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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
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, 1999.
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, CALIFORNIA 95134
(Address of Principal Executive (Zip Code)
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 $12.50 per share on the
Nasdaq National Market) as of June 1, 1999: Approximately $703,364,688.
As of June 1, 1999, there were 63,418,389 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, 1999 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 1999 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 10, 1999 are incorporated by reference
into Part III of this Form 10-K Report.
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TABLE OF CONTENTS
DIGITAL MICROWAVE CORPORATION
1999 FORM 10-K ANNUAL REPORT
PART I
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Item 1 Business ....................................................................... 3
Item 2 Properties ..................................................................... 13
Item 3 Legal Proceedings .............................................................. 13
Item 4 Submission of Matters to a Vote of Security Holders ............................ 13
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters .......... 14
Item 6 Selected Financial Data ........................................................ 14
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................................ 14
Item 7A Quantitative and Qualitative Disclosures About Market Risk ..................... 14
Item 8 Financial Statements and Supplementary Data .................................... 15
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ......................................................... 15
PART III
Item 10 Directors and Executive Officers of the Registrant ............................. 15
Item 11 Executive Compensation ......................................................... 16
Item 12 Security Ownership of Certain Beneficial Owners and Management ................. 16
Item 13 Certain Relationships and Related Transactions ................................. 16
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............... 17
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ITEM 1. BUSINESS
THE FOLLOWING BUSINESS SECTION CONTAINS FORWARD-LOOKING STATEMENTS WHICH
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "FACTORS THAT MAY
AFFECT FUTURE FINANCIAL RESULTS" AND ELSEWHERE IN, OR INCORPORATED BY REFERENCE
INTO, THIS FORM 10-K.
INTRODUCTION
Digital Microwave Corporation ("Digital Microwave" 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 GigaHertz (GHz) TO 38 GHz, and a
variety of transmission capacities, typically ranging from 64 Kilobits to DS-3
or 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. Digital microwave 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 October 1998, the company merged with Innova Corporation, a Washington
Corporation, which designs, manufactures, markets and supports Digital Microwave
radio links for the worldwide telecommunications market. The basis for this
merger was Innova's low-cost technology for its low-to-medium capacity products,
and minimal overlap in the customer bases of the two companies.
In March 1998, the company merged with MAS Technology Limited, 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 Technology
broadened the range of wireless connection solutions that the Company offers to
its customers worldwide.
The Company has sold over 130,000 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, including Nokia Telecommunications,
Northern Telecom, Motorola, Inc., and Siemens AG. Between April 1, 1998 and
March 31, 1999, the Company sold its products to a number of service providers,
including Beijing Telecommunication Equipment Factory and Smart Communications
in the Asia/Pacific region; Polska Telefonia Komorkowa, Jordan Mobile Telephone
Services, Panafon S.A., Sonangol S.A., Orange PCS Limited and Tele2 AB in
Europe, the Middle East and Africa; and Winstar Wireless, Telcel, Radiomovil
Dipsa S.A., Avantel S.A. and Impsat S.A. in the Americas.
INDUSTRY BACKGROUND
Although there was a decline in new business in the past year due to
economic problems in Asia as well as other parts of the world, there continues
to be 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 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 Global System for Mobile
Communcations (GSM), Personal Communication Network (PCN), and Personal
Communication System (PCS), are expected to continue
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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 five 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, including 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 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 may 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 of several
markets and applications, including the infrastructure development market,
cellular applications, private networks and wireless analog replacement
applications.
THE DIGITAL MICROWAVE SOLUTION
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
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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.
As a result of the merger with MAS Technology and Innova Corporation,
Digital Microwave has expanded its product line and has added additional
engineering staff to allow it to focus its efforts on multiple new product
development programs concurrently.
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 Digital Microwave'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, Digital Microwave'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 it to quickly introduce and commercially ship new
products and product enhancements to address changing market demands. The
Company intends to continue to expand its product line in response to the
varying worldwide requirements of wireless networks. Digital Microwave believes
that its mergers with MAS Technology and Innova Corporation increased its
capability to develop and market new products.
ADDRESS WORLDWIDE MARKET OPPORTUNITIES. 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; telecommunications 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, the
Middle East and the Americas. With its 31 sales or support offices in 25
countries, the Company can respond quickly to its customers' needs and provide
prompt on-site technical support.
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 Nokia Telecommunications, Northern Telecom,
Motorola, Inc., and Siemens AG, 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.
The merger with MAS Technology increased Digital Microwave's geography coverage
in New Zealand, Australia and Africa through the sales and service offices that
MAS Technology had in these locations.
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, data access, wireless data transport, and
alternative local telephone facilities access.
EXISTING PRODUCTS
The Company's principal product families include the SPECTRUM-TM- II, XP4-TM-,
DART-TM-, Altium-TM-, DXR-TM- 700, DXR-TM- 200, DXR-TM- 100, and ProVision.
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SPECTRUM II. The SPECTRUM II product family, introduced in July 1995,
offers medium capacity products ranging from T-1, or 1.5 Megabits per second
(Mbps), TO DS-3, OR 45 Mbps, that operate at 7, 8, 13, 15, 18, 23, 26 and 38
GHz. THE SPECTRUM II product line is smaller in size, less expensive and easier
to install than Digital Microwave's previous products. In addition,
significantly more functionality is available in the SPECTRUM II product line
than earlier generation products because of its enhanced software
configurability, which provides the Company's customers with greater flexibility
and control.
XP4. The XP4 product family, which began shipping in September 1998, is
based on a common system architecture and is software configurable. XP4
products operate at frequencies of 7, 8, 13, 15, 18, 23, 26 and 38 GHz.
similar to the SPECTRUM II product family, the XP4 provides significantly more
functionality compared to Digital Microwave's older product lines because of its
enhanced software configurability.
DART. The DART microwave radio, which began shipping in September 1998, is
the latest in radio technology for low-cost, wireless transmission of
telecommunications services. The DART radio offers a single E1 or DS-1 data
stream transmission and is designed for a smaller cell site in a wireless
network, typically referred to as microcell/picocell, and last-mile access
requirements. The very compact, all-outdoor design connects directly to base
station equipment via a single twisted-pair cable, making the DART radio
extremely cost efficient to install and a viable alternative to leased line
facilities. The DART radio can also be used in the build out of wireless
internet access networks. Features of the DART microwave radio include its
compact, integrated outdoor unit, low power consumption, programmability from
laptop computers, and simple network management protocol (SNMP) compatibility.
available frequencies range from 15 GHz to 38 GHz.
ALTIUM. Altium, which began volume shipments in January 1999, is a next
generation radio aimed at providing higher capacity solutions in microwave and
millimeter wave bands. SONET/SDH capable, Altium can wirelessly extend or
complete SONET and SDH transport networks to complement or be an alternative to
fiber deployment. Key attributes of size, performance, and flexibility bring
benefits to both interconnect and access applications. The Company initially
shipped Altium at 7 and 8 GHz frequencies and intends to release additional
frequencies during Fiscal 2000.
DXR 700. The DXR 700 product family, began shipping in March 1999, is a
high performance radio platform that operates across a range of capacities from
2X2 Mbps TO 34 Mbps, using efficient 16 and 64 quadrature amplitude modulation
(QAM). A set of advanced features, including forward error correction and an
adaptive equalizer, target medium- and long-distance link requirements.
Optional errorless diversity protection switching delivers excellent performance
under the most difficult radio transmission conditions. The DXR 700 platform
covers multiple frequencies from 2 GHz to 8 GHz.
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 a variety of
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
in frequency bands from 64 kilobits per second (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,
including quadrature phase shift keying (QPSK) OR QAM modulation and low
error rate technologies, including 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.
PROVISION. The ProVision element manager is a centralized network
monitoring and control system for all digital microwave products. based on a
UNIX-TM- system platform, the ProVision element manager can expand to manage
small systems as well as large networks. The system is particularly suitable
for management of broadband access networks.
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The ProVision management system is built on open standards. It supports
multiple protocols, such as SNMP, TL1 and ASCII, and it seamlessly integrates
into higher level managers through available interfaces. The ProVision
element manager is compatible with all management-enabled digital microwave
radios, including the Altium, SPECTRUM II, XP4, DXR and DART radio families,
as well as prior radio products.
NEW PRODUCT DEVELOPMENT
Digital Microwave intends to continue to focus significant resources on
product development to maintain its competitiveness and to support its entry
into new wireless opportunities, including wireless data transport and
alternative local telephone facilities access. Programs currently in progress,
if successfully completed, could result in new products and additions to current
product families that will 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
Digital Microwave 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.
Although the Company has a large customer base, during any given
quarter, a small number of customers may 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 in some instances, protection from
fluctuations in foreign currency exchange rates. During Fiscal 1999 and
Fiscal 1998, no single customer accounted for 10% or more of the Company's
net sales. However, Siemens AG accounted for 12% of net sales in 1997. At
March 31, 1999, five customers collectively accounted for approximately 42%
of the Company's $63.9 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
Digital Microwave 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, United Arab Emirates, Mexico,
Colombia, India, Sri Lanka, China, Singapore, Argentina, Brazil, Greece,
Malaysia, Sweden, Denmark, South Africa, Zimbabwe, Botswana, Thailand, 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, and in some cases formal, 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
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with a variety of equipment and service capabilities. There can be no
assurance that the Company will continue to be able to maintain and develop
such relationships or, 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, 1999, the Company employed approximately 244 people in
its sales, service and support organization, approximately 70% 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 and New Zealand and its
service centers in the United Kingdom, the United States and the Philippines.
RESEARCH AND DEVELOPMENT
Digital Microwave 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 1999, the Company invested
$24.1 million or 10.2% of net sales on research and development, compared to
$24.5 million or 7.1% of net sales in Fiscal 1998 and $16.2 million or 7.6%
of net sales in Fiscal 1997. The Company expects its research and development
spending to increase in Fiscal 2000. As of March 31, 1999, the Company
employed approximately 174 people in its research and development
organization in San Jose, California, Seattle, Washington and Wellington, New
Zealand.
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 harmed.
MANUFACTURING AND SUPPLIERS
Digital Microwave'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 Seattle, Washington. The Company's manufacturing operations in San Jose,
California, Seattle, Washington and Wellington, New Zealand are certified to
International Standards Organization (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, 1999, the Company maintained a staff of
279 manufacturing personnel.
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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
Digital Microwave's backlog at March 31, 1999 was $63.9 million, as
compared with $102.3 million at March 31, 1998. 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., NERA, Alcatel and the
Microwave Communications Division of Harris Corporation. In addition, other
existing competitors include Nokia, SIAE, Sagem and NEC. 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."
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GOVERNMENT REGULATION
Radio communications are subject to regulation by United States and
foreign laws and international treaties. Digital Microwave's equipment must
conform to international requirements established to avoid interference among
users of microwave frequencies and to permit interconnection of
telecommunications 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 harm 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 harm 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 harmed. 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 harm the Company's
business, financial condition and results of operations. The wireless
telecommunications industry is subject to frequent litigation regarding
patent and other intellectual property rights. Certain companies and
organizations in the wireless telecommunications industry have patents that
protect their intellectual property rights in these areas. In the event of an
adverse result of any such litigation, the Company could be required to
expend significant resources to develop non-infringing technology or to
obtain licenses to
PAGE 10
<PAGE>
the technology that 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 harm the
consolidated financial position, liquidity or results of operations of the
Company.
EMPLOYEES
As of March 31, 1999, the Company employed 873 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.
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, shipment volumes, 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 harm 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 harm 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
PAGE 11
<PAGE>
L.M. Ericsson, Northern Telecom, Siemens AG, Microwave Communications
Division of Harris Corporation, P-COM, Alcatel, Nokia, NERA, NEC, Sagem 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. There can be no assurance that the Company will have the
financial resources, technical expertise, or marketing, sales, distribution,
and customer service and support capabilities to compete successfully.
The Company expects that international sales will continue to account for
the majority of its net product sales for the foreseeable future. As a result,
the Company is subject to the risks of doing business internationally, including
unexpected changes in regulatory requirements; fluctuations in foreign currency
exchange rates; imposition of tariffs and other barriers and restrictions; the
burdens of complying with a variety of foreign laws; and general economic and
geopolitical conditions, including inflation and trade relationships. There can
be no assurance that currency fluctuations, changes in the rate of inflation or
any of the aforementioned factors will not harm 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 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.
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 harm 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 began
implementing these applications in Fiscal 1999. The Company has contacted
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 and to date has expensed approximately $0.2 million. 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 contractually obligated to purchase any quantity of
products in any
PAGE 12
<PAGE>
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 harm the Company's business,
financial condition and results of operations.
ITEM 2. PROPERTIES
The Company's corporate offices and principal research, development and
manufacturing facilities are located in San Jose, California in four leased
buildings aggregating approximately 132,000 square feet. In Fiscal 1999, as
part of the Company's restructuring, approximately 100,000 square feet of
leased space in San Jose, California was vacated by the Company, the cost of
which has been included in the Company's merger and restructuring charge for
Fiscal 1999. The Company's Seattle, Washington facilities consist of three
leased buildings aggregating approximately 79,000 square feet of office and
manufacturing space.
The Company also owns a 44,000 square foot service and repair facility in
Hamilton, Scotland and leases 10,000 square feet in Coventry, England. The
Company owns 7,000 square feet of office space and leases an additional 25,000
square feet of office and manufacturing space in Wellington, New Zealand.
Additionally, the Company also leases an aggregate of approximately 50,000
square feet world wide for sales, 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 1999 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 June 8, 1999.
(b) At the Special Meeting of Stockholders, the following matter was voted
upon:
1. A proposal to approve the adoption of the Digital Microwave
Corporation 1999 Employee Stock Purchase Plan.
Affirmative votes: 44,375,016
Negative votes: 5,575,143
Abstain: 94,032
Non-votes: 0
PAGE 13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The section labeled "Stock Information" appearing on page 36 of the
Company's 1999 Annual Report to Stockholders is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The section labeled "Selected Consolidated Financial Data" appearing on
page 17 of the Company's 1999 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
17 of the Company's 1999 Annual Report to Stockholders is incorporated herein by
reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk:
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company does not use
derivative financial instruments in its investment portfolio. The Company
invests in high-credit quality issuers and, by policy, limits the amount of
credit exposure to any one issuer and country. The portfolio includes only
marketable securities with active secondary or resale markets to ensure
portfolio liquidity. The portfolio is also diversified by tenor to ensure that
funds are readily available as needed to meet the liquidity needs of the
Company. This policy minimizes the requirement to sell securities in order to
meet liquidity needs and therefore the potential effect of changing market rates
on the value of securities sold.
The table below presents principal amounts and related weighted average
interest rates by year of maturity for the Company's investment portfolio.
<TABLE>
Years Ended March 31
----------------------------------------------------------------
2000 2001 2002 2003 2004
(In thousands) ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash equivalents and short-term investments $12,318 - - - -
Weighted average interest rate 5.19% - - - -
</TABLE>
Foreign Currency Exchange Risk:
The Company transacts business in various foreign countries. During fiscal
1998 and 1999, the Company employed a foreign currency hedging program utilizing
foreign currency forward exchange contracts to hedge certain balance sheet and
backlog transactions in non-functional currency transactions. Under this
program, increases or decreases in the Company's foreign currency transactions
when translated to the functional currency are partially offset by realized
gains and losses on the hedging instruments. The goal of this program is to
minimize net fluctuations in the value of these currencies which may cause
short-term earnings volatility. As of March 31, 1999, the Company's foreign
currency forward exchange contracts were comprised primarily of New Zealand
dollars, British Pounds, Canadian dollars and European Monetary Units and
totaled the US dollar equivalent of $25.1 million.
PAGE 14
<PAGE>
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 18 through
35 of the Company's 1999 Annual Report to Stockholders are incorporated herein
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of Digital Microwave are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ---------
<S> <C> <C>
Charles D. Kissner 52 Chairman of the Board and Chief Executive Officer
Sam Smookler 59 President, Broadband, Long Haul and Services
Jean-Francois Grenon 43 President, Narrowband Products
Frank Carretta, Jr. 54 Senior Vice President, Worldwide Sales
Carl A. Thomsen 54 Senior Vice President, Chief Financial Officer and Secretary
John C. Brandt 42 Vice President and Corporate Controller
Carol A. Goudey 51 Corporate Treasurer and Assistant Secretary
Paul A. Kennard 48 Chief Technical Officer and Vice President, Corporate Marketing
John P. O'Neil 61 Vice President, Personnel
</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. 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. In October 1998, at the time of the merger with Innova
Corporation, he became President, Broadband, Long Haul and Services. 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.
Mr. Jean-Francois Grenon joined the Company in October 1998 as President,
Narrowband Products when Innova Corporation merged with the Company. Mr. Grenon
joined Innova in February 1996 as its President and Chief Executive Officer, and
had served as a Director of Innova since June 1996. From March 1994 to December
1995, Mr. Grenon served as President of Microwave Radio Corporation, Digital
Radio Group, a division of California Microwave Radio that he helped found,
which develops and manufactures digital millimeter wave radios.
PAGE 15
<PAGE>
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
Digital Microwave, Mr. Carretta served as Area Sales Director of M/A-COM from
July 1992 to September 1995.
Mr. Carl A. Thomsen joined the Company as Vice President, Chief Financial
Officer and Secretary in February 1995. In April 1999, he was appointed Senior
Vice President. 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. John C. Brandt joined the Company as Controller in June 1997 and was
appointed Vice President in April 1999. 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 Digital
Microwave, she served as Acting Treasurer of California Micro Devices
Corporation, a manufacturer of semiconductor devices, since 1994.
Mr. Paul Kennard joined the Company as Vice President, Engineering in April
1996. He was appointed Chief Technical Officer and Vice President, Corporate
Marketing in October 1998. 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. 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.
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 10, 1999 (the "Proxy
Statement"), is incorporated herein by reference.
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 1999 Annual Report to Stockholders incorporated herein by reference.
PAGE 16
<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 1999 Annual Report to Stockholders and are incorporated
herein by reference pursuant to Item 8:
1. Consolidated Balance Sheets as of March 31, 1999 and 1998.
2. Consolidated Statements of Operations for each of the three
years in the period ended March 31, 1999.
3. Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended March 31, 1999.
4. Consolidated Statements of Cash Flows for each of the three
years in the period ended March 31, 1999.
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, 1999 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 22 hereof.
(b) There were no reports on Form 8-K filed by the Registrant during the
quarter ended March 31, 1999.
(c) See Item 14 (a) 3 above.
(d) See Item 14 (a) 2 above.
PAGE 17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: June 28, 1999.
DIGITAL MICROWAVE CORPORATION
BY: /S/ CHARLES D. KISSNER
-------------------------------------
Charles D. Kissner
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
PAGE 18
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of Digital Microwave
Corporation do hereby constitute and appoint Charles D. Kissner and Carl A.
