<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1997
Registration No. 333-37289
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
EIP MICROWAVE, INC.
(Name of small business issuer in its charter)
DELAWARE 3825 95-2148645
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or Classification Code Number) Identification No.)
organization)
3 Civic Plaza
Suite 265
Newport Beach, California 92660
714-720-1766
(Address and telephone number of
principal executive offices)
1745 McCandless Drive
Milpitas, California 95035
408-945-1477
(Address of principal place of business)
Lewis R. Foster
1745 McCandless Drive
Milpitas, California 95035
408-945-1477
(Name, address and telephone number of agent for service)
Copies to:
Michael E. Johnson, Esq.,
Bainbridge Group, A Law Corporation
18301 Von Karman Avenue, Suite 410
Irvine, California 92612
714-442-6600
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering.[ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Title of each Amount to be Proposed Proposed
class of registered maximum maximum Amount of
securities offering price aggregate registration
to be per share offering price fee
registered
- --------------------------------------------------------------------------------
Common Stock, 1,699,628 $1.70 $2,889,368 $875.57*
par value
$0.01
per share
- --------------------------------------------------------------------------------
/*/ The registration fee is calculated pursuant to Rule 457(o). A registration
fee of $714.62 was paid upon the filing of the initial registration
statement on October 6, 1997. Accordingly, an additional registration fee
of $160.95 is being paid upon the filing of this amended registration
statement.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
<PAGE>
PROSPECTUS
EIP MICROWAVE, INC.
1,699,628 Shares of Common Stock
(Par value, $0.01 per Share)
RIGHTS OFFERING
EIP Microwave, Inc., a Delaware corporation (the "Company"), offers
1,699,628 shares (the "Shares") of its Common Stock, $0.01 par value, at $1.70
per Share to its stockholders of record on November 7, 1997 (the "Record Date")
who reside in states either where state registration of this offering is not
required or, if required, in the judgment of the Company can reasonably be
effected ("Stockholders of Record"). Each Stockholder of Record's right to
subscribe is not transferable. See "Prospectus Summary--The Rights Offering,
- --Method of Exercising Rights" for information on how to subscribe.
The Company's Common Stock is quoted on the NASD's Bulletin Board
under the symbol "EIPM". On November 7, 1997, the closing bid and closing ask
prices of the Company's Common Stock were $2.15 and $3.00, respectively.
THE RIGHTS WILL EXPIRE AT 5:00 P.M., CALIFORNIA TIME, ON DECEMBER 15, 1997,
UNLESS EXTENDED BY THE COMPANY. IN NO EVENT WILL THE EXPIRATION DATE BE
EXTENDED BEYOND MARCH 7, 1997. FAILURE TO EXERCISE RIGHTS COULD RESULT IN
SUBSTANTIAL DILUTION TO NON-EXERCISING STOCKHOLDERS. SEE "RISK
FACTORS--DILUTION FROM RIGHTS OFFERING."
The Rights Offering is being made on an any or all basis, which means
that the Company may accept any subscription received even if all 1,699,268
Shares offered are not purchased. See "Risk Factors--No Minimum Size of Rights
Offering." J. Bradford Bishop, Chairman and Chief Executive Officer of the
Company, and John F. Bishop, Vice Chairman, Secretary and Treasurer of the
Company, both of whom are principal stockholders and members of the Board of
Directors of the Company, have committed to the Company that they will subscribe
for at least $1,360,000 in Common Stock in the Rights Offering if other
stockholders purchase at least $800,000 in Common Stock in the Rights Offering.
See "Risk Factors--Control by Management and Principal Stockholders", and
- --"Dilution from Rights Offering."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 2 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Price to Public Underwriting Proceeds to Issuer
Discounts and (1)
Commissions
- --------------------------------------------------------------------------------
Per Share $1.70 $0 $1.70
- --------------------------------------------------------------------------------
Total: 1,699,628 $2,889,368 $0 $2,889,368
Shares
- --------------------------------------------------------------------------------
(1) Before deducting estimated expenses of the offering of $63,000 payable by
the Company.
The date of this Prospectus is November 10, 1997.
<PAGE>
The Company is a "reporting company," as such term is employed in the Securities
Exchange Act of 1934. It is not listed on any exchange, and its Common Stock is
not eligible for quotation on the NASDAQ SmallCap Market ("NASDAQ") but is
quoted on the NASD's "Bulletin Board." Reports and other information filed by
the Company may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
DC 20549, and at the Regional Offices of the Commission located at 5670 Wilshire
Boulevard, 11th Floor, Los Angeles, CA 90036-3648, 7 World Trade Center, New
York, NY 10048 and Citicorp Center, 500 Madison Street, Suite 1400, Chicago, IL
60661. Copies of such material can be obtained upon written request addressed
to the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, DC 20549, at prescribed rates. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission; the address of
such site is http://www.sec.gov.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission in
Washington, D.C. a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Common Stock offered by this Prospectus. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits listed
in the Registration Statement. The Registration Statement can be examined at
the Public Reference Section of the Securities and Exchange Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and copies may be obtained upon
payment of the prescribed fees.
The Company will provide without charge to each person to whom a copy
of this Prospectus is delivered, on the written or oral request of such person,
a copy of any or all documents incorporated by reference into this Prospectus
that are not delivered herewith, except the exhibits to such documents (unless
such exhibits are specifically incorporated by reference in such documents).
Requests for such copies should be directed to the Company's principal place of
business: EIP Microwave, Inc., 1745 McCandless Drive, Milpitas, CA 95035-8024,
Attn: Lewis R. Foster, Tel. (408) 945-1477.
The Company's Common Stock is not listed on any exchange. See "Risk
Factors--Delisting from NASDAQ."
<PAGE>
TABLE OF CONTENTS
Contents Page
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Rights Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Method of Exercising Rights. . . . . . . . . . . . . . . . . . . . . . . 2
Opportunity to Increase Holdings . . . . . . . . . . . . . . . . . . . . 2
Avoiding Dilution. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Recurring Material Losses and Accumulated Deficit. . . . . . . . . . . . 2
Future Cash Requirements . . . . . . . . . . . . . . . . . . . . . . . . 3
Repayment of Existing Debt . . . . . . . . . . . . . . . . . . . . . . . 3
Dependence on New OEM Relationship . . . . . . . . . . . . . . . . . . . 4
Dependence on Government Contractors . . . . . . . . . . . . . . . . . . 4
Dependence on Key Suppliers. . . . . . . . . . . . . . . . . . . . . . . 4
Uncertainty of Product Development and Introduction. . . . . . . . . . . 4
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Dependence on Key Personnel. . . . . . . . . . . . . . . . . . . . . . . 5
Control by Management and Principal Stockholders . . . . . . . . . . . . 5
Offering Price Not Based on Actual Value . . . . . . . . . . . . . . . . 5
Dividends Not Likely . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Dilution from Rights Offering. . . . . . . . . . . . . . . . . . . . . . 6
Possible Future Dilution . . . . . . . . . . . . . . . . . . . . . . . . 6
No Minimum Size of Rights Offering . . . . . . . . . . . . . . . . . . . 6
Possible Extension of Expiration Date. . . . . . . . . . . . . . . . . . 6
Delisting from Nasdaq. . . . . . . . . . . . . . . . . . . . . . . . . . 6
Limited Trading Volume and Volatility of Stock Price in Public Market. . 7
Market Restrictions on Broker-Dealers. . . . . . . . . . . . . . . . . . 7
Potential Anti-Takeover Effects of Delaware Law. . . . . . . . . . . . . 7
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Determination of Offering Price. . . . . . . . . . . . . . . . . . . . . . . 8
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Rights Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Subscription Expiration Date . . . . . . . . . . . . . . . . . . . . . . 8
Basic Subscription Rights. . . . . . . . . . . . . . . . . . . . . . . . 8
Method of Exercising Rights. . . . . . . . . . . . . . . . . . . . . . . 8
Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Purchase and Sale of Rights . . . . . . . . . . . . . . . . . . . . 9
Delivery of Certificates. . . . . . . . . . . . . . . . . . . . . . 9
Over-Subscription Privilege . . . . . . . . . . . . . . . . . . . . 9
Information Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Market for the Company's Common Stock and Related Stockholder Matters . . .10
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
General/Products . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Markets/Principal Customers. . . . . . . . . . . . . . . . . . . . . . .12
Methods of Distribution. . . . . . . . . . . . . . . . . . . . . . . . .12
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Research, Development and Engineering. . . . . . . . . . . . . . . . . .13
Raw Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Patents, Copyrights, Trademarks and Intellectual Property. . . . . . . .13
Government Approval of Principal Products. . . . . . . . . . . . . . . .14
Effect of Existing or Probable Governmental Regulations. . . . . . . . .14
Compliance with Provisions on Environmental Protection . . . . . . . . .14
i
<PAGE>
Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Bank Line of Credit. . . . . . . . . . . . . . . . . . . . . . . . . . .14
Bishop Family Trust Loan Facility. . . . . . . . . . . . . . . . . . . .15
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Acquisition Discussions. . . . . . . . . . . . . . . . . . . . . . . . .16
Management's Discussion and Analysis of Results of Operations and Financial
Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . .16
Financial Condition. . . . . . . . . . . . . . . . . . . . . . . . . . .17
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Directors, Executive Officers and Key Employees. . . . . . . . . . . . .18
Compensation of Directors. . . . . . . . . . . . . . . . . . . . . . . .19
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . .19
Option Grants in Fiscal 1996. . . . . . . . . . . . . . . . . . . .20
Aggregate Option/SAR Exercises in Fiscal 1996 and FY-End
Option/SAR Values. . . . . . . . . . . . . . . . . . . . . . . . .21
Interest of Management and Others in Certain Transactions. . . . . . . . . .21
Commitment of the Bishops to Purchase Common Stock in Rights Offering. .21
Bishop Family Trust Loan Facility. . . . . . . . . . . . . . . . . . . .22
Subordinated Loan. . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Bridge Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Employment Agreement . . . . . . . . . . . . . . . . . . . . . . . . . .22
Legal Counsel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Security Ownership of Certain Beneficial Owners and Management . . . . . .23
Description of Securities. . . . . . . . . . . . . . . . . . . . . . . . . .25
Authorized Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Dividend Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Liquidation Rights . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Preemptive Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Dissenter's Rights . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Certain Anti-Takeover Provisions . . . . . . . . . . . . . . . . . . . .26
Transfer Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Legal Matters and Interests of Counsel . . . . . . . . . . . . . . . . . . .26
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Change in Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Disclosure of Commission Position on Indemnification for Securities
Act Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
ii
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND
FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS.
SEE "RISK FACTORS" BEGINNING ON PAGE 2 FOR A DISCUSSION OF CERTAIN FACTORS TO BE
CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS.
THE COMPANY
EIP Microwave, Inc., a Delaware corporation (the "Company"), is
engaged in the development, manufacture and sale of high frequency microwave and
radio frequency (RF) test and measurement instruments. The Company's principal
executive offices are located at 3 Civic Plaza, Suite 265, Newport Beach, CA
92660, Tel. (714) 720-1766.
The Company recently introduced a new line of microwave frequency
counters which it began distributing in October 1997, on a private label basis
worldwide through an OEM relationship with Hewlett-Packard Company
("Hewlett-Packard"). The Company also recently received a five-year indefinite
quantity, fixed price subcontract from ManTech Systems Engineering Corporation,
a government contractor ("ManTech"), for the supply of RF synthesized signal
generators and RF down converters, with total sales value to the Company that
could range from approximately $3.5 to $20 million. Further, management expects
that current development efforts will result in the introduction of test
instrumentation for the wireless telecommunications market in 1998. The
proceeds from the Rights Offering will assist the Company in meeting the cash
requirements to continue its business and pursue these opportunities through
fiscal 1998. See "The Company--General Products," "--Markets/Principal
Customers," "--Methods of Distribution" and "--Research, Development and
Engineering."
THE RIGHTS OFFERING
The Company offers 1,699,628 shares (the "Shares") of its Common
Stock, $0.01 par value, to its stockholders of record on November 7, 1997 (the
"Record Date"), who reside in states either where state registration of this
offering is not required or, if required, in the judgment of the Company can
reasonably be effected ("Stockholders of Record"). The Shares are offered at a
purchase price of $1.70 per Share (the "Subscription Price").
The Rights Offering entitles the Stockholders of Record to subscribe
at the Subscription Price for Shares on the basis of four Shares for each share
of Common Stock held on the Record Date (the "Basic Subscription Rights"). In
addition, each Stockholder of Record may over-subscribe to purchase as many
additional Shares as desired. If there are not sufficient Shares to honor all
over-subscriptions, the available Shares will be allocated among those who
over-subscribe based solely on the number of shares subscribed for by each
over-subscribing holder pursuant to the Basic Subscription Rights.
J. Bradford Bishop, Chairman and Chief Executive Officer of the
Company, and John F. Bishop, Vice Chairman, Secretary and Treasurer of the
Company, both of whom are principal stockholders and members of the Board of
Directors of the Company, have committed to the Company that they will subscribe
for at least $1,360,000 in Common Stock in the Rights Offering if other
stockholders purchase at least $800,000 in Common Stock in the Rights Offering.
See "Risk Factors--Control by Management and Principal Stockholders", and
- --"Dilution from Rights Offering."
The Rights Offering is being made directly by the Company to its
Stockholders of Record. No underwriters are involved. No commissions are being
paid. All net proceeds from subscriptions go directly to the Company in their
entirety.
Common Stock offered 1,699,628 shares
Common Stock to be outstanding
after the offering 2,124,535 shares (1)
Use of proceeds Develop new products, fund working
capital requirements and repay
debt.
1
<PAGE>
(1) Assuming all the Shares offered herein are subscribed and sold.
METHOD OF EXERCISING RIGHTS
Stockholders of Record may not transfer their rights to purchase the
Shares. Subscriptions must be made in writing by completing and signing the
enclosed subscription agreement and mailing or delivering it, with a good and
sufficient check for the subscribed amount, to the Company. Completed
subscription agreements and checks must, in any event, be received by the
Company no later than 5:00 P.M., California time, on December 15, 1997, unless
extended by the Company (such date, as it may be extended on one or more
occasions, is referred to herein as the "Expiration Date").
Checks should be made payable to "EIP MICROWAVE, INC." Should the
offering be oversubscribed, the Company will promptly return to subscribers that
portion of their subscription amounts that could not be filled, without any
interest.
OPPORTUNITY TO INCREASE HOLDINGS
While brokerage costs and commissions vary among brokerage firms, a
$25 minimum cost per transaction is in the lower range of such costs. Based on
the Subscription Price of $1.70, a holder of fewer than fifteen shares would
lose money in a sale of his present shares. The Rights Offering thus provides
an opportunity for these holders of a few shares to increase their holdings to
an amount which is a commercially marketable number of shares. No broker's
commission is involved in a purchase of shares in the Rights Offering.
AVOIDING DILUTION
Each Stockholder of Record may avoid dilution of his or her percentage
interest in the Company by subscribing for all Shares subject to his or her
Basic Subscription Rights. See "Risk Factors--Dilution from the Rights
Offering."
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A
HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER, IN
ADDITION TO THE INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS IN EVALUATING THE COMPANY AND THE COMMON STOCK OFFERED
HEREBY. THESE RISK FACTORS COULD CAUSE ACTUAL RESULTS OR EVENTS TO DIFFER
MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD-LOOKING STATEMENT MADE BY OR ON
BEHALF OF THE COMPANY.
RECURRING MATERIAL LOSSES AND ACCUMULATED DEFICIT
The Company operated at a loss of $453,000 in the fiscal year ended
September 30, 1994, made a profit of $125,000 in the fiscal year ended September
30, 1995, operated at a loss of $493,000 in the fiscal year ended September 30,
1996, and operated at a loss of $793,000 in the nine months ended June 30, 1997.
Management of the Company expects that the loss for the fiscal year ended
September 30, 1997 will be approximately $1,285,000. Net cash used in
operations and investing activities by the Company in the fiscal years ended
September 30, 1994, 1995 and 1996, was $36,000, $85,000 and $89,000,
respectively. Net cash used in such activities in the nine months ended June
30, 1997 was $796,000, and management expects that net cash used in such
activities by the Company for the fiscal year ended September 30, 1997, will be
approximately $1,050,000. At the end of fiscal year 1996, the Company's
retained earnings were $374,000, and stockholders' equity was $1,227,000. At
June 30, 1997, the Company's accumulated deficit was $419,000, and stockholders'
equity was $434,000. Management expects that, at September 30, 1997, its
accumulated deficit will be approximately $900,000, and stockholders equity will
be approximately ($60,000). The Company had no indebtedness at September 30,
1994. At September 30, 1995 and 1996, the Company's ratio of interest-bearing
indebtedness to total interest-bearing indebtedness and stockholders' equity was
1% and 20%, respectively. This ratio at June 30, 1997, was 73%, and management
expects that, at September 30, 1997, this ratio will be approximately 105%.
There can be, and is, no assurance that profitable operations and positive cash
flow can be achieved or maintained or that any funds obtained from the offering
described herein will be sufficient to carry the Company to a time when
profitable operations and positive cash flow should sustain the Company.
Continued losses could negatively impact
2
<PAGE>
the Company's working capital and the extension of credit by its lenders and
could cause such lenders to declare a default under the Company's loan
agreements, and declare all outstanding loans immediately due and payable. See
"Risk Factors--Repayment of Existing Debt."
The report of Price Waterhouse LLP on the Company's financial
statements for the year ended September 30, 1996 has been reissued with dual
dates of December 23, 1996 and October 23, 1997. The reissued report includes
an explanatory paragraph to express substantial doubt regarding the Company's
ability to continue as a going concern. There can be no assurance that the
Company will not continue to incur significant operating losses or that required
additional financing will be available to meet the Company's business plan in
fiscal 1998 and beyond.
FUTURE CASH REQUIREMENTS
The Company believes that borrowings under existing or replacement
debt facilities and proceeds from the Rights Offering in an aggregate amount
equal to approximately $3,500,000 will be necessary to satisfy the Company's
cash requirements for implementing its business plan during the remainder of the
fiscal year ending September 30, 1998. The actual cash resources required will
depend upon numerous factors, including those described under "Risk
Factors--Dependence on New OEM Relationship," "--Dependence on Government
Contractors," and "--Uncertainty of Product Development and Introduction", and
the cash requirements could be materially greater than $3,500,000. The Company
expects to meet such cash requirements with borrowings under its existing or
replacement debt facilities, and proceeds from the Rights Offering. There is no
assurance that the Company will be successful in obtaining all such capital from
the Rights Offering or from such debt facilities. If the Company is unable to
obtain such capital from the Rights Offering or from such debt facilities on a
timely basis, the Company will be required to significantly curtail its planned
operations and its business, financial condition and results of operations could
be materially adversely affected.
