<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission file number: 0-15895
September 30, 1998
- ------------------
DIGITAL MICROWAVE CORPORATION
-----------------------------
(Exact name of registrant specified in its charter)
Delaware 77-0016028
- --------------------------------- -------------
(State or other jurisdiction (IRS employer
of incorporation or organization) identification number)
170 Rose Orchard Way
San Jose, CA 95134
- ------------------------------------------ ------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (408) 943-0777
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
The number of outstanding shares of the Registrant's common stock, par value
$.01 per share, was 61,708,342 on October 31, 1998.
<PAGE>
INDEX
-----
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
COVER PAGE 1
INDEX 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-11
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-19
PART II - OTHER INFORMATION
Item 4 - Other Matters 19
Item 5 - Other Information 20
Item 6 - Exhibits and Reports on Form 8-K 20
SIGNATURE 22
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
DIGITAL MICROWAVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS 9/30/98 03/31/98
- ------ ------- --------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 16,984 $ 25,130
Short-term investments 6,592 15,220
Accounts receivable, net 46,458 74,897
Inventories 62,144 60,981
Deferred tax asset 6,522 6,685
Other current assets 7,186 8,896
-------- --------
Total current assets 145,886 191,809
PROPERTY AND EQUIPMENT, NET 35,040 32,528
OTHER ASSETS 15,208 16,063
------ ------
Total assets $ 196,134 $240,400
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of capital lease obligations $ 446 $ 238
Accounts payable 21,302 33,793
Income taxes payable 736 1,298
Accrued liabilities 16,868 26,373
------ --------
Total current liabilities 39,352 61,702
LONG-TERM LIABILITIES:
Capital lease obligations, net of current maturities 1,701 204
------- --------
Total liabilities 41,053 61,906
STOCKHOLDERS' EQUITY
Common Stock and paid-in capital 160,046 159,173
Accumulated other comprehensive income (4,853) (1,615)
Retained earnings (accumulated deficit) (112) 20,936
-------- ------
Total stockholders' equity 155,081 178,494
Total liabilities and stockholders' equity $ 196,134 $240,400
--------- --------
--------- --------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
DIGITAL MICROWAVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 49,611 $ 80,298 $ 102,614 $ 144,856
Cost of sales 39,288 51,004 80,948 92,350
--------- --------- --------- --------
Gross profit 10,323 29,294 21,666 52,506
--------- --------- --------- --------
Operating Expenses:
Research and development 4,572 4,603 9,547 8,902
Selling, general and administrative 13,150 14,501 27,146 27,410
Restructuring costs 0 0 7,212 0
--------- --------- --------- --------
Total operating expenses 17,722 19,104 43,905 36,312
--------- --------- --------- --------
Operating income (loss) (7,399) 10,190 (22,239) 16,194
Other income (expense):
Interest and other income, net 439 1,602 1,367 2,293
Interest expense (56) (118) (79) (321)
--------- --------- --------- --------
Income (loss) before provision for
income taxes (7,016) 11,674 (20,951) 18,166
Provision for income taxes 69 2,025 96 2,707
--------- --------- --------- --------
Net income (loss) $ (7,085) $ 9,649 $ (21,047) $ 15,459
--------- --------- --------- --------
--------- --------- --------- --------
Basic earnings (loss) per share $ (0.15) $ 0.21 $ (0.45) $ 0.35
--------- --------- --------- --------
--------- --------- --------- --------
Diluted earnings (loss) per share $ (0.15) $ 0.20 $ (0.45) $ 0.33
--------- --------- --------- --------
--------- --------- --------- --------
Basic weighted average shares
outstanding 46,774 45,932 46,728 44,348
Diluted stock options 0 2,282 0 2,137
--------- --------- --------- --------
Diluted weighted average shares
outstanding 46,774 48,214 46,728 46,485
--------- --------- --------- --------
--------- --------- --------- --------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
DIGITAL MICROWAVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
-------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (21,047) $ 15,459
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 6,170 4,842
Provision for valuation reserves 7,779 3,073
Provision for warranty reserves 3,967 2,072
Changes in assets and liabilities, net of effect of acquisition:
Decrease (increase) in accounts receivable 22,884 (10,687)
Increase in inventories (7,025) (6,550)
Decrease (increase) in other assets 3,343 (2,272)
Decrease in accounts payable (11,825) (1,396)
Increase (decrease) in income tax payable (562) 900
Decrease in other accrued liabilities (12,595) (10,040)
------- -------
NET CASH USED IN OPERATING ACTIVITIES (8,911) (4,599)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (8,658) (3,193)
Proceeds from available-for-sale securities 17,078 7,933
Acquisition of businesses, net of cash acquired - (11,383)
Investment in Granger Associates Ltd. - (4,000)
Proceeds from the sale of investments 601 -
Proceeds from disposal of fixed assets 1,166 9
Purchases of property and equipment (9,842) (7,141)
------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 345 (17,775)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments to bank - (6,239)
Payment of capital lease obligations 151 (583)
Payment of assumed acquisition debt - (3,286)
Sale of common stock 872 32,420
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 721 22,312
Effect of exchange rate changes on cash (301) 313
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,146) 251
Cash and cash equivalents at beginning of year 25,130 40,374
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $16,984 $40,625
------- -------
------- -------
SUPPLEMENTAL DATA
Interest paid $ 79 $ 230
Income taxes paid $ 565 $ 540
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
DIGITAL MICROWAVE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Digital Microwave Corporation and its wholly owned subsidiaries.
Intercompany accounts and transactions have been eliminated. Prior year
reported results have been restated to include MAS Technology Limited which
merged with the Company in March 1998.
While the financial information furnished is unaudited, the financial
statements included in this report reflect all adjustments (consisting only
of normal recurring adjustments) which the Company considers necessary for
a fair presentation of the results of operations for the interim periods
covered and of the financial condition of the Company at the date of the
interim balance sheet. The results for interim periods are not necessarily
indicative of the results for the entire year. The condensed consolidated
financial statements should be read in connection with the Digital
Microwave Corporation financial statements included in the Company's annual
report and Form 10-K for the fiscal year ended March 31, 1998.
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.
NON-CASH TRANSACTIONS
Equipment acquired and financed under capital leases during the six months
ended September 30, 1998 totaled $1.9 million.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
where cost includes material, labor and manufacturing overhead. Inventories
consist of:
<TABLE>
<CAPTION>
(In thousands)
September 30, 1998 March 31, 1998
------------------ --------------
(Unaudited)
<S> <C> <C>
Raw materials $ 25,951 $ 23,524
Work in process 14,118 18,545
Finished goods 22,075 18,912
--------- ---------
$ 62,144 $ 60,981
--------- ---------
--------- ---------
</TABLE>
6
<PAGE>
OTHER ASSETS
Included in other assets are goodwill and other intangibles which are being
amortized on a straight line basis over their useful lives ranging from 5
to 10 years.
RESTRUCTURING COSTS
The restructuring costs of $7.2 million recorded in the quarter ended June
30, 1998 consist of a $5.8 million write-off related to the discontinuance
of internal information technology systems projects and a write-off of $1.4
million related to severance and other related costs associated with a
reduction in the Company's workforce.
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 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.
FINANCIAL INSTRUMENTS
The Company enters into forward foreign exchange contracts to hedge some of
its firm committed backlog and certain assets and liabilities denominated
in foreign currencies. At September 30, 1998, the Company had forward
foreign exchange contracts to exchange various foreign currencies for U.S.
dollars in the gross amount of $10.7 million. Market value gains and losses
on forward foreign exchange contracts are recognized as offsets to the
exchange gains or losses on the hedged transactions.
NET INCOME PER SHARE
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
7
<PAGE>
result, the Company's reported earnings per share, after adjustment for the
November 1997 stock split, were restated for all prior periods presented.
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.
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 accompanying 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 presented
have been provided as the pro forma amounts are not materially different
from the amounts as presented.
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. In
the first six months of Fiscal 1999, the Company sold approximately 15% of
this investment for $601,000, net of selling costs.
In March 1998, the Company's 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
8.6 million shares to MAS Technology share and option holders. The
combination qualified as a tax-free reorganization accounted for as a
pooling-of-interests transaction. Accordingly, the historical financial
statements of
8
<PAGE>
the Company have 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 the three and six months ended September 30, 1997.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, 1997 September 30, 1997
<S> <C> <C>
Revenue: Digital Microwave $67,106 $123,839
MAS Technology 15,746 25,310
Intercompany sales (2,554) (4,293)
------- -------
Total $80,298 $144,856
------- -------
Net Income: Digital Microwave $ 7,418 $ 13,203
MAS Technology 2,306 2,302
Intercompany profit eliminations (75) (46)
------- -------
Total $ 9,649 $ 15,459
------- -------
</TABLE>
On October 8, 1998, the Company announced the completion of its merger with
Innova Corporation, a Washington corporation which designs, manufactures,
markets and supports millimeter wave radios for use as low-to-medium
capacity wireless communication links in developed and developing
telecommunications markets. Under the terms of the merger agreement, the
Company exchanged 1.05 shares of its Common Stock for each outstanding
share of common stock of Innova. The Company issued approximately 14.7
million shares to Innova shareholders, approximately 24% of the Company's
outstanding Common Stock following consummation of the merger. In addition,
the Company assumed and converted Innova stock options and warrants into
stock options and warrants to purchase approximately 3.8 million shares of
Digital Microwave Corporation Common Stock using the same ratio. The merger
is intended to qualify as a tax-free reorganization and will be accounted
for as a pooling-of-interests transaction.
LITIGATION AND CONTINGENCIES
The Company is subject to legal proceedings and claims that arise in the
normal course of its business. In the opinion of management, these
proceedings will not have a material adverse effect on the financial
position and results of operations of the Company.
CONCENTRATION OF CREDIT RISK
Trade receivables concentrated with certain customers primarily in the
telecommunications industry and in certain geographic locations potentially
subject the Company to concentration of credit risk. In addition to sales
in Western Europe and North America, the Company actively markets and sells
9
<PAGE>
products in Asia, Eastern Europe, South America, the Middle East and
Africa. The Company performs on-going credit evaluations of its customers'
financial conditions and generally requires no collateral, although sales
to Asia, Eastern Europe, South America, the Middle East and Africa are
primarily paid through letters of credit. During the second quarter ended
September 30, 1998, the Company wrote off a $2.7 million receivable related
to an Asian customer that filed for bankruptcy protection.
The Company will continue to be affected, for the foreseeable future, by
the unstable economies in Asia. Further, it is not possible to determine
the future effect a continuation of the economic crisis may have on the
Company's liquidity and earnings. Related effects will be reported in the
financial statements as they become known and estimable.
CREDIT ARRANGEMENTS
The Company's existing credit agreement with a major U.S. bank expired
October 30, 1998. There were no outstanding borrowings under this facility.
On October 31, 1998, an amended and restated agreement was executed with
the bank to provide for the issuance of standby letters of credit on a cash
collateralized basis. The letters of credit, which totaled $1.7 million as
of October 30, 1998, are issued in conjunction with bid and performance
bond requirements under certain contracts with the Company's customers.
In September 1998, the Company received a commitment from a U.S. lender for
a new $40 million asset based credit facility. Loan documents are currently
under review and the Company's management expects to sign this new credit
facility by the end of November 1998.
COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement on Financial Accounting Standards
No. 130 ("SFAS 130"), "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. The following table reconciles
comprehensive income under the provisions of SFAS 130 for the three and six
months ended September 30, 1998 and 1997.
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ (7,085) $ 9,649 $(21,047) $15,459
Other comprehensive income (loss), net of tax
Unrealized currency gain (loss) (1,053) 304 (3,266) 80
Unrealized holding gain on short-
term investments 28 51 28 23
-------- -------- -------- -------
Comprehensive income (loss) $ (8,110) $ 10,004 $(24,285) $15,562
-------- -------- -------- -------
-------- -------- -------- -------
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement on Financial Accounting Standards
No. 133 ("SFAS 133") "Accounting for Derivative and Similar Financial
Instruments and for Hedging Activities" which requires companies to value
derivative financial instruments, including those used for hedging foreign
currency exposures, at current market value with the impact of any changes
in market value being charged against earnings. The Company must adopt SFAS
133 in the first quarter of the fiscal year ended March 31, 2000. The
Company has not determined the effect that SFAS 133 will have on its
financial statements.
