<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 6, 1997.
Registration No. ________________
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 organization) Classification Code Number) Identification No.)
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
<PAGE>
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.[ ]
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. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------
Title of each Amount to be Proposed maximum offering Proposed maximum Amount of
class of securities registered price per share aggregate offering price registration fee
to be registered
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Common Stock, 1,274,721* $1.85* $2,358,234* $714.62
par value $0.01
per share
- -------------------------------------------------------------------------------------------------------------
</TABLE>
/*/ Estimated solely for the purpose of calculating the Registration Fee.
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>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 3, 1997.
PROSPECTUS
EIP MICROWAVE, INC.
___________ Shares of Common Stock
(Par value, $0.01 per Share)
RIGHTS OFFERING
EIP Microwave, Inc., a Delaware corporation (the "Company"), offers
____________ shares (the "Shares") of its Common Stock, $0.01 par value, at
$_____ per Share to its stockholders of record on __________, 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".
THE RIGHTS WILL EXPIRE AT 5:00 P.M., CALIFORNIA TIME ON _____________
[insert date 30 days after effective date of Registration Statement], unless
extended by the Company. 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
____________ Shares offered are not purchased. See "Risk Factors--No Minimum
Size of Rights Offering." John F. Bishop, a principal stockholder, a member
of the Board of Directors, and Vice Chairman, Secretary and Treasurer of the
Company, has committed to the Company that he will purchase $379,500 in
Common Stock by exercise of Rights distributed to him if other stockholders
purchase at least $800,000 in Common Stock upon exercise of Rights
distributed to them. 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"
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.
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Price to Public Underwriting Discounts and Proceeds to Issuer (1)
Commissions
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $_______ $0 $_______
- ---------------------------------------------------------------------------------------------------------
Total: ________ Shares $_______ $0 $_______
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Before deducting estimated expenses of the offering of $55,000 payable
by the Company.
The date of this Prospectus is __________, 1997.
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 Small-Cap 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.
2
<PAGE>
TABLE OF CONTENTS
Contents Page
Prospectus Summary
The Company
The Rights Offering
Method of Exercising Rights
Opportunity to Increase Holdings
Avoiding Dilution
Risk Factors
Recurring Material Losses and Accumulated Deficit
Future Cash Requirements
Repayment of Existing Debt
Dependence on New OEM Relationship
Dependence on Government Contractors
Dependence on Key Suppliers
Uncertainty of Product Development and Introduction
Competition
Dependence on Key Personnel
Control by Management and Principal Stockholders
Offering Price Not Based on Actual Value
Dividends Not Likely
Dilution from Rights Offering
Possible Future Dilution
No Minimum Size of Rights Offering
Possible Extension of Expiration Date
Limited Trading Volume and Volatility of Stock Price in Public Market
Market Restrictions on Broker-Dealers
Potential Anti-Takeover Effects of Delaware Law
Use of Proceeds
Determination of Offering Price
Plan of Distribution
The Rights Offering
Subscription Expiration Date
Basic Subscription Rights
Method of Exercising Rights
Payment
Purchase and Sale of Rights
Delivery of Certificates
Over-Subscription Privilege
Market for the Company's Common Stock and Related Stockholder Matters
The Company
General/Products
Markets/Principal Customers
Methods of Distribution
Competition
Research, Development and Engineering
Raw Materials
Employees
3
<PAGE>
Patents, Copyrights, Trademarks and Intellectual Property
Government Approval of Principal Products
Effect of Existing or Probable Governmental Regulations
Compliance with Provisions on Environmental Protection
Property
Bank Line of Credit
Bishop Family Trust Loan Facility
Legal Proceedings
Acquisition Discussions
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results of Operations
Financial Condition
Management
Directors, Executive Officers and Key Employees
Compensation of Directors
Executive Compensation
Option Grants in Fiscal 1996
Aggregate Option/SAR Exercises in Fiscal 1996 and FY-End Option/SAR
Values
Interest of Management and Others in Certain Transactions
Bishop Family Trust Loan Facility
Subordinated Loan
Bridge Loans
Employment Agreement
Legal Counsel
Security Ownership of Certain Beneficial Owners and Management
Description of Securities
Authorized Stock
Voting Rights
Dividend Rights
Liquidation Rights
Preemptive Rights
Dissenter's Rights
Certain Anti-Takeover Provisions
Transfer Agent
Legal Matters and Interests of Counsel
Experts
Change in Accountants
Indemnification
Disclosure of Commission Position on Indemnification for Securities Act
Liabilities
Financial Statements
4
<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" 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 will be distributed on a private label basis worldwide through
an OEM relationship. The Company also recently received a five-year
indefinite quantity, fixed price supply subcontract from a government
contractor 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 a new product for the
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 ______________ shares (the "Shares") of its Common
Stock, $0.01 par value, to its stockholders of record on _____________, 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 $______ per Share (the "Subscription Price").
