<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 1997
Registration No. 333-37289
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
EIP MICROWAVE, INC.
(Name of small business issuer in its charter)
DELAWARE 3825 95-2148645
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or Classification Code Number) Identification No.)
organization)
3 Civic Plaza
Suite 265
Newport Beach, California 92660
714-720-1766
(Address and telephone number of
principal executive offices)
1745 McCandless Drive
Milpitas, California 95035
408-945-1477
(Address of principal place of business)
Lewis R. Foster
1745 McCandless Drive
Milpitas, California 95035
408-945-1477
(Name, address and telephone number of agent for service)
Copies to:
Michael E. Johnson, Esq.,
Bainbridge Group, A Law Corporation
18301 Von Karman Avenue, Suite 410
Irvine, California 92612
714-442-6600
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering.[ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Title of each Amount to be Proposed Proposed
class of registered maximum maximum Amount of
securities offering price aggregate registration
to be per share offering price fee
registered
- --------------------------------------------------------------------------------
Common Stock, 1,699,628 $1.70 $2,889,368 $875.57*
par value
$0.01
per share
- --------------------------------------------------------------------------------
/*/ The registration fee is calculated pursuant to Rule 457(o). A registration
fee of $714.62 was paid upon the filing of the initial registration
statement on October 6, 1997, and an additional registration fee
of $160.95 was paid upon the filing of amendment No. 1 to this registration
statement.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
<PAGE>
PROSPECTUS
EIP MICROWAVE, INC.
1,699,628 Shares of Common Stock
(Par value, $0.01 per Share)
RIGHTS OFFERING
EIP Microwave, Inc., a Delaware corporation (the "Company"), offers
1,699,628 shares (the "Shares") of its Common Stock, $0.01 par value, at $1.70
per Share to its stockholders of record on November 7, 1997 (the "Record Date")
who reside in states either where state registration of this offering is not
required or, if required, in the judgment of the Company can reasonably be
effected ("Stockholders of Record"). Each Stockholder of Record's right to
subscribe is not transferable. See "Prospectus Summary--The Rights Offering,
- --Method of Exercising Rights" for information on how to subscribe.
The Company's Common Stock is quoted on the NASD's Bulletin Board
under the symbol "EIPM". On November 7, 1997, the closing bid and closing ask
prices of the Company's Common Stock were $2.15 and $3.00, respectively.
THE RIGHTS WILL EXPIRE AT 5:00 P.M., CALIFORNIA TIME, ON DECEMBER 15, 1997,
UNLESS EXTENDED BY THE COMPANY. IN NO EVENT WILL THE EXPIRATION DATE BE
EXTENDED BEYOND MARCH 7, 1997. FAILURE TO EXERCISE RIGHTS COULD RESULT IN
SUBSTANTIAL DILUTION TO NON-EXERCISING STOCKHOLDERS. SEE "RISK
FACTORS--DILUTION FROM RIGHTS OFFERING."
The Rights Offering is being made on an any or all basis, which means
that the Company may accept any subscription received even if all 1,699,268
Shares offered are not purchased. See "Risk Factors--No Minimum Size of Rights
Offering." J. Bradford Bishop, Chairman and Chief Executive Officer of the
Company, and John F. Bishop, Vice Chairman, Secretary and Treasurer of the
Company, both of whom are principal stockholders and members of the Board of
Directors of the Company, have committed to the Company that they will subscribe
for at least $1,360,000 in Common Stock in the Rights Offering if other
stockholders purchase at least $800,000 in Common Stock in the Rights Offering.
See "Risk Factors--Control by Management and Principal Stockholders", and
- --"Dilution from Rights Offering."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 2 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Price to Public Underwriting Proceeds to Issuer
Discounts and (1)
Commissions
- --------------------------------------------------------------------------------
Per Share $1.70 $0 $1.70
- --------------------------------------------------------------------------------
Total: 1,699,628 $2,889,368 $0 $2,889,368
Shares
- --------------------------------------------------------------------------------
(1) Before deducting estimated expenses of the offering of $63,000 payable by
the Company.
The date of this Prospectus is November 14, 1997.
<PAGE>
The Company is a "reporting company," as such term is employed in the Securities
Exchange Act of 1934. It is not listed on any exchange, and its Common Stock is
not eligible for quotation on the NASDAQ SmallCap Market ("NASDAQ") but is
quoted on the NASD's "Bulletin Board." Reports and other information filed by
the Company may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
DC 20549, and at the Regional Offices of the Commission located at 5670 Wilshire
Boulevard, 11th Floor, Los Angeles, CA 90036-3648, 7 World Trade Center, New
York, NY 10048 and Citicorp Center, 500 Madison Street, Suite 1400, Chicago, IL
60661. Copies of such material can be obtained upon written request addressed
to the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, DC 20549, at prescribed rates. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission; the address of
such site is http://www.sec.gov.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission in
Washington, D.C. a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Common Stock offered by this Prospectus. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits listed
in the Registration Statement. The Registration Statement can be examined at
the Public Reference Section of the Securities and Exchange Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and copies may be obtained upon
payment of the prescribed fees.
The Company will provide without charge to each person to whom a copy
of this Prospectus is delivered, on the written or oral request of such person,
a copy of any or all documents incorporated by reference into this Prospectus
that are not delivered herewith, except the exhibits to such documents (unless
such exhibits are specifically incorporated by reference in such documents).
Requests for such copies should be directed to the Company's principal place of
business: EIP Microwave, Inc., 1745 McCandless Drive, Milpitas, CA 95035-8024,
Attn: Lewis R. Foster, Tel. (408) 945-1477.
The Company's Common Stock is not listed on any exchange. See "Risk
Factors--Delisting from NASDAQ."
<PAGE>
TABLE OF CONTENTS
Contents Page
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Rights Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Method of Exercising Rights. . . . . . . . . . . . . . . . . . . . . . . 2
Opportunity to Increase Holdings . . . . . . . . . . . . . . . . . . . . 2
Avoiding Dilution. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Qualified Opinion of Price Waterhouse LLP. . . . . . . . . . . . . . . . 2
Default under Bank Line. . . . . . . . . . . . . . . . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Recurring Material Losses and Accumulated Deficit. . . . . . . . . . . . 2
Future Cash Requirements . . . . . . . . . . . . . . . . . . . . . . . . 3
Repayment of Existing Debt . . . . . . . . . . . . . . . . . . . . . . . 3
Dependence on New OEM Relationship . . . . . . . . . . . . . . . . . . . 4
Dependence on Government Contractors . . . . . . . . . . . . . . . . . . 4
Dependence on Key Suppliers. . . . . . . . . . . . . . . . . . . . . . . 4
Uncertainty of Product Development and Introduction. . . . . . . . . . . 4
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Dependence on Key Personnel. . . . . . . . . . . . . . . . . . . . . . . 5
Control by Management and Principal Stockholders . . . . . . . . . . . . 5
Offering Price Not Based on Actual Value . . . . . . . . . . . . . . . . 5
Dividends Not Likely . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Dilution from Rights Offering. . . . . . . . . . . . . . . . . . . . . . 6
Possible Future Dilution . . . . . . . . . . . . . . . . . . . . . . . . 6
No Minimum Size of Rights Offering . . . . . . . . . . . . . . . . . . . 6
Possible Extension of Expiration Date. . . . . . . . . . . . . . . . . . 6
Delisting from Nasdaq. . . . . . . . . . . . . . . . . . . . . . . . . . 6
Limited Trading Volume and Volatility of Stock Price in Public Market. . 7
Market Restrictions on Broker-Dealers. . . . . . . . . . . . . . . . . . 7
Potential Anti-Takeover Effects of Delaware Law. . . . . . . . . . . . . 7
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Determination of Offering Price. . . . . . . . . . . . . . . . . . . . . . . 8
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Rights Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Subscription Expiration Date . . . . . . . . . . . . . . . . . . . . . . 8
Basic Subscription Rights. . . . . . . . . . . . . . . . . . . . . . . . 8
Method of Exercising Rights. . . . . . . . . . . . . . . . . . . . . . . 8
Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Purchase and Sale of Rights . . . . . . . . . . . . . . . . . . . . 9
Delivery of Certificates. . . . . . . . . . . . . . . . . . . . . . 9
Over-Subscription Privilege . . . . . . . . . . . . . . . . . . . . 9
Information Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Market for the Company's Common Stock and Related Stockholder Matters . . .10
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
General/Products . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Markets/Principal Customers. . . . . . . . . . . . . . . . . . . . . . .12
Methods of Distribution. . . . . . . . . . . . . . . . . . . . . . . . .12
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Research, Development and Engineering. . . . . . . . . . . . . . . . . .13
Raw Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Patents, Copyrights, Trademarks and Intellectual Property. . . . . . . .13
Government Approval of Principal Products. . . . . . . . . . . . . . . .14
Effect of Existing or Probable Governmental Regulations. . . . . . . . .14
Compliance with Provisions on Environmental Protection . . . . . . . . .14
i
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Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Bank Line of Credit. . . . . . . . . . . . . . . . . . . . . . . . . . .14
Bishop Family Trust Loan Facility. . . . . . . . . . . . . . . . . . . .15
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Acquisition Discussions. . . . . . . . . . . . . . . . . . . . . . . . .16
Management's Discussion and Analysis of Results of Operations and Financial
Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . .16
Financial Condition. . . . . . . . . . . . . . . . . . . . . . . . . . .17
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Directors, Executive Officers and Key Employees. . . . . . . . . . . . .18
Compensation of Directors. . . . . . . . . . . . . . . . . . . . . . . .19
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . .19
Option Grants in Fiscal 1996. . . . . . . . . . . . . . . . . . . .20
Aggregate Option/SAR Exercises in Fiscal 1996 and FY-End
Option/SAR Values. . . . . . . . . . . . . . . . . . . . . . . . .21
Interest of Management and Others in Certain Transactions. . . . . . . . . .21
Commitment of the Bishops to Purchase Common Stock in Rights Offering. .21
Bishop Family Trust Loan Facility. . . . . . . . . . . . . . . . . . . .22
Subordinated Loan. . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Bridge Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Employment Agreement . . . . . . . . . . . . . . . . . . . . . . . . . .22
Legal Counsel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Security Ownership of Certain Beneficial Owners and Management . . . . . .23
Description of Securities. . . . . . . . . . . . . . . . . . . . . . . . . .25
Authorized Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Dividend Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Liquidation Rights . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Preemptive Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Dissenter's Rights . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Certain Anti-Takeover Provisions . . . . . . . . . . . . . . . . . . . .26
Transfer Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Legal Matters and Interests of Counsel . . . . . . . . . . . . . . . . . . .26
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Change in Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Disclosure of Commission Position on Indemnification for Securities
Act Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
ii
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND
FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS.
SEE "RISK FACTORS" BEGINNING ON PAGE 2 FOR A DISCUSSION OF CERTAIN FACTORS TO BE
CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS.
THE COMPANY
EIP Microwave, Inc., a Delaware corporation (the "Company"), is
engaged in the development, manufacture and sale of high frequency microwave and
radio frequency (RF) test and measurement instruments. The Company's principal
executive offices are located at 3 Civic Plaza, Suite 265, Newport Beach, CA
92660, Tel. (714) 720-1766.
The Company recently introduced a new line of microwave frequency
counters which it began distributing in October 1997, on a private label basis
worldwide through an OEM relationship with Hewlett-Packard Company
("Hewlett-Packard"). The Company also recently received a five-year indefinite
quantity, fixed price subcontract from ManTech Systems Engineering Corporation,
a government contractor ("ManTech"), for the supply of RF synthesized signal
generators and RF down converters, with total sales value to the Company that
could range from approximately $3.5 to $20 million. Further, management expects
that current development efforts will result in the introduction of test
instrumentation for the wireless telecommunications market in 1998. The
proceeds from the Rights Offering will assist the Company in meeting the cash
requirements to continue its business and pursue these opportunities through
fiscal 1998. See "The Company--General Products," "--Markets/Principal
Customers," "--Methods of Distribution" and "--Research, Development and
Engineering."
THE RIGHTS OFFERING
The Company offers 1,699,628 shares (the "Shares") of its Common
Stock, $0.01 par value, to its stockholders of record on November 7, 1997 (the
"Record Date"), who reside in states either where state registration of this
offering is not required or, if required, in the judgment of the Company can
reasonably be effected ("Stockholders of Record"). The Shares are offered at a
purchase price of $1.70 per Share (the "Subscription Price").
The Rights Offering entitles the Stockholders of Record to subscribe
at the Subscription Price for Shares on the basis of four Shares for each share
of Common Stock held on the Record Date (the "Basic Subscription Rights"). In
addition, each Stockholder of Record may over-subscribe to purchase as many
additional Shares as desired. If there are not sufficient Shares to honor all
over-subscriptions, the available Shares will be allocated among those who
over-subscribe based solely on the number of shares subscribed for by each
over-subscribing holder pursuant to the Basic Subscription Rights.
J. Bradford Bishop, Chairman and Chief Executive Officer of the
Company, and John F. Bishop, Vice Chairman, Secretary and Treasurer of the
Company, both of whom are principal stockholders and members of the Board of
Directors of the Company, have committed to the Company that they will subscribe
for at least $1,360,000 in Common Stock in the Rights Offering if other
stockholders purchase at least $800,000 in Common Stock in the Rights Offering.
See "Risk Factors--Control by Management and Principal Stockholders", and
- --"Dilution from Rights Offering."
The Rights Offering is being made directly by the Company to its
Stockholders of Record. No underwriters are involved. No commissions are being
paid. All net proceeds from subscriptions go directly to the Company in their
entirety.
Common Stock offered 1,699,628 shares
Common Stock to be outstanding
after the offering 2,124,535 shares (1)
Use of proceeds Develop new products, fund working
capital requirements and repay
debt.
1
<PAGE>
(1) Assuming all the Shares offered herein are subscribed and sold.
METHOD OF EXERCISING RIGHTS
Stockholders of Record may not transfer their rights to purchase the
Shares. Subscriptions must be made in writing by completing and signing the
enclosed subscription agreement and mailing or delivering it, with a good and
sufficient check for the subscribed amount, to the Company. Completed
subscription agreements and checks must, in any event, be received by the
Company no later than 5:00 P.M., California time, on December 15, 1997, unless
extended by the Company (such date, as it may be extended on one or more
occasions, is referred to herein as the "Expiration Date").
Checks should be made payable to "EIP MICROWAVE, INC." Should the
offering be oversubscribed, the Company will promptly return to subscribers that
portion of their subscription amounts that could not be filled, without any
interest.
OPPORTUNITY TO INCREASE HOLDINGS
While brokerage costs and commissions vary among brokerage firms, a
$25 minimum cost per transaction is in the lower range of such costs. Based on
the Subscription Price of $1.70, a holder of fewer than fifteen shares would
lose money in a sale of his present shares. The Rights Offering thus provides
an opportunity for these holders of a few shares to increase their holdings to
an amount which is a commercially marketable number of shares. No broker's
commission is involved in a purchase of shares in the Rights Offering.
AVOIDING DILUTION
Each Stockholder of Record may avoid dilution of his or her percentage
interest in the Company by subscribing for all Shares subject to his or her
Basic Subscription Rights. See "Risk Factors--Dilution from the Rights
Offering."
QUALIFIED OPINION OF PRICE WATERHOUSE LLP
The report of Price Waterhouse LLP on the Company's financial
statements for the year ended September 30, 1996 has been reissued with dual
dates of December 23, 1996 and October 23, 1997. The reissued report includes
an explanatory paragraph to express substantial doubt regarding the Company's
ability to continue as a going concern. See "Risk Factors--Recurring Material
Losses and Accumulated Deficit".
DEFAULT UNDER BANK LINE
At November 7, 1997, the Company had outstanding borrowings in the
aggregate principal amount of $179,000 under it's $500,000 bank line of
credit (the "Bank Line") with Silicon Valley Bank ("SVB"), and the Company
was in default of certain financial covenants under the Bank Line. See "Risk
Factors--Default Under Bank Line" and "The Company--Bank Line of Credit."
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A
HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER, IN
ADDITION TO THE INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS IN EVALUATING THE COMPANY AND THE COMMON STOCK OFFERED
HEREBY. THESE RISK FACTORS COULD CAUSE ACTUAL RESULTS OR EVENTS TO DIFFER
MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD-LOOKING STATEMENT MADE BY OR ON
BEHALF OF THE COMPANY.
RECURRING MATERIAL LOSSES AND ACCUMULATED DEFICIT
The Company operated at a loss of $453,000 in the fiscal year ended
September 30, 1994, made a profit of $125,000 in the fiscal year ended September
30, 1995, operated at a loss of $493,000 in the fiscal year ended September 30,
1996, and operated at a loss of $793,000 in the nine months ended June 30, 1997.
Management of the Company expects that the loss for the fiscal year ended
September 30, 1997 will be approximately $1,285,000. Net cash used in
operations and investing activities by the Company in the fiscal years ended
September 30, 1994, 1995 and 1996, was $36,000, $85,000 and $89,000,
respectively. Net cash used in such activities in the nine months ended June
30, 1997 was $796,000, and management expects that net cash used in such
activities by the Company for the fiscal year ended September 30, 1997, will be
approximately $1,050,000. At the end of fiscal year 1996, the Company's
retained earnings were $374,000, and stockholders' equity was $1,227,000. At
June 30, 1997, the Company's accumulated deficit was $419,000, and stockholders'
equity was $434,000. Management expects that, at September 30, 1997, its
accumulated deficit will be approximately $900,000, and stockholders equity will
be approximately ($60,000). The Company had no indebtedness at September 30,
1994. At September 30, 1995 and 1996, the Company's ratio of interest-bearing
indebtedness to total interest-bearing indebtedness and stockholders' equity was
1% and 20%, respectively. This ratio at June 30, 1997, was 73%, and management
expects that, at September 30, 1997, this ratio will be approximately 105%.
There can be, and is, no assurance that profitable operations and positive cash
flow can be achieved or maintained or that any funds obtained from the offering
described herein will be sufficient to carry the Company to a time when
profitable operations and positive cash flow should sustain the Company.
Continued losses could negatively impact
2
<PAGE>
the Company's working capital and the extension of credit by its lenders and
could cause such lenders to declare a default under the Company's loan
agreements, and declare all outstanding loans immediately due and payable. See
"Risk Factors--Repayment of Existing Debt."
The report of Price Waterhouse LLP on the Company's financial
statements for the year ended September 30, 1996 has been reissued with dual
dates of December 23, 1996 and October 23, 1997. The reissued report includes
an explanatory paragraph to express substantial doubt regarding the Company's
ability to continue as a going concern. There can be no assurance that the
Company will not continue to incur significant operating losses or that required
additional financing will be available to meet the Company's business plan in
fiscal 1998 and beyond.
FUTURE CASH REQUIREMENTS
The Company believes that borrowings under existing or replacement
debt facilities and proceeds from the Rights Offering in an aggregate amount
equal to approximately $3,500,000 will be necessary to satisfy the Company's
cash requirements for implementing its business plan during the remainder of the
fiscal year ending September 30, 1998. The actual cash resources required will
depend upon numerous factors, including those described under "Risk
Factors--Dependence on New OEM Relationship," "--Dependence on Government
Contractors," and "--Uncertainty of Product Development and Introduction", and
the cash requirements could be materially greater than $3,500,000. The Company
expects to meet such cash requirements with borrowings under its existing or
replacement debt facilities, and proceeds from the Rights Offering. There is no
assurance that the Company will be successful in obtaining all such capital from
the Rights Offering or from such debt facilities. If the Company is unable to
obtain such capital from the Rights Offering or from such debt facilities on a
timely basis, the Company will be required to significantly curtail its planned
operations and its business, financial condition and results of operations could
be materially adversely affected.
DEFAULT UNDER BANK LINE
At November 7, 1997, the Company had outstanding borrowings in the
aggregate principal amount of $179,000 under its $500,000 bank line of credit
(the "Bank Line") with Silicon Valley Bank ("SVB"), and the Company was in
default of certain financial covenants under the Bank Line. See "The
Company--Bank Line of Credit." As a result of the default, SVB has the right
to declare all outstanding amounts under the Bank Line immediately due and
payable. The Company is engaged in ongoing discussions with SVB concerning the
Bank Line, and SVB has made a non-binding proposal to the Company to, among
other things, amend the Bank Line to, among other things, modify the financial
covenants and allow the Company to receive advances under the Bank Line,
increase the interest rate charged to SVB's prime rate plus 5% per annum, and
change the expiration date for the Bank Line to January 31, 1998. There can be
no assurance that the Company and SVB will enter into an amendment of the Bank
Line in accordance with the non-binding proposal. The Company is continuing to
pursue discussions with other lenders concerning a replacement working capital
facility; however, there can be no assurance that the Company will be able to
obtain a satisfactory working capital facility. Even if the Company is able to
obtain a working capital facility from another lender, there can be no assurance
as to the terms of such facility; and the terms of such facility could be even
less attractive to the Company than the terms of the existing Bank Line or the
non-binding proposal from SVB. If the Company is unable to obtain a
satisfactory working capital facility, the Company and its business could be
materially adversely affected.
REPAYMENT OF EXISTING DEBT
In addition to the Bank Line, the Company has a $1,450,000 term and
revolving advance loan facility with the Bishop Family Trust which expires in
October 1998. At November 7, 1997, the Company had outstanding borrowings in
the aggregate principal amount of $1,200,000 under the Bishop Family Trust Loan
Facility. All such loans are payable in full upon expiration. See "The
Company--Bank Line of Credit" and "--Bishop Family Trust Loan Facility". There
can be no assurance that the Company will be able to extend, repay or refinance
its loans under the Bank Line or the Bishop Family Trust Loan Facility.
Further, such loans are subject to various covenants relating to the Company's
performance and financial condition. If the Company does not maintain
compliance with such covenants, the lenders have the right to declare all
outstanding amounts immediately due and payable. At November 7, 1997 the
Company was in default under the Bank Line, and there can be no assurance that
the Company will be able to maintain compliance with the covenants under the
Bishop Family Trust Loan Facility.
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DEPENDENCE ON NEW OEM RELATIONSHIP
The Company recently introduced a new line of microwave frequency
counters which it began distributing in October 1997, on a private label basis
worldwide through an OEM relationship with Hewlett-Packard Company
("Hewlett-Packard"). The Company expects that this OEM relationship will
account for more than 15% of its revenues in fiscal year 1998. However,
Hewlett-Packard is not obligated to purchase a minimum quantity of products, and
the failure of Hewlett-Packard to purchase the product quantity expected by the
Company would have a material, negative impact upon the Company's business and
prospects of profits. There can be no assurance that the Company will be able
to maintain a successful relationship with Hewlett-Packard and generate revenues
or profits from the relationship.
DEPENDENCE ON GOVERNMENT CONTRACTORS
Approximately 35% of the Company's revenues in the last two fiscal
years have been derived from the sale of products to government contractors.
The Company recently received a five-year indefinite quantity, fixed price
supply subcontract from ManTech Systems Engineering Corporation, a government
contractor ("ManTech"), for the supply of RF synthesized signal generators and
RF down converters, with total sales value to the Company that could range from
approximately $3.5 to $20 million. The Company has received an initial purchase
order under the subcontract in the amount of $227,000. Further production
purchase order releases under the subcontract are subject to satisfactory
completion of field testing of the U.S. Marine Corps' Third Echelon Test Set
(TETS) systems and the Company's components. The Company will incur substantial
expenses in preparing to satisfy its obligations under this subcontract.
However, despite the incurrence of such expenses, this and other subcontracts
with government contractors are subject to cancellation provisions in favor of
the government contractor. The subcontract with ManTech is subject to
termination by ManTech in the event the government terminates its contract with
ManTech. Further, this subcontract can be terminated if the Company's
components do not satisfy field testing requirements or the Company otherwise
defaults under the subcontract. There can be no assurance that such
subcontracts will not be canceled. Further, there can be no assurance that the
Company will receive additional subcontracts from government contractors.
DEPENDENCE ON KEY SUPPLIERS
A number of the Company's products require specialized components
currently available only through single sources of supply. The loss of any of
these sources, or the inability of any such source to meet the Company's
production and quality control requirements, could be detrimental to the Company
with respect to the specific products involved. If any of the Company's single
source suppliers is not able to deliver these specialized components, the
Company would be required to implement alternative supply strategies (such as
changing to one or more other suppliers, which could require product design or
specification changes and would likely cause delays in shipment of the Company's
products) or discontinue sales of the affected products.
UNCERTAINTY OF PRODUCT DEVELOPMENT AND INTRODUCTION
The Company's success depends to a large degree on its ability to
develop and introduce in a timely manner new or updated products which are
affordable, functional in purpose, distinctive in quality and design and
tailored to the purchasing patterns of the Company's customers and potential
customers. Misjudgments as to customer interest in new or updated products
could lead to excess inventories and markdowns and could have a material adverse
effect on the Company's financial condition and results of operations. There
can be no assurance that new products under development will be successfully
developed and introduced. Further, due to the uncertainty associated with any
product development and introduction (such as delays in development and lack of
market acceptance of a new product), there can be no assurances that the
Company's development and introduction efforts will be successful. If products
under development are not successfully introduced, the Company's business,
financial condition and results of operations would be materially adversely
effected.
COMPETITION
The markets in which the Company's products are sold have become
increasingly competitive. Most of the Company's principal competitors have
substantially greater financial resources. The Company's results of
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operations can be significantly affected by pricing pressures arising from
customer demand and pricing strategies by the Company's competitors, and the
timing and market acceptance of new product introductions by competitors of the
Company. There can be no assurance that pricing pressures will not have a
material adverse effect on the Company, or that the Company's competitors will
not succeed in developing products that would render the Company's technology
and products obsolete and noncompetitive.
DEPENDENCE ON KEY PERSONNEL
The loss of the services of any of the Company's management and other
key employees, for any reason, may have a materially adverse effect on the
prospects of the Company. See "Management--Directors, Executive Officers and
Key Employees."
CONTROL BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
J. Bradford Bishop, a member of the Board of Directors and Chairman
and Chief Executive Officer of the Company, is the son of John F. Bishop, a
member of the Board of Directors and Vice Chairman, Secretary and Treasurer of
the Company. J. Bradford Bishop and John F. Bishop (together, the "Bishops")
beneficially own 191,400 shares of Common Stock in the aggregate, representing
approximately 45% of the currently outstanding shares of Common Stock (excluding
outstanding options to purchase Common Stock). If outstanding options are
included, the Bishops beneficially own 196,400 shares of Common Stock,
representing approximately 46% of the currently outstanding shares of Common
Stock. In addition, John F. Bishop is a trustee of the Bishop Family Trust,
which has entered into loan facilities providing for up to $1,450,000 in loans
to the Company. See "The Company--Bishop Family Trust Loan Facility." By
virtue of such stock ownership and their position with the Company, the Bishops
may have the practical ability to determine the election of all directors and
control the outcome of substantially all matters submitted to the Company's
stockholders. Such concentration of ownership and lending relationship could
have the effect of making it more difficult for a third party to acquire, or
discourage a third party from seeking to acquire, control of the Company without
the approval of the Bishops. This concentration of ownership would also enable
the Bishops to acquire all Common Stock of the Company with a smaller
incremental investment than would be required of other potential third party
acquirors. Further, the Bishops have committed to the Company that they will
subscribe for at least $1,360,000 in Common Stock in the Rights Offering if
other stockholders purchase at least $800,000 in Common Stock in the Rights
Offering. If other stockholders do not exercise their Basic Subscription Rights
in full, the Bishops could substantially increase their pro rata ownership of
the Company's Common Stock. See "Risk Factors--Dilution from Rights Offering."
OFFERING PRICE NOT BASED ON ACTUAL VALUE
The price at which the Common Stock is being sold is not based on an
independent valuation of the Company or its assets or other recognized criteria
of investment value. The Subscription Price does not indicate that the Common
Stock has a value of or could be resold at that price. In addition, the
Subscription Price of $1.70 is significantly less than the price at which the
Common Stock has traded at various times during the last twelve months, and
represents a 28% discount to the average closing price of the Common Stock in
the 30 days prior to the Record Date. The effect of the Rights Offering will
likely be to decrease the current market value of the Common Stock. See
"Determination of Offering Price."
DIVIDENDS NOT LIKELY
Dividends have not been paid on the Company's Common Stock in more
than six years. For the foreseeable future it is anticipated that earnings
which may be generated from operations of the Company, if any, will be used to
finance the growth of the Company and repay debt and that cash dividends will
not be paid to holders of the Common Stock. Under the terms of agreements with
the Company's senior and subordinated lenders, the Company may not pay or
declare dividends without the lenders' prior written consent.
DILUTION FROM RIGHTS OFFERING
Stockholders who do not exercise their Basic Subscription Rights will
realize a dilution of their percentage voting interest and ownership interest in
future net earnings, if any, of the Company. The amount of dilution will depend
on the number of shares of Common Stock purchased by other stockholders in the
Rights
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Offering. The Bishops have committed to the Company that they will subscribe
for at least $1,360,000 in Common Stock in the Rights Offering if other
stockholders purchase at least $800,000 in Common Stock in the Rights Offering.
Assuming the Bishops purchase $1,360,000 of Common Stock and other stockholders
only purchase $800,000 of Common Stock, the Bishops would beneficially own
approximately 58% of the Company's Common Stock, and the effective percentage
ownership of any non-exercising stockholder will be reduced by approximately
75%. The dilutive impact on non-exercising stockholders will be even greater
if the Bishops or other stockholders purchase additional shares. If all
stockholders fully exercise their Basic Subscription Rights, the effective
percentage ownership of each stockholder will remain unchanged.
