1996.
(13) Includes a relocation expense reimbursement of $16,301.
(14) Represents (i) a $30,000 signing bonus and (ii) a $53,055 bonus earned in
fiscal year 1997.
(15) Mr. Kennard did not join DMC until April 1996.
77
<PAGE>
The following table contains information concerning stock option grants in
DMC's Fiscal 1998 to the named executive officers. No stock appreciation rights
were granted during such fiscal year to the persons named in the Summary
Compensation Table.
OPTION GRANTS IN DMC'S FISCAL 1998(1)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------
Potential Realizable Value
at Assumed Annual Rates of
Number of % of Total Options Stock Price Appreciation for
Securities Granted to Exercise Option Term ($)(2)
Underlying Options Employees in 1998 Price Expiration ----------------------------
Name Granted (#) Fiscal Year ($/Share) Date 5% 10%
- -------------------- ------------------ -------------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Charles D. Kissner 100,000 6.10% $13.1875 05/13/07 $829,355 $2,101,748
Frank Carretta, Jr. 40,000 2.44 13.1875 05/13/07 331,742 840,699
Jack Hillson 40,000 2.44 13.1875 05/13/07 331,742 840,699
Paul A. Kennard 40,000 2.44 13.1875 05/13/07 331,742 840,699
Carl A. Thomsen 40,000 2.44 13.1875 05/13/07 331,742 840,699
</TABLE>
- ---------------------------
(1) The number of options and the exercise price have been restated to give
effect retroactively to a stock dividend, which effected a two-for-one
stock split of DMC Common Stock in November 1997. All options granted,
except as specifically noted, had ten-year terms and vest ratably over five
years.
(2) The 5% and 10% annual rates of compounded stock price appreciation are
mandated by rules of the Commission. There is no assurance provided to any
named executive officer or any other holder of DMC's securities that the
actual stock price appreciation over the 10-year option term will be at the
assumed 5% and 10% levels or at any other defined level. Unless the market
price of the DMC Common Stock does in fact appreciate over the option term,
no value will be realized from the option grants made to the named
executive officers.
STOCK OPTION EXERCISES AND HOLDINGS
The following table provides information concerning the exercise of stock
options during DMC's Fiscal 1998 by the persons named in the Summary
Compensation Table and the unexercised options held by such persons as of the
end of DMC's Fiscal 1998.
AGGREGATED OPTION EXERCISES IN DMC'S FISCAL 1998(1)
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised in-the-
Money Options at March 31,
Number of Securities 1998 (market price of shares
Underlying Unexercised at March 31, 1997 ($14.75
Options at March 31, 1998 (#) less exercise price) ($)(2)
------------------------------ -------------------------------
Value Realized
(market price at
exercise date
Shares Acquired less exercise
Name on Exercise (#) price)($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- --------------- ---------------- ------------------------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Charles D. Kissner 307,000 $3,696,299 217,404 186,604 $1,676,894 $648,669
Frank Carretta, Jr. 119,000 1,426,970 40,000 81,000 327,250 293,062
Jack Hillson 70,000 882,280 34,000 106,000 248,875 375,500
Paul A. Kennard 40,000 554,160 65,000 85,000 698,750 546,250
Carl A. Thomsen 117,980 1,434,752 75,914 55,840 550,366 193,340
</TABLE>
(1) The number of options and the exercise price have been restated to give
effect retroactively to a stock dividend, which effected a two-for-one
stock split of DMC Common Stock in November 1997.
(2) "In-the-money" options are options with an exercise price less than the
market price of DMC Common Stock on March 31, 1998.
78
<PAGE>
EMPLOYMENT AND TERMINATION ARRANGEMENTS
Mr. Kissner, Mr. Carretta, Mr. Hillson, Mr. Kennard and Mr. Thomsen, the
named executive officers, each have written employment agreements with DMC.
In August 1998, Mr. Kissner entered into a restated employment agreement
with DMC pursuant to which Mr. Kissner is to serve as Chairman and Chief
Executive Officer of DMC. The term of the agreement extends until terminated by
either DMC or Mr. Kissner. The agreement provides that (1) if Mr. Kissner is
terminated for any reason except cause, he shall be entitled to receive
(i) severance pay for thirty-six months at his normal monthly salary; (ii) the
continuation of vesting of his stock options for thirty-six months from the date
of his termination; (iii) a bonus payment equal to three times the average of
the annual incentive bonus paid to him in the previous three fiscal years; and
(iv) a proration of his incentive bonus, if earned, for the then current fiscal
year based on the number of months he was employed during the year by DMC. In
connection with Mr. Kissner entering into the restated employment agreement with
DMC, the DMC Board authorized the immediate vesting of 288,000 shares of
Mr. Kissner's stock option grants, effective as of the date of the restated
employment agreement.
Mr. Carretta, Mr. Hillson and Mr. Thomsen entered into employment
agreements with DMC, effective as of May 1996. The term of each of the
agreements extends until terminated by either DMC or the officer. In connection
with each of these officers signing employment agreements with DMC, the DMC
Board authorized the immediate vesting of fifty percent of each of the stock
option grants awarded to these officers in 1995, effective as of the date of the
employment agreements. The employment agreements for these officers include the
following provisions: (1) if the officer is terminated without cause, the
officer shall be entitled to receive (i) severance pay for six months at his
normal monthly salary; (ii) the continuation of vesting of his stock options for
six months from the date of his termination; and (iii) a proration of his
incentive bonus, if earned, for the then current fiscal year based on the number
of months he was employed during the year by DMC and (2) if DMC is merged or
acquired in a transaction in which there is a change in control of DMC, the
officer shall be entitled to receive (i) severance pay in the amount of two
times his base annual salary; (ii) a bonus payment equal to that of the average
of the bonuses paid to him in the last two fiscal years; and (iii) a proration
to him of his incentive bonus, if earned, for the then current fiscal year based
on the number of months he was employed during the year by DMC.
In June 1996, Mr. Kennard entered into an employment agreement with DMC.
The term of the agreement extends until terminated by either DMC or Mr. Kennard.
In connection with Mr. Kennard signing the employment agreement with DMC, the
DMC Board authorized the immediate vesting of fifty percent of the stock option
grants awarded to Mr. Kennard in 1996, effective as of the date of the
employment agreement. The employment agreement provides that: (1) if
Mr. Kennard is terminated without cause, he shall be entitled to receive
(i) severance pay for six months at his normal monthly salary; (ii) the
continuation of vesting of his stock options for six months from the date of his
termination; and (iii) a proration of his incentive bonus, if earned, for the
then current fiscal year based on the number of months he was employed during
the year by DMC and (2) if DMC is merged or acquired in a transaction in which
there is a change in control of DMC, he shall be entitled to receive
(i) severance pay in the amount of two times his base annual salary; (ii) a
bonus payment equal to that of the average of the bonuses paid to him in the
last two fiscal years; and (iii) a proration to him of his incentive bonus, if
earned, for the then current fiscal year based on the number of months he was
employed during the year by DMC.
COMPENSATION OF DIRECTORS
During DMC's Fiscal 1998, DMC paid each non-employee director $1,000 in
fees for each in-person meeting and $500 per telephone meeting, a retainer of
$3,000 per quarter, and committee meeting fees of $750 for each in-person
committee meeting and $375 for each telephone committee meeting unless, in
either case, such committee meeting was held in conjunction with a DMC Board
meeting. Directors were also reimbursed for their out-of-pocket expenses
incurred in attending meetings of the DMC Board and committees thereof. DMC
also pays consulting fees to members of the DMC Board of $1,000 per day, in one
half day increments, for DMC Board approved projects (including transportation
time) plus reimbursement of all expenses.
Pursuant to DMC's 1994 Incentive Plan, during the year ended March 31,
1998, each new non-employee DMC Board member, upon his or her initial
appointment or election to the DMC Board, received an automatic option grant for
42,000 shares (as adjusted for the two-for-one stock split of DMC Common Stock
in November 1997) with an exercise price equal to the fair market value of the
option shares on the grant date. Each
79
<PAGE>
individual reelected as a non-employee DMC Board member at the 1997 annual
stockholders' meeting, and who had been a DMC Board member for the three prior
years, received an option grant at that time for 14,000 shares (as adjusted for
the two-for-one stock split of DMC Common Stock in November 1997). Each initial
or periodic option grant is immediately exercisable for all the option shares,
but the shares purchased under the option are subject to repurchase by DMC, at
the option exercise price, upon the optionee's cessation of DMC Board service.
The option shares vest, and DMC's repurchase right lapses with respect to option
shares, in three equal annual installments over the optionee's period of DMC
Board service, measured from the grant date. However, upon certain changes in
control of DMC, DMC's repurchase rights immediately lapse in full. Each option
grant has a maximum term of ten years, subject to earlier termination upon the
optionee's cessation of DMC Board service.
Pursuant to the Stock Fee Program of DMC's 1994 Incentive Plan,
non-employee DMC Board members may elect to apply all or any portion of their
annual retainer fee and/or meeting fees otherwise payable in cash to the
acquisition of shares of DMC Common Stock. For the 1998 calendar year,
Mr. Combs and Mr. Oliver have chosen to participate in such program and have
elected to receive DMC Common Stock in lieu of their annual retainer fee of
$12,000. On January 2, 1998, Mr. Combs and Mr. Oliver each received 824 shares
of DMC Common Stock at a purchase price of $14.5625 per share. Such shares will
be held in escrow by DMC and will vest ratably each month over the 1998 calendar
year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the DMC Board currently consists of three
members of the Board: John W. Combs, James D. Meindl and Billy B. Oliver. No
member of this committee is a present or former officer or employee of DMC or
any of its subsidiaries.
No executive officer of DMC served on the board of directors or
compensation committee of any entity which has one or more executive officers
serving as a member of DMC's Board or DMC's Compensation Committee.
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INNOVA CORPORATION
BUSINESS OF INNOVA
OVERVIEW
Innova designs, manufactures and supports millimeter wave radios for use as
low to medium capacity wireless communication links in developed and developing
telecommunications markets. Innova's products enable telecommunications service
providers to establish reliable and cost-effective voice, data and video
communications links within their networks. Innova's products operate in
frequencies ranging from 13 to 38 GHz and may be used in various applications,
including cellular and PCS/PCN networks, broadband communications, local loop
services and long distance networks.
Innova's millimeter wave radio systems are designed to operate at a variety
of E1/T1 rates, are based on a common system architecture and are software
configurable. Innova's principal radio system, the XP4, consist of an IDU,
which interfaces with the user's network and is digitally linked to an ODU,
which transmits and receives the RF signal. The common embedded software
platform in the IDU and ODU is SNMP compliant and provides the ability to
remotely monitor and manage Innova's radios within a network using the service
provider's network management system. Innova's low-capacity, all outdoor radio,
the XP2, also utilizes the common embedded software platform, and combines the
user network interface with the transmission and receive functions into the
single outdoor unit.
Innova markets its products principally to systems integrators with a
strong regional presence in Europe, Latin America and Asia. Innova seeks to
develop strategic relationships with these systems integrators, which provide
field engineering, installation, project financing and support to service
providers. To date, Innova has entered into distribution agreements with Bosch,
NERA, Wireless, Inc. and SAT. Innova also markets its products directly to
certain service providers in the U.S. and internationally. To date, Innova has
supplied products, either through distribution relationships or directly, to
Alestra (Mexico), Associated Communications (Teligent) (U.S.), Avantel (Mexico),
Bosch, Bouygues Telecom (France), Ericsson (Mexico), MobilRom (Romania), Globtel
(Slovakia), Nortel (Canada), PacBell Mobile Services (U.S.) and Telcel
(Venezuela), among others.
PRODUCTS
Innova's radio systems are designed to operate in millimeter wave bands
used for the transmission of voice, data and video traffic over short to medium
distances. Innova's XP4 products are based on a common system architecture and
are software configurable. Innova's XP4 systems operate at data rates up to and
including 8E1 and 8T1, and have been certified for use in the Czech Republic,
France, Germany, Mexico, Slovakia, Argentina, the Philippines, Chile, Colombia,
Brazil, Venezuela, Canada, Spain, the UK and the U.S.
The following table provides transmission distances and the number of
access lines offered by the 13 GHz, 15 GHz, 18 GHz, 23 GHz, 24 GHz, 26 GHz, 28
GHz and 38 GHz systems currently being marketed by Innova.
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XP4 PRODUCT LINE
<TABLE>
<CAPTION>
Number of Access Lines
-----------------------------------
Frequency in 2E1/4E1 and 4T1 or Operational
Ghz 4E1/8E1 4T1/8T1 Range in Miles
- ---------------- -------------- ------------ ---------------
<S> <C> <C> <C>
13 Yes Yes 15
15 Yes Yes 15
18 Yes Yes 10
23 Yes Yes 6
24 No Yes 5
26 Yes No 5
28 No Yes 5
38 Yes Yes 3
</TABLE>
XP4 SYSTEM. The XP4 consists of an IDU and an ODU. The IDU is the
interface to the user's network. It is an assembly mounted indoors, or in a
base station, that contains digital signal processing electronics, including
line interface and digital multiplexing circuitry. The IDU also includes the
alarm and diagnostic ports, service channel and SNMP-compliant network
management capability. The IDU provides for the ability to set capacity,
frequency and power output of the radio link through software configuration
without requiring access to the outdoor unit.
Configuration of Innova's radio systems, including frequency selection,
power output setting, capacity and link ID, along with alarm monitoring and
receive signal level indications, are performed using the five-button keypad
located on the front panel of the IDU, or by using a PC and Innova's proprietary
XPView software interface. In contrast, many competing millimeter wave systems
require mechanical adjustment and manual tuning, which involve sending
maintenance personnel with test equipment to the radio's installed location.
Software embedded in Innova's radio system also facilitates upgrades of system
capacity, with minimal hardware changes.
The ODU consists of a lightweight, compact, integrated RF electronics
enclosure that attaches directly to an antenna. The RF enclosure contains
electronics that, when transmitting, convert, modulate and amplify the digital
signal received from the IDU. Typically, the ODU is installed outdoors on a
tower or rooftop. A simple latch secures the ODU to the antenna, allowing for
vertical or horizontal polarization installation, and permits removal of the ODU
without tools and without affecting antenna alignment.
XP2 SYSTEM. Innova shipped the first units of the XP2 in July 1998. The
XP2 houses the network interface functions and transmit/receive functions in a
single outdoor unit. The XP2 is designed for low capacity applications, and
provides for a single E1/T1 access. Innova has shipped a 38 GHz model, and is
marketing models operating at 13, 15, 18, 23, 24, and 26 GHz.
SOFTWARE. Innova's embedded software platform is common to all Innova
radio systems. It enables control of user configurable features from the
five-button keypad on the IDU or with respect to the XP2, by a personal
computer. The embedded software code is also compatible with Innova's custom
manufacturing test and calibration software. This approach facilitates
automation of the final test process by enabling adjustments to equipment
parameters through software commands, rather than the traditional method of
manual dip-switches or pots.
Innova's XPView software provides a remote means of configuring Innova's
radio systems, as well as providing for advanced diagnostics and maintenance
capabilities, including code downloading.
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CUSTOMERS
Innova's customers consist principally of systems integrators, which
incorporate Innova's radio systems into a variety of telecommunications networks
to be sold to telecommunications service providers. Systems integrators may
also provide engineering and installation services and project financing for
service providers. These systems integrators develop the network design and
provide the field effort necessary to install, commission and maintain Innova's
systems. Systems integrators are extensively used by fixed and mobile service
providers in Europe, Asia and developing countries. Innova also sells its
products directly to service providers, principally in North America. Service
providers can use Innova's products for various applications, including cellular
and PCS/PCN networks, broadband communications, local loop services, and access
to long distance networks. As of December 31, 1997, 85% of Innova's sales have
been to systems integrators, with the remaining 15% being made directly to
service providers.
The systems integrators and service providers set forth below have each
placed significant orders for XP4 radios since introduction of the product line
in the quarter ended September 30, 1996. In addition, Innova has made its first
XP2 systems shipments to a customer.
<TABLE>
<CAPTION>
Systems Integrators Service Providers
------------------- -----------------------------------------
<S> <C>
Bosch Airlink (Brazil)(1)
Ericsson Alestra (Mexico)
NERA Associated Communications (Teligent U.S.)
Nortel Avantel (Mexico)
SAT Bachow Communications (U.S.)
Simtel Bouygues Telecom (France)(1)
Wireless Globtel (Slovakia)(1)
Iusacel (Mexico)
Mercury (Argentina)
PacBell Mobile Services (U.S.)
MobilRom (Romania)(1)
Smartcom (Philippines)(1)
Telcel (Venezuela)(1)
</TABLE>
----------------
(1) Indicates service providers that purchased equipment from a systems
integrator.
To date, approximately twenty-five customers have accounted for all of
Innova's sales of XP4 systems. Sales to Associated Communications (Teligent),
Bachow Communications and Nortel accounted for approximately 14.5%, 12% and 45%
of Innova's XP4 sales, respectively, in calendar 1996. Mr. Bachow, a director
and greater-than-5% beneficial owner of Innova's Common Stock, is the only
shareholder and the President of Bachow Communications. For the year ended
December 31, 1997, Associated Communications (Teligent), Nortel and SAT
accounted for 5%, 24% and 46%, respectively, of Innova's XP4 sales, and as of
December 31, 1997, two customers, NERA and SAT, accounted for approximately 19%
and 27%, respectively, or an aggregate of 46%, of Innova's backlog scheduled for
shipment in the six months subsequent to December 31, 1997. SAT was a
greater-than-5% beneficial owner of Innova's Common Stock at certain times
during 1997. Innova has entered into agreements with SAT for exclusive
distribution in France, Italy, Poland, Hungary, Andorra and Monaco and
nonexclusive distribution in other countries; with Bosch, for global
distribution other than France, Italy, Poland and Hungary; with NERA, for
distribution principally in Asia, Latin America and parts of Europe; and with
Wireless for distribution primarily in Latin America and Asia. Innova also has
sold a significant portion of its products to a single customer in Canada. For
the nine month fiscal period ended December 31, 1996, 50% of total sales were to
a single customer in Canada, and 27% and 43% of total sales for the year ended
December 31, 1997 were to a single customer in each of Canada and France,
respectively. See Note 13 to Innova's Consolidated Financial Statements.
Innova's ability to achieve or increase its sales in the future will depend
significantly upon its ability to (i) obtain and fulfill orders from existing
and new customers; (ii) maintain relationships with and provide support to
existing and new customers; (iii) manufacture systems on a timely and
cost-effective basis; and (iv) meet stringent customer performance and other
requirements and shipment delivery dates. As a result, any cancellation,
reduction
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or delay in orders by, or shipments to, any customer, as a result of
manufacturing difficulties or otherwise, may have a material adverse effect upon
Innova's business, financial condition and results of operations. There can be
no assurance that Innova's sales will continue to increase in the future or that
Innova will be able to retain and support existing customers or to attract new
customers.
DISTRIBUTION RELATIONSHIPS
Innova markets its products principally to systems integrators with a
strong regional presence in countries in Europe, Latin America and Asia. Innova
believes these relationships are a critical component of its ability to include
its systems in major network buildout projects. To date, Innova has sold a
significant quantity of radios pursuant to agreements with NERA and SAT (the
material terms of which are discussed below) as well as other systems
integrators.
NERA ARRANGEMENTS. NERA has entered into an OEM Purchase and Limited
Licensing Agreement with Innova (the "NERA Agreement") pursuant to which they
have ordered in excess of $5 million of XP4 systems and XP4 product kits and
components over a 12-month period. The NERA Agreement authorizes NERA and its
affiliated companies to purchase products from Innova on most-favored-customer
pricing and terms and to distribute such products on a non-exclusive basis in
all countries other than France, Hungary, Poland, Italy, Monaco and Andorra
(collectively, the "SAT Territories"), where sales by NERA are to be coordinated
with SAT on a case-by-case basis. Under the NERA Agreement, Innova and NERA
have committed to cooperative development of certain new XP4 products and
features, and Innova has granted NERA certain design approval rights, as well as
testing rights on XP4 kits purchased from Innova. Innova also has granted NERA
a royalty-free right to manufacture and test XP4 indoor units solely for sale
with Innova's outdoor units; and a royalty-bearing right to use Innova's designs
and technologies for the purpose of manufacturing XP4 products, effective only
upon the occurrence of one of the following restrictive conditions: (i) the
failure of Innova to timely deliver products for over two months (such license
to be effective until Innova cures its inability to ship); (ii) the bankruptcy,
termination of business or dissolution of Innova; or (iii) the termination of
manufacturing and promotion by Innova of XP4 products under the NERA Agreement.
The NERA Agreement provides for Innova to pay penalties for late delivery, to
the extent NERA is obligated to make penalty payments to its customers due to
the late delivery. The NERA Agreement has a five-year term expiring May 30,
2002, at which time all distribution, manufacturing and other rights will
terminate. However, Innova's warranty, maintenance and repair obligations
survive termination. NERA is obligated, during the term of the agreement and
for a two-year period following its termination, not to develop, manufacture or
sell any product based on Innova's products or technologies, except as described
above. Innova also has outsourced some circuit board assembly to NERA's
Singapore facility. The NERA Agreement may be terminated under certain
circumstances, subject to a thirty (30) day cure period.
SAT ARRANGEMENTS. Innova has entered into a Cooperation Agreement with SAT
the ("Cooperation Agreement") under which it has granted distribution rights to
SAT for its XP4 products, including exclusive rights in the SAT Territories and
nonexclusive rights in all other countries except in North America, Australia
and New Zealand. The Cooperation Agreement prohibits Innova from selling XP4
products directly or indirectly in the SAT Territories. The Cooperation
Agreement also grants distribution rights to Innova with respect to certain SAT
products; assures each of the parties most-favored-customer pricing and terms;
specifies the maximum production capacity required to be allocated to SAT by
Innova; assures SAT access to Innova's supply relationships for custom design
parts and components, on comparable commercial terms; grants SAT the right to
advertise the XP4 products as its own; and provides for cooperation in the
development of certain features of Innova's XP4 product line, and sharing of
technical data on an ongoing basis, subject to confidentiality and other
restrictions on use.
The Cooperation Agreement also grants SAT a right to immediate use of
Innova's XP4 designs and technologies for the purpose of developing and
manufacturing (i) any product below 15 GHz within the SAT Territories and (ii)
certain products above 15 GHz, subject to limitations as to the place of
manufacture and, in certain cases, to quantity limitations. SAT is also granted
additional rights to use Innova's designs and technologies for the purpose of
manufacturing certain other XP4 products, subject to limitations as to the place
of manufacture but without quantity limitations. These additional rights are
effective only upon the occurrence of certain failures by Innova to perform
certain obligations under the Cooperation Agreement, such as failure of Innova
to timely deliver a minimum percentage of products for over three months,
discontinuation of the manufacture of products, wrongful rejection of purchase
orders or failure to afford SAT "most favored customer" terms. In any such
case, Innova's failure must involve at least $100,000 of products. SAT is
required to pay specified royalties to Innova on products
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manufactured pursuant to both its conditional and unconditional rights. The
Cooperation Agreement has an initial term of five years, expiring on October 31,
2001, but is automatically renewed for successive five-year terms unless
terminated by either party with one year's notice. Upon expiration of the
initial term or upon termination of the Cooperation Agreement due to an uncured
material breach by Innova, all manufacturing rights which are at that time
effective will become irrevocable and fully paid, and SAT will thereafter be
entitled to manufacture certain XP4 products free of any royalties or other
compensation to Innova.
In conjunction with the Cooperation Agreement, Innova and SAT have also
entered into a Master Purchase Agreement (the "Master Purchase Agreement"),
which includes conditional commitments by SAT to purchase a fixed number of XP4
products in various frequencies and configurations from Innova within an initial
specified period, and to purchase a specified dollar amount of XP4 products
within a subsequent specified period. The Master Purchase Agreement contains
other provisions regarding product acceptance testing procedures applicable to
SAT's purchase commitment. Uncured material defaults under the Cooperation
Agreement may cause termination under the Master Purchase Agreement.
RESEARCH AND DEVELOPMENT
Innova has an ongoing research and development program to enhance its
existing products and to introduce new products. Innova invested approximately
$4.5 million in the fiscal year ended March 31, 1996, $3 million in the nine
month fiscal period ended December 31, 1996 and $4.6 million for the year ended
December 31, 1997 in research and development efforts. Innova expects to
continue to invest significant resources in product research and development.
Innova's research and development efforts focus on using existing product
architectures and technology to maintain commonality and minimize time-to-market
for new products and enhancements. Innova's research and development efforts
are currently focused on developing additional models of Innova's XP4 and XP2
product lines to address both higher and lower capacity applications and greater
modulation efficiency. The common architecture of Innova's products, by
limiting the number of new components needed to develop products or new
frequencies, also allows Innova to react quickly to changing regulatory
environments. Innova's research and development efforts continually strive to
enhance software features contained in its products, and to develop products
which can be manufactured in a simple and cost-effective manner.
MANUFACTURING
Innova performs final assembly and test, quality assurance, packaging and
shipping at its facility in Seattle, Washington. Innova purchases all of the
circuit boards, integrated circuits and other components used in its products
from third-party suppliers. Innova inspects these components for quality,
groups the components into kits by production order and ships the kits to its
subcontractors for initial assembly. As a result of the use of common
components across the full range of Innova products, Innova's manufacturing
process is flexible and can accommodate significant changes in the frequency or
data rate of radios produced on a daily basis. This flexibility also reduces
Innova's need to maintain a large inventory of finished goods, as radios may be
produced to meet specific customer requirements without the need for significant
lead times, setup costs or changes to the manufacturing process.
Innova designs its products to provide a high degree of reliability.
Innova inspects and tests its products during the assembly process and tests
finished products using internally developed procedures. Innova believes its
testing procedures at extreme temperatures are among the most rigorous in the
industry. Innova's quality inspection and testing also include "burn-in"
procedures throughout the assembly process to ensure the quality and reliability
of Innova's products. Innova has extensively invested in computerized test
stations reducing dependency on skilled labor and facilitating a gradual
increase in capacity. Innova believes that its practice of conducting all
testing and calibration internally has contributed to the reliability of its
products. Innova believes the reliability of its XP4 radio systems is the
result of its quality assurance procedures. Innova received ISO 9001
certification in May 1996.
Certain parts incorporated in Innova's products are only available from
single or limited sources, including the field programmable gate arrays supplied
by Xilinx, MMICs and hybrids of certain frequencies supplied by Hewlett-Packard
Company ("Hewlett-Packard") and C&S, saw filters supplied by Sawtek,
microprocessors supplied by Motorola and power supplies supplied by Calex and
incorporated in Innova's products. Certain other parts and
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components used in Innova's products are available from a limited number of
sources. Innova's reliance on these single or limited source suppliers involves
certain risk and uncertainties, including the possibility of a shortage or
discontinuation of certain key components and reduced control over delivery
schedules, manufacturing capability, quality and cost. Any reduced availability
of such parts or components when required could materially impair Innova's
ability to manufacture and deliver its products on a timely basis and result in
the cancellation of orders which could have a material adverse effect on
Innova's business, financial condition and results of operations. In addition,
the purchase of certain key components involves long lead times and, in the
event of unanticipated increases in demand for Innova's products, Innova may be
unable to obtain such components in sufficient quantities to meet its customers'
requirements. Innova has established dual sources for transmit and receive
hybrids with Hewlett-Packard, among others, through blanket order arrangements
covering estimated requirements for 1998. Innova does not have guaranteed
supply arrangements with many of its single or limited source suppliers, does
not maintain an extensive inventory of parts or components and customarily
purchases single or limited source parts and components pursuant to purchase
orders. Business disruptions, production shortfalls or financial difficulties
of a single or limited source supplier could materially and adversely effect
Innova by increasing product costs, or reducing or eliminating the availability
of such parts or components. In such event, the inability of Innova to
establish alternative sources of supply quickly and on a cost-effective basis
could materially impair Innova's ability to manufacture and deliver its products
on a timely basis and could have a material adverse effect on its business,
financial condition and results of operations.
SALES, MARKETING AND CUSTOMER SUPPORT
Innova's sales and marketing efforts are headquartered in Seattle,
Washington. Innova has also established and staffed sales, service and customer
support facilities in Shirley, England. In addition, Innova has sales and
customer support representatives in Nashua, New Hampshire, Miami, Florida and
Dallas, Texas. Innova has recently opened a service and support facility in
Mexico City, Mexico. Innova may increase its overseas presence by opening sales
and support offices in countries not served by its distribution partners.
Innova markets its products directly to service providers in North America and
certain other countries. Innova believes that the contact it achieves with
service providers through such direct sales provides valuable feedback on
product performance and customer needs, which assists Innova in developing new
and enhanced products. Innova promotes its products through participation and
exhibition at trade shows in North America and through promotion of its products
by its system integrators in Europe and Asia.
Innova believes that the ability of its customer service personnel to work
with systems integrators in resolving any technical problems experienced by
service providers is fundamental to its success. Although system integrators
are responsible for providing customer support to the service providers,
Innova's technical support team must work closely with the systems integrator's
support personnel to promptly and efficiently identify and resolve technical
issues.
If Innova is selected to submit a proposal or bid by a new customer, Innova
may also be required to conduct system trials or provide units for customer
approval. If system trials or testing are required and successfully completed,
Innova then negotiates a contract with the customer to set technical and
commercial terms of sale. Innova generally targets systems integrators that are
involved in multiple projects including large quantities of radios. Once a
radio system has been tested by a systems integrator, determined to meet its
specification and designed into a service provider's network, further testing or
contract negotiations are generally not required for successive orders from that
systems integrator, substantially shortening the sales cycle. The process for
sales directly to service providers by Innova is similar to the sales process
for the first sale to a systems integrator, in that it may involve field trials,
contract negotiation, and take from three to six months to complete.
COMPETITION
The wireless communications market is intensely competitive. Innova's
millimeter wave radio systems compete with other wireless telecommunications
products and alternative telecommunications transmission media. The
principal competitive factors in this market include price, product
performance and reliability, range of product offerings, financing terms and
product features. Innova believes that the relatively small size, light
weight, low parts count and low power consumption of its products, together
with the embedded software platform contained in those products, should allow
Innova to compete favorably with its principal competitors in terms of the
reliability, adaptability, upgradeability and ease of installation of its
products. Innova experiences intense competition
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worldwide from a number of leading telecommunications companies that offer a
variety of competitive products and broader telecommunications product lines,
including Alcatel Network Systems, DMC, L.M. Ericsson, the Farinon Division of
Harris Corporation, Lucent (TRT), NEC, Nokia and P-Com, most of which have
substantially greater installed bases, financial resources and production,
marketing, manufacturing, engineering and other capabilities than Innova. This
competition has recently intensified in connection with weakening demand and
softening prices in Asian markets. Innova also may face competition in the
future from new market entrants offering competing technologies. In addition,
Innova's current and prospective customers, including SAT, NERA and Bosch, which
have access to Innova's technology or under some circumstances are granted the
right to use the technology for purposes of manufacturing, could develop or
manufacture products competitive with those that have been or may be developed
by Innova. Innova's future results of operations may depend in part upon the
extent to which Innova's customers elect to purchase from outside sources rather
than develop and manufacture their own radio systems. There can be no assurance
that such customers will rely on or expand their reliance on Innova as an
external source of supply for their radio systems.
Recently, certain of Innova's competitors have announced the introduction
of competitive products, and the acquisition of other competitors and
competitive technologies. Within the near future, Innova expects its
competitors to continue to improve the performance and lower the price of their
current products, and to introduce new products or new technologies that provide
added functionality and other features that may or may not be comparable to
Innova's products, which could cause a significant decline in sales or loss of
market acceptance of Innova's systems, or render Innova's systems or
technologies obsolete or noncompetitive. Innova expects to continue to
experience significant price competition that may materially adversely affect
its gross margins and its business, financial condition and results of
operations. Innova believes that to be competitive, it will continue to be
required to expend significant resources on, among other items, new product
development, and product enhancement and cost reduction.
GOVERNMENT REGULATION
Radio communications are subject to extensive regulation by foreign and
U.S. laws and international treaties. Innova's systems must conform to a
variety of international and domestic requirements established to, among other
things, avoid interference among users of radio frequencies and to permit
interconnection of equipment. In order for Innova's radios to be used in a
foreign jurisdiction, regulatory approval for its systems must be obtained and
end users must comply with such regulations. Regulatory bodies worldwide are
continuing the process of adopting new standards for wireless communication
products. The delays inherent in this governmental approval process may cause
the cancellation, postponement or rescheduling of the installation of
communications systems by Innova's customers, which in turn may have a material
adverse effect on the sale of systems by Innova to such customers. Innova's
arrangements with its distributors generally provide for the distributor to
obtain the regulatory approvals applicable to the use of Innova's products in
the countries into which they are sold by the distributors. Innova believes
that its XP4 products currently comply with all applicable U.S. and foreign
regulations in countries in which its sales are material, but changes in these
regulations, the need to comply with regulations in additional countries in the
event of sales into those countries, or a failure by Innova's distributors to
obtain necessary approvals or permits in connection with sales to service
providers in a country could require Innova to change the features of its radio
systems and thereby incur substantial costs and experience delays in radio
system installation or operations by systems integrators or service providers in
countries in which its sales are material. Failure of Innova's radio systems to
comply with current or future regulations could result in delay, suspension or
cessation of radio systems installation or operations by systems integrators or
service providers. Such regulations could require Innova to change the features
of its radio systems and incur substantial costs and experience delays to comply
with such time-consuming regulations. Equipment to support new services can be
marketed only if permitted by suitable frequency allocations, auctions and
regulations, and the process of establishing new regulations is complex and
lengthy. To the extent systems integrators or service providers are delayed in
deploying these systems, Innova could experience delays in orders. These delays
could have a material adverse effect on Innova's business, financial condition
and results of operations.
The regulatory environment in which Innova operates is subject to
significant change. Regulatory changes, which are affected by political,
economic and technical factors, could significantly impact Innova's operations
by restricting network deployment efforts by Innova's customers or end users,
making current systems obsolete or increasing the opportunity for additional
competition. Any such regulatory changes could have a material adverse
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effect on Innova's business, financial condition and results of operations.
Innova might deem it necessary or advisable to modify its products to operate in
compliance with such regulations. Such modifications could be extremely
expensive and time-consuming.
INTELLECTUAL PROPERTY
Innova relies on technological innovations, trade secrets and expertise to
develop and maintain its competitive position, and upon confidentiality
procedures, common law remedies and contractual provisions to protect its
proprietary rights. Innova does not hold any patents regarding the technology
and expertise involved in the assembly, calibration and testing of its XP4
products. Innova has applied for patents on various elements of its radio
systems. There can be no assurance, however, that such pending patent
applications will ultimately issue as patents or, if patents do issue, that the
claims allowed will be sufficiently broad to protect Innova's proprietary rights
or provide any competitive advantage. In addition, there can be no assurance
that issued patents or pending applications will not be challenged or
circumvented by competitors, or that rights granted will provide any competitive
advantage to Innova. Innova's agreements with its distributors generally
contain noncompetition and non-disclosure provisions prohibiting the distributor
from manufacturing products based on Innova's designs for the term of the
agreement and for a short period thereafter. In general, Innova has not entered
into non-competition agreements with its management and other employees or into
confidentiality and nondisclosure agreements with system integrators or service
providers. Furthermore, it is likely that Innova's competitors can obtain
samples of Innova's products and, through reverse engineering, obtain access to
proprietary knowledge regarding Innova's product designs.
Innova's success will depend in part on its ability to protect its
technology and preserve its trade secrets through common law and contractual
restrictions. There can be no assurance that the trade secrecy or other
measures taken by Innova will be adequate to prevent misappropriation of its
technology, or that competitors will not be able to independently develop
technologies having similar or better functions or performance characteristics.
In addition, the laws of some foreign countries do not protect Innova's
proprietary rights to the same extent as do the laws of the U.S. There can be
no assurance that Innova will have adequate legal remedy to prevent or seek
redress for future unauthorized misappropriation of Innova's technology.
The telecommunications industry is characterized by rapid technological
change, with frequent introductions of new products and technologies. As a
result, industry participants often find it necessary to develop products and
features similar to those introduced by others, increasing the risk that their
products and processes may give rise to claims that they infringe the patents of
others. Accordingly, Innova's current and future products and processes, or
uses thereof, may conflict with patents that have been granted or may be granted
to competitors or others. Such competitors or others could bring legal actions
against Innova or its customers, claiming damages and seeking to enjoin
manufacturing, marketing or use of the affected product or processes.
Similarly, Innova may in the future find it necessary to commence litigation in
order to enforce and protect its proprietary rights. If Innova becomes involved
in any such litigation, it could consume a substantial portion of Innova's
resources and result in a significant diversion of management attention. If the
outcome of any such litigation were adverse to Innova or its customers, its
business, financial condition and results of operations could be materially
adversely affected. In addition to any potential liability for damages, Innova
or its customers could be enjoined from continuing to manufacture, market or use
the affected product or process, and could be required to obtain a license in
order to continue such manufacture, marketing or use. There can be no assurance
that Innova or its customers would prevail in any such action or that any
license required under any such patent would be made available on acceptable
terms, if at all.
EMPLOYEES
As of June 30, 1998, Innova employed 152 full-time and temporary employees.
None of Innova's employees is represented by a collective bargaining agreement.
Innova's future performance will depend in large measure on its ability to
attract and retain highly skilled employees. Innova has never experienced a
work stoppage and believes its relationship with its employees to be good.
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FACILITIES
Innova's corporate offices and research, development and manufacturing
facilities are located in Seattle, Washington, in three adjacent leased
buildings aggregating approximately 85,000 square feet. Innova also leases
2,200 square feet of office space in Shirley, England. Innova believes its
facilities are adequate to meet its needs for the next 12 months.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF INNOVA
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF INNOVA" CONTAINS FORWARD-LOOKING STATEMENTS, WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT, THAT
INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF INNOVA'S PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. INNOVA'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HERE.
OVERVIEW
Innova designs, manufactures and supports millimeter wave radios for use as
short to medium distance wireless communications links in developed and
developing telecommunications markets. Innova began shipping the 23, 26 and
38 GHz models of its XP4 radio systems in the quarter ended September 30, 1996.
In addition, Innova began shipments of the 13, 15 and 24 GHz models of the XP4
line in the quarter ended September 30, 1997 and a 28 GHz model in the quarter
ended June 30, 1998. As of June 30, 1998, Innova had sold its XP4 radios and
related accessories to a total of 25 customers, generating $63.1 million in
total revenues, $10.2 million of which occurred in the quarter ended June 30,
1998. Through June 30, 1998 approximately 58% of Innova's XP4 sales have been
to Northern Telecom and SAT. Through June 30, 1998 approximately 93% of
Innova's sales have been made to customers located outside of the United States.
Innova anticipates that international sales will continue to account for at
least a majority of its sales for the foreseeable future. Innova was a
development stage company from its incorporation in 1989 through March 31, 1996.
As of June 30, 1998, Innova had an accumulated deficit of approximately
$41.2 million.
Innova's net sales consist primarily of sales of point-to-point millimeter
wave radios to systems integrators, other equipment resellers and service
providers, principally for installation outside the U.S. Other revenues are
generated from the resale of related telecommunications equipment such as
antennas, cables and enclosures. Innova recognizes revenue upon shipment.
Innova launched the XP4 product line in late 1996. In light of the
fundamental changes in the character of Innova's operations during the past
three years, which resulted in Innova changing from a development stage company
to an operating company during the nine-month fiscal period ended December 31,
1996, Innova believes that period-to-period comparisons of its financial results
should not be relied upon as an accurate indicator of future performance.
In calendar 1995, Innova began making significant additions of experienced
management in the engineering, manufacturing, sales and administrative areas,
including a new Chief Executive Officer who took office in early calendar 1996.
From late calendar 1995 to the latter part of calendar 1996, Innova continued to
invest in product development and manufacturing infrastructure, in anticipation
of the launch of the XP4 product line, which occurred in the third quarter of
calendar 1996. After an initial evaluation period, orders for XP4 radios
increased late in the final quarter of calendar 1996 and continued to increase
in 1997. Since launching the XP4 product line, Innova has increased expenditures
in an effort to increase sales and expand manufacturing capacity.
Prior to the quarter ended June 30, 1998, XP4 orders had increased more
rapidly than Innova had been able to expand its manufacturing capacity,
resulting in delayed shipping dates and lost orders. However, Innova's backlog
decreased substantially in the second quarter of 1998 with shipments exceeding
firm orders by a wide margin. The decrease in orders is the result of a sharp
increase in competition experienced by Innova in the quarter ended June 30,
1998. Orders for Innova's products have been adversely affected by both an
apparent decrease in worldwide demand (in particular Asia but also to a lesser
degree other markets) and an increase in competition from
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other radio manufacturers. Innova's competitors' pricing has become
increasingly more competitive due to the continued strength of the U.S. dollar.
In addition, many recent radio contract awards have been influenced strongly by
the availability of vendor financing or tied to the purchase of entire networks
in which radios comprise a relatively small part. Innova does not at this time
see any reason to believe that the current competitive market environment, or
that the adverse effect of this market environment on orders for Innova's
products, or pricing of its product, will improve in the near future.
Accordingly, Innova has implemented a program of product and operating cost
reductions to bolster its competitive position. Included in the operating cost
reduction program was a reduction of Innova's labor force of 30% in the month of
June, 1998. This reduction is expected to reduce payroll costs in the future at
an annual rate of over $3 million. Innova also has begun a redesign of the XP4
product line to incorporate the lower cost technology used in the XP2. When
implemented, this redesign of the XP4 line should result in substantially lower
costs along with significantly improved performance.
Innova also expects that its gross margins will continue to be affected by
a variety of other factors, such as: increases in lower-margin sales through
large distributors; increased investment in manufacturing facilities or
equipment; changes in labor costs resulting from increasing manufacturing
capacity; increased manufacturing or testing arrangements with distributors;
changes in product mix; receipt of royalties under limited manufacturing
licenses; increased sourcing of components and subassemblies from third-party
manufacturers; and potential increased price competition.
During 1997, revenue derived from large customers and large-scale projects
represented a significant portion of its total revenues. However, significant
progress was made during 1997 in reducing the percentage that any one customer
represented in order backlog. Innova believes that as its manufacturing capacity
increases its sales will continue to be distributed over a broader base of
customers. Price competition among manufacturers of millimeter wave radios
increased during 1997 and is expected to continue to increase over time. This
may adversely affect Innova's margins.
Innova successfully launched 13, 15 and 24 GHz XP4 radios during 1997. In
addition, Innova also began manufacture and shipments of 8x data rate XP4
systems late in the year. In addition to expanding the XP4 product line with
additional frequencies and data rates, Innova has continued to devote resources
to the development of point-to-point millimeter wave radios with different
architectures that are designed to address different market needs than the XP4
and expects that research and development costs will increase over time.
Innova has entered into distribution agreements whereby it has agreed to
sell XP4 products at various fixed prices. Certain of these distribution
agreements include "most favored customer" pricing commitments which require
Innova to offer lower prices to such distributors in the event such prices are
offered under like terms and conditions to other customers. In addition, some of
these agreements grant limited manufacturing licenses under certain conditions
or impose penalties for late delivery. Innova anticipates that certain of its
distributors will manufacture a portion of the XP4 radios they sell. To date,
NERA and SAT have exercised manufacturing rights to a limited extent. To the
extent such manufacturing by Innova's distributors decreases the number of XP4
units built by Innova, Innova's manufacturing gross profit will be reduced.
Innova invested $9.8 million in equipment and leasehold improvements during
1997. This investment resulted in significant capacity expansion in 1997. Innova
expects to continue to invest substantial amounts in increasing manufacturing
capacity. In addition to the investments in manufacturing equipment and
leasehold improvements, Innova plans to invest in software and management
information systems.
Innova has granted non-qualified stock options to its employees which in
some cases have required attainment of performance goals prior to vesting.
Generally, these options have been granted at exercise prices which Innova
believed to be no less than the fair market value of the underlying Innova
Common Stock as of the date of grant. In 1997, Innova amended previously granted
options to eliminate performance-related vesting criteria. In connection with
these amendments, Innova recorded a non-cash charge to operations of $1,192,727
for the year ended December 31, 1997, which is due primarily to the estimated
fair market value of these amended options exceeding the exercise price on the
amendment date. Additional compensation expense of up to $396,550 will be
recorded over the next four years as these options vest.
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Innova accrues for warranty expenses on an estimated basis, based on a
fixed dollar amount for each radio system shipped. Due to the limited operating
history of Innova, this estimate is based on relatively limited operating
experience. It also is based on management's experience in the millimeter wave
radio industry generally. Actual warranty expenses for XP4 sales may vary
significantly from Innova's estimates. If warranty expenses exceed Innova's
estimate, or if Innova is required to make in-the-field repairs or adjustments
to a significant number of radio systems, Innova's business, financial condition
and results of operations could be materially adversely affected.
Innova's sales may also be affected by a variety of other factors including
the establishment of new distribution relationships, the addition of direct
sales personnel or sales offices, the introduction of new products by Innova or
its competitors, and competitive and other conditions affecting the
telecommunications industry generally. Innova remains dependent on significant
contracts from a limited number of customers. Such contracts are often with
systems integrators, which in turn provide Innova's products to service
providers as part of larger telecommunication system infrastructure buildouts.
Due to Innova's limited operating history and limited number of customers to
date, it is difficult, if not impossible for Innova to accurately predict the
mix or nature of infrastructure projects that provide the basis for its product
sales to systems integrators. Innova anticipates, however, that revenue derived
from current and future large customers and large-scale projects will continue
to represent a significant portion of its total revenues. Because of the small
size of Innova's customer base, the loss of or reduced demand for products from
any customer for any reason, including business failure of the customer,
abandonment of the underlying project, or changes in government policy or
general economic conditions, for example, could have a material adverse effect
on Innova's business, financial condition and results of operations. Innova
believes that price competition among manufacturers of millimeter wave radios is
likely to increase over time, which could adversely affect Innova's sales and
margins.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected items
from Innova's Consolidated Statements of Operations expressed as a percentage of
total revenues.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTH SIX-MONTHS ENDED
MARCH 31, FISCAL PERIOD YEAR ENDED JUNE 30,
---------------------------- ENDED DEC. 31, DEC. 31, -----------------
1994 1995 1996 1996 1997 1997 1998
------- ------- ------- -------------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues:
Net product sales . . . . . . . . . . . . . . . 100.0% 48.8% 22.7% 97.5% 100.0% 100.0% 100.0%
Manufacturing contract service
revenues . . . . . . . . . . . . . . . . . . -- 51.2 77.3 2.5 -- -- --
------- ------- ------- ------- ------- ------- -------
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------- ------- ------- ------- ------- ------- -------
Total cost of products sold and
manufacturing contract services
expenses: . . . . . . . . . . . . . . . . . . . .