In June 1997, the FASB issued Financial Accounting Standards No. 131 ("SFAS
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. SFAS 131 is
effective for companies with fiscal years beginning after December 15,
1997. Interim reporting is not required. The Company believes that the
adoption of this new pronouncement will not have a material effect on the
Company's financial statements.
11
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth the percentage relationships of certain items
from the Company's Condensed Consolidated Statements of Operations as
percentages of net sales:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 79.2 63.5 78.9 63.8
---- ---- ---- ----
Gross profit 20.8 36.5 21.1 36.2
Research & development 9.2 5.7 9.3 6.1
Selling, general & administrative 26.5 18.1 26.5 18.9
Restructuring costs - - 7.0 -
---- ---- ---- ----
Operating income (loss) (14.9) 12.7 (21.7) 11.2
Other income, net 0.8 1.8 1.3 1.4
--- --- --- ---
Income (loss) before provision
for income taxes (14.1) 14.5 (20.4) 12.6
Provision for income taxes 0.1 2.5 0.1 1.9
--- --- --- ---
Net income (loss) (14.2)% 12.0% (20.5)% 10.7%
------- ----- ------- -----
------- ----- ------- -----
</TABLE>
Net sales for the second quarter of Fiscal 1999 were $49.6 million, compared to
$80.3 million reported in the same quarter of Fiscal 1998. Net sales for the
first six months of Fiscal 1999 were $102.6 million, compared to $144.9 million
in the first half of Fiscal 1998. The decrease in net sales was primarily due to
a slowdown in demand for the Company's products in Asia, which began with the
downturn in Asian economies. However, such decrease in the Company's net sales
has been accelerated by the heightened pricing and competitive pressures of the
telecommunications market in other regions of the world. As a result, revenues
from Asia and Europe in the second quarter and first half of Fiscal 1999
significantly decreased from the comparable periods of the prior year.
During the second quarter of Fiscal 1999, the Company received $52.1 million in
new orders shippable over the next twelve months, compared to $74.5 million in
the second quarter of Fiscal 1998. Twelve month backlog at September 30, 1998
was $65.5 million, compared to $83.2 million at March 31, 1998.
The Company includes in its backlog purchase orders with respect to which a
delivery schedule has been specified for product shipment within one year.
Orders in the Company's current backlog are subject to changes in delivery
schedules or to cancellation at the option of the purchaser without significant
penalty. Accordingly, although useful for scheduling
12
<PAGE>
production, backlog as of any particular date may not be a reliable measure of
sales for any future period.
Gross profit as a percentage of net sales for the second quarter of Fiscal 1999
was 20.8% compared to 36.5% in the same quarter of Fiscal 1998. Gross profit as
a percentage of net sales for the first half of Fiscal 1999 was 21.1% compared
to 36.2% in the same period in Fiscal 1998. The decline in gross profit was
primarily the result of the under-utilization of the Company's manufacturing
capacity due to the Company's lower sales volume, lower average selling prices
and higher provision for inventory reserves. The Company reduced its workforce
at the end of the first quarter of Fiscal 1999 and plans to reduce its workforce
by approximately 20% in the third quarter of Fiscal 1999 as it expects sales
volumes to remain at current levels for at least the next six months and
competitive pricing pressure on the Company's products to continue. In addition,
the Company expects continued decreased sales in Asia for the foreseeable future
due to the continuing economic and political instability there. SEE "FACTORS
THAT MAY AFFECT FUTURE FINANCIAL RESULTS."
Research and development expenses of $4.6 million in the second quarter of
Fiscal 1999 were unchanged from the same period in Fiscal 1998. As a percentage
of net sales, research and development expenses were 9.2% in the second quarter
of Fiscal 1999 compared to 5.7% in the second quarter of Fiscal 1998. Such
increase was due primarily to the decrease in net sales over the comparable
period. The increase in research and development expenses from $8.9 million in
the first half of Fiscal 1998 to $9.5 million in the first half of Fiscal 1999
was primarily attributable to the Company's development of its new Altium-TM-
high-capacity wireless product platform. The Company believes research and
development expenses will be slightly lower in absolute dollars in the second
half of Fiscal 1999 compared to the first half of Fiscal 1999 due to the
Company's workforce reductions as described above. The Company remains committed
to continuing its new product rollouts in order to maintain and enhance its
competitive position.
Selling, general and administrative expenses decreased to $13.2 million in the
second quarter of Fiscal 1999 from $14.5 million in the second quarter of Fiscal
1998. As a percentage of net sales, selling, general and administrative expenses
were 26.5% in the second quarter of Fiscal 1999 compared to 18.1% in the
comparable quarter of Fiscal 1998. Such increase in percentage was due primarily
to the decrease in net sales over the comparable period. However, the decrease
in selling, general and administrative expenses in absolute dollars was mostly
attributable to the workforce reduction in the first quarter of Fiscal 1999 and
was partially offset by a $1.8 million increase in a provision for bad debts
related to uncollectable accounts receivables. Selling, general and
administrative expenses of $27.1 million in the first half of Fiscal 1999 were
slightly less than $27.4 million of such expenses in the first half of Fiscal
1998. However, the provision for bad debts related to uncollectable accounts
receivables increased by $3.2 million in the first half of Fiscal 1999 compared
to the same period of the prior year.
The restructuring costs of $7.2 million in the first half of Fiscal 1999 consist
of a write off of $5.8 million related to the discontinuance of several internal
information technology ("IT") systems projects and $1.4 million for severance
and related costs associated with a reduction in the Company's workforce. At
September 30, 1998, the remaining restructuring reserve was
13
<PAGE>
comprised primarily of $0.8 million for the discontinuance of IT systems
projects and $0.1 million for severance and related costs. In addition, in
the fourth quarter of Fiscal 1998, the Company recorded merger and
restructuring expenses of $14.6 million, which 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 September 30, 1998, the
remaining restructuring reserve related to the Company's merger with MAS
Technology was comprised principally of $4.6 million for asset valuation
reserves, and $0.4 million for other restructuring costs.
As disclosed in the Company's most recent Registration Statement on Form S-4
filed with the Securities and Exchange Commission in connection with the
merger with Innova Corporation, the Company expects to incur a substantial
charge of approximately $40 million in the third quarter ending December 31,
1998. This charge will include merger 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, elimination of duplicative facilities and
other integration costs.
Interest income decreased to $0.3 million in the second quarter of Fiscal
1999 compared to $0.7 million in the similar quarter of Fiscal 1998. This
decrease was due primarily to lower average cash balances. The decrease in
interest expense in the second quarter of Fiscal 1999 was primarily
attributable to lower debt balances as compared to the same quarter of the
prior year. Other income decreased by $1.2 million in the second quarter of
Fiscal 1999 due primarily to lower foreign exchange gains.
The Company did not record a tax benefit in the first half of Fiscal 1999 as
it cannot be certain of profitability in Fiscal 1999. In the first half of
Fiscal 1998, the Company recorded a provision for income taxes at an
effective rate of 15%. This was less than the statutory rate primarily due to
the utilization of net operating loss carry forwards and the deferred tax
asset originated from warranty and asset valuation reserves.
FACTORS THAT MAY AFFECT FUTURE FINANCIAL RESULTS
The statements in this Form 10-Q concerning the Company's future products,
expenses, revenues, gross margins, liquidity and cash needs, as well as the
Company's plans and strategies, contain forward-looking statements concerning
the Company's future operations and financial results within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. These
forward-looking statements are based on current expectations and the Company
assumes no obligation to update this information. Numerous factors, such as
economic and competitive conditions, timing and volume of incoming orders,
shipment volumes, product margins, and foreign exchange rates, could cause
actual results to differ materially from those described in these statements,
and prospective investors and stockholders should carefully consider the
factors set forth below in evaluating these forward-looking statements.
14
<PAGE>
Sales of the Company's products are concentrated in a small number of
customers. For the second quarter of Fiscal 1999, the top three customers
accounted for 14% of the net sales. As of September 30, 1998, three of the
Company's customers accounted for 22% of the backlog. The worldwide
telecommunications industry is dominated by a small number of large
corporations, and the Company expects that a significant portion of its
future product sales will continue to be concentrated in a limited number of
customers. The loss of any existing customer, a significant reduction in the
level of sales to any existing customer, or the failure of the Company to
gain additional customers could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, a substantial portion of shipments may occur near the end of each
quarter. Accordingly, the Company's results are difficult to predict and
delays in product delivery or closing of a sale can cause revenues and net
income to fluctuate significantly from anticipated levels and from quarter to
quarter.
Manufacturers of digital microwave telecommunications equipment are
experiencing, and are likely to continue to experience, intense price
pressure which has resulted, and is expected to continue to result, in
downward pricing pressure on the Company's products. As a result, the Company
has experienced, and expects to continue to experience, declining average
sales prices for its products. The Company's ability to maintain its gross
profit margins is dependent upon its ability to continue to improve
manufacturing efficiencies, reduce material costs of products, and to
continue to introduce new products and product enhancements. Any inability of
the Company to respond to increased price competition would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The markets for the Company's products are extremely competitive, and the
Company expects that competition will increase. The Company's existing and
potential competitors include established and emerging companies, such as
L.M. Ericsson, Northern Telecom, Siemens AG, Farinon Division of Harris
Corporation, P-COM, Alcatel, Nokia, NERA, NEC, and SIAE, many of which have
more extensive engineering, manufacturing, and marketing capabilities and
significantly greater financial, technical, and personnel resources than the
Company. The Company believes that its ability to compete successfully will
depend on a number of factors, both within and outside its control, including
price, quality, availability, customer service and support, breadth of
product line, product performance and features, rapid delivery, reliability,
timing of new product introductions by the Company, its customers and its
competitors, and the ability of its customers to obtain financing.
The Company expects that international sales will continue to account for the
majority of its net product sales for the foreseeable future. As a result,
the Company is subject to the risks of doing business internationally,
including unexpected changes in regulatory requirements, fluctuations in
foreign currency exchange rates, such as recently experienced in Asia,
imposition of tariffs and other barriers and restrictions, the burdens of
complying with a variety of foreign laws, and general economic and
geopolitical conditions, including inflation and trade relationships. In
addition, 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, may continue to
adversely impact the Company's revenues in Asian markets. There can be no
assurance that currency fluctuations, changes in
15
<PAGE>
the rate of inflation or any of the aforementioned factors will not continue
to have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's manufacturing operations are highly dependent upon the delivery
of materials by outside suppliers in a timely manner. In addition, the
Company depends in part upon subcontractors to assemble major components and
subsystems used in its products in a timely and satisfactory manner. The
Company does not generally enter into long-term or volume purchase agreements
with any of these suppliers, and no assurance can be given that such
materials, components, and subsystems will be available in the quantities
required by the Company, if at all. The inability of the Company to develop
alternative sources of supply quickly and on a cost-effective basis could
materially impair the Company's ability to manufacture and deliver its
products in a timely manner. There can be no assurance that the Company will
not experience material supply problems or component or subsystem delays in
the future.
The Company has pursued, and will continue to pursue, growth opportunities
through internal development and acquisitions of complementary businesses and
technologies. Acquisitions may involve difficulties in the retention of
personnel, diversion of management's attention, unexpected legal liabilities,
and tax and accounting issues. There can be no assurance that the Company will
be able to successfully identify suitable acquisition candidates, complete
acquisitions, integrate acquired businesses into its operations, or expand into
new markets. Once integrated, acquired businesses may not achieve comparable
levels of revenues, profitability, or productivity as the existing business of
the Company or otherwise perform as expected. The Company's failure to manage
its growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company is 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. The Company's
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 the Company's products being shipped
today are not Year 2000 ready. If not corrected, the Company's computer programs
and products could fail or create erroneous results by or at the Year 2000.
