-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TzymQiIDaW6HOWzV+fy8xwwu7rnEikIfnB0qQt7J0Tb/dtxYc7hzeaFTwAgTo2jP NdyIbk+gh55dLAWaBEU0Dw== 0000891618-96-001076.txt : 19960701 0000891618-96-001076.hdr.sgml : 19960701 ACCESSION NUMBER: 0000891618-96-001076 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960628 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL MICROWAVE CORP /DE/ CENTRAL INDEX KEY: 0000812703 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 770016028 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15895 FILM NUMBER: 96588320 BUSINESS ADDRESS: STREET 1: 170 ROSE ORCHARD WAY CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4089430777 MAIL ADDRESS: STREET 1: 170 ROSE ORCHARD WAY CITY: SAN JOSE STATE: CA ZIP: 95134 10-K 1 FORM 10-K 1 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 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED MARCH 31, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 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 offices) (Zip Code) 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. /X/ State the aggregate market value of voting stock held by non-affiliates of Registrant (based on the last reported sale price of $15.75 per share on the Nasdaq National Market) as of June 1, 1996: Approximately $240,737,427. As of June 1, 1996, there were 15,897,406 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, 1996 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 1996 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 8, 1996 are incorporated by reference into Part III of this Form 10-K Report. Page 1 2 TABLE OF CONTENTS DIGITAL MICROWAVE CORPORATION 1996 FORM 10-K ANNUAL REPORT PART I Item 1 The Business................................................ 3 Item 2 Properties ................................................. 14 Item 3 Legal Proceedings .......................................... 14 Item 4 Submission of Matters to a Vote of Security Holders ........ 14 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters ........................ 15 Item 6 Selected Financial Data .................................... 15 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations .................... 15 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 .............. 16 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 Statements, Schedules, and Reports on Form 8-K .................................... 17 Page 2 3 PART I ITEM 1. THE BUSINESS Digital Microwave Corporation (the "Company" or "DMC") designs, manufactures and markets advanced, high-performance digital microwave equipment for a variety of short and medium-haul communications applications worldwide. This equipment, which is based on microwave and millimeter wave technologies, is the primary alternative to fiber optic and copper cables for these applications, and may be used for the high speed transport of digital signals within telecommunications networks. The transported signals may be digitized voice, video, or data signals generated by computers or facsimile machines. Telecommunications service providers utilize the Company's technology to connect major clients to their networks; cellular and Personal Communications Service (PCS) providers utilize the technology to interconnect base station and switching equipment locations; large corporations, transportation authorities, government agencies and public utility companies utilize the technology as an alternative to leased wireline services in order to create cost efficient, private telecommunications networks. The Company serves a worldwide client base, and in fiscal 1996 approximately 88% of its net sales were to customers located outside of the United States. INDUSTRY BACKGROUND Over the past decade, there has been a significant increase in worldwide demand for rapid, reliable, high-quality telecommunications equipment for transmission of voice, data, facsimile, and video information. This demand has been fueled by changes in the regulatory environment in many developed countries; technological advances, particularly in the wireless communications arena; the rapid establishment of telecommunications infrastructures in many developing countries; and the requirements of private communications networks. Wireless solutions are highly attractive to new ventures establishing competing telecommunications service in highly developed countries, and to operators in developing countries seeking to rapidly increase the availability, quality, and choice of telecommunications services. MICROWAVE AND MILLIMETER WAVE RADIO PRODUCTS The Company's digital microwave radios consist of three basic components: a digital modem for interfacing with digital terminal equipment, a radio frequency ("RF") unit for converting a low frequency carrier signal from the modem to a high frequency microwave signal, and an antenna to radiate transmitting signals and capture receiving signals. From its inception, the Company has used technology and innovation to create quality products that are highly reliable, simple to install, easy to operate, and require minimal maintenance. Focused initially on short-haul microwave products operating at 23 GHz, the Company has progressively developed its range of product offerings and today sells products operating in frequency bands at 2, 6, 7, 8, 10, 11, 13, 15, 18, 23, 26, and 38 GHz, opening access to markets worldwide. To meet a wide range of interconnection applications, the Company currently offers products that are available to carry different digital signal capacities from the low end equivalent to 1XDS-1 or 1XE1 to multiples thereof, up to a maximum of 1XDS-3 or 2XE3. Frequency bands between 2 GHz and 30 GHz are typically classified as "Microwave," while bands between 30 GHz and 60 GHz are classified as "Millimeter Wave." Page 3 4 The basic architecture of the Company's products has consistently followed the innovation of its first designs and has subsequently been adopted as a standard format by many of the Company's competitors. CURRENT PRODUCTS During fiscal 1996, the Company sold products from several product families. Each product family has characteristics designed to meet the needs of specific markets or applications. The principal product families currently in production are the Quantum(TM), M Series, SPECTRUM(TM) II, and DMC Net(R). Other products include the LC, Classic/Classic II. These product families are described further below. SPECTRUM(TM) II During fiscal 1996 the Company commenced volume production of a new family of wireless products named SPECTRUM(TM)II. Designed to closely match the demands of the rapidly growing cellular, PCS and wireless local loop markets, the initial shipments were in 23 GHz and 38 GHz bands to European based clients. Additional options at 13, 15 and 18 GHz SPECTRUM(TM) II were also introduced and delivered by the Company during fiscal 1996. By the end of fiscal 1996 over 3,000 SPECTRUM(TM) II radios had been shipped to more than 20 customers worldwide. The SPECTRUM(TM) II draws from the innovation of earlier DMC products and by incorporating newer technologies adds many new features that make the product more flexible in both customer applications and manufacturing. The breadth of coverage of the SPECTRUM(TM) II product family will allow the Company to enhance its competitive position with regard to product features and performance. Significantly more functionality is available in the SPECTRUM(TM) II because of software configuration and control when compared to earlier generation products, a trend that the Company expects will continue for future products. Delayed in its initial deliveries to E-Plus, a major PCS client in Germany, the SPECTRUM(TM) II was fully technically approved and installations began in the second quarter of fiscal 1996. E-Plus has since committed to deliveries through the end of fiscal 1997. QUANTUM(TM) Designed for the lower frequency bands (2 to 15 GHz) and higher transmission capacities, the QUANTUM(TM) incorporates sophisticated circuitry to provide high quality transmission performance even over terrain that is hostile towards radio transmission techniques. Examples of difficult applications are long links across water, flat wetlands, or desert terrain where radio transmission quality can be adversely affected by weather conditions. In the U.S., the QUANTUM(TM) has been supplied at 6, 10 and 11 GHz for high performance private network applications of gas and electric utility companies. Internationally, the principal application of the QUANTUM(TM) is in backhaul transmission for cellular networks utilizing frequencies in the 7 and 8 GHz range. M SERIES The M Series has been the Company's biggest selling product. First introduced in 1989 at 18 GHz for the North American market, the M Series was progressively expanded and Page 4 5 enhanced to cover 7, 13, 15, 18 and 23 GHz applications. By 1994, the M Series had become one of the world's most utilized microwave radios for interconnection in cellular networks. The product's architecture consists of a common indoor interface unit and a range of outdoor microwave transmitter/receivers, which simplifies training, operation and maintenance wherever operators are required to use more than one frequency band for regulatory or licensing reasons, or simply to fulfill applications over varying distances. The M Series was the first commercialized microwave radio to incorporate multiplexing of up to 16XE1 or 16XDS-1 signals, eliminating the need for standalone multiplexing equipment to perform the same functions. The M Series has an excellent in-service reliability record in a wide variety of network applications worldwide. DMC NET(R) is a sophisticated network monitoring and control system designed to facilitate remote operation and maintenance of microwave radio networks. DMC Net(R) is a custom software application running under the Solaris operating system of SUN Microsystems that accesses digital status and control information integral to all DMC wireless products. DMC Net(R) is currently in use in networks ranging in size from small regional systems containing a few microwave radio links to large nationwide systems containing several thousand microwave radio links. Centralized management and control allows early warning of fault conditions, and rapid diagnosis of problems, and helps to reduce down time and lower the cost of maintenance. Network management capability is a key requirement for all modern telecommunications network applications and is a key differentiator in many of the Company's targeted opportunities. OTHER PRODUCTS CLASSIC/CLASSIC II and LC SERIES RADIOS are derivatives of the original DMC product design that, due to simplicity of design, dependability and low manufacturing cost, continue to generate modest ongoing revenues primarily from existing users. PRODUCT DEVELOPMENT ACTIVITIES The Company's current product development efforts are principally focused on the development of the following products: QUANTUM(TM) - The Company is redirecting product development efforts in fiscal 1997 to enhance its position in the markets currently addressed by the QUANTUM(TM) product line, and to begin to address higher capacity applications. SPECTRUM(TM) II - The Company is also continuing substantial product development efforts in fiscal 1997 to add to the available frequencies in this product line. Continued enhancement of the software for user interface applications is also underway. DMC NET(R) - The Company's current software development efforts are focused on enhancement of the Company's network monitoring and control capabilities. This network software is a significant part of the Company's product offerings, and provides the capability to monitor up to 5,000 radios on a network, as well as certain base station functions. There can be no assurance that the Company will be successful in developing and marketing any of these products, 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 Page 5 6 will adequately meet the requirements of the marketplace and achieve market acceptance. See "Factors That May Affect Future Financial Results." MARKETING, CUSTOMERS AND APPLICATIONS The Company markets its products across most sectors of the telecommunications industry. A number of the Company's major customers are joint ventures or consortiums whose members include BellSouth, Ameritech, Airtouch, Vodafone and Motorola. The principal market segments addressed by the Company, and examples of applications within those markets, are set forth below: MOBILE COMMUNICATIONS SERVICE PROVIDERS Customers in this segment include cellular telephone companies and PCN/PCS companies in the United States and abroad which use the Company's wireless solutions to connect cell sites and link them to switching centers for connection to the public switched telephone network. Although it is a premium or secondary personal communications service in developed countries, cellular/PCS service may often be the primary choice in many developing countries where upgrading the telecommunications infrastructure is an urgent priority. The Company believes that a substantial majority of its products sold are used in cellular, PCN, PCS or similar applications. Typical of the Company's customers in this segment, Panafon, one of the Company's Global Systems Mobile Communications ("GSM") cellular telephone customers, is using the Company's product families to interconnect cells and switching equipment for a cellular telephone network being constructed to cover the major metropolitan areas in Greece. E-Plus, a DCS 1800 PCN operator in Germany, is extensively deploying SPECTRUM(TM) II products managed by DMC Net(R), the Company's network monitoring and control system. In the United States, similar solutions are being provided to BellSouth PCS. The Company has also had significant sales in China, Malaysia, India, and the Philippines providing solutions to mobile communications network operators. TELEPHONE COMPANIES AND COMMON CARRIERS Customers include domestic and foreign telephone companies and long distance and inter-exchange carriers desiring to provide their customers with a greater variety of services, including direct access to long distance networks. Typical customer applications include trunking and local distribution of broadband signals. IONICA, a UK based provider of wireless local loop services, uses the Company's products for trunking applications to build its network. PRIVATE NETWORKS Customers include corporations, institutions, various agencies of the United States, and foreign governments and other organizations seeking greater control over the cost and performance of their communications services. Typical applications in this segment range from a single transmission link connecting two buildings, to complex major networks comprised of dozens of microwave terminals. BANAMEX, a private banking institution, has established a private network using the Company's products to connect several of its banks throughout Mexico to facilitate the rapid communication of information. Page 6 7 For the past several years the majority of the Company's sales have been in the first two categories described above. The following is a list of representative end user customers in the last year within each of these major segments:
MOBILE COMMUNICATIONS SERVICE PROVIDERS TELEPHONE COMPANIES AND COMMON CARRIERS Sterling (India) TELMEX (Mexico) Panafon (Greece) Regional Bell Operating Companies (USA) Comviq GSM (Sweden) Piltel (Philippines) Smart (Philippines) Mercury Communications Ltd.(United Kingdom) Libertel (Netherlands) IONICA (United Kingdom) Sapura (Malaysia) Isla Communications Co., Inc. (Philippines) Airtouch Communications (USA) Impsat (Colombia) BellSouth PCS (USA) E-Plus Mobilfunk GmbH (Germany) Jordan Mobile (Jordan)
CUSTOMER CONCENTRATION The Company has historically relied upon major orders from a small number of customers for a large portion of its net sales, and these key customers have changed from period to period. For fiscal 1996, the top four customers accounted for approximately 38% of net sales. One of these customers, Siemens AG, accounted for 22% of the Company's net sales. No other customer accounted for more than 10% of the Company's net sales. At March 31, 1996, four customers accounted for 49% of the Company's $84 million backlog, of which 16% was attributable to orders under the Siemens/E-Plus contract. 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 principal customers will continue to purchase products from the Company at current levels, if at all, and the loss of any one key customer could have a material adverse effect on the Company's results of operations. BACKLOG The Company's backlog at March 31, 1996 was $84 million, as compared with $93 million at March 31, 1995. The Company includes in backlog only orders scheduled for delivery within 12 months. Product orders in the Company's current backlog are subject to changes in delivery schedules or to cancellation at the option of the purchaser without significant penalty. Accordingly, although useful for scheduling production, backlog as of any particular date may not be a reliable measure of sales for any future period. See "Factors That May Affect Future Financial Results." The Company's major contractual awards are often subject to the receipt of firm orders, which, in turn, may be subject to many conditions, including that the equipment purchased be competitive in the telecommunications marketplace with respect to technology, price, quantity, and other commercial concerns. In addition, because the Company's major orders often require deliveries for periods over 12 months, such products are subject to risks associated with obsolescence due to rapidly changing technological advances. There can be no assurance that the Company will be able to continue to develop and provide competitive products. Page 7 8 SALES AND SERVICE The Company believes that a direct and continuing relationship with its customers is a competitive advantage in attracting new customers and satisfying existing ones. The Company offers its products and services principally through its own sales and service organization. To closely monitor the needs of its customers, the Company has designed a sales and service organization that maintains 13 sales or service offices in ten countries. The Company has four regional sales offices and service centers in North America located near Chicago, Illinois; Toronto, Canada; Atlanta, Georgia; and San Jose, California, where the Company's North American sales organization is headquartered. The Company also has sales and/or service centers in the United Kingdom, Germany, Sweden, Mexico, Colombia, China, Singapore, and the Philippines. In addition, the Company uses independent agents, distributors and international resellers worldwide in concert with its direct sales operation. The Company considers its ability to create and maintain long-term customer relationships an important component of its overall strategy in each of its markets. The Company employs over 179 people in its sales and service organization, approximately 66% of whom primarily support sales outside North America. 