POSSIBLE FUTURE DILUTION
In addition to the shares registered for the Rights Offering described
herein, the Company earlier registered 200,000 shares of Common Stock which will
be available for issuance upon exercise of options granted or to be granted
under the Company's Second Amended and Restated 1994 Stock Option Plan.
Further, the Company has the right to issue additional shares of Common Stock to
the Bishop Family Trust in lieu of cash payment of facility fees. See "The
Company--Bishop Family Trust Loan Facility". The issuance of any such
additional shares would dilute the percentage ownership and could dilute the net
tangible book value per share of stockholders of the Company. Further, if
additional financing is required, additional dilution may take place.
NO MINIMUM SIZE OF RIGHTS OFFERING
The Rights Offering is being made on an any or all basis, which means
that the Company may accept any subscription received even if all 1,699,628
Shares offered are not purchased. Although the Bishops have committed to the
Company that they will subscribe for at least $1,360,000 in Common Stock in the
Rights Offering if other stockholders purchase at least $800,000 in Common Stock
in the Rights Offering, there is no minimum amount of proceeds required for the
Company to consummate the Rights Offering. For example, the Company may realize
no proceeds from the Rights Offering or only a minimal amount of proceeds that
would not result in a material improvement in the Company's ability to meet its
operating objectives. Approximately $610,000 of the funds committed by the
Bishops in the Rights Offering will be used by the Company to repay debt under
the Bishop Family Trust Loan Facility. Proceeds from the purchase of Common
Stock by other stockholders in the Rights Offering may also be used to repay
debt under the Bishop Family Trust Loan Facility. See "Use of Proceeds" and
"The Company--Bishop Family Trust Loan Facility." Even if other stockholders
purchase $800,000 in Common Stock and the Bishops purchase $1,360,000 in Common
Stock in the Rights Offering, the Company will still need additional funds from
the Rights Offering or other sources to meet its cash needs for fiscal 1998. No
assurances can be given as to the amount of gross proceeds that the Company will
realize from the Rights Offering, or the adequacy of such proceeds to meet the
Company's cash requirements. See "Use of Proceeds," "Plan of Distribution," and
"Risk Factors--Future Cash Requirements."
POSSIBLE EXTENSION OF EXPIRATION DATE
The Company has reserved the right to extend the Expiration Date to as
late as March 7, 1998. Funds deposited in payment of the Subscription Price may
not be withdrawn and no interest will be paid thereon to stockholders.
DELISTING FROM NASDAQ
Previously, the Company's Common Stock was traded on the NASDAQ
SmallCap Market ("NASDAQ"). However, the Company failed to maintain the minimum
standards required by NASDAQ to maintain its listing on NASDAQ. The Common
Stock was suspended from trading and delisted from NASDAQ on June 25, 1997, as a
result of the Company's failure to maintain capital and surplus of at least
$1,000,000. The delisting of the Company's Common Stock from NASDAQ could have
an adverse effect on the market value of the Common Stock. See "Market for the
Company's Common Stock and Related Stockholder Matters."
LIMITED TRADING VOLUME AND VOLATILITY OF STOCK PRICE IN PUBLIC MARKET
The Company's Common Stock is thinly traded and may experience
significant price and volume fluctuations which could adversely affect the
market price of the Common Stock without regard to the operating
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performance of the Company. There is no assurance that a more active public
market for such securities will develop after the conclusion of the Rights
Offering described herein or, if a more active trading market develops, that it
will be sustained.
MARKET RESTRICTIONS ON BROKER-DEALERS
The Company's Common Stock is covered by a Securities and Exchange
Commission rule that imposes additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally institutions with assets in excess
of $5 million or individuals with net worth in excess of $1 million or annual
income exceeding $200,000 or $300,000 jointly with their spouse). For
transactions covered by the rule, the broker-dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
agreement to the transaction prior to the sale. Consequently, the rule may
affect the ability of broker-dealers to sell the Company's securities and also
may affect the ability of persons purchasing Shares in this offering to sell
their Shares in the secondary market. Further, the Company's Common Stock is
quoted on an NASD inter-dealer system called the "Bulletin Board" and, following
the Rights Offering, the Company still will not have $4 million in net tangible
assets or $50 million in stockholders' equity, one of which is required for it
to qualify for quotation on NASDAQ, and the Shares are not expected soon to
command a market price of $5 per share, the price required for a
non-NASDAQ-quoted security to escape the trading severities imposed by the
Securities and Exchange Commission on so-called "penny stocks." These trading
severities tend to reduce broker-dealer and investor interest in penny stocks
and could operate (i) to inhibit the ability of the Company's stock to reach a
$4 per share trading price that would make it eligible for quotation on NASDAQ
even should it otherwise qualify for quotation on NASDAQ and (ii) to inhibit the
ability of the Company to use its stock for business acquisition purposes. See
"Market for the Company's Common Stock and Related Stockholder Matters."
POTENTIAL ANTI-TAKEOVER EFFECTS OF DELAWARE LAW
Certain provisions of Delaware law, the Company's Certificate of
Incorporation and its Bylaws could delay, impede or make more difficult a
merger, tender offer or proxy context involving the Company, even if such events
could be beneficial to the interests of the stockholders. Such provisions could
limit the price that certain investors might be willing to pay in the future for
shares of Common Stock. See "Description of Securities--Certain Anti-Takeover
Provisions."
USE OF PROCEEDS
The net proceeds to the Company from the sale of all 1,699,628 shares
of Common Stock offered by the Company hereby are estimated to be $2,826,368,
based on a Subscription Price of $1.70 per share and after deducting the
offering expenses payable by the Company.
The Company expects that the proceeds of the offering will be used to
develop new products, fund working capital requirements and repay debt. The
Company expects to repay a portion of its Loan Facility with the Bishop Family
Trust in an amount equal to $610,000 from the proceeds from the sale of Common
Stock to the Bishops in the Rights Offering. Further, the Company may repay
additional principal under the Loan Facility to the extent the Company believes
funds are available in excess of its internal cash requirements for fiscal 1998.
See "The Company--Bishop Family Trust Loan Facility". The Company intends to
invest the aggregate net proceeds from this offering in short-term,
investment-grade, interest-bearing securities until such time as funds are
needed.
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DETERMINATION OF OFFERING PRICE
The Rights Offering is being conducted by the Company based on the
commitment of the Bishops to subscribe for at least $1,360,000 in Common Stock
in the Rights Offering if other stockholders purchase at least $800,000 in the
Rights Offering. The terms of the Rights Offering were approved by the three
independent members of the Company's Board of Directors (the "Independent
Directors"). The Subscription Price reflects a 28% discount to the average
closing price of the Company's Common Stock in the 30 days prior to the Record
Date. The terms of the Rights Offering were unanimously recommended by the
Independent Directors and approved by the Company's Board of Directors on
November 7, 1997.
The principal factors in the recommendation and approval of the terms
of the Rights Offering were the Company's need for additional capital to
continue development of new products and for working capital purposes, the
nonavailability of such capital from other sources and the opportunity for
stockholders to participate in the financing through the Rights Offering. The
Company has not sought an independent third party opinion with respect to the
value of the Company or the appropriateness of the Subscription Price. The
Subscription Price has no relation to the market value of the Common Stock of
the Company, the value of the Company's assets or the Company's prospects as a
going concern.
PLAN OF DISTRIBUTION
THE RIGHTS OFFERING
The Company offers 1,699,628 shares (the "Shares") of its Common
Stock, $0.01 par value, only to its stockholders of record on November 7, 1997
(the "Record Date"), who reside in states either where state registration of
this offering is not required or, if required, in the judgment of the Company
can reasonably be effected ("Stockholders of Record"). The Shares are offered
at a purchase price of $1.70 per Share (the "Subscription Price").
The Rights Offering is being made directly from the Company to its
Stockholders of Record. No underwriters are involved. No commissions are being
paid. All net proceeds from subscriptions go directly to the Company in their
entirety.
SUBSCRIPTION EXPIRATION DATE
The Rights Offering will expire at 5:00 P.M., California time, on
December 15, 1997, unless extended by the Company (such date, as it may be
extended on one or more occasions, is referred to herein as the "Expiration
Date"). In no event will the Expiration Date be extended beyond March 7, 1998.
If the Company elects to extend the term of the Rights Offering, it will issue a
press release to such effect not later than the first day The Nasdaq National
Market is open for trading following the most recently announced Expiration
Date. Funds provided in payment of the Subscription Price will be held by the
Company, until the closing, which will occur promptly following the Expiration
Date. The subscription for Common Stock in the Rights Offering is irrevocable
once made, and no interest will be paid to subscribing stockolders. AS
DESCRIBED BELOW, SUBSCRIPTIONS MUST BE RECEIVED BEFORE THE EXPIRATION DATE AFTER
WHICH TIME THE RIGHT TO SUBSCRIBE WILL BE VOID AND VALUELESS.
BASIC SUBSCRIPTION RIGHTS
The Rights Offering entitles the Stockholders of Record to subscribe
at the Subscription Price for Shares on the basis of four Shares for each share
of Common Stock held on the Record Date (the "Basic Subscription Rights").
Exercise of the Basic Subscription Rights will also entitle the holders to the
Over-Subscription Privilege described below. See "Plan of Distribution--Method
of Exercising Rights" and "--Over-Subscription Privilege" below.
METHOD OF EXERCISING RIGHTS
To subscribe for Common Stock, a Stockholder of Record should fill in
Section 1 on the Subscription Agreement and sign and transmit it along with the
required payment, in the envelope provided, to the Company at
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1745 McCandless Drive, Milpitas, California 95035. The Subscription Agreement
must arrive on or before the Expiration Date.
PAYMENT. The Subscription Agreement must be accompanied by payment of
the full Subscription Price in U.S. Dollars for all shares. Such payment may be
made by mail. Payment may be made by certified check or bank draft drawn upon a
United States bank, or postal, telegraphic or express money order, payable to
the order of "EIP Microwave, Inc." Sufficient mailing time should be allowed
for the Subscription Agreement and payment to be RECEIVED by the Company before
the expiration of the subscription period at 5:00 P.M., California time,
December 15, 1997, unless extended by the Company (such date, as it may be
extended on one or more occasions, is referred to herein as the "Expiration
Date"), after which time the right to subscribe will be void and valueless.
Payment may also be made by hand delivery to the Company, in cash or by
certified check or bank draft drawn upon a United States bank, or postal,
telegraphic or express money order, payable to the order of "EIP Microwave,
Inc."
The Rights Offering is being made on an any or all basis, which means
that the Company may accept any subscription received even if all 1,699,628
Shares offered are not purchased. The Bishops have committed to the Company
that they will subscribe for at least $1,360,000 in Common Stock in the Rights
Offering if other stockholders purchase at least $800,000 in Common Stock in the
Rights Offering. See "Risk Factors--Control by Management and Principal
Stockholders," "--Dilution from Rights Offering," and "--No Minimum Size of
Rights Offering."
The Company reserves the right to reject any Subscription Agreement
and payment not properly submitted. The Company has no duty to give
notification of defects in any Subscription Agreement and/or payment and will
have no liability for failure to give such notification. The Company will
return any Subscription Agreement and/or payment not properly submitted.
Any questions or requests for assistance concerning the method of
exercising subscription rights or requests for additional copies of this
Prospectus, the Subscription Agreement or the Instructions to the Subscription
Agreement should be directed to the Information Agent at 1-800-631-8985.
PURCHASE AND SALE OF RIGHTS. Subscription rights may not be
transferred, divided, combined, purchased or sold.
DELIVERY OF CERTIFICATES. Certificates for Shares issuable on
exercise of subscription rights will be mailed as soon as practicable after the
Expiration Date.
OVER-SUBSCRIPTION PRIVILEGE. If some stockholders do not fully
exercise all of their Basic Subscription Rights, the remaining Shares will be
offered to those holders of Basic Subscription Rights who wish to acquire more
than the number of shares to which their Basic Subscription Rights entitle them
(the "Over-Subscription Privilege"). Each holder of Basic Subscription Rights
who fully exercises Basic Subscription Rights will be entitled to participate in
such Over-Subscription Privilege and will be asked to indicate on the
Subscription Agreement how many additional shares that stockholder would be
willing to acquire pursuant to the Over-Subscription Privilege. Each
stockholder wishing to exercise its Over-Subscription Privilege must exercise
its Over-Subscription Privilege and must tender payment for the Shares
subscribed for pursuant to the Over-Subscription Privilege at the time it
exercises its Basic Subscription Rights. If there remain sufficient Shares
after the exercise of Basic Subscription Rights, all over-subscriptions will be
honored in full. If there are not sufficient Shares to honor all
over-subscriptions, the available Shares will be allocated among those who
over-subscribe based solely on the number of shares subscribed for by each
over-subscribing holder pursuant to the Basic Subscription Rights. For example,
if after the exercise of the Basic Subscription Rights (1) there remain 150,000
Shares that were not subscribed for pursuant to Basic Subscription Rights, (2)
two stockholders each indicated that they wished to acquire Shares through the
Over-Subscription Privilege, (3) the first stockholder oversubscribed for
150,000 Shares and the second stockholder oversubscribed for 200,000 Shares and
each tendered payment for that number of shares and (4) the first stockholder
acquired 100,000 shares pursuant to its full Basic Subscription Rights and the
second stockholder acquired 200,000 shares pursuant to its full Basic
Subscription Rights; then the first stockholder would be entitled to one-third
or 50,000 Shares and the second stockholder would be entitled to two-thirds or
100,000 Shares.
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The allocation process may involve a series of allocations in order to
assure that the shares available for over-subscription are distributed
proportionately among all over-subscribing holders. Accordingly, the degree to
which each stockholder's request for Shares pursuant to the Over-Subscription
Privilege will be honored will depend on the number of Shares requested, the
number of shares acquired by the exercise of Basic Subscription Rights and the
total number of Shares available for over-subscription. After the expiration of
the subscription rights, the Company will send notice of the number of Shares
acquired pursuant to the Over-Subscription Privilege to each stockholder that
over-subscribed and promptly remit to such stockholder, without any interest,
any payment tendered for shares not acquired under the Over-Subscription
Privilege.
INFORMATION AGENT
The Company has appointed Corporate Investor Communications, Inc.
("CIC") as Information Agent for the Rights Offering. Any questions or requests
for additional copies of this Prospectus, the Subscription Agreement or the
Instructions to the Subscription Agreement may be directed to the Information
Agent at the telephone number and address below.
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, NJ 07072-2586
(201) 896-1900
Or call
Toll Free
(800) 631-8985
The Company will pay the fees and expenses of the Information Agent
and has also agreed to indemnify the Information Agent from certain liabilities
in connection with the Rights Offering.
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
As of the date of this Prospectus, there are 424,907 shares of Common
Stock of the Company owned of record by approximately 254 stockholders.
An additional 200,000 shares of Common Stock of the Company are
reserved for issuance against the exercise of Company stock options.
The following sets forth for each calendar quarter since January 1995,
the range of high and low closing bids for the Company's Common Stock as
reported to the Company by NASDAQ. For the period through June 25, 1997, the
Common Stock was listed on the NASDAQ SmallCap Market under the symbol EIPM.
For the period since June 25, 1997, the Common Stock has been quoted on the NASD
Bulletin Board under the symbol EIPM. These quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
Calendar Quarter High ($) Low ($)
---------------- -------- -------
4th quarter 1997
(through November 7,
1997) 2.75 2.125
3rd quarter 1997 3.625 1.25
2nd quarter 1997 6.00 1.25
1st quarter 1997 2.00 1.00
4th quarter 1996 5.00 1.00
3rd quarter 1996 6.75 3.50
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Calendar Quarter High ($) Low ($)
---------------- -------- -------
2nd quarter 1996 7.50 2.00
1st quarter 1996 7.25 2.75
4th quarter 1995 5.50 1.50
3rd quarter 1995 7.75 5.50
2nd quarter 1995 9.25 1.25
1st quarter 1995 7.00 1.75
The Company's stock is quoted on an NASD inter-dealer system called
the "Bulletin Board." While some Bulletin Board stocks are actively traded,
they do not draw the interest of the NASD brokerage community held by NASDAQ
stocks or exchange-listed stocks. The eligibility requirements for listing the
Company's stock on exchanges are generally as high or higher than the
requirements for eligibility for quotation on NASDAQ, and the Company has no
present plans to list its stock on an exchange.
The Company's stock will not be eligible for quotation on the NASDAQ
SmallCap Market ("NASDAQ") unless it meets various NASDAQ requirements, which it
will not meet even if all the Shares offered herein are subscribed. No
assurance can be made that the Common Stock will ever become eligible for
quotation on NASDAQ.
Further, holders of the Shares offered herein face the prospect of an
indefinite period during which the Shares will be subject to trading severities
imposed on Bulletin Board, so-called "penny stocks" (stocks that trade at less
than $5 per share) by regulations of the Securities and Exchange Commission. The
effect of these trading severities is to reduce broker-dealer and investor
interest in trading or owning "penny stocks" and, hence, could inhibit the
ability of the Company's stock to reach a trading level of $4 per share or
higher and thereby become eligible for quotation on NASDAQ even if the Company
meets NASDAQ's assets and stockholders' equity requirements in the future.
THE COMPANY
THE FOLLOWING DISCUSSION CONTAINS TREND INFORMATION AND OTHER FORWARD-LOOKING
STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. THE ACTUAL RESULTS
OF EIP MICROWAVE, INC. (THE "COMPANY") COULD DIFFER MATERIALLY FROM THE
COMPANY'S HISTORICAL RESULTS OF OPERATIONS AND THOSE DISCUSSED IN THE FORWARD-
LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE IDENTIFIED UNDER THE HEADING
"RISK FACTORS" ABOVE. DUE TO SUCH RISK FACTORS AND OTHER FACTORS, PAST RESULTS
ARE NOT A RELIABLE PREDICTOR OF FUTURE RESULTS.
GENERAL/PRODUCTS
The Company was incorporated under the laws of the State of Delaware
in 1987 under the name EIP Microwave, Inc. The predecessor corporation was
organized under the laws of California in 1961, and merged with the Company in
1987.
The Company is engaged in a single industry segment constituting the
development, manufacture and sale of high frequency microwave and radio
frequency (RF) test and measurement instruments. These instruments include
microwave heterodyne-type automatic frequency counters, microwave and RF pulse
frequency counters, microwave and RF synthesized signal generators, pulse
generators, and downconverters. All of these products are electronic devices
which are used in the design, manufacture and maintenance of microwave and RF
products and systems throughout the world.
Stand-alone microwave frequency counters represented 50% of net sales
in fiscal 1996, 64% of net sales in fiscal 1995, and 75% of net sales in fiscal
1994. The balance of sales in those periods was mainly derived from the
Company's VXIbus-based products. VXIbus is a hardware and software standard for
modular instrumentation. EIP
11
<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 began distributing these products in
October 1997, on a private label basis worldwide through an OEM relationship
with Hewlett-Packard Company ("Hewlett-Packard"). During fiscal 1994, the
Company introduced a microwave pulse frequency counter with peak power
measurement capability.
The Company designs and manufactures its own YIG (Yitrium iron garnet)
filters, which are a key feature of many EIP microwave products. Additionally,
the Company manufactures hybrid microwave integrated circuits (MICs) and
proprietary microwave subassemblies used in its microwave products. Management
believes that the Company's YIG and MIC capabilities provide its microwave
products with competitively superior performance, protection from overload, and
compact size.
MARKETS/PRINCIPAL CUSTOMERS
The Company has a variety of customers worldwide for its microwave
products, including the military, government agencies, government
subcontractors, the telecommunications industry, the aerospace industry, and
research and development facilities. The primary customers for the Company's RF
products are telecommunication companies. The Company's principal customers,
and the percent of its net sales attributable to such customers, are
Northrup-Grumman (29% for the nine months ended June 30, 1997, 22% in fiscal
1996, 11% in fiscal 1995, and 14% in fiscal 1994) and Marconi (19% in fiscal
1995). Other important customers that provided less than 10% of revenues to the
Company in such periods were Hewlett-Packard Company, Lockheed Martin, Kelly Air
Force, Hughes Aircraft, and Harris Corporation.
The Company's sales of microwave products to the United States
Government and its contractors comprised approximately 38%, 33%, 36%, and 44%,
of net sales for the nine months ended June 30, 1997, and the fiscal years 1996,
1995, and 1994, respectively. In September 1997, the Company received a
five-year indefinite quantity, fixed price supply subcontract from a ManTech
Systems Engineering Corporation, a government contractor ("ManTech"), with total
sales value to the Company that could range from approximately $3.5 to $20
million. Foreign sales represented 31% of net sales in the nine months ended
June 30, 1997, 36% of net sales in fiscal 1996, 43% of net sales in fiscal 1995,
and 36% of net sales in fiscal 1994.
METHODS OF DISTRIBUTION
The Company has entered into a five-year OEM Agreement with
Hewlett-Packard Company ("Hewlett-Packard"). The Agreement contemplates the
worldwide distribution of the Company's recently developed line of microwave
frequency counters through Hewlett-Packard on a private label basis. The
Company began distributing this new line of products in October 1997.
The Company uses independent manufacturers' representatives for
distribution of its other products in the United States and in foreign
countries. The Company provides service and technical support to its
manufacturers' representatives, and directly to its customers.
From November 1992 until December 1995, the Company's products were
distributed in a number of foreign countries through an exclusive distribution
agreement with Marconi Instruments, a subsidiary of The General Electric
Company, Plc. of England. Foreign sales through Marconi Instruments represented
19% and 16% of net sales in fiscal 1995 and 1994, respectively. The Company has
since established agreements with other independent manufacturers'
representatives in these countries previously covered by Marconi Instruments.
COMPETITION
The Company believes there are three to six competitors in the
respective markets in which it competes; however, reliable data on sales and
profits of most of the Company's competitors is not readily available because
the
12
<PAGE>
competitors are either privately held or are separate divisions of large
publicly held companies which do not separately report financial results for
competing divisions.
The markets in which the Company's frequency counters are sold are
well-defined and narrow markets which have become increasingly competitive both
in the United States and abroad. Within these narrow markets, the Company
believes it holds a significant competitive position, generally believed to be
number two or three in market share. The Company encounters competition,
however, from certain firms which are substantially larger and have greater
financial resources than the Company; the market leader is believed to be
Hewlett-Packard. Other companies selling products in the same markets as the
Company include Anritsu, Advantest, Racal, and XL Microwave.
The market for microwave synthesized signal generators is considered
to be larger than the microwave frequency counter market. As the market for
this type of product is still developing, the Company has not been able to
determine market share. At present, the only other known supplier of VXIbus
microwave synthesized signal generators is Giga-tronics.
The Company's VXIbus pulse generator and downconverter are sold
primarily as companion products for integrated systems. Competitors for the
pulse generator include Wavetek and Tektronix. There is no known current direct
competition for the VXIbus downconverter.
Competition is based upon performance, reliability, product design,
availability and price and is characterized by technological change.
RESEARCH, DEVELOPMENT AND ENGINEERING
Management believes that the Company's future success is dependent to
a significant extent upon engineering and new product development. Expenditures
for research, development and engineering during the past three years have
ranged between 17% and 11% of annual net sales. Research, development and
engineering expenditures were $978,000, $742,000, and $620,000, for fiscal years
ended September 30, 1996, 1995, and 1994, respectively, and $722,000 and
$724,000, for the nine months ended June 30, 1997, and 1996, respectively.
Management expects that current development efforts will result in the
introduction of new test instrumentation for the wireless telecommunications
market in 1998. All of the Company's research, development and engineering
activities have been Company-funded.
RAW MATERIALS
The principal raw materials used by the Company in its manufacturing
operations include capacitors, resistors, semiconductors, integrated circuits,
transformers, printed circuit boards, display devices, and metal and plastic
cases, most of which are purchased from outside suppliers. For the majority of
materials, the Company has access to many suppliers, and believes that it is not
dependent upon any one supplier, and that adequate alternate sources for its
materials are, for the most part, readily available. There are, however, many
applications which require specialized components currently available, in each
instance, only through a single source of supply. The loss of any of these
sources, or the inability of any such source to meet the Company's production
and quality control requirements, could be detrimental to the Company with
respect to the specific products involved.
EMPLOYEES
The Company had 52 employees at September 30, 1996, 49 of whom were
full time employees, and had 45 employees at September 30, 1997, 39 of whom were
full time employees. The Company believes that its employee relations are good,
but can make no assurances that it will continue to be able to attract and
retain qualified employees. The Company also has engaged the services of
consultants when appropriate.
PATENTS, COPYRIGHTS, TRADEMARKS AND INTELLECTUAL PROPERTY
The Company holds no patents, trademarks, franchises, concessions or
royalty agreements that have a material importance to or effect on its frequency
counter, pulse counter, synthesized signal generator, pulse
13
<PAGE>
generator, or downconverter product lines. However, the Company has obtained
a license from a third party for digital modulation implementations relating to
products under development by the Company.
The Company relies on trade secrets and technical know-how in order to
maintain its competitive advantage and scientific expertise. It is the practice
of the Company to enter into confidentiality agreements with employees,
consultants, and any third party to whom it discloses confidential information.
There can be no assurance that such confidential information will not be
disclosed, that similar trade secrets or expertise will not be independently
developed, or that access to such information could not be gained inadvertently.
GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTS
Government approval is not required for any of the Company's principal
products.
EFFECT OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS
The Company believes it is in compliance with applicable governmental
regulations. The Company is not aware of any probable governmental regulation
which would have a detrimental or disruptive effect on the Company.
COMPLIANCE WITH PROVISIONS ON ENVIRONMENTAL PROTECTION
The Company does not believe that compliance with federal, state, and
local provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, will have any material effect upon the capital expenditures,
earnings, or competitive position of the Company.
PROPERTY
The Company leases a 20,331 square foot one story, concrete structure
located in Milpitas, California, which contains production, warehouse and office
facilities. The lease term continues until October 1998, with an option to renew
for an additional three years. The annual rent for the current term is $226,000
plus applicable real property taxes and insurance. The Company also leases 978
square feet of space as the Company's corporate offices located in Newport
Beach, California. The lease term is on a month-to-month basis with a monthly
rent of $1,320. The current facilities are believed by the Company to be
suitable and adequate for its present requirements.
The Company owns and uses machinery, equipment, and furniture with an
original cost of approximately $5,319,000 at September 30, 1996 and
approximately $5,403,000 at June 30, 1997. The Company also leases and uses
equipment with capital lease obligations of $129,000 at September 30, 1996 and
$105,000 at June 30, 1997. This personal property is believed to be in
acceptable condition.
The Company's management believes the facilities and all machinery and
equipment of the Company are adequately insured to cover loss of equipment or
occupancy privileges.
The Company does not have any investments in real estate, real estate
mortgages or securities of persons primarily engaged in real estate activities,
and has no present policy or limitations with respect to any such future
investments.
BANK LINE OF CREDIT
At November 7, 1997, the Company had outstanding borrowings in the
aggregate principal amount of $179,000 under its bank line of credit (the "Bank
Line") with Silicon Valley Bank ("SVB"). The Bank Line provides for borrowings
up to 60% of eligible accounts receivable, not to exceed $500,000. Interest is
charged at SVB's prime rate plus 3% per annum, provided that the interest rate
in effect each month shall not be less than 10% per annum, and is payable
monthly (11.5% as of November 7, 1997). The Bank Line expires on March 4, 1998.
The Bank Line contains various restrictive covenants requiring, among other
matters, the maintenance of minimum levels of tangible net worth and certain
financial ratios, including a minimum quick ratio and a maximum debt to net
worth ratio, and the achievement of profitability. The Bank Line also precludes
or limits the Company's
14
<PAGE>
ability to take certain actions, such as paying dividends, making loans, making
acquisitions or incurring indebtedness, without the bank's prior written
consent. The Bank Line is secured by substantially all of the Company's assets.
At November 7, 1997, the Company was in default of certain financial
covenants under the Bank Line. The Bank Line permits losses for the quarter
ended June 30, 1997 in an amount up to $165,000 (and the Company's losses for
such fiscal quarter were $278,000), permits losses for the quarter ended
September 30, 1997 in an amount up to $110,000 (and the Company expects that its
losses for such fiscal quarter will be approximately $492,000) and requires a
tangible net worth, including loans from affiliates, of at least $975,000 (and
the Company expects that its tangible net worth, including loans from
affiliates, at September 30, 1997, will be approximately $940,000). The Company
is engaged in ongoing discussions with SVB concerning the Bank Line, and SVB has
made a non-binding proposal to the Company to amend the Bank Line to, among
other things, modify the financial covenants and allow the Company to receive
advances under the Bank Line, increase the interest rate charged to SVB's prime
rate plus 5% per annum, and change the expiration date for the Bank Line to
January 31, 1998. There can be no assurance that the Company and SVB will enter
into an amendment of the Bank Line in accordance with the non-binding proposal.
The Company is continuing to pursue discussions with other lenders concerning a
working capital facility; however, there can be no assurance that the Company
will be able to obtain a satisfactory working capital facility. Even if the
Company is able to obtain a working capital facility from another lender, there
can be no assurance as to the terms of such facility; and the terms of such
facility could be even less attractive to the Company than the terms of the
existing Bank Line or the non-binding proposal from SVB. If the Company is
unable to obtain a satisfactory working capital facility, the Company and its
business could be materially adversely affected.
