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DIGITAL MICROWAVE CORPORATION
Annual Report 1995
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FINANCIAL HIGHLIGHTS
Years Ended March 31, 1995 1994 1993 1992 1991
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(In thousands, except per share data
and number of employees)
Net sales $153,650 $116,010 $103,937 $ 86,097 $130,779
Net income (loss) $ 1,982 $(22,495) $ (6,708) $(19,670) $ 3,765
Net income (loss) per share $ 0.14 $ (1.81) $ (0.55) $ (1.64) $ 0.30
Total assets $102,585 $ 84,003 $ 72,990 $ 87,213 $108,472
Working capital $ 26,996 $ 17,650 $ 35,461 $ 39,183 $ 55,856
Stockholders' equity $ 34,611 $ 28,604 $ 46,335 $ 53,004 $ 72,588
Total employees at year-end 606 538 464 490 608
Common and common
equivalent shares outstanding 13,845 12,448 12,090 11,965 12,365
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TO OUR STOCKHOLDERS
Fiscal year 1995 provided significant opportunities for Digital Microwave
Corporation. We experienced strong demand for our products in a global
marketplace that is increasingly active and competitive. We focused our efforts
to capitalize on the advantages we bring to customers, and integrated advanced
technology into our product line with the introduction of the SPECTRUM(TM) II
radio.
For fiscal year 1995, we recorded net income of $2.0 million, or $0.14 per
share, on sales of $153.6 million, compared to a net loss of $22.5 million, or
$1.81 per share, on sales of $116.0 million for fiscal year 1994.
Our results for fiscal year 1995 are indicative of the considerable
challenges we faced in the past 12 months. Our financial performance improved in
the first nine months of the year, reflecting the growth in the cellular
industry around the world. In the fourth quarter, however, we reported a loss of
$0.37 per share, due to a lower than anticipated level of shipments,
insufficient lead time to respond to late incoming orders, and reserves for
product discounts and other costs on several programs, including the supply of
additional interim equipment to E-Plus Mobilfunk GmbH.
Also during the fourth quarter, we made our final payment to settle the
class action lawsuit filed against the company and its directors in the Spring
of 1990.
Customer demand remained robust for our products throughout fiscal year
1995. Digital Microwave won several important new contracts worldwide, including
awards in Colombia, Mexico, Germany, Malaysia, and the Philippines. New orders
increased 32%, to $175.0 million in bookings in fiscal year 1995, from $133.0
million in fiscal year 1994.
During the fourth quarter, we introduced the SPECTRUM(TM) II digital
micro-wave radio, a significant new product platform designed to address the
needs of the emerging PCS (Personal Communications Services) market.
In response to the requirements of the dynamic global marketplace we serve,
and our desire to focus on meeting customer
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performance and delivery expectations for SPECTRUM(TM) II, we set up a
SPECTRUM(TM) Business Unit in fiscal year 1995. The SPECTRUM(TM) Business Unit's
initial focus is on improving SPECTRUM(TM) family manufacturability, and related
yield and costs, and on completing enhancements to the product.
One measure of a company's strength is its fundamentals - the processes and
procedures that determine how well it executes and meets the needs of its
customers. During the second half of fiscal year 1995, we focused on improving
Digital Microwave's fundamentals, especially in the areas of engineering and
manufacturing.
We also concentrated on improving our order process functions, to reduce
overall inventory levels and to provide faster delivery to customers. In this
regard, the SPECTRUM(TM) Business Unit is serving as a test bed for process
improvement throughout the company.
In the coming fiscal year, process improvement will continue to receive the
strong attention and emphasis of senior management. We recognize that
strengthening the company's fundamentals is an essential requirement for our
future success.
In fiscal year 1995, we gave additional emphasis to our marketing efforts,
as increasing competition worldwide demands that we become more market driven.
To this end, we are creating an inventory of "standard products", to provide
even faster response to customers who need to rapidly build out a cellular
network, for example.
Also during the year, Digital Microwave added to its senior management
staff with three key promotions. Graham Powell was appointed Vice President of
Worldwide Sales, Shaun McFall was named Vice President of Corporate Marketing,
and Tim Hansen was appointed Vice President, SPECTRUM(TM) Business Unit.
In our effort to ensure that we maintain a strong management team, we added
two experienced and talented senior managers. Hal Edmondson joined Digital
Microwave as Corporate Vice President of Manufacturing, and Carl Thomsen as Vice
President and Chief Financial Officer. Before joining the company, Hal was Vice
President, Corporate Manufacturing for the Hewlett Packard Company. Carl was
previously Senior Vice President and Chief Financial Officer for Measurex
Corporation.
As this annual report goes to press, we are completing our search for a new
Chairman of the Board and Chief Executive Officer, a strategist and leader who
will guide our future direction and help us remain focused on our goals.
We approach the next fiscal year with optimism, and confidence in the
continuing market demand for Digital Microwave's products. While we recognize
that we face many challenges in our business, we believe that we have the talent
and resources necessary to responsibly and successfully drive the company's
future.
/s/ R.C. Alberding
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Richard C. Alberding
Co-Chairman of the Board
and Co-Chief Executive Officer
/s/ Clifford H. Higgerson
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Clifford H. Higgerson
Co-Chairman of the Board
and Co-Chief Executive Officer
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INTRODUCTION
For the past 11 years, Digital Microwave Corporation has been a leader in
demonstrating the many benefits of digital microwave communications systems. In
fact, our name has become synonymous with advanced, wireless communications
solutions that are easy to install and use. Our microwave radios work reliably -
24 hours a day, 7 days a week - and often in areas where cable-based systems
couldn't even be considered. - In addition to manufacturing advanced products,
Digital Microwave must aggressively market to the world. We currently have
customers in over 55 countries. Cultural differences, government regulations,
time zones, and customers who may be new to the process of building a
telecommunications network are all challenges we deal with constantly. - To be
competitive in our worldwide marketplace, we must also be present everywhere
there are serious customer requests for quotations. Many of our competitors are
large, global companies with deep pockets, or small firms striving to establish
a reputation. We must be continually on the alert and ready to respond to
requirements and changes - carefully developing and nurturing relationships
which will carry our business into the future. - In the following pages, we
focus on the three key regions of the world that Digital Microwave serves:
Europe, the Americas, and Asia Pacific. During fiscal year 1995, over 70% of our
total revenue was generated by the growth of cellular and PCS/PCN (Personal
Communications Services/Networks) or similar networks in each region. Europe
represented 50% of our total sales, the Americas 35%, and Asia Pacific 15%. - We
will discuss the opportunities and challenges of the three regions, along with
what we believe is Digital Microwave's winning business strategy.