Cost of products sold . . . . . . . . . . . . . . 235.2 157.0 123.6 175.2 70.5 76.1 70.6
Manufacturing contract service
expenses. . . . . . . . . . . . . . . . . . . . -- 34.4 77.3 2.5 -- -- --
------- ------- ------- ------- ------- ------- -------
235.2 191.4 200.9 177.7 70.5 76.1 70.6
Gross margin (deficit). . . . . . . . . . . . . . . (135.2) (91.4) (100.9) (77.7) 29.5 23.9 29.4
Operating expenses:
Selling, general and administrative. . . . . . . 178.6 87.6 118.1 122.9 20.0 27.6 17.6
Research and development . . . . . . . . . . . . 283.0 80.2 230.3 141.0 12.7 17.6 12.1
Loss from operations . . . . . . . . . . . . . . . (596.2) (259.2) (449.3) (341.6) (3.3) (21.3) (0.3)
Other income (expense) . . . . . . . . . . . . . (18.9) (8.7) (12.5) (6.8) 0.3 (2.7) 0.8
Cumulative effect of change in
accounting principle. . . . . . . . . . . . . . . -- -- -- -- -- -- 0.6
------- ------- ------- ------- ------- ------- -------
Net income (loss) . . . . . . . . . . . . . . . . . . (615.7)% (267.9)% (461.8)% (348.4)% (2.9)% (24.0)% 1.1%
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
</TABLE>
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SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
NET PRODUCT SALES. Net product sales increased to $25.0 million for the
six months ended June 30, 1998, as compared to $12.6 million for the six months
ended June 30, 1997. The increase was attributable to the substantially higher
unit sales volumes of XP4 radios during the first half of 1998 as compared to
1997. International sales represented 87% of total net product sales for the six
months ended June 30, 1998. XP4 unit shipment volumes increased steadily until
the latter part of the six months ended June 30, 1998 at which time Innova
experienced a slow down in orders. XP4 sales prices have declined over time.
This decline in prices accelerated late in the quarter ended June 30, 1998.
GROSS PROFIT. Gross profit increased to $7.3 million for the six months
ended June 30, 1998, as compared to $3.0 million for the six months ended
June 30, 1997. The increase in gross profit was primarily attributable to the
increased unit sales volume of XP4 radios and reduced unit material and outside
processing costs resulting from higher volume purchases and lower, negotiated
vendor prices. The gross profit was, however, reduced by lower unit sales
prices. See Note 2 to Innova's Consolidated Financial Statements which discusses
the effect of a change in accounting for certain elements of cost included in
inventories.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $4.4 million for the six months ended
June 30, 1998 as compared to $3.5 million for the six months ended June 30,
1997. The increase was due primarily to increased compensation expenses
associated with the addition of sales and marketing staff in the U.S., the UK
and other sales offices to support the XP4 product line and administrative staff
to support increased business activity. In addition, in early 1998, Innova
increased staffing associated with the implementation of its Oracle ERP systems.
As a result of Innova implementing cost reduction programs and the workforce
reductions in June 1998, selling, general and administrative expenses are
expected to decline for the three months ending September 30, 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$3.0 million for the six months ended June 30, 1998 as compared to $2.2 million
for the six months ended June 30, 1997. The increase in research and development
expenses was primarily due to increases in staffing. Research and development
expenses incurred for the six months ended June 30, 1998 were associated
primarily with the 16x data rate and the XP2 low capacity programs.
OTHER INCOME (EXPENSE). Other income (expense) increased to $209,000 for
the six months ended June 30, 1998 as compared to ($338,000) for the six months
ended June 30, 1997. The increase was due to the increase of interest income
resulting from the investment of funds raised in Innova's initial public
offering which closed on August 8, 1997, along with the reduction of interest
expense resulting from the repayment of amounts previously borrowed under a
working capital bank credit line, which was repaid out of Innova's initial
public offering proceeds.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE NINE MONTH FISCAL PERIOD ENDED
DECEMBER 31, 1996
TOTAL REVENUE. Total revenue increased to $36.1 million for the twelve
months ended December 31, 1997, as compared to $2.1 million for the nine months
ended December 31, 1996. The increase was primarily attributable to sales of XP4
radios, sales of which did not begin until the third quarter of calendar 1996.
International sales represented 95% of net product sales for the twelve months
ended December 31, 1997. Although XP4 unit shipment volumes have increased
steadily since introduction in late 1996, XP4 sales prices have declined over
time and are expected to continue to decline in the future due to increased
price competition, particularly with respect to larger orders.
GROSS PROFIT (LOSS). Gross profit (loss) increased to $10.7 million for
the twelve months ended December 31, 1997, as compared to a loss of
($1.6) million for the nine months ended December 31, 1996. The increase in
gross profit was attributable to the increased sales of XP4 radios, increased
manufacturing volumes and reduced unit material and outside processing costs
resulting from higher-volume purchases and lower, negotiated vendor prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $7.2 million for the twelve months ended
December 31, 1997 as compared to $2.6 million for the nine months ended
December 31, 1996. The increase was due primarily to a $1.2 million charge to
compensation expense in connection
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with amendments to stock options granted in calendar 1996 as well as to
increased compensation expense associated with the addition of sales and
marketing staff in the U.S. and the UK offices to support the XP4 product line
and administrative staff to support increased business activity. Selling,
general and administrative expenses declined as a percentage of revenue due to
the increase in sales. Innova opened small sales offices in Mexico City and
Miami in 1997 and may incur additional expense in connection with opening
additional sales offices, particularly in certain international markets and in
connection with adding administrative personnel.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$4.6 million for the twelve months ended December 31, 1997 as compared to
$3.0 million for the nine months ended December 31, 1996. The increase in
research and development expenses was due primarily to increases in staffing
which offset a large reduction in consulting expenses. Research and development
expenses incurred for the twelve months ended December 31, 1997 were related to
improvements to and expansion of the XP4 product line along with the continued
development of similar products based on different system architectures (the
XP2) and targeted at different market segments. During 1997, Innova completed
development on and brought into manufacture 13, 15 and 24 GHz systems along with
8x data rates.
OTHER INCOME (EXPENSE). Other income (expense) increased to $116,000 for
the twelve months ended December 31, 1997 as compared to ($143,000) for the nine
months ended December 31, 1996. Increased interest expense was incurred as a
result of increases in capitalized leases and borrowings on Innova's working
capital line. This was more than offset by the interest income arising from the
investment in the third quarter of 1997 of the proceeds from Innova's initial
public offering which closed in August of 1997. The proceeds were also used to
repay borrowings under its working capital lines.
INCOME TAXES. No provision for income taxes was recorded, as Innova
incurred net operating losses through December 31, 1997. As of December 31,
1997, Innova had remaining net operating loss carryforwards of $35.3 million
and additional loss carryovers relating to its UK subsidiary. The U.S. net
operating loss carryforwards will begin to expire in 2005. Although the
application of these amounts is subject to certain annual limitations under
the Code, Innova believes that the availability of the cumulative federal net
operating loss carryforward is not currently limited. However, there can be
no assurances that future events, such as the issuance of additional shares
of Innova Common Stock, or transfers of outstanding shares of Innova Common
Stock by Innova's shareholders, will not cause an ownership change to occur
in the future and limit the availability of the NOLs. Innova and DMC believe
consummation of the Merger would constitute an ownership change, which would
limit availability of the NOLs. See "Risk Factors - Limitations on Use of Net
Operating Loss Carryforwards." Innova anticipates that its effective income
tax rate will approach the statutory rate after these amounts are applied or
expire. Innova has provided a full valuation allowance on the deferred tax
assets because of the uncertainty regarding realizability.
NINE MONTH FISCAL PERIOD ENDED DECEMBER 31, 1996 COMPARED TO THE FISCAL YEAR
ENDED MARCH 31, 1996
TOTAL REVENUE. Net product sales increased to $2.1 million for the nine
month fiscal period ended December 31, 1996, as compared to $445,000 for the
fiscal year ended March 31, 1996. The increase in net product sales for the nine
month fiscal period ended December 31, 1996 was due to the launch of the XP4
product line in the quarter ended September 30, 1996. International sales during
this nine month period represented 68% of net product sales. Manufacturing
contract service revenues in each of these periods related to the manufacture of
the XP3 radios for SAT, which was substantially discontinued in the fiscal year
ended March 31, 1996.
GROSS PROFIT (LOSS). Innova's gross profit (loss) decreased to a loss of
$1.6 million for the nine month fiscal period ended December 31, 1996, as
compared to a loss of $2.0 million for the fiscal year ended March 31, 1996. The
decrease in gross loss for the nine month fiscal period ended December 31, 1996
was due to increased revenue resulting from sales of the XP4 products, which
more than offset increased expenses and the decrease in manufacturing contract
sales revenue and related costs resulting from termination of subcontracting
services. Losses in the fiscal year ended March 31, 1996 were the result of the
ramp-up of production capabilities for the XP3 and fixed manufacturing costs
associated therewith. Due to the planned introduction of the XP4, these fixed
costs were not reduced after the decision to end XP3 production.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $2.6 million for the nine month fiscal
period ended December 31, 1996, as compared to $2.3 million for the fiscal year
ended March 31, 1996. The increase for the nine month fiscal period ended
December 31, 1996 was due to
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increased staffing, both in the U.S. and the UK offices, associated with the
launch of the XP4 product line. Selling, general and administrative expenses for
the fiscal year ended March 31, 1996 reflect continued investment in marketing
and other staff in anticipation of the launch of the XP4 after ending production
of XP3 radios.
RESEARCH AND DEVELOPMENT. Research and development expenditures were
$3.0 million for the nine month fiscal period ended December 31, 1996 as
compared to $4.5 million for the fiscal year ended March 31, 1996. The decrease
for the nine month fiscal period ended December 31, 1996, was due to the shorter
period and to Innova's decision to reduce consulting expenses, which were
partially offset by increases in internal research and development headcount.
Research and development expenses for the nine month fiscal period ended
December 31, 1996 were devoted to development of the XP4 product line, including
the development of several frequency and data rate product variations. Innova
anticipates research and development expenses will increase as Innova focuses on
new products in addition to the XP4 product line.
OTHER INCOME (EXPENSE). Other income (expense) for the nine month fiscal
period ended December 31, 1996 decreased as compared to the fiscal year ended
March 31, 1996. The decrease was due to interest income from investment of
proceeds of equity financing. Interest expense may increase substantially over
time if sales and, therefore, eligible accounts receivable and working capital
line borrowings, increase and Innova expands its manufacturing capacity. An
initial public offering in 1997 allowed Innova to pay down working capital
borrowings and reduce interest expense.
The paragraphs entitled "Selling, General and Administrative Expenses,"
"Research and Development," and "Other Income (Expense)" in the sections "Six
Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997,"
"Year Ended December 31, 1997 Compared to the Nine Month Fiscal Period Ended
December 31, 1996," and "Nine Month Fiscal Period Ended December 31, 1996
Compared to the Fiscal Year Ended March 31, 1996," contain forward looking
statements. Actual results could differ materially from those anticipated or
projected in the forward looking statements as a result of a number of factors,
including those set forth in "Risk Factors."
LIQUIDITY AND CAPITAL RESOURCES
In August 1997, Innova completed the sale of 3,162,500 shares of Innova
Common Stock through an initial public offering at a price of $13.00 per share.
The net proceeds of the initial public offering totaled approximately
$37.3 million. Innova also raised an additional $8.5 million from the private
placement of equity securities in March and June of 1997. Concurrent with
Innova's initial public offering, all of Innova's outstanding redeemable
preferred stock, totaling 8,682,287 shares with a carrying value of $47,768,859
immediately prior to the closing of Innova's initial public offering, was
converted into an equal number of shares of Innova Common Stock.
Innova used the $37.3 million net proceeds from its initial public offering
to repay the $2.0 million outstanding principal and accrued interest of its
credit line. In addition, Innova used $1.5 million of the net proceeds to repay
Innova's outstanding principal balance and accrued interest on its term loan.
Approximately $13.9 million of the net proceeds has been used to acquire
equipment and building improvements. The remainder of the net proceeds,
$19.9 million, has been used for working capital purposes and investments in
short-term securities with maturities of six months or less at date of purchase.
As a result of the excess of capacity over current booking levels, Innova
expects to invest relatively minor amounts in additional equipment, leasehold
improvements and information systems over the balance of 1998. The balance of
the net proceeds will be used for working capital and other general corporate
purposes.
Innova had $10.6 million and $21.8 million of cash, cash equivalents and
short term investment securities at June 30, 1998 and December 31, 1997
respectively. Working capital decreased from $37.5 million as of December 31,
1997 to $32.0 million as of June 30, 1998. Accounts receivable increased to
$13.4 million at June 30, 1998 as compared to $11.2 million at December 31,
1997. This was partially the result of a slowdown in payments by certain large
customers. Inventories increased to $22.7 million at June 30, 1998 compared to
$12.0 million at December 31, 1997. This increase was related to increased
inventory purchases in anticipation of customer demand which did not materialize
in the quarter. Accounts payable increased to $12.9 million at June 30, 1998 as
compared to $5.8 million at December 31, 1997 largely due to the increase in
inventory and includes large balances related to equipment purchases made in the
three months ended June 30, 1998.
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Innova believes that its current working capital will be sufficient to meet
its liquidity requirements for at least the next 12 months provided that order
levels improve from those experienced at the end of the second quarter of 1998.
To the extent additional capital is necessary, Innova could be required to
obtain additional credit facilities or to sell additional equity, debt or
convertible securities. There can be no assurance that additional financing will
be available at the time or in the amounts that may be needed, or that any
financing which is available will be on terms favorable to Innova and its
shareholders.
Approximately 93% of Innova's sales through June 30, 1998 were made to
customers located outside the United States. While the operating income Innova
will rely upon to meet a portion of its liquidity needs will come in significant
part from international customers, Innova has experienced no appreciable
difference in pricing, inventory levels or receivables realization between its
domestic and international customers. Additionally, as substantially all of
Innova's sales to date have been denominated in U.S. dollars and Innova
anticipates that this will continue for the foreseeable future, Innova's
operating revenues are not subject to appreciable exchange rate risk and Innova
has consequently not implemented any programs to specifically address such risk.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth the unaudited results of operations for each
of the ten fiscal quarters beginning January 1, 1996 and ending June 30, 1998.
In the opinion of Innova's management, this unaudited financial information
includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth therein, when read in
conjunction with Innova's audited Consolidated Financial Statements and the
Notes thereto appearing elsewhere in this Joint Proxy Statement/Prospectus.
Results of operations for any quarter are not necessarily indicative of the
results that may be expected for any future period. There can be no assurance
that Innova will not experience significant variations in its future results of
operations. See "Risk Factors -- Fluctuations in Quarterly Operating Results."
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<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------------
1996 1997
---------------------------------------------- ----------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues:
Net product sales . . . . . . . $ 12 $ 21 $ 373 $ 1,657 $ 4,910 $ 7,672 $ 10,418 $ 13,100
Manufacturing contract
service revenues . . . . . . 125 42 4 7 -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
137 63 377 1,664 4,910 7,672 10,418 13,100
Total cost of products sold:
Cost of products sold . . . . . 985 900 1,097 1,689 4,081 5,489 7,012 8,865
Manufacturing contract
service expenses . . . . . . 125 42 4 7 -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
1,110 942 1,101 1,696 4,081 5,489 7,012 8,865
Gross profit (loss) . . . . . . (973) (879) (724) (32) 829 2,183 3,406 4,235
Operating expenses:
Selling, general and
administrative. . . . . . 796 737 754 1,094 1,638 1,833 1,801 1,955
Research and development . . 1,576 798 814 1,354 1,111 1,105 1,300 1,086
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations . (3,345) (2,414) (2,292) (2,480) (1,920) (755) 305 1,194
Other income (expense). . . . . (70) (59) (19) (65) (199) (139) 85 369
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Cumulative effect of change in
accounting principle . . . . -- -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) . . . . . . . $ (3,415) $ (2,473) $ (2,311) $ (2,545) $ (2,119) $ (894) $ 390 $ 1,563
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
QUARTER ENDED
1998
----------------------
MARCH 31 JUNE 30
---------- ----------
<S> <C> <C>
Total revenues:
Net product sales . . . . . . . . . . $ 14,749 $ 10,208
Manufacturing contract
service revenues . . . . . . . . . -- --
---------- ----------
14,749 10,208
Total cost of products sold:
Cost of products sold . . . . . . . . 9,786 7,842
Manufacturing contract
service expenses . . . . . . . . . -- --
9,786 7,842
---------- ----------
Gross profit (loss) . . . . . . . . . 4,963 2,366
Operating expenses:
Selling, general and
administrative. . . . . . . . . 2,105 2,277
Research and development . . . . . 1,404 1,608
---------- ----------
Income (loss) from operations . . . . 1,454 (1,519)
Other income (expense). . . . . . . . 209 --
---------- ----------
Cumulative effect of change in
accounting principle . . . . . . . 140 --
---------- ----------
Net income (loss) . . . . . . . . . . $ 1,803 $ (1,519)
---------- ----------
---------- ----------
</TABLE>
96
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------------
1996 1997 1998
---------------------------------------- ------------------------------------- -----------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30
-------- -------- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues:
Net product sales 8.8% 33.3% 98.9% 99.6% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Manufacturing contract
service revenues 91.2 66.7 1.1 0.4 -- -- -- -- -- --
-------- -------- -------- ------- -------- ------- -------- ------- -------- -------
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Total cost of products sold:
Cost of products sold 719.0 1,428.6 291.0 101.5 83.1 71.5 67.3 67.7 66.4 76.8
Manufacturing contract
service expenses 91.2 66.7 1.1 0.4 -- -- -- -- -- --
-------- -------- -------- ------- -------- ------- -------- ------- -------- -------
810.2 1,495.3 292.1 101.9 83.1 71.5 67.3 67.7 66.4 76.8
Gross profit (loss) (710.2) (1,395.3) (192.1) (1.9) 16.9 28.5 32.7 32.3 33.6 23.2
Operating expenses:
Selling, general and
administrative 581.0 1,169.8 200.0 65.7 33.4 23.9 17.3 14.9 14.2 22.3
Research and development 1,150.4 1,266.7 215.9 81.4 22.6 14.4 12.5 8.3 9.5 15.8
-------- -------- -------- ------- -------- ------- -------- ------- -------- -------
Income (loss) from operations (2,441.6) (3,831.8) (608.0) (149.0) (39.1) (9.8) 2.9 9.1 9.9 (14.9)
Other income (expense) (51.1) (93.6) (5.0) (3.9) (4.1) (1.8) 0.8 2.8 1.4 --
Cumulative effect of change in
accounting principle -- -- -- -- -- -- -- -- 0.9 --
-------- -------- -------- ------- -------- ------- -------- ------- -------- -------
Net income (loss) (2,492.7)% (3,925.4)% (613.0)% (152.9)% (43.2)% (11.6)% 3.7% 11.9% 12.2% (14.9)%
-------- -------- -------- ------- -------- ------- -------- ------- -------- -------
-------- -------- -------- ------- -------- ------- -------- ------- -------- -------
</TABLE>
97
<PAGE>
CERTAIN TRANSACTIONS OF INNOVA
FINANCING TRANSACTIONS
Between 1989 and June 1997, the following officers, directors and
beneficial owners of 5% or more of Innova's capital stock participated in a
complex series of financing transactions pursuant to which Innova issued seven
series of convertible preferred stock (Series A, B, C, C1, D, E and F), warrants
to purchase shares of Series A Preferred Stock, warrants to purchase shares of
Innova Common Stock, and convertible notes, all of which were subsequently
repaid or converted into one or another series of preferred stock of Innova, and
certain other notes, all of which have been paid in full: Woodside Fund,
Woodside Fund II and Woodside Fund III (the "Woodside Funds"); UVCC Fund II and
UVCC II Parallel Fund, L.P. (collectively, "UVCC"); Tregor Electronique, S.A.
("Tregor"), a holding company of SAT; Bachow Investment Partners III, L.P.
("Bachow Investment Partners"), Paul S. Bachow Co-Investment Fund ("Bachow
Co-Investment Fund") and Mr. Bachow (collectively, the "Bachow Entities");
Pomona Capital II, L.P. ("Pomona") and Baupost Limited Partnership 1983 C-1
("Baupost"); Mr. Mendicino and the V. Frank Mendicino Defined Benefit Pension
Plan (the "Benefit Plan") and Brian Flynn ("Mr. Flynn"), former Acting Chief
Executive Officer. Each share of preferred stock of Innova was automatically
converted into one share of Innova Common Stock upon consummation of Innova's
initial public offering. Set forth below are descriptions of insider
participation in these transactions over the past three years.
SERIES C AND C1 FINANCING. In February and April 1995, the Bachow
Entities, Tregor, UVCC and Woodside Funds, purchased Series C Preferred Stock
with an aggregate purchase price of $997,181, $1,495,771, $159,549 and $944,225,
respectively, at a purchase price of $6.3672 per share, Innova Common Stock with
an aggregate purchase price of $2,819, $4,229, $458 and $3,669, respectively, at
a purchase price of $.024 per share and received warrants to purchase 283,859
shares, 425,789 shares, 45,416 shares, and 268,784 shares, of Innova Common
Stock, respectively, at a price of $.024 per share in a financing transaction in
which Innova sold Series C Preferred Stock with an aggregate purchase price of
$4,229,792 at a price of $6.3672 per share, Innova Common Stock with an
aggregate purchase price of $ 11,958 at a price of $.024 per share, and issued
warrants to purchase a total of 1,204,050 shares of Innova Common Stock at an
exercise price of $.024 per share to these persons and 13 other unaffiliated
investors.
In September and November 1995, Innova sold Series C1 Preferred Stock with
an aggregate purchase price of $2,890,428 at a price of $6.3672 per share,
Innova Common Stock with an aggregate purchase price of $8,171 at a price of
$.024 per share and issued warrants to purchase a total of 680,917 shares of
Innova Common Stock with an exercise price of $.024 per share to Bachow
Investment Partners, Mr. Bachow, UVCC, Woodside Funds, and 14 other unaffiliated
investors. In this transaction, Bachow Investment Partners and Mr. Bachow, UVCC
and Woodside Funds acquired Series Cl Preferred Stock with an aggregate purchase
price of $1,520,661, $249,296, and $648,168 respectively, shares of Innova
Common Stock with an aggregate purchase price of $4,229, $705, and $1,832,
respectively, and received warrants to purchase 358,239, 58,728, and 152,695
shares of Innova Common Stock at an exercise price of $.024 per share,
respectively.
Each of the 1,120,592 outstanding shares of Series C and C1 Preferred Stock
was automatically converted into one share of Innova Common Stock upon
consummation of Innova's initial public offering and all contractual covenants
by Innova in favor of the holders of Series C and C1 Preferred Stock
automatically terminated, other than the registration rights.
1995 BRIDGE LOANS. From November 1995 through January 1996, Bachow
Investment Partners, UVCC, Woodside Fund III, and nine other unaffiliated
investors lent Innova $1,000,000. Of this amount, Bachow Investment Partners,
UVCC and Woodside Fund III advanced $491,921, $87,828, and $291,922,
respectively. The notes (the "1995 Notes") received by the investors were
payable on demand on or after April 1, 1996, and bore interest at a rate of 16%
per annum for 90 days from the date of issuance and at the rate of 21% per annum
thereafter until paid in full. The investors to whom the 1995 Notes were issued
were also granted rights to receive warrants to purchase Innova Common Stock,
the exercise price of which was to be the lower of $4.80 per share or 80% of the
average price at which the next $20,000,000 of equity was raised by Innova. The
number of warrants to be received was determined by multiplying, for each of the
1995 Notes, the principal amount of the note by 50% and dividing the result by
the exercise price of the warrants as determined above (the "1995 Bridge
Warrants").
98
<PAGE>
1996 BRIDGE LOANS. In February, March and April 1996, Bachow Investment
Partners, Mr. Bachow, UVCC, Woodside Fund III, Mr. Flynn and 13 other
unaffiliated persons lent Innova an aggregate of $6,069,869 as advances in
respect of possible purchases of Series D Preferred Stock. In this transaction,
Bachow Investment Partners and Mr. Bachow, UVCC, and Woodside Fund III and
Mr. Flynn were issued notes bearing interest at a rate of 16% per annum for 90
days from the date of issuance and at a rate of 21% per annum thereafter until
paid in full ("Series D Notes") (all of which were subsequently converted into
Series D Preferred Stock except $69,869 which was paid in cash) in the principal
amount of $3,543,263, $350,000, and $1,258,078 and $135,000, respectively.
Mr. Flynn was Acting Chief Executive Officer of Innova in February 1997 when his
Series D Note was issued. In the event Innova closed a financing at a pre-money
valuation greater than $22.5 million, holders of the Series D Notes were
eligible to receive warrants to purchase Innova Common Stock with an exercise
price of $.024 upon the consummation of such financing (the "1996 Bridge
Warrants"). The number of shares to be covered by the 1996 Bridge Warrants was
equal to the difference between the number of shares of Series D Preferred Stock
issuable upon conversion of the Series D Notes, if the Series D Notes were
converted at a pre-money valuation of $22.5 million, and the number of shares of
Series D Preferred Stock issuable upon conversion of the Series D Notes if the
Series D Financing occurred at a higher valuation.
SERIES D FINANCING. In April 1996, substantially all of the 1995 Notes and
Series D Notes were converted into shares of Series D Preferred Stock with an
aggregate purchase price of $7,000,000, at a price of $3.228 per share with the
balance being paid in cash. Bachow Investment Partners and Mr. Bachow, UVCC and
Woodside Fund III received shares of Series D Preferred Stock with an aggregate
purchase price of $4,035,184, $437,828 and $1,550,000, respectively. Upon the
closing of the Series D financing, Innova issued 1995 Bridge Warrants to
purchase an aggregate of 193,611 shares of Innova Common Stock at an exercise
price per share of $2.5824. Bachow Investment Partners, UVCC, and Woodside Fund
III received 1995 Bridge Warrants to purchase 95,244, 17,004, and 56,521 shares
of Innova Common Stock, respectively. Innova also issued 1996 Bridge Warrants
to purchase an aggregate of 367,082 shares of Innova Common Stock, with Bachow
Investment Partners and Mr. Bachow, UVCC and Woodside Fund III receiving 1996
Bridge Warrants to purchase 211,610, 22,960 and 81,284 shares of Innova Common
Stock, respectively.
In the Series D Financing, Innova also issued to Pomona and Baupost
Series D Preferred Stock with an aggregate purchase price of $5,000,000 at a
price of $3.228 per share.
Each of the 3,717,643 shares of Series D Preferred Stock was automatically
converted into one share of Innova Common Stock upon consummation of Innova's
initial public offering, and all contractual covenants by Innova in favor of the
holders of Series D Preferred Stock automatically terminated, other than the
registration rights.
NOVEMBER 1996 THROUGH MARCH 1997 BRIDGE FINANCING. In November 1996 and
December 1996, Bachow Investment Partners, Baupost and Pomona, Mr. Flynn, UVCC,
Woodside Fund III and 11 other unaffiliated persons lent Innova an aggregate of
$1,500,000, and received notes in exchange (the "1996 Series D Notes"). In this
transaction, Bachow Investment Partners, Baupost and Pomona, Mr. Flynn, UVCC and
Woodside Fund III lent Innova $572,513, $326,535, $6,507, $71,114 and $282,450,
respectively. The 1996 Series D Notes bore interest at 12% per year and were
payable on demand 90 days after issuance. The 1996 Series D Notes were
convertible into Series D Preferred Stock at the option of the holder 90 days
from the date of issuance if not repaid by Innova prior to 91 days from the date
of issuance, at a conversion price of $3.228 per share. In a second related
bridge financing in January through March 1997, Bachow Investment Partners and
Mr. Bachow advanced $1,541,395, Baupost and Pomona advanced $371,303, UVCC
advanced $172,902, Woodside Fund III advanced $686,739, and 15 other
unaffiliated persons advanced $227,661, or an aggregate of $3,000,000, for
additional notes (the "Series E Notes"). The Series E Notes bore interest at
12% per year and were payable on demand 90 days after issuance. The Series E
Notes were convertible into Series E Preferred Stock at the option of the holder
90 days from the date of issuance if not repaid by Innova prior to 91 days from
the date of issuance, at a conversion price $5.19384 per share. The 1996
Series D Notes were retired with $1,500,000 of the amount received in connection
with the issuance of the Series E Notes. Series E Notes with an aggregate
principal amount of $3,000,000 were converted into Series E Preferred Stock at a
conversion price of $5.19384 per share in connection with the Series E financing
described below.
SERIES E FINANCING. In March 1997, Bachow Investment Partners and
Mr. Bachow, UVCC, Woodside Fund III and Pomona and Baupost converted all of
their Series E Notes into shares of Series E Preferred Stock with an aggregate
purchase price of $2,336,581, $287,314, $1,141,171 and $618,838, respectively,
at a price of $5.19384
99
<PAGE>
per share. In this transaction, Innova issued Series E Preferred Stock with an
aggregate purchase price of $4,999,999.
Each of the 962,669 shares of Series E Preferred Stock was automatically
converted into one share of Innova Common Stock upon consummation of Innova's
initial public offering, and all contractual covenants by Innova in favor of the
holders of Series E Preferred Stock automatically terminated, other than the
registration rights.
1997 BRIDGE LOANS. In May 1997, Bachow & Associates and Woodside Fund III
each advanced Innova $250,000 at an interest rate of 12% per annum in
anticipation of the Series F Financing described below. These amounts were
repaid in full at the closing of the Series F Financing.
SERIES F FINANCING. In June 1997, Innova sold Series F Preferred Stock
with an aggregate purchase price of $3,500,000 at a price per share of $6.96 to
Mr. Mendicino and the Benefit Plan and 10 other unaffiliated investors.
Mr. Mendicino and the Benefit Plan purchased $87,355 of Series F Preferred Stock
at a price per share of $6.96.
Each of the 502,867 shares of Series F Preferred Stock was automatically
converted into one share of Innova Common Stock upon consummation of Innova's
initial public offering, and all contractual covenants by Innova in favor of the
holders of Series F Preferred Stock automatically terminated, other than the
registration rights.
ADDITIONAL NOTE ISSUANCES. In October and November 1994, and November
1995, Innova issued promissory notes (the October and November 1994 notes
bearing interest at 15% per annum and the November 1995 notes bearing interest
at 21% per annum) in an aggregate amount of $470,000 to Woodside Fund III. In
November and December 1994, Innova issued promissory notes (bearing interest at
8% per annum) in an aggregate amount of $1,300,000 to SAT. All of these notes
have been repaid in full.
SALES TO BACHOW COMMUNICATIONS
During the fiscal period ended December 31, 1996, Innova sold XP4 radios
and other equipment with an aggregate purchase price of $212,000 to Bachow
Communications, Inc. Mr. Bachow, a director of Innova, is the sole shareholder
and President of Bachow Communications, Inc.
COMPENSATION TO BACHOW ASSOCIATES FOR ACTING CEO'S SERVICES
In May 1996, Bachow & Associates received $217,500 for the services
provided by Mr. Flynn, formerly a Managing Director of Bachow & Associates, who
served as the Acting Chief Executive Officer of Innova from January 1995 to
February 1996.
POLICY CONCERNING TRANSACTIONS WITH RELATED PARTIES
Innova has adopted a policy prohibiting transactions with its directors,
officers or controlling shareholders or their affiliates other than those that
result from competitive bidding or that a majority of Innova's disinterested
directors conclude are expected to benefit Innova and are on terms no less
favorable to Innova than could be obtained in arm's-length transactions with
unaffiliated third parties.
100
<PAGE>
INNOVA MANAGEMENT AND EXECUTIVE COMPENSATION
MANAGEMENT OF INNOVA
The executive officers and directors of Innova and their ages as of July
22, 1998, are as follows:
<TABLE>
<CAPTION>
Name Age Position
------------------------ ---- --------------------------------------
<S> <C> <C>
Jean-Francois Grenon 42 President, Chief Executive Officer and
Director
V. Frank Mendicino 59 Chairman of the Board of Directors
Colin J. R. 68 Executive Vice President -- Sales and
Pallemaerts Marketing
Barbara J. Williams 54 Chief Operating Officer
John M. Hemingway 51 Secretary and Chief Financial Officer
Randy J. Karr 41 Vice President -- Manufacturing
Paul S. Bachow 47 Director
Frances N. Janis 39 Director
Harold O. Shattuck 61 Director
Bernard D. Tarr, Jr. 38 Director
David A. Twyver 51 Director
</TABLE>
Mr. Jean-Francois Grenon joined Innova in February 1996 as its President
and Chief Executive Officer, and has served as a Director of Innova since June
1996. From March 1994 to December 1995, Mr. Grenon served as President of
Microwave Radio Corporation, Digital Radio Group, a division of California
Microwave Radio that he helped found, which develops and manufactures digital
millimeter wave radios. From April 1990 to March 1994, Mr. Grenon served as
Vice President and General Manager of Microwave Radio Corporation, a developer
of microwave radio transmission equipment. Mr. Grenon holds an MBA from Harvard
Business School and a BSEE from Ecole Polytechnique, Universite de Montreal.
Mr. V. Frank Mendicino has served as a Director of Innova since July
1989 and as its Chairman since February 1992. Since 1983, Mr. Mendicino has
served as a General Partner of Woodside Fund, Woodside Fund II and Woodside
Fund III, each of which is a private investment fund. He has also served as
a director of over 15 private companies. Mr. Mendicino holds a B.S. in
Business and a J.D. from the University of Wyoming.
Mr. Colin J. R. Pallemaerts joined Innova in 1992 and now serves as
Executive Vice President of Sales and Marketing. From November 1991 to April
1992, Mr. Pallemaerts served as Vice President of Marketing at P-Com, a
manufacturer of millimeter wave radio equipment. From January 1989 through
November 1991, he served as Vice President International Marketing for Digital
Microwave Corporation, a leading manufacturer of digital microwave systems.
Mr. Pallemaerts holds a Higher National Certificate in Electrical Engineering
from the Mid Essex Technical College and is a Graduate Member of the British
Institute of Electrical Engineers, a BSEE equivalent.
Ms. Barbara J. Williams has served as Innova's Chief Operating Officer
since November 1995. From May 1995 to November 1995, she served as the XP4
Project Manager and from November 1994 to May 1995 as Innova's Manufacturing
Information Systems Manager. From June 1984 to November 1994, she held various
product manager positions at Hewlett-Packard, an electronics manufacturer,
including (i) Project Manager of Research and Development, (ii) Manager of
Customer Support, Surface Mount Technology Center and (iii) Production Manager,
Surface Mount Technology Center. Ms. Williams holds a Ph.D. in Biostatistics
from the University of Washington, an M.S. in Mathematics from the University of
Alaska and a B.A. in Microbiology from the University of Missouri.
Mr. John M. Hemingway has served as Innova's Secretary and Chief Financial
Officer since joining Innova in June 1991. From September 1988 to December
1990, Mr. Hemingway served as a consultant to Disenos Industriales Plasticus, a
manufacturer of video cassettes and similar products located in Mexico and a
wholly-owned subsidiary of Grupo Televisa. From April 1978 to September 1988,
Mr. Hemingway served as Chief Financial officer and a director of Shape, Inc., a
manufacturer of audio and video cassettes, computer tape and diskettes, compact
disks and automatic assembly equipment. Mr. Hemingway holds a B.A. degree from
Yale University in Latin American Studies and an M.B.A. from Dartmouth College.
He is a Certified Public Accountant.
101
<PAGE>
Mr. Randy J. Karr has served as Vice President-Manufacturing of Innova
since January 1997. He joined Innova as Director of Manufacturing in December
1995. From December 1992 to December 1995, Mr. Karr served as Director of
Operations for MRC-Digital, a position he held since the inception of
MRC-Digital in 1992. From August 1982 to December 1992, Mr. Karr managed the
design and development of the Micro-Beam broad band microwave link business at
Channel Master, a division of AVNET Corporation, a distributor of electronic
components. Mr. Karr holds a BSEE from Missouri State University.
Mr. Paul S. Bachow has served as a Director of Innova since January 1993.
He has been President of Bachow & Associates, Inc., a venture capital investment
company ("Bachow & Associates"), since its formation in December 1989.
Mr. Bachow also acts as President of the General Partner of each of Paul S.
Bachow Co-Investment Fund, L.P., and Bachow Investment Partners III, L.P.
Mr. Bachow serves as a director of Deb Shops, Inc., a publicly traded company in
the women's clothing business, Anadigics, Inc., a publicly traded manufacturer
of gallium arsenide chips for use in a broad array of communications devices,
Crusader Holding Corporation, a publicly traded savings and loan, and several
private companies. He has a B.A. from American University, a J.D. from Rutgers
University and a Masters Degree in tax law from New York University, and is a
C.P.A.
Ms. Frances N. Janis has served as a Director of Innova since April 1996.
Since February 1994, Ms. Janis has been the Executive Vice President of Pomona
Partners Inc., which is the General Partner of Pomona Capital II, L.P., where
she is responsible for making direct investments in private companies and
purchasing limited partnership interests in Venture Capital/Leveraged Buyout
funds. From 1983 to 1994 she served as General Partner in Hambro International
Venture Fund II, a private investment firm, where Ms. Janis' responsibilities
included investing in early-stage private companies.
Mr. Harold O. Shattuck has served as a Director of Innova since February
1992. Since May 1991, he has been President of MC Tecinvest Inc., a consulting
company specializing in operations, executive consulting and financial advising
to early- and growth-stage companies in the computer, software and
communications industries. In that capacity, he has advised such clients as
Xerox Venture Capital and MC Partners I and II, offshore funds investing in U.S.
venture capital funds.
Mr. Bernard D. Tarr, Jr. has served as a Director of Innova since February
1995. Since April 1997, Mr. Tarr has served as a managing Director of Arete
Ventures, Inc. and as a Managing Director of Arete Ventures, LLC. From
September 1990 to April 1997 he served as a Vice President of Arete Ventures,
Inc. Arete Ventures, Inc. is the Managing Partner of UVCC Fund II and UVCC II
Parallel Fund, L.P. Arete Ventures, LLC is the Managing Member of the Utility
Competitive Advantage Fund, LLC, which invests in private telecommunications,
information technology, and customer service companies.
Mr. David A. Twyver has served as a Director of Innova since June 1998.
From May 1998, Mr. Twyver has served on the Board of Directors of Metawave
Communications Corporation, a manufacturer of antenna systems for cellular
networks. From 1996 to 1997, Mr. Twyver served as Chief Executive Officer of
Teledesic Corporation, a satellite telecommunications company. From 1974 to
1996, Mr. Twyver served in several management positions at Northern Telecom,
most recently serving as President of the Wireless Networks division from 1993
to 1996. Mr. Twyver graduated from the University of Saskatchewan with a B.S.
in mathematics and physics.
102
<PAGE>
EXECUTIVE COMPENSATION OF INNOVA
GENERAL. The following table sets forth information regarding compensation
earned during Innova's fiscal year ended December 31, 1997, the twelve-month
period ended December 31, 1996, and the fiscal year ended March 31, 1996, by
Innova's Chief Executive Officer and the other executive officers whose total
annual salary and bonus for Innova's fiscal year ended December 31, 1997,
exceeded $100,000.
INNOVA SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-term
Compensation
Annual Compensation Awards
------------------------------------ ---------------------
Securities Underlying
Name and Principal Position Fiscal Year Salary ($) Bonus ($) Stock Options (#)
------------------------------------------- ----------- ---------- --------- ---------------------
<S> <C> <C> <C> <C>
Jean-Francois Grenon 1997 $154,698 305,875 (1)
President, Chief Executive Officer and 1996 (2) 131,539 $ 10,000 611,750 (3)
Director 1995 (4) 26,154 611,750
Colin J.R. Pallemaerts 1997 126,782 46,099 (5)
Executive Vice President -- Sales 1996 (2) 137,198 110,984 67,198 (3)
and Marketing 1996 (2) 127,500 38,022
Barbara J. Williams 1997 118,981 45,147 (6)
Chief Operating Officer 1996 (2) 119,246 90,294 (3)
1996 (4) 90,209 30,687
John M. Hemingway 1997 119,711 43,659 (7)
Secretary and Chief Financial Officer 1996 (2) 117,692 62,318 (3)
1996 (4) 115,058 13,050
Randy J. Karr 1997 103,576 44,851 (8)
Vice President -- Manufacturing 1996 (2) 88,561 20,000 89,702 (3)
1996 (4) 27,228 10,146
</TABLE>
(1) Represents options to purchase 305,875 shares of Innova Common Stock
granted in 1997 to replace and amend options granted in 1996 that were
subject to performance vesting criteria. The reissued options vest over
time instead. See footnote 3 below.
(2) Subsequent to March 31, 1996, Innova changed its fiscal year end to
December 31. The amount shown is for the 12-month period ended December 31,
1996. The amount reflects an overlap of three months compensation (January,
February, and March) for 1996 for the listed executive officers. Overlap
compensation detail for January through March 1996 is as follows: Mr.
Grenon: $26,154 in salary and 611,750 stock options; Mr. Pallemaerts:
$27,952 salary; Ms. Williams: $27,861 salary; Mr. Hemingway: $26,308
salary; Mr. Karr: $23,768.
(3) One half of the options were subject to performance vesting criteria when
granted, but were cancelled and regranted in 1997 to provide for vesting
over time.
(4) The amount shown is for the fiscal year ended March 31, 1996. See also
footnote 2 above.
(5) Includes options to purchase 33,599 shares of Innova Common Stock granted
in 1997 to replace and amend options granted in 1996 that were subject to
performance vesting criteria. The reissued options vest over time instead.
See footnote 3 above.
(6) Represents options to purchase 45,147 shares of Innova Common Stock granted
in 1997 to replace and amend options granted in 1996 that were subject to
performance vesting criteria. The reissued options vest over time instead.
See footnote 3 above.
(7) Includes options to purchase 31,159 shares of Innova Common Stock granted
in 1997 to replace and amend options granted in 1996 that were subject to
performance vesting criteria. The reissued options vest over time instead.
See footnote 3 above.
(8) Represents options to purchase 44,851 shares of Innova Common Stock granted
in 1997 to replace and amend options granted in 1996 that were subject to
performance vesting criteria. The reissued options vest over time instead.
See footnote 3 above.
103
<PAGE>
The following table provides information concerning stock options granted
to executive officers of Innova during Innova's fiscal year ended December 31,
1997.
OPTION GRANTS IN INNOVA'S FISCAL YEAR 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------
Potential Realizable Value
Number Of At Assumed Annual Rates Of
Securities Percent Of Total Stock Price Appreciation
Underlying Options Granted To For Option Term ($)(2)
Options Employees In Exercise Price (1) Expiration --------------------------
Name Granted (#) Fiscal Year ($ Per Share) Date 5% 10%
- ----------------------- ----------- ------------------ ------------------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Jean-Francois Grenon 305,875(3) 33.3% $1.97 02/20/2016 $2,730,937 $7,417,248
Colin J.R. Pallemaerts 33,599(3) 3.7 1.97 12/17/2016 314,964 886,537
12,500(4) 1.4 9.84 06/17/2007 11,791 91,632
Barbara J. Williams 45,147(3) 4.9 1.97 12/17/2016 423,217 1,191,240
John M. Hemingway 31,159(3) 3.4 1.97 12/17/2016 292,091 822,156
12,500(4) 1.4 9.84 06/17/2007 11,791 91,632
Randy J. Karr 44,851 4.9 1.97 12/17/2016 420,442 1,183,430
</TABLE>
- -------------
(1) The exercise price of each option was determined by the Innova Board to be
not less than the estimated fair value of Innova Common Stock on the date
of grant.
(2) Based upon the market price on the date of grant and assumed appreciation
over the term of the options at the respective annual rates of stock
appreciation shown. These amounts are not intended to forecast possible
future appreciation, if any, in the market price of Innova Common Stock.
(3) Represents options granted in 1997 to replace and amend options granted in
1996 that were subject to performance vesting criteria. The reissued
options vest as to 25% of the shares on the first anniversary of the date
of grant of the cancelled options, with the remaining shares vesting
ratably over the next 36 months. See footnote 3 to the Innova Summary
Compensation Table.
(4) The options vest as to 25% of the shares on the first anniversary of the
date of grant, with the remaining shares vesting ratably over the next 36
months.
STOCK OPTION EXERCISES AND HOLDINGS
The following table provides information concerning stock options exercised
by the persons named in the Summary Compensation Table during Innova's fiscal
year ended December 31, 1997, including the aggregate value of any gains
realized on such exercise. The table also provides information regarding the
number and value of unexercised in-the-money options held by such persons at the
end of that fiscal year.
AGGREGATED OPTION EXERCISES IN INNOVA'S FISCAL YEAR 1997
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number Of Securities Value Of Unexercised In-The-
Underlying Unexercised Money Options At Fiscal
Options At Fiscal Year-End (#) Year-End (2) ($)
Shares Acquired On Value ------------------------------ -----------------------------
Name Exercise (#) Realized (1) ($) Exercisable Unexercisable Exercisable Unexercisable
------------------------ ------------------ ---------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jean-Francois Grenon 300 $7,284 280,084 311,366 $3,369,411 $3,986,333
Colin J.R. Pallemaerts -- -- 70,026 66,369 893,995 702,304
Barbara J. Williams -- -- 40,018 85,129 504,221 1,042,424
John M. Hemingway -- -- 52,077 60,538 661,588 629,897
Randy J. Karr -- -- 25,764 74,354 316,086 900,624
</TABLE>
(1) Represents the aggregate fair market value on the respective dates of
exercise of the shares of Innova Common Stock received on exercise of the
options, less the aggregate exercise price of the options.
(2) Represents the aggregate fair market value on December 31, 1997, of the
shares of Innova Common Stock subject to outstanding options, less the
aggregate exercise price of the options.
104
<PAGE>
PRINCIPAL SHAREHOLDERS OF INNOVA
The following table sets forth, as of June 30, 1998, certain information
regarding beneficial ownership of Innova Common Stock (a) by each person known
to Innova to be the beneficial owner of more than five percent of the
outstanding Common Stock of Innova, (b) by each director of Innova, (c) by the
Chief Executive Officer and the other executive officers of Innova whose total
annual salary and bonus, for Innova's fiscal year ended December 31, 1997,
exceeded $100,000, and (d) by all of Innova's executive officers and directors
as a group. Unless otherwise noted, the named beneficial owner has sole voting
and investment power.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF SHARES OF INNOVA
INNOVA COMMON STOCK COMMON STOCK
NAME AND ADDRESS BENEFICIALLY OWNED (1) OUTSTANDING (1)
- -------------------------------------------------------------------- ---------------------- ---------------
<S> <C> <C>
Paul S. Bachow(2) 4,155,450 27.8%
c/o Bachow & Associates
3 Bala Plaza, Suite 502
Bala Cynwyd, Pennsylvania 19004
V. Frank Mendicino(3) 2,318,650 15.7%
c/o Woodside Funds
4133 Mohr Avenue, Suite H
Pleasanton, California 94566
Frances N. Janis(4) 1,253,894 8.9%
c/o Pomona Capital II, L.P.