DEFAULT UNDER BANK LINE
At November 7, 1997, the Company had outstanding borrowings in the
aggregate principal amount of $179,000 under its $500,000 bank line of credit
(the "Bank Line") with Silicon Valley Bank ("SVB"), and the Company was in
default of certain financial covenants under the Bank Line. See "The
Company--Bank Line of Credit." As a result of the default, SVB has the right
to declare all outstanding amounts under the Bank Line immediately due and
payable. The Company is engaged in ongoing discussions with SVB concerning the
Bank Line, and SVB has made a non-binding proposal to the Company to, among
other things, amend the Bank Line to, among other things, modify the financial
covenants and allow the Company to receive advances under the Bank Line,
increase the interest rate charged to SVB's prime rate plus 5% per annum, and
change the expiration date for the Bank Line to January 31, 1998. There can be
no assurance that the Company and SVB will enter into an amendment of the Bank
Line in accordance with the non-binding proposal. The Company is continuing to
pursue discussions with other lenders concerning a replacement working capital
facility; however, there can be no assurance that the Company will be able to
obtain a satisfactory working capital facility. Even if the Company is able to
obtain a working capital facility from another lender, there can be no assurance
as to the terms of such facility; and the terms of such facility could be even
less attractive to the Company than the terms of the existing Bank Line or the
non-binding proposal from SVB. If the Company is unable to obtain a
satisfactory working capital facility, the Company and its business could be
materially adversely affected.
REPAYMENT OF EXISTING DEBT
In addition to the Bank Line, the Company has a $1,450,000 term and
revolving advance loan facility with the Bishop Family Trust which expires in
October 1998. At November 7, 1997, the Company had outstanding borrowings in
the aggregate principal amount of $1,100,000 under the Bishop Family Trust Loan
Facility. All such loans are payable in full upon expiration. See "The
Company--Bank Line of Credit" and "--Bishop Family Trust Loan Facility". There
can be no assurance that the Company will be able to extend, repay or refinance
its loans under the Bank Line or the Bishop Family Trust Loan Facility.
Further, such loans are subject to various covenants relating to the Company's
performance and financial condition. If the Company does not maintain
compliance with such covenants, the lenders have the right to declare all
outstanding amounts immediately due and payable. At November 7, 1997 the
Company was in default under the Bank Line, and there can be no assurance that
the Company will be able to maintain compliance with the covenants under the
Bishop Family Trust Loan Facility.
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DEPENDENCE ON NEW OEM RELATIONSHIP
The Company recently introduced a new line of microwave frequency
counters which it began distributing in October 1997, on a private label basis
worldwide through an OEM relationship with Hewlett-Packard Company
("Hewlett-Packard"). The Company expects that this OEM relationship will
account for more than 15% of its revenues in fiscal year 1998. However,
Hewlett-Packard is not obligated to purchase a minimum quantity of products, and
the failure of Hewlett-Packard to purchase the product quantity expected by the
Company would have a material, negative impact upon the Company's business and
prospects of profits. There can be no assurance that the Company will be able
to maintain a successful relationship with Hewlett-Packard and generate revenues
or profits from the relationship.
DEPENDENCE ON GOVERNMENT CONTRACTORS
Approximately 35% of the Company's revenues in the last two fiscal
years have been derived from the sale of products to government contractors.
The Company recently received a five-year indefinite quantity, fixed price
supply subcontract from ManTech Systems Engineering Corporation, a government
contractor ("ManTech"), for the supply of RF synthesized signal generators and
RF down converters, with total sales value to the Company that could range from
approximately $3.5 to $20 million. The Company has received an initial purchase
order under the subcontract in the amount of $227,000. Further production
purchase order releases under the subcontract are subject to satisfactory
completion of field testing of the U.S. Marine Corps' Third Echelon Test Set
(TETS) systems and the Company's components. The Company will incur substantial
expenses in preparing to satisfy its obligations under this subcontract.
However, despite the incurrence of such expenses, this and other subcontracts
with government contractors are subject to cancellation provisions in favor of
the government contractor. The subcontract with ManTech is subject to
termination by ManTech in the event the government terminates its contract with
ManTech. Further, this subcontract can be terminated if the Company's
components do not satisfy field testing requirements or the Company otherwise
defaults under the subcontract. There can be no assurance that such
subcontracts will not be canceled. Further, there can be no assurance that the
Company will receive additional subcontracts from government contractors.
DEPENDENCE ON KEY SUPPLIERS
A number of the Company's products require specialized components
currently available only through single sources of supply. The loss of any of
these sources, or the inability of any such source to meet the Company's
production and quality control requirements, could be detrimental to the Company
with respect to the specific products involved. If any of the Company's single
source suppliers is not able to deliver these specialized components, the
Company would be required to implement alternative supply strategies (such as
changing to one or more other suppliers, which could require product design or
specification changes and would likely cause delays in shipment of the Company's
products) or discontinue sales of the affected products.
UNCERTAINTY OF PRODUCT DEVELOPMENT AND INTRODUCTION
The Company's success depends to a large degree on its ability to
develop and introduce in a timely manner new or updated products which are
affordable, functional in purpose, distinctive in quality and design and
tailored to the purchasing patterns of the Company's customers and potential
customers. Misjudgments as to customer interest in new or updated products
could lead to excess inventories and markdowns and could have a material adverse
effect on the Company's financial condition and results of operations. There
can be no assurance that new products under development will be successfully
developed and introduced. Further, due to the uncertainty associated with any
product development and introduction (such as delays in development and lack of
market acceptance of a new product), there can be no assurances that the
Company's development and introduction efforts will be successful. If products
under development are not successfully introduced, the Company's business,
financial condition and results of operations would be materially adversely
effected.
COMPETITION
The markets in which the Company's products are sold have become
increasingly competitive. Most of the Company's principal competitors have
substantially greater financial resources. The Company's results of
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operations can be significantly affected by pricing pressures arising from
customer demand and pricing strategies by the Company's competitors, and the
timing and market acceptance of new product introductions by competitors of the
Company. There can be no assurance that pricing pressures will not have a
material adverse effect on the Company, or that the Company's competitors will
not succeed in developing products that would render the Company's technology
and products obsolete and noncompetitive.
DEPENDENCE ON KEY PERSONNEL
The loss of the services of any of the Company's management and other
key employees, for any reason, may have a materially adverse effect on the
prospects of the Company. See "Management--Directors, Executive Officers and
Key Employees."
CONTROL BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
J. Bradford Bishop, a member of the Board of Directors and Chairman
and Chief Executive Officer of the Company, is the son of John F. Bishop, a
member of the Board of Directors and Vice Chairman, Secretary and Treasurer of
the Company. J. Bradford Bishop and John F. Bishop (together, the "Bishops")
beneficially own 191,400 shares of Common Stock in the aggregate, representing
approximately 45% of the currently outstanding shares of Common Stock (excluding
outstanding options to purchase Common Stock). If outstanding options are
included, the Bishops beneficially own 196,400 shares of Common Stock,
representing approximately 46% of the currently outstanding shares of Common
Stock. In addition, John F. Bishop is a trustee of the Bishop Family Trust,
which has entered into loan facilities providing for up to $1,450,000 in loans
to the Company. See "The Company--Bishop Family Trust Loan Facility." By
virtue of such stock ownership and their position with the Company, the Bishops
may have the practical ability to determine the election of all directors and
control the outcome of substantially all matters submitted to the Company's
stockholders. Such concentration of ownership and lending relationship could
have the effect of making it more difficult for a third party to acquire, or
discourage a third party from seeking to acquire, control of the Company without
the approval of the Bishops. This concentration of ownership would also enable
the Bishops to acquire all Common Stock of the Company with a smaller
incremental investment than would be required of other potential third party
acquirors. Further, the Bishops have committed to the Company that they will
subscribe for at least $1,360,000 in Common Stock in the Rights Offering if
other stockholders purchase at least $800,000 in Common Stock in the Rights
Offering. If other stockholders do not exercise their Basic Subscription Rights
in full, the Bishops could substantially increase their pro rata ownership of
the Company's Common Stock. See "Risk Factors--Dilution from Rights Offering."
OFFERING PRICE NOT BASED ON ACTUAL VALUE
The price at which the Common Stock is being sold is not based on an
independent valuation of the Company or its assets or other recognized criteria
of investment value. The Subscription Price does not indicate that the Common
Stock has a value of or could be resold at that price. In addition, the
Subscription Price of $1.70 is significantly less than the price at which the
Common Stock has traded at various times during the last twelve months, and
represents a 28% discount to the average closing price of the Common Stock in
the 30 days prior to the Record Date. The effect of the Rights Offering will
likely be to decrease the current market value of the Common Stock. See
"Determination of Offering Price."
DIVIDENDS NOT LIKELY
Dividends have not been paid on the Company's Common Stock in more
than six years. For the foreseeable future it is anticipated that earnings
which may be generated from operations of the Company, if any, will be used to
finance the growth of the Company and repay debt and that cash dividends will
not be paid to holders of the Common Stock. Under the terms of agreements with
the Company's senior and subordinated lenders, the Company may not pay or
declare dividends without the lenders' prior written consent.
DILUTION FROM RIGHTS OFFERING
Stockholders who do not exercise their Basic Subscription Rights will
realize a dilution of their percentage voting interest and ownership interest in
future net earnings, if any, of the Company. The amount of dilution will depend
on the number of shares of Common Stock purchased by other stockholders in the
Rights
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Offering. The Bishops have committed to the Company that they will subscribe
for at least $1,360,000 in Common Stock in the Rights Offering if other
stockholders purchase at least $800,000 in Common Stock in the Rights Offering.
Assuming the Bishops purchase $1,360,000 of Common Stock and other stockholders
only purchase $800,000 of Common Stock, the Bishops would beneficially own
approximately 58% of the Company's Common Stock, and the effective percentage
ownership of any non-exercising stockholder will be reduced by approximately
75%. The dilutive impact on non-exercising stockholders will be even greater
if the Bishops or other stockholders purchase additional shares. If all
stockholders fully exercise their Basic Subscription Rights, the effective
percentage ownership of each stockholder will remain unchanged.
POSSIBLE FUTURE DILUTION
In addition to the shares registered for the Rights Offering described
herein, the Company earlier registered 200,000 shares of Common Stock which will
be available for issuance upon exercise of options granted or to be granted
under the Company's Second Amended and Restated 1994 Stock Option Plan.
Further, the Company has the right to issue additional shares of Common Stock to
the Bishop Family Trust in lieu of cash payment of facility fees. See "The
Company--Bishop Family Trust Loan Facility". The issuance of any such
additional shares would dilute the percentage ownership and could dilute the net
tangible book value per share of stockholders of the Company. Further, if
additional financing is required, additional dilution may take place.
NO MINIMUM SIZE OF RIGHTS OFFERING
The Rights Offering is being made on an any or all basis, which means
that the Company may accept any subscription received even if all 1,699,628
Shares offered are not purchased. Although the Bishops have committed to the
Company that they will subscribe for at least $1,360,000 in Common Stock in the
Rights Offering if other stockholders purchase at least $800,000 in Common Stock
in the Rights Offering, there is no minimum amount of proceeds required for the
Company to consummate the Rights Offering. For example, the Company may realize
no proceeds from the Rights Offering or only a minimal amount of proceeds that
would not result in a material improvement in the Company's ability to meet its
operating objectives. Approximately $610,000 of the funds committed by the
Bishops in the Rights Offering will be used by the Company to repay debt under
the Bishop Family Trust Loan Facility. Proceeds from the purchase of Common
Stock by other stockholders in the Rights Offering may also be used to repay
debt under the Bishop Family Trust Loan Facility. See "Use of Proceeds" and
"The Company--Bishop Family Trust Loan Facility." Even if other stockholders
purchase $800,000 in Common Stock and the Bishops purchase $1,360,000 in Common
Stock in the Rights Offering, the Company will still need additional funds from
the Rights Offering or other sources to meet its cash needs for fiscal 1998. No
assurances can be given as to the amount of gross proceeds that the Company will
realize from the Rights Offering, or the adequacy of such proceeds to meet the
Company's cash requirements. See "Use of Proceeds," "Plan of Distribution," and
"Risk Factors--Future Cash Requirements."
POSSIBLE EXTENSION OF EXPIRATION DATE
The Company has reserved the right to extend the Expiration Date to as
late as March 7, 1998. Funds deposited in payment of the Subscription Price may
not be withdrawn and no interest will be paid thereon to stockholders.
DELISTING FROM NASDAQ
Previously, the Company's Common Stock was traded on the NASDAQ
SmallCap Market ("NASDAQ"). However, the Company failed to maintain the minimum
standards required by NASDAQ to maintain its listing on NASDAQ. The Common
Stock was suspended from trading and delisted from NASDAQ on June 25, 1997, as a
result of the Company's failure to maintain capital and surplus of at least
$1,000,000. The delisting of the Company's Common Stock from NASDAQ could have
an adverse effect on the market value of the Common Stock. See "Market for the
Company's Common Stock and Related Stockholder Matters."
LIMITED TRADING VOLUME AND VOLATILITY OF STOCK PRICE IN PUBLIC MARKET
The Company's Common Stock is thinly traded and may experience
significant price and volume fluctuations which could adversely affect the
market price of the Common Stock without regard to the operating
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performance of the Company. There is no assurance that a more active public
market for such securities will develop after the conclusion of the Rights
Offering described herein or, if a more active trading market develops, that it
will be sustained.
MARKET RESTRICTIONS ON BROKER-DEALERS
The Company's Common Stock is covered by a Securities and Exchange
Commission rule that imposes additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally institutions with assets in excess
of $5 million or individuals with net worth in excess of $1 million or annual
income exceeding $200,000 or $300,000 jointly with their spouse). For
transactions covered by the rule, the broker-dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
agreement to the transaction prior to the sale. Consequently, the rule may
affect the ability of broker-dealers to sell the Company's securities and also
may affect the ability of persons purchasing Shares in this offering to sell
their Shares in the secondary market. Further, the Company's Common Stock is
quoted on an NASD inter-dealer system called the "Bulletin Board" and, following
the Rights Offering, the Company still will not have $4 million in net tangible
assets or $50 million in stockholders' equity, one of which is required for it
to qualify for quotation on NASDAQ, and the Shares are not expected soon to
command a market price of $5 per share, the price required for a
non-NASDAQ-quoted security to escape the trading severities imposed by the
Securities and Exchange Commission on so-called "penny stocks." These trading
severities tend to reduce broker-dealer and investor interest in penny stocks
and could operate (i) to inhibit the ability of the Company's stock to reach a
$4 per share trading price that would make it eligible for quotation on NASDAQ
even should it otherwise qualify for quotation on NASDAQ and (ii) to inhibit the
ability of the Company to use its stock for business acquisition purposes. See
"Market for the Company's Common Stock and Related Stockholder Matters."
POTENTIAL ANTI-TAKEOVER EFFECTS OF DELAWARE LAW
Certain provisions of Delaware law, the Company's Certificate of
Incorporation and its Bylaws could delay, impede or make more difficult a
merger, tender offer or proxy context involving the Company, even if such events
could be beneficial to the interests of the stockholders. Such provisions could
limit the price that certain investors might be willing to pay in the future for
shares of Common Stock. See "Description of Securities--Certain Anti-Takeover
Provisions."
USE OF PROCEEDS
The net proceeds to the Company from the sale of all 1,699,628 shares
of Common Stock offered by the Company hereby are estimated to be $2,826,368,
based on a Subscription Price of $1.70 per share and after deducting the
offering expenses payable by the Company.
The Company expects that the proceeds of the offering will be used to
develop new products, fund working capital requirements and repay debt. The
Company expects to repay a portion of its Loan Facility with the Bishop Family
Trust in an amount equal to $610,000 from the proceeds from the sale of Common
Stock to the Bishops in the Rights Offering. Further, the Company may repay
additional principal under the Loan Facility to the extent the Company believes
funds are available in excess of its internal cash requirements for fiscal 1998.
See "The Company--Bishop Family Trust Loan Facility". The Company intends to
invest the aggregate net proceeds from this offering in short-term,
investment-grade, interest-bearing securities until such time as funds are
needed.
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DETERMINATION OF OFFERING PRICE
The Rights Offering is being conducted by the Company based on the
commitment of the Bishops to subscribe for at least $1,360,000 in Common Stock
in the Rights Offering if other stockholders purchase at least $800,000 in the
Rights Offering. The terms of the Rights Offering were approved by the three
independent members of the Company's Board of Directors (the "Independent
Directors"). The Subscription Price reflects a 28% discount to the average
closing price of the Company's Common Stock in the 30 days prior to the Record
Date. The terms of the Rights Offering were unanimously recommended by the
Independent Directors and approved by the Company's Board of Directors on
November 7, 1997.
The principal factors in the recommendation and approval of the terms
of the Rights Offering were the Company's need for additional capital to
continue development of new products and for working capital purposes, the
nonavailability of such capital from other sources and the opportunity for
stockholders to participate in the financing through the Rights Offering. The
Company has not sought an independent third party opinion with respect to the
value of the Company or the appropriateness of the Subscription Price. The
Subscription Price has no relation to the market value of the Common Stock of
the Company, the value of the Company's assets or the Company's prospects as a
going concern.
PLAN OF DISTRIBUTION
THE RIGHTS OFFERING
The Company offers 1,699,628 shares (the "Shares") of its Common
Stock, $0.01 par value, only to its stockholders of record on November 7, 1997
(the "Record Date"), who reside in states either where state registration of
this offering is not required or, if required, in the judgment of the Company
can reasonably be effected ("Stockholders of Record"). The Shares are offered
at a purchase price of $1.70 per Share (the "Subscription Price").
The Rights Offering is being made directly from the Company to its
Stockholders of Record. No underwriters are involved. No commissions are being
paid. All net proceeds from subscriptions go directly to the Company in their
entirety.
SUBSCRIPTION EXPIRATION DATE
The Rights Offering will expire at 5:00 P.M., California time, on
December 15, 1997, unless extended by the Company (such date, as it may be
extended on one or more occasions, is referred to herein as the "Expiration
Date"). In no event will the Expiration Date be extended beyond March 7, 1998.
If the Company elects to extend the term of the Rights Offering, it will issue a
press release to such effect not later than the first day The Nasdaq National
Market is open for trading following the most recently announced Expiration
Date. Funds provided in payment of the Subscription Price will be held by the
Company, until the closing, which will occur promptly following the Expiration
Date. The subscription for Common Stock in the Rights Offering is irrevocable
once made, and no interest will be paid to subscribing stockolders. AS
DESCRIBED BELOW, SUBSCRIPTIONS MUST BE RECEIVED BEFORE THE EXPIRATION DATE AFTER
WHICH TIME THE RIGHT TO SUBSCRIBE WILL BE VOID AND VALUELESS.
BASIC SUBSCRIPTION RIGHTS
The Rights Offering entitles the Stockholders of Record to subscribe
at the Subscription Price for Shares on the basis of four Shares for each share
of Common Stock held on the Record Date (the "Basic Subscription Rights").