Thomsen, and each of them, the lawful attorney and agent or attorneys and agents
with power and authority to do any and all acts and things and to execute any
and all instruments which said attorneys and agents, or either of them,
determine may be necessary or advisable or required to enable Digital Microwave
Corporation to comply with the Securities and Exchange Act of 1934, as amended,
and any rules or regulations or requirements of the Securities and Exchange
Commission in connection with this Form 10-K Report. Without limiting the
generality of the foregoing power and authority, the powers include the power
and authority to sign the names of the undersigned officers and directors in the
capacities indicated below to this Form 10-K report or amendment or supplements
thereto, and each of the undersigned hereby ratifies and confirms all that said
attorneys and agents or either of them, shall do or cause to be done by virtue
hereof. This Power of Attorney may be signed in several counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney
as of the date indicated opposite his name.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES SIGNING CAPACITY DATE
- ---------- ---------------- ----
<S> <C> <C>
/s/ CHARLES D. KISSNER Chairman of the Board and June 28, 1999
---------------------------- Chief Executive Officer
Charles D. Kissner
/s/ CARL A. THOMSEN Senior Vice President, Chief Financial Officer & June 28, 1999
---------------------------- Secretary
Carl A. Thomsen (Principal Financial and Accounting Officer)
/s/ RICHARD C. ALBERDING Director June 28, 1999
----------------------------
Richard C. Alberding
/s/ PAUL S. BACHOW Director June 28, 1999
----------------------------
Paul S. Bachow
/s/ JOHN W. COMBS Director June 28, 1999
----------------------------
John W. Combs
/s/ CLIFFORD H. HIGGERSON Director June 28, 1999
----------------------------
Clifford H. Higgerson
/s/ JAMES D. MEINDL Director June 28, 1999
----------------------------
James D. Meindl
/s/ V. FRANK MENDICINO Director June 28, 1999
----------------------------
V. Frank Mendicino
/s/ BILLY B. OLIVER Director June 28, 1999
----------------------------
Billy B. Oliver
Director June , 1999
----------------------------
</TABLE>
<PAGE>
Howard Oringer
PAGE 19
<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, 1999. 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, 1999
PAGE 20
<PAGE>
SCHEDULE II
DIGITAL MICROWAVE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING OF COSTS AND AT END
DESCRIPTION YEAR EXPENSES UTILIZED OF YEAR
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended March 31, 1999
Merger and
Restructuring accrual:
Innova merger costs - $2,700 $2,700 $ -
Severance costs - 4,200 3,300 900
Facility termination costs - 4,100 1,800 2,300
Asset write-down - 5,800 5,000 800
Goodwill - 13,100 13,100 -
------------------------------------------------------
- $29,900(A) $25,900(B) $4,000
</TABLE>
(A) Approximately $12,200 consists of cash outflow.
(B) Approximately $8,200 consists of cash outflow.
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING OF COSTS AND DEDUCTIONS/ AT END
DESCRIPTION YEAR EXPENSES WRITE-OFF OF YEAR
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended March 31, 1999
Allowance for
doubtful accounts $ 3,999 $ 4,608 $ (5,346) $ 3,261
Year Ended March 31, 1998
Allowance for
doubtful accounts $ 3,377 $ 356 $ 266(A) $ 3,999
Year Ended March 31, 1997
Allowance for
doubtful accounts $ 1,373 $ 1,400 $ 604(A) $ 3,377
</TABLE>
(A) Net of transfers from other reserve accounts.
PAGE 21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<C> <S>
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)).
2.2 Agreement and Plan of Reorganization and Merger, dated as of July 22,
1998, by and among Digital Microwave Corporation, Iguana Merger Corp. and
Innova Corporation (incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-4 (File No. 333-62673)).
3.1 Restated Certificate of Incorporation, as amended as of March 24, 1998
(incorporated by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the year ended March 31, 1998).
3.2 Amended and Restated Bylaws, dated as of October 8, 1998 (incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 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 Amended and Restated Rights Agreement dated as of November 3, 1998
between the Company and ChaseMellon Shareholder Services, L.L.C.,
including the form of the Certificate of Designations for the Series A
Junior Participating Stock (incorporated by reference to Exhibit 4.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
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 22
<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 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).
10.16 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).
10.17 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 (incorporated by reference to Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended March 31,
1998).
10.18 Purchase Agreement by and between the Company and Microelectronics
Technology, Inc., dated as of January 15, 1998 (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1998).
10.19 Purchase Agreement by and between the Company and REMEC Inc., dated as
of January 15, 1998 (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998).
10.20 Business Agreement by and between the Company and MTI, dated as of
January 26, 1998 (incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998).
10.21 Digital Microwave Corporation 1998 Non-Officer Employee Stock Option
Plan (incorporated by reference to Exhibit 99.1 to the Company's
Registration Statement on Form S-8 (File No. 333-48535)).
PAGE 23
<PAGE>
10.22 Product Purchase Agreement dated as of June 1, 1998, by and between
Digital Microwave Corporation and Solectron Corporation (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998).
10.23 First Amendment to Credit Agreement dated as of June 1, 1998, by and
between Digital Microwave Corporation and Bank of America National Trust
and Savings Association (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998).
10.24 Second Amendment to Credit Agreement dated as of July 22, 1998,
effective as of June 30, 1998, by and between Digital Microwave
Corporation and Bank of America National Trust and Savings Association
(incorporated by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998).
10.25 Product Purchase Agreement, dated as of July 30, 1998, by and between
Digital Microwave Corporation and REMEC Inc. (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
10.26 Restated Employment Agreement, dated as of August 3, 1998, by and
between Digital Microwave Corporation and Charles D. Kissner
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998).
10.27 Third Amendment to Credit Agreement dated as of September 30, 1998, by
and between Digital Microwave Corporation and Bank of America National
Trust and Savings Association (incorporated by reference to Exhibit 10.3
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
10.28 Loan and Security Agreement dated as of October 1, 1998 between the
Company and Greyrock Capital and related (a) Schedule to Loan and
Security Agreement and (b) Secured Promissory Note, each as of the same
date (incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1998).
10.29 Employment Agreement dated as of October 8, 1998 between the Company
and Jean-Francois Grenon (incorporated by reference to Exhibit 10.5 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998).
10.30 Amended and Restated Agreement dated as of October 30, 1998 between the
Company and Bank of America National Trust and Savings Association
(incorporated by reference to Exhibit 10.6 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1998).
10.31 Digital Microwave Corporation 1999 Non-Officer Employee Restricted
Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to the
Company's Registration Statement on Form S-8 (File No. 333-76233)).
10.32 Digital Microwave Corporation 1999 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 99.1 to the Company's Registration
Statement on Form S-8 (File No. 333-80281)).
10.33 Form of Employment Agreement between the Company and Frank Carretta, Jr.,
Paul A. Kennard, Sam Smookler and Carl A. Thomsen.
10.34 Form of Employment Agreement between John C. Brandt, Carol A. Goudey
and John P. O'Neil.
13.1 Portions of 1999 Annual Report to Stockholders incorporated herein by
reference.
21.1 List of subsidiaries.
PAGE 24
<PAGE>
23.1 Consent of Independent Public Accountants (included on page 26 of this
Annual Report on Form 10-K).
24.1 Power of Attorney (included on page 19 of this Annual Report on Form 10-K).
27.1 Financial Data Schedule for the fiscal year ended March 31, 1999.
27.2 Restated Financial Data Schedule for the fiscal year ended March 31, 1998.
27.3 Restated Financial Data Schedule for the fiscal year ended March 31, 1997.
</TABLE>
PAGE 25
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included (or incorporated by reference) in this
Form 10-K into the Company's previously filed Registration Statements (File
Nos. 33-16539, 33-37173, 33-43155, 33-85270, 33-94438, 333-00855, 333-11385,
333-11387, 333-11389, 333-25953, 333-48533, 333-48535, 333-46867, 333-62673,
333-45053, 333-66857, 333-73007, 333-76233 and 333-80281) on Form S-8.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
June 24, 1999
PAGE 26
<PAGE>
EXHIBIT 10.33
DIGITAL MICROWAVE CORPORATION
FORM OF EMPLOYMENT AGREEMENT
Attached is a form of employment agreement between the Company and certain
executive officers as listed below:
<TABLE>
<CAPTION>
Name Position Annual Salary
- ---- -------- -------------
<C> <S> <C>
Frank Carretta, Jr. Senior Vice President, Worldwide Sales $247,500
Paul A. Kennard Chief Technical Officer and Vice President,
Corporate Marketing $201,600
Sam Smookler President, Broadband, Long Haul Services $320,000
Carl A. Thomsen Senior Vice President, Chief Financial
Officer and Secretary $233,280
</TABLE>
<PAGE>
EMPLOYMENT AGREEMENT
The Agreement, dated as of _______ __, 199_ , is between Digital Microwave
Corporation, a California corporation ("Employer"), and __________,
("Employee").
RECITALS
* Employee is and has been employed by Employer and is currently serving as
__________.
* Employee and Employer entered into an open-ended Employment Agreement on
_____ __, 199_. Employer desires to revise the terms and conditions of the
_____ __, 199_ Agreement.
* Employer desires to continue to employ Employee and to assure itself of the
continued services of Employee for the Period of Employment provided for in this
Employment Agreement, and Employee desires to be employed by Employer for such
period, upon the following terms and conditions.
ACCORDINGLY, the parties agree as follows:
1. Period of Employment.
Employer shall employ Employee to render services to Employer in the position
and with the duties and responsibilities described in Section 2 for the period
(the "Period of Employment") commencing on the date of this Agreement and ending
on the date which the Period of Employment is terminated in accordance with
Section 4.
2. Position and Responsibilities.
(a) Position. Employee shall continue employment with Employer as
__________ and shall perform all services appropriate to that position as
well as other duties that may be assigned by Employer. Employee shall
devote his best efforts and full-time attention to the performance of his
duties. Employee shall be subject to the direction of Employer, which
shall retain full control of the means and methods by which he performs the
above services and of the place(s) at which all services are rendered.
Employee shall report to the __________ or another officer of Employer.
Employee shall be expected to travel if necessary or advisable in order to
meet the obligations of his position.
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<PAGE>
(b) Other Activity. Except upon the prior written consent of Employer,
Employee (during the Period of Employment) shall not (i) accept any other
employment; or (ii) engage, directly or indirectly, in any other business,
commercial, or professional activity (whether or not pursued for pecuniary
advantage) that is or may be competitive with Employer, that might create a
conflict of interest with Employer, or that otherwise might interfere with
the business of Employer, or any Affiliate. An "Affiliate" shall mean any
person or entity that directly or indirectly controls, is controlled by, or
is under common control with Employer. Notwithstanding the foregoing, upon
reasonable notice to Employer, Employee may serve as a director of one for
profit entity and one not for profit entity so long as such entity is not
competitive with Employer or any Affiliate and where such service does not
otherwise create a conflict of interest.
(c) Employee shall be bound by the Non-Compete Agreement which is attached
as Exhibit A, and by reference is incorporated into this Employment
Agreement.
4. Compensation and Benefits.
(a) Compensation. In consideration of the services to be rendered under the
Agreement, Employer shall pay Employee his current base salary of
$__________ per year, payable semi-monthly, pursuant to the procedures
regularly established, and as they may be amended, by Employer in its sole
discretion, during the Period of Employment. Employer shall review
annually Employee's compensation, which may be modified on a short term
basis to reflect business or other conditions. Employer shall determine,
in its sole discretion, whether and how much the existing compensation
shall be adjusted, without regard to any policy or practice Employer may
have for adjusting salaries. In addition to base salary, Employee shall be
eligible to participate in the Employer's executive management incentive
bonus and stock option plans according to the terms of those plans.
(b) Executive Management Incentive Bonus Plan. The target bonus award will be
a percentage of the Employee's base salary. The percentage is to be set by
the Board at the beginning of each fiscal year. The current percentage is
__% of Employee's base salary, and is paid annually following the
certification of the business results of Digital Microwave Corporation.
The criteria for receiving an award under this Plan will be based on the
degree of success that Digital Microwave has in achieving its financial
goals for the fiscal year (__% of the target award) and the accomplishment
of certain key organizational objectives. (__% of the target award.) The
Plan is capped at ___% of the target award. A minimum threshold
achievement of target goals must be met in order to receive any bonus award
under the Plan.
(c) Benefits. Employee shall be entitled to vacation leave in accordance with
Employer's standard policies and the terms of Employee's original
employment offer letter dated _____ __, 199_. As Employee becomes eligible
thereof, Employee shall have the right to participate in and to receive
benefits from all present and future benefit plans specified in Employer's
policies and generally made available to similarly situated employees of
Employer. The amount and extent of benefits to which Employee is entitled
shall be governed by the specific benefit plans, as amended. Employee also
shall be entitled to any benefits or compensation tied to termination as
described in Section 4. Nothing stated in the Agreement shall prevent
Employer from changing or eliminating any benefit during the Period of
Employment as Employer, in its sole discretion, may deem necessary or
desirable. No statement concerning benefits or compensation to which
Employee is entitled shall alter in any way the term of the Agreement, any
renewal thereof, or its termination. All compensation and comparable
payments to be paid to Employee under the Agreement shall be less
withholdings required by law.
(d) Expenses. Employer shall reimburse Employee for reasonable travel and
other business expenses incurred by Employee in the performance of his
duties, in accordance with Employer's policies, as they may be amended
in Employer's sole discretion.
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<PAGE>
4. Termination of Employment.
(a) By Death. The Period of Employment shall terminate automatically upon
the death of Employee. Employer shall pay to Employee's beneficiaries or
estate, as appropriate, any, compensation then due and owing, including
payment for accrued unused vacation, if any, and will when due make a
payment of any incentive bonus to which the Employee would have been
entitled prorated based on the number of months the Employee was employed
during the incentive bonus period. Thereafter, all obligations of Employer
under the Agreement shall cease. Nothing in the Section shall affect any
entitlement of Employee's heirs to the benefits of any life insurance plan
or other applicable benefits.
(b) By Disability. If, by reason of any physical or mental incapacity,
Employee has been or will be prevented from properly performing his duties
under the Agreement for more than ninety (90) consecutive days, then, to
the extent permitted by law, Employer may terminate the Period of
Employment without any advance notice. Employer shall pay Employee all
compensation to which he is entitled up through the day notice of
termination is provided, and, in addition, Employee shall be entitled to
the following benefits provided in subparagraph 4(c): severance, health
insurance premium payments, prorated incentive bonus, and continued vesting
of stock options; thereafter, all obligations of Employer under this
Agreement shall cease. Nothing in this Section shall affect Employee's
rights under any applicable Employer disability plan; provided, however,
that the severance benefits to which Employee is entitled shall be offset
by any disability income payments received by Employee so that the total
monthly severance and disability income benefit payments for the severance
period shall not exceed Employee's then current salary.
(c) By Employer Not For Cause. At any time, the Employer may terminate
the Period of Employment Not for Cause for any reason, by providing
Employee ten (10) days' advance written notice, provided that Employee
shall be paid, in addition to all compensation due and owing through the
last day actually worked, severance in an amount equal to twelve (12)
months of the Employee's then current base salary. Such severance shall be
paid by Employer to Employee in 12 equal monthly installments, commencing
one month from the date of termination, or, at Employer's discretion, in a
single lump sum on the termination date. Employer shall also pay the
Employer's share of health insurance premiums for a period of up to 12
months, or until Employee is eligible to participate in another employer's
plan, whichever comes first, should Employee elect to convert his health
insurance benefits under COBRA. Employer shall also pay when due any
incentive bonus to which the Employee would have been entitled prorated
based on the number of months the Employee was employed during the
incentive bonus period. Employee's stock options will continue to vest for
twelve (12) months following the termination date.
If Employer terminates the Period of Employment Not for Cause within
eighteen (18) months following a Change of Control as defined in
subparagraph 4(f), Employee shall receive the severance benefits set forth
in subparagraph 4(f)(i)-(iv) rather than the severance benefits set forth
in the subparagraph 4(c).
Employer shall have the option, in its complete discretion, to terminate
the Period of Employment at any time prior to the end of such notice
period, provided Employer pays Employee all compensation due and owing
through the last day actually worked plus an amount equal to the base
salary Employee would have earned through the balance of the above notice
period in addition to the severance benefits described above; thereafter,
all of Employer's obligations under the Agreement shall cease. Employer
may dismiss Employee without cause notwithstanding anything to the contrary
contained in or arising from any statements, policies, or practices of
Employer relating to the employment, discipline, or termination of its
employees.
3
<PAGE>
(d) By Employer For Cause. At any time, and without prior notice,
Employer may terminate the Period of Employment for Cause (as defined
below). Employer shall pay Employee all compensation then due and owing;
thereafter, all of Employer's obligations under the Agreement shall cease.
Termination shall be for "Cause" if Employee: (i) acts in bad faith and to
the detriment of Employer; (ii) exhibits in regard to his employment
willful misconduct, dishonesty, habitual neglect of duties, or any willful
act or omission that may materially and adversely affect the Employer's
business or that involves fraud, embezzlement or misappropriation of any
property or proprietary information of the Employer; (iv) is convicted of a
crime involving dishonesty, breach of trust, or physical or emotional harm
to any person; or (v) breaches any material term of the Agreement. If
termination is due to Employee's disability, Section 4(b) above shall
control, and not the subsection on termination for Cause.
(e) By Employee Not for Cause. At any time, Employee may terminate the
Period of Employment for any reason, with or without cause, by providing
Employer ten (10) days' advance written notice. Employer shall have the
option, in its complete discretion, to make termination of the Period of
Employment effective at any time prior to the end of such notice period,
provided Employer pays Employee all compensation due and owing through the
last day actually worked, plus an amount equal to the base salary Employee
would have earned through the balance of the above notice period, not to
exceed ten (10) days; thereafter, all of Employer's obligations under the
Agreement shall cease.
(f) By Employee for Good Reason Upon a Change of Control at anytime.
Employee may terminate, without liability, the Period of Employment for
Good Reason upon a Change of Control (as defined below), provided Employee
gives Employer sixty (60) days' advance written notice of the reason for
termination and his intent to terminate the Agreement. During the period,
Employer shall have an opportunity to correct the condition constituting
Good Reason. If the condition is remedied within the period, Employee's
notice to terminate shall be rescinded automatically; if not remedied,
termination of the Period of Employment shall become effective upon
expiration of the above notice period. In the event, Employer shall pay
Employee all compensation due and owing through the last day actually
worked.
