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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB
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<S> <C>
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act
For the transition period from to
</TABLE>
COMMISSION FILE NUMBER 0-5351
EIP MICROWAVE, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-2148645
(State or other jurisdiction (IRS Employer Identification
of incorporation or organization) No.)
4500 CAMPUS DRIVE, SUITE 219, NEWPORT BEACH, 92660
CALIFORNIA
(Address of principal executive offices) (Zip Code)
</TABLE>
(714) 851-3177
(Issuer's telephone number)
(Former name, former address and former fiscal year, if changed since last
report)
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 [ ]
OUTSTANDING COMMON STOCK: As of February 11, 1998, Registrant had only one class
of common stock, and had 424,907 shares of this $.01 par value common stock
outstanding.
Transitional Small Business Disclosure Format (check one): YES [ ] NO [ X ]
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<PAGE>
EIP MICROWAVE, INC.
FORM 10-QSB
QUARTER ENDED DECEMBER 31, 1997
PART I FINANCIAL INFORMATION
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<S> <C> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December
31, 1997 (unaudited) and September 30, 1997 Page 3
Condensed Consolidated Statements of Operations and
Retained Earnings for the three months ended December
31, 1997 and 1996 (unaudited) Page 4
Condensed Consolidated Statements of Cash Flows for the
three months ended December 31, 1997 and 1996
(unaudited) Page 5
Notes to condensed consolidated financial statements Page 6
Item 2. Management's Discussion and Analysis of Results of Pages 7-12
Operations and Financial Condition
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PART II OTHER INFORMATION
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<S> <C> <C> <C>
Item 2. Changes in Securities Page 13
Item 3. Defaults Upon Senior Securities Page 13
Item 4. Submission of Matters to Vote of Security Holders Page 13
Item 6. Exhibits and Reports on Form 8-K Page 14
Signatures Page 15
Index to Exhibits Page 16
</TABLE>
2
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EIP MICROWAVE, INC.
PART I--FINANCIAL INFORMATION
ITEM 1--CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share data)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 62 $ 250
Short-term investments............................................ 30 30
------ ------
92 280
Accounts receivable, net.......................................... 551 405
Inventories....................................................... 594 1,023
Prepaid expenses.................................................. 58 62
------ ------
Total current assets.......................................... 1,295 1,770
Property and equipment, net......................................... 496 590
------ ------
$ 1,791 $ 2,360
------ ------
------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 604 $ 401
Accrued liabilities............................................... 846 629
Advanced payments from customers.................................. -- --
Bank borrowings................................................... 179 296
Notes payable to affiliates....................................... 1,350 400
Current portion of obligations under capital leases............... 34 34
------ ------
Total current liabilities..................................... 3,013 1,760
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Long term notes payable to affiliates............................... 0 600
Long term obligations under capital leases.......................... 54 63
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Total liabilities............................................. 3,067 2,423
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Commitments and contingencies
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)........................... (2,129) (916)
------ ------
Total stockholders' equity (deficiency)....................... (1,276) (63)
------ ------
$ 1,791 $ 2,360
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</TABLE>
3
<PAGE>
EIP MICROWAVE, INC.
PART I/ITEM 1--CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS
(Dollars in thousands except per share data, unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
1997 1996
------------ -------------
<S> <C> <C>
Net sales............................................................................ $ 998 $ 1,258
------------ ------
Costs and expenses:
Cost of sales...................................................................... 1,310 793
Research, development and engineering.............................................. 241 216
Selling, general and administrative................................................ 540 466
Interest and other, net............................................................ 120 5
------------ ------
Total costs and expenses....................................................... 2,211 1,480
------------ ------
Net loss............................................................................. (1,213) (222)
------------ ------
Retained earnings at beginning of period............................................. (916) 374
------------ ------
Retained earnings at end of period................................................... $ (2,129) $ 152
------------ ------
------------ ------
Net loss per share................................................................... $ (2.85) $ (.52)
------------ ------
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Weighted average common shares outstanding........................................... 425 425
------------ ------
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</TABLE>
4
<PAGE>
EIP MICROWAVE, INC.
