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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-KSB
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1997
---------------------
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-16919
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WAVEMAT INC.
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(Name of small business issuer in its charter)
DELAWARE 38-2512387
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
44191 PLYMOUTH OAKS BLVD., SUITE 100, PLYMOUTH, MICHIGAN 48170
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (313) 454-0020
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on
which registered
NONE
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Securities registered pursuant to Section 12(g) of the 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 is met contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements or any amendment to this Form 10-KSB. /X/
Issuer's revenues for its most recent fiscal year -- $465,251.
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant as of March 12, 1998, computed by reference to
the average closing bid and asked prices of the Company's common stock on the
OTC Bulletin Board ("Pink Sheets") on that date was $96,622.
On March 12, 1998, there were 10,182,125 shares of the Registrant's Common
Stock, $.01 par value issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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The following document (or portions thereof) has been incorporated by reference
in this Annual Report on Form 10-KSB: (1) Proxy Statement for 1998 Annual
Meeting of Shareholders (Part III) and (2) Current Report on Form 8-K, dated
November 9, 1992, as amended, (Part II, Item 8).
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
University Science Partners, Inc. ("USP") was incorporated under the laws of
the State of Delaware on September 19, 1985 to seek technology worldwide from
universities, laboratories and from major international corporations, which
have developed technologies available for transfer or commercialization. The
primary goal of USP was to generate revenues through these technologies by
forming related business entities or through joint venture or licensing
arrangements. During February 1987, USP concluded its initial public offering
of common stock raising net proceeds of approximately $1,995,000. In April
1987, USP formed a majority-owned subsidiary, Wavemat Inc., which began
operations developing, manufacturing and marketing microwave processing
equipment for materials processing on October 1, 1987.
During 1988, USP restructured its business by focusing exclusively on the
exploitation and development of microwave technology. In the first phase of
this restructuring, USP effected a statutory merger under Section 253 of the
Delaware General Corporation Law on December 28, 1988, whereby USP's
majority-owned subsidiary, Wavemat Inc., was merged into USP, with Wavemat,
Inc. (the "Company") as the surviving corporation. In May 1989, University
Science Partners, Inc. changed its name to Wavemat Inc. and sold its
non-microwave technology projects to enable the Company to concentrate all of
its available resources on its proprietary microwave technology.
The Company has incurred operating losses and generated cash flow deficits from
operating activities since its inception; therefore, the Company's ability to
continue as a going concern is contingent upon its ability to raise additional
funds to support its activities. The Company must increase its backlog of open
sales orders substantially and obtain additional product development
assistance to adequately support its activities.
The Company is attempting to generate working capital through the sale of its
microwave processing systems and through its contract research and
development activities. The Company is continuously evaluating acquisition of
technologies and/or entities owning such technologies which are compatible with
the Company's business strategies with the intention of increasing the
Company's revenue generating capabilities. The Company is continuing to seek
funding from various other sources such as additional term loans, lines of
credit, corporate partners and equity financing. However, there is no
assurance that the required amount of additional funds can be raised.
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The Company's principal office and place of business is located at 44191
Plymouth Oaks Blvd. Suite 100, Plymouth, Michigan, 48170 and its telephone
number is 313-454-0020.
PRODUCTS, TECHNOLOGIES AND MARKETS
The Company designs, manufactures, and markets proprietary microwave plasma
systems and sources for advanced materials processing applications. The
Company's microwave processing systems range from standard modules for process
research and development to systems for production integration and turnkey
development. Microwave processing is in use in the areas of semiconductor
device manufacturing, diamond and diamond-like carbon thin films deposition and
other industrial coatings, ion implantation, advanced ceramics, composites, and
polymers.
