U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended Commission File Number
September 30, 1996 0-3392
WESTERN MICROWAVE, INC.
(Name of small business issuer in its charter)
Virginia 94-1530593
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 64252, Sunnyvale, California 94086
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(Address of principal executive offices)
(408) 745-6679
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Issuer's telephone number
Securities registered under
Section 12(b) of the Exchange Act: None
Securities registered under
Section 12(g) of the Exchange Act: Common Stock, $.10 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year ended September 30, 1996
were $0.
The aggregate market value of the voting stock held by non-affiliates of the
issuer on January 31, 1997, based upon the average bid and ask prices of such
stock on that date, was $552,935. The number of shares of Common Stock of the
issuer outstanding as of January 31, 1997 was 1,528,491.
Documents Incorporated By Reference: None
Transitional Small Business Disclosure Format: Yes ___ No _X__
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PART I
ITEM 1. BUSINESS
Western Microwave, Inc. (the "Company") was incorporated in Virginia in 1962.
The Company's mailing address is P.O. Box 64252, Sunnyvale, California 94086.
From 1962 until the sale of substantially all of its operating assets in 1995,
the Company was engaged in the design, development, manufacture and sale of a
wide range of microwave devices, components and subsystems which were used in
both military and commercial microwave electronic systems (the "WMI Business").
On July 21, 1995, the Company sold certain of the assets associated with the
conduct of the WMI Business to ST Microwave Corp. (the "Buyer") in exchange for
cash and the assumption by the Buyer of certain of the liabilities of the
Company. Between July 21, 1995 and September 15, 1995 when the Company's lease
for its facility at 495 Mercury Drive, Sunnyvale, California expired, the
Company disposed of substantially all of its remaining tangible assets. As a
result of such transactions, the Company is no longer engaged in the WMI
Business. The Company's remaining business activity involves the resolution of
the Company's ongoing environmental liability for the cleanup of the Company's
former facility in Sunnyvale, California (See Item 3, LEGAL PROCEEDINGS:
Environmental Claims).
Pending the resolution of the Company's environmental liability, the Company has
temporarily invested its assets in a portfolio of marketable securities with a
view towards the preservation of such assets and the generation of investment
income from interest, dividends and capital gains.
On May 9, 1996, the Board of Directors of the Company approved a Plan of
Liquidation and Dissolution of the Company (the "Plan"), subject to the approval
of the shareholders of the Company. The Company will submit the Plan to its
shareholders for approval at a Special Meeting to be held on or about April 2,
1997.
Effective May 9, 1996, the Company's Common Stock was deleted from the Nasdaq
SmallCap Market. The Company's Common Stock continues to trade on the Nasdaq OTC
Bulletin Board.
HISTORY OF BUSINESS AND
SALE OF THE WMI BUSINESS
BACKGROUND
In fiscal 1989, the Company began to experience a decline in sales attributable
to a significant demand reduction in the defense electronics industry as a
whole. This
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trend continued for the next six (6) fiscal years with annual sales decreasing
from approximately $9.7 million in fiscal 1989 to approximately $2.5 million in
fiscal 1994 (or a reduction of 74%). During the same period, a number of
lawsuits were instituted against the Company alleging that the Company was
responsible for contamination of the soil and groundwater at or in the vicinity
of the Company's former facility on Reamwood Avenue in Sunnyvale, California.
The contamination of the soil and groundwater at the former facility was alleged
to have occurred sometime in the early 1980s prior to the closing of the
Company's plating room operation in 1985.
In response to decreasing sales levels and increasing environmental and legal
costs, both of which had a significant adverse effect on the Company's results
of operations, management instituted a series of cost reduction programs in an
attempt to remain profitable. For example, in fiscal 1990, management made the
decision to substantially terminate the Company's amplifier business due to
substantial losses incurred in prior years and the likelihood of continuing
losses in the future.
In fiscal year 1991, the Company reorganized its manufacturing facilities,
introduced new fabrication techniques and expanded its automated machining
operations in an attempt to remain competitive in a declining industry. The
Company also relocated to a new facility, reduced overhead by eliminating a
number of middle management and support positions and improved its manufacturing
efficiency. During this same period, the Company attempted to develop and
introduce new products for commercial applications to replace lost sales in the
defense sector. The significant cost cutting measures instituted by management
in 1990 and 1991, as well as increased productivity, resulted in a return to
profitability in fiscal 1991 with the Company reporting net income of
approximately $1.08 million.
The Company was unable to sustain profitable operations in fiscal 1992 due
primarily to a 42% decline in sales from approximately $8.17 million in 1991 to
$4.74 million in 1992. During this period, the Company also incurred significant
legal and other expenses in connection with the defense of the environmental
litigation instituted against the Company. As a result of the above, the Company
reported a net loss of approximately $80,000 in fiscal 1992.
Sales continued to decline in fiscal 1993 from approximately $4.74 million to
$3.35 million. The Company's operations were also adversely impacted in such
year by the sudden illness of Dr. Ibrahim Hefni, the Company's President and
Chief Executive Officer. This resulted in a series of management changes until
Dr. Hefni's return to work on a full-time basis in fiscal 1994. Notwithstanding
continuing cost cutting measures, the Company was unable to return to profitable
operations in 1993 in the face of decreasing sales and increasing legal and
environmental costs. Although the Company reported net income of $9,160 for such
year, such profit was attributable
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exclusively to investment income of $396,584, with the WMI Business operating at
a loss.
As a result of the above, in February, 1994 the Company's Board of Directors
solicited offers for the purchase of the operating assets and business of the
Company. Prospective purchasers were furnished with a Confidential Offering
Memorandum describing the WMI Business and seeking cash offers to purchase all
of the Company's operating assets (including machinery, equipment, inventory and
supplies), as well as all inventions, customer lists, backlog and goodwill.
Although preliminary discussions were held with three (3) prospective purchasers
and a preliminary offer was made by one prospective purchaser, the Board of
Directors concluded that no acceptable offer had been received for the purchase
of the WMI Business and the offering period terminated in accordance with its
original terms on March 31, 1994.
As a result of the prior solicitation, in the early part of 1995, ST Microwave
Corp. expressed a renewed interest in acquiring the WMI Business. The Company's
lease for its facility on Mercury Drive in Sunnyvale, California was also due to
expire in September of 1995. Further, although the Company reported a small
profit for the fiscal year ended September 30, 1994, such profit was again
attributable exclusively to investment income with the WMI Business reporting a
continuing operating loss. Accordingly, after a review of the future prospects
for the Company's defense-related business, the Board of Directors determined
that it was in the best interests of the Company and its stockholders to sell
the WMI Business. The Board also determined that it was in the Company's best
interests to complete the sale as quickly as possible to maximize the value of
the Company's assets on a going concern basis. As a result, on July 21, 1995,
the Company completed the sale of the WMI Business to ST Microwave Corp.
SALE OF THE WMI BUSINESS
On July 25, 1995, the Company announced that it had completed the sale of
certain of its operating assets associated with the conduct of its microwave
components and subsystems businesses (the "WMI Business") to ST Microwave Corp.
of Sunnyvale, California, a subsidiary of Signal Technology Corporation (the
"Buyer"). The sale of the WMI Business was effected pursuant to the terms and
upon the conditions contained in an Asset Purchase Agreement dated July 20, 1995
by and between the Company and the Buyer (the "Agreement").
The following is a summary of the major provisions contained in the Agreement
and the other documents and agreements relating to the purchase and sale of the
WMI Business:
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Acquired Assets: Included in the purchase and sale of the WMI Business were all
government contracts, backlog of customer purchase orders, customer list,
trademarks, patents and rights to manufacturing know-how, drawings, designs and
technical documentation, inventories (other than machine shop inventory),
selected production tooling, test fixtures and test sets and equipment, and
trade accounts receivable and goodwill relating to the WMI Business.
Excluded Assets: Excluded from the purchase and sale of the WMI Business were
cash and cash equivalents, marketable securities, all machine shop assets, all
other production machinery and equipment, office furniture and computer
equipment and all other intangible rights and assets not related to the WMI
Business.