Each Stockholder of Record may subscribe to purchase as many of the Shares as
desired; subject to limitation if this offering is oversubscribed.
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 ____________ shares
Common Stock to be outstanding
after the offering ____________ shares (1)
Use of proceeds Develop new products, fund working
capital requirements and repay debt.
(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
5
<PAGE>
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 _____________ [insert date
30 days after effective date of Registration Statement],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 $______, a holder of fewer than ___ 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 subscribe for as many Shares as desired.
However, each Stockholder of Record may avoid a percentage dilution of one's
shareholdings by subscribing for that number of the Shares which equals ___
times his or her shareholdings on the record date. See "Prospectus Summary--The
Rights Offering" above for additional terms of the 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 $__________. At the end of fiscal year
1996, its 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 $___________, and stockholders equity
will be $_______. There can be, and is, no assurance that profitable operations
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 should sustain the Company. Continued losses could
negatively impact 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. See "Risk Factors--Repayment of Existing Debt."
The report of Price Waterhouse LLP on the Company's fiscal 1996
consolidated financial statements was amended on October 1, 1997 to add an
explanatory paragraph 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
6
<PAGE>
or that required additional financing will be available to meet the Company's
business plan in fiscal 1998 and beyond.
FUTURE CASH REQUIREMENTS
In addition to cash on hand and funds generated from operations and funds
available under the Company's Bank Line and Loan Facility, the Company believes
that additional cash of approximately $900,000 will be necessary to satisfy its
cash requirements for 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--Uncertainty of Product
Development and Introduction", and the cash requirements could be materially
greater than $900,000. The Company expects to use the proceeds from the Rights
Offering to meet such cash requirements. There is no assurance that the Company
will be successful in obtaining all such capital from the Rights Offering. If
the Company is unable to obtain such capital from the Rights Offering or from
other debt or equity capital 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.
REPAYMENT OF EXISTING DEBT
The Company has a $500,000 bank line of credit which expires in March 1998,
and a $1,450,000 term and revolving advance loan facility with the Bishop Family
Trust which expires in October 1998. 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 such loans on such dates. 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. There can be no assurance that the Company will be able to maintain
compliance with such covenants.
DEPENDENCE ON NEW OEM RELATIONSHIP
The Company has recently introduced a new line of micrawave frequency
counters for distribution worldwide through a new OEM relationship. The
Company has completed the testing phase with the OEM customer, has received
initial orders 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. The
loss of this OEM customer would have a material, negative impact upon the
Company's business and prospects of profits. Further, there can be no
assurance that the Company will be able to maintain a successful relationship
with the OEM customer and generate revenues 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 a government contractor with total sales value to the Company
that could range from approximately $3.5 to $20 million. 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. 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 a single source of supply. The loss of any of these
sources, or the inability of any such source to meet the Company's
7
<PAGE>
production and quality control requirements, could be detrimental to the Company
with respect to the specific products involved.
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 will 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 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). 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. In addition, John F.
Bishop has committed to the Company that he will purchase $379,500 in Common
Stock by exercise of Rights distributed to him if other stockholders purchase at
least $800,000 in Common Stock upon exercise of Rights distributed to them. If
not all Rights are exercised by other stockholders, the Bishops could 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
8
<PAGE>
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 $____ is significantly less than the
price at which the Common Stock has traded at various times during the last
twelve months, and represents a ____% discount from the average market price
for the 30 days preceding the date of this Prospectus. 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 subscription privileges under this
Rights Offering in full will realize a dilution of their percentage voting
interest and ownership interest in future net earnings, if any, of the
Company to the extent that Rights are exercised by other stockholders. John
F. Bishop has committed to the Company that he will purchase $379,500 in
Common Stock by exercise of Rights distributed to him if other stockholders
purchase at least $800,000 in Common Stock upon exercise of Rights
distributed to them. Assuming Mr. Bishop purchases such amount of Common
Stock and other stockholders only purchase $800,000 of Common Stock, Mr.
