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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED MARCH 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from
to .
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Commission file number 0-15895
DIGITAL MICROWAVE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0016028
(State of incorporation) (I.R.S. Employer Identification No)
170 ROSE ORCHARD WAY, SAN JOSE, CALIFORNIA 95134
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 943-0777
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK-PAR VALUE $0.01 PER SHARE
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. /X/
State the aggregate market value of voting stock held by non-affiliates
of Registrant (based on the last reported sale price of $15.75 per share on the
Nasdaq National Market) as of June 1, 1996: Approximately $240,737,427.
As of June 1, 1996, there were 15,897,406 shares of Common Stock, par
value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended March 31, 1996 are incorporated by reference into Parts I and
II of this Form 10-K Report. With the exception of those portions which are
incorporated by reference, the Registrant's fiscal 1996 Annual Report is not
deemed filed as part of this Report.
2. Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on August 8, 1996 are incorporated by reference into
Part III of this Form 10-K Report.
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TABLE OF CONTENTS
DIGITAL MICROWAVE CORPORATION
1996 FORM 10-K ANNUAL REPORT
PART I
Item 1 The Business................................................ 3
Item 2 Properties ................................................. 14
Item 3 Legal Proceedings .......................................... 14
Item 4 Submission of Matters to a Vote of Security Holders ........ 14
PART II
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters ........................ 15
Item 6 Selected Financial Data .................................... 15
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 15
Item 8 Financial Statements and Supplementary Data ................ 15
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ............................... 15
PART III
Item 10 Directors and Executive Officers of the Registrant .............. 16
Item 11 Executive Compensation .......................................... 16
Item 12 Security Ownership of Certain Beneficial
Owners and Management .................................. 16
Item 13 Certain Relationships and Related Transactions .................. 16
PART IV
Item 14 Exhibits, Financial Statements, Schedules, and
Reports on Form 8-K .................................... 17
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PART I
ITEM 1. THE BUSINESS
Digital Microwave Corporation (the "Company" or "DMC") designs,
manufactures and markets advanced, high-performance digital microwave equipment
for a variety of short and medium-haul communications applications worldwide.
This equipment, which is based on microwave and millimeter wave technologies, is
the primary alternative to fiber optic and copper cables for these applications,
and may be used for the high speed transport of digital signals within
telecommunications networks. The transported signals may be digitized voice,
video, or data signals generated by computers or facsimile machines.
Telecommunications service providers utilize the Company's technology to connect
major clients to their networks; cellular and Personal Communications Service
(PCS) providers utilize the technology to interconnect base station and
switching equipment locations; large corporations, transportation authorities,
government agencies and public utility companies utilize the technology as an
alternative to leased wireline services in order to create cost efficient,
private telecommunications networks.
The Company serves a worldwide client base, and in fiscal 1996
approximately 88% of its net sales were to customers located outside of the
United States.
INDUSTRY BACKGROUND
Over the past decade, there has been a significant increase in
worldwide demand for rapid, reliable, high-quality telecommunications equipment
for transmission of voice, data, facsimile, and video information. This demand
has been fueled by changes in the regulatory environment in many developed
countries; technological advances, particularly in the wireless communications
arena; the rapid establishment of telecommunications infrastructures in many
developing countries; and the requirements of private communications networks.
Wireless solutions are highly attractive to new ventures establishing competing
telecommunications service in highly developed countries, and to operators in
developing countries seeking to rapidly increase the availability, quality, and
choice of telecommunications services.
MICROWAVE AND MILLIMETER WAVE RADIO PRODUCTS
The Company's digital microwave radios consist of three basic
components: a digital modem for interfacing with digital terminal equipment, a
radio frequency ("RF") unit for converting a low frequency carrier signal from
the modem to a high frequency microwave signal, and an antenna to radiate
transmitting signals and capture receiving signals.
From its inception, the Company has used technology and innovation to
create quality products that are highly reliable, simple to install, easy to
operate, and require minimal maintenance. Focused initially on short-haul
microwave products operating at 23 GHz, the Company has progressively developed
its range of product offerings and today sells products operating in frequency
bands at 2, 6, 7, 8, 10, 11, 13, 15, 18, 23, 26, and 38 GHz, opening access to
markets worldwide. To meet a wide range of interconnection applications, the
Company currently offers products that are available to carry different digital
signal capacities from the low end equivalent to 1XDS-1 or 1XE1 to multiples
thereof, up to a maximum of 1XDS-3 or 2XE3. Frequency bands between 2 GHz and 30
GHz are typically classified as "Microwave," while bands between 30 GHz and 60
GHz are classified as "Millimeter Wave."
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The basic architecture of the Company's products has consistently
followed the innovation of its first designs and has subsequently been adopted
as a standard format by many of the Company's competitors.
CURRENT PRODUCTS
During fiscal 1996, the Company sold products from several product
families. Each product family has characteristics designed to meet the needs of
specific markets or applications. The principal product families currently in
production are the Quantum(TM), M Series, SPECTRUM(TM) II, and DMC Net(R). Other
products include the LC, Classic/Classic II. These product families are
described further below.
SPECTRUM(TM) II
During fiscal 1996 the Company commenced volume production of
a new family of wireless products named SPECTRUM(TM)II. Designed to
closely match the demands of the rapidly growing cellular, PCS and
wireless local loop markets, the initial shipments were in 23 GHz and
38 GHz bands to European based clients. Additional options at 13, 15
and 18 GHz SPECTRUM(TM) II were also introduced and delivered by the
Company during fiscal 1996. By the end of fiscal 1996 over 3,000
SPECTRUM(TM) II radios had been shipped to more than 20 customers
worldwide.