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 service and customer support personnel provide customers with training, installation, service and maintenance of the Company's systems under contract. The Company generally offers a standard two-year warranty for all customers. The Company provides warranty and post-warranty services from its San Jose manufacturing location and service centers in the United Kingdom, Canada, Mexico, the Philippines, and Germany. FOREIGN EXCHANGE/INTERNATIONAL SALES Total international sales were 88% and 87% of net sales for fiscal 1996 and 1995, respectively. The Company expects that international sales will continue to account for the majority of its sales in the foreseeable future. The Company is subject to the risks of foreign currency fluctuations, and the changing value of the dollar in relationship to foreign currencies could negatively impact the Company's operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 of "Notes to Consolidated Financial Statements" incorporated herein by reference. International operations and sales may also be adversely affected by the imposition and/or changes in government controls and regulatory requirements, export licensing requirements, restrictions on the export of critical technology, political and economic instability, trade restrictions, changes in tariffs and taxes, and general economic conditions, including inflation and trade relationships. RESEARCH AND DEVELOPMENT The Company has a continuing program of research and development directed toward the enhancement of existing products in response to customer needs and the introduction of new products to broaden its product line. Approximately $11.1 million was invested in research and development in fiscal 1996, compared to $11.4 million in fiscal 1995. Research and development expenses in fiscal 1995 were higher than fiscal 1996 because of major development efforts on the second generation SPECTRUM(TM) II products. As a percentage of net sales, research and development expenses were 7.4% for both fiscal 1996 and 1995. The Company will continue to invest in research and development because it believes that its future performance will depend on its ability to continue to enhance its existing products and to develop new products that meet market needs. There can be no assurance, however, that the Company's product development efforts will result in commercially successful Page 8 9 products. See "Factors That May Affect Future Financial Results" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" incorporated herein by reference. MANUFACTURING AND SUPPLIERS The Company's manufacturing operations consist primarily of final assembly, test and quality control of materials and components. The manufacturing process, performed at the Company's San Jose, California facility, consists primarily of materials management, extensive unit and environmental testing of components and subassemblies at each stage of the manufacturing process, final assembly of the terminals, and prior to shipment, quality assurance testing and inspection of all products. The Company's manufacturing operations are highly dependent upon the delivery of materials by outside suppliers in a timely manner. The Company uses local and offshore subcontractors to assemble major components and subassemblies used in its microwave products. The Company is reliant on the timely delivery of certain key components to meet its manufacturing plan. The inability of the Company to develop alternative sources of supply quickly and on a cost-effective basis could materially impair the Company's ability to manufacture and deliver its products. There can be no assurance that the Company will not experience component delays or other supply problems. Certain microwave integrated circuit subassemblies which are used in all of the Company's microwave radio products are supplied primarily by Microelectronics Technology, Inc. ("MTI") of Taiwan. These subassemblies, which are manufactured by MTI in Taiwan, form the nucleus of the RF Unit. The Company's relationship with MTI commenced in March 1984, at which time the Company and MTI entered into an agreement (the "Development Agreement") pursuant to which MTI performed development engineering work for the Company. The Development Agreement provides MTI with the right to manufacture up to 75% of the Company's production requirements for microwave integrated circuit subassemblies designed by MTI for the Company as long as MTI is able to meet cost, quality and delivery standards available to the Company from other sources. The Development Agreement also provides MTI with a right of first refusal to manufacture certain of the Company's microwave products if the Company determines to subcontract the manufacturing of these products. During the term of the Development Agreement and for a period of one year after termination thereof, MTI may not design, develop, manufacture or cause to be manufactured or sold, for other persons or companies who are, or may become, competitors to the Company, any proprietary designs or components that are similar to certain of the Company's products. The Development Agreement may only be terminated by either party in the event of a breach by the other. From time to time, the Company has experienced delays and other supply problems with MTI, but such delays and other problems have not had a significant impact on the Company's results of operations. To avoid any future problems associated with delays, the Company has contracted for component and subassembly parts from additional sources. The Company and MTI 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 company's respective production plans. COMPETITION The short-haul and medium-haul transmission business is a specialized segment of the telecommunications equipment market and is intensely competitive. A substantial number of established and emerging companies offer a variety of microwave, fiber optic and other transmission 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. The Company Page 9 10 considers its primary competitors to be Alcatel, NEC, California Microwave Corporation, P-Com, Inc., and the Farinon Division of Harris Corporation. In addition, other existing competitors include L.M. Ericsson, Siemens AG, Nokia, SIAE, and NERA. 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 and pressure on gross margins. The Company believes that competition in its markets is based primarily on technological capability, performance, on-time delivery, price, reliability and customer support. 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 the development and timely introduction of new products that keep pace with technological developments and emerging industry standards, and by providing such products at competitive prices. The Company often forms alliances, or teaming arrangements, with major international telecommunications equipment providers as a means of increasing the Company's ability to pursue these limited number of major awards each year. These alliances are necessary for the Company where the customer requires a single system provider with a variety of equipment and service capabilities, as well as for financial strength. There can be no assurance that the Company will be able to continue to develop such alliances, or that if such alliances are developed, they will be successful. E-PLUS CONTRACT In November 1993, the Company entered into an agreement with Siemens AG to supply SPECTRUM(TM) II digital microwave radios to E-Plus Mobilfunk GmbH. As of March 31, 1995, the Company had not met its product acceptance or delivery schedule, and, as a result, recorded significant reserves for product discounts on interim equipment, equipment returns and other related costs (See Note 9 of Notes to Consolidated Financial Statements --"Customer Agreement" incorporated herein by reference.). In July 1995, the Company received product acceptance from E-Plus, and began delivery and installation of the SPECTRUM(TM) II equipment. During the third quarter of fiscal 1996, the Company provided additional reserves of approximately $1.0 million related to the final resolution of other remaining open issues on this contract. PATENTS The Company does not presently have any patents covering its products. The Company believes that its success is not dependent on the ownership of patents but rather on its innovative skills, technical expertise and timely introduction of new products. GOVERNMENT REGULATIONS Radio transmission in the United States is controlled by federal regulation and all microwave radio links installed in the United States, except for those utilizing certain frequencies operating under FCC Part 15 rules, must be licensed by the FCC. Since microwave radios all share the same transmission medium, the FCC requires that every prospective microwave radio licensee assure that it will not interfere with the operation of any existing system. This requirement, known as frequency coordination, must be satisfied before permission for operation will be granted by the FCC. The FCC and similar foreign regulatory bodies require that the Company's products comply with certain rules and regulations governing their performance when operating within their Page 10 11 jurisdiction. 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 their introductions. In the United States, Federal deregulation, which allows common carriers greater flexibility in establishing rates which may be charged for common carrier services, is likely to continue to affect the relative cost effectiveness of private telecommunications networks versus common carrier telecommunication networks. Each state has jurisdiction over the common carrier aspects of intrastate radio and wireline communications, and the nature of this regulation varies widely among the states. Internationally, similar control over rates charged to customers of common carriers is exerted by central governments. User uncertainty as to future government regulatory policies may affect the demand for private network telecommunications products, including the Company's products. In addition, radio transmission is subject to regulation by foreign laws and international treaties. The Company's equipment must conform to international requirements established to avoid interference among users of microwave frequencies and to permit interconnection of equipment. In many developed countries, the unavailability of frequency spectrum has historically inhibited the growth of microwave systems. However, current regulatory efforts by international regulatory authorities are directed at providing microwave frequencies for new PCS. Equipment to support these services can be marketed only if permitted by suitable frequency allocations and regulations. LITIGATION The Company is a defendant in various suits and is subject to various claims which arise in the normal course of business. In the opinion of management, the ultimate disposition of these claims will not have a material effect on the consolidated financial position, liquidity or results of operations of the Company. EMPLOYEES As of March 31, 1996, the Company employed 576 full-time and temporary employees. None of the Company's employees are represented by a collective bargaining agreement. The Company's future performance will depend in large measure on its ability to attract and retain highly skilled employees. The Company believes that it has good relations with its employees and has never experienced a work stoppage. EXECUTIVE OFFICERS OF DIGITAL MICROWAVE In addition to executive officers who are also directors of the Company, the following executive officers are not directors:
Name Age Position -------------------------------------------------------------------------------------------------------- Frank Carretta, Jr. 51 Vice President, Worldwide Sales and Service Carol A. Goudey 48 Treasurer and Assistant Secretary Timothy R. Hansen 36 Vice President and General Manager, SPECTRUM(TM) Division Jack Hillson 45 Vice President and General Manager, Quantum(TM)/Magnum Division Paul A. Kennard 45 Vice President, Engineering Shaun McFall 36 Vice President, Corporate Marketing John P. O'Neil 58 Vice President, Personnel Carl A. Thomsen 51 Vice President, Chief Financial Officer & Secretary --------------------------------------------------------------------------------------------------------
Page 11 12 Frank Carretta, Jr. Mr. Frank Carretta, Jr. joined the Company as Vice President, Worldwide Sales and Service in October 1995. Prior to joining DMC, Mr. Carretta served as Area Sales Director of M/A-Com, Inc., a manufacturer of radio and microwave communications products, from July 1992 to September 1995. From 1988 to June 1992, Mr. Carretta was Vice President of Ward Davis Associates, a manufacturers' representative company selling electronic test instrumentation and software development tools. Carol A. Goudey 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. Ms. Goudey has also previously held the position of Corporate Treasurer at both Ungermann-Bass, Inc., a network systems company, and System Industries, Inc., a computer peripheral company. Timothy R. Hansen Mr. Timothy R. Hansen has served as Vice President and General Manager, SPECTRUM(TM) Division of the Company since February 1995. Mr. Hansen previously served as Vice President and Program Manager of the SPECTRUM(TM) product line. He joined the Company in August 1984 as product manager, and has held management positions in marketing, planning, sales and order management Jack Hillson Mr. Jack Hillson was appointed Vice President and General Manager, Quantum(TM)/Magnum Division of the Company in December 1995. Prior to joining DMC, Mr. Hillson was with M/A-Com, Inc. for over eleven years, serving in various technical and management positions with the Semiconductor and Microelectronics Divisions. Most recently, Mr. Hillson served as the Director of Operations for M/A Com, Inc.'s Power Hybrids Division, which manufactures transistors and amplifier modules for the wireless communications market. Paul Kennard Mr. Paul Kennard joined the Company as Vice President, Engineering in April 1996. From 1989 to March 1996, Mr. Kennard was with California Microwave Corporation, a satellite and wireless communications company, serving as Director of the Signal Processing Technology Department until his promotion in 1994 to Vice President of Engineering, and then to Senior Vice President of Engineering in 1995 for the Microwave Network Systems Division. Shaun McFall Mr. Shaun McFall has served as Vice President, Corporate Marketing of the Company since February 1995. He joined the Company's UK operations in January 1989, and has held several management positions in marketing. Prior to joining DMC, he worked for GEC Telecommunications Ltd. in Germany and Ferranti Industrial Electronics PLC, in Edinburgh, Scotland, both of which are telecommunications companies. John O'Neil 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. Page 12 13 Carl A. Thomsen Mr. Carl A. Thomsen joined the Company as Vice President, Chief Financial Officer and Secretary in February 1995. Prior to joining the Company, he was Senior Vice President and Chief Financial Officer of Measurex Corporation, a manufacturer of sensor based process control systems. Mr. Thomsen joined Measurex Corporation in 1983 as Corporate Controller, was promoted to Vice President in 1986, to Chief Financial Officer in 1992, and to Senior Vice President in 1993. FACTORS THAT MAY AFFECT FUTURE FINANCIAL RESULTS The statements in the Annual Report to the Stockholders and this Form 10-K concerning the Company's future products, expenses, revenue, 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 obligations to update this information. Numerous factors such as economic and competitive conditions, incoming order levels, shipment volumes, product margins, and foreign exchange rates, could cause actual results to differ 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. Sales of the Company's products are concentrated in a small number of customers. For fiscal 1996, the top four customers accounted for 38% of the net sales. As of March 31, 1996, four of the Company's customers accounted for 49% of the backlog, of which 16% was attributable to orders under the E-Plus contract. The worldwide telecommunications industry is dominated by a small number of large corporations and the Company expects that a significant portion of its future product sales will continue to be concentrated in a limited number of customers. The loss of any existing customer, a significant reduction in the level of sales to any existing customer, or the failure of the Company to gain additional customers could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, a substantial portion of shipments may occur near the end of each quarter. Accordingly, the Company's results are difficult to predict and delays in product delivery or closing of a sale can cause revenues and net income to fluctuate significantly from anticipated levels and from quarter to quarter. 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 large and emerging domestic and international companies, such as California Microwave Corporation, Alcatel, Ericsson, Siemens AG, Harris Corporation, Nokia, NEC, and P-Com, many of which have significantly greater financial, technical, manufacturing, marketing, sales and distribution resources and management expertise 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, product performance and features; timing of new product introductions by the Company, its customers and its competitors; the ability of its customers to obtain financing; and customer service and technical support. 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 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. Page 13 14 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 competition 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 reduce costs in line with or faster than declines in prices. The Company's manufacturing operations are highly dependent upon the delivery of materials by outside suppliers in a timely manner. From time to time the Company has experienced delivery delays from key suppliers which impacted sales. There can be no assurance that the Company will not experience material supply problems or component or subsystem delays in the future. ITEM 2. PROPERTIES The Company's corporate offices and principal research, development and manufacturing facilities are located in San Jose, California in four leased buildings aggregating approximately 170,000 square feet. The Company owns 20,000 square feet of office and manufacturing space in East Kilbride, Scotland, 1,500 square feet of which has been sublet until the year 2004. The Company also leases 17,000 square feet in Coventry, England. The Company leases two sales offices located in Chicago, Illinois and Atlanta, Georgia, and approximately 23,000 aggregate square feet of international sales and customer service offices. The Company believes these facilities are adequate to meet its anticipated needs for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS See "Business - Litigation" and Notes 4 and 8 of "Notes to Consolidated Financial Statements" incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Page 14 15 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The section labeled "Stock Information" appearing on the inside front cover of the Company's 1996 Annual Report to Stockholders is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The section labeled "Selected Consolidated Financial Data" appearing on page 14 of the Company's 1996 Annual Report to Stockholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information appearing under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 10 through 14 of the Company's 1996 Annual Report to Stockholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and supplementary data, and related notes and independent auditor's report appearing on pages 15 through 28 of the Company's 1996 Annual Report to Stockholders are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Page 15 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning directors and executive officers under the caption "Election of Directors," "Directors, Executive Officers and Key Personnel," "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 8, 1996 (the "Proxy Statement"), is incorporated herein by reference. In addition, see the discussion under the caption "Employees -- Executive Officers of Digital Microwave" under Item 1 of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information included in the Company's Proxy Statement under the captions "Compensation of Directors," "Executive Compensation and Other Information," "Stock Options," "Option Exercises and Holdings," "Compensation Committee Interlocks and Insider Participation" and "Employment and Termination Arrangements" is incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information included in the Company's Proxy Statement under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Employment and Termination Arrangements" is incorporated by reference herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See "Manufacturing and Supplier" and Note 7 of "Notes to Consolidated Financial Statements" of the Company's 1996 Annual Report incorporated herein by reference. Page 16 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following consolidated financial statements are contained in the Company's 1996 Annual Report to Stockholders and are incorporated herein by reference pursuant to Item 8: 1. Consolidated Balance Sheets as of March 31, 1996 and 1995. 2. Consolidated Statements of Operations for each of the three years in the period ended March 31, 1996. 3. Consolidated Statements of Stockholders' Equity for each of the three years in the period ended March 31, 1996. 4. Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 1996. 5. Notes to Consolidated Financial Statements. 6. Report of Independent Public Accountants. 2. Financial Statement Schedules The following consolidated financial statement schedules for each of the three years in the period ended March 31, 1996 are 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) No reports on Form 8-K were filed by the Registrant during the quarter ended March 31, 1996. (c) See Item 14 (a) 3 above. (d) See Item 14 (a) 2 above. Page 17 18 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 26, 1996. DIGITAL MICROWAVE CORPORATION By: /s/ Charles D. Kissner ------------------------------------------ Charles D. Kissner President and Chief Executive Officer Page 18 19 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 as indicated.