Purchase Price: The Purchase Price paid by the Buyer to the Company for the
Acquired Assets was $1,433,965 of which $1,308,965 was paid at the closing and
$125,000 was deposited into an Escrow Account in accordance with the Agreement.
The purchase price was later adjusted pursuant to a settlement agreement entered
into between the parties on October 20, 1995 to reflect decreases in outstanding
accounts receivable as of the closing date. The adjusted purchase price paid for
the acquired assets was $1,170,384. However, the Company is contesting
approximately $32,000 claimed by the Buyer as a reduction in the purchase price
for uncollected accounts receivable which may result in an increase in the
adjusted purchase price upon resolution of the Company's claim.
Reassignable Accounts Receivable: The Company agreed to repurchase from the
Buyer any of the accounts receivable purchased by the Buyer which remained
outstanding as of 120 days after the closing date "Reassignable Accounts
Receivable") on a dollar-for-dollar basis. The Buyer was entitled to deduct the
purchase price to be paid by the Company for any Reassignable Accounts
Receivable directly from the $125,000 Escrow Account established at the closing
for such purpose. On November 21, 1995, the Buyer submitted a claim of
$95,264.48 to the Escrow Agent for payment of Reassignable Accounts Receivable,
which amount is being contested by the Company. The Company responded by
providing an accounting of the amounts charged against the $125,000 escrow.
Subsequently, the Buyer adjusted their claim to $32,000 . The Company is still
contesting the claim and is attempting to resolve the matter, however, no
agreement has yet been reached.
Assumed Liabilities: At the closing, the Buyer assumed only the liabilities,
responsibilities and obligations of the Company arising on or after the closing
for (i) the government contracts and all customer contracts included in the
backlog and (ii) all warranty obligations of the Company. The Buyer did not
assume any other liabilities or obligations of the Company, which liabilities
and obligations, including specifically all environmental liabilities, remained
with the Company after the closing.
Non-Competition: As a condition to the sale of the WMI Business, the Company
agreed that for a period of five (5) years from the closing, the Company would
not engage in any business which is in competition with the WMI Business sold to
the Buyer or solicit any customers to discontinue or alter their relationships
with the
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Buyer. The non-competition agreement entered into by the Company with the Buyer
specifically excluded the continued operation of the Company's machine shop
after the closing as well as the sale by the Company of any of the Excluded
Assets to any person whether or not such person is in competition with the
Buyer.
Assignment of Tradename: As part of the purchase and sale of the WMI Business,
the Company has granted to the Buyer a license to utilize the name "Western
Microwave" in the conduct of the microwave business formerly carried on by the
Company. The Company has further agreed to assign all right, title and interest
in and to such tradename upon obtaining the necessary shareholder approval to a
change in the Company's name.
PLAN OF LIQUIDATION AND DISSOLUTION
Adoption of Plan by Board of Directors. On May 9, 1996, the Board of
Directors of the Company approved a plan of dissolution and liquidation of the
Company (the "Plan"), subject to the approval of the shareholders of the
Company. The following summary description of the Plan is qualified in its
entirety by reference to the Plan itself. The Plan provides that upon adoption
by the Shareholders, the Company will be dissolved and its corporate existence
terminated in accordance with Virginia law.
Sale or Other Disposition of Remaining Assets. Pursuant to the Plan,
the Company will dispose of any remaining assets other than (i) cash and
marketable securities or (ii) any assets associated with the cleanup of the
Former Headquarters. At September 30, 1996, substantially all of the Company's
assets consisted of cash and marketable securities.
Environmental Reserve; Holdback in Liquidation Distribution. The
Company previously established a reserve to cover the potential costs and
expenses to complete the cleanup of the environmental contamination at the
Company's Former Headquarters and matters related thereto (the "Environmental
Reserve"). At September 30, 1996, the amount of the Environmental Reserve was $1
million. Because it is anticipated that the cleanup of the Company's former
headquarters located at 1271 Reamwood Avenue, Sunnyvale, California may not be
accomplished for a number of years, and because changes and conditions at the
site as the cleanup is undertaken or other unknown circumstances may result in a
significant increase in future clean up costs which cannot be anticipated at
this time, the Board of Directors intends to hold back $3 million from the
initial liquidating distribution to the stockholders pending the final
resolution of the environmental cleanup (the "Environmental Holdback").
The proposed liquidation will not discharge the Company's environmental
liabilities. A Liquidating Trust is being established by the Board of Directors
to make
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available assets for the environmental remediation at the Company's Former
Headquarters and matters related thereto (the "Environmental Remediation"). See
- -- Liquidating Trust Agreement. If the Environmental Holdback is insufficient to
discharge the Company's obligations, the Shareholders may be liable in the
amount of any distributions made to such Shareholders by the Company or the
Trustee of the Liquidating Trust.
If, when the Environmental Remediation is completed, the full amount of
the Environmental Holdback has not been utilized, the remainder will be
distributed to the Shareholders holding interests in the Liquidating Trust at
such time that the distribution is made.
Liquidating Trust Agreement. The Board of Directors will create a
Liquidating Trust for the benefit of the Company's shareholders to hold the
Company's assets and to satisfy the Company's liabilities and expenses during
the liquidation. Shareholders will participate pro rata, in accordance with
their percentage stock ownership interests in the Company, in any assets
remaining in the Liquidating Trust after the payment of all costs and expenses
and the satisfaction of all liabilities and other financial obligations by the
Company. The Directors believe that the reserved amounts for future
environmental costs and other contingencies and expenses will be sufficient to
satisfy all present and future obligations of the Company during the
liquidation. However, no assurances can be given that any assets will remain in
the Liquidating Trust after the satisfaction of such liabilities and expenses or
that any amounts will be available for future distribution from the Liquidating
Trust. Further, due to the lengthy time period anticipated for resolution of the
environmental issues, the existence of the Liquidating Trust may continue for a
considerable period of time subsequent to the legal dissolution of the Company
for purposes of discharging the Liquidating Trust's liabilities and distributing
the Liquidating Trust's assets.
Investment of Proceeds. Pending any liquidating distributions, the
assets of the Company will be invested in such manner as the Board of Directors,
in its sole discretion, deems appropriate, with a view towards the preservation
of such assets.
Costs and Expenses. The Board of Directors will authorize the payment
of reasonable and necessary expenses relating to the administration of the plan
and liquidating distributions contemplated thereunder, including but not limited
to all legal, accounting, printing, appraisal and other fees and expenses of
persons rendering services to the Company. The Plan also authorizes the payment
of reasonable compensation to any person providing services on behalf of the
Company in connection with the resolution of the Company's environmental matters
and the investment of the Company's assets pending final liquidation.
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Employees
As of September 30, 1996, the Company had one full-time employee, Dr. Ibrahim
Hefni, the Company's President, Treasurer and Chief Executive Officer.
Environmental Laws
In 1990 the Company was named as a defendant in two environmental lawsuits. Both
lawsuits relate to the alleged contamination by the Company of the soil and
groundwater at or in the vicinity of the Company's former headquarters at 1271
Reamwood Avenue, Sunnyvale, California (the "Former Headquarters") as the result
of the operation of a plating room in the early 1980s. The plating operation was
closed by the Company in 1985.
In 1992 the Company settled both environmental lawsuits. Under the terms of the
settlements, the Company agreed to undertake certain soil and groundwater
remediation activities at the Former Headquarters. The clean-up of the Former
Headquarters will be undertaken in accordance with site clean-up requirements
approved by the California Regional Water Quality Control Board ("RWQCB") in
response to a workplan for remedial action submitted by the Company. The RWQCB
is responsible for overseeing the remediation of contaminated sites which might
affect the quality of the waters of the State of California.
The RWQCB has adopted site cleanup requirements for WMI to investigate and
remediate VOC contamination found in the soil and groundwater at the site. Since
the adoption of the cleanup orders, the RWQCB and WMI have disagreed as to the
extent of WMI's liability for the contamination. In addition, WMI contends that
there are other responsible parties who have contributed to the site
contamination.