Pursuant to a license agreement, Norton Diamond Film Division ("Norton") of
Saint-Gobain/Norton Industrial Ceramics Corporation, an affiliate of the
Company, has exclusive rights pertaining to the Company's Microwave Plasma Disk
Reactor (MPDR(R)) regarding the Company's diamond thin film technology. In
1994, this exclusive license agreement was amended, granting the Company a
non-exclusive sublicense to manufacture, sell and lease equipment for research
and commercial production of diamond-like carbon (DLC) thin films. In 1995,
Norton agreed to amendment of this license agreement to permit the Company to
sell and market its 2.45 GHz diamond thin film technology to universities and
research facilities. In 1996, Norton further amended this license agreement to
permit the Company rights to commercial sales of its 2.45 GHz diamond thin film
technology.
The market for the Company's microwave processing equipment includes
microelectronic and photonic component manufacturers, material coating
processors, university and national laboratories, research facilities and solid
material processors. To date, the majority of the Company's plasma
processing systems have been sold to university laboratories, major
corporations, and research centers engaged in the development of advanced
materials and advanced material processes. These sales are made through the
Company's internal sales organization and independent sales representatives,
both international and domestic.
Management believes that, as existing and potential customers complete
research, process development demand for the Company's products could
potentially increase as the demand to produce advanced materials and/or
integrate advanced materials processing into production processes on an
economical basis increases. Therefore, the Company has developed products
which address the areas of thermal processing, semiconductor processing diamond
and diamond-like thin film industrial coatings.
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DIAMOND THIN FILM & DIAMOND-LIKE CARBON INDUSTRIAL COATINGS.
The use of a gas plasma for material processing and surface modification is a
common technique used in many industries. Excitation of gas molecules in a
microwave chamber causes the gas molecules to disassociate into molecules,
ions, atoms and electrons. When an appropriate substrate is placed into the
plasma, these molecules, ions and atoms react with the substrate surface. This
process results in a thin solid film being formed or deposited on the substrate
surface. The composition of the film is determined by the choice of gases that
are used in creating the plasma discharge. This process is called plasma
enhanced chemical vapor deposition ("CVD").
The initial application of the Company's microwave CVD reactor was the
depositing of thin diamond films under a joint research program with Norton.
The use of diamond film coatings is a rapidly emerging market with potential
applications in abrasive cutting tools, high speed semiconductors, optical
lenses, rigid disk drives, and hundreds of other applications.
Development of diamond thin film process techniques has been ongoing utilizing
the Wavemat MPDR(R) 300 series at Norton, the Company and several major U.S.
universities. The advantage of the Company's plasma reactor concept is a
controlled, highly efficient plasma condition that provides large area, uniform
film coverage.
In October 1992, the Company delivered the first pilot production microwave
plasma CVD system to Norton. During November 1993, the Company delivered the
first dual-chamber production system to Norton's newly completed diamond film
manufacturing facility. In February 1994, the Company delivered to Norton what
is believed to be the largest microwave plasma CVD system ever made for
production diamond thin film deposition. This system, which operates at a
different microwave frequency than previous Wavemat systems, has been shown to
be able to deposit diamond thin films onto substrates of at least 8 inches in
diameter, and its high power allows deposition rates that have increased
Norton's productivity substantially.
In 1995, pursuant to the amended license agreement, the Company engaged in the
sale of a microwave plasma processing system for diamond thin film deposition
to a research facility in Taiwan. During 1996, the commissioning and
installation of that system was completed at the Taiwan site. The Company has
been agressively pursuing the commercial market for its 2.45 GHz diamond thin
film technology since the execution of the amendment to the aforementioned
exclusive license agreement with Norton.
Product development of the Company's diamond and diamond-like thin film
technology is ongoing. The Company's activities center on large area
deposition on complex shaped materials, as well as process automation for
commercial application. In 1996, the Company emphasized process
development for its diamond-like carbon ("DLC") application. The Company
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works closely with both commercial and educational institutions for the
development of new processes and equipment for other deposition applications.
SEMICONDUCTOR PROCESSING.
Electron Cyclotron Resonance ("ECR") is the enhanced condition created by
introduction of magnetic field lines into a microwave plasma with specific
shapes and magnitudes. The ECR condition expands the microwave plasma
processing capability to even higher efficiencies.