The SPECTRUM(TM) II draws from the innovation of earlier DMC
products and by incorporating newer technologies adds many new features
that make the product more flexible in both customer applications and
manufacturing. The breadth of coverage of the SPECTRUM(TM) II product
family will allow the Company to enhance its competitive position with
regard to product features and performance. Significantly more
functionality is available in the SPECTRUM(TM) II because of software
configuration and control when compared to earlier generation products,
a trend that the Company expects will continue for future products.
Delayed in its initial deliveries to E-Plus, a major PCS
client in Germany, the SPECTRUM(TM) II was fully technically approved
and installations began in the second quarter of fiscal 1996. E-Plus
has since committed to deliveries through the end of fiscal 1997.
QUANTUM(TM)
Designed for the lower frequency bands (2 to 15 GHz) and
higher transmission capacities, the QUANTUM(TM) incorporates
sophisticated circuitry to provide high quality transmission
performance even over terrain that is hostile towards radio
transmission techniques. Examples of difficult applications are long
links across water, flat wetlands, or desert terrain where radio
transmission quality can be adversely affected by weather conditions.
In the U.S., the QUANTUM(TM) has been supplied at 6, 10 and 11 GHz for
high performance private network applications of gas and electric
utility companies. Internationally, the principal application of the
QUANTUM(TM) is in backhaul transmission for cellular networks utilizing
frequencies in the 7 and 8 GHz range.
M SERIES
The M Series has been the Company's biggest selling product.
First introduced in 1989 at 18 GHz for the North American market, the M
Series was progressively expanded and
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enhanced to cover 7, 13, 15, 18 and 23 GHz applications. By 1994, the M
Series had become one of the world's most utilized microwave radios for
interconnection in cellular networks. The product's architecture
consists of a common indoor interface unit and a range of outdoor
microwave transmitter/receivers, which simplifies training, operation
and maintenance wherever operators are required to use more than one
frequency band for regulatory or licensing reasons, or simply to
fulfill applications over varying distances. The M Series was the first
commercialized microwave radio to incorporate multiplexing of up to
16XE1 or 16XDS-1 signals, eliminating the need for standalone
multiplexing equipment to perform the same functions. The M Series has
an excellent in-service reliability record in a wide variety of network
applications worldwide.
DMC NET(R) is a sophisticated network monitoring and control
system designed to facilitate remote operation and maintenance of
microwave radio networks. DMC Net(R) is a custom software application
running under the Solaris operating system of SUN Microsystems that
accesses digital status and control information integral to all DMC
wireless products. DMC Net(R) is currently in use in networks ranging
in size from small regional systems containing a few microwave radio
links to large nationwide systems containing several thousand microwave
radio links. Centralized management and control allows early warning of
fault conditions, and rapid diagnosis of problems, and helps to reduce
down time and lower the cost of maintenance. Network management
capability is a key requirement for all modern telecommunications
network applications and is a key differentiator in many of the
Company's targeted opportunities.
OTHER PRODUCTS
CLASSIC/CLASSIC II and LC SERIES RADIOS are derivatives of the
original DMC product design that, due to simplicity of design,
dependability and low manufacturing cost, continue to generate modest
ongoing revenues primarily from existing users.
PRODUCT DEVELOPMENT ACTIVITIES
The Company's current product development efforts are principally
focused on the development of the following products:
QUANTUM(TM) - The Company is redirecting product development
efforts in fiscal 1997 to enhance its position in the markets currently
addressed by the QUANTUM(TM) product line, and to begin to address
higher capacity applications.
SPECTRUM(TM) II - The Company is also continuing substantial
product development efforts in fiscal 1997 to add to the available
frequencies in this product line. Continued enhancement of the software
for user interface applications is also underway.
DMC NET(R) - The Company's current software development
efforts are focused on enhancement of the Company's network monitoring
and control capabilities. This network software is a significant part
of the Company's product offerings, and provides the capability to
monitor up to 5,000 radios on a network, as well as certain base
station functions.
There can be no assurance that the Company will be successful in
developing and marketing any of these products, that the Company will not
experience difficulties that could further delay or prevent the successful
development, introduction and sale of future products, or that these products
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will adequately meet the requirements of the marketplace and achieve market
acceptance. See "Factors That May Affect Future Financial Results."
MARKETING, CUSTOMERS AND APPLICATIONS
The Company markets its products across most sectors of the
telecommunications industry. A number of the Company's major customers are joint
ventures or consortiums whose members include BellSouth, Ameritech, Airtouch,
Vodafone and Motorola. The principal market segments addressed by the Company,
and examples of applications within those markets, are set forth below:
MOBILE COMMUNICATIONS SERVICE PROVIDERS
Customers in this segment include cellular telephone companies
and PCN/PCS companies in the United States and abroad which use the
Company's wireless solutions to connect cell sites and link them to
switching centers for connection to the public switched telephone
network. Although it is a premium or secondary personal communications
service in developed countries, cellular/PCS service may often be the
primary choice in many developing countries where upgrading the
telecommunications infrastructure is an urgent priority. The Company
believes that a substantial majority of its products sold are used in
cellular, PCN, PCS or similar applications.