780 Third Avenue, 28th Floor
New York, New York 10017-7076
The Bessemer Group, Incorporated (5) 758,405 5.4%
100 Woodbridge Center Drive
Woodbridge, New Jersey 07095-0980
Bernard D. Tarr, Jr.(6) 584,292 4.1%
c/o Arete Ventures, Inc.
6110 Executive Blvd., Suite 1040
Rockville, Maryland 20852
Jean-Francois Grenon(7)(8) 382,044 2.7%
Harold O. Shattuck(7)(9) 33,860 *
David Twyver(7)(10) 10,000 *
Colin J.R. Pallemaerts(7)(11) 73,130 *
John M. Hemingway(7)(12) 56,108 *
Barbara J. Williams(7)(13) 60,875 *
Randy J. Karr(7)(14) 12,731 *
All directors and executive officers as a group (11 persons)(15) 8,941,034 54.2%
</TABLE>
- ---------------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with rules of the
Commission and includes shares over which the indicated beneficial owner
exercises voting and/or investment power. Shares of Innova Common Stock
subject to options currently exercisable or exercisable within 60 days of
June 30, 1998 are deemed outstanding for computing the percentage ownership
of the person holding the options but are not deemed outstanding for
computing the percentage ownership of any other person. Except as
indicated, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power with
respect to all shares of Innova Common Stock shown as beneficially owned by
them.
(2) Includes 2,615,090 shares held by Bachow Investment Partners III, L.P.
("Bachow Investment Partners"), and 277,457 shares held by Paul S. Bachow
Co.-Investment Fund, L.P. ("Bachow Co-Investment Fund"), both limited
partnerships. Mr. Bachow is the President of the General Partner of each of
Bachow Investment Partners and Bachow Co-Investment Fund. Also includes
89,013 shares issuable upon exercise of warrants to purchase Innova Common
Stock held by Mr. Bachow, 786,887 shares issuable upon exercise of warrants
to purchase Innova Common Stock held by Bachow Investment Partners, and
73,052 shares issuable upon exercise of warrants to purchase Innova Common
Stock held by Bachow Co-Investment Fund. Also includes options held by Mr.
Bachow under Innova's Director Stock Option Plan (the "Director Plan") to
purchase 10,000 shares of Innova Common Stock exercisable within 60 days of
June 30, 1998. Excludes options to purchase 4,000 shares of Innova Common
Stock exercisable more than 60 days after June 30, 1998.
(3) Represents 9,000 shares held by V. Frank Mendicino Defined Benefit Pension
Plan (the "Mendicino Benefit Plan"), 2,400 shares held by Mendicino
Brothers, 243,212 shares held by Woodside Fund, 130,912 shares held by
Woodside Fund II, 1,185,413 shares held by
105
<PAGE>
Woodside Fund III (Woodside Fund, Woodside Fund II and Woodside Fund III
are collectively referred to as "Woodside Funds") and 1,000 shares held
by Campus Mall, G.P. ("Campus Mall"). Also represents 294,006 shares
issuable upon exercise of warrants to purchase shares of Innova Common
Stock held by Woodside Fund, 149,509 shares issuable upon exercise of
warrants to purchase shares of Innova Common Stock held by Woodside Fund
II, and 293,198 shares issuable upon exercise of warrants to purchase
shares of Innova Common Stock held by Woodside Fund III. Mr. Mendicino
is a General Partner of Woodside Funds and has shared investment power
and shared voting power over such shares with the two other General
Partners, Vincent M. Occhipinti and Robert E. Larson. Mr. Mendicino is a
General Partner of Campus Mall and has shared investment power and
shared voting power over such shares with Kent Boswell, Michael
Mendicino, Flory Mendicino and John Mendicino. Mr. Mendicino is a
General Partner of Mendicino Brothers and has shared investment power
and shared voting power over such shares with two other General
Partners, Flory Mendicino and P. Michael Mendicino. Also includes
options held by Mr. Mendicino under Innova's Director Plan to purchase
10,000 shares of Innova Common Stock exercisable within 60 days of June
30, 1998. Excludes options to purchase 4,000 shares of Innova Common
Stock exercisable more than 60 days after June 30, 1998.
(4) Represents 895,393 shares held by Pomona Capital II, L.P. ("Pomona
Capital") and 346,701 shares held by Baupost Limited Partnership 1983 C-1
("Baupost"), both limited partnerships. Ms. Janis is Executive Vice
President of Pomona Partners, Inc., the General Partner of Pomona Capital,
and Executive Vice President of Pomona Management Co., Inc.,
attorney-in-fact of Baupost. Ms. Janis has shared investment power and
shared voting power over such shares with each of (i) Michael D. Granoff,
President of Pomona Partners, Inc., and Pomona Management Co., Inc., and
(ii) Stephen Futrell, Treasurer of Pomona Partners, Inc., and Pomona
Management Co., Inc. Also includes options held by Ms. Janis under Innova's
Director Plan to purchase 10,000 shares of Innova Common Stock exercisable
within 60 days of June 30, 1998. Excludes options to purchase 4,000 shares
of Innova Common Stock exercisable more than 60 days after June 30, 1998.
(5) Represents 317,705 shares held by Bessemer Trust Company ("BTC"), 346,830
shares held by Bessemer Trust Company, National Association ("BTNA"), and
93,870 shares held by Bessemer Trust Company of Florida ("BTF", and
collectively with BTC and BTNA, the "Bessemer Group"). The Bessemer Group,
Incorporated ("BGI") is the parent holding company of the Bessemer Group.
BTC has shared voting power over 8,680 shares and shared investment power
over 309,025 shares of the shares it holds. BTNA has shared voting power
over 76,400 shares and shared investment power over 76,400 of the shares it
holds. BTF has shared voting power over 7,300 shares and shared investment
power over 7,300 shares of the shares it holds. BGI has shared voting power
and shared investment power over all 758,405 shares.
(6) Represents 196,322 shares held by UVCC Fund II and 196,322 shares held by
UVCC II Parallel Fund, L.P. (UVCC Fund II and UVCC II Parallel Fund, L.P.
are collectively referred to as "UVCC"). Also includes 90,824 shares
issuable upon exercise of warrants to purchase shares of Innova Common
Stock held by UVCC Fund II, and 90,824 shares issuable upon exercise of
warrants to purchase shares of Innova Common Stock held by UVCC II Parallel
Fund, L.P. Mr. Tarr is Managing Director of Arete Ventures, the General
Partner of the UVCC funds. Also includes options held by Mr. Tarr under
Innova's Director Plan to purchase 10,000 shares of Innova Common Stock
exercisable within 60 days of June 30, 1998. Excludes options to purchase
4,000 shares of Innova Common Stock exercisable more than 60 days after
June 30, 1998.
(7) The address for each of these shareholders is that of Innova.
(8) Represents options to purchase 382,044 shares of Innova Common Stock
exercisable within 60 days of June 30, 1998. Excludes options to purchase
229,406 shares of Innova Common Stock exercisable more than 60 days after
June 30, 1998.
(9) Excludes options to purchase 4,000 shares of Innova Common Stock
exercisable more than 60 days after June 30, 1998.
(10) Represents options to purchase 10,000 shares of Innova Common Stock
exercisable within 60 days of June 30, 1998.
(11) Represents options to purchase 73,130 shares of Innova Common Stock
exercisable within 60 days of June 30, 1998. Excludes options to purchase
49,455 shares of Innova Common Stock exercisable more than 60 days after
June 30, 1998.
(12) Represents options to purchase 56,108 shares of Innova Common Stock
exercisable within 60 days of June 30, 1998. Excludes options to purchase
46,507 shares of Innova Common Stock exercisable more than 60 days after
June 30, 1998.
(13) Includes options to purchase 59,193 shares of Innova Common Stock
exercisable within 60 days of June 30, 1998. Excludes options to purchase
64,272 shares of Innova Common Stock exercisable more than 60 days after
June 30, 1998.
(14) Includes options to purchase 12,731 shares of Innova Common Stock
exercisable within 60 days of June 30, 1998. Excludes options to purchase
57,668 shares of Innova Common Stock exercisable more than 60 days after
June 30, 1998.
(15) Includes options to purchase an aggregate of 633,206 shares of Innova
Common Stock, and an aggregate of 1,867,313 shares of Innova Common Stock
issuable upon exercise of warrants to purchase shares of Innova Common
Stock.
106
<PAGE>
OTHER MATTERS
It is not expected that any matters other than those described in this
Proxy Statement/Prospectus will be brought before the DMC Special Meeting or the
Innova Special Meeting. If any other matters are presented, however, it is the
intention of the persons named in the DMC proxy and the Innova proxy to vote
such proxies in accordance with their respective discretion.
It is expected that representatives of Arthur Andersen LLP, DMC's
independent public accountants, will be present at the DMC Special Meeting and
representatives of KPMG Peat Marwick LLP, Innova's independent public
accountants, will be present at the Innova Special Meeting, where they will have
an opportunity to respond to appropriate questions of stockholders of DMC and
shareholders of Innova, respectively, and to make statements if they so desire.
LEGAL MATTERS
Certain legal matters with respect to the validity of the securities
offered hereby and the federal income tax consequences of the Merger will be
passed upon for DMC by Morrison & Foerster LLP, San Francisco, California.
Certain legal matters with respect to the federal income tax consequences of the
Merger will be passed upon for Innova by Graham & James LLP, Seattle,
Washington.
EXPERTS
The audited consolidated financial statements of Digital Microwave
Corporation as of March 31, 1997 and 1998 and for each of the three years in the
period ended March 31, 1998 have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included in this Proxy Statement/Prospectus in reliance upon
the authority of said firm as experts in giving said reports.
The consolidated financial statements of Innova Corporation and the Innova
Subsidiary as of December 31, 1996 and 1997, and for the year ended March 31,
1996, the nine month period ended December 31, 1996, and the year ended
December 31, 1997, have been included herein and in the registration statement
in reliance upon the report of KPMG Peat Marwick LLP, Seattle, Washington
independent auditors, appearing elsewhere herein and in the registration
statement, and upon the authority of said firm as experts in accounting and
auditing.
STOCKHOLDER PROPOSALS
The deadline for stockholder proposals intended to be considered for
inclusion in DMC's proxy statement for its 1999 Annual Meeting of Stockholders
is expected to be March 4, 1999.
The deadline for shareholder proposals intended to be considered for
inclusion in Innova's proxy statement for its 1999 Annual Meeting of
Shareholders (if the Merger is not consummated), is expected to be January 15,
1999.
107
<PAGE>
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
DIGITAL MICROWAVE CORPORATION
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1998 and 1997
and June 30, 1998 (unaudited) . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the three
years in the period ended March 31, 1998 and for
the three months in the period ended June 30, 1998
and 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity for the
three years in the period ended March 31, 1998. . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the three years
in the period ended March 31, 1998 and for the three
months in the period ended June 30, 1998 and 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-7
INNOVA CORPORATION
Report of Independent Public Accountants . . . . . . . . . . . . . . . . .F-20
Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 1996 and 1997,
and June 30, 1998 (unaudited) . . . . . . . . . . . . . . . . . . .F-21
Consolidated Statements of Operations for the Year Ended
March 31, 1996, the Nine-Month Period Ended December 31,
1996, the Year Ended December 31, 1997, and for the six
months ended June 30, 1997 and 1998 (unaudited) . . . . . . . . . .F-22
Consolidated Statements of Stockholders' Equity (Deficit)
for the Year Ended March 31, 1996, the Nine-Month
Fiscal Period Ended December 31, 1996, the Year Ended
December 31, 1997, and for the six months ended
June 30, 1998 (unaudited) . . . . . . . . . . . . . . . . . . . . .F-23
Consolidated Statements of Cash Flows for the Year Ended
March 31, 1996, the Nine-Month Fiscal Period Ended
December 31, 1996, the Year Ended December 31, 1997,
and the six months ended June 30, 1997 and 1998 (unaudited) . . . .F-24
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . .F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Digital Microwave Corporation:
We have audited the accompanying consolidated balance sheets of Digital
Microwave Corporation (a Delaware Corporation) and subsidiaries as of March 31,
1998 and 1997, and the related Consolidated Statements of Operations,
Stockholders' Equity and Cash Flows for each of the three years in the period
ended March 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Jose, California
April 21, 1998
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
---------------------- --------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1998 1997 1998
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 25,130 $ 40,374 $ 14,764
Short-term investments 15,220 17,947 6,637
Accounts receivable, net of
allowance of $3,795 in
1998 and $3,362 in 1997 74,897 57,873 60,303
Inventories 60,981 51,469 65,981
Deferred tax asset 6,685 361 6,321
Other current assets 8,896 5,232 8,819
-------- -------- --------
Total current assets 191,809 173,256 162,825
-------- -------- --------
PROPERTY AND EQUIPMENT:
Machinery and equipment 56,308 41,921 56,762
Land and buildings 4,125 1,575 5,726
Furniture and fixtures 8,749 7,341 9,273
Leasehold improvements 3,332 2,120 3,776
-------- -------- --------
72,514 52,957 75,537
Accumulated depreciation and
amortization (39,986) (33,757) (42,631)
-------- -------- --------
Net property and equipment 32,528 19,200 32,906
Other assets 16,063 743 15,352
-------- -------- --------
$240,400 $193,199 $211,083
-------- -------- --------
-------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit $ $ 6,601 $ --
Current maturities of capital lease
obligations 238 681 128
Accounts payable 33,793 29,824 27,002
Income taxes payable 1,298 2,440 736
Accrued liabilities 26,373 28,188 20,542
-------- -------- --------
Total current liabilities 61,702 67,734 48,408
LONG-TERM LIABILITIES:
Capital lease obligations, net of
current maturities 204 158 185
-------- -------- --------
Total liabilities 61,906 67,892 48,593
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value;
5,000,000 shares authorized; none
outstanding -- -- --
Common stock, $.01 par value;
95,000,000 shares authorized;
46,663,581 shares in 1998 and
37,021,138 shares in 1997 issued
and outstanding 466 370 467
Additional paid-in capital 158,707 123,899 158,879
Unrealized holding loss on
available-for-sale securities (17) (63) (18)
Retained earnings 20,936 1,058 6,973
Cumulative translation adjustment (1,598) 43 (3,811)
-------- -------- --------
Total stockholders' equity 178,494 125,307 162,490
-------- -------- --------
$240,400 $193,199 $211,083
-------- -------- --------
-------- -------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended March 31, Three Months Ended June 30,
1998 1997 1996 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Sales $310,490 $211,337 $172,418 $ 53,003 $ 64,558
Cost of sales 197,048 137,261 133,612 41,660 41,346
-------- -------- -------- -------- --------
Gross profit 113,442 74,076 38,806 11,343 23,212
-------- -------- -------- -------- --------
Operating Expenses:
Research and development 19,879 13,225 12,885 4,975 4,299
Selling, general and
administrative 58,053 43,513 31,707 13,996 12,907
Merger and restructuring 14,602 -- 7,212 --
-------- -------- -------- -------- --------
Total operating expenses 92,534 56,738 44,592 26,183 17,206
-------- -------- -------- -------- --------
Income (loss) From Operations 20,908 17,338 (5,786) (14,840) 6,006
Other Income (expense):
Interest income 2,486 371 538 424 629
Interest expense (310) (1,333) (1,968) (27) (203)
Other income, net 652 49 1,569 508 60
-------- -------- -------- -------- --------
Total other income (expense) 2,828 (913) 139 905 486
-------- -------- -------- -------- --------
Income (loss) before provision
(credit) for income taxes 23,736 16,425 (5,647) (13,935) 6,492
Provision (credit) for income
taxes 3,858 2,635 (1,175) 27 682
-------- -------- -------- -------- --------
Net Income (Loss) $ 19,878 $ 13,790 $ (4,472) $(13,962) $ 5,810
-------- -------- -------- -------- --------
Basic Earnings (Loss) Per Share $ 0.44 $ 0.36 $ (0.12) $ (0.30) $ 0.14
Diluted Earnings (Loss) Per Share $ 0.42 $ 0.35 $ (0.12) $ (0.30) $ 0.13
Basic weighted average shares 45,361 38,611 37,944 46,682 42,763
outstanding
Dilutive stock options 1,968 1,276 -- -- 1,992
-------- -------- -------- -------- --------
Diluted weighted average shares
outstanding 47,329 39,887 37,944 46,682 44,755
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Unrealized Retained Cumulative Total
Years Ended March 31, 1998, ------------------------ Paid-In Holding Earnings Translation Stockholders'
1997, and 1996 Shares Amount Capital Loss (Deficit) Adjustment Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1995 26,935,386 $ 269 $46,101 $ -- $ (8,260) $ -- $ 38,110
Sale of stock to private
investors 4,127,964 41 19,051 -- -- -- 19,092
Stock options exercised 578,216 6 2,096 -- -- -- 2,102
Tax benefits related to
employee stock
transactions -- 55 -- -- -- 55
Net loss -- -- -- -- (4,472) -- (4,472)
---------- ----- -------- ----- -------- ------- --------
BALANCE, MARCH 31, 1996 31,641,566 316 67,303 -- (12,732) -- 54,887
Sale of stock in secondary
offering 4,400,000 44 51,546 -- -- -- 51,590
Stock options exercised 979,572 10 4,765 -- -- -- 4,775
Tax benefit related to employee
stock transactions -- -- 285 -- -- -- 285
Unrealized holding loss on
available-for-sale securities -- -- -- (63) -- -- (63)
Net income -- -- -- -- 13,790 -- 13,790
Translation adjustment -- -- -- -- 43 43
---------- ----- -------- ----- -------- ------- --------
BALANCE, MARCH 31, 1997 37,021,138 370 123,899 (63) 1,058 43 $125,307
Proceeds from sale of stock 8,327,894 83 24,786 -- -- -- 24,869
Stock options exercised 1,314,549 13 7,830 -- -- -- 7,843
Tax benefit related to employee
stock transactions -- -- 2,192 -- -- -- 2,192
Unrealized holding gain on
available-for-sale securities -- -- -- 46 -- 46
Net income -- -- -- -- 19,878 -- 19,878
Translation adjustment -- -- -- -- -- (1,641) (1,641)
---------- ----- -------- ----- -------- ------- --------
BALANCE, MARCH 31, 1998 46,663,581 $ 466 $158,707 $ (17) $ 20,936 $(1,598) $178,494
---------- ----- -------- ----- -------- ------- --------
---------- ----- -------- ----- -------- ------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
Year Ended March 31, June 30,
------------------------------------ --------------------------
1998 1997 1996 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 19,878 $ 13,790 $ (4,472) $(13,962) $ 5,810
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 10,887 6,717 6,735 3,289 2,203
Provision for uncollectable accounts 356 1,400 580 1,838 402
Provision for inventory reserves 12,862 4,271 8,795 3,071 481
Provision for warranty reserves 5,310 2,385 1,678 1,975 606
Tax benefit of disqualifying dispositions 2,192 285 -- --
Changes in assets and liabilities:
(Increase) in accounts receivable (18,320) (19,818) (3,464) 12,617 (2,921)
(Increase) in inventories (23,510) (17,147) (128) (9,404) (5,323)
(Increase) in deferred taxes (6,496) (193) (351) 238 (777)
Decrease in tax refund receivable -- 1,820 --
(Increase) decrease in other current assets (3,444) (548) 1,441 (1,310) (80)
Increase (decrease) in accounts payable 5,556 8,272 (2,580) (6,297) 848
Increase (decrease) in income tax payable (1,065) 1,072 (96) (565) 816
Increase (decrease) in other accrued liabilities (5,810) 4,594 523 (7,264) (10,131)
-------- -------- -------- -------- --------
Net cash provided by (used for) operating
activities (1,604) 5,080 10,481 (15,774) (8,066)
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities (8,671) (17,947) -- (6,132) (991)
Maturity/sale of available for-sale securities 11,327 -- -- 15,086 3,823
Purchase of property and equipment (22,576) (9,255) (4,922) (5,883) (3,523)
Acquisition of business, net of cash received (11,491) (374) -- -- (11,883)
Proceeds from sale of investments -- -- 461 --
Investment in Granger Associates, Ltd. (4,000) -- -- -- (4,000)
Proceeds from disposal of fixed assets -- 61 -- -- --
-------- -------- -------- -------- --------
Net cash used for investing activities (35,411) (27,515) (4,922) 3,071 (16,574)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from banks -- 20,245 16,188 --
Repayments to banks (6,159) (21,561) (29,682) -- (6,849)
Exchange gains (losses) from currency hedging 1,070 (10) 637 -- --
Payment of assumed Granger, Inc. debt (3,286) -- (3,286)
Payments of capital lease obligations (1,056) (1,025) (1,119) (130) (247)
Sale of common stock 32,712 55,329 15,812 171 26,009
-------- -------- -------- -------- --------
Net cash provided by (used for) financing
activities 23,281 52,978 1,836 41 15,627
-------- -------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,510) 72 559 2,296 364
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (15,244) 30,471 6,836 (10,366) (8,649)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 40,374 9,903 3,067 25,130 39,908
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 25,130 $ 40,374 $ 9,903 $ 14,764 $ 31,259
-------- -------- -------- -------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
F-6
<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, the Company'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 95,000 radios, which operate in nearly every kind of
environment around the world. The Company 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. Prior year information has been restated to reflect the
merger with MAS Technology Limited ("MAS Technology"), a New Zealand
company which designs, manufactures, markets and supports digital
microwave radio links for the worldwide telecommunications market.
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, the 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 following is a summary of cash and cash equivalents as of
March 31:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Cash and money market funds $25,130 $16,583
U.S. Treasuries and government agencies -- 4,844
Commercial paper -- 18,947
------- -------
Total $25,130 $40,374
------- -------
------- -------
</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,
1998, the Company's available-for-sale securities had contractual
maturities ranging from 1 month to 19 months, with a weighted average
maturity of 5 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 $17,000 and $63,000 were recorded as of March 31, 1998
and 1997, respectively. There were realized gains of approximately
$6,000 on the sale of securities during Fiscal 1998, and no realized
gains or losses on sales of securities during Fiscal 1997 and Fiscal
1996.
F-7
<PAGE>
The following is a summary of short-term investments as of March 31:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------
Market
Value at Unrealized
Cost at Balance Sheet Holding
Each Issue Date Gain (Loss)
------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Corporate notes 13,737 13,720 (17)
Municipal notes 500 500 0
Auction rate preferred notes $ 1,000 $ 1,000 $ 0
------- ------- ------
Total $15,237 $15,220 $ (17)
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------
Market
Value at Unrealized
Cost at Balance Sheet Holding
Each Issue Date Gain (Loss)
-------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Corporate notes 15,010 14,947 (63)
Auction rate preferred notes $ 3,000 $ 3,000 $ 0
------- ------- ------
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, 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest $ 310 $ 1,324 $ 1,864
Income taxes $ 8,885 $ 1,754 $ 813
------- -------
</TABLE>
The following non-cash transactions occurred during the fiscal years
ended:
<TABLE>
<CAPTION>
March 31, 1998 1997 1996
-------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax benefit related to employee stock
transactions $ 2,192 $ 285 $ 55
Property purchased under capital leases -- -- $ 1,324
Reduction of accounts payable to vendor in
connection with the sale of stock -- -- $ 5,000
------- ------- --------
</TABLE>
F-8
<PAGE>
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, 1998 1997
------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials $23,524 $20,132
Work-in-process 18,545 16,753
Finished goods 18,912 14,584
------- -------
$60,981 $51,469
------- -------
------- -------
</TABLE>
Inventories contained components and assemblies in excess of the
Company's current estimated requirements and were, therefore, reserved
at March 31, 1998 and 1997. In Fiscal 1998, the Company charged
$7.1 million to cost of sales due to ongoing inventory valuation
analysis and approximately $5.8 million to restructuring costs for
excess and obsolete inventories as a result of product transitions.
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
$1,303,000 and $2,691,000 for Fiscal 1998 and 1997, respectively.
Accumulated amortization on leased assets was $594,000 and $1,016,000
as of March 31, 1998 and 1997, respectively.
OTHER ASSETS. Other assets include goodwill and other intangible
assets which are being amortized on a straight line basis over their
useful lives ranging from five to ten years, as well as minority
investments accounted for using the cost method of accounting.
Goodwill is the excess of the purchase price over the fair value of
net assets acquired. At March 31, 1998 and 1997, goodwill amounted to
$12,574,000 and $767,000, respectively, gross of accumulated
amortization. Accumulated amortization of goodwill amounted to
$1,215,000 and $25,000 at March 31, 1998 and 1997, respectively.
Effective April 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of
long-lived Assets and for Long-Lived Assets to be Disposed of", which
did not have a material effect on the Company's financial condition or
results of operation.
ACCRUED LIABILITIES. Accrued liabilities included the following:
<TABLE>
<CAPTION>
March 31, 1998 1997
----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Customer deposits $ 3,387 $ 9,954
Accrued contract obligations (See Note 7) 1,038 1,632
Accrued payroll and benefits 5,079 4,810
Accrued commissions 6,162 4,131
Accrued warranty 3,097 2,923
Accrued restructuring 4,520 --
Accrued professional fees 1,108 1,982
Other 1,982 2,756
------- -------
$26,373 $28,188
------- -------
------- -------
</TABLE>
FOREIGN CURRENCY TRANSLATION. The functional currency of the
Company's subsidiaries located in the United Kingdom and Latin America
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. The Company's other
international subsidiaries use their local currency as their
functional currency. Assets and liabilities of these subsidiaries are
translated at the exchange rates in effect at the balance sheet date,
and income
F-9
<PAGE>
and expense accounts are translated at the average exchange rates
during the year. The resulting translation adjustments are recorded
directly to a separate component of stockholders' equity.
Gains and losses resulting from foreign exchange transactions are
included in other income (expense) in the accompanying Consolidated
Statements of Operations. The net foreign exchange gain was
$1,070,000 in Fiscal 1998, a loss of $10,000 in Fiscal 1997, and a
$637,000 gain in Fiscal 1996.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. The Company hedges certain
portions of its exposure to foreign currency fluctuations through the
use of forward foreign exchange contracts. The Company enters into
foreign exchange contracts for purposes other than trading, but not to
engage in any foreign currency speculation. Forward foreign exchange
contracts represent agreements to buy or sell a specified amount of
foreign currency at a specified price in the future. These contracts
generally have maturities that do not exceed one month. At March 31,
1998, the Company had forward foreign exchange contracts to exchange
various foreign currencies for U.S. dollars in the aggregate amount of
$36.9 million. Gains and losses associated with currency rate changes
on forward foreign exchange contracts are recorded currently in income
as they offset corresponding gains and losses on the foreign
currency-denominated assets and liabilities being hedged. Therefore,
the carrying value of forward foreign exchange contracts approximates
their fair value. The Company believes that the credit risk with
respect to its forward foreign exchange contracts is minimal because
the Company's enters into contracts with very large financial
institutions. Market risk with respect to forward foreign exchange
contracts is offset by the corresponding exposure related to the
underlying assets and liabilities.
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 with 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. The Company actively markets and sells products in North
America, Europe, the Far East, the Pacific, Africa, the Middle East,
and Central 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. Stockholders approved a two-for-one
stock split paid in the form of a stock dividend in November 1997.
Accordingly, all share and earnings per share data for all periods
presented have been adjusted to reflect the stock split.
In February 1997, the Financial Accounting Standards Board (the
"FASB") issued Statement on Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share," which became effective on December
15, 1997. As a result, the Company's reported earnings per share,
after adjustment for the November 1997 stock split, for the prior two
years were restated. Under the new requirements, primary earnings per
share have been replaced with basic earnings per share, and fully
diluted earnings per share have been replaced with diluted earnings
per share.
Under SFAS 128, basic earnings per share are computed by dividing net
income by the weighted average number of common shares outstanding
during the period. Diluted earnings per share are computed by
dividing net income by the weighted average number of common shares
and dilutive stock options 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 anti-dilutive.
As of March 31, 1998 and 1997, there were 151,000 and 429,000 weighted
average options outstanding, respectively, to purchase shares of
Common Stock that were not included in the computation of diluted
earnings per share as the options' exercise prices were greater than
the average market price of the shares of Common Stock for the
respective years. Additionally, as of March 31, 1996, there were
1,588,000 weighted average
F-10
<PAGE>
options outstanding to purchase shares of Common Stock that were not
included in the computation of diluted earnings per share because they
were anti-dilutive as a result of the net loss incurred in Fiscal
1996.
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 the Notes to Consolidated Financial Statements contains a summary
of the pro forma effects on reported net income and earnings per share
for Fiscal 1998, 1997 and 1996 based on the fair market value of the
options granted at the grant date as prescribed by SFAS 123.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the FASB issued
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," which establishes standards for the reporting
and display of comprehensive income and its components in general
purpose financial statements. Also, in June 1997, the FASB issued
Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures
About Segments of an Enterprise and Related Information," which
establishes annual and interim reporting standards for business
segments of a company and related disclosures. Both SFAS No. 130 and
SFAS No. 131 are effective for companies with fiscal years beginning
after December 15, 1997. The Company believes that the adoption of
these new pronouncements will not have a material effect on the
Company's financial statements.
NOTE 3. CREDIT ARRANGEMENTS
At March 31, 1998, the Company had an unsecured $20 million credit
facility with a major U.S. bank that expires on June 30, 1998. The
facility provides borrowings at either (a) the greater of the bank's
prime reference rate or the federal funds rate plus 0.5% per annum
(8.50% at March 31, 1998) or (b) the applicable London Interbank
Offering Rate plus 1% per annum. At March 31, 1998, there were no
borrowings outstanding under this credit facility, and $19.6 million
of credit was available net of outstanding letters of credit. The
credit facility agreement requires the Company to maintain certain
financial covenants, including various liquidity and debt ratios,
minimum tangible net worth and profitability requirements. The
Company is currently negotiating an increase in and extension of this
credit facility.
On June 30, 1997, the Company repaid in full all of the outstanding
borrowings under a $25 million credit facility with a U.S. bank and a
credit company, which credit facility expired on that date. In April
1997, the Company had exercised its option to terminate the facility
as of June 30, 1997 and notified the lenders of its intent. The
facility was secured by certain assets of the Company and had required
minimum borrowings of $2 million.
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, 1998, future minimum payment obligations under
these leases were as follows:
F-11
<PAGE>
<TABLE>
<CAPTION>
Years Ending March 31, Capital Operating
---------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
1999 $ 265 $ 3,837
2000 103 3,466
2001 82 3,192
2002 30 1,886
2003 11 125
2004 and beyond - 1,626
----- -------
Future minimum lease payments 491 $14,132
-------
-------
Less amount representing interest (9% to 12%) (49)
-----
Present value of future minimum lease
payments 442
Less current maturities (238)
-----
Long-term lease obligations $ 204
-----
-----
</TABLE>
Rent expense under operating leases was approximately $5,540,000,
$3,628,000 and $3,736,000 for the years ended March 31, 1998, 1997 and
1996, respectively.
LEGAL CONTINGENCIES. The Company is a party to various legal
proceedings which arise in the normal course of business. In the
opinion of management, the ultimate disposition of these proceedings
will not have a material adverse effect on the consolidated financial
position, liquidity or results of operations of the Company.
CONTINGENCIES IN MANUFACTURING AND SUPPLIERS. The Company's
manufacturing operations are highly dependent upon the timely delivery
of materials and components by outside suppliers. 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. The Company does not generally enter into
long-term or volume purchase agreements with any of its 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 component delays or other supply
problems in the future.
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, 1998 1997 1996
-------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic $20,922 $11,962 $(9,845)
Foreign 2,814 4,463 4,198
------- ------- -------
$23,736 $16,425 $(5,647)
------- ------- -------
------- ------- -------
</TABLE>
F-12
<PAGE>
The provision (credit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
Years Ended March 31, 1998 1997 1996
-----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $6,770 $1,118 $(2,018)
State 365 44 --
Foreign 3,047 1,473 843
------- ------- -------
Total current $10,182 $ 2,635 $(1,175)
Deferred: (6,324) -- --
------- ------- -------
$ 3,858 $ 2,635 $(1,175)
------- ------- -------
------- ------- -------
</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, 1998 1997 1996
--------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected tax provision (credit) $ 8,191 $ 5,749 $(1,920)
State taxes net of Federal benefit 565 367 (343)
Change in valuation allowance (4,956) (3,079) 3,346
Non-deductible acquisition costs 2,704 -- --
Reversal of previously provided
taxes upon settlement of the
IRS audit -- -- (2,018)
FSC commission (1,657) (581) --
Other (989) 179 2,110
------- ------- -------
$ 3,858 $ 2,635 $ 1,175
------- ------- -------
------- ------- -------
</TABLE>
The major components of the net deferred tax asset consisted of the
following:
<TABLE>
<CAPTION>
Years Ended March 31, 1998 1997
--------------------------- -------- --------
(IN THOUSANDS)
<S> <C> <C>
Inventory reserves $ 9,461 $ 4,583
Warranty reserves 1,154 1,023
Bad debt reserves 1,408 696
Accrued commissions 1,163 893
Net operating loss carry-forwards 651 2,942
Tax credits 901 5,084
Other 2,806 955
-------- --------
17,544 16,176
Less: Valuation reserve - Operations (10,859) (15,815)
Net deferred tax asset 6,685 361
-------- --------
-------- --------
</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 fully realize these benefits and, accordingly,
has continued to provide a valuation allowance for them. Net
operating loss carry-forwards are all foreign losses that total
$1,925,000 and carry forward indefinitely. Tax credits are all state
credits that total $1,390,000 and carry forward indefinitely.
NOTE 6: COMMON STOCK
The Company's stockholders approved a two-for-one stock split paid in
the form of a stock dividend in November 1997, and in March 1998, the
stockholders approved an increase in the total number of authorized
shares of Common Stock from 60,000,000 shares to 95,000,000 shares.
F-13
<PAGE>
STOCK OPTION PLANS. The Company's 1984 Stock Option Plan (the "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, 1998, the options to purchase 303,410 shares of
Common Stock were outstanding under the 1984 Plan, of which 183,970
shares were exercisable at prices ranging from $2.63 to $12.44 per
share. Upon the adoption of the Company's 1994 Stock Incentive Plan
("the 1994 Plan"), the Company terminated future grants under the 1984
Plan.
In July 1994, the stockholders approved 2,366,660 shares of Common
Stock to be reserved for issuance under the 1994 Plan over a ten-year
term, as adjusted for a two-for-one stock split in November 1997. In
August 1996, the stockholders approved the reservation for issuance of
2,000,000 additional shares of Common Stock under the 1994 Plan, as
adjusted for the two-for-one stock split. In March 1998, the
stockholders approved the reservation for issuance of 2,500,000
additional shares of Common Stock under the 1994 Plan. The terms of
the 1994 Plan also provide 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 is such annual increase to exceed 300,000 shares. The
total number of shares of Common Stock reserved for issuance under the
1994 Plan is 7,166,660. At March 31, 1998, the options to purchase
3,538,866 shares were outstanding, of which 884,613 were exercisable
at prices ranging from $4.00 to $23.31 per share. At March 31, 1998,
the number of shares available for future grants was 2,830,535.
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 (the "1996 Plan"). The 1996 Plan authorizes
1,000,000 shares of Common Stock to be reserved for issuance to
non-officer key employees as an incentive to continue in the service
of the Company, as adjusted for the two-for-one stock split. The 1996
Plan will terminate on the date on which all shares available have
been issued. At March 31, 1998, 868,810 shares were outstanding, of
which 63,600 were exercisable, at prices ranging from $4.13 to $13.19,
and 37,010 shares were available for future grants.
On November 11, 1997, the Company adopted the 1998 Non-Officer
Employee Stock Option Plan (the "1998 Plan") which became effective on
January 2, 1998. The 1998 Plan authorizes 500,000 shares of Common
Stock to be reserved for issuance to non-officer key employees as an
incentive to continue in the service of the Company. The 1998 Plan
will terminate on the date on which all shares available have been
issued. At March 31, 1998, there were no shares outstanding, and
500,000 were available for future grants.
In connection with the Company's merger with MAS Technology (see Note
9), the Company assumed the MAS Technology 1997 Stock Option Plan (the
"1997 MAS Plan") under the same terms and conditions as were
applicable under the 1997 MAS Plan prior to the merger. Each
outstanding option to purchase MAS ordinary shares, whether vested or
unvested, was assumed and converted into an option to receive 1.20
shares of the Company's Common Stock. The 1997 MAS Plan provided for
the grant of stock options to employees and certain independent
contractors of MAS. Options granted under the 1997 MAS Plan vest from
one to three years from the date of grant. Additionally, options
granted under the 1997 MAS Plan automatically vest upon the
involuntary termination of the employment of an option holder within
18 months of the change in ownership of the Company. At March 31,
1998, options to purchase 496,560 shares of Common Stock were
outstanding under the 1997 MAS Plan, of which 70,800 were exercisable
at exercise prices ranging from $11.67 to $17.92 per share. The 1997
MAS Plan has been terminated as to future grants.
At March 31, 1998, the Company had reserved 8,575,191 shares for
future issuance under the 1984, 1994, 1996 and 1998 Plans, as well as
the 1997 MAS Plan.
F-14
<PAGE>
The following table summarizes the Company's stock option activity
under all of its Plans:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------------------
Wdg Avg Ex Wdg Avg Ex Option Price
Fiscal Years Ended March 31, Shares Price* Shares Price* Shares Per Share
---------------------------------------------------------------------------------------------------------------------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 4,621 $ 7.13 3,620 $5.75 2,927 $5.24
Granted 2,282 14.63 2,235 8.19 1,795 6.15
Exercised (1,315) 5.97 (919) 4.36 (541) 3.22
Expired or canceled (380) 7.92 (315) 6.47 (561) 6.88
Options outstanding at end
of year 5,208 $10.79 4,621 $7.13 3,620 $5.75
Exercisable at end of year 1,203 1,383 1,208
Weighted average fair
value of options granted $ 7.62 $ 4.51 $ 2.94
------- ------ ------
</TABLE>
*WEIGHTED AVERAGE EXERCISE PRICE
The following summarizes the stock options outstanding at March 31,
1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Actual Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices 3/31/98 Life Price 3/31/98 Price
-----------------------------------------------------------------------------------------------------------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$ 2.625 - 7.813 1,720 7.25 $ 5.98 760 $ 5.80
$ 7.875 - 11.875 1,523 9.03 10.52 301 10.55
$12.438 - 23.313 1,965 9.31 15.22 142 17.02
----------------
$ 2.625 - 23.313 5,208 8.55 $10.79 1,203 $ 7.57
----------------
</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 1998 and 1997 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.
F-15
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income (loss)-as reported $ 19,878 $ 13,790 $ (4,472)
Net income (loss)-pro forma $ 10,806 $ 9,927 $( 6,799)
Basic net income (loss) per share-
as reported $ 0.44 $ 0.36 $ (0.12)
Basic net income (loss) per share-
pro forma $ 0.24 $ 0.25 $ (0.18)
Diluted net income per share -
as reported $ 0.42 $ 0.35 $ (0.12)
Diluted net income per share -
pro forma $ 0.25 $ 0.24 $ (0.18)
---------------------------------------------------------------------
</TABLE>
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>
<CAPTION>
1998 1997 and 1996
----------------------------------------------------------------------
<S> <C> <C>
Expected dividend yield 0.0% 0.0%
Expected stock volatility 74.7% 74.3%
Risk-free interest rate 5.5% - 6.4% 5.3% - 7.1%
Expected life of options from
vest date 0.8 years 0.7 years
Forfeiture rate actual actual
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN. In August 1996, the Company adopted an
Employee Stock Purchase Plan (the "Purchase Plan") and reserved
600,000 shares of Common Stock for issuance under the Purchase Plan,
as adjusted for a two-for-one stock split in November 1997.
Employees, subject to certain restrictions, may purchase Common Stock
under the Purchase 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 terms of the Purchase Plan. The
Company sold 166,597 and 60,626 shares under the Purchase Plan in
Fiscal 1998 and Fiscal 1997, respectively. At March 31, 1998, 372,777
shares remained available for future issuance under the Purchase Plan.
STOCKHOLDERS' RIGHTS AGREEMENT. In October 1991, the Company adopted
a Stockholders' Rights Agreement pursuant to which one Preferred Share
Purchase Right (a "Right") was distributed for each outstanding share
of Common Stock. Each Right, as adjusted to give effect to a stock
dividend, which effected a two-for-one stock split in November 1997,
entitles stockholders to buy one two-hundredth of a share of Series A
Junior Participating Preferred Stock at an exercise price of $50.00
upon certain events. The Rights expire on October 23, 2001, unless
earlier redeemed by the Company.
The Rights become exercisable if a person acquires 15% or more of the
Company's Common Stock or announces a tender offer that would result
in such person owning 15% or more of the Company's Common Stock, other
than a person who has reported or is required to report beneficial
ownership of the Company's Common Stock on Schedule 13G under the
Securities Exchange Act of 1934, as amended, with respect to whom the
threshold is 20%. If the Rights become exercisable, the holder of
each Right (other than the person whose acquisition triggered the
exercisability of the Rights) will be entitled to purchase, at the
Right's then-current exercise price, a number of shares of the
Company's Common Stock having a market value of twice the exercise
price. In addition, if the Company were to be acquired in a merger or
business combination after the Rights became exercisable, each Right
will entitle its holder to purchase, at the Right's then-current
exercise price, stock of the acquiring company having a market value
of twice the exercise price. The Rights, as adjusted to give effect
to a stock dividend, which effected a two-for-one stock split, in
November 1997, are redeemable by the Company at a price of $0.005 per
Right at any time within ten days after a person has acquired 15% (or
20% in the case of a Schedule G filer) or more of the Company's Common
Stock.
F-16
<PAGE>
NOTE 7. CUSTOMER AGREEMENT
In November 1993, the Company entered into an agreement with Siemens
AG to supply SPECTRUM II digital microwave radios to E-Plus Mobilfunk
GmbH. As of March 31, 1995, the Company had not met its product
acceptance or delivery schedule, and, as a result, recorded
significant reserves for product discounts on interim equipment,
equipment returns and other related costs. 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 5%, 12% and 19% of net sales
for Fiscal 1998, 1997 and 1996, respectively. No other customers
accounted for more than 10% of net sales during Fiscal 1998, 1997, or
1996.
Geographic information for Fiscal 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
United States United Kingdom New Zealand Others Eliminations Total
- -----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1998
SALES TO UNAFFILIATED CUSTOMERS $187,832 $58,961 $ 50,256 $13,441 -- $310,490
INTERCOMPANY SALES 54,135 -- -- $ (54,135) --
-------- ------- --------- ------- --------- --------
NET SALES $241,967 $58,961 $ 50,256 $13,441 $ (54,135) $310,490
-------- ------- --------- ------- --------- --------
OPERATING INCOME (loss) $ 22,775 $ 1,444 $ (1,912) $ 235 $ (1,634) $ 20,908
-------- ------- --------- ------- --------- --------
IDENTIFIABLE ASSETS $168,016 $24,033 $ 44,693 $10,174 $ (6,516) $240,400
-------- ------- --------- ------- --------- --------
1997
Sales to unaffiliated customers $147,575 $22,416 $ 35,300 $ 6,046 -- $211,337
Intercompany sales 24,540 -- -- -- $ (24,540)
-------- ------- --------- ------- --------- --------
Net sales $172,115 $22,416 $ 35,300 $ 6,046 $ (24,540) $211,337
-------- ------- --------- ------- --------- --------
Operating income (loss) $ 12,533 $ 2,893 $ 3,520 $ 141 $ (1,749) $ 17,338
-------- ------- --------- ------- --------- --------
Identifiable assets $155,341 $15,858 $ 23,850 $ 759 $ (2,609) $193,199
1996
Sales to unaffiliated customers $128,667 $13,935 $ 26,702 $ 3,114 -- $ 172,418
Intercompany sales 14,684 -- -- $ (14,684) --
-------- ------- --------- ------- --------- --------
Net sales $143,351 $13,935 $ 26,702 $ 3,114 $ (14,684) $ 172,418
-------- ------- --------- ------- --------- --------
Operating income $(10,138) $ 1,767 $ 2,237 $ 220 $ 128 $ (5,786)
-------- ------- --------- ------- --------- --------
Identifiable assets $ 92,760 $ 6,539 $ 11,527 $ 2,016 $ (5,992) $ 106,850
-------- ------- --------- ------- --------- --------
</TABLE>
Intercompany sales to the Company's foreign subsidiaries are
transacted at prices comparable to those offered to unaffiliated
customers, after taking into account the value added to products and
services by the subsidiaries.
F-17
<PAGE>
The following table represents export sales from the United States to
unaffiliated customers by geographic region:
<TABLE>
<CAPTION>
Years Ended March 31, 1998 1997 1996
- -------------------------------------------------------------------------------
(IN THOUSANDS
<S> <C> <C> <C>
Canada and South America $ 39,393 $28,718 $14,876
Europe 44,622 54,594 59,732
Asia/Pacific 86,750 53,431 35,867
-------- -------- --------
Total export sales $170,765 $136,743 $110,475
-------- -------- --------
-------- -------- --------
Export sales as a % of net sales 71% 80% 77%
</TABLE>
NOTE 9. MERGERS AND ACQUISITIONS
In May 1997, the Company acquired all of the outstanding shares of
Granger, Inc., a U.S. manufacturer of wireless products and provider
of installation services. The purchase price of Granger, Inc.,
including the assumption of debt and the purchase of certain product
rights, totaled $14.7 million. A portion of the purchase price was
allocated to the net assets acquired based on their estimated fair
values. The fair value of the tangible assets acquired and
liabilities assumed was $5.8 million and $1.9 million, respectively.
The purchase price in excess of the net assets acquired of
$10.8 million is recorded as goodwill on the balance sheet and is
being amortized over 10 years. The acquisition has been accounted for
using the purchase method of accounting. Accordingly, the
accompanying financial statements include the results of Granger, Inc.
since the date of acquisition. No pro forma financial statements for
the periods prior to the acquisition have been provided due to the
amounts being immaterial.
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 has been accounted for using the cost method
of accounting. Subsequent to March 31, 1998, the Company sold
approximately 10% of this investment for approximately $470,000, net
of selling costs.
In March 1998, stockholders approved the issuance of Common Stock of
the Company pursuant to an agreement to merge with MAS Technology
Limited ("MAS Technology"), a New Zealand company, which designs,
manufactures, markets and supports digital microwave radio links for
the worldwide telecommunications market. Under the terms of the
agreement, the Company exchanged 1.2 shares of its Common Stock for
each outstanding share of MAS Technology stock and stock options. The
Company issued approximately 8.2 million shares to MAS Technology
share and option holders. The combination is intended to qualify as a
tax-free reorganization accounted for as a pooling-of-interests
transaction. Accordingly, the historical financial statements of the
Company has been restated to reflect the results of MAS Technology for
all periods presented.
