<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K/A
Amendment No. 3
to Form 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. FOR THE FISCAL YEAR ENDED MARCH 31, 1998.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from _______ to ______.
Commission file number 0-15895
DIGITAL MICROWAVE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 77-0016028
(State of Incorporation) (I.R.S. Employer Identification No.)
170 ROSE ORCHARD WAY, SAN JOSE, 95134
CALIFORNIA (Zip Code)
(Address of Principal Executive
Offices)
Registrant's telephone number, including area code: (408) 943-0777
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK-PAR VALUE $0.01 PER SHARE
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. / /
State the aggregate market value of the voting stock held by non-affiliates
of Registrant (based on the last reported sale price of $7.00 per share on the
Nasdaq National Market) as of June 24, 1998: Approximately $241,636,808.
As of June 24, 1998, there were 46,685,992 shares of Common Stock, par
value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended March 31, 1998 are incorporated by reference into Parts I and II
of this Form 10-K Report. With the exception of those portions which are
incorporated by reference, the Registrant's Fiscal 1998 Annual Report is
not deemed filed as part of this Report.
2. Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on August 4, 1998 are incorporated by reference
into Part III of this Form 10-K Report.
<PAGE>
EXPLANATORY NOTE
This Amendment No. 3 on Form 10-K/A to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1998 is being filed solely to
correct a printer's error which resulted in the omission of financial
information on page 19 of Exhibit 13 thereto and which amendment replaces the
previous Form 10-K filing in its entirety.
<PAGE>
TABLE OF CONTENTS
DIGITAL MICROWAVE CORPORATION
1998 FORM 10-K ANNUAL REPORT
PART I
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 4 Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 17
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . 18
Item 6 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations . . 18
Item 8 Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . 18
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . 18
PART III
Item 10 Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . 19
Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 12 Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . 19
Item 13 Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . 19
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . 20
</TABLE>
Page 2
<PAGE>
ITEM 1. BUSINESS
THE FOLLOWING BUSINESS SECTION CONTAINS FORWARD-LOOKING STATEMENTS WHICH
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "FACTORS THAT MAY
AFFECT FUTURE FINANCIAL RESULTS" AND ELSEWHERE IN, OR INCORPORATED BY REFERENCE
INTO, THIS FORM 10-K.
INTRODUCTION
Digital Microwave Corporation ("DMC" or the "Company") designs,
manufactures and markets advanced wireless solutions for worldwide telephone
network interconnection and access. The Company provides its customers with a
broad product line, which contains products that operate using a variety of
transmission frequencies, ranging from 0.3 GHz to 38 GHz, and a variety of
transmission capacities, typically ranging from 64 Kilobits to DS-3 (45 Megabits
per second). The Company's broad product line allows it to market and sell its
products to service providers in many locations worldwide with varying
interconnection and access requirements. DMC designs its products to meet the
requirements of mobile communications networks and fixed access networks
worldwide. The Company's products typically enable its customers to deploy and
expand their wireless infrastructure and market their services rapidly to
subscribers, so that service providers can realize a return on their investments
in frequency allocation licenses and network equipment.
In March 1998, the Company merged with MAS Technology Limited ("MAS"), a
New Zealand company, which designs, manufactures, markets and supports digital
microwave radio links for the worldwide telecommunications market. The
complementary product lines and distribution channels of MAS broadened the range
of wireless connection solutions that the Company offers to its customers
worldwide.
The Company believes that it is well-positioned to address worldwide market
opportunities for wireless infrastructure suppliers. For example, there are
substantial telecommunications infrastructures being built for the first time in
many African, Asian and Latin American countries; infrastructures are being
expanded in Europe; and PCS interconnect networks are being constructed in the
United States. The Company believes that maintaining close proximity to its
customers provides it with a competitive advantage in securing orders for its
products and in servicing its customers. Local offices enable the Company to
better understand the local issues and requirements of its customers and to
address its customers' individual geographic, regulatory, and infrastructure
requirements. As a result, the Company has developed a global sales, service and
support organization, with offices in Europe, Africa, Asia, New Zealand,
Australia, and the Americas. With its 33 sales or support offices in 25
countries, the Company can respond quickly to its customers' needs and provide
prompt on-site technical support.
The Company has sold over 95,000 radios, which have been installed in
over 70 countries. The Company markets its products to service providers
directly, as well as indirectly through its relationships with original
equipment manufacturer ("OEM") base station suppliers, such as Motorola,
Inc., Siemens AG, and Northern Telecom. Between April 1, 1997 and March 31,
1998, the Company had sold its products to a number of service providers,
including Beijing Telecommunication Equipment Factory, Bell South,
Microelectronics Technology, Mutiara Telecom and SMART Communications, Inc.
in the Asia/Pacific region; IONICA, Jordan Mobile Telephone Services, and
Telkom SA in Europe, the Middle East and Africa; and Sprint PCS and Winstar
Wireless in the Americas.
Page 3
<PAGE>
INDUSTRY BACKGROUND
In recent years, there has been increased worldwide demand for high
performance mobile voice telephony, high speed data communications, fixed and
mobile cellular communications, video broadcast services and paging services.
This demand continues to increase due to: (i) changes in the regulatory
environment in many countries; (ii) the rapid establishment of
telecommunications infrastructures in many developing countries; (iii)
technological advances, particularly in the wireless telecommunications market;
and (iv) the deployment of private communications networks. Given their
relatively low cost and ease of deployment, wireless solutions are attractive to
new service providers establishing competing telecommunications services in
developed countries and to telecommunications service providers in developing
countries seeking to rapidly increase the availability and quality of
telecommunications services. The upgrade and expansion of existing networks and
the deployment of new networks, such as those for GSM, PCN, and PCS, are
expected to continue to offer growth opportunities for wireless infrastructure
suppliers. Wireless infrastructure suppliers address the requirements of both
mobile communications networks and fixed access networks.
Cellular telephone and other wireless services have grown rapidly over the
past several years due to deregulation, increased competition, technological
advances, and increasing consumer demand for connectivity to telecommunications
services. The demand for fixed access networks also continues to increase for
many of the same reasons, including the privatization of public telephone
operators, deregulation and the emergence of new applications, such as wireless
local loop, wireless data transport and alternative local telephone facilities
access.
Wireless networks are constructed using microwave radios and other
equipment to connect cell sites, switching systems, other wireline transmission
systems and other fixed facilities. Wireless networks range in size from a
single transmission link connecting two buildings to complex networks comprised
of thousands of wireless connections. The architecture of a network is
influenced by several factors, including the available radio frequency spectrum,
coordination of frequencies with existing infrastructure, application
requirements, environmental factors and local geography. Regulatory authorities
in different jurisdictions allocate different portions of the radio frequency
spectrum for various telecommunications services. In addition, most individual
networks require radio links which operate at several frequencies and the
transmission of voice and data typically requires different transmission
capacities. Moreover, networks in different locations are constructed using
different combinations of frequencies and with different transmission
capacities. No one transmission frequency or transmission capacity predominates
in the global market.
Whether expanding existing networks or deploying new networks, service
providers must choose between constructing such networks using traditional
wireline infrastructure or wireless infrastructure. Traditional wireline
connectivity solutions typically require significant installation periods and
may be relatively expensive to install. In developed countries where wireline
infrastructure is in place, new service providers may have the option to lease
networks from traditional service providers, but in many instances choose not to
do so because leasing arrangements must be entered into with their competitors,
may be comparatively expensive and do not allow control over the network. In
developing countries, many service providers are initially installing wireless
networks because such networks are generally faster to install and may be less
expensive than traditional wireline networks. As a result, many service
providers are deploying wireless networks as an alternative to the construction
or leasing of traditional wireline networks.
For several applications, digital microwave transmission systems offer
numerous advantages over competing transmission technologies, including lower
cost of implementation and rapid deployment. Digital microwave systems can be
deployed in a matter of weeks and typically require lower infrastructure
investments and installation lead times than alternative transmission
technologies. Digital microwave systems are especially advantageous where
geographically dispersed customers or operations, environmental constraints,
difficult terrain, or limited installation times render the installation and
implementation of wireline networks impractical or too costly.
The Company believes that as telecommunication requirements grow, digital
microwave systems will continue to be used as transmission links to support a
variety of existing and expanding communications networks and applications. In
this regard, the Company believes that digital microwave systems will be used to
address the connection requirements
Page 4
<PAGE>
of the several markets and applications, including the infrastructure
development market, cellular applications, private networks and wireless analog
replacement applications.
THE DMC SOLUTION
DMC designs, manufactures and markets advanced, wireless solutions for
worldwide telephone network interconnection and access. The Company provides its
customers with a broad product line, which contains products that operate using
a variety of transmission frequencies, ranging from 0.3 GHz to 38 GHz, and a
variety of transmission capacities, typically ranging from 64 Kilobits to DS-3
(45 Megabits per second), carrying voice, data and video signals. The Company's
broad product line allows it to market and sell its products to service
providers in many locations worldwide with varying interconnection and access
requirements. The Company has sold more than 95,000 radios, which have been
installed in over 70 countries. During the last two years, the Company has sold
its products and provided services to over 300 customers.
The Company has established offices worldwide, with locations in Europe,
Africa, Asia, New Zealand, Australia, and the Americas. These offices enable the
Company to understand the local issues and requirements of its customers and to
address its customers' individual geographic, regulatory and infrastructure
requirements. In addition, its global sales, service and support organization
allows the Company to respond quickly to its customers' needs and to provide
prompt on-site technical support.
The Company believes that the use of standard design platforms for both
hardware and software components in the development of its products enables the
Company to more rapidly introduce and commercially ship new products and product
enhancements to address changing market demands. The use of standard design
platforms, flexible architectures and components, and software configurable
features allows the Company to offer its customers high-performance products
with a high degree of flexibility and functionality. Flexible architectures and
components facilitate system scalability, allow customers to acquire additional
features at a relatively low incremental cost, reduce the development time of
new features, and facilitate the efficient customization of the Company's
products. The use of standard design platforms also enables the Company to
manufacture its products in a more cost-effective manner. The software features
of many of the Company's product lines provide the Company's customers with a
greater degree of flexibility in installing, operating and maintaining their
networks.
The Company certifies its products to comply with various standards, such
as European Telecom Standards Institute ("ETSI") and International
Telecommunications Union ("ITU") regulations, which allow the Company to market
and sell its products in Europe and other locations worldwide. In addition, the
Company's manufacturing facilities in San Jose, California and Wellington, New
Zealand are certified to International Standards Organization ("ISO") 9001, a
recognized international quality standard.
THE COMPANY'S STRATEGY
The Company's strategy is to build on the strength of its current products,
which offer point-to-point solutions, and its strong customer sales, service and
support organization to become a leading provider of integrated wireless
solutions. Key elements of DMC's strategy include:
MAINTAIN A COMPREHENSIVE PRODUCT LINE. The Company anticipates that the
requirements of its customers will continue to evolve as the telecommunications
services market changes and expands. In this regard, since the Company's
customers often do not know the exact frequency band and capacity needs of their
networks at the time they are awarded franchises, DMC's broad product line
provides them with the flexibility to respond to individual market needs, and to
coordinate frequencies with existing infrastructure and other significant
variables. The Company believes that the use of standard design platforms and
flexible architectures for both hardware and software components in its products
enables DMC to quickly introduce and commercially ship new products and product
enhancements to address changing market
Page 5
<PAGE>
demands. The Company intends to continue to expand its product line in response
to the varying worldwide requirements of wireless networks.
PURSUE WORLDWIDE MARKET OPPORTUNITIES. The Company believes that the
deployment of new wireless telecommunications networks and the upgrade and
expansion of existing networks provide it with many global market opportunities.
In many emerging markets in Africa, Asia and Latin America, substantial
telecommunications networks are being built for the first time; in Europe,
infrastructures are being expanded; and, in the United States, PCS interconnect
networks are being constructed. The Company intends to continue to pursue
global market opportunities through its established worldwide sales, service and
support organization, as well as through its relationships with OEM base station
suppliers.
ENHANCE GLOBAL SALES, SERVICE AND SUPPORT ORGANIZATION. The Company
believes maintaining close proximity to its customers provides it with a
competitive advantage in securing orders and servicing its customers. Local
offices provide the Company with a better understanding of its customers' needs
and enable the Company to respond to local issues and unique local requirements.
As a result, DMC has developed a global sales, service and support organization,
with offices in Europe, Africa, Asia, New Zealand, Australia, and the Americas.
The Company intends to continue to provide its customers with direct sales,
service and support from local offices.
LEVERAGE DISTRIBUTION CHANNELS. The Company markets its products to
service providers directly, as well as indirectly through its relationships with
OEM base station suppliers, such as Motorola, Inc., Siemens AG, and Northern
Telecom, as well as through its relationships with system integrators and
private labelers. The Company also markets its products through independent
agents and distributors in certain countries. The Company intends to leverage
upon such relationships and its direct worldwide presence with service providers
to expand its customer base and enhance its global presence.
FOCUS ON BUSINESS EXPANSION INTO EMERGING APPLICATIONS. The Company
believes that it can leverage its core technical competencies and its global
sales, service and support organization to enter into emerging applications,
including wireless local loop, wireless data transport, and alternative local
telephone facilities access. The Company intends to migrate and expand its
product line from a full point-to-point product line to offer multipoint
distribution products with a broader range of traffic handling capacities to
meet emerging market demands.
PRODUCTS
The Company's principal product families include the SPECTRUM-TM- II,
FibreNex-TM-, DMC Net-Registered Trademark- for
OpenView-Registered Trademark-, DXR-TM- 200, and DXR-TM- 100.
EXISTING PRODUCTS
SPECTRUM II. The SPECTRUM II product family, introduced in July 1995,
offers medium capacity ranging from T-1 (1.5 Mbps) to DS-3 (45 Mbps) products
that operate at 7, 8, 13, 15, 18, 23, 26 and 38 GHz. The SPECTRUM II product
line is smaller in size, less expensive and easier to install than previous
products. In addition, significantly more functionality is available in the
SPECTRUM II product line because of its enhanced software configurability which
provides the Company's customers with greater flexibility and control.
FIBRENEX. The FibreNex product solution, introduced in June 1997,
consists of a compact add/drop multiplexer ("ADM"), SPECTRUM II radios, and
the DMC Net for OpenView network management system. By using the FibreNex
solution, telecos/PTTs, competitive access providers ("CAPs"), local exchange
carriers and others can distribute voice, data, and video transport service
of a 155 Mbps SONET/SDH communications network to multiple end users. Using
the ADM, the service provider can tap into fiber infrastructures. The
service provider then can apply microwave radios operating at various
capacities and frequencies to provide wireless extensions of network
capability into numerous
Page 6
<PAGE>
different locations. The integrated network management system enables
centralized monitoring of the entire network, including both fiber and radio
elements.
DMC NET FOR OPENVIEW. The latest generation solution, DMC Net for
OpenView is a versatile, interoperable network management system based on the
HP OpenView platform and is designed for use in small, medium, and large
telecommunications networks. Using Simple Network Management Protocol
("SNMP"), DMC Net for OpenView provides customers with an increased ability
to manage the hardware of multiple vendors from a common management platform.