Signatures Signing Capacity Date - --------------------------------------------------------------------------------------------------- /s/ Charles D. Kissner President and Chief Executive Officer June 26, 1996 - ------------------------------ Charles D. Kissner /s/ Carl A. Thomsen Vice President, Chief Financial Officer June 26, 1996 - ------------------------------ & Secretary Carl A. Thomsen (Principal Financial and Accounting Officer) /s/Richard C. Alberding Director June 26, 1996 - ------------------------------ Richard C. Alberding /s/William E. Gibson Director June 26, 1996 - ------------------------------ William E. Gibson /s/ Clifford H. Higgerson Director June 26, 1996 - ------------------------------ Clifford H. Higgerson /s/ James D. Meindl Director June 26, 1996 - ------------------------------ James D. Meindl /s/Billy B. Oliver Director June 26, 1996 - ------------------------------ Billy B. Oliver
Page 19 20 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 to stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated April 22, 1996. Our audits were made for the purpose of forming an opinion on those 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 financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP San Jose, California April 22, 1996 Page 20 21 SCHEDULE II DIGITAL MICROWAVE CORPORATION VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands) - ----------------------------------------------------------------------------------------- Balance at Charged to Balance Beginning of Costs and Deductions/ at End Description Period Expenses Write-off of Period - ----------------------------------------------------------------------------------------- Year Ended March 31, 1996 Allowance for doubtful accounts $1,413 $580 $ 620 $1,373 Year Ended March 31, 1995 Allowance for doubtful accounts $3,240 $276 $2,103 $1,413 Year Ended March 31, 1994 Allowance for doubtful accounts $3,067 $300 $ 127 $3,240 Accrued restructuring charge $ 617 $ 89 $ 706 $ --
Page 21 22 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 3.1 Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 33-13431) (reference is also made to Exhibit 4.2). 3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended March 31, 1993). 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended March 31, 1988). 4.2 Rights Agreement dated as of October 24, 1991 between the Company and Manufacturers Hanover Trust of California, including the Certificate of Designations for the Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 1 to the Company's Current Report on 8-K filed on November 5, 1991). 10.1+ Digital Microwave Corporation 1984 Stock Option Plan, as amended and restated on June 11, 1991. (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended March 31, 1991). 10.2+ Form of Installment Incentive Stock Option Agreement (incorporated by reference to Exhibit 28.2 to the Company's Registration Statement on Form S-8 (File No. 33-43155). 10.3+ Form of installment Non-qualified Stock Option Agreement (incorporated by reference to Exhibit 28.3 to the Company's Registration Statement on Form S-8 (File No. 33-43155)). 10.5 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). 10.6 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). 10.7 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). 10.9 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)). 10.11 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 23 10.12* 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). 10.22 Loan and Security Agreement dated June 25, 1992 between the Company and CoastFed Business Credit Corporation (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended March 31, 1992). 10.23 Accounts Collateral Security Agreement dated June 25, 1992 between the Company and CoastFed Business Credit Corporation (incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended March 31, 1992). 10.24 Letter of Credit Collateral Agreement dated June 25, 1992 between the Company and CoastFed Business Credit Corporation (incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended March 31, 1992). 10.25 Letter Agreement dated June 23, 1993 between the Company and CoastFed Business Credit Corporation (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended March 31, 1993). 10.26* 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). 10.27* 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). 10.28* 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). 10.29 Amendment to Loan Documents between the Company and CoastFed Business Credit Corporation dated as of July 28, 1994 (incorporated by reference to Exhibit (1) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.30 Amended and Restated Accounts and Inventory Collateral Security Agreement between the Company and CoastFed Business Credit Corporation dated as of July 28, 1994 (incorporated by reference to Exhibit (2) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.31 Loan Agreement between the Company and Heller Financial dated October 28, 1994 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994). 10.32 Agreement on Exchange of Interim Equipment dated October 27, 1994 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994). Page 23 24 10.33+ Digital Microwave Corporation 1994 Stock Incentive Plan (incorporated by reference to the Registration Statement on Form S-8 filed with the Commission on October 17, 1994). 10.34 Loan Agreement dated March 21, 1995 between the Company and Bank of the West incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year ended March 31, 1995. 10.35 Amendment to Loan Agreement dated March 31, 1995 between the Company and Heller Financial, Inc. incorporated by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year ended March 31, 1995. 10.36 Employment Agreement dated May 1, 1996 between the Company and Charles D. Kissner. 10.37 Form of Employment Agreement between the Company and certain Executive Officers. 13.1 Annual Report to Stockholders. 21.1 List of subsidiaries. 23.1 Consent of Independent Public Accountants. 24.1 Power of Attorney (included on page 19 of this Annual Report on Form 10-K). 27.1 Financial data schedule. + Management Contract or Compensatory Plan or Arrangement. * Confidential treatment of certain portions of this exhibit has been granted. Page 24 EX-10.36 2 EMPLOYMENT AGREEMENT W/ CHARLES KISSNER 5/1/96 1 EXHIBIT 10.36 E M P L O Y M E N T A G R E E M E N T This Agreement, dated as of May 1, 1996, is between Digital Microwave Corporation, a California corporation ("Employer"), and Charles D. Kissner ("Employee"). RECITALS * Employee is and has been employed by Employer and is currently serving as the President and Chief Executive Officer. * Employer desires to continue to employ Employee and to assure itself of the continued services of Employee for the Period of Employment provided for in this Employment Agreement, and Employee desires to be employed by Employer for such period, upon the following terms and conditions. ACCORDINGLY, the parties agree as follows: 1. Period of Employment. (a) Basic Term. Employer shall employ Employee to render services to Employer in the position and with the duties and responsibilities described in Section 2 for the period (the "Period of Employment") commencing on the date of this Agreement and ending on the date upon which the Period of Employment is terminated in accordance with Section 4. 2. Position and Responsibilities. (a) Position. Employee shall continue employment with Employer and shall perform all services as may be assigned by Employer. Employee shall devote his best efforts and full-time attention to the performance of his duties. Employee shall be subject to the direction of Employer, which shall retain full control of the means and methods by which he performs the above services and of the place(s) at which all services are rendered. Employee shall report to the Board of Directors of Employer. Employee shall be expected to travel if necessary or advisable in order to meet the obligations of his position. 2 (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. 3. Compensation and Benefits. (a) Compensation. In consideration of the services to be rendered under this Agreement, Employer shall pay Employee a base salary of $330,000 per year, payable semi-monthly, pursuant to the procedures regularly established, and as they may be amended, by Employer in its sole discretion, during the Period of Employment. Employer shall review annually Employee's compensation and shall determine, in its sole discretion, whether and how much the existing compensation shall be adjusted, without regard to any policy or practice Employer may have for adjusting salaries. In addition to base salary, Employee shall be eligible to participate in the Employer's executive management incentive bonus and stock option plans according to the terms of those plans. (b) Benefits. Employee shall be entitled to vacation leave in accordance with Employer's standard policies. As Employee becomes eligible therefor, Employee shall have the right to participate in and to receive benefits from all present and future benefit plans specified in Employer's policies and generally made available to similarly situated employees of Employer. The amount and extent of benefits to which Employee is entitled shall be governed by the specific benefit plan, as amended. Employee also shall be entitled to any benefits or compensation tied to termination as described in Section 4. Nothing stated in this Agreement shall prevent Employer from changing or eliminating any benefit during the Period of Employment as Employer, in its sole discretion, may deem necessary or desirable. No statement concerning benefits or compensation to which Employee is entitled shall alter in any way the term of this Agreement, any renewal thereof, or its termination. All compensation and comparable payments to be paid to Employee under this Agreement shall be less withholdings required by law. (c) Expenses. Employer shall reimburse Employee for reasonable travel and other business expenses incurred by Employee in the performance of his duties, in accordance with Employer's policies, as they may be amended in Employer's sole discretion. 2 3 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 this Agreement shall cease. Nothing in this Section shall affect any entitlement of Employee's heirs to the benefits of any life insurance plan or other applicable benefits. (b) By Disability. If, by reason of any physical or mental incapacity, Employee has been or will be prevented from properly performing his duties under ther Agreement for more than ninety (90) consecutive days, then, to the extent permitted by law, Employer may terminate the Period of Employment without any advance notice. Employer shall pay Employee all compensation to which he is entitled up through the day notice of termination is provided, and, in addition, Employer shall when due make a payment of any incentive bonus to which the Employee would have been entitled prorated based on the number of months the Employee was employed during the incentive bonus period; thereafter, all obligations of Employer under this Agreement shall cease. Nothing in this Section shall affect Employee's rights under any applicable Employer disability plan. (c) By Employer Not For Cause. At any time, Employer may terminate the Period of Employment Not for Cause for any reason, by providing Employee ten (10) days' advance written notice, provided that Employee shall be paid, in addition to all compensation due and owing through the last day actually worked, severance in an amount equal to twelve 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 and will permit Employee's stock options, if any, to continue to vest for 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 this subparagraph 4(c). Employer shall have the option, in its complete discretion, to terminate the Period of Employment at any time prior to the end of such notice period, provided Employer pays 3 4 Employee all compensation due and owing through the last day actually worked plus an amount equal to the base salary Employee would have earned through the balance of the above notice period in addition to the severance benefits described above; thereafter, all of Employer's obligations under this Agreement shall cease. Employer may dismiss Employee without cause notwithstanding anything to the contrary contained in or arising from any statements, policies, or practices of Employer relating to the employment, discipline, or termination of its employees. (d) By Employer For Cause. At any time, and without prior notice, Employer may terminate the Period of Employment for Cause (as defined below). Employer shall pay Employee all compensation then due and owing; thereafter, all of Employer's obligations under this Agreement shall cease. Termination shall be for "Cause" if Employee: (i) acts in bad faith and to the detriment of Employer; (ii) exhibits in regard to his employment willful misconduct, dishonesty, habitual neglect of duties, or any willful act or omission that may materially and adversely affect the Employer's business or that involves fraud, embezzlement or misappropriation of any property or proprietary information of the Employer; (iv) is convicted of a crime involving dishonesty, breach of trust, or physical or emotional harm to any person; or (v) breaches any material term of this Agreement. If termination is due to Employee's disability, Section 4(b) above shall control, and not this subsection on termination for Cause. (e) By Employee Not for Cause. At any time, Employee may terminate the Period of Employment for any reason, with or without cause, by providing Employer ten (10) days' advance written notice. Employer shall have the option, in its complete discretion, to make termination of the Period of Employment effective at any time prior to the end of such notice period, provided Employer pays Employee all compensation due and owing through the last day actually worked, plus an amount equal to the base salary Employee would have earned through the balance of the above notice period, not to exceed ten (10) days; thereafter, all of Employer's obligations under this Agreement shall cease. (f) By Employee for Good Reason Upon a Change of Control. Employee may terminate, without liability, the Period of Employment for Good Reason upon a Change of Control (as defined below), provided Employee gives Employer sixty (60) days' advance written notice of the reason for termination and his intent to terminate this Agreement. During this period, Employer shall have an opportunity to correct the condition constituting Good Reason. If the condition is remedied within this period, Employee's notice to terminate shall be rescinded automatically; if not remedied, termination of the Period of Employment shall become effective upon expiration of the above notice period. In this event, Employer shall pay Employee all compensation due and owing through the last day actually worked. Employer shall also have the option, in its complete discretion, to make termination effective at any time prior to the end of the notice period, provided that Employer pays Employee all compensation due and owing through the balance of the notice period (not to exceed sixty (60) days). 4 5 Employee shall be entitled to exercise his right to terminate this Agreement for Good Reason only if he gives the required notice not more than forty-five (45) days after the occurrence of the event that is the basis for the Good Reason. If Employee terminates the Period of Employment for Good Reason upon a Change of Control, Employee shall receive the following: (i) A severance payment equal to twenty-four (24) months 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. (ii) A payment when due of the incentive bonus to which the Employee would have been entitled prorated based on the number of months the Employee was employed during the incentive bonus period. (iii) A payment equal to the annual incentive bonus payments received by Employee, if any, for the previous two years, divided by two. (iv) Payment of the Employee's share of health insurance premiums for a period of up to eighteen (18) months, or until Employee is eligible to participate in another Employer's plan, whichever comes first, should Employee elect to convert his/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 5 6 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 this Agreement. (g) Termination Obligations. (i) Employee agrees that all property, including, without limitation, all equipment, tangible Proprietary Information (as defined below), documents, books, records, reports, notes, contracts, lists, computer disks (and other computer-generated files and data), and copies thereof, created on any medium and furnished to, obtained by, or prepared by Employee in the course of or incident to his employment, belongs to Employer and shall be returned promptly to Employer upon termination of the Period of Employment. (ii) All benefits to which Employee is otherwise entitled shall cease upon Employee's termination of the Period of Employment, unless explicitly continued either under this Agreement or under any specific written policy or benefit plan of Employer. (iii) Upon termination of the Period of Employment, Employee shall be deemed to have resigned from all offices and directorships then held with Employer or any Affiliate. (iv) The representations and warranties contained in this Agreement and Employee's obligations under this Section 4(g) on Termination Obligations and Section 5 on Proprietary Information shall survive the termination of the Period of Employment and the expiration of this Agreement. (v) Following any termination of the Period of Employment, Employee shall fully cooperate with Employer in all matters relating to the winding up of pending work on behalf of Employer and the orderly transfer of work to other employees of Employer. Employee shall also cooperate in the defense of any action brought by any third party against Employer that relates in any way to Employee's acts or omissions while employed by Employer. 6 7 5. Proprietary Information. (a) Defined. "Proprietary Information" is all information and any idea in whatever form, tangible or intangible, pertaining in any manner to the business of Employer, or any Affiliate, or its employees, clients, consultants, or business associates, which was produced by any employee of Employer, or any Affiliate, in the course of his or her employment or otherwise produced or acquired by or on behalf of Employer, or any Affiliate. All Proprietary Information not generally known outside of Employer's organization, and all Proprietary Information so known only through improper means, shall be deemed "Confidential Information." Without limiting the foregoing definition, Proprietary and Confidential Information shall include, but not be limited to: (i) formulas, teaching and development techniques, processes, trade secrets, computer programs, electronic codes, inventions, improvements, and research projects; (ii) information about costs, profits, markets, sales, and lists of customers or clients; (iii) business, marketing, and strategic plans; and (iv) employee personnel files and compensation information. Employee should consult any Employer procedures instituted to identify and protect certain types of Confidential Information, which are considered by Employer to be safeguards in addition to the protection provided by this Agreement. Nothing contained in those procedures or in this Agreement is intended to limit the effect of the other. (b) General Restrictions on Use. During the Period of Employment, Employee shall use Proprietary Information, and shall disclose Confidential Information, only for the benefit of Employer and as is necessary to carry out his responsibilities under this Agreement. Following termination, Employee shall neither, directly or indirectly, use any Proprietary Information nor disclose any Confidential Information, except as expressly and specifically authorized in writing by Employer. The publication of any Proprietary Information through literature or speeches must be approved in advance in writing by Employer. 