Bishop would beneficially own approximately _____% of the Company's Common
Stock, and the effective percentage ownership of any non-exercising
stockholder will be reduced by approximately ___%. The dilutive impact on
non-exercising stockholders will be even greater if Mr. Bishop 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 "Bishop
Family Trust 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
____________ Shares offered are not purchased. Although John F. Bishop, a
principal stockholder, a member of the Board of Directors, and Vice Chairman,
Secretary and Treasurer of the Company, has committed to the Company that he
will purchase $379,500 in Common Stock by exercise of Rights distributed to
him if other stockholders purchase at least $800,000 in Common Stock upon
exercise of Rights distributed to them, there is no minimum amount of
proceeds required for the Company to consummate the Rights Offering. The
funds committed by Mr. Bishop in the Rights Offering will be used by the
Company to repay debt under the Bishop Family Trust Loan Facility. Thus, even
if other stockholders purchase $800,000 in Common Stock and Mr. Bishop
purchases $379,500 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. Accordingly, 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" and "Plan of Distribution."
POSSIBLE EXTENSION OF EXPIRATION DATE
9
<PAGE>
The Company has reserved the right to extend the Expiration Date to as late
as _____________, 199__ [120 days after effective date]. Funds deposited in
payment of the Subscription Price may not be withdrawn and no interest will be
paid thereon to stockholders.
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 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 Stockholders 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."
USE OF PROCEEDS
The net proceeds to the Company from the sale of all ______________ shares
of Common Stock offered by the Company hereby are estimated to be $____________,
based on a Subscription Price of $_____ 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 sufficient to reduce the outstanding principal
thereunder to $1,000,000. 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.
10
<PAGE>
DETERMINATION OF OFFERING PRICE
The Rights Offering is being conducted by the Company based on the
commitment of John F. Bishop to purchase $379,500 in Common Stock by exercise of
Rights distributed to him if other stockholders purchase at least $800,000 in
Common Stock upon exercise of Rights distributed to them. The terms of the
Rights Offering were negotiated by the three independent members of the
Company's Board of Directors (the "Independent Directors"). The Subscription
Price reflects a __% discount to the average price at which the Company's Common
Stock traded in the 30 days prior to the effective date of the Rights Offering.
The terms of the Rights Offering were unanimously recommended by the Independent
Directors and approved by a majority of the Company's Board of Directors on
October __, 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 ________________ shares (the "Shares") of its Common
Stock, $0.01 par value, only to its stockholders of record of ____________, 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 $_____ 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 will expire at 5:00 P.M., California time on _____________
[insert date 30 days after effective date of Registration Statement], 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 _______________[120 days after effective
date of Registration Statement]. If the Company elects to extend the term of
the Rights, 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 exercise of Rights is
irrevocable once made, and no interest will be paid to Holders exercising their
Rights. AS DESCRIBED BELOW, RIGHTS MUST BE EXERCISED, IF AT ALL, BEFORE THE
EXPIRATION DATE AFTER WHICH TIME THE RIGHTS WILL BE VOID AND VALUELESS.
BASIC SUBSCRIPTION RIGHTS
The Rights entitle the holders to subscribe at the Subscription Price for
Shares on the basis of _____ Shares for each share of Common Stock held on
the Record Date (the "Basic Subscription Rights"). Exercise of the Basic
11
<PAGE>
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 exercise the Rights, the holder 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 1745 McCandless Drive, Milpitas,
California 95035. The Subscription Agreement must arrive on or before the
Expiration Date.