Centralized management and control allows for the early warning of fault
conditions and the rapid diagnosis of problems, which reduce downtime and
lower the cost of maintenance. DMC Net for OpenView, which is supported on
Windows NT and will be supported UNIX systems, succeeds standalone network
element managers sold previously under the DMC Net name.
DXR 200. First shipped in 1994, the DXR 200 product line provides an
integrated, modular, linking solution for a wide variety of communications
systems in markets with low to medium capacity transmission requirements. The
DXR 200's integrated modular design allows it to support over 2,000 different
configurations, which can incorporate multiple features in the unit to
accommodate the differing communications needs of the Company's customers,
overcome difficult radio frequency environments, accommodate multiple data
speeds and support multiple communication protocols. The DXR 200 can operate on
every frequency band from 64 Kbps to 2.7 GHz.
DXR 100. First shipped in 1996, the DXR 100 product line is designed to
address medium and long haul, trunking applications and capacities higher than
those addressed by the DXR 200. The DXR 100 supports these higher capacity
environments using spectrum efficient transmission techniques such as QPSK or
QAM modulation and low error rate technologies such as forward error correction
and adaptive equalization. The DXR 100 provides low to medium capacity links
for cellular applications, basic telephony transmission and customer access
applications, particularly in urban areas. The DXR 100 supports a variety of
data rates with high spectrum efficiencies and maintains signal reception in
harsh or difficult radio frequency environments.
NEW PRODUCT DEVELOPMENT
The Company intends to continue to focus significant resources on product
development to maintain its competitiveness and to support its entry into new
wireless opportunities, including those in wireless local loop, wireless data
transport and alternative local telephone facilities access. Programs currently
in progress, if successfully completed, could result in new products which are
both point-to-point and point-to-multipoint and could have the capability to
handle greater amounts of voice and data traffic at increased
cost-effectiveness.
There can be no assurance that the Company will be successful in developing
and marketing any of the products currently being developed, that the Company
will not experience difficulties that could further delay or prevent the
successful development, introduction and sale of future products, or that these
products will adequately meet the requirements of the marketplace and achieve
market acceptance. See "Research and Development."
CUSTOMERS
The Company markets its products to customers in the telecommunications
industry worldwide. The Company's customers include service providers, which
incorporate the Company's products into their telecommunications networks to
deliver services directly to consumers, and OEMs, which provide and install
integrated systems to service providers. The following is a representative list
of customers to which the Company has shipped its products for the period from
April 1, 1997 to March 31, 1998:
Page 7
<PAGE>
<TABLE>
<S><C>
- --------------------------------------------------------------------------------
SERVICE PROVIDERS
- --------------------------------------------------------------------------------
AMERICAS
Baja Celular Mexicana SA de CV Telcel
IMPSAT S.A. Winstar Wireless
Sprint PCS
- --------------------------------------------------------------------------------
EUROPE/MIDDLE EAST/AFRICA
Comviq GSM AB Polska Telefonia Komorkowa
E-Plus Mobilfunk GmbH Tele Greenland
Eskom, South Africa Telkom SA, South Africa
IONICA UAB Omnitel
Jordan Mobile Telephone Services Zimbabwe Post and Telecommunications
Panafon SA Corporation
- --------------------------------------------------------------------------------
ASIA/PACIFIC
Beijing Telecommunication Sapura PCN
Equipment Factory SMART Communications, Inc.
BellSouth, New Zealand Star Digitel Limited
Dhiraaga Maldives Sterling Cellular Ltd.
Microelectronics Technology, Inc. Zhejiang Unicom
Mutiara Telecom
- --------------------------------------------------------------------------------
OEMs
- --------------------------------------------------------------------------------
Motorola Inc. Siemens AG
Northern Telecom
- --------------------------------------------------------------------------------
</TABLE>
Although the Company has a large customer base, during any given quarter, a
small number of customers account for a significant portion of the Company's net
sales. In certain circumstances, the Company sells its products to service
providers through OEMs, which provide the service providers with access to
financing and the Company, in some instances, with protection from fluctuations
in foreign currency exchange rates. During Fiscal 1998, 1997 and 1996, Siemens
AG accounted for 5%, 12%, and 19%, respectively, of the Company's net sales. At
March 31, 1998, five customers collectively accounted for approximately 21% of
the Company's $83.2 million backlog. While management considers the Company's
relationships with each of its major customers to be good, there can be no
assurance that the Company's current customers will continue to place orders
with the Company, that orders by existing customers will continue to be at
levels of previous periods, or that the Company will be able to obtain orders
from new customers. The Company's customers typically are not contractually
obligated to purchase any quantity of products in a particular period and
product sales to major customers have varied widely from period to period. The
loss of any existing customer, a significant reduction in the level of sales to
any existing customer, or the failure of the Company to gain additional
customers could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Factors That May Affect
Future Financial Results."
SALES, MARKETING AND SERVICE
The Company believes that a direct and continuing relationship with service
providers is a competitive advantage in attracting new customers and satisfying
existing ones. As a result, the Company offers its products and services
principally through its own sales, service and support organization, which
allows the Company to closely monitor the needs of its customers. The Company
has offices in the United States, New Zealand, Australia, Canada, the United
Kingdom, Germany, Jordan, Mexico, Colombia, India, China, Singapore, Argentina,
Brazil, Greece, Indonesia, Malaysia, Russia, Sweden, Denmark, South Africa,
Zimbabwe, Botswana, and the Philippines. The Company's local offices provide it
with a better understanding of its customers' needs and enable the Company to
respond to local issues and unique local requirements.
The Company has informal relationships with OEM base station suppliers.
Such relationships increase the Company's ability to pursue the limited
number of major contract awards each year. In addition, such relationships
provide the Company's customers with easier access to financing and to
integrated system providers with a variety of
Page 8
<PAGE>
equipment and service capabilities. There can be no assurance that the
Company will continue to be able to maintain and develop such relationships
or, that if such relationships are developed, they will be successful. In
selected countries, the Company also markets its products through independent
agents and distributors, as well as system integrators and brand labelers.
As of March 31, 1998, the Company employed approximately 460 people in its
sales, service and support organization, approximately 60% of whom primarily
support sales outside the United States. Sales personnel are highly trained to
provide the customer with assistance in selecting and configuring a digital
microwave system suitable for the customer's particular needs. The Company's
customer service and support personnel provide customers with training,
installation, service and maintenance of the Company's systems under contract.
The Company generally offers a standard two-year warranty for all customers on
all of the Company's products other than the DXR 200 and DXR 700 product lines,
for which there is generally a standard one-year warranty for all customers. The
Company provides warranty and post-warranty services from its manufacturing
locations in the United States, the United Kingdom and New Zealand and its
service centers in Mexico, Brazil, the Philippines and Canada.
RESEARCH AND DEVELOPMENT
The Company believes that its ability to enhance its current products,
develop and introduce new products on a timely basis, maintain technological
competitiveness and meet customer requirements is essential to the Company's
continued success. Accordingly, the Company allocates, and intends to continue
to allocate, a significant portion of its resources to research and development
efforts. During Fiscal 1998, Fiscal 1997, and Fiscal 1996, the Company invested
$19.9 million, $13.2 million, and $12.9 million, respectively, on research and
development which represents 6.4%, 6.3%, and 7.5%, respectively, of net sales.
The Company expects research and development expenses to increase in Fiscal
1999. As of March 31, 1998, the Company employed approximately 172 people in its
research and development organization.
The market for the Company's products is characterized by rapidly changing
technologies and evolving industry standards. Accordingly, the Company's future
performance depends on a number of factors, including its ability to identify
emerging technological trends in its target markets, to develop and to maintain
competitive products, to enhance its products by adding innovative features that
differentiate its products from those of its competitors and to manufacture and
to bring products to market quickly at cost-effective prices. The Company
believes that the use of flexible architectures and components assists in the
rapid deployment of new products and enhancements to satisfy customer, industry
and market needs. The Company believes that to remain competitive in the future
it will need to continue to develop new products, which will require the
investment of significant financial resources in product development. There can
be no assurance, however, that the Company will successfully complete the
development of any future products, that such products will achieve market
acceptance or that such products will be capable of being manufactured at
competitive prices in sufficient volumes. In the event that such products are
not developed in a timely manner, do not gain market acceptance or are not
manufacturable at competitive prices, the Company's business, financial
condition and results of operations could be materially adversely affected.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations consist primarily of final
assembly, customer software configuration, test and quality control of
materials and components. The manufacturing process consists primarily of
materials management, extensive unit and environmental testing of components
and subassemblies at each stage of the manufacturing process, final assembly
of the terminals, and prior to shipment, quality assurance testing and
inspection of all products. The Company has three manufacturing facilities,
which presently are located in San Jose, California, Wellington, New Zealand
and East Kilbride, Scotland. The Company recently purchased a manufacturing
facility in Hamilton, Scotland and intends to sell the East Kilbride
building. The Company's manufacturing operations in San Jose, California and
Wellington, New Zealand are certified to ISO 9001, a recognized international
quality standard. The manufacturing facility in Wellington, New Zealand is
also certified to ISO 14001, an internationally-recognized environmental
quality standard. As of March 31, 1998, the Company maintained a staff of
380 manufacturing personnel.
Page 9
<PAGE>
The Company's manufacturing operations are highly dependent upon the
delivery of materials and components by outside suppliers in a timely manner. In
addition, the Company depends in part upon subcontractors to assemble major
components and subassemblies used in its products in a timely and satisfactory
manner. The Company does not generally enter into long-term or volume purchase
agreements with any of its suppliers, and no assurance can be given that such
materials, components and subsystems will be available in the quantities
required by the Company, if at all. The inability of the Company to develop
alternative sources of supply quickly and on a cost-effective basis could
materially impair the Company's ability to manufacture and deliver its products
in a timely manner. There can be no assurance that the Company will not
experience material supply problems or component or subsystem delays in the
future.
From time to time, the Company has experienced delays and other supply
problems with vendors, but such delays and other problems have not had a
significant impact on the Company's results of operations. To reduce any future
problems associated with delays, the Company has contracted for component and
subassembly parts from additional sources. The Company and its key suppliers
maintain a high level of communication at all levels of their respective
management to ensure that production requirements and constraints are taken into
account in each of their respective production plans.
BACKLOG
The Company's backlog at March 31, 1998 was $83.2 million, as compared with
$98 million at March 31, 1997. The Company only includes orders scheduled for
delivery within 12 months in its backlog. Product orders in the Company's
current backlog are subject to changes in delivery schedules or to cancellation
at the option of the purchaser without significant penalty. Accordingly,
although useful for scheduling production, backlog as of any particular date may
not be a reliable measure of sales for any future period because of the timing
of orders, delivery intervals, customer and product mix, and the possibility of
changes in delivery schedules and additions or cancellations of orders.
COMPETITION
The microwave interconnection and access business is a specialized
segment of the wireless telecommunications industry and is extremely
competitive. The Company expects such competition to increase in the future.
Several established and emerging companies offer a variety of microwave,
fiber optic, and other connectivity products for applications similar to
those of the Company's products. Many of the Company's competitors have more
extensive engineering, manufacturing and marketing capabilities and
substantially greater financial, technical and personnel resources than the
Company. In addition, many of the Company's competitors have greater name
recognition, a larger installed base of products and longer-standing customer
relationships. The Company considers its primary competitors to be L.M.
Ericsson, Northern Telecom, Siemens AG, P-COM, Inc., and the Farinon Division
of Harris Corporation. In addition, other existing competitors include
Alcatel, Nokia, Innova, SIAE, NEC, and NERA. Both Northern Telecom and
Siemens AG have product lines that compete with those of the Company, and are
also OEMs through which the Company markets and sells its products. Some of
the Company's largest customers could develop the capability to manufacture
products similar to those manufactured by the Company. Existing and potential
competition in the industry has resulted in, and will continue to result in,
significant price competition. The Company believes that competition in its
markets is based primarily on 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's future success will depend upon its ability to
address the increasingly sophisticated needs of its customers by enhancing
its current products, by developing and introducing new products in a timely
manner that keep pace with technological developments and emerging wireless
telecommunications services, and by providing such products at competitive
prices. There can be no assurance that the Company will have the financial
resources, technical expertise, or marketing, sales, distribution, and
customer service and support capabilities to compete successfully. See
"Factors That May Affect Future Financial Results."
Page 10
<PAGE>
GOVERNMENT REGULATION
Radio communications are subject to regulation by United States and foreign
laws and international treaties. The Company's equipment must conform to
international requirements established to avoid interference among users of
microwave frequencies and to permit interconnection of telecommunication
equipment. The Company has complied with such rules and regulations with respect
to its existing products. Any delays in compliance with respect to future
products could delay the introduction of such products. In addition, radio
transmission is subject to regulation by foreign laws and international
treaties. Equipment to support these services can be marketed only if permitted
by suitable frequency allocations and regulations. Failure by the regulatory
authorities to allocate suitable frequency spectrum could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The regulatory environment in which the Company operates is subject to
change. Regulatory changes, which are affected by political, economic and
technical factors, could significantly impact the Company's operations by
restricting development efforts by the Company and its customers, making current
systems obsolete or increasing the opportunity for additional competition. Any
such regulatory changes could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company might deem
it necessary or advisable to modify its systems to operate in compliance with
such regulations. Such modifications could be extremely expensive and
time-consuming to complete.
INTELLECTUAL PROPERTY
The Company's ability to compete will depend, in part, on its ability to
obtain and enforce intellectual property protection for its technology in the
United States and internationally. The Company relies upon a combination of
trade secrets, trademarks, copyrights, patents and contractual rights to protect
its intellectual property. For example, the Company presently has two patents
covering its products. In addition, the Company enters into confidentiality and
invention assignment agreements with its employees, and enters into
non-disclosure agreements with its suppliers and appropriate customers so as to
limit access to and disclosure of its proprietary information. There can be no
assurance that any steps taken by the Company will be adequate to deter
misappropriation or impede independent third party development of similar
technologies. In the event that such intellectual property arrangements are
insufficient, the Company's business, financial condition and results of
operations could be materially adversely affected. Moreover, there can be no
assurance that the protection provided to the Company's intellectual property by
the laws and courts of foreign nations will be substantially similar to the
remedies available under United States law or that third parties will not assert
infringement claims against the Company.
While the Company's ability to compete may be affected by its ability to
protect its intellectual property, the Company believes that, because of the
rapid pace of technological change in the wireless telecommunications industry,
its innovative skills, technical expertise and ability to introduce new products
on a timely basis will be more important in maintaining its competitive position
than protection of its intellectual property. Trade secret, trademark, copyright
and patent protections are important but must be supported by other factors such
as the expanding knowledge, ability and experience of the Company's personnel,
new product introductions and product enhancements. Although the Company
continues to implement protective measures and intends to defend vigorously its
intellectual property rights, there can be no assurance that these measures will
be successful.
The wireless telecommunications industry is characterized by numerous
allegations of patent infringement among competitors and considerable related
litigation. Accordingly, the Company may in the future be notified that it is
infringing certain patent or other intellectual property rights of others.