The following table shows the reconciliation of the historical results
of the Company to the results presented in the accompanying Statements
of Operations for Fiscal 1997 and Fiscal 1996.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1997 1996
---- ----
<S> <C> <C>
Revenue: Digital Microwave $178,344 $150,419
MAS Technology 35,300 26,702
Intercompany sales (2,307) (4,703)
-------- --------
Total $211,337 $172,418
-------- --------
Net Income: Digital Microwave $ 11,707 $ (5,955)
MAS Technology 2,165 1,483
Intercompany profit
eliminations (82) --
-------- --------
Total $ 13,790 $ (4,472)
-------- --------
</TABLE>
F-18
<PAGE>
Merger and restructuring expenses for Fiscal 1998 primarily included
payments to the Company's investment bankers of $3.4 million for
brokering the Company's merger with MAS Technology, legal and
accounting fees of $0.9 million, asset valuation reserves for
inventory, receivables and warranty totaling $7.1 million, as well as
various other costs of $3.2 million, which included office closures
and contract terminations. As of March 31, 1998, the remaining
restructuring reserve was comprised principally of $7.1 million for
asset valuation reserves, and $3.2 million for other restructuring
costs.
NOTE 10. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
On July 22, 1998, the Company entered into a Merger Agreement pursuant
to which the Company will acquire Innova Corporation ("Innova"), a
manufacturer of microwave radio equipment (the "Merger"). In the
Merger, each outstanding share of common stock of Innova shall be
converted into 1.05 shares of capital stock of the Company. The
Company will also assume all outstanding options, warrants and other
rights to acquire Innova capital stock. The Merger is subject to
approval by the stockholders of both companies and certain other
conditions, including the receipt of opinion that the Merger may be
accounted for as a pooling of interests.
If the Merger is accounted for under the pooling of interests method,
historical financial data in future reports will be restated to
include Innova data. The following unaudited pro forma summary
presents the combined condensed consolidated results of operations as
if the merger had been completed on April 1, 1995.
(unaudited pro forma)
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, THREE MONTHS ENDED JUNE 30,
-------------------- ---------------------------
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales............................... $ 345,116 $ 213,441 $ 174,380 $ 63,211 $ 69,468
Net income (loss)................... 18,818 6,461 (13,533) 15,481) 3,691
Basic earnings (loss) per share..... $ 0.37 $ 0.16 $ (0.35) $ (0.25) $ 0.08
Diluted earnings (loss) per share... $ 0.30 $ 0.13 $ (0.35) $ ( 0.25) $ 0.06
</TABLE>
The unaudited pro forma combined condensed consolidated statements of
income for the years ended March 31, 1996, 1997 and 1998 reflect the
combination of the financial statements of DMC for the years ended
March 31, 1996, 1997 and 1998 with the financial statements of Innova
for the year ended March 31, 1996, the nine months ended December 31,
1996 and the year ended December 31, 1997, respectively. The
unaudited pro forma combined statements of income for the three month
periods ended June 30, 1997 and 1998 reflect the combination of the
statements of income (loss) of DMC for the three month periods ended
June 30, 1997 and 1998 with the statements of income (loss) of Innova
for the three month periods ended March 31, 1997 and June 30, 1998,
respectively. As a result, the results of operations for Innova for
the three months ended March 31, 1998 are not included in any of the
periods presented in the unaudited pro forma combined financial
statements.
The Company and Innova estimate that they will incur direct
transaction costs of approximately $4,000,000 associated with the
Merger, consisting of transaction fees for investment bankers,
attorneys, accountants, financial printing and other related charges.
These nonrecurring transaction costs will be charged to operations
upon consummation of the Merger. It is expected that following the
Merger the combined companies will incur an additional significant
charge to operations, which is currently estimated to be in the range
of $30 million to $40 million, to reflect costs associated with
integrating the two companies. This charge and the direct transaction
costs have not been reflected in the pro forma financial data. There
can be no assurance that the combined company will not incur
additional charges to reflect costs associated with the Merger or that
management will be successful in its efforts to integrate the
operations of the two companies.
Pursuant to the Merger Agreement, it may be terminated by either party
under certain circumstances. The Company and Innova have each agreed
that if the Merger is not consummated as a result of certain specified
events, it will pay to the other party a termination fee of $
4,500,000.
If the Merger is not consummated, expenses incurred in connection with
the proposed Merger (including the possible "termination" fees
described above) could have a material adverse effect on the Company's
results of operations.
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Innova Corporation:
We have audited the accompanying consolidated balance sheets of Innova
Corporation and subsidiary as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the year ended March 31, 1996, the nine month fiscal period ended
December 31, 1996, and the year ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Innova
Corporation and subsidiary as of December 31, 1996 and 1997, and the results of
their operations and their cash flows for the year ended March 31, 1996, the
nine month fiscal period ended December 31, 1996 and the year ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Seattle, Washington
February 3, 1998
F-20
<PAGE>
INNOVA CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
ASSETS 1996 1997 1998
----------------- --------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 173 2,455 4,348
Short-term investment securities -- 19,319 6,221
Accounts receivable, net of allowance for doubtful
accounts of $15, $205 and $450 at December 31, 1996 and
1997, and June 30, 1998 (unaudited), respectively 1,740 11,164 13,448
Inventories 2,534 12,048 22,670
Other current assets 73 250 288
----------------- --------------- --------------
Total current assets 4,520 45,236 46,975
Equipment and leasehold improvements, at cost, net 2,647 11,134 16,657
Other assets 138 425 701
----------------- --------------- --------------
$ 7,305 56,795 64,333
----------------- --------------- --------------
----------------- --------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Deficit)
Current liabilities:
Notes payable $ 506 -- --
Current installments of obligations under capital leases 504 1,103 894
Notes payable to stockholders 1,500 -- --
Accounts payable 1,944 5,780 12,854
Accrued liabilities 356 837 1,207
----------------- --------------- --------------
Total current liabilities 4,810 7,720 14,955
Obligations under capital leases, excluding current
installments 542 970 611
Redeemable preferred stock, no par value. Authorized
11,874,998 shares at December 31, 1996, and 5,000,000
shares at December 31, 1997 and June 30, 1998 (unaudited),
issued and outstanding 7,216,751 shares at December 31, 1996
and 0 shares at December 31, 1997 and June 30, 1998 (unaudited)
[liquidation preference of $40,022 at December 31, 1996
and $0 at December 31, 1997 and June 30, 1998 (unaudited)
and redemption value of $36,474 at December 31, 1996
and $0 at December 31, 1997 and June 30, 1998 (unaudited)] 39,313 -- --
Stockholders' equity (deficit):
Common stock, no par value. Authorized 15,625,000 shares
at December 31, 1996 and 30,000,000 shares at
December 31, 1997 and June 30, 1998 (unaudited); issued
and outstanding 941,334 shares at December 31, 1996,
13,679,593 shares at December 31, 1997 and 14,005,877
shares at June 30, 1998 (unaudited) 1,377 86,621 86,801
Additional paid-in capital 1,605 3,262 3,262
Deferred stock compensation expense -- (397) (235)
Accumulated other comprehensive income 33 54 90
Accumulated deficit (40,375) (41,435) (41,151)
----------------- --------------- --------------
Total stockholders' equity (deficit) (37,360) 48,105 48,767
Commitments, contingencies and subsequent event
----------------- --------------- --------------
$ 7,305 56,795 64,333
----------------- --------------- --------------
----------------- --------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
INNOVA CORPORATION
AND SUBSIDIARY
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTH
FISCAL PERIOD SIX MONTHS ENDED
YEAR ENDED ENDED YEAR ENDED JUNE 30,
MARCH 31, DECEMBER 31, DECEMBER 31, ----------------------------
1996 1996 1997 1997 1998
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net product sales $ 445 2,050 36,100 12,582 24,957
Manufacturing contract service revenues 1,517 54 -- -- --
------------- ------------- ------------- ------------- -------------
Total revenues 1,962 2,104 36,100 12,582 24,957
------------- ------------- ------------- ------------- -------------
Cost of products sold 2,425 3,685 25,447 9,570 17,628
Manufacturing contract service expenses 1,517 54 -- -- --
------------- ------------- ------------- ------------- -------------
Total cost of products sold and manu-
facturing contract service expenses 3,942 3,739 25,447 9,570 17,628
------------- ------------- ------------- ------------- -------------
Gross profit (loss) (1,980) (1,635) 10,653 3,012 7,329
Operating expenses:
Selling, general and administrative 2,316 2,584 7,227 3,471 4,382
Research and development 4,520 2,967 4,602 2,216 3,012
------------- ------------- ------------- ------------- -------------
Total operating expenses 6,836 5,551 11,829 5,687 7,394
------------- ------------- ------------- ------------- -------------
Loss from operations (8,816) (7,186) (1,176) (2,675) (65)
Other income (expense):
Interest income 38 102 594 -- 401
Interest expense (287) (249) (546) (338) (202)
Other income 4 4 68 -- 10
------------- ------------- ------------- ------------- -------------
(245) (143) 116 (338) 209
------------- ------------- ------------- ------------- -------------
Net income (loss) before cumulative effect
of change in accounting principle (9,061) (7,329) (1,060) (3,013) 144
Cumulative effect of change in accounting principle -- -- -- -- 140
------------- ------------- ------------- ------------- -------------
Net income (loss) $ (9,061) (7,329) (1,060) (3,013) 284
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
$ (14.40) (8.27) (0.18) (3.17) 0.02
Basic and diluted net income (loss) per share
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Shares used in computing basic net income (loss)
per share 629 886 5,795 949 13,867
Shares used in computing diluted net income (loss)
per share 629 886 5,795 949 17,294
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
INNOVA CORPORATION
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Deficit)
(In thousands, except share data)
<TABLE>
<CAPTION>
DEFERRED
COMMON STOCK ADDITIONAL STOCK
--------------------------- PAID-IN COMPENSATION
DESCRIPTION SHARES AMOUNT CAPITAL EXPENSE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balances at March 31, 1995 523,810 $ 1,302 1,605 --
Sale of common stock for cash 340,467 8 -- --
Common stock issued upon exercise of stock options 18,565 20 -- --
Net loss -- -- -- --
Translation adjustment -- -- -- --
------------ ------------ ------------ ------------
Balances at March 31, 1996 882,842 1,330 1,605 --
Common stock issued upon exercise of stock options 10,684 12 -- --
Stock issued to vendors for services 47,808 35 -- --
Net loss -- -- -- --
Translation adjustment -- -- -- --
------------ ------------ ------------ ------------
Balances at December 31, 1996 941,334 1,377 1,605 --
Deferred compensation expense related to common
stock options -- -- 1,590 (1,590)
Amortization of deferred stock compensation -- -- -- 1,193
Estimated fair value of warrant issued in connection
with note payable -- -- 67 --
Common stock issued upon exercise of stock options 104,191 174 -- --
Common stock issued upon conversion of preferred stock 8,682,287 47,769 -- --
Common stock issued in connection with initial public
offering, net of issuance expenses of $3,811 3,162,500 37,301 -- --
Common stock issued upon exercise of warrants 789,281 -- -- --
Net loss -- -- -- --
Translation adjustment -- -- -- --
------------ ------------ ------------ ------------
Balances at December 31, 1997 13,679,593 86,621 3,262 (397)
Amortization of deferred stock compensation (unaudited) -- -- -- 162
Common stock issued upon exercise of stock options 129,917 177 -- --
(unaudited)
Common stock issued upon exercise of warrants (unaudited) 196,367 3 -- --
Net income (unaudited) -- -- -- --
Translation adjustment (unaudited) -- -- -- --
------------ ------------ ------------ ------------
Balances at June 30, 1998 (unaudited) 14,005,877 $ 86,801 3,262 (235)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
DESCRIPTION INCOME DEFICIT EQUITY (DEFICIT)
------------- ------------ ----------------
<S> <C> <C> <C>
Balances at March 31, 1995 25 (23,985) (21,053)
Sale of common stock for cash -- -- 8
Common stock issued upon exercise of stock options -- -- 20
Net loss -- (9,061) (9,061)
Translation adjustment 1 -- 1
------------- ------------ ----------------
Balances at March 31, 1996 26 (33,046) (30,085)
Common stock issued upon exercise of stock options -- -- 12
Stock issued to vendors for services -- -- 35
Net loss -- (7,329) (7,329)
Translation adjustment 7 -- 7
------------ ------------ ------------
Balances at December 31, 1996 33 (40,375) (37,360)
Deferred compensation expense related to common
stock options -- -- --
Amortization of deferred stock compensation -- -- 1,193
Estimated fair value of warrant issued in connection
with note payable -- -- 67
Common stock issued upon exercise of stock options -- -- 174
Common stock issued upon conversion of preferred stock -- -- 47,769
Common stock issued in connection with initial public -- --
offering, net of issuance expenses of $3,811 -- -- 37,301
Common stock issued upon exercise of warrants -- -- --
Net loss -- (1,060) (1,060)
Translation adjustment 21 -- 21
------------ ------------ ------------
Balances at December 31, 1997 54 (41,435) 48,105
Amortization of deferred stock compensation (unaudited) -- -- 162
Common stock issued upon exercise of stock options -- -- 177
(unaudited)
Common stock issued upon exercise of warrants (unaudited) -- -- 3
Net income (unaudited) -- 284 284
Translation adjustment (unaudited) 36 -- 36
------------ ------------ ------------
Balances at June 30, 1998 (unaudited) 90 (41,151) 48,767
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
INNOVA CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
NINE MONTH
FISCAL PERIOD SIX MONTHS ENDED
YEAR ENDED ENDED YEAR ENDED JUNE 30,
MARCH 31, DECEMBER 31, DECEMBER 31, ----------------------
1996 1996 1997 1997 1998
---------- ----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (9,061) (7,329) (1,060) (3,013) 284
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 759 634 1,331 493 1,423
Stock issued to vendors for services -- 49 -- -- --
Amortization of deferred stock compensation -- -- 1,193 966 162
Amortization of note payable discount -- -- 51 17 --
Change in certain assets and liabilities:
Decrease (increase) in accounts receivable 160 (1,662) (9,424) (3,377) (2,284)
Increase in inventories (22) (1,926) (9,514) (3,400) (10,622)
Decrease (increase) in other current assets 3 (17) (420) (113) (38)
Increase in accounts payable and accrued
liabilities 798 700 4,334 1,222 7,444
----------- ----------- ---------- ----------- ----------
Net cash used in operating activities (7,363) (9,551) (13,509) (7,205) (3,631)
----------- ----------- ---------- ----------- ----------
Cash flows from investing activities:
Purchase of short-term investment securities -- -- (19,319) -- 13,098
Purchase of equipment and leasehold improvements (549) (325) (7,896) (843) (6,946)
Increase in other assets (43) (25) (45) (35) (276)
----------- ----------- ---------- ----------- ----------
Net cash provided by (used in)
investing activities (592) (350) (27,260) (878) 5,876
----------- ----------- ---------- ----------- ----------
Cash flows from financing activities:
Repayments of obligations under capital leases (561) (404) (895) (417) (568)
Net proceeds from (repayments of) notes payable -- 506 (506) 5,163 --
Net proceeds from notes payable to vendor 1,000 -- -- -- --
Net repayment of notes payable to vendor (1,000) -- -- -- --
Proceeds from (repayments of) notes payable to
stockholders 70 (70) -- -- --
Net proceeds from issuance of convertible notes payable 3,702 4,782 -- -- --
Proceeds from sale of redeemable preferred stock 3,080 4,953 6,956 6,956 --
Proceeds from sale of common stock 8 -- 37,301 -- --
Proceeds from exercise of common stock options and warrants 20 12 174 21 180
----------- ----------- ---------- ----------- ----------
Net cash provided by (used in)
financing activities 6,319 9,779 43,030 11,723 (388)
----------- ----------- ---------- ----------- ----------
Effect of translation and exchange rate changes on cash
flows 1 8 21 21 36
----------- ----------- ---------- ----------- ----------
Net increase (decrease) in cash and cash
equivalents (1,635) (114) 2,282 3,661 1,893
Cash and cash equivalents at beginning of period 1,922 287 173 173 2,455
----------- ----------- ---------- ----------- ----------
Cash and cash equivalents at end of period $ 287 173 2,455 3,834 4,348
----------- ----------- ---------- ----------- ----------
----------- ----------- ---------- ----------- ----------
Supplemental disclosure of cash flow information -- cash
paid during the period for interest $ 17 364 546 312 202
----------- ----------- ---------- ----------- ----------
----------- ----------- ---------- ----------- ----------
Supplemental schedule of noncash financing activities:
Notes payable to stockholders converted into redeemable
preferred stock $ -- 6,984 1,500 1,500 --
Notes payable to stockholders converted into
mandatorily convertible notes payable 1,000 -- -- -- --
Estimated fair value of warrant issued in connection
with notes payable -- -- 67 67 --
Capital lease obligations incurred to acquire equipment 531 633 1,922 1,967 --
Conversion of redeemable preferred stock into common
stock -- -- 47,769 -- --
Stock subscriptions receivable 3,282 -- -- -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
INNOVA CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information as of June 30, 1998 and for the
six months ended June 30, 1997 and 1998 is unaudited)
(In thousands, except share and per share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
Innova Corporation (Company) was formed to develop, manufacture and
market communication systems utilizing conical horn technology. In
November 1993, the Company shipped the first production units of a
line of point-to-point radios. In November 1994, the Company
discontinued manufacture for its own account of the original radio
line; however, production of this product was continued under a
"Processor For Hire Agreement" for the account of one of Innova's
stockholders [see note 7(a), Related Party Transactions] until
approximately March 31, 1996. Also in 1994, a program to redesign the
original radios was launched. The redesign program was undertaken due
to changing market demands. For the period from January 17, 1989
(inception) through March 31, 1996, the Company was considered to be
in the development stage as the Company had not generated significant
revenues from its research and development efforts and "Processor For
Hire Agreement" and operations had been financed primarily through the
issuance of equity securities. Subsequent to March 31, 1996, the
Company effected a change in its year-end to December 31. During the
nine month fiscal period ended December 31, 1996, the Company began
manufacturing and selling redesigned radios and emerged from the
development stage.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the Company and its
wholly-owned subsidiary, Innova Europe Limited.
Innova Europe Limited was formed to sell products developed and
manufactured by the Company to customers in Europe. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(c) CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid debt securities with a
maturity of three months or less at date of purchase to be cash
equivalents.
The Company classifies its short-term investments as
available-for-sale. Accordingly, these investments are carried at
fair value. The fair value of such securities approximated cost, and
there were no unrealized holding gains or losses at December 31, 1996,
and 1997, and June 30, 1998. Realized gains and losses are determined
using the specific identification method. At December 31, 1997 and
June 30, 1998, all short-term investments consisted of U.S. government
agency securities with a maturity of less than one year.
(d) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value).
(e) DEPRECIATION AND AMORTIZATION
Depreciation of equipment and amortization of leasehold improvements
is provided on the straight-line method over the estimated useful
lives of the assets which range from two to five years, not to exceed
lease terms for leasehold improvements.
F-25
<PAGE>
(f) PATENTS
The Company has filed several patent applications in the United States
and other countries. Costs associated with filing patent applications
are capitalized and are amortized using the straight-line method over
the estimated economic lives of the patents ranging from two to five
years.
(g) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed,
requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility.
Based on the Company's product development process, software
development costs incurred by the Company between the establishment of
technological feasibility and the point at which the product is ready
for general release have not been significant.
(h) REVENUE RECOGNITION
The Company recognizes revenue on product sales upon shipment. Under
the Processor For Hire Agreement -- (PFHA) as discussed in note 7(a),
manufacturing contract service revenues were recognized as the
services were performed.
The Company provides warranties, which generally last for two years,
on the products that it sells. The provision for warranty expense is
based on historical industry and Company experience and is accrued
when products are sold.
(i) INCOME TAXES
Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax basis of assets
and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable
income. Valuation allowances are established for deferred tax assets
to the extent there is uncertainty regarding the Company's ability to
generate taxable income in the future and when it is more likely than
not that such deferred tax assets will not be realized. Income tax
expense is the tax payable or refundable for the period plus or minus
the change during the period in net deferred tax assets and
liabilities.
(j) FOREIGN CURRENCY TRANSLATION
The functional currency of Innova Europe Limited is the British Pound
Sterling. Assets and liabilities of Innova Europe Limited have been
translated to U.S. dollars using rates of exchange in effect at the
balance sheet date. Income and expense accounts have been translated
to U.S. dollars using average rates of exchange during the periods.
The net gain or loss resulting from translation is shown as
accumulated other comprehensive income in stockholders' equity.
(k) RECLASSIFICATIONS
Certain reclassifications have been made to the March 31 and December
31, 1996 amounts to conform to the December 31, 1997 and June 30, 1998
presentation.
F-26
<PAGE>
(l) CONCENTRATION OF CREDIT RISK AND SUPPLIER CONCENTRATION
The Company currently purchases an important component of its products
from two principal suppliers. Although there are a limited number of
potential manufacturers of such component, management believes that
other suppliers could provide similar components on comparable terms.
A change in suppliers, however, could cause a delay in manufacturing
and a possible loss of sales, which could have a material adverse
effect on the manufacturing and delivery of the Company's products.
Purchases from these principal suppliers were as follows:
<TABLE>
<CAPTION>
NINE MONTH
FISCAL PERIOD
ENDED YEAR ENDED
YEAR-ENDED DECEMBER DECEMBER SIX MONTHS ENDED JUNE 30,
MARCH 31, 31, 31,
1996 1996 1997 1997 1998
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Supplier $ 64 945 4,792 1,750 5,961
A
Supplier -- 131 2,628 854 2,335
B
</TABLE>
The Company also purchases other components of lesser significance
which are available from a limited number of manufacturers.
Credit is extended to customers based on an evaluation of their
financial condition and collateral is generally not required. The
Company's customers consist principally of telecommunications service
providers and system integrators. The Company maintains an allowance
for doubtful accounts to reduce the effects of credit losses. Through
June 30, 1998, actual credit losses have not been significant and,
therefore, a limited allowance for doubtful accounts has been
recorded. See major customers and segment information at note 13.
(m) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
April 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets held and
used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell. Adoption of this Statement did not have a material impact on
the consolidated financial statements.
(n) STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation arrangement in
accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense under fixed plans
would be recorded on the date of grant only
F-27
<PAGE>
if the fair value of the underlying stock at the date of grant
exceeded the exercise price. Statement of Financial Accounting
Standard (SFAS) No. 123, Accounting for Stock-Based Compensation,
requires entities that continue to apply the provisions of APB Opinion
No. 25 for transactions with employees to provide pro forma net income
and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied to these transactions.
(o) NET INCOME (LOSS) PER SHARE
The Financial Accounting Standards Board (FASB) recently issued SFAS
No. 128, Earnings Per Share. SFAS No. 128 requires the presentation of
basic earnings per share, and for companies with complex capital
structures, diluted earnings per share. Basic earnings per share is
computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed
using the weighted average number of common and dilutive common
equivalent shares outstanding during the period.
The Company has presented basic and diluted net loss per share in
accordance with SFAS No. 128. Since the Company had a net loss for
the year ended March 31, 1996, nine month fiscal period ended
December 31, 1996, year ended December 31, 1997 and for the six months
ended June 30, 1997, basic and diluted net loss per share is the same.
The following table reconciles the shares used to compute basic and
diluted net income per share for the six months ended June 30, 1998
(in thousands):
<TABLE>
<S> <C>
Shares used to compute basic net income per share 13,867
Impact of stock options and warrants 3,427
------------
Shares used to compute diluted net income per share 17,294
------------
------------
</TABLE>
Excluded from the computation of diluted earnings per share for the
year ended December 31, 1997 are options to acquire 1,759,368 shares
of Common Stock with a weighted-average exercise price of $3.60 and
warrants to acquire 2,151,760 shares of Common Stock with a weighted
average exercise price of $0.4328 because their effects would be
anti-dilutive. Also excluded from the computation of diluted earnings
per share for the year ended December 31, 1997 are the common
equivalent shares resulting from the assumed conversion of 8,682,287
shares of redeemable preferred stock because the effects were
antidilutive prior to the conversion of the preferred stock into
common stock upon the closing of the Company's initial public offering
on August 8, 1997. The accretion of the difference between the
carrying value of the redeemable preferred stock and the redemption
price has not been reflected in the net loss per share calculations
because the amounts were not significant for the year ended December
31, 1997.
Excluded from the computation of diluted earnings per share for the
six months ended June 30, 1998 are options to acquire 192,000 shares
of common stock because the options' exercise price was greater than
the average market price of the common shares.
(p) COMPREHENSIVE INCOME (LOSS)
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income (Statement 130). Statement 130 establishes standards for
reporting and disclosure of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. Statement 130, which is
effective for fiscal years beginning after December 15, 1997, requires
reclassification of financial statements for earlier periods to be
provided for comparative purposes. The Company has not determined the
manner in which it will present the information required by Statement
130 in its annual financial statements. The Company's total
comprehensive income (loss) for the year ended March 31, 1996, the
nine month fiscal period ended
F-28
<PAGE>
December 31, 1996, the year ended December 31, 1997 and the six months
ended June 30, 1997 and 1998 was $(9,060), $(7,322), $(1,039),
$(2,993) and $320, respectively. Comprehensive income (loss)
consisted of net income (loss) in foreign currency translation
adjustments.
(q) ACCOUNTING CHANGE
During the first quarter of 1998, the Company implemented a new
enterprise reporting software package, the "Oracle ERP Implementation"
which permits the capturing of detailed manufacturing costs. As a
result of being able to capture detailed manufacturing costs, the
Company changed its method of accounting for certain elements of cost
included in its inventories. Effective January 1, 1998, the Company
includes certain additional purchasing administrative costs as
elements of overhead cost included in its inventories and allocates
cost overhead pools to inventory based on cost of materials and direct
labor hours. Previously, certain purchasing administrative costs were
expensed as incurred and overhead was allocated to inventory solely
based on direct labor hours. The Company believes that the change in
accounting for its inventories is preferable in the circumstances
because it provides a better matching of the costs incurred to
manufacture the inventories with their related revenues.
The change in accounting is reported as the cumulative effect of a
change in accounting principle in the consolidated statement of
operations. The cumulative effect of the change in accounting
principle as of January 1, 1998 was to increase net income for the six
months ended June 30, 1998 by approximately $140 or $0.01 per basic
and diluted share. Had the new method of accounting for certain
elements of cost included in inventories been in effect for the year
ended December 31, 1997 net loss and net loss per basic and diluted
share would have been $(920) and $(0.16), respectively.
The effect of this change in accounting principle for the nine month
fiscal period ended December 31, 1996, and for the six months ended
June 30, 1997 was immaterial.
Net income before the change in accounting principle increased by $243
($0.02 per basic and diluted share) for the six months ended June 30,
1998 as a result of the change in accounting.
(r) NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments
of an Enterprise and Related Information (Statement 131). Statement
131 establishes standards for the way that public business enterprises
report information about operating segments. It also establishes
standards for related disclosures about products and services,
geographic areas and major customers. Statement 131 is effective for
fiscal years beginning after December 15, 1997. In the initial year
of application, comparative information for earlier years must be
restated. The Company has not determined the manner in which it will
present the information required by Statement 131.
(2) USE OF ESTIMATES
The preparation of consolidated 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 reporting period. Actual results could differ from
those estimates.
F-29
<PAGE>
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
---------------- --------------- ------------
<S> <C> <C> <C>
Raw materials $ 1,875 10,383 17,450
Work-in-progress 504 1,612 2,306
Finished goods 155 53 2,914
---------------- --------------- ------------
$ 2,534 12,048 22,670
---------------- --------------- ------------
---------------- --------------- ------------
</TABLE>
(4) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
---------------- --------------- ------------
<S> <C> <C> <C>
Equipment $ 5,152 14,616 21,160
Leasehold improvements 141 495 850
---------------- --------------- ------------
5,293 15,111 22,010
Less accumulated depreciation and
amortization 2,646 3,977 5,353
---------------- --------------- ------------
$ 2,647 11,134 16,657
---------------- --------------- ------------
---------------- --------------- ------------
</TABLE>
Included in equipment and leasehold improvements are the gross cost of
equipment and related accumulated amortization recorded under capital
leases as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
---------------- --------------- ------------
<S> <C> <C> <C>
Equipment $ 2,633 4,610 4,298
Less accumulated amortization 1,182 1,869 2,227
---------------- --------------- ------------
$ 1,451 2,741 2,071
---------------- --------------- ------------
---------------- --------------- ------------
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
(5) NOTES PAYABLE
In October 1996, the Company entered into a $5,000 revolving credit
agreement which bore interest at the LIBOR rate plus 4.875% with a minimum
of 8% per annum (10.545% at December 31, 1996). Amounts outstanding were
$506 at December 31, 1996, and $0 at December 31, 1997. Under the terms of
the agreement, advances under the credit facility were limited to 80% of
billed trade receivables outstanding. The agreement was subject to
automatic renewals
F-30
<PAGE>
for successive one-year terms. In April 1997, the Company amended the
credit agreement to include an additional term loan for $1,500 on the
earlier of:
(a) April 30, 1998;
(b) the date the initial October 1996 revolving credit agreement
terminated; or
(c) the date the Company first issued equity, debt or other securities,
other than the Series F financing discussed in note 8, subsequent to
April 1997.
In connection with the term loan, the Company issued to the lender a
warrant, expiring in April 2003, to purchase 21,500 shares of the Company's
common stock, at $6.96 per share. The estimated value of the warrant, $67
was recorded as debt discount and was amortized to interest expense over
the period that the debt was outstanding. This agreement was terminated as
of December 1997 and all amounts borrowed thereunder repaid.
(6) ACCRUED LIABILITIES
A summary of accrued liabilities is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
---------------- --------------- ------------
<S> <C> <C> <C>
Accrued compensation expense $ 289 687 941
Provision for warranty 20 150 266
Other accruals 47 -- --
---------------- --------------- ------------
$ 356 837 1,207
---------------- --------------- ------------
---------------- --------------- ------------
</TABLE>
(7) RELATED PARTY TRANSACTIONS
(a) SALES, MANUFACTURING AND SERVICE REVENUES
Sales totaling approximately $212, $15 and $0 were made to one of the
Company's major stockholders during the nine month fiscal period ended
December 31, 1996, the year ended December 31, 1997 and the six months
ended June 30, 1998, respectively.
Substantially all of the total revenues recognized in the year ended
March 31, 1996 were to Societe Anonyme de Telecommunications (SAT), a
stockholder of the Company. In November 1994, the Company entered
into a Processor For Hire Agreement -- (PFHA) with SAT whereby SAT
purchased substantially all of the Company's inventories as of
November 1994 for cash. The PFHA called for the Company to continue
to manufacture radios for SAT; however, SAT was responsible for
supplying the materials used in the manufacture of these radios.
Under the PFHA, SAT reimbursed the Company for the costs incurred by
the Company in the assembly and testing of the radios. In addition,
SAT paid to the Company a fee to cover administrative costs plus a
profit. This fee was based on the volume of materials purchased for
SAT for the production of the radios. The Company managed all of the
manufacturing and purchasing functions associated with the manufacture
of radios and the purchase of radio components. The PFHA was
substantially terminated as of March 31, 1996.
The reimbursement of the costs of manufacture along with the
administration fee during the year ended March 31, 1996 and the nine
month fiscal period ended December 31, 1996 have been recorded as
manufacturing contract service revenues in the consolidated statements
of operations. The identifiable costs associated with the manufacture
of the radios covered by the PFHA have been summarized in the
consolidated statements of operations as manufacturing contract
service expenses.
F-31
<PAGE>
Product sales made to SAT for the nine month fiscal period ended
December 31, 1996, for the year ended December 31, 1997 and the six
months ended June 30, 1997 and 1998 were $3, $15,400, $3,532 and
$9,100, respectively.
(b) ACCOUNTS RECEIVABLE
Accounts receivable due from SAT were $58, $5,473 and $3,107 at
December 31, 1996 and 1997 and June 30, 1998, respectively.
(c) MANDATORILY CONVERTIBLE NOTES PAYABLE FOR PREFERRED STOCK, STOCK
SUBSCRIPTIONS RECEIVABLE, AND RELATED EQUITY TRANSACTION
On March 27, 1996, the Company entered into stock subscription
agreements with certain existing stockholders for the purpose of
selling Series D preferred stock for an aggregate price of $7,000.
The $7,000 includes $1,000 in unsecured notes payable to stockholders
issued in November and December 1995 as discussed in the following
paragraph. As of March 31, 1996, proceeds of $3,702 net of offering
costs of $16, had been received by the Company related to the stock
subscription agreements. The remaining $3,282 was received during the
nine month fiscal period ended December 31, 1996. Mandatorily
convertible notes payable were issued as the cash was received by the
Company. Mandatorily convertible notes payable accrued interest at
16% annually and were convertible into Series D preferred shares at
the earlier of a "qualified financing" event or April 26, 1996. A
"qualified financing" event, as defined in the stock subscription
agreements, was consummated on April 26, 1996 when the Company issued
1,548,940 shares of Series D preferred stock, at $3.228 per share to a
new stockholder for proceeds of $4,953. The mandatorily convertible
notes payable outstanding at April 26, 1996 were then converted into
2,168,523 shares of Series D preferred stock at $3.228 per share, and
contingent common stock purchase warrants (contingent upon the pricing
of the "qualified financing" event) totaling 367,082 with an exercise
price of $0.024 per share, were issued to the former holders of the
mandatorily convertible notes payable. No separate value has been
assigned to the warrants as the value was not significant at the date
of issuance.
Unsecured notes payable to stockholders were issued in November and
December 1995 totaling $1,000, bearing interest at rates ranging from
16%-21%. In connection with these notes, 193,611 warrants were issued
to purchase common stock for $2.5824 per share which expire April 26,
2001. No separate value has been assigned to the warrants as the
value was not significant at the date of issuance. On March 27, 1996,
these unsecured notes payable were exchanged for mandatorily
convertible notes payable as part of the stock subscription agreements
described above.
Interest expense on unsecured borrowings from stockholders amounted to
$108, $70, $63, $63 and $0 for the year ended March 31, 1996, the nine
month fiscal period ended December 31, 1996, the year ended December
31, 1997 and the six months ended June 30, 1997 and 1998 respectively.
In November 1996, the Company issued $1,500 in unsecured 12%
convertible promissory notes payable to stockholders, which were
subsequently converted into Series E preferred stock in March 1997.
(d) COMPENSATION EXPENSE
In May 1996, the Company paid a representative of a stockholder $218
for services rendered from January 1995 to February 1996, who served
as the acting Chief Operating Officer of the Company.
F-32
<PAGE>
(8) COMMON AND REDEEMABLE PREFERRED STOCK
The Company had authorized issuance of redeemable preferred stock at
December 31, 1996 as follows:
<TABLE>
<CAPTION>
SHARES
ISSUED AND
OUTSTANDING LIQUIDATION
SHARES DECEMBER 31, PREFERENCE
TYPE SERIES AUTHORIZED 1996 PER SHARE
---------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
A Preferred A.1 833,333 667,120 $ 13.2360
A Preferred A.2 833,333 -- 0.8400
A Preferred A.3 2,500,000 907,023 7.9176
B Preferred B 2,083,333 804,553 6.0600
C Senior Preferred C 833,333 664,298 6.3672
C Senior Preferred C.1 625,000 456,294 6.3672
D Preferred D 4,166,666 3,717,463 3.2280
</TABLE>
F-33
<PAGE>
The following table summarizes activity of the Company's preferred stock for the
year ended March 31, 1996, the nine month fiscal period ended December 31, 1996
and the year ended December 31, 1997:
<TABLE>
<CAPTION>
PREFERRED STOCK
PRICE PER ---------------------------
DESCRIPTION SHARE SHARES AMOUNT
----------- ------------ ------------
<S> <C> <C> <C>
Balances at March 31, 1995 $ -- 3,042,994 $24,497
Sale of Series C1 senior preferred stock, net of issuance
costs of $22 6.3672 422,625 2,669
Sales of Series C1 senior preferred stock, net of issuance
costs of $3 6.3672 31,320 196
----------- ------------ ------------
Balances at March 31, 1996 -- 3,496,939 27,362
Sale of Series D preferred stock for cash, net of issuance
costs of $47 3.228 1,548,940 4,953
Conversion of convertible notes for Series D preferred
stock, net of issuance costs of $16 3.228 2,168,523 6,984
Series C1 preferred stock issued to vendors for services -- 2,349 14
----------- ------------ ------------
Balances at December 31, 1996 -- 7,216,751 39,313
Conversion of notes payable to Series E preferred stock 5.19384 288,799 1,500
Sale of Series E preferred stock for cash, net of issuance
costs of $14 5.19384 673,870 3,486
Sale of Series F preferred stock for cash, net of issuance
costs of $30 6.96000 502,867 3,470
Conversion of preferred to common stock -- (8,682,287) (47,769)
----------- ------------ ------------
Balance at December 31, 1997 $ -- -- $ --
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
The shares of preferred stock were convertible into an equal number of
common shares at any time, were automatically convertible upon the
consummation of an initial public offering (IPO), had certain liquidation
and dividend preferences over common shares, and also had certain
antidilution rights. The preferred shares were redeemable, at the holder's
option (subject to approval by 50% of all preferred shares then
outstanding), at any time after October 1, 1997. The redemption value was
$7.9176 per share for the Series A preferred shares. The redemption value
was equal to the liquidation preference for all other preferred shares
(appropriately adjusted for stock splits, stock dividends, combinations,
recapitalizations, reclassification and similar corporate rearrangements)
plus the amount of all declared and unpaid dividends thereon. All Series C
Senior Preferred and Series D Preferred shares had preference over other
preferred shares with regard to liquidation. Holders of all preferred
shares had the right as a group to elect three members of the Company's
Board of Directors. The remaining directors were elected by the holders of
all outstanding preferred and common shares. The voting rights were the
same for all preferred and common shares. Pursuant to the rules of the
Securities and Exchange Commission, the Company had classified redeemable
preferred stock outside stockholders' equity (deficit). All of the shares
of preferred stock converted to common stock in conjunction with the
Company's successful consummation of an IPO on August 8, 1997.
In March 1997, the Company revised its Articles of Incorporation,
increasing the authorized number of preferred shares to 12,874,998 of which
1,000,000 shares were designated as Series E Preferred stock which had
identical preferences as the Series C Senior Preferred and Series D
Preferred, except that the liquidation preference was $5.1936
F-34
<PAGE>
per share. In June 1997, the Company revised its Articles of
Incorporation, increasing the authorized number of common shares to
16,666,666 and preferred shares to 13,379,164 of which 504,166 shares were
designated as Series F Preferred stock which had identical preferences as
the Series C Senior Preferred and Series D Preferred, except that the
liquidation preference was $6.96 per share.
During 1997, the Board of Directors authorized a 24:1 reverse stock split
on its common and preferred stock and eliminated the par values related
thereto. In addition, the Board approved changes in the authorized number
of preferred shares to 5,000,000 and common shares to 30,000,000 effective
upon closing of the IPO in August 1997. These consolidated financial
statements and notes thereto have been restated for these actions.
In conjunction with various financing rounds, warrants have been issued.
No separate value has been assigned to the warrants as the values were not
significant at the date of issuance, other than 21,500 warrants with an
exercise price of $6.96 per share issued in connection with debt financing
in April 1997. Outstanding warrants at December 31, 1996 and 1997 and June
30, 1998 are summarized as follows:
<TABLE>
<CAPTION>
WARRANTS OUTSTANDING EXERCISE
ISSUED IN ------------------------------------------ PRICE OF
CONJUNCTION WITH 12/31/96 12/31/97 6/30/98 WARRANT EXPIRE
------------------------------ ----------- ----------- ------------ ----------- --------------------
<S> <C> <C> <C> <C> <C>
Series A.2 preferred
stock 481,977 327,078 230,372 $ 0.8400 May 31, 1999
Series C and D preferred
stock 2,252,049 1,622,002 1,527,444 0.0240 February 13, 2000
through April 26,
2001
Series D preferred stock 193,611 181,180 172,277 2.5824 April 26, 2001
Term loan -- 21,500 21,500 6.9600 April 30, 2002
----------- ----------- ------------
Total 2,927,637 2,151,760 1,951,593
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
In June 1997, the Company amended the terms of the warrants to purchase
481,977 of Series A.2 preferred stock to provide that if the outstanding
preferred shares of the Company are converted into common shares, the
warrants will be for the purchase of 481,977 shares of common stock.
(9) STOCK OPTION PLAN
The Company has two stock option plans (the Plans) to compensate directors,
key employees, consultants and vendors for past and future services and has
authorized a total of 2,703,333 shares of common stock (2,583,333 for the
employee and vendor plan and 120,000 for the director plan) reserved for
grants. Options may be granted under the Plans as either incentive stock
options or as nonqualified stock options.
Incentive stock options may be granted at prices not less than fair market
value of the stock, generally are exercisable based on continued employment
over a five-year period in equal increments each year beginning one year
from the date of grant, and expire ten years from the date of grant. The
Company has granted no incentive stock options to date.
Nonqualified options may be granted at prices determined by the Company and
generally expire ten to twenty years from the date of grant. The options
vest and become exercisable over one to four years in cumulative increments
beginning one year from the date of grant. A distinction is made between
nonqualified time vesting and nonqualified
F-35
<PAGE>
time and performance vesting options. Nonqualified time and performance
vesting options require the attainment of certain performance goals in
addition to the passage of time prior to vesting. As of December 31, 1997,
no performance vesting options were outstanding.
In accounting for the options requiring the attainment of certain
performance goals, the Company must include a determination of compensation
cost at the end of each period if the market value of the shares of the
Company's stock exceeds the exercise price. Any compensation cost shall be
charged to expense over the periods the employee performs the related
service. During the first quarter of 1997, the Company amended the terms
of 460,633 stock options by eliminating the performance criteria. The
table below reflects these performance options as being amended to time
vesting. The Company recorded deferred stock compensation totaling $1,590
during the year ended December 31, 1997. The deferred stock compensation
relates principally to the 460,633 options with performance goals
outstanding prior to the elimination of the performance criteria. In
addition, the deferred stock compensation includes some amounts recorded
for nonqualified time vesting grants where the estimated market value of
the shares of the Company's stock exceeded the exercise price at the date
of the grant. The estimated market value of the Company's common stock
used in calculating the majority of the deferred stock compensation was
approximately $4.32 per share. Additional deferred stock compensation
relates principally to the authorization by the Board of Directors for the
grant of 56,247 options to employees that vest upon the attainment of
certain performance goals. The estimated fair market value of the
Company's Common Stock used in calculating deferred stock compensation
related to the 56,247 future option grants was approximately $10.00 per
share. In June 1997, the Company amended the terms of these stock option
grants by eliminating the performance criteria.
F-36
<PAGE>
A summary of nonqualified time vesting and time and performance vesting
stock options is as follows:
<TABLE>
<CAPTION>
EMPLOYEE AND VENDOR PLAN OUTSTANDING OPTIONS NUMBER OF SHARES
-------------------------------------------------------------
WEIGHTED
SHARES TIME AND AVERAGE
AVAILABLE FOR PERFORMANCE EXERCISE
FUTURE GRANT TIME VESTING VESTING PRICE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balances at March 31, 1995 69,392 347,033 -- $ 1.0584
Plan amendment 1,041,667 -- -- --
Options granted (1,235,293) 602,780 632,513 1.5840
Options expired 299,657 (136,338) (163,319) 0.8736
Options exercised -- (18,565) -- 1.0608
------------- ------------- ------------- -------------
Balances at March 31, 1996 175,423 794,910 469,194 1.5120
Options granted (409,896) 255,138 154,758 1.7280
Options expired 238,753 (75,434) (163,319) 0.7560
Options exercised -- (10,684) -- 1.1136
------------- ------------- ------------- -------------
Balances at December 31, 1996 4,280 963,930 460,633 1.6128
Plan amendment 625,000 -- -- --
Options granted (917,194) 860,947 56,247 5.6488
Options canceled 526,461 (526,461) -- 2.7255
Options exercised -- (95,928) -- 0.8854
Options amended -- 516,880 (516,880) 2.2435
------------- ------------- ------------- -------------
Balances at December 31, 1997 238,547 1,719,368 -- 3.4548
Plan amendment 500,000 -- -- --
Options granted (461,110) 461,110 -- 9.7756
Options canceled 424,213 (424,213) -- 14.2678
Options exercised -- (129,917) -- 1.3661
------------- ------------- ------------- -------------
Balances at June 30, 1998 701,650 1,626,348 -- $ 2.5990
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
F-37
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR PLAN OUTSTANDING OPTIONS NUMBER OF SHARES
---------------------------------------------------
SHARES WEIGHTED
AVAILABLE FOR AVERAGE
FUTURE GRANT TIME VESTING EXERCISE PRICE
--------------- --------------- --------------
<S> <C> <C> <C>
Balances at December 31, 1996 -- -- $ --
Plan adoption 120,000 -- --
Options granted (48,263) 48,263 9.84
Options exercised -- (8,263) 9.84
--------------- --------------- --------------
Balances at December 31, 1997 71,737 40,000 9.84
Options granted (30,000) 30,000 12.19
--------------- --------------- --------------
Balances at June 30, 1998 41,737 70,000 $ $10.85
--------------- --------------- --------------
--------------- --------------- --------------
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its Plans, and
accordingly compensation cost is recognized only for those options in which
the fair value of the underlying common stock exceeds the exercise price at
the date of grant. Had the Company determined compensation cost of
employee stock options based on the fair value of the option at the grant
date for its stock options under SFAS No. 123, the Company's net loss would
have been increased to the pro forma amount indicated below:
<TABLE>
<CAPTION>
NINE MONTH
FISCAL PERIOD
YEAR ENDED ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net loss:
As reported $ (9,061) (7,329) (1,060)
Pro forma (9,065) (7,339) (993)
Net loss per share:
As reported (14.40) (8.27) (0.18)
Pro forma (14.40) (8.28) (0.38)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to stock
options granted before April 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The weighted-average fair value per share of the grants made during the
year ended March 31, 1996, the nine month fiscal period ended December 31,
1996 and the year ended December 31, 1997 was approximately $0.02, $0.054
and $3.392, respectively. The fair value of the stock options granted
prior to the Company's IPO was estimated on the date of grant using the
minimum-value method with the following weighted-average assumptions:
expected dividend yield 0%, risk-free interest rate averaging approximately
6.3%, and an expected life ranging from two to six years. The fair value
of the stock options granted after the Company's IPO was estimated on the
date of grant using the Black-Scholes method with the following weighted
average assumptions: expected dividend yield 0%, volatility 50%, risk-free
interest rate averaging approximately 6.0%, and an expected life ranging
from two to six years.