Typical of the Company's customers in this segment, Panafon,
one of the Company's Global Systems Mobile Communications ("GSM")
cellular telephone customers, is using the Company's product families
to interconnect cells and switching equipment for a cellular telephone
network being constructed to cover the major metropolitan areas in
Greece. E-Plus, a DCS 1800 PCN operator in Germany, is extensively
deploying SPECTRUM(TM) II products managed by DMC Net(R), the Company's
network monitoring and control system. In the United States, similar
solutions are being provided to BellSouth PCS. The Company has also had
significant sales in China, Malaysia, India, and the Philippines
providing solutions to mobile communications network operators.
TELEPHONE COMPANIES AND COMMON CARRIERS
Customers include domestic and foreign telephone companies and
long distance and inter-exchange carriers desiring to provide their
customers with a greater variety of services, including direct access
to long distance networks. Typical customer applications include
trunking and local distribution of broadband signals. IONICA, a UK
based provider of wireless local loop services, uses the Company's
products for trunking applications to build its network.
PRIVATE NETWORKS
Customers include corporations, institutions, various agencies
of the United States, and foreign governments and other organizations
seeking greater control over the cost and performance of their
communications services. Typical applications in this segment range
from a single transmission link connecting two buildings, to complex
major networks comprised of dozens of microwave terminals. BANAMEX, a
private banking institution, has established a private network using
the Company's products to connect several of its banks throughout
Mexico to facilitate the rapid communication of information.
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For the past several years the majority of the Company's sales have
been in the first two categories described above. The following is a list of
representative end user customers in the last year within each of these major
segments:
MOBILE COMMUNICATIONS SERVICE PROVIDERS TELEPHONE COMPANIES AND COMMON CARRIERS
Sterling (India) TELMEX (Mexico)
Panafon (Greece) Regional Bell Operating Companies (USA)
Comviq GSM (Sweden) Piltel (Philippines)
Smart (Philippines) Mercury Communications Ltd.(United Kingdom)
Libertel (Netherlands) IONICA (United Kingdom)
Sapura (Malaysia) Isla Communications Co., Inc. (Philippines)
Airtouch Communications (USA) Impsat (Colombia)
BellSouth PCS (USA)
E-Plus Mobilfunk GmbH (Germany)
Jordan Mobile (Jordan)
CUSTOMER CONCENTRATION
The Company has historically relied upon major orders from a small
number of customers for a large portion of its net sales, and these key
customers have changed from period to period. For fiscal 1996, the top four
customers accounted for approximately 38% of net sales. One of these customers,
Siemens AG, accounted for 22% of the Company's net sales. No other customer
accounted for more than 10% of the Company's net sales. At March 31, 1996, four
customers accounted for 49% of the Company's $84 million backlog, of which 16%
was attributable to orders under the Siemens/E-Plus contract. While management
considers the Company's relationships with each of its major customers to be
good, there can be no assurance that the Company's principal customers will
continue to purchase products from the Company at current levels, if at all, and
the loss of any one key customer could have a material adverse effect on the
Company's results of operations.
BACKLOG
The Company's backlog at March 31, 1996 was $84 million, as compared
with $93 million at March 31, 1995. The Company includes in backlog only orders
scheduled for delivery within 12 months. Product orders in the Company's current
backlog are subject to changes in delivery schedules or to cancellation at the
option of the purchaser without significant penalty. Accordingly, although
useful for scheduling production, backlog as of any particular date may not be a
reliable measure of sales for any future period. See "Factors That May Affect
Future Financial Results."
The Company's major contractual awards are often subject to the receipt
of firm orders, which, in turn, may be subject to many conditions, including
that the equipment purchased be competitive in the telecommunications
marketplace with respect to technology, price, quantity, and other commercial
concerns. In addition, because the Company's major orders often require
deliveries for periods over 12 months, such products are subject to risks
associated with obsolescence due to rapidly changing technological advances.
There can be no assurance that the Company will be able to continue to develop
and provide competitive products.
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SALES AND SERVICE
The Company believes that a direct and continuing relationship with its
customers is a competitive advantage in attracting new customers and satisfying
existing ones. The Company offers its products and services principally through
its own sales and service organization. To closely monitor the needs of its
customers, the Company has designed a sales and service organization that
maintains 13 sales or service offices in ten countries. The Company has four
regional sales offices and service centers in North America located near
Chicago, Illinois; Toronto, Canada; Atlanta, Georgia; and San Jose, California,
where the Company's North American sales organization is headquartered. The
Company also has sales and/or service centers in the United Kingdom, Germany,
Sweden, Mexico, Colombia, China, Singapore, and the Philippines. In addition,
the Company uses independent agents, distributors and international resellers
worldwide in concert with its direct sales operation.
The Company considers its ability to create and maintain long-term
customer relationships an important component of its overall strategy in each of
its markets. The Company employs over 179 people in its sales and service
organization, approximately 66% of whom primarily support sales outside North
America. Sales personnel are highly trained to provide the customer with
assistance in selecting and configuring a digital microwave system suitable for
the customer's particular needs. The Company's service and customer support
personnel provide customers with training, installation, service and maintenance
of the Company's systems under contract. The Company generally offers a standard
two-year warranty for all customers. The Company provides warranty and
post-warranty services from its San Jose manufacturing location and service
centers in the United Kingdom, Canada, Mexico, the Philippines, and Germany.
FOREIGN EXCHANGE/INTERNATIONAL SALES
Total international sales were 88% and 87% of net sales for fiscal 1996
and 1995, respectively. The Company expects that international sales will
continue to account for the majority of its sales in the foreseeable future. The
Company is subject to the risks of foreign currency fluctuations, and the
changing value of the dollar in relationship to foreign currencies could
negatively impact the Company's operating results. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 2 of
"Notes to Consolidated Financial Statements" incorporated herein by reference.