The Company is taking steps to ensure its products and computer programs will
continue to operate on and after January 1, 2000. The Company has formed a
project team consisting of staff from 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. The Company is currently in the
renovation stage with respect to most of its Year 2000 issues. The Company
estimates that it will complete this five phase process for all of its
significant systems by December 31, 1998. The Company's Year 2000 project team
has identified its manufacturing
16
<PAGE>
IT system as its highest priority and is currently installing an upgrade to
the Company's current manufacturing system supplied by the vendor of that
system. The Company expects its manufacturing systems to be Year 2000 ready
by December 31,1998. The Company's Network operating systems also are Year
2000 ready. Most of the Company's personal computers have been evaluated and
have been found to be non-compliant and software upgrades have been ordered
to correct the non-compliance. Some older personal computers will be replaced
or taken out of service.
The Company has completed an assessment of its products. Most of its hardware
products are not affected by the Year 2000 issue because no clock exists in
these products. Year 2000 readiness testing is in process for its newer
products, such as Altium and network software products. Some older network
software products are not Year 2000 ready and the Company is currently
developing an upgrade plan for customers who are using this software.
The Company is sending out letters in November 1998 to its primary suppliers
and subcontractors to determine whether they are developing plans to address
processing transactions in the Year 2000 and to monitor their progress toward
Year 2000 capability.
The Company believes that it will expend approximately $0.5 million
investigating and remedying issues related to Year 2000 readiness involving
internal operations. Approximately $60,000 has been expensed to date for
purchases of software test tools, software upgrades and upgrading a security
system related to Year 2000 readiness.
If systems material to the Company's operations have not been made Year 2000
ready by the completion of the project, the Year 2000 issue could have a
material adverse effect on the Company's financial statements. The Company
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. The
Company expects to develop such a contingency plan by December 31, 1998.
Based on the steps being taken to address this issue and the progress to
date, the Company's management believes that the Year 2000 readiness expenses
will not have a material adverse effect on the Company's earnings. However,
there can be no assurance that Year 2000 problems will not occur with respect
to the Company's computer systems. Furthermore, the Year 2000 problem may
impact other entities with which the Company transacts business, and the
Company cannot predict the effect of the Year 2000 problem on such entities
or the resulting effect on the Company. As a result, if preventative and/or
corrective actions by the Company or those the Company does business with are
not made in a timely manner, the Year 2000 issue could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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 rules and regulations
have not yet been defined and finalized by the European Commission with
regard to the euro currency. The Company has assessed the effect the euro
formation will have on its internal systems and the sale of its products.
Most of the Company's European sales and
17
<PAGE>
operating transactions are based primarily in U.S. dollars or U.K. pounds
sterling, neither of which are subject to the euro conversion. In addition,
the Company plans to upgrade its internal computer systems in early 1999 to
convert the European currency to euro. The Company's management believes that
the cost of upgrading the Company's systems in connection with the euro
conversion will not be material and that such conversion will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities in the first half of Fiscal 1999 was
$8.9 million, compared to net cash used for operating activities of $4.6
million in the first half of Fiscal 1998. The decline in cash provided from
operations was primarily the result of the net loss for the quarter. In
addition, despite a significant reduction in inventory purchases during the
first half of Fiscal 1999, inventories increased during the first half of
Fiscal 1999 as actual sales were less than forecasted sales. Other accrued
liabilities decreased during the first half of Fiscal 1999 due to payments
for merger costs, bonuses, and profit sharing accrued at March 31, 1998, the
end of Fiscal 1998. Accounts payable decreased due to reduced inventory
purchases. Accounts receivable decreased significantly due to higher
collections and lower sales during the first half of Fiscal 1999.
To partially offset the cash used by operations, the Company received over
$8.4 million in net proceeds from the sale of its short-term investments
during the first half of Fiscal 1999. Purchases of property and equipment
increased by $2.7 million in the first half of Fiscal 1999 compared to the
first half of Fiscal 1998 and were mostly attributable to payments on the
Company's new facility in the United Kingdom. In the first half of Fiscal
1998, the Company completed the acquisition of Granger, Inc. for total
consideration of $14.7 million and purchased a minority interest in Granger
Associates, Ltd., a UK company, for $4.0 million.
In the first half of Fiscal 1998, MAS Technology, a subsidiary of the
Company, sold approximately $26.7 million of ordinary shares in a public
offering. A portion of these proceeds were used to pay off MAS Technology's
outstanding debt of approximately $4.6 million. Proceeds from the sale of
stock to employees in the first half of Fiscal 1999 and 1998 were $0.9
million and $5.7 million, respectively. In addition, Digital Microwave
Corporation paid off its outstanding debt of $2.0 million in the first
quarter of Fiscal 1998, excluding lease obligations.
During June and July 1998, the Company amended its agreement with a major
U.S. bank to increase the unsecured credit facility from $20.0 million to
$25.0 million, extend the expiration date of the agreement to September 30,
1998, and to change certain terms of the agreement. In September 1998, an
additional extension was granted through October 1998 and this existing
agreement expired October 30, 1998. There were no outstanding borrowings
under this facility. On October 31, 1998, an amended and restated agreement
was executed with the bank to provide for the issuance of standby letters of
credit on a cash collateralized basis. The letters of credit, which totaled
$1.7 million as of October 30, 1998, are issued in
18
<PAGE>
conjunction with bid and performance bond requirements under certain
contracts with the Company's customers.
In September 1998, the Company received a commitment from a U.S. lender for a
new $40 million asset based credit facility. Loan documents are currently
under review and the Company's management expects to sign this new credit
facility by the end of November 1998. The new credit facility is expected to
provide for the extension of credit based on the availability of certain
eligible receivables, inventory and fixed assets of the Company at an
interest rate of prime plus 1.5%. The new credit facility will not require
the maintenance of financial covenants.
The Company believes that it will be necessary to borrow against its credit
facility to meet both its working capital and capital expenditure
requirements through Fiscal 1999. In addition, the Company may require
additional financing from other sources; however, there can be no assurance
that the Company will be able to obtain such additional financing in the
required time frame on commercially reasonable terms, or at all. Management
has implemented plans to reduce the Company's cash requirements through a
combination of reductions in working capital, equipment purchases and
operating expenditures. Management believes that such plans combined with
existing cash balances and other sources of liquidity will enable the Company
to meet its cash requirements through Fiscal 1999. However, there can be no
assurance that the Company will be able to implement these plans or that it
will be able to do so without a material adverse effect on the Company's
business, financial results or results of operations.
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held an Annual Meeting of Stockholders on August 4, 1998.
(b) At the Annual Meeting of Stockholders, the following directors were
elected:
<TABLE>
<CAPTION>
Votes
-----
For Withheld
--- --------
<S> <C> <C>
Charles D. Kissner 40,454,351 305,903
Richard C. Alberding 40,457,487 302,767
John W. Combs 40,544,430 215,824
Clifford H. Higgerson 40,577,199 183,055
James D. Meindl 40,571,074 189,180
Billy B. Oliver 40,418,618 341,636
Howard Oringer 40,571,671 188,583
</TABLE>
(c) At the Annual Meeting of Stockholders, the following additional matters
were voted upon:
19
<PAGE>
1. A proposal to ratify and approve certain amendments to the
Company's 1994 Stock Incentive Plan including increasing the
maximum number of shares of Common Stock granted to any
participant.
<TABLE>
<S> <C>
Affirmative votes: 33,041,808
Negative votes: 6,055,872
Abstain: 1,414,473
Non-votes: 248,101
</TABLE>
2. A proposal to ratify the selection of Arthur Andersen LLP as
independent public accountants for the fiscal year ending March 31,
1999.
<TABLE>
<S> <C>
Affirmative votes: 40,524,285
Negative votes: 146,948
Abstain 89,021
Non-votes 0
</TABLE>
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
For a list of exhibits to this Form 10-Q, see the exhibit index located
on page 21.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on July 29, 1998 relating to the
Company's entering into the Agreement and Plan of Reorganization and
Merger, dated as of July 22, 1998, by and among the Company, Innova
Corporation and Iguana Merger Corp.
20
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
10.1* Product Purchase Agreement, dated as of July 30, 1998, by and
between Digital Microwave Corporation and REMEC Inc.
10.2 Restated Employment Agreement, dated as of August 3, 1998, by and
between Digital Microwave Corporation and Charles D. Kissner.
10.3 Third Amendment to Credit Agreement dated as of September 30, 1998,
by and between Digital Microwave Corporation and Bank of America
National Trust and Savings Association.
27.1 Financial Data Schedule for the quarter ended September 30, 1998.
27.2 Restated Financial Data Schedule for the quarter ended
September 30, 1997.
* Confidential treatment of certain portions of this exhibit has been requested.
21
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGITAL MICROWAVE CORPORATION
Date: November 16, 1998 By /s/ Carl A. Thomsen
-------------------------- ------------------------------
Carl A. Thomsen
Vice President, Chief Financial
Officer and Secretary
22
<PAGE>
Exhibit 10.1
PURCHASE AGREEMENT
ALTIUM TECHNOLOGY
JULY 30, 1998
REMEC INC.
9404 CHESAPEAKE DRIVE
SAN DIEGO, CA. 92123
ATTN.: MR. ERROL EKAIREB
PRESIDENT AND CHIEF OPERATING OFFICER
MR. JON OPALSKI
PRESIDENT, REMEC WIRELESS
Gentlemen:
This memo serves to document the requirements and agreements between Digital
Microwave Corporation (DMC) and REMEC Inc. (REMEC).
The parties hereby agree that upon execution of this Agreement, the following
terms and conditions shall supersede any previously negotiated terms and
conditions and shall take precedence over any other document during the
period of this agreement. The parties also agree that this Agreement will
apply only to the "Altium" Products as provided in the attached Exhibit D.
This Agreement shall automatically be reviewed each year for the purpose of
marketing and forecast analysis.
1. Upon REMEC's acceptance of this letter by signing and returning one copy
to DMC, REMEC is directed to proceed at once to commence activities per
the Statement of Work described in Exhibit A. DMC is requesting REMEC to
assemble [*] ([*]) protected [*] GHz Beta units and manufacture full
production [*] GHz Out-Door Units per technical documentation provided by
DMC. In addition to the work related to the [*] GHz ODU assembly and
associated sub-assemblies, this agreement also serves to cover design,
development, and production of other frequency bands defined in Exhibit C.
DMC recognizes that this effort will require STE (special test equipment)
cost, as detailed in Exhibit A. STE is defined as application specific
interface fixtures and software. The costs detailed in Exhibit A are for
each frequency band and each module except where a module is a common
subassembly for all bands. The STE costs will be amortized over the
initial [*] units. DMC will retain title of all STE listed in Exhibit A.
If additional STE is required for growth in volume REMEC will make the
appropriate investment. DMC holds the right to purchase the additional
STE. Additional bands will be funded by DMC per the schedule for each band
as outlined in Exhibit C.
- --------------------------------------------------------------------------------
[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
sf-602617 1
<PAGE>
2. Beta unit delivery is critical to the overall Altium program. All material
for the [*] GHz beta phase has been procured by DMC and provided to REMEC
to build the [*] [*] GHz beta units. REMEC will assemble the beta units
using the supplied material at a cost of $[*] each.
3. Per this agreement DMC is requesting REMEC to begin full design and
development of the additional frequency bands as defined in Exhibit C.
REMEC is to follow general architecture and topologies as established with
the [*] GHz Altium product on all new product designs as well as design
for performance documentation provided by DMC. REMEC will design and
develop internal sub-assemblies (modules) and will incorporate a common
electronic and mechanical interface to allow a second source to be
qualified on all internal modules. If REMEC is unable or unwilling to
provide the product in the volume required by DMC, REMEC with DMC support,
will provide full documentation and license agreements for each product
developed by REMEC to allow DMC to develop a build to print second source
supplier. Second source suppliers shall be deemed non-competitors of REMEC
to allow protection of REMEC proprietary technology to be used in product
design. DMC is to provide all supporting documentation for the [*] and [*]
GHz designs so that REMEC may implement cost reduction or yield
improvements for each product as required.
