U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1 TO 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, 1995 0-3392
WESTERN MICROWAVE, INC.
-----------------------
(Name of small business issuer in its charter)
VIRGINIA 94-1530593
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. BOX 94088, SUNNYVALE, CALIFORNIA 94088
-------------------------------------------
(Address of principal executive offices)
(415) 780-9276
--------------
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, 1995
were $2,153,713.
The aggregate market value of the voting stock held by non-affiliates of the
issuer on December 26, 1995, based upon the average bid and ask prices of such
stock on that date was $1,039,012. The number of shares of Common stock of the
issuer outstanding as of December 26, 1995 was 1,378,491.
DOCUMENTS INCORPORATED BY REFERENCE: None
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: Yes ___ No X
1
PART II
Items 6, 7, 12 and 13 to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended September 30, 1995 are hereby amended and restated in
their entirety as set forth below:
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Assets. Total assets as of September 30, 1995 increased from the beginning of
the fiscal year by approximately $1.8 million to a total of $7.32 million. The
increase in total assets is the result of the cash sale, at fair market value,
of the assets associated with the WMI Business and of certain other tangible
assets for approximately 1.25 million. The increase in total assets was also
due, in part, to investment income consisting of interest, dividends and capital
gains on the sales of securities of approximately $582,000. As of September 30,
1995, both trade accounts receivable and inventories were eliminated from the
balance sheet as a result of such sale. Net current assets (current assets
reduced by current liabilities) increased by approximately $750,000 from the
beginning of the fiscal year reflecting the gain from the sale of assets offset,
in part, by a $500,000 increase in the environmental reserve in fiscal 1995.
Total Stockholders' Equity. Total stockholders' equity as of the close of the
1995 fiscal year increased from approximately $4.5 million (or $3.24 per share)
at the beginning of the fiscal year to approximately $5.13 million (or $3.73 per
share) at the close of the fiscal year. The increase of approximately $647,000
in total stockholders' equity for the current fiscal year is the result of the
sale of the WMI Business offset, in part, by the increase in the environmental
reserve. In fiscal 1995, the Company redeemed 6,100 shares of its Common Stock
at an average cost of $1.50 per share.
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 or which might be
instituted by the California Regional Water Quality Control Board. In the second
quarter of fiscal
2
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.
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. 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 clean-up 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 clean-up costs of operating a groundwater treatment
system for a three to four year period.
The $1,000,000 reserve at September 30, 1995 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. At September 30,
1995, the Company's total assets exceeded $7 million, and, therefore, the
Company believes that it has more than sufficient assets to complete the
clean-up 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,
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, 1995, the portfolio of marketable securities were valued at
approximately $6.95 million.
3
RESULTS OF OPERATIONS
Sales and Cost of Sales. For the approximate 10-month period ending with the
sale of the WMI Business on July 21, 1995, the Company reported total sales of
Approximately $2.15 million, a cost of sales of 69% and a gross profit of
approximately $660,000. Sales and cost of sales for this partial period were at
levels substantially consistent with fiscal 1994. The inability of the Company
to increase sales as a result of the continuing decline in the defense
electronics industry was a major factor in the decision of the Board of
Directors to sell the WMI Business in fiscal 1995.
Selling, General and Administrative Expenses. Included in total selling, general
and administrative expenses for fiscal 1995 were the following expenses (i) a
$500,000 increase in the environmental reserve, (ii) compensation expense for
Dr. Hefni of $100,000 for environmental consulting and $398,000 for management
of the Company's investment portfolio for the four (4) year period 1991-1995 and
(iii) legal and environmental expenses attributable to the clean up of the
Former Headquarters totaling approximately $364,000.
Interest, Dividends and Capital Gains. Investment income for fiscal 1995
consisting of interest, dividends and capital gains on the sales of securities
totaled $527,928, an increase of approximately $125,000 (or 30%) from fiscal
1994 levels. In addition, in fiscal 1995, the Company realized a gain of
approximately $961,000 on the sale of operating and business assets in
connection with the sale of the WMI Business and the sale of the remaining
tangible assets.
ITEM 7. FINANCIAL STATEMENTS
The Company's audited financial statements for the fiscal year ended September
30, 1995 and for the periods indicated accompany this report as Item 13(a)(1).
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS;
OTHER TRANSACTIONS
TRANSACTIONS WITH MICROWAVE ENGINEERING CORPORATION.
During the fiscal year ended September 30, 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 16.29% 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.
4
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.