PAYMENT. Rights exercised 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 date of the subscription period at 5:00 P.M., California time,
_____________[insert date 30 days after effective date of Registration
Statement] 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 Rights 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 ___________
Shares offered are not purchased. John F. Bishop, a principal stockholder, a
member of the Board of Directors, and Vice Chairman, Secretary and Treasurer
of the Company, has committed to the Company that he will purchase $379,500
in Common Stock by exercise of Rights distributed to him if other
stockholders purchase at least $800,000 in Common Stock upon exercise of
Rights distributed to them. See "Risk Factors--Control by Management and
Principal Stockholders," "--Dilution from Rights Offerings," 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.
PURCHASE AND SALE OF RIGHTS. Rights may not be transferred, divided,
combined, purchased or sold.
DELIVERY OF CERTIFICATES. Certificates for Shares issuable on exercise of
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
12
<PAGE>
acquire Shares to 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.
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 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.
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 137 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 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 Small-Cap 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 ($)
- -------------------------------------------------------------------------------
4th quarter 1997
(through October 1, 1997) 2.1875 2.1875
- -------------------------------------------------------------------------------
3rd quarter 1997 3.625 1.25
- -------------------------------------------------------------------------------
2nd quarter 1997 6.00 1.25
- -------------------------------------------------------------------------------
1st quarter 1997 2.00 1.00
- -------------------------------------------------------------------------------
4th quarter 1996 5.00 1.00
- -------------------------------------------------------------------------------
3rd quarter 1996 6.75 3.50
- -------------------------------------------------------------------------------
2nd quarter 1996 7.50 2.00
- -------------------------------------------------------------------------------
1st quarter 1996 7.25 2.75
- -------------------------------------------------------------------------------
4th quarter 1995 5.50 1.50
- -------------------------------------------------------------------------------
3rd quarter 1995 7.75 5.50
- -------------------------------------------------------------------------------
13
<PAGE>
- -------------------------------------------------------------------------------
Calendar Quarter High ($) Low ($)
- -------------------------------------------------------------------------------
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
Small-Cap 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
14
<PAGE>
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 has completed testing of the product line
with the OEM customer that will distribute the product, and the Company is
preparing the product line for production. 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 include Hewlett-Packard, ManTech Systems Engineering,
Northrup-Grumman, Lockheed Martin, Kelly Air Force Base, Hughes Aircraft, and
Harris Corporation.
The Company sells its microwave products to approximately 1,000
customers, of which sales 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 government contractor with
total sales value to the Company that could range from approximately $3.5 to
$20 million. In September 1997, the Company received a five-year indefinite
quantity, fixed price supply subcontract from a government contractor 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 a major
company considered to be one of the leaders in test and measurement
instrumentation. The Agreement contemplates the sale of EIP's recently
developed line of microwave counters to the OEM customer on a private label
basis for worldwide distribution. The Company has completed the testing
phase with the OEM customer, has received initial orders and has commenced
preparation for production of the new line of products.
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
15
<PAGE>
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
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 a new product for the
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.
16
<PAGE>
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
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.
17
<PAGE>
BANK LINE OF CREDIT
At October __, 1997, the Company had outstanding borrowings in the
aggregate principal amount of $295,500 under its bank line of credit (the
"Bank Line"). The Bank Line provides for borrowings up to 60% of eligible
accounts receivable, not to exceed $500,000. Interest is charged 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 (11.5% as of October __, 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 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 October __, 1997,
the Company was in compliance with the restrictive covenants of the Bank Line.
BISHOP FAMILY TRUST LOAN FACILITY
At October __, 1997, the Company had outstanding borrowings in the
aggregate principal amount of $1,250,000 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 October __, 1997). The Loan Facility expires on
October __, 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 commencing in January 1998. The Bishop
Family Trust 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 October __, 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 __, 1997 and
will be payable by the Company on January __, 1998.
B. If the principal amount of the obligations outstanding under the
Loan Facility on January __, 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 April __, 1998.
C. If the principal amount of the obligations outstanding under the
Loan Facility on April __, 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 July __, 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.
LEGAL PROCEEDINGS
18
<PAGE>
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, orders from government contractors, and sales of
products configured in the VXIbus format. 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 primarily attributable to an increase in sales of higher
gross margin units and an improved gross margin for VXI products. 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 VXI products.
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. Backlog at June 30, 1996, 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 $6,115,000,
a 14% decrease from $7,127,000 for the prior year.
19
<PAGE>
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
primarily due to increased international orders, orders from government
contractors, and orders for products configured in the VXIbus format.