The disagreements between WMI and the RWQCB resulted in the imposition by the
RWQCB in 1995 of administrative civil liability against WMI in the amount of
$600,000. WMI appealed the order imposing civil liability and in June 1995 the
parties entered into a Settlement Agreement to avoid future litigation. Under
the terms of such Settlement Agreement, WMI agreed to dismiss its appeal of the
RWQCB order, to pay a total of $100,000 in penalties, to expend $250,000 in soil
and groundwater remediation activities and to contribute an additional $250,000
to an irrevocable account to be used solely for future investigation and
remediation at the site. In addition, WMI agreed to accomplish certain
remediation tasks in accordance with an agreed to schedule. In accordance with
the schedule of tasks, in 1995 WMI undertook the excavation and remediation of
contaminated soil from most of the "hot-spot" areas at the site and continued
its efforts to evaluate and propose a final remediation plan for the remaining
soil and groundwater contamination at the site. (See Item 3, LEGAL PROCEEDINGS -
Environmental Claims).
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INVESTMENT OF CURRENT ASSETS
As a result of the sale of the WMI Business and the subsequent liquidation of
other tangible assets, substantially all of the Company's remaining assets
consist of cash and marketable securities. As of September 30, 1996, the
Company's net current assets (current assets less current liabilities) totaled
approximately $5.3 million. Pending the resolution of the Company's
environmental liability for the cleanup of the Former Headquarters, the Company
has invested substantially all of its current assets in a diversified portfolio
of marketable securities.
At September 30, 1996, the Company's portfolio was invested as follows: 2% in
fixed income securities maturing in the year 2020; 67% in common stocks; 29% in
high-yielding preferred stocks; and 2% in money market funds. The portfolio has
been structured to preserve capital with a view towards generating current
income from interest, dividends and capital gains.
The estimated annual income from the investment of the Company's portfolio is
approximately $410,000. In addition, the Company is expected to derive capital
gains from the sale of certain investments which have appreciated over their
original cost. At September 30, 1996, the net unrealized appreciation (net of
tax effect) in the value of the investments over their original cost totaled
$413,868. In addition, the Company had unrealized gains on put and call option
contracts of $408,360 at September 30, 1996.
ITEM 2. PROPERTIES
The Company maintains no operating facility. At the present time, the Company
maintains a Post Office Box for mailing purposes.
ITEM 3. LEGAL PROCEEDINGS
ENVIRONMENTAL CLAIMS
LITIGATION MATTERS:
Two environmental lawsuits were instituted against the Company in fiscal year
1990. Both lawsuits relate to the alleged contamination by the Company of the
soil and groundwater at or in the vicinity of the Company's former headquarters
at 1271 Reamwood Avenue, Sunnyvale, California (the "Former Headquarters"). The
two lawsuits were instituted against the Company separately by Intersil, Inc.
("Intersil") and by the owner of the Former Headquarters.
Suit by Intersil. On September 28, 1990, Intersil instituted a civil
action in the United States District Court, Northern District of
California pursuant to the
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Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") for reimbursement of response costs incurred and to be
incurred by Intersil in response to the release or threatened release
of hazardous substances from the Former Headquarters and for a
declaratory judgment as to the Company's liability for future response
costs. The action also sought a judgment awarding Intersil compensatory
damages, costs and interest, as well as an order requiring that the
Company abate the conditions giving rise to the action. The Intersil
suit followed the demand made in May, 1990 for not less than
$807,831.50 which represented approximately 50% of Intersil's response
costs incurred as of February 28, 1990. In 1992, Intersil increased its
demand to approximately $3.7 million. The suit also included claims for
negligence, nuisance, waste and trespass, all as a result of the
alleged release or threatened release of hazardous substances into the
environment by the Company.
Suit by Former Landlord. In August, 1990, the owner of the Former
Headquarters instituted legal action against the Company in Superior
Court of California, Santa Clara County, for the costs of investigating
and remedying suspected toxic contamination at the site. The complaint
alleged that during its occupancy of the Former Headquarters, the
Company released or disposed of certain toxic and hazardous substances
onto the property resulting in contamination of the groundwater beneath
the property. The complaint estimated that the cost of investigation
and clean-up of the alleged contamination exceeded $200,000. The
owner's complaint also sought to hold the Company liable for lost rents
in excess of $30,000 per month until the clean-up of the alleged
contamination is complete. In addition, the owner's complaint alleged
that the Company damaged the property by failing to properly maintain
it and by removing fixtures and causing other damage upon vacating the
premises. The complaint estimated that the costs that will be incurred
to repair and restore such alleged damage will total not less than
$50,000. The complaint also sought to recover for the diminution in the
value of the property caused by all of the alleged actions of the
Company as described above. Finally, the complaint sought punitive
damages of $1,000,000 and payment of the owner's other administrative
costs and legal expenses.
The Company retained environmental counsel to defend the Company in both the
Intersil suit and the environmental lawsuit filed by the Former Landlord. The
primary liability issue in both lawsuits was whether or not the Company was the
source of any soil and/or groundwater contamination at the Former Headquarters
and, if so, the allocation of the clean-up costs at or about the site among the
contributors.
On July 28, 1992, the Company announced that it had reached an agreement to
settle the two environmental lawsuits instituted against the Company by Intersil
and the Former Landlord. Definitive settlement agreements were executed and
exchanged by
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all parties in November, 1992. Under the terms of both settlements, the Company
agreed to reimburse both Intersil and the Former Landlord for certain costs
alleged to have been incurred in remediating soil and groundwater contamination
at the Former Headquarters. The costs of both settlements were funded, in large
part, by $1,000,000 in proceeds obtained from the Company's insurance carriers
in exchange for a release forever discharging the insurance carriers from
further claims in connection with the site. In addition, as part of the
settlements the Company agreed to undertake soil and groundwater remediation at
the Former Headquarters.
SITE CLEANUP REQUIREMENTS:
Since 1993, the Company has been engaged in the clean-up of the Former
Headquarters pursuant to the Settlement Agreements and in accordance with site
cleanup orders adopted by the California Regional Water Quality Control Board
(the "RWQCB"). The RWQCB is responsible for overseeing the remediation of
contaminated sites which might affect the quality of the waters of the State of
California.
The RWQCB has adopted site cleanup requirements for WMI to investigate and
remediate VOC contamination found in the soil and groundwater at the site. A
workplan for remedial action, including several amendments thereto, was
submitted by the Company to the RWQCB in early 1993. In July of 1993, the RWQCB
conditionally approved the Company's workplan. The workplan contemplated the
installation by the Company of a pilot treatment system for the underground
removal of chemical contamination in the shallow groundwater at the site as well
as soil remediation and additional testing and groundwater monitoring at the
site. In fiscal 1994, the Company continued its efforts to obtain final approval
of a workplan for remedial action from the RWQCB. Under the terms of the
settlement agreements entered into by the Company, the Company was entitled to
hook into an existing groundwater treatment system being operated on a
contiguous site. However, after the settlement agreements were executed, the
operator of the system advised the Company of its intention to abandon the
system and to implement a passive treatment system. As a result of these changes
in circumstances, the Company experienced some delays in implementing
groundwater treatment at the site and full compliance with the RWQCB cleanup
orders.
Since the adoption of the cleanup orders, the RWQCB and WMI have disagreed as to
the extent of WMI's liability for the contamination. In addition, WMI contends
that there are other responsible parties who have contributed to the site
contamination. The disagreements between WMI and the RWQCB resulted in the
imposition by the RWQCB in 1995 of administrative civil liability against WMI in
the amount of $600,000. WMI appealed the order imposing such civil liability and
in June 1995 the parties entered into a Settlement Agreement to avoid future
litigation. Under the terms of such Settlement Agreement, WMI agreed to dismiss
its appeal of the
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RWQCB order, to pay a total of $100,000 in penalties, to expend $250,000 in soil
and groundwater remediation activities and to contribute an additional $250,000
to an irrevocable account to be used solely for future investigation and
remediation at the site. In addition, WMI agreed to accomplish certain
remediation tasks in accordance with an agreed to schedule.
In October 1995, Intersil notified the Company that the Intersil's Bentonite
slurry wall was damaged by excavation activity performed by the Company.