BISHOP FAMILY TRUST LOAN FACILITY
At November 7, 1997, the Company had outstanding borrowings in the
aggregate principal amount of $1,200,000 under a loan and security agreement
(the "Loan Facility") with John F. Bishop and Ann R. Bishop, trustees of the
Bishop Family Trust (the "Bishop Family Trust"). The Loan Facility provides for
a term loan of $1,000,000 and revolving advances up to $450,000. Interest is
charged at the prime rate plus 5% per annum and is payable monthly (13.5% as of
November 7, 1997). The Loan Facility expires on October 15, 1998. The Loan
Facility contains various restrictive covenants requiring, among other matters,
the achievement of profitability on a rolling 3-month basis commencing in August
1998, and the maintenance of minimum revenues from its OEM relationship with
Hewlett-Packard Company commencing in January 1998. The Loan Facility also
precludes or limits the Company's ability to take certain actions, such as
paying dividends, making loans, making acquisitions or incurring indebtedness,
without the Bishop Family Trust's prior written consent. The Loan Facility is
secured by substantially all of the Company's assets. The Bishop Family Trust
has subordinated the Loan Facility to the Bank Line. At November 7, 1997, the
Company was in compliance with the restrictive covenants of the Loan Facility.
Under the terms of the Loan Facility, the Company will be obligated to
pay facility fees of up to $282,000 to the Bishop Family Trust in the manner
described below.
A. A facility fee of $70,500 was fully earned on October 22, 1997
and will be payable by the Company on January 22, 1998.
B. If the principal amount of the obligations outstanding under the
Loan Facility on January 22, 1998 exceeds $1,000,000, then an additional
facility fee of $70,500 will be fully earned on such date and will be payable by
the Company on January 22, 1998.
C. If the principal amount of the obligations outstanding under the
Loan Facility on April 22, 1998 exceeds $1,000,000, then an additional facility
fee of $141,000 will be fully earned on such date and will be payable by the
Company on April 22, 1998.
The Company will have the right to pay the facility fee in cash or by issuance
of Common Stock. The number of shares of Common Stock issuable as payment for a
facility fee will equal (a) the applicable facility fee divided by (b) the Fair
Market Value (as defined in the Loan Facility) per share of Common Stock on the
date such facility fee is payable to the Bishop Family Trust.
15
<PAGE>
LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company or its
subsidiary is a party or of which any of their property is the subject. The
Company is not aware of any such legal proceeding contemplated by a governmental
authority.
ACQUISITION DISCUSSIONS
Since 1995, the Company has held discussions with several other
companies with respect to a possible acquisition of certain of the Company
product lines by such other companies. No offers have been made. The Board of
Directors will consider any future acquisition offers made to the Company in
light of what appears to be in the best interest of the Company's stockholders.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THE FOLLOWING DISCUSSION CONTAINS TREND INFORMATION AND OTHER FORWARD-LOOKING
STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE COMPANY'S HISTORICAL RESULTS OF
OPERATIONS AND THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO,
THOSE IDENTIFIED UNDER THE HEADING "RISK FACTORS" ABOVE. DUE TO SUCH RISK
FACTORS AND OTHER FACTORS, PAST RESULTS ARE NOT A RELIABLE PREDICTOR OF FUTURE
RESULTS.
IN ADDITION, THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES HEREIN, AND IS
QUALIFIED ENTIRELY BY THE FOREGOING AND BY OTHER MORE DETAILED FINANCIAL
INFORMATION APPEARING ELSEWHERE.
RESULTS OF OPERATIONS
Net sales for the nine months ended June 30, 1997, were $3,560,000, a
27% decrease from net sales of $4,886,000 for the same period the prior year.
The decrease in net sales for this period was primarily attributable to lower
export sales of frequency counters. Net sales for fiscal 1996 were $6,492,000,
a 3% decrease from fiscal 1995 sales of $6,721,000. The decrease in net sales
in fiscal 1996, compared to the prior year, was primarily attributable to market
softness for the Company's products. The 25% increase in fiscal 1995 net sales,
compared to fiscal 1994 net sales of $5,389,000 was primarily attributable to
increased international sales (43% of fiscal 1995 net sales vs. 36% of fiscal
1994 net sales), orders from government contractors (36% of fiscal 1995 net
sales vs. 44% of fiscal 1994 net sales), and sales of products configured in the
VXIbus format (28% of fiscal 1995 net sales vs. 14% of fiscal 1994 net sales).
Foreign exchange rate fluctuations did not have a material impact on net sales
or gross profit margins for the last three fiscal years.
Gross margin increased to 39% for the nine months ended June 30, 1997, from
37% for the same period the prior year. The increase in gross margin percentage
for this period was due almost entirely to an improved gross margin for VXIbus
products. An increase in sales of higher gross margin units had a relatively
small impact. The Company's gross profit margin decreased in fiscal 1996 to 37%,
from 46% in fiscal 1995, and 44% in fiscal 1994. The decrease in the fiscal
1996 gross profit margin, compared to fiscal 1995 and fiscal 1994, is primarily
due to a sales mix shift from higher margin stand-alone counter products to
lower margin VXIbus products and lower than expected gross profit margin on
these VXIbus products. Each of these factors had a comparable impact on the
decrease in gross profit margin.
Inflation did not have a material effect on revenues nor gross profit
during the nine months ended June 30, 1997 or the fiscal years 1996 or 1995.
Incoming orders for the nine months ended June 30, 1997, were
$3,213,000, a 36% decrease from orders of $5,007,000 for the same period a year
ago. The decrease in orders for the nine months ended June 30, 1997, resulted
primarily from a shortfall in domestic and international large order bookings,
particularly the lack of a large VXI order in the nine months ended June 30,
1997, and international base level bookings. Each of these factors had a
comparable impact on the decrease in orders. Backlog at June 30, 1997, was
$404,000, a 69% decrease from a backlog of $1,292,000 at the end of the third
fiscal quarter the prior year. Incoming orders for fiscal 1996 were
16
<PAGE>
$6,115,000, a 14% decrease from $7,127,000 for the prior year. Backlog at
September 30, 1996, was $763,000, a 37% decrease from $1,210,000 at September
30, 1995. The decrease in orders and backlog in fiscal 1996, compared to the
prior year, was primarily due to a 36% decrease in large government-related
orders. Incoming orders for the fiscal 1995 year increased 20% from $5,929,000
for the same period of the previous year. Backlog at September 30, 1995
increased 40% from $862,000 at September 30, 1994. The increases in orders and
backlog for fiscal 1995, compared to fiscal 1994, were due almost entirely to
increased orders for products configured in the VXIbus format and to a much
lesser extent to increased international orders and orders from government
contractors.
Research, development and engineering expenses were $722,000 for the
nine months ended June 30, 1997, comparable to $724,000 for the same period the
prior year. Research, development and engineering expenditures increased 32% to
$978,000 in fiscal 1996, from $742,000 in the prior fiscal year. The increase
in fiscal 1996, compared to fiscal 1995, was a result of increased new product
development expenditures, primarily to support a new frequency measurement
product line introduced in fiscal 1997. Research, development and engineering
expenditures in fiscal 1995 increased 20%, compared to $620,000 in fiscal year
1994, due to increased new product development expenditures. The majority of
the fiscal 1996 and 1995 investment was in the development of non-VXIbus
standard product.
Selling, general and administrative expenses decreased 9% to
$1,416,000 for the nine months ended June 30, 1997, compared to $1,548,000 in
the same period the prior year. The decrease in selling, general and
administrative expenses was due almost entirely to decreased commission expense
resulting from decreased sales volume. Overall expense control had a small
impact. Selling, general and administrative expenses decreased 9% in fiscal
1996 to $2,084,000, compared to $2,289,000 in fiscal 1995, primarily due to the
decrease in commission expense resulting from lower sales volume (approximately
60% of the change), and a decrease in advertising expenses (approximately 20% of
the change). Selling, general and administrative expenses increased 4% in
fiscal 1995, compared to $2,197,000 in fiscal 1994, primarily due to increased
commission expense resulting from increased sales volume.
The Company recorded a net loss of $793,000 for the nine months ended
June 30, 1997, as compared to a net loss of $319,000 recorded for the same
period the prior year. Gains on sale of capital equipment of $98,000 reduced
the net loss for the nine months ended June 30, 1997. Further, the net loss for
the nine months ended June 30, 1996 reflects a credit of $111,000 due to the
waiver of fees owed by the Company to members of the Board of Directors, and a
gain on sale of capital equipment of $50,000. The increase in losses for the
nine month period ended June 30, 1997, compared to the same period the prior
year, is primarily due to decreased sales.
The Company recorded a net loss of $493,000 in fiscal 1996, as
compared to net earnings of $125,000 in fiscal 1995, and a net loss of $453,000
in fiscal 1994. Gains on sales of fixed assets of $14,000 and $56,000 in fiscal
1996 and fiscal 1995, respectively, reduced the net loss or increased the net
earnings in such years. As described above, the net loss for fiscal 1996
reflects a credit of $111,000 due to the waiver of fees owed by the Company to
members of the Board of Directors. The Company earned interest and dividend
income of $26,000, $25,000, and $4,000, during fiscal 1996, 1995, and 1994,
respectively. The increase in interest and dividend income earned in fiscal
1996 and fiscal 1995, as compared to fiscal 1994, was primarily due to increased
earnings performance in short-term securities.
The Company believes that it will incur costs of addressing Year 2000
issues in amounts of approximately $150,000 in fiscal 1998 and $50,000 in fiscal
1999, for hardware, software, installation, and related training, for a new
business management and accounting system.
FINANCIAL CONDITION
At June 30, 1997, the Company's cash, cash equivalents and short-term
investment balance was $284,000, as compared with a cash, cash equivalents and
short-term investment balance of $540,000 at September 30, 1996, and $445,000 at
September 30, 1995. The Company's accounts payable balance was $314,000 at June
30, 1997, compared to $706,000 at September 30, 1996, and $610,000 at September
30, 1995. At June 30, 1997 and at September 30, 1996, the Company had no
material commitments for capital expenditures.
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<PAGE>
At June 30, 1997, working capital decreased $216,000 from September
30, 1996, and decreased by $724,000 in fiscal 1996, after an increase of
$313,000 in fiscal 1995. The Company's current ratio decreased to 1.36:1 at
June 30, 1997, from 1.42:1 at September 30, 1996, and 2.09:1 at September 30,
1995.
At June 30, 1997, the Company had outstanding borrowings in the
aggregate principal amount of $295,500 under its bank line of credit (the "Bank
Line"), borrowings in the aggregate principal amount of $600,000 under
subordinated notes (the "Subordinated Notes") payable to the Bishops, and
borrowings in the aggregate principal amount of $150,000 under a demand note
(the "Bridge Loan") to the Bishops. The Subordinated Notes and the Bridge Loan
were repaid on October 15, 1997 with the proceeds from the Loan Facility with
the Bishop Family Trust.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information regarding the directors and
executive officers of the Company, including age, period served as a director,
present position with the Company, and other business experience during the past
five years, and any other public company for which the individual is a director.
NAME AGE POSITION
- ----- ---- ---------
J. Bradford 46 Director since 1978. Chairman of the Board and Chief
Bishop (1) Executive Officer of the Company since 1994.
President of the Company from 1990 to 1992.
President of Continental Paper Recycling, and former
Chief Executive Officer, Carson Energy Group, a power
plant development company.
John F. Bishop 73 Director since 1961. Vice Chairman of the Board
(1) since 1994. Treasurer since 1985. Secretary since
1990.
Former Chairman of the Board, President, and
Treasurer of Cushman Electronics, Inc., a
manufacturer of test instruments for telephone
communication systems.
Michael E. 37 Director since 1996.
Johnson President, Bainbridge Group, a Law Corporation.
Former counsel, Jones, Day, Reavis & Pogue, a law
firm.
Robert D. 73 Director since 1978.
Johnson Former Vice Chairman and Director, Cushman
(2)(3)(4) Electronics, Inc., and former Director, EIP/Cushman,
Inc.
J. Sidney Webb, 77 Director since 1981.
Jr. (2)(3)(4) Chairman of the Board, The Titan Corporation,
manufacturer of defense and industrial products and
systems; Director, Plantronics, Inc., supplier of
communication headset products and services to users
and providers worldwide.
Lewis R. Foster 59 President and Chief Operating Officer of the Company
since 1996. Co-founder and President of Sailpower
Systems, Inc., a manufacturer of proprietary products
for the international marine market, from 1987-1997.
Vice President of de Recat & Associates, Inc., a career
management consulting firm, from 1987 until 1994.
President of the Company from 1976-1986.
Ivan N. Andres 49 Vice President, Marketing and Sales of the Company
since 1994. Director of Marketing of On-Demand
Environmental Systems, an air pollution control
company, from 1992-1994. Independent consultant from
1991-1992. Director of Marketing of Acurrel, a
microwave instrumentation company, prior to 1991.
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<PAGE>
- --------------------
(1) J. Bradford Bishop is the son of John F. Bishop.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
(4) Member of Stock Option Committee.
COMPENSATION OF DIRECTORS
Non-management Directors are paid a monthly retainer of $600, and
receive $600 per day for attendance at Board Meetings. They also receive $200
per day for committee meetings held on the same day as Board meetings and $400
per day if held on a separate day. Committee chairmen receive $100 per day in
addition to the above. Directors who are officers of the Company receive no
compensation for service on the Board of Directors or committees thereof.
Accrued and unpaid retainers and fees for non-management Directors as
of February 13, 1996 (the "Accrued Directors Fees") were owed to Messrs. Robert
D. Johnson, James J. Shelton and J. Sidney Webb in amounts equal to
approximately $30,600, $29,100 and $30,900, respectively. As of February 13,
1996, each of Messrs. Johnson and Webb agreed to waive all Accrued Directors
Fees owing to him in exchange for the grant by the Company of an option to
purchase 5,000 shares of Common Stock of the Company under the terms of the
Company's Amended and Restated 1994 Stock Option Plan, with the exception that
such options would be immediately vested and exercisable and would not terminate
upon ceasing to be a Director or upon death or disability. On February 7, 1996,
Mr. Shelton's term of office as Director expired and, as of February 13, 1996,
he agreed to waive all Accrued Directors Fees owing to him, in exchange for
amending his Nonqualified Stock Option Agreement with the Company to eliminate
the requirement that his options terminate three months after he ceases to be a
Director and the requirement that he continuously serve as a Director of the
Company as a condition to him becoming vested in the options to purchase the
remaining 6,667 shares of Common Stock under the Nonqualified Stock Option
Agreement.
EXECUTIVE COMPENSATION
The following table sets forth all compensation for services in all
capacities accrued by the Company during the fiscal years ended September 30,
1996, 1995, and 1994, for the Company's Chief Executive Officer and certain of
its most highly compensated executive officers. The Company issued no restricted
stock awards and there were no long term incentive plan payouts.
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------------------------------- ----------------------------------------
(A) (B) (C) (D) (E) (F) (G)
Name and Year Salary Bonus Other Annual Securities Underlying All Other
Principal Position ($) ($) Compensation Options/SARs Compensation
($) (#) ($)
(1) (5)
<S> <C> <S> <S> <C> <C> <C>
J. Bradford Bishop, 1996 0 0 0 15,000(6) 0
Chairman and Chief 1995 0 0 0 0 0
Executive Officer 1994 0 0 2,160(2) 0 0
John F. Bishop, Vice 1996 58,500 0 11,853(3) 0 328
Chairman, President, 1995 75,000 0 25,677(3) 0 362
Treasurer and Secretary 1994 75,000 0 14,449(3) 0 283
John J. Ardizzone, Jr., 1996 84,614 0 12,973(4) 3,000(6) 588
Vice President 1995 78,750 14,000 11,461(4) 10,000(6) 554
Operations and Chief 1994 71,542 0 8,713(4) 0 460
Financial Officer
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E) (F) (G)
Name and Year Salary Bonus Other Annual Securities Underlying All Other
Principal Position ($) ($) Compensation Options/SARs Compensation
($) (#) ($)
(1) (5)
<S> <C> <C> <C> <C> <C> <C>
Ivan Andres, 1996 73,819 19,000 6,559(7) 2,500(6) 554
Vice President, 1995 73,755 28,000 *(8) 8,000(6) 530
Marketing and Sales 1994 9,232 0 *(8) 0 0
</TABLE>
- -------------------
(1) Amounts in this column include compensation to officers from (a) the
Company's supplemental medical reimbursement plan in which all officers are
eligible to participate, (b) the Company's tax and financial counseling
reimbursement plan in which all officers are eligible to participate, (c)
the Company's legal services reimbursement plan in which the Vice Chairman
is eligible to participate, (d) the payment of car allowances to certain
officers in lieu of providing a company car, (e) the payment of private
club dues for certain officers and (f) contributions by the Company on
behalf of certain officers pursuant to its Retirement/Savings Plan which
qualifies as a thrift plan under Section 401(k) of the Internal Revenue
Code. The type and amount of each perquisite or other personal benefit
which exceeds 25% of the total perquisites and other personal benefits
reported for such officer are identified in a footnote.
(2) On behalf of Mr. J.B. Bishop, the Company paid $2,160 under the
supplemental medical reimbursement plan in fiscal 1994.
(3) On behalf of Mr. J.F. Bishop, the Company paid $7,522 under the
supplemental medical reimbursement plan and paid $4,006 for private club
dues in fiscal 1996, paid $12,776 under the legal services reimbursement
plan in fiscal 1995, and paid $4,267 for private club dues in fiscal 1994.
Amounts do not include non-cash compensation to Mr. J.F. Bishop in the form
of expenses related to personal use of a Company-supplied automobile, which
amount did not exceed 10% of the cash compensation of Mr. J.F. Bishop.
(4) On behalf of Mr. Ardizzone, the Company paid $3,924 under the supplemental
medical reimbursement plan, paid $4,200 in car allowances and contributed
$2,699 under the Retirement/Savings Plan in fiscal 1996, paid $4,200 in car
allowances and contributed $2,956 under the Retirement/Savings Plan in
fiscal 1995, and paid $4,200 in car allowances in fiscal 1994.
(5) Amounts in this column consist of payments by the Company of premiums for
term life insurance.
(6) Options to purchase common stock awarded under the Company's Amended and
Restated 1994 Stock Option Plan.
(7) On behalf of Mr. Andres, the Company paid $4,200 in car allowances and
contributed $2,305 under the Retirement/ Savings Plan in fiscal 1996.
(8) Perquisites and personal benefits provided to the named executive officer
under various Company programs did not exceed $50,000 or 10% of such
individual's salary and bonus.
OPTION GRANTS IN FISCAL 1996. The following table provides information on
options granted under the Company's Second Amended and Restated 1994 Stock
Option Plan in fiscal 1996 to the named executive officers:
<TABLE>
<CAPTION>
Individual Grants
- ------------------------------------------------------------------------------------------------------------------
Number of Securities % of Total
Underlying Options Exercise or Base
Options Granted to Employees in Price Expiration
Name Granted (#) Fiscal Year (1) ($/Sh) Date
<S> <C> <C> <C> <C>
J. Bradford Bishop 15,002(2) 54.5% $4.2625 2/13/01
John F. Bishop ---- ---- ---- ----
John J. Ardizzone, Jr. (4) 3,000(3) 10.9% $3.875 2/13/06
Ivan Andres 2,500(3) 9.1% $3.875 2/13/06
</TABLE>
(1) Percentage based on grants to employees during the last fiscal year of
options to purchase 27,500 shares of Common Stock.
(2) The options granted to the named individual become exercisable with respect
to one-third of such shares on February 13, 1997 and will become
exercisable with respect to an additional one third on February 13 of each
of the following two years.
20
<PAGE>
(3) The options granted to the named individuals become exercisable with
respect to 20% of such shares on February 13, 1997 and will become
exercisable with respect to an additional 20% on February 13 of each of the
following four years.
(4) The options granted to Mr. Ardizzone were canceled in connection with his
resignation in October 1996.
AGGREGATE OPTION/SAR EXERCISES IN FISCAL 1996 AND FY-END OPTION/SAR
VALUES. The following table provides information regarding option and SAR
exercises in fiscal 1996 by the named executive officers and the value of such
officers' unexercised options at September 30, 1996:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/
Options/ SARs at FY-End($)
Shares SARs at FY-End (#) (1)
Acquired on Value Exercisable (E)/ Exercisable (E)/
Name Exercise (#) Realized ($) Unexercisable (U) Unexercisable (U)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J. Bradford Bishop --- --- 15,000 options(U) $22,313/options(U)
- ----------------------------------------------------------------------------------------------------------------------------------
John F. Bishop --- --- --- ---
- ----------------------------------------------------------------------------------------------------------------------------------
John J. Ardizzone, Jr. (2) 2,000(3) $6,000 6,750 options(E) $ 6,750/options(E)
11,000 options(U) $32,625/options(U)
4,000 SARs(U) $12,000/SARS(U)
- ----------------------------------------------------------------------------------------------------------------------------------
Ivan Andres 1,600(4) $5,800 8,900 options(U) $26,288/options(U)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------------
(1) The options and SARs at fiscal year end were in-the-money based on a fair
market value per share of Common Stock of $5.75, which represents the mean
between the bid and asked prices of a share on the NASDAQ System at the
close of business on September 30, 1996.
(2) All unexercised options and SARs of Mr. Ardizzone were canceled in
connection with his resignation in October 1996.
(3) Represents SARs exercised by the named individual.
(4) Represents shares acquired by exercise of options by the named individual.
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
COMMITMENT OF THE BISHOPS TO PURCHASE COMMON STOCK IN RIGHTS OFFERING
J. Bradford Bishop, Chairman and Chief Executive Officer of the
Company, and John F. Bishop, Vice Chairman, Secretary and Treasurer of the
Company, both of whom are principal stockholders and members of the Board of
Directors of the Company (the "Bishops") have committed to the Company that they
will purchase $1,360,000 in Common Stock by exercise of Rights distributed to
them if other stockholders purchase at least $800,000 in Common Stock upon
exercise of Rights distributed to them (the "Commitment"). Thus, the Bishops'
subscription for Shares in the Rights Offering is conditional, whereas
subscriptions by other stockholders are unconditional. In order to avoid being
diluted in the Rights Offering, other stockholders will be required to submit
unconditional subscription agreements prior to the expiration date.
In the opinion of management and the disinterested members of the
Board of Directors, the terms of the Commitment are fair and reasonable and as
favorable to the Company as those which could be obtained from unrelated third
parties.
BISHOP FAMILY TRUST LOAN FACILITY
The Company has entered into a Loan Facility with the Bishop Family
Trust. See "The Company--Bishop Family Trust Loan Facility" above.
In the opinion of management and the disinterested members of the
Board of Directors, the terms of the Loan Facility are fair and reasonable and
as favorable to the Company as those which could be obtained from unrelated
third parties.
21
<PAGE>
SUBORDINATED LOAN
The Company entered into Subordinated Loan Agreement dated as of
December 16, 1996 with J. Bradford Bishop, Chairman and Chief Executive Officer
of the Company, and John F. Bishop, Vice Chairman, Treasurer and Secretary of
the Company (together, the "Bishops"). The Bishops advanced $600,000 to the
Company under the Subordinated Loan Agreement. Interest accrued thereon at 8%
per annum, payable quarterly. In connection with the Subordinated Loan
Agreement, the Company issued warrants to the Bishops to purchase 90,000 shares
of Common Stock at $3.00 per share. The Subordinated Loan Agreement terminated
on October 15, 1997, and all principal thereunder was repaid in full on such
date with the proceeds from the Loan Facility with the Bishop Family Trust. As
consideration for the early repayment of such obligations, the warrants issued
to the Bishops were canceled on October 15, 1997.
In the opinion of management and the disinterested members of the
Board of Directors, the terms of the Subordinated Loan Agreement, including the
warrants to be issued thereunder, were fair and reasonable and as favorable to
the Company as those which could be obtained from unrelated third parties.
BRIDGE LOANS
The Company has received several bridge loans from the Bishops payable
on demand (the "Bridge Loans"), which amounted to $400,000, plus interest, on
October 15, 1997. Interest accrued thereon at 10% per annum. All principal of
the Bridge Loans was repaid in full on such date with the proceeds from the Loan
Facility with the Bishop Family Trust.
In the opinion of management and the disinterested members of the
Board of Directors, the terms of the Bridge Loans were fair and reasonable and
as favorable to the Company as those which could be obtained from unrelated
third parties.
EMPLOYMENT AGREEMENT
On October 1, 1995, the Company entered into an Employment Agreement
with John F. Bishop, Vice-Chairman of the Board, Treasurer and Secretary of the
Company, whereby Mr. Bishop will provide his services for a monthly salary of
$6,500 for an initial term of two years. On the first day of each month, the
initial term is automatically extended for an additional month, unless either
party notifies the other in writing of his or its desire not to extend the term.
In the event the Company elects not to extend the term or there is a change in
control of the Company (the date of such event is referred to as the "Transition
Date"), Mr. Bishop will continue to perform services for the Company for a three
month transition period and the Company will maintain his compensation and other
benefits for the three month transition period and an additional twenty-one
months. Should Mr. Bishop become permanently disabled, the Company shall pay to
him fifty percent (50%) of the agreed salary for the remainder of the term.
Effective January 1, 1997, Mr. Bishop agreed to reduce his monthly salary to
$3,250 until the Transition Date. In addition to the foregoing compensation, the
Company will provide Mr. Bishop with a private office at 3 Civic Center Plaza,
Suite 265, Newport Beach, California (or a comparable location in the City of
Newport Beach), secretarial and administrative assistance, office equipment and
supplies and other facilities and services suitable to his position. Mr. Bishop
is also entitled to all employee benefits provided to senior management
personnel of the Company and to participate in the Company's medical
reimbursement plan which is supplemental to the medical plan covering all
employees, the tax and financial counseling reimbursement plan and the legal
reimbursement plan provided by the Company as well as Company paid life
insurance.
In addition to his monthly compensation, Mr. Bishop is entitled under
the Employment Agreement to the full and unrestricted use of the currently
provided 1989 Mercedes Benz Model 560 automobile or its successor automobile if
replaced at any time prior to the end of his employment term. The Company
provides all gasoline, maintenance, repair and insurance with respect to the
automobile during the term of the Agreement. In consideration for Mr. Bishop's
prior agreement to reduce his monthly salary to $1 per month for the period from
February 1992 through July 1992 and the deduction of $217 per month from his
monthly salary for the period from August 1992 through October 1995, the Company
granted to Mr. Bishop the right to acquire the automobile with full credit for
the foregone salary totaling $56,846. Mr. Bishop has the right to acquire the
automobile at any time during the two months immediately preceding the end of
his employment term. If the automobile's Kelly Blue Book value is in excess of
$56,846, Mr. Bishop shall pay to the Company the difference at the time Mr.
Bishop acquires the
22
<PAGE>
automobile. If the value of the automobile is less than $56,846, the Company
shall pay the difference to Mr. Bishop at the time he acquires the automobile.
In the event that Mr. Bishop's employment is terminated prior to the end of his
employment term, he shall have the right to acquire the automobile at that time.
In the event of Mr. Bishop's death, the right to acquire the automobile shall be
exercisable by Mr. Bishop's widow or the executor of his estate.
The Company may terminate the Employment Agreement only if Mr. Bishop
were to be convicted of a felony, if he willfully fails to fulfill his duties,
if he commits gross negligence in the performance of his duties, if he
intentionally misappropriates significant funds of the Company or if he dies.
Mr. Bishop may terminate the agreement at any time on thirty days notice to the
Company.
Under the Employment Agreement, Mr. Bishop may not disclose
confidential information of the Company at any time. This provision survives
termination of the Employment Agreement. Mr. Bishop is further prohibited from
soliciting employees or customers of the Company for at least one (1) year
following termination of the Employment Agreement.
LEGAL COUNSEL
Bainbridge Group, a Law Corporation ("Bainbridge Group") provides
ongoing legal services for the Company. Michael E. Johnson, a director of the
Company, is President of Bainbridge Group. In the opinion of management and the
disinterested members of the Board of Directors, the terms of the relationship
between the Company and Bainbridge Group are fair and reasonable and as
favorable to the Company as those which could be obtained from unrelated third
parties. The Company obtains legal services from an affiliate at rates normally
charged to a third party.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of October 14, 1997, certain
information as to the Common Stock of the Company beneficially owned, directly
or indirectly, by each person who is known to the Company to beneficially own
more than 5% of the outstanding Common Stock, by each director, by each nominee
for director, by each executive officer named in the Summary Compensation Table,
and by all executive officers and directors of the Company as a group. The
persons named hold sole voting and investment power with respect to the shares
shown opposite their respective names, unless otherwise indicated. (Note --
"Direct" means Common Stock held individually, or held in joint tenancy or as
community property with spouse. "Indirect" means Common Stock held by spouse as
separate property, or held of record by the stockholder for the benefit of
another person, or held of record by the stockholder as trustee of a trust.)
<TABLE>
<CAPTION>
Name and Address of Amount of Nature of Percent
Beneficial Owner Beneficial Ownership Beneficial Ownership of Class
---------------- -------------------- -------------------- --------
<S> <C> <C> <C>
CEDE & Company 186,100 Indirect(1) 43.80%
Depository Trust Company
7 Hanover Square
New York, New York 10004
John F. Bishop (2) 128,927 Indirect (3) 30.34%
J. Bradford Bishop (2) 62,473 Indirect (4) 15.69%
5,000 Direct (6)
J. Sidney Webb (2) 800 Indirect (5) 2.86%
11,667 Direct (6)
Robert D. Johnson (2) 200 Indirect (7) 2.72%
11,667 Direct(6)
Michael E. Johnson (2) 3,333 Direct (6) *
23
<PAGE>
<CAPTION>
Name and Address of Amount of Nature of Percent
Beneficial Owner Beneficial Ownership Beneficial Ownership of Class
---------------- -------------------- -------------------- --------
<S> <C> <C> <C>
Ivan Andres (2) 2,100 Direct (6) *
John J. Ardizzone, Jr. (2) 0 --- *
All Executive Officers and 226,167 --- 49.31%
Directors as a Group
(7 persons) (8)
</TABLE>
- ----------------------------
* Less than 1% of the class
(1) CEDE & Company is a nominee of the Depository Trust Company, which is a
wholly owned subsidiary of the New York Stock Exchange, Inc. CEDE disclaims
any beneficial interest in shares of the Company's Common Stock held in
its name.