Although there are no such pending lawsuits against the Company or unresolved
notices that the Company is infringing upon intellectual property rights of
others, there can be no assurance that litigation or infringement claims will
not occur in the future. Such litigation or claims could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business, financial condition and results of operations. The wireless
telecommunications industry is subject to frequent litigation regarding patent
and other intellectual property rights. Certain companies and organizations in
the wireless
Page 11
<PAGE>
telecommunications industry have patents that protect their intellectual
property rights in these areas. In the event of an adverse result of any such
litigation, the Company could be required to expend significant resources to
develop non-infringing technology or to obtain licenses to the technology which
is the subject of the litigation. There can be no assurance that the Company
would be successful in such development or that any such license would be
available on commercially reasonable terms.
LITIGATION
The Company may be a defendant at any time in various suits and is subject
to various claims that arise in the normal course of business. In the opinion
of management, the ultimate disposition of these proceedings will not have a
material adverse effect on the consolidated financial position, liquidity or
results of operations of the Company.
EMPLOYEES
As of March 31, 1998, the Company employed 1,147 full-time and temporary
employees. None of the Company's employees is represented by a collective
bargaining agreement. The Company's future performance will depend in large
measure on its ability to attract and retain highly skilled employees.
Competition for such personnel is intense and there can be no assurance that the
Company will be successful in attracting and retaining highly skilled employees.
The Company has never experienced a work stoppage and believes its relationship
with its employees to be good.
Page 12
<PAGE>
EXECUTIVE OFFICERS OF DMC
The current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Charles D. Kissner 51 Chairman of the Board and Chief Executive Officer
Sam Smookler 58 President and Chief Operating Officer
Frank Carretta, Jr. 53 Senior Vice President, Worldwide Sales, Service and Marketing
Jack Hillson 47 Senior Vice President and General Manager, Operations
John C. Brandt 41 Corporate Controller
Carol A. Goudey 50 Treasurer and Assistant Secretary
Timothy R. Hansen 37 Vice President, New Business Development
Paul A. Kennard 47 Vice President, Engineering
Shaun McFall 37 Vice President, Corporate Marketing
John P. O'Neil 60 Vice President, Personnel
Carl A. Thomsen 53 Vice President, Chief Financial Officer and Secretary
</TABLE>
Mr. Charles D. Kissner joined the Company as President, Chief Executive
Officer and was elected Director of the Company in July 1995 and Chairman of the
Board in August 1996. He currently serves as Chairman of the Board and Chief
Executive Officer of the Company. Prior to joining the Company, he served as
Vice President and General Manager of the Microelectronics Division of
M/A-COM, Inc. ("M/A-COM"), a manufacturer of radio and microwave communication
products, from July 1993 to July 1995. From February 1990 to July 1993,
Mr. Kissner served as President, Chief Executive Officer, and a Director of
Aristacom International, Inc., a communications software company. Mr. Kissner
currently is a director of Quickturn Design Systems, Inc., a provider of design
emulation systems, Spectrian, Inc., a supplier of linear high power amplifiers
for wireless communications, and American Medical Flight Support, Inc., a
non-profit medical transportation company.
Mr. Sam Smookler joined the Company as President and Chief Operating
Officer in January 1998. Prior to joining the Company, he served as President
and Chief Operating Officer of Signal Technology Corporation, a manufacturer of
electronic components and subsystems, from September 1997 to January 1998, and
as President of East Coast Operations from February 1997 to September 1997.
Prior to such time he served as Vice President and General Manager of the
Interconnection Products Division of Augat Corporation, a manufacturer of
telecommunications connection products, from November 1994 to February 1997.
From February 1992 to October 1994, he served as General Manager of a division
of M/A-COM. In addition, Mr. Smookler served as Group Vice President of Sipex
Corporation, a manufacturer of hybrid semiconductors from 1986 to January 1992.
Mr. Frank Carretta, Jr. joined the Company as Vice President, Worldwide
Sales and Service in October 1995 and was appointed Senior Vice President,
Worldwide Sales, Service and Marketing in November 1996. Prior to joining DMC,
Mr. Carretta served as Area Sales Director of M/A-COM from July 1992 to
September 1995. From 1988 to June 1992, Mr. Carretta was Vice President of Ward
Davis Associates, a manufacturers' representative company selling electronic
test instrumentation and software development tools.
Mr. Jack Hillson was appointed Senior Vice President and General Manager,
Operations of the Company in November 1996. He previously served as Vice
President and General Manager, QUANTUM/Magnum Division of the Company from
December 1995 to November 1996. Prior to joining DMC, Mr. Hillson was with
M/A-COM for eleven years, serving in various technical and management positions
with the Semiconductor and Microelectronics Divisions. Most recently,
Mr. Hillson served as the Director of Operations for M/A-COM's Power Hybrids
Division, which manufactures transistors and amplifier modules for the wireless
communications market.
Page 13
<PAGE>
Mr. John C. Brandt joined the Company as Controller in June 1997. Prior to
joining the Company, Mr. Brandt was employed with Honeywell-Measurex, a
manufacturer of control systems, from 1981 to June 1997, where he served in a
variety of financial positions, and most recently served as Operations
Controller from 1988 to June 1997.
Ms. Carol A. Goudey joined the Company as Treasurer in April 1996 and was
additionally appointed Assistant Secretary in May 1996. Prior to joining DMC,
she served as Acting Treasurer of California Micro Devices Corporation, a
manufacturer of semiconductor devices, since 1994. Ms. Goudey has also
previously held the position of Corporate Treasurer at both
Ungermann-Bass, Inc., a network systems company, from 1985 to 1989, and System
Industries, Inc., a computer peripheral company, from 1984 to 1985.
Mr. Timothy R. Hansen has served as Vice President, New Business
Development of the Company since August 1996. He previously served as Vice
President and General Manager, SPECTRUM Division of the Company from
February 1995 to August 1996, and as Vice President and Program Manager of the
SPECTRUM product line. He joined the Company in August 1984 as product manager,
and has held management positions in marketing, planning, sales and order
management.
Mr. Paul Kennard joined the Company as Vice President, Engineering in April
1996. From 1989 to March 1996, Mr. Kennard was with California Microwave
Corporation, a satellite and wireless communications company, serving as
Director of the Signal Processing Technology Department until his promotion in
1994 to Vice President of Engineering, and then to Senior Vice President of
Engineering in 1995 for the Microwave Network Systems Division.
Mr. Shaun McFall has served as Vice President, Corporate Marketing of the
Company since February 1995. He joined the Company's UK operations in January
1989, and has held several management positions in marketing. Prior to joining
DMC, he worked for GEC Telecommunications Ltd. in Germany and Ferranti
Industrial Electronics PLC, in Edinburgh, Scotland, both of which are
telecommunications companies.
Mr. John O'Neil joined the Company as Vice President, Personnel in May
1993. Mr. O'Neil was Vice President of Personnel and Administration of BEI
Electronics, Inc., a defense electronics firm, from January 1989 to April 1993.
Mr. Carl A. Thomsen joined the Company as Vice President, Chief Financial
Officer and Secretary in February 1995. Prior to joining the Company, he was
Senior Vice President and Chief Financial Officer of Measurex Corporation, a
manufacturer of sensor based process control systems. Mr. Thomsen joined
Measurex Corporation in 1983 as Corporate Controller, was promoted to Vice
President in 1986, to Chief Financial Officer in 1992, and to Senior Vice
President in 1993.
Page 14
<PAGE>
FACTORS THAT MAY AFFECT FUTURE FINANCIAL RESULTS
The statements in the Annual Report to Stockholders and this Form 10-K
concerning the Company's future products, expenses, revenues, gross margins,
liquidity, and cash needs, as well as the Company's plans and strategies,
contain forward-looking statements concerning the Company's future operations
and financial results. These forward-looking statements are based on current
expectations, and the Company assumes no obligation to update this information.
Numerous factors could cause actual results to differ materially from those
described in these statements. In particular, the Company's results can vary
due to economic and competitive conditions, the volume and timing of product
orders received and delivered during the quarter, product margins, the ability
of the Company and its key suppliers to respond to changes made by customers in
their orders, and the timing of new product introductions by the Company and its
competitors. The Company's results may also vary significantly depending on
other factors, including the mix of products sold; the cost and availability of
components and subsystems; relative prices of the Company's products; adoption
of new technologies and industry standards; competition; fluctuations in foreign
currency exchange rates; regulatory developments; and general economic
conditions. Furthermore, the Company's backlog may not be representative of
actual sales for any succeeding period because of the timing of orders, delivery
intervals, customer and product mix, and the possibility of changes in delivery
schedules and additions or cancellation of orders. Prospective investors and
stockholders should carefully consider the factors discussed above and set forth
below in evaluating these forward-looking statements.
The quarterly operating results of the Company can vary significantly
depending on several factors, any of which could have a material adverse effect
on the Company's business, financial condition or results of operations. In
particular, the Company's quarterly results of operations can vary due to the
volume and timing of product orders received and delivered during the quarter,
the ability of the Company and its key suppliers to respond to changes made by
customers in their orders, and the timing of new product introductions by the
Company and its competitors. The quarterly operating results also may vary
significantly depending on other factors, including the mix of products sold,
the cost and availability of components and subsystems, relative prices of the
Company's products, adoption of new technologies and industry standards,
competition, fluctuations in foreign currency exchange rates, regulatory
developments, and general economic conditions.
Manufacturers of digital microwave telecommunications equipment are
experiencing, and are likely to continue to experience, intense price pressure,
which has resulted, and is expected to continue to result, in downward pricing
pressure on the Company's products. As a result, the Company has experienced,
and expects to continue to experience, declining average sales prices for its
products. The Company's future profitability is dependent upon its ability to
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, Innova, 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 continues to experience customer demands for shorter
delivery cycles. The Company increased its inventory levels in order to
respond to this demand which, in turn, may increase the risk of obsolescence
of its inventories. There can be no assurance that the Company will have the
financial resources, technical expertise, or marketing, sales, distribution,
and customer service and support capabilities to compete successfully.
The Company expects that international sales will continue to account for
the majority of its net product sales for the foreseeable future. As a result,
the Company is subject to the risks of doing business internationally, including
unexpected changes in regulatory requirements; fluctuations in foreign currency
exchange rates; imposition of tariffs and
Page 15
<PAGE>
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
the rate of inflation or any of the aforementioned factors will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's manufacturing operations are highly dependent upon the
delivery of materials by outside suppliers in a timely manner. In addition, the
Company depends in part upon subcontractors to assemble major components and
subsystems used in its products in a timely and satisfactory manner. 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. If not corrected, the Company's computer programs could fail
or create erroneous results by or at the year 2000. The Company has purchased
new computer programs to address this issue and intends to implement these
applications during Fiscal 1999. The Company is contacting its primary
suppliers and subcontractors to determine that they are developing plans to
address processing transactions in the year 2000 and to monitor their progress
toward Year 2000 capability. The Company believes that it will expend
approximately $0.5 million for investigating and remedying issues related to
Year 2000 compliance involving its internal operations. Management believes
that the Year 2000 compliance 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. 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.
During any given quarter, a small number of customers account for a
significant portion of the Company's net sales. The Company's customers
typically are not contractually obligated to purchase any quantity of products
in any particular period, and product sales to major customers have varied
widely from period to period. The loss of any existing customer, a significant
reduction in the level of sales to any existing customer, or the failure of the
Company to gain additional customers could have a material adverse effect on the
Company's business, financial condition and results of operations.
Page 16
<PAGE>
ITEM 2. PROPERTIES
The Company's corporate offices and principal research, development and
manufacturing facilities are located in San Jose, California in five leased
buildings aggregating approximately 230,000 square feet. The Company owns
20,000 square feet of office and manufacturing space in East Kilbride, Scotland,
1,500 square feet of which has been sublet until the year 2004. The Company
recently purchased 32,000 square feet of office and manufacturing space in
Hamilton, Scotland and intends to sell the East Kilbride building. The Company
also leases 17,000 square feet in Coventry, England and 45,000 square feet in
Wellington, New Zealand. The Company leases approximately 45,000 aggregate
square feet of sales and customer service and support offices. The Company
believes these facilities are adequate to meet its anticipated needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
See "Business -- Litigation" under Item 1 of this Form 10-K and Note 4 of
"Notes to Consolidated Financial Statements" incorporated herein by reference
from the Company's 1998 Annual Report to Stockholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held a Special Meeting of Stockholders on March 23,
1998.
(b) At the Special Meeting of Stockholders, the following matters
were voted upon:
1. A proposal to approve the issuance of shares of the Company's
Common Stock pursuant to an Agreement and Plan of Reorganization
and Amalgamation, dated as of December 22, 1997, by and among the
Company, South Amalgamation Sub Ltd. and MAS Technology Limited.
<TABLE>
<S> <C>
Affirmative votes: 27,735,229
Negative votes: 91,879
Abstain: 78,142
Non-votes: 7,264,457
</TABLE>
2. A proposal to approve an amendment to the Restated Certificate of
Incorporation of the Company to (a) increase the total number of
shares that the Company has authority to issue from 65,000,000 to
100,000,000 shares and (b) increase the number of authorized
shares of the Company's Common Stock from 60,000,000 to
95,000,000 shares.
<TABLE>
<S> <C>
Affirmative votes: 34,439,390
Negative votes: 676,020
Abstain 54,297
Non-votes 0
</TABLE>
3. A proposal to approve the adoption of an amendment to the
Company's 1994 Stock Incentive Plan to increase the number of
shares of the Company's Common Stock authorized for issuance
thereunder from 4,666,660 shares to 7,166,660 shares.
<TABLE>
<S> <C>
Affirmative votes: 15,956,945
Negative votes: 11,696,404
Abstain 251,901
Non-votes 7,264,457
</TABLE>
Page 17
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The section appearing on the inside front cover of the Company's 1998
Annual Report to Stockholders relating to prices of the Company's Common Stock
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The section labeled "Selected Consolidated Financial Data" appearing on
page 15 of the Company's 1998 Annual Report to Stockholders is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information appearing under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 11 through
15 of the Company's 1998 Annual Report to Stockholders is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data, and related
notes and Report of Independent Public Accountants appearing on pages 16 through
29 of the Company's 1998 Annual Report to Stockholders are incorporated herein
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
Page 18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers under the caption
"Election of Directors," "Board Meetings and Committees," "Security Ownership of
Certain Beneficial Owners and Management" and "Compliance with Section 16(a) of
the Securities Exchange Act of 1934" in the Company's Proxy Statement for the
Annual Meeting of Stockholders to be held on August 4, 1998 (the "Proxy
Statement"), is incorporated herein by reference. In addition, see the
discussion under the caption "Business -- Employees -- Executive Officers" under
Item 1 of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information included in the Company's Proxy Statement under the
captions "Compensation of Directors," "Executive Compensation and Other
Information," "Stock Options," "Option Exercises and Holdings," "Compensation
Committee Interlocks and Insider Participation" and "Employment and Termination
Arrangements" is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information included in the Company's Proxy Statement under the
captions "Security Ownership of Certain Beneficial Owners and Management" and
"Employment and Termination Arrangements" is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Business -- Manufacturing and Suppliers" under Item 1 of this Form
10-K and Note 4 of "Notes to Consolidated Financial Statements" of the Company's
1998 Annual Report to Stockholders incorporated herein by reference.
Page 19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following consolidated financial statements are contained in the
Company's 1998 Annual Report to Stockholders and are incorporated
herein by reference pursuant to Item 8:
1. Consolidated Balance Sheets as of March 31, 1998 and 1997.
2. Consolidated Statements of Operations for each of the three
years in the period ended March 31, 1998.
3. Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended March 31, 1998.
4. Consolidated Statements of Cash Flows for each of the three
years in the period ended March 31, 1998.
5. Notes to Consolidated Financial Statements.
6. Report of Independent Public Accountants.
2. FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule for each of
the three years in the period ended March 31, 1998 is submitted
herewith:
II Valuation and Qualifying Accounts and Reserves.
Schedules not listed above have been omitted because they are not
applicable or required, or information required to be set forth
therein is included in the Consolidated Financial Statements,
including the Notes thereto, incorporated herein by reference.
3. EXHIBITS
The Exhibit Index begins on Page 25 hereof.
(B) There were no reports on Form 8-K filed by the Registrant during
the quarter ended March 31, 1998.
(C) See Item 14 (a) 3 above.
(D) See Item 14 (a) 2 above.
Page 20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: August 25, 1999.
DIGITAL MICROWAVE CORPORATION
BY: /S/ CHARLES D. KISSNER*
------------------------------
Charles D. Kissner
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Page 21
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES SIGNING CAPACITY DATE
---------- ---------------- ----
<S> <C> <C>
/s/ CHARLES D. KISSNER* Chairman of the Board and August 25, 1999
- ------------------------------ Chief Executive Officer
Charles D. Kissner
/s/ CARL A. THOMSEN Vice President, Chief August 25, 1999
- ------------------------------ Financial Officer & Secretary
Carl A. Thomsen (Principal Financial and
Accounting Officer)
/s/ RICHARD C. ALBERDING* Director August 25, 1999
- ------------------------------
Richard C. Alberding
/s/ JOHN W. COMBS* Director August 25, 1999
- ------------------------------
John W. Combs
/s/ JAMES D. MEINDL* Director August 25, 1999
- ------------------------------
James D. Meindl
/s/ HOWARD ORINGER* Director August 25, 1999
- ------------------------------
Howard Oringer
By: /s/ CARL A. THOMSEN August 25, 1999
---------------------------
Carl A. Thomsen
Attorney-in-fact
</TABLE>
Page 22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Digital Microwave Corporation:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in Digital Microwave
Corporation's Annual Report incorporated by reference in this Form 10-K, and
have issued our report thereon dated April 21, 1998. Our audits were made for
the purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. The schedule listed in item 14a(2) is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
consolidated financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
April 21, 1998
Page 23
<PAGE>
SCHEDULE II
DIGITAL MICROWAVE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------
BALANCE AT CHARGED TO BALANCE BALANCE
BEGINNING OF COSTS AND DEDUCTIONS/ AT END
DESCRIPTION YEAR EXPENSES WRITE-OFF OF YEAR
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended March 31, 1998
Allowance for
doubtful accounts $3,362 $ 356 $ (77)(A) $3,795
Year Ended March 31, 1997
Allowance for
doubtful accounts $1,373 $1,400 $(589)(A) $3,362
Year Ended March 31, 1996
Allowance for
doubtful accounts $1,413 $ 580 $ 620 $1,373
</TABLE>
(A) Net of transfers from other reserve accounts.
Page 24
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
2.1 Agreement and Plan of Reorganization and Amalgamation, dated December
22, 1997, among the Company, South Amalgamation Sub Ltd. and MAS
(incorporated by reference to Exhibit 2.1 to the Company's
Registration Statement on Form S-4 (File No. 333-45053)).
3.1 Restated Certificate of Incorporation, as amended as of March 24,
1998.
3.2 Amended and Restated Bylaws, dated as of March 24, 1998.
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit
4.1 to the Company's Annual Report on Form 10-K for the year ended
March 31, 1988).
4.2 Rights Agreement dated as of October 24, 1991 between the Company and
Manufacturers Hanover Trust Company of California, including the
Certificate of Designations for the Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 1 to the
Company's Current Report on 8-K filed on November 5, 1991).
10.1 Digital Microwave Corporation 1984 Stock Option Plan, as amended and
restated on June 11, 1991. (incorporated by reference to Exhibit 10.1
to the Company's Annual Report on Form 10-K for the year ended March
31, 1991).
10.2 Form of Installment Incentive Stock Option Agreement (incorporated by
reference to Exhibit 28.2 to the Company's Registration Statement on
Form S-8 (File No. 33-43155)).
10.3 Form of installment Non-qualified Stock Option Agreement (incorporated
by reference to Exhibit 28.3 to the Company's Registration Statement
on Form S-8 (File No. 33-43155)).
10.4 Lease of premises located at 170 Rose Orchard Way, San Jose,
California (incorporated by reference to Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the year ended March 31, 1991).
10.5 Lease of premises located at 130 Rose Orchard Way, San Jose,
California. (incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the year ended March 31,
1991).
10.6 Lease of premises located at 110 Rose Orchard Way, San Jose,
California. (incorporated by reference to Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the year ended March 31,
1991).
10.7 Microelectronics Technology, Inc. Development Agreement dated as of
March 9, 1984 (incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1 (File No. 33-13431)).
10.8 Form of Indemnification Agreement between the Company and its
directors and certain officers (incorporated by reference to Exhibit
10.16 to the Company's Registration Statement on Form S-1 (File No.
33-13431)).
Page 25
<PAGE>
10.9* Technology Transfer & Marketing Agreement dated October 2, 1987
between Microelectronics Technology Inc. and the Company (incorporated
by reference to Exhibit 10.17 to the Company's Annual Report on Form
10-K for the year ended March 31, 1988).
10.10* Product Acquisition Agreement dated as of September 23, 1992 between
the Company and Microelectronics Technology, Inc. (incorporated by
reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K
for the year ended March 31, 1993).
10.11* Product Acquisition Agreement dated as of December 28, 1992 between
the Company and Microelectronics Technology, Inc. (incorporated by
reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K
for the year ended March 31, 1993).
10.12* Teaming Agreement dated as of November 16, 1993 between the Company
and Siemens AG (including the Supply Agreement dated November 16, 1993
between Siemens AG and E-Plus Mobilfunk GmbH) (incorporated by
reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K
for the year ended March 31, 1994).
10.13 Agreement on Exchange of Interim Equipment dated October 27, 1994
(incorporated by reference the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1994).
10.14 Digital Microwave Corporation 1994 Stock Incentive Plan, as amended
and restated (incorporated by reference to the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on
August 4, 1998).
10.15 Employment Agreement dated May 1, 1996 between the Company and Charles
D. Kissner (incorporated by reference to Exhibit 10.36 of the
Company's Annual Report on Form 10-K for the year ended March 31,
1996).
10.16 Form of Employment Agreement between the Company and certain executive
officers (incorporated by reference to Exhibit 10.38 of the Company's
Annual Report on Form 10-K for the year ended March 31, 1996).
10.17 Amendment to Loan Agreement dated June 24, 1996 between the Company
and the CoastFed Business Credit Corporation (incorporated by
reference to Exhibit 10.38 of the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996).
10.18 Amendment to Loan Agreement effective as of June 25, 1996 between the
Company and the CoastFed Business Credit Corporation (incorporated by
reference to Exhibit 10.39 of the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996).
10.19 Form of Employment Agreement between the Company and certain executive
officers (incorporated by reference to Exhibit 10.28 to the Company's
Annual Report on Form 10-K for the year ended March 31, 1997).
10.20 Credit Agreement, dated as of June 30, 1997, by and between the
Company and Bank of America National Trust and Savings Association
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997).
10.21 Lease, dated April 5, 1995, by and between Metropolitan Life Insurance
Company and Digital Microwave Corporation, relating to 180 Rose
Orchard Way, San Jose, California (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).
Page 26
<PAGE>
10.22 Sublease Agreement, dated August 29, 1997, by and between Wyse
Technology Inc., Digital Microwave Corporation and Wyse Technology
Investments, Inc., relating to 3745 North First Street, San Jose,
California.
10.23* Purchase Agreement, dated January 15, 1998, between the Company and
Microelectronics Technology, Inc.
10.24* Purchase Agreement, dated January 15, 1998, between the Company and
REMEC, Inc.
10.25* Business Agreement, dated January 26, 1998, between the Company and
Microelectronics Technology, Inc.
13.1 Portions of 1998 Annual Report to Stockholders incorporated herein by
reference.
21.1 List of subsidiaries.
23.1 Consent of Independent Public Accountants (included on page 28 of this
Annual Report on Form 10-K).
24.1 Power of Attorney (included on page 22 of this Annual Report on Form
10-K).
27.1 Financial Data Schedule for the fiscal year ended March 31, 1998.
27.2 Restated Financial Data Schedule for the fiscal year ended March 31,
1997.
27.3 Restated Financial Data Schedule for the fiscal year ended March 31,
1996.
* Confidential treatment of certain portions of this exhibit has been
requested.
Page 27
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included (or incorporated by reference) in this Form 10-K
into the Company's previously filed Registration Statements (File Nos.
33-16539, 33-37173, 33-43155, 33-85270, 33-94438, 333-00855, 333-11385,
333-11387, 333-11389, 333-25953, 333-48533, 333-48535 and 333-46867) on
Form S-8.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
July 30, 1999
Page 28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
of financial condition and results of operations
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Factors That May Affect Future
Financial Results" and elsewhere in this Annual Report.
All data from prior years has been restated to reflect the Company's merger in
March 1998 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. See Note 9 of the Notes
to Consolidated Financial Statements.
OVERVIEW
Digital Microwave Corporation designs, manufactures, and markets advanced
wireless solutions for worldwide telephone network interconnection and access.
The Company was founded in 1984, and since its inception has shipped over 95,000
microwave radios worldwide.
The Company has equipment installed in over 70 countries, and a significant
portion of the Company's revenue is derived from sales outside the United
States. In Fiscal 1998, 1997, and 1996, 95%, 95%, and 89%, respectively, of the
Company's revenues were from sales for equipment and services outside the United
States.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationships of certain items
from the Company's consolidated statements of operations as a percentage of net
sales for the periods indicated:
<TABLE>
<CAPTION>
Years Ended March 31,
- ------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 63.5 64.9 77.5
Inventory valuation charge 1.9 - -
-------------------------------
Gross profit 34.6 35.1 22.5
Research and development 6.4 6.3 7.5
Selling, general and administrative 18.7 20.6 18.4
Merger and restructuring 2.8 - -
-------------------------------
Operating income (loss) 6.7 8.2 (3.4)
Other income (expense), net 0.9 (0.4) 0.1
-------------------------------
Income (loss) before provision for income taxes 7.6 7.8 (3.3)
Provision (credit) for income taxes 1.2 1.3 (0.7)
-------------------------------
Net income (loss) 6.4% 6.5% (2.6)%
-------------------------------
-------------------------------
</TABLE>
YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1997
NET SALES. Net sales for Fiscal 1998 were $310.5 million, a 47% increase
compared to net sales of $211.3 million in Fiscal 1997. The increase in net
sales was due to higher sales in all the Company's major geographic areas. For
Fiscal 1998, net sales were $119.6 million in Europe, $95.8 million in the
Asia/Pacific region, $49.5 million in South America, $29.3 million in North
America, and $16.3 million in Africa compared to $81.0, $66.5, $26.3, $25.2, and
$12.3 million, respectively, in Fiscal 1997. See Note 8 of the Notes to
Consolidated Financial Statements. However, the Company expects a decline in net
sales for Fiscal 1999 in the Asia/Pacific region due to that region's current
economic and political instability.
The increase in net sales in Fiscal 1998 compared to Fiscal 1997 was also due to
the increased market acceptance of the SPECTRUM-TM- II product line and its
growing worldwide market. SPECTRUM II sales increased by 138% in Fiscal 1998
from Fiscal 1997 and accounted for 56% of total net sales in Fiscal 1998
compared to 35% in Fiscal 1997. In addition, the MAS Technology DXR-TM- product
line sales increased by 22% in Fiscal 1998 from Fiscal 1997 due to the increased
market acceptance of this product line.
GROSS PROFIT. Gross profit in Fiscal 1998 remained essentially flat in Fiscal
1997 with a greater mix of SPECTRUM II product line shipments versus older
products and improved utilization of manufacturing capacity in Fiscal 1998
offset by inventory valuation charges of $5.8 million. Net sales for Fiscal
1998 of SPECTRUM II increased to $175.3 million from $73.5 million in Fiscal
1997. Net sales of the MAS Technology DXR product line increased to $30.6
million in Fiscal 1998 from $25.0 million in Fiscal 1997. Net sales of
QUANTUM-TM- decreased to $23.9 million in Fiscal 1998 from $29.5 million in
Fiscal 1997 primarily due to decreased customer demand for this product. Net
sales in Fiscal 1998 of the M Series product line, which has been largely
replaced by the SPECTRUM II product line, decreased to $13.6 million from
$31.5 million in Fiscal 1997. Net sales for other products and services
amounted to $67.1 million in Fiscal 1998 compared to $51.8 million in Fiscal
1997. Inventory valuation charges, included in cost of sales, totaled $5.9
million in fiscal 1998. These charges relate to the phase-out of older
products during the fiscal year.
The Company has seen its gross profit remain essentially flat in Fiscal 1998;
however, there can be no assurance that the Company will be able to maintain
its gross profit at current levels. Of particular concern is the current
economic and political instability in the Asia/Pacific region and the intense
competitive price pressure of the telecommunications market, which results in
downward pricing pressure on the Company's products. See "Factors That May
Affect Future Financial Results."
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for Fiscal
1998 of $19.9 million were $6.7 million higher than the $13.2 million reported
in Fiscal 1997. This increase was primarily attributable to the Company's
development of its new Altium-TM- high-capacity wireless platform. The Altium
digital product line will
11
<PAGE>
be available in frequencies ranging from 6 to 38 Gigahertz ("GHz"). Product
shipments of certain frequencies of Altium radios are planned to begin in the
second half of Fiscal 1999. The Company will continue to invest in the
development of new products and features in order to maintain and enhance its
competitive position and as a result, expects research and development spending
to continue to increase in Fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for Fiscal 1998 increased by $14.6 million to $58.1
million from $43.5 million in Fiscal 1997. This increase was mostly attributable
to an increase in personnel, sales office, and related travel and expenses as
the Company continued to increase its worldwide sales and customer service and
support organization, as well as greater sales commissions resulting from the
Company's increased sales. In addition, goodwill amortization of $1.2 million,
which was related to the Company's acquisition of Granger, Inc. in May 1997 as
well as selling, general and administrative expenses of Granger Inc., partially
contributed to this increase.
MERGER AND RESTRUCTURING EXPENSES. Merger and restructuring expenses totalled
$8.8 million for Fiscal 1998. These expenses included payments to the
Company's investment bankers, legal and accounting fees of $4.3 million
related to the Company's March 1998 merger with MAS Technology Limited, a New
Zealand company, asset valuation reserves for inventory of $0.1 million,
receivables of $0.3 million, and warranty of $0.9 million related to MAS
Technology. Other associated costs of $3.2 million include termination
payments to employees of $0.7 million, other employee related costs of $0.5
million, purchase commitment losses of $1.1 million and leasehold termination
costs of $0.3 million.
INTEREST AND OTHER INCOME, NET. Interest and other income, net for Fiscal 1998
was $3.1 million compared to $0.4 million in Fiscal 1997. This increase
primarily resulted from interest income of $2.1 million on higher average cash
balances and from foreign exchange gains by MAS Technology.