6. Arbitration. (a) Arbitrable Claims. All disputes between Employee (and his attorneys, successors, and assigns) and Employer (and its Affiliates, shareholders, directors, officers, employees, agents, successors, attorneys, and assigns) relating in any manner whatsoever to the employment or termination of Employee, including, without limitation, all disputes arising under this Agreement, ("Arbitrable Claims") shall be resolved by arbitration. All persons and entities specified in the preceding sentence (other than Employer and Employee) shall be considered third-party beneficiaries of the rights and obligations created by this Section on Arbitration. Arbitrable Claims shall include, but are not limited to, contract (express or implied) and tort claims of all kinds, as well as all claims based on any federal, state, or local law, statute, or regulation, excepting only claims under applicable workers' compensation law and unemployment insurance claims. By way of example 7 8 and not in limitation of the foregoing, Arbitrable Claims shall include any claims arising under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, and the California Fair Employment and Housing Act, as well as any claims asserting wrongful termination, breach of contract, breach of the covenant of good faith and fair dealing, negligent or intentional infliction of emotional distress, negligent or intentional misrepresentation, negligent or intentional interference with contract or prospective economic advantage, defamation, invasion of privacy, and claims related to disability. Arbitration shall be final and binding upon the parties and shall be the exclusive remedy for all Arbitrable Claims, except that Employer may, at its option, seek injunctive relief and damages in court for any breach of Section 5 of this Agreement. Subject to the foregoing sentence, THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO TRIAL BY JURY IN REGARD TO ARBITRABLE CLAIMS. (b) Procedure. Arbitration of Arbitrable Claims shall be in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association ("AAA Employment Rules"), except as provided otherwise in this Agreement. Arbitration shall be initiated by providing written notice to the other party with a statement of the claim(s) asserted, the facts upon which the claim(s) are based, and the remedy sought. The burden of proof in any arbitration shall be allocated as provided by applicable law, unless otherwise specified in this Agreement. Either party may bring an action in court to compel arbitration under this Agreement and to enforce an arbitration award. Otherwise, neither party shall initiate or prosecute any lawsuit or administrative action in any way related to any Arbitrable Claim. The Federal Arbitration Act shall govern the interpretation and enforcement of this Section 6. (c) Arbitrator Selection and Authority. All disputes involving Arbitrable Claims shall be decided by a single arbitrator. The arbitrator shall be selected by mutual agreement of the parties within thirty (30) days of the effective date of the notice initiating the arbitration. If the parties cannot agree on an arbitrator, then the complaining party shall notify the AAA and request selection of an arbitrator in accordance with the AAA Employment Rules. The arbitrator shall have only such authority to award equitable relief, damages, costs, and fees as a court would have for the particular claim(s) asserted. The fees of the arbitrator shall be split between both parties equally. The arbitrator shall have exclusive authority to resolve all Arbitrable Claims, including, but not limited to, any claim that all or any part of ther 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 8 9 court orders necessary to effectuate fully the provisions of this subsection concerning confidentiality. (e) Continuing Obligations. The rights and obligations of Employee and Employer set forth in this Section on Arbitration shall survive the termination of Employee's employment and the expiration of this Agreement. 7. Notices. Any notice under this Agreement must be in writing and shall be effective upon delivery by hand, upon facsimile transmission to the number provided below (if one is provided), or three (3) business days after deposit in the United States mail, postage prepaid, certified or registered, and addressed to Employer or to Employee at the corresponding address below. Employee shall be obligated to notify Employer in writing of any change in his address. Notice of change of address shall be effective only when done in accordance with this Section. Employer's Notice Address: Vice President, Personnel Digital Microwave Corporation 170 Rose Orchard Way San Jose, California 95134 Fax Phone No.: (408)944-1701 Employee's Notice Address: Charles D. Kissner 27778 Stirrup Way Los Altos Hills, California 94022 Fax No.:_______________________ 8. Action by Employer. All actions required or permitted to be taken under this Agreement by Employer, including, without limitation, exercise of discretion, consents, waivers, and amendments to this Agreement, shall be made and authorized only by the President or by his or her representative specifically authorized to fulfill these obligations under this Agreement. 9 10 9. Integration. This Agreement is intended to be the final, complete, and exclusive statement of the terms of Employee's employment by Employer. This Agreement supersedes all other prior and contemporaneous agreements and statements pertaining in any manner to the employment of Employee, and it may not be contradicted by evidence of any prior or contemporaneous statements or agreements. To the extent that the practices, policies, or procedures of Employer, now or in the future, apply to Employee and are inconsistent with the terms of this Agreement, the provisions of this Agreement shall control. 10. Amendments; Waivers. This Agreement may not be modified, amended, or terminated except by an instrument in writing, signed by each of the parties. No failure to exercise and no delay in exercising any right, remedy, or power under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, or power under this Agreement preclude any other or further exercise thereof, or the exercise of any other right, remedy, or power provided herein or by law or in equity. 11. Assignment; Successors and Assigns. Employee agrees that he will not assign, sell, transfer, delegate, or otherwise dispose of, whether voluntarily or involuntarily, or by operation of law, any rights or obligations under this Agreement. Any such purported assignment, transfer, or delegation shall be null and void. Nothing in this Agreement shall prevent the consolidation of Employer with, or its merger into, any other entity, or the sale by Employer of all or substantially all of its assets, or the otherwise lawful assignment by Employer of any rights or obligations under this Agreement. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of the parties and their respective heirs, legal representatives, successors, and permitted assigns, and shall not benefit any person or entity other than those specifically enumerated in this Agreement. 12. Severability. If any provision of this Agreement, or its application to any person, place, or circumstance, is held by an arbitrator or a court of competent jurisdiction to be invalid, unenforceable, or void, such provision shall be enforced to the greatest extent permitted by law, and the remainder of this Agreement and such provision as applied to other persons, places, and circumstances shall remain in full force and effect. 10 11 13. Attorneys' Fees. In any legal action, arbitration, or other proceeding brought to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and costs. 14. Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of California. 15. Interpretation. This Agreement shall be construed as a whole, according to its fair meaning, and not in favor of or against any party. By way of example and not in limitation, this Agreement shall not be construed in favor of the party receiving a benefit nor against the party responsible for any particular language in this Agreement. Captions are used for reference purposes only and should be ignored in the interpretation of this Agreement. 16. Employee Acknowledgment. Employee acknowledges that he has had the opportunity to consult legal counsel in regard to this Agreement, that he has read and understands this Agreement, that he is fully aware of its legal effect, and that he has entered into it freely and voluntarily and based on his own judgment and not on any representations or promises other than those contained in this Agreement. 11 12 The parties have duly executed this Agreement as of the date first written above. - ------------------------------ Charles D. Kissner Digital Microwave Corporation - ------------------------------- By: Clifford H. Higgerson Its: Chairman of the Board 12 EX-10.37 3 FORM OF EMPLOYMENT AGREEMENT W/ EXECUTIVE OFFICERS 1 Exhibit 10.37 DIGITAL MICROWAVE CORPORATION FORM OF EMPLOYMENT AGREEMENT Attached is a form of employment agreement between the Company and certain executive officers as listed below:
Name Position Annual Salary ---- -------- ------------- Timothy R. Hansen Vice President and General Manager, $127,200 SPECTRUM(TM) Division Shaun McFall Vice President, Corporate Marketing $132,500 John O'Neil Vice President, Personnel $144,768 Carl A. Thomsen Vice President, Chief Financial $190,800 Officer and Secretary
2 E M P L O Y M E N T A G R E E M E N T This Agreement, dated as of _________, 1996, is between Digital Microwave Corporation, a California corporation ("Employer"), and ___________ ("Employee"). RECITALS * Employee is and has been employed by Employer and is currently serving as the ___________________. * Employer desires to continue to employ Employee and to assure itself of the continued services of Employee for the Period of Employment provided for in this Employment Agreement, and Employee desires to be employed by Employer for such period, upon the following terms and conditions. ACCORDINGLY, the parties agree as follows: 1. Period of Employment. (a) Basic Term. Employer shall employ Employee to render services to Employer in the position and with the duties and responsibilities described in Section 2 for the period (the "Period of Employment") commencing on the date of this Agreement and ending on the date upon which the Period of Employment is terminated in accordance with Section 4. 2. Position and Responsibilities. (a) Position. Employee shall continue employment with Employer and shall perform all services as may be assigned by Employer. Employee shall devote his best efforts and full-time attention to the performance of his duties. Employee shall be subject to the direction of Employer, which shall retain full control of the means and methods by which he performs the above services and of the place(s) at which all services are rendered. Employee shall report to 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. 3 (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. 3. Compensation and Benefits. (a) Compensation. In consideration of the services to be rendered under this Agreement, Employer shall pay Employee a base salary of $___________ per year, payable semi-monthly, pursuant to the procedures regularly established, and as they may be amended, by Employer in its sole discretion, during the Period of Employment. Employer shall review annually Employee's compensation and shall determine, in its sole discretion, whether and how much the existing compensation shall be adjusted, without regard to any policy or practice Employer may have for adjusting salaries. In addition to base salary, Employee shall be eligible to participate in the Employer's executive management incentive bonus and stock option plans according to the terms of those plans. (b) Benefits. Employee shall be entitled to vacation leave in accordance with Employer's standard policies. As Employee becomes eligible therefor, Employee shall have the right to participate in and to receive benefits from all present and future benefit plans specified in Employer's policies and generally made available to similarly situated employees of Employer. The amount and extent of benefits to which Employee is entitled shall be governed by the specific benefit plan, as amended. Employee also shall be entitled to any benefits or compensation tied to termination as described in Section 4. Nothing stated in this Agreement shall prevent Employer from changing or eliminating any benefit during the Period of Employment as Employer, in its sole discretion, may deem necessary or desirable. No statement concerning benefits or compensation to which Employee is entitled shall alter in any way the term of this Agreement, any renewal thereof, or its termination. All compensation and comparable payments to be paid to Employee under this Agreement shall be less withholdings required by law. (c) Expenses. Employer shall reimburse Employee for reasonable travel and other business expenses incurred by Employee in the performance of his duties, in accordance with Employer's policies, as they may be amended in Employer's sole discretion. 2 4 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 this Agreement shall cease. Nothing in this Section shall affect any entitlement of Employee's heirs to the benefits of any life insurance plan or other applicable benefits. (b) By Disability. If, by reason of any physical or mental incapacity, Employee has been or will be prevented from properly performing his duties under this Agreement for more than ninety (90) consecutive days, then, to the extent permitted by law, Employer may terminate the Period of Employment without any advance notice. Employer shall pay Employee all compensation to which he is entitled up through the day notice of termination is provided, and, in addition, Employer shall when due make a payment of any incentive bonus to which the Employee would have been entitled prorated based on the number of months the Employee was employed during the incentive bonus period; thereafter, all obligations of Employer under this Agreement shall cease. Nothing in this Section shall affect Employee's rights under any applicable Employer disability plan. (c) By Employer Not For Cause. At any time, Employer may terminate the Period of Employment Not for Cause for any reason, by providing Employee ten (10) days' advance written notice, provided that Employee shall be paid, in addition to all compensation due and owing through the last day actually worked, severance in an amount equal to six months of the Employee's then current base salary. Such severance shall be paid by Employer to Employee in 6 equal monthly installments, commencing one month from the date of termination, or, at Employer's discretion, in a single lump sum on the termination date. Employer shall also pay the Employer's share of health insurance premiums for a period of up to 6 months, or until Employee is eligible to participate in another employer's plan, whichever comes first, should Employee elect to convert his health insurance benefits under COBRA. Employer shall also pay when due any incentive bonus to which the Employee would have been entitled prorated based on the number of months the Employee was employed during the incentive bonus period and will permit Employee's stock options, if any, to continue to vest for 6 months following the termination date. If Employer terminates the Period of Employment Not for Cause within eighteen (18) months following a Change of Control as defined in subparagraph 4(f), Employee shall receive the severance benefits set forth in subparagraph 4(f)(i)-(iv) rather than the severance benefits set forth in this subparagraph 4(c). Employer shall have the option, in its complete discretion, to terminate the Period of Employment at any time prior to the end of such notice period, provided Employer pays 3 5 Employee all compensation due and owing through the last day actually worked plus an amount equal to the base salary Employee would have earned through the balance of the above notice period in addition to the severance benefits described above; thereafter, all of Employer's obligations under this Agreement shall cease. Employer may dismiss Employee without cause notwithstanding anything to the contrary contained in or arising from any statements, policies, or practices of Employer relating to the employment, discipline, or termination of its employees. (d) By Employer For Cause. At any time, and without prior notice, Employer may terminate the Period of Employment for Cause (as defined below). Employer shall pay Employee all compensation then due and owing; thereafter, all of Employer's obligations under this Agreement shall cease. Termination shall be for "Cause" if Employee: (i) acts in bad faith and to the detriment of Employer; (ii) exhibits in regard to his employment willful misconduct, dishonesty, habitual neglect of duties, or any willful act or omission that may materially and adversely affect the Employer's business or that involves fraud, embezzlement or misappropriation of any property or proprietary information of the Employer; (iv) is convicted of a crime involving dishonesty, breach of trust, or physical or emotional harm to any person; or (v) breaches any material term of this Agreement. If termination is due to Employee's disability, Section 4(b) above shall control, and not this subsection on termination for Cause. (e) By Employee Not for Cause. At any time, Employee may terminate the Period of Employment for any reason, with or without cause, by providing Employer ten (10) days' advance written notice. Employer shall have the option, in its complete discretion, to make termination of the Period of Employment effective at any time prior to the end of such notice period, provided Employer pays Employee all compensation due and owing through the last day actually worked, plus an amount equal to the base salary Employee would have earned through the balance of the above notice period, not to exceed ten (10) days; thereafter, all of Employer's obligations under this Agreement shall cease. (f) By Employee for Good Reason Upon a Change of Control. Employee may terminate, without liability, the Period of Employment for Good Reason upon a Change of Control (as defined below), provided Employee gives Employer sixty (60) days' advance written notice of the reason for termination and his intent to terminate this Agreement. During this period, Employer shall have an opportunity to correct the condition constituting Good Reason. If the condition is remedied within this period, Employee's notice to terminate shall be rescinded automatically; if not remedied, termination of the Period of Employment shall become effective upon expiration of the above notice period. In this event, Employer shall pay Employee all compensation due and owing through the last day actually worked. Employer shall also have the option, in its complete discretion, to make termination effective at any time prior to the end of the notice period, provided that Employer pays Employee all compensation due and owing through the balance of the notice period (not to exceed sixty (60) days). 