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[GRAPHIC 1]
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AMERICAS
Personal Communications Services (PCS) is synonymous with the emerging
telecommunications market in the U.S. After years of limited growth for digital
microwave radio in this country, due mainly to a built out cellular network, the
potential impact of PCS is enormous. PCS promises a new generation of wireless
devices which will stimulate choice for the consumer and competition in the
telephone industry. PCS operates much like the current cellular systems, with
the exception of a smaller cell size and shorter radio path lengths. - There is
considerable speculation and little agreement about the potential size of the
market for PCS, and the timing of the installation of these networks. But most
experts believe that the impact of PCS will be felt in the next 3-5 years,
because prospective PCS service providers paid substantial sums to secure radio
spectrum and need to generate revenues as soon as possible. - One type of
anticipated service would assign each customer one number and one handset that
would function as a cordless phone at home and at work, as well as a cellular
phone on the road. Incoming calls would find the customer wherever the handset
happened to be. - Applications for digital microwave radio for PCS networks are
two-fold: the first is to link individual cell sites and the mobile telephone
switching office. The second is to address the FCC's "relocation plan" that
requires PCS operators to provide comparable facilities for the incumbent
microwave licensees, if the PCS operator interferes with the current frequencies
in use. - Digital Microwave is well positioned to take a leadership role in both
the PCS roll out and frequency relocations, with a mature sales/support
organization, our new compact SPECTRUM(TM) II radio, advanced network management
capabilities, and worldwide reputation for customer service and reliability.
- - In Latin and South America, the market growth is primarily in the cellular
industry, as evidenced by Digital Microwave's fiscal year 1995 contract award
from Celumovil S.A., a new franchise cellular operator in Colombia.
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[GRAPHIC 2]
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EUROPE
Digital Microwave has maintained a presence in Europe since 1988, when we opened
our facility in East Kilbride, Scotland, then established our European sales
office in Coventry, England. - The market for microwave radio in Western Europe
today is primarily driven by the growth of digital mobile services. Further
deregulation is focused on 1998, when competition among the PTTs (national
telephone companies) will be introduced throughout the market. - The main driver
for the Western European market is enhancements to basic telecommunications
services; to date only a handful of carriers provide a full range of services.
Current projections indicate that digital technology will replace analog phones
before the year 2000, offering features such as call routing, call waiting, call
forwarding, and voice messaging. - Eastern Europe, on the other hand, is an
emerging market, with considerable opportunities to supply basic phone services
to businesses and homes. In Poland, for example, we have provided cellular
operator Centertel with flexible products, plus engineering and system planning
support. - To address the growing telecommunications needs of Russia and the CIS
states, we opened a sales office in Moscow in fiscal year 1995. Digital
Microwave's radios are used to connect hotels and businesses to long distance
carriers in Moscow and St. Petersburg. - A key highlight of fiscal year 1995 was
the introduction of the SPECTRUM(TM) II, our new "smart radio", at tradeshows in
Europe and the U.S. The SPECTRUM(TM) II will impact our business in every part
of the world. SPECTRUM(TM) II is a versatile, adaptable, and configurable radio
family that makes microwave communications easy and affordable. - The
SPECTRUM(TM) II's design and compact size is ideal for the base stations and
cell sites of cellular and PCS/PCN phone systems. Digital Microwave's first
customer for the SPECTRUM(TM) II is E-Plus, a PCS cellular network provider in
the Federal Republic of Germany.
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[GRAPHIC 2]
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ASIA PACIFIC
Telecommunications growth in the Asia Pacific region is accelerating. Leading
the way is increasing demand for basic telephone services, fueled by
deregulation and new operator licensing, and the ensuing competition between
service providers. Wireless services offer developing countries a means to
rapidly install large-scale telephone systems, and boost their nation's economy.
- - The growth opportunities for Digital Microwave's business in the Asia Pacific
region are significant, based on the sizable investments being made for
infrastructure build-outs, and the need for systems to reach smaller cities and
towns, or provide basic telephone services in highly populated areas. - One
example is wireless local loop, where microwave radio can be used to set up the
communications channel between the telephone subscriber's location and the local
telephone company's office. - Evidence of substantial opportunity abounds. Only
a small percentage of the population has access to a phone; in fact, half of the
people in the world have never made a phone call. As of June 1994, only 2% of
the population in Indonesia had telephone service. In China, although cellular
penetration in 1994 increased 245%, there are just 1.5 million subscribers,
leaving considerable room for future growth. - The Asia Pacific region has some
unique challenges. Business is complicated by multi-level relationships:
government regulators, existing and newly licensed operators, consortia of
foreign investors, major foreign suppliers, technology partners, local
manufacturers' requirements, and complex distribution channels. Digital
Microwave's participation in this area's tremendous growth requires relationship
building in many areas simultaneously. - Digital Microwave has been increasingly
active in the Asia Pacific region, cultivating and supporting customers, as well
as expanding strategic partnerships and alliances in several countries. We
currently have sales/support offices in Singapore, India, and the Philippines.
Our awards in this region include a contract won during fiscal year 1995 for a
nationwide PCN network for Electronics and Telematique (Malaysia) Sdn. Bhd.
(ETM).
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW Net sales for the fiscal year ended March 31, 1995 increased by 32.4%
to $153.6 million from $116.0 million for fiscal 1994. Net income for fiscal
1995 was $2.0 million ($0.14 per share), compared to a net loss of $22.5 million
($1.81 per share), in fiscal 1994.
Through the first three quarters of fiscal 1995, the Company experienced
increased revenue and profitability. Sales and net income through the first nine
months of fiscal 1995 were $120.3 million and $7.0 million, respectively,
compared to sales of $84.5 million and a net loss of $24.0 million in the
similar period of fiscal 1994. In the fourth quarter of fiscal 1995, sales
declined due to insufficient lead time to respond to late incoming orders, and
customer-driven changes, resulting in lower than expected revenue of $33.4
million. In addition, delay in the shipment of the SPECTRUM(TM) II product
resulted in additional shipments of interim equipment. As a result, the Company
recorded significant reserves for product discounts and other related costs,
resulting in low margins for the quarter. The net effect of these events was a
net loss of $5.0 million ($0.37 per share) in the fourth quarter of fiscal 1995,
compared to $1.5 million of net income ($0.11 per share) in the similar period
of fiscal 1994.