INTEREST EXPENSE. Interest expense for Fiscal 1998 was $0.3 million compared to
$1.3 million in Fiscal 1997. The decrease in interest expense was primarily
attributable to lower average principal balances outstanding on the Company's
line of credit and note payable in Fiscal 1998.
PROVISION (CREDIT) FOR INCOME TAXES. The Company recorded an income tax
provision in Fiscal 1998 and 1997 at an effective rate of 16%. This was less
than the statutory rate primarily due to the utilization of the net operating
loss, tax credit, and other tax attributable carry-forwards. The Company
expects, assuming continued operating profitability, that the effective tax rate
will increase in Fiscal 1999, but that it will be less than the statutory rate
as the Company continues to benefit from its deferred tax asset.
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
NET SALES. Net sales for Fiscal 1997 were $211.3 million, a 23% increase
compared to net sales of $172.4 million in Fiscal 1996. The increase in net
sales was due to higher sales in all regions. For Fiscal 1997, net sales were
$81.0 million in Europe, $66.5 million in the Asia/Pacific region, $51.5 million
in the Americas, and $12.3 in Africa compared to $75.5 million, $47.6 million,
$43.4 million, and $5.9 million, respectively, in Fiscal 1996.
The increase in net sales in Fiscal 1997 compared to Fiscal 1996 was also due to
the rapid market acceptance of the SPECTRUM II product line after its first
commercial shipment in 1995. SPECTRUM II accounted for 35% of total net sales in
Fiscal 1997 compared to 15% in Fiscal 1996. MAS Technology's sales increased 32%
in Fiscal 1997 compared to Fiscal 1996 due to increased customer demand for the
DXR product line.
GROSS PROFIT. Gross profit in Fiscal 1997 was higher than in Fiscal 1996
primarily due to the Company's shift in product mix toward the SPECTRUM II
product line, which began shipping in July 1995. In addition, an increase in the
number of MAS Technology DXR products sold, combined with an increase in the
average selling price of the MAS Technology DXR product, contributed to a
greater gross profit in Fiscal 1997 as compared to Fiscal 1996. In Fiscal 1997,
the Company instituted a formal process improvement program, entitled "Operation
NewWave," to improve manufacturing operations, product development cycle time,
and asset utilization. The Company started to see results from this program with
improved gross margins and better inventory turnover. A shift in product mix
also increased gross profit. Fiscal 1996 was negatively impacted by the
shipments of approximately $9.0 million of M Series and other products to
E-Plus, a major European customer, at no margin due to delays in completion of
the SPECTRUM II product. See Note 7 of Notes to Consolidated Financial
Statements. Fiscal 1996 also included provisions for excess and obsolete
inventory of approximately $7.0 million, unabsorbed manufacturing expenses due
to lower production volume, rework expenses, and other costs related to the
startup of SPECTRUM II production. The additional inventory reserves were
necessary as a result of the changes in the Company's product line focus with
the introduction of the SPECTRUM II product line, as well as changes in customer
requirements. Net sales for Fiscal 1997 of SPECTRUM II increased to $73.5
million from $25.6 million in Fiscal 1996. Net sales of QUANTUM increased to
$29.5 million in Fiscal 1997 from $12.9 million in Fiscal 1996. Net sales in
Fiscal 1997 of the M Series product line, which has been largely replaced by the
SPECTRUM II product line, decreased to $31.5 million from $63.1 million in
Fiscal 1996. Net sales for other products and services, including MAS Technology
sales, amounted to $76.8 million in Fiscal 1997 compared to $70.8 million in
Fiscal 1996.
12
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for Fiscal
1997 of $13.2 million were $0.3 million more than the $12.9 million reported in
Fiscal 1996. This increase was primarily attributable to the roll out of the MAS
Technology DXR product line. However, as a percentage of sales, research and
development expenses decreased. This decrease was primarily attributable to
lower project costs in connection with the SPECTRUM II product as it
transitioned from its initial development stage to production.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for Fiscal 1997 increased by $11.8 million to $43.5
million from $31.7 million in Fiscal 1996. This increase was mostly attributable
to an increase in personnel, sales office, and related travel expenses as the
Company continued to increase its worldwide sales and customer service and
support organization. Also contributing to the increase were consulting fees
related to the company-wide process improvement program, a higher provision for
uncollectable accounts receivable, primarily related to one customer in Asia, as
well as profit-sharing and management bonus expenses due to the improved
profitability of the Company during Fiscal 1997.
INTEREST AND OTHER INCOME, NET. Interest and other income, net for Fiscal 1997
was $0.4 million compared to $2.1 million in Fiscal 1996. Fiscal 1996 included
interest income related to income tax refunds of $0.4 million and gain on the
sale of investments of $0.7 million. There were no similar items in Fiscal 1997.
The Company's foreign exchange gains were $0.6 million higher in Fiscal 1996
compared to Fiscal 1997.
INTEREST EXPENSE. Interest expense for Fiscal 1997 was $1.3 million compared to
$2.0 million in Fiscal 1996. The decrease in interest expense was primarily
attributable to lower average principal balances outstanding on the Company's
line of credit and note payable in Fiscal 1997.
PROVISION (CREDIT) FOR INCOME TAXES. The Company recorded an income tax
provision in Fiscal 1997 at an effective rate of 16%. This was less than the
statutory rate primarily due to the utilization of the net operating loss, tax
credit, and other tax carry-forwards. For Fiscal 1996, the Company recorded a
net tax benefit of $1.2 million. The net tax benefit included a $2.0 million tax
benefit resulting from the completion of an IRS audit of the Fiscal years ended
March 31, 1990 through 1994, and the receipt of tax refunds resulting from a
favorable IRS letter ruling. The ruling allowed the Company to carry-back and
obtain a refund for certain net tax operating losses incurred in Fiscal 1995.
The $0.8 million difference between the total net tax benefit and the tax
benefit recorded as a result of the IRS audit settlement represents a tax
provision on income earned in foreign jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
In Fiscal 1998, the Company's cash and short-term investments decreased by $18.0
million. Proceeds from the sale of ordinary shares related to a public offering
by MAS Technology prior to its merger with the Company, and from the exercise of
Company stock options by employees, generated cash in the amount of $32.7
million. This was offset by the acquisition of Granger, Inc. for $14.7 million,
the purchase of a minority interest in Granger Associates, Ltd. for $4.0
million, and investments in property and equipment of $22.6 million.
Accounts receivable increased by 29% during Fiscal 1998 compared to Fiscal 1997,
while sales increased by 47% in Fiscal 1998 as compared to Fiscal 1997. Net
inventories increased by 18% in Fiscal 1998 compared to the prior year due to
the Company's growth in sales. Inventory reserves increased in Fiscal 1998
compared to Fiscal 1997 due primarily to the phase-out of older product lines.
Deferred taxes increased in Fiscal 1998 primarily due to timing differences of
certain expenses, such as inventory reserves.
Accounts payable increased by 13% in Fiscal 1998 compared to Fiscal 1997 as a
result of the sales growth that generated increased inventory and operating
expenses. The 6% decrease in accrued liabilities was due primarily to a
reduction in customer deposits, which was partially offset by an acquisition and
restructuring accrual related to the Company's merger with MAS Technology.
At March 31, 1998, the Company had an unsecured $20 million credit facility with
a major U.S. bank that expires on June 30, 1998. The facility provides
borrowings at either (a) the greater of the bank's prime reference rate or the
federal funds rate plus 0.5% per annum (8.50% at March 31, 1998) or (b) the
applicable London Interbank Offering Rate plus 1% per annum. At March 31, 1998,
there were no borrowings outstanding under this credit facility, and $19.6
million of credit was available, net of outstanding letters of credit. The
credit facility agreement requires the Company to maintain certain financial
covenants, including various liquidity and debt ratios, minimum tangible net
worth, and profitability requirements. At March 31, 1998, the Company was in
compliance with the requirements of the facility. The Company is currently
negotiating an increase in and extension of this credit facility.
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. Management believes that the Company will receive an
increase in and an extension of its credit facility; however, there can be no
assurance that this will occur. In the event that the Company's credit facility
is not increased or extended, management will attempt to
13
<PAGE>
obtain 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. In the
event that the credit facility is not extended and such additional financing is
not available, management will implement 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 can implement these plans or that it can do
so without a material adverse effect on the Company's business, financial
results or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. It is Digital Microwave's policy not to enter into
derivative financial instruments except for hedging of foreign currency
exposures. The Company hedges certain portions of its exposure to foreign
currency fluctuations through the use of forward foreign exchange contracts.
The Company enters into forward foreign exchange contracts for purposes other
than trading; however, the Company does not engage in any foreign currency
speculation. Forward foreign exchange contracts represent agreements to buy
or sell a specified amount of foreign currency at a specified price in the
future. These contracts generally have maturities that do not exceed one
month. At March 31, 1998, the Company had forward foreign exchange contracts
to exchange various foreign currencies for U.S. dollars in the aggregate
amount of $36.9 million, primarily in New Zealand dollars and British pounds.
Gains and losses associated with currency rate changes on forward foreign
exchange contracts are recorded currently in income as they offset
corresponding gains and losses on the foreign currency-denominated assets and
liabilities and shipment of products hedged, or deferred if the foreign
currency order has not shipped. Therefore, the carrying value of forward
foreign exchange contracts approximates their fair value. The Company
believes that the credit risk with respect to its forward foreign exchange
contracts is minimal because the Company enters into contracts with major
financial institutions. Market risk with respect to forward foreign exchange
contracts is offset by the corresponding exposure related to the underlying
assets and liabilities.
FOREIGN CURRENCY RATE RISK. Although nearly all of Digital Microwave's sales
and expenses are denominated in U.S. dollars, Digital Microwave has
experienced foreign exchange gains and losses to date, and expects to incur
additional gains and losses in Fiscal 1999. Digital Microwave engaged in
foreign currency hedging activities during Fiscal 1998, as explained above,
and intends to continue doing so as needed.
FACTORS THAT MAY AFFECT FUTURE FINANCIAL RESULTS
The Stockholders' Letter and discussions in this Annual Report concerning the
Company's future products, expenses, revenues, gross margins, liquidity, and
cash needs, as well as the Company's plans and strategies, contain
forward-looking statements concerning the Company's future operations and
financial results. These forward-looking statements are based on current
expectations, and the Company assumes no obligation to update this information.
Numerous factors, such as economic and competitive conditions, timing and volume
of incoming orders, shipment volumes, product margins, and foreign exchange
rates, could cause actual results to differ materially from those described in
these statements, and prospective investors and stockholders should carefully
consider the factors set forth below in evaluating these forward-looking
statements. The Company's backlog may not be representative of actual sales for
any succeeding period because of the timing of orders, delivery intervals,
customer and product mix, and the possibility of changes in delivery schedules
and additions or cancellation of orders.
The quarterly operating results of the Company can vary significantly depending
on several factors, any of which could have a material adverse effect on the
Company's business, financial condition or results of operations. In particular,
the Company's quarterly results of operations can vary due to the volume and
timing of product orders received and delivered during the quarter, the ability
of the Company and its key suppliers to respond to changes made by customers in
their orders, and the timing of new product introductions by the Company and its
competitors. The quarterly operating results also may vary significantly
depending on other factors, including the mix of product sold, the cost and
availability of components and subsystems, relative prices of the Company's
products, adoption of new technologies and industry standards, competition,
fluctuations in foreign currency exchange rates, regulatory developments, and
general economic conditions.
Manufacturers of digital microwave telecommunications equipment are
experiencing, and are likely to continue to experience, intense price pressure,
which has resulted, and is expected to continue to result, in downward pricing
pressure on the Company's products. As a result, the Company has experienced,
and expects to continue to experience, declining average sales prices for its
products. The Company's future profitablility is dependent upon its ability to
continue to improve manufacturing efficiencies, reduce material costs of
products, and introduce new products and product enhancements.
The markets for the Company's products are extremely competitive, and the
Company expects that competition will increase. The Company's existing and
potential competitors include established and emerging companies, such as L.M.
Ericsson, Siemens AG, Farinon Division of Harris Corporation, P-COM, Alcatel,
Nokia, Innova, 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 continues to experience
customer demands for shorter delivery cycles. The Company increased its
inventory levels in order to respond to this demand which, in turn, may increase
the risk of obsolescence of its inventories.
The Company expects that international sales will continue to account for the
majority of its net product sales for the foreseeable future. As a result, the
Company is subject to the risks of doing business internationally, including
unexpected changes in regulatory requirements, fluctuations in foreign currency
exchange rates, imposition of tariffs and other barriers and restrictions, the
burdens of complying with a variety of foreign laws, and general economic and
geopolitical conditions, including inflation and trade relation-ships. In
addition, recent economic 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 the rate of inflation or any of
the aforementioned factors will not have a material adverse effect on the
Company's business, financial conditions or 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 its
suppliers, and no assurance
14
<PAGE>
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 manage-ment'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. If not corrected, the Company's computer programs could fail
or create erroneous results by or at the year 2000. The Company has purchased
new computer programs to address this issue and intends to implement these
applications during Fiscal 1999. The Company is contacting its primary suppliers
and subcontractors to determine that they are developing plans to address
processing transactions in the year 2000 and to monitor their progress toward
Year 2000 capability. The Company believes that it will expend approximately
$0.5 million for investigating and remedying issues related to Year 2000
compliance involving its internal operations. Management believes that the Year
2000 compliance 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. 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.