Employer shall also have the option, in its complete discretion, to make
termination effective at any time prior to the end of the notice period,
provided that Employer pays Employee all compensation due and owing through
the balance of the notice period (not to exceed sixty (60) days). Employee
shall be entitled to exercise his right to terminate the Agreement for Good
Reason only if he gives the required notice not more than forty-five (45)
days after the occurrence of the event that is the basis for the Good
Reason. If Employee terminates the Period of Employment for Good Reason
upon a Change of Control, Employee shall receive the following:
(i) A severance payment equal to twenty four (24) month's of the
Employee's then base salary. At the discretion of the Employer, the
severance payment may be made in the form of salary continuation over the
equivalent pay periods that the severance covers or in a lump sum payment.
4
<PAGE>
(ii) A payment when due of the incentive bonus to which the Employee
would have been entitled prorated based on the number of months the
Employee was employed during the incentive bonus period.
(iii) A payment equal to the annual incentive bonus payments
received by Employee, if any, for the previous two years.
(iv) Payment of the Employee's share of health insurance premiums for
a period of up to twenty four (24) months, or until Employee is eligible to
participate in another Employer's plan, whichever comes first, should
Employee elect to convert his/her health insurance benefits under COBRA.
"Change of Control" shall mean the occurrence of any of the following
events as used herein, after the Effective Date: (i) any "person" (as such
term is used in Sections 13 (d) and 14 (d) of the Securities Exchange Act of
1934, as amended) other than Digital Microwave or its affiliates (a "Third
Party") is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
said Act), directly or indirectly, of securities of the Employer representing
fifty percent (50%) or more of the total voting power represented by the
Employer's then outstanding voting securities; (ii) the stockholders of the
Employer approve a merger or consolidation of the Employer with any other
corporation that is a Third Party, other than a merger or consolidation which
would result in the voting securities of the Employer outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at least
fifty percent (50%) of the total voting power represented by the voting
securities of the Employer or such surviving entity outstanding immediately
after such merger or consolidation; or (iii) the stockholders of the Employer
approve a plan of complete liquidation or dissolution of the Employer or an
agreement for the sale or disposition by the Employer of all or substantially
all the Employer's assets to a Third Party. "Change of Control" shall also
mean a change in the composition of the Board over a period of thirty-six
(36) months or less such that a majority of the Board members (rounded up to
the next whole number) ceases, by reason of one or more contested elections
for Board membership, to be comprised of individuals who either (i) have been
Board members continuously since the beginning of such period or (ii) have
been elected or nominated for election as Board members during such period by
at least a majority of the Board members described in clause (i) who were
still in office at the time such election or nomination was approved by the
Board.
Termination shall be for "Good Reason" if: (i) there is a material and
adverse change in Employee's position, duties, responsibilities, or status with
Employer; (ii) there is a reduction in Employee's salary then in effect, other
than a reduction comparable to reductions generally applicable to similarly
situated employees of Employer; (iii) there is a material reduction in
Employee's benefits, other than a reduction comparable to reductions generally
applicable to similarly situated employees of Employer; (iv) the Employer
involuntarily relocates the Employee; or (v) Employer materially breaches the
Agreement.
(g) Termination Obligations.
(i) Employee agrees that all property, including, without limitation,
all equipment, tangible Proprietary Information (as defined below),
documents, books, records, reports, notes, contracts, lists, computer disks
(and other computer-generated files and data), and copies thereof, created
on any medium and furnished to, obtained by, or prepared by Employee in the
course of or incident to his employment, belongs to Employer and shall be
returned promptly to Employer upon termination of the Period of Employment.
(ii) All benefits to which Employee is otherwise entitled shall cease
upon Employee's termination of the Period of Employment, unless explicitly
continued either under the Agreement or under any specific written policy
or benefit plan of Employer.
(iii) Upon termination of the Period of Employment, Employee shall be
deemed to have resigned from all offices and directorships then held with
Employer or any Affiliate.
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<PAGE>
(iv) The representations and warranties contained in the Agreement and
Employee's obligations under the Section 4(g) on Termination Obligations
and Section 5 on Proprietary Information shall survive the termination of
the Period of Employment and the expiration of the Agreement.
(v) Following any termination of the Period of Employment, Employee
shall fully cooperate with Employer in all matters relating to the winding
up of pending work on behalf of Employer and the orderly transfer of work
to other employees of Employer. Employee shall also cooperate in the
defense of any action brought by any third party against Employer that
relates in any way to Employee's acts or omissions while employed by
Employer.
5. Proprietary Information.
(a) Defined. "Proprietary Information" is all information and any idea in
whatever form, tangible or intangible, pertaining in any manner to the
business of Employer, or any Affiliate, or its employees, clients,
consultants, or business associates, which was produced by any employee of
Employer, or any Affiliate, in the course of his or his employment or
otherwise produced or acquired by or on behalf of Employer, or any
Affiliate. All Proprietary Information not generally known outside of
Employer's organization, and all Proprietary Information so known only
through improper means, shall be deemed "Confidential Information."
Without limiting the foregoing definition, Proprietary and Confidential
Information shall include, but not be limited to: (i) formulas, teaching
and development techniques, processes, trade secrets, computer programs,
electronic codes, inventions, improvements, and research projects; (ii)
information about costs, profits, markets, sales, and lists of customers or
clients; (iii) business, marketing, and strategic plans; and (iv) employee
personnel files and compensation information. Employee should consult any
Employer procedures instituted to identify and protect certain types of
Confidential Information, which are considered by Employer to be safeguards
in addition to the protection provided by the Agreement. Nothing contained
in those procedures or in the Agreement is intended to limit the effect of
the other.
(b) General Restrictions on Use. During the Period of Employment,
Employee shall use Proprietary Information, and shall disclose Confidential
Information, only for the benefit of Employer and as is necessary to carry
out his responsibilities under the Agreement. Following termination,
Employee shall neither, directly or indirectly, use any Proprietary
Information nor disclose any Confidential Information, except as expressly
and specifically authorized in writing by Employer. The publication of any
Proprietary Information through literature or speeches must be approved in
advance in writing by Employer.
6
<PAGE>
6. Arbitration.
(a) Arbitrable Claims. All disputes between Employee (and his attorneys,
successors, and assigns) and Employer (and its Affiliates, shareholders,
directors, officers, employees, agents, successors, attorneys, and assigns)
relating in any manner whatsoever to the employment or termination of
Employee, including, without limitation, all disputes arising under the
Agreement, ("Arbitrable Claims") shall be resolved by arbitration. All
persons and entities specified in the preceding sentence (other than
Employer and Employee) shall be considered third-party beneficiaries of the
rights and obligations created by the Section on Arbitration. Arbitrable
Claims shall include, but are not limited to, contract (express or implied)
and tort claims of all kinds, as well as all claims based on any federal,
state, or local law, statute, or regulation, excepting only claims under
applicable workers' compensation law and unemployment insurance claims. By
way of example and not in limitation of the foregoing, Arbitrable Claims
shall include any claims arising under Title VII of the Civil Rights Act of
1964, the Age Discrimination in Employment Act, the Americans with
Disabilities Act, and the California Fair Employment and Housing Act, as
well as any claims asserting wrongful termination, breach of contract,
breach of the covenant of good faith and fair dealing, negligent or
intentional infliction of emotional distress, negligent or intentional
misrepresentation, negligent or intentional interference with contract or
prospective economic advantage, defamation, invasion of privacy, and claims
related to disability. Arbitration shall be final and binding upon the
parties and shall be the exclusive remedy for all Arbitrable Claims, except
that Employer may, at its option, seek injunctive relief and damages in
court for any breach of Section 5 of the Agreement. Subject to the
foregoing sentence, THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO
TRIAL BY JURY IN REGARD TO ARBITRABLE CLAIMS.
(b) Procedure. Arbitration of Arbitrable Claims shall be in accordance
with the Employment Dispute Resolution Rules of the American Arbitration
Association ("AAA Employment Rules"), except as provided otherwise in the
Agreement. Arbitration shall be initiated by providing written notice to
the other party with a statement of the claim(s) asserted, the facts upon
which the claim(s) are based, and the remedy sought. The burden of proof
in any arbitration shall be allocated as provided by applicable law, unless
otherwise specified in the Agreement. Either party may bring an action in
court to compel arbitration under the Agreement and to enforce an
arbitration award. Otherwise, neither party shall initiate or prosecute
any lawsuit or administrative action in any way related to any Arbitrable
Claim. The Federal Arbitration Act shall govern the interpretation and
enforcement of the Section 6.
(c) Arbitrator Selection and Authority. All disputes involving Arbitrable
Claims shall be decided by a single arbitrator. The arbitrator shall be
selected by mutual agreement of the parties within thirty (30) days of the
effective date of the notice initiating the arbitration. If the parties
cannot agree on an arbitrator, then the complaining party shall notify the
AAA and request selection of an arbitrator in accordance with the AAA
Employment Rules. The arbitrator shall have only such authority to award
equitable relief, damages, costs, and fees as a court would have for the
particular claim(s) asserted. The fees of the arbitrator shall be split
between both parties equally. The arbitrator shall have exclusive
authority to resolve all Arbitrable Claims, including, but not limited to,
any claim that all or any part of the Agreement is void or unenforceable.
(d) Confidentiality. All proceedings and all documents prepared in
connection with any Arbitrable Claim shall be confidential and, unless
otherwise required by law, the subject matter thereof shall not be
disclosed to any person other than the parties to the proceedings, their
counsel, witnesses and experts, the arbitrator, and, if involved, the court
and court staff. All documents filed with the arbitrator or with a court
shall be filed under seal. The parties shall stipulate to all arbitration
and court orders necessary to effectuate fully the provisions of the
subsection concerning confidentiality.
(e) Continuing Obligations. The rights and obligations of Employee and
Employer set forth in the Section on Arbitration shall survive the
termination of Employee's employment and the expiration of the Agreement.
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<PAGE>
7. Notices.
Any notice under the Agreement must be in writing and shall be effective upon
delivery by hand, upon facsimile transmission to the number provided below (if
one is provided), or three (3) business days after deposit in the United States
mail, postage prepaid, certified or registered, and addressed to Employer or to
Employee at the corresponding address below. Employee shall be obligated to
notify Employer in writing of any change in his address. Notice of change of
address shall be effective only when done in accordance with the Section.
Employer's Notice Address:
Vice President, Personnel
Digital Microwave Corporation
170 Rose Orchard Way
San Jose, California 95134
Fax Phone No.: (408)944-1701
Employee's Notice Address:
__________
% Digital Microwave Corporation
170 Rose Orchard Way
San Jose, California 95134
Fax Phone No.: (408) 944-1701
8. Action by Employer.
All actions required or permitted to be taken under the Agreement by Employer,
including, without limitation, exercise of discretion, consents, waivers, and
amendments to the Agreement, shall be made and authorized only by the President
or by his or his representative specifically authorized to fulfill these
obligations under the Agreement.
9. Integration.
The Agreement is intended to be the final, complete, and exclusive statement of
the terms of Employee's employment by Employer. The Agreement supersedes all
other prior and contemporaneous agreements and statements pertaining in any
manner to the employment of Employee, and it may not be contradicted by evidence
of any prior or contemporaneous statements or agreements. To the extent that
the practices, policies, or procedures of Employer, now or in the future, apply
to Employee and are inconsistent with the terms of the Agreement, the provisions
of the Agreement shall control.
10. Amendments; Waivers.
The Agreement may not be modified, amended, or terminated except by an
instrument in writing, signed by each of the parties. No failure to exercise
and no delay in exercising any right, remedy, or power under the Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, or power under the Agreement preclude any other or further
exercise thereof, or the exercise of any other right, remedy, or power provided
herein or by law or in equity.
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<PAGE>
11. Assignment; Successors and Assigns.
Employee agrees that he will not assign, sell, transfer, delegate, or otherwise
dispose of, whether voluntarily or involuntarily, or by operation of law, any
rights or obligations under the Agreement. Any such purported assignment,
transfer, or delegation shall be null and void. Nothing in the Agreement shall
prevent the consolidation of Employer with, or its merger into, any other
entity, or the sale by Employer of all or substantially all of its assets, or
the otherwise lawful assignment by Employer of any rights or obligations under
the Agreement. Subject to the foregoing, the Agreement shall be binding upon
and shall inure to the benefit of the parties and their respective heirs, legal
representatives, successors, and permitted assigns, and shall not benefit any
person or entity other than those specifically enumerated in the Agreement.
12. Severability.
If any provision of the Agreement, or its application to any person, place, or
circumstance, is held by an arbitrator or a court of competent jurisdiction to
be invalid, unenforceable, or void, such provision shall be enforced to the
greatest extent permitted by law, and the remainder of the Agreement and such
provision as applied to other persons, places, and circumstances shall remain in
full force and effect.
13. Attorneys' Fees.
In any legal action, arbitration, or other proceeding brought to enforce or
interpret the terms of the Agreement, the prevailing party shall be entitled to
recover reasonable attorneys' fees and costs.
14. Governing Law. The Agreement shall be governed by and construed in
accordance with the law of the State of California.
15. Interpretation.
The Agreement shall be construed as a whole, according to its fair meaning, and
not in favor of or against any party. By way of example and not in limitation,
the Agreement shall not be construed in favor of the party receiving a benefit
nor against the party responsible for any particular language in the Agreement.
Captions are used for reference purposes only and should be ignored in the
interpretation of the Agreement.
16. Employee Acknowledgment.
Employee acknowledges that he has had the opportunity to consult legal counsel
in regard to the Agreement, that he has read and understands the Agreement, that
he is fully aware of its legal effect, and that he has entered into it freely
and voluntarily and based on his own judgment and not on any representations or
promises other than those contained in the Agreement.
The parties have duly executed the Agreement as of the date first written above.
______________________________
__________
Digital Microwave Corporation
_______________________________
By: Charles D. Kissner
Its: Chairman and Chief Executive Officer
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<PAGE>
EXHIBIT A
POST-EMPLOYMENT CONSULTING PERIOD
NON COMPETE AGREEMENT
Post-employment Consulting Period.
(i) If Employee is eligible for post-employment consulting benefits
pursuant to subparagraphs 4(b), 4(c) or 4(f), Employee will be available
for consultation upon Employer's request during the applicable Post-
employment Consulting Period. Employee shall make himself available for up
to 20 hours per month. Employee shall work in good faith and shall devote
his best efforts to perform the consulting services requested by Employer.
Employer shall work in good faith to reasonably accommodate Employee's
schedule. Employee shall not be required to provide more than 20 hours per
month, unless otherwise agreed in writing by both parties.
(ii) During the Post-employment Consulting Period, Employee may accept
other employment or consulting positions or engage in any other business
activity, except to the extent doing so interferes with Employees
obligations under this Agreement or creates a conflict of interest. If
Employee is retained, either as an employee or as an independent
contractor, by any company (or engages in any business activity) that is in
competition with the business of Employer, Employee shall notify Employer
within five (5) days (but no later than the date Employee begins the
retention or competitive activity). The Post-employment Consulting Period
will terminate effective on the effective date of this notice, unless
otherwise agreed in writing by Employer.
As of the Effective Date of this Agreement, the following companies are
considered to be in competition with Employer (but are not the only such
competitors): Harris Corporation/Farinon Division, California Microwave,
Alcatel, NEC, Western Multiplex, P-Com, ATI, Netro, Siemens, Ericsson,
Nokia, Nortel, Nera, Wireless Inc.
(iii) The term of the Post-employment Consulting Period shall be the
period specified in Section 4, unless terminated sooner in accordance with
Paragraph (ii) above or as follows: Employee may terminate the Post-
employment Consulting Period for any reason by providing Employer ten (10)
days' advance written notice. Employer may terminate the Post-employment
Consulting Period without any prior notice only if Employee breaches a term
in Employment Agreement, including without limitation Section 4(g) on
Termination Obligations, Section 5 on Proprietary Information and Section 6
on Arbitration or Exhibit A on the Post-employment Consulting Period.
(iv) Employee's right to receive any benefits provided by Section 4 of the
Employment Agreement during the Post-employment Consulting Period is
conditioned on Employee performing Employee's obligations during the Post-
employment Consulting Period, and Employee shall not be entitled to any
additional compensation for the consulting services, unless otherwise
agreed in writing by Employer. Employer shall provide the benefits
provided in Section 4 of the Employment Agreement through the effective
date of the termination of the Post-employment Consulting Period.
Thereafter, all of Employer's obligations under this Agreement shall cease.
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<PAGE>
<PAGE>
EXHIBIT 10.34
DIGITAL MICROWAVE CORPORATION
FORM OF EMPLOYMENT AGREEMENT
Attached is a form of employment agreement between the Company and certain
executive officers as listed below:
<TABLE>
<CAPTION>
Name Position Annual Salary
- ---- -------- -------------
<S> <C> <C>
John C. Brandt Vice President and Corporate Controller $132,000
Carol A. Goudey Corporate Treasurer and Assistant Secretary $132,000
John O'Neil Vice President, Personnel $162,640
</TABLE>
<PAGE>
EMPLOYMENT AGREEMENT
The Agreement, dated as of _______ __, 199_ , is between Digital Microwave
Corporation, a California corporation ("Employer"), and ___________,
("Employee").
RECITALS
* Employee is and has been employed by Employer and is currently serving as the
__________.
* Employee and Employer entered into an open-ended Employment Agreement on ____
__, 199_. Employer desires to revise the terms and conditions of the _____ __,
199_ Agreement.
* Employer desires to continue to employ Employee and to assure itself of the
continued services of Employee for the Period of Employment provided for in this
Employment Agreement, and Employee desires to be employed by Employer for such
period, upon the following terms and conditions.
ACCORDINGLY, the parties agree as follows:
1. Period of Employment.
Employer shall employ Employee to render services to Employer in the position
and with the duties and responsibilities described in Section 2 for the period
(the "Period of Employment") commencing on the date of this Agreement and ending
on the date which the Period of Employment is terminated in accordance with
Section 4.
2. Position and Responsibilities.
(a) Position. Employee shall continue employment with Employer as
__________ and shall perform all services appropriate to that position as
well as other duties that may be assigned by Employer. Employee shall
devote his best efforts and full-time attention to the performance of his
duties. Employee shall be subject to the direction of Employer, which
shall retain full control of the means and methods by which he performs the
above services and of the place(s) at which all services are rendered.
Employee shall report to the __________ or another officer of Employer.
Employee shall be expected to travel if necessary or advisable in order to
meet the obligations of his position.
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(b) Other Activity. Except upon the prior written consent of Employer,
Employee (during the Period of Employment) shall not (i) accept any other
employment; or (ii) engage, directly or indirectly, in any other business,
commercial, or professional activity (whether or not pursued for pecuniary
advantage) that is or may be competitive with Employer, that might create a
conflict of interest with Employer, or that otherwise might interfere with
the business of Employer, or any Affiliate. An "Affiliate" shall mean any
person or entity that directly or indirectly controls, is controlled by, or
is under common control with Employer. Notwithstanding the foregoing, upon
reasonable notice to Employer, Employee may serve as a director of one for
profit entity and one not for profit entity so long as such entity is not
competitive with Employer or any Affiliate and where such service does not
otherwise create a conflict of interest.
