SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
FORM 10-KSB/A
Amendment No.1
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file No. 0-5351
EIP MICROWAVE, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 95-2148645
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
6950 SW Hampton Street, Suite 200
Portland, Oregon 97223
(Address of principal executive offices) (Zip Code)
(503) 598-2605
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.01 Par Value
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [ X ] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
The issuer's revenues for the fiscal year ended September 30, 1997, were
$4,739,000. The aggregate market value of the voting stock held by
non-affiliates of the issuer, computed by reference to the average bid and asked
prices as of December 23, 1997, was approximately $405,000. For purposes of this
determination only, directors and officers of the issuer have been assumed to be
affiliates. There were a total of 424,907 shares of the issuer's common stock
outstanding as of December 23, 1997.
1
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Definitive Proxy Statement filed with Securities and
Exchange Commission relating to the Company's 1998 Annual Meeting of
Stockholders - Part III.
Transitional Small Business Disclosure Format
(check one): Yes [ ] No [X]
2
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the Consolidated Financial Statements, together
with the notes thereto and the reports thereon of Meredith, Cardozo, Lanz & Chiu
LLP and Price Waterhouse LLP appearing on the pages of this report set forth
below:
Page(s)
Consolidated Balance Sheets as of September 30, 1997 and 1996 4
Consolidated Statements of Operations for the Years Ended
September 30, 1997, 1996 and 1995 5
Consolidated Statements of Stockholders' Equity (Deficiency) for the
Years Ended September 30, 1997, 1996 and 1995 5
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1996 and 1995 6
Notes to Consolidated Financial Statements 7-16
Report of Independent Auditors 17
Report of Independent Accountants 18
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data) September 30, September 30,
1997 1996
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 250 $ 216
Short-term investments 30 324
----------------------------------
280 540
Accounts receivable, net 405 686
Inventories 1,023 1,067
Prepaid expenses 62 59
----------------------------------
Total current assets 1,770 2,352
Property and equipment, net 590 631
----------------------------------
$ 2,360 $ 2,983
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 401 $ 706
Accrued liabilities 629 546
Advanced payments from customers - 190
Bank borrowings 296 185
Notes payable to affiliates 400 -
Current portion of obligations under capital leases 34 34
----------------------------------
Total current liabilities 1,760 1,661
----------------------------------
Long term notes payable to affiliates 600 -
Long term obligations under capital leases 63 95
----------------------------------
Total liabilities 2,423 1,756
----------------------------------
Commitments and contingencies (Note 5)
Stockholders' equity (deficiency):
Common stock, $.01 par value;
authorized -10,000,000 shares;
424,907 issued and outstanding 5 5
Additional paid-in capital 848 848
Retained earnings (accumulated deficit) (916) 374
----------------------------------
Total stockholders' equity (deficiency) (63) 1,227
----------------------------------
$ 2,360 $ 2,983
==================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS AND
STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended September 30, 1997 1996 1995
(In thousands except per share data)
<S> <C> <C> <C>
Net sales $ 4,739 $ 6,492 $ 6,721
----------------------------------------------
Cost and expenses:
Cost of sales 2,955 4,064 3,646
Research, development and engineering 996 978 742
Selling, general and administrative 2,005 2,084 2,289
Interest and other, net 73 (141) (81)
-----------------------------------------------
Total costs and expenses 6,029 6,985 6,596
----------------------------------------------
Net income (loss) before income tax (1,290) (493) 125
Income tax provision - - -
----------------------------------------------
Net income (loss) $(1,290) $ (493) $ 125
==============================================
Net income (loss) per share $ (3.04) $ (1.16) $ 0.30
==============================================
Weighted average common shares outstanding 425 423 423
==============================================
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Retained
Additional Earnings
Common Stock Paid-in (Accumulated
(Dollars in thousands) Shares Amount Capital Deficit) Total
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994 423,307 $ 5 $ 844 $ 742 $ 1,591
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
Net income - - - (1,290) (1,290)
------------------------------------------------------------
Balance at September 30, 1997 424,907 $ 5 $ 848 $ (916) $ (63)
===========================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash
For the years ended September 30, 1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,290) $ (493) $ 125
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 167 147 220
(Gain) loss on the sale of capital equipment (118) (50) (146)
Change in assets and liabilities:
Accounts receivable, net 281 378 (350)
Inventories 44 66 (149)
Prepaid expenses and other assets (3) 45 (36)
Accounts payable (305) 96 83
Accrued liabilities 83 (130) 65
Advanced payments from customers (190) 190 -
-------------------------------------------
Cash provided by (used in) operating activities (1,331) 249 (188)
--------------------------------------------
Cash flows from investing activities:
Purchase of short-term investments - (213) (11)
Sale of short-term investments 294 208 -