During any given quarter, a small number of customers may account for a
significant portion of the Company's net sales. The Company's customers
typically are not contract-ually obligated to purchase any quantity of products
in any particular period, and product sales to major customers have varied
widely from period to period. The loss of any existing customer, a significant
reduction in the level of sales to any existing customer, or the failure of the
Company to gain additional customers could have a material adverse effect on the
Company's business, financial condition, and results of operations.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended March 31,
- ----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Net sales $310,490 $211,337 $172,418 $165,148 $126,236
Net income (loss) 19,878 13,790 (4,472) 2,567 (22,874)
Diluted net income
(loss) per share 0.42 0.35 (0.12) 0.07 (0.69)
CONSOLIDATED BALANCE
SHEETS DATA:
Total assets $240,400 $193,199 $106,850 $109,500 $ 87,504
Long-term liabilities 204 158 2,783 6,362 459
</TABLE>
15
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Years Ended March 31,
- ---------------------------------------------------------------------------------
1998 1997
---------------------
(In thousands, except share
and per share amounts)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 25,130 $ 40,374
Short-term investments 15,220 17,947
Accounts receivable, net of allowance
of $3,795 in 1998 and $3,362 in 1997 74,897 57,873
Inventories 60,981 51,469
Deferred tax asset 6,685 361
Other current assets 8,896 5,232
---------------------
Total current assets 191,809 173,256
---------------------
PROPERTY AND EQUIPMENT:
Machinery and equipment 56,308 41,921
Land and buildings 4,125 1,575
Furniture and fixtures 8,749 7,341
Leasehold improvements 3,332 2,120
---------------------
72,514 52,957
Accumulated depreciation and amortization (39,986) (33,757)
---------------------
Net property and equipment 32,528 19,200
---------------------
Other assets 16,063 743
---------------------
$240,400 $193,199
---------------------
---------------------
</TABLE>
<TABLE>
<CAPTION>
Years Ended March 31,
- ---------------------------------------------------------------------------------
1998 1997
---------------------
(In thousands, except share
and per share amounts)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit $ - $ 6,601
Current maturities
of capital lease obligations 238 681
Accounts payable 33,793 29,824
Income taxes payable 1,298 2,440
Accrued liabilities 26,373 28,188
---------------------
Total current liabilities 61,702 67,734
LONG-TERM LIABILITIES:
Capital lease obligations,
net of current maturities 204 158
---------------------
Total liabilities 61,906 67,892
---------------------
COMMITMENTS AND CONTINGENCIES
(NOTE 4) STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value;
5,000,000 shares authorized;
none outstanding - -
Common stock, $.01 par value;
95,000,000 shares authorized;
46,663,581 shares in 1998 and 37,021,138
shares in 1997 issued and outstanding 466 370
Additional paid-in capital 158,707 123,899
Unrealized holding loss on
available-for-sale securities (17) (63)
Retained earnings 20,936 1,058
Cumulative translation adjustment (1,598) 43
---------------------
Total stockholders' equity 178,494 125,307
---------------------
$240,400 $193,199
---------------------
---------------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
16
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended March 31,
- --------------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
NET SALES: $ 310,490 $ 211,337 $ 172,418
Cost of sales 197,048 137,261 133,612
Inventory valuation charge 5,850 - -
----------------------------------------
Gross profit 107,592 74,076 38,806
----------------------------------------
OPERATING EXPENSES:
Research and development 19,879 13,225 12,885
Selling, general and administrative 58,053 43,513 31,707
Merger and restructuring 8,752 - -
----------------------------------------
Total operating expenses 86,684 56,738 44,592
----------------------------------------
Income (loss) from operations 20,908 17,338 (5,786)
Other income (expense):
Interest income 2,486 371 538
Interest expense (310) (1,333) (1,968)
Other income (expense), net 652 49 1,569
----------------------------------------
Total other income (expense) 2,828 (913) 139
----------------------------------------
Income (loss) before provision (credit) for income taxes 23,736 16,425 (5,647)
Provision (credit) for income taxes 3,858 2,635 (1,175)
----------------------------------------
NET INCOME (LOSS) $ 19,878 $ 13,790 $ (4,472)
----------------------------------------
----------------------------------------
Basic earnings (loss) per share $ 0.44 $ 0.36 $ (0.12)
Diluted earnings (loss) per share $ 0.42 $ 0.35 $ (0.12)
Basic weighted average shares outstanding 45,361 38,611 37,944
Dilutive stock options 1,968 1,276 -
----------------------------------------
Diluted weighted average shares outstanding 47,329 39,887 37,944
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended March 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------------------------------
Common Additional Unrealized
Stock Paid-in Holding
Shares Amount Capital Gain (Loss)
-------------------------------------------------
(In thousands, except share amounts)
<S> <C> <C> <C> <C>
BALANCE, MARCH 31, 1995 26,935,386 $269 $ 46,101 $ -
Sale of stock to private investors 4,127,964 41 19,051 -
Stock options exercised 578,216 6 2,096 -
Tax benefits related to employee stock
transactions - - 55 -
Net loss - - - -
-------------------------------------------------
BALANCE, MARCH 31, 1996 31,641,566 316 67,303 -
Sale of stock in secondary offering 4,400,000 44 51,546 -
Stock options exercised 979,572 10 4,765 -
Tax benefit related to employee stock transactions - - 285 -
Unrealized holding loss on available-for-sale
securities - - - (63)
Net income - - - -
Translation adjustment - - - -
-------------------------------------------------
BALANCE, MARCH 31, 1997 37,021,138 370 123,899 (63)
Proceeds from sale of stock 8,327,894 83 24,786 -
Stock options exercised 1,314,549 13 7,830 -
Tax benefit related to employee stock transactions - - 2,192 -
Unrealized holding gain on available-for-sale
securities - - - 46
Net income - - - -
Translation adjustment - - - -
-------------------------------------------------
BALANCE, MARCH 31, 1998 46,663,581 $466 $158,707 $(17)
-------------------------------------------------
-------------------------------------------------
<CAPTION>
Years Ended March 31, 1998, 1997, and 1996
- -------------------------------------------------------------------------------------------------
Retained Cumulative Total
Earnings Translation Stockholders'
(Deficit) Adjustment Equity
-------------------------------------------
(In thousands, except share amounts)
<S> <C> <C> <C>
BALANCE, MARCH 31, 1995 $ (8,260) $ - $ 38,110
Sale of stock to private investors - - 19,092
Stock options exercised - - 2,102
Tax benefits related to employee stock
transactions - - 55
Net loss (4,472) - (4,472)
-------------------------------------------
BALANCE, MARCH 31, 1996 (12,732) - 54,887
Sale of stock in secondary offering - - 51,590
Stock options exercised - - 4,775
Tax benefit related to employee stock transactions - - 285
Unrealized holding loss on available-for-sale
securities - - (63)
Net income 13,790 - 13,790
Translation adjustment - 43 43
-------------------------------------------
BALANCE, MARCH 31, 1997 1,058 43 125,307
Proceeds from sale of stock - - 24,869
Stock options exercised - - 7,843
Tax benefit related to employee stock transactions - - 2,192
Unrealized holding gain on available-for-sale
securities - - 46
Net income 19,878 - 19,878
Translation adjustment - (1,641) (1,641)
-------------------------------------------
BALANCE, MARCH 31, 1998 $ 20,936 $(1,598) $ 178,494
-------------------------------------------
-------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31,
- -------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 19,878 $ 13,790 $ (4,472)
Adjustments to reconcile net
income (loss) to net cash provided
by (used for) operating activities:
Depreciation and amortization 10,887 6,717 6,735
Provision for uncollectable accounts 356 1,400 580
Provision for inventory reserves 12,862 4,271 8,795
Provision for warranty reserves 5,310 2,385 1,678
Tax benefit of disqualifying dispositions 2,192 285 -
Changes in assets and liabilities:
Increase in accounts receivable (18,320) (19,818) (3,464)
Increase in inventories (23,510) (17,147) (128)
Increase in deferred taxes (6,496) (193) (351)
Decrease in tax refund receivable - - 1,820
(Increase) decrease in other current assets (3,444) (548) 1,441
Increase (decrease) in accounts payable 5,556 8,272 (2,580)
Increase (decrease) in income tax payable (1,065) 1,072 (96)
Increase (decrease) in other
accrued liabilities (5,810) 4,594 523
---------------------------------------
Net cash provided by
(used for) operating activities (1,604) 5,080 10,481
</TABLE>
<TABLE>
<CAPTION>
Years Ended March 31,
- -------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities (8,671) (17,947) -
Maturity/sale of available-for-sale securities 11,327 - -
Purchase of property and equipment (22,576) (9,255) (4,922)
Acquisition of business, net of cash received (11,491) (374) -
Investment in Granger Associates, Ltd. (4,000) - -
Proceeds from disposal of fixed assets - 61 -
---------------------------------------
Net cash used for investing activities (35,411) (27,515) (4,922)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from banks - 20,245 16,188
Repayments to banks (6,159) (21,561) (29,682)
Exchange gains (losses) from currency hedging 1,070 (10) 637
Payment of assumed Granger, Inc. debt (3,286) - -
Payments of capital lease obligations (1,056) (1,025) (1,119)
Sale of common stock 32,712 55,329 15,812
---------------------------------------
Net cash provided by financing activities 23,281 52,978 1,836
Effect of exchange rate changes on cash (1,510) (72) (559)
---------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15,244) 30,471 6,836
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 40,374 9,903 3,067
---------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 25,130 $ 40,374 $ 9,903
---------------------------------------
---------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
Digital Microwave Corporation (the "Company") designs, manufactures, and markets
advanced wireless solutions for worldwide telephone network interconnection and
access. Transmitting and receiving multiple digital lines, the Company's
high-performance digital microwave systems carry voice, data, and digitized
video signals across a full spectrum of frequencies and capacities. The Company
has sold over 95,000 radios, which operate in nearly every kind of environment
around the world. The Company was founded in January 1984, and is traded under
the symbol DMIC on the Nasdaq National Market.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Digital Microwave Corporation and its wholly owned subsidiaries.
Intercompany accounts and transactions have been eliminated. Prior year
information has been restated to reflect the merger with MAS Technology Limited
("MAS Technology"), a New Zealand company which designs, manufactures, markets,
and supports digital microwave radio links for the worldwide telecommunications
market.
ESTIMATES. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS. For purposes of the Consolidated Statements of Cash
Flows, the Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
The following is a summary of cash and cash equivalents as of March 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998 1997
-------------------
(In thousands)
<S> <C> <C>
Cash and money market funds $ 25,130 $ 16,583
U.S. Treasuries and government agencies - 4,844
Commercial paper - 18,947
-------------------
Total cash and cash equivalents $ 25,130 $ 40,374
-------------------
-------------------
</TABLE>
SHORT-TERM INVESTMENTS. The Company invests its excess cash in high-quality and
easily marketable instruments to ensure cash is readily available for use in its
current operations. Accordingly, all of the Company's marketable securities are
classified as "available-for-sale" in accordance with the provisions of the
Statement of Financial Accounting Standards No. 115. At March 31, 1998, the
Company's available-for-sale securities had contractual maturities ranging from
1 month to 19 months, with a weighted average maturity of 5 months.
All short-term investments are reported at fair market value with the related
unrealized holding gains and losses reported as a component of stockholders'
equity. Unrealized holding losses on the portfolio of approximately $17,000 and
$63,000 were recorded as of March 31, 1998 and 1997, respectively. There were
realized gains of approximately $6,000 on the sale of securities during Fiscal
1998, and no realized gains or losses on sales of securities during Fiscal 1997
and Fiscal 1996.
The following is a summary of short-term investments as of March 31:
<TABLE>
<CAPTION>
1998
- -----------------------------------------------------------------------------------------
MARKET
VALUE AT UNREALIZED
COST AT BALANCE SHEET HOLDING
EACH ISSUE DATE GAIN (LOSS)
----------------------------------------
(In thousands)
<S> <C> <C> <C>
CORPORATE NOTES $13,737 $ 13,720 $(17)
MUNICIPAL NOTES 500 500 -
AUCTION RATE PREFERRED NOTES 1,000 1,000 -
----------------------------------------
TOTAL $15,237 $ 15,220 $(17)
----------------------------------------
----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997
- -----------------------------------------------------------------------------------------
Market
Value at Unrealized
Cost at Balance Sheet Holding
Each Issue Date Gain (Loss)
----------------------------------------
(In thousands)
<S> <C> <C> <C>
Corporate notes $15,010 $14,947 $ (63)
Auction rate preferred notes 3,000 3,000 -
----------------------------------------
Total $18,010 $17,947 $ (63)
----------------------------------------
----------------------------------------
</TABLE>
20
<PAGE>
SUPPLEMENTAL STATEMENTS OF CASH FLOWS DISCLOSURES. Cash paid for interest and
income taxes for each of the three fiscal years presented in the consolidated
statements of cash flows was as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
- --------------------------------------------------------------------------------
1998 1997 1996
-----------------------------
(In thousands)
<S> <C> <C> <C>
Interest $ 310 $1,324 $ 1,864
Income taxes $ 8,885 $1,754 $ 813
</TABLE>
The following non-cash transactions occurred during the fiscal years:
<TABLE>
<CAPTION>
Years Ended March 31,
- --------------------------------------------------------------------------------
1998 1997 1996
-----------------------------
(In thousands)
<S> <C> <C> <C>
Tax benefit related to employee
stock transactions $ 2,192 $ 285 $ 55
Property purchased under capital leases $ - $ - $ 1,324
Reduction of accounts payable to vendor
in connection with the sale of stock $ - $ - $ 5,000
</TABLE>
INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out)
or market, where cost includes material, labor, and manufacturing overhead.
Inventories consisted of:
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997
---------------------
(In thousands)
<S> <C> <C>
Raw materials $ 23,524 $ 20,132
Work-in-process 18,545 16,753
Finished goods 18,912 14,584
---------------------
$ 60,981 $ 51,469
---------------------
---------------------
</TABLE>
Inventories contained components and assemblies in excess of the Company's
current estimated requirements and were, therefore, reserved at March 31,
1998 and 1997. In Fiscal 1998, the Company charged $7.1 million to cost of
sales due to ongoing inventory valuation analysis in addition to
approximately $5.8 million due to excess and obsolete inventories as a result
of product transitions.
PROPERTY AND EQUIPMENT. Property and equipment is stated at cost. Depreciation
and amortization are calculated using the straight-line method over the shorter
of the estimated useful lives of the assets (ranging from three to five years
for equipment and furniture, and forty years for buildings) or the lease term.
Included in property and equipment are assets held under capital leases with a
cost of $1,303,000 and $2,691,000 for Fiscal 1998 and 1997, respectively.
Accumulated amortization on leased assets was $594,000 and $1,016,000 as of
March 31, 1998 and 1997, respectively.
OTHER ASSETS. Other assets include goodwill and other intangible assets which
are being amortized on a straight line basis over their useful lives ranging
from five to ten years, as well as minority investments accounted for using the
cost method of accounting. Goodwill is the excess of the purchase price over the
fair value of net assets acquired. At March 31, 1998 and 1997, goodwill amounted
to $12,574,000 and $767,000, respectively, gross of accumulated amortization.
Accumulated amortization of goodwill amounted to $1,215,000 and $25,000 at March
31, 1998 and 1997, respectively. The Company continually reviews goodwill and
other intangible assets to evaluate whether events or changes have occurred
that would suggest an impairment of carrying value. An impairment would be
recognized when expected future operating cash flows are lower than the
carrying value.
Effective April 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," which did not have a material effect on
the Company's financial condition or results of operations.
ACCRUED LIABILITIES. Accrued liabilities included the following:
<TABLE>
<CAPTION>
Years Ended March 31,
- ---------------------------------------------------------------------------------
1998 1997
--------------------
(In thousands)
<S> <C> <C>
Customer deposits $ 3,387 $ 9,954
Accrued contract obligations (See Note 7) 1,038 1,632
Accrued payroll and benefits 5,079 4,810
Accrued commissions 6,162 4,131
Accrued warranty 3,097 2,923
Accrued restructuring 4,520 -
Accrued professional fees 1,108 1,982
Other 1,982 2,756
--------------------
$ 26,373 $ 28,188
--------------------
</TABLE>
21
<PAGE>
FOREIGN CURRENCY TRANSLATION. The functional currency of the Company's
subsidiaries located in the United Kingdom and Latin America is the U.S. dollar.
Accordingly, all of the monetary assets and liabilities of these subsidiaries
are remeasured into U.S. dollars at the current exchange rate as of the
applicable balance sheet date, and all non-monetary assets and liabilities are
remeasured at historical rates. Sales and expenses are remeasured at the average
exchange rate prevailing during the period. Gains and losses resulting from the
remeasurement of the subsidiaries' financial statements are included in the
Consolidated Statements of Operations. The Company's other international
subsidiaries use their local currency as their functional currency. Assets and
liabilities of these subsidiaries are translated at the exchange rates in effect
at the balance sheet date, and income and expense accounts are translated at the
average exchange rates during the year. The resulting translation adjustments
are recorded directly to a separate component of stockholders' equity.