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 primarily to decreased commission expense resulting from
decreased sales volume and overall expense control, compared to the same
period the prior year. 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, and a decrease in advertising expenses. 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.
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,
20
<PAGE>
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.
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 __, 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.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NAME AGE POSITION
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
J. Bradford Bishop (1) 45 Director since 1978. Chairman of the Board and Chief 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 (1) 73 Director since 1961. Vice Chairman of the Board 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. Johnson 36 Director since 1996.
President, Bainbridge Group, a Law Corporation. Former counsel, Jones,
Day, Reavis & Pogue, a law firm.
- ---------------------------------------------------------------------------------------------------------------------
Robert D. Johnson (2)(3)(4) 73 Director since 1978.
Former Vice Chairman and Director, Cushman Electronics, Inc., and former
Director, EIP/Cushman, Inc.
- ---------------------------------------------------------------------------------------------------------------------
J. Sidney Webb, Jr. 77 Director since 1981.
(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.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
NAME AGE POSITION
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------------------------
(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 $30,900, respectively. As of February 13, 1996, each of
Messrs. Johnson and Webb agreed to waive all Accrued Directors Fees owing to him
in exchange for the grant by the Company of an option to purchase 5,000 shares
of Common Stock of the Company under the terms of the Company's Amended and
Restated 1994 Stock Option Plan, with the exception that such options would be
immediately vested and exercisable and would not terminate upon ceasing to be a
Director or upon death or disability. On February 7, 1996, Mr. Shelton's term of
office as Director expired and, as of February 13, 1996, he agreed to waive all
Accrued Directors Fees owing to him, in exchange for amending his Nonqualified
Stock Option Agreement with the Company to eliminate the requirement that his
options terminate three months after he ceases to be a Director and the
requirement that he continuously serve as a Director of the Company as a
condition to him becoming vested in the options to purchase the remaining 6,667
shares of Common Stock under the Nonqualified Stock Option Agreement.
EXECUTIVE COMPENSATION
The following table sets forth all compensation for services in all
capacities accrued by the Company during the fiscal years ended September 30,
1996, 1995, and 1994, for the Company's Chief Executive Officer and
22
<PAGE>
certain of its most highly compensated executive officers. The Company issued no
restricted stock awards and there were no long term incentive plan payouts.
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
----------------------------------- ------------
- -----------------------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E) (F) (G)
Name and Principal Year Salary Bonus Other Annual Securities Underlying All Other
Position ($) ($) Compensation Options/SARs Compensation
($) (#) ($)
(1) (5)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <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
- -----------------------------------------------------------------------------------------------------------
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) 534
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.
23
<PAGE>
(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% $3.875 2/13/06
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
(1) Percentage based on grants to employees during the last fiscal year of
options to purchase 27,500 shares of Common Stock.
(2) The options granted to the named individual become exercisable with
respect to one-third of such shares on February 13, 1997 and will become
exercisable with respect to an additional one third on February 13 of
each of the following two years.
(3) The options granted to the named individuals become exercisable with
respect to 20% of such shares on February 13, 1997 and will become
exercisable with respect to an additional 20% on February 13 of each of
the following four years.
(4) The options granted to Mr. Ardizzone were canceled in connection with his
resignation in October 1996.
AGGREGATE OPTION/SAR EXERCISES IN FISCAL 1996 AND FY-END OPTION/SAR
VALUES. The following table provides information regarding option and SAR
exercises in fiscal 1996 by the named executive officers and the value of such
officers' unexercised options at September 30, 1996:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/
Options/ SARs at FY-End($)
SARs at FY-End (#) (1)
Shares ------------------ -----------------
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 JOHN F. BISHOP TO PURCHASE COMMON STOCK IN RIGHTS OFFERING
John F. Bishop, a principal stockholder, a member of the Board of
Directors, and Vice Chairman, Secretary and Treasurer of the Company, has
committed to the Company that he will purchase $379,500 in Common Stock by
exercise of Rights distributed to him if other stockholders purchase at least
$800,000 in Common Stock upon exercise of Rights distributed to them (the
"Commitment"). Thus, Mr. Bishop's 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.