4. REMEC shall be responsible for material procurement on all alpha and beta
units beyond the [*] GHz group. DMC shall pay for any excess material in
the event of a DMC requested design change on product implemented after
the start of fabrication or assembly, which render the assemblies scrap
including effected production material. Alpha and Beta ODU's shall be
submitted to DMC per the schedule as outlined in Exhibit C. REMEC will
provide a compliance matrix document within (60) sixty days of receiving
DMC ODU functional requirement documents (PSD) for those products to be
designed by REMEC. REMEC will conduct a design review meeting at the
completion of the alpha phase. This meeting shall provide full performance
data per the latest revision of the DMC ODU PSD for each alpha unit. If
REMEC can not meet product yield, or forecasted costs with DMC provided
designs or specifications, REMEC shall call for a meeting and present to
DMC a plan and cost to achieve satisfactory yields and costs. If the REMEC
plan is unacceptable to DMC REMEC reserves the right to cancel production
of these products from the purchase order.
5. The termination liability schedule ( Exhibit E) applies to this contract.
REMEC may not expend or commit a sum greater than that indicated by the
established review points until approved by DMC.
6. REMEC shall be paid for performance of the work hereunder upon delivery of
product as set forth in Exhibit A, attached hereto, DMC may terminate the
Work for just cause on a ([*]) day written notice and REMEC shall
immediately stop performance of the Work and not incur further charges.
DMC shall make any payment due to REMEC for Work performed and material
expenses REMEC incurred or committed to its vendors for completion of the
Altium program up until the time of termination in an amount commensurate
with the actual Work performed for a particular milestone. REMEC will
initiate a product review meeting if the [*] GHz DMC design fails to meet
standards for product yield, cost, or labor time values.
- --------------------------------------------------------------------------------
[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
sf-602617 2
<PAGE>
7. Digital Microwave Corporation will issue a fixed price purchase order in
the amount of $[*] for approximately [*] ([*]) Out Door Units or
approximately [*] transceiver units assuming a [*]/[*] mix of protected
and unprotected product. Price per unit is given in Exhibit D. This
product is expected to be delivered over a [*] year period. The [*] GHz
beta units shall be delivered per the schedule in Exhibit C. Both parties
acknowledge that such contract must be accepted by both DMC and REMEC. No
such acceptance is implied by this letter of agreement. All sales are
subject to the DMC terms and conditions as noted in Exhibit B. Any further
changes by DMC to the design, specification, or test requirements which
impact material cost or labor time standards shall initiate discussion to
re-negotiate the unit price.
8. Standard Terms and Conditions of Purchase set forth is [*], any reference
in said terms and Conditions of Purchase to adjustment in prices or
delivery schedule shall be inapplicable and no changes to this letter
shall be deemed to increase REMEC's authorization to expend funds and to
make commitments hereunder unless expressly so stated in any such change.
9. The purchase order shall include the Terms and Conditions of Purchase set
forth in Exhibit B, and the delivery schedule, prices and any additional
provisions that the parties agree upon.
10. In the event of termination of this agreement, per paragraphs 4 or 6
above, DMC shall pay REMEC for all Work performed up to the date of notice
of such termination on a time and material basis (including overhead and
G&A at a reasonable and customary rate), REMEC shall submit all financial
data required for DMC to verify charges. REMEC acknowledges that in no
event shall DMC be responsible to REMEC for any payments in excess of the
termination liability amounts set forth in Exhibit E. Upon such payment,
REMEC shall turn over to DMC all Work performed by REMEC up to the date of
termination. All Work prepared under this agreement shall be deemed a
"work made for hire" under the United States copyright laws. In the event
that, notwithstanding the foregoing, title to and ownership of the Work
initially vests in REMEC, REMEC agrees to execute, at DMC's request, all
documents that are necessary to transfer and assign all such title and
ownership of the Work to DMC, except work that is not unique to Altium.
REMEC ownership includes, but is not limited to: filters, modules and
circuits REMEC developed either for Altium application or other
applications, and associated process drawings which are not specified in
DMC's PSD. REMEC is entitled to own all rights and such designs.
11. This Agreement is to be considered confidential. Neither party shall
disclose either the existence, the terms or conditions, or the subject
matter of this Agreement without the prior written consent of the other
party.
12. Neither party shall use the other party's name in any publicity or use the
other party's name in any notice to any third party without the prior
written consent of the other party, such consent not to be unreasonably
withheld.
- --------------------------------------------------------------------------------
[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
sf-602617 3
<PAGE>
13. Both parties warrant that Work to be performed under this agreement letter
shall be performed in a professional manner by qualified personnel. DMC
and REMEC agree that the full cooperation of both companies is necessary
to enable the Work to meet its scheduled timetable.
14. Should market changes not support the conditions of this agreement DMC
reserves the right to terminate this contract for convenience by written
notification whereupon REMEC shall immediately stop all relevant work. In
the event of termination for convenience DMC shall be financially
responsible for materials covering the [*]-day purchase release for
finished product, WIP for the [*] month release, [*] month product
forecast and long lead material. DMC will also pay the difference in unit
price for the lower volume sold based on a [*]% CRC per Exhibit D.
Please signify your concurrence with this agreement by signing in the space
provided below and returning the signed original to me.
Regards,
/s/ Gary G. Lopes
Accepted this 30th day of July 1998
DIGITAL MICROWAVE CORPORATION REMEC INC.
- ------------------------------ --------------
By: /s/ Sam Smookler By: /s/ Errol Ekaireb
------------------------------- ------------------------
Title: President and Title: President and
Chief Operating Officer Chief Operating Officer
- ---------------------------------- -------------------------------
- --------------------------------------------------------------------------------
[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
sf-602617 4
<PAGE>
EXHIBIT A
STATEMENT OF WORK
DMC and REMEC shall participate in a joint effort to design and develop the
Altium ODU assembly for various frequency bands with the intention of REMEC
being an ODU manufacturer. The top level ODU design, as well as several key
modules (IF Module and Synthesizer Module) will be designed by DMC with
REMEC's participation to ensure manufacturabilty to REMEC
design/manufacturing standards. Other modules and frequency bands will be
specified by DMC and wholly designed and developed by REMEC. After
development of the [*] and [*] GHz product, REMEC will assume full
responsibility for design and development of all applicable modules.
DESIGN PHASE
The following are key tasks and responsibilities of this statement of work
for development of ODU's for [*], [*] and [*] GHz bands. [*] and [*] GHz
development will be joint development efforts.
[*]
ALPHA PHASE
DMC and REMEC shall participate in a joint effort to develop the design into
prototype modules and ODU assemblies for various frequency bands. The major
tasks and responsibilities are:
[*]
ALPHA PHASE DELIVERABLES
[*] Alpha ODU units for each frequency band of development per the delivery
schedule defined in Exhibit C. Each unit shall meet the electrical
performance requirements per the frequency appropriate DMC supplied PSD.
- --------------------------------------------------------------------------------
[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
sf-602617 5
<PAGE>
BETA PHASE
DMC and REMEC shall participate in a joint effort to develop the prototype
design into pre-production ODU assemblies for various frequency bands. The
major tasks and responsibilities are:
[*]
Pricing is as defined in Exhibit D
BETA PHASE DELIVERABLES
QTY Type and description
--------------------------
[*] [*] [*] GHz ODU, Protected, built and tested per DMC PSD
[*] [*] [*] GHz ODU, Protected, built and tested per DMC PSD
[*] [*] [*] GHz ODU, Protected, built and tested per DMC PSD
[*] [*] [*] GHz ODU, Protected, built and tested per DMC PSD
[*] [*] [*] GHz ODU, Protected, built and tested per DMC PSD
- --------------------------------------------------------------------------------
[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
sf-602617 6
<PAGE>
PRODUCTION DELIVERABLES
- -----------------------
Approximately [*] total complete and tested Out Door Units per DMC documentation
and released production order. Product mix will be both protected and
unprotected configurations in the [*], [*], [*], [*], or [*] GHz bands and set
per purchase order releases. Initial volume build is expected to be for [*] GHz
units. STE charges will be amortized over the initial quantity of [*] units as
noted in Exhibit D.
PRODUCT FORECAST
- ----------------
It is agreed that DMC will provide REMEC, on a monthly basis, [*] ([*]) day firm
purchase release, [*] ([*]) months Product forecasts and [*] ([*]) months
rolling forecasts for long lead time items. This section, as appropriate, may be
modified in an addendum to reflect specific Product requirements. STE COSTS The
anticipated Total STE cost :
<TABLE>
<CAPTION>
BAND COST
- -----------------------------------
<S> <C>
[*] GHz $[*]
[*] GHz $[*]
[*] GHz $[*]
[*] GHz $[*]
[*] GHz $[*]
- ------------------------
TOTAL $[*]
</TABLE>
MATERIAL PROCUREMENT
- --------------------
REMEC is authorized to purchase materials using standard purchasing practices
including, but not limited to, acquisition of material recognizing Economic
Order Quantities, ABC buy policy and long lead time component management in
order to meet the Purchase Order requirements of DMC. DMC recognizes its
financial responsibility and assumes liability for materials covering the
[*]-day purchase release for finished product, WIP for the [*] month
release, [*] month product forecast and long lead material. This production
forecast shall supercede those requirements in Exhibit E. The [*] GHz long lead
time item list (Exhibit F) will be reviewed quarterly. The long lead item list
for [*] GHz will be added as it becomes available. DMC agrees to provide REMEC
releases against the open purchase order with ODU configuration and frequency
requirements a minimum of [*] ([*]) days in advance of Delivery (or as otherwise
provided by an addendum) and shall become effective upon acceptance of the order
by REMEC within [*] ([*]) days of receipt of said release.
- --------------------------------------------------------------------------------
[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
sf-602617 7
<PAGE>
EXHIBIT B:
TERMS AND CONDITIONS OF PURCHASE
Alpha, payment will be [*] per set price.
Beta, payment will be [*] per set price.
Production, payment will be [*] per set price.
1. INVOICES. Payment of invoices shall not constitute acceptance of the
product and shall be subject to adjustment for errors, shortages, defects
in the product or other failure of Seller to meet the requirements of the
order. Buyer may at any time set off any amount owed by Buyer to Seller
against any amount owed by Seller.
2. TAXES. Unless otherwise specified, the prices set forth in this order
include all applicable federal, state, and local taxes. All such taxes
shall be stated separately on Seller's invoice.
3. OVERSHIPMENTS. Buyer will pay only for maximum quantities ordered.
Overshipments will be held at Seller's risk and expense for a reasonable
time awaiting shipping instructions. Return shipping charges for excess
quantities will be at Seller's expense.
4. PACKING AND SHIPPING. Unless otherwise specified, all products shall
be packed, packaged, marked and otherwise prepared for shipment in a manner
which is: (i) in accordance with good commercial practice, (ii) acceptable
to common carriers for shipment at the lowest rate for the particular
product and in accordance with all governmental regulations and (iii)
adequate to insure safe arrival of the product at the named destination and
for storage and protection against weather. An itemized packing sheet must
accompany each shipment unless otherwise specified.
5. F.O.B. POINT. Unless otherwise specifically provided on the face of
the purchase order, the product called for hereunder shall be delivered on
Ex Works (Incoterms 1990) Sellers facility freight collect.
6. RESPONSIBILITY FOR SUPPLIES. Title passes to Buyer and Buyer assumes
risk of loss upon delivery to the carrier at the Sellers facility.
7. WARRANTY. Seller warrants that all supplies delivered hereunder shall
be free from defects in workmanship, material other than material furnished
by Buyer, and manufacture; shall comply with the requirements of this
contract, including any drawings or specifications incorporated herein or
samples furnished by Seller; and, where design is Seller's responsibility,
be free from defects in design. The foregoing warranties shall constitute
conditions and are in lieu of all other warranties, whether expressed or
implied, and shall survive delivery, inspection, acceptance and payment.