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, 1995 1994 1993
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(% of Net sales)
Net sales 100.0% 100.0% 100.0%
Cost of sales 74.7 68.0 76.6
Research and development 7.4 8.0 9.7
Selling, general and administrative 16.1 20.1 20.8
Non-recurring charges -- 23.3 --
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Operating income (loss) 1.8 (19.4) (7.1)
Other income (expense), net (.4) 1.0 0.7
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Income (loss) before
provision for income taxes 1.4 (18.4) (6.4)
Provision for income taxes .1 1.0 --
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Net income (loss) 1.3% (19.4)% (6.4)%
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RESULTS OF OPERATIONS 1995 Compared to 1994. Net sales increased 32.4% to $153.6
million in fiscal year 1995 from $116.0 million in fiscal year 1994. The Company
reported increased sales in Europe/Africa 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. Total international sales
for fiscal years 1995 and 1994 were 87.0% and 90.5% of total 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 under the E-Plus contract. Under this
contract, the Company is required to ship M Series and SPECTRUM(TM) I products
("interim equipment") pending
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final acceptance of the SPECTRUM(TM) II product. As of March 31, 1995, the
Company has recognized $12.9 million of revenue with nominal margins on
shipments of interim equipment that has been accepted by E-Plus. Future
shipments of interim equipment are subject to substantial discounts. As a
result, the Company has recorded significant reserves 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. In the event of further delays in delivery of the SPECTRUM(TM) II
product, the Company's results of operations could be adversely impacted in
fiscal 1996. The Company expects its gross margin in fiscal 1996 will continue
to be under significant pressure due to the intensely competitive nature of its
business. See "Factors That May Affect Future Financial Results" and Note 9 of
Notes to Consolidated Financial Statements.
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) 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. 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 is attributable to the higher sales volume
in fiscal 1995. The increase in absolute dollars 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.
In fiscal 1994, the Company recorded non-recurring charges of $27.0 million
for costs related to the settlement in principle of the class action lawsuits
and costs associated with the anticipated liquidation of its 45% interest in its
joint venture, DMC Telecom (Malaysia) Sdn. Bhd. (DMCT (M)). See Notes 7 and 8 of
Notes to Consolidated Financial Statements.
In connection with the class action lawsuits, the Company reached an
agreement in principle in fiscal 1994 under which the Company and its Directors
would be released from any further liabilities. In fiscal 1994, the Company
recorded a charge to earnings for the settlement of the litigation of $20.0
million, which included the settlement amount, certain attorneys' fees,
estimated interest and other costs related to the litigation. The Company paid
the settlement amount of the litigation and obtained the final judgement and
order of dismissal of the litigation in fiscal 1995.
The Company's write down in connection with the anticipated liquidation of
DMCT (M) resulted in a charge to earnings of $7.0 million in fiscal 1994. The
Company's net investment in DMCT (M) was $4.0 million, which consisted of
receivables outstanding from DMCT (M) of approximately $6.0 million, reduced by
a reserve of $2.0 million for deferred margin on sales to the joint venture. The
Company was also the guarantor of approximately $2.0 million of DMCT (M) bank
indebtedness, which was due in July 1994. This charge to earnings takes into
account the full amount of the receivables, the guarantee of indebtedness to the
bank, anticipated legal fees, and other charges associated with the liquidation
of the joint venture, less applicable reserves. The Company settled its 45%
share in the liquidation of the joint venture in fiscal 1995 by paying
approximately $2.1 million, and receiving inventory and fixed assets valued at
approximately $0.6 million and $0.3 million, respectively.
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 the joint venture with Optical
Microwave Network, Inc. (OMNI).
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Interest expense in fiscal 1995 was $0.5 million compared to $0.6 million
in fiscal 1994. Interest related to the class action litigation settlement was
charged to reserves previously established.
The Company recorded an income tax provision in fiscal 1995 at an
effective rate of 10% or $0.2 million, which is less than the statutory rate
due to the realization of certain temporary differences.
RESULTS OF OPERATIONS 1994 Compared to 1993. Net sales increased 11.6% to $116.0
million in fiscal year 1994 from $103.9 million in fiscal year 1993. The Company
reported increased sales in Asia Pacific and Europe/Africa of 26% and 10%,
respectively, compared to the prior fiscal year. Total international sales for
fiscal years 1994 and 1993 were 90.5% and 86.5% of total net sales,
respectively.
Cost of sales as a percentage of net sales decreased to 68.0% in fiscal
1994 from 76.6% in fiscal 1993. The improvement in cost of sales as a percentage
of net sales and gross margin in fiscal 1994 reflects higher sales volume,
improved utilization of manufacturing resources, and lower product costs. Also,
cost of sales and gross margins in fiscal year 1993 were adversely affected by
additional provisions for inventory and warranty reserves.
Research and development expenses decreased by $0.8 million, from $10.1
million in fiscal year 1993 to $9.3 million in fiscal year 1994. As a percentage
of net sales, research and development expenses in fiscal year 1994 were 8.0%
compared to 9.7% in fiscal 1993. The decrease was due to the effect of the
strategic restructuring implemented in the prior fiscal year, resulting in a
more focused product development plan which requires less research and
development expense.
Selling, general and administrative expenses increased to $23.3 million in
fiscal 1994 from $21.6 million in fiscal 1993. As a percentage of net sales,
selling, general and administrative expenses were 20.1% in 1994, as compared
with 20.8% in fiscal 1993. The decrease in selling, general and administrative
expenses as a percentage of net sales was attributable to the higher sales
volume in fiscal 1994. The increase in absolute dollars was principally due to
the expansion of sales and sales support personnel in Asia Pacific and other
expenses associated with the sales function.
The Company recorded non-recurring charges of $27.0 million for costs
related to the settlement in principle of the class action lawsuits and costs
associated with the anticipated liquidation of its 45% interest in the joint
venture, DMCT (M) as explained previously. See Notes 7 and 8 of Notes to
Consolidated Financial Statements.
Interest and other income (expense), net for fiscal 1994 was $1.7 million
of income compared to $1.8 million of income in fiscal 1993. Interest expense in
fiscal 1994 was $0.6 million, or $0.5 million lower than the fiscal 1993 amount
of $1.1 million. This reduced expense was due to lower borrowings from an
existing line of credit in fiscal 1994 and the lower interest rate associated
therewith.