Capital expenditures (168) (394) (41)
Proceeds from the sale of capital equipment 160 61 155
-------------------------------------------
Cash (used in) provided by investing activities 286 (338) 103
-------------------------------------------
Cash flows from financing activities:
Proceeds from bank borrowings 111 185 -
Proceeds from notes payable to affiliates 1,000 - -
Proceeds from sales of common stock to employees - 4 -
Repayment of obligations under capital leases (32) (10) -
-------------------------------------------
Cash provided by financing activities 1,079 179 -
-------------------------------------------
Increase (decrease) in cash and equivalents 34 90 (85)
Cash and equivalents at beginning of period 216 126 211
------------------------------------------
Cash and equivalents at end of period $ 250 $ 216 $ 126
==========================================
Supplemental information:
Interest paid $ 31 $ 13 $ 1
Equipment acquired pursuant to capital leases - $ 124 -
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
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 standalone
microwave frequency counters represented 53% of net sales in 1997, 50% of net
sales in 1996, and 64% of net sales in 1995. Substantially all of its activities
are conducted in the United States, and the Company has no foreign manufacturing
operations nor material amounts of foreign assets. Export sales, principally to
customers in Western Europe and Pacific Rim countries, as a percent of net sales
were approximately 30% in 1997, 36% in 1996, and 43% in 1995. 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 43%
in 1997 (20% to one government subcontractor), 33% in 1996 (22% to one
government subcontractor), and 36% in 1995 (11% to one government
subcontractor).
Liquidity
As shown in the accompanying consolidated financial statements, the
Company incurred a loss from operations for the year ended September 30, 1997 of
$1,290,000 and has experienced significant fluctuations in operating results in
the past. The fiscal 1998 operating plan includes the release of a new frequency
measurement product and other new products. To the extent that product
development is delayed or the new product introductions do not achieve
sufficient market acceptance, the Company's financial position and results of
operations will be adversely impacted. The Company's fiscal 1998 operating plan
also assumes additional financing will be necessary to fund its 1998 operations
(see notes 6 and 7).
The Company has incurred significant recent losses from operations and
additional financing will be required for the Company to meet its business plan
for fiscal 1998 and beyond. 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 consolidated 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.
7
<PAGE>
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.
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, 1997 and 1996. 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, 1997, the accounts receivable balances from three customers
represented 14%, 12%, and 8% 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.
8
<PAGE>
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 common and common equivalent shares outstanding
during the year. As a result of the losses incurred in fiscal 1997 and 1996, the
common equivalent shares were antidilutive and, accordingly, were excluded from
the computation of loss per share for those years. Common stock equivalents were
not materially dilutive for the year ended September 30, 1995.
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 were adopted by
EIP for the year ending September 30, 1997, and therefore there was no impact on
EIP's consolidated financial position or results of operations.
In February 1997, the Financial Accounting 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 earnings 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.
9
<PAGE>
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.
NOTE 2. Consolidated Balance Sheet Detail
(Dollars in thousands) September 30,
1997 1996
Accounts receivable:
Trade $ 455 $ 736
Less - allowance for doubtful accounts (50) (50)
--------------------------
$ 405 $ 686
=========================
Inventories:
Raw materials $ 531 $ 719
Work-in-process 452 320
Finished goods 40 28
-------------------------
$ 1,023 $ 1,067
=========================
Property plant and equipment:
Machinery and equipment $ 3,093 $ 3,121
Computer equipment and software 1,047 1,054
Demonstrator equipment 306 337
Furniture, fixtures and other fixed assets 865 807
-------------------------
5,311 5,319
Less: accumulated depreciation (4,721) (4,688)
--------------------------
$ 590 $ 631
=========================
Accrued liabilities:
Salaries, wages and benefits $ 297 $ 215
Board of Directors fees and expenses 116 77
Legal and accounting 89 14
Accrued interest - affiliates 49 -
Commissions 25 83
Warranty 21 53
Other 32 104
-------------------------
$ 629 $ 546
=========================
10
<PAGE>
NOTE 3. Employee Benefit Plans
Retirement Plan
The Company has a Retirement/Savings Plan which qualifies as a thrift
plan under Section 401(k) of the Internal Revenue Code. All employees who have
completed three months of service on or before the semiannual entry period are
eligible to participate in the Retirement Plan. The Retirement Plan allows
participants to contribute up to 12% of their earnings to the Retirement Plan
and deduct this amount from their wages for federal income tax purposes. The
Company will contribute 50 cents for each dollar contributed by the employee up
to 3% of total wages. Company contributions in fiscal years 1997, 1996, and
1995, totaled $39,000, $49,000, and $38,000, 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 fiscal years 1997 and 1996. Bonuses of $61,000 were awarded for fiscal 1995
results.