4 6 Employee shall be entitled to exercise his right to terminate this Agreement for Good Reason only if he gives the required notice not more than forty-five (45) days after the occurrence of the event that is the basis for the Good Reason. If Employee terminates the Period of Employment for Good Reason upon a Change of Control, Employee shall receive the following: (i) A severance payment equal to twenty-four (24) months 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. (ii) A payment when due of the incentive bonus to which the Employee would have been entitled prorated based on the number of months the Employee was employed during the incentive bonus period. (iii) A payment equal to the annual incentive bonus payments received by Employee, if any, for the previous two years, divided by two. (iv) Payment of the Employee's share of health insurance premiums for a period of up to eighteen (18) months, or until Employee is eligible to participate in another Employer's plan, whichever comes first, should Employee elect to convert his/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 5 7 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 this Agreement. (g) Termination Obligations. (i) Employee agrees that all property, including, without limitation, all equipment, tangible Proprietary Information (as defined below), documents, books, records, reports, notes, contracts, lists, computer disks (and other computer-generated files and data), and copies thereof, created on any medium and furnished to, obtained by, or prepared by Employee in the course of or incident to his employment, belongs to Employer and shall be returned promptly to Employer upon termination of the Period of Employment. (ii) All benefits to which Employee is otherwise entitled shall cease upon Employee's termination of the Period of Employment, unless explicitly continued either under this Agreement or under any specific written policy or benefit plan of Employer. (iii) Upon termination of the Period of Employment, Employee shall be deemed to have resigned from all offices and directorships then held with Employer or any Affiliate. (iv) The representations and warranties contained in this Agreement and Employee's obligations under this Section 4(g) on Termination Obligations and Section 5 on Proprietary Information shall survive the termination of the Period of Employment and the expiration of this Agreement. (v) Following any termination of the Period of Employment, Employee shall fully cooperate with Employer in all matters relating to the winding up of pending work on behalf of Employer and the orderly transfer of work to other employees of Employer. Employee shall also cooperate in the defense of any action brought by any third party against Employer that relates in any way to Employee's acts or omissions while employed by Employer. 6 8 5. Proprietary Information. (a) Defined. "Proprietary Information" is all information and any idea in whatever form, tangible or intangible, pertaining in any manner to the business of Employer, or any Affiliate, or its employees, clients, consultants, or business associates, which was produced by any employee of Employer, or any Affiliate, in the course of his or her employment or otherwise produced or acquired by or on behalf of Employer, or any Affiliate. All Proprietary Information not generally known outside of Employer's organization, and all Proprietary Information so known only through improper means, shall be deemed "Confidential Information." Without limiting the foregoing definition, Proprietary and Confidential Information shall include, but not be limited to: (i) formulas, teaching and development techniques, processes, trade secrets, computer programs, electronic codes, inventions, improvements, and research projects; (ii) information about costs, profits, markets, sales, and lists of customers or clients; (iii) business, marketing, and strategic plans; and (iv) employee personnel files and compensation information. Employee should consult any Employer procedures instituted to identify and protect certain types of Confidential Information, which are considered by Employer to be safeguards in addition to the protection provided by this Agreement. Nothing contained in those procedures or in this Agreement is intended to limit the effect of the other. (b) General Restrictions on Use. During the Period of Employment, Employee shall use Proprietary Information, and shall disclose Confidential Information, only for the benefit of Employer and as is necessary to carry out his responsibilities under this Agreement. Following termination, Employee shall neither, directly or indirectly, use any Proprietary Information nor disclose any Confidential Information, except as expressly and specifically authorized in writing by Employer. The publication of any Proprietary Information through literature or speeches must be approved in advance in writing by Employer. 6. Arbitration. (a) Arbitrable Claims. All disputes between Employee (and his attorneys, successors, and assigns) and Employer (and its Affiliates, shareholders, directors, officers, employees, agents, successors, attorneys, and assigns) relating in any manner whatsoever to the employment or termination of Employee, including, without limitation, all disputes arising under this Agreement, ("Arbitrable Claims") shall be resolved by arbitration. All persons and entities specified in the preceding sentence (other than Employer and Employee) shall be considered third-party beneficiaries of the rights and obligations created by this Section on Arbitration. Arbitrable Claims shall include, but are not limited to, contract (express or implied) and tort claims of all kinds, as well as all claims based on any federal, state, or local law, statute, or regulation, excepting only claims under applicable workers' compensation law and unemployment insurance claims. By way of example 7 9 and not in limitation of the foregoing, Arbitrable Claims shall include any claims arising under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, and the California Fair Employment and Housing Act, as well as any claims asserting wrongful termination, breach of contract, breach of the covenant of good faith and fair dealing, negligent or intentional infliction of emotional distress, negligent or intentional misrepresentation, negligent or intentional interference with contract or prospective economic advantage, defamation, invasion of privacy, and claims related to disability. Arbitration shall be final and binding upon the parties and shall be the exclusive remedy for all Arbitrable Claims, except that Employer may, at its option, seek injunctive relief and damages in court for any breach of Section 5 of this Agreement. Subject to the foregoing sentence, THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO TRIAL BY JURY IN REGARD TO ARBITRABLE CLAIMS. (b) Procedure. Arbitration of Arbitrable Claims shall be in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association ("AAA Employment Rules"), except as provided otherwise in this Agreement. Arbitration shall be initiated by providing written notice to the other party with a statement of the claim(s) asserted, the facts upon which the claim(s) are based, and the remedy sought. The burden of proof in any arbitration shall be allocated as provided by applicable law, unless otherwise specified in this Agreement. Either party may bring an action in court to compel arbitration under this Agreement and to enforce an arbitration award. Otherwise, neither party shall initiate or prosecute any lawsuit or administrative action in any way related to any Arbitrable Claim. The Federal Arbitration Act shall govern the interpretation and enforcement of this Section 6. (c) Arbitrator Selection and Authority. All disputes involving Arbitrable Claims shall be decided by a single arbitrator. The arbitrator shall be selected by mutual agreement of the parties within thirty (30) days of the effective date of the notice initiating the arbitration. If the parties cannot agree on an arbitrator, then the complaining party shall notify the AAA and request selection of an arbitrator in accordance with the AAA Employment Rules. The arbitrator shall have only such authority to award equitable relief, damages, costs, and fees as a court would have for the particular claim(s) asserted. The fees of the arbitrator shall be split between both parties equally. The arbitrator shall have exclusive authority to resolve all Arbitrable Claims, including, but not limited to, any claim that all or any part of ther 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 8 10 court orders necessary to effectuate fully the provisions of this subsection concerning confidentiality. (e) Continuing Obligations. The rights and obligations of Employee and Employer set forth in this Section on Arbitration shall survive the termination of Employee's employment and the expiration of this Agreement. 7. Notices. Any notice under this Agreement must be in writing and shall be effective upon delivery by hand, upon facsimile transmission to the number provided below (if one is provided), or three (3) business days after deposit in the United States mail, postage prepaid, certified or registered, and addressed to Employer or to Employee at the corresponding address below. Employee shall be obligated to notify Employer in writing of any change in his address. Notice of change of address shall be effective only when done in accordance with this Section. Employer's Notice Address: Vice President, Personnel Digital Microwave Corporation 170 Rose Orchard Way San Jose, California 95134 Fax Phone No.: (408)944-1701 Employee's Notice Address: - ---------------- - ---------------- - ---------------- 8. Action by Employer. All actions required or permitted to be taken under this Agreement by Employer, including, without limitation, exercise of discretion, consents, waivers, and amendments to this Agreement, shall be made and authorized only by the President or by his or her representative specifically authorized to fulfill these obligations under this Agreement. 9 11 9. Integration. This Agreement is intended to be the final, complete, and exclusive statement of the terms of Employee's employment by Employer. This Agreement supersedes all other prior and contemporaneous agreements and statements pertaining in any manner to the employment of Employee, and it may not be contradicted by evidence of any prior or contemporaneous statements or agreements. To the extent that the practices, policies, or procedures of Employer, now or in the future, apply to Employee and are inconsistent with the terms of this Agreement, the provisions of this Agreement shall control. 10. Amendments; Waivers. This Agreement may not be modified, amended, or terminated except by an instrument in writing, signed by each of the parties. No failure to exercise and no delay in exercising any right, remedy, or power under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, or power under this Agreement preclude any other or further exercise thereof, or the exercise of any other right, remedy, or power provided herein or by law or in equity. 11. Assignment; Successors and Assigns. Employee agrees that he will not assign, sell, transfer, delegate, or otherwise dispose of, whether voluntarily or involuntarily, or by operation of law, any rights or obligations under this Agreement. Any such purported assignment, transfer, or delegation shall be null and void. Nothing in this Agreement shall prevent the consolidation of Employer with, or its merger into, any other entity, or the sale by Employer of all or substantially all of its assets, or the otherwise lawful assignment by Employer of any rights or obligations under this Agreement. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of the parties and their respective heirs, legal representatives, successors, and permitted assigns, and shall not benefit any person or entity other than those specifically enumerated in this Agreement. 12. Severability. If any provision of this Agreement, or its application to any person, place, or circumstance, is held by an arbitrator or a court of competent jurisdiction to be invalid, unenforceable, or void, such provision shall be enforced to the greatest extent permitted by law, and the remainder of this Agreement and such provision as applied to other persons, places, and circumstances shall remain in full force and effect. 10 12 13. Attorneys' Fees. In any legal action, arbitration, or other proceeding brought to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and costs. 14. Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of California. 15. Interpretation. This Agreement shall be construed as a whole, according to its fair meaning, and not in favor of or against any party. By way of example and not in limitation, this Agreement shall not be construed in favor of the party receiving a benefit nor against the party responsible for any particular language in this Agreement. Captions are used for reference purposes only and should be ignored in the interpretation of this Agreement. 16. Employee Acknowledgment. Employee acknowledges that he has had the opportunity to consult legal counsel in regard to this Agreement, that he has read and understands this Agreement, that he is fully aware of its legal effect, and that he has entered into it freely and voluntarily and based on his own judgment and not on any representations or promises other than those contained in this Agreement. 11 13 The parties have duly executed this Agreement as of the date first written above. - ------------------------------ EMPLOYEE'S NAME Digital Microwave Corporation - ------------------------------- By: Charles D. Kissner Its: President and Chief Executive Officer 12 EX-13.1 4 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13.1 PROFILE Digital Microwave Corporation designs, manufactures, and markets advanced, high-performance digital microwave radios and other short- and medium-haul communications products, systems, and services. The company's comprehensive portfolio of technologically advanced products is designed for use in cellular telephone systems, private networks, and other wireless telecommunications applications worldwide. Digital Microwave Corporation is headquartered in San Jose, California. The company has regional sales and service headquarters in the United Kingdom, Singapore, and San Jose, with additional sales offices in Asia, Europe, Latin America, and North America. Digital Microwave has sold over 60,000 radios, with systems installed in over 60 countries. 2 FINANCIAL HIGHLIGHTS
Years Ended March 31, 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------ (In thousands, except per share data and number of employees) Net sales $ 150,419 $ 153,650 $ 116,010 $ 103,937 $ 86,097 Net income (loss) $ (5,955) $ 1,982 $ (22,495) $ (6,708) $ (19,670) Net income (loss) per share $ (0.40) $ 0.14 $ (1.81) $ (0.55) $ (1.64) Total assets $ 95,797 $ 102,585 $ 84,003 $ 72,990 $ 87,213 Working capital $ 37,456 $ 26,996 $ 17,650 $ 35,461 $ 39,183 Stockholders' equity $ 49,735 $ 34,611 $ 28,604 $ 46,335 $ 53,004 Total employees at year-end 576 606 538 464 490 Weighted average, common and common equivalent shares outstanding 14,895 13,845 12,448 12,090 11,965 - ------------------------------------------------------------------------------------------------------------------
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 bid quotations of the company's common stock as reported by Nasdaq for the periods indicated.
Fiscal Year Ended March 31, 1996 March 31, 1995 High Low High Low - --------------------------------------------------------------------------------------- 1st Quarter 14 9 1/2 16 8 3/4 2nd Quarter 14 5/8 10 3/4 18 3/4 10 1/4 3rd Quarter 12 5/8 9 1/2 20 5/8 11 5/8 4th Quarter 11 1/8 8 1/8 20 3/4 11 7/8 - ---------------------------------------------------------------------------------------
The company has not paid dividends on its common stock and does not intend to pay dividends in the foreseeable future in order to retain earnings for use in its business. At March 31, 1996, there were approximately 337 stockholders of record. 3 TO OUR STOCKHOLDERS Fiscal year 1996 brought many unique changes, challenges, and opportunities to Digital Microwave Corporation. The second half of the year was especially dramatic, as the company dedicated itself to improving its financial performance and customer satisfaction, and accelerating new product introductions, particularly in the SPECTRUM(TM)II product line. In the third quarter, we took inventory and other reserves as part of our fundamental restructuring and improvement activities. This was largely the reason we recorded a net loss of $6.0 million, or $0.40 per share, on sales of $150.4 million in fiscal year 1996, compared to net income of $2.0 million, or $0.14 per share, on sales of $153.7 million for fiscal year 1995. While Digital Microwave recorded a loss for the year, we reported a profit of $0.02 per share in the fourth quarter of fiscal year 1996, indicating that we are beginning to realize the impact of our focus on company-wide improvements. Orders activity increased in the second half of the year, due to the growing customer reception of our new products, and the ongoing buildup of the wireless infrastructure worldwide. Key contract awards for the company included orders in the Philippines, the United Kingdom, the Netherlands, Malaysia, the U.S., and China. We also expanded our facility in Manila, and established a Beijing sales office, as well as a joint service and support facility with the Beijing Telecommunication Equipment Factory. For fiscal year 1996, we received $155 million in new orders, compared to $175 million for fiscal year 1995. Orders in the second half of fiscal year 1996 were $86 million, almost 25% above the first half level of $69 million. Our SPECTRUM(TM)II radio was approved by its first major customer, E-Plus Mobilfunk GmbH, in the second quarter of fiscal year 1996, and the 23 and 38 GHz versions of this product family began shipping in volume in that quarter. In the third quarter, we introduced 13, 15, 18, and 26 GHz frequencies in the SPECTRUM(TM)II product family, and a 2xE3 product in the QUANTUM(TM) line. By the end of fiscal year 1996, we had shipped SPECTRUM(TM)II radios to 20 countries. 4 In the fourth quarter, we announced a software-controlled MMIC (Microwave Monolithic Integrated Circuit) multiplier transceiver, which we are shipping in our SPECTRUM(TM)II radios. We believe the company's product portfolio is now one of the most complete in the industry, and that we offer the latest and best technology to meet our customers' needs. Key to Digital Microwave's long-term sustained success is our ongoing process analysis and change. Company-wide programs were initiated this past fiscal year to improve our fundamental operating processes, especially in the areas of engineering and manufacturing. These process reviews are designed to provide basic changes to the way we operate. We achieved some immediate results, including manufacturing yield breakthroughs, and significantly increased capacity in the factory. Our San Jose, California facility received registration to the ISO 9001-94 standard. This is an upgrade for Digital Microwave, which received its original registration in November, 1993. We are proud of this achievement, which helps demonstrate our continuing commitment to quality. During the second quarter, Digital Microwave raised $19.1 million with a private placement of common stock, and used these funds to reduce long-term debt and vendor obligations. In addition, through an ongoing focus on working capital utilization, the company's balance sheet position improved significantly during fiscal year 1996, and is now in its best position in some time. In addition to my joining the company in mid-year, we made several key additions to our management team during fiscal year 1996. Frank Carretta, Jr. joined the company as Vice President of Worldwide Sales and Service, Jack Hillson joined as Vice President and General Manager of the QUANTUM(TM)/Magnum Division, and Paul Kennard joined as Vice President of Engineering. Dr. James Meindl, whose expertise in electronics spans over 30 years, joined the company's Board of Directors. He is the Joseph M. Pettit Chair Professor of Microelectronics at the Georgia Institute of Technology in Atlanta, Georgia. As we move into fiscal year 1997, Digital Microwave is committed to remaining a leader in our business. We have the management team in place and the commitment to attain our goals. We feel our products are particularly well-suited for the available market for microwave radio around the world. The changes we initiated in the middle of fiscal year 1996 are beginning to show results, and will accelerate in the next fiscal year. We believe Digital Microwave is in an excellent position to successfully grow our business. /s/Charles D. Kissner ------------------------------------- CHARLES D. KISSNER President and Chief Executive Officer 5 FISCAL YEAR 1996 was a transitional and exciting year for Digital Microwave Corporation. The arrival of a new Chief Executive Officer and members of the management team precipitated a number of changes throughout the company, which will accelerate Digital Microwave's growth in fiscal year 1997 and beyond. Change always raises questions with stockholders and customers, as well as with a company's employees. In this year's annual report, our goal is to answer the questions we believe are uppermost in the minds of our stockholders with an interview with President and Chief Executive Officer Chuck Kissner. We have also included stories from the three key regions we serve worldwide, to demonstrate our dedication to customer satisfaction. 