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 __, 1997, and all obligations thereunder were 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 __, 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 __, 1997. Interest accrued thereon at 10% per annum. The Bridge Loans
were repaid in full on such date with the proceeds from the Loan Facility with
the Bishop Family Trust.
24
<PAGE>
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 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
25
<PAGE>
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 1, 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 Beneficial Nature of Beneficial Percent of Class
Beneficial Owner Ownership Ownership
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CEDE & Company 186,065 Indirect(1) 43.79%
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) *
- --------------------------------------------------------------------------------------------------------------------
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
26
<PAGE>
(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.
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
27
<PAGE>
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.
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.
28
<PAGE>
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 retained _______________________________ as its independent
accountant and dismissed Price Waterhouse LLP, effective October ___, 1997.
During the most recent fiscal years and through the date of change, there
were no disagreements between the Company and 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. The
reports of Price Waterhouse LLP on the Company's financial statements for the
past two years did not contain an adverse opinion or a disclaimer of opinion.
Further, except for the explanatory paragraph described in "Experts" above,
such reports were not qualified or modified as to uncertainty, audit scope or
accounting principle. The change in independent accountant was approved by
the Audit Committee of the Board of Directors of the Company.
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 Agreement 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.
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.
29
<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.
/s/ PRICE WATERHOUSE LLP
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 1, 1997.
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS
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 34 34 15
leases
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
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
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 424,907 5 848 (419) 434
(unaudited)
--------------------------------------------------------------------
--------------------------------------------------------------------
</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,
principally to customers in Western Europe and Pacific Rim countries, as a
percent of net sales were approximately 36% in 1996, 43% in 1995, and 36% 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's fiscal 1997 operating plan also assumes additional
financing will be necessary to fund its 1997 operations and beyond (see notes 6
and 7).
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. The Company has recently entered into an
OEM agreement for a new line of counter products and has plans to continue
developing enhanced products. 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. Management plans to pursue additional 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
F-7
<PAGE>
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.
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
F-8
<PAGE>
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
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, June 30,
1996 1995 1997
(unaudited)
<S> <C> <C> <C>
Accounts receivable:
Trade $ 736 $ 1,138 $ 358
Less-allowance for doubtful accounts (50) (74) (50)
------------------------ -----------
$ 686 1,064 $ 308
------------------------ -----------
------------------------ -----------
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
------------------------ -----------
------------------------ -----------
</TABLE>
F-9
<PAGE>
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 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.
F-10
<PAGE>
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
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)
---------------------------
---------------------------
F-11
<PAGE>
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 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,
F-12
<PAGE>
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 1, 1997, the Company was not in compliance with the
restrictive covenants of the line, as so amended. However, 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 __, 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 obligations, the
warrants issued to the Bishops were canceled on October __, 1997. This new loan
facility provides
F-13
<PAGE>
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 __, 1997). The loan facility expires on October __, 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 __, 1997, the Company had outstanding borrowings of
$1,250,000 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-14
<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
$____ 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 $____ must be forwarded directly to EIP Microwave, Inc.
The subscription rights expire at 5:00 p.m., California time on
_______________, 199_ [insert date 30 days after effective date of Registration
Statement], unless extended by the Company. No subscription agreements will
be accepted thereafter.
Stockholder Name: ______________________
Stockholder Address: ______________________
Number of shares owned
by Stockholder on
____________________: ______________________
[Record Date]
Number of shares subject
to Basic Subscription Rights: ______________________
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 _________
[total amount offered] less
the number subscribed for in
A.)
C. Total subscription (A + B): ___________ shares
D. Total cost (C x $____): ___________ shares
Signature of Telephone
Stockholder: ______________________________ Number: (____)________________
SECTION 2 - Address for delivery of stock certificate if different from above.
_____________________________________
_____________________________________
_____________________________________
<PAGE>
INSTRUCTIONS FOR USE OF SUBSCRIPTION AGREEMENT
Each stockholder of EIP Microwave, Inc. (the "Company") has the right to
subscribe for ____ Shares for each full share of common stock of the Company
(the "Basic Subscription Rights") owned of record at the close of business on
_______________, 199__ (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 ____. The subscription price is $_____
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
_______________, 199__, 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
____.
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 ________
shares [total number offered] 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 $____, 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.