Intersil alleged this damage was responsible for increased migration of
groundwater from Intersil's site to the Company's site. Following a series of
motions and proceedings before a Special Master, the court entered an order on
August 19, 1996 requiring the Company to pay approximately $210,000 in damages
to Intersil plus $16,000 in Special Master fees. The order was confirmed in a
judgment entered on October 30, 1996. In addition, the Company may be required
to pay additional attorneys' fee to Intersil of $60,000. The Company has
appealed the order and is currently investigating its options. Management is
unable to determine the outcome of the appeal but has taken this judgment into
consideration in determining the environmental liability reserve. During fiscal
1996, the Company incurred and expensed approximately $200,000 in environmental
cleanup costs.
The Company has been ordered to resubmit a Remedial Action Plan ("RAP") to the
Regional Water Quality Control Board ("RWQCB") which evaluates and proposes a
final remediation plan for the Sunnyvale site. The Company has submitted its
draft RAP to the RWQCB and expects to obtain approval in the next few months.
ENVIRONMENTAL RESERVE:
In fiscal year 1990, the Company established a reserve in the amount of $250,000
to cover the anticipated costs and expenses of conducting the environmental
investigation and defending against the environmental claims instituted by
Intersil and by the owner of the Former Headquarters or which might be
instituted by the California Regional Water Quality Control Board. In the second
quarter of fiscal 1992, the legal reserve was increased by $150,000. As a result
of the settlement of the environmental lawsuits, at the end of 1992 the legal
reserve was converted to a reserve for anticipated environmental clean-up costs.
As a result of the conditional approval of the Company's workplan contemplating
significant soil and groundwater remediation activities, in 1993 the Company
increased the reserve for future environmental clean-up costs to $500,000. In
fiscal 1994 and fiscal 1995, the Company expensed all current environmental
costs which totaled approximately $564,000 for the two year period. In fiscal
1996, environmental cleanup related expenses totaled approximately $200,000.
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As a result of further investigation and soil remediation activities completed
by the Company at the site in fiscal 1995, the Company determined that the
existing $500,000 environmental reserve would not be adequate to complete the
cleanup. As a result, in fiscal 1995, the Company increased the reserve for
future environmental costs by $500,000 to $1,000,000. Notwithstanding the
additional cleanup expenses incurred during 1996, the Company has maintained the
reserve at $1,000,000 at September 30, 1996.
The $1,000,000 reserve represents management's best estimate of the anticipated
costs and expenses to complete the clean-up of the site in accordance with the
Company's workplan. However, there is no assurance that the clean-up of the site
can be completed for the reserved amount and changes in conditions at the site
as the clean-up is undertaken or other unknown circumstances may result in
significant increases in future clean-up costs which cannot be reasonably
anticipated by the Company at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
The Company delayed its Annual Meeting in 1996 to combine it with a Special
Meeting of Shareholders to be held for the purpose of approving the Plan of
Liquidation and Dissolution adopted by the Board of Directors on May 9, 1996.
The Company filed a Preliminary Proxy Statement on June 7, 1996 and received
comments from the staff of the Securities and Exchange Commission (the
"Commission") on July 9, 1996. However, after responding to the Commission's
comments in September, 1996, the Company's Board of Directors decided to defer
the Special Meeting until the Annual Report on Form 10-KSB for the fiscal year
ended September 30, 1996 was available for distribution to shareholders. The
Company anticipates that the Meeting of Shareholders will be held on or about
April 2, 1997.
Part II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Western Microwave, Inc. Common Stock is traded in the over-the-counter market
under the symbol WMIC. The Company's Common Stock was included in the Nasdaq
Small Cap Market until May 1996, when it was delisted by the Nasdaq Stock
Market, Inc. The Company's Common Stock continues to be traded on the Nasdaq OTC
Bulletin Board.
The following table shows the range of high and low bid quotations as reported
in the Nasdaq over-the-counter market for the Company's Common Stock for the
periods indicated.
- 13 -
FISCAL YEAR FISCAL YEAR
1996 1995
HIGH LOW HIGH LOW
First Quarter 1-7/8 1-3/8 1-1/8 1
Second Quarter 1-5/8 1-1/4 1 1
Third Quarter 1-5/8 1-1/4 1-1/2 1
Fourth Quarter 1-1/2 1 2-1/8 1-3/8
The over-the-counter market quotations shown above reflect inter-dealer prices,
without retail markup, markdown or commission and may not represent actual
transactions. Since May, 1996, the trading in the Company's Common Stock has not
been reported and is difficult to monitor. The prices may fluctuate widely
depending on the trading volume and the balance between buy and sell orders.
Stockholders are urged to contact their brokers to obtain current information
with respect to the trading price of the Common Stock.
No dividends have been paid by the Company on its Common Stock during the
five-year period ended September 30, 1996; provided, however, that in the second
quarter of the 1992 fiscal year, the Company announced the redemption, in their
entirety, of all outstanding Rights under the Company's Common Shares Rights
Agreement dated as of February 17, 1989 at a redemption price of $.01 per Right
payable in cash to holders of record as of February 11, 1992. The total
redemption of such Rights was effected during the second quarter of the 1992
fiscal year at a cost to the Company of $14,052.33, which amount was
characterized as an extraordinary dividend distribution. The Company had
approximately 600 shareholders of record as of September 30, 1996.
Item 6. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Assets. Total assets as of September 30, 1996 increased from the beginning of
the fiscal year by approximately $1.23 million to a total of $8.55 million. The
increase in total assets is the result of additional purchases of investment
securities on margin ($1.1 million), appreciation in the fair value of
investment securities ($97,000) and proceeds from sale of common stock
($150,000), offset by the net loss for the year of approximately $117,000.
- 14 -
Total Stockholders' Equity. Total stockholders' equity as of the close of the
1996 fiscal year increased from approximately $5.13 million (or $3.73 per share)
at the beginning of the fiscal year to approximately $5.27 million (or $3.44 per
share) at the close of the fiscal year. The increase of approximately $129,000
in total stockholders' equity for the current fiscal year is the result of the
aforementioned increase in the fair value of investment securities and proceeds
from the sale of common stock offset by the net loss incurred for the year. The
decline in the book value per share of $.29 is the result of additional shares
issued in the sale of common stock which more than offset the increase in
stockholders' equity on a per share basis.
Environmental Liability. Under the terms of the settlement agreements entered
into by the Company in connection with the settlement of the environmental
lawsuits, the Company has agreed to undertake certain soil and groundwater
remediation activities at its former headquarters on Reamwood Avenue, Sunnyvale,
California (See, Item 3, LEGAL PROCEEDINGS - Environmental Claims)
In fiscal year 1990, the Company established a reserve in the amount of $250,000
to cover the anticipated costs and expenses of conducting the environmental
investigation and defending against the environmental claims instituted by
Intersil and by the owner of the Former Headquarters on which might be
instituted by the California Regional Water Quality Control Board. In the second
quarter of fiscal 1992, the legal reserve was increased by $150,000. As a result
of the settlement of the environmental lawsuits, at the end of 1992 the legal
reserve was converted to a reserve for anticipated environmental cleanup costs.
As a result of the conditional approval of the Company's workplan contemplating
significant soil and groundwater remediation activities in 1993, the Company
increased the reserve for future environmental cleanup costs to $500,000. In
fiscal 1994 and 1995, the Company expensed all current environmental costs which
totaled approximately $564,000 for the two year period.
As a result of further investigation and soil remediation activities completed
by the Company at the site in fiscal 1995, the Company determined that the
existing $500,000 environmental reserve should not be adequate to complete the
cleanup. As a result, in fiscal 1995, the Company increased the reserve for
future environmental costs by $500,000 to $1,000,000. The $500,000 increase in
the environmental reserve at the close of the 1995 fiscal year was based, in
large part, on the historical costs expended by the Company in the clean up in
fiscal 1994 and 1995. During such two year period, the Company's cleanup costs
and expenses averaged approximately $282,000 per year. Under the Company's
workplan, the Company could reasonably expect to continue groundwater treatment
for a minimum of two to three years at an annual cost per year of at least
$250,000. Accordingly, the $1,000,000 reserve at September 30, 1995 was intended
to cover the anticipated cleanup costs of operating a groundwater treatment
system for a three to four year period.