(2) The mailing address for such individual is in care of EIP Microwave, Inc.,
1745 McCandless Drive, Milpitas, CA 95035.
(3) Consists of (i) 118,260 shares held by J.F. Bishop and his spouse as
trustees of the Bishop Family Trust, and (ii) 10,667 shares held by J.F.
Bishop as trustee for the benefit of certain of his children.
(4) Consists of (i) 22,473 shares held by J.B. Bishop and his spouse as
trustees of a revocable trust, and (ii) 40,000 shares held by J.B. Bishop
and his spouse as trustees of the Bishop 1993 Children's Trust.
(5) Held by J.S. Webb as trustee of the Webb Family Trust.
(6) Consists of shares for which the named individual has the right to acquire
beneficial ownership within 60 days after the Record Date by exercise of
options granted under the Company's Second Amended and Restated 1994 Stock
Option Plan.
(7) Held by R.D. Johnson and his spouse as trustees of the Robert D. Johnson
and Dorothy A. Johnson Trust.
(8) Total includes the shares indirectly held by Messrs. J.F. Bishop, J.B.
Bishop, J.S. Webb and R.D. Johnson as trustees, as noted above.
24
<PAGE>
DESCRIPTION OF SECURITIES
The following description of the securities of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a summary
and is qualified in its entirety by the provisions of the Certificate of
Incorporation and Bylaws, which have been filed as exhibits to the Company's
Registration Statement.
AUTHORIZED STOCK
The Company is authorized to issue 10,000,000 shares of Common Stock,
$0.01 par value. As of the date of this Prospectus the Company had 424,907
shares of Common Stock issued and outstanding.
VOTING RIGHTS
Holders of the shares of Common Stock are entitled to one vote per
share on all matters submitted to a vote of the stockholders. Except as
described in the following paragraph, shares of Common Stock do not have
cumulative voting rights, which means that the holders of a majority of the
shares voting for the election of the board of directors can elect all members
of the board of directors.
As a Delaware corporation doing business in California, the Company is
subject to certain provisions of the California General Corporation law (the
"California Law") if certain property, payroll and sales factors are met and
more than 50% of the Common Stock is held of record by persons having addresses
in California (excluding shares held by broker-dealers, banks or other
nominees). The Company believes that it meets the statutory test for
applicability of certain provisions of California Law to the Company. One of
these provisions, Section 708, entitles a stockholder to cumulate his or her
votes at an election of directors. Accordingly, with respect to the election of
directors only, if one or more stockholders give notice at the Annual Meeting
before the voting of their intention to cumulate their votes, all stockholders
entitled to vote shall have the right to so cumulate their votes and to give one
candidate, who has been nominated prior to the voting, a number of votes equal
to the number of directors to be elected multiplied by the number of votes to
which his or her shares are entitled, or to distribute such votes among two or
more such candidates on the same principle in such proportions as each
stockholder may determine. If such vote is not conducted by cumulative voting,
stockholders may vote in favor of all nominees, withhold their votes as to all
nominees, or vote in favor of specific nominees and withhold their votes as to
other nominees.
DIVIDEND RIGHTS
Holders of record of shares of Common Stock are entitled to receive
dividends when and if declared by the board of directors out of funds of the
Company legally available therefor. The Company does not anticipate paying
dividends in the near future.
LIQUIDATION RIGHTS
Upon any liquidation, dissolution or winding up of the Company,
holders of shares of Common Stock are entitled to receive a pro rata share of
the assets of the Company available for distribution to stockholders.
PREEMPTIVE RIGHTS
Holders of Common Stock do not have any preemptive rights to subscribe
for or to purchase any stock, obligations or other securities of the Company.
DISSENTER'S RIGHTS
Under current Delaware law, a stockholder is afforded dissenters'
rights which if properly exercised may require the corporation to repurchase its
shares. Dissenters' rights commonly arise in extraordinary transactions such as
mergers, consolidations, reorganizations, substantial asset sales, liquidating
distributions, and certain amendments to the Company's certificate of
incorporation.
25
<PAGE>
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Bylaws contain
provisions that could delay, defer or prevent a change in control of the
Company. The Company has a classified Board of directors. The Board is divided
into three classes, each class consisting of two directors. There is one
vacancy in the class whose term expires at the 1998 Annual Meeting. The terms
of directors in the two remaining classes expire at the 1999 Annual Meeting and
the 2000 Annual Meeting, respectively. Further, the Bylaws set forth procedures
for the nomination of director candidates by the Board of Directors or
stockholders, and require that a stockholder give specified notice of its intent
to nominate a director candidate at least 90 days prior to the Annual Meeting.
The Company's Certificate of Incorporation restricts the ability of
the Company to engage in specified transactions with any interested person. An
"interested person" is defined to include any individual or entity who is the
beneficial owner of 10% or more of the Common Stock. Such transactions are
prohibited, unless the transaction is approved by (i) the holders of two-thirds
of the outstanding shares of Common Stock and a majority of such shares not held
by the interested person, or (ii) a majority of the directors who are
unaffiliated with the interested person and who were directors prior to the time
the interested person became an interested person (or are successors to such
directors). Other requirements may also be applicable for certain transactions.
TRANSFER AGENT
ChaseMellon Shareholder Services, L.L.C. serves as the transfer agent
of the Company.
LEGAL MATTERS AND INTERESTS OF COUNSEL
The validity of the authorization and issuance of the securities
offered hereby will be passed upon for the Company by Bainbridge Group, a Law
Corporation, of Irvine, California. Bainbridge Group also provides ongoing legal
services for the Company. Michael E. Johnson, President of Bainbridge Group, is
a director of the Company and is the holder of options to purchase 10,000 shares
of common stock of the Company.
EXPERTS
The consolidated balance sheets of EIP Microwave, Inc. and
subsidiaries as of September 30, 1996, and 1995, and the consolidated statements
of operations and retained earnings (accumulated deficit), stockholders' equity
and cash flows for the years then ended, have been included herein and in the
Registration Statement in reliance upon the report of Price Waterhouse LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The report of Price Waterhouse LLP covering the aforementioned
financial statements contains an explanatory paragraph. The explanatory
paragraph states the Company has incurred significant recent losses from
operations and may need to obtain additional financing to meet its business
plans for fiscal 1998 and beyond that raise substantial doubt about its ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
CHANGE IN ACCOUNTANTS
The Company engaged Meredith, Cardozo, Lanz & Chiu LLP as its new
independent accountants as of October 9, 1997.
On October 9, 1997, EIP Microwave, Inc. (the "Company") dismissed
Price Waterhouse LLP as its independent accountants. The reports of Price
Waterhouse LLP on the financial statements for the years ended September 30,
1995 and 1996 contained no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principle,
except that their reissued report on the financial statements for the year ended
September 30, 1996, which was dual dated December 23, 1996 and October 23, 1997
includes an explanatory paragraph to express substantial doubt regarding the
Company's ability to continue as a going concern. The Company's Audit Committee
participated in and approved the decision to change independent accountants. In
connection with its audits for the two most recent fiscal years and through
October 9, 1997,
26
<PAGE>
there have been no disagreements with Price Waterhouse LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
Price Waterhouse LLP would have caused them to make reference thereto in their
report on the financial statements for such years. Price Waterhouse LLP
furnished the Company with a letter addressed to the Securities and Exchange
Commission stating that it agrees with the statements in this paragraph.
INDEMNIFICATION
Under Delaware corporation law, a corporation is authorized to
indemnify officers, directors, employees and agents who are made or threatened
to be made parties to any civil, criminal, administrative or investigative suit
or proceeding by reason of the fact that they are or were a director, officer,
employee or agent of the corporation or are or were acting in the same capacity
for another entity at the request of the corporation. Such indemnification
includes expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such persons if they acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation or, with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful. In the case of any action or suit by or in the right of the
corporation against such persons, the corporation is authorized to provide
similar indemnification, provided that, should any such persons be adjudged to
be liable for negligence or misconduct in the performance of duties to the
corporation, the court conducting the proceeding must determine that such
persons are nevertheless fairly and reasonably entitled to indemnification. To
the extent any such persons are successful on the merits in defense of any such
action, suit or proceeding, Delaware law provides that they shall be indemnified
against reasonable expenses, including attorney fees. A corporation is
authorized to advance anticipated expenses for such suits or proceedings upon an
undertaking by the person to whom such advance is made to repay such advances if
it is ultimately determined that such person is not entitled to be indemnified
by the corporation. Indemnification and payment of expenses provided by
Delaware law are not deemed exclusive of any other rights by which an officer,
director, employee or agent may seek indemnification or payment of expenses or
may be entitled to under any by-law, agreement, or vote of stockholders or
disinterested directors. In such regard, a Delaware corporation is empowered
to, and may, purchase and maintain liability insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation.
Article Ninth of the Company's Certificate of Incorporation
eliminates, to the fullest extent permitted by law, the personal liability of
directors for monetary damages in certain instances for breach of a director's
fiduciary duty of care. Article IX of the Company's Bylaws provides that
(i) each director, officer and employee of the Company shall be indemnified by
the Company to the fullest extent authorized by Delaware law subject to certain
limitations, (ii) each indemnitee is entitled to be paid by the Company for its
expenses in defending proceedings in advance of final determination, (iii) the
right of indemnification provided therein shall not be exclusive, (iv) the
Company is authorized to enter into contracts with any director, officer,
employee or agent of the Company which provide for indemnification equivalent to
or greater than provided in Article IX, and (v) the Company is required to
maintain insurance to the extent reasonably available to protect itself and any
such director, officer, employee or agent.
Consistent with Article IX of the Company's Bylaws, the Company has
entered into individual Indemnification Agreements with its directors and
officers. The Indemnification Agreements, among other things, provide mandatory
indemnification protection in excess of that provided by Delaware corporation
law. The Indemnification Agreements provide certain procedures relating to
indemnification and advancement of expenses.
In addition, the Company currently carries limited insurance coverage
for its directors and officers. The Indemnification Agreements provide
protections beyond those currently available from the Company's existing
director's and officer's liability insurance.
As a result of the foregoing, the Company may, at some future time, be
legally obligated to pay judgments (including amounts paid in settlement) and
expenses in regard to civil or criminal suits or proceedings brought against one
or more of its officers, directors, employees or agents, as such, with respect
to the Company.
27
<PAGE>
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable.
28
<PAGE>
EIP MICROWAVE, INC.
Index to Financial Statements for the
Years ended September 30, 1996 and 1995 and
Nine Months ended June 30, 1997 and 1996
- --------------------------------------------------------------------------------
Contents Page
- --------------------------------------------------------------------------------
Report of Independent Accountants F-2
- --------------------------------------------------------------------------------
Financial Statements
- --------------------------------------------------------------------------------
Consolidated Balance Sheet as of F-3
September 30, 1995, and 1996, and
June 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
Consolidated Statements of Operations and Retained F-4
Earnings (Accumulated Deficit) for the Years Ended
September 30, 1995 and 1996, and the Nine Months
Ended June 30, 1996 and June 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
Statements of Stockholders' Equity for the F-4
Years Ended September 30, 1995 and 1996, and
the Nine Months Ended June 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows for the F-5
Years Ended September 30, 1995 and 1996, and the
Nine Months Ending June 30, 1996 and 1997
(unaudited)
- --------------------------------------------------------------------------------
Notes to Financial Statements F-6
- --------------------------------------------------------------------------------
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of EIP Microwave, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of EIP
Microwave, Inc. and its subsidiary at September 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred significant recent losses from
operations and may need to obtain additional financing to meet its business
plans for fiscal 1998 and beyond that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/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 23, 1997.
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1997 1996 1995
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 257 $ 216 $ 126
Short-term investments 27 324 319
-------- -------- --------
284 540 445
Accounts receivable, net 308 686 1,064
Inventories 1,125 1,067 1,133
Prepaid expenses 71 59 74
-------- -------- --------
Total current assets 1,788 2,352 2,716
-------- -------- --------
Property and equipment, net 630 631 271
-------- -------- --------
Other assets - - 30
$ 2,418 $ 2,983 $ 3,017
-------- -------- --------
-------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 314 $ 706 $ 610
Accrued liabilities 519 546 676
Advanced payments from customers - 190 -
Bank borrowings 296 185 -
Notes payable to affiliates 150 - -
Current portion of obligations under capital
leases 34 34 15
Total current liabilities 1,313 1,661 1,301
-------- -------- --------
Long term notes payable to affiliates 600 - -
Long term obligations under capital leases 71 95 -
Total Liabilities 1,984 1,756 1,301
-------- -------- --------
Commitments and contingencies (Note 5)
Stockholders' equity:
Common stock $.01 par value, authorized 5 5 5
- 10,000,000 shares;
424,907 issued and outstanding
Additional paid-in-capital 848 848 844
Retained earnings (accumulated deficit) (419) 374 867
-------- -------- --------
Total stockholders' equity 434 1,227 1,716
-------- -------- --------
$ 2,418 $ 2,983 $ 3,017
-------- -------- --------
-------- -------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Years Ended
Ended June 30, September 30,
1997 1996 1996 1995
--------------------- ---------------------
(unaudited)
<S> <C> <C> <C> <C>
Net sales $ 3,560 $ 4,886 $ 6,492 $ 6,721
Costs and expenses:
Cost of sales 2,170 3,075 4,064 3,646
Research, development and engineering 722 724 978 742
Selling, general and administrative 1,416 1,548 2,084 2,289
Interest and other, net 45 (142) (141) (81)
-------- -------- -------- --------
Total costs and expenses 4,353 5,205 6,985 6,596
-------- -------- -------- --------
Net income (loss) (793) (319) (493) 125
Retained earnings at beginning of period 374 867 867 742
Retained earnings (accumulated deficit)
at end of period $ (419) $ 548 $ 374 $ 867
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share $ (1.87) $ (.75) $ (1.16) $ 0.30
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares outstanding 425 423 423 423
-------- -------- -------- --------
-------- -------- -------- --------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Common Stock Paid-in Retained
(Dollars in thousands) Shares Amount Capital Earnings Total
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994 423,307 $ 5 $ 844 $ 742 $1,591
-------------------------------------------------------------------
Stock Issues - - - - -
-------------------------------------------------------------------
Net Income - - - 125 125
-------------------------------------------------------------------
Balance at September 30, 1995 423,307 5 844 867 1,716
-------------------------------------------------------------------
Stock Issues 1,600 - 4 - 4
Net Income - - - (493) (493)
-------------------------------------------------------------------
Balance at September 30, 1996 424,907 5 848 374 1,227
-------------------------------------------------------------------
Stock Issues (unaudited) - - - - -
Net income (unaudited) - - - (793) (793)
-------------------------------------------------------------------
Balance at June 30, 1997
(unaudited) 424,907 5 848 (419) 434
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash
(Dollars in thousands, unaudited)
<TABLE>
<CAPTION>
Nine Months Years Ended
Ended June 30 September 30
1997 1996 1996 1995
------------------- -------------------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (793) $ (319) $ (493) $ 125
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 190 134 147 220
Gain on sale of capital equipment (98) (50) (50) (146)
Change in assets and liabilities:
Accounts receivable, net 378 277 378 (350)
Inventories (58) 117 66 (149)
Prepaid expenses (12) 33 45 ( 36)
Accounts payable (392) 1 96 83
Accrued liabilities (27) (151) (130) 65
Advanced payment from customers (190) - 190 -
-------- -------- -------- --------
Cash provided by (used in) operating activities (1,002) 42 249 (188)
-------- -------- -------- --------
Cash flows from investing activities:
Purchase of short-term investments - (19) (213) (11)
Sale of short-term investments 297 - 208 -
Capital expenditures (192) (347) (394) (41)
Proceeds from sale of capital equipment 101 61 61 155
-------- -------- -------- --------
Cash provided by (used in) investing activities 206 (305) (338) 103
-------- -------- -------- --------
Cash flows from financing activities:
Proceeds from bank borrowings 111 185 185 -
Proceeds from notes payable to affiliates 750 - - -
Proceeds from sales of common stock to employees - - 4 -
Repayment of obligations under capital leases (24) - (10) -
-------- -------- -------- --------
Cash provided by financing activities 837 185 179 -
-------- -------- -------- --------
Increase (decrease) in cash and cash equivalents 41 (78) 90 (85)
Cash and cash equivalents at beginning of period 216 126 126 211
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 257 $ 48 $ 216 $ 126
-------- -------- -------- --------
-------- -------- -------- --------
Supplemental information
Equipment acquired pursuant to capital leases - - 124 -
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 1. THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The Company is engaged in a single industry segment constituting the
development, manufacture, and sale of high frequency microwave and radio
frequency (RF) test and measurement instruments. The Company's stand-alone
microwave frequency counters represented 50% of net sales in 1996, 64% of net
sales in 1995, and 75% of net sales in 1994. Substantially all of its
activities are conducted in the United States, and the Company has no foreign
manufacturing operations nor material amounts of foreign assets. Export sales
to customers in Western Europe, Pacific Rim countries and in other parts of the
world, as a percent of net sales respectively, were approximately 20%, 11% and
5% in 1996, 25%, 13% and 5% in 1995, and 17%, 9% and 10% in 1994. Profit
margins are similar on foreign and domestic sales. Direct sales to the United
States government and its contractors as a percent of net sales were
approximately 33% in 1996 (22% to one government subcontractor), 36% in 1995
(11% to one government subcontractor), and 38% and 26% for the nine months ended
June 30, 1997 and 1996, respectively (29 and 19% to one government
subcontractor, respectively).
LIQUIDITY
As shown in the accompanying financial statements, the Company incurred a
loss from operations for the year ended September 30, 1996 of $493,000 and has
experienced significant fluctuations in operating results in the past. The
fiscal 1997 operating plan anticipates the release of a new frequency
measurement product. To the extent that product development is delayed or the
new product introduction does not achieve sufficient market acceptance, the
Company's financial position and results of operations will be adversely
impacted.
The Company has incurred significant recent losses from operations
and additional financing will be required for the Company to meet its
business plan for fiscal 1998 and beyond. There can be no assurance that the
Company will not incur additional losses until its recently introduced and
existing products generate significant revenues. The accompanying financial
statements have been prepared assuming the Company will continue as a going
concern. The Company's business plan for fiscal 1998 involves three key
operating objectives: (1) increasing the manufacture and shipment of
microwave frequency counters to Hewlett-Packard Company for distribution on a
private label basis worldwide through an OEM relationship; (2) completing
field testing of the Company's RF synthesized signal generators and RF down
converters under its five-year indefinite quantity, fixed price subcontract
with ManTech Systems Engineering Corporation, and preparing for shipment of
production quantities of these products in the fourth fiscal quarter of 1998;
and (3) completing current development efforts and introducing new test
instrumentation for the wireless telecommunications market. Management
believes that it can successfully implement these key operating objectives.
The Company's ability to generate sufficient cash to support its business
plan during the 1998 fiscal year depends on the ability of management to
obtain additional debt and equity financing, through the Rights Offering and
other capital sources. Management is currently pursuing additional debt
financing. If the Company is unable to obtain such financing, it will be
required to reduce discretionary spending in order to maintain its operations
at a reduced level. Management believes that it will be able to reduce
discretionary spending if required. The accompanying financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany transactions and
accounts have been eliminated.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
F-6
<PAGE>
SHORT-TERM INVESTMENTS
Short-term investments, consisting of publicly traded preferred stocks and
government bonds, are stated at fair value. The Company has adopted Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires companies to
classify investments in debt and equity securities with readily determinable
fair values as "held-to-maturity", "available for sale", or "trading" and
establishes accounting and reporting requirements for each classification. The
Company classifies all securities held as available for sale. Securities
classified as available for sale are reported at their fair market value with
unrealized gains and losses reported as a separate component of stockholders'
equity. Such unrealized gains and losses were immaterial as of September 30,
1996 and 1995, and June 30, 1997. The Company's government bonds have a maturity
of one year or less. Publicly traded preferred stocks are considered highly
liquid and are classified as short-term investments.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents and
short-term investments and trade accounts receivable. The Company places its
cash, cash equivalents and short-term investments in a variety of financial
instruments such as certificates of deposit and marketable equity securities.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The
Company maintains an allowance for uncollectible accounts receivable based upon
the expected collectibility of all accounts receivable balances. At September
30, 1996, the accounts receivable balance from three customers represented 32%,
12%, and 10% of net trade receivables, and at June 30, 1997 14%, 11%, and 7% of
net trade receivables.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
actual cost (determined on a first-in, first-out basis), or market.
PROPERTY AND EQUIPMENT
Purchased property and equipment are stated at cost and are depreciated
using the straight-line method over lives ranging from three to eight years.
Self-constructed demonstrator products are stated at their standard
manufacturing cost.
REVENUE RECOGNITION AND WARRANTY
Sales are recognized at the time of shipment provided no significant
obligations remain and collectibility is probable. The Company provides for the
estimated costs of fulfilling its warranty obligation at the time the related
sale is recorded.
INCOME TAXES
The Company utilizes an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequence of events that have been recognized in the Company's financial
statements or tax returns.
NET INCOME (LOSS) PER SHARE
The calculation of net income (loss) per share is based upon the weighted
average number of shares outstanding during the year. Common stock equivalents
were not materially dilutive for the year ended September 30, 1995. As a result
of the losses incurred in fiscal 1996 and 1994, and for the nine months ended
June 30, 1997 and 1996, the common equivalent shares were antidilutive and,
accordingly, were excluded from the computation of loss per share for those
years.
F-7
<PAGE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Only the disclosure requirements of this standard will be
adopted by EIP for the year ending September 30, 1997, and therefore there will
be no impact on EIP's consolidated financial position or results of operations.
In February 1997, the Financial Account Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). SFAS 128, which is effective for the Company's fiscal year ending
September 30, 1998, redefines earning per share under generally accepted
accounting principles. Under the new standard, primary earnings per share is
replaced by basic earnings per share, and fully diluted earnings per share is
replaced by diluted earnings per share. The adoption of SFAS 128 is not
expected to have a material impact on the Company since earnings per share
reported under Accounting Principles Board Opinion No. 15 approximates diluted
earnings per share, which will be reported under SFAS 128.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Standards No. 129 ("SFAS 129"), "Disclosure of
Information about Capital Structure". SFAS 129 requires disclosure of certain
information related to the Company's capital structure and is not anticipated to
have a material impact on the Company's financial position or results of
operations.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive
Income." SFAS 130 establishes standards for reporting comprehensive income and
its components in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income as defined
includes all changes in equity (net assets) during a period from nonowner
sources. Examples of items to be included in comprehensive income, which are
excluded from net income, include foreign currency translation adjustments and
unrealized gain/loss on available-for-sale securities. The disclosure
prescribed by SFAS must be made beginning with the first quarter of 1998.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards
for the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
has not yet determined the impact, if any, of adopting this new standard. The
disclosures prescribed by SFAS 131 are effective in 1998.
INTERIM RESULTS (UNAUDITED)
The accompanying balance sheet as of June 30, 1997, the statements of
operations and of cash flows for the nine months ended June 30, 1996 and 1997
are unaudited. In the opinion of management, the statements have been prepared
on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair statement of the results of interim periods. The data disclosed in these
notes to financial statements for these periods are also unaudited.
NOTE 2. CONSOLIDATED BALANCE SHEET DETAIL
(Dollars in thousands) September 30, June 30,
1996 1995 1997
Accounts receivable: (unaudited)
Trade $ 736 $1,138 $ 358
Less - allowance for doubtful accounts (50) (74) (50)
----------------- ------
$ 686 1,064 $ 308
F-8
<PAGE>
----------------- ------
----------------- ------
Inventories:
Raw materials $ 719 $ 633 $ 599
Work-in-process 320 489 411
Finished goods 28 11 115
----------------- ------
----------------- ------
$1,067 $1,133 $1,125
----------------- ------
----------------- ------
Property plant and equipment:
Machinery and equipment $3,121 $3,168 $3,124
Computer equipment and software 1,054 1,160 1,060
Demonstrator equipment 337 359 350
Furniture, fixtures and other fixed assets 807 471 869
----------------- ------
----------------- ------
5,319 5,158 5,403
Less: accumulated depreciation (4,688) (4,887) (4,773)
----------------- ------
----------------- ------
$ 631 $ 271 $ 630
----------------- ------
----------------- ------
Accrued liabilities:
Salaries, wages and benefits $ 215 $ 157 $ 260
Commissions 83 61 11
Warranty 53 66 32
Other 195 392 216
----------------- ------
$ 546 $ 676 $ 519
----------------- ------
----------------- ------
NOTE 3. EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN
The Company has a Retirement/Savings Plan which qualifies as a thrift
plan under Section 401(k) of the Internal Revenue Code. All employees who have
completed three months of service on or before the semiannual entry period are
eligible to participate in the Retirement Plan. The Retirement Plan allows
participants to contribute up to 12% of their earnings to the Retirement Plan
and deduct this amount from their wages for federal income tax purposes. The
Company will contribute 50 cents for each dollar contributed by the employee up
to 3% of total wages. Company contributions in fiscal years 1996, 1995, and for
the nine months ended June 30, 1997, totaled $49,000, $38,000 and $30,000,
respectively.
INCENTIVE COMPENSATION
The Company has an incentive compensation plan which provides for
awards of bonuses to officers and key employees based principally on achieving
stipulated Company financial objectives. In making specific awards,
consideration is given to the individual's contribution to the success of the
Company, to the success and performance of the unit or department of which the
individual is a member, and to the achievement of individual performance goals
established at the beginning of the fiscal year. The formula for computing
bonuses has been subject to annual modification and may in the future be again
modified at the discretion of the Board of Directors. No bonuses were awarded
for the nine months ended June 30, 1997 and 1996, nor for fiscal 1996. Bonuses
of $61,000 were awarded for fiscal 1995 results. No bonuses were awarded for
fiscal 1994 results.
STOCK APPRECIATION RIGHTS PLAN
On November 11, 1992, the Board of Directors adopted a Stock
Appreciation Rights Plan ("SAR Plan"). The SAR Plan provides for the award of
appreciation rights ("SARs") to officers and key management employees of the
F-9
<PAGE>
Company entitling such participants to receive the increase, if any, in the
value of one share of Company common stock from the date of the award to the
date(s) of valuation established at the time of the award. Generally, SARs are
deemed vested in five equal annual installments. Each award vested will be paid
in cash on a scheduled payment date. During the nine months ended June 30,
1997, and during fiscal 1996, 1995 and 1994, no SARs were awarded. A total of
760, 2,760, 2,760 and 7,760 SARs were vested during the nine months ended
June 30, 1997, and during fiscal 1996, 1995 and 1994, respectively. A total of
4,000, 0, 960, and 24,040 SARs were canceled during the nine months ended
June 30, 1997, and during fiscal 1996, 1995, and 1994, respectively, leaving an
aggregate of 760 SARs outstanding at June 30, 1997. The Company accrues a
compensation liability over the vesting period based on the increase in the
market value of the common stock over the award price. The liability recorded
in the nine months ended June 30, 1997, and during fiscal 1996 and 1995 was
$1,900, $7,900 and $20,293, respectively. No compensation liability was
recorded for fiscal 1994 relating to the SAR Plan.
STOCK OPTION PLAN
Under the Company's Second Amended and Restated 1994 Stock Option Plan
(the "Plan"), as in effect on June 30, 1997, stock options may be awarded to
directors, consultants and employees to purchase up to 200,000 shares of common
stock at exercise prices determined by the Board of Directors. The options can
generally be awarded for periods up to 10 years and are subject to vesting
schedules as determined by the Board of Directors.
The following table summarizes option activity under the Plan:
Options Options Options
Available Outstanding Price Per Share
Balance at September 30, 1994 - - $ -
Options authorized 80,000 - -
Options granted (57,500) 57,500 2.375
---------------------------------------
Balance at September 30, 1995 22,500 57,500 $ 2.375
---------------------------------------
---------------------------------------
Additional options authorized 20,000 - -
Options granted (37,500) 37,500 $3.875-4.263
Options exercised - (1,600) 2.375
---------------------------------------
Balance at September 30, 1996 5,000 93,400 $2.375-4.263
---------------------------------------
---------------------------------------
Additional options authorized (unaudited) 100,000 - -
Option granted (unaudited) (50,000) 50,000 $ 4.75
Options canceled (unaudited) 13,000 (13,000) $2.375-3.875
---------------------------------------
Balance at June 30, 1997 (unaudited) 68,000 130,400 $ 2.375-4.75
---------------------------------------
---------------------------------------
As of June 30, 1997, 46,431 awarded options are exercisable.
NOTE 4. INCOME TAXES
Deferred tax assets (liabilities) are summarized as follows:
(Dollars in thousands) 1996 1995
Net operating loss carryforwards $ 1,104 $ 1,016
Tax credit carryforwards 106 106
Inventory and other valuation reserves 221 190
F-10
<PAGE>
Other - -
----------------------------
Gross deferred tax asset 1,431 1,312
----------------------------
Depreciation expense - -
Other - -
----------------------------
Gross deferred tax liability - -
----------------------------
Deferred tax asset valuation allowance $ (1,431) $ (1,312)
----------------------------
----------------------------
The Company provides a valuation allowance for deferred tax assets when it
is more likely than not that some portion or all of the deferred tax asset will
not be realized.