(c) Employee shall be bound by the Non-Compete Agreement which is attached
as Exhibit A, and by reference is incorporated into this Employment
Agreement.
3. Compensation and Benefits.
(a) Compensation. In consideration of the services to be rendered under the
Agreement, Employer shall pay Employee his current base salary of
$__________ per year, payable semi-monthly, pursuant to the procedures
regularly established, and as they may be amended, by Employer in its sole
discretion, during the Period of Employment. Employer shall review
annually Employee's compensation, which may be modified on a short term
basis to reflect business or other conditions. Employer shall determine,
in its sole discretion, whether and how much the existing compensation
shall be adjusted, without regard to any policy or practice Employer may
have for adjusting salaries. In addition to base salary, Employee shall be
eligible to participate in the Employer's executive management incentive
bonus and stock option plans according to the terms of those plans.
(b) Executive Management Incentive Bonus Plan. The target bonus award will be
a percentage of the Employee's base salary. The percentage is to be set by
the Board at the beginning of each fiscal year. The current percentage is
__% of Employee's base salary, and is paid annually following the
certification of the business results of Digital Microwave Corporation.
The criteria for receiving an award under this Plan will be based on the
degree of success that Digital Microwave has in achieving its financial
goals for the fiscal year (__% of the target award) and the accomplishment
of certain key organizational objectives. ( % of the target award.) The
Plan is capped at ___% of the target award. A minimum threshold
achievement of target goals must be met in order to receive any bonus award
under the Plan.
(c) Benefits. Employee shall be entitled to vacation leave in accordance with
Employer's standard policies and the terms of Employee's original
employment offer letter dated _____ __, 199_. As Employee becomes eligible
thereof, Employee shall have the right to participate in and to receive
benefits from all present and future benefit plans specified in Employer's
policies and generally made available to similarly situated employees of
Employer. The amount and extent of benefits to which Employee is entitled
shall be governed by the specific benefit plans, as amended. Employee also
shall be entitled to any benefits or compensation tied to termination as
described in Section 4. Nothing stated in the Agreement shall prevent
Employer from changing or eliminating any benefit during the Period of
Employment as Employer, in its sole discretion, may deem necessary or
desirable. No statement concerning benefits or compensation to which
Employee is entitled shall alter in any way the term of the Agreement, any
renewal thereof, or its termination. All compensation and comparable
payments to be paid to Employee under the Agreement shall be less
withholdings required by law.
(d) Expenses. Employer shall reimburse Employee for reasonable travel and
other business expenses incurred by Employee in the performance of his
duties, in accordance with Employer's policies, as they may be amended
in Employer's sole discretion.
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<PAGE>
4. Termination of Employment.
(a) By Death. The Period of Employment shall terminate automatically upon
the death of Employee. Employer shall pay to Employee's beneficiaries or
estate, as appropriate, any, compensation then due and owing, including
payment for accrued unused vacation, if any, and will when due make a
payment of any incentive bonus to which the Employee would have been
entitled prorated based on the number of months the Employee was employed
during the incentive bonus period. Thereafter, all obligations of Employer
under the Agreement shall cease. Nothing in the Section shall affect any
entitlement of Employee's heirs to the benefits of any life insurance plan
or other applicable benefits.
(b) By Disability. If, by reason of any physical or mental incapacity,
Employee has been or will be prevented from properly performing his duties
under the Agreement for more than ninety (90) consecutive days, then, to
the extent permitted by law, Employer may terminate the Period of
Employment without any advance notice. Employer shall pay Employee all
compensation to which he is entitled up through the day notice of
termination is provided, and, in addition, Employee shall be entitled to
the following benefits provided in subparagraph 4(c): severance, health
insurance premium payments, prorated incentive bonus, and continued vesting
of stock options; thereafter, all obligations of Employer under this
Agreement shall cease. Nothing in this Section shall affect Employee's
rights under any applicable Employer disability plan; provided, however,
that the severance benefits to which Employee is entitled shall be offset
by any disability income payments received by Employee so that the total
monthly severance and disability income benefit payments for the severance
period shall not exceed Employee's then current salary.
(c) By Employer Not For Cause. At any time, the Employer may terminate
the Period of Employment Not for Cause for any reason, by providing
Employee ten (10) days' advance written notice, provided that Employee
shall be paid, in addition to all compensation due and owing through the
last day actually worked, severance in an amount equal to twelve (12)
months of the Employee's then current base salary. Such severance shall be
paid by Employer to Employee in 12 equal monthly installments, commencing
one month from the date of termination, or, at Employer's discretion, in a
single lump sum on the termination date. Employer shall also pay the
Employer's share of health insurance premiums for a period of up to 12
months, or until Employee is eligible to participate in another employer's
plan, whichever comes first, should Employee elect to convert his health
insurance benefits under COBRA. Employer shall also pay when due, any
incentive bonus to which the Employee would have been entitled prorated
based on the number of months the Employee was employed during the
incentive bonus period. Employee's stock options will continue to vest for
six (6) months following the termination date.
If Employer terminates the Period of Employment Not for Cause within
eighteen (18) months following a Change of Control as defined in
subparagraph 4(f), Employee shall receive the severance benefits set forth
in subparagraph 4(f)(i)-(iv) rather than the severance benefits set forth
in the subparagraph 4(c).
Employer shall have the option, in its complete discretion, to terminate
the Period of Employment at any time prior to the end of such notice
period, provided Employer pays Employee all compensation due and owing
through the last day actually worked plus an amount equal to the base
salary Employee would have earned through the balance of the above notice
period in addition to the severance benefits described above; thereafter,
all of Employer's obligations under the Agreement shall cease. Employer
may dismiss Employee without cause notwithstanding anything to the contrary
contained in or arising from any statements, policies, or practices of
Employer relating to the employment, discipline, or termination of its
employees.
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<PAGE>
(d) By Employer For Cause. At any time, and without prior notice,
Employer may terminate the Period of Employment for Cause (as defined
below). Employer shall pay Employee all compensation then due and owing;
thereafter, all of Employer's obligations under the Agreement shall cease.
Termination shall be for "Cause" if Employee: (i) acts in bad faith and to
the detriment of Employer; (ii) exhibits in regard to his employment
willful misconduct, dishonesty, habitual neglect of duties, or any willful
act or omission that may materially and adversely affect the Employer's
business or that involves fraud, embezzlement or misappropriation of any
property or proprietary information of the Employer; (iv) is convicted of a
crime involving dishonesty, breach of trust, or physical or emotional harm
to any person; or (v) breaches any material term of the Agreement. If
termination is due to Employee's disability, Section 4(b) above shall
control, and not the subsection on termination for Cause.
(e) By Employee Not for Cause. At any time, Employee may terminate the
Period of Employment for any reason, with or without cause, by providing
Employer ten (10) days' advance written notice. Employer shall have the
option, in its complete discretion, to make termination of the Period of
Employment effective at any time prior to the end of such notice period,
provided Employer pays Employee all compensation due and owing through the
last day actually worked, plus an amount equal to the base salary Employee
would have earned through the balance of the above notice period, not to
exceed ten (10) days; thereafter, all of Employer's obligations under the
Agreement shall cease.
(f) By Employee for Good Reason Upon a Change of Control at anytime.
Employee may terminate, without liability, the Period of Employment for
Good Reason upon a Change of Control (as defined below), provided Employee
gives Employer sixty (60) days' advance written notice of the reason for
termination and his intent to terminate the Agreement. During the period,
Employer shall have an opportunity to correct the condition constituting
Good Reason. If the condition is remedied within the period, Employee's
notice to terminate shall be rescinded automatically; if not remedied,
termination of the Period of Employment shall become effective upon
expiration of the above notice period. In the event, Employer shall pay
Employee all compensation due and owing through the last day actually
worked.
Employer shall also have the option, in its complete discretion, to make
termination effective at any time prior to the end of the notice period,
provided that Employer pays Employee all compensation due and owing through
the balance of the notice period (not to exceed sixty (60) days). Employee
shall be entitled to exercise his right to terminate the Agreement for Good
Reason only if he gives the required notice not more than forty-five (45)
days after the occurrence of the event that is the basis for the Good
Reason. If Employee terminates the Period of Employment for Good Reason
upon a Change of Control, Employee shall receive the following:
(i) A severance payment equal to twenty four (24) month's of the
Employee's then base salary. At the discretion of the Employer, the
severance payment may be made in the form of salary continuation over the
equivalent pay periods that the severance covers or in a lump sum payment.
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<PAGE>
(ii) A payment when due of the incentive bonus to which the Employee
would have been entitled prorated based on the number of months the
Employee was employed during the incentive bonus period.
(iii) A payment equal to the annual incentive bonus payments
received by Employee, if any, for the previous two years.
(iv) Payment of the Employee's share of health insurance premiums for
a period of up to twenty four (24) months, or until Employee is eligible to
participate in another Employer's plan, whichever comes first, should
Employee elect to convert his/her health insurance benefits under COBRA.
"Change of Control" shall mean the occurrence of any of the following
events as used herein, after the Effective Date: (i) any "person" (as such
term is used in Sections 13 (d) and 14 (d) of the Securities Exchange Act of
1934, as amended) other than Digital Microwave or its affiliates (a "Third
Party") is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
said Act), directly or indirectly, of securities of the Employer representing
fifty percent (50%) or more of the total voting power represented by the
Employer's then outstanding voting securities; (ii) the stockholders of the
Employer approve a merger or consolidation of the Employer with any other
corporation that is a Third Party, other than a merger or consolidation which
would result in the voting securities of the Employer outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at least
fifty percent (50%) of the total voting power represented by the voting
securities of the Employer or such surviving entity outstanding immediately
after such merger or consolidation; or (iii) the stockholders of the Employer
approve a plan of complete liquidation or dissolution of the Employer or an
agreement for the sale or disposition by the Employer of all or substantially
all the Employer's assets to a Third Party. "Change of Control" shall also
mean a change in the composition of the Board over a period of thirty-six
(36) months or less such that a majority of the Board members (rounded up to
the next whole number) ceases, by reason of one or more contested elections
for Board membership, to be comprised of individuals who either (i) have been
Board members continuously since the beginning of such period or (ii) have
been elected or nominated for election as Board members during such period by
at least a majority of the Board members described in clause (i) who were
still in office at the time such election or nomination was approved by the
Board.
Termination shall be for "Good Reason" if: (i) there is a material and
adverse change in Employee's position, duties, responsibilities, or status with
Employer; (ii) there is a reduction in Employee's salary then in effect, other
than a reduction comparable to reductions generally applicable to similarly
situated employees of Employer; (iii) there is a material reduction in
Employee's benefits, other than a reduction comparable to reductions generally
applicable to similarly situated employees of Employer; (iv) the Employer
involuntarily relocates the Employee; or (v) Employer materially breaches the
Agreement.
(g) Termination Obligations.
(i) Employee agrees that all property, including, without limitation,
all equipment, tangible Proprietary Information (as defined below),
documents, books, records, reports, notes, contracts, lists, computer disks
(and other computer-generated files and data), and copies thereof, created
on any medium and furnished to, obtained by, or prepared by Employee in the
course of or incident to his employment, belongs to Employer and shall be
returned promptly to Employer upon termination of the Period of Employment.
(ii) All benefits to which Employee is otherwise entitled shall cease
upon Employee's termination of the Period of Employment, unless explicitly
continued either under the Agreement or under any specific written policy
or benefit plan of Employer.
(iii) Upon termination of the Period of Employment, Employee shall be
deemed to have resigned from all offices and directorships then held with
Employer or any Affiliate.
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<PAGE>
(iv) The representations and warranties contained in the Agreement and
Employee's obligations under the Section 4(g) on Termination Obligations
and Section 5 on Proprietary Information shall survive the termination of
the Period of Employment and the expiration of the Agreement.
(v) Following any termination of the Period of Employment, Employee shall
fully cooperate with Employer in all matters relating to the winding up of
pending work on behalf of Employer and the orderly transfer of work to
other employees of Employer. Employee shall also cooperate in the defense
of any action brought by any third party against Employer that relates in
any way to Employee's acts or omissions while employed by Employer.
5. Proprietary Information.
(a) Defined. "Proprietary Information" is all information and any idea in
whatever form, tangible or intangible, pertaining in any manner to the
business of Employer, or any Affiliate, or its employees, clients,
consultants, or business associates, which was produced by any employee of
Employer, or any Affiliate, in the course of his or his employment or
otherwise produced or acquired by or on behalf of Employer, or any
Affiliate. All Proprietary Information not generally known outside of
Employer's organization, and all Proprietary Information so known only
through improper means, shall be deemed "Confidential Information."
Without limiting the foregoing definition, Proprietary and Confidential
Information shall include, but not be limited to: (i) formulas, teaching
and development techniques, processes, trade secrets, computer programs,
electronic codes, inventions, improvements, and research projects; (ii)
information about costs, profits, markets, sales, and lists of customers or
clients; (iii) business, marketing, and strategic plans; and (iv) employee
personnel files and compensation information. Employee should consult any
Employer procedures instituted to identify and protect certain types of
Confidential Information, which are considered by Employer to be safeguards
in addition to the protection provided by the Agreement. Nothing contained
in those procedures or in the Agreement is intended to limit the effect of
the other.
(b) General Restrictions on Use. During the Period of Employment,
Employee shall use Proprietary Information, and shall disclose Confidential
Information, only for the benefit of Employer and as is necessary to carry
out his responsibilities under the Agreement. Following termination,
Employee shall neither, directly or indirectly, use any Proprietary
Information nor disclose any Confidential Information, except as expressly
and specifically authorized in writing by Employer. The publication of any
Proprietary Information through literature or speeches must be approved in
advance in writing by Employer.
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<PAGE>
6. Arbitration.
(a) Arbitrable Claims. All disputes between Employee (and his attorneys,
successors, and assigns) and Employer (and its Affiliates, shareholders,
directors, officers, employees, agents, successors, attorneys, and assigns)
relating in any manner whatsoever to the employment or termination of
Employee, including, without limitation, all disputes arising under the
Agreement, ("Arbitrable Claims") shall be resolved by arbitration. All
persons and entities specified in the preceding sentence (other than
Employer and Employee) shall be considered third-party beneficiaries of the
rights and obligations created by the Section on Arbitration. Arbitrable
Claims shall include, but are not limited to, contract (express or implied)
and tort claims of all kinds, as well as all claims based on any federal,
state, or local law, statute, or regulation, excepting only claims under
applicable workers' compensation law and unemployment insurance claims. By
way of example and not in limitation of the foregoing, Arbitrable Claims
shall include any claims arising under Title VII of the Civil Rights Act of
1964, the Age Discrimination in Employment Act, the Americans with
Disabilities Act, and the California Fair Employment and Housing Act, as
well as any claims asserting wrongful termination, breach of contract,
breach of the covenant of good faith and fair dealing, negligent or
intentional infliction of emotional distress, negligent or intentional
misrepresentation, negligent or intentional interference with contract or
prospective economic advantage, defamation, invasion of privacy, and claims
related to disability. Arbitration shall be final and binding upon the
parties and shall be the exclusive remedy for all Arbitrable Claims, except
that Employer may, at its option, seek injunctive relief and damages in
court for any breach of Section 5 of the Agreement. Subject to the
foregoing sentence, THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO
TRIAL BY JURY IN REGARD TO ARBITRABLE CLAIMS.
(b) Procedure. Arbitration of Arbitrable Claims shall be in accordance
with the Employment Dispute Resolution Rules of the American Arbitration
Association ("AAA Employment Rules"), except as provided otherwise in the
Agreement. Arbitration shall be initiated by providing written notice to
the other party with a statement of the claim(s) asserted, the facts upon
which the claim(s) are based, and the remedy sought. The burden of proof
in any arbitration shall be allocated as provided by applicable law, unless
otherwise specified in the Agreement. Either party may bring an action in
court to compel arbitration under the Agreement and to enforce an
arbitration award. Otherwise, neither party shall initiate or prosecute
any lawsuit or administrative action in any way related to any Arbitrable
Claim. The Federal Arbitration Act shall govern the interpretation and
enforcement of the Section 6.
(c) Arbitrator Selection and Authority. All disputes involving Arbitrable
Claims shall be decided by a single arbitrator. The arbitrator shall be
selected by mutual agreement of the parties within thirty (30) days of the
effective date of the notice initiating the arbitration. If the parties
cannot agree on an arbitrator, then the complaining party shall notify the
AAA and request selection of an arbitrator in accordance with the AAA
Employment Rules. The arbitrator shall have only such authority to award
equitable relief, damages, costs, and fees as a court would have for the
particular claim(s) asserted. The fees of the arbitrator shall be split
between both parties equally. The arbitrator shall have exclusive
authority to resolve all Arbitrable Claims, including, but not limited to,
any claim that all or any part of the Agreement is void or unenforceable.
(d) Confidentiality. All proceedings and all documents prepared in
connection with any Arbitrable Claim shall be confidential and, unless
otherwise required by law, the subject matter thereof shall not be
disclosed to any person other than the parties to the proceedings, their
counsel, witnesses and experts, the arbitrator, and, if involved, the court
and court staff. All documents filed with the arbitrator or with a court
shall be filed under seal. The parties shall stipulate to all arbitration
and court orders necessary to effectuate fully the provisions of the
subsection concerning confidentiality.
(e) Continuing Obligations. The rights and obligations of Employee and
Employer set forth in the Section on Arbitration shall survive the
termination of Employee's employment and the expiration of the Agreement.
7
<PAGE>
7. Notices.
Any notice under the Agreement must be in writing and shall be effective upon
delivery by hand, upon facsimile transmission to the number provided below (if
one is provided), or three (3) business days after deposit in the United States
mail, postage prepaid, certified or registered, and addressed to Employer or to
Employee at the corresponding address below. Employee shall be obligated to
notify Employer in writing of any change in his address. Notice of change of
address shall be effective only when done in accordance with the Section.
Employer's Notice Address:
Vice President, Personnel
Digital Microwave Corporation
170 Rose Orchard Way
San Jose, California 95134
Fax Phone No.: (408)944-1701
Employee's Notice Address:
__________
% Digital Microwave Corporation
170 Rose Orchard Way
San Jose, California 95134
Fax Phone No.: (408) 944-1701
8. Action by Employer.
All actions required or permitted to be taken under the Agreement by Employer,
including, without limitation, exercise of discretion, consents, waivers, and
amendments to the Agreement, shall be made and authorized only by the President
or by his or his representative specifically authorized to fulfill these
obligations under the Agreement.