If any products delivered hereunder do not meet the warranties specified
herein or otherwise applicable, Buyer may at its election require the
Seller to promptly correct, at no cost to Buyer, any defective or
nonconforming products by repair or replacement, at Seller's facility for a
period of [*] ([*]) months from delivery. The foregoing remedies shall be
deemed to be exclusive,
- --------------------------------------------------------------------------------
[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
sf-602617 8
<PAGE>
and in no event shall Seller be liable to Buyer for incidental or
consequential damages. The provisions of this clause shall not limit or
effect the rights of Buyer under the clause hereof entitled Inspection.
8. INSPECTION. All products purchased hereunder shall be subject to
inspection and test by Buyer to the extent practicable at all times and
places during and after the period of manufacture and in any event prior to
final acceptance. In case any product is defective in material or
workmanship, or otherwise not in conformity with the requirements of this
order, Buyer shall have the right to reject it, and require its correction
or replacement. Any product which has been rejected or required to be
corrected shall be replaced or corrected by and at the expense of the
Seller promptly after notice. If, after being requested by Buyer, the
Seller fails to replace or correct any defective product within a
reasonable time of the delivery schedule Buyer may with appropriate notice
terminate this order for default in accordance with the clause herein
entitled "Termination for Default". Notwithstanding any prior inspection or
payment hereunder, all products shall also be subject to final inspection
and acceptance at Buyer's plant within a reasonable time after delivery.
9. CHANGES IN PROCESS OR METHOD OF MANUFACTURING. Seller will notify
buyer of any significant changes in the process or method of manufacture
during the term of this purchase order that affect form, fit or function
when such changes are implemented by seller, allowing buyer to evaluate
them in a parallel process. Comments to such changes must be returned to
seller within [*] working days. If buyer determines within [*] working
days the proposed changes may have a significant impact to the performance
required by DMC's specifications, Buyer may request for an additional [*]
working days for further evaluation. Seller agrees that should the change
prove to compromise performance, quality or reliability as defined in the
specification, Seller will be financially responsible for product
manufactured during this [*] day period.
10. CHANGES. The Buyer may at any time by written order, and without
notice to sureties or assignees, suspend performance hereunder, increase or
decrease the ordered quantity or make changes in the applicable drawings,
designs or specification, the method of shipment or packing, and/or place
of delivery. If any such change causes an increase or decrease in the cost
of or the time required for performance of this order, an equitable
adjustment shall be made in the order price or delivery schedule or both,
and the order shall be modified in writing accordingly. However, nothing
in this clause shall excuse Seller from proceeding with the order as
changed or amended.
11. TERMINATION FOR DEFAULT. It is understood and agreed that time is of
the essence under this order or any extension thereof effected by any
change order. Buyer may by written notice terminate this order in whole or
in part if the Seller fails (i) to make delivery of the product or to
perform the service within a reasonable time of the time specified herein,
or (ii) to replace or correct defective products in accordance with the
provision of those clauses hereof entitled "Warranty" and "Inspection" or,
(iii) to perform any of the provisions of this order or to so fail to make
progress as to endanger performance in accordance with the terms hereof,
including delivery schedules, or (iv) if Seller becomes insolvent, admits
in writing its inability to pay its debts as they mature, files a voluntary
petition to bankruptcy, makes an assignment for the benefit of creditors or
if a petition under bankruptcy is filed against it.
- --------------------------------------------------------------------------------
[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
sf-602617 9
<PAGE>
12. PATENT INDEMNITY. Seller represents and warrants that (i) it has the
right to disclose or use, without liability to others, all subject matter,
including ideas, inventions, creations, works, processes, designs and
methods that Seller will disclose or use in its performance of this order;
(ii) the products, and Buyer's use thereof, do not and will not infringe
any patent, copyright, trade secret, mask work right, or other proprietary
right of others; and (iii) in connection with its performance under this
order, Seller will not infringe any patent, copyright, trade secret, mask
work right, or any other proprietary right of any third party. Seller will
indemnify, hold harmless, and at Buyer's request defend Buyer from and
against any loss, cost, liability or expense (including court costs and
reasonable fees of attorneys and other professionals) arising out of or
resulting from any breach or claimed breach of the above representations
and warranties. In the event of any such claim, Buyer agrees (i) to notify
Seller of the claim, (ii) if Buyer has not requested that Seller defend the
claim, to permit Seller, at Seller's expense, to participate in the defense
thereof with counsel of Seller's choosing, subject to Buyer's supervision
and control, and (iii) if Buyer has requested that Seller defend the claim,
to provide Seller with all needed information, assistance and authority
necessary for Seller to do so. If the use by Buyer of any of the products
purchased under this Agreement is enjoined, or in Buyer's opinion is likely
to be enjoined, at Buyer's request and option, and without prejudice to
Buyer's rights and remedies, Seller at its expense will procure from the
person or persons claiming or likely to claim infringement, a license for
Buyer and its customers to continue to use such products, or modify the
allegedly infringing order to avoid the infringement, without materially
impairing performance or compliance with Buyer's specifications or this
order. Buyer represents and warrants that (i) it has the right to disclose
or use, without liability to others, all subject matter, including ideas,
inventions, creations, works, processes, designs and methods that Buyer
will disclose or use in its performance of this order; (ii) the products,
and Seller's use thereof, do not and will not infringe any patent,
copyright, trade secret, mask work right, or other proprietary right of
others; and (iii) in connection with its performance under this order,
Buyer will not infringe any patent, copyright, trade secret, mask work
right, or any other proprietary right of any third party. Buyer will
indemnify, hold harmless, and at Seller's request defend Seller from and
against any loss, cost, liability or expense (including court costs and
reasonable fees of attorneys and other professionals) arising out of or
resulting from any breach or claimed breach of the above representations
and warranties. In the event of any such claim, Seller agrees (i) to
notify buyer of the claim, (ii) if Seller has not requested that Buyer
defend the claim, to permit Buyer , at Seller's expense, to participate in
the defense thereof with counsel of Buyer's choosing, subject to Seller's
supervision and control, and (iii) if Seller has requested that Buyer
defend the claim, to provide Buyer with all needed information, assistance
and authority necessary for Seller to do so.
13. COMPLIANCE WITH LAWS. The Seller warrants that no law, rule or
ordinance of the United States, a State or any other governmental agency
has been violated in the manufacture or sale of the products or in the
performance of services covered by this order, and will defend and hold
Buyer harmless from loss, cost or damage as a result of any such actual or
alleged violation. Upon written request by Buyer, Seller agrees to execute
and furnish a certification of compliance, which may be on Buyer's form and
which shall certify compliance with any applicable Federal, State and or
Local Laws or Regulations, including but not limited to FLSA, EEOC, and
OSHA.
10
<PAGE>
14. ASSIGNMENT AND SUBCONTRACTORS. No right or obligation under this
purchase order including the right to receive monies due hereunder) shall
be assigned by Seller, and Seller shall not enter into any substantial
subcontracts without the prior written consent of Buyer. Any purported
assignment without such consent shall be null and void and Buyer shall not
be obligated to recognize any claim from Seller resulting from a
subcontract, not previously consented to by Buyer.
15 SPECIAL TOOLING. If special tooling used in the performance of this
purchase order has been charged to this order, or to this order and other
orders placed by the Buyer, title to such special tooling shall vest in the
Buyer, at the option of the Buyer. Such tooling is to be used only in the
performance of such Purchase Orders unless otherwise approved by Buyer.
The Seller agrees that it will follow normal industrial practice in the
identification and maintenance of property control records on all such
tooling, and will make such records available for inspection by the Buyer
at all reasonable times. After the termination or completion of such
Order(s) and upon the request of the Buyer, the Seller shall furnish a list
of such tooling in the form requested and shall make such tooling available
for disposition by the Buyer.
16 APPLICABLE LAW. This purchase order shall be governed by and enforced
in accordance with California law as applied to contracts entered into in
California by California residents to be performed entirely within the
State of California.
17. EXCUSABLE DELAYS. The Seller shall be liable for default unless
nonperformance is caused by an occurrence beyond the reasonable control of
the Seller and without its fault or negligence such as, acts of God or the
public enemy, acts of the Government in either its sovereign or contractual
capacity, fires, floods, epidemics, quarantine restrictions, strikes,
unusually severe weather, and delays of common carriers. The Seller shall
notify the Buyer in writing as soon as it is reasonably possible after the
commencement of any excusable delay, setting forth the full particulars in
connection therewith, shall remedy such occurrence with all reasonable
dispatch, and shall promptly give written notice to the Buyer of the
cessation of such occurrence.
18. DISPUTES. The parties shall attempt to resolve all disputes and
disagreements arising under or relating to this Agreement through
negotiation. If the parties are not able to reach a resolution after
reasonable, good faith efforts, the matter (excluding claims under Article
13, Patent Indemnity) shall be referred to mediation, before and as a
condition precedent to the initiation of any adjudicative action or
proceeding. In the event that such dispute or disagreement is not resolved
through mediation, then it shall be submitted to arbitration upon the
request of one party after the service of that request on the other party.
Pending resolution of any such dispute, Seller shall diligently perform all
work called for by this Agreement.
11
<PAGE>
EXHIBIT C:
SCHEDULE FOR DEVELOPMENT
<TABLE>
<CAPTION>
- ------- ------------ ------------ ---------------- ---------------- ---------------- -------------- ----------------- -------------
TYPE SPEC'S* ALPHA ALPHA ALPHA ALPHA BETA BETA BETA
(GHZ) (SCD'S) XCVR SYNTH FILTER ODU MODULE TEST ODU SYSTEM
MODULE MODULE MODULE TEST TEST TEST
- ------- ------------ ------------ ------------- ------------ ------------- ------------- ----------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
[*] [*] [*] [*] [*] [*] [*] [*] [*]
RESPONSIBLE: [*] [*] [*] [*] [*] [*] [*] [*]
BY (DATE):
- ------- ------------ ------------ ------------- ------------ ------------- ------------- ----------------- ----------- ------------
[*] [*] [*] [*] [*] [*] [*] [*] [*]
RESPONSIBLE: [*] [*] [*] [*] [*] [*] [*] [*]
BY (DATE):
- ------- ------------ ------------ ------------- ------------ ------------- ------------- ----------------- ----------- ------------
[*] [*] [*] [*] [*] [*] [*] [*] [*]
RESPONSIBLE: [*] [*] [*] [*] [*] [*] [*] [*]
BY (DATE):
- ------- ------------ ------------ ------------- ------------ ------------- ------------- ----------------- ----------- ------------
[*] [*] [*] [*] [*] [*] [*] [*] [*]
RESPONSIBLE: [*] [*] [*] [*] [*] [*] [*] [*]
BY (DATE):
- ------- ------------ ------------ ------------- ------------ ------------- ------------- ----------------- ----------- ------------
[*] [*] [*] [*] [*] [*] [*] [*] [*]
RESPONSIBLE: [*] [*] [*] [*] [*] [*] [*] [*]
BY (DATE):
- ------- ------------ ------------ ------------- ------------ ------------- ------------- ----------------- ----------- ------------
</TABLE>
* THE DATES IN THE SPEC'S COLUMN MEANS COMPLETION OF ALL REQUIRED
SPECIFICATIONS FOR THE RESPECTIVE FREQUENCY BAND BY THE DATE GIVEN.
NOTE: ALL DATES SHOWN ABOVE ARE COMPLETION DATES FOR EACH OF THE RESPECTIVE
PHASES
1) [*] GHz schedule is contingent upon receipt of al beta material and
documentation.
2) [*] GHz alpha synthesizers contingent upon delivery of DMC design
documentation, MSD and demonstration of a [*] GHz beta unit.
3) All REMEC dates indicated on the above schedule are contingent upon
receipt of DMC documentation on the dates indicated.