F-38
<PAGE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- --------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------ ------------- ----------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
$ 0.240 6,794 12.21 years $ 0.240 6,794 $ 0.2400
0.790 384,091 17.57 years 0.790 235,668 0.7900
1.920 - 1.970 994,631 18.45 years 1.969 359,357 1.9700
2.880 34,387 14.6 years 2.880 33,242 2.8800
3.600 - 4.320 53,190 18.23 years 3.684 4,175 3.6000
6.000 21,093 19.46 years 6.000 - -
9.840 170,416 9.65 years 9.840 40,242 9.8400
13.00 - 18.750 28,857 9.76 years 16.379 - -
20.500 - 21.625 53,786 9.75 years 21.260 - -
24.750 12,123 9.81 years 24.750 - -
------------- ---------------
1,759,368 16.82 years $ 3.599 679,478 $ 2.0641
------------- ---------------
------------- ---------------
</TABLE>
(10) EMPLOYEE BENEFIT PLAN
In January 1996, the Company implemented a 401(k) plan that covers all
employees who satisfy certain eligibility requirements relating to minimum
age, length of service and hours worked. Under the profit sharing portion
of the plan, the Company may make an annual contribution for the benefit of
eligible employees in an amount determined by the Board of Directors. As
of December 31, 1997, the Company had not made any contributions to the
plan. Under the 401(k) portion of the plan, eligible employees may make
pretax elective contributions of up to 15% of their compensation, subject
to maximum limits on contributions prescribed by law. The Company elected,
in 1998, to match employee contributions to the plan, not to exceed 4% of
each employee's base pay.
F-39
<PAGE>
(11) INCOME TAXES
The expected U.S. federal income tax expense (benefit) is different than
the amount computed by applying the U.S. federal income tax rate of 34% to
pretax income (loss) for the year ended March 31, 1996, the nine month
fiscal period ended December 31, 1996, the year ended December 31, 1997 and
the six months ended June 30, 1997 and 1998 as a result of the following:
<TABLE>
<CAPTION>
NINE
MONTH FISCAL
PERIOD ENDED YEAR ENDED SIX MONTHS ENDED
YEAR ENDED DECEMBER DECEMBER JUNE 30,
% OF PRE-TAX NET MARCH 31, 31, 31, ---------------------------
INCOME (LOSS) 1996 1996 1997 1997 1998
------------------------ ------------ -------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Computed
"expected"
income tax
expense (benefit) (34.0)% (34.0)% (34.0)% (34.0)% 34.0%
Permanent tax
differences .1 .1 .1 .1 6.5
Other (.2) -- -- --
Valuation allowance
change 34.1% 33.9% 33.9% 33.9% (40.5)%
------------ -------------- ------------- ------------ -------------
--% --% --% --% %
------------ -------------- ------------- ------------ -------------
------------ -------------- ------------- ------------ -------------
</TABLE>
The Company has not recorded an income tax benefit for the year ended March
31, 1996, the nine month fiscal period ended December 31, 1996, the year
ended December 31, 1997 and the six months ended June 30, 1997 and 1998,
due to the recording of a valuation allowance as an offset to net deferred
tax assets. A valuation allowance is provided due to uncertainties
relating to the realization of deferred tax assets.
F-40
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets (liabilities) are presented below:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
--------------- -------------- -------------
<S> <C> <C> <C>
Write down of inventories,
deductible in different years for
tax purposes $ 158 185 243
Equipment and leasehold
improvements, principally due to
differences in depreciation and
amortization 99 53 71
Accrued liabilities deductible in
different years for tax purposes 182 128 156
Amortization of stock option
expense deductible in different
years for tax purposes 293 208 (382)
Net operating loss carry forwards 12,545 13,062 13,433
--------------- -------------- -------------
Total gross deferred tax
assets 13,277 13,636 13,521
Less valuation allowance (13,277) (13,636) (13,521)
--------------- -------------- -------------
Net deferred tax assets $ -- -- --
--------------- -------------- -------------
--------------- -------------- -------------
</TABLE>
The valuation allowance for deferred tax assets increased $2,487 for the
nine month fiscal period ended December 31, 1996, and $359 for the year
ended December 31, 1997 and decreased $115 for the six months ended
June 30, 1998. Approximately $491 of the valuation allowance at December
31, 1997 is attributable to stock options, the benefit of which will be
credited to additional paid-in capital when realized.
At December 31, 1997, the Company had U.S. federal tax net operating loss
carry forwards available to offset future Federal taxable income, if any,
of approximately $35,300 that begin to expire in 2005. At December 31,
1997, the Company also has net operating tax loss carry forwards available
to offset future United Kingdom taxable income, if any, of approximately
$3,100 that begin to expire in 2006.
The utilization of the tax net operating loss carry forwards are limited
due to ownership changes that have occurred as a result of the sale of
common and preferred stock. Consequently, utilization of approximately
$19,000 of net operating loss carry forwards will be limited to
approximately $1,400 per year.
F-41
<PAGE>
(12) COMMITMENTS
(a) LEASE COMMITMENTS
The Company is obligated under various capital leases for certain
equipment that expire at various dates during the next three years.
The Company also has certain noncancelable operating leases that
expire over the next five years and require the Company to pay certain
executory costs such as maintenance and taxes. Future minimum lease
payments under noncancelable operating leases and future minimum
capital lease payments as of December 31, 1997 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------------- ------------
<S> <C> <C>
Years ending December 31:
1998 $ 1,179 613
1999 986 665
2000 452 689
2001 -- 614
2002 -- 137
--------------- ------------
Total minimum lease payments 2,617 $ 2,718
------------
------------
Less amount representing interest (at rates averaging 15%) 544
---------------
Present value of net minimum capital lease
payments 2,073
Less current installments of obligations under capital leases 1,103
---------------
Obligations under capital leases, excluding
current installments $ 970
---------------
---------------
</TABLE>
Rental expense for operating leases totaled $235 for the year ended
March 31, 1996, $241 for the nine month fiscal period ended December
31, 1996, $543 for the year ended December 31, 1997, $264 and $436 for
the six months ended June 30, 1997 and 1998, respectively.
(b) INVENTORIES
The Company is obligated by contract to purchase inventory from a
foreign supplier. The obligation is denominated in Singapore dollars
and at December 31, 1997, the obligation in U.S. dollars was $868. In
1997, the Company recorded a foreign exchange gain of $32 as a result
of purchases of components denominated in foreign currencies pursuant
to this obligation. The obligation was satisfied by June 30, 1998.
F-42
<PAGE>
(13) MAJOR CUSTOMERS AND SEGMENT INFORMATION
The Company currently operates in a single segment selling millimeter wave
radio systems. Product sales during the nine month fiscal period ended
December 31, 1996, the year ended December 31, 1997 and the six months
ended June 30, 1997 and 1998 to individual customers and by geographic
region accounting for more than 10% of total revenues are shown below:
<TABLE>
<CAPTION>
NINE
MONTH FISCAL
PERIOD ENDED YEAR ENDED
GEOGRAPHIC DECEMBER 31, DECEMBER 31, SIX MONTHS ENDED JUNE 30,
CUSTOMER REGION 1996 1997 1997 1998
-------- ------------ ------------------ -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
A Canada 50% 27% 50% 5%
B U.S. 13% 4% 12% --
C U.S. 10% -- -- --
D France -- 43% 28% 36%
E Germany -- -- -- 20%
F U.K. -- -- -- 18%
</TABLE>
The Company actively markets its products in numerous geographical
locations, including North America, Europe, Asia, and South America.
The following customers individually account for more than 10% of accounts
receivable as shown below:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
CUSTOMER 1996 1997 1998
-------- --------------- --------------- ----------
<S> <C> <C> <C>
A 60% 6% 4%
B 15% -- --
C -- 49% 22%
D -- -- 19%
E -- -- 23%
</TABLE>
Also see related discussion for SAT in note 7(b).
F-43
<PAGE>
Product sales to customers domiciled in the indicated geographic region
were as follows (end users of the Company's products may be located in
different geographic regions than the Company's customers):
<TABLE>
<CAPTION>
NINE MONTH
FISCAL PERIOD
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1996 1997 1997 1998
-------------------- ---------------- ---------- ----------
<S> <C> <C> <C> <C>
Canada $ 1,035 9,872 6,341 1,291
Europe -- 17,403 3,532 18,788
U.S. 656 1,908 1,549 286
Latin America 280 5,210 730 4,592
Other 79 1,707 430 --
-------------------- ---------------- ---------- ----------
$ 2,050 36,100 12,582 24,957
-------------------- ---------------- ---------- ----------
-------------------- ---------------- ---------- ----------
</TABLE>
Manufacturing contract service revenues for all periods presented were to a
single customer located in France (see note 7a).
(14) CONTINGENCIES
The Company is subject to various legal proceedings and claims which have
arisen in the ordinary course of its business. These actions when
ultimately concluded and determined will not, in the opinion of management,
have a material effect on results of operations or the financial condition
of the Company.
(15) FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, short-term investment securities, accounts receivable,
accounts payable, accrued liabilities, notes payable and notes payable to
stockholders. The carrying amount of obligations under notes payable and
notes payable to stockholders approximates their fair values based on
current rates available to the Company. The remaining financial
instruments have a short-term until maturity or settlement in cash and,
therefore, the carrying value approximates fair value.
(16) PROPOSED MERGER WITH DIGITAL MICROWAVE CORPORATION (UNAUDITED)
On July 22, 1998 the Company signed a definitive agreement to merge with
Digital Microwave Corporation ("DMIC") which designs, manufactures, markets
and supports advanced wireless solutions for the worldwide
telecommunications market. Under the terms of the agreement, DMIC will
exchange 1.05 shares of its Common Stock for each outstanding share of the
Company's stock. Based upon the capitalization of the Company and DMIC as
of June 30, 1998, the Company's shareholders will own approximately 27% of
the combined company, assuming no exercise of outstanding options or
warrants to acquire DMIC or the Company's common stock. The combination is
intended to qualify as a tax-free reorganization accounted for as a
pooling-of-interests transaction. There can be no assurance that the
proposed merger will be consummated by the Company.
F-44
<PAGE>
APPENDICES TO THE
PROXY STATEMENT/PROSPECTUS
APPENDIX A MERGER AGREEMENT
APPENDIX B OPINION OF CIBC OPPENHEIMER CORP.
APPENDIX C OPINION OF HAMBRECHT & QUIST LLC
APPENDIX D CHAPTER 23B.13 OF THE WASHINGTON BUSINESS CORPORATION ACT
APPENDIX E FORMS OF PROXY OF DMC AND INNOVA
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF
REORGANIZATION AND MERGER
AMONG
DIGITAL MICROWAVE CORPORATION
IGUANA MERGER CORP.
AND
INNOVA CORPORATION
JULY 22, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
SECTION 1.01. The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
SECTION 1.02. Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
SECTION 1.03. Effect of the Merger . . . . . . . . . . . . . . . . . . . . . . . . .A-2
SECTION 1.04. Articles of Incorporation. . . . . . . . . . . . . . . . . . . . . . .A-2
SECTION 1.05. Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . .A-2
SECTION 1.06. Merger Consideration; Conversion and Cancellation of Securities. . . .A-2
SECTION 1.07. Exchange of Certificates.. . . . . . . . . . . . . . . . . . . . . . .A-3
SECTION 1.08. Stock Transfer Books . . . . . . . . . . . . . . . . . . . . . . . . .A-4
SECTION 1.09. Dissenting Shares. . . . . . . . . . . . . . . . . . . . . . . . . . .A-4
SECTION 1.10. Lost, Stolen or Destroyed Certificate. . . . . . . . . . . . . . . . .A-5
SECTION 1.11. Tax and Accounting Consequences. . . . . . . . . . . . . . . . . . . .A-5
SECTION 1.12. Material Adverse Effect. . . . . . . . . . . . . . . . . . . . . . . .A-5
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY. . . . . . . . . . . . .A-5
SECTION 2.01. Organization and Qualification; Subsidiary.. . . . . . . . . . . . . .A-5
SECTION 2.02. Articles of Incorporation. . . . . . . . . . . . . . . . . . . . . . .A-6
SECTION 2.03. Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-6
SECTION 2.04. Authority Relative to this Agreement.. . . . . . . . . . . . . . . . .A-6
SECTION 2.05. No Conflict; Required Filings and Consents.. . . . . . . . . . . . . .A-7
SECTION 2.06. Compliance; Permits. . . . . . . . . . . . . . . . . . . . . . . . . .A-7
SECTION 2.07. SEC Filings; Financial Statements. . . . . . . . . . . . . . . . . . .A-7
SECTION 2.08. Absence of Certain Changes or Events . . . . . . . . . . . . . . . . .A-8
SECTION 2.09. No Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . .A-8
SECTION 2.10. Absence of Litigation. . . . . . . . . . . . . . . . . . . . . . . . .A-8
SECTION 2.11. Employee Benefit Plans; Employment Agreements. . . . . . . . . . . . .A-9
SECTION 2.12. Employment Matters . . . . . . . . . . . . . . . . . . . . . . . . . .A-9
SECTION 2.13. Registration Statement; Joint Proxy Statement Prospectus.. . . . . . A-10
SECTION 2.14. Title to Property. . . . . . . . . . . . . . . . . . . . . . . . . . A-10
SECTION 2.15. Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-10
SECTION 2.16. Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . . A-11
SECTION 2.17. Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-11
SECTION 2.18. Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . A-11
SECTION 2.19. Opinion of Financial Advisor . . . . . . . . . . . . . . . . . . . . A-12
SECTION 2.20. Intellectual Property. . . . . . . . . . . . . . . . . . . . . . . . A-12
SECTION 2.21. Interested Party Transactions. . . . . . . . . . . . . . . . . . . . A-12
SECTION 2.22. Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-12
SECTION 2.23. Vote Required. . . . . . . . . . . . . . . . . . . . . . . . . . . . A-12
SECTION 2.24. Pooling Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . A-12
SECTION 2.25. Ownership of Parent Common Stock.. . . . . . . . . . . . . . . . . . A-12
ARTICLE III REPRESENTATIONS AND WARRANTIES OF
PARENT AND MERGER SUB . . . . . . . . . . . . . . . . . . . . . . . A-12
SECTION 3.01. Organization and Qualification; Subsidiaries.. . . . . . . . . . . . A-12
SECTION 3.02. Certificate of Incorporation and Bylaws . . . . . . . . . . . . . . A-13
SECTION 3.03. Capitalization.. . . . . . . . . . . . . . . . . . . . . . . . . . . A-13
SECTION 3.04. Authority Relative to this Agreement . . . . . . . . . . . . . . . . A-13
SECTION 3.05. No Conflict; Required Filings and Consents.. . . . . . . . . . . . . A-14
SECTION 3.06. Compliance; Permits. . . . . . . . . . . . . . . . . . . . . . . . . A-14
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 3.07. SEC Filings; Financial Statements. . . . . . . . . . . . . . . . . . A-15
SECTION 3.08. Absence of Certain Changes or Events . . . . . . . . . . . . . . . . A-15
SECTION 3.09. No Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . A-15
SECTION 3.10. Absence of Litigation. . . . . . . . . . . . . . . . . . . . . . . . A-15
SECTION 3.11. Employee Benefit Plans; Employment Agreements. . . . . . . . . . . . A-16
SECTION 3.12. Labor Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . A-16
SECTION 3.13. Registration Statement; Joint Proxy Statement Prospectus . . . . . . A-17
SECTION 3.14. Title to Property. . . . . . . . . . . . . . . . . . . . . . . . . . A-17
SECTION 3.15. Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-17
SECTION 3.16. Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . . A-17
SECTION 3.17. Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-18
SECTION 3.18. Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . A-18
SECTION 3.19. Opinion of Financial Advisor . . . . . . . . . . . . . . . . . . . . A-18
SECTION 3.20. Intellectual Property. . . . . . . . . . . . . . . . . . . . . . . . A-18
SECTION 3.21. Interested Party Transactions. . . . . . . . . . . . . . . . . . . . A-18
SECTION 3.22. Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-18
SECTION 3.23. Vote Required. . . . . . . . . . . . . . . . . . . . . . . . . . . . A-19
SECTION 3.24. Pooling Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . A-19
SECTION 3.25. Parent Rights Agreement. . . . . . . . . . . . . . . . . . . . . . . A-19
SECTION 3.26. Ownership of Company Common Stock. . . . . . . . . . . . . . . . . . A-19
ARTICLE IV CONDUCT OF BUSINESS PENDING THE MERGER . . . . . . . . . . . . . . . A-19
SECTION 4.01. Conduct of Business by the Company Pending the Merger. . . . . . . . A-19
SECTION 4.02. No Solicitation. . . . . . . . . . . . . . . . . . . . . . . . . . . A-21
SECTION 4.03. Conduct of Business by Parent Pending the Merger.. . . . . . . . . . A-21
ARTICLE V ADDITIONAL AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . A-22
SECTION 5.01. Joint Proxy Statement Prospectus; Registration Statement.. . . . . . A-22
SECTION 5.02. Stockholders' Meetings . . . . . . . . . . . . . . . . . . . . . . . A-22
SECTION 5.03. Access to Information; Confidentiality . . . . . . . . . . . . . . . A-22
SECTION 5.04. Consents; Approvals. . . . . . . . . . . . . . . . . . . . . . . . . A-22
SECTION 5.05. Indemnification and Insurance. . . . . . . . . . . . . . . . . . . . A-23
SECTION 5.06. Agreements of Affiliates; Irrevocable Proxies. . . . . . . . . . . . A-24
SECTION 5.07. Notification of Certain Matters. . . . . . . . . . . . . . . . . . . A-24
SECTION 5.08. Further Assurances; Tax Treatment. . . . . . . . . . . . . . . . . . A-24
SECTION 5.09. Public Announcements . . . . . . . . . . . . . . . . . . . . . . . . A-24
SECTION 5.10. Listing of Parent Common Shares. . . . . . . . . . . . . . . . . . . A-25
SECTION 5.11. Conveyance Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . A-25
SECTION 5.12. Accountant's Letters . . . . . . . . . . . . . . . . . . . . . . . . A-25
SECTION 5.13. Pooling Accounting Treatment . . . . . . . . . . . . . . . . . . . . A-25
SECTION 5.14. Appointment of Director. . . . . . . . . . . . . . . . . . . . . . . A-25
SECTION 5.15. Disclosure Schedules.. . . . . . . . . . . . . . . . . . . . . . . . A-25
ARTICLE VI CONDITIONS TO THE MERGER . . . . . . . . . . . . . . . . . . . . . . A-25
SECTION 6.01. Conditions to Obligation of Each Party to Effect the Merger. . . . . A-25
SECTION 6.02. Additional Conditions to Obligations of Parent and Merger Sub. . . . A-26
SECTION 6.03. Additional Conditions to Obligation of the Company . . . . . . . . . A-27
ARTICLE VII TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-27
SECTION 7.01. Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-27
SECTION 7.02. Effect of Termination. . . . . . . . . . . . . . . . . . . . . . . . A-29
SECTION 7.03. Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . A-29
</TABLE>
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<TABLE>
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PAGE
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<S> <C> <C>
ARTICLE VIII GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . A-30
SECTION 8.01. Effectiveness of Representations, Warranties
and Agreements; Knowledge, Etc.. . . . . . . . . . . . . . . . . . A-30
SECTION 8.02. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-30
SECTION 8.03. Certain Definitions. For purposes of this Agreement, the term:. . . A-31
SECTION 8.04. Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-31
SECTION 8.05. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-32
SECTION 8.06. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-32
SECTION 8.07. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-32
SECTION 8.08. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . A-32
SECTION 8.09. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-32
SECTION 8.10. Parties in Interest. . . . . . . . . . . . . . . . . . . . . . . . . A-32
SECTION 8.11. Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . A-32
SECTION 8.12. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-32
SECTION 8.13. Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . A-33
EXHIBIT 5.06 Form of Company Shareholder Agreement. . . . . . . . . . . . . . . . Ex-1
</TABLE>
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AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER, dated as of July 22, 1998
(this "Agreement"), among DIGITAL MICROWAVE CORPORATION, a Delaware corporation
("Parent"), IGUANA MERGER CORP., a Washington corporation and a wholly owned
subsidiary of Parent ("Merger Sub"), and INNOVA CORPORATION, a Washington
corporation (the "Company").
WITNESSETH:
WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company have
each determined that it is advisable and in the best interest of their
respective stockholders and shareholders for Parent to enter into a business
combination with the Company upon the terms and subject to the conditions set
forth herein;
WHEREAS, in furtherance of such combination, the Boards of Directors of
Parent, Merger Sub and the Company have each approved the Merger (the "Merger")
of Merger Sub with and into the Company in accordance with the applicable
provisions of the laws of the State of Washington ("Washington Law"), and upon
the terms and subject to the conditions set forth herein;
WHEREAS, Parent, Merger Sub and the Company intend, by approving
resolutions authorizing this Agreement, to adopt this Agreement as a plan of
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), and the regulations thereunder; and
WHEREAS, pursuant to the Merger, each outstanding share (a "Share") of
Company Common Stock shall be exchanged for the right to receive the Merger
Consideration (as defined in Section 1.07(b)), upon the terms and subject to the
conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Parent, Merger Sub and the Company hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.01. THE MERGER.
(a) At the Effective Time (as defined in Section 1.02 hereof), and subject
to and upon the terms and conditions of this Agreement and Washington Law,
Merger Sub shall be merged with and into the Company, the separate corporate
existence of Merger Sub shall cease upon filing of articles of merger with the
Secretary of State of the State of Washington pursuant to Chapter 23B of the
Washington Business Corporation Act (the "WBCA"), and the Company shall continue
as the surviving company being the successor to all the property, rights,
powers, privileges, liabilities and obligations of both the Merger Sub and the
Company. The Company, as the surviving company after the Merger, is hereinafter
sometimes referred to as the "Surviving Company."
(b) The exchange and delivery of all documents required to be delivered as
a condition to the Merger shall be held immediately prior to the Effective Time
at the offices of Morrison & Foerster LLP, 425 Market Street, San Francisco,
California 94105, unless another date, time or place is agreed to in writing by
the parties hereto.
SECTION 1.02. EFFECTIVE TIME. As promptly as practicable after the
satisfaction or waiver of the conditions set forth in Article VI, but in no
event later than three days thereafter, the parties hereto shall cause the
Merger to be consummated by filing all necessary documentation (the "Merger
Documents"), together with any required related certificates, with the Secretary
of State of the State of Washington, in such form as required by, and executed
in accordance with the relevant provisions of, the WBCA (the time of such filing
being the "Effective Time").
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SECTION 1.03. EFFECT OF THE MERGER. At the Effective Time, the effect of
the Merger shall be as provided in this Agreement, the Merger Documents and the
applicable provisions of the WBCA. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time all the property, rights,
powers and privileges of the Company and Merger Sub shall vest in the Surviving
Company, and all liabilities and obligations of the Company and Merger Sub shall
become the liabilities and obligations of the Surviving Company.
SECTION 1.04. ARTICLES OF INCORPORATION. Unless otherwise determined by
Parent prior to the Effective Time, at the Effective Time the Articles of
Incorporation and Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be the Articles of Incorporation and Bylaws of the
Surviving Company until thereafter amended as provided by the WBCA and such
Articles of Incorporation and Bylaws.
SECTION 1.05. DIRECTORS AND OFFICERS. The directors of Merger Sub
immediately prior to the Effective Time shall be the initial directors of the
Surviving Company, each to hold office in accordance with the Articles of
Incorporation and the Bylaws of the Surviving Company, and the officers of the
Company immediately prior to the Effective Time shall be the initial officers of
the Surviving Company, in each case until their respective successors are duly
elected or appointed and qualified.
SECTION 1.06. MERGER CONSIDERATION; CONVERSION AND CANCELLATION OF
SECURITIES. At the Effective Time, by virtue of the Merger and without any
action on the part of Parent, Merger Sub, the Company or the holders of any of
the following securities:
(a) CONVERSION OF SECURITIES. Each Share issued and outstanding
immediately prior to the Effective Time (excluding any Shares to be canceled
pursuant to Section 1.06(b) and any Company Dissenting Shares as defined in
Section 1.09) shall be converted, subject to Section 1.06(f), into the right to
receive 1.05 shares (the "Exchange Ratio") of validly issued, fully paid and
nonassessable shares of Parent Common Stock, $0.01 par value and the associated
purchase rights under the Parent Rights Agreement (as defined in Section 3.25)
("Parent Common Shares").
(b) CANCELLATION. Each Share held in the treasury of the Company and each
Share owned by Parent, Merger Sub or any direct or indirect wholly owned
subsidiary of the Company or Parent immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part of the holder
thereof, be canceled without payment of any consideration therefor and cease to
exist.
(c) ASSUMPTION OF STOCK OPTIONS AND STOCK PURCHASE RIGHTS.
(i) At the Effective Time, each outstanding option to
purchase Company Common Stock (a "Stock Option") granted under the
Company's 1990 Stock Option Plan and the Company's Director Stock Option
Plan (collectively, the "Company Stock Option Plans"), whether vested or
unvested, and each outstanding warrant or other right to purchase Company
Common Stock ("Stock Purchase Right") shall either (A) be deemed assumed by
Parent and deemed to constitute an option or stock purchase right to
acquire, on the same terms and conditions as were applicable under such
Stock Option or Stock Purchase Right prior to the Effective Time or (B) in
the case of Stock Options, be, in Parent's discretion, substituted for an
option to acquire under Parent's applicable stock option plan, in either
case the number (rounded down to the nearest whole number) of Parent Common
Shares as the holder of such Stock Option or Stock Purchase Right would
have been entitled to receive pursuant to the Merger had such holder
exercised such Stock Option or Stock Purchase Right in full immediately
prior to the Effective Time (not taking into account whether or not such
option was in fact exercisable), at a price per share rounded up to the
nearest whole cent equal to (x) the aggregate exercise price for Company
Common Stock otherwise purchasable pursuant to such Stock Option or Stock
Purchase Right divided by (y) the number of Parent Common Shares deemed
purchasable pursuant to such Stock Option or Stock Purchase Right;
PROVIDED, HOWEVER, that the vesting schedule of the assumed options shall
continue to be determined by reference to the applicable Company Stock
Option Plan.
(ii) As soon as practicable, but in no event later than ten
(10) days after the Effective Time, Parent shall deliver to each holder of
an outstanding Stock Option or Stock Purchase Right an
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appropriate notice setting forth such holder's rights pursuant thereto as a
result of the Merger and such Stock Option or Stock Purchase Right shall
continue in effect on the same terms and conditions (including
anti-dilution provisions, and subject to the adjustments required by this
Section 1.06(c) after giving effect to the Merger). Parent shall comply
with the terms of all such Stock Options (to the extent not substituted) or
Stock Purchase Rights and ensure, to the extent required by, and subject to
the provisions of, the applicable Company Stock Option Plan, that Stock
Options which qualified for special tax treatment prior to the Effective
Time continue to so qualify after the Effective Time. Prior to the
Effective Time, Parent shall take all corporate action necessary to reserve
for issuance a sufficient number of Parent Common Shares for delivery
pursuant to the terms set forth in this Section 1.06(c).
(iii) As soon as practicable, but in no event later than sixty
(60) business days after the Effective Time, Parent shall file with the SEC
an amendment to its existing registration statement on Form S-8 or file a
new registration statement on Form S-8 covering the shares of Parent Common
Stock issuable pursuant to the exercise of outstanding Stock Options
assumed by Parent. The shares of Parent Common Stock to be issued upon
exercise of such options shall be duly authorized, validly issued,
fully-paid and nonassessable.
(d) COMMON STOCK OF MERGER SUB. Each share of the common stock of Merger
Sub issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for a validly issued, fully paid and nonassessable
ordinary share of the Surviving Company. Each share certificate of Merger Sub
evidencing ownership of any such shares shall continue to evidence ownership of
such shares of the Surviving Company.
(e) ADJUSTMENTS TO EXCHANGE RATIO. The Exchange Ratio shall be adjusted
to reflect fully the effect of any share split, reverse split, share dividend
(including any dividend or distribution of securities convertible into Parent
Common Shares or Company Common Stock), reorganization, recapitalization or
other like change with respect to Parent Common Shares or Company Common Stock
occurring after the date hereof and prior to the Effective Time.
(f) FRACTIONAL SHARES. No fraction of a Parent Common Share will be
issued, but in lieu thereof each holder of Company Common Stock who would
otherwise be entitled to a fraction of a Parent Common Share (after aggregating
all fractional Parent Common Shares to be received by such holder) shall receive
from Parent an amount of cash (rounded up to the nearest whole cent), without
interest, equal to the product of (i) such fraction, multiplied by (ii) the
product of the Exchange Ratio multiplied by the average of the last reported
sales prices of a share of Parent Common Stock for the fifteen (15) trading days
prior to the date which is two (2) days prior to the Effective Time.
SECTION 1.07. EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. Parent shall supply, or shall cause to be supplied,
to or for the account of a bank or trust company designated by Parent and
reasonably acceptable to the Company (the "Exchange Agent"), in trust for the
benefit of the holders of Company Common Stock (other than Dissenting Shares),
for exchange in accordance with this Section 1.07, through the Exchange Agent,
certificates evidencing the Parent Common Shares issuable pursuant to
Section 1.06 in exchange for outstanding Shares.
(b) EXCHANGE PROCEDURES. As soon as reasonably practicable after the
Effective Time, Parent will instruct the Exchange Agent to mail to each holder
of record of a certificate or certificates which immediately prior to the
Effective Time evidenced outstanding Shares (other than Dissenting Shares) (the
"Certificates") (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon proper delivery of the Certificates to the Exchange Agent and shall be
in such form and have such other provisions as Parent may reasonably specify)
and (ii) instructions to effect the surrender of the Certificates in exchange
for the certificates evidencing Parent Common Shares and, in lieu of any
fractional shares thereof, cash. Upon surrender of a Certificate for
cancellation to the Exchange Agent together with such letter of transmittal,
duly executed, and such other customary documents as may be required pursuant to
such instructions, the holder of such Certificate shall be entitled to receive
in exchange therefor (A) certificates evidencing that number of whole Parent
Common Shares which such holder has the right to receive in accordance with the
Exchange Ratio in respect of the Shares formerly evidenced by such Certificate,
(B) any dividends or other distributions to which such holder is entitled to
receive prior to the Effective Time, and (C) cash in lieu of fractional Parent
Common Shares to which
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such holder is entitled pursuant to Section 1.06(f) (the Parent Common Shares,
dividends, distributions and cash described in clauses (A)-(C) being,
collectively, the "Merger Consideration"), and the Certificate so surrendered
shall forthwith be canceled. In the event of a transfer of ownership of Shares
which is not registered in the transfer records of the Company as of the
Effective Time, Parent Common Shares and cash may be issued and paid in
accordance with this Article I to a transferee if the Certificate evidencing
such Shares is presented to the Exchange Agent, accompanied by all documents
required to evidence and effect such transfer pursuant to this Section 1.07(b)
and by evidence that any applicable stock/share transfer taxes have been paid.
Until so surrendered, each outstanding Certificate that, prior to the Effective
Time, represented Shares will be deemed from and after the Effective Time, for
all corporate purposes, other than the payment of dividends, to evidence the
ownership of the number of full Parent Common Shares into which such Shares
shall have been so converted and the right to receive an amount in cash in lieu
of the issuance of any fractional shares in accordance with Section 1.06.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED PARENT COMMON SHARES. No
dividends or other distributions declared or made after the Effective Time with
respect to Parent Common Shares with a record date after the Effective Time
shall be paid to the holder of any unsurrendered Certificate with respect to the
Parent Common Shares such holder is entitled to receive until the holder of such
Certificate shall surrender such Certificate. Subject to applicable law,
following surrender of any such Certificate, there shall be paid to the record
holder of the certificates representing whole shares of Parent Common Shares
issued in exchange therefor, without interest, at the time of such surrender,
the amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of Parent
Common Shares.
(d) TRANSFERS OF OWNERSHIP. If any certificate for Parent Common Shares
is to be issued in a name other than that in which the Certificate surrendered
in exchange therefor is registered, it will be a condition of the issuance
thereof that the Certificate so surrendered will be properly endorsed and
otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Parent, or any agent designated by it, any transfer
or other taxes required by reason of the issuance of a certificate for Parent
Common Shares in any name other than that of the registered holder of the
Certificate surrendered, or established to the satisfaction of Parent or any
agent designated by it that such tax has been paid or is not payable.
(e) NO LIABILITY. Neither Parent, Merger Sub nor the Company shall be
liable to any holder of Shares for any Merger Consideration (or dividends or
distributions with respect thereto) delivered to a public official pursuant to
any applicable abandoned property, escheat or similar law.
(f) WITHHOLDING RIGHTS. Parent or the Exchange Agent shall be entitled to
deduct and withhold from the Merger Consideration otherwise payable pursuant to
this Agreement to any holder of Shares such amounts as Parent or the Exchange
Agent is required to deduct and withhold with respect to the making of such
payment under the Code, or any provision of state, local or foreign tax law. To
the extent that amounts are so withheld by Parent or the Exchange Agent, such
withheld amounts shall be treated for all purposes of this Agreement as having
been paid to the holder of the Shares in respect of which such deduction and
withholding was made by Parent or the Exchange Agent.
SECTION 1.08. STOCK TRANSFER BOOKS. At the Effective Time, the stock
transfer books of the Company shall be closed, and the Merger Consideration
delivered upon the surrender for exchange of Shares in accordance with the terms
hereof shall be deemed to have been issued in full satisfaction of all rights
pertaining to such Shares, and there shall be no further registration of
transfers on the records of the Surviving Company of Shares which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Company for any reason, they
shall be canceled and exchanged as provided in this Article I.
SECTION 1.09. DISSENTING SHARES.
(a) Shares held by any holder entitled to and seeking relief as a
dissenting stockholder under Section 23B.13.020 of the WBCA (the "Company
Dissenting Shares") shall not be converted into the right to receive Parent
Common Shares but shall be converted into such consideration as may be due with
respect to such shares pursuant to the applicable provisions of the WBCA, unless
and until the right of such holder to receive fair cash value for
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such Company Dissenting Shares terminates in accordance with Section 23B.13.020
of the WBCA. If such right is terminated otherwise than by the purchase of such
shares by the Surviving Corporation, then such shares shall cease to be Company
Dissenting Shares and shall be converted into and shall represent the right to
receive Parent Common Shares as provided in Section 1.07(b).
(b) The Company shall give Parent (i) prompt notice of any written demands
received by the Company to require the Company to purchase shares of capital
stock of the Company pursuant to Section 23B.13.020 of the WBCA, withdrawals of
such demands, and any other instruments served pursuant to Section 23B.13.020 of
the WBCA and received by the Company and (ii) the opportunity to participate in
all negotiations and proceedings with respect to such demands. The Company
shall not, except with the prior written consent of Parent, voluntarily make any
payment with respect to any such demands or offer to settle or settle any such
demands.
SECTION 1.10. LOST, STOLEN OR DESTROYED CERTIFICATE. In the event any
Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed Certificates, upon the
making of an affidavit of that fact by the holder thereof, such Parent Common
Shares as may be required pursuant to Section 1.06; provided, however, that
Parent may, in its reasonable discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
Certificates to deliver a bond in such sum as it may reasonably direct as
indemnity against any claim that may be made against Parent or the Exchange
Agent with respect to the Certificates alleged to have been lost, stolen or
destroyed.
SECTION 1.11. TAX AND ACCOUNTING CONSEQUENCES. It is intended by the
parties here to that the Merger shall (i) constitute a reorganization within the
meaning of Section 368(a) of the Code and (ii) qualify for accounting treatment
as a pooling of interests under United States generally accepted accounting
principles ("U.S. GAAP"). The parties hereto hereby adopt this Agreement as a
"plan of reorganization" within the meaning of Section 368 of the Code.
SECTION 1.12. MATERIAL ADVERSE EFFECT. For purposes of this Agreement,
when used in connection with the Company or its subsidiary, or Parent or any of
its respective subsidiaries, as the case may be, the term "Material Adverse
Effect" means any change or effect that, individually or when taken together
with all other such changes or effects that have occurred prior to the date of
determination of the occurrence of the Material Adverse Effect, is or is
reasonably likely to be materially adverse to the business, assets (including
intangible assets), financial condition or results of operations of the Company
and its subsidiary or Parent and its respective subsidiaries, respectively, in
each case taken as a whole; PROVIDED, HOWEVER, that a "Material Adverse Effect"
with respect to the Company or its Subsidiary shall not include (i) any change
or effect directly resulting from execution, delivery or performance of this
Agreement or the announcement of the transactions contemplated by this Agreement
including any change or effect resulting from the overlap in customers of the
Company and Parent, (ii) any change or effect resulting from the failure of
Parent or Merger Sub to perform any of their respective obligations hereunder or
under any agreement or instrument in connection with the transactions
contemplated hereby or (iii) any change or effect generally applicable to the
industries in which the Company or its Subsidiary operates.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Merger Sub that,
except as set forth in the written disclosure schedule previously delivered by
the Company to Parent (the "Company Disclosure Schedule") or as set forth in the
Company SEC Reports (as defined below):
SECTION 2.01. ORGANIZATION AND QUALIFICATION; SUBSIDIARY.
(a) Each of the Company and its subsidiary, Innova Europe Limited (the
"Subsidiary"), is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has the
requisite corporate power and corporate authority and is in possession of all
franchises, grants, authorizations, licenses, permits, easements, consents,
certificates, approvals and orders ("Approvals") necessary to own, lease and
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operate the properties it purports to own, operate or lease and to carry on its
business as it is now being conducted, except where the failure to have such
power, authority and Approvals would not, individually or in the aggregate, have
a Material Adverse Effect. Each of the Company and the Subsidiary is duly
qualified or licensed as a foreign corporation to do business, and is in good
standing, in each jurisdiction where the character of its properties owned,
leased or operated by it or the nature of its activities makes such
qualification or licensing necessary, except for such failures to be so duly
qualified or licensed and in good standing that would not, either individually
or in the aggregate, have a Material Adverse Effect. The Subsidiary is the only
subsidiary in which the Company has any equity interest, except for TechInnova
S.A. de C.V., a Mexican corporation, which is dormant under Mexican law and
which has no material assets or liabilities.
SECTION 2.02. ARTICLES OF INCORPORATION. The Company has heretofore
furnished to Parent a complete and correct copy of the Articles of Incorporation
and Bylaws, including any amendments to date of the Company and the Memorandum
of Association of the Subsidiary. The Articles of Incorporation and Bylaws of
the Company and the Memorandum of Association of the Subsidiary are in full
force and effect. The Company is not in material violation of any of the
provisions of its Articles of Incorporation and Bylaws. The Subsidiary is not
in material violation of any of the provisions of its Memorandum of Association.
SECTION 2.03. CAPITALIZATION. The authorized Common Stock of the
Company consists of 30,000,000 shares of Company Common Stock. As of June 30,
1998, (i) 14,005,877 Shares were issued and outstanding, all of which are
validly issued, fully paid and nonassessable, (ii) no shares of Company Common
Stock were held in treasury or by the Subsidiary, (iii) 1,695,748 shares of
Company Common Stock were reserved for future issuance pursuant to outstanding
employee stock options granted pursuant to the Company's Stock Option Plans and
(iv) 1,951,593 shares of Company Common Stock were reserved for future issuance
pursuant to Stock Purchase Rights. No shares of Company Common Stock have been
issued between June 30, 1998 and the date hereof. Except as set forth in
Section 2.03 or Section 2.11 of the Company Disclosure Schedule, there are no
options, warrants or other rights, agreements, arrangements or commitments of
any character relating to the issued or unissued shares of the Company or the
Subsidiary or obligating the Company or the Subsidiary to issue or sell any
shares of, or other equity interests in, the Company or the Subsidiary. All
shares of Company Common Stock subject to issuance as aforesaid, upon issuance
on the terms and conditions specified in the instruments pursuant to which they
are issuable, shall be duly authorized, validly issued, fully paid and
nonassessable. There are no obligations, contingent or otherwise, of the
Company or the Subsidiary to repurchase, redeem or otherwise acquire any shares
of Company Common Stock or the shares of the Subsidiary or to provide funds to
or make any investment (in the form of a loan, capital contribution or
otherwise) in the Subsidiary or any other entity other than guarantees of bank
obligations of the Subsidiary entered into in the ordinary course of business.
Except as set forth in Section 2.03 of the Company Disclosure Schedule, all of
the outstanding shares of the Subsidiary are duly authorized, validly issued,
fully paid and nonassessable, and all such shares are owned by the Company free
and clear of all security interests, liens, claims, pledges, agreements,
limitations in the Company's voting rights, charges or other encumbrances of any
nature whatsoever.
SECTION 2.04. AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has
all necessary corporate power and corporate authority to execute and deliver
this Agreement, and subject to obtaining any necessary shareholder approval of
this Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by the Company and the consummation by the Company of the transactions
contemplated hereby have been duly and validly authorized by all necessary
corporate action of the Company and no other corporate proceedings on the part
of the Company are necessary to authorize this Agreement or to consummate the
transactions so contemplated (other than the approval and adoption of the Merger
by the shareholders of the Company entitled to vote in accordance with the WBCA
and the Company's Articles of Incorporation). The Board of Directors of the
Company has determined that it is advisable and in the best interest of the
Company's shareholders for the Company to enter into a business combination with
Parent upon the terms and subject to the conditions of this Agreement. This
Agreement has been duly and validly executed and delivered by the Company and,
assuming the due authorization, execution and delivery by Parent and Merger Sub,
as applicable, constitutes a legal, valid and binding obligation of the Company.
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SECTION 2.05. NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) Section 2.05(a) of the Company Disclosure Schedule contains a list of
all Company Material Contracts. For purposes hereof, "Company Material
Contracts" shall mean all material agreements required to be filed with the
Securities Exchange Commission ("SEC") as of the date hereof pursuant to the
requirements of the Securities Exchange Act of 1934, as amended, and the SEC's
rules thereunder (collectively, the "Exchange Act") as "material contracts" of
the Company and the Subsidiary, as applicable.
(b) Except as set forth in Section 2.05(b) of the Company Disclosure
Schedule, the execution and delivery of this Agreement by the Company does not,
and the performance of this Agreement by the Company will not, (i) conflict with
or violate the Articles of Incorporation or Bylaws of the Company, (ii) conflict
with or violate any law, rule, regulation, order, judgment or decree applicable
to the Company or the Subsidiary or by which any of their respective properties
are bound or affected, or (iii) result in any breach of or constitute a default
(or an event that with notice or lapse of time or both would become a default)
under, or impair the Company's or the Subsidiary's rights or alter the rights or
obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any Material Contract,
or result in the creation of a lien or encumbrance on any of the properties or
assets of the Company or the Subsidiary pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which the Company or the Subsidiary is a party or by
which the Company or the Subsidiary or any of their respective properties are
bound or affected, except in any such case for any such conflicts, violations,
breaches, defaults or other occurrences that would not, individually or in the
aggregate, have a Material Adverse Effect.
(c) The execution and delivery of this Agreement by the Company does not,
and the performance of this Agreement by the Company will not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental or regulatory authority, domestic or foreign, except
(i) for applicable requirements, if any, of the Securities Act of 1933, as
amended (the "Securities Act"), the Exchange Act, the rules of the Nasdaq
National Market, state securities laws ("Blue Sky Laws"), the pre-merger
notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act") and the rules and regulations thereunder, and
the filing and recordation of appropriate Merger Documents as required by
Washington Law and (ii) where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not
prevent or delay consummation of the Merger, or otherwise prevent or delay the
Company from performing its obligations under this Agreement, or would not
otherwise have a Material Adverse Effect.
SECTION 2.06. COMPLIANCE; PERMITS.
(a) Neither the Company nor the Subsidiary is in conflict with, or in
default or violation of, (i) any law, rule, regulation, order, judgment or
decree applicable to the Company or the Subsidiary or by which its or any of
their respective properties is bound or affected or (ii) any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which the Company or the Subsidiary is a party
or by which the Company or the Subsidiary or its or any of their respective
properties is bound or affected, except for any such conflicts, defaults or
violations which would not, individually or in the aggregate, have a Material
Adverse Effect.
(b) The Company and the Subsidiary hold all permits, licenses, easements,
variances, exemptions, consents, certificates, orders and approvals from
governmental authorities which are material to the operation of the business of
the Company and the Subsidiary taken as a whole as it is now being conducted
(collectively, the "Company Permits"). The Company and the Subsidiary are in
compliance with the terms of the Company Permits, except where the failure to so
comply would not have a Material Adverse Effect.
SECTION 2.07. SEC FILINGS; FINANCIAL STATEMENTS.
(a) The Company has filed all forms, reports and documents required to be
filed with the SEC since December 31, 1997 and has made available to Parent
(i) its Quarterly Report on Form 10-Q for the period ended March 31, 1998 and
its Annual Report on Form 10-K for the period ended December 31, 1997, (ii) all
proxy
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statements relating to the Company's meetings of shareholders (whether annual or
special) held since December 31, 1997, (iii) all other reports or registration
statements filed by the Company with the SEC since December 31, 1997, and
(iv) all amendments and supplements to all such reports and registration
statements filed by the Company with the SEC (collectively, the "Company SEC
Reports"). The Company SEC Reports (i) complied in all material respects with
the requirements of the Securities Act or the Exchange Act, as the case may be,
and (ii) did not at the time they were filed (or if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such filing)
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The Subsidiary is not required to file any forms, reports or other
documents with the SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in the Company SEC Reports was
prepared in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods involved (except as may be indicated
in the notes thereto) and each fairly presented the consolidated financial
position of the Company and the Subsidiary as of the respective dates thereof
and the consolidated results of its operations and cash flows for the periods
indicated, except that the unaudited interim financial statements were or are
subject to normal and recurring year-end adjustments which were not or are not
expected to be material in amount.
(c) The Company has heretofore furnished to Parent a complete and correct
copy of any amendments or modifications, which have not yet been filed with the
SEC but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by the Company with the SEC pursuant
to the Securities Act or the Exchange Act.
SECTION 2.08. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set
forth in Section 2.08 of the Company Disclosure Schedule or in the Company SEC
Reports, since December 31, 1997, the Company has conducted its business
substantially in the ordinary course and there has not occurred: (i) any
Material Adverse Effect; (ii) any amendments or changes in the Articles of
Incorporation or the Bylaws of the Company; (iii) any damage to, destruction or
loss of any assets of the Company, (whether or not covered by insurance) that
could have a Material Adverse Effect; (iv) any material change by the Company in
its accounting methods, principles or practices; (v) any material revaluation by
the Company of any of its assets, including, without limitation, writing down
the value of inventory or writing off notes or accounts receivable other than in
the ordinary course of business; (vi) except as disclosed in the Company
Disclosure Schedule, any other action or event that would have required the
consent of Parent pursuant to Section 4.01 had such action or event occurred
after the date of this Agreement, or (vii) any sale of a material amount of
property of the Company, except in the ordinary course of business.