PART IV
ITEM 13. INDEX OF EXHIBITS, FINANCIAL STATEMENTS AND REPORTS
ON 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) Consolidated Balance Sheet for Fiscal Year Ended
September 30, 1995;
(ii) Consolidated Statements of Earnings for Fiscal Years
ended September 30, 1995 and 1994;
(iii) Consolidated Statement of Stockholders' Equity for
Fiscal Years ended September 30, 1995 and 1994; and
(iv) Consolidated Statements of Cash Flows for Fiscal
Years ended September 30, 1995 and 1994.
5
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
duly caused this Form 10-KSB/A amending its Annual Report on Form 10-KSB for the
fiscal year ended September 30, 1995 to be signed on its behalf by the
undersigned, thereunto duly authorized.
WESTERN MICROWAVE, INC.
By: Dr. Ibrahim Hefni
/s/ I. Hefni
----------------------------------
President and Treasurer and
Chief Executive Officer
Dated: June 11, 1997
6
Financial Statements
Item 13(a)1
WESTERN MICROWAVE, INC. AND SUBSIDIARY
Financial Statements
and
Report of Independent Certified Public Accountants
September 30, 1995 and 1994
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Western Microwave, Inc.
We have audited the accompanying consolidated balance sheet of Western
Microwave, Inc. and Subsidiary as of September 30, 1995, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the two years in the period ended September 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Western Microwave,
Inc. and Subsidiary as of September 30, 1995, and the consolidated results of
their operations and their consolidated cash flows for each of the two years in
the period ended September 30, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note C to the financial statements, the Company changed its
method of accounting for investment securities during the year ended September
30, 1995.
As discussed in Note I to the financial statements, the Company reached an
agreement in fiscal year 1992 to settle two environmental lawsuits instituted
against the Company. The Company has agreed to undertake certain soil and
groundwater remediation as part of the settlement. The Company has established a
reserve to cover the anticipated costs and expenses to complete the clean-up of
the site. However, there is no assurance that the clean-up of the site can be
completed for the reserved amount as unknown circumstances may occur and result
in significant increases in future clean-up costs, which cannot be estimated by
the Company.
/s/ Grant Thornton LLP
- --------------------------
San Jose, California
December 6, 1995
WESTERN MICROWAVE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 289,154
Securities available for sale 6,947,644
Note receivable 80,000
Prepaid expenses 2,420
-----------
Total current assets 7,319,218
PROPERTY, PLANT AND EQUIPMENT - AT COST
Production machinery and test equipment 200,000
Office furniture and other equipment 61,159
261,159
Less accumulated depreciation 259,163
1,996
$ 7,321,214
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 289,203
Accrued liabilities 1,895,866
-----------
Total current liabilities 2,185,069
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY
Common stock - $.10 par value; 3,000,000 shares authorized;
1,405,233 issued, 1,378,491 outstanding 137,849
Capital in excess of par value 4,013,981
Retained earnings 984,315
-----------
Total stockholders' equity 5,136,145
$ 7,321,214
===========
</TABLE>
The accompanying notes are an integral part of this statement.
WESTERN MICROWAVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Sales $2,153,713 $2,512,425
Costs of sales 1,493,684 1,919,458
----------- -----------
Gross profit 660,029 592,967
Selling, general and administrative expenses 2,002,157 943,507
Product development expenses 912 10,818
Investment income (527,928) (405,487)
Gain on sale of operating business and assets (961,087) -
Other income (323) (11,675)
----------- -----------
513,731 537,163
----------- -----------
Earnings before income taxes 146,298 55,804
Income tax benefit (expense) 192,652 (800)
----------- -----------
NET EARNINGS $338,950 $55,004
=========== ===========
Earnings per share of common stock $ .25 $ .04
=========== ===========
Weighted average number of shares of common stock outstanding 1,381,033 1,384,591
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
WESTERN MICROWAVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
Capital in
Common Stock Excess of Retained
Shares Amount Par Value Earnings Total
------ ------ --------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1993 1,384,591 $ 138,459 $ 4,022,521 $ 273,109 $ 4,434,089
Net earnings - - - 55,004 55,004
----------- ----------- -------------- ---------- --------------
Balance, September 30, 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 $ 984,315 $ 5,136,145
=========== =========== ============== ========== ==============
</TABLE>
The accompanying notes are an integral part of this statement.