The U.S. net operating loss carryforward of approximately $2,800,000 at
September 30, 1996, expires by fiscal year 2010 if not offset against taxable
income. The amount of and the benefit from net operating losses that can be
carried forward may be impaired in certain circumstances. Events which may
cause changes in the Company's tax carryovers include, but are not limited to, a
cumulative ownership change of more than 50% over a three-year period.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company has signed a lease for 20,331 square feet in a building
located in Milpitas, California, for an initial term of three years ending
October 31, 1998. The lease provides for rentals of $226,000, $226,000, and
$19,000 for fiscal years 1997, 1998 and 1999 plus applicable real property taxes
and insurance, and contains one three year renewal option. Future lease
commitments for the next five fiscal years for all other leases as of
September 30, 1996 were as follows (in thousands):
Fiscal year ending September 30, Capital Leases Operating Leases
- -------------------------------- -------------- ----------------
1997 $ 46 $ 34
1998 36 32
1999 28 24
2000 26 23
Thereafter 19 16
-------- --------
Total minimum lease payments $ 155 $ 129
-------- --------
--------
Less amount representing interest (26)
--------
Present value of minimum lease payments 129
Less current portion (34)
--------
Long-term lease obligation $ 95
--------
--------
The Company also leases certain equipment on a month-to-month basis.
Total rental expense under all operating leases was $258,000, $300,000, and
$364,000, in fiscal years 1996, 1995, and 1994, respectively.
On October 1, 1995, the Company entered into an Employment Agreement
(the "Agreement") with John F. Bishop, Vice-Chairman of the Board, Treasurer,
and Secretary of the Company, whereby Mr. Bishop will provide his services for a
monthly salary of $6,500 for an initial term of two years. On the first day of
each month, the
F-11
<PAGE>
initial term is automatically extended for an additional month, unless either
party notifies the other in writing of his or its desire not to extend the term.
In the event the Company elects not to extend the term or there is a change in
control of the Company (the date of such event is referred to as the "Transition
Date"), Mr. Bishop will continue to perform services for the Company for a three
month transition period and the Company would maintain his compensation and
other benefits for the three month transition period and an additional
twenty-one months. Effective January 1, 1997, Mr. Bishop has agreed to reduce
his monthly salary to $3,250 until the Transition Date. The Agreement also
allows Mr. Bishop the use of an automobile and the right to receive title to the
automobile, arising out of his agreement to forgo $56,846 of salary in prior
years. Maintenance, insurance and gasoline costs for the automobile and an
office location are also part of the Agreement. The corporate office is
currently located in Newport Beach, California, leased at a monthly rate of
$1,320 on a month-to-month basis.
NOTE 6. BANK BORROWINGS
As of September 30, 1996, the Company had a bank line of credit
("line") which provided for borrowings up to $500,000, not to exceed 60% of
eligible accounts receivable. The balance outstanding was $185,000 as of
September 30, 1996. The line bears interest at the bank's prime rate plus 3%
per annum, provided that the interest rate in effect each month shall not be
less than 10% per annum, and is payable monthly (11.25% as of September 30,
1996). The line contains various restrictive covenants requiring, among other
matters, the maintenance of minimum levels of tangible net worth and
profitability and certain financial ratios, including minimum quick ratio and
maximum debt to net worth ratio. The line also precludes or limits the Company
in taking certain actions, such as paying dividends, making loans, making
acquisitions or incurring indebtedness, without the bank's prior written
consent. The line is secured by substantially all of the Company's assets. As
of November 15, 1996, the bank extended the maturity date of the line to
January 15, 1997 and amended certain restrictive covenants, but limited
borrowings to the $185,000 outstanding.
On January 15, 1997, the bank line was revised to provide for
borrowings up to $500,000. At October 1, 1997, the outstanding borrowings were
$295,500. As of October 23, 1997, the Company was not in compliance with the
restrictive covenants of the line, as so amended. In the event that the Company
is unable to maintain compliance with financial covenants, J. Bradford Bishop,
the Chairman and Chief Executive Officer of the Company, and John F. Bishop, the
Vice Chairman, Treasurer and Secretary of the Company (the "Bishops") have
agreed to finance up to $500,000 of working capital (in addition to funds
provided under the subordinated loan facility (note 7)) on terms acceptable to
the Bishops and the Company to replace the line of credit.
NOTE 7. SUBSEQUENT EVENT
On December 16, 1996, the Company entered a subordinated loan
agreement with the Bishops. This agreement provides for borrowings up to a
maximum aggregate amount of $600,000 by the Company. The commitment of the
Bishops to make advances to the Company expires on February 1, 1998, and all
advances must be repaid by February 1, 2000. Interest is charged at 8% per
annum, and is payable quarterly. The advances are secured by substantially all
of the assets of the Company and are subordinated to the Company's bank line of
credit. The agreement contains various restrictive covenants. In connection
with the subordinated loan agreement, the Company will issue warrants entitling
the Bishops to purchase up to 90,000 shares of the Company's common stock at
$3.00 per share. The warrants expire on December 16, 2001.
Future performance and levels of capital expenditures could reduce the
total amount of funds available under the bank line of credit and the
subordinated loan agreement at any given time.
NOTE 8. BOARD OF DIRECTORS' FEES
During fiscal 1996, the Board of Directors waived fees owed to them by
the Company totaling $112,000. The reversal of previously accrued fees was
included in "Interest and other, net" cost and expenses in the statement of
operations, and thereby reduced the net loss for the year ended September 30,
1996.
NOTE 9. RECENT EVENTS (UNAUDITED)
On October 15, 1997, the subordinated loan with the Bishops (Note 7)
was extinguished with funds provided by a loan entered into with the Bishop
Family Trust. As consideration for the early repayment of such
F-12
<PAGE>
obligations, the warrants issued to the Bishops were canceled on October 15,
1997. This new loan facility provides for a term loan of 1,000,000 and
revolving advances up to $450,000. Interest is charged at the prime rate plus
5% per annum and is payable monthly (13.5% as of October 23, 1997). The loan
facility expires on October 15, 1998. Funds made available by this facility
were also used to extinguish bridge loans of $400,000 which had been received
from the Bishops in May and August 1997. At October 23, 1997, the Company had
outstanding borrowings of $1,200,000 under the loan facility. At this time the
Company is not in compliance with the restrictive covenants of the loan
facility.
The Company has recently introduced a new line of counter products for
distribution worldwide through a new OEM relationship. The Company has
completed the testing phase with the OEM customer and has commenced preparation
for production of the new line of products. The Company expects that this OEM
relationship will account for a material portion of its revenues in fiscal year
1998 and thereafter.
F-13
<PAGE>
APPENDIX I
FORM OF SUBSCRIPTION AGREEMENT
(PLEASE CAREFULLY REVIEW THE ATTACHED INSTRUCTIONS)
EIP Microwave, Inc.
Subscription Agreement
This Subscription Agreement (the "Subscription Agreement") represents
a subscription to acquire the number of shares (the "Shares") of common stock of
EIP Microwave, Inc. (the "Company") set forth below at a subscription price of
$1.70 per share for the total subscription price set forth below. The
registered owner named below is entitled to subscribe for the Shares pursuant to
subscription rights granted to stockholders upon the terms and conditions set
forth in the related Prospectus. For each Share subscribed for, the
subscription price of $1.70 must be forwarded directly to EIP Microwave, Inc.
The subscription rights expire at 5:00 p.m., California time, on
December 15, 1997, unless extended by the Company. No subscription agreements
will be accepted thereafter.
Stockholder Name: _________________________
Stockholder Address: _________________________
Number of shares owned
by Stockholder on
November 7, 1997: _________________________
Number of shares subject
to Basic Subscription Rights:
(number of shares shown above x 4) _________________________
SECTION 1 - Subscription and Signature
I hereby irrevocably subscribe for the number of Shares indicated
below, on the terms specified in the related Prospectus.
A. Basic Subscription: _____________ shares
B. Over-Subscription: _____________ shares (No more than
1,699,628 less
the number
subscribed for in
A.)
C. Total subscription (A + B): _____________ shares
D. Total cost (C x $1.70): $____________
Signature of Telephone
Stockholder: ______________________________ Number: (____)________________
SECTION 2 - Address for delivery of stock certificate if different from above.
_____________________________________
_____________________________________
_____________________________________
A-1
<PAGE>
INSTRUCTIONS FOR USE OF SUBSCRIPTION AGREEMENT
----------------------
CONSULT THE INFORMATION AGENT, YOUR
BANK OR BROKER AS TO ANY QUESTIONS
Each stockholder of EIP Microwave, Inc. (the "Company") has the right
to subscribe for four Shares for each full share of common stock of the Company
(the "Basic Subscription Rights") owned of record at the close of business on
November 7, 1997 (the "Record Date"). The number of Shares you are entitled to
subscribe for appears on the front of the Subscription Agreement or can be
calculated by multiplying the number of shares of common stock owned of record
on the record date by four. The subscription price is $1.70 for each Share.
You may also subscribe for Shares pursuant to an over-subscription privilege
(the "Over-Subscription Privilege"). To exercise your rights, you must complete
the appropriate sections of the Subscription Agreement. If you wish to exercise
your rights for the Over-Subscription Privilege, you must do so by no later than
5:00 p.m., California time, on December 15, 1997, unless extended by the
Company. Rights may be exercised only through the Company.
To exercise your rights please complete and return the Subscription
Agreement.
1. Complete "SECTION 1--Subscription and Signature."
A. Basic Subscription Rights. Enter the number of shares you intend to
purchase under your Basic Subscription Rights. The maximum number of
shares you may purchase on basic subscription appears on the front of
the Subscription Agreement or can be calculated by multiplying the
number of shares of common stock owned of record on the record date by
four.
B. Over-Subscription Privilege. Enter the number of shares you desire to
purchase under your Over-Subscription Privilege. The
Over-Subscription Privilege is available only if you exercised all of
your Basic Subscription Rights. The maximum number of shares that you
can purchase pursuant to the Over-Subscription Privilege is 1,699,628
shares less the number of shares you purchased on Basic Subscription
Rights. The number of shares that will actually be purchased by you
will be subject to allotment if there are not enough shares remaining
after the Basic Subscription Rights to completely fill all requests
for purchases on over-subscription.
C. Total Subscription. Enter the total number of shares you want to
purchase in the offer. This number is the sum of the number of shares
you are purchasing on Basic Subscription Rights plus the number of
shares you desire to purchase under the Over-Subscription Privilege.
D. Total cost. Enter the total cost of your subscription. Your total
cost is the dollar number obtained when you multiply the number of
shares shown under total subscription by $1.70, the subscription price
per share.
2. Sign the Subscription Agreement in the space provide at the bottom of
Section 1. Include your daytime telephone number in the space provided.
3. Enclose the executed Subscription Agreement, together with a check or money
order made payable to "EIP Microwave, Inc." in the amount of the total cost
(Item D. of Section 1) in the envelope provided. If you use your own
envelope, address it to EIP Microwave, Inc., 1745 McCandless Drive,
Milpitas, California 95035-8024. You may also personally deliver your
Subscription Agreement and payment to EIP Microwave, Inc., at the same
address.
4. Mail or deliver your executed Subscription Agreement and payment for the
total cost on a timely basis so that it is received by the Company by no
later than 5:00 p.m., California time, on December 15, 1997 unless extended
by the Company (such date, as it may be extended on one or more occasions,
is referred to herein as the "Expiration Date"). If the Company has not
received your Subscription Agreement and payment for the total cost by 5:00
p.m., California time, on the Expiration Date, you will not be entitled to
purchase shares pursuant to the rights. Accordingly, if you are sending
your executed Subscription Agreement and payment
A-2
<PAGE>
by mail, please allow sufficient time for them to be received by the
Company prior to 5:00 p.m., California time, on the Expiration Date.
The Rights Offering is being made on any or all basis, which means that the
Company may accept any subscription received even if all 1,699,628 Shares
offered are not subscribed for in the Rights Offering. J. Bradford Bishop,
Chairman and Chief Executive Officer of the Company, and John F. Bishop,
Vice Chairman, Secretary and Treasurer of the Company, both of whom are
principal stockholders and members of the Board of Directors of the
Company, have committed to the Company that they will purchase $1,360,000
in Common Stock by exercise of Rights distributed to them if other
stockholders purchase at least $800,000 in Common Stock upon exercise of
Rights distributed to them.
The Company reserves the right to reject any subscription agreement and
payment not properly submitted. The Company has no duty to give
notification of defects in any subscription agreement and/or payment and
will have no liability for failure to give such notification. The Company
will return any subscription agreement and/or payment not properly
submitted.
Stockholders should carefully review the related Prospectus prior to making
an investment decision with respect to the rights referred to in this
Subscription Agreement.
5. Information Agent. The address, telephone and telecopier numbers of the
Information Agent are as follows:
Corporate Investor Communications, Inc. ("CIC")
111 Commerce Road
Carlstadt, NJ 07072-2586
Telephone: (201) 896-1900
or Toll Free: (800) 631-8985
Telecopier: (201) 896-0910
A-3
<PAGE>
PART II
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Delaware corporation law, a corporation is authorized to
indemnify officers, directors, employees and agents who are made or threatened
to be made parties to any civil, criminal, administrative or investigative suit
or proceeding by reason of the fact that they are or were a director, officer,
employee or agent of the corporation or are or were acting in the same capacity
for another entity at the request of the corporation. Such indemnification
includes expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such persons if they acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation or, with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful. In the case of any action or suit by or in the right of the
corporation against such persons, the corporation is authorized to provide
similar indemnification, provided that, should any such persons be adjudged to
be liable for negligence or misconduct in the performance of duties to the
corporation, the court conducting the proceeding must determine that such
persons are nevertheless fairly and reasonably entitled to indemnification. To
the extent any such persons are successful on the merits in defense of any such
action, suit or proceeding, Delaware law provides that they shall be indemnified
against reasonable expenses, including attorney fees. A corporation is
authorized to advance anticipated expenses for such suits or proceedings upon an
undertaking by the person to whom such advance is made to repay such advances if
it is ultimately determined that such person is not entitled to be indemnified
by the corporation. Indemnification and payment of expenses provided by
Delaware law are not deemed exclusive of any other rights by which an officer,
director, employee or agent may seek indemnification or payment of expenses or
may be entitled to under any by-law, agreement, or vote of stockholders or
disinterested directors. In such regard, a Delaware corporation is empowered
to, and may, purchase and maintain liability insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation.
Article Ninth of the Company's Certificate of Incorporation
eliminates, to the fullest extent permitted by law, the personal liability of
directors for monetary damages in certain instances for breach of a director's
fiduciary duty of care. Article IX of the Company's Bylaws provides that
(i) each director, officer and employee of the Company shall be indemnified by
the Company to the fullest extent authorized by Delaware law subject to certain
limitations, (ii) each indemnitee is entitled to be paid by the Company for its
expenses in defending proceedings in advance of final determination, (iii) the
right of indemnification provided therein shall not be exclusive, (iv) the
Company is authorized to enter into contracts with any director, officer,
employee or agent of the Company which provide for indemnification equivalent to
or greater than provided in Article IX, and (v) the Company is required to
maintain insurance to the extent reasonably available to protect itself and any
such director, officer, employee or agent.
Consistent with Article IX of the Company's Bylaws, the Company has
entered into individual Indemnification Agreements with its directors and
officers. The Indemnification Agreements, among other things, provide mandatory
indemnification protection in excess of that provided by Delaware corporation
law. The Indemnification Agreements provide certain procedures relating to
indemnification and advancement of expenses.
In addition, the Company currently carries limited insurance coverage
for its directors and officers. The Indemnification Agreements provide
protections beyond those currently available from the Company's existing
director's and officer's liability insurance.
As a result of the foregoing, the Company may, at some future time, be
legally obligated to pay judgments (including amounts paid in settlement) and
expenses in regard to civil or criminal suits or proceedings brought against one
or more of its officers, directors, employees or agents, as such, with respect
to the Company.
To the extent of the indemnification rights provided by the Delaware
statutes and provided by the Company's charter, bylaws and indemnification
agreements, and to the extent of the Company's abilities to meet such
indemnification obligations, the officers, directors and agents of the Company
would be beneficially affected.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
II-1
<PAGE>
The following are all expenses of this issuance and distribution.
There are no underwriting discounts or commissions.
- -------------------------------------------------
Item Amount (1)
- -------------------------------------------------
SEC Registration fees $876
- -------------------------------------------------
Blue sky fees $4,000
- -------------------------------------------------
Printing $5,000
- -------------------------------------------------
Transfer Agent $1,000
- -------------------------------------------------
Information Agent $7,000
- -------------------------------------------------
Legal $35,000
- -------------------------------------------------
Accounting $5,000
- -------------------------------------------------
Miscellaneous $5,124
- -------------------------------------------------
TOTAL $63,000
- -------------------------------------------------
(1) Estimate
RECENT SALES OF UNREGISTERED SECURITIES
On April 10, 1997 the Company issued warrants to purchase 90,000
shares of its Common Stock to John F. Bishop and J. Bradford Bishop (together,
the "Bishops") in consideration for the loan of $600,000 by the Bishops to the
Company pursuant to the Subordinated Loan Agreement. These warrants were
canceled on October 15, 1997. See "Interests of Management and Others in
Certain Transactions--Subordinated Loan."
The Company issued debt securities to Silicon Valley Bank
evidencing cash loans of up to $500,000. See "The Company--Bank Line." The
Company also issued debt securities to the Bishops evidencing cash loans of
up to $1,000,000, and such loans have been repaid with the proceeds of the
Bishop Family Trust Loan Facility. See "Interests of Management and Others
in Certain Transactions--Subordinated Loan" and "--Bridge Loans." In
addition, the Company issued debt securities to the Bishop Family Trust
evidencing cash loans through November 10, 1997 of $1,200,000. See "The
Company--Bishop Family Trust Loan Facility." No underwriting discounts or
commissions were paid in connection with the issuance of the foregoing debt
securities.
The securities were not registered under the Securities Act of 1933 in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act or by Regulation D of the Commission.
II-2
<PAGE>
EXHIBITS
Filed as part of this Form SB-2 Registration Statement or incorporated
by reference are the following exhibits.
Exhibit
Number
3(a) Company's Certificate of Incorporation, filed on April 29, 1987, and
Certificate of Amendment of Certificate of Incorporation, filed February
8, 1993, previously filed on February 12, 1993, as Exhibit 3(a) to Form
10-QSB Quarterly Report for quarter ended December 31, 1992, and
incorporated herein by reference.
3(b) Company's Bylaws, previously filed June 25, 1987 (File No. 0-5351), as
Exhibit 3(b) to Form 8-K, and incorporated herein by reference.
5(a) Opinion of Bainbridge Group, a Law Corporation, as to the legality of the
securities covered by the Form SB-2 Registration Statement.
10(a) Standard Form Lease dated August 18, 1995, by and between Berg & Berg
Developers, as landlord, and the Company, as tenant, covering the
Company's manufacturing facility located at 1745 McCandless Drive,
Milpitas, California, previously filed on December 29, 1995, as Exhibit
10(a) to Form 10-KSB Annual Report for fiscal year ended September 30,
1995 (the "1995 Annual Report"), and incorporated herein by reference.
10(b) Loan and Security Agreement dated March 10, 1992, between the Company and
Silicon Valley Bank, previously filed on May 14, 1992, as Exhibit 10(a)
to Form 10-Q Quarterly Report for quarter ended March 31, 1992, and
incorporated herein by reference.
10(c) Amendment to Loan Agreement dated December 20, 1994, between the Company
and Silicon Valley Bank, previously filed on December 29, 1994, as
Exhibit 10(h) to the 1994 Annual Report, and incorporated herein by
reference.
10(d) Loan Modification Agreement dated as of November 27, 1995, between the
Company and Silicon Valley Bank, previously filed on December 29, 1995,
as Exhibit 10(i) to the 1995 Annual Report, and incorporated herein by
reference.
10(e) Loan Modification Agreement dated as of June 28, 1996, between the
Company and Silicon Valley Bank, previously filed on August 13, 1996, as
Exhibit 10(a) to Form 10-QSB Quarterly Report for quarter ended June 30,
1996, and incorporated herein by reference.
10(f) Loan Modification Agreement dated as of November 15 , 1996 between the
Company and Silicon Valley Bank, previously filed on December 30, 1996,
as Exhibit 10(f) to Form 10-KSB Annual Report for fiscal year ended
September 30, 1996 (the "1996 Annual Report"), and incorporated herein by
reference.
10(g) Loan Modification Agreement dated as of January 15, 1997, between the
Company and Silicon Valley Bank, previously filed on May 13, 1997, as
Exhibit 10(a) to Form 10-QSB Quarterly Report for quarter ended March 31,
1997, and incorporated herein by reference.
10(h) Loan Modification Agreement dated as of March 5, 1997, between the
Company and Silicon Valley Bank, previously filed on May 13, 1997, as
Exhibit 10(a) to Form 10-QSB Quarterly Report for quarter ended March 31,
1997, and incorporated herein by reference.
II-3
<PAGE>
10(i) Loan and Security Agreement dated as of October 15, 1997, between the
Company and the Bishop Family Trust.
10(j) Fixed Price Subcontract dated August 15, 1997, between the Company and
ManTech Systems Engineering Corporation.
*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-4
<PAGE>
10(x) Indemnification Agreement dated February 13, 1996, between the Company
and Michael E. Johnson, previously filed on May 9, 1996, as Exhibit 10(a)
to Form 10-QSB Quarterly Report for quarter ended March 31, 1996, and
incorporated herein by reference.
10(y) Indemnification Agreement dated February 19, 1997, between the Company
and Lewis R. Foster, previously filed on May 13, 1997, as Exhibit 10(c)
to Form 10-QSB Quarterly Report for quarter ended March 31, 1997, and
incorporated herein by reference.
10(z) Indemnification Agreement dated February 19, 1997, between the Company
and Ivan Andres, previously filed on May 13, 1997, as Exhibit 10(d) to
Form 10-QSB Quarterly Report for quarter ended March 31, 1997), and
incorporated herein by reference.
10(aa) OEM Purchase Agreement effective on May 28, 1997, previously filed on
August 14, 1997, as Exhibit 10(a) to Form 10-QSB Quarterly Report for
quarter ended June 30, 1997, and incorporated herein by reference.
16 Letter dated November 13, 1997 from Price Waterhouse LLP to the
Securities and Exchange Commission, previously filed on November 14,
1997, as Exhibit 16 to Form 8-K/A 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.
23(b) Consent of Price Waterhouse LLP.
- -----------------------------------
UNDERTAKINGS
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this amendment to the
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Milpitas, California on November 13, 1997.
EIP MICROWAVE, INC.
By: /s/ Lewis R. Foster
-------------------------------------
Lewis R. Foster
President and Chief Operating Officer
In accordance with the requirements of the Securities Act of 1933,
this amendment to the registration statement was signed by the following persons
in the capacities and on the dates indicated.
November 13, 1997 /s/ Lewis R. Foster
----------------------------------------
Lewis R. Foster
President and Chief Operating Officer
November 13, 1997 /s/ John F. Bishop
----------------------------------------
John F. Bishop
Vice Chairman, Treasurer, Secretary, and Director
(Principal Financial Officer)
----------------------------------------
Michael E. Johnson
Director
November 13, 1997 /s/ Robert D. Johnson
----------------------------------------
Robert D. Johnson
Director
November 13, 1997 /s/ J. Sidney Webb
----------------------------------------
J. Sidney Webb
Director
November 13, 1997 /s/ J. Bradford Bishop
----------------------------------------
J. Bradford Bishop
Chairman of the Board, Chief Executive Officer
and Director
(Principal Executive Officer)
November 13, 1997 /s/ E. O. Bince
----------------------------------------
E. O. Bince
Controller (Principal Accounting Officer)
II-6
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
5(a) Opinion of Bainbridge Group, a Law Corporation, as to the
legality of the securities covered by the Form SB-2 Registration
Statement.
10(i) Loan and Security Agreement dated as of October 15, 1997, between
the Company and the Bishop Family Trust.
10(j) Fixed Price Subcontract dated August 15, 1997, between the
Company and ManTech Systems Engineering Corporation. (1)
23(a) Consent of Bainbridge Group, a Law Corporation, to the reference
to it as counsel who has passed upon certain information
contained in the Prospectus.
23(b) Consent of Price Waterhouse, LLP.
- -----------------------------------
(1) Portions of this document are confidential, and have been omitted
pursuant to 17 C.F.R. Section 240.24b-2 and filed separately with the
Securities and Exchange Commission.
II-7
<PAGE>
EXHIBIT 5(a)
BAINBRIDGE GROUP
November 13, 1997
EIP Microwave, Inc.
3 Civic Plaza, Suite 265
Newport Beach, California 92660
Gentlemen:
In connection with the preparation and filing of a Form SB-2/A Registration
Statement under the Securities Act of 1933, to be filed by EIP Microwave, Inc.
for the purpose of registering 1,699,628 shares of its Common Stock (the
"Shares") to be offered to its stockholders of record on a date to be selected
by its board of directors prior to the effective date of the Registration
Statement, we have acted as counsel to EIP Microwave, Inc. (the "Company") in
the preparation of the Form SB-2/A Registration Statement. We advise you that we
are familiar with the originals or copies, certified or otherwise identified to
our satisfaction, of documents, corporate records, or other instruments relating
to the incorporation of the Company and the authorization and the issuance of
the Shares, including the following:
(a) Certificate of Incorporation of the Company;
(b) By-laws of the Company;
(c) Corporate proceedings and filings reflected in the minutes of the
Company as certified to by the secretary of the Company;
(d) Specimen certificates representing the Shares; and
(e) The Form SB-2/A Registration Statement relating to the Shares and
to be filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
Based solely on the foregoing, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware.
2. The Company has corporate power to conduct the business now being
conducted and is duly authorized and in good standing to do business in the
jurisdiction in which its ownership of property or the conduct of its business
legally requires that authorization.
3. The Company has an authorized capitalization as set forth in the
Registration Statement, and the Shares conform to the statements concerning them
in the Registration Statements.
4. The Shares have been duly and validly authorized. The Shares,
when issued, will be legally issued, fully paid and non-assessable.
5. No consent, approval, authorization, or other order of any
regulatory authority or third party is legally required for the valid issuance
of the Shares other than the order making effective the registration of the
Shares, which order must be issued by the Securities and Exchange Commission,
and other than similar action to be taken by the state securities regulatory
agencies of states which require registration of, or filings with respect to,
the Shares in those states.
<PAGE>
6. The consummation of the offering and sale of the Shares as
contemplated in the Registration Statements will not result in a breach of any
of the terms and provisions of, or constitute a default under, any notes,
indenture, mortgage, deed of trust, or other agreement or instrument to which
the Company to its knowledge is now a party, or the Certificate of
Incorporation of the Company.
7. We do not know, and you have advised us that you do not know, of
any legal or governmental proceeding pending or threatened to which the Company
is a party, or of which the property of the Company is the subject, of a
character required to be disclosed in the Registration Statements that is not
disclosed and properly described in this document; and you and we do not know of
any contracts of a character to be disclosed in the Registration Statement that
are not disclosed, filed and properly summarized in such document.
8. The Registration Statement and any further amendments and
supplements made by the Company prior to the effective date of the Form SB-2/A
Registration Statement comply as to form in all material respects with the
requirements of the Securities Act of 1933, as amended, and the applicable rules
and regulations of the Securities and Exchange Commission. We have no reason to
believe that the Registration Statement contains any untrue statement of a
material fact or omits to state any material fact required to be stated in the
document or necessary to make the statements in it not misleading.
We hereby consent to the filing of this opinion as Exhibit 5(a) to the
Form SB-2/A Registration Statement to be filed by the Company on or about
November 13, 1997.
Sincerely,
BAINBRIDGE GROUP
/s/ Michael E. Johnson
-----------------------------------
Michael E. Johnson, President
<PAGE>
EXHIBIT 10(i)
THE SECURITIES REPRESENTED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933; THEY HAVE BEEN ACQUIRED BY THE HOLDER FOR
INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF EXCEPT AS MAY BE AUTHORIZED UNDER THE SECURITIES ACT OF
1933 AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER.
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT is entered into as of October 15, 1997
between JOHN F. BISHOP AND ANN R. BISHOP, TRUSTEES OF THE BISHOP FAMILY TRUST
("Lender"), located at 2 Inverness Lane, Newport Beach, California 92660, and
EIP MICROWAVE, INC., a Delaware corporation ("Borrower"), located at 1745
McCandless Drive, Milpitas, California 95035-8024.
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 TERMS. In addition to the terms that are defined within this
Agreement, the following terms shall have the following definitions when used
in this Agreement:
"Account Debtor" means any Person who is or who may become
obligated under, with respect to, or on account of an Account.
"Accounts" means all presently existing and hereafter arising
accounts receivable, contract rights, and all other forms of obligations
owing to Borrower arising out of the sale or lease of goods or the rendition
of services by Borrower, whether or not earned by performance, all credit
insurance, guaranties, and other security therefor, as well as all goods
returned to or reclaimed by Borrower, and Borrower's Books relating to any of
the foregoing.
"Agreement" means this Loan and Security Agreement and any riders,
addenda, extensions, supplements, amendments or modifications to or in
connection with this Loan and Security Agreement.
"Authorized Officer" means any officer of Borrower.
"Bankruptcy Code" means the United States Bankruptcy Code (11
U.S.C. Sections 101 et seq.), as amended, and any successor statute.
"Borrower's Books" means all of Borrower's books and records
including all of the following: ledgers, records indicating, summarizing or
evidencing Borrower's assets (including the Collateral) or liabilities; all
information relating to Borrower's business operations or financial
condition; and all computer programs, disk or tape files, printouts, runs or
other computer prepared information, and the equipment containing such
information.