6 Q. WHAT AREAS HAVE YOU FOCUSED ON SINCE YOU JOINED DIGITAL MICROWAVE? My first priority was to establish a high performance, unified management team to lead the company in fulfilling our key objectives. Our management team has been totally dedicated to customer satisfaction, financial performance, and new product introduction. Each of these elements has a set of milestones that directly impact Digital Microwave's overall company performance, and therefore, its total value. All of these elements require substantial improvements in processes, or in how the company accomplishes its tasks. These initiatives were launched in the second half of fiscal year 1996, shortly after I joined the company. So far, the impact is encouraging. Our basic financial performance has improved in almost every major category. The company's balance sheet is substantially stronger than a year ago, and customer interest in our products has accelerated, resulting in a positive upturn in new orders. Q. HOW DO YOU DIFFERENTIATE YOURSELVES FROM THE COMPETITION? First, we offer one of the broadest microwave radio product lines of any company in the world market. Second, we are intensely responsive to our customers, who rely on us to meet their demanding requirements. Third, we have an excellent reputation for product reliability. Finally, Digital Microwave has a tradition of innovation in the industry, which we demonstrated with our recent SPECTRUM(TM)II product introductions and enhancements. Q. DIGITAL MICROWAVE FACES MANY LARGE, GLOBAL COMPETITORS. WHAT DOES IT TAKE FOR A COMPANY YOUR SIZE TO BE COMPETITIVE IN TODAY'S GLOBAL MARKETPLACE? Although Digital Microwave would be considered a mid-size company, our sales put us in the top tier of the approximately 20 companies selling point-to-point microwave radios. Because we are not in the business of providing wireless base stations and switching equipment, we are better able to work with many of the global giants in telecommunications, giving us a broad market access. Our absolute dedication to being the best microwave radio company provides the focus we need to stay competitive. We have developed deep worldwide expertise to help customers apply microwave solutions to meet their unique geographic requirements, accelerated new technology introductions, and established a reputation for being highly responsive to customers' needs. Our experience indicates that Digital Microwave is frequently considered the "company to beat" by our competitors. 7 Q. DIGITAL MICROWAVE SEEMS TO BE GOING THROUGH A "TURNAROUND". WHAT IS THE COMPANY FOCUSING ON TO MAKE THIS EFFORT A SUCCESS? Improving a company's long-term chances of success requires total dedication to question everything it does, and then having the courage to do whatever it takes to be the best. At Digital Microwave, we are looking at everything we do from the customer's viewpoint to determine what we should keep or discard. We've asked every employee to make a set of commitments which support teamwork and fundamental change. No existing process is sacred in our quest to be the best, nor does this quest have an end. Improvement also requires a totally focused management team to carry it through. We now have a team in place with a proven track record, and we are delivering on our commitments by promising only what we have a plan to support. Q. WHAT PROGRESS DID THE COMPANY MAKE IN PROCESS IMPROVEMENTS DURING FISCAL YEAR 1996? We implemented a number of process improvements, especially in the second half of the fiscal year. These included a new layout of the factory floor to increase product flow, and test procedures to improve overall quality. These improvements are part of a major reengineering program that we have embarked upon. The results of these improvements started to take hold in the fourth quarter, as we turned profitable. As we begin fiscal year 1997, we will initiate even more dramatic programs. Q. WHAT PROGRESS DID THE COMPANY MAKE TOWARD INTRODUCING NEW PRODUCTS IN FISCAL YEAR 1996? We made substantial progress throughout the year. In the third and fourth quarters, we had the most successful new product introduction period in the company's history. We announced 13, 15, 18, and 26 GHz versions of the SPECTRUM(TM)II, and a 2xE3 QUANTUM(TM) product. We also introduced significant, industry-leading new technologies into the SPECTRUM(TM)II product line. 8 Q. WHAT ARE THE MOST IMPORTANT GROWTH OPPORTUNITIES FOR THE COMPANY? Most of the company's products will be installed in the buildup of the worldwide wireless infrastructure. In locations where a wired infrastructure is sparse, the buildup will be particularly rapid. Recent expansion in the Asia Pacific region and in certain areas in Europe bear this out. South America will offer opportunities, depending on the state of the economies and political situations there. The U.S. market will increase with the implementation of Personal Communications Service (PCS) deployment and new local bypass services. With our strong international sales and service support capabilities, we are well positioned to take advantage of market opportunities anywhere in the world. Q. WHAT ARE THE MAJOR CHALLENGES FACING DIGITAL MICROWAVE? The most significant challenge is the intensity of competition, in terms of numbers and type. There is such explosive growth in the wireless market, and telecommunications in general, that many people want a piece of the pie. We substantially improved our competitive position over the past six months, and fared well in head-to-head contests. We believe our focus and commitment to long-range technology will serve us well in remaining a market leader. Q. WHAT IS DIGITAL MICROWAVE'S STRATEGY FOR THE LONG TERM? First, we intend to remain a leader in the point-to-point microwave business - by filling out the capabilities in our product offerings, by continuing to make fundamental architectural modifications, and by reducing product costs to meet changes in the environments where our products are used. We also intend to expand our business into adjacent market opportunities which leverage our expertise. Third, we plan to utilize new software and hardware technology to further advance our competitive position. Q. DOES DIGITAL MICROWAVE HAVE THE RESOURCES TO SUCCESSFULLY DRIVE THE COMPANY'S FUTURE? During fiscal year 1996, we significantly strengthened the balance sheet, through additional equity and improved working capital utilization. This stronger balance sheet provides the resources necessary to aggressively grow the company. We expect major process improvements in fiscal year 1997 to further strengthen our financial position. We also have a $25 million working capital line of credit to handle our day-to-day operating requirements. A key resource of Digital Microwave is its team of dedicated employees, whose efforts are important for the company to achieve its goals for fiscal year 1997 and beyond. We are confident that we now have the financial and personnel resources to successfully drive our future. 9 ASIA PACIFIC The rainy season in India was imminent as Digital Microwave employees from San Jose and the UK worked feverishly to set up 52 links of 15 GHz M Series radios in central Bombay in just four weeks. Temperatures hovered in the upper 90's, with over 90% humidity. The installers faced several unusual challenges, including climbing over plumbing pipes which were installed on the outside of buildings to get to the roofs. Other difficulties included delays in the release of equipment from customs, long hours, and endless traffic snarls. Despite these adverse conditions, the installation was completed on time, and over 70 microwave links are currently up and running. EUROPE When Digital Microwave employees in Coventry, UK managed a turnkey GSM network installation for CelTel in the country of Uganda, they broke new ground - - and sometimes new roads. CelTel is the first cellular telephone company to operate in Uganda. Some installation sites could be reached only through narrow dirt tracks, or in some cases, roads had to be cut. Outside of Kampala, the largest city in central Uganda, there was no electricity, so diesel generators were used at these sites. Some Digital Microwave radios were installed around Lake Victoria, the largest lake in Africa, which flows through three countries. AMERICAS A major fiber-based network company in Canada turned to Digital Microwave when they needed a fast turnup for their customers in Toronto, Vancouver, and Ottawa. This Competitive Access Provider (CAP) is augmenting its fiber systems using microwave radio. Because approval to install fiber can take months, this customer purchased links of 15 and 23 GHz SPECTRUM(TM)II radios to use as the "last link", or to connect buildings off the fiber route. The end users include Internet providers, banks, and some cellular companies. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW. Net sales for the fiscal year ended March 31, 1996 were $150.4 million compared to $153.7 million for fiscal 1995. Net loss for fiscal 1996 was $6.0 million ($0.40 per share), compared to net income of $2.0 million ($0.14 per share), in fiscal 1995. The results for fiscal 1996 were impacted negatively by a one-time provision for excess and obsolete inventory of approximately $7.0 million, and $1.0 million of additional reserves related to the final resolution of E-Plus remaining open issues, both of which were recorded in the third quarter. The Company received $155 million in orders shippable within a twelve month period during fiscal 1996 compared to $175 million for fiscal 1995. The twelve month backlog at March 31, 1996 was $84 million compared to $93 million at the end of fiscal 1995. The following table sets forth items from the Company's consolidated statements of operations, expressed as a percentage of net sales:
Years Ended March 31, 1996 1995 1994 - -------------------------------------------------------------------------------- (% of Net sales) Net sales 100.0% 100.0% 100.0% Cost of sales 79.7 74.7 68.0 Research and development 7.4 7.4 8.0 Selling, general and administrative 18.2 16.1 20.1 Non-recurring charges -- -- 23.3 ----- ----- ----- Operating income (loss) (5.3) 1.8 (19.4) Other income (expense), net .1 (.4) 1.0 ----- ----- ----- Income (loss) before provision for income taxes (5.2) 1.4 (18.4) Provision (credit) for income taxes (1.3) .1 1.0 ----- ----- ----- Net income (loss) (3.9)% 1.3% (19.4)% ----- ----- ----- - --------------------------------------------------------------------------------
RESULTS OF OPERATIONS 1996 COMPARED TO 1995. Net sales decreased 2.1% from $153.7 million in fiscal year 1995 to $150.4 million in fiscal year 1996. Net sales in the Americas were $36.2 million, a 32% decrease from $53.0 million reported in fiscal 1995, and net sales in fiscal 1996 for Europe of $73.7 million were 4% lower than the $77.1 million reported in fiscal 1995. These decreases were partly offset by an increase of 72% in sales in Asia Pacific, from $23.6 million reported in fiscal 1995 to $40.5 million in fiscal 1996. International sales for fiscal years 1996 and 1995 were 88% and 87% of total net sales, respectively. The decrease in sales in the Americas was due to lower orders from Colombia and Mexico. The economic condition in Mexico is still affecting the orders level. The increase in sales in Asia Pacific was due to the growth of major wireless service providers in the Philippines, Malaysia, India and China. See Note 10 of Notes to Consolidated Financial Statements. Cost of sales as a percentage of net sales increased to 79.7% in fiscal 1996 from 74.7% in fiscal 1995. The increased cost of sales as a percentage of sales and lower gross margins in fiscal 1996 was primarily due to provisions for excess and obsolete inventory of approximately $8.8 million recorded in fiscal 1996, compared to $1.0 million in fiscal 1995, unabsorbed manufacturing overhead expenses because of lower production volume, rework expenses 10 11 and costs related to the start up of SPECTRUM(TM) II production. The additional inventory reserves were necessary as a result of the changes in the Company's product line focus due to the introduction of SPECTRUM(TM) II products and changes in the customer requirements, thereby requiring the need to balance inventory on hand to the production requirements. Also, an additional reserve of $1.0 million was recorded in the third quarter of fiscal 1996 to cover the final resolution of E-Plus remaining open issues as a result of delays in the shipment of the SPECTRUM(TM) II products at the start of the year. Competitive price pressures on major contracts also continue to contribute to the lower gross margins. See "Factors That May Affect Future Financial Results" and Note 9 of Notes to Consolidated Financial Statements. Research and development expenses decreased by $0.3 million, from $11.4 million in fiscal year 1995 to $11.1 million in fiscal year 1996. As a percentage of net sales, research and development expenses were 7.4% for both fiscal years 1996 and 1995. The Company will continue to invest in timely development of new products and features in order to maintain and enhance its competitive position. Selling, general and administrative expenses increased to $27.4 million in fiscal 1996 from $24.8 million in fiscal 1995. As a percentage of net sales, selling, general and administrative expenses were 18.2% in 1996, as compared with 16.1% in fiscal 1995. The increase in expense was principally due to the continued expansion of sales and sales support personnel in Asia Pacific and the Americas, new marketing and advertising programs as well as increases in other administrative expenses. Interest and other income (expense), net for fiscal 1996 was $0.1 million of income compared to $0.5 million expense in fiscal 1995. Interest expense in fiscal 1996 was $1.9 million compared to $0.5 million in fiscal 1995. The increase in interest expense was attributable to the higher principal balances outstanding on the line of credit and note payable for the first half of fiscal 1996. The higher interest expense was offset by the gain on sale of investment of $0.7 million, interest income on the income tax refunds of $0.4 million, foreign exchange gains of $0.5 million and royalty income of $0.3 million. The favorable exchange gains were attributable to receivables denominated in foreign currencies. The Company booked a tax benefit of $2.0 million in fiscal 1996 compared to a $0.2 million tax provision in fiscal 1995. The tax benefit was recorded after the completion of an IRS audit of the fiscal years ended March 31, 1990 through 1994 and the receipt of tax refunds resulting from a favorable IRS letter ruling. The ruling allowed the Company a 10 year carryback for net operating losses incurred in fiscal 1995 and to obtain federal tax refunds. Substantially all of these refunds had not been previously recorded for financial statement purposes as their realization was uncertain. See Note 5 of Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS 1995 COMPARED TO 1994. Net sales increased 32.4% to $153.7 million in fiscal year 1995 from $116.0 million in fiscal year 1994. The Company reported increased sales in fiscal 1995 in Europe and the Americas of 45% and 41% respectively, compared to the prior fiscal year. These increases were partly offset by a decline of 7% in sales in Asia Pacific. International sales for fiscal years 1995 and 1994 were 87% and 91% of net sales, respectively. Cost of sales as a percentage of net sales increased to 74.7% in fiscal 1995 from 68.0% in fiscal 1994. The increased cost of sales as a percentage of sales and lower gross margins in fiscal 1995 were primarily due to delays in shipments of SPECTRUM(TM) II radios 11 12 under the E-Plus contract. Under this contract, the Company was required to ship M Series and SPECTRUM(TM) I products ("interim equipment") pending final acceptance of the SPECTRUM(TM) II product. As of March 31, 1995, the Company had recognized $12.9 million of revenue with nominal margins on shipments of interim equipment that had been accepted by E-Plus. In as much as future shipments of interim equipment were subject to substantial discounts, the Company recorded significant reserves in the fourth quarter of fiscal 1995 related to such discounts, based on the estimated acceptance schedule, and other contract related costs. Competitive price pressures on major contracts also contributed to the lower gross margins. Research and development expenses increased by $2.1 million, from $9.3 million in fiscal year 1994 to $11.4 million in fiscal year 1995. The increase in expenses was attributable to the increased development efforts on the second generation SPECTRUM(TM) II products. As a percentage of net sales, research and development expenses in fiscal year 1995 were 7.4% compared to 8.0% in fiscal 1994. The decrease in research and development as a percentage of net sales was due to higher sales in fiscal 1995 compared to fiscal 1994. Selling, general and administrative expenses increased to $24.8 million in fiscal 1995 from $23.3 million in fiscal 1994. The increase in expense was principally due to the expansion of sales and sales support personnel in Asia Pacific and the Americas, as well as increases in other expenses associated with the sales function. As a percentage of net sales, selling, general and administrative expenses were 16.1% in 1995, as compared with 20.1% in fiscal 1994. The decrease in selling, general and administrative expenses as a percentage of net sales was attributable to the higher sales volume in fiscal 1995. In fiscal 1994, the Company recorded a non-recurring charge of $27.0 million for costs related to the settlement of certain stockholders' class action lawsuits of $20.0 million and costs associated with the liquidation of a 45% interest in the joint venture, DMC Telecom (Malaysia) Sdn. Bhd., of $7.0 million. See Notes 7 and 8 of Notes to Consolidated Financial Statements. Interest and other income (expense), net for fiscal 1995 was nominal compared to $1.7 million of other income in fiscal 1994, which included a $1.1 million gain on the sale of the Company's W-band product line and a $0.4 million gain on the sale of the Company's interest in a joint venture with Optical Microwave Network, Inc. (OMNI). The Company recorded an income tax provision in fiscal 1995 at an effective tax rate of 10% which was less than the statutory rate due to the realization of certain temporary differences. LIQUIDITY AND CAPITAL RESOURCES. Net cash provided by operating activities in fiscal 1996 was $8.2 million, compared to net cash used for operating activities of $17.2 million in fiscal 1995. Total assets at March 31, 1996 of $95.8 million decreased by $6.8 million from $102.6 million at March 31, 1995, principally due to decreases in inventory and other current assets. Inventories decreased primarily as a result of increases in inventory reserves. The decrease in other current assets was caused by the collection of income tax refunds and reduction of other prepaid items. These decreases were partially offset by increases in accounts receivable. The increase in accounts receivable was caused by higher sales levels in the fourth quarter of fiscal 1996 compared with the fourth quarter of fiscal 1995. Total liabilities at March 31, 1996 of $46.1 million were $21.9 million lower than the $68.0 million at March 31, 1995. The decrease was primarily due to a reduction of $12.2 million in outstanding balances on the line of credit and note payable and a reduction of 12 13 $10.1 million in accounts payable. The reductions were funded primarily from the proceeds of approximately $19.1 million from an overseas private placement of the Company's common stock which was received in the form of a reduction in the Company's trade payable to one investor of $5.0 million and cash proceeds of $14.1 million from the remaining investors. The private placement was the primary factor in the increase in stockholders' equity from $34.6 million at March 31, 1995 to $49.7 million at March 31, 1996, partly offset by the net loss of $6.0 million in fiscal 1996. The private placement was completed on August 22, 1995 and 2,063,982 shares of common stock were sold to the investors. At March 31, 1996 the Company's principal sources of liquidity consisted of $8.3 million in cash and a revolving bank credit facility that provides up to $20.0 million in credit (which was increased to $25.0 million in May 1996). At March 31, 1996, $3.1 million was outstanding under this line. See Note 3 of Notes to Consolidated Financial Statements. The Company believes that the liquidity provided by existing cash balances, anticipated future cash flows from operations, and the Company's existing borrowing arrangement will be sufficient to meet both working capital and capital expenditure requirements for the foreseeable future. The Company leases certain property, equipment and facilities under operating and capital leases. Rent expense under the operating leases was approximately $3.7 million in fiscal 1996. See Note 4 of Notes to Consolidated Financial Statements. FACTORS THAT MAY AFFECT FUTURE FINANCIAL RESULTS. The stockholders' letter and discussions in this annual report concerning the Company's future products, expenses, revenue, 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, incoming order levels, shipment volumes, product margins, and foreign exchange rates, could cause actual results to differ from those described in these statements and prospective investors and stockholders should carefully consider the factors set forth below in evaluating these forward-looking statements. The Company's backlog may not be representative of actual sales for any succeeding period because of the timing of orders, delivery intervals, customer and product mix and the possibility of changes in delivery schedules and additions or cancellation of orders. Sales of the Company's products are concentrated in a small number of customers. For fiscal 1996, the top four customers accounted for 38% of the net sales. As of March 31, 1996, four of the Company's customers accounted for 49% of the backlog, of which 16% was attributable to orders under the E-Plus contract. The worldwide telecommunications industry is dominated by a small number of large corporations and the Company expects that a significant portion of its future product sales will continue to be concentrated in a limited number of customers. The loss of any existing customer, a significant reduction in the level of sales to any existing customer, or the failure of the Company to gain additional customers could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, a substantial portion of shipments may occur near the end of each quarter. Accordingly, the Company's results are difficult to predict and delays in product delivery or closing of a sale can cause revenues and net income to fluctuate significantly from anticipated levels and from quarter to quarter. 