PART I/ITEM 1--CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (decrease) in cash
(Dollars in thousands, unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
1997 1996
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................................... $ (1,213) $ (222)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization.................................................... 52 76
Write down of inventory.......................................................... 600 --
(Gain) loss on sale of capital equipment......................................... (6) (36)
Change in assets and liabilities:
Accounts receivable, net....................................................... (146) 233
Inventories.................................................................... (171) 65
Prepaid expenses............................................................... 4 (8)
Accounts payable............................................................... 203 (251)
Accrued liabilities............................................................ 217 (47)
Advanced payments from customers............................................... -- (181)
------------ -----
Cash provided by (used in) operating activities...................................... (460) (371)
------------ -----
Cash flows from investing activities:
Purchase of short-term investments................................................. -- --
Sale of short-term investments..................................................... -- 298
Capital expenditures............................................................... 12 (85)
Proceeds from the sale of capital equipment........................................ 36 36
------------ -----
Cash (used in) provided by investing activities...................................... 48 249
------------ -----
Cash flows from financing activities:
Proceeds from notes payable to affiliates.......................................... 350 --
Repayment of bank borrowings....................................................... (117) --
Repayment of obligations under capital leases...................................... (9) (8)
------------ -----
Cash used in financing activities.................................................... 224 (8)
------------ -----
Decrease in cash and cash equivalents................................................ (188) (130)
Cash and cash equivalents at beginning of period..................................... 250 216
------------ -----
Cash and cash equivalents at end of period........................................... $ 62 $ 86
------------ -----
------------ -----
</TABLE>
5
<PAGE>
EIP MICROWAVE, INC.
PART I/ITEM 1--CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(a) The condensed consolidated financial statements presented in this Form
10-QSB have been prepared from the accounting records without audit on a
basis consistent with the financial statements included in the Company's
annual report filed with the Securities and Exchange Commission for the
preceding fiscal year. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission. The
information furnished reflects all adjustments and disclosures which are, in
the opinion of management, of a normal, recurring nature, and necessary for
a fair statement of the results for the interim periods. This report should
be read in conjunction with the Company's 1997 Annual Report on Form 10-KSB.
The results of operations for the interim periods presented are not
necessarily indicative of the results expected for the entire year.
(b) Composition of certain balance sheet captions (Dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
Accounts receivable:
Trade....................................... $ 601 $ 455
Less allowance for doubtful accounts........ (50) (50)
------------- -------------
$ 551 $ 405
------------- -------------
Inventories:
Raw materials............................... $ 55 $ 531
Work-in-process............................. 537 452
Finished goods.............................. 2 40
------------- -------------
$ 594 $ 1,023
------------- -------------
Property and equipment:
Cost........................................ $ 5,267 $ 5,311
Accumulated depreciation.................... (4,771) (4,721)
------------- -------------
$ 496 $ 590
------------- -------------
</TABLE>
(c) 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 during the three months ended
December 31, 1997 and 1996, the common and common equivalent shares were
antidilutive and, accordingly, were excluded from the computation of loss
per share for those periods.
6
<PAGE>
EIP MICROWAVE, INC.
PART I/ITEM 2--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 "CERTAIN FACTORS" BELOW. 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 three months ended December 31, 1997, were $998,000, a 21%
decrease from sales of $1,258,000 in the same period last year. The decrease in
sales for the period was primarily attributable to lower sales of continuous
wave counters and VXI products.
Gross profit margin in the first fiscal quarter of 1998 was negative 31%
compared to a positive 37% gross margin in the comparable quarter of fiscal
1997. This was primarily due to a write-down of inventory by $600,000 to reserve
for potential obsolescence related to discontinuance of selected products. To a
lesser extent the gross margin was affected by lower sales levels without
corresponding reductions in fixed manufacturing overhead, and selective price
reductions.
Incoming orders for the first fiscal quarter were $946,000, an 8% increase
from $876,000 for the same period a year ago. Backlog at December 31, 1997, was
$389,000, a 2% increase from $381,000 at the end of the first fiscal quarter
last year. The increase in orders and backlog resulted primarily from an
increase in orders for traditional counters.