- 15 -
The Company, in fiscal 1996, expensed approximately $200,000 in costs relating
to the environmental cleanup but has left the $1,000,000 reserve unchanged. The
$1,000,000 reserve at September 30, 1996 represents management's best estimate
of the anticipated costs and expenses to complete the cleanup of the site in
accordance with the Company's proposed workplan. However, there is no assurance
that the cleanup of the site can be completed for the reserved amount and
changes in conditions at the site as the cleanup is undertaken or other unknown
circumstances may result in significant increases in future cleanup costs which
cannot be reasonably anticipated by the Company at this time. At September 30,
1996, the Company's total assets exceeded $8.5 million, and, therefore, the
Company believes that it has more than sufficient assets to complete the cleanup
in the event the anticipated costs and expenses exceed the amount of the
reserve.
Liquidity and Capital Resources. As a result of the sale of the WMI Business in
fiscal 1995, substantially all of the Company's assets consist of cash and
marketable securities. Pending the resolution of the Company's environmental
liability for the cleanup of the Former Headquarters, the Company has invested
substantially all of its current assets in a diversified portfolio of marketable
securities. As of September 30, 1996, the portfolio of marketable securities
were valued at approximately $8.33 million.
RESULTS OF OPERATIONS
Sales or Cost of Sales. The Company had no sales or costs of sales in fiscal
1996.
Selling, General and Administrative Expenses. Included in total selling, general
and administrative expenses for fiscal 1996 were compensation paid to Dr. Hefni
in the form of environmental consulting fees of $150,000, portfolio management
fees of $66,000 and a portfolio value increase fee of $112,000. Other
significant expense items include legal expenses of $214,000 and environmental
cleanup related expenses of $200,000.
Interest, Dividends and Capital Gains. Investment income for fiscal 1996
consisting of interest, dividends and capital gains on the sales of securities
totaled $731,531, an increase of approximately $203,000 (or 38%) from fiscal
1995 levels. In addition, in fiscal 1996, the Company realized an additional
gain of approximately $105,000 on the sale of operating and business assets in
connection with the sale of WMI Business.
- 16 -
ITEM 7. FINANCIAL STATEMENTS
The Company's audited financial statements for the fiscal year ended September
30, 1996 and for the period indicated accompany this report as Item 13(a)1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Grant Thornton LLP audited the financial statements of the Company for each of
the fiscal years ended September 30, 1990 through 1996. There have been no
changes in or disagreements with the Company's independent public accountants
during the two most recent fiscal years.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH
EXCHANGE ACT REPORTING REQUIREMENTS
The directors of the Company as of the date of this report are:
DIRECTOR
NAME OF DIRECTOR PRINCIPAL OCCUPATION SINCE AGE
- ---------------- -------------------- ----- ---
Dr. Ibrahim Hefni President, Treasurer 1989 69
and Chief Executive
Officer of the Company
James M. Herrmann President and Director of 1990 51
Microwave Engineering
Corporation, a manufacturer
of microwave and millimeter
wave components
Basil Hefni Self Employed - Private Investor 1995 37
Except as set forth below, each of the nominees has been engaged in his
principal occupation described above during the past five years. Basil Hefni is
the son of Dr. Ibrahim Hefni. There are no other family relationships between
any director or executive officer of the Company.
- 17 -
Dr. Hefni was elected as Acting Chief Executive Officer of the Company in
February, 1990 and assumed the offices of Chief Executive Officer, President and
Treasurer in November, 1991. On August 6, 1993, Dr. Hefni resigned as President
and Treasurer of the Company due to illness and on November 18, 1993, Dr. Hefni
resigned his position as Chief Executive Officer of the Company. Dr. Hefni
reassumed the positions of Chief Executive Officer, President and Treasurer of
the Company on March 8, 1994.
Michael Ghandehari, who was elected to the Board of Directors at the 1995
Meeting of Shareholders, resigned his position as a director on August 11, 1995
after the closing of the sale of the WMI Business to ST Microwave Corp. as a
result of his subsequent employment by the Buyer. The Board of Directors
appointed Basil Hefni to fill the vacancy created by the resignation of Mr.
Ghandehari to serve until the next Annual Meeting of Shareholders.
The Annual Meeting of Shareholders of 1997 is scheduled to be held on or about
April 2, 1997.
The executive officers of the Company as of the date of this report are:
NAME POSITION AGE
- ---- -------- ---
Dr. Ibrahim Hefni Chief Executive Officer, 69
President, Treasurer
and Secretary
- 18 -
ITEM 10. EXECUTIVE COMPENSATION
The following table shows the total compensation of the Company's Chief
Executive Officer and of the other executive officers of the Company for the
periods indicated:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Name and Other Annual Long-Term
Principal Position Year Salary Bonus Compensation Compensation(1)
Ibrahim Hefni
President, Treasurer & CEO 1996 $ - 0 - $ - 0 - $ 328,000(6) None
President, Treasurer & CEO 1995 $150,000 $398,000(2) $100,000(3) None
President, Treasurer & CEO 1994 $ - 0 - $ - 0 - None (4)
Michael Ghandehari(5)
Secretary 1996 $ - 0 - $ - 0 - None None
Secretary 1995 $ $
Secretary 1994 $ 69,235 $ - 0 - None None
</TABLE>
(1) Incudes any award of restricted stock, stock options granted, SARs,
long-term incentive plans or similar arrangements providing for
long-term compensation.
(2) In fiscal 1995, Dr. Hefni was paid a total of $398,000 as compensation
for the management of the Company's investment portfolio for the four
(4) year period 1991 through 1995 based on a percentage of the income
and net appreciation in the value of the investment portfolio.
(3) In fiscal 1995, Dr. Hefni was paid an environmental consulting fee of
$100,000 in addition to his salary as President, Treasurer and CEO.
(4) In consideration of all services rendered to the Company, in fiscal
1994, Dr. Hefni was granted an option, exercisable at any time within
10 years, to purchase up to 150,000 shares of the Company's Common
Stock at the current fair market value per share on the date of such
grant of $1.00 per share. Dr. Hefni exercised the option to purchase
these shares in May 1996.
(5) On August 6, 1993, the Board of Directors appointed Mr. Ghandehari to
serve as Acting President and Treasurer of the Company as a result of
the illness of Dr. Hefni. On March 8, 1994, Dr. Hefni resumed the
positions of President, Treasurer and Chief Executive Officer. Mr.
Ghandehari resigned as a director of the Company in August 1995.
(6) In fiscal 1996, Dr. Hefni was paid an environmental consulting fee of
$150,00, portfolio management fees of $66,000 and a portfolio value
increase fee of $112,000.
Except as set forth in footnote 4 above, neither the Company's Chief Executive
Officer nor any other executive officer has been granted any stock options or
stock appreciation rights ("SARs") or participates in any other long-term
incentive plan ("LTIP") at the Company.
- 19 -
The Company has no employment contracts or other compensatory plans or
arrangements providing for any payments by the Company upon the resignation,
retirement or other termination of an executive officer's employment with the
Company or upon a change in control of the Company. The Company did not pay any
Directors fees during fiscal 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of December 30, 1996, 1,528,491 shares of the Company's Common Stock were
issued and outstanding. Information as of December 30, 1996 as to each person
known to Management to be the beneficial owner of more than 5% of the Company's
Common Stock is set forth below:
NAME AND ADDRESS AMOUNT OWNED PERCENT OWNED
- ---------------- ----------- -------------
I. and W. Hefni 341,200 22.32%
704 Hemenway Cove
Boulder City, NV 89005
Basil Hefni 240,000 15.70%
940 Great Pond Road
North Andover, MA 01845
Microwave Engineering Corp. 224,500 14.69%
1551 Osgood Street
North Andover, MA 01845
- 20 -
The following table sets forth the beneficial ownership of Common Stock of the
Company (including shares subject to immediately exercisable stock options) as
of December 30, 1996 of each director of the Company and of all directors and
officers as a group:
NUMBER OF APPROXIMATE
NAME SHARES OWNED PERCENTAGE OWNERSHIP
- ---- ------------ --------------------
Dr. Ibrahim Hefni 565,7001(2) 37.01%
Basil Hefni 240,000 15.70%
James M. Herrmann 224,500(1) 14.69%
All directors and
executive officers as
a group (3 persons) 805,700 52.71%
- ------------------
1 Includes, in the case of Dr. Hefni, and represents, in the case of Mr.
Herrmann, 224,500 shares owned by Microwave Engineering Corporation, of
which Dr. Hefni and Mr. Herrmann are directors.