SECTION 2.09. NO UNDISCLOSED LIABILITIES. Except as is disclosed in
Section 2.09 of the Company Disclosure Schedule or in the Company SEC Reports,
neither the Company nor the Subsidiary has any liabilities (absolute, accrued,
contingent or otherwise) which are, in the aggregate, material to the business,
operations or financial condition of the Company and the Subsidiary taken as a
whole, except liabilities (a) reflected and adequately provided for in the
Company's audited balance sheet (including any related notes thereto) for the
fiscal year ended December 31, 1997 (the "1997 Company Balance Sheet");
(b) incurred in the ordinary course of business and not required under U.S. GAAP
to be reflected on the 1997 Company Balance Sheet; (c) incurred since December
31, 1997 in the ordinary course of business and consistent with past practice,
or (d) liabilities incurred in connection with this Agreement.
SECTION 2.10. ABSENCE OF LITIGATION. Except as set forth in
Section 2.10 of the Company Disclosure Schedule or the Company SEC Reports,
there are no claims, actions, suits, proceedings or investigations pending or,
to the knowledge of the Company, threatened against the Company or the
Subsidiary, or any properties or rights of the Company or the Subsidiary, before
any court, arbitrator or administrative, governmental or regulatory authority or
body, domestic or foreign, that, individually or in the aggregate, could have a
Material Adverse Effect.
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SECTION 2.11. EMPLOYEE BENEFIT PLANS; EMPLOYMENT AGREEMENTS.
(a) Section 2.11 of the Company Disclosure Schedule lists all employee
benefit plans and all bonus, stock option, stock purchase, incentive, deferred
compensation, supplemental retirement, severance and other similar fringe or
employee benefit plans, programs or arrangements, and any current or former
employment or executive compensation or severance agreements, written or
otherwise, for the benefit of, or relating to, any employee of the Company, any
trade or business (whether or not incorporated) which is a member of a
controlled group including the Company or which is under common control with the
Company (a "Company ERISA Affiliate") within the meaning of Section 414 of the
Code, or the Subsidiary, as well as each plan with respect to which the Company
or a Company ERISA Affiliate could incur liability under Section 4069 (if such
plan has been or were terminated) or Section 4212(c) of ERISA (together, the
"Company Employee Plans"), excluding agreements under which the Company has no
remaining monetary obligations and any of the foregoing that are required to be
maintained by the Company under the laws of any foreign jurisdiction. A copy of
each such written Company Employee Plan (other than those referred to in Section
4(b)(4) of ERISA) has been made available to Parent.
(b) (i) Except as set forth in Section 2.11(b) of the Company Disclosure
Schedule, none of the Company Employee Plans promises or provides retiree
medical or other retiree welfare benefits to any person; (ii) there has been no
prohibited transaction with respect to any Company Employee Plan, which could
result in any material liability of the Company or the Subsidiary; (iii) all
Company Employee Plans are in compliance in all material respects with the
requirements prescribed by any and all statutes, orders, or governmental rules
and regulations currently in effect with respect thereto, and the Company and
the Subsidiary have performed all material obligations required to be performed
by them under, are not in any material respect in default under or violation of,
and have no knowledge of any default or violation by any other party to, any of
the Company Employee Plans; (iv) each Company Employee Plan intended to qualify
under Section 401(a) of the Code and each trust intended to qualify under
Section 501(a) of the Code is the subject of a favorable determination letter
from the IRS, and nothing has occurred which may reasonably be expected to
impair such determination; (v) all contributions required to be made to any
Company Employee Plan pursuant to Section 412 of the Code, or the terms of the
Company Employee Plan or any collective bargaining agreement, have been made and
a reasonable amount has been accrued for contributions to each Company Employee
Plan for the current plan years; (vi) with respect to each Company Employee
Plan, no "reportable event" within the meaning of Section 4043 of ERISA
(excluding any such event for which the thirty (30) day notice requirement has
been waived under the regulations to Section 4043 of ERISA) nor any event
described in Section 4062, 4063 or 4041 of ERISA has occurred, and (vii) neither
the Company nor any Company ERISA Affiliate has incurred, nor reasonably expects
to incur, any liability under Title IV of ERISA (other than liability for
premium payments to the Pension Benefit Guaranty Corporation arising in the
ordinary course of the administration of the Company Employee Plans).
(c) Section 2.11(c) of the Company Disclosure Schedule sets forth a true
and complete list of each current or former employee, officer or director of the
Company or the Subsidiary who holds any option to purchase Company Common Stock
as of the date hereof, together with the number of shares of Company Common
Stock subject to such option, the date of grant of such option, the extent to
which such option is vested (or will become vested within six months from the
date hereof, or as a result of, the Merger), the option price of such option and
the expiration date of such option. Section 2.11(c) of the Company Disclosure
Schedule also sets forth the total number of such options.
(d) Except as set forth in Section 2.11(d) of the Company Disclosure
Schedule, the Company has made available to Parent (i) copies of all employment
agreements with officers of the Company; (ii) copies of all agreements with
consultants who are individuals obligating the Company to make annual cash
payments in an amount exceeding $50,000, (iii) a schedule listing all officers
of the Company who have executed a non-competition agreement with the Company;
(iv) copies (or descriptions) of all severance agreements, programs and policies
of the Company with or relating to its employees, excluding programs and
policies required to be maintained by law, and (v) copies of all plans,
programs, agreements and other arrangements of the Company with or relating to
its employees which contain change in control provisions.
SECTION 2.12. EMPLOYMENT MATTERS. Except as set forth in Section 2.12
of the Company Disclosure Schedule or in the Company SEC Reports, (i) there are
no controversies pending or, to the knowledge of the Company or the Subsidiary,
threatened, between the Company or the Subsidiary and any of their respective
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employees, which controversies have or may reasonably be expected to have a
Material Adverse Effect; (ii) neither the Company nor the Subsidiary is a party
to any collective bargaining agreement or other labor union contract applicable
to persons employed by the Company or the Subsidiary nor does the Company or the
Subsidiary know of any activities or proceedings of any labor union to organize
any such employees, and (iii) neither the Company nor the Subsidiary has any
knowledge of any strikes, slowdowns, work stoppages, lockouts, or threats
thereof, by or with respect to any employees of the Company or the Subsidiary.
SECTION 2.13. REGISTRATION STATEMENT; JOINT PROXY STATEMENT PROSPECTUS.
Subject to the accuracy of the representations of Parent in Section 3.13, the
information supplied by the Company for inclusion in the registration statement
to be filed with the SEC by Parent in connection with the issuance of shares of
Parent Common Stock in the Merger (the "Registration Statement") shall not at
the time the Registration Statement is declared effective by the SEC contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading. The
information supplied by the Company for inclusion in the joint proxy
statement/prospectus to be sent to the shareholders of the Company in connection
with the meeting of the shareholders of the Company to consider the Merger (the
"Company Shareholders' Meeting") and to be sent to the stockholders of Parent in
connection with the meeting of the stockholders of Parent to consider the Merger
(the Parent Stockholders Meeting," and together with the Company Stockholder
Meeting, the "Stockholders' Meetings") (such joint proxy statement/prospectus as
amended or supplemented is referred to herein as the "Joint Proxy
Statement/Prospectus") will not, on the date the Joint Proxy
Statement/Prospectus (or any amendment thereof or supplement thereto) is first
mailed to shareholders or stockholders, at the time of the Stockholders'
Meetings, or at the Effective Time, contain any statement which, at such time
and in light of the circumstances under which it shall be made, is false or
misleading with respect to any material fact, or shall omit to state any
material fact necessary in order to make the statements made therein, not false
or misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the Stockholders' Meetings which has become false or misleading. If
at any time prior to the Effective Time any event relating to the Company or any
of its respective affiliates, officers or directors should be discovered by the
Company which should be set forth in an amendment to the Registration Statement
or a supplement to the Joint Proxy Statement/Prospectus, the Company shall
promptly inform Parent and Merger Sub. The Joint Proxy Statement/Prospectus
shall comply in all material respects as to form and substance with the
requirements of the Securities Act, the Exchange Act and the rules and
regulations thereunder. Notwithstanding the foregoing, the Company makes no
representation or warranty with respect to any information supplied by Parent or
Merger Sub which is contained in any of the foregoing documents.
SECTION 2.14. TITLE TO PROPERTY. The Company and the Subsidiary each
own or lease no material real property other than as set forth in Section
2.14 of the Company Disclosure Schedule or the Company SEC Reports. Except
as reflected in the Company's financial statements included in the Company
SEC Reports, the Company and the Subsidiary each have good and defensible
title to all of their properties and assets, free and clear of all liens,
charges and encumbrances except liens for taxes not yet due and payable and
such liens or other imperfections of title, if any, as do not materially
detract from the value of or interfere with the present use of the property
affected thereby or which, individually or in the aggregate, would not have a
Material Adverse Effect; and, to the knowledge of the Company, all leases
pursuant to which the Company or the Subsidiary lease from others material
amounts of real or personal property are in good standing, valid and
effective in accordance with their respective terms, and there is not, to the
knowledge of the Company, under any of such leases, any existing material
default or event of default (or event which with notice or lapse of time, or
both, would constitute a material default and in respect of which the Company
or the Subsidiary, as applicable, has not taken adequate steps to prevent
such a default from occurring) except where the lack of such good standing,
validity and effectiveness or the existence of such default or event of
default would not have a Material Adverse Effect.
SECTION 2.15. TAXES.
(a) For purposes of this Agreement, "Tax" or "Taxes" shall mean taxes,
fees, levies, duties, tariffs, imposts and governmental impositions or charges
of any kind in the nature of (or similar to) taxes, payable to any federal,
state, local or foreign taxing authority, including (without limitation)
(i) income, franchise, profits, gross
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receipts, ad valorem, net worth, goods and services, fringe benefits,
withholding, sales, use, service, real or personal property, special
assessments, Common Stock, license, payroll, employment, social security,
accident compensation, unemployment compensation, utility, severance,
production, excise, stamp, occupation, premiums, windfall profits, transfer and
gains taxes and (ii) interest, penalties, additional taxes and additions to tax
imposed with respect thereto; and "Tax Returns" shall mean returns, reports and
information statements with respect to Taxes required to be filed with the
United States Internal Revenue Service (the "IRS") or any other taxing
authority, domestic or foreign, including, without limitation, consolidated,
combined and unitary tax returns.
(b) Except as disclosed in Section 2.15(b) of the Company Disclosure
Schedule, each of the Company and the Subsidiary has filed all United States
federal income Tax Returns and all other material Tax Returns required to be
filed by them, and have duly paid or made adequate provision on their books for
the payment of all taxes which have been incurred or are due and payable.
Except as disclosed in Section 2.15(b) of the Company Disclosure Schedule
(i) there are no pending audits, examinations or proposed audits or examinations
of any tax returns filed by the Company or the Subsidiary and (ii) neither the
Company nor the Subsidiary has given or been requested to give waivers or
extensions of any statute of limitations relating to the payment of Taxes for
which the Company or the Subsidiary may be liable. Except as set forth in
Section 2.15(b) of the Company Disclosure Schedule, as of the date of this
Agreement the Tax Returns of the Company have not been audited by the IRS and
the Tax Returns of the Subsidiary have been audited by the Inland Revenue
Service (or the appropriate statute of limitations has expired) for all fiscal
years through 1996.
SECTION 2.16. Except as set forth in Section 2.15(c) of the Company
Disclosure Schedule, neither the Company nor the Subsidiary: (i) is a party to
any agreement providing for the allocation, payment or sharing of taxes among
the Company, the Subsidiary, or any third parties; or (ii) has an application
pending with respect to any Tax requesting permission for a change in accounting
method.ENVIRONMENTAL MATTERS. Except as set forth in Section 2.16 of the Company
Disclosure Schedule, and except in all cases as, in the aggregate, have not had
and could not reasonably be expected to have a Material Adverse Effect, each of
the Company and the Subsidiary to the best of the Company's knowledge (i) have
obtained all applicable permits, licenses and other authorization which are
required under federal, state or local laws relating to pollution or protection
of the environment, including laws relating to emissions, discharges, releases
or threatened releases of pollutants, contaminants or hazardous or toxic
materials or wastes into ambient air, surface water, ground water or land or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of pollutants, contaminants or
hazardous or toxic materials or wastes by the Company or the Subsidiary (or
their respective agents); (ii) are in compliance with all terms and conditions
of such required permits, licenses and authorization, and also are in compliance
with all other limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules and timetables contained in such laws or
contained in any regulation, code, plan, order, decree, judgment, notice or
demand letter issued, entered, promulgated or approved thereunder; (iii) as of
the date hereof, are not aware of nor have received notice of any event,
condition, circumstance, activity, practice, incident, action or plan which is
reasonably likely to interfere with or prevent continued compliance with or
which would give rise to any common law or statutory liability, or otherwise
form the basis of any claim, action, suit or proceeding, based on or resulting
from the Company's or any of the Subsidiary's (or any of their respective
agents') manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling, or the emission, discharge or release into the
environment, of any pollutant, contaminant or hazardous or toxic material or
waste, and (iv) have taken all actions necessary under applicable requirements
of federal, state or local laws, rules or regulations to register any products
or materials required to be registered by the Company or the Subsidiary (or any
of their respective agents) thereunder.
SECTION 2.18. BROKERS. No broker, finder or investment banker (other
than Hambrecht & Quist LLC ("H&Q")) is entitled to any brokerage, finder's or
other fee or commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of the Company. The
Company has heretofore furnished to Parent a complete and correct copy of all
agreements between the Company and H&Q pursuant to which such firm would be
entitled to any payment relating to the transactions contemplated hereunder.
SECTION 2.19. FULL DISCLOSURE. No statement contained in any
certificate or schedule furnished or to be furnished by the Company or the
Subsidiary to Parent or Merger Sub in, or pursuant to the provisions of, this
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Agreement contains or shall contain any untrue statement of a material fact or
omits or will omit to state any material fact necessary, in the light of the
circumstances under which it was made, in order to make the statements herein or
therein not misleading.
SECTION 2.20. OPINION OF FINANCIAL ADVISOR. Company has been advised by
its financial advisor, H&Q, that in its opinion, as of July 22, 1998, the
Exchange Ratio is fair from a financial point of view to Company and has
delivered a written copy of such opinion dated July 22, 1998 to the Company.
SECTION 2.21. INTELLECTUAL PROPERTY. To the Company's knowledge,
neither the Company nor the Subsidiary utilizes or has utilized any patent,
trademark, tradename, service mark, copyright, software, trade secret or
know-how, except for those which are owned, possessed or lawfully used by the
Company or the Subsidiary in their operations, and, to the best knowledge of the
Company, neither the Company nor the Subsidiary infringe upon or unlawfully or
wrongfully use any patent, trademark, tradename, service mark, copyright or
trade secret owned or validly claimed by another.
SECTION 2.22. INTERESTED PARTY TRANSACTIONS. Except as set forth in
Section 2.21 of the Company Disclosure Schedule or in the Company SEC Reports,
since December 31, 1997, no event has occurred that would be required to be
reported as a Certain Relationship or Related Transaction, pursuant to Item 404
of Regulation S-K promulgated by the SEC.
SECTION 2.23. INSURANCE. The Company and the Subsidiary maintain fire
and casualty, general liability, business interruption, product liability and
sprinkler and water damage insurance that the Company believes to be reasonably
prudent for its business.
SECTION 2.24. VOTE REQUIRED. The affirmative vote of the holders
(entitled to vote and voting on the Merger) of at least a majority of the shares
of the Company Common Stock is the only vote of the holders of the Company's
Common Stock necessary to approve the Merger.
SECTION 2.25. POOLING MATTERS. Neither the Company nor any of its
affiliates has, to the Company's knowledge and based upon consultation with its
independent public accountants, taken or agreed to take any action that (without
giving effect to any action taken or agreed to be taken by Parent or any of its
affiliates) would prevent Parent from accounting for the business combination to
be effected by the Merger as a pooling of interests in accordance with U.S. GAAP
and applicable SEC regulations.
SECTION 2.26. OWNERSHIP OF PARENT COMMON STOCK.
The Company is not the beneficial owner of any shares of Parent Common Stock.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub hereby represent and warrant to the Company that,
except as set forth in the written disclosure schedule previously delivered by
Parent to the Company (the "Parent Disclosure Schedule") or as set forth in the
Parent SEC Reports (as defined below):
SECTION 3.01. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.
(a) Parent and each of its subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation and has the requisite corporate power and corporate authority and
is in possession of all Approvals necessary to own, lease and operate the
properties it purports to own, operate or lease and to carry on its business as
it is now being conducted, except where the failure to have such power,
authority and Approvals would not, individually or in the aggregate, have a
Material Adverse Effect. Parent and each of its subsidiaries is duly qualified
or licensed as a foreign corporation to do business, and is in good
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standing, in each jurisdiction where the character of its properties owned,
leased or operated by it or the nature of its activities makes such
qualification or licensing necessary, except for such failures to be so duly
qualified or licensed and in good standing that would not, either individually
or in the aggregate, have a Material Adverse Effect. A true and complete list
of all of Parent's subsidiaries, together with the jurisdiction of incorporation
of each subsidiary and the percentage of each subsidiary's outstanding Common
Stock owned by Parent or another subsidiary, is set forth in Section 3.01 of the
Parent Disclosure Schedule.
SECTION 3.02. CERTIFICATE OF INCORPORATION AND BYLAWS. Parent has
heretofore furnished to the Company a complete and correct copy of the
Certificate of Incorporation and Bylaws, as amended to date, of Parent and the
Articles of Incorporation and Bylaws, as amended to date, of Merger Sub. Such
Certificate of Incorporation and Bylaws of Parent and Articles of Incorporation
and Bylaws of Merger Sub are in full force and effect. Parent is not in
material violation of any of the provisions of its Certificate of Incorporation
or Bylaws. Merger Sub is not in material violation of any of the provisions of
its Articles of Incorporation or Bylaws.
SECTION 3.03. CAPITALIZATION.
(a) As of June 30, 1998, the authorized Common Stock of Parent consisted
of (i) 95,000,000 shares of Parent Common Stock of which: (x) 46,688,992 shares
were issued and outstanding, (y) no shares were held in treasury, (z) 5,850,021
shares were reserved for issuance pursuant to outstanding options under Parent's
stock option plans as set forth in Section 3.11(a) of the Parent Disclosure
Schedule ("Parent's Stock Option Plans"); and (ii) 5,000,000 shares of Preferred
Stock, $0.01 par value ("Parent Preferred Stock"), none of which were issued and
outstanding. No shares of Parent Common Stock have been issued between June 30,
1998 and the date hereof, except for shares issued upon exercise of options
outstanding under Parent's Stock Option Plans. The authorized Common Stock of
Merger Sub consists of 100 shares of common stock, all of which, as of the date
hereof, are issued and outstanding. All of the outstanding shares of Parent's
and Merger Sub's respective Common Stock have been duly authorized and validly
issued and are fully paid and nonassessable. Except for options outstanding
under Parent's Stock Option Plans and as set forth in Section 3.03 or
Section 3.11 of the Parent Disclosure Schedule, there are no options, warrants
or other rights, agreements, arrangements or commitments of any character
relating to the issued or unissued Common Stock of Parent or any of its
subsidiaries or obligating Parent or any of its subsidiaries to issue or sell
any shares of Common Stock of, or other equity interests in, Parent or any of
its subsidiaries. There are no obligations, contingent or otherwise, of Parent
or any of its subsidiaries to repurchase, redeem or otherwise acquire any shares
of Parent Common Stock or the Common Stock of any subsidiary or to provide funds
to or make any investment (in the form of a loan, capital contribution or
otherwise) in any subsidiary or any other entity other than guarantees of bank
obligations of any subsidiary entered into in the ordinary course of business.
Except as set forth in Section 3.03(a) of the Parent Disclosure Schedule or as
will not have a Material Adverse Effect, all of the outstanding shares of Common
Stock of each of Parent's subsidiaries is duly authorized, validly issued, fully
paid and nonassessable and all such shares are owned by Parent or another
subsidiary free and clear of all security interests, liens, claims, pledges,
agreements, limitations in Parent's voting rights, charges or other encumbrances
of any nature whatsoever.
(b) The shares of Parent Common Stock to be issued pursuant to the Merger
will be duly authorized, validly issued, fully paid and nonassessable and shall
be available for trading on the Nasdaq National Market.
SECTION 3.04. AUTHORITY RELATIVE TO THIS AGREEMENT. Each of Parent and
Merger Sub has all necessary corporate power and corporate authority to execute
and deliver this Agreement, and subject to obtaining any necessary stockholder
approval of this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by Parent and Merger Sub and the consummation by Parent and
Merger Sub of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action on the part of Parent and Merger
Sub, and no other corporate proceedings on the part of Parent or Merger Sub are
necessary to authorize this Agreement or to consummate the transactions so
contemplated (other than approval by the holders of the outstanding shares of
Parent Common Stock entitled to vote in accordance with Delaware Law and
Parent's Certificate of Incorporation and Bylaws). The Board of Directors of
Parent has determined that it is advisable and in the best interest of Parent's
stockholders for Parent to enter into a business combination with the Company
upon the terms and subject to the conditions of this Agreement. This Agreement
has been duly and validly executed and delivered by Parent and Merger Sub and,
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assuming the due authorization, execution and delivery by the Company,
constitutes a legal, valid and binding obligation of Parent and Merger Sub.
SECTION 3.05. NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) Section 3.05(a) of the Parent Disclosure Schedule includes all Parent
Material Contracts. For purposes hereof, "Parent Material Contracts" shall mean
all material agreements required to be filed with the SEC as of the date hereof
pursuant to the requirements of the Exchange Act as "material contracts" of
Parent and its subsidiaries, as applicable.
(b) Except as set forth in Section 3.05(b) of the Parent Disclosure
Schedule, the execution and delivery of this Agreement by Parent and Merger Sub
do not, and the performance of this Agreement by Parent and Merger Sub shall
not, (i) conflict with or violate the Certificate of Incorporation or Bylaws of
Parent or the Articles of Incorporation or Bylaws of Merger Sub, (ii) conflict
with or violate any law, rule, regulation, order, judgment or decree applicable
to Parent or any of its subsidiaries or by which its or their respective
properties are bound or affected, or (iii) result in any breach of or constitute
a default (or an event which with notice or lapse of time or both would become a
default) under, or impair Parent's or any of its subsidiaries' rights or alter
the rights or obligations of any third party under, or give to others any rights
of termination, amendment, acceleration or cancellation of, any Parent Material
Contract, or result in the creation of a lien or encumbrance on any of the
properties or assets of Parent or any of its subsidiaries pursuant to, any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Parent or any of its
subsidiaries is a party or by which Parent or any of its subsidiaries or its or
any of their respective properties are bound or affected, except in any such
case for any such conflicts, violations, breaches, defaults or other occurrences
that would not, individually or in the aggregate, have a Material Adverse
Effect.
(c) The execution and delivery of this Agreement by Parent and Merger Sub
does not, and the performance of this Agreement by Parent and Merger Sub shall
not, require any consent, approval, authorization or permit of, or filing with
or notification to, any governmental or regulatory authority, domestic or
foreign, except (i) for applicable requirements, if any, of the Securities Act,
the Exchange Act, the rules of the Nasdaq National Market, the Blue Sky Laws,
the pre-merger notification requirements of the HSR Act and the filing and
recordation of appropriate Merger Documents as required by Washington Law and
(ii) where the failure to obtain such consents, approvals, authorizations or
permits, or to make such filings or notifications, would not prevent or delay
consummation of the Merger, or otherwise prevent Parent or Merger Sub from
performing their respective obligations under this Agreement, and would not have
a Material Adverse Effect.
SECTION 3.06. COMPLIANCE; PERMITS.
(a) Neither Parent nor any of its subsidiaries is in conflict with,
or in default or violation of, (i) any law, rule, regulation, order, judgment or
decree applicable to the Company or its subsidiaries or by which its or any of
their respective properties is bound or affected or (ii) any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which the Company or its subsidiaries is a
party or by which the Company or its subsidiaries or its or any of their
respective properties is bound or affected, except for any such conflicts,
defaults or violations which would not, individually or in the aggregate, have a
Material Adverse Effect.
(b) Parent and its subsidiaries hold all permits, licenses, easements,
variances, exemptions, consents, certificates, orders and approvals from
governmental authorities which are material to the operation of the business of
the Company and its subsidiaries taken as a whole as it is now being conducted
(collectively, the "Parent Permits"). Parent and its subsidiaries are in
compliance with the terms of the Parent Permits, except where the failure to so
comply would not have a Material Adverse Effect.
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SECTION 3.07. SEC FILINGS; FINANCIAL STATEMENTS.
(a) Parent has filed all forms, reports and documents required to be filed
with the SEC since March 31, 1998 and has heretofore delivered to the Company,
in the form filed with the SEC, (i) its Annual Reports on Form 10-K for the
fiscal year ended March 31, 1998, (ii) all proxy statements relating to Parent's
meetings of stockholders (whether annual or special) to be held up to August 4,
1998, (iii) all other reports or registration statements (other than Forms 3, 4
or 5 filed on behalf of affiliates of Parent) filed by Parent with the SEC since
March 31, 1998 and (iv) all amendments and supplements to all such reports and
registration statements filed by Parent with the SEC (collectively, the "Parent
SEC Reports"). The Parent SEC Reports (i) complied in all material respects
with the requirements of the Securities Act or the Exchange Act, as the case may
be, and (ii) did not at the time they were filed (or if amended or superseded by
a filing prior to the date of this Agreement, then on the date of such filing)
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. None of Parent's subsidiaries is required to file any forms,
reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in the Parent SEC Reports has been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods involved (except as may be indicated
in the notes thereto) and each fairly presents the consolidated financial
position of Parent and its subsidiaries as of the respective dates thereof and
the consolidated results of its operations and cash flows for the periods
indicated, except that the unaudited interim financial statements were or are
subject to normal and recurring year-end adjustments which were not or are not
expected to be material in amount.
(c) Parent has heretofore furnished to the Company a complete and correct
copy of any amendments or modifications, which have not yet been filed with the
SEC but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by Parent with the SEC pursuant to
the Securities Act or the Exchange Act.
SECTION 3.08. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set
forth in Section 3.08 of the Parent Disclosure Schedule or in the Parent SEC
Reports, since March 31, 1998, Parent has conducted its business substantially
in the ordinary course and there has not occurred: (i) any Material Adverse
Effect; (ii) any amendments or changes in the Certificate of Incorporation or
Bylaws of Parent; (iii) any damage to, destruction or loss of any assets of the
Parent (whether or not covered by insurance), that could have a Material Adverse
Effect; (iv) any material change by Parent in its accounting methods, principles
or practices; (v) any material revaluation by Parent of any of its assets,
including without limitation, writing down the value of inventory or writing off
notes or accounts receivable other than in the ordinary course of business;
(vi) except as disclosed in the Parent Disclosure Schedule, any other action or
event that would have required the consent of the Company pursuant to
Section 4.03 had such action or event occurred after the date of this Agreement,
or (vii) any sale of a material amount of assets of Parent, except in the
ordinary course of business.
SECTION 3.09. NO UNDISCLOSED LIABILITIES. Except as is disclosed in
Section 3.09 of the Parent Disclosure Schedule or in the Parent SEC Reports,
neither the Parent nor any of its subsidiaries has any liabilities (absolute,
accrued, contingent or otherwise) which are, in the aggregate, material to the
business, operations or financial condition of the Parent and its subsidiaries
taken as a whole, except liabilities (a) reflected and adequately provided for
in the Parent's balance sheet (including any related notes thereto) as of March
31, 1998 (the "1998 Parent Balance Sheet"), (b) incurred in the ordinary course
of business and not required under U.S. GAAP to be reflected on such balance
sheet, (c) incurred since March 31, 1998 in the ordinary course of business and
consistent with past practice, or (d) liabilities incurred in connection with
this Agreement.
SECTION 3.10. ABSENCE OF LITIGATION. Except as set forth in
Section 3.10 of the Parent Disclosure Schedule or the Parent SEC Reports, there
are no claims, actions, suits, proceedings or investigations pending or, to the
knowledge of Parent, threatened against Parent or any of its subsidiaries, or
any properties or rights of Parent or any of its subsidiaries, before any court,
arbitrator or administrative, governmental or regulatory authority or body,
domestic or foreign, that, individually or in the aggregate, could have a
Material Adverse Effect.
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SECTION 3.11. EMPLOYEE BENEFIT PLANS; EMPLOYMENT AGREEMENTS.
(a) Section 3.11 of the Parent Disclosure Schedule lists all employee
benefit plans (as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) and all bonus, stock option, stock
purchase, incentive, deferred compensation, supplemental retirement, severance
and other similar fringe or employee benefit plans, programs or arrangements,
and any current or former employment or executive compensation or severance
agreements, written or otherwise, for the benefit of, or relating to, any
employee of Parent, any trade or business (whether or not incorporated) which is
a member of a controlled group including Parent or which is under common control
with Parent (an "ERISA Affiliate") within the meaning of Section 414 of the
Code, or any subsidiary of Parent, as well as each plan with respect to which
Parent or an ERISA Affiliate could incur liability under Section 4069 (if such
plan has been or were terminated) or Section 4212(c) of ERISA (together, the
"Parent Employee Plans"), excluding agreements under which Parent has no
remaining monetary obligations and any of the foregoing that are required to be
maintained by the Company under the laws of any foreign jurisdiction. A copy of
each such written Parent Employee Plan (other than those referred to in
Section 4(b)(4) of ERISA) has been made available to the Company.
(b) (i) Except as set forth in Section 3.11(b) of the Parent Disclosure
Schedule, none of the Parent Employee Plans promises or provides retiree medical
or other retiree welfare benefits to any person and none of the Parent Employee
Plans is a "multiemployer plan" as such term is defined in Section 3(37) of
ERISA; (ii) there has been no "prohibited transaction", as such term is defined
in Section 406 of ERISA and Section 4975 of the Code, with respect to any Parent
Employee Plan, which could result in any material liability of Parent or any of
its subsidiaries; (iii) all Parent Employee Plans are in compliance in all
material respects with the requirements prescribed by any and all statutes
(including ERISA and the Code), orders, or governmental rules and regulations
currently in effect with respect thereto (including all applicable requirements
for notification to participants or the Department of Labor, the IRS or
Secretary of the Treasury), and Parent and each of its subsidiaries have
performed all material obligations required to be performed by them under, are
not in any material respect in default under or violation of, and have no
knowledge of any default or violation by any other party to, any of the Parent
Employee Plans; (iv) each Parent Employee Plan intended to qualify under
Section 401(a) of the Code and each trust intended to qualify under
Section 501(a) of the Code is the subject of a favorable determination letter
from the IRS, and nothing has occurred which may reasonably be expected to
impair such determination; (v) all contributions required to be made to any
Parent Employee Plan pursuant to Section 412 of the Code, or the terms of the
Parent Employee Plan or any collective bargaining agreement, have been made and
a reasonable amount has been accrued for contributions to each Parent Employee
Plan for the current plan years; (vi) with respect to each Parent Employee Plan,
no "reportable event" within the meaning of Section 4043 of ERISA (excluding any
such event for which the thirty (30) day notice requirement has been waived
under the regulations to Section 4043 of ERISA) nor any event described in
Section 4062, 4063 or 4041 of ERISA has occurred, and (vii) neither Parent nor
any ERISA Affiliate has incurred, nor reasonably expects to incur, any liability
under Title IV of ERISA (other than liability for premium payments to the
Pension Benefit Guaranty Corporation arising in the ordinary course of the
administration of the Parent Employee Plans).
SECTION 3.12. LABOR MATTERS. Except as set forth in Section 3.12 of
the Parent Disclosure Schedule or in the Parent SEC Reports, (i) there are no
controversies pending or, to the knowledge of Parent or any of its subsidiaries,
threatened between Parent or any of its subsidiaries and any of their respective
employees, which controversies have or may reasonably be expected to have a
Material Adverse Effect; (ii) neither Parent nor any of its subsidiaries is a
party to any collective bargaining agreement or other labor union contract
applicable to persons employed by Parent or its subsidiaries nor does Parent or
any of its subsidiaries know of any activities or proceedings of any labor union
to organize any such employees, and (iii) neither Parent nor any of its
subsidiaries has any knowledge of any strikes, slowdowns, work stoppages,
lockouts or threats thereof, by or with respect to any employees of Parent or
any of its subsidiaries.
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SECTION 3.13. REGISTRATION STATEMENT; JOINT PROXY STATEMENT PROSPECTUS.
Subject to the accuracy of the representations of the Company in Section 2.13,
the Registration Statement shall not, at the time the Registration Statement
(including any amendments or supplements thereto) is declared effective by the
SEC, contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements included therein, in
light of the circumstances under which they were made, not misleading. The
information supplied by Parent for inclusion in the Joint Proxy
Statement/Prospectus will not, on the date the Joint Proxy Statement/Prospectus
is first mailed to shareholders or stockholders (or at the time of any
subsequent amendment or supplement), at the time of the Stockholders' Meetings
or at the Effective Time, contain any statement which, at such time and in light
of the circumstances under which it shall be made, is false or misleading with
respect to any material fact, or will omit to state any material fact necessary
in order to make the statements therein not false or misleading; or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Stockholders'
Meetings which has become false or misleading. If at any time prior to the
Effective Time any event relating to Parent, Merger Sub or any of their
respective affiliates, officers or directors should be discovered by Parent or
Merger Sub which should be set forth in an amendment to the Registration
Statement or a supplement to the Joint Proxy Statement/Prospectus, Parent or
Merger Sub will promptly inform the Company. The Registration Statement and
Joint Proxy Statement/ Prospectus shall comply in all material respects as to
form and substance with the requirements of the Securities Act, the Exchange Act
and the rules and regulations thereunder. Notwithstanding the foregoing, Parent
makes no representation or warranty with respect to any information supplied by
the Company which is contained in, or furnished in any of the foregoing
documents.
SECTION 3.14. TITLE TO PROPERTY. Except as reflected in the Parent's
financial statements included in the Parent SEC Reports, Parent and each of its
subsidiaries have good and defensible title to all of their properties and
assets, free and clear of all liens, charges and encumbrances except liens for
taxes not yet due and payable and such liens or other imperfections of title, if
any, as do not materially detract from the value of or interfere with the
present use of the property affected thereby or which, individually or in the
aggregate, would not have a Material Adverse Effect; and, to Parent's knowledge,
all leases pursuant to which Parent or any of its subsidiaries lease from others
material amounts of real or personal property are in good standing, valid and
effective in accordance with their respective terms, and there is not, to the
knowledge of Parent, under any of such leases, any existing material default or
event of default (or event which with notice or lapse of time, or both, would
constitute a material default and in respect of which Parent or such subsidiary,
as applicable, has not taken adequate steps to prevent such a default from
occurring) except where the lack of such good standing, validity and
effectiveness, or the existence of such default or event of default would not
have a Material Adverse Effect.
SECTION 3.15. TAXES. Except as disclosed in Section 3.15 of the
Parent Disclosure Schedule, Parent and each of its subsidiaries have filed all
United States federal income Tax Returns and all other material Tax Returns
required to be filed by them, and have duly paid or made adequate provision on
their books for the payment of all taxes which have been incurred or are due and
payable. Except as disclosed in Section 3.15 of the Company Disclosure Schedule
(i) there are no pending audits, examinations or proposed audits or examinations
of any tax returns filed by Parent or its subsidiaries and (ii) neither the
Parent nor any of its subsidiaries has given or been requested to give waivers
or extensions of any statute of limitations relating to the payment of Taxes for
which Parent or any of its subsidiaries may be liable. Except as set forth in
Section 3.15 of the Parent Disclosure Schedule, as of the date of this Agreement
the consolidated Tax Returns of Parent and each of its subsidiaries have been
audited by the IRS (or the appropriate statute of limitations has expired) for
all fiscal years through March 31, 1994. Except as set forth in Section 3.15 of
the Parent Disclosure Schedule, neither Parent nor any of its subsidiaries:
(i) is a party to any agreement providing for the allocation, payment or sharing
of taxes among Parent, its subsidiaries, or any third parties; or (ii) has an
application pending with respect to any Tax requesting permission for a change
in accounting method.
SECTION 3.16. ENVIRONMENTAL MATTERS. Except as set forth in
Section 3.16 of the Parent Disclosure Schedule, and except in all cases as, in
the aggregate, have not had and could not reasonably be expected to have a
Material Adverse Effect, Parent and each of its subsidiaries to the best of
Parent's knowledge (i) have obtained all
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applicable permits, licenses and other authorization which are required under
federal, state or local laws relating to pollution or protection of the
environment, including laws relating to emissions, discharges, releases or
threatened releases of pollutants, contaminants, or hazardous or toxic materials
or wastes into ambient air, surface water, ground water or land or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of pollutants, contaminants or hazardous or
toxic materials or wastes by Parent or its subsidiaries (or their respective
agents); (ii) are in compliance with all terms and conditions of such required
permits, licenses and authorization, and also are in compliance with all other
limitations, restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules and timetables contained in such laws or contained in any
regulation, code, plan, order, decree, judgment, notice or demand letter issued,
entered, promulgated or approved thereunder; (iii) as of the date hereof, are
not aware of nor have received notice of any event, condition, circumstance,
activity, practice, incident, action or plan which is reasonably likely to
interfere with or prevent continued compliance with or which would give rise to
any common law or statutory liability, or otherwise form the basis of any claim,
action, suit or proceeding, based on or resulting from Parent's or any of its
subsidiaries' (or any of their respective agents') manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling, or the
emission, discharge or release into the environment, of any pollutant,
contaminant, or hazardous or toxic material or waste, and (iv) have taken all
actions necessary under applicable requirements of federal, state or local laws,
rules or regulations to register any products or materials required to be
registered by Parent or its subsidiaries (or any of their respective agents)
thereunder.
SECTION 3.17. BROKERS. No broker, finder or investment banker (other
than CIBC Oppenheimer Corp. ("CIBC Oppenheimer")) is entitled to any brokerage,
finder's or other fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
Parent or Merger Sub. Parent has heretofore furnished to the Company a complete
and correct copy of all agreements between Parent and CIBC Oppenheimer pursuant
to which such firm would be entitled to any payment relating to the transaction
contemplated hereunder.
SECTION 3.18. FULL DISCLOSURE. No statement contained in any
certificate or schedule furnished or to be furnished by Parent or Merger Sub to
the Company in, or pursuant to the provisions of, this Agreement contains or
will contain any untrue statement of a material fact or omits or shall omit to
state any material fact necessary, in the light of the circumstances under which
it was made, in order to make the statements herein or therein not misleading.
SECTION 3.19. OPINION OF FINANCIAL ADVISOR. Parent has been advised by
its financial advisor, CIBC Oppenheimer, that, in its opinion, as of July 22,
1998, the Exchange Ratio is fair from a financial point of view to Parent and
delivered a written copy of such opinion dated July 22, 1998 to Parent.
SECTION 3.20. INTELLECTUAL PROPERTY. To Parents' knowledge, neither
Parent nor any of its subsidiaries utilizes or has utilized any patent,
trademark, tradename, service mark, copyright, software, trade secret or
know-how, except for those which are owned, possessed or lawfully used by Parent
or its subsidiaries in their operations, and, to the best knowledge of Parent,
neither Parent nor any of its subsidiaries infringes upon or unlawfully or
wrongfully uses any patent, trademark, tradename, service mark, copyright or
trade secret owned or validly claimed by another.
SECTION 3.21. INTERESTED PARTY TRANSACTIONS. Except as set forth in
Section 3.21 of the Parent Disclosure Schedule or in the Parent SEC Reports,
since the date of the Parent's most recent proxy statement dated July 13, 1998,
no event has occurred that would be required to be reported as a Certain
Relationship or Related Transaction, pursuant to Item 404 of Regulation S-K
promulgated by the SEC.
SECTION 3.22. INSURANCE. Parent and its subsidiaries maintain fire and
casualty, general liability, business interruption, product liability and
sprinkler and water damage insurance that Parent believes to be reasonably
prudent for its business.
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SECTION 3.23. VOTE REQUIRED. The affirmative vote of the holders of at
least a majority of the outstanding Parent Common Shares is the only vote of the
holders of the Parent's Common Stock necessary to approve the Merger.
SECTION 3.24. POOLING MATTERS. Neither Parent nor any of its affiliates
has, to the Parent's knowledge and based upon consultation with its independent
public accountants, taken or agreed to take any action that (without giving
effect to any action taken or agreed to be taken by the Company or any of its
affiliates) would prevent Parent from accounting for the business combination to
be effected by the Merger as a pooling of interests in accordance with U.S. GAAP
and applicable SEC regulations.
SECTION 3.25. PARENT RIGHTS AGREEMENT.
Prior hereto, Parent has delivered to the Company a true and complete copy
of the Rights Agreement dated as of October 24, 1991 between Parent and
Manufacturers Hanover Trust Company of California (the "Parent Rights
Agreement") in effect on the date hereof, and, assuming the accuracy of the
representations contained in Sections 2.25 and 3.05, this Agreement will not
result in the triggering of any right (including, without limitation a "flip-in"
or "flip-over" or similar event commonly described in rights agreements) or
entitlement of Parent stockholders under the Parent Rights Agreement or any
similar agreement to which Parent or any of its affiliates is a party.
SECTION 3.26. OWNERSHIP OF COMPANY COMMON STOCK.
Parent is not the beneficial owner of any shares of Company Common Stock.
ARTICLE IV
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 4.01. CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER.
During the period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement or the Effective Time, except as
set forth in Section 4.01 of the Company Disclosure Schedule or contemplated by
this Agreement, the Company covenants and agrees that, unless Parent shall
otherwise agree in writing, the Company shall conduct its business and shall
cause the business of the Subsidiary to be conducted in the ordinary course of
business and in a manner substantially consistent with past practice; and the
Company shall use reasonable commercial efforts to preserve substantially intact
the business organization of the Company and the Subsidiary, to keep available
the services of the present officers, employees and consultants of the Company
and the Subsidiary and to preserve the present relationships of the Company and
the Subsidiary with customers, suppliers and other persons with which the
Company or the Subsidiary has significant business relations. By way of
amplification and not limitation, except as set forth in Section 4.01 of the
Company Disclosure Schedule or contemplated by this Agreement, neither the
Company nor the Subsidiary shall, during the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, directly or indirectly do, or propose to do, any of the
following without the prior written consent of Parent:
(a) amend or otherwise change the Company's Articles of Incorporation or
Bylaws;
(b) issue, sell, pledge, dispose of or encumber, or authorize the
issuance, sale, pledge, disposition or encumbrance of, any shares of Company
Common Stock of any class, or any options, warrants, convertible securities or
other rights of any kind to acquire any shares of Company Common Stock, or any
other ownership interest (including, without limitation, any phantom interest)
of the Company, the Subsidiary or any of its affiliates (except for the issuance
of (i) shares of Company Common Stock issuable pursuant to stock options under
the Company Stock Option Plans which options are outstanding on the date hereof,
(ii) the grant of options consistent with past practice to purchase up to
100,000 shares of Company Common Stock to newly hired employees (excluding
officers); PROVIDED THAT the vesting of such new options is not in any manner
accelerated by the Merger; and (iii) shares of Company Common Stock pursuant to
the exercise of Stock Purchase Rights which are outstanding on the date hereof);
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(c) sell, pledge, dispose of or encumber any assets of the Company or the
Subsidiary (except for (i) sales of assets in the ordinary course of business
and in a manner substantially consistent with past practice, (ii) dispositions
of obsolete or worthless assets and (iii) sales of immaterial assets not in
excess of $100,000);
(d) except as is contemplated by Section 5.05, accelerate, amend or change
the period (or permit any acceleration, amendment or change) of exercisability
of options or restricted stock granted under the Employee Plans (including the
Company Stock Option Plans) or authorize cash payments in exchange for any
options granted under any of such plans;
(e) (i) declare, set aside, make or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect of
any of its Common Stock, except that the Subsidiary may declare and pay a
dividend to the Company, (ii) split, combine or reclassify any of its Common
Stock or issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its Common Stock or
(iii) amend the terms of, repurchase, redeem or otherwise acquire, or permit the
Subsidiary to repurchase, redeem or otherwise acquire, any of its securities or
any securities of the Subsidiary, or propose to do any of the foregoing;
(f) (i) acquire (by merger, consolidation, or acquisition of stock or
assets) any company, corporation, partnership or other business organization or
division thereof; (ii) incur any indebtedness for borrowed money or issue any
debt securities or assume, guarantee (other than guarantees of bank debt of the
Subsidiary entered into in the ordinary course of business) or endorse or
otherwise as an accommodation become responsible for, the obligations of any
person, or make any loans or advances, except in the ordinary course of business
consistent with past practice; (iii) enter into or amend any material contract
or agreement other than in the ordinary course of business; (iv) authorize any
capital expenditures or purchase of fixed assets which are, in the aggregate, in
excess of $100,000 for the Company and the Subsidiary taken as a whole, or
(v) enter into or amend any contract, agreement, commitment or arrangement to
effect any of the matters prohibited by Section 4.01(f);
(g) increase the compensation payable or to become payable to its officers
or employees, except for increases in salary or wages of employees of the
Company or the Subsidiary who are not officers of the Company in accordance with
past practices, or grant any severance or termination pay to, or enter into any
employment or severance agreement with any director, officer (except for
officers who are terminated on an involuntary basis) or other employee of the
Company or the Subsidiary, or establish, adopt, enter into or amend any
collective bargaining, bonus, profit sharing, thrift, compensation, stock
option, restricted stock, pension, retirement, deferred compensation,
employment, termination, severance or other plan, agreement, trust, fund, policy
or arrangement for the benefit of any current or former directors, officers or
employees, except, in each case, as may be required by law;
(h) take any action to change accounting policies or procedures
(including, without limitation, procedures with respect to revenue recognition,
payments of accounts payable and collection of accounts receivable) except as
required by U.S. GAAP or applicable law;
(i) make any material tax election inconsistent with past practices or
settle or compromise any material federal, state, local or foreign tax liability
or agree to an extension of a statute of limitations except to the extent the
amount of any such settlement has been reserved for on the most recent Company
SEC Report;
(j) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business and
consistent with past practice of liabilities reflected or reserved against in
the financial statements of the Company or incurred in the ordinary course of
business and consistent with past practice; or
(k) take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.01(a) through (j) above, or any action which would make
any of the representations or warranties of the Company contained in this
Agreement untrue or incorrect or prevent the Company from performing or cause
the Company not to perform its covenants hereunder.
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SECTION 4.02. NO SOLICITATION.