Exercise of the Basic Subscription Rights will also entitle the holders to the
Over-Subscription Privilege described below. See "Plan of Distribution--Method
of Exercising Rights" and "--Over-Subscription Privilege" below.
METHOD OF EXERCISING RIGHTS
To subscribe for Common Stock, a Stockholder of Record should fill in
Section 1 on the Subscription Agreement and sign and transmit it along with the
required payment, in the envelope provided, to the Company at
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1745 McCandless Drive, Milpitas, California 95035. The Subscription Agreement
must arrive on or before the Expiration Date.
PAYMENT. The Subscription Agreement must be accompanied by payment of
the full Subscription Price in U.S. Dollars for all shares. Such payment may be
made by mail. Payment may be made by certified check or bank draft drawn upon a
United States bank, or postal, telegraphic or express money order, payable to
the order of "EIP Microwave, Inc." Sufficient mailing time should be allowed
for the Subscription Agreement and payment to be RECEIVED by the Company before
the expiration of the subscription period at 5:00 P.M., California time,
December 15, 1997, unless extended by the Company (such date, as it may be
extended on one or more occasions, is referred to herein as the "Expiration
Date"), after which time the right to subscribe will be void and valueless.
Payment may also be made by hand delivery to the Company, in cash or by
certified check or bank draft drawn upon a United States bank, or postal,
telegraphic or express money order, payable to the order of "EIP Microwave,
Inc."
The Rights Offering is being made on an any or all basis, which means
that the Company may accept any subscription received even if all 1,699,628
Shares offered are not purchased. The Bishops have committed to the Company
that they will subscribe for at least $1,360,000 in Common Stock in the Rights
Offering if other stockholders purchase at least $800,000 in Common Stock in the
Rights Offering. See "Risk Factors--Control by Management and Principal
Stockholders," "--Dilution from Rights Offering," and "--No Minimum Size of
Rights Offering."
The Company reserves the right to reject any Subscription Agreement
and payment not properly submitted. The Company has no duty to give
notification of defects in any Subscription Agreement and/or payment and will
have no liability for failure to give such notification. The Company will
return any Subscription Agreement and/or payment not properly submitted.
Any questions or requests for assistance concerning the method of
exercising subscription rights or requests for additional copies of this
Prospectus, the Subscription Agreement or the Instructions to the Subscription
Agreement should be directed to the Information Agent at 1-800-633-8985.
PURCHASE AND SALE OF RIGHTS. Subscription rights may not be
transferred, divided, combined, purchased or sold.
DELIVERY OF CERTIFICATES. Certificates for Shares issuable on
exercise of subscription rights will be mailed as soon as practicable after the
Expiration Date.
OVER-SUBSCRIPTION PRIVILEGE. If some stockholders do not fully
exercise all of their Basic Subscription Rights, the remaining Shares will be
offered to those holders of Basic Subscription Rights who wish to acquire more
than the number of shares to which their Basic Subscription Rights entitle them
(the "Over-Subscription Privilege"). Each holder of Basic Subscription Rights
who fully exercises Basic Subscription Rights will be entitled to participate in
such Over-Subscription Privilege and will be asked to indicate on the
Subscription Agreement how many additional shares that stockholder would be
willing to acquire pursuant to the Over-Subscription Privilege. Each
stockholder wishing to exercise its Over-Subscription Privilege must exercise
its Over-Subscription Privilege and must tender payment for the Shares
subscribed for pursuant to the Over-Subscription Privilege at the time it
exercises its Basic Subscription Rights. If there remain sufficient Shares
after the exercise of Basic Subscription Rights, all over-subscriptions will be
honored in full. If there are not sufficient Shares to honor all
over-subscriptions, the available Shares will be allocated among those who
over-subscribe based solely on the number of shares subscribed for by each
over-subscribing holder pursuant to the Basic Subscription Rights. For example,
if after the exercise of the Basic Subscription Rights (1) there remain 150,000
Shares that were not subscribed for pursuant to Basic Subscription Rights, (2)
two stockholders each indicated that they wished to acquire Shares through the
Over-Subscription Privilege, (3) the first stockholder oversubscribed for
150,000 Shares and the second stockholder oversubscribed for 200,000 Shares and
each tendered payment for that number of shares and (4) the first stockholder
acquired 100,000 shares pursuant to its full Basic Subscription Rights and the
second stockholder acquired 200,000 shares pursuant to its full Basic
Subscription Rights; then the first stockholder would be entitled to one-third
or 50,000 Shares and the second stockholder would be entitled to two-thirds or
100,000 Shares.
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The allocation process may involve a series of allocations in order to
assure that the shares available for over-subscription are distributed
proportionately among all over-subscribing holders. Accordingly, the degree to
which each stockholder's request for Shares pursuant to the Over-Subscription
Privilege will be honored will depend on the number of Shares requested, the
number of shares acquired by the exercise of Basic Subscription Rights and the
total number of Shares available for over-subscription. After the expiration of
the subscription rights, the Company will send notice of the number of Shares
acquired pursuant to the Over-Subscription Privilege to each stockholder that
over-subscribed and promptly remit to such stockholder, without any interest,
any payment tendered for shares not acquired under the Over-Subscription
Privilege.
INFORMATION AGENT
The Company has appointed Corporate Investor Communications, Inc.
("CIC") as Information Agent for the Rights Offering. Any questions or requests
for additional copies of this Prospectus, the Subscription Agreement or the
Instructions to the Subscription Agreement may be directed to the Information
Agent at the telephone number and address below.
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, NJ 07072-2586
(201) 896-1900
Or call
Toll Free
(800) 633-8985
The Company will pay the fees and expenses of the Information Agent
and has also agreed to indemnify the Information Agent from certain liabilities
in connection with the Rights Offering.
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
As of the date of this Prospectus, there are 424,907 shares of Common
Stock of the Company owned of record by approximately 254 stockholders.
An additional 200,000 shares of Common Stock of the Company are
reserved for issuance against the exercise of Company stock options.
The following sets forth for each calendar quarter since January 1995,
the range of high and low closing bids for the Company's Common Stock as
reported to the Company by NASDAQ. For the period through June 25, 1997, the
Common Stock was listed on the NASDAQ SmallCap Market under the symbol EIPM.
For the period since June 25, 1997, the Common Stock has been quoted on the NASD
Bulletin Board under the symbol EIPM. These quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
Calendar Quarter High ($) Low ($)
---------------- -------- -------
4th quarter 1997
(through November 7,
1997) 2.75 2.125
3rd quarter 1997 3.625 1.25
2nd quarter 1997 6.00 1.25
1st quarter 1997 2.00 1.00
4th quarter 1996 5.00 1.00
3rd quarter 1996 6.75 3.50
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Calendar Quarter High ($) Low ($)
---------------- -------- -------
2nd quarter 1996 7.50 2.00
1st quarter 1996 7.25 2.75
4th quarter 1995 5.50 1.50
3rd quarter 1995 7.75 5.50
2nd quarter 1995 9.25 1.25
1st quarter 1995 7.00 1.75
The Company's stock is quoted on an NASD inter-dealer system called
the "Bulletin Board." While some Bulletin Board stocks are actively traded,
they do not draw the interest of the NASD brokerage community held by NASDAQ
stocks or exchange-listed stocks. The eligibility requirements for listing the
Company's stock on exchanges are generally as high or higher than the
requirements for eligibility for quotation on NASDAQ, and the Company has no
present plans to list its stock on an exchange.
The Company's stock will not be eligible for quotation on the NASDAQ
SmallCap Market ("NASDAQ") unless it meets various NASDAQ requirements, which it
will not meet even if all the Shares offered herein are subscribed. No
assurance can be made that the Common Stock will ever become eligible for
quotation on NASDAQ.
Further, holders of the Shares offered herein face the prospect of an
indefinite period during which the Shares will be subject to trading severities
imposed on Bulletin Board, so-called "penny stocks" (stocks that trade at less
than $5 per share) by regulations of the Securities and Exchange Commission. The
effect of these trading severities is to reduce broker-dealer and investor
interest in trading or owning "penny stocks" and, hence, could inhibit the
ability of the Company's stock to reach a trading level of $4 per share or
higher and thereby become eligible for quotation on NASDAQ even if the Company
meets NASDAQ's assets and stockholders' equity requirements in the future.
THE COMPANY
THE FOLLOWING DISCUSSION CONTAINS TREND INFORMATION AND OTHER FORWARD-LOOKING
STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. THE ACTUAL RESULTS
OF EIP MICROWAVE, INC. (THE "COMPANY") COULD DIFFER MATERIALLY FROM THE
COMPANY'S HISTORICAL RESULTS OF OPERATIONS AND THOSE DISCUSSED IN THE FORWARD-
LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE IDENTIFIED UNDER THE HEADING
"RISK FACTORS" ABOVE. DUE TO SUCH RISK FACTORS AND OTHER FACTORS, PAST RESULTS
ARE NOT A RELIABLE PREDICTOR OF FUTURE RESULTS.
GENERAL/PRODUCTS
The Company was incorporated under the laws of the State of Delaware
in 1987 under the name EIP Microwave, Inc. The predecessor corporation was
organized under the laws of California in 1961, and merged with the Company in
1987.
The Company is engaged in a single industry segment constituting the
development, manufacture and sale of high frequency microwave and radio
frequency (RF) test and measurement instruments. These instruments include
microwave heterodyne-type automatic frequency counters, microwave and RF pulse
frequency counters, microwave and RF synthesized signal generators, pulse
generators, and downconverters. All of these products are electronic devices
which are used in the design, manufacture and maintenance of microwave and RF
products and systems throughout the world.
Stand-alone microwave frequency counters represented 50% of net sales
in fiscal 1996, 64% of net sales in fiscal 1995, and 75% of net sales in fiscal
1994. The balance of sales in those periods was mainly derived from the
Company's VXIbus-based products. VXIbus is a hardware and software standard for
modular instrumentation. EIP
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manufactures individual modules in the VXIbus format that provide various
functions, including frequency measurement, synthesized signal generation,
downconversion and modulation. These modules plug in to standardized racks that
supply power and computer resources.
During fiscal 1997, the Company introduced a new line of microwave
frequency counters suitable for use in laboratory, manufacturing and field
service environments. These products are portable and can be operated on their
own internal batteries. The Company began distributing these products in
October 1997, on a private label basis worldwide through an OEM relationship
with Hewlett-Packard Company ("Hewlett-Packard"). During fiscal 1994, the
Company introduced a microwave pulse frequency counter with peak power
measurement capability.
The Company designs and manufactures its own YIG (Yitrium iron garnet)
filters, which are a key feature of many EIP microwave products. Additionally,
the Company manufactures hybrid microwave integrated circuits (MICs) and
proprietary microwave subassemblies used in its microwave products. Management
believes that the Company's YIG and MIC capabilities provide its microwave
products with competitively superior performance, protection from overload, and
compact size.
MARKETS/PRINCIPAL CUSTOMERS
The Company has a variety of customers worldwide for its microwave
products, including the military, government agencies, government
subcontractors, the telecommunications industry, the aerospace industry, and
research and development facilities. The primary customers for the Company's RF
products are telecommunication companies. The Company's principal customers,
and the percent of its net sales attributable to such customers, are
Northrup-Grumman (29% for the nine months ended June 30, 1997, 22% in fiscal
1996, 11% in fiscal 1995, and 14% in fiscal 1994) and Marconi (19% in fiscal
1995). Other important customers that provided less than 10% of revenues to the
Company in such periods were Hewlett-Packard Company, Lockheed Martin, Kelly Air
Force, Hughes Aircraft, and Harris Corporation.
The Company's sales of microwave products to the United States
Government and its contractors comprised approximately 38%, 33%, 36%, and 44%,
of net sales for the nine months ended June 30, 1997, and the fiscal years 1996,
1995, and 1994, respectively. In September 1997, the Company received a
five-year indefinite quantity, fixed price supply subcontract from a ManTech
Systems Engineering Corporation, a government contractor ("ManTech"), with total
sales value to the Company that could range from approximately $3.5 to $20
million. Foreign sales represented 31% of net sales in the nine months ended
June 30, 1997, 36% of net sales in fiscal 1996, 43% of net sales in fiscal 1995,
and 36% of net sales in fiscal 1994.
METHODS OF DISTRIBUTION
The Company has entered into a five-year OEM Agreement with
Hewlett-Packard Company ("Hewlett-Packard"). The Agreement contemplates the
worldwide distribution of the Company's recently developed line of microwave
frequency counters through Hewlett-Packard on a private label basis. The
Company began distributing this new line of products in October 1997.
The Company uses independent manufacturers' representatives for
distribution of its other products in the United States and in foreign
countries. The Company provides service and technical support to its
manufacturers' representatives, and directly to its customers.
From November 1992 until December 1995, the Company's products were
distributed in a number of foreign countries through an exclusive distribution
agreement with Marconi Instruments, a subsidiary of The General Electric
Company, Plc. of England. Foreign sales through Marconi Instruments represented
19% and 16% of net sales in fiscal 1995 and 1994, respectively. The Company has
since established agreements with other independent manufacturers'
representatives in these countries previously covered by Marconi Instruments.
COMPETITION
The Company believes there are three to six competitors in the
respective markets in which it competes; however, reliable data on sales and
profits of most of the Company's competitors is not readily available because
the
12
<PAGE>
competitors are either privately held or are separate divisions of large
publicly held companies which do not separately report financial results for
competing divisions.
The markets in which the Company's frequency counters are sold are
well-defined and narrow markets which have become increasingly competitive both
in the United States and abroad. Within these narrow markets, the Company
believes it holds a significant competitive position, generally believed to be
number two or three in market share. The Company encounters competition,
however, from certain firms which are substantially larger and have greater
financial resources than the Company; the market leader is believed to be
Hewlett-Packard. Other companies selling products in the same markets as the
Company include Anritsu, Advantest, Racal, and XL Microwave.
The market for microwave synthesized signal generators is considered
to be larger than the microwave frequency counter market. As the market for
this type of product is still developing, the Company has not been able to
determine market share. At present, the only other known supplier of VXIbus
microwave synthesized signal generators is Giga-tronics.
The Company's VXIbus pulse generator and downconverter are sold
primarily as companion products for integrated systems. Competitors for the
pulse generator include Wavetek and Tektronix. There is no known current direct
competition for the VXIbus downconverter.
Competition is based upon performance, reliability, product design,
availability and price and is characterized by technological change.
RESEARCH, DEVELOPMENT AND ENGINEERING
Management believes that the Company's future success is dependent to
a significant extent upon engineering and new product development. Expenditures
for research, development and engineering during the past three years have
ranged between 17% and 11% of annual net sales. Research, development and
engineering expenditures were $978,000, $742,000, and $620,000, for fiscal years
ended September 30, 1996, 1995, and 1994, respectively, and $722,000 and
$724,000, for the nine months ended June 30, 1997, and 1996, respectively.
Management expects that current development efforts will result in the
introduction of new test instrumentation for the wireless telecommunications
market in 1998. All of the Company's research, development and engineering
activities have been Company-funded.
RAW MATERIALS
The principal raw materials used by the Company in its manufacturing
operations include capacitors, resistors, semiconductors, integrated circuits,
transformers, printed circuit boards, display devices, and metal and plastic
cases, most of which are purchased from outside suppliers. For the majority of
materials, the Company has access to many suppliers, and believes that it is not
dependent upon any one supplier, and that adequate alternate sources for its
materials are, for the most part, readily available. There are, however, many
applications which require specialized components currently available, in each
instance, only through a single source of supply. The loss of any of these
sources, or the inability of any such source to meet the Company's production
and quality control requirements, could be detrimental to the Company with
respect to the specific products involved.
EMPLOYEES
The Company had 52 employees at September 30, 1996, 49 of whom were
full time employees, and had 45 employees at September 30, 1997, 39 of whom were
full time employees. The Company believes that its employee relations are good,
but can make no assurances that it will continue to be able to attract and
retain qualified employees. The Company also has engaged the services of
consultants when appropriate.
PATENTS, COPYRIGHTS, TRADEMARKS AND INTELLECTUAL PROPERTY
The Company holds no patents, trademarks, franchises, concessions or
royalty agreements that have a material importance to or effect on its frequency
counter, pulse counter, synthesized signal generator, pulse
13
<PAGE>
generator, or downconverter product lines. However, the Company has obtained
a license from a third party for digital modulation implementations relating to
products under development by the Company.
The Company relies on trade secrets and technical know-how in order to
maintain its competitive advantage and scientific expertise. It is the practice
of the Company to enter into confidentiality agreements with employees,
consultants, and any third party to whom it discloses confidential information.
There can be no assurance that such confidential information will not be
disclosed, that similar trade secrets or expertise will not be independently
developed, or that access to such information could not be gained inadvertently.
GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTS
Government approval is not required for any of the Company's principal
products.
EFFECT OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS
The Company believes it is in compliance with applicable governmental
regulations. The Company is not aware of any probable governmental regulation
which would have a detrimental or disruptive effect on the Company.
COMPLIANCE WITH PROVISIONS ON ENVIRONMENTAL PROTECTION
The Company does not believe that compliance with federal, state, and
local provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, will have any material effect upon the capital expenditures,
earnings, or competitive position of the Company.
PROPERTY
The Company leases a 20,331 square foot one story, concrete structure
located in Milpitas, California, which contains production, warehouse and office
facilities. The lease term continues until October 1998, with an option to renew
for an additional three years. The annual rent for the current term is $226,000
plus applicable real property taxes and insurance. The Company also leases 978
square feet of space as the Company's corporate offices located in Newport
Beach, California. The lease term is on a month-to-month basis with a monthly
rent of $1,320. The current facilities are believed by the Company to be
suitable and adequate for its present requirements.
The Company owns and uses machinery, equipment, and furniture with an
original cost of approximately $5,319,000 at September 30, 1996 and
approximately $5,403,000 at June 30, 1997. The Company also leases and uses
equipment with capital lease obligations of $129,000 at September 30, 1996 and
$105,000 at June 30, 1997. This personal property is believed to be in
acceptable condition.
The Company's management believes the facilities and all machinery and
equipment of the Company are adequately insured to cover loss of equipment or
occupancy privileges.
The Company does not have any investments in real estate, real estate
mortgages or securities of persons primarily engaged in real estate activities,
and has no present policy or limitations with respect to any such future
investments.
BANK LINE OF CREDIT
At November 7, 1997, the Company had outstanding borrowings in the
aggregate principal amount of $179,000 under its bank line of credit (the "Bank
Line") with Silicon Valley Bank ("SVB"). The Bank Line provides for borrowings
up to 60% of eligible accounts receivable, not to exceed $500,000. Interest is
charged at SVB's prime rate plus 3% per annum, provided that the interest rate
in effect each month shall not be less than 10% per annum, and is payable
monthly (11.5% as of November 7, 1997). The Bank Line expires on March 4, 1998.