Stock Appreciation Rights Plan
On November 11, 1992, the Board of Directors adopted a Stock
Appreciation Rights Plan ("SAR Plan"). The SAR Plan provides for the award of
appreciation rights ("SARs") to officers and key management employees of the
Company entitling such participants to receive the increase, if any, in the
value of one share of Company common stock from the date of the award to the
date(s) of valuation established at the time of the award. Generally, SARs are
deemed vested in five equal annual installments. Each award vested will be paid
in cash on a scheduled payment date. During fiscal 1997, 1996, and 1995, no SARs
were awarded. A total of 760, 2,760, and 2,760 SARs were vested during fiscal
1997, 1996, and 1995, respectively. A total of 4000, and 960 SARs were canceled
during fiscal 1997 and 1995, respectively, leaving an aggregate of 760 SARs
outstanding at September 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 fiscal 1997, 1996 and 1995
was $2,000, $8,000 and $20,000, respectively.
Stock Option Plan
FASB Statement 123, "Accounting for Stock-Based Compensation", requires
the Company to provide pro forma information regarding net income and earnings
per share as if compensation cost for the Company's stock option plans had been
determined in accordance with the fair value based method prescribed in FASB
Statement 123. The Company estimates the fair value of stock options at the
grant date by using the Black-Scholes option pricing-model with the following
weighted average assumptions used for grants in 1996, 1995, and 1994,
respectively: dividend yield of 0; expected volatility of 211%, 198%, and 139%;
risk-free interest rates of 5.79%, 5.73%, and 5.72%; and expected lives of four
years for the plan options.
11
<PAGE>
Under the accounting provisions of FASB Statement 123, the Company's
net (loss) income and (loss) earnings per share would have been
increased/reduced to the pro forma amounts indicated below. Pro forma results
for 1997 may not be indicative of pro forma results in future periods because
the pro forma amounts do not include pro forma compensation cost for options
granted prior to October 1, 1996.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
Net (loss) income:
As reported $ (1,290,000) $ (493,000) $ 125,000
=========== =========== ===========
Pro forma $ (1,311,000) $ (493,000) $ 125,000
=========== =========== ===========
Primary (loss) earnings per share:
As reported $ (3.04) $ (1.16) $ 0.30
=========== =========== ===========
Pro forma $ (3.08) $ (1.16) $ 0.30
=========== =========== ===========
</TABLE>
A summary of the status of the Company's stock option plan as of September 30,
1997, 1996, and 1995, and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------------------------------------------------------------
September 30, 1997 September 30, 1996 September 30, 1995
------------------------- ------------------------- -------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 95,400 $ 3.039 59,500 $ 2.375 -- $ --
Granted 50,000 4.750 37,500 4.030 59,500 2.375
Exercised -- -- (1,600) 2.375 -- --
Cancelled (13,000) 2.721 -- -- -- --
------- --------- ------- --------- ------- ---------
Outstanding at
end of year 132,400 $ 3.727 95,400 $ 3.039 59,500 $ 2.375
======= ========= ======= ========= ======= =========
Options exercisable
at year-end 49,765 24,299 --
======= ======= =======
Weighted-average
fair value of
options granted
during the year $ 4.750 $ 4.030 $ 2.375
======== ======== ========
</TABLE>
The following table summarizes information about stock options outstanding at
September 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- ------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 9/30/97 Contractual Life Exercise Price at 9/30/97 Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$2.375 47,900 7.5 Years $ 2.375 29,532 $ 2.375
$3.875 19,500 8.3 Years $ 3.875 11,900 $ 3.875
$4.263 15,000 8.3 Years $ 4.263 5,000 $ 4.263
$4.750 50,000 9.1 Years $ 4.750 3,333 $ 4.750
---------- --------- ---------- ----------
132,400 $ 3.707 49,765 $ 3.082
========== ========= ========== ==========
</TABLE>
12
<PAGE>
NOTE 4. Income Taxes
Deferred tax assets (liabilities) are summarized as follows:
(Dollars in thousands) 1997 1996 1995
Net operating loss carryforwards $ 1,613 $ 1,104 $ 1,016
Tax credit carryforwards 124 106 106
Inventory and other valuation reserves 229 221 190
-------------------------------------
Gross deferred tax asset 1,966 1,431 1,312
-------------------------------------
Gross deferred tax liability - - -
-------------------------------------
Deferred tax asset valuation allowance (1,966) (1,431) (1,312)
-------------------------------------
Net deferred tax asset $ - $ - $ -
-------------------------------------
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 $4,400,000 at
September 30, 1997, expires by fiscal year 2011 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 and $19,000 for
fiscal years 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, 1997 were as
follows (in thousands):
Fiscal year ending September 30, Capital Leases Operating Leases
-------------------------------- -------------- ----------------
1998 $ 40 $ 33
1999 28 24
2000 26 22
Thereafter 21 19
---- --
Total minimum lease payments 115 $ 98
===
Less amount representing interest (18)
-----
Present value of minimum lease payments 97
Less current portion (34)
----
Long-term lease obligation $ 63
====
13
<PAGE>
The Company also leases certain equipment on a month-to-month basis.