(a) The Company shall not, and shall use its reasonable best efforts to
cause the Company shareholders listed on Schedule 5.06 hereto to not, initiate,
solicit or encourage (including by way of furnishing information or assistance),
or take any other action to facilitate, any inquiries or the making of any
proposal relating to, or that may reasonably be expected to lead to, any
Alternative Transaction (as defined in Section 7.03(c)), or enter into
discussions or negotiate with any person or entity in furtherance of such
inquiries or to obtain an Alternative Transaction, or agree to, or endorse, any
Alternative Transaction, or authorize or permit any of the officers, directors,
employees or agents of the Company or the Subsidiary or any investment banker,
financial advisor, attorney, accountant or other representative retained by the
Company or the Subsidiary to take any such action and the Company shall promptly
notify Parent, subject to confidentiality restrictions existing on the date
hereof, of all relevant terms of any such inquiries or proposals received by the
Company or the Subsidiary or by any such officer, director, employee, agent,
investment banker, financial advisor, attorney, accountant or other
representative relating to any of such matters and if such inquiry or proposal
is in writing, the Company shall promptly deliver or cause to be delivered to
Parent a copy of such inquiry or proposal, subject to confidentiality
restrictions existing on the date hereof; PROVIDED, HOWEVER, that nothing
contained in this subsection (a) shall prohibit the Board of Directors of the
Company from (i) furnishing information to, or entering into discussions or
negotiations with, any persons or entity in connection with an unsolicited bona
fide proposal in writing by such person or entity relating to an Alternative
Transaction if, and only to the extent that (A) the Board of Directors of the
Company, after duly considering the advice of Graham & James LLP determines in
good faith that such action is required for the Board of Directors of the
Company to comply with its fiduciary duties to shareholders imposed by
Washington Law and (B) prior to furnishing such information to, or entering into
discussions or negotiations with, such person or entity the Company provides
written notice to Parent to the effect that it is furnishing information to, or
entering into discussions or negotiations with, such person or entity; or
(ii) complying with Rule 14e-2 promulgated under the Exchange Act with regard to
an Alternative Transaction.
(b) The Company shall immediately cease and cause to be terminated any
existing discussions or negotiations with any parties (other than Parent and
Merger Sub) conducted heretofore with respect to any of the foregoing. The
Company agrees not to release any third party from any confidentiality or
standstill agreement to which the Company is a party.
(c) The Company shall ensure that the officers, directors and employees of
the Company and the Subsidiary and any investment banker or other advisor or
representative retained by the Company are aware of the restrictions described
in this Section 4.01.
SECTION 4.03. CONDUCT OF BUSINESS BY PARENT PENDING THE MERGER.
During the period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement or the Effective Time, Parent
covenants and agrees that, unless the Company shall otherwise agree in writing,
Parent shall not do any of the following:
(a) issue, sell, pledge, dispose of or encumber, or authorize the
issuance, sale, pledge, disposition or encumbrance of, any shares of capital
stock of any class, or any options, warrants, convertible securities (except
convertible debt securities) or other rights of any kind to acquire any shares
of capital stock, or any other ownership interest (including, without
limitation, any phantom interest) of Parent, any of its subsidiaries or
affiliates (other than with respect to acquisitions by Parent or grants or
exercises of options under Parent's existing stock option plans and for sales of
stock pursuant to Parent's existing stock purchase plans) pursuant to any
transaction pursuant to which any person (or group of persons) acquires more
than 50 percent of the outstanding shares of Parent Common Stock, whether from
Parent or pursuant to a tender offer or exchange offer or otherwise, (ii) effect
a merger or other business combination involving Parent pursuant to which any
person (or group of persons) acquires more than 50 percent of the outstanding
shares of Parent Common Stock or the entity surviving such merger or business
combination or (iii) any other transaction pursuant to which any person (or
group of persons) acquires control of Parent's assets; or
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(b) in the event that Parent shall consider entering into any transaction
involving an acquisition (whether by purchase of assets, merger or otherwise) of
a third party prior to the Effective Time which will require approval of
Parent's stockholders, agree to enter into such transaction prior to
consultation with the Board of Directors of the Company;
(c) take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.03(a) or 4.03(b) above, or any action which would make
any of the representations or warranties of Parent contained in this Agreement
untrue or incorrect or prevent Parent from performing or cause Parent not to
perform its covenants hereunder.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.01. JOINT PROXY STATEMENT PROSPECTUS; REGISTRATION STATEMENT.
As promptly as practicable (but in no event later than August 31, 1998), the
Company and Parent shall prepare and file with the SEC the Joint Proxy
Statement/Prospectus and the Registration Statement of the Parent relating to
the Merger, the transactions contemplated hereby and the Parent Common Shares to
be issued in connection with the Merger. Parent and the Company will take such
actions as may be reasonably required to cause the Registration Statement to
become effective as soon thereafter as practicable. The Joint Proxy
Statement/Prospectus shall include the recommendation of the Board of Directors
of the Company in favor of the Merger and the recommendation of the Board of
Directors of Parent in favor of the issuance of Parent Common Shares in
connection with the Merger.
SECTION 5.02. STOCKHOLDERS' MEETINGS. The Company and Parent shall call
and hold their respective Stockholders' Meetings as promptly as practicable for
the purpose of voting upon the approval of the Merger, and Parent and the
Company shall use their reasonable best efforts to hold the Stockholders'
Meetings on the same day (and at the same time of such day) and as soon as
practicable after the date on which the Registration Statement becomes
effective. The Company and Parent shall use their best efforts to hold the
Stockholders' Meetings not later than October 21, 1998. The Company and Parent
shall use their respective reasonable best efforts to solicit from their
respective stockholders proxies in favor of the approval of the Merger and the
issuance of Parent Common Shares in connection with the Merger, respectively,
and shall take all other action necessary or advisable to secure the vote or
consent of stockholders required by Delaware Law with respect to Parent and
Washington Law with respect to the Company and the Certificate of Incorporation
and Bylaws of Parent and the Articles of Incorporation and Bylaws of the Company
to obtain such approvals, unless otherwise necessary under the applicable
fiduciary duties of the respective directors of the Company and Parent, as
determined by such directors in good faith after consultation with and based
upon the advice of outside legal counsel.
SECTION 5.03. ACCESS TO INFORMATION; CONFIDENTIALITY. Upon reasonable
notice and subject to restrictions contained in confidentiality agreements to
which such party is subject (from which such party shall use reasonable efforts
to be released solely for purposes hereof), the Company and Parent shall each
(and shall cause each of their subsidiaries to) afford to the officers,
employees, accountants, counsel and other representatives of the other,
reasonable access, during the period prior to the Effective Time, to all its
properties, books, contracts, commitments and records and, during such period,
subject to confidentiality restrictions. The Company and Parent each shall (and
shall cause each of their subsidiaries to) furnish promptly to the other all
information concerning its business, properties and personnel as such other
party may reasonably request, and each shall make available to the other the
appropriate individuals (including attorneys, accountants and other
professionals) for discussion of the other's business, properties and personnel
as either party may reasonably request. Each party shall keep such information
confidential in accordance with the terms of the letter agreement, entered into
on July 15, 1998, (the "Confidentiality Agreement") between Parent and the
Company.
SECTION 5.04. CONSENTS; APPROVALS. The Company and Parent shall each use
their reasonable best efforts to obtain all consents, waivers, approvals,
authorizations or orders (including, without limitation, all governmental and
regulatory rulings and approvals), and the Company and Parent shall make all
filings (including, without limitation, all filings with governmental or
regulatory agencies) required in connection with the
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authorization, execution and delivery of this Agreement by the Company and
Parent and the consummation by them of the transactions contemplated hereby.
The Company and Parent shall furnish all information required to be included in
the Joint Proxy Statement/Prospectus and the Registration Statement, or for any
application or other filing to be made pursuant to the rules and regulations of
any governmental body in connection with the transactions contemplated by this
Agreement.
SECTION 5.05. INDEMNIFICATION AND INSURANCE.
(a) To the extent, if any, not provided by an existing right under the
Company's directors and officers liability insurance policies, from and after
the Effective Time, Parent and the Surviving Corporation shall, to the fullest
extent permitted by applicable law, indemnify, defend and hold harmless each
person who is now, or has been at any time prior to the date hereof, or who
becomes prior to the Effective Time, a director, officer or employee of the
Company or its Subsidiary (each an "Indemnified Party" and, collectively, the
"Indemnified Parties") against all losses, expenses (including reasonable
attorneys' fees and expenses), claims, damages or liabilities or, subject to the
provision of the next succeeding sentence, amounts paid in settlement, arising
out of actions or omissions occurring at or prior to the Effective Time and
whether asserted or claimed prior to, at or after the Effective Time that are in
whole or in part (i) based on, or arising out of the fact that such person is or
was a director, officer or employee of the Company or its Subsidiary or (ii)
based on, arising out of or pertaining to the transactions contemplated by this
Agreement. In the event of any such loss, expense, claim, damage or liability
(whether or not arising before the Effective Time), (i) Parent and/or the
Surviving Corporation shall pay the reasonable fees and expenses of counsel
selected by the Indemnified Parties, which counsel shall be reasonably
satisfactory to Parent, promptly after statements therefor are received and
otherwise advance to such Indemnified Party upon request reimbursement of
documented expenses reasonably incurred, in either case to the extent not
prohibited by the WBCA and upon receipt of any affirmation and undertaking
required by the WBCA, (ii) Parent and/or the Surviving Corporation will
cooperate in the defense of any such matter and (iii) any determination required
to be made with respect to whether an Indemnified Party's conduct complies with
the standards set forth under Washington Law and the Surviving Corporation's
Restated Articles of Incorporation and Bylaws shall be made by independent
counsel mutually acceptable to the Surviving Corporation and Indemnified Party;
PROVIDED, HOWEVER, that Parent and/or the Surviving Corporation shall not be
liable for any settlement effected without its written consent (which consent
shall not be unreasonably withheld). If Parent or the Surviving Corporation is
itself a party in a matter indemnifiable pursuant to this Section 5.05, the
Indemnified Parties agree to be represented by counsel for Parent and/or the
Surviving Corporation, as applicable, except to the extent that there is, under
applicable standards of professional conduct, a conflict on any significant
issue between the positions of the Indemnified party and Parent and/or the
Surviving Corporation, as applicable. The Indemnified Parties as a group may
retain only one law firm with respect to each related matter except to the
extent there is, in the opinion of counsel to an Indemnified Party, under
applicable standards of professional conduct, a conflict on any significant
issue between the positions of any two or more Indemnified Parties.
(b) For a period of six years after the Effective Time, Parent and/or the
Surviving Corporation shall cause to be maintained in effect the policies of
directors' and officers' liability insurance maintained by the Company for the
benefit of those persons who are covered by such policies at the Effective Time
to the extent such policies cover acts and omissions of directors and officers
of the Company which occurred or would have occurred in the case of omissions
prior to the Effective Time (or Parent and/or the Surviving Corporation may
substitute therefor policies of at least the same coverage with respect to
matters occurring prior to the Effective Time); PROVIDED, HOWEVER, that in no
event shall Parent and/or the Surviving Corporation be required to expend in
excess of 150 percent of the annual premium currently paid by the Company for
such coverage, and PROVIDED FURTHER, that if the premium for such coverage
exceeds such amount, Parent and/or the Surviving Corporation shall purchase a
policy with the greatest coverage available for such 150 percent of the annual
premium.
(c) In the event Parent and/or the Surviving Corporation or any of their
successors and assigns (i) consolidates with or merges into any other person and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger or (ii) transfers all or substantially all of their
properties and assets to any person, then and in either such case, proper
provision shall be made so that the successors and assigns of Parent and/or the
Surviving Corporation shall assume the obligations set forth in this Section
5.05.
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(d) To the fullest extent permitted by law, from and after the Effective
Time, all rights to indemnification now existing in favor of the employees,
agents, directors or officers of the Company and its Subsidiary with respect to
their activities as such prior to the Effective Time, as provided for in their
respective Articles of Incorporation or Bylaws, in effect on the date hereof or
otherwise in effect on the date hereof, shall survive the Merger and shall
continue in full force and effect for a period of not less than six years from
the Effective Time.
SECTION 5.06. AGREEMENTS OF AFFILIATES; IRREVOCABLE PROXIES. The Company
shall deliver to Parent, prior to the date the Registration Statement becomes
effective under the Securities Act, a letter (the "Affiliate Letter")
identifying all persons who are, or may be deemed to be, at the time of the
Company Stockholders' Meetings, "affiliates" of the Company for purposes of Rule
145 under the Securities Act. The Company shall use its best efforts to cause
each person who is identified as an "affiliate" in the Affiliate Letter to
deliver to Parent, prior to the Effective Time, a written agreement (an
"Affiliate Agreement") in a form mutually agreeable to the Company and Parent.
The Company shall use its reasonable best efforts to cause the shareholders of
the Company listed on Schedule 5.06 hereto (the "Key Company Shareholders") to
enter into concurrently with the execution of this Agreement a shareholder
agreement, in substantially the form attached hereto as EXHIBIT 5.06 (a "Company
Shareholder Agreement"), with Parent to: (a) provide an irrevocable proxy to
Parent to support and vote in favor of the Merger, (b) agree, to the extent
required to allow Parent to account for the business combination to be effected
by the Merger as a pooling of interests, not to sell, transfer or assign any
Parent Common Shares received by them pursuant to the Merger until the
expiration of all applicable holding periods required under the pooling of
interest accounting rules and (c) take all actions and execute all documents
reasonably requested by Parent to carry out the foregoing matters.
SECTION 5.07. NOTIFICATION OF CERTAIN MATTERS. The Company shall give
prompt notice to Parent, and Parent shall give prompt notice to the Company, of
(i) the occurrence or non-occurrence of any event of which it becomes aware or
of which it should reasonably have been aware, the occurrence or non-occurrence
of which would be likely to cause any representation or warranty contained in
this Agreement to be materially untrue or inaccurate and (ii) any failure of the
Company, Parent or Merger Sub, as the case may be, to materially comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; PROVIDED, HOWEVER, that the delivery of any notice pursuant to
this Section shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice and FURTHER PROVIDED that failure
to give such notice shall not be treated as a breach of covenant for the
purposes of Section 6.02(b) or 6.03(b) unless the failure to give such notice
results in material prejudice to the other party.
SECTION 5.08. FURTHER ASSURANCES; TAX TREATMENT.
(a) Upon the terms and subject to the conditions hereof, each of the
parties hereto shall use all reasonable best efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all other things necessary,
proper or advisable to consummate and make effective as promptly as practicable
the transactions contemplated by this Agreement, to obtain in a timely manner
all necessary waivers, consents and approvals and to effect all necessary
registrations and filings, and to otherwise satisfy or cause to be satisfied all
conditions precedent to its obligations under this Agreement. The foregoing
covenant shall not include any obligation by Parent to agree to divest, abandon,
license or take similar action with respect to any assets (tangible or
intangible) of Parent or the Company.
(b) Each of Parent, Merger Sub and the Company shall use its best efforts
to cause the Merger to qualify, and will not (both before and after consummation
of the Merger) take any actions which could prevent the Merger from qualifying,
as a reorganization under the provisions of Section 368 of the Code.
SECTION 5.09. PUBLIC ANNOUNCEMENTS. Parent and the Company shall consult
with each other before issuing any press release with respect to the Merger or
this Agreement and shall not issue any such press release or make any such
public statement without the prior consent of the other party, which shall not
be unreasonably withheld; PROVIDED, HOWEVER, that a party may, without the prior
consent of the other party, issue such press release or make such public
statement as may upon the advice of counsel be required by law or the NASD if it
has used all reasonable efforts to consult with the other party.
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SECTION 5.10. LISTING OF PARENT COMMON SHARES. Parent shall cause the
Parent Common Shares to be issued in the Merger to be approved for quotation on
the Nasdaq National Market and shall use commercially reasonable best efforts to
effect such quotation prior to the Effective Time.
SECTION 5.11. CONVEYANCE TAXES. Parent and the Company shall cooperate in
the preparation, execution and filing of all returns, questionnaires,
applications, or other documents regarding any real property transfer or gains,
sales, use, transfer, value added, stock transfer and stamp taxes, any transfer,
recording, registration and other fees, and any similar taxes which become
payable in connection with the transactions contemplated hereby that are
required or permitted to be filed on or before the Effective Time.
SECTION 5.12. ACCOUNTANT'S LETTERS. Upon reasonable notice from the
other, the Company or Parent shall use their respective best efforts to cause
Arthur Andersen LLP and KPMG Peat Marwick LLP, respectively, to deliver to
Parent or the Company, as the case may be, a letter covering such matters as are
requested by Parent or the Company, as the case may be, and as are customarily
addressed in accountant's "comfort" letters.
SECTION 5.13. POOLING ACCOUNTING TREATMENT. Each of the Parties will use
its best efforts to cause the transactions contemplated by this Agreement to be
accounted for as a pooling transaction by each Party's independent certified
public accountants, by the NASD and by the SEC, respectively, and each of the
Parties agrees that it will take no action that would cause such accounting
treatment not to be obtained.
SECTION 5.14. APPOINTMENT OF DIRECTOR. At the Effective Time, Paul Bachow
shall be appointed to the board of directors of Parent and shall be nominated by
management to serve as a member of the board of directors of Parent for a
one-year term at each of the annual meetings of Parent's stockholders held in
1999, 2000 and 2001. At the Effective Time, V. Frank Mendicino ("Mr.
Mendicino") shall be appointed to the board of directors of Parent and shall be
nominated by management to serve as a member of the board of directors of Parent
for a one-year term at each of the annual meetings of Parent's stockholders held
in 1999 and 2000, PROVIDED, HOWEVER; the obligation of Parent's management to
nominate Mr. Mendicino at either or both annual meetings of Parent's
stockholders, as applicable, shall lapse upon the date that Woodside Fund III
liquidates or otherwise distributes all Parent Common Shares held by Woodside
Fund III.
SECTION 5.15. DISCLOSURE SCHEDULES. On the date of this Agreement, (i)
the Company has delivered to Parent the Company Disclosure Schedule, accompanied
by a certificate signed by the chief financial officer of the Company stating
that the Company Disclosure Schedule is being delivered pursuant to this Section
5.15, and (ii) Parent has delivered to the Company the Parent Disclosure
Schedule, accompanied by a certificate signed by the chief financial officer of
Parent stating that the Parent Disclosure Schedule is being delivered pursuant
to this Section 5.15. The Company Disclosure Schedule and the Parent Disclosure
Schedule are collectively referred to herein as the "Disclosure Schedules." The
Disclosure Schedules, when so delivered, shall be deemed to constitute an
integral part of this Agreement and to modify or otherwise affect the respective
representations, warranties, covenants or agreements of the parties hereto
contained herein to the extent that such representations, warranties, covenants
or agreements expressly refer to the Disclosure Schedules. Anything to the
contrary contained herein or set forth in the Disclosure Schedules
notwithstanding, any and all statements, representations, warranties or
disclosures set forth in the Disclosure Schedules shall be deemed to have been
made on and as of the date of this Agreement.
ARTICLE VI
CONDITIONS TO THE MERGER
SECTION 6.01. CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER.
The respective obligations of each party to effect the Merger shall be subject
to the satisfaction at or prior to the Effective Time of the following
conditions:
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(a) EFFECTIVENESS OF THE REGISTRATION STATEMENT. The Registration
Statement shall have been declared effective by the SEC under the Securities
Act. No stop order suspending the effectiveness of the Registration Statement
shall have been issued by the SEC and no proceedings for that purpose and no
similar proceeding in respect of the Joint Proxy Statement/Prospectus shall have
been initiated or threatened by the SEC;
(b) STOCKHOLDER APPROVAL. This Agreement and the Merger shall have been
approved and adopted by the requisite vote of the stockholders of the Company
and Parent;
(c) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect; and there shall not be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced or
deemed applicable to the Merger, which makes the consummation of the Merger
illegal; and
(d) TAX OPINIONS. Parent and Company shall have received the opinions of
their respective counsel, Morrison & Foerster LLP and Graham & James LLP, in
form and substance reasonably satisfactory to each, on the basis of certain
facts, representations and assumptions set forth in such opinion, dated the
Effective Time, to the effect that the Merger will be treated for federal income
tax purposes as a reorganization qualifying under the provisions of
Section 368(a) of the Code and that each of Parent, Merger Subsidiary and the
Company will be a party to the reorganization within the meaning of
Section 368(b) of the Code.
(e) HSR ACT. The waiting period (and any extension thereof) applicable to
the consummation of the Merger under the HSR Act shall have expired or been
terminated.
SECTION 6.02. ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER
SUB. The obligations of Parent and Merger Sub to effect the Merger are also
subject to the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company contained in this Agreement shall be true and correct in all
respects on and as of the Effective Time, except for (i) changes contemplated by
this Agreement, (ii) those representations and warranties which address matters
only as of a particular date (which shall remain true and correct as of such
date) and (iii) where the failure to be true and correct would not have a
Material Adverse Effect, with the same force and effect as if made on and as of
the Effective Time, and Parent and Merger Sub shall have received a certificate
to such effect signed by the President and Chief Financial Officer of the
Company;
(b) AGREEMENTS AND COVENANTS. The Company shall have performed or
complied in all material respects with all agreements and covenants required by
this Agreement to be performed or complied with by it on or prior to the
Effective Time, and Parent and Merger Sub shall have received a certificate to
such effect signed by the President and Chief Financial Officer of the Company;
(c) CONSENTS OBTAINED. All material consents, waivers, approvals,
authorizations or orders required to be obtained, and all filings required to be
made ("Material Consents"), by the Company for the authorization, execution and
delivery of this Agreement and the consummation by it of the transactions
contemplated hereby shall have been obtained and made by the Company, except
where the failure to receive such Material Consents would not have a Material
Adverse Effect on the Company or Parent;
(d) MATERIAL ADVERSE CHANGE. Since the date of this Agreement, there
shall have been no change in the Company or the Subsidiary having or reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect;
(e) OPINION OF ACCOUNTANT. Parent shall have received (i) an opinion of
Arthur Andersen LLP, independent public accountants, to the effect that the
Merger qualifies for a pooling of interests accounting treatment if consummated
in accordance with this Agreement and (ii) a copy of the opinion referred to in
Section 6.03(e) below; and
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(f) AFFILIATE AGREEMENTS. Parent shall have received from each person who
is identified in the Affiliate Letter as an "affiliate" of the Company, an
Affiliate Agreement, and such Affiliate Agreement shall be in full force and
effect.
(g) COMPANY SHAREHOLDER AGREEMENTS. Parent shall have received from each
Key Company Shareholder a Company Shareholder Agreement, and such Company
Shareholder Agreement shall be in full force and effect.
SECTION 6.03. ADDITIONAL CONDITIONS TO OBLIGATION OF THE COMPANY. The
obligation of the Company to effect the Merger is also subject to the following
conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Parent and Merger Sub contained in this Agreement shall be true and correct in
all respects on and as of the Effective Time, except for (i) changes
contemplated by this Agreement, (ii) those representations and warranties which
address matters only as of a particular date (which shall remain true and
correct as of such date) and (iii) where the failure to be true and correct
would not have a Material Adverse Effect, with the same force and effect as if
made on and as of the Effective Time, and the Company shall have received a
certificate to such effect signed by the President and Chief Financial Officer
of Parent;
(b) AGREEMENTS AND COVENANTS. Parent and Merger Sub shall have performed
or complied in all material respects with all agreements and covenants required
by this Agreement to be performed or complied with by them on or prior to the
Effective Time, and the Company shall have received a certificate to such effect
signed by the President and Chief Financial Officer of Parent;
(c) CONSENTS OBTAINED. All Material Consents required to be obtained or
made by Parent and Merger Sub for the authorization, execution and delivery of
this Agreement and the consummation by them of the transactions contemplated
hereby shall have been obtained and made by Parent and Merger Sub, except where
the failure to receive such Material Consents would not have a Material Adverse
Effect on the Company or Parent;
(d) MATERIAL ADVERSE CHANGE. Since the date of this Agreement, there
shall have been no change in Parent or any subsidiary of the Parent having or
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect; and
(e) OPINION OF ACCOUNTANT. The Company shall have received (i) an opinion
of KPMG, independent public accountants, to the effect that the Merger qualifies
for a pooling of interests accounting treatment if consummated in accordance
with this Agreement and (ii) a copy of the opinion referred to in
Section 6.02(e) above.
(f) TRIGGER OF PARENT RIGHTS. No event that would result in the
triggering of any right or entitlement of Parent stockholders under the Parent
Rights Agreement, including a "flip-in" or "flip-over" or similar event commonly
described in such rights plans, has or will occur, including but not limited to,
as a result of this Agreement, which would have or be reasonably likely to
result in a Parent Material Adverse Effect or materially change the number of
outstanding equity securities of Parent, and the rights under the Parent Rights
Agreement shall not have become nonredeemable by any action of the Board of
Directors of Parent.
(g) APPROVAL FOR QUOTATION ON NASDAQ NATIONAL MARKET. The Parent Common
Shares to be issued in the Merger shall have been approved for quotation on the
Nasdaq National Market, subject only to official notice of issuance.
ARTICLE VII
TERMINATION
SECTION 7.01. TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time, notwithstanding approval thereof by the
stockholders of the Company or Parent:
(a) by mutual written consent duly authorized by the Boards of Directors
of Parent and the Company; or
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(b) by either Parent or the Company if the Merger shall not have been
consummated by January 29, 1999 (provided that the right to terminate this
Agreement under this Section 7.01(b) shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the cause of or
resulted in the failure of the Merger to occur on or before such date); or
(c) by either Parent or the Company if a court of competent jurisdiction
or governmental, regulatory or administrative agency or commission shall have
issued a non-appealable final order, decree or ruling or taken any other action,
in each case having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger, except if the party relying on such order,
decree or ruling or other action has not complied with its obligations under
Section 5.08; or
(d) by Parent or the Company, if, at the Parent or Company Stockholders'
Meetings (including any adjournment or postponement thereof), the requisite vote
of the stockholders of the Parent or Company shall not have been obtained; or
(e) by Parent, if (i) the Board of Directors of the Company shall
withdraw, modify or change its recommendation of this Agreement or the Merger in
a manner adverse to Parent or shall have resolved to do any of the foregoing;
(ii) the Board of Directors of the Company shall have recommended to the
shareholders of the Company an Alternative Transaction (as defined in
Section 7.03(c)); or (iii) a tender offer or exchange offer for 15% or more of
the outstanding shares of Company Common Stock is commenced (other than by
Parent or an affiliate of Parent), and the Board of Directors of the Company
recommends that the stockholders of the Company tender their shares in such
tender or exchange offer; or
(f) by Parent or the Company, upon a breach of any representation,
warranty, covenant or agreement on the part of the Company or Parent,
respectively, set forth in this Agreement such that the conditions set forth in
Section 6.02(a) or 6.02(b), or Section 6.03(a) or 6.03(b), would not be
satisfied (a "Terminating Breach"), PROVIDED THAT if such Terminating Breach is
curable prior to January 29, 1999 by Parent or the Company, as the case may be,
through the exercise of its reasonable best efforts and for so long as Parent or
the Company, as the case may be, continues to exercise such reasonable best
efforts, neither the Company nor the Parent, respectively, may terminate this
Agreement under this Section 7.01;
(g) by the Company, if the Board of Directors of Parent shall withdraw,
modify or change its recommendation of this Agreement or the Merger, including
without limitation approval of the issuance of Parent Common Shares in
connection with the Merger, in a manner adverse to the Company or shall have
resolved to do any of the foregoing;
(h) by the Company, if the Board of Directors of Parent shall approve any
transaction described in Section 4.03(a) hereto; or
(i) by the Company, upon two days' prior written notice to Parent, if, as
a result of a tender offer by a party other than Parent or any of its affiliates
or any written offer or proposal with respect to an Alternative Transaction (as
defined in Section 7.03(c)) by a party other than Parent or any of its
affiliates, the Board of Directors of the Company determines in good faith that
the fiduciary obligations of such directors under applicable law require that
such tender offer or other written offer or proposal be accepted; PROVIDED,
HOWEVER, that (i) the Board of Directors of the Company shall have been advised
in writing by Graham & James LLP that notwithstanding a binding commitment to
consummate an agreement of the nature of this Agreement entered into in the
proper exercise of their applicable fiduciary duties, and notwithstanding all
concessions which may be offered by Parent in negotiations entered into pursuant
to clause (ii) below, such fiduciary duties would also require the directors to
reconsider such commitment as a result of such tender offer or other written
offer or proposal; and (ii) prior to any such termination, the Company shall,
and shall cause its respective financial and legal advisors to negotiate with
parent to make such adjustments in the terms and conditions of this Agreement as
would enable the Company to proceed with the transactions contemplated herein;
providing further that Parent and the Company acknowledge and affirm that,
notwithstanding anything in this Section 7.01(i) to the contrary, Parent and
the Company intend this Agreement to be an exclusive agreement and, accordingly,
nothing in this Agreement is intended to constitute a solicitation of an offer
or proposal for an Alternative Transaction (as defined in Section 7.03(c)), it
being
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acknowledged and agreed that any such offer or proposal would interfere with the
strategic advantages and benefits that Parent and the Company anticipate
deriving from the Merger and other transactions contemplated hereby.
SECTION 7.02. EFFECT OF TERMINATION. In the event of the termination of
this Agreement pursuant to Section 7.01, this Agreement shall forthwith become
void and there shall be no liability or obligation on the part of any party
hereto or any of its affiliates, directors, officers or stockholders except
(i) as set forth in Sections 5.09, 7.03 and 8.01 hereof, and (ii) nothing herein
shall relieve any party from liability for any willful breach hereof.
SECTION 7.03. FEES AND EXPENSES.
(a) Except as set forth in this Section 7.03, either (i) all fees and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses, if the
Merger is not consummated, or (ii) if the Merger is consummated, then the
Surviving Company shall pay all such fees and expenses; PROVIDED, HOWEVER, that
Parent and the Company shall share equally all fees and expenses, other than
attorneys' fees, incurred in relation to the printing and filing of the Joint
Proxy Statement/Prospectus (including any preliminary materials related thereto)
and the Registration Statement (including financial statements and exhibits) and
any amendments or supplements thereto.
(b) The Company shall pay Parent a fee of $4,500,000 in cash (the "Fee"),
plus actual, documented and reasonable out-of-pocket expenses of Parent relating
to the transactions contemplated by this Agreement (including, but not limited
to, fees and expenses of Parent's counsel, accountants and financial advisers,
but excluding any discretionary fees paid to such financial advisors), upon the
earlier to occur of the following events:
(i) the termination by Parent pursuant to Section 7.01(d) as a
result of the failure to receive the requisite vote for approval and
adoption by the stockholders of the Company at the Company Stockholders'
Meeting
(ii) the termination of this Agreement by Parent pursuant to
Section 7.01(e);
(iii) the termination of this Agreement by Parent pursuant to
Section 7.01(f) after a breach by the Company of the Agreement; or
(iv) the termination of this Agreement by the Company pursuant
to Section 7.01(i).
(c) As used herein, "Alternative Transaction" means either (i) a
transaction pursuant to which any person (or group of persons) other than Parent
or its affiliates (a "Third Party") acquires more than 15 percent of the
outstanding Shares, whether from the Company or pursuant to a tender offer or
exchange offer or otherwise, (ii) a merger or other business combination
involving the Company pursuant to which any Third Party acquires more than 15
percent of the outstanding equity securities of the Company or the entity
surviving such merger or business combination or (iii) any other transaction
pursuant to which any Third Party acquires control of assets (including for this
purpose the outstanding equity securities of the Subsidiary) of the Company or
its Subsidiary having a fair market value (as determined by the Board of
Directors of the Company in good faith) equal to more than 15 percent of the
fair market value of all the assets of the Company and its Subsidiary, taken as
a whole, immediately prior to such transaction; PROVIDED, HOWEVER, that the term
Alternative Transaction shall not include any acquisition of securities by a
broker dealer in connection with a bona fide public offering of such securities.
(d) Parent shall pay the Company the Fee, plus actual, documented and
reasonable out-of-pocket expenses of the Company relating to the transactions
contemplated by this Agreement (including, but not limited to, fees and expenses
of the Company's counsel, accountants and financial advisers, but excluding any
discretionary fees paid to such financial advisors), upon the earlier to occur
of the following events: (i) the termination by the Company pursuant to
Section 7.01(d) as a result of the failure to receive the requisite vote for
approval and adoption by the stockholders of Parent at the Parent Stockholders'
Meeting, (ii) the termination of this Agreement by the Company pursuant to
Section 7.01(f) after a breach by Parent or Merger Sub of the Agreement, (iii)
the termination of this Agreement by the Company pursuant to Section 7.01(g),
unless Parent's Board of Directors withdraws its
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recommendation of this Agreement or the Merger because Parent terminates the
Agreement pursuant to Section 7.01(e) or (iv) the termination of this Agreement
by the Company pursuant to Section 7.01(h).
(e) The Fee payable pursuant to Sections 7.03(b) or 7.03(d) shall be paid
within one business day after the first to occur of the events described in
Section 7.03(b), or Section 7.03(d); PROVIDED, THAT, in no event shall Parent or
the Company, as the case may be, be required to pay such Fee to the other, if,
immediately prior to the termination of this Agreement, the party to receive the
Fee was in material breach of its obligations under this Agreement.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.01. EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS;
KNOWLEDGE, ETC.
(a) Except as otherwise provided in this Section 8.01, the
representations, warranties and agreements of each party hereto shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any other party hereto, any person controlling any such party or
any of their officers or directors, whether prior to or after the execution of
this Agreement. The representations, warranties and agreements in this
Agreement shall terminate at the Effective Time or upon the termination of this
Agreement pursuant to Section 7.01, as the case may be, except that the
agreements set forth in Article I and Section 5.05 shall survive the Effective
Time indefinitely and those set forth in Section 7.03 shall survive termination
indefinitely. The Confidentiality Agreement shall survive termination of this
Agreement as provided therein.
(b) Any disclosure made with reference to one or more Sections of the
Company Disclosure Schedule or the Parent Disclosure Schedule shall be deemed
disclosed with respect to each other section therein as to which such disclosure
is relevant provided that such relevance is reasonably apparent.
SECTION 8.02. NOTICES. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made as of the date delivered or mailed if delivered personally or mailed by
registered or certified mail (postage prepaid, return receipt requested) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like changes of address which shall be effective upon
receipt) or sent by electronic transmission, with confirmation received, to the
telecopy number specified below:
(a) If to Parent or Merger Sub:
DIGITAL MICROWAVE CORPORATION
170 Rose Orchard Way
San Jose, CA 95134
With copies to:
Morrison & Foerster LLP
425 Market Street
San Francisco, CA 94105
Telecopier No. (415) 268-7522
Attention: Bruce A. Mann
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(b) If to the Company:
INNOVA CORPORATION
Gateway North, Building 2
3325 South 116th Street
Seattle, WA 98168
With copies to:
Graham & James LLP
1001 Fourth Avenue Plaza, Suite 4500
Seattle, WA 98154
Telecopier No.: (206) 389-1708
Attention: Benjamin F. Stephens
SECTION 8.03. CERTAIN DEFINITIONS. For purposes of this Agreement, the
term:
(a) "affiliates" means a person that directly or indirectly, through one
or more intermediaries, controls, is controlled by, or is under common control
with, the first mentioned person;
(b) "beneficial owner" with respect to any shares of Company Common Stock
or Parent Common Stock, means a person who shall be deemed to be the beneficial
owner of such shares (i) which such person or any of its affiliates or
associates beneficially owns, directly or indirectly, (ii) which such person or
any of its affiliates or associates (as such term is defined in Rule 12b-2 of
the Exchange Act) has, directly or indirectly, (A) the right to acquire (whether
such right is exercisable immediately or subject only to the passage of time),
pursuant to any agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise, or
(B) the right to vote pursuant to any agreement, arrangement or understanding or
(iii) which are beneficially owned, directly or indirectly, by any other persons
with whom such person or any of its affiliates or person with whom such person
or any of its affiliates or associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing of any
shares;
(c) "business day" means any day other than a day on which banks in San
Francisco are required or authorized to be closed;
(d) "control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee or
executor, of the power to direct or cause the direction of the management or
policies of a person, whether through the ownership of stock, as trustee or
executor, by contract or credit arrangement or otherwise;
(e) "Person" means an individual, corporation, partnership, association,
trust, unincorporated organization, other entity or group (as defined in
Section 13(d)(3) of the Exchange Act); and
(f) "subsidiary" or "subsidiaries" of the Company, the Surviving Company,
Parent or any other person means any corporation, partnership, joint venture or
other legal entity of which the Company, the Surviving Company, Parent or such
other person, as the case may be, (either alone or through or together with any
other subsidiary) owns, directly or indirectly, more than 50% of the stock or
other equity interests, the holders of which are generally entitled to vote for
the election of the board of directors or other governing body of such
corporation or other legal entity.
SECTION 8.04. AMENDMENT. This Agreement may be amended by the parties
hereto by action taken by or on behalf of their respective Boards of Directors
at any time prior to the Effective Time; PROVIDED, HOWEVER, that, after approval
of the Merger by either the stockholders of the Company or Parent, no amendment
may be made which by law requires further approval by such shareholders without
such further approval. This Agreement may not be amended except by an
instrument in writing signed by the parties hereto.
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<PAGE>
SECTION 8.05. WAIVER. At any time prior to the Effective Time, any party
hereto may with respect to any other party hereto (a) extend the time for the
performance of any of the obligations or other acts, (b) waive any inaccuracies
in the representations and warranties contained herein or in any document
delivered pursuant hereto and (c) waive compliance with any of the agreements,
covenants or conditions contained herein. Any such extension or waiver shall be
valid if set forth in an instrument in writing signed by the party or parties to
be bound thereby.
SECTION 8.06. HEADINGS. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 8.07. SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal, incapable of being enforced by any rule of law or
public policy, or would violate pooling of interest treatment under U.S. GAAP
and SEC regulations, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal, incapable of being enforced or would violate pooling of
interest treatment under U.S. GAAP and SEC regulations, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the extent possible.
SECTION 8.08. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement and supersedes all prior agreements and undertakings (other than the
Confidentiality Agreement), both written and oral, among the parties, or any of
them, with respect to the subject matter hereof and, except as otherwise
expressly provided herein, are not intended to confer upon any other person any
rights or remedies hereunder.
SECTION 8.09. ASSIGNMENT. This Agreement shall not be assigned by
operation of law or otherwise, except that Parent and Merger Sub may assign all
or any of their rights hereunder to any subsidiary provided that no such
assignment shall relieve the assigning party of its obligations hereunder.
SECTION 8.10. PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person any right, benefit or remedy of any nature whatsoever under or by reason
of this Agreement other than Section 5.05 (which is intended to be for the
benefit of the Indemnified Parties and may be enforced by such Indemnified
Parties).
SECTION 8.11. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the internal laws of the State of Delaware
applicable to contracts executed and fully performed within the State of
Delaware, without regard to the conflicts of laws provisions thereof, except
that the effect of (but not the conditions to) the Merger shall be governed by,
and construed in accordance with, the internal laws of the State of Washington.
SECTION 8.12. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
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SECTION 8.13. Waiver of Jury Trial. EACH OF THE PARENT, MERGER SUB AND
THE COMPANY HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW,
ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER
BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY.
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
DIGITAL MICROWAVE CORPORATION
By /s/ Charles D. Kissner
----------------------------------
Name Charles D. Kissner
Title Chairman & Chief Executive Officer
IGUANA MERGER CORP.
By /s/ Carl A. Thomsen
----------------------------------
Name Carl A. Thomsen
Title Chief Financial Officer
INNOVA CORPORATION
By /s/ Jean-Francois Grenon
----------------------------------
Name Jean-Francois Grenon
Title President and Chief Executive Officer
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<PAGE>
EXHIBIT 5.06
FORM OF
COMPANY SHAREHOLDER AGREEMENT
COMPANY SHAREHOLDER AGREEMENT, dated as of July __, 1998 (this
"Agreement") by and between Digital Microwave Corporation ("Parent") and
___________ (the "Shareholder").
WITNESSETH:
WHEREAS, Section 5.06 of the Agreement and Plan of Reorganization and
Merger, dated as of the date hereof (the "Merger Agreement"; all terms not
defined herein shall have the meanings set forth in the Merger Agreement), by
and among Parent, Iguana Merger Corp. and Innova Corporation (the "Company")
requires that the Company use its reasonable best efforts to cause the
shareholders listed on Schedule 5.06 of the Merger Agreement to enter into a
shareholder agreement with Parent; and
WHEREAS, the Shareholder desires to assist the Company in consummating
the Merger.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, Parent and the Shareholder hereby agree as follows:
1. The Shareholder shall vote all of its beneficially owned shares
of the Common Stock of the Company in favor of the Merger at a shareholders
meeting of the Company held for the purpose of approving the Merger and the
transactions contemplated in the Merger Agreement, unless the board of directors
of the Company withdraws its recommendation to the shareholders of the Company
in favor of the Merger and the transactions contemplated in the Merger
Agreement.
2. The Shareholder shall not make any sale, disposition or other
transfer of, or otherwise reduce the Shareholder's investment risk with respect
to, the Parent Common Shares received by the Shareholder pursuant to the Merger
during the thirty days prior to the Effective Time without the prior written
consent of Parent. The Shareholder further agrees that, in order to preserve
pooling-of-interests accounting treatment of the Merger, the Shareholder will
not sell, transfer or otherwise dispose of, nor will the Shareholder reduce its
risk with respect to, any of the Parent Common Shares to be received pursuant to
the Merger, directly or indirectly, during a period of time beginning with the
Effective Time and ending with a date upon which financial results of at least
30 days of post-merger combined operations have been first published by Parent
in accordance with SEC Accounting Series Release No. 130 as amended by Release
No. 135 (including without limitation, entering into any loan transaction or
pledge of stock which by its terms would allow a third party to own or sell any
of the Parent Common Shares to be received by the Shareholder prior to the
expiration of such period). Further, the Shareholder will not knowingly take
any other action which could reasonably be expected to jeopardize the accounting
treatment of the transactions contemplated by the Merger Agreement as a pooling
of interests.
3. The Shareholder shall take all actions and execute such documents
as are reasonably requested by Parent to carry out the foregoing matters.
4. This Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of Delaware applicable to contracts
executed and fully performed within the State of Delaware, without regard to the
conflicts of laws provisions thereof.
5. This Agreement may be executed in one or more counterparts, and
by each party hereto in separate counterparts, each of which when executed shall
be deemed to be an original but all of which taken together shall constitute one
and the same agreement.
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<PAGE>
IN WITNESS WHEREOF, Parent and the Shareholder have caused this
Agreement to be executed as of the date first above written.
DIGITAL MICROWAVE CORPORATION
By ______________________________________
Name ____________________________________
Title ___________________________________
SHAREHOLDER
_________________________________
________________
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<PAGE>
APPENDIX B
[CIBC OPPENHEIMER LETTERHEAD]
July 22, 1998
The Board of Directors
Digital Microwave Corporation
170 Rose Orchard Way
San Jose, CA 95134
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to Digital Microwave Corporation, a Delaware corporation ("DMC"), of
the ratio of the number of shares of newly-issued Digital Microwave Corporation
common stock, par value $0.01 per share ("DMC Common Stock"), to be exchanged
for each share of common stock, no par value ("Innova Common Stock"), of Innova
Corporation, a Washington corporation ("Innova"), in the proposed merger (the
"Merger") of a wholly-owned subsidiary of DMC ("Merger Sub"), with and into
Innova pursuant to the Agreement and Plan of Reorganization and Merger dated as
of July 22, 1998 by and among DMC, Merger Sub and Innova (the "Merger
Agreement"). It is our understanding that it is the intention of DMC and Innova
that the Merger be treated as a tax-free reorganization pursuant to Section
368(a) of the Internal Revenue Code of 1986, as amended, and that the Merger be
treated as a "pooling of interests" business combination in accordance with U.S.
Generally Accepted Accounting Principles. As provided in the Merger Agreement,
at the effective time of the Merger each outstanding share of Innova Common
Stock, other than shares of Innova Common Stock held in treasury or any shares
held by DMC or any wholly-owned subsidiary of DMC or any dissenting shares, will
be converted into the right to receive 1.050 shares of DMC Common Stock (the
"Exchange Ratio"). It is also our understanding that certain shareholders of
Innova have entered into a Shareholder Agreement dated July 22, 1998
("Shareholder Agreement") with DMC whereby certain principal holders of the
shares of common stock of Innova (each, a "Voting Shareholder" and
collectively, the "Voting Shareholders") which own approximately 48.8% of such
common stock will agree, among other things, to grant a proxy to DMC to vote
such shares of common stock in favor of the Merger. The terms and conditions of
the Merger and related agreements are more fully set forth in the Merger
Agreement and related agreements, respectively.
In connection with the opinion contained herein we have, among other
things,
(i) reviewed the financial terms and conditions of the Merger
Agreement and related agreements;
(ii) reviewed the Annual Reports on Form 10-K and Annual Reports to
Shareholders for the two fiscal years ended March 31, 1998 of
DMC;
(iii) reviewed the Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 of Innova and Form S-1A dated August 8, 1997 of
Innova;
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(iv) reviewed the Quarterly Reports on Form 10-Q of DMC for the fiscal
year 1998;
(v) reviewed the Quarterly Reports on Form 10-Q of Innova for the
fiscal year 1997 and 1998 year to date;
(vi) reviewed certain internal financial statements and other
financial and operating data concerning DMC and Innova prepared
by the managements of DMC and Innova, respectively;
(vii) reviewed certain other communications from DMC and Innova to its
stockholders;
(viii) reviewed certain internal financial and operating analyses and
forecasts of (x) DMC prepared by DMC's management and (y) Innova
prepared by DMC's and Innova's managements;
(ix) held discussions with senior members of the managements of DMC
and Innova regarding the past and current business operations and
financial condition and the future prospects of their respective
companies as well as the estimates of the operating savings and
other benefits and cost reductions expected by the respective
managements to be realized from the Merger and analyzed the
proforma financial impact of the Merger on DMC's earnings per
share;
(x) considered the strategic rationale and objectives for the Merger
as outlined to CIBC Oppenheimer by the managements of DMC and
Innova;
(xi) reviewed the reported prices and trading activity for DMC Common
Stock and Innova Common Stock and compared certain financial and
stock market information, to the extent applicable, for DMC and
Innova with similar information for other companies whose
securities are publicly traded;
(xii) reviewed, to the extent publicly available, the financial terms
of certain recent business combinations in the wireless equipment
industry;
(xiii) performed such other studies and analyses and considered such
other financial, economic and market criteria as we considered
necessary to arrive at our opinion.