9. Integration.
The Agreement is intended to be the final, complete, and exclusive statement of
the terms of Employee's employment by Employer. The Agreement supersedes all
other prior and contemporaneous agreements and statements pertaining in any
manner to the employment of Employee, and it may not be contradicted by evidence
of any prior or contemporaneous statements or agreements. To the extent that
the practices, policies, or procedures of Employer, now or in the future, apply
to Employee and are inconsistent with the terms of the Agreement, the provisions
of the Agreement shall control.
10. Amendments; Waivers.
The Agreement may not be modified, amended, or terminated except by an
instrument in writing, signed by each of the parties. No failure to exercise
and no delay in exercising any right, remedy, or power under the Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, or power under the Agreement preclude any other or further
exercise thereof, or the exercise of any other right, remedy, or power provided
herein or by law or in equity.
8
<PAGE>
11. Assignment; Successors and Assigns.
Employee agrees that he will not assign, sell, transfer, delegate, or otherwise
dispose of, whether voluntarily or involuntarily, or by operation of law, any
rights or obligations under the Agreement. Any such purported assignment,
transfer, or delegation shall be null and void. Nothing in the Agreement shall
prevent the consolidation of Employer with, or its merger into, any other
entity, or the sale by Employer of all or substantially all of its assets, or
the otherwise lawful assignment by Employer of any rights or obligations under
the Agreement. Subject to the foregoing, the Agreement shall be binding upon
and shall inure to the benefit of the parties and their respective heirs, legal
representatives, successors, and permitted assigns, and shall not benefit any
person or entity other than those specifically enumerated in the Agreement.
12. Severability.
If any provision of the Agreement, or its application to any person, place, or
circumstance, is held by an arbitrator or a court of competent jurisdiction to
be invalid, unenforceable, or void, such provision shall be enforced to the
greatest extent permitted by law, and the remainder of the Agreement and such
provision as applied to other persons, places, and circumstances shall remain in
full force and effect.
13. Attorneys' Fees.
In any legal action, arbitration, or other proceeding brought to enforce or
interpret the terms of the Agreement, the prevailing party shall be entitled to
recover reasonable attorneys' fees and costs.
14. Governing Law. The Agreement shall be governed by and construed in
accordance with the law of the State of California.
15. Interpretation.
The Agreement shall be construed as a whole, according to its fair meaning, and
not in favor of or against any party. By way of example and not in limitation,
the Agreement shall not be construed in favor of the party receiving a benefit
nor against the party responsible for any particular language in the Agreement.
Captions are used for reference purposes only and should be ignored in the
interpretation of the Agreement.
16. Employee Acknowledgment.
Employee acknowledges that he has had the opportunity to consult legal counsel
in regard to the Agreement, that he has read and understands the Agreement, that
he is fully aware of its legal effect, and that he has entered into it freely
and voluntarily and based on his own judgment and not on any representations or
promises other than those contained in the Agreement.
The parties have duly executed the Agreement as of the date first written above.
______________________________
__________
Digital Microwave Corporation
_______________________________
By: Charles D. Kissner
Its: Chairman and Chief Executive Officer
9
<PAGE>
EXHIBIT A
POST-EMPLOYMENT CONSULTING PERIOD
NON COMPETE AGREEMENT
Post-employment Consulting Period.
(i) If Employee is eligible for post-employment consulting benefits
pursuant to subparagraphs 4(b), 4(c) or 4(f), Employee will be available
for consultation upon Employer's request during the applicable Post-
employment Consulting Period. Employee shall make himself available for up
to 20 hours per month. Employee shall work in good faith and shall devote
his best efforts to perform the consulting services requested by Employer.
Employer shall work in good faith to reasonably accommodate Employee's
schedule. Employee shall not be required to provide more than 20 hours per
month, unless otherwise agreed in writing by both parties.
(ii) During the Post-employment Consulting Period, Employee may accept
other employment or consulting positions or engage in any other business
activity, except to the extent doing so interferes with Employees
obligations under this Agreement or creates a conflict of interest. If
Employee is retained, either as an employee or as an independent
contractor, by any company (or engages in any business activity) that is in
competition with the business of Employer, Employee shall notify Employer
within five (5) days (but no later than the date Employee begins the
retention or competitive activity). The Post-employment Consulting Period
will terminate effective on the effective date of this notice, unless
otherwise agreed in writing by Employer.
As of the Effective Date of this Agreement, the following companies are
considered to be in competition with Employer (but are not the only such
competitors): Harris Corporation/Farinon Division, California Microwave,
Alcatel, NEC, Western Multiplex, P-Com, ATI, Netro, Siemens, Ericsson,
Nokia, Nortel, Nera, Wireless Inc.
(iii) The term of the Post-employment Consulting Period shall be the
period specified in Section 4, unless terminated sooner in accordance with
Paragraph (ii) above or as follows: Employee may terminate the Post-
employment Consulting Period for any reason by providing Employer ten (10)
days' advance written notice. Employer may terminate the Post-employment
Consulting Period without any prior notice only if Employee breaches a term
in Employment Agreement, including without limitation Section 4(g) on
Termination Obligations, Section 5 on Proprietary Information and Section 6
on Arbitration or Exhibit A on the Post-employment Consulting Period.
(iv) Employee's right to receive any benefits provided by Section 4 of the
Employment Agreement during the Post-employment Consulting Period is
conditioned on Employee performing Employee's obligations during the Post-
employment Consulting Period, and Employee shall not be entitled to any
additional compensation for the consulting services, unless otherwise
agreed in writing by Employer. Employer shall provide the benefits
provided in Section 4 of the Employment Agreement through the effective
date of the termination of the Post-employment Consulting Period.
Thereafter, all of Employer's obligations under this Agreement shall cease.
10
<PAGE>
FINANCIAL HIGHLIGHTS AND STOCK INFORMATION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
years ended march 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------
(in thousands, except per share data and number of employees)
<S> <C> <C> <C> <C> <C>
Net sales $ 236,499 $ 345,116 $ 213,441 $ 174,380 $ 167,506
Net income (loss) $ (96,729) $ 18,818 $ 6,461 $ (13,533) $ (3,751)
Diluted net income (loss) per share $ (1.57) $ 0.35 $ 0.13 $ (0.35) $ (0.10)
Total assets $ 202,164 $ 297,196 $ 200,504 $ 113,597 $ 114,593
Working capital $ 85,247 $ 167,623 $ 105,233 $ 43,684 $ 31,082
Stockholders' equity $ 131,213 $ 226,600 $ 87,947 $ 24,802 $ 16,964
Total employees at year end 873 1,324 939 670 686
Diluted weighted average shares outstanding 61,601 54,459 50,464 38,604 36,335
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Prior years have been restated to include Innova Corporation, which merged
with the Company in October 1998 in a pooling-of-interests transaction, and MAS
Technology Limited, which merged with the Company in March 1998 in a pooling-of-
interests transaction. See Note 8 of the Notes to Consolidated Financial
Statements.
TEN
<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 that 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 October 1998 with Innova Corporation ("Innova"), a Washington corporation
which designs, manufactures, markets, and supports digital microwave radio
links for the worldwide telecommunications market. See Note 8 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 has shipped over 130,000
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. The Company's revenues from sales for equipment and services outside
the United States were 87% in Fiscal 1999, 93% in Fiscal 1998, and 90% in
Fiscal 1997.
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,
------------------------------
1999 1998 1997
------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 78.4 64.0 66.1
Inventory valuation charges 16.0 1.7 -
------------------------------
Gross profit 5.6 34.3 33.9
Research and development 10.2 7.1 7.6
Selling, general and administrative 23.4 18.9 21.6
Merger and restructuring 12.7 2.5 -
------------------------------
Operating income (loss) (40.7) 5.8 4.7
Other income (expense), net 0.1 0.8 (0.5)
------------------------------
Income (loss) before provision
for income taxes (40.6) 6.6 4.2
Provision for income taxes 0.3 1.1 1.2
------------------------------
Net income (loss) (40.9)% 5.5% 3.0%
------------------------------
------------------------------
</TABLE>
YEAR ENDED MARCH 31, 1999 COMPARED TO THE YEAR ENDED MARCH 31, 1998
NET SALES. Net sales for Fiscal 1999 were $236.5 million, a 31% decrease
compared to net sales of $345.1 million in Fiscal 1998. The decrease in net
sales was in part due to a slowdown in demand for the Company's products in
Asia, which began with the downturn in Asian economies. However, such
decrease in the Company's net sales has been accelerated by the heightened
pricing and competitive pressures of the telecommunications market in Europe
and other regions of the world. For Fiscal 1999, net sales were $83.2 million
in Europe, $50.3 million in the Asia/Pacific region, $52.2 million in South
America, $31.8 million in North America, and $19.0 million in Africa. In
Fiscal 1998, net sales were $146.8 million in Europe, $96.1 million in the
Asia/Pacific region, $54.7 million in South America, $31.2 million in North
America, and $16.3 million in Africa. See Note 7 of the Notes to Consolidated
Financial Statements.
Net sales for Fiscal 1999 of SPECTRUM II-TM- decreased to $111.8 million from
$175.3 million in Fiscal 1998. Net sales of the DXR-TM- product line
increased to $32.5 million in Fiscal 1999 from $30.6 million in Fiscal 1998.
Net sales of the XP4-TM- product line decreased to $32.2 million in Fiscal
1999 from $36.1 million in Fiscal 1998. Net sales of the new Altium-TM-
product line were $5.3 million. Net sales for other products and services,
including older product lines that have been phased out, amounted to $54.7
million in Fiscal 1999 compared to $103.1 million in Fiscal 1998.
GROSS PROFIT. Inventory valuation charges, included in cost of sales, totaled
$37.7 million in Fiscal 1999 and $5.9 million in Fiscal 1998. In Fiscal 1999,
these inventory valuation charges consisted primarily of two main components:
an excess and obsolescence adjustment, and cancellation charges to vendors
for purchase commitments. The merger with Innova and planned introduction of
new product lines accelerated the obsolescence of the SPECTRUM II product
line. Accordingly, inventory-related charges of $30.3 million were recorded.
The reduction in the Company's sales volume compared to the prior year had an
adverse effect on purchase order commitments to vendors. Accordingly,
liabilities of $7.4 million were recognized to account for vendor
cancellation and related charges on purchase order commitments. In Fiscal
1998, the inventory valuation charges were for the phase-out of older product
lines. Gross profit margin percentage in Fiscal 1999, excluding inventory
valuation charges, was lower than in Fiscal 1998 primarily due to
underutilization of manufacturing capacity and lower average selling prices
of the SPECTRUM II product line.
ELEVEN
<PAGE>
The Company reduced its workforce at the end of the first quarter of Fiscal
1999 and in the third quarter of Fiscal 1999 to minimize the impact of
unfavorable capacity utilization. The Company believes that its sales volume
has stabilized during the past nine months; however, management cannot
provide assurance that the continuing economic and political instability in
Asia and recent economic instability in Latin America will not have further
material adverse effect on the Company's business, financial condition, and
results of operations. See "Factors That May Affect Future Financial Results."
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
Fiscal 1999 of $24.1 million were slightly lower than the $24.5 million
reported in Fiscal 1998. However, as a percentage of sales, research and
development expenses increased from 7.1% for Fiscal 1998 to 10.2% for Fiscal
1999. This increase was due primarily to the decrease in net sales over the
comparable period. Research and development expenses for Fiscal 1999 were
primarily attributable to the Company's development of its XP4, DART, and
DXR-TM- 700 product offerings and its new Altium high-capacity wireless
product platform. The Company will continue to invest in the development of
new products and features in order to maintain and enhance its competitive
position, and, as a result, expects research and development spending to
increase in Fiscal 2000.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses for Fiscal 1999 decreased by $10.0 million to $55.3
million from $65.3 million in Fiscal 1998. As a percentage of net sales,
selling, general, and administrative expenses were 23.4% in Fiscal 1999
compared to 18.9% in Fiscal 1998. This increase in percentage was due
primarily to the decrease in net sales over the comparable period. The
decrease in selling, general, and administrative expenses in absolute dollars
was mostly attributable to the workforce reductions in the first and third
quarters of Fiscal 1999. Partially offsetting this decrease is an increase in
the provision for bad debts for specific customers, which is included in
selling, general, and administrative expenses. The provision for bad debts
included in Fiscal 1999 was $4.6 million compared to $0.4 million in Fiscal
1998. The increase in the provision for bad debts from Fiscal 1998 was the
result of write-offs taken relating to two customer accounts which totaled
$4.3 million.
MERGER AND RESTRUCTURING EXPENSES. Merger and restructuring charges of $29.9
million were recorded in Fiscal 1999. These charges consisted of $2.7 million
for investment banker, legal, and accounting fees related to the Innova
merger consummated in October 1998, $4.2 million for severance costs, $4.1
million for facility termination costs, a write-off of $5.8 million related
to the discontinuance of several projects related to the implementation of
software purchased for internal use, and a write-off of goodwill and certain
assets related to the Company's subsidiary, Granger, Inc., totaling $13.1
million. The assets of Granger, Inc. were sold in March 1999. Approximately
$12.2 million of the $29.9 million in merger and restructuring charges will
be a cash outflow, of which $8.2 million has been paid as of March 31, 1999.
The remaining amounts are expected to be paid during Fiscal 2000, and consist
of $0.9 million for severance, $2.3 million for facility termination costs,
and $0.8 million for other costs.
INTEREST AND OTHER INCOME, NET. Interest income was $1.5 million in Fiscal
1999 compared to $3.1 million in Fiscal 1998. This decrease resulted
primarily from lower average cash balances. Other Income, Net is primarily
due to foreign exchange gains and losses.
INTEREST EXPENSE. Interest expense for Fiscal 1999 was $0.5 million compared
to $0.9 million in Fiscal 1998. The decrease in interest expense was
primarily attributable to lower average lease obligations and debt in Fiscal
1999.
PROVISION FOR INCOME TAXES. The Company recorded an income tax provision in
Fiscal 1999 related to taxable income at certain of the Company's foreign
subsidiaries. In Fiscal 1998, the Company recorded an income tax provision at
an effective rate of 17%. This was less than the statutory rate, primarily
due to the utilization of net operating losses, tax credits, and other
tax-attributable carry-forwards. Due to net operating loss carry-forwards,
the Company expects that the Fiscal 2000 effective tax rate will be
significantly less than the statutory rate.
YEAR ENDED MARCH 31, 1998 COMPARED TO THE YEAR ENDED MARCH 31, 1997
NET SALES. Net sales for Fiscal 1998 were $345.1 million, a 62% increase
compared to net sales of $213.4 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 $146.8 million in Europe, $96.1 million in
the Asia/Pacific region, $54.7 million in South America, $31.2 million in
North America, and $16.3 million in Africa. In Fiscal 1997, net sales were
$81.0 million in Europe, $66.6 million in the Asia/Pacific region, $26.6
million in South America, $26.9 million in North America and $12.3 million in
Africa. See Note 7 of the Notes to Consolidated Financial Statements.
TWELVE
<PAGE>
Net sales for Fiscal 1998 of SPECTRUM II increased to $175.3 million from
$73.5 million in Fiscal 1997. Net sales of the DXR product line increased to
$30.6 million in Fiscal 1998 from $25.0 million in Fiscal 1997. Net sales of
the XP4 product line increased to $36.1 million from $2.1 million in Fiscal
1997. Net sales of the QUANTUM-TM- product line 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 $65.6 million in Fiscal 1998
compared to $51.8 million in Fiscal 1997.
The increase in net sales in Fiscal 1998 compared to Fiscal 1997 was
primarily due to the increased market acceptance of the SPECTRUM II product
line as well as a general growing worldwide market. SPECTRUM II sales
increased by 138% in Fiscal 1998 from Fiscal 1997 and accounted for 51% of
total net sales in Fiscal 1998 compared to 34% in Fiscal 1997. In addition,
DXR product 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 was higher than in Fiscal 1997
primarily due to a greater mix of SPECTRUM II product line shipments versus
older products, and improved utilization of manufacturing capacity. 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.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
Fiscal 1998 of $24.5 million were $8.3 million higher than the $16.2 million
incurred in Fiscal 1997. This increase was primarily attributable to the
Company's development of its new Altium high-capacity wireless platform and
XP4 frequency rollout plan.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses for Fiscal 1998 increased by $19.2 million to $65.3
million from $46.1 million in Fiscal 1997. 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, and to higher 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 the selling, general, and
administrative expenses of Granger Inc., partially contributed to this
increase.
MERGER AND RESTRUCTURING EXPENSES. Merger and restructuring expenses totaled
$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, MAS Technology asset valuation reserves for inventory,
receivables, and warranty totaling $1.3 million, as well as various other
costs of $3.2 million relating to office closures and contract terminations.
There are no remaining amounts to be paid during Fiscal 2000.
INTEREST AND OTHER INCOME, NET. Interest income for Fiscal 1998 was $3.1
million compared to $0.5 million in Fiscal 1997. This increase resulted
primarily from higher average cash balances. Other income, net for Fiscal
1998 was $0.7 million compared to $0.1 million in Fiscal 1997. This increase
resulted primarily from foreign exchange gains.
INTEREST EXPENSE. Interest expense for Fiscal 1998 was $0.9 million compared
to $1.6 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 FOR INCOME TAXES. The Company recorded an income tax provision in
Fiscal 1998 at an effective rate of 17%. This was less than the statutory
rate primarily due to the utilization of net operating losses, tax credits,
and other tax-attributable carry-forwards.
LIQUIDITY AND CAPITAL RESOURCES
In Fiscal 1999, the Company's cash and short-term investments decreased by
$34.9 million. This decrease was primarily the result of the $96.7 million
net loss, partially offset by non-cash expenses such as depreciation and
amortization, and provisions for inventory reserves, warranty, and
uncollectable accounts.
Accounts receivable decreased by 30% during Fiscal 1999 compared to Fiscal
1998 primarily resulting from a 31% decrease in net sales. Net inventories
decreased by 31% in Fiscal 1999 compared to the prior year due to decreased
purchases by the Company in connection with its declining sales and increased
provisions for excess and obsolete inventories. Inventory reserves increased
in Fiscal 1999 compared to Fiscal 1998 as the merger with Innova and the
planned introduction of new product lines accelerated the obsolescence of the
SPECTRUM II product line.
THIRTEEN
<PAGE>
Accounts payable decreased by 37% in Fiscal 1999 compared to Fiscal 1998 due
to the decrease in inventory purchases and selling, general, and
administrative expenses. The increase in accrued liabilities was due
primarily to inventory purchase commitments, and merger- and
restructuring-related expenses discussed above.