13 14 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 large and emerging domestic and international companies, such as California Microwave, Alcatel, Ericsson, Siemens AG, Harris Corporation, Nokia, NEC, and P-Com, many of which have significantly greater financial, technical, manufacturing, marketing, sales and distribution resources and management expertise 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, product performance and features; timing of new product introductions by the Company, its customers and its competitors; the ability of its customers to obtain financing; and customer service and technical support. 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. 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 competition 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 reduce costs in line with or faster than declines in prices. The Company's manufacturing operations are highly dependent upon the delivery of materials by outside suppliers in a timely manner. From time to time the Company has experienced delivery delays from key suppliers which impacted sales. There can be no assurance that the Company will not experience material supply problems or component or subsystem delays in the future. SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended March 31, 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net sales $ 150,419 $ 153,650 $ 116,010 $ 103,937 $ 86,097 Net income (loss) $ (5,955) $ 1,982 $ (22,495) $ (6,708) $ (19,670) Net income (loss) per share $ (0.40) $ 0.14 $ (1.81) $ (0.55) $ (1.64) CONSOLIDATED BALANCE SHEETS DATA: Total assets $ 95,797 $ 102,585 $ 84,003 $ 72,990 $ 87,213 Long-term liabilities $ 2,782 $ 6,362 $ 459 $ 201 $ 629 - ---------------------------------------------------------------------------------------------------------------------------
14 15 CONSOLIDATED BALANCE SHEETS
March 31, 1996 1995 - ---------------------------------------------------------------------------------------- (In thousands, except share and per share amounts) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 8,299 $ 1,919 Restricted cash 719 1,100 Accounts receivable, net of allowance of $1,373 in 1996 and $1,413 in 1995 33,398 32,513 Inventories, net 35,347 46,732 Tax refund receivable -- 1,820 Other current assets 2,973 4,524 --------- --------- Total current assets 80,736 88,608 --------- --------- PROPERTY AND EQUIPMENT: Machinery and equipment 36,609 32,450 Land and buildings 1,262 1,262 Furniture and fixtures 7,602 6,668 Leasehold improvements 2,262 2,139 --------- --------- 47,735 42,519 Accumulated depreciation and amortization (32,674) (28,542) --------- --------- Net property and equipment 15,061 13,977 --------- --------- $ 95,797 $ 102,585 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Lines of credit $ 3,106 $ 11,731 Current maturities of note payable 3,334 3,333 Current maturities of capital lease obligations 1,025 776 Accounts payable 16,252 26,373 Income taxes payable 973 1,629 Other accrued liabilities 18,590 17,770 --------- --------- Total current liabilities 43,280 61,612 LONG-TERM LIABILITIES: Note payable, net of current maturities 1,944 5,556 Capital lease obligations, net of current maturities 838 806 --------- --------- Total liabilities 46,062 67,974 --------- --------- COMMITMENTS AND CONTINGENCIES (NOTE 4) STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; 5,000,000 shares authorized; none outstanding -- -- Common stock, $.01 par value; 30,000,000 shares authorized; 15,820,783 shares in 1996 and 13,467,693 shares in 1995 issued and outstanding 159 135 Additional paid-in capital 65,368 44,313 Accumulated deficit (15,792) (9,837) --------- --------- Total stockholders' equity 49,735 34,611 --------- --------- $ 95,797 $ 102,585 ========= =========
The accompanying notes are an integral part of these consolidated balance sheets. 15 16 CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------ (In thousands, except per share amounts) NET SALES $ 150,419 $ 153,650 $ 116,010 Cost of Sales 119,918 114,760 78,874 --------- --------- --------- Gross profit 30,501 38,890 37,136 --------- --------- --------- OPERATING EXPENSES: Research and development 11,108 11,379 9,316 Selling, general and administrative 27,416 24,763 23,338 Non-recurring charges -- -- 27,000 --------- --------- --------- Total operating expenses 38,524 36,142 59,654 --------- --------- --------- Income (loss) from operations (8,023) 2,748 (22,518) OTHER INCOME (EXPENSE): Interest and other income (expense), net 1,975 (16) 1,718 Interest (expense) (1,860) (530) (603) --------- --------- --------- Income (loss) before provision for income taxes (7,908) 2,202 (21,403) Provision (credit) for income taxes (1,953) 220 1,092 --------- --------- --------- Net income (loss) $ (5,955) $ 1,982 $ (22,495) ========= ========= ========= Net Income (Loss) Per Share $ (0.40) $ 0.14 $ (1.81) ========= ========= ========= Weighted Average Number of Common and Common Equivalent Shares Outstanding 14,895 13,845 12,448
The accompanying notes are an integral part of these consolidated financial statements. 16 17 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Retained Common Stock Additional Earnings Total ----------------------- Paid-In (Accumulated Stockholders' Years Ended March 31, 1996, 1995, and 1994 Shares Amount Capital Deficit) Equity - ------------------------------------------------------------------------------------------------------------------------------- (In thousands, except share amounts) Balance, March 31, 1993 12,132,964 $ 121 $ 35,538 $ 10,676 $ 46,335 Stock options exercised 690,745 7 3,995 -- 4,002 Tax benefits related to employee stock transactions -- -- 762 -- 762 Net loss -- -- -- (22,495) (22,495) ---------- ---------- ---------- ---------- ---------- Balance, March 31, 1994 12,823,709 128 40,295 (11,819) 28,604 Stock options and warrants exercised 643,984 7 4,018 -- 4,025 Net income -- -- -- 1,982 1,982 ---------- ---------- ---------- ---------- ---------- Balance, March 31, 1995 13,467,693 135 44,313 (9,837) 34,611 Sale of stock to private investors 2,063,982 21 19,071 -- 19,092 Stock options exercised 289,108 3 1,929 -- 1,932 Tax benefits related to employee stock transaction -- -- 55 -- 55 Net loss -- -- -- (5,955) (5,955) ---------- ---------- ---------- ---------- ---------- Balance, March 31, 1996 15,820,783 $ 159 $ 65,368 $ (15,792) $ 49,735 ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 17 18 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (5,955) $ 1,982 $(22,495) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 6,332 6,356 6,448 Provision for non-recurring charges -- -- 27,000 Provision for uncollectible accounts 580 276 300 Provision for inventory reserves 8,795 958 117 Provision for warranty reserves 1,678 1,911 1,285 Gain on sale of product lines -- -- (1,089) Gain on sale of investment in OMNI -- -- (371) Changes in assets and liabilities: (Increase) decrease in restricted cash 381 200 281 (Increase) decrease in accounts receivable (1,492) (5,774) (6,880) (Increase) decrease in inventories 904 (12,212) (13,232) (Increase) decrease in tax refund receivable 1,820 778 1,691 (Increase) decrease in other current assets 1,559 (1,503) (73) Increase (decrease) in accounts payable (5,144) 5,398 13,607 Increase (decrease) in accrued litigation -- (19,900) -- Increase (decrease) in other accrued liabilities (1,241) 4,287 203 -------- -------- -------- Net cash provided by (used for) operating activities 8,217 (17,243) 6,792 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (4,527) (8,111) (5,840) -------- -------- -------- Net cash used for investing activities (4,527) (8,111) (5,840) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings from banks 16,188 36,744 21,858 Repayments to banks (28,423) (16,124) (23,084) Payments of note payable to MTI -- -- (3,075) Payments of capital lease obligations (1,019) (695) (946) Sale of common stock 15,812 4,025 4,002 -------- -------- -------- Net cash provided by (used for) financing activities 2,558 23,950 (1,245) -------- -------- -------- Effect of Exchange Rate Changes on Cash 132 (39) (146) -------- -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents 6,380 (1,443) (439) Cash and Cash Equivalents at Beginning of Year 1,919 3,362 3,801 -------- -------- -------- Cash and Cash Equivalents at End of Year $ 8,299 $ 1,919 $ 3,362 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 18 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF BUSINESS Digital Microwave Corporation (the "Company") designs, manufactures and markets advanced high-performance digital microwave equipment for a wide variety of short and medium-haul communications applications worldwide. This comprehensive family of technologically advanced products is designed for use in cellular telephone systems, private networks, and other wireless telecommunications. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION. The consolidated financial statements include the accounts of Digital Microwave Corporation and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated. ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue 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. RESTRICTED CASH. The Company is required to segregate and maintain certain cash balances as security for letters of credit provided to secure performance or bid bonds under some of the Company's revenue contracts. As of March 31, 1996 and 1995, the Company was required to segregate and maintain $0.7 million and $1.1 million, respectively, which are included as restricted cash in the accompanying consolidated balance sheets. 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:
Years Ended March 31, 1996 1995 1994 - --------------------------------------------------------------------------- (In thousands) Interest $1,753 $1,556 $ 603 Income taxes $ 172 $ 62 $ 245 - ---------------------------------------------------------------------------
The following non-cash transactions occurred during the fiscal years ended:
March 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------- (In thousands) Tax benefit related to employee stock transactions $ 55 $ -- $ 762 Property purchased under capital leases $1,324 $ 1,314 $ 966 Reduction of accounts payable to MTI in connection with the sale of stock (See Note 7) $5,000 $ -- $ -- Reduction of accounts payable to MTI in connection with the sale of OMNI $ -- $ -- $ 400 - -----------------------------------------------------------------------------------------
19 20 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:
March 31, 1996 1995 - --------------------------------------------------------------------------- (In thousands) Raw materials $11,840 $16,506 Work in process 16,342 20,977 Finished goods 7,165 9,249 ------- ------- $35,347 $46,732 ======= ======= - ---------------------------------------------------------------------------
Inventories contained components and assemblies in excess of the Company's current estimated requirements and were reserved at March 31, 1996 and 1995. Also, as a result of product transitions in the third quarter of fiscal 1996, the Company charged cost of sales for approximately $7.0 million for excess and obsolete inventories. Due to competitive pressures, it is possible that these estimates could change in the foreseeable future. PROPERTY AND EQUIPMENT. Property and equipment is stated at cost. Depreciation and amortization are provided 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 $3,641,000 and $2,503,000 for fiscal years 1996 and 1995, respectively. Accumulated amortization on leased assets was $1,044,000 and $712,000 as of March 31, 1996 and 1995, respectively. OTHER ACCRUED LIABILITIES. Other accrued liabilities included the following:
March 31, 1996 1995 - ----------------------------------------------------------------------------------------- (In thousands) Customer deposits $ 4,839 $ 1,095 Accrued contract obligations (See Note 9) 3,759 4,045 Accrued commissions 3,246 1,873 Deferred revenue -- 3,431 Accrued warranty 3,076 3,075 Closing costs - DMC TeleCom (Malaysia) Sdn. Bhd. (See Note 7) 367 1,029 Other 3,303 3,222 ------- ------- $18,590 $17,770 ======= ======= - -----------------------------------------------------------------------------------------
Accrued contract obligations primarily relate to product and other equipment to be provided to E-Plus, as well as discounts on shipments of interim equipment and other customer obligations. Deferred revenue consisted principally of shipments of interim equipment to E-Plus that were subject to a right of return. FOREIGN CURRENCY TRANSLATION. The functional currency of the Company's subsidiaries is the U.S. dollar. Accordingly, all of the monetary assets and liabilities of these subsidiaries are remeasured into U.S. dollars at the current exchange rate as of the applicable balance sheet date, and all non-monetary assets and liabilities are remeasured at historical rates. Sales and expenses are remeasured at the average exchange rate prevailing during the period. Gains and losses resulting from the remeasurement of the subsidiaries' financial statements are included in the consolidated statements of operations. 20 21 Gains and losses resulting from foreign exchange transactions are included in other income (expense) in the accompanying consolidated statements of operations. Realized gains and losses on foreign exchange contracts designated as hedges are included in income or expense when the underlying transaction occurs. For fiscal year ended March 31, 1996 the aggregate net foreign exchange gain was $506,000 and for fiscal years ended March 31, 1995, and 1994, the aggregate net foreign exchange loss was $39,000 and $198,000, respectively. CONCENTRATION OF CREDIT RISK. Trade receivables concentrated with certain customers primarily in the telecommunications industry and in certain geographic locations potentially subject the Company to concentration of credit risk. In addition to sales in Western Europe and North America, the Company actively markets and sells products in the Far East, Eastern Europe and South America. The Company performs on-going credit evaluations of its customers' financial conditions and generally requires no collateral. REVENUE RECOGNITION. Revenue from product sales is generally recognized upon shipment. Service revenue, which is less than 10% of net revenue for each of the three fiscal years presented, is recognized once the related services are performed. PRODUCT WARRANTY. The Company provides, at the time of sale, for the estimated cost to repair or replace products under warranty. RESEARCH AND DEVELOPMENT. All research and development costs are expensed as incurred. NET INCOME (LOSS) PER SHARE. Net income per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. Net loss per share is computed using only the weighted average number of common shares outstanding during the period, as the inclusion of common equivalent shares would be antidilutive. NOTE 3. CREDIT ARRANGEMENTS At March 31, 1996, the Company had a $20.0 million credit facility with a U.S. bank and a credit company that expires on June 30, 1996. Borrowings bear interest at the prime rate plus 1.5% per annum (9.75% at March 31, 1996) and are secured by certain assets of the Company. At March 31, 1996, $3.1 million was outstanding under this credit facility, and $16.9 million of credit was available based on the underlying collateral. The agreement requires the Company to maintain certain financial covenants, including minimum tangible net worth and profitability requirements. The Company was in default of the annual loss covenant of the credit agreement for the fiscal year ended March 31, 1996 and obtained a waiver from the lenders. In June 1996, the Company renewed the credit arrangement increasing the facility to $25.0 million at an interest rate of prime plus 1% under the same general terms and conditions to expire on June 30, 1997. In October 1994, the Company signed a three year, $10.0 million promissory note, payable to a financing company in equal monthly installments of approximately $278,000. This note is secured by all equipment in the Company's San Jose, California facility. The promissory note bears interest at prime plus 2.25% per annum (10.5% at March 31, 1996). The agreement requires the Company to maintain certain financial covenants, including minimum net worth and profitability requirements. At March 31, 1996, the outstanding balance under this note was $5.3 million, of which $3.3 million is due in fiscal 1997. 21 22 NOTE 4. LEASE COMMITMENTS AND CONTINGENCIES The Company leases certain property and equipment, as well as its headquarters and manufacturing facilities, under noncancelable operating and capital leases, which expire at various periods through 2003. At March 31, 1996, future minimum payment obligations under these leases were as follows:
Years Ending March 31, Capital Operating - ----------------------------------------------------------------------------- (In thousands) 1997 $ 1,179 $ 2,461 1998 736 2,168 1999 162 1,936 2000 -- 1,915 2001 -- 1,920 2002 and beyond -- 2,546 ------- ------- Future minimum lease payments 2,077 $12,946 ======= Less-amount representing interest (9% to 14%) (214) ------- Present value of future minimum lease payments 1,863 Less-current maturities 1,025 ------- Long-term lease obligations $ 838 ======= - -----------------------------------------------------------------------------