International operations and sales may also be adversely affected by the
imposition and/or changes in government controls and regulatory requirements,
export licensing requirements, restrictions on the export of critical
technology, political and economic instability, trade restrictions, changes in
tariffs and taxes, and general economic conditions, including inflation and
trade relationships.
RESEARCH AND DEVELOPMENT
The Company has a continuing program of research and development
directed toward the enhancement of existing products in response to customer
needs and the introduction of new products to broaden its product line.
Approximately $11.1 million was invested in research and development in fiscal
1996, compared to $11.4 million in fiscal 1995. Research and development
expenses in fiscal 1995 were higher than fiscal 1996 because of major
development efforts on the second generation SPECTRUM(TM) II products. As a
percentage of net sales, research and development expenses were 7.4% for both
fiscal 1996 and 1995. The Company will continue to invest in research and
development because it believes that its future performance will depend on its
ability to continue to enhance its existing products and to develop new products
that meet market needs. There can be no assurance, however, that the Company's
product development efforts will result in commercially successful
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products. See "Factors That May Affect Future Financial Results" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" incorporated herein by reference.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations consist primarily of final
assembly, test and quality control of materials and components. The
manufacturing process, performed at the Company's San Jose, California facility,
consists primarily of materials management, extensive unit and environmental
testing of components and subassemblies at each stage of the manufacturing
process, final assembly of the terminals, and prior to shipment, quality
assurance testing and inspection of all products.
The Company's manufacturing operations are highly dependent upon the
delivery of materials by outside suppliers in a timely manner. The Company uses
local and offshore subcontractors to assemble major components and subassemblies
used in its microwave products. The Company is reliant on the timely delivery of
certain key components to meet its manufacturing plan. The inability of the
Company to develop alternative sources of supply quickly and on a cost-effective
basis could materially impair the Company's ability to manufacture and deliver
its products. There can be no assurance that the Company will not experience
component delays or other supply problems.
Certain microwave integrated circuit subassemblies which are used in
all of the Company's microwave radio products are supplied primarily by
Microelectronics Technology, Inc. ("MTI") of Taiwan. These subassemblies, which
are manufactured by MTI in Taiwan, form the nucleus of the RF Unit. The
Company's relationship with MTI commenced in March 1984, at which time the
Company and MTI entered into an agreement (the "Development Agreement") pursuant
to which MTI performed development engineering work for the Company. The
Development Agreement provides MTI with the right to manufacture up to 75% of
the Company's production requirements for microwave integrated circuit
subassemblies designed by MTI for the Company as long as MTI is able to meet
cost, quality and delivery standards available to the Company from other
sources. The Development Agreement also provides MTI with a right of first
refusal to manufacture certain of the Company's microwave products if the
Company determines to subcontract the manufacturing of these products. During
the term of the Development Agreement and for a period of one year after
termination thereof, MTI may not design, develop, manufacture or cause to be
manufactured or sold, for other persons or companies who are, or may become,
competitors to the Company, any proprietary designs or components that are
similar to certain of the Company's products. The Development Agreement may only
be terminated by either party in the event of a breach by the other.
From time to time, the Company has experienced delays and other supply
problems with MTI, but such delays and other problems have not had a significant
impact on the Company's results of operations. To avoid any future problems
associated with delays, the Company has contracted for component and subassembly
parts from additional sources. The Company and MTI maintain a high level of
communication at all levels of their respective management to ensure that
production requirements and constraints are taken into account in each company's
respective production plans.
COMPETITION
The short-haul and medium-haul transmission business is a specialized
segment of the telecommunications equipment market and is intensely competitive.
A substantial number of established and emerging companies offer a variety of
microwave, fiber optic and other transmission products for applications similar
to those of the Company's products. Many of the Company's competitors have more
extensive engineering, manufacturing and marketing capabilities and
substantially greater financial, technical and personnel resources than the
Company. The Company
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considers its primary competitors to be Alcatel, NEC, California Microwave
Corporation, P-Com, Inc., and the Farinon Division of Harris Corporation. In
addition, other existing competitors include L.M. Ericsson, Siemens AG, Nokia,
SIAE, and NERA. Some of the Company's largest customers could develop the
capability to manufacture products similar to those manufactured by the Company.
Existing and potential competition in the industry has resulted in and will
continue to result in significant price competition and pressure on gross
margins. The Company believes that competition in its markets is based primarily
on technological capability, performance, on-time delivery, price, reliability
and customer support. The Company's future success will depend upon its ability
to address the increasingly sophisticated needs of its customers by enhancing
its current products, by the development and timely introduction of new products
that keep pace with technological developments and emerging industry standards,
and by providing such products at competitive prices.
The Company often forms alliances, or teaming arrangements, with major
international telecommunications equipment providers as a means of increasing
the Company's ability to pursue these limited number of major awards each year.
These alliances are necessary for the Company where the customer requires a
single system provider with a variety of equipment and service capabilities, as
well as for financial strength. There can be no assurance that the Company will
be able to continue to develop such alliances, or that if such alliances are
developed, they will be successful.