Total rental expense under all operating leases was $254,000, $258,000, and
$300,000, in fiscal years 1997, 1996, and 1995, respectively.
On October 1, 1995, the Company entered into an Employment Agreement
(the "Agreement") with John F. Bishop, Vice-Chairman of the Board, Treasurer,
and Secretary of the Company, whereby Mr. Bishop will provide his services for a
monthly salary of $6,500 for an initial term of two years. On the first day of
each month, the initial term is automatically extended for an additional month,
unless either party notifies the other in writing of his or its desire not to
extend the term. In the event the Company elects not to extend the term or there
is a change in control of the Company (the date of such event is referred to as
the "Transition Date"), Mr. Bishop will continue to perform services for the
Company for a three month transition period and the Company would maintain his
compensation and other benefits for the three month transition period and an
additional twenty-one months. Effective January 1, 1997, Mr. Bishop has agreed
to reduce his monthly salary to $3,250 until the Transition Date. The Agreement
also allows Mr. Bishop the use of an automobile and the right to receive title
to the automobile, 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
At 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 September 30, 1997, the outstanding borrowings
were $296,000. 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. Subordinated Loan Agreement and Bridge Loans
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
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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
obligations thereunder were repaid in full on such date with the proceeds from
the Loan Facility with the Bishop Family Trust (Note 8). As consideration for
the early repayment of such obligations, the warrants issued to the Bishops were
canceled on October 15, 1997.
The Company has received several bridge loans from the Bishops payable
on demand (the "Bridge Loans"), which amounted to $400,000, plus interest, on
September 30, 1997. Interest accrued thereon at 10% per annum. The Bridge Loans
were repaid in full on October 15, 1997, with the proceeds from the Loan
Facility with the Bishop Family Trust.
NOTE 8. Subsequent Event
On October 15, 1997, the Company entered into 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% and is payable monthly (13.5% as
of October 15, 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
commencing in January 1998. The Bishop Family Trust also precludes or limits the
Company's ability to take certain actions, such as paying dividends, making
loans, making acquisitions or incurring indebtedness, without the Bishop Family
Trust's prior written consent. The Loan Facility is secured by substantially all
of the Company's assets. The Bishop Family Trust has subordinated the Loan
Facility to the Bank Line. At October 15, 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.
Future performance and levels of capital expenditures could reduce the
total amount of funds available under the Bank Line and the Loan Facility at any
given time.
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NOTE 9. 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.
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REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Stockholders of EIP Microwave, Inc.
We have audited the accompanying consolidated balance sheet of EIP
Microwave, Inc. and subsidiary as of September 30, 1997, and the related
consolidated statements of operations, stockholders' equity (deficiency), and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. The
consolidated financial statements of EIP Microwave, Inc. and subsidiary as of
September 30, 1996 and for the years ended September 30, 1996 and 1995 were
audited by other auditors whose report as of October 23, 1997 included an
explanatory paragraph that described conditions that raise substantial doubt
about the Company's ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of EIP
Microwave, Inc. and subsidiary as of September 30, 1997, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
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 will need to obtain additional financing to meet its business
plans for fiscal 1998 and beyond. These conditions 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/ Meredith, Cardozo, Lanz & Chiu LLP
MEREDITH, CARDOZO, LANZ & CHIU LLP
San Jose, California
November 20, 1997
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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.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EIP MICROWAVE, INC.
September , 1998 By:
------------------------------------
J. Bradford Bishop
Chairman of the Board
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ J. Bradford Bishop
- -------------------------- September 21, 1998
J. Bradford Bishop Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ William J. Stanners, Jr.
- --------------------------
William J. Stanners, Jr. September 21, 1998
Chief Financial Officer, Treasurer and
Assistant Secretary (Principal Financial
Officer & Principal Accounting Officer)
/s/ John F. Bishop
- --------------------------
John F. Bishop Director September 21, 1998
- --------------------------
Robert D. Johnson Director September , 1998
- --------------------------
J. Sidney Webb Director September , 1998
/s/ Michael E. Johnson
- --------------------------
Michael E. Johnson Director September 21, 1998
/s/ James N. Cutler, Jr.
- --------------------------
James N. Cutler, Jr. Director September 21, 1998
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