<PAGE>
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 _______________, 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 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 _________ Shares
offered are not subscribed for in the Rights Offering. John F. Bishop, a
principal stockholder, member of the Board of Directors, and Vice Chairman,
Secretary and Treasurer of the Company, has committed to the Company that
he will purchase $379,500 in Common Stock by exercise of Rights distributed
to him 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.
<PAGE>
PART II
INDEMNIFICATION OF DIRECTORS AND OFFICERS
There is set forth in the Prospectus under "Description of Securities -
Indemnification" a description of the laws of Delaware with respect to the
indemnification of officers, directors, and agents of corporations incorporated
in Delaware.
The Company has charter provisions, bylaw provisions and indemnification
agreements that insure or indemnify, to the full extent allowed by the laws
of Delaware, directors, officers, employees, agents or persons serving in
similar capacities in other enterprises at the request of the Company.
To the extent of the indemnification rights provided by the Delaware
statutes and provided by the Company's charter and bylaws, 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
The following are all expenses of this issuance and distribution. There are
no underwriting discounts or commissions.
- --------------------------------------------------------------------------------
Item Amount (1)
- --------------------------------------------------------------------------------
SEC Registration fees $ 715
- --------------------------------------------------------------------------------
Blue sky fees $ 4,000
- --------------------------------------------------------------------------------
Printing $ 5,000
- --------------------------------------------------------------------------------
Transfer Agent $ 1,000
- --------------------------------------------------------------------------------
Legal $35,000
- --------------------------------------------------------------------------------
Accounting $ 5,000
- --------------------------------------------------------------------------------
Miscellaneous $ 4,285
- --------------------------------------------------------------------------------
TOTAL $55,000
- --------------------------------------------------------------------------------
(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 in connection with the
Subordinated Loan Agreement. These warrants were canceled on October __, 1997.
In addition, the Company issued debt securities to its lenders, as set
forth in the Prospectus under "The Company--Bank Line," "--Bishop Family
Trust Loan Facility," "Interests of Management and Others in Certain
Transactions--Subordinated Loan" and "--Bridge Loans."
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-1
<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.(1)
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.
10(i) Loan Modification Agreement dated as of October__, 1997, between the
Company and Silicon Valley Bank. (1)
10(j) Loan and Security Agreement dated as of October __, 1997, between the
Company and the lenders referred to therein, including the schedules
and exhibits thereto.(1)
- -----------------------------
(1) To be filed by amendment.
II-2
<PAGE>
*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.
II-3
<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.
6 Letter dated October __, 1997 from Price Waterhouse LLP to the
Securities and Exchange Commission, previously filed on October __,
1997, as Exhibit 16 to Form 8-K Current Report, and incorporated
herein by reference.
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.(1)
23(b) Consent of Price Waterhouse, LLP.(1)
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.
- -----------------------------
(1) To be filed by amendment.
II-4
<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 registration
statement to be signed on its behalf by the undersigned in Milpitas, California
on October 5, 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
registration statement was signed by the following persons in the capacities and
on the dates indicated.
October 5, 1997 /s/ Lewis R. Foster
-----------------------------------
Lewis R. Foster
President and Chief Operating Officer
October 5, 1997 /s/ John F. Bishop
-----------------------------------
John F. Bishop
Vice Chairman, Treasurer, Secretary, and Director
(Principal Financial Officer)
-----------------------------------
Michael E. Johnson
Director
October 5, 1997 /s/ Robert D. Johnson
-----------------------------------
Robert D. Johnson
Director
October 5, 1997 /s/ J. Sidney Webb
-----------------------------------
J. Sidney Webb
Director
October 5, 1997 /s/ J. Bradford Bishop
-----------------------------------
J. Bradford Bishop
Chairman of the Board, Chief Executive Officer and
Director (Principal Executive Officer)
October 5, 1997 /s/ E. O. Bince
-----------------------------------
E. O. Bince
Controller (Principal Accounting Officer)
II-5
<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 Modification Agreement dated as of October __, 1997,
between the Company and Silicon Valley Bank.*
10(j) Loan and Security Agreement dated as of October __, 1997,
between the Company and the lenders referred to therein,
including the schedules and exhibits thereto.*
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.*
- --------------------------
*To be filed by amendment.