The Company recorded an income tax provision in fiscal 1994 of $1.1
million, which results primarily from the writedown of a previously recorded
deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES Total assets at March 31, 1995 increased by
approximately $18.6 million from March 31, 1994. This increase was due
principally to increases in accounts receivable of $5.3 million and inventories
of $11.4 million. The increase in accounts receivable was primarily due to the
higher sales level in the fourth quarter of fiscal 1995, as compared to the
fourth quarter of fiscal 1994. Inventories increased because of lower than
expected sales in the fourth quarter of fiscal 1995, anticipation of higher
manufacturing and shipping levels in the coming fiscal year, and delay in the
SPECTRUM(TM) II product shipments. The inventory buildup resulted in an increase
in accounts payable of $5.1 million to $26.4 million at March 31, 1995 from
$21.3 million at March 31, 1994. See Note 2 of Notes to Consolidated Financial
Statements.
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Total liabilities increased by $12.6 million from $55.4 million in fiscal
year 1994 to $68.0 million in fiscal year 1995. This increase was principally
the result of increased borrowings of $11.7 million under lines of credit with
banks and a credit company, a $8.9 million note payable with a financial
institution, increases of $5.1 million in accounts payable, and an increase of
$7.5 million in deferred revenue and accrued contract obligations. See Note 2 of
Notes to Consolidated Financial Statements. These increases were offset by the
reduction of accrued litigation settlement. The Company's outstanding debt under
credit agreements and notes payable increased in fiscal year 1995 due to: (1)
additional working capital requirements of $9.3 million caused by increased
operations, and (2) payments totaling approximately $20.0 million related to the
settlement of stockholders' lawsuits (See Note 8 of Notes to Consolidated
Financial Statements). The note payable and the lines of credit require that the
Company maintain certain financial covenants, including minimum tangible net
worth and profitability requirements. As of March 31, 1995, the Company was in
compliance with these covenants, as amended.
At March 31, 1995, the Company's principal sources of liquidity consisted
of $1.9 million in cash and revolving bank credit facilities that provide up to
$35.0 million in credit, of which approximately $13.0 million was available. At
March 31, 1995, $11.7 million was outstanding under these lines. See Notes 1 and
3 of Notes to Consolidated Financial Statements.
The Company expects to require additional financing, including possibly
equity financing, in fiscal year 1996 to provide liquidity and to maintain
compliance with covenants in existing credit agreements. Management believes
that additional financing can be obtained; however, there can be no assurance
that financing will be available to meet future needs or that the Company will
continue to maintain compliance with its debt covenants. In the event that
additional financing is not available, management will implement plans to reduce
the Company's cash requirements through a combination of reductions in working
capital expenditures, equipment purchases and operating expenditures. Management
believes these plans combined with existing cash balances and other sources of
liquidity will be sufficient to maintain compliance with existing loan covenants
and enable the Company to meet its cash requirements through fiscal 1996.
However, there can be no assurance that the Company can implement these plans or
that it can do so without adversely impacting the Company's operations.
The Company leases certain property, equipment, and facilities under
operating and capital leases. Rent expense under the operating leases was
approximately $3.5 million in fiscal 1995. See Note 4 of Notes to Consolidated
Financial Statements.
FACTORS THAT MAY AFFECT FUTURE FINANCIAL RESULTS Bookings for fiscal 1995
consisted of orders of $175.0 million shippable within a twelve month period,
compared to orders of $133.0 million in fiscal 1994. The Company's backlog at
March 31, 1995 was approximately $93.2 million, as compared with approximately
$71.8 million at March 31, 1994. Approximately $15.6 million of the Company's
backlog at March 31, 1995 was attributable to orders under the E-Plus contract.
The Company believes that increases in new orders are contingent upon,
among other factors, its ability to compete effectively in world markets, and to
develop and manufacture products that meet the needs of these markets. Because
of the timing of orders, delivery intervals, customer and product mix, and the
possibility of changes in delivery schedules and additions to or cancellations
of orders, the Company's backlog may not be representative of actual sales for
any succeeding period.
The Company's profitability in fiscal 1996 will be affected by its ability
to deliver in large quantities the Company's SPECTRUM(TM) II products, which
carry higher margins than the current product line. Acceptance tests of the
SPECTRUM(TM) II product under the E-Plus contract have not yet been completed.
Under the contract with E-Plus, continued delays could result in the imposition
on the Company of
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additional penalties, costs, and/or the cancellation of orders.
To the extent that SPECTRUM(TM) II equipment is delivered later than currently
scheduled, the Company's obligation to deliver substantially discounted interim
equipment could be increased. See Note 9 of Notes to Consolidated Financial
Statements. The contract with E-Plus is described more fully in the Company's
Annual Report on Form 10-K.
The Company's revenues are generated principally from the sale of products
and systems that have a long sales cycle but short delivery requirements. A
single order can represent a significant percentage of the Company's sales for
any quarter. In addition, a substantial portion of shipments may occur near the
end of each quarter. Accordingly, the Company's interim 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.
The telecommunications industry is characterized by rapid technological
change, frequent new product introductions, increasingly lower cost solutions,
and evolving industry standards. In addition, customers in the
telecommunications industry expect shorter product development and manufacturing
cycles, and less expensive, higher performance and smaller sized products. The
Company's future success will depend upon its ability to address the
increasingly sophisticated needs of its customers by enhancing its current
products, by developing and introducing on a timely basis new products that keep
pace with technological developments and emerging industry standards, and by
providing such products at competitive prices. As discussed above, the
SPECTRUM(TM) II product line is material to the Company from the standpoint of
its competitive position.
There can be no assurance that the Company will be successful in developing
and marketing future products, that the Company will not experience difficulties
that could further delay or prevent the successful development, introduction,
and sale of these products, or that these products will adequately meet the
requirements of the marketplace and achieve market acceptance.
No assurance can be given regarding future financial results as such
results are dependent upon many factors, including economic and competitive
conditions, incoming order levels, shipment volumes, product margins, and
foreign exchange rates.
SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended March 31, 1995 1994 1993 1992 1991
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(In thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net sales $ 153,650 $ 116,010 $ 103,937 $ 86,097 $ 130,779
Net income (loss) $ 1,982 $ (22,495) $ (6,708) $(19,670) $ 3,765
Net income (loss) per share $ 0.14 $ (1.81) $ (0.55) $ (1.64) $ 0.30
CONSOLIDATED BALANCE SHEETS DATA:
Total assets $ 102,585 $ 84,003 $ 72,990 $ 87,213 $ 108,472
Long-term liabilities $ 6,362 $ 459 $ 201 $ 629 $ 921
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CONSOLIDATED BALANCE SHEETS
March 31, 1995 1994
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(In thousands, except share and per share amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,919 $ 3,362
Restricted cash 1,100 1,300
Accounts receivable, net of allowance of
$1,413 in 1995 and $3,240 in 1994 32,513 27,196
Inventories 46,732 35,340
Tax refund receivable 1,820 2,598
Other current assets 4,524 2,794
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Total current assets 88,608 72,590
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PROPERTY AND EQUIPMENT:
Machinery and equipment 32,450 28,442
Land and buildings 1,262 1,255
Furniture and fixtures 6,668 5,459
Leasehold improvements 2,139 1,843
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42,519 36,999
Accumulated depreciation and amortization (28,542) (25,586)
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Net property and equipment 13,977 11,413
--------- ---------
$ 102,585 $ 84,003
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Lines of credit $ 11,731 $ --
Current maturities of note payable 3,333 --
Current maturities of capital lease obligations 776 504
Accounts payable 26,373 21,274
Income taxes payable 1,629 1,474
Accrued litigation settlement -- 19,900
Other accrued liabilities 17,770 11,788
--------- ---------
Total current liabilities 61,612 54,940
LONG-TERM LIABILITIES:
Note payable, net of current maturities 5,556 --
Capital lease obligations, net of current maturities 806 459
--------- ---------
Total liabilities 67,974 55,399
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTES 4 AND 7)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; none outstanding -- --
Common stock, $.01 par value; 30,000,000 shares
authorized; 13,467,693 shares in 1995 and 12,823,709
shares in 1994 issued and outstanding 135 128
Additional paid-in capital 44,313 40,295
Accumulated deficit (9,837) (11,819)
--------- ---------
Total stockholders' equity 34,611 28,604
--------- ---------
$ 102,585 $ 84,003
========= =========
The accompanying notes are an integral part of these consolidated balance
sheets.
18
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31, 1995 1994 1993
- --------------------------------------------------------------------------------------
(In thousands, except per share amounts)
NET SALES $ 153,650 $ 116,010 $ 103,937
COST OF SALES 114,760 78,874 79,622
--------- --------- ---------
Gross profit 38,890 37,136 24,315
--------- --------- ---------
OPERATING EXPENSES:
Research and development 11,379 9,316 10,086
Selling, general and administrative 24,763 23,338 21,641
Non-recurring charges -- 27,000 --
--------- --------- ---------
Total operating expenses 36,142 59,654 31,727
--------- --------- ---------
Income (loss) from operations 2,748 (22,518) (7,412)
OTHER INCOME (EXPENSE):
Interest and other income (expense), net (16) 1,718 1,768
Interest (expense) (530) (603) (1,064)
--------- --------- ---------
Income (loss) before provision
for income taxes 2,202 (21,403) (6,708)
PROVISION FOR INCOME TAXES 220 1,092 --
--------- --------- ---------
Net income (loss) $ 1,982 $ (22,495) $ (6,708)
========= ========= =========
NET INCOME (LOSS) PER SHARE $ 0.14 $ (1.81) $ (0.55)
========= ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 13,845 12,448 12,090
The accompanying notes are an integral part of these consolidated financial
statements.
16
19
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Retained
Common Stock Additional Earnings Total
Years Ended March 31, 1995, 1994, ------------------------- Paid-In (Accumulated Stockholders'
and 1993 Shares Amount Capital Deficit) Equity
- ------------------------------------------------------------------------------------------------------------------
(In thousands, except share amounts)
BALANCE, MARCH 31, 1992 11,999,414 $ 120 $ 35,500 $ 17,384 $ 53,004
Stock options exercised 133,550 1 38 -- 39
Net loss -- -- -- (6,708) (6,708)
---------- ------- ---------- ---------- ----------
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
========== ======= ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
17
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,982 $(22,495) $ (6,708)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 6,356 6,448 7,696
Provision for non-recurring charges -- 27,000 --
Provision for uncollectible accounts 276 300 650
Provision for inventory reserves 958 117 5,715
Provision for warranty reserves 1,911 1,285 2,895
Equity in income of joint ventures -- -- 195
Gain on sale of product lines -- (1,089) (2,144)
Gain on sale of investment in OMNI -- (371) --
Changes in assets and liabilities:
(Increase) decrease in restricted cash 200 281 (1,423)
(Increase) decrease in accounts receivable (5,774) (6,880) (2,414)
(Increase) decrease in inventories (12,212) (13,232) 5,632
(Increase) decrease in tax refund receivable 778 1,691 1,283
(Increase) decrease in deferred income taxes -- 960 2,240
(Increase) decrease in receivable from DMC
Telecom (Malaysia) Sdn. Bhd -- -- (2,969)
(Increase) decrease in other current assets (1,503) (73) 959
Increase (decrease) in accounts payable 5,398 13,607 2,973
Increase (decrease) in income taxes payable 168 9 (203)
Increase (decrease) in accrued litigation (19,900) -- --
Increase (decrease) in other accrued liabilities 4,119 (766) (3,609)
-------- -------- --------
Net cash provided by (used for)
operating activities (17,243) 6,792 10,768
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (8,111) (5,864) (4,465)
Proceeds from sale of property and equipment -- 24 134
Proceeds from sale of product line -- -- 1,600
-------- -------- --------
Net cash used for investing activities (8,111) (5,840) (2,731)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from banks 36,744 21,858 78,419
Repayments to banks (16,124) (23,084) (83,033)
Payments of note payable to MTI -- (3,075) (1,025)
Payments of capital lease obligations (695) (946) (745)
Sale of common stock 4,025 4,002 39
-------- -------- --------
Net cash provided by (used for)
financing activities 23,950 (1,245) (6,345)
-------- -------- --------
Effect of Exchange Rate Changes on Cash (39) (146) (45)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (1,443) (439) 1,647
Cash and Cash Equivalents at Beginning of Year 3,362 3,801 2,154
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 1,919 $ 3,362 $ 3,801
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
18
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND RISK FACTORS
- -------------------------------------------------------------------------------
Digital Microwave Corporation (the "Company") designs, manufactures and markets
high-performance digital microwave equipment for a wide variety of short- and
medium-haul communications applications worldwide. As a result of increased
working capital requirements, payments related to the settlement of the
shareholders' lawsuit, and low profitability levels in fiscal 1995, the
Company's liquidity has declined. The Company expects to require additional
financing, including possibly equity financing, in fiscal year 1996 to provide
liquidity and to maintain compliance with covenants in existing credit
agreements. Management believes that additional financing can be obtained;
however, there can be no assurance that financing will be available to meet
future needs or that the Company will continue to maintain compliance with its
debt covenants. See discussion of "Liquidity and Capital Resources" and "Factors
That Might Affect Future Financial Results" within Management's Discussion and
Analysis of Financial Condition and Results of Operations.