E-PLUS CONTRACT
In November 1993, the Company entered into an agreement with Siemens AG
to supply SPECTRUM(TM) II digital microwave radios to E-Plus Mobilfunk GmbH. As
of March 31, 1995, the Company had not met its product acceptance or delivery
schedule, and, as a result, recorded significant reserves for product discounts
on interim equipment, equipment returns and other related costs (See Note 9 of
Notes to Consolidated Financial Statements --"Customer Agreement" incorporated
herein by reference.). In July 1995, the Company received product acceptance
from E-Plus, and began delivery and installation of the SPECTRUM(TM) II
equipment. During the third quarter of fiscal 1996, the Company provided
additional reserves of approximately $1.0 million related to the final
resolution of other remaining open issues on this contract.
PATENTS
The Company does not presently have any patents covering its products.
The Company believes that its success is not dependent on the ownership of
patents but rather on its innovative skills, technical expertise and timely
introduction of new products.
GOVERNMENT REGULATIONS
Radio transmission in the United States is controlled by federal
regulation and all microwave radio links installed in the United States, except
for those utilizing certain frequencies operating under FCC Part 15 rules, must
be licensed by the FCC. Since microwave radios all share the same transmission
medium, the FCC requires that every prospective microwave radio licensee assure
that it will not interfere with the operation of any existing system. This
requirement, known as frequency coordination, must be satisfied before
permission for operation will be granted by the FCC.
The FCC and similar foreign regulatory bodies require that the
Company's products comply with certain rules and regulations governing their
performance when operating within their
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jurisdiction. The Company has complied with such rules and regulations with
respect to its existing products. Any delays in compliance with respect to
future products could delay their introductions.
In the United States, Federal deregulation, which allows common
carriers greater flexibility in establishing rates which may be charged for
common carrier services, is likely to continue to affect the relative cost
effectiveness of private telecommunications networks versus common carrier
telecommunication networks. Each state has jurisdiction over the common carrier
aspects of intrastate radio and wireline communications, and the nature of this
regulation varies widely among the states. Internationally, similar control over
rates charged to customers of common carriers is exerted by central governments.
User uncertainty as to future government regulatory policies may affect the
demand for private network telecommunications products, including the Company's
products.
In addition, radio transmission is subject to regulation by foreign
laws and international treaties. The Company's equipment must conform to
international requirements established to avoid interference among users of
microwave frequencies and to permit interconnection of equipment. In many
developed countries, the unavailability of frequency spectrum has historically
inhibited the growth of microwave systems. However, current regulatory efforts
by international regulatory authorities are directed at providing microwave
frequencies for new PCS. Equipment to support these services can be marketed
only if permitted by suitable frequency allocations and regulations.
LITIGATION
The Company is a defendant in various suits and is subject to various
claims which arise in the normal course of business. In the opinion of
management, the ultimate disposition of these claims will not have a material
effect on the consolidated financial position, liquidity or results of
operations of the Company.
EMPLOYEES
As of March 31, 1996, the Company employed 576 full-time and temporary
employees. None of the Company's employees are represented by a collective
bargaining agreement. The Company's future performance will depend in large
measure on its ability to attract and retain highly skilled employees. The
Company believes that it has good relations with its employees and has never
experienced a work stoppage.
EXECUTIVE OFFICERS OF DIGITAL MICROWAVE
In addition to executive officers who are also directors of the
Company, the following executive officers are not directors:
Name Age Position
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Frank Carretta, Jr. 51 Vice President, Worldwide Sales and Service
Carol A. Goudey 48 Treasurer and Assistant Secretary
Timothy R. Hansen 36 Vice President and General Manager,
SPECTRUM(TM) Division
Jack Hillson 45 Vice President and General Manager,
Quantum(TM)/Magnum Division
Paul A. Kennard 45 Vice President, Engineering
Shaun McFall 36 Vice President, Corporate Marketing
John P. O'Neil 58 Vice President, Personnel
Carl A. Thomsen 51 Vice President, Chief Financial Officer & Secretary
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Frank Carretta, Jr.
Mr. Frank Carretta, Jr. joined the Company as Vice President, Worldwide
Sales and Service in October 1995. Prior to joining DMC, Mr. Carretta served as
Area Sales Director of M/A-Com, Inc., a manufacturer of radio and microwave
communications products, from July 1992 to September 1995. From 1988 to June
1992, Mr. Carretta was Vice President of Ward Davis Associates, a manufacturers'
representative company selling electronic test instrumentation and software
development tools.
Carol A. Goudey
Ms. Carol A. Goudey joined the Company as Treasurer in April 1996 and
was additionally appointed Assistant Secretary in May 1996. Prior to joining
Digital Microwave, she served as Acting Treasurer of California Micro Devices
Corporation, a manufacturer of semiconductor devices, since 1994. Ms. Goudey has
also previously held the position of Corporate Treasurer at both Ungermann-Bass,
Inc., a network systems company, and System Industries, Inc., a computer
peripheral company.
Timothy R. Hansen
Mr. Timothy R. Hansen has served as Vice President and General Manager,
SPECTRUM(TM) Division of the Company since February 1995. Mr. Hansen previously
served as Vice President and Program Manager of the SPECTRUM(TM) product line.
He joined the Company in August 1984 as product manager, and has held management
positions in marketing, planning, sales and order management
Jack Hillson
Mr. Jack Hillson was appointed Vice President and General Manager,
Quantum(TM)/Magnum Division of the Company in December 1995. Prior to joining
DMC, Mr. Hillson was with M/A-Com, Inc. for over eleven years, serving in
various technical and management positions with the Semiconductor and
Microelectronics Divisions. Most recently, Mr. Hillson served as the Director of
Operations for M/A Com, Inc.'s Power Hybrids Division, which manufactures
transistors and amplifier modules for the wireless communications market.