Research, development and engineering expenses increased 12% to $241,000 in
the first fiscal quarter of 1998, compared to $216,000 for the same quarter last
year. The increase in research, development and engineering expenses was due to
new product development expenditures, primarily to support a new frequency
measurement product and products for an order from a government contractor.
Selling, general and administrative expenses increased 16% to $540,000
during the first fiscal quarter of 1998, compared to $466,000 for the same
quarter last year. The increase in selling, general and administrative expenses
is due primarily to expenses related to the Company's pending Rights Offering.
This increase in expenses was partially offset by lower commissions on reduced
sales in the first fiscal quarter of 1998.
Interest and other expense was $120,000 during the first fiscal quarter of
1998, compared to $5,000 for the same quarter last year. This increase was
primarily due to a higher level of outstanding debt and a higher effective
interest rate on such debt.
The Company recorded a net loss of $1,213,000 for the first fiscal quarter
of 1998, as compared to a net loss of $222,000 recorded during the same period
last year. Gains on the sale of capital equipment of $6,000 and $36,000 are
included in the net loss for the first quarter of 1998 and 1997, respectively.
The increase in the loss for the period, compared to the same period last year,
is primarily attributable to the inventory write off discussed above and, to a
lesser extent, lower sales and increased operating expenses discussed above.
7
<PAGE>
EIP MICROWAVE, INC.
PART I/ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
FINANCIAL CONDITION
At December 31, 1997, the Company's cash, cash equivalents and short-term
investment balance was $92,000, as compared to $280,000 at September 30, 1997.
At December 31, 1997, the Company had no material commitments for capital
expenditures. At December 31, 1997, working capital decreased $1,728,000 from
September 30, 1997, and the Company's current ratio decreased to 0.43:1 from
1.01:1 at September 30, 1997.
At December 31, 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"), as amended. The Bank Line provided for
borrowings up to 60% of eligible accounts receivable, not to exceed $500,000. At
December 31, 1997, interest was charged at the bank's prime rate plus 5% per
annum (13.5% as of December 31, 1997), and was payable monthly. The Bank Line
contained 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 maximum losses. The Bank line also precluded or limited the Company's
ability to take certain actions, such as paying dividends, making loans, making
acquisitions or incurring indebtedness, without the bank's prior written
consent. The Bank Line was secured by substantially all of the Company's assets,
and was guaranteed by the Bishops and the Bishop Family Trust. The Bank Line was
repaid in full on January 22, 1998 and the Bank Line expired on January 31,
1998.
At December 31, 1997, the Company had outstanding borrowings in the
aggregate principal amount of $1,350,000 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 (13.5% as of December 31, 1997), and
is payable monthly. 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
subordinated the Loan Facility to the Bank Line. At December 31, 1997, the
Company was in compliance with restrictive covenants of the Loan Facility.
Under the terms of the Loan Facility, a facility fee of $141,000 became
payable by the Company on January 22, 1998. 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 has
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. At February 13, 1998,
the outstanding borrowings under the Loan Facility were $1,250,000 and the
Company was in default of its obligation to pay facility fees under the Loan
Facility.
Since January 1, 1998, the Company has obtained demand loans (the "Demand
Loans") from J. Bradford Bishop, Chairman and Chief Executive Officer of the
Company, in an aggregate amount of $700,000 through February 11, 1998. Interest
is charged at 10% per annum, and is payable on demand. The Demand Loans are
secured by substantially all of the Company's assets.
8
<PAGE>
EIP MICROWAVE, INC.
PART I/ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
On November 14, 1997, the Company began a rights offering (the "Rights
Offering"), whereby the Company offered 1,699,628 shares (the "Shares") of its
Common Stock at $1.70 per Share to its stockholders of record on November 7,
1997 (the "Record Date"). The Rights Offering was initially set to expire on
December 15, 1997. On December 16, 1997, the Company extended the expiration
date for the Rights Offering until January 5, 1998. On December 23, 1997, the
Company increased the number of Shares offered to 5,948,698, and lowered the
price for each Share to $1.00. The Company thereafter extended the Rights
Offering two additional times until January 30, 1998 and February 26, 1998,
respectively. The net proceeds to the Company upon successful completion of the
Rights Offering will be used to repay debt and to fund working capital
requirements.