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.
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, 1995 and
1994, the Company was required to segregate and maintain $1.1 million and $1.3
million, respectively, which are included as restricted cash in the accompanying
consolidated balance sheets.
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO 115. Effective April
1, 1994, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". There was no effect on the Company's financial position or results
of operations due to the adoption of this statement. As of March 31, 1995, the
Company's investments subject to the provisions of SFAS No. 115 were not
material.
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, 1995 1994 1993
- ------------------------------------------------------------------------------
(In thousands)
Interest $ 1,556 $ 603 $ 1,020
Income taxes $ 62 $ 245 $ 1,011
- ------------------------------------------------------------------------------
19
22
The following non-cash transactions occurred during the years ended:
March 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------
(In thousands)
Tax benefit related to employee stock transactions $ -- $ 762 $ --
Property purchased under capital leases $1,314 $ 966 --
Conversion of accounts payable to notes payable for MTI $ -- -- $4,100
Reduction of accounts payable to MTI in connection
with the sale of the W-band product line $ -- -- $4,608
Reduction of accounts payable to MTI in
connection with the sale of OMNI (See Note 7) $ -- $ 400 $ --
- ------------------------------------------------------------------------------------------
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, 1995 1994
- ------------------------------------------------------------------------------------------
(In thousands)
Raw materials $16,506 $ 12,889
Work in process 20,977 15,885
Finished goods 9,249 6,566
------- --------
$46,732 $ 35,340
======= ========
- ------------------------------------------------------------------------------------------
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 two to forty years) or
the lease term. Included in property and equipment are assets held under capital
leases with a cost of $2,503,000 and $4,227,000 for fiscal years 1995 and 1994,
respectively. Accumulated amortization on leased assets was $712,000 and
$2,345,000 as of March 31, 1995 and 1994, respectively.
OTHER ACCRUED LIABILITIES. Other accrued liabilities included the following:
March 31, 1995 1994
- ------------------------------------------------------------------------------------------
(In thousands)
Accrued contract obligations (See Note 9) $ 4,045 $ --
Deferred revenue 3,431 --
Customer deposits 1,095 2,059
Accrued warranty 3,075 2,423
Closing costs - DMC TeleCom (Malaysia) Sdn. Bhd.
(See Note 7) 1,029 3,123
Other 5,095 4,183
------- -------
$17,770 $11,788
======= =======
- -----------------------------------------------------------------------------------------
Accrued contract obligations primarily relate to product and other
equipment to be provided to E-Plus, as well as estimated discounts on shipments
of interim equipment and other customer obligations.
Deferred revenue as of March 31, 1995 consists principally of shipments of
interim equipment to E-Plus, that are 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.
23
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 years ended March 31, 1995, 1994, and 1993, the aggregate net
foreign exchange loss was $39,000, $198,000, and $531,000, respectively.
CONCENTRATION OF CREDIT RISK. Trade receivables concentrated with certain
customers 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 the Americas. During fiscal 1995, Mexico experienced a
significant decline in the value of the peso. At March 31, 1995, the Company's
trade receivables from Mexican customers, which are denominated in U.S. dollars,
totaled $2.6 million.
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. Common equivalent shares are
excluded in the calculation of the net loss per share because their effect would
be antidilutive.
NOTE 3. CREDIT ARRANGEMENTS
- -------------------------------------------------------------------------------
In April 1995, the Company extended its $20.0 million credit facility with a
U.S. bank and a credit company to June 30, 1996. Borrowings bear interest at
the prime rate (9% as of March 31, 1995) plus 1H% per annum, and are secured by
certain assets of the Company. The agreement requires the Company to maintain
certain financial covenants, including minimum tangible net worth and
profitability requirements. At March 31, 1995, $7.0 million was outstanding
under this credit facility, and $13.0 million of credit was available based on
the underlying collateral.
In March 1995, the Company obtained a working capital line of credit of
$15.0 million from a U.S. bank guaranteed by the Export-Import Bank of the
United States. Borrowings under this line bear interest at the prime rate plus
1H% per annum, and are secured by certain receivables and inventories. The
agreement requires the Company to maintain a minimum level of tangible net
worth. At March 31, 1995, $4.7 million was outstanding under this line, which
was the maximum credit available on that date based on the underlying
collateral. The line of credit expires on February 19, 1996, and any outstanding
amounts are due on August 28, 1996.
In October 1994, the Company entered into 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 located in San
Jose, California that is owned by the Company. The promissory note bears
interest at prime plus 2-1/4% per annum. The agreement requires the Company to
maintain certain financial covenants, including minimum net worth and
profitability requirements. At March 31, 1995, the outstanding balance under
this note was $8.9 million.
The above agreements contain cross-default provisions. At March 31,1995,
the Company was in compliance with all of the financial covenants required under
the above credit arrangements, as amended.
21
24
NOTE 4. LEASE COMMITMENTS
- --------------------------------------------------------------------------------
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, 1995, future minimum
payment obligations under these leases were as follows:
Years Ending March 31, Capital Operating
- --------------------------------------------------------------------------------------------------
(In thousands)
1996 $ 927 $ 2,147
1997 662 1,867
1998 220 1,797
1999 -- 1,771
2000 - -- 1,771
2001 and beyond -- 4,273
-------- --------
Future minimum lease payments 1,809 $13,626
========
Less-amount representing interest (9% to 14%) (227)
--------
Present value of future minimum lease payments 1,582
Less-current maturities 776
--------
Long-term lease obligations $ 806
========
- --------------------------------------------------------------------------------------------------
Rent expense under operating leases was approximately $3,458,000, $2,892,000,
and $5,133,000 for the years ended March 31, 1995, 1994, and 1993, respectively.
NOTE 5. INCOME TAXES
- --------------------------------------------------------------------------------
Through March 31, 1993, the Company accounted for income taxes pursuant to
Accounting Principles Board (APB) Opinion 11. Effective April 1, 1993, the
Company adopted the provisions of SFAS No. 109, "Accounting for Income Taxes".