At March 31, 1999, the Company had an asset-based borrowing facility
agreement with a U.S. lender for $40.0 million. The working capital line of
credit, which includes a $5.0 million term loan, is secured by certain
receivables, inventory, and fixed assets of the Company. This credit facility
provides borrowings at prime plus 1.5% per annum. There is a minimum monthly
interest requirement of $20,000. As of March 31, 1999, approximately $21.0
million was available for borrowing under this agreement, of which $2.6
million was outstanding. This credit facility does not require the
maintenance of financial covenants.
In the future, the Company may require additional financing from other
sources; however, there can be no assurance that the Company will be able to
obtain such additional financing in the required time frame on commercially
reasonable terms, or at all. Management has implemented plans to reduce the
Company's cash requirements through a combination of reductions in working
capital, equipment purchases, and operating expenditures. Management believes
that such plans, combined with existing cash balances and other sources of
liquidity, will enable the Company to meet its cash requirements through
Fiscal 2000. However, there can be no assurance that the Company will be able
to implement these plans or that it will be able to do so without a material
adverse effect on the Company's business, financial results, or results of
operations.
YEAR 2000 COMPLIANCE ISSUES. 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 and products could fail or
create erroneous results by or at the year 2000.
The Company is taking steps to ensure that its products and computer programs
will continue to operate on and after January 1, 2000. The Company formed a
project team consisting of staff from Manufacturing, Customer Service,
Finance, Human Resources, Sales, Marketing, Legal, Engineering, and
Information Technology (IT) departments, led by a project manager. A
five-phase solution process has been established consisting of (1) awareness,
(2) assessment, (3) renovation, (4) validation, and (5) implementation. The
Company has substantially completed this five-phase process with respect to
most of its Year 2000 issues. The remaining open issues consist of
completing major vendor site reviews and contingency plans for each major
location. The Company's Year 2000 project team identified its manufacturing
IT system as its highest priority and has implemented Year 2000 upgrades to
its manufacturing systems. The Company's network operating systems also are
Year 2000-ready. The Company's personal computers have been evaluated and
upgrades were installed to correct noncompliance. Some older personal
computers were replaced or taken out of service.
The Company has completed an assessment of most of its products. Most of its
hardware products are not affected by the Year 2000 issue because no internal
clock exists in these products. Year 2000 readiness testing has been
completed for newer products, including the Altium product line and network
software products. Some older network software products are not Year
2000-ready, and the Company has developed an upgrade plan for customers who
are using this software.
The Company mailed letters to its primary suppliers and subcontractors to
determine whether they are developing plans to address processing
transactions in the Year 2000 and to monitor their progress toward Year 2000
capability. Approximately 50% of the vendors contacted have responded, and
the Year 2000 team is currently arranging site visits with critical vendors
to ensure that processes are actually in place as represented.
The Company believes that it will expend approximately $0.5 million
investigating and remedying issues related to Year 2000 readiness involving
internal operations. Approximately $0.2 million has been expensed to date for
purchases of software test tools, software upgrades, and upgrading a security
system related to Year 2000 readiness. In addition, the Company estimates
that
FOURTEEN
<PAGE>
$0.2 million of internal personnel costs have been incurred to date
supporting the Company's Year 2000 readiness plan.
If systems critical to the Company's operations have not been made Year
2000-ready by the completion of the project, the Year 2000 issue could have a
material adverse effect on the Company's financial statements. The Company is
currently developing a contingency plan to operate in the event that any
noncompliant critical systems are not remedied by January 1, 2000. The
Company expects to finalize its contingency plan by September 30, 1999.
Based on the steps being taken to address this issue and the progress to
date, the Company's management believes that the Year 2000 readiness expenses
will not have a material adverse effect on the Company's earnings. However,
there can be no assurance that Year 2000 problems will not occur with respect
to the Company's computer systems. Furthermore, the Year 2000 problem may
impact other entities with which the Company transacts business, and the
Company cannot predict the effect of the Year 2000 problem on such entities
or the resulting effect on the Company. As a result, if preventative and/or
corrective actions by the Company or those the Company does business with are
not made in a timely manner, the Year 2000 issue could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
EUROPEAN MONETARY UNION. In January 1999, a new currency called the "euro"
was introduced in certain Economic and Monetary Union ("EMU") countries.
During 2002, all EMU countries are expected to be operating with the euro as
their single currency. Uncertainty exists as to the effect the euro currency
will have on the marketplace. Additionally, all of the rules and regulations
have not yet been defined and finalized by the European Commission with
regard to the euro currency. The Company has assessed the effect the euro
formation will have on its internal systems and the sale of its products. The
Company's European sales and operating transactions are based primarily in
U.S. dollars or U.K. pounds sterling, neither of which are subject to the
euro conversion. While the Company does have some sales denominated in the
European Currency Unit, this currency is successfully being converted in the
market to the new European Monetary Unit at parity. In addition, the Company
upgraded its internal computer systems to convert the European currency to
the euro. The cost of upgrading the Company's systems in connection with the
euro conversion was not material and no material adverse effect on the
Company's business, financial condition, and results of operations is
expected due to the upgrade.
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, 1999, the Company had forward foreign exchange contracts
to exchange various foreign currencies for U.S. dollars in the aggregate
amount of $25.1 million, primarily in New Zealand dollars, British pounds,
and European Monetary Units. Gains and losses associated with currency rate
changes on forward foreign exchange contracts are recorded currently in
income as they offset corresponding gains and losses on the foreign
currency-denominated assets and liabilities being hedged. Therefore, the
carrying value of forward foreign exchange contracts approximates their fair
value. The Company believes that the credit risk with respect to its forward
foreign exchange contracts is minimal because the Company 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 some foreign exchange gains and losses to date, and expects to
incur additional gains and losses in Fiscal 2000. Digital Microwave did
engage in foreign currency hedging activities during Fiscal 1999, as
explained above, and intends to continue doing so as needed.
FIFTEEN
<PAGE>
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 timing
of orders, delivery intervals, customer and product mix, 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 operation 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 upon 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 pricing
pressure that 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 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, Microwave Communications Division of Harris
Corporation, P-COM, Alcatel, Nokia, NERA, NEC, and SIAE, many of which have
more extensive engineering, manufacturing, and marketing capabilities and
significantly greater financial, technical, and personnel resources than the
Company. The Company believes that its ability to compete successfully will
depend on a number of factors both within and outside its control, including
price, quality, availability, customer service and support, breadth of
product line, product performance and features, rapid delivery, reliability,
timing of new product introductions by the Company, its customers and its
competitors, and the ability of its customers to obtain financing. The
Company continues to experience customer demands for shorter delivery cycles.
The Company expects that international sales will continue to account for the
majority of its net product sales for the foreseeable future. As a result,
the Company is subject to the risks of doing business internationally,
including unexpected changes in regulatory requirements, fluctuations in
foreign currency exchange rates, imposition of tariffs and other barriers and
restrictions, the burdens of complying with a variety of foreign laws, and
general economic and geopolitical conditions, including inflation and trade
relationships. There can be no assurance that currency fluctuations, changes
in the rate of inflation, or any of the aforementioned factors will not have
a material adverse effect on the Company's business, financial 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 can be given that such materials,
components, and subsystems
SIXTEEN
<PAGE>
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 impact
on the Company's business, financial condition, and results of operations.
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 contractually obligated to purchase any quantity of
products in any particular period, and product sales to major customers have
varied widely from period to period. The loss of any existing customer, a
significant reduction in the level of sales to any existing customer, or the
failure of the Company to gain additional customers could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
- ------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
years ended march 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales $ 236,499 $ 345,116 $ 213,441 $ 174,380 $ 167,506
Net income (loss) (96,729) 18,818 6,461 (13,533) (3,751)
Diluted net income (loss) per share (1.57) 0.35 0.13 (0.35) (0.10)
CONSOLIDATED BALANCE SHEETS DATA:
Total assets $ 202,164 $ 297,196 $ 200,504 $ 113,597 $ 114,593
Long-term liabilities 2,236 1,174 700 10,097 6,805
</TABLE>
SEVENTEEN
<PAGE>
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
march 31,
-------------------------------
1999 1998
-------------------------------
(in thousands, except share and
per share amounts)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 21,518 $ 27,585
Short-term investments 5,745 34,540
Accounts receivable, net of allowance of $3,261 in 1999 and $3,999 in 1998 60,253 86,061
Inventories 50,610 73,029
Deferred tax asset 3,009 6,685
Other current assets 12,827 9,145
-------------------------------
Total current assets 153,962 237,045
-------------------------------
PROPERTY AND EQUIPMENT:
Machinery and equipment 77,236 71,413
Land and buildings 6,090 4,125
Furniture and fixtures 10,327 8,755
Leasehold improvements 4,597 3,332
-------------------------------
98,250 87,625
Accumulated depreciation and amortization (55,225) (43,963)
-------------------------------
Net property and equipment 43,025 43,662
-------------------------------
Other assets 5,177 16,489
-------------------------------
$ 202,164 $ 297,196
-------------------------------
-------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 725 $ -
Current maturities of capital lease obligations 862 1,342
Accounts payable 25,116 39,572
Income taxes payable 1,399 1,298
Accrued liabilities 40,613 27,210
-------------------------------
Total current liabilities 68,715 69,422
LONG-TERM LIABILITIES:
Long-term debt 1,896 -
Capital lease obligations, net of current maturities 340 1,174
-------------------------------
Total liabilities 70,951 70,596
-------------------------------
-------------------------------
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; 62,144,171
shares in 1999 and 61,027,154 shares in 1998 issued and outstanding 621 610
Additional paid-in capital 250,602 248,447
Deferred stock compensation expense (88) (397)
Accumulated deficit (115,424) (20,499)
Accumulated other comprehensive loss (4,498) (1,561)
-------------------------------
Total stockholders' equity 131,213 226,600
-------------------------------
$ 202,164 $ 297,196
-------------------------------
-------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
EIGHTEEN
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
years ended march 31,
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
NET SALES $ 236,499 $ 345,116 $ 213,441
Cost of sales 185,493 221,021 141,000
Inventory valuation charges 37,739 5,850 -
---------------------------------------------------
Gross profit 13,267 118,245 72,441
---------------------------------------------------
OPERATING EXPENSES:
Research and development 24,131 24,482 16,192
Selling, general, and administrative 55,342 65,280 46,097
Merger and restructuring 29,941 8,752 -
---------------------------------------------------
Total operating expenses 109,414 98,514 62,289
---------------------------------------------------
Income (loss) from operations (96,147) 19,731 10,152
OTHER INCOME (EXPENSE):
Interest income 1,474 3,080 473
Interest expense (479) (856) (1,582)
Other income, net (970) 720 53
---------------------------------------------------
Total other income (expense), net 25 2,944 (1,056)
---------------------------------------------------
Income (loss) before provision for income taxes (96,122) 22,675 9,096
Provision for income taxes 607 3,857 2,635
---------------------------------------------------
NET INCOME (LOSS) $ (96,729) $ 18,818 $ 6,461
---------------------------------------------------
---------------------------------------------------
Basic earnings (loss) per share $ (1.57) $ 0.37 $ 0.16
Diluted earnings (loss) per share $ (1.57) $ 0.35 $ 0.13
Basic weighted average shares outstanding 61,601 51,285 39,541
Impact of dilutive stock options and warrants N/A 3,174 10,923
---------------------------------------------------
Diluted weighted average shares outstanding 61,601 54,459 50,464
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
NINETEEN
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
years ended march 31, 1999, 1998, and 1997
-------------------------------------------------------------------------------------
Additional Deferred Accumulated Total
Common Stock Paid-In Stock Accumulated Other Com- Stockholders'
Shares Amount Capital Compensation Deficit prehensive Loss Equity
-------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1996 32,569 $ 325 $ 70,229 $ - $ (45,778) $ 26 $ 24,802
Components of comprehensive income:
Net income - - - - 6,461 - 6,461
Unrealized holding loss on
available-for-sale securities - - - - - (63) (63)
Translation adjustment - - - - - 50 50
--------
Total comprehensive income 6,448
--------
Sale of stock 4,461 45 51,592 - - - 51,637
Stock options exercised 980 10 4,765 - - - 4,775
Tax benefit related to employee
stock transactions - - 285 - - - 285
---------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 38,010 380 126,871 - (39,317) 13 87,947
Components of comprehensive income:
Net income - - - - 18,818 - 18,818
Unrealized holding gain on
available-for-sale securities - - - - - 46 46
Translation adjustment - - - - - (1,620) (1,620)
--------
Total comprehensive income 17,244
--------
Proceeds from sale of stock 11,649 117 62,054 - - - 62,171
Conversion of preferred stock 9,116 91 47,678 - - - 47,769
Stock issued for options & warrants 2,252 22 9,652 (1,590) - - 8,084
Amortization of deferred stock compensation - - - 1,193 - - 1,193
Tax benefit related to employee
stock transactions - - 2,192 - - - 2,192
---------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 61,027 610 248,447 (397) (20,499) (1,561) 226,600
Components of comprehensive income:
Net loss - - - - (96,729) - (96,729)
Unrealized holding loss on
available-for-sale securities - - - - - (1,613) (1,613)
Translation adjustment - - - - - (1,324) (1,324)
Total comprehensive loss (99,666)
Proceeds from sale of stock 372 4 904 - - - 908
Stock issued for options & warrants 745 7 1,187 - - - 1,194
Amortization of deferred stock compensation - - - 309 - - 309
Tax benefit related to employee
stock transactions - - 64 - - - 64
Adjustment to conform year-end
of pooled company - - - - 1,804 - 1,804
---------------------------------------------------------------------------------
BALANCE, MARCH 31, 1999 62,144 $ 621 $ 250,602 $ (88) $(115,424) $(4,498) $131,213
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
TWENTY
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
years ended march 31,
----------------------------------------
1999 1998 1997
----------------------------------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (96,729) $ 18,818 $ 6,461
Adjustments to reconcile net income
(loss) to net cash used for operating activities:
Adjustment to conform year-end of pooled company 1,804 - -
Depreciation and amortization 25,912 13,411 7,351
Provision for uncollectable accounts 4,608 356 1,400
Provision for inventory reserves 20,305 12,862 4,271
Provision for warranty reserves 7,023 5,310 2,385
Tax benefit of disqualifying dispositions 64 2,192 285
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 20,620 (27,744) (21,480)
Decrease (increase) in inventories 1,503 (33,024) (19,073)
Decrease (increase) in deferred taxes 3,639 (6,496) (193)
Increase in tax refund receivable (4,553) - -
Decrease (increase) in other current assets 786 (3,864) (565)
Decrease in other assets 11,624 6 24
Increase (decrease) in accounts payable (14,283) 9,890 8,972
Increase (decrease) in income tax payable 102 (1,065) 1,072
Increase (decrease) in other accrued liabilities 6,841 (5,810) 4,594
----------------------------------------
Net cash used for operating activities (10,734) (15,158) (4,496)
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities (16,621) (27,990) (17,947)
Maturity/sale of available-for-sale securities 45,374 11,327 -
Purchase of property and equipment (24,711) (30,471) (9,580)
Acquisition of business, net of cash received (2,286) (11,491) (374)
Investment in Granger Associates, Ltd. - (4,000) -
Proceeds from the sale of other assets 610 - -
Proceeds from disposal of fixed assets 1,194 - 61
----------------------------------------
Net cash provided by (used for) investing activities 3,560 (62,625) (27,840)
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from banks 2,600 - 20,681
Repayments to banks - (6,665) (21,561)
Payment of assumed Granger, Inc. debt - (3,286) -
Payments of capital lease obligations (1,314) (1,951) (1,429)
Proceeds from sale of Common Stock 2,166 77,143 65,076
----------------------------------------
Net cash provided by financing activities 3,452 65,241 62,767
----------------------------------------
Effect of exchange rate changes on cash (2,345) (420) (74)
----------------------------------------
Net increase (decrease) in cash and cash equivalents (6,067) (12,962) 30,357
Cash and cash equivalents at beginning of year 27,585 40,547 10,190
----------------------------------------
Cash and cash equivalents at end of year $ 21,518 $ 27,585 $ 40,547
----------------------------------------
----------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
TWENTY ONE
<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 130,000 radios that 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. Certain prior
year amounts have been reclassified to conform to the current year
presentation. Prior year information has been restated to reflect the October
1998 merger with Innova Corporation ("Innova"), a Washington corporation that
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. Cash and
cash equivalents consisted of cash, money market funds, and short-term
securities as of March 31, 1999 and 1998.
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, 1999, 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 and long-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 $1,665,000 were recorded as of March 31, 1999 and $17,000 of
unrealized holding losses were recorded as of March 31, 1998. There were
realized gains of approximately $6,000 on the sale of securities during each
of Fiscal 1999 and Fiscal 1998, and no realized gains or losses on sales of
securities during Fiscal 1997. Long-term investments are included in Other
Assets in the Consolidated Balance Sheets.
The following is a summary of short-term and long-term investments as of
March 31:
<TABLE>
<CAPTION>
1999
------------------------------------------
MARKET
VALUE AT UNREALIZED
COST AT BALANCE SHEET HOLDING
EACH ISSUE DATE GAIN (LOSS)
------------------------------------------
(in thousands)
<S> <C> <C> <C>
CORPORATE NOTES $ 5,753 $ 5,745 $ (8)
INVESTMENT IN
GRANGER ASSOCIATES, LTD. $ 3,399 $ 1,742 $ (1,657)
------------------------------------------
TOTAL $ 9,152 $ 7,487 $ (1,665)
------------------------------------------
------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------------
Market
Value at Unrealized
Cost at Balance Sheet Holding
Each Issue Date Gain (Loss)
------------------------------------------
(in thousands)
<S> <C> <C> <C>
Corporate notes $ 13,737 $ 13,720 $ (17)
Municipal notes 500 500 0
U.S. government agency
securities 19,320 19,320 0
Auction rate preferred notes 1,000 1,000 0
------------------------------------------
Total short-term investments $ 34,557 $ 34,540 $ (17)
------------------------------------------
------------------------------------------
Investment in Granger
Associates, Ltd. 4,000 4,000 -
------------------------------------------
$ 34,557 $ 34,540 $ (17)
------------------------------------------
------------------------------------------
</TABLE>
TWENTY TWO
<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,
-------------------------------------
1999 1998 1997
-------------------------------------
(in thousands)
<S> <C> <C> <C>
Interest $ 762 $ 856 $ 1,688
Income taxes $ 2,003 $ 8,885 $ 1,754
</TABLE>
The following non-cash transactions occurred during the fiscal years ended:
<TABLE>
<CAPTION>
march 31,
-------------------------------------
1999 1998 1997
-------------------------------------
(in thousands)
<S> <C> <C> <C>
Notes payable to stockholders
converted into redeemable
preferred stock $ - $ 1,500 $ 6,984
Estimated fair value of
warrant issued in
connection with
notes payable $ - $ 67 $ -
Capital lease obligations
incurred to acquire
equipment $ - $ 1,922 $ 633
Conversion of redeemable
preferred stock into
common stock $ - $ 47,769 $ -
</TABLE>
INVENTORIES. Inventories are stated at the lower of cost (first-in,
first-out) or market, where cost includes material, labor, and manufacturing
overhead. Inventories consisted of:
<TABLE>
<CAPTION>
march 31,
--------------------------
1999 1998
--------------------------
(in thousands)
<S> <C> <C>
Raw materials $ 25,616 $ 25,183
Work-in-process 9,537 19,104
Finished goods 15,457 28,742
---------------------------
$ 50,610 $ 73,029
---------------------------
---------------------------
</TABLE>
Inventories contained components and assemblies in excess of the Company's
current estimated requirements and were, therefore, reserved at March 31,
1999 and 1998. The Company charged $20.3 million in Fiscal 1999 and $12.9
million in Fiscal 1998 to cost of sales due to ongoing inventory valuation
analysis for excess and obsolete inventories as a result of product
transitions.