Paul Kennard
Mr. Paul Kennard joined the Company as Vice President, Engineering in
April 1996. From 1989 to March 1996, Mr. Kennard was with California Microwave
Corporation, a satellite and wireless communications company, serving as
Director of the Signal Processing Technology Department until his promotion in
1994 to Vice President of Engineering, and then to Senior Vice President of
Engineering in 1995 for the Microwave Network Systems Division.
Shaun McFall
Mr. Shaun McFall has served as Vice President, Corporate Marketing of
the Company since February 1995. He joined the Company's UK operations in
January 1989, and has held several management positions in marketing. Prior to
joining DMC, he worked for GEC Telecommunications Ltd. in Germany and Ferranti
Industrial Electronics PLC, in Edinburgh, Scotland, both of which are
telecommunications companies.
John O'Neil
Mr. John O'Neil joined the Company as Vice President, Personnel in May
1993. Mr. O'Neil was Vice President of Personnel and Administration of BEI
Electronics, Inc., a defense electronics firm, from January 1989 to April 1993.
Page 12
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Carl A. Thomsen
Mr. Carl A. Thomsen joined the Company as Vice President, Chief
Financial Officer and Secretary in February 1995. Prior to joining the Company,
he was Senior Vice President and Chief Financial Officer of Measurex
Corporation, a manufacturer of sensor based process control systems. Mr. Thomsen
joined Measurex Corporation in 1983 as Corporate Controller, was promoted to
Vice President in 1986, to Chief Financial Officer in 1992, and to Senior Vice
President in 1993.
FACTORS THAT MAY AFFECT FUTURE FINANCIAL RESULTS
The statements in the Annual Report to the Stockholders and this Form
10-K concerning the Company's future products, expenses, revenue, liquidity and
cash needs as well as the Company's plans and strategies contain forward-looking
statements concerning the Company's future operations and financial results.
These forward-looking statements are based on current expectations and the
Company assumes no obligations to update this information. Numerous factors such
as economic and competitive conditions, incoming order levels, shipment volumes,
product margins, and foreign exchange rates, could cause actual results to
differ from those described in these statements and prospective investors and
stockholders should carefully consider the factors set forth below in evaluating
these forward-looking statements.
Sales of the Company's products are concentrated in a small number of
customers. For fiscal 1996, the top four customers accounted for 38% of the net
sales. As of March 31, 1996, four of the Company's customers accounted for 49%
of the backlog, of which 16% was attributable to orders under the E-Plus
contract. The worldwide telecommunications industry is dominated by a small
number of large corporations and the Company expects that a significant portion
of its future product sales will continue to be concentrated in a limited number
of customers. The loss of any existing customer, a significant reduction in the
level of sales to any existing customer, or the failure of the Company to gain
additional customers could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, a
substantial portion of shipments may occur near the end of each quarter.
Accordingly, the Company's results are difficult to predict and delays in
product delivery or closing of a sale can cause revenues and net income to
fluctuate significantly from anticipated levels and from quarter to quarter.
The markets for the Company's products are extremely competitive and
the Company expects that competition will increase. The Company's existing and
potential competitors include large and emerging domestic and international
companies, such as California Microwave Corporation, Alcatel, Ericsson, Siemens
AG, Harris Corporation, Nokia, NEC, and P-Com, many of which have significantly
greater financial, technical, manufacturing, marketing, sales and distribution
resources and management expertise than the Company. The Company believes that
its ability to compete successfully will depend on a number of factors both
within and outside its control, including price, quality, availability, product
performance and features; timing of new product introductions by the Company,
its customers and its competitors; the ability of its customers to obtain
financing; and customer service and technical support.
The Company expects that international sales will continue to account
for the majority of its net product sales for the foreseeable future. As a
result, the Company is subject to the risks of doing business internationally,
including unexpected changes in regulatory requirements; fluctuations in foreign
currency rates; imposition of tariffs and other barriers and restrictions; the
burdens of complying with a variety of foreign laws and general economic and
geopolitical conditions, including inflation and trade relationships.
Page 13
14
Manufacturers of digital microwave telecommunications equipment are
experiencing, and are likely to continue to experience, intense price pressure,
which has resulted, and is expected to continue to result, in downward pricing
competition on the Company's products. As a result, the Company has experienced,
and expects to continue to experience, declining average sales prices for its
products. The Company's future profitability is dependent upon its ability to
reduce costs in line with or faster than declines in prices.
The Company's manufacturing operations are highly dependent upon the
delivery of materials by outside suppliers in a timely manner. From time to time
the Company has experienced delivery delays from key suppliers which impacted
sales. There can be no assurance that the Company will not experience material
supply problems or component or subsystem delays in the future.
ITEM 2. PROPERTIES
The Company's corporate offices and principal research, development and
manufacturing facilities are located in San Jose, California in four leased
buildings aggregating approximately 170,000 square feet. The Company owns 20,000
square feet of office and manufacturing space in East Kilbride, Scotland, 1,500
square feet of which has been sublet until the year 2004. The Company also
leases 17,000 square feet in Coventry, England. The Company leases two sales
offices located in Chicago, Illinois and Atlanta, Georgia, and approximately
23,000 aggregate square feet of international sales and customer service
offices. The Company believes these facilities are adequate to meet its
anticipated needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
See "Business - Litigation" and Notes 4 and 8 of "Notes to Consolidated
Financial Statements" incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Page 14
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The section labeled "Stock Information" appearing on the inside front
cover of the Company's 1996 Annual Report to Stockholders is incorporated herein
by reference.