The domestic and foreign components of income (loss) before provision for
income taxes were as follows:
Years Ended March 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------
(In thousands)
Domestic $ 1,182 $(19,864) $ (5,810)
Foreign 1,020 (1,539) (898)
--------- -------- ---------
$ 2,202 $(21,403) $ (6,708)
========= ======== =========
- --------------------------------------------------------------------------------------------------
The provision for income taxes consisted of the following:
Years Ended March 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------
(In thousands)
CURRENT:
Federal $ 220 $ 95 $ --
State -- -- --
Foreign -- 37 (101)
---------- --------- -----------
Total current 220 132 (101)
---------- --------- -----------
DEFERRED (PREPAID):
Federal -- 960 101
State -- -- --
Foreign -- -- --
---------- --------- -----------
Total deferred (prepaid) -- 960 101
---------- --------- -----------
$ 220 $ 1,092 $ --
========== ========= ===========
25
Deferred (prepaid) income taxes result from differences in the timing of certain
expense items for tax and financial reporting purposes. The tax effect of these
differences for the years reported under APB No. 11 were as follows:
Year Ended March 31, 1993
- ---------------------------------------------------------------------------------------------------
(In thousands)
Restructuring reserves $ 539
Warranty and other reserves and accruals not currently deductible 413
Tax (under) over book depreciation (374)
Effect of timing differences benefitted in prior years (571)
Other 94
----------
$ 101
==========
- ---------------------------------------------------------------------------------------------------
The provision for income taxes differs from the amount computed by applying the
statutory Federal income tax rate as follows:
Years Ended March 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------
(In thousands)
Expected tax (benefit) $ 749 $ (7,277) $ (2,281)
Change in valuation allowance (624) 8,883 --
Foreign taxes incurred -- 37 --
Foreign tax credit -- -- 61
Domestic loss which resulted in no current tax benefit -- -- 2,220
Other 95 (551) --
------ --------- ---------
$ 220 $ 1,092 $ --
====== ========= =========
- ---------------------------------------------------------------------------------------------------
The major components of the net deferred tax asset consisted of the following:
March 31, 1995 1994
- ---------------------------------------------------------------------------------------------------
(In thousands)
Inventory reserves $ 1,820 $ 942
Depreciation and asset basis differences 808 838
Warranty reserves 1,183 952
Bad debt reserves 842 2,057
Restructuring reserves 271 373
Net operating loss carryforwards 6,785 563
Accrued lawsuit settlement -- 7,499
Tax credits 2,764 1,739
Other 1,075 1,209
--------- ----------
15,548 16,172
Less: Valuation reserve (15,548) (16,172)
========= ==========
$ -- $ --
========= ==========
- ---------------------------------------------------------------------------------------------------
The net operating loss carryforwards totaling $21.5 million will expire at
various dates from 2007 through the year 2010, and tax credit carryforwards will
expire at various dates from 2006 through the year 2010.
NOTE 6. COMMON STOCK
- --------------------------------------------------------------------------------
STOCK OPTION PLANS. The Company's 1984 Stock Option Plan provides for the grant
of both incentive and nonqualified stock options to key employees and certain
independent contractors of the Company. At March 31, 1995, options to purchase
1,197,705 common shares were outstanding under
23
26
the 1984 Plan, of which 337,000 options were exercisable. As a result of
the adoption of the 1994 stock incentive plan, there will be no future grants
under the 1984 Plan.
In July 1994, the stockholders approved the 1994 Stock Incentive Plan. The
1994 Plan authorizes 900,000 shares of common stock to be reserved for issuance
over a ten year term. This share reserve will automatically increase on the
first trading day of each calendar year for five years after the adoption of the
1994 Plan, beginning with the 1995 calendar year, 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, 1995, options to purchase 266,000 shares had been granted
under the 1994 Plan, none of which were exercisable. The Company has reserved
approximately 2,098,000 shares for issuance under these plans.
The following table summarizes the Company's stock option activity:
Number Option Price
of Shares per Share
- ---------------------------------------------------------------------------------------------------
Outstanding at March 31, 1992 2,031,043 $ .06 -$18.13
Granted 2,118,237 $ 5.25 -$ 7.50
Exercised (133,550) $ .06 -$ 9.00
Canceled (1,845,609) $ 4.50 -$18.13
---------- --------------
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
========== ==============
- ---------------------------------------------------------------------------------------------------
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.
27
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 1995, 1994 and 1993.
Purchases of subassemblies from MTI totaled approximately $23,509,000,
$15,636,000, and $10,712,000 for the fiscal years ended March 31, 1995, 1994,
and 1993, respectively. Trade accounts payable to MTI at March 31, 1995 and 1994
were $6,507,000 and $4,305,000, 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 1995, 1994, and 1993, sales to MTI under this
agreement were $1,031,000, $2,146,000, and $550,000, respectively. In addition,
amounts due from MTI at March 31, 1995 and 1994 were $61,800 and $113,000,
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.
OPTICAL MICROWAVE NETWORKS, INC. (OMNI). In fiscal 1989, the Company and MTI
entered into a joint venture to form Optical Microwave Networks Inc. (OMNI) to
manufacture integrated circuits in the United States. The Company invested
$400,000 for a 20% interest in OMNI and accounted for this investment using the
equity method of accounting. The Company sold its interest in OMNI to MTI for
$400,000, thereby realizing a gain of $371,000 during fiscal 1994. OMNI has
continued to supply products and services to the Company. During fiscal 1995,
1994, and 1993, purchases of components from OMNI totaled approximately
$6,239,000, $6,754,000, and $3,129,000, respectively. Trade accounts payable to
OMNI as of March 31, 1995 and 1994 were $1,521,000 and $1,302,000, respectively.
25
28
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.
DMC TELECOM (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 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 connection with the Company's investment in DMCT(M), the Company
guaranteed up to approximately $2 million of the joint venture's debt under the
joint venture's line of credit agreement with a Malaysian bank, which was due in
July 1994.
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 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
judgement 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 million relating to the write off of the Company's
receivable from the joint venture, DMCT(M).
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 and other related costs (See Note 2 - Other Accrued
Liabilities). The Company is working closely with Siemens AG and E-Plus to
resolve the remaining issues precluding the acceptance. At March 31, 1995, the
Company had recorded reserves for estimated obligations
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under this contract. However, there can be no assurance that the Company will
meet its remaining commitments under this contract and not incur additional
significant penalties. If the Company does not meet its current delivery
commitments under the contract, the customer can continue to order interim
equipment at a substantial discount, and can cancel the contract or individual
orders.