In addition to cash on hand and funds generated from operations the Company
believes that borrowings under future debt facilities and proceeds from the
Rights Offering in an aggregate amount equal to approximately $4,000,000 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.
See "Certain Factors--Future Cash Requirements" below.
CERTAIN FACTORS
IN ADDITION TO THE FACTORS DISCUSSED ELSEWHERE IN THIS QUARTERLY REPORT ON
FORM 10-QSB, THE FOLLOWING ARE IMPORTANT FACTORS WHICH 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 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, operated at a loss of $1,290,000 in the fiscal year ended September 30,
1997 and operated at a loss of $1,213,000 in the fiscal quarter ended December
31, 1997. Net cash used in operations and investing activities by the Company in
the fiscal years ended September 30, 1995, 1996 and 1997, and in the three
months ending December 31, 1997, was $85,000, $89,000, $1,045,000 and $412,000,
respectively. At the end of fiscal year 1996, the Company's retained earnings
were $374,000, and stockholders' equity was $1,227,000. At the end of fiscal
year 1997, the Company's accumulated deficit was $916,000, and stockholders'
deficiency was $63,000. At December 31, 1997, the Company's accumulated deficit
was $2,129,000, and stockholders' deficiency was $1,276,000. At September 30,
1996, September 30, 1997, and December 31, 1997, the Company's ratio of
interest-bearing indebtedness to total interest-bearing indebtedness and
stockholders' equity was 20%, 105%, and 474%, respectively. 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 Rights Offering will
be sufficient to carry the Company to a time when profitable operations and
positive cash flow would sustain the Company. Continued losses would negatively
impact the Company's working capital and the extension of credit by its lenders
and could cause such lenders to declare a default under the Company's loan
agreements, and declare all outstanding loans immediately due and payable. See
"Certain Factors-- Repayment of Existing Debt and Future Debt Facilities."
The report of Meredith, Cardozo, Lanz & Chiu LLP on the Company's financial
statements for the year ended September 30, 1997, and issued as of November 20,
1997, includes an explanatory paragraph to express substantial doubt regarding
the Company's ability to continue as a going concern. 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
9
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EIP MICROWAVE, INC.
PART I/ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
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 net proceeds from its pending Rights Offering and
borrowings under future debt facilities in an aggregate amount equal to
approximately $4,000,000 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 "Certain
Factors--Dependence on New OEM Relationship," "--Dependence on Government
Contractors," "--Uncertainty of Product Development and Introduction," and "--
Uncertainty of External Strategic Opportunities" and the cash requirements could
be materially greater than $4,000,000.
With the net proceeds from the Rights Offering, the Company plans to repay
all outstanding amounts under its existing debt facilities. There is no
assurance that the Company will be successful in obtaining all such capital from
the Rights Offering. After completion of the Rights Offering, the Company plans
to enter into one or more new debt facilities with third party lenders (the
"Future Debt Facilities") to provide for the remaining cash required to
implement its business plan for the remainder of fiscal 1998.
The Company is continuing to pursue discussions with other lenders
concerning the Future Debt Facilities; however, there can be no assurance that
the Company will be able to obtain the Future Debt Facilities. Even if the
Company is able to obtain Future Debt Facilities, there can be no assurance as
to the terms thereof. If the Company is unable to obtain the Future Debt
Facilities, the Company and its business will likely be materially adversely
affected.
There is no assurance that the Company will be successful in obtaining all
such capital from the Rights Offering and from the Future Debt Facilities. If
the Company is unable to obtain such capital on a timely basis, the Company will
be required to consider, among other actions, a substantial reduction in its
research and development expenses which will impact the introduction of new
products, a substantial reduction in other operating expenses and the sale of
one or more product lines of the Company. Such actions to significantly curtail
its planned operations will likely have a materially adverse affect on the
Company's business, financial condition and results of operations.