PROPERTY AND EQUIPMENT. Property and equipment is stated at cost.
Depreciation and amortization are calculated using the straight-line method
over the shorter of the estimated useful lives of the assets (ranging from
three to five years for equipment and furniture, and forty years for
buildings) or the lease term. Included in property and equipment are assets
held under capital leases with a cost of $2,517,000 for Fiscal 1999 and
$5,913,000 for Fiscal 1998. Accumulated amortization on leased assets was
$974,000 as of March 31, 1999 and $2,463,000 as of March 31, 1998.
OTHER ASSETS. Other assets include goodwill and other intangible assets that
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. Goodwill, gross of accumulated
amortization, amounted to $2,778,000 as of March 31, 1999 and $12,574,000 as
of March 31, 1998. Accumulated amortization of goodwill amounted to $959,000
at March 31, 1999 and $1,215,000 at March 31, 1998. 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. In accordance with Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," goodwill of $9.7
million, net of accumulated amortization related to the purchase of Granger,
Inc., was written off in the third quarter of Fiscal 1999. This write-off is
included in Merger and Restructuring expenses in the Consolidated Statements
of Operations. In March 1999, the assets of Granger, Inc. were sold.
TWENTY THREE
<PAGE>
ACCRUED LIABILITIES. Accrued liabilities included the following:
<TABLE>
<CAPTION>
march 31,
------------------------
1999 1998
------------------------
(in thousands)
<S> <C> <C>
Customer deposits $ 3,170 $ 3,387
Accrued payroll and benefits 2,628 5,361
Accrued commissions 4,986 6,162
Accrued warranty 3,033 3,247
Accrued restructuring 3,998 4,520
Accrued inventory purchase order
cancellation and valuation costs 15,482 -
Accrued professional fees 829 1,309
Other 6,486 3,224
------------------------
$ 40,612 $ 27,210
------------------------
------------------------
</TABLE>
FOREIGN CURRENCY TRANSLATION. The functional currency of the Company's
subsidiaries located in the United Kingdom and Latin America is the U.S.
dollar. Accordingly, all of the monetary assets and liabilities of these
subsidiaries are remeasured into U.S. dollars at the current exchange rate as
of the applicable balance sheet date, and all non-monetary assets and
liabilities are remeasured at historical rates. Sales and expenses are
remeasured at the average exchange rate prevailing during the period. Gains
and losses resulting from the remeasurement of the subsidiaries' financial
statements are included in the Consolidated Statements of Operations. The
Company's other international subsidiaries use their local currency as their
functional currency. Assets and liabilities of these subsidiaries are
translated at the exchange rates in effect at the balance sheet date, and
income 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 loss was $799,000 in Fiscal 1999, a
gain of $1,070,000 in Fiscal 1998, and a loss of $10,000 in Fiscal 1997.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. The Company hedges certain portions
of its exposure to foreign currency fluctuations through the use of forward
foreign exchange contracts. The Company enters into forward foreign exchange
contracts for purposes other than trading, but the Company does not engage in
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, 1999, the Company had forward foreign
exchange contracts to exchange various foreign currencies for U.S. dollars in
the aggregate amount of $25.1 million, primarily in New Zealand dollars,
British pounds, and European Currency Units. Gains and losses associated with
currency rate changes on forward foreign exchange contracts are recorded in
income if 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 major financial institutions. Market risk with respect to
forward foreign exchange contracts is offset by the corresponding exposure
related to the underlying assets, liabilities, and shipments of product.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally of temporary
cash investments and trade receivables. The Company has cash investment
policies that limit the amount of credit exposure to any one financial
institution and restrict placement of investments to financial institutions
evaluated as highly creditworthy. 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, China, the Asia/Pacific region, Africa, and South America.
The Company performs ongoing credit evaluations of its customers' financial
conditions and generally requires no collateral, although certain sales to
China, the Asia/Pacific region, Europe, South America, and Africa are paid
through letters of credit.
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
TWENTY FOUR
<PAGE>
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, which is
generally for a two-year period.
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.
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 potentially dilutive securities
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 potentially dilutive securities would be anti-dilutive.
As of March 31, 1999, there were 4,344,000 weighted-average options
outstanding and 1,983,000 warrants 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 1999.
Additionally, there were 1,998,000 weighted-average options outstanding as of
March 31, 1998, to purchase shares of Common Stock that were not included in
the computation of diluted earnings per share, as the options' exercise
prices were greater than the average market price of the shares of Common
Stock. At March 31, 1997, there were 1,504,000 weighted-average options
outstanding to purchase shares of Common Stock that were not included in the
computation of diluted earnings per share, as the options' exercise prices
were greater than the average market price of the shares of Common Stock.
Also excluded from the computation of diluted earnings per share were
warrants to acquire 2,259,000 shares of Common Stock in Fiscal 1998 and
3,074,000 shares of Common Stock in Fiscal 1997 as the warrants' exercise
prices were greater than the average market price of the shares of Common
Stock.
STOCK COMPENSATION. 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 1999, 1998, and 1997, based on the fair
market value of the options granted at the grant date as prescribed by
SFAS 123.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the FASB issued Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," which establishes standards for the
reporting and display of comprehensive income and its components in general
purpose financial statements. SFAS No. 133 is effective for companies with
fiscal years beginning after June 15, 2000. SFAS 133 requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities or firm commitments through earnings,
or recognized in other comprehensive income until the hedged item is
recognized in earnings. The Company believes that the adoption of this new
pronouncement will not have a material effect on the Company's financial
statements.
NOTE 3. CREDIT ARRANGEMENTS
At March 31, 1999, the Company had an asset-based borrowing facility
agreement with a U.S. lender for borrowings up to $40.0 million. The working
capital line of credit, which includes a $5.0 million term loan, is secured
by certain receivables, inventory, and fixed assets of the Company. This
credit facility provides borrowings at prime plus 1.5% per annum. There is a
minimum monthly interest requirement of $20,000. As of March 31, 1999,
approximately $21.0 million was available for borrowing under this agreement,
of which $2.6 million was outstanding. Repayment of the $2.6 million
outstanding amount is payable monthly over four years. The credit facility
does not require the maintenance of financial covenants; however, there were
certain non-financial covenants with which the Company was in compliance as
of March 31, 1999.
TWENTY FIVE
<PAGE>
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 that expire at various periods through 2018. At March 31,
1999, future minimum payment obligations under these leases were as follows:
<TABLE>
<CAPTION>
years ending march 31,
----------------------
Capital Operating
----------------------
(in thousands)
<S> <C> <C>
2000 $ 947 $ 4,224
2001 356 3,906
2002 2,579
2003 - 563
2004 - 383
2005 and beyond - 4,503
----------------------
Future minimum lease
payments 1,303 $ 16,158
--------
--------
Less amount representing
interest (averaging 15%) (101)
--------
Present value of future
minimum lease payments 1,202
Less current maturities (862)
--------
Long-term lease obligations $ 340
--------
--------
</TABLE>
Rent expense under operating leases was approximately $5,255,000 for the year
ended March 31, 1999, $6,083,000 for the year ended March 31, 1998, and
$3,869,000 for the year ended March 31, 1997.
LEGAL CONTINGENCIES. The Company is a party to various legal proceedings 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.
CONTINGENCIES IN MANUFACTURING AND SUPPLIERS. The Company's manufacturing
operations are highly dependent upon the timely delivery of materials and
components by outside suppliers. In addition, the Company depends in part
upon subcontractors to assemble major components and subsystems used in its
products in a timely and satisfactory manner. The Company does not generally
enter into long-term or volume-purchase agreements with any of its suppliers,
and no assurance can be given that such materials, components, and subsystems
will be available in the quantities required by the Company, if at all. The
inability of the Company to develop alternative sources of supply quickly and
on a cost-effective basis could materially impair the Company's ability to
manufacture and deliver its products in a timely manner. There can be no
assurance that the Company will not experience component delays or other
supply problems in the future.
NOTE 5. INCOME TAXES
The Company provides for income taxes using an asset and liability approach,
under which deferred income taxes are provided based upon enacted tax laws
and rates applicable to periods in which the taxes become payable.
The domestic and foreign components of income (loss) before provision for
income taxes were as follows:
<TABLE>
<CAPTION>
years ended march 31,
---------------------------------------
1999 1998 1997
---------------------------------------
(in thousands)
<S> <C> <C> <C>
Domestic $ (91,230) $ 19,861 $ 4,633
Foreign (4,892) 2,814 4,463
---------------------------------------
$ (96,122) $ 22,675 $ 9,096
---------------------------------------
---------------------------------------
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
years ended march 31,
---------------------------------------
1999 1998 1997
---------------------------------------
(in thousands)
<S> <C> <C> <C>
Current:
Federal $ - $ 6,770 $ 1,118
State - 365 44
Foreign 321 3,047 1,473
---------------------------------------
Total current 321 10,182 2,635
Deferred 286 (6,325) -
---------------------------------------
$ 607 $ 3,857 $ 2,635
---------------------------------------
---------------------------------------
</TABLE>
TWENTY SIX
<PAGE>
The provision for income taxes differs from the amount computed by applying the
statutory Federal income tax rate as follows:
<TABLE>
<CAPTION>
years ended march 31,
---------------------------------------
1999 1998 1997
---------------------------------------
(in thousands)
<S> <C> <C> <C>
Expected tax provision $ (32,681) $ 7,709 $ 3,093
State taxes net of
Federal benefit (2,403) 565 367
Change in valuation
allowance 32,385 (4,474) (423)
Non-deductible
acquisition costs 443 2,333 -
Non-deductible goodwill 3,863 371 -
FSC commission - (1,657) (581)
Other (1,000) (990) 179
---------------------------------------
$ 607 $ 3,857 $ 2,635
---------------------------------------
---------------------------------------
</TABLE>
The major components of the net deferred tax asset consisted of the following:
<TABLE>
<CAPTION>
march 31,
-------------------------
1999 1998
-------------------------
(in thousands)
<S> <C> <C>
Inventory reserves $ 17,454 $ 9,646
Restructuring reserves 9,495 -
Warranty reserves 1,055 1,154
Bad debt reserves 1,067 1,408
Accrued commissions 806 1,163
Net operating loss carry-forwards 13,051 13,713
Tax credits 7,887 901
Other 9,074 3,195
-------------------------
59,889 31,180
Less: Valuation reserve --
Operations (56,880) (24,495)
-------------------------
Net deferred tax asset $ 3,009 $ 6,685
-------------------------
-------------------------
</TABLE>
The realizability of the $3.0 million deferred tax asset at March 31, 1999 is
dependent on future profitability. If the Company does not generate net
income in future periods, the $3.0 million would be written off. 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. At March 31, 1999, the Company had U.S. Federal net
operating loss carry-forwards of $36,341,000 and state net operating loss
carry-forwards of $5,800,000 available to offset future taxable income, if
any. The net operating loss carry-forwards expire in various years through
2012. In addition, foreign net operating loss carry-forwards at March 31,
1999, total $878,000. Tax credits include approximately $3,613,000 of Federal
minimum tax credits that carry forward indefinitely. The remaining tax
credits of $4,274,000 are Federal and state credits that expire in various
years through 2019. The Internal Revenue Code contains provisions that may
limit the net operating loss carry-forwards to be used in any given year upon
the occurrence of certain events, including a significant change in ownership
interest.
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. All share and per share data have
been adjusted to give effect to this stock split. 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, 1999, options to purchase 264,040 shares of Common Stock were outstanding
under the 1984 Plan, of which 226,140 shares were exercisable at an average
exercise price of $6.88 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. In August
1996, the stockholders approved the reservation for issuance of 2,000,000
additional shares of Common Stock under the 1994 Plan. 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
TWENTY SEVEN
<PAGE>
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
7,766,660. At March 31, 1999, options to purchase 5,519,136 shares were
outstanding, of which 1,940,261 were exercisable at an average exercise price
of $8.62 per share. At March 31, 1999, the number of shares available for
future grant was 1,116,412.
The 1994 Plan contains: (i) a discretionary grant program for key employees
and consultants whereby options generally vest over five years and expire
after 10 years, (ii) an automatic grant program for non-employee Board
members, whereby options vest over three years and expire after 10 years,
(iii) a salary reduction grant program under which key employees may elect to
have a portion of their base salary reduced each year in return for stock
options, (iv) a stock fee program under which the non-employee Board members
may elect to apply all or a portion of their annual retainer fee to the
acquisition of shares of Common Stock, and (v) a stock issuance program under
which eligible individuals may be issued shares of Common Stock as a bonus
tied to their performance of services or the Company's attainment of
financial milestones, or pursuant to their individual elections to receive
such shares in lieu of base salary. The implementation and use of any of
these equity incentive programs (other than the automatic grant program and
the stock fee program) is within the sole discretion of the Compensation
Committee of the Board of Directors of the Company.
In April 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. The 1996 Plan will
terminate on the date on which all shares available have been issued. At
March 31, 1999, 799,210 shares were outstanding, of which 217,898 were
exercisable, at an average exercise price of $7.05 per share, and 80,610
shares were available for future grants.
In November 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, 1999, there were 492,450
options outstanding, none of which were exercisable, and 7,550 were available
for future grants.
In connection with the Company's merger with MAS Technology (see Note 8), the
Company assumed the MAS Technology 1997 Stock Option Plan (the "1997 MAS
Plan") under the same terms and conditions as were applicable under the 1997
MAS Plan prior to the merger. Each outstanding option to purchase MAS
ordinary shares, whether vested or unvested, was assumed and converted into
an option to receive 1.20 shares of the Company's Common Stock. The 1997 MAS
Plan provided for the grant of stock options to employees and certain
independent contractors of MAS. Options granted under the 1997 MAS Plan vest
from one to three years from the date of grant. Additionally, options granted
under the 1997 MAS Plan automatically vest upon the involuntary termination
of the employment of an option holder within 18 months of the change in
ownership of the Company. At March 31, 1999, options to purchase 314,040
shares of Common Stock were outstanding under the 1997 MAS Plan, of which
60,992 were exercisable at an average exercise price of $15.31 per share. The
1997 MAS Plan has been terminated as to future grants.
In connection with the Company's merger with Innova Corporation (see Note 8),
the Company assumed the 1990 Innova Stock Option Plan and the 1997 Director
Stock Option Plan (the "Innova Plans") under the same terms and conditions as
were applicable under the Innova Plans prior to the merger, except for the
immediate vesting of all outstanding stock options under these plans upon
consummation of the merger. Each outstanding option to purchase Innova common
shares was assumed and converted into an option to receive 1.05 shares of the
Company's Common Stock. The Innova Plans provided for the grant of stock
options to employees, directors, and certain vendors of Innova. At March 31,
1999, options to purchase 1,429,810 shares of Common Stock were outstanding
under the 1990 Innova Stock Option Plan and 52,500 shares of Common Stock
were outstanding under the 1997 Innova Director Stock Option Plan, of which
all stock options under both plans were exercisable at an average exercise
price of $2.71 per share. The Innova Plans have been terminated as to future
grants.
At March 31, 1999, the Company had reserved 10,075,758 shares for future
issuance under all stock options plans for which there were options
outstanding or available for grant as of March 31, 1999.
TWENTY EIGHT
<PAGE>
The following table summarizes the Company's stock option activity under all of
its stock option plans:
<TABLE>
<CAPTION>
fiscal years ended march 31,
------------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- -----------------------
WEIGHTED AVG Weighted Avg Weighted Avg
SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(shares in thousands)
Options outstanding at beginning of year 7,055 $ 8.86 5,633 $ 6.12 4,455 $ 4.94
Granted 3,768 6.69 3,778 10.56 2,503 7.49
Exercised (441) 2.99 (1,424) 5.63 (931) 4.32
Expired or canceled (1,511) 12.64 (932) 4.77 (394) 5.32
------------------------------------------------------------------------------------
Options outstanding at end of year 8,871 $ 7.51 7,055 $ 8.86 5,633 $ 6.12
------------------------------------------------------------------------------------
Exercisable at end of year 3,928 1,882 1,383
Weighted average fair value of
options granted $ 2.86 $ 5.62 $ 4.51
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
The following summarizes the stock options outstanding at March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ---------------------------
NUMBER WEIGHTED AVG NUMBER
OUTSTANDING REMAINING WEIGHTED AVG EXERCISABLE WEIGHTED AVG
ACTUAL RANGE OF EXERCISE PRICES 3/31/99 CONTRACTUAL LIFE EXERCISE PRICE 3/31/99 EXERCISE PRICE
- ----------------------------------------------------------------------------------------------------------------------
(shares in thousands)
<S> <C> <C> <C> <C> <C>
$ 0.23 - 4.13 2,790 8.61 $ 2.60 1,534 $ 2.22
$ 4.19 - 7.25 2,803 8.24 6.19 1,290 6.05
$ 7.31 - 13.19 2,197 7.67 10.16 855 10.46
$ 13.25 - 23.31 1,081 8.61 15.82 249 17.31
- ----------------------------------------------------------------------------------------------------------------------
$ 0.23 - 23.31 8,871 8.26 $ 7.22 3,928 $ 6.23
</TABLE>
In accordance with the disclosure requirements of SFAS No.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 1999 and 1998 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>
1999 1998 1997
----------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net income (loss) -- as reported $ (96,729) $ 18,818 $ 6,461
Net income (loss) -- pro forma $ (107,515) $ 9,746 $ 2,598
Basic net income (loss) per share -- as reported $ (1.57) $ 0.37 $ 0.16
Basic net income (loss) per share -- pro forma $ (1.75) $ 0.19 $ 0.07
Diluted net income (loss) per share
-- as reported $ (1.57) $ 0.35 $ 0.13
Diluted net income (loss) per share -- pro forma $ (1.75) $ 0.18 $ 0.05
</TABLE>
TWENTY NINE
<PAGE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock volatility 78.6% 74.7% 74.3%
Risk-free interest rate 4.8% - 5.6% 5.5% - 6.4% 5.3% - 7.1%
Expected life of options from vest date 0.9 YEARS 0.8 years 0.7 years
Forfeiture rate ACTUAL actual actual
- ------------------------------------------------------------------------------------------
</TABLE>
WARRANTS. In connection with the Innova merger, the Company assumed the
outstanding warrants of Innova to purchase common stock of Innova. The Innova
warrants were issued in conjunction with various financing rounds. No
separate values were assigned to the warrants as the values were not
significant at the date of issuance, other than warrants for 21,500 shares of
Innova common stock with an exercise price of $6.96 per share issued in
connection with debt financing in April 1997. There were 1,889,000 warrants
outstanding at March 31, 1999, 2,152,000 outstanding at March 31, 1998, and
2,928,000 at March 31, 1997. The warrants expire May 31, 1999, through April
30, 2002. Upon exercise of these warrants, each warrant is converted to 1.05
shares of the Company's Common Stock.