"Business Day" means any day which is not a Saturday, Sunday or
legal holiday.
"Code" means the California Uniform Commercial Code, as amended
from time to time.
"Collateral" means all of the following: the Accounts; the
Equipment; the General Intangibles; the Inventory; the Negotiable Collateral;
any money or other assets of Borrower which
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hereafter come into the possession, custody or control of Lender; and all
proceeds and products, whether tangible or intangible, of any of the
foregoing, including proceeds of insurance covering any or all of the
Collateral, and any and all Accounts, Equipment, General Intangibles,
Inventory, Negotiable Collateral, money, deposit accounts or other tangible
or intangible property resulting from the sale or other disposition of the
Collateral, or any portion thereof or interest therein, and the proceeds
thereof.
"Common Stock" means the common stock, $0.01 par value per share,
of Borrower.
"Environmental Law" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, the Resource
Conservation and Recovery Act of 1976, the Hazardous Materials Transportation
Act, the Toxic Substances Control Act, the regulations pertaining to such
statutes, and any other safety, health or environmental statutes, laws,
regulations or ordinances of the United States or of any state, county or
municipality in which Borrower conducts its business or the Collateral is
located.
"Equipment" means all of Borrower's present and hereafter acquired
computers, office machines, equipment, machinery. machine tools, motors,
furniture, furnishings, fixtures, motor vehicles, rolling stock, processors,
tools, parts, dies, jigs, goods (other than consumer goods, farm products or
inventory), wherever located, and any interest of Borrower in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions and improvements to any of the foregoing, wherever
located.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended, and the regulations thereunder.
"ERISA Affiliate" means each trade or business (whether or not
incorporated and whether or not foreign) which is or may hereafter become a
member of a group of which Borrower is a member and which is treated as a
single employer under ERISA Section 4001(b)(1), or IRC Section 414.
"Event of Default" means the events specified in SECTION 8.
"Fair Market Value" per share of Common Stock means: (a) if the
Common Stock is traded on an exchange, then the average closing price at
which a share of Common Stock is traded on the 10 trading days prior to the
date of determination; (b) if the Common Stock is traded over-the-counter on
the NASDAQ System, then the average of the bid and asked closing prices of a
share of Common Stock on said System on the 10 trading days prior to the date
of determination; (c) if the Common Stock is designated a National Market
System security, then the average closing price at which a share of Common
Stock traded on the 10 trading days prior to the date of determination; and
(d) if neither (a), (b) nor (c) applies, then the fair market value of the
Common Stock on the date of determination, as determined by the Board of
Directors of Borrower in good faith (which determination shall be conclusive
and binding on all persons).
"General Intangibles" means all of Borrower's present and future
general intangibles and other personal property (including contract rights,
rights arising under common law, statutes or regulations, choses or things in
action, goodwill, patents, trade names, trademarks, service marks, trade
secrets, copyrights, blueprints, drawings, purchase orders, customer lists,
monies due or recoverable from pension funds, monies due under any royalty or
licensing agreements, route lists, infringement claims, computer programs,
computer discs, computer tapes, literature, reports, catalogs, deposit
accounts, insurance premium rebates, tax refunds and tax refund claims) other
than goods and Accounts, and Borrower's Books relating to any of the
foregoing.
"Hazardous Material" means any substance, material, emission or
waste which is or hereafter becomes regulated or classified as a hazardous
substance, hazardous material, toxic substance or solid waste under any
Environmental Law, asbestos, petroleum products, urea formaldehyde,
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polychlorhated biphenyls (PCBs), radon and any other hazardous or toxic
substance, material, emission or waste.
"Insolvency Proceeding" means any proceeding commenced by or
against any Person under any provision of the Bankruptcy Code or under any
other bankruptcy or insolvency law, including assignments for the benefit of
creditors, formal or informal moratoria, compositions, extensions generally
with its creditors or proceedings seeking reorganization, liquidation,
arrangement or other similar relief.
"Inventory" means all present and future inventory in which
Borrower has any interest, including goods held for sale or lease or to be
furnished under a contract of service, Borrower's present and future raw
materials, work in process, finished goods and materials used in or consumed
in Borrower's business, goods which have been returned to, repossessed by or
stopped in transit by Borrower, packing and shipping materials, wherever
located, any documents of title representing any of the above, and Borrower's
Books relating to any of the foregoing.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Lender Expenses" means all of the following: costs and expenses
including taxes, assessments and insurance premiums) required to be paid by
Borrower under any of the Loan Documents which are paid or advanced by
Lender; filing, recording, publication, appraisal (including periodic
Collateral appraisals), real estate survey, environmental audit and search
fees assessed, paid or incurred by Lender in connection with Lender's
transactions with Borrower; costs and expenses incurred by Lender in the
disbursement or collection of funds to or from Borrower; charges resulting
from the dishonor of checks; costs and expenses paid or incurred by Lender to
correct any default or enforce any provision of the Loan Documents, or in
gaining possession of, maintaining, handling, preserving, storing, shipping,
selling, preparing for sale or advertising to sell the Collateral, or any
portion thereof, irrespective of whether a sale is consummated; costs and
expenses paid or incurred by Lender that result from third party claims
against Lender covered by Borrower's indemnification of Lender in SECTION
11.4; costs and expenses paid or incurred by Lender in enforcing or defending
the Loan Documents; and Lender's reasonable attorneys fees and expenses
incurred in advising, structuring, drafting, reviewing, administering,
amending, terminating, enforcing, defending or otherwise representing Lender
in connection with the Loan Documents or the Obligations (including attorneys
fees and expenses incurred in connection with a workout, a restructuring, an
action to lift the automatic stay of Section 362 of the Bankruptcy Code, any
other action or participation by Lender in an Insolvency Proceeding
concerning Borrower or any guarantor of the Obligations or any defense or
participation by Lender in any lender liability, preference or fraudulent
conveyance actions).
"Loan Documents" means, collectively, this Agreement, any Notes,
any security agreements, pledge agreements, deeds of trust, mortgages or
other encumbrances or agreements which secure the Obligations, any guaranties
of the Obligations, any lock box or blocked account agreements and any other
agreement entered into between Borrower or any guarantor of the Obligations
and Lender relating to or in connection with this Agreement.
"Multiemployer Plan" means a multiemployer plan as defined in ERISA
Sections 3(37) or 4001(a)(3) or IRC Section 414(f) which covers employees of
Borrower or any ERISA Affiliate.
"Negotiable Collateral" means all of Borrower's present and future
letters of credit, notes, drafts, instruments, certificated and
uncertificated securities, documents, leases and chattel paper, and
Borrower's Books relating to any of the foregoing.
"Note" means any promissory note made by Borrower to the order of
Lender concurrently herewith or at any time hereafter.
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"Obligations" means loans, advances, debts, liabilities (including
all amounts charged to Borrower's loan account pursuant to any agreement
authorizing Lender to charge Borrower's loan account), obligations, fees,
lease payments, guaranties, covenants and duties owing by Borrower to Lender
of any kind and description (whether pursuant to or evidenced by the Loan
Documents, by any note or other instrument or by any other agreement between
Lender and Borrower, and irrespective of whether for the payment of money),
whether direct or indirect, absolute or contingent, due or to become due, now
existing or hereafter arising, including any debt, liability or obligation
owing from Borrower to others which Lender may obtain by assignment or
otherwise, and all interest thereon, including any interest that, but for the
provisions of the Bankruptcy Code, would have accrued, and all Lender
Expenses which Borrower is required to pay or reimburse pursuant to the Loan
Documents, by law or otherwise.
"Person" means and includes natural persons, corporations, limited
partnerships, general partnerships, limited liability company, joint
ventures, trusts, land trusts, business trusts or other organizations,
irrespective of whether they are legal entities, and governments and agencies
and political subdivisions thereof.
"Plan" means any plan described in ERISA Section 3(2) maintained
for employees of Borrower or any ERISA Affiliate, other than a Multiemployer
Plan.
"Reference Rate" means the variable rate of interest, per annum,
published by The Wall Street Journal as the "Prime Rate" and based on "the
base rate on corporate loans posted by at least 75% of the nation's 30
largest banks". The Reference Rate is nothing more nor less than an index for
determining the interest rate payable under the terms of this Agreement. The
Reference Rate is not necessarily the best rate, or any other definition of
rates, offered by the banks that establish the rate or by Lender. In the
event The Wall Street Journal ceases to publish the "Prime Rate", Lender may
substitute any similar index for the Reference Rate.
"Term Loan" means any term loan made by Lender to Borrower,
evidenced by and repayable in accordance with the terms and conditions of a
Note.
1.2 CONSTRUCTION. Unless the context of this Agreement clearly
requires otherwise, references to the plural include the singular, references
to the singular include the plural, the term "including" is not limiting and
the term "or" has the inclusive meaning generally represented by the phrase
"and/or". The words hereof, herein, hereby, hereunder, and similar terms in
this Agreement refer to this Agreement as a whole and not to any particular
provision of this Agreement. Section, subsection, clause, exhibit and
schedule references are to this Agreement unless otherwise specified. Any
reference in this Agreement or in any of the other Loan Documents to this
Agreement or any of the other Loan Documents shall include all alterations,
amendments, changes, extensions, modifications, renewals, replacements,
substitutions and supplements thereto and thereof.
1.3 ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with generally accepted
accounting principles ("GAAP") as in effect from time to time. When used
herein, the term financial statements shall include the notes and schedules
thereto.
1.4 RIDERS, EXHIBITS, ETC. The Conditions Precedent Rider to this
Agreement and all of the other riders, exhibits, addenda and schedules to
this Agreement shall be deemed incorporated herein by reference.
1.5 CODE. Any terms used in this Agreement which are defined in
the Code shall be construed and defined as set forth in the Code unless
otherwise defined herein.
2. ADVANCES AND TERMS OF PAYMENT
2.1 LOANS.
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A. REVOLVING ADVANCES; REVOLVING ADVANCE LIMIT. Upon the
request of Borrower, made at any time or from time to time during the term
hereof, and so long as no Event of Default has occurred and is continuing,
Lender shall, in its sole discretion, make advances (the "Revolving
Advances") to Borrower; provided, however, that in no event shall the
aggregate amount of the outstanding Revolving Advances be greater than, at
any time, the sum of Four Hundred Fifty Thousand Dollars ($450,000) (the
"Revolving Advance Limit"). Lender may reduce the Revolving Advance Limit or
establish reserves with respect to borrowing availability if Lender
determines, in its sole discretion, that there has occurred, or is likely to
occur, an impairment of the prospect of repayment of all or any portion of
the Obligations, the value of the Collateral or the validity or priority of
Lender's security interests in the Collateral. The Revolving Advances will be
evidenced by and repayable in accordance with the terms and conditions of a
Note of even date herewith. Any Revolving Advances made by Lender to
Borrower shall constitute Obligations and shall be secured by the Collateral.
The occurrence of a default under such Note or under any Note made in
respect of any Revolving Advances shall constitute an Event of Default
hereunder.
B. TERM LOAN. Concurrently with the funding of the initial
Revolving Advance, Lender will make a term Loan to Borrower in the original
principal amount of One Million Dollars ($1,000,000 ), to be evidenced by and
repayable in accordance with the terms and conditions of a Note of even date
herewith. Such Term Loan and any other Term Loan subsequently made by Lender
to Borrower shall constitute Obligations and shall be secured by the
Collateral. The occurrence of a default under such Note or under any Note
made in respect of any subsequent Term Loan shall constitute an Event of
Default hereunder.
C. ADVANCE LIMIT. The sum of the Revolving Advance Limit
PLUS the principal amount of all Term Loans outstanding from time to time, if
any, is referred to herein as the Advance Limit.
2.2 OVERADVANCES. All Revolving Advances made hereunder shall be
added to and deemed part of the Obligations when made. If, at any time and
for any reason, the aggregate amount of the outstanding Revolving Advances
exceeds the dollar limitations contained in SECTION 2.1A (an "Overadvance"),
then Borrower shall, upon demand by Lender, immediately pay to Lender, in
cash, the amount of such excess.
2.3 OVERADVANCE FEE. Without affecting Borrower's obligation to
immediately repay to Lender the amount of each Overadvance in accordance with
the provisions of SECTION 2.2, in the event Lender agrees to permit any
Overadvance to exist and continue, and in consideration for permitting such
Overadvance to exist and continue, Borrower shall pay to Lender a fee in an
amount equal to two percent (2.0%) per month on the amount of the Overadvance
for each day any Overadvance exists. All such fees shall be computed on the
basis of a thirty (30) day month for the actual number of days elapsed.
2.4 AUTHORIZATION TO MAKE REVOLVING ADVANCES. Borrower hereby
authorizes Lender to make the Revolving Advances based upon telephonic or
other instructions received from anyone purporting to be an Authorized
Officer, or at the discretion of Lender without instructions from or notice
to Borrower, if such Revolving Advances are necessary to satisfy any
Obligations. All requests for Revolving Advances hereunder shall specify the
date on which the requested Revolving Advance is to be made (which day shall
be a Business Day) and the amount of the requested Revolving Advance.
Requests received after 11:00 am. Pacific time on any day shall be deemed to
have been made as of the opening of business on the immediately following
Business Day. All Revolving Advances made under this Agreement shall be
conclusively presumed to have been made to, at the request of, and for the
benefit of Borrower when deposited to the credit of Borrower or otherwise
disbursed in accordance with the instructions of Borrower or in accordance
with the terms and conditions of this Agreement.
2.5 INTEREST.
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A. BASIC RATE; DEFAULT RATE. Except where specified to the
contrary in any Loan Document, the aggregate outstanding amount of all
Obligations shall bear interest at the rate of five percent (5%) per annum
above the Reference Rate. The aggregate outstanding amount of all
Obligations shall bear interest, from and after written notice by Lender to
Borrower of the occurrence of an Event of Default and without constituting a
waiver of any such Event of Default, at the rate of eight percent (8%) per
annum above the Reference Rate; PROVIDED, HOWEVER, that in the event an
Insolvency Proceeding is commenced by or against Borrower, Lender may charge
such default rate of interest without providing written notice thereof to
Borrower. All interest payable under the Loan Documents shall be computed on
the basis of a three hundred sixty (360) day year for the actual number of
days elapsed, based on the aggregate amount of the Obligations that are
outstanding on each day. Interest shall continue to accrue until all of the
Obligations are paid in full.
B. INITIAL RATE. The Reference Rate as of the date of this
Agreement is eight and one half percent (8.50%) per annum, and, therefore,
the effective rate of interest hereunder as of the date of this Agreement is
thirteen and one half percent (13.50%) per annum. The interest rate payable
by Borrower under the terms of this Agreement shall be adjusted in accordance
with any change in the Reference Rate from time to time on the date of any
such change. All interest payable by Borrower shall be due and payable on
the first day of each calendar month during the term of this Agreement.
2.6 VERIFICATION AND COLLECTION OF ACCOUNTS. Lender or Lender's
designee may, at any time, with or without notice to Borrower, (a) notify
Account Debtors of Borrower that the Accounts have been assigned to Lender
and that Lender has a security interest in the Accounts; (b) contact Account
Debtors of Borrower, either in writing or by telephone, for the purpose of
verifying the validity, amount or any other matter relating to any Accounts;
and (c) collect the Accounts directly and charge the collection costs and
expenses to Borrower's loan account. Unless and until Lender begins direct
collection of the Accounts or gives Borrower other written instructions,
Borrower shall collect all Accounts and the proceeds of other Collateral for
the benefit of Lender, receive in trust all payments thereon as Lender's
trustee and, if requested by Lender, immediately deliver said payments to
Lender in their original form as received by Borrower (subject to the terms
of any lockbox, blocked account or similar agreement entered into for the
purpose of collection of the Accounts).
2.7 CREDITING PAYMENTS. For the purpose of calculating the
availability of Revolving Advances under SECTION 2.1A, the receipt by Lender
of any wire transfer of funds, check or other item of payment shall be
applied immediately to provisionally reduce the Obligations, but such receipt
shall not be considered a payment on account unless such wire transfer is of
immediately available federal funds and is made to the appropriate deposit
account of Lender or unless and until such check or other item of payment is
honored when presented for payment. In the event any check or other item of
payment is not honored when presented for payment, Borrower shall be deemed
not to have made such payment and interest shall be recalculated accordingly.
Notwithstanding anything to the contrary contained herein, any wire transfer,
check or other item of payment received by Lender after 11:00 am. Pacific
time shall be deemed to have been received by Lender as of the opening of
business on the immediately following Business Day.
2.8 ANNUAL FEE. Borrower shall pay Lender an annual fee (the
"Annual Fee") in the amount of Eleven Thousand Five Hundred Dollars ($11,500).
The Annual Fee shall be fully earned and is due and payable on the date
that the initial Revolving Advance is made hereunder. After the anniversary
of the date of this Agreement, the Annual Fee shall be prorated and paid on a
monthly basis by Borrower for all renewal terms or so long as any of the
Obligations are outstanding.
2.9 FACILITY FEE. Borrower shall pay Lender facility fees (the
"Facility Fees") as follows:
A. A Facility Fee of Seventy Thousand Five Hundred Dollars
($70,500) shall be fully earned on the date that the initial Revolving
Advance is made hereunder and shall be payable
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by Borrower on the date that is three months after the date that the initial
Revolving Advance is made hereunder (the "3-Month Date").
B. If the principal amount of the Obligations outstanding on
the 3-Month Date exceeds $1,000,000, then an additional Facility Fee of
Seventy Thousand Five Hundred Dollars ($70,500) shall be fully earned and
shall be payable by Borrower on the 3-Month Date.
C. If the principal amount of the Obligations outstanding on
the date that is six months after the date that the initial Revolving Advance
is made hereunder (the "6-Month Date") exceeds $1,000,000, then an additional
Facility Fee of One Hundred Forty One Thousand ($141,000) shall be fully
earned and shall be payable by Borrower on the 6-Month Date.
Borrower shall 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 shall equal (a) the applicable Facility Fee divided by (b)
the Fair Market Value per share of Common Stock on the date such Facility Fee
is payable to Lender.
2.10-2.11 [INTENTIONALLY OMITTED]
2.12 AUDIT FEE. Borrower shall pay Lender an audit fee in an
amount equal to Five Hundred Dollars ($500) for each audit of Borrower
performed by Lender subsequent to the making of the initial Revolving Advance
hereunder.
2.13 LATE REPORTING FEE. Borrower shall pay Lender a fee in an
amount equal to Fifty Dollars ($50) per document per day for each Business
Day any report, financial statement or schedule required to be delivered to
Lender by this Agreement is past due.
2.14 MISCELLANEOUS FEES. Borrower shall pay Lender its customary
fees for wire transfers (including, a premium for early and late transfers),
returned checks, letter of credit guarantees and any other services provided
by Lender to Borrower that are incidental to this Agreement. Upon Borrower's
request, Lender shall provide Borrower with a written schedule of the amounts
of all such miscellaneous fees.
2.15 MAXIMUM CHARGES. In no event shall interest on the
Obligations exceed the highest lawful rate in effect from time to time. It is
not the intention of the parties hereto to make an agreement which violates
any applicable state or federal usury laws. In no event shall Borrower pay
or Lender accept or charge any interest which, together with any other
charges upon the principal or any portion thereof, exceeds the maximum lawful
rate of interest allowable under any applicable state or federal usury laws.
Should any provision of this Agreement or any existing or future Notes or
Loan Documents between the parties be construed to require the payment of
interest which, together with any other charges upon the principal or any
portion thereof, exceeds the maximum lawful rate of interest, then any such
excess shall be applied to the remaining principal balance, if any, and the
remainder refunded to Borrower.
3. TERM OF AGREEMENT AND EARLY TERMINATION
3.1 TERM. This Agreement shall become effective in accordance
with Section 14.1 and shall continue in full force and effect for a term
ending one (1) year after the date hereof and shall be deemed automatically
renewed for successive terms of one (1) month thereafter until terminated as
of the end of the initial term or any renewal term (each a "Term") by either
party giving the other at least sixty (60) days written notice.
3.2 EARLY TERMINATION. Borrower, subject to the payment of the
fee described below, may terminate this Agreement other than at the end of
the then current Term by giving Lender prior
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written notice of its intention to effect an early termination of this
Agreement. Lender may terminate this Agreement at any time upon or after the
occurrence of an Event of Default. In view of the impracticability and
extreme difficulty of ascertaining actual damages and by mutual agreement of
the parties as to a reasonable calculation of Lender's lost profits as a
result of an early termination of this Agreement, in either of the instances
described in the preceding two sentences, Borrower shall pay to Lender, upon
the effective date of such early termination and in addition to all other
Obligations, an early termination fee (the "Early Termination Fee") in an
amount equal to Eight Thousand Dollars ($8,000) per month for the period
commencing on the effective date of such early termination and ending on the
first anniversary of the date hereof. No Early Termination Fee is payable for
an early termination following the first anniversary of the date hereof. The
Early Termination Fee shall be presumed to be the amount of damages sustained
by Lender as the result of the early termination and Borrower agrees that it
is reasonable under the circumstances currently existing. The Early
Termination Fee shall be deemed included in the Obligations. Notwithstanding
anything herein to the contrary, if and to the extent the Early Termination
Fee constitutes interest under applicable law, the Early Termination Fee,
when added to all other interest contracted for, charged or received under
this Agreement or any other Loan Documents, shall not exceed, and shall be
limited to an amount which constitutes, interest at the maximum lawful rate
of interest allowable under applicable law.
3.3 EFFECT OF TERMINATION. Upon termination of this Agreement,
all of the Obligations shall be immediately due and payable in full. No
termination of this Agreement shall relieve or discharge Borrower of
Borrower's duties, obligations and covenants hereunder until all of the
Obligations have been fully and indefeasibly paid and satisfied, and Lender's
continuing security interest in the Collateral shall remain in effect until
all of the Obligations have been fully and indefeasibly paid and satisfied.
4. CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST. Borrower hereby grants to Lender
a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each
and all of its covenants and duties under the Loan Documents. Lender's
security interest in the Collateral shall attach to all Collateral without
further act on the part of Lender or Borrower. Other than sales of Inventory
(including Inventory consisting of Equipment but not Equipment used in the
production of goods sold by Borrower) to buyers in the ordinary course of
business, Borrower has no authority, express or implied, to dispose of any
item or portion of the Collateral.
4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral,
including proceeds, is evidenced by or consists of Negotiable Collateral,
Borrower shall, upon the request of Lender, immediately endorse and assign
such Negotiable Collateral to Lender and deliver physical possession of such
Negotiable Collateral to Lender.
4.3 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall
execute and deliver to Lender, concurrently with Borrower's execution and
delivery of this Agreement and at any time thereafter at the request of
Lender, all financing statements, continuation financing statements, fixture
filings, security agreements, chattel mortgages, pledges, assignments,
endorsements of certificates of title, applications for title, affidavits,
reports, notices, schedules of accounts, letters of authority, and all other
documents that Lender may reasonably request, in form satisfactory to Lender,
to perfect and continue perfected Lender's security interest in the
Collateral and in order to fully consummate all of the transactions
contemplated hereunder and under the other Loan Documents.
4.4 POWER OF ATTORNEY. Borrower hereby irrevocably designates,
makes, constitutes and appoints Lender (and any of Lender's officers,
employees or agents designated by Lender) as Borrower's true and lawful
attorney-in-fact, and Lender, or Lender's agent. may, without notice to
Borrower and in either Borrower's or Lender's name, but at the cost and
expense of Borrower, at such time
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or times as Lender in its sole discretion may determine: (a) demand payment
of the Accounts from the Account Debtors, enforce payment of the Accounts by
legal proceedings or otherwise, and generally exercise all of Borrower's
rights and remedies with respect to the collection of the Accounts; (b) take
control, in any manner, of any item of payment or proceeds relating to any
Collateral; (c) prepare, file and sign Borrower's name to a proof of claim in
bankruptcy or similar document against any Account Debtor or to any notice of
lien, assignment or satisfaction of lien or similar document in connection
with any of the Collateral; (d) sign Borrower's name on any of documents
described in Section 4.3 or on any other similar documents to be executed,
recorded or filed in order to perfect or continue perfected Lender's security
interest in the Collateral; (e) sign Borrower's name on any invoices, bills
of lading, freight bills, chattel paper, documents, instruments or similar
documents or agreements relating to the Accounts, Inventory or other
Collateral, drafts against Account Debtors, schedules and assignments of
Accounts, verifications of Accounts and notices to Account Debtors; (f) send
requests for verification of Accounts; (g) endorse Borrower's name on any
checks, notes, acceptances, money orders, drafts or other items of payment or
proceeds relating to any Collateral that may come into Lender's possession
and deposit the same to the account of Lender for application to the
Obligations; (h) do all other acts and things necessary, in Lender's
determination, to fulfill Borrower's obligations under this Agreement or any
of the other Loan Documents; (i) at any time that an Event of Default has
occurred and is continuing, notify the post office authorities to change the
address for delivery of Borrower's mail to an address designated by Lender,
to receive and open all mail addressed to Borrower, and to retain all mail
relating to the Collateral and forward all other mail to Borrower; (j) at any
time that an Event of Default has occurred and is continuing, use the
information recorded on or contained in any data processing equipment and
computer hardware and software relating to the Accounts, Inventory, Equipment
and any other Collateral and to which Borrower has access; (k) at any time
that an Event of Default has occurred and is continuing, make, settle and
adjust all claims under Borrower's policies of insurance, make all
determinations and decisions with respect to such policies of insurance and
endorse the name of Borrower on any check, draft, instrument or other item of
payment for the proceeds of such policies of insurance; (l) at any time that
an Event of Default has occurred and is continuing, sell or assign any of the
Accounts and other Collateral upon such terms, for such amounts and at such
time or times as Lender deems advisable; and (m) at any time that an Event of
Default has occurred and is continuing, settle, adjust or compromise disputes
and claims respecting the Accounts directly with Account Debtors, for amounts
and upon terms that Lender determines to be reasonable, and, in furtherance
thereof, execute and deliver any documents and releases that Lender
determines to be necessary. The appointment of Lender as Borrower's
attorney-in-fact and each and every one of Lender's rights and powers, being
coupled with an interest, is irrevocable until all of the Obligations have
been fully repaid and performed and this Agreement has been terminated.
4.5 RIGHT TO INSPECT. Lender, through any of its officers,
employees or agents, shall have the right at any time or times during
Borrower's usual business hours, or during the usual business hours of any
third party having control over any of Borrower's Books. to inspect
Borrower's Books in order to verify the amount or condition of, or any other
matter relating to, the Collateral or Borrower's financial condition. Lender
also shall have the right at any time or times during Borrower's usual
business hours to inspect and examine the Inventory and the Equipment and to
check and test the same as to quality, quantity, value and condition. If an
Event of Default has occurred or if Lender reasonably believes that an Event
of Default has occurred, Lender may conduct any of the inspections referenced
in this SECTION 4.5 at any time without regard to Borrower's or any third
party's usual business hours.
5. REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties to
Lender and each such representation and warranty shall be deemed to be
repeated with each Revolving Advance made by Lender and shall be conclusively
presumed to have been relied on by Lender regardless of any investigation
made or information possessed by Lender. The following representations and
warranties shall be cumulative and in addition to any and all other
representations and warranties which Borrower shall now or hereafter give, or
cause to be given, to Lender.
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5.1 NO PRIOR ENCUMBRANCES; SECURITY INTERESTS. Borrower has good
and indefeasible title to the Collateral, free and clear of liens, claims,
security interests or encumbrances, except (a) the security interests granted
to Lender by Borrower, (b) the security interests disclosed in the UCC
searches attached hereto as SCHEDULE A and (c) any security interest which
Borrower has disclosed in writing to Lender and to which Lender has given its
prior written consent.
5.2 ACCOUNTS. All of Borrower's Accounts constitute bona fide
vesting obligations created by the sale and delivery of Inventory or the
rendition of services to Account Debtors in the ordinary course of Borrower's
business, and, in the case of Accounts created by the sale and delivery of
Inventory, the Inventory giving rise to such Accounts has been delivered to
the Account Debtor.
5.4 LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and
Equipment are not stored with a bailee, warehouseman, processor or similar
party unless Lender has consented thereto in writing and are located only at
the following locations: 1745 McCandless Drive, Milpitas, California
95035-8024, and 3 Civic Plaza, Suite 265, Newport Beach, California 92660;
however demonstration units typically are not stored at this location and are
in the possession of sales personnel, representatives and/or customers in the
ordinary course of business.
5.5 INVENTORY RECORDS. Borrower keeps correct and accurate
records itemizing and describing the kind, type, quality and quantity of the
inventory and Borrower's cost therefor.
5.6 LOCATION OF PRINCIPAL OFFICE. The principal office of
Borrower is located at the address stated in the first paragraph of this
Agreement.
5.7 DUE INCORPORATION AND QUALIFICATION. Borrower is a
corporation duly organized and existing and in good standing under the laws
of the state of its incorporation and is qualified or licensed to do business
in, and is in good standing in, any state in which the failure to be
qualified or licensed and in good standing could have a material adverse
effect on Borrower's business or the Collateral.
5.8 FICTITIOUS NAME(S). Borrower is conducting its business at
the present time under the following trade or fictitious name(s) : none.
Borrower has complied with the fictitious name laws of all jurisdictions in
which compliance is required in connection with its use of such name(s).
During the five (5) years prior to the date of this Agreement, Borrower
conducted business under the following trade or fictitious name(s) in
addition to those stated above: none
5.9 PERMITS AND LICENSES. Borrower holds all licenses, permits,
franchises, approvals and consents as are required in the conduct of its
business and the ownership and operation of its properties.