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, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------
American Telephone & Telegraph Co. -- 10% 21%
Mercury Communications Ltd. -- 11% 6%
- ---------------------------------------------------------------------------------------------------
Export sales from the United States to unaffiliated customers in fiscal 1995,
1994, and 1993 were 84%, 87%, and 84% of U.S. sales, respectively.
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.
Geographic information for the fiscal years ended March 31, 1995, 1994, and 1993
is as follows:
United United
States Canada Mexico Kingdom Eliminations Total
- -----------------------------------------------------------------------------------------------------------------
(In thousands)
1995
Sales to unaffiliated
customers $ 126,171 $ 1,075 $ 1,409 $ 24,995 -- $ 153,650
Intercompany sales 20,287 -- -- -- (20,287) --
--------- --------- --------- --------- --------- ---------
Net sales $ 146,458 $ 1,075 $ 1,409 $ 24,995 $ (20,287) $ 153,650
--------- --------- --------- --------- --------- ---------
Operating income $ 1,384 $ 56 $ 143 $ 1,159 $ 6 $ 2,748
--------- --------- --------- --------- --------- ---------
Identifiable assets $ 102,687 $ 314 $ 1,155 $ 7,269 $ (8,840) $ 102,585
--------- --------- --------- --------- --------- ---------
1994
Sales to unaffiliated
customers $ 84,956 $ 1,375 $ 1,318 $ 28,361 -- $ 116,010
Intercompany sales 26,961 -- -- -- (26,961) --
--------- --------- --------- --------- --------- ---------
Net sales $ 111,917 $ 1,375 $ 1,318 $ 28,361 $ (26,961) $ 116,010
--------- --------- --------- --------- --------- ---------
Operating income $ (20,995) $ (172) $ 198 $ (1,277) $ (272) $ (22,518)
--------- --------- --------- --------- --------- ---------
Identifiable assets $ 96,078 $ 777 $ 1,452 $ 13,429 $ (27,733) $ 84,003
--------- --------- --------- --------- --------- ---------
1993
Sales to unaffiliated
customers $ 87,745 $ 2,079 $ 218 $ 13,895 -- $ 103,937
Intercompany sales 11,714 -- -- -- (11,714) --
--------- --------- --------- --------- --------- ---------
Net sales $ 99,459 $ 2,079 $ 218 $ 13,895 $ (11,714) $ 103,937
--------- --------- --------- --------- --------- ---------
Operating income (loss) $ (4,913) $ (44) $ (63) $ (2,407) $ 15 $ (7,412)
--------- --------- --------- --------- --------- ---------
Identifiable assets $ 83,337 $ 834 $ 259 $ 10,983 $ (22,423) $ 72,990
--------- --------- --------- --------- --------- ---------
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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,
1995 and 1994, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1995. 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, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1995 in conformity with generally accepted accounting
principles.
San Jose, California ARTHUR ANDERSEN LLP
May 8, 1995
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OFFICERS
Richard C. Alberding
Co-Chief Executive Officer
Clifford H. Higgerson
Co-Chief Executive Officer
Mark A. Byington
Vice President, Engineering
Hal E. Edmondson
Vice President, Manufacturing
Timothy R. Hansen
Vice President, SPECTRUM(TM)
Business Unit
Shaun McFall
Vice President, Corporate Marketing
John P. O'Neil
Vice President, Personnel
Graham J. Powell
Vice President, Worldwide Sales
Carl A. Thomsen
Vice President and
Chief Financial Officer
DIRECTORS
Richard C. Alberding
Executive Vice President (Retired)
Hewlett-Packard Company
William E. Gibson
President, DMC Telecom
Dr. Jack M. Gill
General Partner
Vanguard Associates
A Private Venture Capital
Investment Partnership
Clifford H. Higgerson
General Partner
Communications Ventures
and Vanguard Associates
Private Venture Capital
Investment Partnerships
Billy B. Oliver
A Private Communications Consultant
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
San Jose, California
GENERAL
LEGAL COUNSEL
Brobeck, Phleger & Harrison
San Francisco, California
REGISTRAR AND
TRANSFER AGENT
Chemical Mellon
Shareholder Services
San Francisco, California
CORPORATE
HEADQUARTERS
Digital Microwave Corporation
170 Rose Orchard Way
San Jose, CA 95134
United States of America
PRINCIPAL
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
SALES OFFICES
North American Headquarters:
San Jose, California
Norcross, Georgia
Schaumburg, Illinois
Seattle, Washington
DMC Telecom Canada Inc.
Toronto, Canada
European Headquarters:
DMC Telecom
Coventry, England
DMC Telecom
East Kilbride, Scotland
DMC Moscow
Moscow, Russia
Latin American Headquarters:
San Jose, California
DMC de Mexico, S.A. de C.V. Mexico City, Mexico
DMC de Colombia
Santa Fe de Bogota, Colombia
Asia Pacific Headquarters:
Digital Microwave Corporation
Singapore
Digital Microwave Corporation
Manila, Philippines
Digital Microwave Corporation
New Delhi, India
SEC FORM 10-K
A copy of the Company's
Annual Report to the Securities
and Exchange Commission on
Form 10-K is available without
charge by writing to:
Digital Microwave Corporation
Attn: Corporate Communications
170 Rose Orchard Way
San Jose, CA 95134
32
PROFILE
Digital Microwave Corporation designs, manufactures, and markets advanced, high
performance digital microwave radios for short- and medium-haul communications.
- - Digital Microwave's products are capable of transmitting and receiving
multiple digital lines, carrying voice, data and video signals, up to a total
capacity of 45 megabits per second. - The company's comprehensive portfolio of
technologically advanced products is designed for use by telecommunications
operators providing PCS/PCN, mobile telephone services, and local access, as
well as for use in private networks 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 50,000 radios, with systems installed in over 55
countries.
[LOGO DIGITAL MICROWAVE CORPORATION]
170 ROSE ORCHARD WAY
SAN JOSE, CALIFORNIA 95134
PHONE: 408 943-0777
FAX: 408 944-1678
33
STOCK INFORMATION
The company's common stock is traded over-the-counter 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, 1995 March 31, 1994
High Low High Low
- -------------------------------------------------------------------------------------------------
1st Quarter 16 8 3/4 15 1/4 8 1/2
2nd Quarter 18 3/4 10 1/4 17 8 3/4
3rd Quarter 20 5/8 11 5/8 29 3/4 16 7/8
4th Quarter 20 3/4 11 7/8 29 3/8 13 1/4
- -------------------------------------------------------------------------------------------------
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, 1995, there were approximately 325 stockholders of
record.