REPAYMENT OF EXISTING DEBT AND FUTURE DEBT FACILITIES
The Company had a $500,000 working capital facility with a bank which
expired on January 31, 1998 and the Company repaid all amounts outstanding
thereunder in the amount of $179,000 on January 22, 1998. The Company has a
$1,450,000 term and revolving advance loan facility (the "Loan Facility") with
the Bishop Family Trust which expires in October 1998, and $1,250,000 was
outstanding thereunder on February 13, 1998. The Company has loans (the "Demand
Loans") payable on demand to J. Bradford Bishop, and $700,000 was outstanding
thereunder on February 13, 1998. See "Management's Discussion and
Analysis--Financial Condition." The Bishop Family Trust and J. Bradford Bishop
are affiliates of the Company, and the Company plans to repay all outstanding
amounts under the Loan Facility and the Demand Loans with the net proceeds from
the Rights Offering.
10
<PAGE>
EIP MICROWAVE, INC.
PART I/ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
Assuming that the Company is able to obtain the Future Debt Facilities, the
Company expects that the Future Debt Facilities will impose various covenants
relating to the Company's performance and financial condition. If the Company
does not maintain compliance with such covenants, the lender will have the right
to declare all outstanding amounts immediately due and payable. There can be no
assurance that the Company will be able to maintain compliance with the
covenants under the Future Debt Facilities.
INVENTORY RESERVE
The Company recorded a write-down of inventory by $600,000 in the first
fiscal quarter of 1998 to reserve for potential obsolescence related to
discontinuance of selected products. While management believes the amount of the
inventory reserve is appropriate under current circumstances, there can be no
assurance that the amount of the reserves will be sufficient to account for the
discontinuance of such products. See "Results of Operations."
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 approximately
35% 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 37% 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
11
<PAGE>
EIP MICROWAVE, INC.
PART I/ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
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 signal 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.
UNCERTAINTY OF EXTERNAL STRATEGIC OPPORTUNITIES
The Company intends to pursue appropriate strategic opportunities to acquire
other companies or their technology or products. The Company believes that such
opportunities are available that will have strategic benefit to the Company;
however, there can be no assurance that the Company will be able to successfully
identify, negotiate and consummate such acquisition opportunities. Such
acquisitions could enable the Company to generate additional revenues and to
increase its gross profit by an amount which exceeds any increase in operating
expenses; however, there can be no assurance that the Company would be able to
obtain such financial benefits. Further, the Company's current financial
condition does not enable it to make such acquisitions without incurring debt or
issuing equity to finance such acquisitions.
COMPETITION
The markets in which the Company's products are sold have become
increasingly competitive. Most of the Company's principal competitors have
substantially greater financial resources. The Company's results of operations
can be significantly affected by pricing pressures arising from customer demand
and pricing strategies by the Company's competitors, and the timing and market
acceptance of new product introductions by competitors of the Company. There can
be no assurance that pricing pressures will not have a material adverse effect
on the Company, or that the Company's competitors will not succeed in developing
products that would render the Company's technology and products obsolete and
noncompetitive.
Due to the foregoing and other factors, past results are not a reliable
predictor of future results. In addition, the securities of many technology and
developmental companies, such as the Company, have historically been subject to
extensive price and volume fluctuations that may adversely affect the market
price of their common stock.
12
<PAGE>
EIP MICROWAVE, INC.
PART II--OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
The Company's Bank Line, which expired on January 31, 1998, contained
restrictions on dividend payments and other restrictive covenants regarding,
among other matters, the maintenance of minimal levels of profitability and
tangible net worth, minimum quick ratio and limits of debt to net worth. The
Company's Loan Facility with the Bishop Family trust contains restrictions on
dividend payments and other restrictive covenants. The Bank Line and the Loan
Facility with the Bishop Family Trust are more fully described in Part I/Item
2--Financial Condition.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of December 31, 1997, the Company was in default under its Bank Line. The
Bank Line, among other restrictive covenants, prohibits the incurrence of losses
by the Company in excess of $630,000 for the quarter ending December 31, 1997.
The Company's actual loss for such quarter was $1,213,000. The principal amount
outstanding under the Bank Line was $179,000 as of December 31, 1997. The
Company repaid all outstanding principal amount on January 22, 1998. The Bank
Line expired on January 31, 1998, and was not renewed. The Bank Line is more
fully described in Part 1/Item 2--Financial Condition.