WESTERN MICROWAVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1995 1994
-------------- ---------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net earnings $ 338,950 $ 55,004
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 51,061 55,739
Deferred income taxes (211,502) -
Gain on sale of securities (166,286) (95,338)
Gain on sale of operating business and assets (961,087) -
Changes in assets and liabilities:
Accounts receivable (97,239) 95,397
Other receivables 12,719 512,280
Inventories 53,587 7,650
Prepaid expenses 24,913 (3,439)
Accounts payable 170,451 (45,341)
Accrued liabilities 1,189,912 (185,842)
-------------- --------------
Net cash provided by operating activities 405,479 396,110
Cash flows from investing activities:
Proceeds from sale of operating business and assets 1,607,873 -
Purchase of investment securities (3,760,572) (1,555,264)
Proceeds from sale of investment securities 2,205,104 790,628
Proceeds from margin loan - 195,094
Payment on margin loan (195,094) -
Decrease in other assets 14,962 -
-------------- --------------
Net cash used in investing activities (127,727) (569,542)
Cash flows from financing activities:
Repurchase of Company stock (9,150) -
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 268,602 (173,432)
Cash and cash equivalents at beginning of year 20,552 193,984
-------------- --------------
Cash and cash equivalents at end of year $ 289,154 $ 20,552
============== =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ 800 $ 800
</TABLE>
The accompanying notes are an integral part of this statement.
WESTERN MICROWAVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
Contract Revenue
The Company recognizes contract revenue on the percentage of completion
basis using the units of delivery method. Anticipated losses on contracts
are recognized at the time they are identified.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property and Equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization are provided by using straight-line and accelerated methods
over principally five years.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a 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 Microwave Corp. ("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. The Company recognized a gain of approximately $431,000 as a
result of this transaction.
WESTERN MICROWAVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995 AND 1994
NOTE B - SALE OF OPERATING BUSINESS AND ASSETS (continued)
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.
The Company is currently in the process of considering various options for
the future of the Company.
NOTE C - INVESTMENT SECURITIES
As of October 1, 1994, the Company adopted FASB 115, Accounting for Certain
Investments in Debt and Equity Securities, which affects the value at which
certain investments are recorded in the Company's consolidated balance
sheet. This adoption had no effect on the Company's consolidated statement
of income in 1995. However, as a result of FASB 115, the Company's
investment securities were reclassified as investments available for sale
and recorded in the consolidated balance sheet at fair value, with net
unrealized gains and losses on these investments shown as a component of
stockholders' equity. At October 1, 1994, the net unrealized holding gain
was $96,304 (net of tax of $64,202).
The amortized cost, unrealized gains and losses, and fair values of the
Company's available-for-sale securities held at September 30, 1995 are
summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Equity securities $ 5,257,212 $ 630,942 $ (115,085) $ 5,773,069
Debt securities 326,728 12,897 - 339,625
Cash on deposit with brokers 834,950 - - 834,950
-------------- ------------ ------------ --------------
$ 6,418,890 $ 643,839 $ (115,085) $ 6,947,644
============== ============ ============ ==============
</TABLE>
All of the above noted debt securities mature in the year 2015.
Proceeds on sales of securities classified as available-for-sale were
$2,205,104 in 1995. Gains of $205,514 and losses of $39,228 were realized on
these sales. The Company uses the specific identification method to
determine the cost of securities sold.
WESTERN MICROWAVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995 AND 1994
NOTE C - INVESTMENT SECURITIES (continued)
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. This obligation could occur if the market
price of the securities dropped below the option price. At September 30,
1995, the aggregate contract obligation to the Company, assuming all
contracts were put to the Company would be $2,295,000. 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, 1995, the Company has recorded a
liability for the amounts received on open contracts of $148,018. At
September 30, 1995, the Company has unrealized gains of $135,288 on open
contracts. The Company has also entered into certain contracts in which the
Company receives a payment and agrees to sell shares (regardless of if the
Company owns the shares) of specific securities if the holder calls the
securities from the Company. 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 existing at September 30, 1995. At September 30, 1995, the Company
has recorded a liability for the amounts received on open contracts of
$21,624. At September 30, 1995, the Company has unrealized gains of $21,124
on these open contracts. The Company records the premium payments it
receives from these activities as a liability upon receipt. Unrealized gains
on open contracts are deferred and not recognized until the contracts lapse
or are settled. Unrealized losses on open contracts 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, 1995:
Payroll and other $ 706,022
Environmental clean-up/Litigation (Note J) 1,000,000
Deferred income (Note C) 169,642
Other 20,202
--------------
$ 1,895,866
==============
Accrued payroll consists of amounts due the Company's President and Chief
Executive Officer ("CEO"), Dr. Ibrahim Hefni, for services rendered in 1995
as President and CEO ($150,000), Environmental Consultant ($100,000) and
Investment Manager ($398,000). The fees for investment management are for
fiscal years 1991 through 1995.