2 Does not include 240,000 shares beneficially owned by Basil Hefni as to
which shares Dr. Hefni disclaims beneficial ownership. Basil Hefni is
Dr. Hefni's adult son and does not share the same residence as Dr.
Hefni.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS;
OTHER TRANSACTIONS
During the fiscal year ended September 30, 1996, the Company engaged in certain
transactions with Microwave Engineering Corporation ("MEC"), the holder of
224,500 shares of the Company's Common Stock (or 16.29% of the outstanding
Common Stock). James M. Herrmann, President of MEC, serves as a Director of the
Company. Dr. Hefni, Chief Executive Officer and a Director of the Company, is a
stockholder and a Director of MEC.
The transactions between the Company and MEC included the preparation by MEC of
the Company's payroll and the Company's quarterly payroll reports. MEC did not
charge the Company for this service and no compensation was paid by the Company
to MEC for such services in fiscal 1995 or 1996.
- 21 -
PART IV
Item 13. INDEX OF EXHIBITS, FINANCIAL STATEMENTS AND REPORTS
OF FORM 8-K
(a) The following documents are filed as part of this report.
1. Financial Statements. The audited financial statements, including
the Notes thereto, to be included in Part II, Item 7 which accompany
this Report as Item 13(a)1 are as follows:
(i) Balance Sheet for Fiscal Year Ended September 30, 1996;
(ii) Statements of Operations for the Fiscal Years ended September
30, 1996 and 1995.
(iii) Statement of Stockholders' Equity for Fiscal Years ended
September 30, 1996 and 1995; and
(iv) Statements of Cash Flows for Fiscal Years ended September 30,
1996 and 1995.
2. Exhibits.
Exhibit 21. The Company's sole subsidiary is Western Microwave
International Inc., a foreign corporation
incorporated and based in the U.S. Virgin Islands.
Exhibit 24. Power of Attorney (below).
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the fourth quarter ended September 30, 1996.
- 22 -
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WESTERN MICROWAVE, INC.
By: Dr. Ibrahim Hefni
/s/ I. Hefni
-------------------------------
President, Chief Executive Officer,
and Treasurer
Dated: February 11, 1997
- 23 -
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ibrahim Hefni as his attorney-in-fact, with the
power of substitution, for him in any and all capacities, to sign any amendments
in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
Chief Executive Officer,
/s/ I. Hefni President, Treasurer
- --------------------- and Director February 11, 1997
Ibrahim Hefni
/s/ James M. Herrmann Director February 11, 1997
- ---------------------
James M. Herrmann
/s/ Basil Hefni Director February 11, 1997
- ---------------------
Basil Hefni
- 24 -
WESTERN MICROWAVE, INC. AND SUBSIDIARY
FINANCIAL STATEMENTS
AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
SEPTEMBER 30, 1996 AND 1995
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Western Microwave, Inc.
We have audited the accompanying balance sheet of Western Microwave, Inc., as of
September 30, 1996, and the related statements of operations, stockholders'
equity, and cash flows for each of the two years in the period ended September
30, 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.
As discussed in Note I to the financial statements, the Company's Board of
Directors has approved a plan of liquidation of the Company, pending shareholder
approval.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Western Microwave, Inc., as of
September 30, 1996, and the results of its operations and its cash flows for
each of the two years in the period ended September 30, 1996, in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
San Jose, California
January 15, 1996
WESTERN MICROWAVE, INC.
BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and cash equivalents $ 45,787
Money market fund 160,668
Securities available for sale 8,334,637
Other assets 9,861
----------
Total assets $8,550,953
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 142,341
Margin account liability 1,075,437
Accrued liabilities 2,067,319
----------
Total liabilities 3,285,097
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY
Common stock - $.10 par value; 3,000,000 shares authorized;
1,555,233 issued, 1,528,491 outstanding 152,849
Capital in excess of par value 4,148,981
Unrealized gain on marketable securities 413,868
Retained earnings 550,158
----------
Total stockholders' equity 5,265,856
----------
$8,550,953
==========
</TABLE>
The accompanying notes are an integral part of this statement.
WESTERN MICROWAVE, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Sales $ - $2,153,713
Costs of sales - 1,493,684
---------- -----------
Gross profit - 660,029
Selling, general and administrative expenses 947,738 2,003,069
Investment income (731,531) (527,928)
Gain on sale of operating business and assets (105,018) (961,087)
Other income (32,986) (323)
---------- -----------
78,203 513,731
---------- -----------
Earnings (loss) before income taxes (78,203) 146,298
Income tax benefit (expense) (38,702) 192,652
---------- -----------
NET EARNINGS (LOSS) ($116,905) $ 338,950
=========== ===========
Earnings (loss) per share of common stock ($0.08) $ 0.25
=========== ===========
Weighted average number of shares of common stock outstanding 1,450,049 1,381,033
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
WESTERN MICROWAVE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
` Unrealized
Outstanding Capital in Gain on
Common Stock Excess of Retained Marketable
Shares Amount Par Value Earnings Securities Total
------ ------ --------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1994 1,384,591 $138,459 $4,022,521 $328,113 $ - $4,489,093
Stock repurchase (6,100) (610) (8,540) - - (9,150)
Fair value adjustment -
securities available for sale - - - - 317,252 317,252
Net earnings - - - 338,950 - 338,950
--------- --------- --------- --------- --------- ---------
Balance, September 30, 1995 1,378,491 137,849 4,013,981 667,063 317,252 5,136,145
Fair value adjustment -
securities available for sale - - - - 96,616 96,616
Sale of common stock 150,000 15,000 135,000 - - 150,000
Net loss - - - (116,905) - (116,905)
--------- --------- --------- --------- --------- ---------
Balance, September 30, 1996 1,528,491 $152,849 $4,148,981 $550,158 $413,868 $5,265,856
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
WESTERN MICROWAVE, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net earnings (loss) $(116,905) $338,950
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation 1,996 51,061
Deferred income taxes 33,702 (211,502)
Gain on sale of securities (81,147) (166,286)
Gain on sale of operating business and assets (105,018) (961,087)
Changes in assets and liabilities:
Accounts receivable (8,947) (97,239)
Other receivables 80,000 12,719
Inventories - 53,587
Prepaid expenses 1,506 24,913
Accounts payable (146,863) 170,451
Accrued liabilities 171,453 1,189,912
--------- ---------
Net cash provided by (used in) operating activities (170,223) 405,479
Cash flows from investing activities:
Proceeds from sale of operating business and assets 105,018 1,607,873
Purchase of investment securities (1,758,954) (3,955,666)
Proceeds from sale of investment securities 1,430,792 2,205,104
Decrease in other assets - 14,962
--------- ---------
Net cash used in investing activities (223,144) (127,727)
Cash flows from financing activities:
Sale of common stock 150,000 -
Repurchase of Company stock - (9,150)
--------- ---------
Net cash provided by (used in) financing activities 150,000 (9,150)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (243,367) 268,602
Cash and cash equivalents at beginning of year 289,154 20,552
--------- ---------
Cash and cash equivalents at end of year $45,787 $289,154
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $19,800 $ 800
</TABLE>
The accompanying notes are an integral part of these statements.
WESTERN MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
-----------
Western Microwave, Inc. (the "Company") sold the remaining assets of its
microwave manufacturing business to ST Microwave Corp. ("ST") in July of
1995. The Company is no longer engaged in the microwave manufacturing
business. The Company's remaining business activity involves the resolution
of the Company's ongoing environmental liability for the cleanup of the
Company's former facility in Sunnyvale, California. The Company's remaining
assets consist of marketable securities which are managed by the Company
with a view towards the preservation of such assets and the generation of
investment income in the form of interest, dividends and capital gains. See
Note I.
Use of Estimates
----------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements, as well as revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash Equivalents
----------------
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Earnings Per Share
------------------
Earnings per share is based upon the weighted average number of outstanding
common shares.