- --------------------------------------------------------------------------------
[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
sf-602617 12
<PAGE>
EXHIBIT D:
[*] GHZ BETA PRICING:
<TABLE>
<CAPTION>
QTY ODU UNIT PRICE
--- --------------
<S> <C>
[*] $[*]
TOTAL $[*]
-------
</TABLE>
ALPHA, BETA AND PRODUCTION UNIT PRICING
- ---------------------------------------
For [*], [*], [*], [*], and [*] GHz ODU product
<TABLE>
<CAPTION>
TYPE ODU QUANTITY PRICE
- -------------------------------------------------------------------
<S> <C> <C> <C>
Protected ODU < [*] $[*] )
) Total =[*] transceivers
Unprotected ODU < [*] $[*] )
Protected ODU > [*] < [*] $[*] )
- - ) Total =[*]transceivers
Unprotected ODU > [*] < [*] $[*] )
- -
</TABLE>
A reduction in quantities will result in a price increase based on a [*]%
cost reduction curve (CRC). Increased quantities above those listed in either
category will result in a reduction in price based on a [*]% CRC.
All prices are based on a product mix of [*]% [*]/[*]/[*] GHz and [*]% [*]/[*]
/[*]/[*] GHz. A mix of greater than [*]% in the [*]/[*]/[*]/[*] GHz. will
result in a price increase based a [*]% higher cost for the [*]/[*]/[*]/[*]
GHz product. An increase greater than the [*]% product mix for the [*]/[*]/[*]
GHz product will result in a price reduction using the same [*]% ratio.
- --------------------------------------------------------------------------------
[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
sf-602617 13
<PAGE>
EXHIBIT E
TERMINATION LIABILITY SCHEDULE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
[*] [*] [*] [*] [*]
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
[*] Days after $[*] $[*] $[*] $[*] $[*]
receipt of SCD
(PDR)
- ---------------------------------------------------------------------------------------------
Completion of $[*] $[*] $[*] $[*] $[*]
Alpha Phase (CDR)
- ---------------------------------------------------------------------------------------------
</TABLE>
Notes:
1. The above figures are additive at the Completion of the Alpha/Beta Phase 2.
The above figures represent termination liability per frequency band
3. [*] Days after receipt of SCD means from turn-on of the respective frequency
band with the first modular or ODU Level SCD
4. Coverage includes [*] months of Long Lead material based upon a [*]%
[*]/[*]/[*] GHz frequency band and [*]% [*]/[*]/[*] & [*] GHz frequency band
split
- --------------------------------------------------------------------------------
[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
sf-602617 14
<PAGE>
EXHIBIT F
Long Lead Material [*] GHz
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
ASSY # COMPONENT DESCRIPTION QTY LEAD
- ----------------------------------------------------------------------------------------------------------------------
PER TIME
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
[*] [*] [*] 1 [*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 2 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 8 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 5 [*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 1 [*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 2 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 2 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 4 NC/NR- [*]-WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 2 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] [*] 2 [*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 8 NC/NR-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 2 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] [*] 1 [*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 1 [*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 3 [*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 8 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 3 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 1 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 4 [*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 2 [*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 1 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
sf-602617 15
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 1 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 1 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 1 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 1 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 1 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 4 [*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 1 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 4 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] [*] 1 [*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 1 [*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 2 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 1 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 1 [*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 2 [*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 1 [*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] [*] 1 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 1 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] [*] 1 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 1 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] [*] 1 [*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 1 [*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 1 [*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] [*] 1 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
[*] [*] 1 [*]-[*] WEEKS
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
[*] Omitted pursuant to a confidential treatment request. The material has been
filed separately with the Securities and Exchange Commission.
sf-602617 16
<PAGE>
Exhibit 10.2
R E S T A T E D E M P L O Y M E N T A G R E E M E N T
This Restated Employment Agreement ("Agreement"), dated as of August 3,
1998 is between Digital Microwave Corporation, a California corporation
("Employer"), and Charles D. Kissner ("Employee").
RECITALS
* Employee has been employed by Employer and is currently serving as the
Chairman and Chief Executive Officer, pursuant to an Employment Agreement
executed by the parties and dated May 1, 1996.
* Employer desires to continue to employ Employee and to assure itself of the
continued services of Employee for the Period of Employment provided for in this
Agreement, and Employee desires to be employed by Employer for such period, upon
the following terms and conditions.
ACCORDINGLY, the parties agree as follows:
1. Period of Employment.
(a) Basic Term. Employer shall employ Employee to render services to Employer
in the position and with the duties and responsibilities described in Section 2
for the period (the "Period of Employment") commencing on the date of this
Agreement and ending on the date upon which the Period of Employment is
terminated in accordance with Section 4.
2. Position and Responsibilities.
(a) Position. Employee shall continue employment with Employer and shall
perform all services appropriate to that position, as well as such other
services as may be assigned by Employer. Employee shall devote his best efforts
and full-time attention to the performance of his duties. Employee shall be
subject to the direction of Employer, which shall retain full control of the
means and methods by which he performs the above services and of the place(s) at
which all services are rendered. Employee shall report to the Board of
Directors of Employer ("Board"). Employee shall be expected to travel if
necessary or advisable in order to meet the obligations of his position.
(b) Other Activity. Except upon the prior written consent of Employer,
Employee (during the Period of Employment) shall not (i) accept any other
employment; or (ii) engage, directly or indirectly, in any other business,
commercial, or professional activity (whether or not pursued for
1
<PAGE>
pecuniary advantage) that is or may be competitive with Employer, that might
create a conflict of interest with Employer, or that otherwise might
interfere with the business of Employer, or any Affiliate. An "Affiliate"
shall mean any person or entity that directly or indirectly controls, is
controlled by, or is under common control with Employer. Notwithstanding the
foregoing, upon reasonable notice to Employer, Employee may serve as a
director of a reasonable number of entities so long as such entities are not
competitive with Employer or any Affiliate and where such service does not
otherwise create a conflict of interest.
3. Compensation and Benefits.
(a) Compensation. In consideration of the services to be rendered under this
Agreement, Employer shall pay Employee a base salary of $430,000 per year,
payable semi-monthly, pursuant to the procedures regularly established, and as
they may be amended, by Employer in its sole discretion, during the Period of
Employment. Employer shall review annually Employee's compensation and shall
determine, in its sole discretion, whether and how much the existing
compensation shall be adjusted, without regard to any policy or practice
Employer may have for adjusting salaries. In addition to base salary, Employee
shall be eligible to participate in the Employer's executive management
incentive bonus and stock option plans according to the terms of those plans.
(b) Benefits. Employee shall be entitled to vacation leave in accordance with
Employer's standard policies. As Employee becomes eligible therefor, Employee
shall have the right to participate in and to receive benefits from all present
and future benefit plans specified in Employer's policies and generally made
available to similarly situated employees of Employer. The amount and extent of
benefits to which Employee is entitled shall be governed by the specific benefit
plan, as amended. Employee also shall be entitled to any benefits or
compensation tied to termination as described in Section 4. Nothing stated in
this Agreement shall prevent Employer from changing or eliminating any benefit
during the Period of Employment as Employer, in its sole discretion, may deem
necessary or desirable. No statement concerning benefits or compensation to
which Employee is entitled shall alter in any way the term of this Agreement,
any renewal thereof, or its termination. All compensation and comparable
payments to be paid to Employee under this Agreement shall be less withholdings
required by law.
(c) Expenses. Employer shall reimburse Employee for reasonable travel and
other business expenses incurred by Employee in the performance of his duties,
in accordance with Employer's policies, as they may be amended in Employer's
sole discretion. It is expected that Employee may expend funds on occasion for
which no reimbursement will be received. Examples include certain entertainment
for Executive Officers and use of private or commercial air transportation which
significantly exceeds costs consistent with Company Policies.
2
<PAGE>
4. Termination of Employment.
(a) By Death. The Period of Employment shall terminate automatically upon
the death of Employee. Upon termination by death, stock options issued
concurrently with the execution of this Agreement and during the Period of
Employment ("Stock Options") that are then outstanding but not yet
exercisable shall automatically vest and become exercisable as to an
additional sixty percent (60%) of the total number of shares subject to each
such Stock Option. Employee's beneficiaries or estate shall also receive any
compensation then due and owing to Employee, including payment for accrued
but unused vacation and the severance benefits provided in subparagraphs
4(c)(i)-(iii), excluding the benefits described in subparagraph 4(e)(iv)-(v).
Upon termination by death, should Employee's dependents who already receive
health insurance benefits under Employer's group plan ("Dependents") elect to
convert their health insurance benefits under COBRA, Employer will pay for
Dependents' share of health insurance premiums for a period of up to
thirty-six (36) months, or until Dependents are eligible to participate in
another group plan, whichever comes first. Thereafter, all obligations of
Employer under this Agreement shall cease. Nothing in this Section shall
affect any entitlement of Employee's heirs to the benefits of any life
insurance plan or other applicable benefits.
(b) By Disability. If, by reason of any physical or mental incapacity,
Employee has been or will be prevented from properly performing his duties
under this Agreement for more than ninety (90) consecutive days, then, to the
extent permitted by law, Employer may terminate the Period of Employment
without any advance notice. Upon termination by disability, Employer shall
pay Employee all compensation to which he is entitled up through the day
notice of termination is provided, and, Employee shall be entitled to receive
the severance benefits provided in subparagraphs 4(a)(i)-(v). Thereafter,
all obligations of Employer under this Agreement shall cease. Nothing in this
Section shall affect Employee's rights under any applicable Employer
disability plan; provided, however, that the severance benefits to which
Employee is entitled shall be offset by any disability income payments
received by Employee so that the total monthly severance and disability
income benefit payments for the severance period shall not exceed Employee's
then current base salary.
(c) By Employer Not For Cause. At any time, Employer may terminate the
Period of Employment Not for Cause for any reason, by providing Employee ten
(10) days' advance written notice, provided that Employee shall, in addition
to all compensation due and owing through the last day actually worked,
receive the following:
(i) A severance payment equal to three times the average of
Employee's annual base salary for the preceding three (3) years. At the
discretion of the Employer, the severance payment may be made in the form of
salary continuation over the equivalent pay periods that the severance covers
or in a lump sum payment.
3
<PAGE>
(ii) A payment equal to three (3) times the average of the annual
incentive bonus payments received by Employee, if any, for the previous three
(3) fiscal years.
(iii) A payment when due of the incentive bonus to which the Employee
would have been entitled prorated based on the number of months the Employee was
employed during the incentive bonus period.
(iv) Payment of the Employee's share of health insurance premiums
for a period of up to thirty-six (36) months, or until Employee is eligible
to participate in another Employer's plan, whichever comes first, should
Employee elect to convert his health insurance benefits under COBRA.
(v) Stock Options shall continue to vest and become exercisable for
thirty-six (36) months, except as otherwise provided for in the Stock Options.
(d) By Employer For Cause. At any time, and without prior notice, Employer may
terminate the Period of Employment for Cause (as defined below). Employer shall
pay Employee all compensation then due and owing; thereafter, all of Employer's
obligations under this Agreement shall cease. Termination shall be for "Cause"
if Employee: (i) acts in bad faith and to the detriment of Employer;
(ii) exhibits in regard to his employment willful misconduct, dishonesty,
habitual neglect of duties, or any willful act or omission that may materially
and adversely affect the Employer's business or that involves fraud,
embezzlement or misappropriation of any property or proprietary information of
the Employer; (iii) is convicted of a crime involving dishonesty, breach of
trust, or physical or emotional harm to any person; or (iv) breaches any
material term of this Agreement. If termination is due to Employee's
disability, Section 4(b) above shall control, and not this subsection on
termination for Cause.
(e) By Employee Not for Cause. At any time, Employee may terminate the Period
of Employment for any reason, with or without cause, by providing Employer ten
(10) days' advance written notice. Employer shall have the option, in its
complete discretion, to make termination of the Period of Employment effective
at any time prior to the end of such notice period, provided Employer pays
Employee all compensation due and owing through the last day actually worked,
plus an amount equal to the base salary Employee would have earned through the
balance of the above notice period, not to exceed ten (10) days; thereafter, all
of Employer's obligations under this Agreement shall cease.
