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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.
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FINANCIAL HIGHLIGHTS
Years Ended March 31, 1996 1995 1994 1993 1992
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(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
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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
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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
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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.
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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.
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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
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CHARLES D. KISSNER
President and Chief Executive Officer
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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.
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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.
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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.
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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.
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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.
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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, 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
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(% 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
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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)%
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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
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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
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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
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$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.
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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.
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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%
- --------------------------------------------------------------------------------
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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,
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
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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