5.10 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery and
performance of the Loan Documents to which Borrower is a party are within
Borrower's corporate powers, have been duly authorized and are not in
conflict with nor constitute a breach of any provision contained in
Borrower's Articles or Certificate of Incorporation or Bylaws, nor will they
create a default under any material agreement to which Borrower is a party.
5.11 LITIGATION. There are no actions or proceedings pending by or
against Borrower before any court or administrative agency and Borrower has
no knowledge or notice of any pending, threatened or imminent litigation,
governmental investigations, or claims, complaints, actions or prosecutions
involving Borrower or any guarantor of the Obligations, except for ongoing
collection matters in which Borrower is the plaintiff and such matters as
have been disclosed to Lender in writing.
5.12 TAXES. All assessments and taxes, whether real, personal or
otherwise, due or payable by, or imposed, levied or assessed against Borrower
or any of its property or in connection with Borrower's business have been
paid in full prior to delinquency or the expiration of any extension period.
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5.13 NO MATERIAL ADVERSE CHANGE IN FINANCIAL CONDITION. All
financial statements relating to Borrower which have been or may hereafter be
delivered by Borrower to Lender have been prepared in accordance with GAAP
and fairly present Borrower's financial condition as of the date thereof and
Borrower's results of operations for the period then ended. There has been no
material adverse change in the financial condition of Borrower since the date
of the most recent of such financial statements submitted to Lender.
5.14 SOLVENCY. Borrower is solvent and able to pay its debts
(including trade debts) as they mature. No transfer of property is being
made by Borrower and no obligation is being incurred by Borrower in
connection with the transactions contemplated by this Agreement or the other
Loan Documents with the intent to hinder, delay or defraud either present or
future creditors of Borrower.
5.15 ERISA. Neither Borrower, nor any ERISA Affiliate nor any Plan
is or has been in violation of any of the provisions of ERISA, any of the
qualification requirements of IRC Section 401(a), or any of the published
interpretations thereof. No lien upon the assets of Borrower has arisen with
respect to any Plan. No prohibited transaction within the meaning of ERISA
Section 406 or IRC Section 4975(c) has occurred with respect to any Plan.
Neither Borrower nor any ERISA Affiliate has incurred any withdrawal
liability with respect to any Multiemployer Plan. Borrower and each ERISA
Affiliate have made all contributions required to be made by them to any Plan
or Multiemployer Plan when due. There is no accumulated funding deficiency
in any Plan, whether or not waived.
5.16 ENVIRONMENTAL LAWS AND HAZARDOUS MATERIALS. Borrower has
complied with all Environmental Laws. Except as previously disclosed to
Lender in writing, Borrower has not caused or permitted any Hazardous
Materials to be located, incorporated, generated, stored, manufactured,
transported to or from, released, disposed of or used at, upon, under or
within any premises at which Borrower conducts its business, or in connection
with Borrower's business. To the best of Borrower's knowledge, no prior
owner or operator of any premises at which Borrower conducts its business has
caused or permitted any of the above to occur at, upon, under or within any
of such premises.
5.17 INTELLECTUAL PROPERTY. Borrower does not own or have rights
as licensee in or to any trademarks or patents or have any trademark or
patent applications pending, except as disclosed in SCHEDULE B attached
hereto.
5.18 LABOR AND EMPLOYMENT DISPUTES. There are no pending
grievances, disputes or controversies with any union or other organization of
Borrower's employees, or pending threats of strikes or work stoppages, or
demands for collective bargaining by any union or other organization of
Borrower's employees.
5.19 SENIOR INDEBTEDNESS. Borrower shall perform and comply with
all obligations with respect to any senior indebtedness to which the
Obligations under the Loan Documents are subordinated.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that during the term of this
Agreement and until payment in full of the Obligations, and unless Lender
shall otherwise consent in writing (which consent may be granted or denied in
Lender's sole and absolute discretion), Borrower shall do all of the
following:
6.1 ACCOUNTING SYSTEM. Borrower at all times shall maintain a
standard and modern system of accounting in accordance with GAAP with ledger
and account cards or computer tapes, disks, printouts and records pertaining
to the Collateral which contain information as may from time to time be
requested by Lender. Borrower also shall keep proper books of account
showing all sales, claims and allowances on its Inventory.
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6.2 COLLATERAL REPORTS. Borrower shall deliver to Lender, no
later than the fifteenth day of each month during the term of this Agreement,
a detailed aging of the Accounts, a reconciliation statement and a summary
aging, by vendor, of all accounts payable and any book overdraft. Borrower
shall deliver to Lender, as Lender may from time to time require, collection
reports, sales journals, invoices, original delivery receipts, customers'
purchase orders, shipping instructions, bills of lading and other
documentation respecting shipment arrangements. Absent such a request by
Lender, copies of all such documentation shall be held by Borrower as
custodian for Lender.
6.3 RETURNS. Returns and allowances, if any, as between Borrower
and its Account Debtors, shall be permitted by Borrower on the same basis and
in accordance with the usual and customary practices of Borrower as they
exist at the time of the execution and delivery of this Agreement. If any
Account Debtor returns any Inventory to Borrower, Borrower shall promptly
determine the reason for such return and, if Borrower accepts such return,
issue a credit memorandum (with a copy to be sent to Lender) in the
appropriate amount to such Account Debtor. Borrower shall promptly notify
Lender of all returns and recoveries and of all disputes and claims.
6.4 DESIGNATION OF INVENTORY. Borrower shall now and from time to
time hereafter. but not less frequently than monthy, execute and deliver to
Lender a designation of Inventory specifying Borrower's cost and the
wholesale market value of Borrower's raw materials, work in process and
finished goods, and further specifying such other information as Lender may
reasonably request.
6.5 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall
deliver to Lender: (a) as soon as available, but in any event within thirty
(30) days after the end of each of Borrower's fiscal quarters during each of
Borrower's fiscal years, a company prepared balance sheet and profit and loss
statement covering Borrower's operations during such period; and (b) as soon
as available, but in any event within ninety (90) days after the end of each
of Borrower's fiscal years, financial statements of Borrower for each such
fiscal year, audited by independent certified public accountants acceptable
to Lender. Notwithstanding the foregoing, Lender reserves the right to
require Borrower to provide Lender with company prepared financial statements
on a monthly (rather than quarterly) basis. All such annual financial
statements shall include a balance sheet and profit and loss statement,
together with the accountants' letter to management. Borrower shall also
deliver Borrower's Form 10-Qs, 10-Ks or 8-Ks, and any other filings made by
Borrower with the Securities and Exchange Commission, if any, as soon as the
same become available, and any other report reasonably requested by Lender
relating to the Collateral or the financial condition of Borrower, including
financial projections, and a certificate signed by the chief financial
officer or chief executive officer of Borrower to the effect that all
reports, statements or computer prepared information of any kind or nature
delivered or caused to be delivered to Lender under this Section 6.5 fairly
present the financial condition of Borrower and that there exists on the date
of delivery of such certificate to Lender no condition or event which
constitutes an Event of Default.
6.6 LITIGATION. Borrower shall promptly notify Lender in writing
of any litigation, governmental investigations or criminal prosecutions
involving Borrower, other than collection matters in which Borrower is the
plaintiff.
6.7 TAX RETURNS, RECEIPTS. Borrower shall deliver to Lender
copies of each of Borrower's federal income tax returns, and any amendments
thereto, within thirty (30) days after the filing thereof with the Internal
Revenue Service. Furthermore, Borrower shall deliver to Lender, promptly
upon request by Lender, satisfactory evidence of Borrower's payment of all
federal withholding taxes required to be paid by Borrower.
6.8 GUARANTOR TAX RETURNS. Borrower shall cause each guarantor of
the Obligations to deliver to Lender copies of such guarantor's federal
income tax returns within thirty (30) days after the filing thereof with the
Internal Revenue Service.
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6.9 TITLE TO EQUIPMENT. Upon Lender's request, Borrower shall
immediately deliver to Lender, properly endorsed, any and all evidences of
ownership of, or certificates of title or applications for title to, any
items of Equipment.
6.10 MAINTENANCE OF EQUIPMENT. Borrower shall keep and maintain
the Equipment in good operating condition and repair and shall make all
necessary replacements thereto so that the value and operating efficiency
thereof shall at all times be maintained and preserved. Borrower shall not
permit any item of Equipment to become a fxture to real estate or an
accession to other property, and the Equipment is now and shall at all times
remain personal property.
6.11 TAXES. All assessments and taxes, whether real, personal or
otherwise, due or payable by, or imposed, levied or assessed against Borrower
or any of its property or in connection with Borrower's business shall be
paid in full prior to delinquency or the expiration of any extension period.
Borrower shall make due and timely payment or deposit of all federal, state
and local taxes, assessments or contributions required of it by law and will
execute and deliver to Lender, on demand, appropriate certificates attesting
to the payment or deposit thereof. Borrower shall make timely payment or
deposit of all tax payments and withholding taxes required of it by
applicable laws, including those laws conceming F.I.C.A., F.U.T.A., state
disability and local, state and federal income taxes, and shall, upon
request, fumish Lender with proof satisfactory to Lender indicating that
Borrower has made such payments or deposits.
6.12 INSURANCE. Borrower, at its expense, shall keep and maintain
the Collateral insured against all risk of loss or damage from fire, theft,
vandalism, malicious mischief, explosion, sprinklers and all other hazards
and risks of physical damage included within the meaning of the term
"extended coverage" in such amounts as are ordinarily insured against by
other similar businesses. Borrower shall also keep and maintain
comprehensive general public liability insurance and property damage
insurance, and insurance against loss from business interruption, insuring
against all risks relating to or arising from Borrower's ownership and use of
the Collateral and Borrower's other assets and the operation of Borrower's
business. All such policies of insurance shall be in such form, with such
companies and in such amouns as may be satisfactory to Lender. Borrower
shall deliver to Lender certified copies of such policies of insurance and
evidence of the payments of all premiums therefor. All such policies of
insurance (except those of public liability and property damage) shall
contain a Lender's Loss Payable endorsement in a form satisfactory to Lender,
naming Lender as sole loss payee thereof, and shall contain a waiver of
warranties. All proceeds payable under any such policy shall be payable to
Lender to be applied to the Obligations.
6.13 NO OFFSETS OR COUNTERCLAIMS. All payments hereunder and under
the other Loan Documents made by or on behalf of Borrower shall be made
without offset or counterclaim, and Borrower hereby waives any right to
offset, against the repayment of the Obligations, any claims it may have
against Lender.
6.14 LENDER EXPENSES. Borrower shall immediately and without
demand reimburse Lender for all sums expended by Lender which constitute
Lender Expenses and Borrower hereby authorizes and approves all Revolving
Advances and payments by Lender for items constituting Lender Expenses.
Borrower acknowledges that Lender Expenses include, among other things, (a)
Lender's reasonable attorneys fees and expenses incurred in defending or
otherwise representing Lender concerning the Loan Documents or the
Obligations and (b) charges resulting from the dishonor of checks. Since
Lender Expenses are a part of the Obligations which are secured by the
Collateral, Lender shall not be required to discharge any lien or terminate
any security interest in the Collateral unless and until (y) Borrower and
Lender execute a mutual general release of liability and indemnification in
favor of and acceptable to Lender and (z) to the extent another financial
institution refinances the Obligations, such financial institution delivers
an agreement. acceptable to Lender, to indemnify Lender for loss arising from
checks delivered to Lender for collection and payment of the Obligations
which are returned for non-payment or for any other reason.
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6.15 COMPLIANCE WITH LAW. Borrower shall comply with the
requirements of all applicable laws, rules, regulations and orders of
governmental authorities relating to Borrower and the conduct of Borrower's
business, including the Fair Labor Standards Act and the Americans with
Disabilities Act.
6.16 LOCATION OF INVENTORY AND EQUIPMENT. Borrower shall keep the
Inventory and Equipment only at the locations identified in SECTION 5.5.
6.17 ENVIRONMENTAL LAWS AND HAZARDOUS MATERIALS. Borrower shall
not permit any lien under any Environmental Law to be filed against any of
the Collateral or any of Borrower's real property in which Lender holds a
lien, and will promptly notify Lender of any proceeding, inquiry or claim
relating to any alleged violation of any Environmental Law, or any alleged
loss, damage or injury resulting from any Hazardous Material. Lender shall
have the right to join and participate in, as a party if it so elects, any
legal or administrative proceeding initiated against Borrower or any
guarantor of the Obligations with respect to any Hazardous Material or in
connection with any Environmental Law.
6.18 MANUFACTURING, DEVELOPMENT AND PROFITABILITY MILESTONES.
A. Commencing January 1, 1998, Borrower's sales of products
under the OEM Purchase Agreement dated May 28, 1997, shall be at least
$200,000 per quarter.
B. Borrower shall perform all of its obligations under the
Collaboration Agreement with Work GmbH and, unless the Collaboration
Agreement is otherwise terminated, Borrower shall use best efforts to cause
Work GmbH to deliver five fully functional pilot run Modules to Borrower
under the terms of the Collaboration Agreement no later than March 30, 1998.
C. Commencing with the three months ending August 31, 1998,
Borrower shall maintain positive net income on a rolling three month basis
(excluding any fees payable under this Agreement).
7. NEGATIVE COVENANTS
Borrower covenants and agrees that during the term of this
Agreement and until payment in full of the Obligations, Borrower will not do
any of the following without Lender's prior written consent (which consent
may be granted or denied in Lender's sole and absolute discretion):
7.1 INDEBTEDNESS. Create, incur, assume, permit or otherwise
become liable with respect to any indebtedness ouside of the ordinary and
usual course of Borrower's business, except (a) indebtedness set forth in
Borrower's latest financial statements submitted to Lender prior to the date
of this Agreement and renewals or extensions of such indebtedness and (b) the
Obligations.
7.2 LIENS. Create, incur, assume or permit to exist any security
interest, lien, pledge, mortgage or encumbrance on any Collateral or on any
of Borrower's real property in which Lender holds a lien, except (a) the
security interests granted to Lender by Borrower, (b) the security interests
disclosed in the UCC searches attached hereto as SCHEDULE A and (c) any
security interest which Borrower has disclosed in writing to Lender and to
which Lender has given its prior written consent.
7.3 EXTRAORDINARY TRANSACTIONS. Enter into any transaction not in
the ordinary and usual course of Borrower's business, including the sale,
lease or other disposition of, whether by sale or otherwise, any of
Borrower's assets other than sales of Inventory (including Inventory
consisting of Equipment but not Equipment used in the production of goods
sold by Borrower) in the ordinary and usual course of Borrower's business; or
make any advance, loan or capital contribution to any Person except in the
ordinary and usual course of Borrower's business.
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7.4 CHANGE NAME. Change Borrower's name, business structure or
identity, or add any new fictitious name.
7.5 FUNDAMENTAL CHANGES. Enter into any acquisition, merger,
consolidation. reorganization or recapitalization, or reclassify its capital
stock, or liquidate, wind up or dissolve itself (or suffer any liquidation or
dissolution), or acquire by purchase or otherwise all or substantially all of
the assets, stock or other beneficial ownership interest of any other Person.
7.6 GUARANTY. Guaranty or otherwise become in any way liable with
respect to the obligations of any third party except by endorsement of
instruments or items of payment for deposit to the account of Borrower for
negotiation and delivery to Lender.
7.7 RESTRUCTURE. Make any change in Borrower's capital structure
or in the principal nature of Borrower's business operations.
7.8 PREPAYMENTS. Prepay any indebtedness owing to any third
party.
7.9 [INTENTIONALLY OMITTED]
7.10 COMPENSATION. Pay total compensation, including salaries,
withdrawals, fees, bonuses, commissions, drawing accounts, management fees or
other paymants, whether directly or indirectly, in money or otherwise, during
any fiscal year to all of Borrower's executives, officers, shareholders,
affiliates, and directors (or any relatives thereof) in an aggregate amount
in excess of one hundred thirty percent (130 %) of those paid in the prior
fiscal year.
7.11 LOANS TO INSIDERS. Make any loans, advances or extensions of
credit to any officer, director, executive, employee or shareholder of
Borrower, or any relative of any of the foregoing, or to any entity which is
a subsidiary of, related to, affiliated with or has common shareholders,
officers or directors with Borrower, which when aggregated with all other
loans, advances or extensions of credit to any or all of the above Persons at
any time outstanding during the term of this Agreement, exceeds Ten Thousand
Dollars ($10,000 ).
7.12 CAPITAL EXPENDITURES. Make any capital expenditure, or any
commitment therefor, in excess of Four Hundred Thousand Dollars ($400,000)
for any individual transaction or where the aggregate amount of such capital
expenditures, made or committed for in any fiscal year, is in excess of Four
Hundred Thousand Dollars ($400,000).
7.13 CONSIGNMENTS. Consign any Inventory; or sell any Inventory on
bill and hold, sale on approval or other conditional terms of sale.
7.14 DISTRIBUTIONS. Make any distribution or declare or pay any
dividends (in cash or in stock) on, or purchase, acquire, redeem or retire
any of Borrower's capital stock, of any class, whether now or hereafter
outstanding.
7.15 ACCOUNTING METHODS. Modify or change its method of accounting
or enter into, modify or terminate any agreement currently existing or at any
time hereafter entered into with any third party accounting firm or service
bureau for the preparation or storage of Borrower's accounting records
without said accounting firm or service bureau agreeing to provide Lender
information regarding the Collateral or Borrower's fnancial condition.
Borrower waives the right to assert a confidential relationship, if any, it
may have with any accounting firm or service bureau in connection with any
information requested by Lender pursuant to or in accordance with this
Agreement, and agrees that Lender may contact directly any such accounting
firm or service bureau in order to obtain such information.
7.16 SUSPENSION. Suspend or go out of business.
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7.17 LOCATION OF PRINCIPAL OFFICE. Relocate its principal office
to a new location unless Lender is given thirty (30) days prior written
notice thereof.
8. EVENTS OF DEFAULT
The occurrence of any one or more of the following events shall
constitute an "Event of Default" under this Agreement.
8.1 FAILURE TO PAY. Borrower fails to pay when due and payable,
or when declared due and payable, any portion of the Obligations (whether
principal, interest, fees and charges due Lender, reimbursement of Lender
Expenses, or other amounts constituting Obligations);
8.2 FAILURE TO PERFORM. Borrower fails or neglects to perform,
keep or observe any term, provision, condition, representation, warranty,
covenant or agreement contained in this Agreement, in any of the other Loan
Documents or in any other present or future agreement between Borrower and
Lender;
8.3 MISREPRESENTATION. Any misstatement or misrepresentation now
or hereafter exists in any warranty, representation, statement or report made
to Lender by Borrower or any officer, employee, agent or director of
Borrower, or if any such warranty or representation is withdrawn by any of
them;
8.4 MISREPRESENTATION OF COLLATERAL. Any writing, document,
aging, certificate or other evidence of the Accounts shall be incomplete,
incorrect or misleading at the time the same is furnished to Lender; or
Borrower shall fail to immediately remit to Lender proceeds of Accounts and
other Collateral, pursuant to the terms of SECTION2.6;
8.5 MATERIAL ADVERSE CHANGE. There is a material adverse change
in Borrower's business or financial condition;
8.6 MATERIAL IMPAIRMENT. There is a material impairment of the
prospect of repayment of any portion of the Obligations owing to Lender or a
material impairment of the value or priority of Lender's security interests
in the Collateral;
8.7 LEVY OR ATTACHMENT. Any material portion of Borrower's assets
is attached, seized, subjected to a writ or distress warrant, or is levied
upon, or comes into the possession of any judicial officer;
8.8 INSOLVENCY BY BORROWER. An Insolvency Proceeding is commenced
by Borrower;
8.9 INSOLVENCY AGAINST BORROWER. An Insolvency Proceeding is
commenced against Borrower;
8.10 INJUNCTION AGAINST BORROWER. Borrower is enjoined, restrained
or in any way prevented by court order from continuing to conduct all or any
material part of its business affairs;
8.11 GOVERNMENT LIEN. A notice of lien, levy or assessment is
filed of record with respect to any of Borrower's assets by the United States
government, or any department, agency or instrumentality thereof, or by any
state, county, municipal or other governmental agency, or any taxes or debts
owing at any time hereafter to any one or more of such entities becomes a
lien, whether choate or otherwise, upon any of Borrower's assets and the same
is not paid on the payment date thereof;
8.12 JUDGMENT. A judgment is entered against Borrower;
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8.13 CROSS DEFAULT TO MATERIAL AGREEMENTS. There is a default in
any material agreement to which Borrower is a party with one or more third
parties or by which Borrower or Borrower's property or assets are bound;
8.14 SUBORDINATED DEBT PAYMENTS. Borrower makes any payment on
account of indebtedness that has been contractually subordinated in right of
payment to the payment of the Obligations, except to the extent such payment
is permitted by the terms of the subordination agreement applicable to such
indebtedness;
8.15 LOSS OF GUARANTOR. Any guarantor of the Obligations dies,
terminates his/her/its guaranty, becomes the subject of an Insolvency
Proceeding, or contests his/her/its obligations under such a guaranty; or if
any such guaranty of the Obligations ceases to be valid or enforceable for
any reason;
8.16 ERISA VIOLATION. A prohibited transaction within the meaning
of ERISA Section 406 or IRC Section 4975(c) shall occur with respect to a
Plan which could have a material adverse effect on the financial condition of
Borrower; any lien upon the assets of Borrower in connection with any Plan
shall arise; Borrower or any ERISA Affiliate shall completely or partially
withdraw from a Multiemployer Plan and such withdrawal could, in the opinion
of Lender, have a material adverse effect on the financial condition of
Borrower, Borrower or any of its ERISA Affiliates shall fail to make full
payment when due of all amounts which Borrower or any of its ER1SA Affiliates
may be required to pay to any Plan or any Multiemployer Plan as one or more
contributions thereto; Borrower or any of its ERISA Affiliates creates or
permits the creation of any accumulated funding deficiency, whether or not
waived; the voluntary or involuntary termination of any Plan which
termination could, in the opinion of Lender, have a material adverse effect
on the financial condition of Borrower, or Borrower shall fail to notify
Lender promptly and in any event within ten (10) days of the occurrence of
any event which constitutes an Event of Default under this clause or would
constitute such an Event of Default upon the exercise of Lender's judgment;
or
8.17 CRIMINAL PROCEEDINGS. Criminal proceedings are instituted
against Borrower, any member of Borrower's senior management or any guarantor
of the Obligations that could result in the forfeiture or loss of Collateral
or a material impairment of the financial condition of Borrower or any
guarantor of the Obligations.
Notwithstanding anything contained in this SECTION 8 to the
contrary, Lender shall refrain from exercising its rights and remedies and an
Event of Default shall not be deemed to have occurred by reason of the
occurrence of any of the events set forth in SECTIONS 8.7, 8.9, 8.11 or 8.12
of this Agreement if, within ten (10) days from the date thereof, the same is
released, discharged, dismissed, bonded against or satisfied; provided,
however, Lender shall not be obligated to make Revolving Advances to Borrower
during such period.
9. LENDER'S RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES. Upon the occurrence of an Event of
Default, Lender may, at its election, without notice of its election and
without demand, do any one or more of the following, all of which are
authorized by Borrower;
(a) Declare all Obligations, whether evidenced by this
Agreement, any of the other Loan Documents or otherwise, immediately due and
payable in full;
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement, any of the other Loan Documents or
any other agreement between Borrower and Lender;
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(c) Terminate this Agreement and any of the other Loan
Documents as to any future liability or obligation of Lender, but without
affecting Lender's rights and security interest in the Collateral and without
affecting the Obligations;
(d) Settle or adjust disputes and claims directly with
Account Debtors for amounts and upon terms which Lender considers advisable
and, in such cases, Lender will credit Borrower's loan account with only the
net amounts received by Lender in payment of such disputed Accounts, after
deducting all Lender Expenses incurred or expended in connection therewith;
(e) Cause Borrower to hold all returned Inventory in trust
for Lender, segregate all returned Inventory from all other property of
Borrower or in Borrower's possession and conspicuously label said returned
Inventory as the property of Lender;
(f) Without notice to or demand upon Borrower or any
guarantor, make such payments and do such acts as Lender considers necessary
or reasonable to protect its security interest in the Collateral. Borrower
agrees to assemble the Collateral if Lender so requires and to deliver or
make the Collateral available to Lender at a place designated by Lender.
Borrower authorizes Lender to enter any premises where the Collateral is
located, to take and maintain possession of the Collateral, or any part of
it, and to pay, purchase, contest or compromise any encumbrance, charge or
lien that in Lender's determination appears to be prior or superior to its
security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's owned premises, Borrower hereby grants
Lender a license to enter into possession of such premises and to occupy the
same, without charge, in order to exercise any of Lender's rights or remedies
provided herein, at law, in equity, or otherwise;
(g) Without notice to Borrower (such notice being expressly
waived) and without constituting a retention of any collateral in
satisfaction of an obligation (within the meaning of Section 9505 of the
Code), set off and apply to the Obligations any and all (i) balances and
deposits of Borrower held by Lender (including any amounts received in a
lockbox or blocked account), or (ii) indebtedness at any time owing to or for
the credit or the account of Borrower held by Lender;
(h) Hold, as cash collateral, any and all balances and
deposits of Borrower held by Lender (including any amounts received in a
lockbox or blocked account) to secure the Obligations;
(i) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale and sell (in the manner provided for
herein) the Collateral. Lender is hereby granted a license or other right to
use, without charge, Borrower's labels, patents, copyrights, rights of use of
any name, trade secrets, trade names, trademarks, service marks, and
advertising matter, or any property of a similar nature, as it pertains to
the Collateral, in completing production of, advertising for sale and selling
any Collateral. Borrower's rights under all licenses and all franchise
agreements shall inure to Lender's benefit;
(j) Sell the Collateral at either a public or private sale,
or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's premises) as
Lender determines is commercially reasonable. It is not necessary that the
Collateral be present at any such sale;
(k) Lender shall give notice of the disposition of the
Collateral as follows:
(1) Lender shall give the Borrower and each holder of a
security interest in the Collateral who has filed with Lender a written
request for notice, a notice in writing of the time and place of public sale
or, if the sale is a private sale or some other disposition other than a
public sale is to be made, then the time on or after which the private sale
or other disposition is to be made;
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(2) The notice shall be personally delivered or mailed,
postage prepaid, to Borrower as provided in Section 12, at least five (5)
calendar days before the date fixed for the sale, or at least five (5)
calendar days before the date on or after which the private sale or other
disposition is to be made, unless the Collateral is perishable or threatens
to decline speedily in value. Notice to Persons other than Borrower claiming
an interest in the Collateral shall be sent to such addresses as they have
furnished to Lender:
(3) If the sale is to be a public sale, Lender shall
also give notice of the time and place by publishing a notice one time at
least five (5) calendar days before the date of the sale in a newspaper of
general circulation in the county in which the sale is to be held;
(l) Lender may credit bid and purchase at any public sale;
(m) Any deficiency that exists after disposition of the
Collateral as provided above shall be paid immediately by Borrower. Any
excess will be remitted without interest by Lender to the party or parties
legally entitled to such excess; and
(n) In addition to the foregoing, Lender shall have all
rights and remedies provided by law and any rights and remedies contained in
any other Loan Documents. All such rights and remedies shall be cumulative.
9.2 NO WAIVER. No delay on the part of Lender in exercising any
right, power or privilege under this Agreement shall operate as a waiver, nor
shall any single or partial exercise of any right, power or privilege under
this Agreement or otherwise, preclude other or further exercise of the right,
power or privilege or the exercise of any other right, power or privilege.
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10. TAXES AND EXPENSES REGARDING THE COLLATERAL
If Borrower fails to pay any monies (whether taxes, assessments,
insurance premiums or otherwise) due to third parties regarding the
Collateral, or fails to make any deposits or furnish any required proof of
payment or deposit, or fails to perform any of Borrower's other covenants
under the terms of this Agreement, then in its discretion and without prior
notice to Borrower, Lender may do any or all of the following: (a) make any
payment which Borrower has failed to pay or any part thereof; (b) set up such
reserves in Borrower's loan account as Lender deems necessary to protect
Lender from the exposure created by such failure; (c) obtain and maintain
insurance policies of the type described in SECTION 6.12 and take any action
with respect to such policies as Lender deems prudent; or (d) take any other
action deemed necessary by Lender to preserve and protect its interests and
rights under this Agreement. Any payments made by Lender shall not constitute
an agreement by Lender to make similar payments in the future or a waiver by
Lender of any Event of Default under this Agreement. Lender need not inquire
as to, or contest the validity of, any such expense, tax, security interest,
encumbrance or lien and the receipt of notice for the payment thereof shall
be conclusive evidence that the same was validly due and owing.
11. WAIVERS AND INDEMNIFICATIONS
11.1 WAIVERS. Borrower waives demand, protest, notice of protest,
notice of default or dishonor, notice of payment and nonpayment, notice of
any default, notice of nonpayment at maturity, notice of intention to
accelerate and notice of acceleration, so that Lender may exercise any and
all rights and remedies under the Loan Agreement or any other Loan Documents,
or as otherwise provided at law or in equity, immediately upon the occurrence
of any Event of Default, without any further notice, grace or opportunity to
cure whatsoever. Borrower further waives notice prior to Lender's taking
possession or control of the Collateral, any bond or security which might be
required by any court prior to allowing Lender to exercise any of Lender's
remedies, and the benefit of all valuation. appraisement and exemption laws.
Borrower agrees that Lender may compromise, settle or release without notice
to Borrower any accounts, documents, instruments, chattel paper or guaranties
at any time held by Lender on which Borrower may in any way be liable.