The Bank Line contains various restrictive covenants requiring, among other
matters, the maintenance of minimum levels of tangible net worth and certain
financial ratios, including a minimum quick ratio and a maximum debt to net
worth ratio, and the achievement of profitability. The Bank Line also precludes
or limits the Company's
14
<PAGE>
ability to take certain actions, such as paying dividends, making loans, making
acquisitions or incurring indebtedness, without the bank's prior written
consent. The Bank Line is secured by substantially all of the Company's assets.
At November 7, 1997, the Company was in default of certain financial
covenants under the Bank Line. The Bank Line permits losses for the quarter
ended June 30, 1997 in an amount up to $165,000 (and the Company's losses for
such fiscal quarter were $278,000), permits losses for the quarter ended
September 30, 1997 in an amount up to $110,000 (and the Company expects that its
losses for such fiscal quarter will be approximately $492,000) and requires a
tangible net worth, including loans from affiliates, of at least $975,000 (and
the Company expects that its tangible net worth, including loans from
affiliates, at September 30, 1997, will be approximately $940,000). The Company
is engaged in ongoing discussions with SVB concerning the Bank Line, and SVB has
made a non-binding proposal to the Company to amend the Bank Line to, among
other things, modify the financial covenants and allow the Company to receive
advances under the Bank Line, increase the interest rate charged to SVB's prime
rate plus 5% per annum, and change the expiration date for the Bank Line to
January 31, 1998. There can be no assurance that the Company and SVB will enter
into an amendment of the Bank Line in accordance with the non-binding proposal.
The Company is continuing to pursue discussions with other lenders concerning a
working capital facility; however, there can be no assurance that the Company
will be able to obtain a satisfactory working capital facility. Even if the
Company is able to obtain a working capital facility from another lender, there
can be no assurance as to the terms of such facility; and the terms of such
facility could be even less attractive to the Company than the terms of the
existing Bank Line or the non-binding proposal from SVB. If the Company is
unable to obtain a satisfactory working capital facility, the Company and its
business could be materially adversely affected.
BISHOP FAMILY TRUST LOAN FACILITY
At November 7, 1997, the Company had outstanding borrowings in the
aggregate principal amount of $1,100,000 under a loan and security agreement
(the "Loan Facility") with John F. Bishop and Ann R. Bishop, trustees of the
Bishop Family Trust (the "Bishop Family Trust"). The Loan Facility provides for
a term loan of $1,000,000 and revolving advances up to $450,000. Interest is
charged at the prime rate plus 5% per annum and is payable monthly (13.5% as of
November 7, 1997). The Loan Facility expires on October 15, 1998. The Loan
Facility contains various restrictive covenants requiring, among other matters,
the achievement of profitability on a rolling 3-month basis commencing in August
1998, and the maintenance of minimum revenues from its OEM relationship with
Hewlett-Packard Company commencing in January 1998. The Loan Facility also
precludes or limits the Company's ability to take certain actions, such as
paying dividends, making loans, making acquisitions or incurring indebtedness,
without the Bishop Family Trust's prior written consent. The Loan Facility is
secured by substantially all of the Company's assets. The Bishop Family Trust
has subordinated the Loan Facility to the Bank Line. At November 7, 1997, the
Company was in compliance with the restrictive covenants of the Loan Facility.
Under the terms of the Loan Facility, the Company will be obligated to
pay facility fees of up to $282,000 to the Bishop Family Trust in the manner
described below.
A. A facility fee of $70,500 was fully earned on October 22, 1997
and will be payable by the Company on January 22, 1998.
B. If the principal amount of the obligations outstanding under the
Loan Facility on January 22, 1998 exceeds $1,000,000, then an additional
facility fee of $70,500 will be fully earned on such date and will be payable by
the Company on January 22, 1998.
C. If the principal amount of the obligations outstanding under the
Loan Facility on April 22, 1998 exceeds $1,000,000, then an additional facility
fee of $141,000 will be fully earned on such date and will be payable by the
Company on April 22, 1998.
The Company will have the right to pay the facility fee in cash or by issuance
of Common Stock. The number of shares of Common Stock issuable as payment for a
facility fee will equal (a) the applicable facility fee divided by (b) the Fair
Market Value (as defined in the Loan Facility) per share of Common Stock on the
date such facility fee is payable to the Bishop Family Trust.
15
<PAGE>
LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company or its
subsidiary is a party or of which any of their property is the subject. The
Company is not aware of any such legal proceeding contemplated by a governmental
authority.
ACQUISITION DISCUSSIONS
Since 1995, the Company has held discussions with several other
companies with respect to a possible acquisition of certain of the Company
product lines by such other companies. No offers have been made. The Board of
Directors will consider any future acquisition offers made to the Company in
light of what appears to be in the best interest of the Company's stockholders.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THE FOLLOWING DISCUSSION CONTAINS TREND INFORMATION AND OTHER FORWARD-LOOKING
STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE COMPANY'S HISTORICAL RESULTS OF
OPERATIONS AND THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO,
THOSE IDENTIFIED UNDER THE HEADING "RISK FACTORS" ABOVE. DUE TO SUCH RISK
FACTORS AND OTHER FACTORS, PAST RESULTS ARE NOT A RELIABLE PREDICTOR OF FUTURE
RESULTS.
IN ADDITION, THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES HEREIN, AND IS
QUALIFIED ENTIRELY BY THE FOREGOING AND BY OTHER MORE DETAILED FINANCIAL
INFORMATION APPEARING ELSEWHERE.
RESULTS OF OPERATIONS
Net sales for the nine months ended June 30, 1997, were $3,560,000, a
27% decrease from net sales of $4,886,000 for the same period the prior year.
The decrease in net sales for this period was primarily attributable to lower
export sales of frequency counters. Net sales for fiscal 1996 were $6,492,000,
a 3% decrease from fiscal 1995 sales of $6,721,000. The decrease in net sales
in fiscal 1996, compared to the prior year, was primarily attributable to market
softness for the Company's products. The 25% increase in fiscal 1995 net sales,
compared to fiscal 1994 net sales of $5,389,000 was primarily attributable to
increased international sales (43% of fiscal 1995 net sales vs. 36% of fiscal
1994 net sales), orders from government contractors (36% of fiscal 1995 net
sales vs. 44% of fiscal 1994 net sales), and sales of products configured in the
VXIbus format (28% of fiscal 1995 net sales vs. 14% of fiscal 1994 net sales).
Foreign exchange rate fluctuations did not have a material impact on net sales
or gross profit margins for the last three fiscal years.
Gross margin increased to 39% for the nine months ended June 30, 1997, from
37% for the same period the prior year. The increase in gross margin percentage
for this period was due almost entirely to an improved gross margin for VXIbus
products. An increase in sales of higher gross margin units had a relatively
small impact. The Company's gross profit margin decreased in fiscal 1996 to 37%,
from 46% in fiscal 1995, and 44% in fiscal 1994. The decrease in the fiscal
1996 gross profit margin, compared to fiscal 1995 and fiscal 1994, is primarily
due to a sales mix shift from higher margin stand-alone counter products to
lower margin VXIbus products and lower than expected gross profit margin on
these VXIbus products. Each of these factors had a comparable impact on the
decrease in gross profit margin.
Inflation did not have a material effect on revenues nor gross profit
during the nine months ended June 30, 1997 or the fiscal years 1996 or 1995.
Incoming orders for the nine months ended June 30, 1997, were
$3,213,000, a 36% decrease from orders of $5,007,000 for the same period a year
ago. The decrease in orders for the nine months ended June 30, 1997, resulted
primarily from a shortfall in domestic and international large order bookings,
particularly the lack of a large VXI order in the nine months ended June 30,
1997, and international base level bookings. Each of these factors had a
comparable impact on the decrease in orders. Backlog at June 30, 1997, was
$404,000, a 69% decrease from a backlog of $1,292,000 at the end of the third
fiscal quarter the prior year. Incoming orders for fiscal 1996 were
16
<PAGE>
$6,115,000, a 14% decrease from $7,127,000 for the prior year. Backlog at
September 30, 1996, was $763,000, a 37% decrease from $1,210,000 at September
30, 1995. The decrease in orders and backlog in fiscal 1996, compared to the
prior year, was primarily due to a 36% decrease in large government-related
orders. Incoming orders for the fiscal 1995 year increased 20% from $5,929,000
for the same period of the previous year. Backlog at September 30, 1995
increased 40% from $862,000 at September 30, 1994. The increases in orders and
backlog for fiscal 1995, compared to fiscal 1994, were due almost entirely to
increased orders for products configured in the VXIbus format and to a much
lesser extent to increased international orders and orders from government
contractors.
Research, development and engineering expenses were $722,000 for the
nine months ended June 30, 1997, comparable to $724,000 for the same period the
prior year. Research, development and engineering expenditures increased 32% to
$978,000 in fiscal 1996, from $742,000 in the prior fiscal year. The increase
in fiscal 1996, compared to fiscal 1995, was a result of increased new product
development expenditures, primarily to support a new frequency measurement
product line introduced in fiscal 1997. Research, development and engineering
expenditures in fiscal 1995 increased 20%, compared to $620,000 in fiscal year
1994, due to increased new product development expenditures. The majority of
the fiscal 1996 and 1995 investment was in the development of non-VXIbus
standard product.
Selling, general and administrative expenses decreased 9% to
$1,416,000 for the nine months ended June 30, 1997, compared to $1,548,000 in
the same period the prior year. The decrease in selling, general and
administrative expenses was due almost entirely to decreased commission expense
resulting from decreased sales volume. Overall expense control had a small
impact. Selling, general and administrative expenses decreased 9% in fiscal
1996 to $2,084,000, compared to $2,289,000 in fiscal 1995, primarily due to the
decrease in commission expense resulting from lower sales volume (approximately
60% of the change), and a decrease in advertising expenses (approximately 20% of
the change). Selling, general and administrative expenses increased 4% in
fiscal 1995, compared to $2,197,000 in fiscal 1994, primarily due to increased
commission expense resulting from increased sales volume.
The Company recorded a net loss of $793,000 for the nine months ended
June 30, 1997, as compared to a net loss of $319,000 recorded for the same
period the prior year. Gains on sale of capital equipment of $98,000 reduced
the net loss for the nine months ended June 30, 1997. Further, the net loss for
the nine months ended June 30, 1996 reflects a credit of $111,000 due to the
waiver of fees owed by the Company to members of the Board of Directors, and a
gain on sale of capital equipment of $50,000. The increase in losses for the
nine month period ended June 30, 1997, compared to the same period the prior
year, is primarily due to decreased sales.
The Company recorded a net loss of $493,000 in fiscal 1996, as
compared to net earnings of $125,000 in fiscal 1995, and a net loss of $453,000
in fiscal 1994. Gains on sales of fixed assets of $14,000 and $56,000 in fiscal
1996 and fiscal 1995, respectively, reduced the net loss or increased the net
earnings in such years. As described above, the net loss for fiscal 1996
reflects a credit of $111,000 due to the waiver of fees owed by the Company to
members of the Board of Directors. The Company earned interest and dividend
income of $26,000, $25,000, and $4,000, during fiscal 1996, 1995, and 1994,
respectively. The increase in interest and dividend income earned in fiscal
1996 and fiscal 1995, as compared to fiscal 1994, was primarily due to increased
earnings performance in short-term securities.
The Company believes that it will incur costs of addressing Year 2000
issues in amounts of approximately $150,000 in fiscal 1998 and $50,000 in fiscal
1999, for hardware, software, installation, and related training, for a new
business management and accounting system.
FINANCIAL CONDITION
At June 30, 1997, the Company's cash, cash equivalents and short-term
investment balance was $284,000, as compared with a cash, cash equivalents and
short-term investment balance of $540,000 at September 30, 1996, and $445,000 at
September 30, 1995. The Company's accounts payable balance was $314,000 at June
30, 1997, compared to $706,000 at September 30, 1996, and $610,000 at September
30, 1995. At June 30, 1997 and at September 30, 1996, the Company had no
material commitments for capital expenditures.
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<PAGE>
At June 30, 1997, working capital decreased $216,000 from September
30, 1996, and decreased by $724,000 in fiscal 1996, after an increase of
$313,000 in fiscal 1995. The Company's current ratio decreased to 1.36:1 at
June 30, 1997, from 1.42:1 at September 30, 1996, and 2.09:1 at September 30,
1995.
At June 30, 1997, the Company had outstanding borrowings in the
aggregate principal amount of $295,500 under its bank line of credit (the "Bank
Line"), borrowings in the aggregate principal amount of $600,000 under
subordinated notes (the "Subordinated Notes") payable to the Bishops, and
borrowings in the aggregate principal amount of $150,000 under a demand note
(the "Bridge Loan") to the Bishops. The Subordinated Notes and the Bridge Loan
were repaid on October 15, 1997 with the proceeds from the Loan Facility with
the Bishop Family Trust.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information regarding the directors and
executive officers of the Company, including age, period served as a director,
present position with the Company, and other business experience during the past
five years, and any other public company for which the individual is a director.
NAME AGE POSITION
- ----- ---- ---------
J. Bradford 46 Director since 1978. Chairman of the Board and Chief
Bishop (1) Executive Officer of the Company since 1994.
President of the Company from 1990 to 1992.
President of Continental Paper Recycling, and former
Chief Executive Officer, Carson Energy Group, a power
plant development company.
John F. Bishop 73 Director since 1961. Vice Chairman of the Board
(1) since 1994. Treasurer since 1985. Secretary since
1990.
Former Chairman of the Board, President, and
Treasurer of Cushman Electronics, Inc., a
manufacturer of test instruments for telephone
communication systems.
Michael E. 37 Director since 1996.
Johnson President, Bainbridge Group, a Law Corporation.
Former counsel, Jones, Day, Reavis & Pogue, a law
firm.
Robert D. 73 Director since 1978.
Johnson Former Vice Chairman and Director, Cushman
(2)(3)(4) Electronics, Inc., and former Director, EIP/Cushman,
Inc.
J. Sidney Webb, 77 Director since 1981.
Jr. (2)(3)(4) Chairman of the Board, The Titan Corporation,
manufacturer of defense and industrial products and
systems; Director, Plantronics, Inc., supplier of
communication headset products and services to users
and providers worldwide.
Lewis R. Foster 59 President and Chief Operating Officer of the Company
since 1996. Co-founder and President of Sailpower
Systems, Inc., a manufacturer of proprietary products
for the international marine market, from 1987-1997.
Vice President of de Recat & Associates, Inc., a career
management consulting firm, from 1987 until 1994.
President of the Company from 1976-1986.
Ivan N. Andres 49 Vice President, Marketing and Sales of the Company
since 1994. Director of Marketing of On-Demand
Environmental Systems, an air pollution control
company, from 1992-1994. Independent consultant from
1991-1992. Director of Marketing of Acurrel, a
microwave instrumentation company, prior to 1991.
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<PAGE>
- --------------------
(1) J. Bradford Bishop is the son of John F. Bishop.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
(4) Member of Stock Option Committee.
COMPENSATION OF DIRECTORS
Non-management Directors are paid a monthly retainer of $600, and
receive $600 per day for attendance at Board Meetings. They also receive $200
per day for committee meetings held on the same day as Board meetings and $400
per day if held on a separate day. Committee chairmen receive $100 per day in
addition to the above. Directors who are officers of the Company receive no
compensation for service on the Board of Directors or committees thereof.
Accrued and unpaid retainers and fees for non-management Directors as
of February 13, 1996 (the "Accrued Directors Fees") were owed to Messrs. Robert
D. Johnson, James J. Shelton and J. Sidney Webb in amounts equal to
approximately $30,600, $29,100 and $30,900, respectively. As of February 13,
1996, each of Messrs. Johnson and Webb agreed to waive all Accrued Directors
Fees owing to him in exchange for the grant by the Company of an option to
purchase 5,000 shares of Common Stock of the Company under the terms of the
Company's Amended and Restated 1994 Stock Option Plan, with the exception that
such options would be immediately vested and exercisable and would not terminate
upon ceasing to be a Director or upon death or disability. On February 7, 1996,
Mr. Shelton's term of office as Director expired and, as of February 13, 1996,
he agreed to waive all Accrued Directors Fees owing to him, in exchange for
amending his Nonqualified Stock Option Agreement with the Company to eliminate
the requirement that his options terminate three months after he ceases to be a
Director and the requirement that he continuously serve as a Director of the
Company as a condition to him becoming vested in the options to purchase the
remaining 6,667 shares of Common Stock under the Nonqualified Stock Option
Agreement.
EXECUTIVE COMPENSATION
The following table sets forth all compensation for services in all
capacities accrued by the Company during the fiscal years ended September 30,
1996, 1995, and 1994, for the Company's Chief Executive Officer and certain of
its most highly compensated executive officers. The Company issued no restricted
stock awards and there were no long term incentive plan payouts.
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------------------------------- ----------------------------------------
(A) (B) (C) (D) (E) (F) (G)
Name and Year Salary Bonus Other Annual Securities Underlying All Other
Principal Position ($) ($) Compensation Options/SARs Compensation
($) (#) ($)
(1) (5)
<S> <C> <S> <S> <C> <C> <C>
J. Bradford Bishop, 1996 0 0 0 15,000(6) 0
Chairman and Chief 1995 0 0 0 0 0
Executive Officer 1994 0 0 2,160(2) 0 0
John F. Bishop, Vice 1996 58,500 0 11,853(3) 0 328
Chairman, President, 1995 75,000 0 25,677(3) 0 362
Treasurer and Secretary 1994 75,000 0 14,449(3) 0 283
John J. Ardizzone, Jr., 1996 84,614 0 12,973(4) 3,000(6) 588
Vice President 1995 78,750 14,000 11,461(4) 10,000(6) 554
Operations and Chief 1994 71,542 0 8,713(4) 0 460
Financial Officer
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E) (F) (G)
Name and Year Salary Bonus Other Annual Securities Underlying All Other
Principal Position ($) ($) Compensation Options/SARs Compensation
($) (#) ($)
(1) (5)
<S> <C> <C> <C> <C> <C> <C>
Ivan Andres, 1996 73,819 19,000 6,559(7) 2,500(6) 554
Vice President, 1995 73,755 28,000 *(8) 8,000(6) 530
Marketing and Sales 1994 9,232 0 *(8) 0 0
</TABLE>
- -------------------
(1) Amounts in this column include compensation to officers from (a) the
Company's supplemental medical reimbursement plan in which all officers are
eligible to participate, (b) the Company's tax and financial counseling
reimbursement plan in which all officers are eligible to participate, (c)
the Company's legal services reimbursement plan in which the Vice Chairman
is eligible to participate, (d) the payment of car allowances to certain
officers in lieu of providing a company car, (e) the payment of private
club dues for certain officers and (f) contributions by the Company on
behalf of certain officers pursuant to its Retirement/Savings Plan which
qualifies as a thrift plan under Section 401(k) of the Internal Revenue
Code. The type and amount of each perquisite or other personal benefit
which exceeds 25% of the total perquisites and other personal benefits
reported for such officer are identified in a footnote.