(f) By Employee for Good Reason. Employee may terminate, without liability,
the Period of Employment for Good Reason (as defined below), provided
Employee gives Employer sixty (60) days' advance written notice of the reason
for termination and his intent to terminate this Agreement. During this
period, Employer shall have an opportunity to correct the condition
constituting Good Reason. If the condition is remedied within this period,
Employee's notice to terminate shall be rescinded automatically; if not
remedied, termination of the Period of Employment shall become effective upon
expiration of the above notice period. In this event,
4
<PAGE>
Employer shall pay Employee all compensation due and owing through the last
day actually worked including any accrued but unused vacation. Employer
shall also have the option, in its complete discretion, to make termination
effective at any time prior to the end of the notice period, provided that
Employer pays Employee all compensation due and owing through the balance of
the notice period (not to exceed sixty (60) days). Employee shall be
entitled to exercise his right to terminate this Agreement for Good Reason
only if he gives the required notice not more than forty-five (45) days after
the occurrence of the event that is the basis for the Good Reason. If
Employee terminates the Period of Employment for Good Reason pursuant to the
provisions of this Section 4(f), Employee shall receive the severance
benefits described in subparagraphs 4(a)(i)-(v) above.
Termination shall be for "Good Reason" if Employee voluntarily resigns
following: (i) a change in Employee's position with employer which materially
reduces Employee's level of responsibility; (ii) a reduction in Employee's
level of compensation (including base salary, fringe benefits, and any
non-discretionary and objective-standard incentive payment or bonus award) by
more than five percent (5%); or (iii) a relocation of Employee's principal
place of employment by more than fifty (50) miles, provided and only if such
change, reduction or relocation is effected by the Employer without
Employee's consent.
(g) Termination Obligations.
(i) Employee agrees that all property, including, without limitation, all
equipment, tangible Proprietary Information (as defined below), documents,
books, records, reports, notes, contracts, lists, computer disks (and other
computer-generated files and data), and copies thereof, created on any medium
and furnished to, obtained by, or prepared by Employee in the course of or
incident to his employment, belongs to Employer and shall be returned promptly
to Employer upon termination of the Period of Employment.
(ii) All benefits to which Employee is otherwise entitled shall cease upon
Employee's termination of the Period of Employment, unless explicitly continued
either under this Agreement or under any specific written policy or benefit plan
of Employer.
(iii) Upon termination of the Period of Employment, Employee shall be deemed
to have resigned from all offices and directorships then held with Employer or
any Affiliate, unless otherwise approved by the Company's Board of Directors.
(iv) The representations and warranties contained in this Agreement and
Employee's obligations under this Section 4(g) on Termination Obligations and
Section 5 on Proprietary Information shall survive the termination of the Period
of Employment and the expiration of this Agreement.
(v) Following any termination of the Period of Employment, Employee shall
fully cooperate with Employer in all matters relating to the winding up of
pending work on behalf of Employer and the orderly transfer of work to other
employees of Employer. Employee shall also cooperate
5
<PAGE>
in the defense of any action brought by any third party against Employer that
relates in any way to Employee's acts or omissions while employed by Employer.
5. Proprietary Information.
(a) Defined. "Proprietary Information" is all information and any idea in
whatever form, tangible or intangible, pertaining in any manner to the business
of Employer, or any Affiliate, or its employees, clients, consultants, or
business associates, which was produced by any employee of Employer, or any
Affiliate, in the course of his or her employment or otherwise produced or
acquired by or on behalf of Employer, or any Affiliate. All Proprietary
Information not generally known outside of Employer's organization, and all
Proprietary Information so known only through improper means, shall be deemed
"Confidential Information." Without limiting the foregoing definition,
Proprietary and Confidential Information shall include, but not be limited to:
(i) formulas, teaching and development techniques, processes, trade secrets,
computer programs, electronic codes, inventions, improvements, and research
projects; (ii) information about costs, profits, markets, sales, and lists of
customers or clients; (iii) business, marketing, and strategic plans; and (iv)
employee personnel files and compensation information. Employee should consult
any Employer procedures instituted to identify and protect certain types of
Confidential Information, which are considered by Employer to be safeguards in
addition to the protection provided by this Agreement. Nothing contained in
those procedures or in this Agreement is intended to limit the effect of the
other.
(b) General Restrictions on Use. During the Period of Employment, Employee
shall use Proprietary Information, and shall disclose Confidential Information,
only for the benefit of Employer and as is necessary to carry out his
responsibilities under this Agreement. Following termination, Employee shall
neither, directly or indirectly, use any Proprietary Information nor disclose
any Confidential Information, except as expressly and specifically authorized in
writing by Employer. The publication of any Proprietary Information through
literature or speeches must be approved in advance in writing by Employer.
6. Arbitration.
(a) Arbitrable Claims. All disputes between Employee (and his attorneys,
successors, and assigns) and Employer (and its Affiliates, shareholders,
directors, officers, employees, agents, successors, attorneys, and assigns)
relating in any manner whatsoever to the employment or termination of Employee,
including, without limitation, all disputes arising under this Agreement,
("Arbitrable Claims") shall be resolved by arbitration. All persons and
entities specified in the preceding sentence (other than Employer and Employee)
shall be considered third-party beneficiaries of the rights and obligations
created by this Section on Arbitration. Arbitrable Claims shall include, but
are not limited to, contract (express or implied) and tort claims of all kinds,
as well as all claims based on any federal, state, or local law, statute, or
regulation,
6
<PAGE>
excepting only claims under applicable workers' compensation law and
unemployment insurance claims. By way of example and not in limitation of
the foregoing, Arbitrable Claims shall include any claims arising under Title
VII of the Civil Rights Act of 1964, the Age Discrimination in Employment
Act, the Americans with Disabilities Act, and the California Fair Employment
and Housing Act, as well as any claims asserting wrongful termination, breach
of contract, breach of the covenant of good faith and fair dealing, negligent
or intentional infliction of emotional distress, negligent or intentional
misrepresentation, negligent or intentional interference with contract or
prospective economic advantage, defamation, invasion of privacy, and claims
related to disability. Arbitration shall be final and binding upon the
parties and shall be the exclusive remedy for all Arbitrable Claims, except
that Employer may, at its option, seek injunctive relief and damages in court
for any breach of Section 5 of this Agreement. Subject to the foregoing
sentence, THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO TRIAL BY JURY
IN REGARD TO ARBITRABLE CLAIMS.
(b) Procedure. Arbitration of Arbitrable Claims shall be in accordance with
the Employment Dispute Resolution Rules of the American Arbitration Association
("AAA Employment Rules"), except as provided otherwise in this Agreement.
Arbitration shall be initiated by providing written notice to the other party
with a statement of the claim(s) asserted, the facts upon which the claim(s) are
based, and the remedy sought. The burden of proof in any arbitration shall be
allocated as provided by applicable law, unless otherwise specified in this
Agreement. Either party may bring an action in court to compel arbitration
under this Agreement and to enforce an arbitration award. Otherwise, neither
party shall initiate or prosecute any lawsuit or administrative action in any
way related to any Arbitrable Claim. The Federal Arbitration Act shall govern
the interpretation and enforcement of this Section 6.
(c) Arbitrator Selection and Authority. All disputes involving Arbitrable
Claims shall be decided by a single arbitrator. The arbitrator shall be
selected by mutual agreement of the parties within thirty (30) days of the
effective date of the notice initiating the arbitration. If the parties cannot
agree on an arbitrator, then the complaining party shall notify the AAA and
request selection of an arbitrator in accordance with the AAA Employment Rules.
The arbitrator shall have only such authority to award equitable relief,
damages, costs, and fees as a court would have for the particular claim(s)
asserted. The fees of the arbitrator shall be split between both parties
equally. The arbitrator shall have exclusive authority to resolve all
Arbitrable Claims, including, but not limited to, any claim that all or any part
of this Agreement is void or unenforceable.
(d) Confidentiality. All proceedings and all documents prepared in connection
with any Arbitrable Claim shall be confidential and, unless otherwise required
by law, the subject matter thereof shall not be disclosed to any person other
than the parties to the proceedings, their counsel, witnesses and experts, the
arbitrator, and, if involved, the court and court staff. All documents filed
with the arbitrator or with a court shall be filed under seal. The parties
shall stipulate to all arbitration and court orders necessary to effectuate
fully the provisions of this subsection concerning confidentiality.
7
<PAGE>
(e) Continuing Obligations. The rights and obligations of Employee and
Employer set forth in this Section on Arbitration shall survive the termination
of Employee's employment and the expiration of this Agreement.
7. Notices.
Any notice under this Agreement must be in writing and shall be effective upon
delivery by hand, upon facsimile transmission to the number provided below (if
one is provided), or three (3) business days after deposit in the United States
mail, postage prepaid, certified or registered, and addressed to Employer or to
Employee at the corresponding address below. Employee shall be obligated to
notify Employer in writing of any change in his address. Notice of change of
address shall be effective only when done in accordance with this Section.
8
<PAGE>
Employer's Notice Address:
Vice President, Personnel
Digital Microwave Corporation
170 Rose Orchard Way
San Jose, California 95134
Fax Phone No.: (408)944-1701
Employee's Notice Address:
Charles D. Kissner
Digital Microwave Corporation
170 Rose Orchard Way
San Jose, California 95134
Fax Phone No.: (408)944-1701
8. Action by Employer.
All actions required or permitted to be taken under this Agreement by Employer,
including, without limitation, exercise of discretion, consents, waivers, and
amendments to this Agreement, shall be made and authorized only by the Chairman
or by his or her representative specifically authorized to fulfill these
obligations under this Agreement.
9. Integration.
This Agreement is intended to be the final, complete, and exclusive statement
of the terms of Employee's employment by Employer. Except for any
Proprietary Information Agreements, previous stock option agreements, and any
agreements evidencing an issuance of Stock Options, this Agreement supersedes
all other prior and contemporaneous agreements and statements pertaining in
any manner to the employment of Employee, including but not limited to
Employee's previous Employment Agreement with Employer, dated May 1, 1996,
and it may not be contradicted by evidence of any prior or contemporaneous
statements or agreements. To the extent that the practices, policies, or
procedures of Employer, now or in the future, apply to Employee and are
inconsistent with the terms of this Agreement, the provisions of this
Agreement shall control.
9
<PAGE>
10. Amendments; Waivers.
This Agreement may not be modified, amended, or terminated except by an
instrument in writing, signed by each of the parties. No failure to exercise
and no delay in exercising any right, remedy, or power under this Agreement
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right, remedy, or power under this Agreement preclude any other or further
exercise thereof, or the exercise of any other right, remedy, or power provided
herein or by law or in equity.
11. Assignment; Successors and Assigns.
Employee agrees that he will not assign, sell, transfer, delegate, or otherwise
dispose of, whether voluntarily or involuntarily, or by operation of law, any
rights or obligations under this Agreement. Any such purported assignment,
transfer, or delegation shall be null and void. Nothing in this Agreement shall
prevent the consolidation of Employer with, or its merger into, any other
entity, or the sale by Employer of all or substantially all of its assets, or
the otherwise lawful assignment by Employer of any rights or obligations under
this Agreement. Subject to the foregoing, this Agreement shall be binding upon
and shall inure to the benefit of the parties and their respective heirs, legal
representatives, successors, and permitted assigns, and shall not benefit any
person or entity other than those specifically enumerated in this Agreement.
12. Severability.
If any provision of this Agreement, or its application to any person, place, or
circumstance, is held by an arbitrator or a court of competent jurisdiction to
be invalid, unenforceable, or void, such provision shall be enforced to the
greatest extent permitted by law, and the remainder of this Agreement and such
provision as applied to other persons, places, and circumstances shall remain in
full force and effect.
13. Attorneys' Fees.
In any legal action, arbitration, or other proceeding brought to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
recover reasonable attorneys' fees and costs.
10
<PAGE>
14. Governing Law.
This Agreement shall be governed by and construed in accordance with the law of
the State of California.
15. Interpretation.
This Agreement shall be construed as a whole, according to its fair meaning,
and not in favor of or against any party. By way of example and not in
limitation, this Agreement shall not be construed in favor of the party
receiving a benefit nor against the party responsible for any particular
language in this Agreement. Captions are used for reference purposes only and
should be ignored in the interpretation of the Agreement.
16. Employee Acknowledgment.
Employee acknowledges that he has had the opportunity to consult legal counsel
in regard to this Agreement, that he has read and understands this Agreement,
that he is fully aware of its legal effect, and that he has entered into it
freely and voluntarily and based on his own judgment and not on any
representations or promises other than those contained in this Agreement.