ITEM 6. SELECTED FINANCIAL DATA
The section labeled "Selected Consolidated Financial Data" appearing on
page 14 of the Company's 1996 Annual Report to Stockholders is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information appearing under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 10
through 14 of the Company's 1996 Annual Report to Stockholders is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data, and
related notes and independent auditor's report appearing on pages 15 through 28
of the Company's 1996 Annual Report to Stockholders are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers under the
caption "Election of Directors," "Directors, Executive Officers and Key
Personnel," "Board Meetings and Committees," "Security Ownership of Certain
Beneficial Owners and Management" and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held on August 8, 1996 (the "Proxy Statement"), is
incorporated herein by reference. In addition, see the discussion under the
caption "Employees -- Executive Officers of Digital Microwave" under Item 1 of
this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information included in the Company's Proxy Statement under the
captions "Compensation of Directors," "Executive Compensation and Other
Information," "Stock Options," "Option Exercises and Holdings," "Compensation
Committee Interlocks and Insider Participation" and "Employment and Termination
Arrangements" is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information included in the Company's Proxy Statement under the
captions "Security Ownership of Certain Beneficial Owners and Management" and
"Employment and Termination Arrangements" is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Manufacturing and Supplier" and Note 7 of "Notes to Consolidated
Financial Statements" of the Company's 1996 Annual Report incorporated herein by
reference.
Page 16
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements are
contained in the Company's 1996 Annual Report to Stockholders
and are incorporated herein by reference pursuant to Item 8:
1. Consolidated Balance Sheets as of March 31,
1996 and 1995.
2. Consolidated Statements of Operations for
each of the three years in the period ended
March 31, 1996.
3. Consolidated Statements of Stockholders'
Equity for each of the three years in the
period ended March 31, 1996.
4. Consolidated Statements of Cash Flows for
each of the three years in the period ended
March 31, 1996.
5. Notes to Consolidated Financial Statements.
6. Report of Independent Public Accountants.
2. Financial Statement Schedules
The following consolidated financial statement
schedules for each of the three years in the period ended
March 31, 1996 are submitted herewith:
II Valuation and Qualifying Accounts and
Reserves
Schedules not listed above have been omitted because they are not
applicable or required, or information required to be set forth therein is
included in the Consolidated Financial Statements, including the Notes thereto,
incorporated herein by reference.
3. Exhibits
The Exhibit Index begins on Page 22 hereof.
(b) No reports on Form 8-K were filed by the Registrant during the
quarter ended March 31, 1996.
(c) See Item 14 (a) 3 above.
(d) See Item 14 (a) 2 above.
Page 17
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: June 26, 1996.
DIGITAL MICROWAVE CORPORATION
By: /s/ Charles D. Kissner
------------------------------------------
Charles D. Kissner
President and Chief Executive Officer
Page 18
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of Digital Microwave
Corporation do hereby constitute and appoint Charles D. Kissner and Carl A.
Thomsen, and each of them, the lawful attorney and agent or attorneys and agents
with power and authority to do any and all acts and things and to execute any
and all instruments which said attorneys and agents, or either of them,
determine may be necessary or advisable or required to enable Digital Microwave
Corporation to comply with the Securities and Exchange Act of 1934, as amended,
and any rules or regulations or requirements of the Securities and Exchange
Commission in connection with this Form 10-K Report. Without limiting the
generality of the foregoing power and authority, the powers include the power
and authority to sign the names of the undersigned officers and directors in the
capacities indicated below to this Form 10-K report or amendment or supplements
thereto, and each of the undersigned hereby ratifies and confirms all that said
attorneys and agents or either of them, shall do or cause to be done by virtue
hereof. This Power of Attorney may be signed in several counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney
as of the date indicated opposite his name.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates as indicated.
Signatures Signing Capacity Date
- ---------------------------------------------------------------------------------------------------
/s/ Charles D. Kissner President and Chief Executive Officer June 26, 1996
- ------------------------------
Charles D. Kissner
/s/ Carl A. Thomsen Vice President, Chief Financial Officer June 26, 1996
- ------------------------------ & Secretary
Carl A. Thomsen (Principal Financial and Accounting Officer)
/s/Richard C. Alberding Director June 26, 1996
- ------------------------------
Richard C. Alberding
/s/William E. Gibson Director June 26, 1996
- ------------------------------
William E. Gibson
/s/ Clifford H. Higgerson Director June 26, 1996
- ------------------------------
Clifford H. Higgerson
/s/ James D. Meindl Director June 26, 1996
- ------------------------------
James D. Meindl
/s/Billy B. Oliver Director June 26, 1996
- ------------------------------
Billy B. Oliver
Page 19
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Digital Microwave Corporation:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in Digital Microwave
Corporation's Annual Report to stockholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated April 22, 1996. Our audits
were made for the purpose of forming an opinion on those statements taken as a
whole. The schedule listed in Item 14a(2) is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
April 22, 1996
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SCHEDULE II
DIGITAL MICROWAVE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
- -----------------------------------------------------------------------------------------
Balance at Charged to Balance
Beginning of Costs and Deductions/ at End
Description Period Expenses Write-off of Period
- -----------------------------------------------------------------------------------------
Year Ended March 31, 1996
Allowance for
doubtful accounts $1,413 $580 $ 620 $1,373
Year Ended March 31, 1995
Allowance for
doubtful accounts $3,240 $276 $2,103 $1,413
Year Ended March 31, 1994
Allowance for
doubtful accounts $3,067 $300 $ 127 $3,240
Accrued restructuring
charge $ 617 $ 89 $ 706 $ --
Page 21
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3.1 Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File
No. 33-13431) (reference is also made to Exhibit 4.2).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2
to the Company's Annual Report on Form 10-K for the year ended March
31, 1993).