(2) On behalf of Mr. J.B. Bishop, the Company paid $2,160 under the
supplemental medical reimbursement plan in fiscal 1994.
(3) On behalf of Mr. J.F. Bishop, the Company paid $7,522 under the
supplemental medical reimbursement plan and paid $4,006 for private club
dues in fiscal 1996, paid $12,776 under the legal services reimbursement
plan in fiscal 1995, and paid $4,267 for private club dues in fiscal 1994.
Amounts do not include non-cash compensation to Mr. J.F. Bishop in the form
of expenses related to personal use of a Company-supplied automobile, which
amount did not exceed 10% of the cash compensation of Mr. J.F. Bishop.
(4) On behalf of Mr. Ardizzone, the Company paid $3,924 under the supplemental
medical reimbursement plan, paid $4,200 in car allowances and contributed
$2,699 under the Retirement/Savings Plan in fiscal 1996, paid $4,200 in car
allowances and contributed $2,956 under the Retirement/Savings Plan in
fiscal 1995, and paid $4,200 in car allowances in fiscal 1994.
(5) Amounts in this column consist of payments by the Company of premiums for
term life insurance.
(6) Options to purchase common stock awarded under the Company's Amended and
Restated 1994 Stock Option Plan.
(7) On behalf of Mr. Andres, the Company paid $4,200 in car allowances and
contributed $2,305 under the Retirement/ Savings Plan in fiscal 1996.
(8) Perquisites and personal benefits provided to the named executive officer
under various Company programs did not exceed $50,000 or 10% of such
individual's salary and bonus.
OPTION GRANTS IN FISCAL 1996. The following table provides information on
options granted under the Company's Second Amended and Restated 1994 Stock
Option Plan in fiscal 1996 to the named executive officers:
<TABLE>
<CAPTION>
Individual Grants
- ------------------------------------------------------------------------------------------------------------------
Number of Securities % of Total
Underlying Options Exercise or Base
Options Granted to Employees in Price Expiration
Name Granted (#) Fiscal Year (1) ($/Sh) Date
<S> <C> <C> <C> <C>
J. Bradford Bishop 15,002(2) 54.5% $4.2625 2/13/01
John F. Bishop ---- ---- ---- ----
John J. Ardizzone, Jr. (4) 3,000(3) 10.9% $3.875 2/13/06
Ivan Andres 2,500(3) 9.1% $3.875 2/13/06
</TABLE>
(1) Percentage based on grants to employees during the last fiscal year of
options to purchase 27,500 shares of Common Stock.
(2) The options granted to the named individual become exercisable with respect
to one-third of such shares on February 13, 1997 and will become
exercisable with respect to an additional one third on February 13 of each
of the following two years.
20
<PAGE>
(3) The options granted to the named individuals become exercisable with
respect to 20% of such shares on February 13, 1997 and will become
exercisable with respect to an additional 20% on February 13 of each of the
following four years.
(4) The options granted to Mr. Ardizzone were canceled in connection with his
resignation in October 1996.
AGGREGATE OPTION/SAR EXERCISES IN FISCAL 1996 AND FY-END OPTION/SAR
VALUES. The following table provides information regarding option and SAR
exercises in fiscal 1996 by the named executive officers and the value of such
officers' unexercised options at September 30, 1996:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/
Options/ SARs at FY-End($)
Shares SARs at FY-End (#) (1)
Acquired on Value Exercisable (E)/ Exercisable (E)/
Name Exercise (#) Realized ($) Unexercisable (U) Unexercisable (U)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J. Bradford Bishop --- --- 15,000 options(U) $22,313/options(U)
- ----------------------------------------------------------------------------------------------------------------------------------
John F. Bishop --- --- --- ---
- ----------------------------------------------------------------------------------------------------------------------------------
John J. Ardizzone, Jr. (2) 2,000(3) $6,000 6,750 options(E) $ 6,750/options(E)
11,000 options(U) $32,625/options(U)
4,000 SARs(U) $12,000/SARS(U)
- ----------------------------------------------------------------------------------------------------------------------------------
Ivan Andres 1,600(4) $5,800 8,900 options(U) $26,288/options(U)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------------
(1) The options and SARs at fiscal year end were in-the-money based on a fair
market value per share of Common Stock of $5.75, which represents the mean
between the bid and asked prices of a share on the NASDAQ System at the
close of business on September 30, 1996.
(2) All unexercised options and SARs of Mr. Ardizzone were canceled in
connection with his resignation in October 1996.
(3) Represents SARs exercised by the named individual.
(4) Represents shares acquired by exercise of options by the named individual.
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
COMMITMENT OF THE BISHOPS TO PURCHASE COMMON STOCK IN RIGHTS OFFERING
J. Bradford Bishop, Chairman and Chief Executive Officer of the
Company, and John F. Bishop, Vice Chairman, Secretary and Treasurer of the
Company, both of whom are principal stockholders and members of the Board of
Directors of the Company (the "Bishops") have committed to the Company that they
will purchase $1,360,000 in Common Stock by exercise of Rights distributed to
them if other stockholders purchase at least $800,000 in Common Stock upon
exercise of Rights distributed to them (the "Commitment"). Thus, the Bishops'
subscription for Shares in the Rights Offering is conditional, whereas
subscriptions by other stockholders are unconditional. In order to avoid being
diluted in the Rights Offering, other stockholders will be required to submit
unconditional subscription agreements prior to the expiration date.
In the opinion of management and the disinterested members of the
Board of Directors, the terms of the Commitment are fair and reasonable and as
favorable to the Company as those which could be obtained from unrelated third
parties.
BISHOP FAMILY TRUST LOAN FACILITY
The Company has entered into a Loan Facility with the Bishop Family
Trust. See "The Company--Bishop Family Trust Loan Facility" above.
In the opinion of management and the disinterested members of the
Board of Directors, the terms of the Loan Facility are fair and reasonable and
as favorable to the Company as those which could be obtained from unrelated
third parties.
21
<PAGE>
SUBORDINATED LOAN
The Company entered into Subordinated Loan Agreement dated as of
December 16, 1996 with J. Bradford Bishop, Chairman and Chief Executive Officer
of the Company, and John F. Bishop, Vice Chairman, Treasurer and Secretary of
the Company (together, the "Bishops"). The Bishops advanced $600,000 to the
Company under the Subordinated Loan Agreement. Interest accrued thereon at 8%
per annum, payable quarterly. In connection with the Subordinated Loan
Agreement, the Company issued warrants to the Bishops to purchase 90,000 shares
of Common Stock at $3.00 per share. The Subordinated Loan Agreement terminated
on October 15, 1997, and all principal thereunder was repaid in full on such
date with the proceeds from the Loan Facility with the Bishop Family Trust. As
consideration for the early repayment of such obligations, the warrants issued
to the Bishops were canceled on October 15, 1997.
In the opinion of management and the disinterested members of the
Board of Directors, the terms of the Subordinated Loan Agreement, including the
warrants to be issued thereunder, were fair and reasonable and as favorable to
the Company as those which could be obtained from unrelated third parties.
BRIDGE LOANS
The Company has received several bridge loans from the Bishops payable
on demand (the "Bridge Loans"), which amounted to $400,000, plus interest, on
October 15, 1997. Interest accrued thereon at 10% per annum. All principal of
the Bridge Loans was repaid in full on such date with the proceeds from the Loan
Facility with the Bishop Family Trust.
In the opinion of management and the disinterested members of the
Board of Directors, the terms of the Bridge Loans were fair and reasonable and
as favorable to the Company as those which could be obtained from unrelated
third parties.
EMPLOYMENT AGREEMENT
On October 1, 1995, the Company entered into an Employment Agreement
with John F. Bishop, Vice-Chairman of the Board, Treasurer and Secretary of the
Company, whereby Mr. Bishop will provide his services for a monthly salary of
$6,500 for an initial term of two years. On the first day of each month, the
initial term is automatically extended for an additional month, unless either
party notifies the other in writing of his or its desire not to extend the term.
In the event the Company elects not to extend the term or there is a change in
control of the Company (the date of such event is referred to as the "Transition
Date"), Mr. Bishop will continue to perform services for the Company for a three
month transition period and the Company will maintain his compensation and other
benefits for the three month transition period and an additional twenty-one
months. Should Mr. Bishop become permanently disabled, the Company shall pay to
him fifty percent (50%) of the agreed salary for the remainder of the term.
Effective January 1, 1997, Mr. Bishop agreed to reduce his monthly salary to
$3,250 until the Transition Date. In addition to the foregoing compensation, the
Company will provide Mr. Bishop with a private office at 3 Civic Center Plaza,
Suite 265, Newport Beach, California (or a comparable location in the City of
Newport Beach), secretarial and administrative assistance, office equipment and
supplies and other facilities and services suitable to his position. Mr. Bishop
is also entitled to all employee benefits provided to senior management
personnel of the Company and to participate in the Company's medical
reimbursement plan which is supplemental to the medical plan covering all
employees, the tax and financial counseling reimbursement plan and the legal
reimbursement plan provided by the Company as well as Company paid life
insurance.
In addition to his monthly compensation, Mr. Bishop is entitled under
the Employment Agreement to the full and unrestricted use of the currently
provided 1989 Mercedes Benz Model 560 automobile or its successor automobile if
replaced at any time prior to the end of his employment term. The Company
provides all gasoline, maintenance, repair and insurance with respect to the
automobile during the term of the Agreement. In consideration for Mr. Bishop's
prior agreement to reduce his monthly salary to $1 per month for the period from
February 1992 through July 1992 and the deduction of $217 per month from his
monthly salary for the period from August 1992 through October 1995, the Company
granted to Mr. Bishop the right to acquire the automobile with full credit for
the foregone salary totaling $56,846. Mr. Bishop has the right to acquire the
automobile at any time during the two months immediately preceding the end of
his employment term. If the automobile's Kelly Blue Book value is in excess of
$56,846, Mr. Bishop shall pay to the Company the difference at the time Mr.
Bishop acquires the
22
<PAGE>
automobile. If the value of the automobile is less than $56,846, the Company
shall pay the difference to Mr. Bishop at the time he acquires the automobile.
In the event that Mr. Bishop's employment is terminated prior to the end of his
employment term, he shall have the right to acquire the automobile at that time.
In the event of Mr. Bishop's death, the right to acquire the automobile shall be
exercisable by Mr. Bishop's widow or the executor of his estate.
The Company may terminate the Employment Agreement only if Mr. Bishop
were to be convicted of a felony, if he willfully fails to fulfill his duties,
if he commits gross negligence in the performance of his duties, if he
intentionally misappropriates significant funds of the Company or if he dies.
Mr. Bishop may terminate the agreement at any time on thirty days notice to the
Company.
Under the Employment Agreement, Mr. Bishop may not disclose
confidential information of the Company at any time. This provision survives
termination of the Employment Agreement. Mr. Bishop is further prohibited from
soliciting employees or customers of the Company for at least one (1) year
following termination of the Employment Agreement.
LEGAL COUNSEL
Bainbridge Group, a Law Corporation ("Bainbridge Group") provides
ongoing legal services for the Company. Michael E. Johnson, a director of the
Company, is President of Bainbridge Group. In the opinion of management and the
disinterested members of the Board of Directors, the terms of the relationship
between the Company and Bainbridge Group are fair and reasonable and as
favorable to the Company as those which could be obtained from unrelated third
parties. The Company obtains legal services from an affiliate at rates normally
charged to a third party.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of October 14, 1997, certain
information as to the Common Stock of the Company beneficially owned, directly
or indirectly, by each person who is known to the Company to beneficially own
more than 5% of the outstanding Common Stock, by each director, by each nominee
for director, by each executive officer named in the Summary Compensation Table,
and by all executive officers and directors of the Company as a group. The
persons named hold sole voting and investment power with respect to the shares
shown opposite their respective names, unless otherwise indicated. (Note --
"Direct" means Common Stock held individually, or held in joint tenancy or as
community property with spouse. "Indirect" means Common Stock held by spouse as
separate property, or held of record by the stockholder for the benefit of
another person, or held of record by the stockholder as trustee of a trust.)
<TABLE>
<CAPTION>
Name and Address of Amount of Nature of Percent
Beneficial Owner Beneficial Ownership Beneficial Ownership of Class
---------------- -------------------- -------------------- --------
<S> <C> <C> <C>
CEDE & Company 186,100 Indirect(1) 43.80%
Depository Trust Company
7 Hanover Square
New York, New York 10004
John F. Bishop (2) 128,927 Indirect (3) 30.34%
J. Bradford Bishop (2) 62,473 Indirect (4) 15.69%
5,000 Direct (6)
J. Sidney Webb (2) 800 Indirect (5) 2.86%
11,667 Direct (6)
Robert D. Johnson (2) 200 Indirect (7) 2.72%
11,667 Direct(6)
Michael E. Johnson (2) 3,333 Direct (6) *
23
<PAGE>
<CAPTION>
Name and Address of Amount of Nature of Percent
Beneficial Owner Beneficial Ownership Beneficial Ownership of Class
---------------- -------------------- -------------------- --------
<S> <C> <C> <C>
Ivan Andres (2) 2,100 Direct (6) *
John J. Ardizzone, Jr. (2) 0 --- *
All Executive Officers and 226,167 --- 49.31%
Directors as a Group
(7 persons) (8)
</TABLE>
- ----------------------------
* Less than 1% of the class
(1) CEDE & Company is a nominee of the Depository Trust Company, which is a
wholly owned subsidiary of the New York Stock Exchange, Inc. CEDE disclaims
any beneficial interest in shares of the Company's Common Stock held in
its name.
(2) The mailing address for such individual is in care of EIP Microwave, Inc.,
1745 McCandless Drive, Milpitas, CA 95035.
(3) Consists of (i) 118,260 shares held by J.F. Bishop and his spouse as
trustees of the Bishop Family Trust, and (ii) 10,667 shares held by J.F.
Bishop as trustee for the benefit of certain of his children.
(4) Consists of (i) 22,473 shares held by J.B. Bishop and his spouse as
trustees of a revocable trust, and (ii) 40,000 shares held by J.B. Bishop
and his spouse as trustees of the Bishop 1993 Children's Trust.
(5) Held by J.S. Webb as trustee of the Webb Family Trust.
(6) Consists of shares for which the named individual has the right to acquire
beneficial ownership within 60 days after the Record Date by exercise of
options granted under the Company's Second Amended and Restated 1994 Stock
Option Plan.
(7) Held by R.D. Johnson and his spouse as trustees of the Robert D. Johnson
and Dorothy A. Johnson Trust.
(8) Total includes the shares indirectly held by Messrs. J.F. Bishop, J.B.
Bishop, J.S. Webb and R.D. Johnson as trustees, as noted above.
24
<PAGE>
DESCRIPTION OF SECURITIES
The following description of the securities of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a summary
and is qualified in its entirety by the provisions of the Certificate of
Incorporation and Bylaws, which have been filed as exhibits to the Company's
Registration Statement.
AUTHORIZED STOCK
The Company is authorized to issue 10,000,000 shares of Common Stock,
$0.01 par value. As of the date of this Prospectus the Company had 424,907
shares of Common Stock issued and outstanding.
VOTING RIGHTS
Holders of the shares of Common Stock are entitled to one vote per
share on all matters submitted to a vote of the stockholders. Except as
described in the following paragraph, shares of Common Stock do not have
cumulative voting rights, which means that the holders of a majority of the
shares voting for the election of the board of directors can elect all members
of the board of directors.
As a Delaware corporation doing business in California, the Company is
subject to certain provisions of the California General Corporation law (the
"California Law") if certain property, payroll and sales factors are met and
more than 50% of the Common Stock is held of record by persons having addresses
in California (excluding shares held by broker-dealers, banks or other
nominees). The Company believes that it meets the statutory test for
applicability of certain provisions of California Law to the Company. One of
these provisions, Section 708, entitles a stockholder to cumulate his or her
votes at an election of directors. Accordingly, with respect to the election of
directors only, if one or more stockholders give notice at the Annual Meeting
before the voting of their intention to cumulate their votes, all stockholders
entitled to vote shall have the right to so cumulate their votes and to give one
candidate, who has been nominated prior to the voting, a number of votes equal
to the number of directors to be elected multiplied by the number of votes to
which his or her shares are entitled, or to distribute such votes among two or
more such candidates on the same principle in such proportions as each
stockholder may determine. If such vote is not conducted by cumulative voting,
stockholders may vote in favor of all nominees, withhold their votes as to all
nominees, or vote in favor of specific nominees and withhold their votes as to
other nominees.
DIVIDEND RIGHTS
Holders of record of shares of Common Stock are entitled to receive
dividends when and if declared by the board of directors out of funds of the
Company legally available therefor. The Company does not anticipate paying
dividends in the near future.
LIQUIDATION RIGHTS
Upon any liquidation, dissolution or winding up of the Company,
holders of shares of Common Stock are entitled to receive a pro rata share of
the assets of the Company available for distribution to stockholders.
PREEMPTIVE RIGHTS
Holders of Common Stock do not have any preemptive rights to subscribe
for or to purchase any stock, obligations or other securities of the Company.
DISSENTER'S RIGHTS
Under current Delaware law, a stockholder is afforded dissenters'
rights which if properly exercised may require the corporation to repurchase its
shares. Dissenters' rights commonly arise in extraordinary transactions such as
mergers, consolidations, reorganizations, substantial asset sales, liquidating
distributions, and certain amendments to the Company's certificate of
incorporation.
25
<PAGE>
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Bylaws contain
provisions that could delay, defer or prevent a change in control of the
Company. The Company has a classified Board of directors. The Board is divided
into three classes, each class consisting of two directors. There is one
vacancy in the class whose term expires at the 1998 Annual Meeting. The terms
of directors in the two remaining classes expire at the 1999 Annual Meeting and
the 2000 Annual Meeting, respectively. Further, the Bylaws set forth procedures
for the nomination of director candidates by the Board of Directors or
stockholders, and require that a stockholder give specified notice of its intent
to nominate a director candidate at least 90 days prior to the Annual Meeting.
The Company's Certificate of Incorporation restricts the ability of
the Company to engage in specified transactions with any interested person. An
"interested person" is defined to include any individual or entity who is the
beneficial owner of 10% or more of the Common Stock. Such transactions are
prohibited, unless the transaction is approved by (i) the holders of two-thirds
of the outstanding shares of Common Stock and a majority of such shares not held
by the interested person, or (ii) a majority of the directors who are
unaffiliated with the interested person and who were directors prior to the time
the interested person became an interested person (or are successors to such
directors). Other requirements may also be applicable for certain transactions.
TRANSFER AGENT
ChaseMellon Shareholder Services, L.L.C. serves as the transfer agent
of the Company.