WESTERN MICROWAVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995 AND 1994
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 types of differences between assets
and liabilities for financial statement and tax return purposes are
unrealized gains on investments, certain liabilities and net operating loss
carryforward amounts.
There was no effect on net earnings in 1994 as a result of this change in
accounting for income taxes.
Deferred taxes consist of the following at September 30, 1995:
Deferred tax assets and (liabilities)
Environmental reserves $ 300,000
Net operating loss carryforward 104,254
Unrealized gain on investments (211,502)
----------
192,752
Less valuation allowance (192,752)
----------
$ -
==========
As of September 30, 1995, 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.
WESTERN MICROWAVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995 AND 1994
NOTE E - INCOME TAXES (continued)
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:
<TABLE>
<CAPTION>
1995 1994
-------------- ---------
<S> <C> <C>
Pretax income $ 146,298 $ $55,804
-------------- --------------
Tax at federal rate 49,741 8,951
State income tax and other 17,951 3,461
Non taxable income (68,633) (63,765)
Change in deferred tax asset valuation allowance (191,711) 52,153
-------------- --------------
Actual tax (benefit) expense $ (192,652) $ 800
============== ==============
</TABLE>
WESTERN MICROWAVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995 AND 1994
NOTE F - COMMON STOCK
Stock Options
Options granted under the 1981 Incentive Stock Option Plan ("ISOP") were
granted to employees at fair market value at the grant date. All options
granted under the ISOP vest cumulatively over twenty equal quarterly
installments. However, employees may exercise unvested options at any time
providing that the employee executes a repurchase agreement giving the
Company the right to repurchase the unvested shares at cost in the event of
termination of employment. No shares were subject to repurchase at September
30, 1995. These options expire, to the extent not exercised, between six and
ten years from the date of grant.
In addition, a non-statutory stock option plan was adopted in 1983. These
options were granted to members of the Board of Directors at the fair market
value on the date of the grant and expire, to the extent not exercised, ten
years from the grant date.
The 1981 and 1983 stock option plans terminated in accordance with their
provisions. The termination of the plans did not affect outstanding options
at September 30, 1994.
The following is a summary of stock option activity for the year in the
period ended September 30, 1995:
<TABLE>
<CAPTION>
Outstanding Options
Aggregate Exercise Exercise Price
Number Price Per Share
------ ----- ---------
<S> <C> <C> <C>
Balance, September 30, 1994 3000 $4,890 $1.63
Options canceled 3000 4,890 1.63
Balance, September 30, 1995 - $ - $ -
</TABLE>
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.
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, 1995, the Company had
repurchased a total of 26,742 shares pursuant to such stock repurchase
program.
WESTERN MICROWAVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995 AND 1994
NOTE G - COMMITMENTS AND CONTINGENCIES
The Company leased its manufacturing and office facilities under a lease
which expired in September 1995. Under terms of the lease, the Company was
obligated to pay property taxes, insurance and maintenance.
Rent expense in fiscal 1995 and 1994 was approximately $151,000 and
$156,000, respectively.
NOTE H - SALES
The Company operates in a single industry segment: the design, development,
manufacturing and marketing of microwave components and subsystems. Most of
the Company's business activity is with customers in the defense industry.
There were no customers who accounted for more than ten percent of sales
during 1995 and 1994.
Net sales for 1995 and 1994 included export sales of approximately $934,000
and $780,000, respectively.
NOTE I - RELATED PARTY TRANSACTIONS
During the fiscal years ended September 30, 1995 and 1994, 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.
WESTERN MICROWAVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995 AND 1994
NOTE J - 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.
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 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 clean-up costs at or about
the site among the contributors.
WESTERN MICROWAVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995 AND 1994
NOTE J - ENVIRONMENTAL CLAIMS (continued)
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 clean-up 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.
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.
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.
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 clean-up requirements. The Company
believes it has resolved its differences with the RWQCB and is moving toward
proposing and receiving a final remediation plan. During fiscal 1995, the
Company continued its soil remediation and implemented its groundwater
treatment.
WESTERN MICROWAVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995 AND 1994
NOTE J - ENVIRONMENTAL CLAIMS (continued)
As a result of the conditional approval of the Company's workplan, the
Company increased the reserve for future environmental clean-up costs at
September 30, 1993 to $500,000. 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 expensed all current environmental costs and increased its
reserve for future environmental costs by $500,000 to $1,000,000. The
increase is a result of the Company determining that more resources will be
needed to remediate the site as a result of work performed at the site in
the current year. 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. A range of loss relating to the environmental costs, therefore, cannot
be determined.