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit
4.1 to the Company's Annual Report on Form 10-K for the year ended
March 31, 1988).
4.2 Rights Agreement dated as of October 24, 1991 between the Company and
Manufacturers Hanover Trust of California, including the Certificate of
Designations for the Series A Junior Participating Preferred Stock
(incorporated by reference to Exhibit 1 to the Company's Current Report
on 8-K filed on November 5, 1991).
10.1+ Digital Microwave Corporation 1984 Stock Option Plan, as amended and
restated on June 11, 1991. (incorporated by reference to Exhibit 10.1
to the Company's Annual Report on Form 10-K for the year ended March
31, 1991).
10.2+ Form of Installment Incentive Stock Option Agreement (incorporated by
reference to Exhibit 28.2 to the Company's Registration Statement on
Form S-8 (File No. 33-43155).
10.3+ Form of installment Non-qualified Stock Option Agreement (incorporated
by reference to Exhibit 28.3 to the Company's Registration Statement on
Form S-8 (File No. 33-43155)).
10.5 Lease of premises located at 170 Rose Orchard Way, San Jose, California
(incorporated by reference to Exhibit 10.5 to the Company's Annual
Report on Form 10-K for the year-ended March 31, 1991).
10.6 Lease of premises located at 130 Rose Orchard Way, San Jose, California
(incorporated by reference to Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the year ended March 31, 1991).
10.7 Lease of premises located at 110 Rose Orchard Way, San Jose, California
(incorporated by reference to Exhibit 10.7 to the Company's Annual
Report on Form 10-K for the year ended March 31, 1991).
10.9 Microelectronics Technology, Inc. Development Agreement dated as of
March 9, 1984 (incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1 (File No. 33-13431)).
10.11 Form of Indemnification Agreement between the Company and its directors
and certain officers (incorporated by reference to Exhibit 10.16 to the
Company's Registration Statement on Form S-1 (File No. 33-13431)).
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10.12* Technology Transfer & Marketing Agreement dated October 2, 1987 between
Microelectronics Technology Inc. and the Company (incorporated by
reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K
for the year ended March 31, 1988).
10.22 Loan and Security Agreement dated June 25, 1992 between the Company and
CoastFed Business Credit Corporation (incorporated by reference to
Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year
ended March 31, 1992).
10.23 Accounts Collateral Security Agreement dated June 25, 1992 between the
Company and CoastFed Business Credit Corporation (incorporated by
reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K
for the year ended March 31, 1992).
10.24 Letter of Credit Collateral Agreement dated June 25, 1992 between the
Company and CoastFed Business Credit Corporation (incorporated by
reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K
for the year ended March 31, 1992).
10.25 Letter Agreement dated June 23, 1993 between the Company and CoastFed
Business Credit Corporation (incorporated by reference to Exhibit 10.25
to the Company's Annual Report on Form 10-K for the year ended March
31, 1993).
10.26* Product Acquisition Agreement dated as of September 23, 1992 between
the Company and Microelectronics Technology, Inc. (incorporated by
reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K
for the year ended March 31, 1993).
10.27* Product Acquisition Agreement dated as of December 28, 1992 between the
Company and Microelectronics Technology, Inc. (incorporated by
reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K
for the year ended March 31, 1993).
10.28* Teaming Agreement dated as of November 16, 1993 between the Company and
Siemens AG (including the Supply Agreement dated November 16, 1993
between Siemens AG and E-Plus Mobilfunk GmbH) (incorporated by
reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K
for the year ended March 31, 1994).
10.29 Amendment to Loan Documents between the Company and CoastFed Business
Credit Corporation dated as of July 28, 1994 (incorporated by reference
to Exhibit (1) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994).
10.30 Amended and Restated Accounts and Inventory Collateral Security
Agreement between the Company and CoastFed Business Credit Corporation
dated as of July 28, 1994 (incorporated by reference to Exhibit (2) to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994).
10.31 Loan Agreement between the Company and Heller Financial dated October
28, 1994 (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1994).
10.32 Agreement on Exchange of Interim Equipment dated October 27, 1994
(incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1994).
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10.33+ Digital Microwave Corporation 1994 Stock Incentive Plan (incorporated
by reference to the Registration Statement on Form S-8 filed with the
Commission on October 17, 1994).
10.34 Loan Agreement dated March 21, 1995 between the Company and Bank of the
West incorporated by reference to Exhibit 10.34 to the Company's Annual
Report on Form 10-K for the year ended March 31, 1995.
10.35 Amendment to Loan Agreement dated March 31, 1995 between the Company
and Heller Financial, Inc. incorporated by reference to Exhibit 10.35
to the Company's Annual Report on Form 10-K for the year ended
March 31, 1995.
10.36 Employment Agreement dated May 1, 1996 between the Company and Charles
D. Kissner.
10.37 Form of Employment Agreement between the Company and certain Executive
Officers.
13.1 Annual Report to Stockholders.
21.1 List of subsidiaries.
23.1 Consent of Independent Public Accountants.
24.1 Power of Attorney (included on page 19 of this Annual Report on Form
10-K).
27.1 Financial data schedule.
+ Management Contract or Compensatory Plan or Arrangement.
* Confidential treatment of certain portions of this exhibit has been
granted.
Page 24