11
<PAGE>
The parties have duly executed this Agreement as of the date first written
above.
/s/ CHARLES D. KISSNER
- ------------------------------
Charles D. Kissner
Digital Microwave Corporation
/s/ BILLY B. OLIVER
- ------------------------------
By: Billy B. Oliver
Its: Chairman of the Compensation Committee
of the Board of Directors
12
<PAGE>
Exhibit 10.3
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (the "AMENDMENT"), dated as of
September 30 1998, is entered into by and between DIGITAL MICROWAVE CORPORATION
(the "BORROWER") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the
"BANK").
RECITALS
A. The Borrower and the Bank are parties to a Credit Agreement dated as
of June 30, 1997, amended by First and Second Amendments thereto between the
Borrower and the Bank on June 1, 1998 and July 22, 1998, respectively (as in
effect as of the opening of business on the date of this Amendment, the "CREDIT
AGREEMENT") pursuant to which the Bank has extended certain credit facilities to
the Borrower.
B. The Borrower has requested that the Bank agree to certain amendments
of the Credit Agreement.
C. The Bank is willing to amend the Credit Agreement subject to the terms
and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. DEFINED TERMS. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings, if any, assigned to them in the Credit
Agreement.
2. AMENDMENTS TO CREDIT AGREEMENT.
(a) Article I of the Credit Agreement is amended as follows:
(1) By deleting the following definitions:
Acceptable Subsidiary Advance
Availability Period Bank Guaranty
Bank Guaranty Outstanding Amount Closing Date
Continuing Guaranty Credit Limit
Dollar Advances Final Maturity Date
Floating Rate Local Currency
Local Currency Advance Notice of Borrowing
Notice of Conversion/Continuation Offshore Credit Provider
Offshore Rate Offshore Rate Advance
Offshore Rate Interest Period Reference Rate Advance
Revolving Facility
(2) By adding the following definition in the proper alphabetical
sequence:
"LETTERS OF CREDIT" means the Letters of Credit described in
Exhibit I of the Third Amendment to Credit Agreement.
1
<PAGE>
(3) By modifying the definition of "L/C Outstanding Amount" to
provide as follows:
"L/C OUTSTANDING AMOUNT": at any time, the undrawn amount
at such time of any Letter of Credit, plus the amount of all
drafts or drawings paid or accepted by the Bank which have not
yet been reimbursed to the Bank, plus any other obligation or
liability of the Borrower to the Bank with respect to any Letter
of Credit.
(b) Article II of the Credit Agreement is amended in its entirety to
provide as follows:
ARTICLE II
THE LETTERS OF CREDIT
2.01 THE LETTERS OF CREDIT.
(a) The Bank agrees to continue the Letters of Credit and to honor
drafts under the Letters of Credit. The Bank shall be under no obligation to
amend any of the Letters of Credit.
(b) On October 30, 1998, the Borrower covenants and agrees that it
shall either:
(1) return all of the Letters of Credit to the Bank so that the
Bank may cancel the Letters of Credit; or
(2) if the Borrower is unable to return all or any of the
Letters of Credit, the Borrower agrees to deposit with the Bank, with
respect to each Letter of Credit it is unable to return to the Bank, an
amount in Dollars equal to the L/C Outstanding Amount of such Letter of
Credit to be held as cash collateral for the Borrower's obligations with
respect to such Letter of Credit and the Borrower's obligations under this
Agreement and the other Credit Documents.
(c) In addition to any other rights or remedies which the Bank may
have under this Agreement or otherwise, upon the occurrence of an Event of
Default the Bank may require the Borrower to provide cash collateral in Dollars
in the amount of the L/C Outstanding Amount of the Letters of Credit, to be held
as cash collateral for the Borrower's obligations with respect to the Letters of
Credit and the Borrower's obligations under this Agreement and the other Credit
Documents.
(d) If a Letter of Credit is issued in a currency other than Dollars,
the equivalent amount in Dollars of its L/C Outstanding Amount shall be
determined as set forth in Paragraph 5 of the application and agreement for
standby letter of credit applicable to such Letter of Credit. The Bank may,
from time to time, require additional deposits in Dollars so that the total
amount deposited with the Bank is not less than the equivalent amount in Dollars
of the L/C Outstanding Amount of such letter of credit, determined as set forth
in said Paragraph 5.
2.02 DRAWINGS UNDER THE LETTERS OF CREDIT. In case of a drawing
or payment by the Bank under a Letter of Credit, the Bank will notify the
Borrower. The Borrower will
2
<PAGE>
promptly reimburse the Bank in the currency in which the Letter of Credit is
payable, except that the Bank may, at its option, require payments to be made
in Dollars, as set forth in Paragraph 5 of the application and agreement for
standby letter of credit applicable to such Letter of Credit. Each such
reimbursement obligation, if not paid when due, shall bear interest, payable
on demand from the date of such drawing or payment at the Reference Rate plus
2.00%.
2.03 LETTER OF CREDIT FEES. The Borrower shall pay to the Bank a
non-refundable fee equal to 1.00% per annum of the outstanding undrawn amount
of each financial standby letter of credit and 0.50% per annum of the
outstanding undrawn amount of each performance standby letter of credit
payable quarterly in advance, and calculated on the basis of the face amount
outstanding on the day the fee is calculated. The Borrower shall also pay
the standard fees and commissions charged to Bank customers at the times and
in the amounts the Bank advises the Borrower from time to time as being
applicable to the Borrower's standby letters of credit.
(c) Section 3.06 of Article III of the Credit Agreement is amended in
its entirety to provide as follows:
Any sum payable by the Borrower hereunder (including unpaid interest and
the obligation to furnish cash collateral) if not paid when due shall bear
interest (payable on demand) from its due date until payment in full at a
rate per annum equal to the Reference Rate plus 2.00% per annum. At the
option of the Bank, in each instance, any sum payable hereunder which is
not paid when due (including unpaid interest) may be added to principal of
the credit extended hereunder and shall thereafter bear interest at the
rate applicable to principal.
(d) Article IV of the Credit Agreement is amended in its entirety to
provide as follows:
ARTICLE IV
INTENTIONALLY OMITTED
(e) The last line of Section 7.16 of the Credit Agreement is amended
by adding the following after "June 30, 1998 may not exceed $15,000,000" and
prior to the period:
; PROVIDED, FURTHER, THAT each of the net and operating loss for the
quarter ending September 30, 1998 may not exceed $10,000,000 excluding the
financial results of the Borrower's acquisition of Innova Corporation
(f) The Credit Agreement is amended (1) to delete all references
throughout its text to the definitions deleted from Article I by Section 2(a)(1)
of this Amendment, and (2) all references to letters of credit issued under the
Credit Agreement shall be deemed references to the Letters of Credit.
3. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and
warrants to the Bank as follows:
(a) The execution, delivery and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate and other action
and do not and will not
3
<PAGE>
require any registration with, consent or approval of, notice to or action
by, any Person (including any Governmental Authority) in order to be
effective and enforceable. The Credit Agreement as amended by this Amendment
constitutes the legal, valid and binding obligations of the Borrower,
enforceable against it in accordance with its respective terms.
(b) The Borrower is entering into this Amendment on the basis of its
own investigation and for its own reasons, without reliance upon the Bank or any
other Person.
4. EFFECTIVE DATE. This Amendment will become effective as of September
30, 1998, PROVIDED that on or before October 1, 1998 the Bank has received from
the Borrower a duly executed original (or, if elected by the Bank, an executed
facsimile copy) of this Amendment.
5. RESERVATION OF RIGHTS. The Borrower acknowledges and agrees that the
execution and delivery by the Bank of this Amendment shall not be deemed to
create a course of dealing or otherwise obligate the Bank to enter into
amendments under the same, similar or any other circumstances in the future.
6. MISCELLANEOUS.
(a) Except as herein expressly amended, all terms, covenants and
provisions of the Credit Agreement are and shall remain in full force and effect
and all references therein and in the other Loan Documents to such Credit
Agreement shall henceforth refer to the Credit Agreement as amended by this
Amendment. This Amendment shall be deemed incorporated into, and a part of, the
Credit Agreement. This Amendment is a Credit Document.
(b) This Amendment shall be binding upon and inure to the benefit of
the parties hereto and to the Credit Agreement and their respective successors
and assigns. No third party beneficiaries are intended in connection with this
Amendment.
(c) This Amendment shall be governed by and construed in accordance
with the law of the State of California.
(d) This Amendment may be executed in any number of counterparts,
each of which shall be deemed an original, but all such counterparts together
shall constitute but one and the same instrument. Each of the parties hereto
understands and agrees that this document (and any other document required
herein) may be delivered by any party thereto either in the form of an
executed original or an executed original sent by facsimile transmission to
be followed promptly by mailing of a hard copy original, and that receipt by
the Bank of a facsimile transmitted document purportedly bearing the
signature of the Borrower shall bind the Borrower with the same force and
effect as the delivery of a hard copy original. Any failure by the Bank to
receive the hard copy executed original of such document shall not diminish
the binding effect of receipt of the facsimile transmitted executed original
of such document which hard copy page was not received by the Bank, and the
Bank is hereby authorized to make sufficient photocopies thereof to assemble
complete counterparty documents.
(e) This Amendment supersedes all prior drafts and communications
with respect thereto. This Amendment may not be amended except in accordance
with the provisions of Section 9.05 of the Credit Agreement.
4
<PAGE>
(f) If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision shall be
invalidated without affecting the remaining provisions of this Amendment or the
Credit Agreement, respectively.
The rest of the page is deliberately left blank.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.
DIGITAL MICROWAVE CORPORATION
By: /s/ CARL A. THOMSEN
-------------------
Name: Carl A. Thomsen
Title: Vice President, Chief Financial
Officer and Secretary
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ MICHAEL J. MC CUTCHIN
-------------------------
Name: Michael J. McCutchin
Title: Managing Director
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON
FORM 10-Q OF DIGITAL MICROWAVE CORPORATION FOR THE FISCAL QUARTER ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 16,984
<SECURITIES> 6,592
<RECEIVABLES> 51,393
<ALLOWANCES> 4,935
<INVENTORY> 62,144
<CURRENT-ASSETS> 145,886
<PP&E> 79,114
<DEPRECIATION> 44,074
<TOTAL-ASSETS> 196,134
<CURRENT-LIABILITIES> 39,352
<BONDS> 0
0
0
<COMMON> 470
<OTHER-SE> 154,611
<TOTAL-LIABILITY-AND-EQUITY> 196,134
<SALES> 102,614
<TOTAL-REVENUES> 102,614
<CGS> 80,948
<TOTAL-COSTS> 80,948
<OTHER-EXPENSES> 43,905
<LOSS-PROVISION> 3,847
<INTEREST-EXPENSE> 79
<INCOME-PRETAX> (20,951)
<INCOME-TAX> 96
<INCOME-CONTINUING> (21,047)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,047)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM
10-Q OF DIGITAL MICROWAVE CORPORATION FOR THE QUARTER ENDED SEPTEMBER 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 40,625
<SECURITIES> 13,207
<RECEIVABLES> 71,819
<ALLOWANCES> 3,894
<INVENTORY> 56,037
<CURRENT-ASSETS> 181,903
<PP&E> 57,424
<DEPRECIATION> 34,637
<TOTAL-ASSETS> 223,116
<CURRENT-LIABILITIES> 50,652
<BONDS> 0
0
0
<COMMON> 381
<OTHER-SE> 171,904
<TOTAL-LIABILITY-AND-EQUITY> 223,116
<SALES> 144,856
<TOTAL-REVENUES> 144,856
<CGS> 92,350
<TOTAL-COSTS> 92,350
<OTHER-EXPENSES> 36,312
<LOSS-PROVISION> 592
<INTEREST-EXPENSE> 321
<INCOME-PRETAX> 18,166
<INCOME-TAX> 2,707
<INCOME-CONTINUING> 15,459
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,459
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.33
</TABLE>