Gains and losses resulting from foreign exchange transactions are included in
other income (expense) in the accompanying Consolidated Statements of
Operations. The net foreign exchange gain was $1,070,000 in Fiscal 1998, a loss
of $10,000 in Fiscal 1997, and a $637,000 gain in Fiscal 1996.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. The Company hedges certain portions
of its exposure to foreign currency fluctuations through the use of forward
foreign exchange contracts. The Company designates and assigns foreign
exchange contracts to foreign currency-denominated assets, liabilities and
firm order commitments. The Company enters into foreign exchange contracts
for purposes other than trading, but not to engage in any foreign currency
speculation. Forward foreign exchange contracts represent agreements to buy
or sell a specified amount of foreign currency at a specified price in the
future. These contracts generally have maturities that do not exceed one
month. At March 31, 1998, the Company had forward foreign exchange contracts
to exchange various foreign currencies for U.S. dollars in the aggregate
amount of $36.9 million primarily in New Zealand dollars and British pounds.
Gains and losses associated with currency rate changes on forward foreign
exchange contracts are recorded currently in income as they offset
corresponding gains and losses on the foreign currency-denominated assets,
liabilities and shipment of product hedged or deferred if the foreign
currency order has not shipped. Therefore, the carrying value of forward
foreign exchange contracts approximates their fair value. The Company
believes that the credit risk with respect to its forward foreign exchange
contracts is minimal because the Company enters into contracts with very
large financial institutions. Market risk with respect to forward foreign
exchange contracts is offset by the corresponding exposure related to the
underlying assets and liabilities.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject the
Company to concentrations of credit risk consist principally of temporary cash
investments and trade receivables. The Company has cash investment policies that
limit the amount of credit exposure to any one financial institution and
restrict placement of investments with financial institutions evaluated as
highly credit worthy. Trade receivables concentrated with certain customers
primarily in the telecommunications industry and in certain geographic locations
potentially subject the Company to concentration of credit risk. The Company
actively markets and sells products in North America, Europe, the Far East, the
Pacific, Africa, the Middle East, and Central and South America. The Company
performs ongoing credit evaluations of its customers' financial conditions and
generally requires no collateral.
REVENUE RECOGNITION. Revenue from product sales is recognized upon shipment,
except when product sales are combined with significant post-shipment
installation services provided over an extended period of time. Under this
exception, revenue is deferred until such services have been performed.
Revenue from product sales is net of third-party commissions, freight, and
duty charges. Service revenue, which is less than 10% of net sales for each
of the three fiscal years presented, is recognized when the related services
are performed.
PRODUCT WARRANTY. The Company provides, at the time of sale, for the estimated
cost to repair or replace products under warranty.
RESEARCH AND DEVELOPMENT. All research and development costs are expensed as
incurred.
NET INCOME (LOSS) PER SHARE. Stockholders approved a two-for-one stock split
paid in the form of a stock dividend in November 1997. Accordingly, all share
and earnings per share data for all periods presented have been adjusted to
reflect the stock split.
In February 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement on Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share," which became effective on December 15, 1997. As a result, the Company's
reported earnings per share, after adjustment for the November 1997 stock split,
for the prior two years were restated. Under the new requirements, primary
earnings per share have been replaced with basic earnings per share, and fully
diluted earnings per share have been replaced with diluted earnings per share.
Under SFAS 128, basic earnings per share are computed by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share are computed by dividing net income by the weighted
average number of common shares and dilutive stock options outstanding during
the period. Net loss per share is computed using only the weighted average
number of common shares outstanding during the period, as the inclusion of
common equivalent shares would be anti-dilutive.
As of March 31, 1998 and 1997, there were 151,000 and 429,000 weighted average
options outstanding, respectively, to purchase shares of Common Stock that were
not included in the computation of diluted earnings per share as the options'
exercise prices
22
<PAGE>
were greater than the average market price of the shares of Common Stock for the
respective years. Additionally, as of March 31, 1996, there were 1,588,000
weighted average options outstanding to purchase shares of Common Stock that
were not included in the computation of diluted earnings per share because they
were anti-dilutive as a result of the net loss incurred in Fiscal 1996.
STOCK COMPENSATION. Effective April 1, 1996, the Company adopted the disclosure
provisions of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation." In accordance with the provisions of SFAS 123,
the Company applies APB Opinion 25 and related interpretations in accounting for
its stock option plans. Note 6 of the Notes to Consolidated Financial Statements
contains a summary of the pro forma effects on reported net income and earnings
per share for Fiscal 1998, 1997, and 1996 based on the fair market value of the
options granted at the grant date as prescribed by SFAS 123.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the FASB issued Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income and its components in general purpose financial statements. Also, in June
1997, the FASB issued Financial Accounting Standards No. 131 ("SFAS No. 131"),
"Disclosures About Segments of an Enterprise and Related Information," which
establishes annual and interim reporting standards for business segments of a
company and related disclosures. Both SFAS No. 130 and SFAS No. 131 are
effective for companies with fiscal years beginning after December 15, 1997. The
Company believes that the adoption of these new pronouncements will not have a
material effect on the Company's financial statements.
NOTE 3. CREDIT ARRANGEMENTS
At March 31, 1998, the Company had an unsecured $20 million credit facility with
a major U.S. bank that expires on June 30, 1998. The facility provides
borrowings at either (a) the greater of the bank's prime reference rate or the
federal funds rate plus 0.5% per annum (8.50% at March 31, 1998) or (b) the
applicable London Interbank Offering Rate plus 1% per annum. At March 31, 1998,
there were no borrowings outstanding under this credit facility, and $19.6
million of credit was available net of outstanding letters of credit. The credit
facility agreement requires the Company to maintain certain financial covenants,
including various liquidity and debt ratios, minimum tangible net worth, and
profitability requirements. The Company is currently negotiating an increase in
and extension of this credit facility.
On June 30, 1997, the Company repaid in full all of the outstanding borrowings
under a $25 million credit facility with a U.S. bank and a credit company, which
credit facility expired on that date. In April 1997, the Company had exercised
its option to terminate the facility as of June 30, 1997 and notified the
lenders of its intent. The facility was secured by certain assets of the Company
and had required minimum borrowings of $2 million.
NOTE 4. COMMITMENTS AND CONTINGENCIES
The Company leases certain property and equipment, as well as its headquarters
and manufacturing facilities, under noncancelable operating and capital leases
which expire at various periods through 2018. At March 31, 1998, future minimum
payment obligations under these leases were as follows:
<TABLE>
<CAPTION>
Years Ending March 31,
- -----------------------------------------------------------------------------------
Capital Operating
-----------------------
(In thousands)
<S> <C> <C>
1999 $ 265 $ 3,837
2000 103 3,466
2001 82 3,192
2002 30 1,886
2003 11 125
2004 and beyond - 1,626
-----------------------
Future minimum lease payments 491 $14,132
----------
----------
Less amount representing interest (9% to 12%) (49)
---------
Present value of future minimum lease payments 442
Less current maturities (238)
---------
Long-term lease obligations $ 204
---------
---------
</TABLE>
Rent expense under operating leases was approximately $5,540,000, $3,628,000 and
$3,736,000 for the years ended March 31, 1998, 1997, and 1996, respectively.
LEGAL CONTINGENCIES. The Company is a party to various legal proceedings which
arise in the normal course of business. In the opinion of management, the
ultimate disposition of these proceedings will not have a material adverse
effect on the consolidated financial position, liquidity or results of
operations of the Company.
CONTINGENCIES IN MANUFACTURING AND SUPPLIERS. The Company's manufacturing
operations are highly dependent upon the timely delivery of materials and
components by outside suppliers. In addition, the Company depends in part upon
subcontractors
23
<PAGE>
to assemble major components and subsystems used in its products in a timely and
satisfactory manner. The Company does not generally enter into long-term or
volume purchase agreements with any of its suppliers, and no assurance can be
given that such materials, components, and subsystems will be available in the
quantities required by the Company, if at all. The inability of the Company to
develop alternative sources of supply quickly and on a cost-effective basis
could materially impair the Company's ability to man-ufacture and deliver its
products in a timely manner. There can be no assurance that the Company will not
experience component delays or other supply problems in the future.
NOTE 5. INCOME TAXES
The Company provides for income taxes using an asset and liability approach,
under which deferred income taxes are provided based upon enacted tax laws and
rates applicable to periods in which the taxes become payable.
The domestic and foreign components of income (loss) before provision for income
taxes were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Years Ended March 31,
1998 1997 1996
--------------------------------
(In thousands)
<S> <C> <C> <C>
Domestic $ 20,922 11,962 (9,845)
Foreign 2,814 4,463 4,198
--------------------------------
$ 23,736 $16,425 $(5,647)
--------------------------------
--------------------------------
</TABLE>
The provision (credit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
Years Ended March 31,
- ---------------------------------------------------------------------------------
1998 1997 1996
-------------------------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ 6,770 $1,118 $(2,018)
State 365 44 -
Foreign 3,047 1,473 843
-------------------------------
Total current $10,182 $2,635 $(1,175)
Deferred (6,324) - -
-------------------------------
$ 3,858 $2,635 $(1,175)
-------------------------------
-------------------------------
</TABLE>
The provision (credit) for income taxes differs from the amount computed by
applying the statutory Federal income tax rate as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Years Ended March 31,
1998 1997 1996
-------------------------------
(In thousands)
<S> <C> <C> <C>
Expected tax provision (credit) $ 8,191 $5,749 $(1,920)
State taxes net of Federal benefit 565 367 (343)
Change in valuation allowance (4,956) (3,079) 3,346
Non-deductible acquisition costs 2,704 - -
Reversal of previously provided taxes upon
settlement of the IRS audit - - (2,018)
FSC commission (1,657) (581) -
Other (989) 179 2,110
-------------------------------
$3,858 $2,635 $ 1,175
-------------------------------
-------------------------------
</TABLE>
The major components of the net deferred tax asset consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Years Ended March 31,
---------------------
1998 1997
(In thousands)
<S> <C> <C>
Inventory reserves $ 9,461 $ 4,583
Warranty reserves 1,154 1,023
Bad debt reserves 1,408 696
Accrued commissions 1,163 893
Net operating loss carry-forwards 651 2,942
Tax credits 901 5,084
Other 2,806 955
---------------------
17,544 16,176
Less: Valuation reserve - operations (10,859) (15,815)
---------------------
Net deferred tax asset $ 6,685 $ 361
---------------------
---------------------
</TABLE>
24
<PAGE>
The valuation allowance provides a reserve against deferred tax assets that may
expire or go unutilized by the Company. In accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," the
Company believes it is more likely than not that the Company will not fully
realize these benefits and, accordingly, has continued to provide a valuation
allowance for them. Net operating loss carry-forwards are all foreign losses
that total $1,925,000 and carry forward indefinitely. Tax credits are all state
credits that total $1,390,000 and carry forward indefinitely.
NOTE 6. COMMON STOCK
The Company's stockholders approved a two-for-one stock split paid in the form
of a stock dividend in November 1997, and in March 1998, the stockholders
approved an increase in the total number of authorized shares of Common Stock
from 60,000,000 shares to 95,000,000 shares.
STOCK OPTION PLANS. The Company's 1984 Stock Option Plan (the "1984 Plan")
provides for the grant of both incentive and nonqualified stock options to key
employees and certain independent contractors of the Company. At March 31, 1998,
the options to purchase 303,410 shares of Common Stock were outstanding under
the 1984 Plan, of which 183,970 shares were exercisable at prices ranging from
$2.63 to $12.44 per share. Upon the adoption of the Company's 1994 Stock
Incentive Plan (the "1994 Plan"), the Company terminated future grants under the
1984 Plan.
In July 1994, the stockholders approved 2,366,660 shares of Common Stock to be
reserved for issuance under the 1994 Plan over a ten-year term, as adjusted for
a two-for-one stock split in November 1997. In August 1996, the stockholders
approved the reservation for issuance of 2,000,000 additional shares of Common
Stock under the 1994 Plan, as adjusted for the two-for-one stock split. In March
1998, the stockholders approved the reservation for issuance of 2,500,000
additional shares of Common Stock under the 1994 Plan. The terms of the 1994
Plan also provide for an automatic increase on the first trading day of each
calendar year for five years after the adoption of the 1994 Plan, beginning
January 1995, of an amount equal to one percent (1%) of the number of shares of
Common Stock outstanding, but in no event is such annual increase to exceed
300,000 shares. The total number of shares of Common Stock reserved for issuance
under the 1994 Plan is 7,166,660. At March 31, 1998, options to purchase
3,538,866 shares were outstanding, of which 884,613 were exercisable at prices
ranging from $4.00 to $23.31 per share. At March 31, 1998, the number of shares
available for future grants was 2,830,535.
The 1994 Plan contains: (i) a discretionary grant program for key employees and
con-sultants whereby options generally vest over five years and expire after 10
years, (ii) an automatic grant program for non-employee Board members, whereby
options vest over three years and expire after 10 years, (iii) a salary
reduction grant program under which key employees may elect to have a portion of
their base salary reduced each year in return for stock options, (iv) a stock
fee program under which the non-employee Board members may elect to apply all or
a portion of their annual retainer fee to the acquisition of shares of Common
Stock, and (v) a stock issuance program under which eligible individuals may be
issued shares of Common Stock as a bonus tied to their performance of services
or the Company's attainment of financial milestones, or pursuant to their
individual elections to receive such shares in lieu of base salary. The
implementation and use of any of these equity incentive programs (other than the
automatic grant program and the stock fee program) is within the sole discretion
of the Compensation Committee of the Board of Directors of the Company.
On April 18, 1996, the Company adopted the 1996 Non-Officer Employee Stock
Option Plan (the "1996 Plan"). The 1996 Plan authorizes 1,000,000 shares of
Common Stock to be reserved for issuance to non-officer key employees as an
incentive to continue in the service of the Company, as adjusted for the
two-for-one stock split. The 1996 Plan will terminate on the date on which all
shares available have been issued. At March 31, 1998, 868,810 shares were
outstanding, of which 63,600 were exercisable, at prices ranging from $4.13 to
$13.19, and 37,010 shares were available for future grants.
On November 11, 1997, the Company adopted the 1998 Non-Officer Employee Stock
Option Plan (the "1998 Plan") which became effective on January 2, 1998. The
1998 Plan authorizes 500,000 shares of Common Stock to be reserved for issuance
to non-officer key employees as an incentive to continue in the service of the
Company. The 1998 Plan will terminate on the date on which all shares available
have been issued. At March 31, 1998, there were no shares outstanding, and
500,000 shares were available for future grants.
In connection with the Company's merger with MAS Technology (see Note 9), the
Company assumed the MAS Technology 1997 Stock Option Plan (the "1997 MAS Plan")
under the same terms and conditions as were applicable under the 1997 MAS Plan
prior to the merger. Each outstanding option to purchase MAS ordinary shares,
whether vested or unvested, was assumed and converted into an option to receive
1.20 shares of the Company's Common Stock. The 1997 MAS Plan provided for the
grant of stock options to employees and certain independent contractors of MAS.