LEGAL MATTERS AND INTERESTS OF COUNSEL
The validity of the authorization and issuance of the securities
offered hereby will be passed upon for the Company by Bainbridge Group, a Law
Corporation, of Irvine, California. Bainbridge Group also provides ongoing legal
services for the Company. Michael E. Johnson, President of Bainbridge Group, is
a director of the Company and is the holder of options to purchase 10,000 shares
of common stock of the Company.
EXPERTS
The consolidated balance sheets of EIP Microwave, Inc. and
subsidiaries as of September 30, 1996, and 1995, and the consolidated statements
of operations and retained earnings (accumulated deficit), stockholders' equity
and cash flows for the years then ended, have been included herein and in the
Registration Statement in reliance upon the report of Price Waterhouse LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The report of Price Waterhouse LLP covering the aforementioned
financial statements contains an explanatory paragraph. The explanatory
paragraph states the Company has incurred significant recent losses from
operations and may need to obtain additional financing to meet its business
plans for fiscal 1998 and beyond that raise substantial doubt about its ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
CHANGE IN ACCOUNTANTS
The Company engaged Meredith, Cardozo, Lanz & Chiu LLP as its new
independent accountants as of October 9, 1997.
On October 9, 1997, EIP Microwave, Inc. (the "Company") dismissed
Price Waterhouse LLP as its independent accountants. The reports of Price
Waterhouse LLP on the financial statements for the years ended September 30,
1995 and 1996 contained no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principle,
except that their reissued report on the financial statements for the year ended
September 30, 1996, which was dual dated December 23, 1996 and October 23, 1997
includes an explanatory paragraph to express substantial doubt regarding the
Company's ability to continue as a going concern. The Company's Audit Committee
participated in and approved the decision to change independent accountants. In
connection with its audits for the two most recent fiscal years and through
October 9, 1997,
26
<PAGE>
there have been no disagreements with Price Waterhouse LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
Price Waterhouse LLP would have caused them to make reference thereto in their
report on the financial statements for such years. Price Waterhouse LLP
furnished the Company with a letter addressed to the Securities and Exchange
Commission stating that it agrees with the statements in this paragraph.
INDEMNIFICATION
Under Delaware corporation law, a corporation is authorized to
indemnify officers, directors, employees and agents who are made or threatened
to be made parties to any civil, criminal, administrative or investigative suit
or proceeding by reason of the fact that they are or were a director, officer,
employee or agent of the corporation or are or were acting in the same capacity
for another entity at the request of the corporation. Such indemnification
includes expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such persons if they acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation or, with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful. In the case of any action or suit by or in the right of the
corporation against such persons, the corporation is authorized to provide
similar indemnification, provided that, should any such persons be adjudged to
be liable for negligence or misconduct in the performance of duties to the
corporation, the court conducting the proceeding must determine that such
persons are nevertheless fairly and reasonably entitled to indemnification. To
the extent any such persons are successful on the merits in defense of any such
action, suit or proceeding, Delaware law provides that they shall be indemnified
against reasonable expenses, including attorney fees. A corporation is
authorized to advance anticipated expenses for such suits or proceedings upon an
undertaking by the person to whom such advance is made to repay such advances if
it is ultimately determined that such person is not entitled to be indemnified
by the corporation. Indemnification and payment of expenses provided by
Delaware law are not deemed exclusive of any other rights by which an officer,
director, employee or agent may seek indemnification or payment of expenses or
may be entitled to under any by-law, agreement, or vote of stockholders or
disinterested directors. In such regard, a Delaware corporation is empowered
to, and may, purchase and maintain liability insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation.
Article Ninth of the Company's Certificate of Incorporation
eliminates, to the fullest extent permitted by law, the personal liability of
directors for monetary damages in certain instances for breach of a director's
fiduciary duty of care. Article IX of the Company's Bylaws provides that
(i) each director, officer and employee of the Company shall be indemnified by
the Company to the fullest extent authorized by Delaware law subject to certain
limitations, (ii) each indemnitee is entitled to be paid by the Company for its
expenses in defending proceedings in advance of final determination, (iii) the
right of indemnification provided therein shall not be exclusive, (iv) the
Company is authorized to enter into contracts with any director, officer,
employee or agent of the Company which provide for indemnification equivalent to
or greater than provided in Article IX, and (v) the Company is required to
maintain insurance to the extent reasonably available to protect itself and any
such director, officer, employee or agent.
Consistent with Article IX of the Company's Bylaws, the Company has
entered into individual Indemnification Agreements with its directors and
officers. The Indemnification Agreements, among other things, provide mandatory
indemnification protection in excess of that provided by Delaware corporation
law. The Indemnification Agreements provide certain procedures relating to
indemnification and advancement of expenses.
In addition, the Company currently carries limited insurance coverage
for its directors and officers. The Indemnification Agreements provide
protections beyond those currently available from the Company's existing
director's and officer's liability insurance.
As a result of the foregoing, the Company may, at some future time, be
legally obligated to pay judgments (including amounts paid in settlement) and
expenses in regard to civil or criminal suits or proceedings brought against one
or more of its officers, directors, employees or agents, as such, with respect
to the Company.
27
<PAGE>
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable.
28
<PAGE>
EIP MICROWAVE, INC.
Index to Financial Statements for the
Years ended September 30, 1996 and 1995 and
Nine Months ended June 30, 1997 and 1996
- --------------------------------------------------------------------------------
Contents Page
- --------------------------------------------------------------------------------
Report of Independent Accountants F-2
- --------------------------------------------------------------------------------
Financial Statements
- --------------------------------------------------------------------------------
Consolidated Balance Sheet as of F-3
September 30, 1995, and 1996, and
June 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
Consolidated Statements of Operations and Retained F-4
Earnings (Accumulated Deficit) for the Years Ended
September 30, 1995 and 1996, and the Nine Months
Ended June 30, 1996 and June 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
Statements of Stockholders' Equity for the F-4
Years Ended September 30, 1995 and 1996, and
the Nine Months Ended June 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows for the F-5
Years Ended September 30, 1995 and 1996, and the
Nine Months Ending June 30, 1996 and 1997
(unaudited)
- --------------------------------------------------------------------------------
Notes to Financial Statements F-6
- --------------------------------------------------------------------------------
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of EIP Microwave, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of EIP
Microwave, Inc. and its subsidiary at September 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1996, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred significant recent losses from
operations and may need to obtain additional financing to meet its business
plans for fiscal 1998 and beyond that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PRICE WATERHOUSE LLP
San Jose, California
December 23, 1996, except for the third paragraph of Note 1, the second
paragraph of Note 6 and Note 9, which are as of October 23, 1997.
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1997 1996 1995
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 257 $ 216 $ 126
Short-term investments 27 324 319
-------- -------- --------
284 540 445
Accounts receivable, net 308 686 1,064
Inventories 1,125 1,067 1,133
Prepaid expenses 71 59 74
-------- -------- --------
Total current assets 1,788 2,352 2,716
-------- -------- --------
Property and equipment, net 630 631 271
-------- -------- --------
Other assets - - 30
$ 2,418 $ 2,983 $ 3,017
-------- -------- --------
-------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 314 $ 706 $ 610
Accrued liabilities 519 546 676
Advanced payments from customers - 190 -
Bank borrowings 296 185 -
Notes payable to affiliates 150 - -
Current portion of obligations under capital
leases 34 34 15
Total current liabilities 1,313 1,661 1,301
-------- -------- --------
Long term notes payable to affiliates 600 - -
Long term obligations under capital leases 71 95 -
Total Liabilities 1,984 1,756 1,301
-------- -------- --------
Commitments and contingencies (Note 5)
Stockholders' equity:
Common stock $.01 par value, authorized 5 5 5
- 10,000,000 shares;
424,907 issued and outstanding
Additional paid-in-capital 848 848 844
Retained earnings (accumulated deficit) (419) 374 867
-------- -------- --------
Total stockholders' equity 434 1,227 1,716
-------- -------- --------
$ 2,418 $ 2,983 $ 3,017
-------- -------- --------
-------- -------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Years Ended
Ended June 30, September 30,
1997 1996 1996 1995
--------------------- ---------------------
(unaudited)
<S> <C> <C> <C> <C>
Net sales $ 3,560 $ 4,886 $ 6,492 $ 6,721
Costs and expenses:
Cost of sales 2,170 3,075 4,064 3,646
Research, development and engineering 722 724 978 742
Selling, general and administrative 1,416 1,548 2,084 2,289
Interest and other, net 45 (142) (141) (81)
-------- -------- -------- --------
Total costs and expenses 4,353 5,205 6,985 6,596
-------- -------- -------- --------
Net income (loss) (793) (319) (493) 125
Retained earnings at beginning of period 374 867 867 742
Retained earnings (accumulated deficit)
at end of period $ (419) $ 548 $ 374 $ 867
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share $ (1.87) $ (.75) $ (1.16) $ 0.30
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares outstanding 425 423 423 423
-------- -------- -------- --------
-------- -------- -------- --------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Common Stock Paid-in Retained
(Dollars in thousands) Shares Amount Capital Earnings Total
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994 423,307 $ 5 $ 844 $ 742 $1,591
-------------------------------------------------------------------
Stock Issues - - - - -
-------------------------------------------------------------------
Net Income - - - 125 125
-------------------------------------------------------------------
Balance at September 30, 1995 423,307 5 844 867 1,716
-------------------------------------------------------------------
Stock Issues 1,600 - 4 - 4
Net Income - - - (493) (493)
-------------------------------------------------------------------
Balance at September 30, 1996 424,907 5 848 374 1,227
-------------------------------------------------------------------
Stock Issues (unaudited) - - - - -
Net income (unaudited) - - - (793) (793)
-------------------------------------------------------------------
Balance at June 30, 1997
(unaudited) 424,907 5 848 (419) 434
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash
(Dollars in thousands, unaudited)
<TABLE>
<CAPTION>
Nine Months Years Ended
Ended June 30 September 30
1997 1996 1996 1995
------------------- -------------------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (793) $ (319) $ (493) $ 125
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 190 134 147 220
Gain on sale of capital equipment (98) (50) (50) (146)
Change in assets and liabilities:
Accounts receivable, net 378 277 378 (350)
Inventories (58) 117 66 (149)
Prepaid expenses (12) 33 45 ( 36)
Accounts payable (392) 1 96 83
Accrued liabilities (27) (151) (130) 65
Advanced payment from customers (190) - 190 -
-------- -------- -------- --------
Cash provided by (used in) operating activities (1,002) 42 249 (188)
-------- -------- -------- --------
Cash flows from investing activities:
Purchase of short-term investments - (19) (213) (11)
Sale of short-term investments 297 - 208 -
Capital expenditures (192) (347) (394) (41)
Proceeds from sale of capital equipment 101 61 61 155
-------- -------- -------- --------
Cash provided by (used in) investing activities 206 (305) (338) 103
-------- -------- -------- --------
Cash flows from financing activities:
Proceeds from bank borrowings 111 185 185 -
Proceeds from notes payable to affiliates 750 - - -
Proceeds from sales of common stock to employees - - 4 -
Repayment of obligations under capital leases (24) - (10) -
-------- -------- -------- --------
Cash provided by financing activities 837 185 179 -
-------- -------- -------- --------
Increase (decrease) in cash and cash equivalents 41 (78) 90 (85)
Cash and cash equivalents at beginning of period 216 126 126 211
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 257 $ 48 $ 216 $ 126
-------- -------- -------- --------
-------- -------- -------- --------
Supplemental information
Equipment acquired pursuant to capital leases - - 124 -
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 1. THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The Company is engaged in a single industry segment constituting the
development, manufacture, and sale of high frequency microwave and radio
frequency (RF) test and measurement instruments. The Company's stand-alone
microwave frequency counters represented 50% of net sales in 1996, 64% of net
sales in 1995, and 75% of net sales in 1994. Substantially all of its
activities are conducted in the United States, and the Company has no foreign
manufacturing operations nor material amounts of foreign assets. Export sales
to customers in Western Europe, Pacific Rim countries and in other parts of the
world, as a percent of net sales respectively, were approximately 20%, 11% and
5% in 1996, 25%, 13% and 5% in 1995, and 17%, 9% and 10% in 1994. Profit
margins are similar on foreign and domestic sales. Direct sales to the United
States government and its contractors as a percent of net sales were
approximately 33% in 1996 (22% to one government subcontractor), 36% in 1995
(11% to one government subcontractor), and 38% and 26% for the nine months ended
June 30, 1997 and 1996, respectively (29 and 19% to one government
subcontractor, respectively).
LIQUIDITY
As shown in the accompanying financial statements, the Company incurred a
loss from operations for the year ended September 30, 1996 of $493,000 and has
experienced significant fluctuations in operating results in the past. The
fiscal 1997 operating plan anticipates the release of a new frequency
measurement product. To the extent that product development is delayed or the
new product introduction does not achieve sufficient market acceptance, the
Company's financial position and results of operations will be adversely
impacted.
The Company has incurred significant recent losses from operations
and additional financing will be required for the Company to meet its
business plan for fiscal 1998 and beyond. There can be no assurance that the
Company will not incur additional losses until its recently introduced and
existing products generate significant revenues. The accompanying financial
statements have been prepared assuming the Company will continue as a going
concern. The Company's business plan for fiscal 1998 involves three key
operating objectives: (1) increasing the manufacture and shipment of
microwave frequency counters to Hewlett-Packard Company for distribution on a
private label basis worldwide through an OEM relationship; (2) completing
field testing of the Company's RF synthesized signal generators and RF down
converters under its five-year indefinite quantity, fixed price subcontract
with ManTech Systems Engineering Corporation, and preparing for shipment of
production quantities of these products in the fourth fiscal quarter of 1998;
and (3) completing current development efforts and introducing new test
instrumentation for the wireless telecommunications market. Management
believes that it can successfully implement these key operating objectives.
The Company's ability to generate sufficient cash to support its business
plan during the 1998 fiscal year depends on the ability of management to
obtain additional debt and equity financing, through the Rights Offering and
other capital sources. Management is currently pursuing additional debt
financing. If the Company is unable to obtain such financing, it will be
required to reduce discretionary spending in order to maintain its operations
at a reduced level. Management believes that it will be able to reduce
discretionary spending if required. The accompanying financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany transactions and
accounts have been eliminated.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
F-6
<PAGE>
SHORT-TERM INVESTMENTS
Short-term investments, consisting of publicly traded preferred stocks and
government bonds, are stated at fair value. The Company has adopted Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires companies to
classify investments in debt and equity securities with readily determinable
fair values as "held-to-maturity", "available for sale", or "trading" and
establishes accounting and reporting requirements for each classification. The
Company classifies all securities held as available for sale. Securities
classified as available for sale are reported at their fair market value with
unrealized gains and losses reported as a separate component of stockholders'
equity. Such unrealized gains and losses were immaterial as of September 30,
1996 and 1995, and June 30, 1997. The Company's government bonds have a maturity
of one year or less. Publicly traded preferred stocks are considered highly
liquid and are classified as short-term investments.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents and
short-term investments and trade accounts receivable. The Company places its
cash, cash equivalents and short-term investments in a variety of financial
instruments such as certificates of deposit and marketable equity securities.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The
Company maintains an allowance for uncollectible accounts receivable based upon
the expected collectibility of all accounts receivable balances. At September
30, 1996, the accounts receivable balance from three customers represented 32%,
12%, and 10% of net trade receivables, and at June 30, 1997 14%, 11%, and 7% of
net trade receivables.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
actual cost (determined on a first-in, first-out basis), or market.
PROPERTY AND EQUIPMENT
Purchased property and equipment are stated at cost and are depreciated
using the straight-line method over lives ranging from three to eight years.
Self-constructed demonstrator products are stated at their standard
manufacturing cost.
REVENUE RECOGNITION AND WARRANTY
Sales are recognized at the time of shipment provided no significant
obligations remain and collectibility is probable. The Company provides for the
estimated costs of fulfilling its warranty obligation at the time the related
sale is recorded.
INCOME TAXES
The Company utilizes an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequence of events that have been recognized in the Company's financial
statements or tax returns.
NET INCOME (LOSS) PER SHARE
The calculation of net income (loss) per share is based upon the weighted
average number of shares outstanding during the year. Common stock equivalents
were not materially dilutive for the year ended September 30, 1995. As a result
of the losses incurred in fiscal 1996 and 1994, and for the nine months ended
June 30, 1997 and 1996, the common equivalent shares were antidilutive and,
accordingly, were excluded from the computation of loss per share for those
years.
F-7
<PAGE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Only the disclosure requirements of this standard will be
adopted by EIP for the year ending September 30, 1997, and therefore there will
be no impact on EIP's consolidated financial position or results of operations.
In February 1997, the Financial Account Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). SFAS 128, which is effective for the Company's fiscal year ending
September 30, 1998, redefines earning per share under generally accepted
accounting principles. Under the new standard, primary earnings per share is
replaced by basic earnings per share, and fully diluted earnings per share is
replaced by diluted earnings per share. The adoption of SFAS 128 is not
expected to have a material impact on the Company since earnings per share
reported under Accounting Principles Board Opinion No. 15 approximates diluted
earnings per share, which will be reported under SFAS 128.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Standards No. 129 ("SFAS 129"), "Disclosure of
Information about Capital Structure". SFAS 129 requires disclosure of certain
information related to the Company's capital structure and is not anticipated to
have a material impact on the Company's financial position or results of
operations.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive
Income." SFAS 130 establishes standards for reporting comprehensive income and
its components in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income as defined
includes all changes in equity (net assets) during a period from nonowner
sources. Examples of items to be included in comprehensive income, which are
excluded from net income, include foreign currency translation adjustments and
unrealized gain/loss on available-for-sale securities. The disclosure
prescribed by SFAS must be made beginning with the first quarter of 1998.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards
for the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
has not yet determined the impact, if any, of adopting this new standard. The
disclosures prescribed by SFAS 131 are effective in 1998.
INTERIM RESULTS (UNAUDITED)
The accompanying balance sheet as of June 30, 1997, the statements of
operations and of cash flows for the nine months ended June 30, 1996 and 1997
are unaudited. In the opinion of management, the statements have been prepared
on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair statement of the results of interim periods. The data disclosed in these
notes to financial statements for these periods are also unaudited.