NOTE B - SALE OF OPERATING BUSINESS AND ASSETS
On July 21, 1995, the Company completed the sale of certain of its operating
assets associated with the conduct of its microwave components and
subsystems businesses to ST of Sunnyvale, California, a subsidiary of Signal
Technology Corporation. Under the terms of the initial asset purchase
agreement and a subsequent agreement entered into by the Company and ST, the
Company sold selected equipment, certain inventory, all outstanding accounts
receivable, all intangible assets, the outstanding backlog of customer
orders and the right to operate under the name of Western Microwave for a
total net purchase price of approximately $1,150,000. In fiscal 1995, the
Company recognized a gain of approximately $431,000 as a result of this
transaction. During 1996, as a result of settling out the final amounts of
claims between the Company and ST, the Company recognized an additional gain
of approximately $105,000.
Excluded from the sale to ST were substantially all the Company's electronic
test equipment and production machinery, as well as all assets associated
with the Company's machine shop operation. In September of 1995, these
assets were liquidated by the Company which resulted in a gain of
approximately $530,000 recognized by the Company.
WESTERN MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1995
NOTE C - INVESTMENT SECURITIES
The Company accounts for its investment securities portfolio in accordance
with the provisions of FASB 115, Accounting for Certain Investments in Debt
and Equity Securities. The Company's investment securities are all
classified as "available for sale" and are recorded in the accompanying
balance sheet at fair value, with net unrealized gains and losses on these
investments shown as a component of stockholders' equity.
The amortized cost, unrealized gains and losses, and fair values of the
Company's available-for-sale securities held at September 30, 1996 are
summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Equity securities $ 7,582,437 $ 1,049,788 $ (460,088) $ 8,172,137
Debt security 160,531 1,969 - 162,500
------------- ------------- ------------- -------------
$ 7,742,968 $ 1,051,757 $ (460,088) $ 8,334,637
============= ============= ============= =============
</TABLE>
The debt security matures in the year 2020.
Proceeds on sales of securities classified as available-for-sale were
$1,430,792 and $2,205,104 in 1996 and 1995, respectively. Gains of $91,675
and $205,514 and losses of $34,562 and $39,228 were realized on these sales
for 1996 and 1995, respectively. The Company uses the specific
identification method to determine the cost of securities sold.
The Company has entered into certain contracts in which the Company receives
a payment and agrees to buy shares of specific securities if the holder puts
the securities to the Company (put contracts). This obligation could occur
if the market price of the securities drops below the option price. At
September 30, 1996, the aggregate contract obligation to the Company,
assuming all contracts were put to the Company would be $12,828,250. The
aggregate obligation on put contracts for which the option price exceeds the
market price is $1,738,250. The market risk to the Company is that if the
share prices of the securities subject to the options decline below the
option price, and the holder puts the securities to the Company, the Company
would be required to buy the securities at a price in excess of market. At
September 30, 1996, the Company has recorded a liability for the amounts
received on open put contracts of $853,730. At September 30, 1996, the
Company has net unrealized gains of $360,292 on open put contracts. The
Company has also entered into certain contracts in which the Company
receives a payment and agrees to sell shares of specific securities if the
holder calls the securities from the Company (call contracts). This
obligation could occur if the market price of the securities rises above the
option price. The market risk to the Company is that if the share prices of
the securities subject to the options rises above the option price and the
holder calls the securities from the Company, the Company would be required
to buy the securities at market price and sell them at a price less than
market. There were no uncovered call contracts at September 30, 1996. At
WESTERN MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1995
NOTE C - INVESTMENT SECURITIES (continued)
September 30, 1996, the Company has recorded a liability for the amounts
received on open contracts of $59,318. At September 30, 1996, the Company
has net unrealized gains of $48,068 on these open contracts. The Company
records the premium payments it receives from these activities as a deferred
liability upon receipt. Unrealized gains on open contracts are deferred and
not recognized until the contracts lapse or are settled. Unrealized losses
are not recognized until realized, i.e., when the contract is either put to
the Company or called from the Company.
NOTE D - ACCRUED LIABILITIES
Accrued liabilities consist of the following at September 30, 1996:
Payroll and other $ 154,271
Environmental cleanup/Litigation (Note H) 1,000,000
Deferred income (Note C) 913,048
-------------
$ 2,067,319
=============
NOTE E - INCOME TAXES
The Company adopted, effective October 1, 1993, the Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes, issued
in February 1992. Under the asset and liability approach for financial
accounting and reporting for income taxes specified by SFAS 109, the
following basic principles are applied in accounting for income taxes at the
date of the financial statements: a) a current liability or asset is
recognized for the estimated taxes payable or refundable on income for the
current year; b) a deferred tax liability or asset is recognized for the
estimated future tax effects attributable to temporary differences and
carryforwards; c) the measurement of current and deferred tax liabilities
and assets is based on the provisions of the enacted tax law; the effects of
future changes in tax laws or rates are not anticipated; and d) the
measurement of deferred taxes is reduced, if necessary, by the amount of any
tax benefits that, based upon available evidence, are not expected to be
realized.
Certain events and application of the tax laws create temporary differences
between the tax basis of an asset or liability and its reported amount in
the financial statements. The principal differences between assets and
liabilities for financial statement and tax return purposes are the
environmental reserve of $1,000,000, the unrealized gains on investment
securities of approximately $591,000, and federal net operating loss
carryforwards of $153,000.
WESTERN MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1995
NOTE E - INCOME TAXES (continued)
Deferred taxes consist of the following at September 30, 1996:
Deferred tax assets and (liabilities)
Environmental reserves $ 401,380
Net operating loss carryforward 52,000
Unrealized gain on investments (229,800)
-----------
223,580
Less valuation allowance (223,580)
-----------
$ -
===========
As of September 30, 1996, management does not believe, based upon available
evidence, that it is more likely than not that the Company will be able to
realize any of the net deferred tax assets.
The following is a reconciliation of the expected tax expense (computing
using the applicable federal and state statutory rates) to actual tax
expense (benefit) for the years ended September 30:
1996 1995
------------- -------------
Pretax income (loss) $ (78,203) $ 146,298
------------- -------------
Tax at federal rate 14,551 49,741
State income tax and other 5,000 17,951
Non taxable income and other 17,425 (68,633)
Change in deferred tax asset
valuation allowance 30,828 (191,711)
------------- -------------
Actual tax (benefit) expense $ 38,702 $ (192,652)
============= =============
NOTE F - COMMON STOCK
The Company's common shares have been previously traded in the NASDAQ
SmallCap Market. On May 9, 1996, the Company's securities were deleted from
the NASDAQ SmallCap Market and, as a result, the Company's securities are no
longer traded on any exchange and the Company does not intend to apply for
re-listing on NASDAQ or any other exchange.
Stock Options
-------------
On December 20, 1994, the Board of Directors of the Company granted CEO, Dr.
Hefni, a non-statutory stock option to purchase 150,000 shares of the
Company's common stock at a purchase price of $1.00 per share, which
represented the fair market value of the common stock at the date of the
grant. The option was exercisable immediately and for a period of ten years
from the date of the grant. The option was granted to Dr. Hefni for
consideration of his services as President and CEO of the Company during the
year ended 1994. Dr. Hefni did not receive any other compensation during
fiscal 1994. The options were exercised by Dr. Hefni in May 1996.
WESTERN MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1995
NOTE F - COMMON STOCK (continued)
Stock Repurchase Program
------------------------
On March 10, 1992, the Company announced its intention to repurchase, from
time to time, in open market transactions, up to 100,000 shares of the
Company's Common Stock. As of September 30, 1996, the Company had
repurchased a total of 26,742 shares pursuant to such stock repurchase
program.
NOTE G - RELATED PARTY TRANSACTIONS
During the fiscal years ended September 30, 1996 and 1995, the Company
engaged in certain transactions with Microwave Engineering Corporation
("MEC"), the holder of 224,500 shares of the Company's Common Stock (or 16%
of the outstanding Common Stock). James M. Herrmann, President of MEC,
serves as a Director of the Company. Dr. Ibrahim Hefni, a director of the
Company, is a stockholder and director of MEC.
The transactions between the Company and MEC included the provision of
financial consulting services; the provision of accounting and bookkeeping
functions, including the preparation of the Company's payroll and other
accounting functions for the Company; and the sale by MEC of certain parts,
supplies, computer equipment and other tangible personal property to the
Company. MEC did not charge the Company for any services rendered during
fiscal 1995 and 1996.