Options granted under the 1997 MAS Plan vest from one to three years from date
of grant. Additionally, options granted under the 1997 MAS Plan automatically
vest upon the involuntary termination of the employment of an option holder
within 18 months of the change in ownership of the Company. At March 31, 1998,
options to purchase 496,560 shares of Common Stock were outstanding under the
1997 MAS Plan, of which 70,800 were exercisable at exercise prices ranging from
$11.67 to $17.92 per share. The 1997 MAS Plan has been terminated as to future
grants.
25
<PAGE>
At March 31, 1998, the Company had reserved 8,575,191 shares for future issuance
under the 1984, 1994, 1996, and 1998 Plans, as well as the 1997 MAS Plan.
The following table summarizes the Company's stock option activity under all of
its Plans:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------
WEIGHTED Weighted Option
AVERAGE Average Price
SHARES EXERCISE PRICE Shares Exercise Price Shares Per Share
-----------------------------------------------------------------------
(Shares in thousands)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 4,621 $ 7.13 3,620 $ 5.75 2,927 $ 5.24
Granted 2,282 14.63 2,235 8.19 1,795 6.15
Exercised (1,315) 5.97 (919) 4.36 (541) 3.22
Expired or canceled (380) 7.92 (315) 6.47 (561) 6.88
-----------------------------------------------------------------------
Options outstanding at
end of year 5,208 $ 10.79 4,621 $ 7.13 3,620 $ 5.75
-----------------------------------------------------------------------
Exercisable at end of year 1,203 1,383 1,208
Weighted average
fair value of
options granted $ 7.62 $ 4.51 $ 2.94
-----------------------------------------------------------------------
</TABLE>
The following summarizes the stock options outstanding at March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------------------------------------
ACTUAL NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES 3/31/98 CONTRACTUAL LIFE EXERCISE PRICE 3/31/98 EXERCISE PRICE
- -------------------------------------------------------------------------------------------------------
(Shares in thousands)
<S> <C> <C> <C> <C> <C>
$2.625 -7.813 1,720 7.25 $ 5.98 760 $ 5.80
$7.875 -11.875 1,523 9.03 10.52 301 10.55
$12.438 -23.313 1,965 9.31 15.22 142 17.02
- -------------------------------------------------------------------------------------------------------
$2.625 -23.313 5,208 8.55 $10.79 1,203 $ 7.57
- -------------------------------------------------------------------------------------------------------
</TABLE>
In accordance with the disclosure requirements of SFAS 123, if the Company had
elected to recognize compensation cost based on the fair market value of the
options granted at grant date as prescribed, income and earnings per share would
have been reduced to the pro forma amounts indicated in the table below. The pro
forma effect on net income for Fiscal 1998 and 1997 is not representative of the
pro forma effect on net income in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
Fiscal 1996.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net income - as reported $ 19,878 $ 13,790 $ (4,472)
Net income - pro forma $ 10,806 $ 9,927 $ (6,799)
Basic net income per share - as reported $ 0.44 $ 0.36 $ (0.12)
Basic net income per share - pro forma $ 0.24 $ 0.25 $ (0.18)
Diluted net income per share - as reported $ 0.42 $ 0.35 $ (0.12)
Diluted net income per share - pro forma $ 0.25 $ 0.24 $ (0.18)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1998 1997 and 1996
---------------------------------
<S> <C> <C>
Expected dividend yield 0.0% 0.0%
Expected stock volatility 74.7% 74.3%
Risk-free interest rate 5.5% - 6.4% 5.3% - 7.1%
Expected life of options from vest date 0.8 YEARS 0.7 years
Forfeiture rate ACTUAL actual
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN. In August 1996, the Company adopted an Employee
Stock Purchase Plan (the "Purchase Plan") and reserved 600,000 shares of Common
Stock for issuance under the Purchase Plan, as adjusted for a two-for-one stock
split in November 1997. Employees, subject to certain restrictions, may purchase
Common Stock under the Purchase Plan through payroll withholding at a price per
share of 85% of the fair market value at the beginning or end of the purchase
period,
26
<PAGE>
as defined under the terms of the Purchase Plan. The Company sold 166,597 and
60,626 shares under the Purchase Plan in Fiscal 1998 and Fiscal 1997,
respectively. At March 31, 1998, 372,777 shares remained available for future
issuance under the Purchase Plan.
STOCKHOLDERS' RIGHTS AGREEMENT. In October 1991, the Company adopted a
Stockholders' Rights Agreement pursuant to which one Preferred Share Purchase
Right (a "Right") was distributed for each outstanding share of Common Stock.
Each Right, as adjusted to give effect to a stock dividend, which effected a
two-for-one stock split in November 1997, entitles stockholders to buy one
two-hundredth of a share of Series A Junior Participating Preferred Stock at an
exercise price of $50.00 upon certain events. The Rights expire on October 23,
2001, unless earlier redeemed by the Company.
The Rights become exercisable if a person acquires 15% or more of the Company's
Common Stock or announces a tender offer that would result in such person owning
15% or more of the Company's Common Stock, other than a person who has reported
or is required to report beneficial ownership of the Company's Common Stock on
Schedule 13G under the Securities Exchange Act of 1934, as amended, with respect
to whom the threshold is 20%. If the Rights become exercisable, the holder of
each Right (other than the person whose acquisition triggered the exercisability
of the Rights) will be entitled to purchase, at the Right's then-current
exercise price, a number of shares of the Company's Common Stock having a market
value of twice the exercise price. In addition, if the Company were to be
acquired in a merger or business combination after the Rights became
exercisable, each Right will entitle its holder to purchase, at the Right's
then-current exercise price, stock of the acquiring company having a market
value of twice the exercise price. The Rights, as adjusted to give effect to a
stock dividend, which effected a two-for-one stock split, in November 1997, are
redeemable by the Company at a price of $0.005 per Right at any time within ten
days after a person has acquired 15% (or 20% in the case of a Schedule G filer)
or more of the Company's Common Stock.
NOTE 7. CUSTOMER AGREEMENT
In November 1993, the Company entered into an agreement with Siemens AG to
supply SPECTRUM II digital microwave radios to E-Plus Mobilfunk GmbH. As of
March 31, 1995, the Company had not met its product acceptance or delivery
schedule, and, as a result, recorded significant reserves for product discounts
on interim equipment, equipment returns, and other related costs. In July 1995,
the Company received product acceptance from E-Plus, and began delivery and
installation of the SPECTRUM II equipment. During the third quarter of Fiscal
1996, the Company provided additional reserves of approximately $1.0 million
related to the final resolution of other remaining open issues on this contract.
NOTE 8. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
The Company operates in a single industry segment, the design and manufacture of
short- and medium-haul digital transmission products.
One customer (Siemens AG) accounted for 5%, 12%, and 19% of net sales for Fiscal
1998, 1997, and 1996, respectively. No other customers accounted for more than
10% of net sales during Fiscal 1998, 1997, or 1996.
Geographic information for Fiscal 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
United United New
States Kingdom Zealand Others Eliminations Total
-----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
1998
SALES TO UNAFFILIATED
CUSTOMERS $ 187,832 $58,961 $ 50,256 $13,441 $ - $ 310,490
INTERCOMPANY SALES 54,135 - - - (54,135) -
-----------------------------------------------------------------------------------
NET SALES $ 241,967 $58,961 50,256 $13,441 $(54,135) $ 310,490
OPERATING
INCOME (LOSS) $ 22,775 $ 1,444 (1,912) $ 235 $ (1,634) $ 20,908
IDENTIFIABLE ASSETS $ 168,016 $24,033 44,693 $10,174 $ (6,516) $ 240,400
1997
Sales to unaffiliated
customers $ 147,575 $22,416 $ 35,300 $ 6,046 $ - $ 211,337
Intercompany sales 24,540 - - - (24,540) -
-----------------------------------------------------------------------------------
Net sales $ 172,115 $22,416 $ 35,300 $ 6,046 $(24,540) $ 211,337
Operating income $ 12,533 $ 2,893 3,520 $ 141 $ (1,749) $ 17,338
Identifiable assets $ 155,341 $15,858 23,850 $ 759 $ (2,609) $ 193,199
1996
Sales to unaffiliated
customers $ 128,667 $13,935 $ 26,702 $ 3,114 $ - $ 172,418
Intercompany sales 14,684 - - - (14,684) -
-----------------------------------------------------------------------------------
Net sales $ 143,351 $13,935 $ 26,702 $ 3,114 $(14,684) $ 172,418
Operating
income (loss) $ (10,138) $ 1,767 2,237 $ 220 $ 128 $ (5,786)
Identifiable assets $ 92,760 $ 6,539 11,527 $ 2,016 $ (5,992) $ 106,850
</TABLE>
27
<PAGE>
Intercompany sales to the Company's foreign subsidiaries are transacted at
prices comparable to those offered to unaffiliated customers, after taking into
account the value added to products and services by the subsidiaries.
The following table represents export sales from the United States to
unaffiliated customers by geographic region:
<TABLE>
<CAPTION>
Years Ended March 31,
- -----------------------------------------------------------------------------
1998 1997 1996
----------------------------------------
(In thousands)
<S> <C> <C> <C>
Canada and South America $ 39,393 $ 28,718 $ 14,876
Europe 44,622 54,594 59,732
Asia/Pacific 86,750 53,431 35,867
----------------------------------------
Total export sales $170,765 $136,743 $110,475
----------------------------------------
----------------------------------------
Export sales as a % of net sales 71% 80% 77%
</TABLE>
NOTE 9. MERGERS AND ACQUISITIONS
In May 1997, the Company acquired all of the outstanding shares of Granger,
Inc., a U.S. manufacturer of wireless products and provider of installation
services. The purchase price of Granger, Inc., including the assumption of debt
and the purchase of certain product rights, totaled $14.7 million. A portion of
the purchase price was allocated to the net assets acquired based on their
estimated fair values. The fair value of the tangible assets acquired and
liabilities assumed was $5.8 million and $1.9 million, respectively. The
purchase price in excess of the net assets acquired of $10.8 million is recorded
as goodwill on the balance sheet and is being amortized over 10 years. The
acquisition has been accounted for using the purchase method of accounting.
Accordingly, the accompanying financial statements include the results of
Granger, Inc. since the date of acquisition. No pro forma financial statements
for periods prior to the acquisition have been provided due to the amounts being
immaterial.
In addition, concurrent with the acquisition of Granger, Inc., the Company made
a minority investment in Granger Associates, Ltd., a privately held company
based in the United Kingdom, for $4.0 million. This minority investment has been
accounted for using the cost method of accounting. Subsequent to March 31, 1998,
the Company sold approximately 10% of this investment for approximately
$470,000, net of selling costs.
In March 1998, stockholders approved the issuance of Common Stock of the Company
pursuant to an agreement to merge with MAS Technology Limited ("MAS
Technology"), a New Zealand company, which designs, manufactures, markets and
supports digital microwave radio links for the worldwide telecommunications
market. Under the terms of the agreement, the Company exchanged 1.2 shares of
its Common Stock for each outstanding share of MAS Technology stock and stock
options. The Company issued approximately 8.2 million shares to MAS Technology
share and option holders. The combination is intended to qualify as a tax-free
reorganization accounted for as a pooling-of-interests transaction. Accordingly,
the historical financial statements of the Company 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 Fiscal 1997 and Fiscal 1996.
<TABLE>
<CAPTION>
Nine Months Ended Years Ended March 31,
- ----------------------------------------------------------------------------------
December 31, 1997 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
REVENUE: Digital Microwave $195,790 $178,344 $ 150,419
MAS Technology 38,846 35,300 26,702
Intercompany sales (6,020) (2,307) (4,703)
-----------------------------------------
Total $228,616 $211,337 $ 172,418
-----------------------------------------
-----------------------------------------
NET INCOME: Digital Microwave $ 22,067 $ 11,707 $ (5,955)
MAS Technology 3,770 2,165 1,483
Intercompany profit
eliminations (14) (82) -
-----------------------------------------
Total $ 25,823 $ 13,790 $ (4,472)
-----------------------------------------
-----------------------------------------
</TABLE>
MERGER AND RESTRUCTURING EXPENSES. Merger and restructuring expenses totalled
$8.8 million for Fiscal 1998. These expenses included payments to the
Company's investment bankers, legal and accounting fees of $4.3 million
related to the Company's March 1998 merger with MAS Technology Limited, a New
Zealand company, asset valuation reserves for inventory of $0.1 million,
receivables of $0.3 million, and warranty of $0.9 million related to MAS
Technology. Other associated costs of $3.2 million include termination
payments to employees of $0.7 million, other employee related costs of $0.5
million, purchase commitment losses of $1.1 million and leasehold termination
costs of $0.3 million. As of March 31, 1998, the remaining restructuring
reserve was comprised principally of $1.1 million for asset valuation
reserves, and $3.2 million for other restructuring costs.
28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Digital Microwave Corporation:
We have audited the accompanying consolidated balance sheets of Digital
Microwave Corporation (a Delaware corporation) and subsidiaries as of March 31,
1998 and 1997, and the related Consolidated Statements of Operations,
Stockholders' Equity and Cash Flows for each of the three years in the period
ended March 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digital Microwave Corporation
and subsidiaries as of March 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1998 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
San Jose, California
April 21, 1998
29
<PAGE>
STOCK INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol DMIC. The following table sets forth the high and low closing sales
prices of the Company's Common Stock as reported by Nasdaq for the periods
indicated. The prior year per share amounts have been restated to give effect
retroactively to a stock dividend, which effected a two-for-one stock split, in
November 1997.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
- --------------------------------------------------------------------------------
1998 1997
-----------------------------------------
HIGH LOW High Low
-----------------------------------------
<S> <C> <C> <C> <C>
1st Quarter $ 16.00 $ 9.63 $9.13 $ 4.00
2nd Quarter 22.63 13.63 11.94 6.13
3rd Quarter 25.50 12.63 14.59 10.06
4th Quarter 21.63 12.44 18.81 9.63
</TABLE>
The Company has not paid cash dividends on its Common Stock and does not intend
to pay cash dividends in the foreseeable future in order to retain earnings for
use in its business. At March 31, 1998, there were approximately 199
stockholders of record.
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE ANNUAL REPORT ON FORM 10-K OF DIGITAL MICROWAVE
CORPORATION FOR THE FISCAL YEAR ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 25,130
<SECURITIES> 15,220
<RECEIVABLES> 78,692
<ALLOWANCES> 3,795
<INVENTORY> 60,981
<CURRENT-ASSETS> 191,809
<PP&E> 72,514
<DEPRECIATION> 39,986
<TOTAL-ASSETS> 240,400
<CURRENT-LIABILITIES> 61,702
<BONDS> 0
0
0
<COMMON> 466
<OTHER-SE> 178,028
<TOTAL-LIABILITY-AND-EQUITY> 240,400
<SALES> 310,490
<TOTAL-REVENUES> 310,490
<CGS> 202,898
<TOTAL-COSTS> 202,898
<OTHER-EXPENSES> 86,684
<LOSS-PROVISION> 356
<INTEREST-EXPENSE> 310
<INCOME-PRETAX> 23,736
<INCOME-TAX> 3,858
<INCOME-CONTINUING> 19,878
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,878
<EPS-BASIC> .44
<EPS-DILUTED> .42
</TABLE>