Rent expense under operating leases was approximately $3,679,000, $3,458,000, and $2,892,000 for the years ended March 31, 1996, 1995, and 1994, respectively. The Company is a defendant in various suits and is subject to various claims which arise in the normal course of business. In the opinion of management, the ultimate disposition of these claims will not have a material adverse effect on the consolidated financial position, liquidity or results of operations of the Company. 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:
Years Ended March 31, 1996 1995 1994 - ------------------------------------------------------------------------------ (In thousands) Domestic $ (9,845) $ 1,182 $(19,864) Foreign 1,937 1,020 (1,539) -------- -------- -------- $ (7,908) $ 2,202 $(21,403) ======== ======== ======== - ------------------------------------------------------------------------------
22 23 The provision (credit) for income taxes consisted of the following:
Years Ended March 31, 1996 1995 1994 - --------------------------------------------------------------------------------- (In thousands) Current: Federal $(2,018) $ 220 $ 95 State -- -- -- Foreign 65 -- 37 ------- ------- ------- Total current (1,953) 220 132 ------- ------- ------- Deferred (prepaid): Federal -- -- 960 State -- -- -- Foreign -- -- -- ------- ------- ------- Total deferred (prepaid) -- -- 960 ------- ------- ------- $(1,953) $ 220 $ 1,092 ======= ======= ======= - ---------------------------------------------------------------------------------
The provision (credit) for income taxes differs from the amount computed by applying the statutory Federal income tax rate as follows:
Years Ended March 31, 1996 1995 1994 - -------------------------------------------------------------------------------------- (In thousands) Expected tax (benefit) $(2,689) $ 749 $(7,277) State taxes net of Federal benefit (343) -- -- Change in valuation allowance 3,346 (624) 8,883 Reversal of previously provided taxes upon settlement of the IRS audit (2,018) -- -- Other (249) 95 (514) ------- ------- ------- $(1,953) $ 220 $ 1,092 ======= ======= ======= - --------------------------------------------------------------------------------------
The major components of the net deferred tax asset consisted of the following:
March 31, 1996 1995 - ----------------------------------------------------------------------------- (In thousands) Inventory reserves $ 6,041 $ 1,820 Depreciation 685 808 Warranty reserves 1,158 1,183 Bad debt reserves 655 842 Net operating loss carryforwards 3,879 6,785 Tax credits 5,514 2,764 Other 1,430 1,346 -------- -------- 19,362 15,548 Less: Valuation reserve - Operations (18,894) (15,548) Less: Valuation reserve - Equity (468) -- -------- -------- Net deferred tax asset $ -- $ -- ======== ======== - -----------------------------------------------------------------------------
Federal net operating loss carryforwards totaling $8.1 million will expire at various dates from 2010 through the year 2011. State net operating loss carryforwards totaling $13.5 million will expire at various dates from 1999 through the year 2001. The tax credit carryforwards will expire at various dates from 2006 through the year 2011. 23 24 NOTE 6. COMMON STOCK STOCK OPTION PLANS. The Company's 1984 Stock Option Plan ("1984 Plan") provides for the grant of both incentive and nonqualifed stock options to key employees and certain independent contractors of the Company. At March 31, 1996, options to purchase 756,403 common shares were outstanding under the 1984 Plan, of which 499,420 options were exercisable at prices ranging from $0.50 to $26.00 per share. As a result of the adoption of the 1994 Stock Incentive Plan ("1994 Plan") there were no shares available for future grants under the 1984 Plan. In July 1994, the stockholders approved the 1994 Plan. The 1994 Plan authorizes 1,183,330 shares of common stock to be reserved for issuance over a ten year term. This share reserve automatically increases on the first trading day of each calendar year for five years after the adoption of the 1994 Plan, beginning January 1995, by an amount equal to one percent (1%) of the total number of shares of common stock outstanding, but in no event will any such annual increase exceed 150,000 shares. 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. At March 31, 1996, options to purchase 1,053,479 shares were outstanding under the 1994 Plan, of which 100,400 were exercisable at prices ranging from $10.00 to $18.13 per share. At March 31, 1996, the Company had 129,851 shares available for future grant under the 1994 Plan. At March 31, 1996, the Company had reserved 1,939,733 shares for future issuance under the 1984 and 1994 Plans. The following table summarizes the Company's stock option activity:
Number Option Price of Shares per Share - -------------------------------------------------------------------------------------- Outstanding at March 31, 1993 2,170,121 $ .06 - $11.75 Granted 253,150 $ 9.00 - $26.00 Exercised (690,745) $ .06 - $11.75 Canceled (370,348) $ 5.25 - $23.75 --------- --------------- Outstanding at March 31, 1994 1,362,178 $ .22 - $26.00 Granted 855,044 $ 9.87 - $18.13 Exercised (531,484) $ .22 - $13.25 Canceled (222,033) $ 5.25 - $26.00 --------- --------------- Outstanding at March 31, 1995 1,463,705 $ .50 - $26.00 Granted 897,293 $10.00 - $14.50 Exercised (270,705) $ .50 - $ 9.88 Canceled (280,411) $ 5.25 - $26.00 --------- --------------- Outstanding at March 31, 1996 1,809,882 $ .50 - $26.00 ========= =============== - --------------------------------------------------------------------------------------
24 25 STOCKHOLDERS' RIGHTS AGREEMENT. In October 1991, the Company adopted a Stockholders' Rights Agreement pursuant to which one Preferred Share Purchase Right was distributed for each outstanding share of common stock. Each Right entitles stockholders to buy one one-hundredth of a share of Series A Junior Participating Preferred Stock at an exercise price of $50.00 upon certain events. The Rights expire on October 23, 2001, unless earlier redeemed by the Company. The Rights become exercisable if a person acquires 15% or more of the Company's common stock or announces a tender offer that would result in such person owning 15% or more of the Company's common stock. If the Rights become exercisable, the holder of each Right (other than the person whose acquisition triggered the exercisability of the Rights) will be entitled to purchase, at the Right's then-current exercise price, a number of shares of the Company's common stock having a market value of twice the exercise price. In addition, if the Company were to be acquired in a merger or business combination after the Rights became exercisable, each Right will entitle its holder to purchase, at the Right's then-current exercise price, common stock of the acquiring company having a market value of twice the exercise price. The Rights are redeemable by the Company at a price of $0.01 per Right at any time within ten days after a person has acquired 15% or more of the Company's common stock. NOTE 7. TECHNOLOGY DEVELOPMENT, MANUFACTURING AND RELATED AGREEMENTS MICROELECTRONICS TECHNOLOGY, INC. (MTI). The microwave integrated circuit subassemblies which are key components in the Company's microwave radio products are supplied primarily by MTI, which manufactures such subassemblies in Taiwan. In 1984, the Company entered into a development agreement and stock purchase agreement with MTI. The agreements include provisions which enable MTI to perform development engineering work and to manufacture subassemblies for the Company's products. Under the development agreement, MTI has the right to manufacture up to 75% of the Company's production requirements for microwave integrated circuit subassemblies designed by MTI for the Company as long as MTI is able to meet cost, quality and delivery standards available to the Company from other sources. The agreement also provides MTI with a right to manufacture certain of the Company's microwave products if the Company decides to subcontract the manufacturing of these products. The agreement may be terminated by either party only in the event of a breach by the other. The Company did not incur any development costs for work performed by MTI under this agreement in fiscal 1996, 1995 and 1994. Purchases of subassemblies from MTI totaled approximately $22,246,000, $23,509,000, and $15,636,000, for the fiscal years ended March 31, 1996, 1995, and 1994, respectively. Trade accounts payable to MTI at March 31, 1996 and 1995 were $3,939,000 and $6,507,000 respectively. In October 1987, the Company and MTI entered into a Technology Transfer and Marketing Agreement whereby the Company granted MTI a license to manufacture, use and market certain of the Company's products in the Republic of China (Taiwan). For fiscal years 1996, 1995, and 1994, sales to MTI under this agreement were $1,952,000, $1,031,000, and $2,146,000, respectively. In addition, amounts due from MTI at March 31, 1996 and 1995 were $453,000 and $61,800, respectively. In fiscal 1993, in connection with a financing agreement, the Company issued MTI warrants for the purchase of 112,500 shares of common stock at $6.50 per share. During fiscal 1995, MTI exercised all of these warrants. In fiscal 1996, in connection with a private placement of the Company's common stock, MTI bought 515,995 shares at $9.69 per share, payment of which was made by offset of the Company's trade accounts payable to MTI. 25 26 SALE OF PRODUCT LINES. During fiscal 1993, the Company sold its fiber optic product line and W-Band product line to Microelectronics Technology Inc. (MTI) for total proceeds of $6.2 million, of which $1.6 million was paid in cash and the remainder was remitted through a reduction of the Company's trade payable to MTI. The total net gain resulting from the sale of these product lines of $3.2 million was recognized in other income as the transfer of technology related to these product lines was completed. In fiscal 1994 and 1993, the Company recognized $1.1 million and $2.1 million of total gain, respectively. DMCTELECOM (MALAYSIA) SDN. BHD. In February 1991, the Company, together with Alpine Resources Sdn. Bhd. and Superior Communications Sdn. Bhd., both Malaysian corporations, formed a Malaysian corporation called DMC Telecom (Malaysia) Sdn. Bhd. (DMCT(M)). The Company invested $739,000 for a 45% interest and accounted for this investment using the equity method of accounting. In conjunction with this investment, the Company entered into a Technology Transfer Agreement with DMCT(M) wherein DMCT(M) was given specific license to manufacture and sell, as well as resell, certain of the Company's products in Malaysia, Brunei, Singapore, Thailand, Philippines, and Indonesia. In the quarter ended December 31, 1993, due to the continuing decline of the financial viability of DMCT(M) and disputes regarding collection of the outstanding receivables, the Company recorded a non-recurring charge of $7.0 million associated with the anticipated liquidation of its 45% interest in DMCT(M). The charge related to a write-off of the Company's receivables from the joint venture of $5,966,000, net of $1,957,000 of deferred margin previously accrued, and an accrual for other related liabilities, including the Company's guarantee of approximately $2.0 million of the joint venture's line of credit, anticipated legal fees and other charges associated with the liquidation of the joint venture. On December 23, 1994, the Company reached agreement with the shareholders of DMCT(M). The Company paid approximately $2.1 million for its 45% share of the costs of liquidating the joint venture, and received inventory and fixed assets valued at approximately $600,000 and $300,000, respectively. NOTE 8. NON-RECURRING CHARGES During the third quarter of fiscal 1994, the Company and its Directors agreed to a settlement in principle of six class action lawsuits alleging securities law violations. The total charge for the settlement was $20.0 million, including the settlement amount, attorneys' fees, interest, and other related costs. The final payment under the settlement agreement was made in fiscal year 1995, and a final judgment and order of dismissal was received from the United States District Court of Northern California. Also, during the third quarter of fiscal 1994, the Company recorded a non-recurring charge of $7.0 million relating to the write off of the Company's receivable from the joint venture, DMCT(M). See Note 7 of Notes to Consolidated Financial Statements. NOTE 9. CUSTOMER AGREEMENT In November 1993, the Company entered into an agreement with Siemens AG to supply SPECTRUM(TM) II digital microwave radios to E-Plus Mobilfunk GmbH. As of March 31, 1995, the Company had not met its product acceptance or delivery schedule, and, as a result, recorded significant reserves for product discounts on interim equipment, equipment returns and other related costs (See Note 2 - Other Accrued Liabilities). In July 1995, the Company received product acceptance from E-Plus, and began delivery and installation of the SPECTRUM(TM) II equipment. During the third quarter of fiscal 1996, the Company provided additional reserves of approximately $1.0 million related to the final resolution of other remaining open issues on this contract. 26 27 NOTE 10. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION The Company operates in a single industry segment, the design and manufacture of short- and medium-haul digital transmission products. The following table summarizes customers accounting for more than 10% of net sales in the fiscal years ended:
March 31, 1996 1995 1994 - --------------------------------------------------------------------------------------- Siemens AG 22% - - American Telephone & Telegraph Co. - - 10% Mercury Communications Ltd. - - 11% - ---------------------------------------------------------------------------------------
Geographic information for the fiscal years ended March 31, 1996, 1995, and 1994 is as follows:
United United States Kingdom Others Eliminations Total - ------------------------------------------------------------------------------------------------------------------------- (In thousands) 1996 Sales to unaffiliated customers $ 133,370 $ 13,935 $ 3,114 $ - $ 150,419 Intercompany sales 9,981 - - (9,981) - --------- --------- --------- --------- --------- Net sales $ 143,351 $ 13,935 $ 3,114 $ (9,981) $ 150,419 --------- --------- --------- --------- --------- Operating income (loss) $ (10,138) $ 1,767 $ 220 $ 128 $ (8,023) --------- --------- --------- --------- --------- Identifiable assets $ 92,760 $ 6,539 $ 2,016 $ (5,518) $ 95,797 --------- --------- --------- --------- --------- 1995 Sales to unaffiliated customers $ 126,171 $ 24,995 $ 2,484 $ - $ 153,650 Intercompany sales 20,287 - - (20,287) - --------- --------- --------- --------- --------- Net sales $ 146,458 $ 24,995 $ 2,484 $ (20,287) $ 153,650 --------- --------- --------- --------- --------- Operating income $ 1,384 $ 1,159 $ 199 $ 6 $ 2,748 --------- --------- --------- --------- --------- Identifiable assets $ 102,687 $ 7,269 $ 1,469 $ (8,840) $ 102,585 --------- --------- --------- --------- --------- 1994 Sales to unaffiliated customers $ 84,956 $ 28,361 $ 2,693 $ - $ 116,010 Intercompany sales 26,961 - - (26,961) - --------- --------- --------- --------- --------- Net sales $ 111,917 $ 28,361 $ 2,693 $ (26,961) $ 116,010 --------- --------- --------- --------- --------- Operating income $ (20,995) $ (1,277) $ 26 $ (272) $ (22,518) --------- --------- --------- --------- --------- Identifiable assets $ 96,078 $ 13,429 $ 2,229 $ (27,733) $ 84,003 --------- --------- --------- --------- --------- - -------------------------------------------------------------------------------------------------------------------------
Intercompany sales to the Company's foreign subsidiaries are transacted at prices comparable to those offered to unaffiliated customers, after taking into account the value-added to products and services by the subsidiaries. The following table represents export sales from the United States to unaffiliated customers by geographic region:
March 31, 1996 1995 1994 - -------------------------------------------------------------------------------- (In thousands) Canada and South America $ 14,876 $ 30,565 $ 23,516 Europe 59,732 52,105 24,814 Asia Pacific 40,570 23,601 25,363 -------- -------- -------- Total export sales $115,178 $106,271 $ 73,693 ======== ======== ======== Export sales as a % of U.S. sales 86% 84% 87% - --------------------------------------------------------------------------------
27 28 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE BOARD OF DIRECTORS OF DIGITAL MICROWAVE CORPORATION: We have audited the accompanying consolidated balance sheets of Digital Microwave Corporation (a Delaware Corporation) and subsidiaries as of March 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended March 31, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Jose, California April 22, 1996 28 29 CORPORATE DIRECTORY OFFICERS Charles D. Kissner CORPORATE President and HEADQUARTERS Charles D. Kissner Chief Executive Officer President and Digital Microwave Corporation Chief Executive Officer Dr. James D. Meindl 170 Rose Orchard Way Professor of Microelectronics San Jose, CA 95134 Frank Carretta, Jr. Georgia Institute of Technology United States of America Vice President, Worldwide Sales and Service Billy B. Oliver A Private Communications SALES OFFICES Carol A. Goudey Consultant Corporate Treasurer and North American Headquarters: Assistant Secretary San Jose, California INDEPENDENT PUBLIC Norcross, Georgia Timothy R. Hansen ACCOUNTANTS Schaumburg, Illinois Vice President and Toronto, Canada General Manager, Arthur Andersen LLP SPECTRUM(TM) Division San Jose, California European Headquarters: Coventry, England Jack Hillson East Kilbride, Scotland Vice President and GENERAL LEGAL COUNSEL Moscow, Russia General Manager, QUANTUM(TM)/Magnum Division Morrison & Foerster LLP Latin American Headquarters: San Francisco, California San Jose, California Paul A. Kennard Vice President, Engineering Mexico City, Mexico REGISTRAR AND Santa Fe de Bogota, Colombia Shaun McFall TRANSFER AGENT Vice President, Asia Pacific Headquarters: Corporate Marketing Chemical Mellon Singapore Shareholder Services John P. O'Neil San Francisco, California Metro Manila, Philippines Vice President, Personnel New Delhi, India Beijing, China Carl A. Thomsen PRINCIPAL SUBSIDIARIES Vice President, Chief Financial Officer and Secretary DMC Telecom U.K. Ltd. SEC FORM 10-K East Kilbride, Scotland A copy of the Company's DIRECTORS DMC Telecom Canada Inc. Annual Report to the Toronto, Canada Securities and Exchange Richard C. Alberding Commission on Form 10-K Executive Vice President (Retired) DMC de Mexico, S.A. de C.V. is available without charge Hewlett-Packard Company Mexico City, Mexico by writing to: William E. Gibson Digital Microwave de Digital Microwave Corporation President, DMC Telecom (Retired) Venezuela, C.A. Attn: Corporate Communications Digital Microwave Corporation Caracas, Venezuela 170 Rose Orchard Way San Jose, CA 95134 Clifford H. Higgerson DMC de Colombia Chairman of the Board of Directors Santa Fe de Bogota, Colombia Digital Microwave Corporation General Partner DMC Telecom Philippines, Inc. Communications Ventures Metro Manila, Philippines and Vanguard Associates Private Venture Capital Investment Partnerships
EX-21.1 5 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 DIGITAL MICROWAVE CORPORATION LIST OF SUBSIDIARIES DMC Telecom U.K. Ltd. East Kilbride, Scotland DMC Telecom Canada Inc. Toronto, Canada DMC de Mexico, S.A. de C.V. Mexico City, Mexico Digital Microwave de Venezuela, C.A. Caracas, Venezuela DMC de Colombia Santa Fe de Bogota, Colombia DMC Telecom Philippines, Inc. Metro Manila, Philippines EX-23.1 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 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 and 33-85270) on Form S-8. ARTHUR ANDERSEN LLP San Jose, California June 24, 1996 Page 25 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) ANNUAL REPORT FILED BY REFERENCE ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 1996. 1,000 YEAR MAR-31-1996 APR-01-1995 MAR-31-1996 8,299 0 33,398 0 35,347 80,736 47,735 32,674 95,797 43,280 0 0 0 159 0 95,797 150,419 150,419 119,918 119,918 38,524 0 1,860 (7,908) 1,953 (5,955) 0 0 0 (5,955) (0.40) (0.40)
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