EMPLOYEE STOCK PURCHASE PLANS. In August 1996, the Company adopted an
Employee Stock Purchase Plan (the "1996 Purchase Plan") and reserved 600,000
shares of Common Stock for issuance under the 1996 Purchase Plan. Employees,
subject to certain restrictions, were able to purchase Common Stock under the
1996 Purchase Plan through payroll withholding at a price per share of 85% of
the fair market value at the beginning or end of the purchase period, as
defined under the terms of the 1996 Purchase Plan. The Company sold 372,345
shares in Fiscal 1999, and 166,597 shares in Fiscal 1998 under the Purchase
Plan. At March 31, 1999, no shares remained available for future issuance
under the 1996 Purchase Plan. Accordingly, in June 1999, the Company adopted
the 1999 Employee Stock Purchase Plan (the "1999 Purchase Plan") and reserved
900,000 shares of Common Stock for issuance under the 1999 Purchase Plan
subject to shareholder approval. Employees, subject to certain restrictions,
may purchase Common Stock under the 1999 Purchase Plan through payroll
withholding at a price per share of 85% of the fair market value at the
beginning or end of the purchase period, as defined under the terms of the
1999 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
THIRTY
<PAGE>
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. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," as of March 31, 1999. SFAS No. 131
establishes annual and interim reporting standards for an enterprise's
operating segments and related disclosures about products, geographic
information, and major customers. Operating segment information for Fiscal
1998 and 1997 is also presented in accordance with SFAS No. 131. See Note 1
for a brief description of the Company's business.
The Company is organized into two operating segments: Products and Services.
The Chief Executive Officer ("CEO") has been identified as the Chief
Operating Decision-Maker as defined by SFAS 131. Resources are allocated to
each of these groups using information on their revenues and operating
profits before interest and taxes.
The Products operating segment includes the SPECTRUM II, XP4, DART, Altium,
and DXR digital microwave systems for digital transmission markets, and
designs, develops, and manufactures these products in Seattle, Washington;
San Jose, California; and, Wellington, New Zealand. The Services operating
segment includes, but is not limited to, installation, repair, network
design, path surveys, integration, and other services.
The Company does not identify or allocate assets or depreciation by operating
segment, nor does the CEO evaluate these groups on these criteria. Operating
segments generally do not sell products to each other, and accordingly, there
are no significant inter-segment revenues to be reported. The Company does
not allocate interest and taxes to operating segments. The accounting
policies for segment reporting are the same as for the Company as a whole.
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------
(in thousands)
<S> <C> <C> <C>
PRODUCTS
Revenues $ 215,545 $ 320,688 $ 201,272
Operating profit (loss) (94,186) 16,572 8,390
SERVICES
Revenues 20,954 24,428 12,169
Operating profit (loss) (1,961) 3,159 1,762
TOTAL
Revenues $ 236,499 $ 345,116 $ 213,441
Operating profit (loss) (96,147) 19,731 10,152
</TABLE>
One customer (Siemens AG) accounted for 12% of net sales for Fiscal 1997. No
other customers accounted for more than 10% of net sales during Fiscal 1999,
1998, or 1997.
Revenues from unaffiliated customers by product for Fiscal 1999, 1998, and
1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------
(in thousands)
<S> <C> <C> <C>
SPECTRUM II $ 111,823 $ 175,326 $ 73,528
XP4 32,247 36,100 2,104
DXR 32,513 30,589 24,971
Altium 5,259 - -
Quantum 7,227 23,936 29,467
M-Series 3,581 13,596 31,485
Other Products 22,895 41,141 39,717
----------------------------------------
Total Products $ 215,545 $ 320,688 $201,272
Total Services $ 20,954 $ 24,428 $ 12,169
----------------------------------------
Total Revenue $ 236,499 $ 345,116 $213,441
----------------------------------------
----------------------------------------
</TABLE>
THIRTY ONE
<PAGE>
Revenues from unaffiliated customers by geographic region for Fiscal 1999, 1998,
and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------
(in thousands)
<S> <C> <C> <C>
Europe $ 83,242 $ 146,812 $ 81,068
Africa 19,036 16,283 12,300
North America 31,757 31,239 26,922
South America 52,207 54,707 26,576
Asia/Pacific 50,257 96,075 66,575
----------------------------------------
Total revenues $236,499 $345,116 $213,441
----------------------------------------
----------------------------------------
</TABLE>
Long-lived assets consisted primarily of property, plant, and equipment during
Fiscal 1999 and 1998. Net property, plant, and equipment by country was as
follows:
<TABLE>
<CAPTION>
1999 1998
------------------------
(in thousands)
<S> <C> <C>
United States $ 28,043 $ 32,122
United Kingdom 11,621 8,946
Other foreign countries 3,361 2,594
------------------------
Total property, plant, and
equipment, net $ 43,025 $ 43,662
------------------------
------------------------
</TABLE>
NOTE 8. 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 was $5.8 million and liabilities assumed was $1.9 million. The
purchase price in excess of the net assets acquired of $10.8 million was
recorded as goodwill on the balance sheet. (See Note 2 above). The
acquisition was accounted for using the purchase method of accounting.
Accordingly, the accompanying financial statements include the results of
Granger, Inc. since the date of acquisition. No pro forma financial
statements for the periods presented have been provided 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. In
Fiscal 1999, the Company sold approximately 10% of this investment for
$470,000.
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
was qualified 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.
THIRTY TWO
<PAGE>
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 the nine months ended December 31, 1997.
<TABLE>
<CAPTION>
year ended nine months ended
march 31, 1997 december 31, 1997
-----------------------------------
<S> <C> <C> <C>
REVENUE: Digital Microwave $ 178,344 $ 195,790
MAS Technology 35,300 38,846
Intercompany sales (2,307) (6,020)
-----------------------------------
Total $ 211,337 $ 228,616
-----------------------------------
-----------------------------------
Net INCOME: Digital Microwave $ 11,707 $ 22,067
MAS Technology 2,165 3,770
Intercompany profit eliminations (82) (14)
-----------------------------------
Total $ 13,790 $ 25,823
-----------------------------------
-----------------------------------
</TABLE>
In October 1998, stockholders approved the issuance of Common Stock of the
Company pursuant to an agreement to merge with Innova Corporation ("Innova"),
a Washington corporation, which designs, manufactures, markets, and supports
digital microwave radio links for the worldwide telecommunications market.
Under the terms of the agreement, the Company exchanged 1.05 shares of its
Common Stock for each outstanding share of Innova stock, stock options, and
warrants. The Company issued approximately 14.7 million shares to Innova
shareholders upon consummation of the merger. The combination qualified 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 Innova 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 1998 and Fiscal 1997 and the six months ended September 30, 1996.
<TABLE>
<CAPTION>
years ended march 31 six months ended
1998 1997 september 31, 1996
------------------------ ------------------
<S> <C> <C> <C> <C>
REVENUE: Digital Microwave $ 310,490 $ 211,337 $ 102,614
Innova 36,100 2,104 15,881
Intercompany sales (1,474) - -
------------------------ ------------------
Total $ 345,116 $ 213,441 $ 118,495
------------------------ ------------------
------------------------ ------------------
NET INCOME: Digital Microwave $ 19,878 $ 13,790 $ (21,047)
Innova (1,060) (7,329) (5,548)
Intercompany profit eliminations - - -
------------------------ ------------------
Total $ 18,818 $ 6,461 $ 26,595
------------------------ ------------------
------------------------ ------------------
</TABLE>
THIRTY THREE
<PAGE>
Merger and restructuring expenses of $8.8 million for Fiscal 1998 included
payments of $4.3 million for investment banker, legal, and accounting fees;
asset valuation reserves for inventory, receivables, and warranty totaling
$1.3 million; as well as various other costs of $3.2 million, which included
office closures and contract terminations. As of March 31, 1999, there was no
remaining restructuring reserve related to the Fiscal 1998 merger and
restructuring.
Merger and restructuring charges of $29.9 million were recorded in Fiscal
1999. These charges consisted of $2.7 million for investment banker, legal,
and accounting fees related to the Innova merger consummated in October 1998,
$4.2 million for severance costs, $4.1 million for facility termination
costs, a write-off of $5.8 million related to the discontinuance of several
projects related to the implementation of software purchased for internal
use, and a write-off of goodwill and certain assets related to the Company's
subsidiary, Granger, Inc., totaling $13.1 million. The assets of Granger,
Inc. were sold in March 1999. Approximately $12.2 million of the $29.9
million in merger and restructuring charges will be a cash outflow, of which
$8.2 million has been paid as of March 31, 1999. The remaining amounts are
expected to be paid during Fiscal 2000, and consist of $0.9 million for
severance, $2.3 million for facility termination costs, and $0.8 million for
purchased commitments of software.
THIRTY FOUR
<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, 1999 and 1998, and the related Consolidated Statements of Operations,
Stockholders' Equity, and Cash Flows for each of the three years in the
period ended March 31, 1999. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 1999, in conformity with generally accepted accounting
principles.
/s/Arthur Andersen LLP
- ------------------------
Arthur Andersen LLP
San Jose, California
April 21, 1999
THIRTY FIVE
<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,
------------------------------------------------------
1999 1998
------------------------------------------------------
HIGH LOW high low
------------------------------------------------------
<S> <C> <C> <C> <C>
1st Quarter $ 14.50 $ 7.00 $ 16.00 $ 9.63
2nd Quarter 7.63 2.88 22.63 13.63
3rd Quarter 6.84 2.38 25.50 12.63
4th Quarter 10.50 6.50 21.63 12.44
</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, 1999, there were approximately
356 stockholders of record.
CORPORATE DIRECTORY
OFFICERS
Charles D. Kissner
Chairman of the Board and
Chief Executive Officer
Jean-Francois Grenon
President
Narrowband Division
Sam Smookler
President
Broadband, Long Haul,
and Services Group
Frank Carretta, Jr.
Senior Vice President
Worldwide Sales
Carl A. Thomsen
Senior Vice President, Chief Financial
Officer, and Secretary
John C. Brandt
Vice President and Corporate Controller
Carol A. Goudey
Corporate Treasurer and
Assistant Secretary
Paul A. Kennard
Vice President, Corporate Marketing
and Chief Technical Officer
John P. O'Neil
Vice President, Personnel
DIRECTORS
Richard C. Alberding
Executive Vice President (Retired)
Hewlett-Packard Company
Paul S. Bachow
President of the Corporate General Partners
Bachow Investment Partners III, L.P.
Paul S. Bachow Co-Investment Fund, L.P.
John W. Combs
President, Southwest Area
Nextel Communications, Inc.
Clifford H. Higgerson
General Partner
Communications Ventures
and General Partner
Vanguard Venture Partners
Charles D. Kissner
Chairman of the Board and
Chief Executive Officer
Dr. James D. Meindl, Ph.D.
Director of Microelectronics
Research Center
Chaired Professor of Microelectronics
Georgia Institute of Technology
V. Frank Mendicino
General Partner
Woodside Fund
Billy B. Oliver
A Private Communications
Consultant
Howard Oringer
Managing Director
Communications Capital Group
THIRTY SIX
<PAGE>
INDEPENDENT PUBLIC ACCOUNTS
Arthur Andersen LLP
San Jose, California
GENERAL LEGAL COUNSEL
Morrison & Foerster LLP
San Francisco, California
REGISTRAR AND TRANSFER AGENT
ChaseMellon
Shareholder Services LLC
San Francisco, California
PRINCIPAL SUBSIDIARIES
DMC Telecom UK, Ltd.
Lanarkshire, Scotland
DMC Telecom Canada, Inc.
Etobicoke, Ontario, Canada
DMC do Brazil Ltda.
Campinas, Brazil
DMC de Mexico, S.A. de C.V.
Mexico D.F., Mexico
Digital Microwave India
Private Limited
New Delhi, India
DMC Telecom Philippines, Inc.
Metro Manila, Philippines
Digital Microwave Corporation
Limited
Wellington, New Zealand
Digital Microwave (Proprietary)
Limited
South Pretoria, Republic of South Africa
Digital Microwave Asia Pacific (S)
Pte. Ltd.
Singapore
Digital Microwave NW, Inc.
Seattle, Washington, USA
CORPORATE HEADQUARTERS
Digital Microwave Corporation
170 Rose Orchard Way
San Jose, CA 95134
United States of America
SALES AND SERVICE OFFICES
NORTH AMERICA:
San Jose, California
Lawrenceville, Georgia
Itasca, Illinois
Plantation, Florida
Seattle, Washington
Etobicoke, Ontario, Canada
EUROPE:
Coventry, England
Lanarkshire, Scotland
Freising, Germany
Athens, Greece
Copenhagen, Denmark
Stockholm, Sweden
THE MIDDLE EAST:
Dubai, United Arab Emirates
AFRICA:
South Pretoria, South Africa
Harare, Zimbabwe
Francistown, Botswana
CENTRAL AND SOUTH AMERICA:
Mexico City, Mexico
Santa Fe de Bogota, Colombia
Buenos Aires, Argentina
Campinas, Sao Paulo, Brazil
Curitiba, Parana, Brazil
ASIA/PACIFIC:
Singapore
Wellington, New Zealand
Beijing, China
Clark Special Economic Zone, Philippines
Manila (Makati City), Philippines
New Delhi, India
Colombo, Sri Lanka
Victoria, Australia
Bangkok, Thailand
Kuala Lumpur, Malaysia
SEC FORM 10-K
A copy of the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission is available without charge by writing to:
Digital Microwave Corporation
Attn: Investor Relations
170 Rose Orchard Way
San Jose, CA 95134
[inside back cover]
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME/LOCATION JURISDICTION OF INCORPORATION
------------- -----------------------------
<S> <C>
DMC TELECOM U.K. LTD., Lanarkshire, Scotland State of Delaware, USA
DMC TELECOM CANADA, INC., Toronto, Canada Toronto, Canada
DMC DE MEXICO, SA. DE C.V., Mexico D.F., Mexico Mexico City, Mexico
DMC DO BRASIL LTDA., Campinas, Brazil Rio de Janeiro, Brazil
DMC TELECOM PHILIPPINES, INC., Makati City, Philippines Metro Manila, Philippines
DIGITAL MICROWAVE INDIA PRIVATE LIMITED , New Delhi, India New Delhi, India
DIGITAL MICROWAVE NW, INC., Seattle, Washington USA State of Washington, USA
MAS TECHNOLOGY LIMITED, Wellington, New Zealand Wellington, New Zealand
DIGITAL MICROWAVE ASIA PACIFIC (S) PTE. LTD., Singapore Republic of Singapore
DIGITAL MICROWAVE CORPORATION (PTY.) LIMITED, South Pretoria Republic of South Africa
</TABLE>
PAGE 28
<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, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 21,518
<SECURITIES> 5,745
<RECEIVABLES> 63,514
<ALLOWANCES> 3,261
<INVENTORY> 50,610
<CURRENT-ASSETS> 153,962
<PP&E> 98,250
<DEPRECIATION> 55,225
<TOTAL-ASSETS> 202,164
<CURRENT-LIABILITIES> 68,715
<BONDS> 1,896
0
0
<COMMON> 621
<OTHER-SE> 130,592
<TOTAL-LIABILITY-AND-EQUITY> 202,164
<SALES> 236,499
<TOTAL-REVENUES> 236,499
<CGS> 223,232
<TOTAL-COSTS> 223,232
<OTHER-EXPENSES> 109,414
<LOSS-PROVISION> 4,608
<INTEREST-EXPENSE> 479
<INCOME-PRETAX> (96,122)
<INCOME-TAX> 607
<INCOME-CONTINUING> (96,729)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (96,729)
<EPS-BASIC> (1.57)
<EPS-DILUTED> (1.57)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS RESTATED 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> 27,585
<SECURITIES> 34,540
<RECEIVABLES> 90,060
<ALLOWANCES> 3,999
<INVENTORY> 73,029
<CURRENT-ASSETS> 237,045
<PP&E> 87,625
<DEPRECIATION> 43,963
<TOTAL-ASSETS> 297,196
<CURRENT-LIABILITIES> 69,422
<BONDS> 0
0
0
<COMMON> 610
<OTHER-SE> 225,990
<TOTAL-LIABILITY-AND-EQUITY> 297,196
<SALES> 345,116
<TOTAL-REVENUES> 345,116
<CGS> 226,871
<TOTAL-COSTS> 226,871
<OTHER-EXPENSES> 98,514
<LOSS-PROVISION> 356
<INTEREST-EXPENSE> 856
<INCOME-PRETAX> 22,675
<INCOME-TAX> 3,857
<INCOME-CONTINUING> 18,818
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,818
<EPS-BASIC> 0.37
<EPS-DILUTED> 0.35
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS RESTATED 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, 1997 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-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 40,547
<SECURITIES> 17,947
<RECEIVABLES> 62,990
<ALLOWANCES> 3,377
<INVENTORY> 54,003
<CURRENT-ASSETS> 177,776
<PP&E> 58,250
<DEPRECIATION> 36,403
<TOTAL-ASSETS> 200,504
<CURRENT-LIABILITIES> 72,544
<BONDS> 0
0
0
<COMMON> 513
<OTHER-SE> 126,747
<TOTAL-LIABILITY-AND-EQUITY> 200,504
<SALES> 213,441
<TOTAL-REVENUES> 213,441
<CGS> 141,000
<TOTAL-COSTS> 141,000
<OTHER-EXPENSES> 62,289
<LOSS-PROVISION> 1,400
<INTEREST-EXPENSE> 1,582
<INCOME-PRETAX> 9,096
<INCOME-TAX> 2,635
<INCOME-CONTINUING> 6,461
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,461
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.13
</TABLE>