NOTE 2. CONSOLIDATED BALANCE SHEET DETAIL
(Dollars in thousands) September 30, June 30,
1996 1995 1997
Accounts receivable: (unaudited)
Trade $ 736 $1,138 $ 358
Less - allowance for doubtful accounts (50) (74) (50)
----------------- ------
$ 686 1,064 $ 308
F-8
<PAGE>
----------------- ------
----------------- ------
Inventories:
Raw materials $ 719 $ 633 $ 599
Work-in-process 320 489 411
Finished goods 28 11 115
----------------- ------
----------------- ------
$1,067 $1,133 $1,125
----------------- ------
----------------- ------
Property plant and equipment:
Machinery and equipment $3,121 $3,168 $3,124
Computer equipment and software 1,054 1,160 1,060
Demonstrator equipment 337 359 350
Furniture, fixtures and other fixed assets 807 471 869
----------------- ------
----------------- ------
5,319 5,158 5,403
Less: accumulated depreciation (4,688) (4,887) (4,773)
----------------- ------
----------------- ------
$ 631 $ 271 $ 630
----------------- ------
----------------- ------
Accrued liabilities:
Salaries, wages and benefits $ 215 $ 157 $ 260
Commissions 83 61 11
Warranty 53 66 32
Other 195 392 216
----------------- ------
$ 546 $ 676 $ 519
----------------- ------
----------------- ------
NOTE 3. EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN
The Company has a Retirement/Savings Plan which qualifies as a thrift
plan under Section 401(k) of the Internal Revenue Code. All employees who have
completed three months of service on or before the semiannual entry period are
eligible to participate in the Retirement Plan. The Retirement Plan allows
participants to contribute up to 12% of their earnings to the Retirement Plan
and deduct this amount from their wages for federal income tax purposes. The
Company will contribute 50 cents for each dollar contributed by the employee up
to 3% of total wages. Company contributions in fiscal years 1996, 1995, and for
the nine months ended June 30, 1997, totaled $49,000, $38,000 and $30,000,
respectively.
INCENTIVE COMPENSATION
The Company has an incentive compensation plan which provides for
awards of bonuses to officers and key employees based principally on achieving
stipulated Company financial objectives. In making specific awards,
consideration is given to the individual's contribution to the success of the
Company, to the success and performance of the unit or department of which the
individual is a member, and to the achievement of individual performance goals
established at the beginning of the fiscal year. The formula for computing
bonuses has been subject to annual modification and may in the future be again
modified at the discretion of the Board of Directors. No bonuses were awarded
for the nine months ended June 30, 1997 and 1996, nor for fiscal 1996. Bonuses
of $61,000 were awarded for fiscal 1995 results. No bonuses were awarded for
fiscal 1994 results.
STOCK APPRECIATION RIGHTS PLAN
On November 11, 1992, the Board of Directors adopted a Stock
Appreciation Rights Plan ("SAR Plan"). The SAR Plan provides for the award of
appreciation rights ("SARs") to officers and key management employees of the
F-9
<PAGE>
Company entitling such participants to receive the increase, if any, in the
value of one share of Company common stock from the date of the award to the
date(s) of valuation established at the time of the award. Generally, SARs are
deemed vested in five equal annual installments. Each award vested will be paid
in cash on a scheduled payment date. During the nine months ended June 30,
1997, and during fiscal 1996, 1995 and 1994, no SARs were awarded. A total of
760, 2,760, 2,760 and 7,760 SARs were vested during the nine months ended
June 30, 1997, and during fiscal 1996, 1995 and 1994, respectively. A total of
4,000, 0, 960, and 24,040 SARs were canceled during the nine months ended
June 30, 1997, and during fiscal 1996, 1995, and 1994, respectively, leaving an
aggregate of 760 SARs outstanding at June 30, 1997. The Company accrues a
compensation liability over the vesting period based on the increase in the
market value of the common stock over the award price. The liability recorded
in the nine months ended June 30, 1997, and during fiscal 1996 and 1995 was
$1,900, $7,900 and $20,293, respectively. No compensation liability was
recorded for fiscal 1994 relating to the SAR Plan.
STOCK OPTION PLAN
Under the Company's Second Amended and Restated 1994 Stock Option Plan
(the "Plan"), as in effect on June 30, 1997, stock options may be awarded to
directors, consultants and employees to purchase up to 200,000 shares of common
stock at exercise prices determined by the Board of Directors. The options can
generally be awarded for periods up to 10 years and are subject to vesting
schedules as determined by the Board of Directors.
The following table summarizes option activity under the Plan:
Options Options Options
Available Outstanding Price Per Share
Balance at September 30, 1994 - - $ -
Options authorized 80,000 - -
Options granted (57,500) 57,500 2.375
---------------------------------------
Balance at September 30, 1995 22,500 57,500 $ 2.375
---------------------------------------
---------------------------------------
Additional options authorized 20,000 - -
Options granted (37,500) 37,500 $3.875-4.263
Options exercised - (1,600) 2.375
---------------------------------------
Balance at September 30, 1996 5,000 93,400 $2.375-4.263
---------------------------------------
---------------------------------------
Additional options authorized (unaudited) 100,000 - -
Option granted (unaudited) (50,000) 50,000 $ 4.75
Options canceled (unaudited) 13,000 (13,000) $2.375-3.875
---------------------------------------
Balance at June 30, 1997 (unaudited) 68,000 130,400 $ 2.375-4.75
---------------------------------------
---------------------------------------
As of June 30, 1997, 46,431 awarded options are exercisable.
NOTE 4. INCOME TAXES
Deferred tax assets (liabilities) are summarized as follows:
(Dollars in thousands) 1996 1995
Net operating loss carryforwards $ 1,104 $ 1,016
Tax credit carryforwards 106 106
Inventory and other valuation reserves 221 190
F-10
<PAGE>
Other - -
----------------------------
Gross deferred tax asset 1,431 1,312
----------------------------
Depreciation expense - -
Other - -
----------------------------
Gross deferred tax liability - -
----------------------------
Deferred tax asset valuation allowance $ (1,431) $ (1,312)
----------------------------
----------------------------
The Company provides a valuation allowance for deferred tax assets when it
is more likely than not that some portion or all of the deferred tax asset will
not be realized.
The U.S. net operating loss carryforward of approximately $2,800,000 at
September 30, 1996, expires by fiscal year 2010 if not offset against taxable
income. The amount of and the benefit from net operating losses that can be
carried forward may be impaired in certain circumstances. Events which may
cause changes in the Company's tax carryovers include, but are not limited to, a
cumulative ownership change of more than 50% over a three-year period.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company has signed a lease for 20,331 square feet in a building
located in Milpitas, California, for an initial term of three years ending
October 31, 1998. The lease provides for rentals of $226,000, $226,000, and
$19,000 for fiscal years 1997, 1998 and 1999 plus applicable real property taxes
and insurance, and contains one three year renewal option. Future lease
commitments for the next five fiscal years for all other leases as of
September 30, 1996 were as follows (in thousands):
Fiscal year ending September 30, Capital Leases Operating Leases
- -------------------------------- -------------- ----------------
1997 $ 46 $ 34
1998 36 32
1999 28 24
2000 26 23
Thereafter 19 16
-------- --------
Total minimum lease payments $ 155 $ 129
-------- --------
--------
Less amount representing interest (26)
--------
Present value of minimum lease payments 129
Less current portion (34)
--------
Long-term lease obligation $ 95
--------
--------
The Company also leases certain equipment on a month-to-month basis.
Total rental expense under all operating leases was $258,000, $300,000, and
$364,000, in fiscal years 1996, 1995, and 1994, respectively.
On October 1, 1995, the Company entered into an Employment Agreement
(the "Agreement") with John F. Bishop, Vice-Chairman of the Board, Treasurer,
and Secretary of the Company, whereby Mr. Bishop will provide his services for a
monthly salary of $6,500 for an initial term of two years. On the first day of
each month, the
F-11
<PAGE>
initial term is automatically extended for an additional month, unless either
party notifies the other in writing of his or its desire not to extend the term.
In the event the Company elects not to extend the term or there is a change in
control of the Company (the date of such event is referred to as the "Transition
Date"), Mr. Bishop will continue to perform services for the Company for a three
month transition period and the Company would maintain his compensation and
other benefits for the three month transition period and an additional
twenty-one months. Effective January 1, 1997, Mr. Bishop has agreed to reduce
his monthly salary to $3,250 until the Transition Date. The Agreement also
allows Mr. Bishop the use of an automobile and the right to receive title to the
automobile, arising out of his agreement to forgo $56,846 of salary in prior
years. Maintenance, insurance and gasoline costs for the automobile and an
office location are also part of the Agreement. The corporate office is
currently located in Newport Beach, California, leased at a monthly rate of
$1,320 on a month-to-month basis.
NOTE 6. BANK BORROWINGS
As of September 30, 1996, the Company had a bank line of credit
("line") which provided for borrowings up to $500,000, not to exceed 60% of
eligible accounts receivable. The balance outstanding was $185,000 as of
September 30, 1996. The line bears interest at the bank's prime rate plus 3%
per annum, provided that the interest rate in effect each month shall not be
less than 10% per annum, and is payable monthly (11.25% as of September 30,
1996). The line contains various restrictive covenants requiring, among other
matters, the maintenance of minimum levels of tangible net worth and
profitability and certain financial ratios, including minimum quick ratio and
maximum debt to net worth ratio. The line also precludes or limits the Company
in taking certain actions, such as paying dividends, making loans, making
acquisitions or incurring indebtedness, without the bank's prior written
consent. The line is secured by substantially all of the Company's assets. As
of November 15, 1996, the bank extended the maturity date of the line to
January 15, 1997 and amended certain restrictive covenants, but limited
borrowings to the $185,000 outstanding.
On January 15, 1997, the bank line was revised to provide for
borrowings up to $500,000. At October 1, 1997, the outstanding borrowings were
$295,500. As of October 23, 1997, the Company was not in compliance with the
restrictive covenants of the line, as so amended. In the event that the Company
is unable to maintain compliance with financial covenants, J. Bradford Bishop,
the Chairman and Chief Executive Officer of the Company, and John F. Bishop, the
Vice Chairman, Treasurer and Secretary of the Company (the "Bishops") have
agreed to finance up to $500,000 of working capital (in addition to funds
provided under the subordinated loan facility (note 7)) on terms acceptable to
the Bishops and the Company to replace the line of credit.
NOTE 7. SUBSEQUENT EVENT
On December 16, 1996, the Company entered a subordinated loan
agreement with the Bishops. This agreement provides for borrowings up to a
maximum aggregate amount of $600,000 by the Company. The commitment of the
Bishops to make advances to the Company expires on February 1, 1998, and all
advances must be repaid by February 1, 2000. Interest is charged at 8% per
annum, and is payable quarterly. The advances are secured by substantially all
of the assets of the Company and are subordinated to the Company's bank line of
credit. The agreement contains various restrictive covenants. In connection
with the subordinated loan agreement, the Company will issue warrants entitling
the Bishops to purchase up to 90,000 shares of the Company's common stock at
$3.00 per share. The warrants expire on December 16, 2001.
Future performance and levels of capital expenditures could reduce the
total amount of funds available under the bank line of credit and the
subordinated loan agreement at any given time.
NOTE 8. BOARD OF DIRECTORS' FEES
During fiscal 1996, the Board of Directors waived fees owed to them by
the Company totaling $112,000. The reversal of previously accrued fees was
included in "Interest and other, net" cost and expenses in the statement of
operations, and thereby reduced the net loss for the year ended September 30,
1996.
NOTE 9. RECENT EVENTS (UNAUDITED)
On October 15, 1997, the subordinated loan with the Bishops (Note 7)
was extinguished with funds provided by a loan entered into with the Bishop
Family Trust. As consideration for the early repayment of such
F-12
<PAGE>
obligations, the warrants issued to the Bishops were canceled on October 15,
1997. This new loan facility provides for a term loan of 1,000,000 and
revolving advances up to $450,000. Interest is charged at the prime rate plus
5% per annum and is payable monthly (13.5% as of October 23, 1997). The loan
facility expires on October 15, 1998. Funds made available by this facility
were also used to extinguish bridge loans of $400,000 which had been received
from the Bishops in May and August 1997. At October 23, 1997, the Company had
outstanding borrowings of $1,100,000 under the loan facility. At this time the
Company is not in compliance with the restrictive covenants of the loan
facility.
The Company has recently introduced a new line of counter products for
distribution worldwide through a new OEM relationship. The Company has
completed the testing phase with the OEM customer and has commenced preparation
for production of the new line of products. The Company expects that this OEM
relationship will account for a material portion of its revenues in fiscal year
1998 and thereafter.
F-13
<PAGE>
APPENDIX I
FORM OF SUBSCRIPTION AGREEMENT
(PLEASE CAREFULLY REVIEW THE ATTACHED INSTRUCTIONS)
EIP Microwave, Inc.
Subscription Agreement
This Subscription Agreement (the "Subscription Agreement") represents
a subscription to acquire the number of shares (the "Shares") of common stock of
EIP Microwave, Inc. (the "Company") set forth below at a subscription price of
$1.70 per share for the total subscription price set forth below. The
registered owner named below is entitled to subscribe for the Shares pursuant to
subscription rights granted to stockholders upon the terms and conditions set
forth in the related Prospectus. For each Share subscribed for, the
subscription price of $1.70 must be forwarded directly to EIP Microwave, Inc.
The subscription rights expire at 5:00 p.m., California time, on
December 15, 1997, unless extended by the Company. No subscription agreements
will be accepted thereafter.
Stockholder Name: _________________________
Stockholder Address: _________________________
Number of shares owned
by Stockholder on
November 7, 1997: _________________________
Number of shares subject
to Basic Subscription Rights:
(number of shares shown above x 4) _________________________
SECTION 1 - Subscription and Signature
I hereby irrevocably subscribe for the number of Shares indicated
below, on the terms specified in the related Prospectus.
A. Basic Subscription: _____________ shares
B. Over-Subscription: _____________ shares (No more than
1,699,628 less
the number
subscribed for in
A.)
C. Total subscription (A + B): _____________ shares
D. Total cost (C x $1.70): $____________
Signature of Telephone
Stockholder: ______________________________ Number: (____)________________
SECTION 2 - Address for delivery of stock certificate if different from above.
_____________________________________
_____________________________________
_____________________________________
A-1
<PAGE>
INSTRUCTIONS FOR USE OF SUBSCRIPTION AGREEMENT
----------------------
CONSULT THE INFORMATION AGENT, YOUR
BANK OR BROKER AS TO ANY QUESTIONS
Each stockholder of EIP Microwave, Inc. (the "Company") has the right
to subscribe for four Shares for each full share of common stock of the Company
(the "Basic Subscription Rights") owned of record at the close of business on
November 7, 1997 (the "Record Date"). The number of Shares you are entitled to
subscribe for appears on the front of the Subscription Agreement or can be
calculated by multiplying the number of shares of common stock owned of record
on the record date by four. The subscription price is $1.70 for each Share.
You may also subscribe for Shares pursuant to an over-subscription privilege
(the "Over-Subscription Privilege"). To exercise your rights, you must complete
the appropriate sections of the Subscription Agreement. If you wish to exercise
your rights for the Over-Subscription Privilege, you must do so by no later than
5:00 p.m., California time, on December 15, 1997, unless extended by the
Company. Rights may be exercised only through the Company.
To exercise your rights please complete and return the Subscription
Agreement.
1. Complete "SECTION 1--Subscription and Signature."
A. Basic Subscription Rights. Enter the number of shares you intend to
purchase under your Basic Subscription Rights. The maximum number of
shares you may purchase on basic subscription appears on the front of
the Subscription Agreement or can be calculated by multiplying the
number of shares of common stock owned of record on the record date by
four.
B. Over-Subscription Privilege. Enter the number of shares you desire to
purchase under your Over-Subscription Privilege. The
Over-Subscription Privilege is available only if you exercised all of
your Basic Subscription Rights. The maximum number of shares that you
can purchase pursuant to the Over-Subscription Privilege is 1,699,628
shares less the number of shares you purchased on Basic Subscription
Rights. The number of shares that will actually be purchased by you
will be subject to allotment if there are not enough shares remaining
after the Basic Subscription Rights to completely fill all requests
for purchases on over-subscription.
C. Total Subscription. Enter the total number of shares you want to
purchase in the offer. This number is the sum of the number of shares
you are purchasing on Basic Subscription Rights plus the number of
shares you desire to purchase under the Over-Subscription Privilege.
D. Total cost. Enter the total cost of your subscription. Your total
cost is the dollar number obtained when you multiply the number of
shares shown under total subscription by $1.70, the subscription price
per share.
2. Sign the Subscription Agreement in the space provide at the bottom of
Section 1. Include your daytime telephone number in the space provided.
3. Enclose the executed Subscription Agreement, together with a check or money
order made payable to "EIP Microwave, Inc." in the amount of the total cost
(Item D. of Section 1) in the envelope provided. If you use your own
envelope, address it to EIP Microwave, Inc., 1745 McCandless Drive,
Milpitas, California 95035-8024. You may also personally deliver your
Subscription Agreement and payment to EIP Microwave, Inc., at the same
address.
4. Mail or deliver your executed Subscription Agreement and payment for the
total cost on a timely basis so that it is received by the Company by no
later than 5:00 p.m., California time, on December 15, 1997 unless extended
by the Company (such date, as it may be extended on one or more occasions,
is referred to herein as the "Expiration Date"). If the Company has not
received your Subscription Agreement and payment for the total cost by 5:00
p.m., California time, on the Expiration Date, you will not be entitled to
purchase shares pursuant to the rights. Accordingly, if you are sending
your executed Subscription Agreement and payment
A-2
<PAGE>
by mail, please allow sufficient time for them to be received by the
Company prior to 5:00 p.m., California time, on the Expiration Date.
The Rights Offering is being made on any or all basis, which means that the
Company may accept any subscription received even if all 1,699,628 Shares
offered are not subscribed for in the Rights Offering. J. Bradford Bishop,
Chairman and Chief Executive Officer of the Company, and John F. Bishop,
Vice Chairman, Secretary and Treasurer of the Company, both of whom are
principal stockholders and members of the Board of Directors of the
Company, have committed to the Company that they will purchase $1,360,000
in Common Stock by exercise of Rights distributed to them if other
stockholders purchase at least $800,000 in Common Stock upon exercise of
Rights distributed to them.
The Company reserves the right to reject any subscription agreement and
payment not properly submitted. The Company has no duty to give
notification of defects in any subscription agreement and/or payment and
will have no liability for failure to give such notification. The Company
will return any subscription agreement and/or payment not properly
submitted.
Stockholders should carefully review the related Prospectus prior to making
an investment decision with respect to the rights referred to in this
Subscription Agreement.