11.2 NO MARSHALING. Borrower, on its own behalf and on behalf of
its successors and assigns. hereby expressly waives all rights, if any, to
require a marshaling of assets by Lender or to require that Lender first
resort to some or any portion of the Collateral before foreclosing upon,
selling or otherwise realizing on any other portion thereof.
11.3 LENDER'S LIABILITY FOR COLLATERAL. So long as Lender complies
with its obligations, if any, under Section 9207 of the Code, Lender shall
not in any way or manner be liable or responsible for: (a) the safekeeping of
the Collateral; (b) any loss or damage thereto occurring or arising in any
manner or fashion from any cause; (c) any diminution in the value thereof; or
(d) any act or default of any carrier, warehouseman, bailee, forwarding
agency or other Person. All risk of loss, damage or destruction of the
Collateral shall be borne by Borrower.
11.4 INDEMNIFICATION. Borrower shall defend, indemnify and hold
harmless Lender, its directors, officers. agents, employees, participants and
assigns, from and against any and all claims, demands, costs, suits, actions,
causes of action, liabilities, damages, losses, obligations, judgments and
expenses, including attorneys fees and costs, of any nature whatsoever, in
any way relating to or arising from the transactions contemplated by this
Agreement or any other Loan Document (including those relating to or arising
from any alleged or actual violation of any Environmental Law, or any loss,
damage or injury resulting from any Hazardous Material); provided that the
foregoing indemnification shall not extend to liabilities, damages, losses,
obligations, judgments and expenses arising from the gross negligence or
willful misconduct of Lender. This indemnification provision shall survive
the termination of this Agreement. The indemnities provided for herein shall
not require payment as a condition to recovery.
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12. NOTICES
Unless otherwise provided in this Agreement, all notices or demands
by any party relating to this Agreement, the Loan Documents or any other
agreement entered into in connection herewith shall be in writing and (except
for financial statements and other informational documents which may be sent
by first-class mail, postage prepaid) shall be personally delivered or sent
by registered or certified mail, postage prepaid, return receipt requested,
or by receipted overnight delivery service to Borrower or to Lender, as the
case may be, at their addresses set forth below:
If to Borrower: EIP MICROWAVE, INC.
1745 McCandless Drive
Milpitas, California 95035
Attn: President
If to Lender: JOHN F. BISHOP AND ANN R. BISHOP,
TRUSTEES OF THE BISHOP FAMILY TRUST
2 Inverness Lane
Newport Beach, California 92660
The parties hereto may change the address at which they are to receive
notices hereunder by notice in writing in the foregoing manner given to the
other. All notices or demands sent in accordance with this SECTION 12, other
than notices by Lender in connection with Sections 9504 and 9505 of the Code,
shall be deemed received on the earlier of the date of actual receipt or
three (3) calendar days after the deposit thereof in the mail. Borrower
acknowledges and agrees that notices sent by Lender in connection with
Sections 9504 or 9505 of the Code shall be deemed sent when deposited in the
mail or otherwise sent by Lender in accordance with the delivery methods set
forth above.
13. DESTRUCTION OF BORROWER'S DOCUMENTS
All documents, schedules, invoices, agings or other papers
delivered to Lender may be destroyed or otherwise disposed of by Lender four
(4) months after they are delivered to or received by Lender unless Borrower
requests, in writing, the return of said documents, schedules, invoices,
agings or other papers and makes arrangements, at Borrower's expense, for
their retum.
14. GENERAL PROVISIONS
14.1 EFFECTIVENESS. This Agreement and the other Loan Documents
shall be binding and deemed effective when executed by Borrower and Lender.
14.2 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure
to the benefit of the respective successors and assigns of each of the
parties; provided, however, that Borrower may not assign this Agreement or
any rights hereunder without Lender's prior written consent and any
prohibited assignment shall be absolutely void. No consent to an assignment
by Lender shall release Borrower from its Obligations. Lender may assign
this Agreement and its rights and duties hereunder. Lender reserves the
right to sell, assign, transfer, negotiate or grant participations in all or
any part of, or any interest in Lender's rights and benefits hereunder. In
connection therewith, Lender may disclose all documents and information which
Lender now or hereafter may have relating to Borrower or Borrower's business.
14.3 SECTION HEADINGS. Headings and numbers have been set forth
herein for convenience only. Unless the contrary is compelled by the
context, everything contained in each paragraph applies equally to this
entire Agreement.
14.4 INTERPRETATION. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against Lender or Borrower,
whether under any rule of construction or otherwise. On the contrary, this
Agreement has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to
fairly accomplish the purposes and intentions of all parties hereto.
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14.5 SEVERABILITY OF PROVISIONS. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the
purpose of determining the legal enforceability of any specific provision.
14.6 AMENDMENTS IN WRITING. Neither this Agreement nor any
provision hereof shall be amended, modified, waived or terminated orally or
by course of conduct or pattern of dealing, but only by a written agreement
signed by an authorized representative of Lender. Any purported amendment,
modification, waiver or termination of this Agreement or any provision hereof
that is not in writing and signed by an authorized representative of Lender
shall be void and of no effect.
14.7 INTEGRATION. This Agreement, together with the other Loan
Documents, reflects the entire agreement between the parties with respect to
the subject matter hereof. This Agreement, together with the other Loan
Documents, supersedes all prior agreements, understandings and negotiations,
if any, which are merged into this Agreement and the other Loan Documents.
14.8 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts each of which,
when executed and delivered, shall be deemed to be an original and all of
which, when taken together, shall constitute but one and the same Agreement.
14.9 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the incurrence
or payment of the Obligations by Borrower or any guarantor of the Obligations
or the transfer by either or both of such parties to Lender of any property
of either or both of such parties should for any reason subsequently be
declared to be void or voidable under any state or federal law relating to
creditors' rights, including provisions of the Bankruptcy Code relating to
fraudulent conveyances, preferences and other voidable or recoverable
payments of money or transfers of property (a "Voidable Transfer"), and if
Lender is required to repay or restore, in whole or in part, any such
Voidable Transfer, or elects to do so upon the reasonable advice of its
counsel, then, as to any such Voidable Transfer, or the amount thereof that
Lender is required or elects to repay or restore, and as to all reasonable
costs, expenses and attorneys fees of Lender related thereto, the liability
of Borrower or such guarantor automatically shall be revived, reinstated and
restored and shall exist as though such Voidable Transfer had never been
made.
14.10 CONSULTATION WITH COUNSEL. Borrower and Lender acknowledge
that they have been given the opportunity to consult with counsel and other
advisors of their choice prior to entering into this Agreement.
14.11 LIMITATION OF LIABILITY. No claim may be made by Borrower or
any other Person against Lender or the officers, directors, employees or
agents of Lender for any special, indirect, punitive or consequential damages
in respect of any claim for breach of contract or any other theory of
liability arising out of or related to the transactions contemplated by this
Agreement, or any act, omission or event occurring in connection therewith,
and Borrower hereby waives, releases and agrees not to sue upon any claim for
any such damages.
14.12 TELEFACSIMILE EXECUTION. Delivery of an executed counterpart
of this Agreement or any other Loan Document by telefacsimile transmission
shall be equally as effective as delivery of an executed hard copy of the
same. Any party delivering an executed counterpart of this Agreement or any
other Loan Document by telefacsimile transmission shall also deliver an
executed hard copy of the same, but the failure by such party to deliver an
executed hard copy shall not affect the validity, enforceability and binding
effect of this Agreement or such other Loan Document.
15. CHOICE OF LAW AND VENUE
THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION,
AND ENFORCEMENT AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED
UNDER, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA; PROVIDED, HOWEVER, THAT THE LAWS OF THE STATE IN WHICH THE
COLLATERAL IS LOCATED SHALL GOVERN WITH RESPECT TO (A)
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THE CREATION OF LIENS ON COLLATERAL LOCATED lN SUCH STATE AND (B) THE METHOD,
MANNER AND PROCEDURE FOR FORECLOSURE OF LENDER'S LIENS UPON ANY PORTION OF
THE COLLATERAL LOCATED IN SUCH STATE AND THE ENFORCEMENT IN SUCH STATE OF
LENDER'S OTHER REMEDIES WITH RESPECT TO THE COLLATERAL LOCATED IN SUCH STATE.
THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN
CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND LITIGATED ONLY 1N THE STATE
COURTS LOCATED IN THE COUNTY OF ORANGE, STATE OF CALIFORNIA, THE FEDERAL
COURTS WHOSE VENUE INCLUDES THE COUNTY OF ORANGE, STATE OF CALIFORNIA, OR, AT
THE SOLE OPTION OF LENDER, IN ANY OTHER COURT IN WHICH LENDER SHALL INITIATE
LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER
THE MATTER IN CONTROVERSY. THE PARTIES EXPRESSLY SUBMIT AND CONSENT IN
ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN ANY
SUCH COURT, AND THE PARTIES HEREBY WAIVE ANY OBJECTION WHICH EITHER MAY HAVE
BASED UPON LACK OF PERSONAL JURISDICTION AND HEREBY CONSENT TO THE GRANTING
OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY ANY SUCH COURT.
FURTHERMORE, BORROWER AND LENDER EACH WAIVES, TO THE EXTENT PERMITTED UNDER
APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF "FORUM NON
CONVENIENS" OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN
ACCORDANCE WITH THIS SECTION 15.
16. WAIVER OF JURY TRIAL
BORROWER AND LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS
CONTEMPLATED HEREIN OR THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER
AND LENDER REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY
AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH
LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE
FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed as of October 15, 1997.
EIP MICROWAVE, INC., JOHN F. BISHOP AND ANN R. BISHOP,
a Delaware corporation TRUSTEES OF THE BISHOP FAMILY TRUST
Signed by: /s/ Lewsis R. Foster Signed by: /S/ John F. Bishop
-------------------- -------------------
Print Name: Lewis R. Foster Print Name: John F. Bishop
Title/Capacity: President Title/Capacity: Trustee
Signed by: /s/ Ann R. Bishop
-------------------
Print Name: Ann R. Bishop
Title/Capacity: Trustee
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SCHEDULE A TO THE
LOAN AND SECURITY AGREEMENT
UCC SEARCHES
25
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SCHEDULE B TO THE
LOAN AND SECURITY AGREEMENT
INTELLECTUAL PROPERTY
Borrower does not own or have rights as licensee in or to any trademarks or
patents or have any trademark or patent applications pending, except as
disclosed below.
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THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933; THEY HAVE BEEN ACQUIRED BY THE HOLDER FOR
INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF EXCEPT AS MAY BE AUTHORIZED UNDER THE SECURITIES ACT OF
1933 AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER.
TERM NOTE
$1,000,000 October 15, 1997
FOR VALUE RECEIVED, the undersigned, EIP MICROWAVE, INC., a Delaware
corporation ("Borrower"), hereby promises to pay JOHN F. BISHOP AND ANN R.
BISHOP, TRUSTEES OF THE BISHOP FAMILY TRUST ("Lender"), or order, at 2
Inverness, Newport Beach, California 92660, or at such other address as the
holder hereof may specify in writing, the principal sum of One Million
Dollars ($1,000,000), or such lesser principal amount as is outstanding from
time to time, plus interest in the manner and upon the terms and conditions
set forth below.
1. DEFINED TERMS. Any and all initially capitalized terms used herein
shall have the meanings ascribed to them in that certain Loan and Security
Agreement dated as of October 15, 1997 (the "Loan Agreement"), unless
specifically defined herein.
2. RATE OF INTEREST. The outstanding principal balance of this
Secured Promissory Note (this "Note") shall bear interest at the rate of five
percent (5.0%) per annum above the Reference Rate. The Reference Rate as of
the date of this Note is eight and one half percent (8.50%) per annum, and,
therefore, the effective rate of interest hereunder as of the date of this
Note is thirteen and one-half percent (13.50 %) per annum. The interest rate
payable under the terms of this Note shall be adjusted in accordance with any
change in the Reference Rate from time to time on the date of any such
change. Any interest not paid when due may be compounded by adding it to the
principal and thereafter shall bear interest at the rate provided herein.
Upon the occurrence of an Event of Default under the Loan Agreement, at
Lender's option, the rate of interest on this Note, without constituting a
waiver of any such Event of Default, shall be increased to eight percent (8.0
%) per annum above the Reference Rate. All interest payable under this Note
shall be computed on the basis of a three hundred sixty (360) day year for
the actual number of days elapsed. Interest shall continue to accrue until
this Note is paid in full.
3. SCHEDULE OF PAYMENTS; COTERMINOUS WITH LOAN AGREEMENT. Principal
and interest shall be due and payable on the dates and in the manner set
forth below:
(a) The unpaid principal balance of this Note and all accrued
interest and other charges shall be due and payable in full on the first
anniversary of the date hereof.
(b) All interest payable by Borrower shall be due and payable on
the first day of each month commencing on the first day of the month
following the date hereof and continuing thereafter until this Note is paid
in full.
(c) Notwithstanding anything to the contrary in this Note or any
of the other Loan Documents, all unpaid principal, accrued interest and other
charges owing under this Note shall be due and payable in full upon the
termination of the Loan Agreement for any reason whatsoever.
4. PREPAYMENT. Borrower shall be entitled to prepay this Note in
whole or in part from time to time. In conjunction with a termination of the
Loan Agreement which constitutes an early termination pursuant to Section 3.2
of the Loan Agreement, the unpaid principal amount of this Note shall be
subject to the Early Termination Fee described in Section 3.2 of the Loan
Agreement. Any such Early Termination Fee in respect of the unpaid principal
amount of this Note shall be presumed to be the amount
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of damages sustained by Lender as the result of the prepayment and Borrower
agrees that it is a reasonable fee under the circumstances currently
existing.
5. RIGHT OF ACCELERATION. Upon Borrower's failure to make any payment
under this Note when due or the occurrence of any other Event of Default
under the Loan Agreement, Lender may, at its election and without notice to
Borrower, declare the entire balance hereof immediately due and payable in
full.
6. LATE CHARGE. If any installment of principal or interest is not
paid within ten (10) days of the date on which it is due, Lender may assess a
late charge equal to ten percent (10.0%) of the amount of such late payment.
This charge is a result of the reasonable endeavor by Borrower and Lender to
estimate Lender's added costs and damages resulting from Borrower's failure
to make timely payments under this Note; hence, Borrower agrees that the
charge shall be presumed to be the amount of damage sustained by Lender since
it is impracticable to determine the actual amount necessary to reimburse
Lender for its damages.
7. SECURITY. Borrower understands and agrees that this Note is
secured by, among other things, the security interests granted to Lender
under the Loan Agreement and other Loan Documents, and that this Note is
subject to all the terms and conditions thereof including without limitation
the remedies specified therein.
8. WAIVERS. Borrower hereby waives presentment for payment, protest,
demand, notice of dishonor, notice of nonpayment, notice of maturity, notice
of intent to accelerate, notice of acceleration, presentment for the purpose
of accelerating maturity and diligence in collection.
9. SUCCESSORS AND ASSIGNS. This Note shall bind and inure to the
benefit of the respective successors and assigns of Borrower and Lender;
PROVIDED, HOWEVER, that Borrower may not assign this Note or any rights or
duties hereunder without Lender's prior written consent and any prohibited
assignment shall be absolutely void. No consent to an assignment by Lender
shall release Borrower from its obligations hereunder. Lender and its
successors and assigns may assign this Note and its rights and duties
hereunder. Lender reserves the right to sell, assign, transfer, negotiate or
grant participations in all or any part of, or any interest in Lender's
rights and benefits hereunder. In connection therewith, Lender may disclose
all documents and information which Lender now or hereafter may have relating
to Borrower or Borrower's business.
10. GENERAL PROVISIONS.
(a) If this Note is not paid when due, Borrower promises to pay
all costs of collection, foreclosure fees and reasonable attorneys fees
incurred by Lender, whether or not suit is filed hereon.
(b) This Note may not be changed, modified, amended or terminated
except by a writing duly executed by Borrower and Lender.
(c) No waiver of any rights under this Note is valid or effective
unless made in writing and signed by Lender.
(d) No delay or omission on the part of Lender in exercising any
right shall operate as a waiver thereof or of any other right.
(e) A waiver by Lender upon any one occasion shall not be
construed as a bar or waiver of any right or remedy on any future occasion.
(f) Should any one or more of the provisions of this Note be
determined illegal or unenforceable, all other provisions shall nevertheless
remain effective.
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(g) Section headings used in this Note are solely for convenience
of reference, shall not constitute a part of this Note for any other purpose
and shall not affect the construction of this Note.
11. CHOICE OF LAW AND VENUE.
THE VALIDITY OF THIS NOTE, ITS CONSTRUCTION, INTERPRETATION, AND
ENFORCEMENT AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER,
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA.
BORROWER AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION
WITH THIS NOTE SHALL BE TRIED AND LITIGATED ONLY IN THE STATE COURTS LOCATED
IN THE COUNTY OF ORANGE, STATE OF CALIFORNIA, THE FEDERAL COURTS WHOSE VENUE
INCLUDES THE COUNTY OF ORANGE, STATE OF CALIFORNIA, OR, AT THE SOLE OPTION OF
LENDER, IN ANY OTHER COURT IN WHICH LENDER SHALL INITIATE LEGAL OR EQUITABLE
PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN
CONTROVERSY. BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH
JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN ANY SUCH COURT, AND
BORROWER HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF
PERSONAL JURISDICTION AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR
EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY ANY SUCH COURT. FURTHERMORE,
BORROWER WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT IT
MAY HAVE TO ASSERT THE DOCTRINE OF "FORUM NON CONVENIENS" OR TO OBJECT TO
VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION
11.
12. WAIVER OF JURY TRIAL.
BORROWER HEREBY WAIVES ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION BASED UPON OR ARISING OUT OF THIS NOTE OR ANY OF THE TRANSACTIONS
CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER REPRESENTS THAT
IT HAS REVIEWED THIS WAIVER AND KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF
LITIGATION, A COPY OF THIS NOTE MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL
BY THE COURT.
IN WITNESS WHEREOF, Borrower has caused this Note to be executed and
delivered in Milpitas, California.
BORROWER:
EIP MICROWAVE, INC.,
a Delaware corporation,
Signed By: /s/ Lewis R. Foster
------------------------
Print Name: Lewis R. Foster
Title/Capacity: President
29
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933; THEY HAVE BEEN ACQUIRED BY THE HOLDER FOR
INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF EXCEPT AS MAY BE AUTHORIZED UNDER THE SECURITIES ACT OF
1933 AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER.
REVOLVING ADVANCES NOTE
$450,0000 October 15, 1997
FOR VALUE RECEIVED, the undersigned, EIP MICROWAVE, INC., a Delaware
corporation ("Borrower"), hereby promises to pay JOHN F. BISHOP AND ANN R.
BISHOP, TRUSTEES OF THE BISHOP FAMILY TRUST ("Lender"), or order, at 2
Inverness, Newport Beach, California 92660, or at such other address as the
holder hereof may specify in writing, the principal sum of Four Hundred Fifty
Thousand Dollars ($450,000), or such lesser principal amount of Revolving
Advances as is outstanding from time to time, plus interest in the manner and
upon the terms and conditions set forth below.
1. DEFINED TERMS. Any and all initially capitalized terms used herein
shall have the meanings ascribed to them in that certain Loan and Security
Agreement dated as of October 15, 1997 (the "Loan Agreement"), unless
specifically defined herein.
2. RATE OF INTEREST. The outstanding principal balance of this
Secured Promissory Note (this "Note") shall bear interest at the rate of five
percent (5.0%) per annum above the Reference Rate. The Reference Rate as of
the date of this Note is eight and one half percent (8.50%) per annum, and,
therefore, the effective rate of interest hereunder as of the date of this
Note is thirteen and one-half percent (13.50 %) per annum. The interest rate
payable under the terms of this Note shall be adjusted in accordance with any
change in the Reference Rate from time to time on the date of any such
change. Any interest not paid when due may be compounded by adding it to the
principal and thereafter shall bear interest at the rate provided herein.
Upon the occurrence of an Event of Default under the Loan Agreement, at
Lender's option, the rate of interest on this Note, without constituting a
waiver of any such Event of Default, shall be increased to eight percent (8.0
%) per annum above the Reference Rate. All interest payable under this Note
shall be computed on the basis of a three hundred sixty (360) day year for
the actual number of days elapsed. Interest shall continue to accrue until
this Note is paid in full.
3. SCHEDULE OF PAYMENTS; COTERMINOUS WITH LOAN AGREEMENT. Principal
and interest shall be due and payable on the dates and in the manner set
forth below:
(a) The unpaid principal balance of this Note and all accrued
interest and other charges shall be due and payable in full on the first
anniversary of the date hereof.
(b) All interest payable by Borrower shall be due and payable on
the first day of each month commencing on the first day of the month
following the date hereof and continuing thereafter until this Note is paid
in full.
(c) Notwithstanding anything to the contrary in this Note or any
of the other Loan Documents, all unpaid principal, accrued interest and other
charges owing under this Note shall be due and payable in full upon the
termination of the Loan Agreement for any reason whatsoever.
4. PREPAYMENT. Borrower shall be entitled to prepay this Note in
whole or in part from time to time.
30
<PAGE>
5. RIGHT OF ACCELERATION. Upon Borrower's failure to make any payment
under this Note when due or the occurrence of any other Event of Default
under the Loan Agreement, Lender may, at its election and without notice to
Borrower, declare the entire balance hereof immediately due and payable in
full.
6. LATE CHARGE. If any installment of principal or interest is not
paid within ten (10) days of the date on which it is due, Lender may assess a
late charge equal to ten percent (10.0%) of the amount of such late payment.
This charge is a result of the reasonable endeavor by Borrower and Lender to
estimate Lender's added costs and damages resulting from Borrower's failure
to make timely payments under this Note; hence, Borrower agrees that the
charge shall be presumed to be the amount of damage sustained by Lender since
it is impracticable to determine the actual amount necessary to reimburse
Lender for its damages.
7. SECURITY. Borrower understands and agrees that this Note is
secured by, among other things, the security interests granted to Lender
under the Loan Agreement and other Loan Documents, and that this Note is
subject to all the terms and conditions thereof including without limitation
the remedies specified therein.
8. WAIVERS. Borrower hereby waives presentment for payment, protest,
demand, notice of dishonor, notice of nonpayment, notice of maturity, notice
of intent to accelerate, notice of acceleration, presentment for the purpose
of accelerating maturity and diligence in collection.
9. SUCCESSORS AND ASSIGNS. This Note shall bind and inure to the
benefit of the respective successors and assigns of Borrower and Lender;
PROVIDED, HOWEVER, that Borrower may not assign this Note or any rights or
duties hereunder without Lender's prior written consent and any prohibited
assignment shall be absolutely void. No consent to an assignment by Lender
shall release Borrower from its obligations hereunder. Lender and its
successors and assigns may assign this Note and its rights and duties
hereunder. Lender reserves the right to sell, assign, transfer, negotiate or
grant participations in all or any part of, or any interest in Lender's
rights and benefits hereunder. In connection therewith, Lender may disclose
all documents and information which Lender now or hereafter may have relating
to Borrower or Borrower's business.
10. GENERAL PROVISIONS.
(a) If this Note is not paid when due, Borrower promises to pay
all costs of collection, foreclosure fees and reasonable attorneys fees
incurred by Lender, whether or not suit is filed hereon.
(b) This Note may not be changed, modified, amended or terminated
except by a writing duly executed by Borrower and Lender.
(c) No waiver of any rights under this Note is valid or effective
unless made in writing and signed by Lender.
(d) No delay or omission on the part of Lender in exercising any
right shall operate as a waiver thereof or of any other right.
(e) A waiver by Lender upon any one occasion shall not be
construed as a bar or waiver of any right or remedy on any future occasion.
(f) Should any one or more of the provisions of this Note be
determined illegal or unenforceable, all other provisions shall nevertheless
remain effective.
(g) Section headings used in this Note are solely for convenience
of reference, shall not constitute a part of this Note for any other purpose
and shall not affect the construction of this Note.
31
<PAGE>
11. CHOICE OF LAW AND VENUE.
THE VALIDITY OF THIS NOTE, ITS CONSTRUCTION, INTERPRETATION, AND
ENFORCEMENT AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER,
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA.
BORROWER AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION
WITH THIS NOTE SHALL BE TRIED AND LITIGATED ONLY IN THE STATE COURTS LOCATED
IN THE COUNTY OF ORANGE, STATE OF CALIFORNIA, THE FEDERAL COURTS WHOSE VENUE
INCLUDES THE COUNTY OF ORANGE, STATE OF CALIFORNIA, OR, AT THE SOLE OPTION OF
LENDER, IN ANY OTHER COURT IN WHICH LENDER SHALL INITIATE LEGAL OR EQUITABLE
PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN
CONTROVERSY. BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH
JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN ANY SUCH COURT, AND
BORROWER HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF
PERSONAL JURISDICTION AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR
EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY ANY SUCH COURT. FURTHERMORE,
BORROWER WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT IT
MAY HAVE TO ASSERT THE DOCTRINE OF "FORUM NON CONVENIENS" OR TO OBJECT TO
VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION
11.
12. WAIVER OF JURY TRIAL.
BORROWER HEREBY WAIVES ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION BASED UPON OR ARISING OUT OF THIS NOTE OR ANY OF THE TRANSACTIONS
CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER REPRESENTS THAT
IT HAS REVIEWED THIS WAIVER AND KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF
LITIGATION, A COPY OF THIS NOTE MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL
BY THE COURT.
IN WITNESS WHEREOF, Borrower has caused this Note to be executed and
delivered in Milpitas, California.
BORROWER:
EIP MICROWAVE, INC.,
a Delaware corporation,
Signed By: /s/ Lewis R. Foster
------------------------
Print Name: Lewis R. Foster
Title/Capacity: President
32
<PAGE>
EXHIBIT 10(j)
- -------------------------------------------------------------------------------
NOTE: Information has been redacted from the following agreement. The
location of such redacted information is identified by asterisks (*). Such
information is confidential and has been omitted pursuant to 17 C.F.R. Reg.
Section 240.24b-2 and filed separately with the Securities and Exchange
Commission.
- -------------------------------------------------------------------------------
FIXED PRICE SUBCONTRACT
#EIP-001-97
BETWEEN
MANTECH SYSTEMS ENGINEERING CORPORATION
AND EIP MICROWAVE, INCORPORATED
This is an indefinite quantity, fixed price supply contract
(Subcontract) between ManTech Systems Engineering Corporation ("Buyer"),
having offices located at 14119A Sullyfield Circle, Second Floor, Chantilly,
VA 20151 and EIP Microwave, Inc. ("Seller"), with offices at 1745 McCandless
Drive, Milpitas, CA 95035, for the supply by Seller of Radio Frequency Signal
Generator and Radio Frequency Down Converter.
The effective date of this Subcontract is August 15 ,
1997. The Subcontract will be for a term of five years commencing on the
effective date.
The following Sections attached hereto, are incorporated herein:
SECTION DESCRIPTION
Section A Supplies and Services to Be Furnished
Section B Delivery Schedule/Period of Performance
Section C Description and/or Specifications of Supplies
and/or Services to Be Furnished
Section D Procurement Requirements
Section E Warranty Plan
Section F Purchase Order Terms and Conditions, T-1 (9-91)
Section G Part II, Contract Clauses
Section H Purchase Description and Statement of Work
AGREED: AGREED:
ManTech (Buyer) EIP Microwave, Inc. (Seller)
By: /s/ John J. Ressa By: /s/ Lewis R. Foster
----------------------------- -----------------------------------
Authorized Signature Authorized Signature
Name Printed: John J. Ressa Name Printed: Lewis R. Foster
--------------------- -------------------------
Title: Senior Vice President Title: President
--------------------------- ----------------------------------
Date Signed: 9 September 1997 Date Signed: 5 September 1997
--------------------- -----------------------------
1
***
<PAGE>
SECTION G - PART II, CONTRACT CLAUSES
Incorporated by reference to Part II - Contract Clauses of U.S. Marine
Corps Contract No. M67854-97-D-3047 with ManTech Systems Engineering
Corporation.
<PAGE>
SECTION H - PURCHASE DESCRIPTION AND STATEMENT OF WORK
Incorporated by reference to Purchase Description and Statement of Work
of U.S. Marine Corps Contract No. M67854-97-D-3047 with ManTech Systems
Engineering Corporation.
<PAGE>
EXHIBIT 23(a)
BAINBRIDGE GROUP
November 13, 1997
EIP Microwave, Inc.
3 Civic Plaza, Suite 265
Newport Beach, California 92660
Gentlemen:
The undersigned is named in a Form SB-2/A Registration Statement of EIP
Microwave, Inc., a Delaware corporation (the "Company"), which registration
statement filed with the Securities and Exchange Commission in connection with a
rights offering of 1,699,628 shares of Common Stock of the Company to its
stockholders. The capacity in which the undersigned is named in such SB-2
Registration Statement is that of counsel to the Company and as a person who has
given an opinion on the validity of the securities being registered and upon
other legal matters concerning the registration or offering of the securities
described therein.
The undersigned hereby consents to being named in such SB-2 Registration
Statement in the capacity therein described.
Sincerely,
BAINBRIDGE GROUP
/s/ Michael E. Johnson
-----------------------------
Michael E. Johnson, President
<PAGE>
Exhibit 23(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form SB-2 (No. 333-37289) of our report dated
December 23, 1996, except for the third paragraph of Note 1, the second
paragraph of Note 6 and Note 9, which are as of October 23, 1997, relating to
the financial statements of EIP Microwave, Inc., which appears in such
Prospectus. We also consent to the references to us under the heading "Experts"
in such Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
San Jose, California
November 13, 1997