At the direction of the Board of Directors of DMC, we have relied upon and
assumed the accuracy and completeness of all of the financial and other
information reviewed by us for purposes of this opinion, without assuming
responsibility for the independent verification of such information. In that
regard, we have assumed, at the direction of the Board of Directors of DMC, that
the financial forecasts and information prepared by the respective managements
of DMC and Innova have been reasonably prepared on a basis reflecting the best
currently available judgments and estimates of the competitive, operating and
regulatory environments and the related financial prospects of DMC and Innova
for the relevant periods. We assume no responsibility for and express no view
as to such forecasts or the information or the assumptions on which they are
based. We have further relied upon the assurance of management of DMC that they
are unaware of any facts that would make the information provided to us
incomplete in any meaningful respect or misleading in any respect. We have not
made an independent evaluation or appraisal of the assets or liabilities of DMC
or Innova or any of their subsidiaries, and we
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<PAGE>
have not been furnished with any such evaluation or appraisal. We express no
opinion as to the likely future trading range of shares of DMC Common Stock
following consummation of the Merger nor the likelihood that estimates of the
operating savings and other benefits and cost reductions will be achieved as a
result of the Merger. The prices at which such shares will trade in the future
will depend on a variety of factors, including the business performance of the
combined company following the Merger, interest rates, dividend rates, economic
conditions generally and in particular in the markets in which the combined
company will operate, and other market conditions affecting the securities
markets generally. Our opinion is necessarily based on economic, market and
other conditions as in effect on, and the information made available to us as
of, the date of this letter, and we have not been requested, nor have we
undertaken any responsibility, to update our opinion in light of future
developments.
We have further assumed, with your consent, that (i) the representations
and warranties contained in the Merger Agreement are true and correct in all
material respects, (ii) the Merger will be consummated in accordance with the
terms described in the Merger Agreement and related agreements, without any
amendment thereto (including, among other things, that the Merger will qualify
as a tax-free reorganization pursuant to Section 368(a) of the Internal Revenue
Code of 1986, as amended, and that the Merger will be treated as a "pooling of
interests" business combination in accordance with U.S. Generally Accepted
Accounting Principles), and without waiver by DMC of any of the conditions to
its obligation to close thereunder and (iii) the Merger will be consummated in a
manner that complies in all material respects with the applicable provisions of
the Securities Act of 1933, as amended, the Securities Exchange Act of 1934 and
all other applicable federal and state statutes, rules and regulations.
As an investment banking firm, CIBC Oppenheimer Corp. ("CIBC Oppenheimer")
is continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, underwriting, distributions of
securities and similar activities. We are familiar with DMC having acted as its
financial advisor in connection with, and having participated in certain of the
negotiations leading to, the Merger Agreement and related agreements. We are
entitled to receive fees for services rendered to DMC in connection with this
engagement and will receive from DMC additional fees for our services, a
substantial portion of which is contingent upon the consummation of the Merger,
including a fee upon delivery of this opinion. In addition, CIBC Oppenheimer's
equity research department provides published research coverage of DMC.
In the ordinary course of our respective securities businesses, CIBC
Oppenheimer and its affiliates actively trade the equity and debt securities of
various corporate issuers, which may from time to time include securities of DMC
and Innova. Therefore, we may from time to time hold a long or short position in
such securities.
Based upon and subject to the foregoing and such other matters as we
consider relevant, it is our
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opinion that, as of the date hereof, the Exchange Ratio is fair, from a
financial point of view, to DMC.
Our advisory services and the opinion expressed herein are for the
information of the Board of Directors of DMC only in its evaluation of the
proposed Merger and do not constitute a recommendation to any stockholder of
DMC, and our opinion may not be published or otherwise used or referred to, in
whole or in part, nor shall any public reference to CIBC Oppenheimer be made
without our prior written consent; provided, however, that this opinion may be
included in its entirety in the proxy statement to be contained in Registration
Statement on Form S-4 that will be filed by DMC with the Securities and Exchange
Commission with respect to the Merger and the transactions related thereto.
Very truly yours,
/s/ CIBC OPPENHEIMER CORP.
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APPENDIX C
[HAMBRECHT & QUIST LLC LETTERHEAD]
ONE BUSH STREET
SAN FRANCISCO, CA 94104
(415) 439-3000
July 22, 1998
CONFIDENTIAL
The Board of Directors
Innova Corporation
3325 South 116th Street
Seattle, WA 98168
Ladies and Gentlemen:
You have requested our opinion as to the fairness from a financial point of view
to the holders of the outstanding shares of common stock (the "Common Stock") of
Innova Corporation ("Innova" or the "Company") of the consideration to be
received by such shareholders in connection with the proposed merger of NEWCO
("Merger Sub"), a wholly owned subsidiary of Digital Microwave Corporation
("DMC"), with and into Innova (the "Proposed Transaction") pursuant to the
Agreement and Plan of Reorganization and Merger to be dated as of July 22,
1998, among DMC, Merger Sub, and Innova (the "Agreement").
We understand that the terms of the Agreement provide, among other things, that
each issued and outstanding share of Common Stock shall be converted into the
right to receive 1.05 shares of common stock of DMC, as more fully set forth in
the Agreement. For purposes of this opinion, we have assumed that the Proposed
Transaction will qualify as a tax-free reorganization under the United States
Internal Revenue Code for the shareholders of the Company and that the Proposed
Transaction will be accounted for as a pooling of interests.
Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment banking
services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, strategic transactions,
corporate restructurings, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. We have acted as a financial advisor to the Board of
Directors of Innova in connection with the Proposed Transaction, and we will
receive a fee for our services, which include the rendering of this opinion.
In the past, we have provided investment banking and other financial advisory
services to Innova and have received fees for rendering these services. In
particular, Hambrecht & Quist acted as a co-managing underwriter in the
Company's initial public offering in 1997. In the ordinary course of business,
Hambrecht & Quist may actively trade in the equity and derivative securities of
DMC and Innova for its own account and for the accounts of its customers and,
accordingly,
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The Board of Directors
Innova Corporation
Page 2
may at any time hold a long or short position in such securities. Hambrecht &
Quist may in the future provide additional investment banking or other financial
advisory services to DMC.
In connection with our review of the Proposed Transaction, and in arriving at
our opinion, we have, among other things:
(i) reviewed the publicly available consolidated financial statements of
DMC for recent years and interim periods to date and certain other
relevant financial and operating data of DMC made available to us from
published sources and from the internal records of DMC;
(ii) reviewed certain internal financial and operating information,
including certain projections, relating to DMC prepared by the
management of DMC;
(iii) discussed the business, financial condition and prospects of DMC with
certain of its officers;
(iv) reviewed the publicly available consolidated financial statements of
Innova for recent years and interim periods to date and certain other
relevant financial and operating data of Innova made available to us
from published sources and from the internal records of Innova;
(v) reviewed certain internal financial and operating information relating
to Innova prepared by the management of Innova;
(vi) discussed the business, financial condition and prospects of Innova
with certain of its officers;
(vii) reviewed the recent reported prices and trading activity for the
common stocks of DMC and Innova and compared such information and
certain financial information for DMC and Innova with similar
information for certain other companies engaged in businesses we
consider comparable;
(viii) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(ix) reviewed the Agreement;
(x) performed such other analyses and examinations and considered such
other information, financial studies, analyses and investigations and
financial, economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning DMC or Innova considered in
connection with our review of the Proposed Transaction, and we have not assumed
any responsibility for independent verification of such information. We have
not prepared any independent valuation or appraisal of any of the assets or
liabilities of DMC or Innova, nor have we conducted a physical inspection of the
properties and facilities of either company. With respect to the financial
forecasts and projections made available to us and used in our analysis, we have
assumed that they reflect the best currently available estimates and judgments
of the expected future financial performance of
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The Board of Directors
Innova Corporation
Page 3
DMC and Innova. For purposes of this opinion, we have assumed that neither DMC
nor Innova is a party to any pending transactions, including external
financings, recapitalizations or material merger discussions, other than the
Proposed Transaction and those activities undertaken in the ordinary course of
conducting their respective businesses. Our opinion is necessarily based upon
market, economic, financial and other conditions as they exist and can be
evaluated as of the date of this letter, and any change in such conditions would
require a reevaluation of this opinion. We express no opinion as to the price
at which DMC Common Stock will trade subsequent to the Effective Time (as
defined in the Agreement).
It is understood that this letter is for the information of the Board of
Directors in connection with its evaluation of the Proposed Transaction and may
not be used for any other purpose without our prior written consent; provided,
however, that this letter may be reproduced in full in the Proxy
Statement/Prospectus relating to the Proposed Transaction. This letter does not
constitute a recommendation to any stockholder as to how such stockholder should
vote on the Proposed Transaction.
Based upon and subject to the foregoing and after considering such other matters
as we deem relevant, we are of the opinion that, as of the date hereof, the
consideration to be received by the holders of the Common Stock in the Proposed
Transaction is fair to such holders from a financial point of view. We express
no opinion, however, as to the adequacy of any consideration received in the
Proposed Transaction by DMC or any of its affiliates.
Very truly yours,
HAMBRECHT & QUIST LLC
By /s/ Paul B. Cleveland
----------------------------------
Paul B. Cleveland
Managing Director
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APPENDIX D
CHAPTER 23B.13 OF THE WASHINGTON BUSINESS CORPORATION ACT
RCW 23B.13.010 DEFINITIONS -- AS USED IN THIS CHAPTER:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by merger
or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under RCW 23B.13.020 and who exercises that right when and in
the manner required by RCW 23B.13.200 through 23B.13.280.
(3) "Fair value," with respect to a dissenter's shares, means the value
of the shares immediately before the effective date of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner
of shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
RCW 23B.13.020 RIGHT TO DISSENT.
(1) A shareholder is entitled to dissent from, and obtain payment of the
fair value of the shareholder's shares in the event of, any of the following
corporate actions:
(a) Consummation of a plan of merger to which the corporation is
a party (i) if shareholder approval is required for the merger by RCW
23B.11.030, 23B.11.080, or the articles of incorporation and the
shareholder is entitled to vote on the merger, or (ii) if the corporation
is a subsidiary that is merged with its parent under RCW 23B.11.040;
(b) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be acquired, if
the shareholder is entitled to vote on the plan;
(c) Consummation of a sale or exchange of all, or substantially
all, of the property of the corporation other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale or
exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which all
or substantially all of the net proceeds of the sale will be distributed to
the shareholders within one year after the date of sale;
(d) An amendment of the articles of incorporation that materially
reduces the number of shares owned by the shareholder to a fraction of a
share if the fractional share so created is to be acquired for cash under
RCW 23B.06.040;
or
(e) Any corporate action taken pursuant to a shareholder vote to
the extent the articles of incorporation, bylaws, or a resolution of the
board of directors provides that voting or nonvoting shareholders are
entitled to dissent and obtain payment for their shares.
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(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action fails to comply with
the procedural requirements imposed by this title, RCW 25.10.900 through
25.10.955, the articles of incorporation, or the bylaws, or is fraudulent with
respect to the shareholder or the corporation.
(3) The right of a dissenting shareholder to obtain payment of the fair
value of the shareholder's shares shall terminate upon the occurrence of any one
of the following events:
(a) The proposed corporate action is abandoned or rescinded;
(b) A court having jurisdiction permanently enjoins or sets aside
the corporate action; or
(c) The shareholder's demand for payment is withdrawn with the
written consent of the corporation.
RCW 23B.13.030 DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(1) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in the shareholder's name only if the shareholder
dissents with respect to all shares beneficially owned by any one person and
notifies the corporation in writing of the name and address of each person on
whose behalf the shareholder asserts dissenters' rights. The rights of a
partial dissenter under this subsection are determined as if the shares as to
which the dissenter dissents and the dissenter's other shares were registered in
the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder submits to the corporation the
record shareholder's written consent to the dissent not later than the time
the beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder does so with respect to all shares
of which such shareholder is the beneficial shareholder or over which such
shareholder has power to direct the vote.
RCW 23B.13.200 NOTICE OF DISSENTERS' RIGHTS.
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert dissenters'
rights under this chapter and be accompanied by a copy of this chapter.
(2) If corporate action creating dissenters' rights under RCW
23B.13.020 is taken without a vote of shareholders, the corporation, within ten
days after the effective date of such corporate action, shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in RCW 23B.13.220.
RCW 23B.13.210 NOTICE OF INTENT TO DEMAND PAYMENT.
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights must (a) deliver to the corporation before
the vote is taken written notice of the shareholder's intent to demand payment
for the shareholder's shares if the proposed action is effected, and (b) not
vote such shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection
(1) of this section is not entitled to payment for the shareholder's shares
under this chapter.
RCW 23B.13.220 DISSENTERS' NOTICE.
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of RCW 23B.13.210.
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(2) The dissenters' notice must be sent within ten days after the
effective date of the corporate action, and must:
(a) State where the payment demand must be sent and where and
when certificates for certificated shares must be deposited;
(b) Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand is
received;
(c) Supply a form for demanding payment that includes the date of
the first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not the person acquired beneficial
ownership of the shares before that date;
(d) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty nor more than sixty days
after the date the notice in subsection (1) of this section is delivered;
and
(e) Be accompanied by a copy of this chapter.
RCW 23B.13.230 DUTY TO DEMAND PAYMENT.
(1) A shareholder sent a dissenters' notice described in RCW 23B.13.220
must demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to RCW 23B.13.220 (2)(c), and deposit the
shareholder's certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits the shareholder's
share certificates under subsection (1) of this section retains all other rights
of a shareholder until the proposed corporate action is effected.
(3) A shareholder who does not demand payment or deposit the
shareholder's share certificates where required, each by the date set in the
dissenters' notice, is not entitled to payment for the shareholder's shares
under this chapter.
RCW 23B.13.240 SHARE RESTRICTIONS.
(1) The corporation may restrict the transfer of uncertificated shares
from the date the demand for their payment is received until the proposed
corporate action is effected or the restriction is released under RCW
23B.13.260.
(2) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until the
effective date of the proposed corporate action.
RCW 23B.13.250 PAYMENT.
(1) Except as provided in RCW 23B.13.270, within thirty days of the
later of the effective date of the proposed corporate action, or the date the
payment demand is received, the corporation shall pay each dissenter who
complied with RCW 23B.13.230 the amount the corporation estimates to be the fair
value of the shareholder's shares, plus accrued interest.
(2) The payment must be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal
year ending not more than sixteen months before the date of payment, an
income statement for that year, a statement of changes in shareholders'
equity for that year, and the latest available interim financial
statements, if any;
(b) An explanation of how the corporation estimated the fair
value of the shares;
(c) An explanation of how the interest was calculated;
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(d) A statement of the dissenter's right to demand payment under
RCW 23B.13.280 ; and
(e) A copy of this chapter.
RCW 23B.13.260 FAILURE TO TAKE ACTION.
(1) If the corporation does not effect the proposed action within sixty
days after the date set for demanding payment and depositing share certificates,
the corporation shall return the deposited certificates and release any transfer
restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation wishes to undertake the proposed action, it must
send a new dissenters' notice under RCW 23B.13.220 and repeat the payment
demand procedure.
RCW 23B.13.270 AFTER-ACQUIRED SHARES.
(1) A corporation may elect to withhold payment required by RCW
23B.13.250 from a dissenter unless the dissenter was the beneficial owner of
the shares before the date set forth in the dissenters' notice as the date of
the first announcement to news media or to shareholders of the terms of the
proposed corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of the dissenter's demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares, an explanation of
how the interest was calculated, and a statement of the dissenter's right to
demand payment under RCW 23B.13.280.
RCW 23B.13.280 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR
OFFER.
(1) A dissenter may notify the corporation in writing of the dissenter's
own estimate of the fair value of the dissenter's shares and amount of interest
due, and demand payment of the dissenter's estimate, less any payment under RCW
23B.13.250, or reject the corporation's offer under RCW 23B.13.270 and demand
payment of the dissenter's estimate of the fair value of the dissenter's shares
and interest due,
if:
(a) The dissenter believes that the amount paid under RCW
23B.13.250 or offered under RCW 23B.13.270 is less than the fair value
of the dissenter's shares or that the interest due is incorrectly
calculated;
(b) The corporation fails to make payment under RCW 23B.13.250
within sixty days after the date set for demanding payment; or
(c) The corporation does not effect the proposed action and does
not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty days after the date set for
demanding payment.
(2) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (1) of this section within thirty days after the
corporation made or offered payment for the dissenter's shares.
RCW 23B.13.300 COURT ACTION.
(1) If a demand for payment under RCW 23B.13.280 remains unsettled,
the corporation shall commence a proceeding within sixty days after receiving
the payment demand and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the
proceeding within the sixty-day period, it shall pay each dissenter whose demand
remains unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the superior court
of the county where a corporation's principal office, or, if none in this state,
its registered office, is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where
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the registered office of the domestic corporation merged with or whose shares
were acquired by the foreign corporation was located.
(3) The corporation shall make all dissenters, whether or not residents
of this state, whose demands remain unsettled, parties to the proceeding as in
an action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The corporation may join as a party to the proceeding any
shareholder who claims to be a dissenter but who has not, in the opinion of the
corporation, complied with the provisions of this chapter. If the court
determines that such shareholder has not complied with the provisions of this
chapter, the shareholder shall be dismissed as a party.
(5) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers
described in the order appointing them, or in any amendment to it. The
dissenters are entitled to the same discovery rights as parties in other civil
proceedings.
(6) Each dissenter made a party to the proceeding is entitled to
judgment (a) for the amount, if any, by which the court finds the fair value of
the dissenter's shares, plus interest, exceeds the amount paid by the
corporation, or (b) for the fair value, plus accrued interest, of the
dissenter's after-acquired shares for which the corporation elected to withhold
payment under RCW 23B.13.270.
RCW 23B.13.310 COURT COSTS AND COUNSEL FEES.
(1) The court in a proceeding commenced under RCW 23B.13.300 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court. The court shall assess the costs
against the corporation, except that the court may assess the costs against all
or some of the dissenters, in amounts the court finds equitable, to the extent
the court finds the dissenters acted arbitrarily, vexatiously, or not in good
faith in demanding payment under RCW 23B.13.280.
(2) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters
if the court finds the corporation did not substantially comply with the
requirements of RCW 23B.13.200 through 23B.13.280; or
(b) Against either the corporation or a dissenter, in favor of
any other party, if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by chapter 23B.13 RCW.
(3) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited.
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APPENDIX E
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF DIGITAL MICROWAVE CORPORATION
FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 7, 1998
The undersigned stockholder of DIGITAL MICROWAVE CORPORATION, a Delaware
corporation, hereby acknowledges receipt of the Notice of Special Meeting of
Stockholders and Proxy Statement, each dated September 8, 1998, and hereby
appoints Charles D. Kissner, Carl A. Thomsen and Carol A. Goudey or any one of
them, proxies, with full power to each of substitution, on behalf and in the
name of the undersigned, to represent the undersigned at the Special Meeting of
Stockholders of DIGITAL MICROWAVE CORPORATION ("DMC") to be held on October 7,
1998 at 11:00 a.m. at its executive offices located at 170 Rose Orchard Way, San
Jose, California, and at any adjournment or adjournments thereof, and to vote
all shares of Common Stock which the undersigned would be entitled to vote if
then and there personally present, on the matters set forth below.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR PROPOSAL 1 SET FORTH BELOW, AS MORE FULLY DESCRIBED
IN THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS, AND AS SAID PROXIES DEEM
ADVISABLE ON SUCH MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.
1. PROPOSAL TO APPROVE THE ISSUANCE OF DMC COMMON STOCK IN CONNECTION
WITH THE AGREEMENT AND PLAN OF REORGANIZATION AND MERGER, DATED AS OF JULY 22,
1998, AMONG DMC, IGUANA MERGER CORP., A WASHINGTON CORPORATION AND A WHOLLY
OWNED SUBSIDIARY OF DMC ("MERGER SUB"), AND INNOVA CORPORATION, A WASHINGTON
CORPORATION ("INNOVA"), PURSUANT TO WHICH MERGER SUB WILL BE MERGED WITH AND
INTO INNOVA, AND INNOVA WILL BECOME A WHOLLY OWNED SUBSIDIARY OF DMC:
_____ FOR _____ AGAINST _____ ABSTAIN
DATED: _____________________, 1998
-----------------------------------
Signature
-----------------------------------
Signature
This Proxy should be marked, dated
and signed by the stockholder(s)
exactly as his or her name appears
hereon, and returned promptly in
the enclosed envelope. Persons
signing in a fiduciary capacity
should so indicate. If shares are
held by joint tenants or as
community property, both should
sign.
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THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF INNOVA CORPORATION
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 7, 1998
The undersigned shareholder of INNOVA CORPORATION, a Washington
corporation, hereby acknowledges receipt of the Notice of Special Meeting of
Shareholders and Proxy Statement, each dated September 8, 1998, and hereby
appoints Jean-Francois Grenon and John M. Hemingway or either of them, proxies,
with full power to each of substitution, on behalf and in the name of the
undersigned, to represent the undersigned at the Special Meeting of Shareholders
of INNOVA CORPORATION ("Innova") to be held on October 7, 1998 at 11:00 a.m. at
its executive offices located at Gateway North, Building 2, 3325 South 116th
Street, Seattle, Washington, and at any adjournment or adjournments thereof, and
to vote all shares of Common Stock which the undersigned would be entitled to
vote if then and there personally present, on the matters set forth below.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR PROPOSAL 1 SET FORTH BELOW, AS MORE FULLY DESCRIBED
IN THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS, AND AS SAID PROXIES DEEM
ADVISABLE ON SUCH MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.
1. PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION AND
MERGER, DATED AS OF JULY 22, 1998, AMONG DIGITAL MICROWAVE CORPORATION, A
DELAWARE CORPORATION ("DMC"), IGUANA MERGER CORP., A WASHINGTON CORPORATION
AND A WHOLLY OWNED SUBSIDIARY OF DMC ("MERGER SUB"), AND INNOVA, PURSUANT TO
WHICH MERGER SUB WILL BE MERGED WITH AND INTO INNOVA, AND INNOVA WILL BECOME
A WHOLLY OWNED SUBSIDIARY OF DMC:
_____ FOR _____ AGAINST _____ ABSTAIN
DATED: _____________________, 1998
-----------------------------------
Signature
-----------------------------------
Signature
This Proxy should be marked, dated and signed by the shareholder(s) exactly
as his or her name appears hereon, and returned promptly in the enclosed
envelope. Persons signing in a fiduciary capacity should so indicate. If
shares are held by joint tenants or as community property, both should sign.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the Delaware General Corporation Law (the "DGCL")
provides in relevant part that "a corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation), by
reason of the fact that he is or was a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful." With respect to
derivative actions, Section 145(b) of the DGCL provides in relevant part that
"[a] corporation may indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or suit by or
in the right of the corporation to procure a judgment in its favor. . . . [by
reason of his service in one of the capacities specified in the preceding
sentence] against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interest of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper."
The Registrant's Restated Certificate of Incorporation provides that each
person who is or was or who had agreed to become a director or officer of the
Registrant or who had agreed at the request of the Registrant's Board of
Directors or an officer of the Registrant to serve as an employee or agent of
the Registrant or as a director, officer, employee or agent or another
corporation, partnership, joint venture, trust or other enterprise, shall be
indemnified by the Registrant to the full extent permitted by the DGCL or any
other applicable laws. Such Restated Certificate of Incorporation also provides
that the Registrant may enter into one or more agreements with any person which
provides for indemnification greater or different than that provided in such
Certificate, and that no amendment or repeal of such Certificate shall apply to
or have any effect on the right to indemnification permitted or authorized
thereunder for or with respect to claims asserted before or after such amendment
or repeal arising from acts or omissions occurring in whole or in part before
the effective date of such amendment or repeal.
The Registrant's Bylaws provide that the Registrant shall indemnify to the
full extent authorized by law any person made or threatened to be made a party
to an action or a proceeding, whether criminal, civil, administrative or
investigative, by reason of the fact that he, his testator or intestate was or
is a director, officer or employee of the Registrant or any predecessor of the
Registrant or serves or served any other enterprise as a director, officer or
employee at the request of the Registrant or any predecessor of the Registrant.
The Registrant has entered into indemnification agreements with its
directors and certain of its officers.
The Registrant has purchased and maintains insurance on behalf of any
person who is or was a director or officer against loss arising from any claim
asserted against him and incurred by him in any such capacity, subject to
certain exclusions.
See also the undertakings set out in response to Item 22 herein.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
----- -------
<C> <S>
2.1 Agreement and Plan of Reorganization and Merger ("Merger
Agreement"), dated as of July 22, 1998, by and between Digital
Microwave Corporation, Iguana Merger Corp. and Innova
Corporation ("Innova") (included as Appendix A to the Joint
Proxy Statement/Prospectus filed as part of this Registration
Statement).
5.1 Opinion of Morrison & Foerster LLP together with consent.
8.1 Tax Opinion of Morrison & Foerster LLP together with consent.
8.2 Tax Opinion of Graham & James LLP together with consent.
23.1 Consent of Arthur Andersen LLP, independent public accountants.
23.2 Consent of KPMG Peat Marwick LLP, independent auditors.
24.1 Power of Attorney (See Page II-4 of this Registration Statement).
99.1 Company Shareholder Agreement, dated as of July 22, 1998, by and
between the Registrant and Paul S. Bachow.
99.2 Company Shareholder Agreement, dated as of July 22, 1998, by and
between the Registrant and V. Frank Mendicino.
99.3 Consent of Paul Bachow to Become a Director.
99.4 Consent of V. Frank Mendicino to Become a Director.
</TABLE>
ITEM 22. UNDERTAKINGS.
(1) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(2) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is part of this Registration Statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(3) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933 (the "Act")
and is used in connection with an offering of securities subject to Rule 415,
will be filed as part of an amendment to the Registration Statement and will not
be used until such amendment is effective, and that for purposes of determining
any liability under the Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(4) The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
II-2
<PAGE>
(5) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
(6) Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions hereof, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Jose, State of
California, on this 1st day of September, 1998.
DIGITAL MICROWAVE CORPORATION
By: /s/ CHARLES D. KISSNER
------------------------------------
Charles D. Kissner
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, severally and not jointly, Charles D.
Kissner and Carl A. Thomsen with full power to act alone, his true and lawful
attorneys-in-fact, with the power of substitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Registration Statement and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact full power and authority to do
and perform each and every act and thing requisite and necessary to be done as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/ CHARLES D. KISSNER Chairman of the Board and September 1, 1998
- ------------------------------- Chief Executive Officer
Charles D. Kissner
/s/ RICHARD C. ALBERDING Director September 1, 1998
- -------------------------------
Richard C. Alberding
/s/ JOHN W. COMBS Director September 1, 1998
- -------------------------------
John W. Combs
/s/ CLIFFORD H. HIGGERSON Director September 1, 1998
- -------------------------------
Clifford H. Higgerson
/s/ JAMES D. MEINDL Director September 1, 1998
- -------------------------------
James D. Meindl
/s/ BILLY B. OLIVER Director September 1, 1998
- -------------------------------
Billy B. Oliver
/s/ HOWARD ORINGER Director September 1, 1998
- -------------------------------
Howard Oringer
/s/ CARL A. THOMSEN Vice President, Chief September 1, 1998
- ------------------------------- Financial Officer and
Carl A. Thomsen Secretary (Principal
Financial and Accounting
Officer)
II-4
<PAGE>
EXHIBIT 5.1
MORRISON & FOERSTER LLP
ATTORNEYS AT LAW
425 MARKET STREET
SAN FRANCISCO, CALIFORNIA 94105-2482
September 1, 1998
Digital Microwave Corporation
170 Rose Orchard Way
San Jose, CA 95134
Re: Digital Microwave Corporation:
18,513,797 Shares of Common Stock
---------------------------------------
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-4
(the "Registration Statement") filed by you with the Securities and Exchange
Commission on September 1, 1998, in connection with the registration under the
Securities Act of 1933, as amended, of 18,513,797 shares of your Common Stock,
par value of $0.01 (the "Common Stock"). The Common Stock is to be issued to
the former shareholders of Innova Corporation, a Washington corporation
("Innova"), pursuant to the terms of that certain Agreement and Plan of
Reorganization and Merger, dated as of July 22, 1998, by and between you, Iguana
Merger Corp., a Washington corporation and your wholly owned subsidiary, and
Innova.
In connection with this opinion, we have examined all proceedings taken by
you relating to the issuance of up to 18,513,797 shares of the Common Stock.
It is our opinion that the up to 18,513,797 shares of the Common Stock
being issued by you, when issued in the manner referred to in the Registration
Statement, will be legally and validly issued, fully paid, and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us in the Registration
Statement, the Proxy Statement/Prospectus constituting a part thereof, and any
amendments thereto.
Very truly yours,
/s/ MORRISON & FOERSTER LLP
<PAGE>
EXHIBIT 8.1
MORRISON & FOERSTER LLP
ATTORNEYS AT LAW
425 MARKET STREET
SAN FRANCISCO, CALIFORNIA 94105-2482
________ , 1998
Digital Microwave Corporation
170 Rose Orchard Way
San Jose, CA 95134
Re: Agreement and Plan of Reorganization and Merger, dated as of July
22, 1998, by and among Digital Microwave Corporation, a Delaware
Corporation, Iguana Merger Corp., a Washington corporation, and
Innova Corporation, a Washington corporation
Ladies and Gentlemen:
This opinion is being delivered to you pursuant to Section 6.01(d) of the
Agreement and Plan of Reorganization and Merger, dated as of July 22, 1998 (the
"Merger Agreement"), by and among Digital Microwave Corporation, a Delaware
corporation ("DMC"), Iguana Merger Corp., a Washington corporation and a
wholly owned subsidiary of DMC ("Sub") and Innova Corporation, a Washington
corporation ("Innova"). Pursuant to the Merger Agreement, Sub will merge with
and into Innova (the "Merger"). As a result of the Merger, Innova will become a
wholly owned subsidiary of DMC and the former shareholders of Innova will
receive shares of DMC Common Stock, all on the terms set forth in the Merger
Agreement.
The Merger Agreement and certain proposed transactions incident thereto are
described in the Registration Statement on Form S-4 filed by DMC with the
Securities and Exchange Commission (the "Registration Statement"), which
includes the Proxy Statement/Prospectus of DMC and Innova (the "Proxy
Statement/Prospectus"). Unless otherwise indicated, any capitalized terms used
herein and not otherwise defined have the meaning ascribed to them in the Proxy
Statement/Prospectus.
We have acted as legal counsel to DMC and Sub in connection with the
Merger. As such, and for purposes of rendering this opinion, we have examined
(or will examine on or prior to the Effective Time) and are familiar with the
Merger Agreement, the Registration Statement, and such other presently existing
documents, records and matters of law as we have deemed necessary or appropriate
in connection with rendering this opinion.
In addition, we have assumed (i) that the Merger will be consummated in the
manner contemplated by the Proxy Statement/Prospectus and in accordance with the
provisions of the Merger Agreement, (ii) that all representations and warranties
made by DMC and Innova in the Merger Agreement, as well as those representations
made in the certificates of representations provided to us by DMC and Innova
are, and at the Effective Time will be, true and complete in all material
respects, and (iii) that any representation made "to the knowledge" or similarly
qualified is correct without such qualification. In our examination of
documents, we have assumed the authenticity of original documents, the accuracy
of copies, the genuineness of signatures, and the legal capacity of the
signatories.
The conclusions expressed herein represent our judgement of the proper
treatment of certain aspects of the Merger under the income tax laws of the
United States based upon the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Regulations, rulings and other pronouncements of the Internal
Revenue
<PAGE>
MORRISON & FOERSTER LLP
Digital Microwave Corporation
____________, 1998
Page Two
Service (the "IRS") currently in effect, and judicial decisions, all of which
are subject to change, prospectively or retroactively. No assurance can be
given that such changes will not take place, or that such changes would not
affect the conclusions expressed herein. Furthermore, our opinion represents
only our best judgment of how a court would conclude if presented with the
issues addressed herein and is not binding upon either the IRS or any court.
Thus, no assurance can be given that a position taken in reliance on our opinion
will not be challenged by the IRS or rejected by a court.
Our opinion relates solely to the tax consequences of the Merger under the
federal income tax laws of the United States, and we express no opinion (and no
opinion should be inferred) regarding the tax consequences of the Merger under
the laws of any other jurisdiction. This opinion addresses only the specific
issues set forth below, and does not address any other tax consequences that may
result from the Merger or any other transaction (including any transaction
undertaken in connection with the Merger).
No opinion is expressed as to any transaction other than the Merger as
described in the Merger Agreement or as to any transaction whatsoever, including
the Merger, if all of the transactions described in the Merger Agreement are not
consummated in accordance with the terms of such Merger Agreement and without
waiver or breach of any material provision thereof, or if all the
representation, warranties, statements and assumptions upon which we rely are
not true and accurate at all relevant times. In the event any one of the
statements, representations, warranties or assumptions upon which we rely to
issue this opinion are incorrect, our opinion might be adversely affected and
may not be relied upon.
Based upon and subject to the foregoing, we are of the opinion that:
(1) The Merger will be a "reorganization" within the meaning of Section
368(a) of the Code; and
(2) DMC and Innova will each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code.
This opinion has been delivered to you for the purpose of satisfying the
conditions set forth in Section 6.01(d) of the Merger Agreement and is intended
solely for your benefit; it may not be relied upon for any other purpose or by
any other person or entity, and may not be made available to any other person or
entity without our prior written consent. We hereby consent to the filing of
this opinion as an exhibit to the Registration Statement and further consent to
all references to us in the Registration Statement. In giving this consent, we
do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations of the Securities and Exchange Commission thereunder, nor do we
thereby admit that we are experts with respect to any part of such Registration
Statement within the meaning of the term "experts" as used in the Securities Act
of 1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
DRAFT
Morrison & Foerster LLP
<PAGE>
EXHIBIT 8.2
[GRAHAM & JAMES LLP LETTERHEAD]
_________, 1998
Innova Corporation
Gateway North, Building 2
3325 South 116th Street
Seattle, WA 98168
Re: Agreement and Plan of Reorganization
Gentlemen:
We have acted as counsel to Innova Corporation, a Washington corporation
(hereinafter "Target"), in connection with the proposed merger (hereinafter the
"Merger") of Iguana Merger Corp., a Washington corporation (hereinafter "Sub"),
with and into Target in return for shares of Sub's parent, after which Target
will be wholly owned by Digital Microwave Corporation, a Delaware corporation
(hereinafter "Parent"), all pursuant to the terms of the Agreement and Plan of
Reorganization and Merger dated as of July 22, 1998 (the "Reorganization
Agreement") by and among Parent, Target and Sub, each as described in the
Reorganization Agreement.
This opinion is being rendered pursuant to your request. All capitalized
terms, unless otherwise specified, have the meaning assigned to them in the
Reorganization Agreement.
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
(i) the Reorganization Agreement, and (ii) such other documents as we have
deemed necessary or appropriate in order to enable us to render the opinion
below. In our examination, we have assumed: (i) the genuineness of all
signatures; (ii) the legal capacity of all natural persons; (iii) the
authenticity of all documents submitted to us as originals; (iv) the conformity
to original documents of all documents submitted to us as certified, conformed
or photostatic copies; (v) the authenticity of the originals of such copies and
(vi) that the Merger will be consummated in the manner contemplated and in
accordance with the Reorganization Agreement.
In rendering the opinion set forth below, we have relied upon certain
written representations and covenants of Parent and Target, which are annexed
hereto and we have considered the applicable provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury Regulations, pertinent judicial
authorities, interpretive rulings of the Internal Revenue Service (the "IRS")
and such other authorities as we have considered relevant. We express no
opinion as to any transaction whatsoever if the transaction is not consummated
in accordance with the Reorganization Agreement.
OPINION
Based upon and subject to the foregoing, we are of the opinion that the
Merger will, under current law, constitute a tax-free reorganization under
Section 368(a) of the Code, and Parent and Target will each be a party to the
reorganization within the meaning of Section 368(b) of the Code.
As a tax-free reorganization, the Merger should have the following federal
income tax consequences for Target shareholders, Target and Parent:
<PAGE>
[GRAHAM & JAMES LLP LETTERHEAD]
Innova Corporation _________, 1998
Page 2
1. No gain or loss will be recognized by holders of common stock of
Target ("Target Common Stock") as a result of the exchange of such shares for
shares of Parent common stock, par value $0.01 (1 CENT) per share ("Parent
Common Stock") pursuant to the Merger, except that gain or loss will be
recognized on the receipt of cash, if any, received in lieu of fractional shares
or upon a Target shareholder's exercise of dissenters' rights. Any cash
received by a shareholder of Target in lieu of a fractional share or because of
the exercise of dissenters' rights will be treated as received in exchange for
such fractional share or the dissenter's shares and not as a dividend.
2. The tax basis of the shares of Parent Common Stock received by each
shareholder of Target will equal the tax basis of such shareholder's shares of
Target Common Stock (reduced by any amount allocable to fractional share
interests for which cash is received) exchanged in the Merger.
3. The holding period for the shares of Parent Common Stock received by
each shareholder of Target will include the holding period for the shares of
Target Common Stock of such shareholder exchanged in the Merger.
4. Parent will not recognize gain or loss as a result of the Merger.
5. Target will not recognize gain or loss as a result of the Merger.
QUALIFICATIONS
The above described intended tax consequences are subject to certain
qualifications and are based on the truth and accuracy of the representations of
the parties in the Reorganization Agreement and the representations of Target
and Parent in the Representation Letters.
No party has requested a ruling from the IRS in connection with the Merger.
A successful IRS challenge to the tax-free status of the Merger would result in
a Target shareholder recognizing gain or loss with respect to each share of
Target Common Stock surrendered equal to the difference between the
shareholder's basis in such share and the fair market value, as of the date of
the Merger, of the cash (if any) and Parent Common Stock received on conversion
thereof. In such event, a Target shareholder's aggregate basis in the shares of
Parent Common Stock and cash received in the exchange would equal the fair
market value of such shares and his/her holding period for such shares would not
include the period during which he or she held shares of Target Common Stock.
Any gain recognized as a result of the Merger which would otherwise be long
term capital gain may be treated as ordinary income if the IRS determines that
an employee-shareholder of Target received shares of Parent Common Stock as
compensation for services rather than solely in exchange for Target Common
Stock.
This opinion is limited to the effects of the Internal Revenue laws of the
United States currently in force on the persons and transactions described
herein, and we express no opinion as to the applicability or effect of the laws
of any other jurisdictions. In addition, we express no opinion regarding any
federal or state antitrust or securities laws and regulations or compliance with
fiduciary duty requirements.
Although the foregoing represents a fair and reasonable analysis of the
Code, the Treasury Regulations and judicial decisions relevant to the proposed
Merger, without obtaining a private letter ruling from the IRS, assurance cannot
be given that the IRS would agree with all of the conclusions reached herein.
The conclusions expressed herein represent our best judgment of the proper tax
treatment of certain aspects of the Merger and this judgment is not binding upon
either the IRS or any Court.
Our opinions expressed above are based solely upon: (i) the
representations of Target in the Representation Letter, and (ii) the actual
knowledge of the attorney signing this opinion on behalf of the firm and the
other attorneys within this firm who have devoted substantial attention to the
Merger and related matters.
<PAGE>
[GRAHAM & JAMES LLP LETTERHEAD]
Innova Corporation _________, 1998
Page 3
Except as set forth above, we express no opinion as to the tax consequences
to any party, whether Federal, state, local or foreign, of the Merger or of any
transactions related to the Merger or contemplated by the Reorganization
Agreement. This opinion is being furnished only to you in connection with the
Merger and solely for your benefit in connection therewith and may not be used
or relied upon for any other purpose and may not be circulated, quoted or
otherwise referred to for any other purpose without our express written consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and further consent to all references to us in the
Registration Statement. In giving this consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder, nor do we thereby admit that we
are experts with respect to any part of such Registration Statement within the
meaning of the term "experts" as used in the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
DRAFT
GRAHAM & JAMES LLP/RIDDELL WILLIAMS P.S.
<PAGE>
EXHIBIT 23.1
CONSENT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report included in this registration statement and to the incorporation by
reference in this registration statement of our report dated April 21, 1998
included in Digital Microwave Corporation's Form 10-K for the year ended March
31, 1998.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
August 31, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF KPMG PEAT MARWICK LLP
INDEPENDENT AUDITORS
The Board of Directors
Innova Corporation:
We consent to the use of our report included herein and to the reference
to our firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Seattle,
Washington
August 31, 1998
<PAGE>
EXHIBIT 99.1
COMPANY SHAREHOLDER AGREEMENT
COMPANY SHAREHOLDER AGREEMENT, dated as of July 22, 1998 (this
"Agreement") by and between Digital Microwave Corporation ("Parent") and Paul
S. Bachow (the "Shareholder").
WITNESSETH:
WHEREAS, Section 5.06 of the Agreement and Plan of Reorganization and
Merger, dated as of the date hereof (the "Merger Agreement"; all terms not
defined herein shall have the meanings set forth in the Merger Agreement), by
and among Parent, Iguana Merger Corp. and Innova Corporation (the "Company")
requires that the Company use its reasonable best efforts to cause the
shareholders listed on Schedule 5.06 of the Merger Agreement to enter into a
shareholder agreement with Parent; and
WHEREAS, the Shareholder desires to assist the Company in consummating
the Merger.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, Parent and the Shareholder hereby agree as follows:
1. The Shareholder shall vote all of its beneficially owned shares
of the Common Stock of the Company in favor of the Merger at a shareholders
meeting of the Company held for the purpose of approving the Merger and the
transactions contemplated in the Merger Agreement, unless the board of directors
of the Company withdraws its recommendation to the shareholders of the Company
in favor of the Merger and the transactions contemplated in the Merger
Agreement.
2. The Shareholder shall not make any sale, disposition or other
transfer of, or otherwise reduce the Shareholder's investment risk with respect
to, the Parent Common Shares received by the Shareholder pursuant to the Merger
during the thirty days prior to the Effective Time without the prior written
consent of Parent. The Shareholder further agrees that, in order to preserve
pooling-of-interests accounting treatment of the Merger, the Shareholder will
not sell, transfer or otherwise dispose of, nor will the Shareholder reduce its
risk with respect to, any of the Parent Common Shares to be received pursuant to
the Merger, directly or indirectly, during a period of time beginning with the
Effective Time and ending with a date upon which financial results of at least
30 days of post-merger combined operations have been first published by Parent
in accordance with SEC Accounting Series Release No. 130 as amended by Release
No. 135 (including without limitation, entering into any loan transaction or
pledge of stock which by its terms would allow a third party to own or sell any
of the Parent Common Shares to be received by the Shareholder prior to the
expiration of such period). Further, the Shareholder will not knowingly take
any other action which could reasonably be expected to jeopardize the accounting
treatment of the transactions contemplated by the Merger Agreement as a pooling
of interests.
3. The Shareholder shall take all actions and execute such documents
as are reasonably requested by Parent to carry out the foregoing matters.
4. This Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of Delaware applicable to contracts
executed and fully performed within the State of Delaware, without regard to the
conflicts of laws provisions thereof.
5. This Agreement may be executed in one or more counterparts, and
by each party hereto in separate counterparts, each of which when executed shall
be deemed to be an original but all of which taken together shall constitute one
and the same agreement.
IN WITNESS WHEREOF, Parent and the Shareholder have caused this
Agreement to be executed as of the date first above written.
1
<PAGE>
DIGITAL MICROWAVE CORPORATION
By /s/ Charles D. Kissner
---------------------------------
Name: Charles D. Kissner
Title: Chairman and Chief Executive
Officer
SHAREHOLDER
/s/ Paul S. Bachow
---------------------------------
Paul S. Bachow
2
<PAGE>
EXHIBIT 99.2
COMPANY SHAREHOLDER AGREEMENT
COMPANY SHAREHOLDER AGREEMENT, dated as of July 22, 1998 (this
"Agreement") by and between Digital Microwave Corporation ("Parent") and V.
Frank Mendicino (the "Shareholder").
WITNESSETH:
WHEREAS, Section 5.06 of the Agreement and Plan of Reorganization and
Merger, dated as of the date hereof (the "Merger Agreement"; all terms not
defined herein shall have the meanings set forth in the Merger Agreement), by
and among Parent, Iguana Merger Corp. and Innova Corporation (the "Company")
requires that the Company use its reasonable best efforts to cause the
shareholders listed on Schedule 5.06 of the Merger Agreement to enter into a
shareholder agreement with Parent; and
WHEREAS, the Shareholder desires to assist the Company in consummating
the Merger.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, Parent and the Shareholder hereby agree as follows:
1. The Shareholder shall vote all of its beneficially owned shares
of the Common Stock of the Company in favor of the Merger at a shareholders
meeting of the Company held for the purpose of approving the Merger and the
transactions contemplated in the Merger Agreement, unless the board of directors
of the Company withdraws its recommendation to the shareholders of the Company
in favor of the Merger and the transactions contemplated in the Merger
Agreement.
2. The Shareholder shall not make any sale, disposition or other
transfer of, or otherwise reduce the Shareholder's investment risk with respect
to, the Parent Common Shares received by the Shareholder pursuant to the Merger
during the thirty days prior to the Effective Time without the prior written
consent of Parent. The Shareholder further agrees that, in order to preserve
pooling-of-interests accounting treatment of the Merger, the Shareholder will
not sell, transfer or otherwise dispose of, nor will the Shareholder reduce its
risk with respect to, any of the Parent Common Shares to be received pursuant to
the Merger, directly or indirectly, during a period of time beginning with the
Effective Time and ending with a date upon which financial results of at least
30 days of post-merger combined operations have been first published by Parent
in accordance with SEC Accounting Series Release No. 130 as amended by Release
No. 135 (including without limitation, entering into any loan transaction or
pledge of stock which by its terms would allow a third party to own or sell any
of the Parent Common Shares to be received by the Shareholder prior to the
expiration of such period). Further, the Shareholder will not knowingly take
any other action which could reasonably be expected to jeopardize the accounting
treatment of the transactions contemplated by the Merger Agreement as a pooling
of interests.
3. The Shareholder shall take all actions and execute such documents
as are reasonably requested by Parent to carry out the foregoing matters.
4. This Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of Delaware applicable to contracts
executed and fully performed within the State of Delaware, without regard to the
conflicts of laws provisions thereof.
5. This Agreement may be executed in one or more counterparts, and
by each party hereto in separate counterparts, each of which when executed shall
be deemed to be an original but all of which taken together shall constitute one
and the same agreement.
IN WITNESS WHEREOF, Parent and the Shareholder have caused this
Agreement to be executed as of the date first above written.
1
<PAGE>
DIGITAL MICROWAVE CORPORATION
By /s/ Charles D. Kissner
----------------------------------
Name: Charles D. Kissner
Title: Chairman & Chief Executive
Officer
SHAREHOLDER
/s/ V. Frank Mendicino
---------------------------------
V. Frank Mendicino
2
<PAGE>
EXHIBIT 99.3
CONSENT OF PERSON TO BECOME A DIRECTOR
I hereby consent to being named in this Registration Statement as a person
who may become a director of Digital Microwave Corporation.
/s/ PAUL BACHOW
---------------
Paul Bachow
Dated: August 31, 1998
<PAGE>
EXHIBIT 99.4
CONSENT OF PERSON TO BECOME A DIRECTOR
I hereby consent to being named in this Registration Statement as a person
who may become a director of Digital Microwave Corporation.
/s/ V. FRANK MENDICINO
----------------------
V. Frank Mendicino
Dated: August 31, 1998