5. Information Agent. The address, telephone and telecopier numbers of the
Information Agent are as follows:
Corporate Investor Communications, Inc. ("CIC")
111 Commerce Road
Carlstadt, NJ 07072-2586
Telephone: (201) 896-1900
or Toll Free: (800) 633-8985
Telecopier: (201) 896-0910
A-3
<PAGE>
PART II
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Delaware corporation law, a corporation is authorized to
indemnify officers, directors, employees and agents who are made or threatened
to be made parties to any civil, criminal, administrative or investigative suit
or proceeding by reason of the fact that they are or were a director, officer,
employee or agent of the corporation or are or were acting in the same capacity
for another entity at the request of the corporation. Such indemnification
includes expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such persons if they acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation or, with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful. In the case of any action or suit by or in the right of the
corporation against such persons, the corporation is authorized to provide
similar indemnification, provided that, should any such persons be adjudged to
be liable for negligence or misconduct in the performance of duties to the
corporation, the court conducting the proceeding must determine that such
persons are nevertheless fairly and reasonably entitled to indemnification. To
the extent any such persons are successful on the merits in defense of any such
action, suit or proceeding, Delaware law provides that they shall be indemnified
against reasonable expenses, including attorney fees. A corporation is
authorized to advance anticipated expenses for such suits or proceedings upon an
undertaking by the person to whom such advance is made to repay such advances if
it is ultimately determined that such person is not entitled to be indemnified
by the corporation. Indemnification and payment of expenses provided by
Delaware law are not deemed exclusive of any other rights by which an officer,
director, employee or agent may seek indemnification or payment of expenses or
may be entitled to under any by-law, agreement, or vote of stockholders or
disinterested directors. In such regard, a Delaware corporation is empowered
to, and may, purchase and maintain liability insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation.
Article Ninth of the Company's Certificate of Incorporation
eliminates, to the fullest extent permitted by law, the personal liability of
directors for monetary damages in certain instances for breach of a director's
fiduciary duty of care. Article IX of the Company's Bylaws provides that
(i) each director, officer and employee of the Company shall be indemnified by
the Company to the fullest extent authorized by Delaware law subject to certain
limitations, (ii) each indemnitee is entitled to be paid by the Company for its
expenses in defending proceedings in advance of final determination, (iii) the
right of indemnification provided therein shall not be exclusive, (iv) the
Company is authorized to enter into contracts with any director, officer,
employee or agent of the Company which provide for indemnification equivalent to
or greater than provided in Article IX, and (v) the Company is required to
maintain insurance to the extent reasonably available to protect itself and any
such director, officer, employee or agent.
Consistent with Article IX of the Company's Bylaws, the Company has
entered into individual Indemnification Agreements with its directors and
officers. The Indemnification Agreements, among other things, provide mandatory
indemnification protection in excess of that provided by Delaware corporation
law. The Indemnification Agreements provide certain procedures relating to
indemnification and advancement of expenses.
In addition, the Company currently carries limited insurance coverage
for its directors and officers. The Indemnification Agreements provide
protections beyond those currently available from the Company's existing
director's and officer's liability insurance.
As a result of the foregoing, the Company may, at some future time, be
legally obligated to pay judgments (including amounts paid in settlement) and
expenses in regard to civil or criminal suits or proceedings brought against one
or more of its officers, directors, employees or agents, as such, with respect
to the Company.
To the extent of the indemnification rights provided by the Delaware
statutes and provided by the Company's charter, bylaws and indemnification
agreements, and to the extent of the Company's abilities to meet such
indemnification obligations, the officers, directors and agents of the Company
would be beneficially affected.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
II-1
<PAGE>
The following are all expenses of this issuance and distribution.
There are no underwriting discounts or commissions.
- -------------------------------------------------
Item Amount (1)
- -------------------------------------------------
SEC Registration fees $876
- -------------------------------------------------
Blue sky fees $4,000
- -------------------------------------------------
Printing $5,000
- -------------------------------------------------
Transfer Agent $1,000
- -------------------------------------------------
Information Agent $7,000
- -------------------------------------------------
Legal $35,000
- -------------------------------------------------
Accounting $5,000
- -------------------------------------------------
Miscellaneous $5,124
- -------------------------------------------------
TOTAL $63,000
- -------------------------------------------------
(1) Estimate
RECENT SALES OF UNREGISTERED SECURITIES
On April 10, 1997 the Company issued warrants to purchase 90,000
shares of its Common Stock to John F. Bishop and J. Bradford Bishop (together,
the "Bishops") in consideration for the loan of $600,000 by the Bishops to the
Company pursuant to the Subordinated Loan Agreement. These warrants were
canceled on October 15, 1997. See "Interests of Management and Others in
Certain Transactions--Subordinated Loan."
The Company issued debt securities to Silicon Valley Bank
evidencing cash loans of up to $500,000. See "The Company--Bank Line." The
Company also issued debt securities to the Bishops evidencing cash loans of
up to $1,000,000, and such loans have been repaid with the proceeds of the
Bishop Family Trust Loan Facility. See "Interests of Management and Others
in Certain Transactions--Subordinated Loan" and "--Bridge Loans." In
addition, the Company issued debt securities to the Bishop Family Trust
evidencing cash loans through November 10, 1997 of $1,100,000. See "The
Company--Bishop Family Trust Loan Facility." No underwriting discounts or
commissions were paid in connection with the issuance of the foregoing debt
securities.
The securities were not registered under the Securities Act of 1933 in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act or by Regulation D of the Commission.
II-2
<PAGE>
EXHIBITS
Filed as part of this Form SB-2 Registration Statement or incorporated
by reference are the following exhibits.
Exhibit
Number
3(a) Company's Certificate of Incorporation, filed on April 29, 1987, and
Certificate of Amendment of Certificate of Incorporation, filed February
8, 1993, previously filed on February 12, 1993, as Exhibit 3(a) to Form
10-QSB Quarterly Report for quarter ended December 31, 1992, and
incorporated herein by reference.
3(b) Company's Bylaws, previously filed June 25, 1987 (File No. 0-5351), as
Exhibit 3(b) to Form 8-K, and incorporated herein by reference.
5(a) Opinion of Bainbridge Group, a Law Corporation, as to the legality of the
securities covered by the Form SB-2 Registration Statement.
10(a) Standard Form Lease dated August 18, 1995, by and between Berg & Berg
Developers, as landlord, and the Company, as tenant, covering the
Company's manufacturing facility located at 1745 McCandless Drive,
Milpitas, California, previously filed on December 29, 1995, as Exhibit
10(a) to Form 10-KSB Annual Report for fiscal year ended September 30,
1995 (the "1995 Annual Report"), and incorporated herein by reference.
10(b) Loan and Security Agreement dated March 10, 1992, between the Company and
Silicon Valley Bank, previously filed on May 14, 1992, as Exhibit 10(a)
to Form 10-Q Quarterly Report for quarter ended March 31, 1992, and
incorporated herein by reference.
10(c) Amendment to Loan Agreement dated December 20, 1994, between the Company
and Silicon Valley Bank, previously filed on December 29, 1994, as
Exhibit 10(h) to the 1994 Annual Report, and incorporated herein by
reference.
10(d) Loan Modification Agreement dated as of November 27, 1995, between the
Company and Silicon Valley Bank, previously filed on December 29, 1995,
as Exhibit 10(i) to the 1995 Annual Report, and incorporated herein by
reference.
10(e) Loan Modification Agreement dated as of June 28, 1996, between the
Company and Silicon Valley Bank, previously filed on August 13, 1996, as
Exhibit 10(a) to Form 10-QSB Quarterly Report for quarter ended June 30,
1996, and incorporated herein by reference.
10(f) Loan Modification Agreement dated as of November 15 , 1996 between the
Company and Silicon Valley Bank, previously filed on December 30, 1996,
as Exhibit 10(f) to Form 10-KSB Annual Report for fiscal year ended
September 30, 1996 (the "1996 Annual Report"), and incorporated herein by
reference.
10(g) Loan Modification Agreement dated as of January 15, 1997, between the
Company and Silicon Valley Bank, previously filed on May 13, 1997, as
Exhibit 10(a) to Form 10-QSB Quarterly Report for quarter ended March 31,
1997, and incorporated herein by reference.
10(h) Loan Modification Agreement dated as of March 5, 1997, between the
Company and Silicon Valley Bank, previously filed on May 13, 1997, as
Exhibit 10(a) to Form 10-QSB Quarterly Report for quarter ended March 31,
1997, and incorporated herein by reference.
II-3
<PAGE>
10(i) Loan and Security Agreement dated as of October 15, 1997, between the
Company and the Bishop Family Trust. (1)
10(j) Fixed Price Subcontract dated August 15, 1997, between the Company and
ManTech Systems Engineering Corporation. (1)
*10(k) Employment Agreement dated as of October 1, 1995, between the Company and
John F. Bishop, previously filed on December 29, 1995, as Exhibit 10(k)
to the 1995 Annual Report, and incorporated herein by reference.
*10(l) Amendment dated November 20, 1996 to Employment Agreement between the
Company and John F. Bishop, previously filed on December 30, 1996, as
Exhibit 10(i) to the 1996 Annual Report, and incorporated herein by
reference.
*10(m) Company's medical reimbursement plan (entitled "Full Medical Coverage")
covering certain officers, previously filed on December 23, 1981 (File
No. 0-5351), as Exhibit 10(o) to Form 10-K Annual Report for fiscal year
ended September 30, 1981, and incorporated herein by reference.
*10(n) Company's Tax and Financial Counseling reimbursement plan covering
officers, previously filed on December 23, 1981 (File No. 0-5351), as
Exhibit 10(p) to Form 10-K Annual Report for fiscal year ended September
30, 1981, and incorporated herein by reference.
*10(o) Written description of EIP Bonus Plan for Fiscal 1997, previously filed
on December 30, 1996, as Exhibit 10(l) to the 1996 Annual Report, and
incorporated herein by reference.
*10(p) Second Amended and Restated 1994 Stock Option Plan, previously filed on
December 30, 1996, as Exhibit 10(n) to the 1996 Annual Report, and
incorporated herein by reference.
*10(q) Non-qualified Stock Option Agreement-Form, previously filed on December
29, 1995, as Exhibit 10(v) to the 1995 Annual Report, and incorporated
herein by reference.
*10(r) Incentive Stock Option Agreement-Form, previously filed on December 29,
1995, as Exhibit 10(w) to the 1995 Annual Report, and incorporated herein
by reference.
10(s) Indemnification Agreement dated July 15, 1992, between the Company and J.
Bradford Bishop, previously filed on December 20, 1992, as Exhibit 10(n)
to Form 10-KSB Annual Report for fiscal year ended September 30, 1992
(the "1992 Annual Report"), and incorporated herein by reference.
10(t) Indemnification Agreement dated July 15, 1992, between the Company and
Robert D. Johnson, previously filed on December 20, 1992, as Exhibit
10(o) to the 1992 Annual Report for fiscal year ended September 30, 1992,
and incorporated herein by reference.
10(u) Indemnification Agreement dated July 15, 1992, between the Company and
James J. Shelton, previously filed on December 20, 1992, as Exhibit 10(p)
to the 1992 Annual Report for fiscal year ended September 30, 1992, and
incorporated herein by reference.
10(v) Indemnification Agreement dated July 15, 1992, between the Company and J.
Sidney Webb, Jr., previously filed on December 20, 1992, as Exhibit 10(q)
to the 1992 Annual Report for fiscal year ended September 30, 1992, and
incorporated herein by reference.
10(w) Indemnification Agreement dated July 15, 1992, between the Company and
John F. Bishop, previously filed on December 23, 1993, as Exhibit 10(m)
to Form 10-KSB Annual Report, for fiscal year 1993 (the "1993 Annual
Report"), and incorporated herein by reference.
- -----------------------------------
* Management contract or compensatory plan or arrangement.
(1) To be filed by amendment.
II-4
<PAGE>
10(x) Indemnification Agreement dated February 13, 1996, between the Company
and Michael E. Johnson, previously filed on May 9, 1996, as Exhibit 10(a)
to Form 10-QSB Quarterly Report for quarter ended March 31, 1996, and
incorporated herein by reference.
10(y) Indemnification Agreement dated February 19, 1997, between the Company
and Lewis R. Foster, previously filed on May 13, 1997, as Exhibit 10(c)
to Form 10-QSB Quarterly Report for quarter ended March 31, 1997, and
incorporated herein by reference.
10(z) Indemnification Agreement dated February 19, 1997, between the Company
and Ivan Andres, previously filed on May 13, 1997, as Exhibit 10(d) to
Form 10-QSB Quarterly Report for quarter ended March 31, 1997), and
incorporated herein by reference.
10(aa) OEM Purchase Agreement effective on May 28, 1997, previously filed on
August 14, 1997, as Exhibit 10(a) to Form 10-QSB Quarterly Report for
quarter ended June 30, 1997, and incorporated herein by reference.
16 Letter dated November __, 1997 from Price Waterhouse LLP to the
Securities and Exchange Commission, previously filed on November __,
1997, as Exhibit 16 to Form 8-K/A Current Report, and incorporated herein
by reference. (1)
21 Subsidiaries of the Company, previously filed on December 30, 1996, as
Exhibit 21 to the 1996 Annual Report, and incorporated herein by
reference.
23(a) Consent of Bainbridge Group, a Law Corporation, to the reference to it as
counsel who has passed upon certain information contained in the
Prospectus.
23(b) Consent of Price Waterhouse LLP. (1)
- -----------------------------------
(1) To be filed by amendment.
UNDERTAKINGS
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this amendment to the
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Milpitas, California on November 7, 1997.
EIP MICROWAVE, INC.
By: /s/ Lewis R. Foster
-------------------------------------
Lewis R. Foster
President and Chief Operating Officer
In accordance with the requirements of the Securities Act of 1933,
this amendment to the registration statement was signed by the following persons
in the capacities and on the dates indicated.
November 7, 1997 /s/ Lewis R. Foster
----------------------------------------
Lewis R. Foster
President and Chief Operating Officer
November 7, 1997 /s/ John F. Bishop
----------------------------------------
John F. Bishop
Vice Chairman, Treasurer, Secretary, and Director
(Principal Financial Officer)
----------------------------------------
Michael E. Johnson
Director
November 7, 1997 /s/ Robert D. Johnson
----------------------------------------
Robert D. Johnson
Director
November 7, 1997 /s/ J. Sidney Webb
----------------------------------------
J. Sidney Webb
Director
November 7, 1997 /s/ J. Bradford Bishop
----------------------------------------
J. Bradford Bishop
Chairman of the Board, Chief Executive Officer
and Director
(Principal Executive Officer)
November 7, 1997 /s/ E. O. Bince
----------------------------------------
E. O. Bince
Controller (Principal Accounting Officer)
II-6
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
5(a) Opinion of Bainbridge Group, a Law Corporation, as to the
legality of the securities covered by the Form SB-2 Registration
Statement.
10(i) Loan and Security Agreement dated as of October 15, 1997, between
the Company and the Bishop Family Trust. (1)
10(j) Fixed Price Subcontract dated August 15, 1997, between the
Company and ManTech Systems Engineering Corporation. (1)
23(a) Consent of Bainbridge Group, a Law Corporation, to the reference
to it as counsel who has passed upon certain information
contained in the Prospectus.
23(b) Consent of Price Waterhouse, LLP. (1)
- -----------------------------------
(1) To be filed by amendment.
II-7
<PAGE>
EXHIBIT 5(a)
BAINBRIDGE GROUP
November 7, 1997
EIP Microwave, Inc.
3 Civic Plaza, Suite 265
Newport Beach, California 92660
Gentlemen:
In connection with the preparation and filing of a Form SB-2/A Registration
Statement under the Securities Act of 1933, to be filed by EIP Microwave, Inc.
for the purpose of registering 1,699,628 shares of its Common Stock (the
"Shares") to be offered to its stockholders of record on a date to be selected
by its board of directors prior to the effective date of the Registration
Statement, we have acted as counsel to EIP Microwave, Inc. (the "Company") in
the preparation of the Form SB-2/A Registration Statement. We advise you that we
are familiar with the originals or copies, certified or otherwise identified to
our satisfaction, of documents, corporate records, or other instruments relating
to the incorporation of the Company and the authorization and the issuance of
the Shares, including the following:
(a) Certificate of Incorporation of the Company;
(b) By-laws of the Company;
(c) Corporate proceedings and filings reflected in the minutes of the
Company as certified to by the secretary of the Company;
(d) Specimen certificates representing the Shares; and
(e) The Form SB-2/A Registration Statement relating to the Shares and
to be filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
Based solely on the foregoing, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware.
2. The Company has corporate power to conduct the business now being
conducted and is duly authorized and in good standing to do business in the
jurisdiction in which its ownership of property or the conduct of its business
legally requires that authorization.
3. The Company has an authorized capitalization as set forth in the
Registration Statement, and the Shares conform to the statements concerning them
in the Registration Statements.
4. The Shares have been duly and validly authorized. The Shares,
when issued, will be legally issued, fully paid and non-assessable.
5. No consent, approval, authorization, or other order of any
regulatory authority or third party is legally required for the valid issuance
of the Shares other than the order making effective the registration of the
Shares, which order must be issued by the Securities and Exchange Commission,
and other than similar action to be taken by the state securities regulatory
agencies of states which require registration of, or filings with respect to,
the Shares in those states.
<PAGE>
6. The consummation of the offering and sale of the Shares as
contemplated in the Registration Statements will not result in a breach of any
of the terms and provisions of, or constitute a default under, any notes,
indenture, mortgage, deed of trust, or other agreement or instrument to which
the Company to its knowledge is now a party, or the Certificate of
Incorporation of the Company.
7. We do not know, and you have advised us that you do not know, of
any legal or governmental proceeding pending or threatened to which the Company
is a party, or of which the property of the Company is the subject, of a
character required to be disclosed in the Registration Statements that is not
disclosed and properly described in this document; and you and we do not know of
any contracts of a character to be disclosed in the Registration Statement that
are not disclosed, filed and properly summarized in such document.
8. The Registration Statement and any further amendments and
supplements made by the Company prior to the effective date of the Form SB-2/A
Registration Statement comply as to form in all material respects with the
requirements of the Securities Act of 1933, as amended, and the applicable rules
and regulations of the Securities and Exchange Commission. We have no reason to
believe that the Registration Statement contains any untrue statement of a
material fact or omits to state any material fact required to be stated in the
document or necessary to make the statements in it not misleading.
Sincerely,
BAINBRIDGE GROUP
/s/ Michael E. Johnson
-----------------------------------
Michael E. Johnson, President
<PAGE>
EXHIBIT 23(a)
BAINBRIDGE GROUP
November 7, 1997
EIP Microwave, Inc.
3 Civic Plaza, Suite 265
Newport Beach, California 92660
Gentlemen:
The undersigned is named in a Form SB-2/A Registration Statement of EIP
Microwave, Inc., a Delaware corporation (the "Company"), which registration
statement filed with the Securities and Exchange Commission in connection with a
rights offering of 1,699,628 shares of Common Stock of the Company to its
stockholders. The capacity in which the undersigned is named in such SB-2
Registration Statement is that of counsel to the Company and as a person who has
given an opinion on the validity of the securities being registered and upon
other legal matters concerning the registration or offering of the securities
described therein.
The undersigned hereby consents to being named in such SB-2 Registration
Statement in the capacity therein described.
Sincerely,
BAINBRIDGE GROUP
/s/ Michael E. Johnson
-----------------------------
Michael E. Johnson, President