As of December 31, 1997, the Company was in compliance under its Loan
Facility with the Bishop Family Trust. The Loan Facility, among other
obligations, requires the Company to pay facility fees of $141,000 on January
22, 1998. The Company has not paid such facility fees as of February 13, 1998.
The principal amount outstanding under the Loan Facility was $1,250,000 as of
February 13, 1998. The Loan Facility is more fully described in Part I/Item
2.--Financial Condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) No matter was submitted to a vote of the security holders during the
period covered by this report, through solicitation of proxies or
otherwise.
(b) Subsequent Event Disclosure:
The Company held its Annual Meeting of Stockholders on February 11, 1998.
Two items were voted on by the stockholders.
(1) Mr. Robert D. Johnson was re-elected and Mr. James N. Cutler, Jr. was
elected as Class III members of the Board of Directors with terms
expiring at the 2001 Annual Meeting of Stockholders. The votes cast
for or withheld from the nominees were as follows: For Robert D.
Johnson--357,594; Withheld--6,310, for James N. Cutler, Jr.--357,614;
Withheld--6,290. John F. Bishop and J. Bradford Bishop, each a Class
I director, and Michael E. Johnson and J. Sidney Webb, each a Class
II director, were not up for re-election and continue in office.
(2) The stockholders approved the Company's 1998 Stock Plan, as adopted
by the Board of Directors, and the reservation and authorization of
1,500,000 shares of Common Stock, reserved for issuance under the
terms of the Plan. Vote to approve as follows: For--229,196;
Against--9,186; Abstain--108; Broker Non-Votes--125,414.
13
<PAGE>
EIP MICROWAVE, INC.
PART II--OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K.
During the quarter ended December 31, 1997, the Company filed one report
on Form 8-K and two amendments on Form 8-K/A.
On October 16, 1997 the Company filed a report on Form 8-K reporting
that it had dismissed Price Waterhouse LLP and retained Meredith, Cardozo,
Lanz & Chiu LLP as its independent accountant as well as various related
matters. On October 24, 1997 the Company amended its October 16, 1997
report. On November 14, 1997 the Company further amended its earlier report
and amendment and reported the following: (i) on October 9, 1997, the
Company dismissed Price Waterhouse LLP as its independent accountant; (ii)
the reports of Price Waterhouse LLP on the Company's 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; (iii) the Company's Audit Committee
participated in and approved the decision to change independent accountants;
and (iv) during the two most recent fiscal years and through the date of
change, there were no disagreements between the Company and Price Waterhouse
LLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of Price Waterhouse LLP would have caused them
to make reference thereto in their report on the financial statements for
such years.
14
<PAGE>
EIP MICROWAVE, INC.
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
DATE: February 17, 1998 BY: /s/ J. BRADFORD BISHOP
----------------------------------------
J. Bradford Bishop
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)
DATE: February 17, 1998 BY: /s/ JOHN F. BISHOP
----------------------------------------
John F. Bishop
VICE CHAIRMAN, TREASURER, SECRETARY
AND DIRECTOR (PRINCIPAL FINANCIAL OFFICER)
15
<PAGE>
EIP MICROWAVE, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
- ----------- ------------------------------------------------------------------------------------ ---------------------
<C> <S> <C>
27 Financial Data Schedule --
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 62
<SECURITIES> 30
<RECEIVABLES> 601
<ALLOWANCES> 50
<INVENTORY> 551
<CURRENT-ASSETS> 1,295
<PP&E> 5,267
<DEPRECIATION> 4,771
<TOTAL-ASSETS> 1,791
<CURRENT-LIABILITIES> 3,013
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> 848
<TOTAL-LIABILITY-AND-EQUITY> 1,791
<SALES> 998
<TOTAL-REVENUES> 998
<CGS> 1,310
<TOTAL-COSTS> 1,310
<OTHER-EXPENSES> 901
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,213)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,213)
<EPS-PRIMARY> (2.85)
<EPS-DILUTED> (2.85)
</TABLE>