NOTE H - ENVIRONMENTAL CLAIMS
Two environmental lawsuits were instituted against the Company in fiscal
year 1990. Both lawsuits relate to the alleged contamination by the Company
of the soil and groundwater at or in the vicinity of the Company's former
headquarters at 1271 Reamwood Avenue, Sunnyvale, California (the "Former
Headquarters"). The two lawsuits have been instituted against the Company
separately by Intersil, Inc. ("Intersil") and by the owner of the Former
Headquarters.
Suit by Intersil - On September 28, 1990, Intersil instituted a civil
action in the United States District Court, Northern District of
California pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") for reimbursement of response
costs incurred and to be incurred by Intersil in response to the release
or threatened release of hazardous substances from the Former
Headquarters and for a declaratory judgment as to the Company's liability
for future response costs. The action also sought a judgment awarding
Intersil compensatory damages, costs and interest, as well as an order
requiring that the Company abate the conditions giving rise to the
action. The Intersil suit followed the demand made in May 1990 for not
less than $807,831.50 which represented approximately 50% of Intersil's
response costs incurred as of February 28, 1990. In 1992, Intersil
increased its demand to approximately $3.7 million. The suit also
included claims for negligence, nuisance, waste and trespass, all as a
result of the alleged release or threatened release of hazardous
substances into the environment by the Company.
WESTERN MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1995
NOTE H - ENVIRONMENTAL CLAIMS (continued)
Suit by Former Landlord - In August 1990, the owner of the Former
Headquarters instituted legal action against the Company in Superior
Court of California, Santa Clara County, for the costs of investigating
and remedying suspected toxic contamination at the site. The complaint
alleged that during its occupancy of the Former Headquarters, the Company
released or disposed of certain toxic and hazardous substances onto the
property resulting in contamination of the groundwater beneath the
property. The complaint estimated that the cost of investigation and
cleanup of the alleged contamination exceeded $200,000. The owner's
complaint also sought to hold the Company liable for lost rents in excess
of $30,000 per month until the cleanup of the alleged contamination was
completed. In addition, the owner's complaint alleged that the Company
damaged the property by failing to properly maintain it and by removing
fixtures and causing other damage upon vacating the premises. The
complaint estimated that the costs to be incurred to repair the alleged
damage would total not less than $50,000. The complaint also sought to
recover for the diminution in the value of the property caused by all of
the alleged actions of the Company as described above. Finally, the
complaint sought punitive damages of $1,000,000 and payment of the
owner's other administrative costs and legal expenses.
The Company retained environmental counsel to defend the Company in both the
Intersil suit and the environmental lawsuit filed by the former Landlord.
The primary liability issue in both lawsuits was whether or not the Company
was the source of any soil and/or groundwater contamination at the Former
Headquarters and, if so, the allocation of the cleanup costs at or about the
site among the contributors.
In fiscal year 1990, the Company established a reserve in the amount of
$250,000 to cover the anticipated costs and expense of conducting the
environmental investigation and defending against claims for environmental
matters already instituted by Intersil and by the owner of the Former
Headquarters or which might be instituted by the California Regional Water
Quality Control Board ("RWQCB"). In the second quarter of fiscal 1992, the
legal reserve was increased by $150,000 and the reserve was converted to a
reserve for anticipated environmental cleanup costs. As of the close of the
1992 fiscal year, the balance of the environmental reserve was approximately
$360,000.
On July 28, 1992, the Company announced that it had reached an agreement to
settle the two environmental lawsuits instituted against the Company by
Intersil and the Former Landlord. Definitive settlement agreements were
executed and exchanged by all parties in November, 1992. Under the terms of
both settlements, the Company has agreed to reimburse both Intersil and the
Former Landlord for certain costs alleged to have been incurred in
remediating soil and groundwater contamination at the Former Headquarters.
The costs of both settlements were funded, in large part, by proceeds
obtained by the Company's insurance carriers. In addition, as part of the
settlements, the Company agreed to undertake soil and groundwater
remediation at the Former Headquarters.
WESTERN MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1995
NOTE H - ENVIRONMENTAL CLAIMS (continued)
A workplan for remedial action, including several amendments thereto, was
submitted by the Company to the RWQCB in early 1993. In July of 1993, the
RWQCB conditionally approved the Company's workplan. The workplan
contemplates the installation by the Company of a pilot treatment system for
the underground removal of chemical contamination in the shallow groundwater
at the site as well as soil remediation and additional testing and
groundwater monitoring at the site. As a result of the conditional approval
of the Company's workplan, the Company increased the reserve for future
environmental cleanup costs at September 30, 1993 to $500,000.
In fiscal 1994, the Company continued its efforts to obtain final approval
of a workplan for remedial action from the RWQCB. Under the terms of the
settlement agreements entered into by the Company, the Company was entitled
to hook in to an existing groundwater treatment system being operated on a
contiguous site. However, after the settlement agreements were executed, the
operator of the system advised the Company of its intention to abandon the
system and to implement a passive treatment system. As a result of these
changes in circumstances, the Company experienced some delays in
implementing groundwater treatment at the site. During fiscal 1994, the
Company expensed all current environmental costs with the result that the
reserve for future environmental costs at September 30, 1994 remained at
$500,000.
In fiscal 1995, the Company was fined $100,000 and ordered to put $250,000
in an irrevocable account, to be used solely for remediation activities, by
the RWQCB for violating certain site cleanup requirements. During fiscal
1995, the Company continued its soil remediation and implemented its
groundwater treatment. As a result of further analysis and additional
information provided, the Company increased the environmental reserve to
$1,000,000 at September 30, 1995.
In October 1995, Intersil notified the Company that the Intersil's Bentonite
slurry wall was damaged by excavation activity performed by the Company.
Intersil alleged this damage was responsible for increased migration of
groundwater from Intersil's site to the Company's site. Following a series
of motions and proceedings before a Special Master, the court entered an
order on August 19, 1996 requiring the Company to pay approximately $210,000
in damages to Intersil plus $16,000 in Special Master fees. The order was
confirmed in a judgment entered on October 30, 1996. In addition, the
Company may be required to pay additional attorneys' fee to Intersil of
$60,000. The Company has appealed the order and is currently investigating
is options. Management is unable to determine the outcome of the appeal but
has taken this judgment into consideration in determining the environmental
liability reserve. During fiscal 1996, the Company incurred and expensed
approximately $200,000 in environmental cleanup costs.
The Company has been ordered to resubmit a Remedial Action Plan ("RAP") to
the Regional Water Quality Control Board ("RWQCB") which evaluates and
proposes a final remediation plan for the Sunnyvale site. The Company has
submitted its draft RAP to the RWQCB and expects to obtain approval in the
next few months.
WESTERN MICROWAVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1995
NOTE H - ENVIRONMENTAL CLAIMS (continued)
The Company has maintained its environmental liability reserve at $1,000,000
at September 30, 1996. The $1,000,000 reserve represents management's best
estimate of the anticipated costs and expenses to complete the cleanup of
the site in accordance with the Company's workplan. However, there is no
assurance that the cleanup of the site can be completed for the reserved
amount and changes in conditions at the site as the cleanup is undertaken or
other unknown circumstances may result in significant increases in future
cleanup costs which cannot be reasonably anticipated by the Company at this
time.
NOTE I - PROPOSED LIQUIDATION OF THE COMPANY
On May 1, 1996, the Company's Board of Directors approved a plan of
dissolution and liquidation of the Company subject to the approval of the
Company's shareholders. It is anticipated that voting on this proposal will
occur sometime in the first calendar quarter of 1997. The Company plans to
distribute the net assets to the shareholders after establishing a
liquidating trust of $3,000,000 to cover the environmental reserve. When the
environmental remediation is completed, the remaining balance in the trust
will be distributed to shareholders holding an interest in the liquidating
trust. Due to the uncertainty surrounding the resolution of the
environmental reserve, the liquidating trust may continue in existence for a
considerable period of time subsequent to the legal dissolution of the
Company for purposes of discharging the trust's assets and liabilities.