Microwave research in the use of ECR plasmas for semiconductor process
applications has been conducted over the past ten years. Despite the known
advantages of ECR plasma processing: low substrate damage and the ability to
process at much lower temperatures, difficulties still exist with the process
uniformity and the ability to cover large wafers. Management has believed that
the Company's ECR technology, Microwave Plasma Disk Reactor ("MPDR(R)"),
contains inherent patented concepts that provide the advantages of ECR
processing while eliminating the apparent disadvantages. This was demonstrated
in 1994 by two major microelectronic device manufacturers, who used the MPDR
ECR plasma source to fabricate "state-of-the-art" devices on large wafers.
This plasma source design offers significant advantages over other fixed cavity
plasma sources, which must utilize external adjustments and large
electromagnets requiring large amounts of electrical power to operate. The
Company has an exclusive worldwide license with Michigan State University for
this ECR device, which is distinguished as being the only United States based
patented proprietary design. See "License Agreement".
The Company currently produces the MPDR(R) product line, developed to address
the needs of the ECR market: the 315i, a microwave ECR plasma source designed
to provide the flexibility and control of gas plasma density and uniformity
over a wide range of operating conditions in the micro-electronics and
photonics industries; the 325i, a larger microwave ECR plasma source for
production-scale silicon wafer products; and the 610i microwave ECR ion source,
a small area electrodeless plasma source used in ultrahigh vacuum advanced
semiconductor research and nitride thin film deposition. The MPDR(R) product
line is sold as stand-alone sources or as fully integrated plasma processing
systems.
During the past year, the Company developed the MPDR(R) 4325i ECR plasma
processing systemm to address the needs of the semiconductor etch market. In
the area of gallium nitride (GaN) film growth, the Company developed a boron
nitride accessory package for the MPDR(R) 610i which increases growth rates and
enhances film uniformity.
THERMAL PROCESSING.
Thermal processing by microwave power is created by high frequency
electromagnetic energy "coupling" into a material causing atomic and
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molecular vibration. The friction caused by such vibration energizes
and heats the material. The Company's patented technology is an
internally adjustable chamber that allows for the control of the internal
microwave field patterns. An internal sliding short physically changes the
shape of the cavity. Thus, a resonance occurs in which almost all of the
microwave energy can be focused on the material being processed. Further,
since the material properties may change as the process proceeds, the
Company's microwave cavity can adjust accordingly to maintain optimum
efficient coupling to the material.
To address the needs of current thermal processing research, the Company
provides two research systems, the MCR 1100 and 2200. These are designed for
low temperature composites curing and high temperature ceramics sintering,
respectively. Furthermore, the CMPR(TM) 250 was developed to provide a
controlled environment throughout the process cycle which is necessary in many
thermal process applications. The CMPR(TM) 250 technology has been applied to
warm-compaction powder metallurgy. This process requires precise heating of
metallic powders, which are then compressed to near solid densities. The
Company's technology has been used to design and manufacture a metal powder
microwave heater for preheating the metal powder prior to compaction. The
Company has developed a coaxial microwave system for solid materials processing
with features including an autotuning module, dielectric property and electric
field measurements. The resonant cavity central to the system configuration
has been well-documented in literature as providing the most accurate and
reliable measurements of dielectric properties.
COMPETITION
The primary factor of competition in relationship to the Company's microwave
products is process performance. It is management's opinion that the selection
of the Company's product by a customer is based upon the efficiency and
performance of the Company's microwave technologies in relation to conventional
microwave plasma products, diamond and diamond-like deposition equipment, or
thermal processing equipment of competitors. In addition, such factors as
price, service and support, previous history with the customer's application,
and product quality are important considerations of customers in selecting the
Company's instruments and related services. Corporations and institutions with
greater resources than the Company may, therefore, have a significant
competitive advantage over the Company.
Several companies which manufacture microwave plasma components and systems are
also competitors of the Company, including Applied Science and Technology,
Inc., Plasma-Therm I.P. Inc., PlasmaQuest, Inc. and Plasma Technology Inc.
Management believes that the Company's proprietary plasma equipment has a
positive differentiation from the equipment of these companies because the
Company's products have a unique tuning capability to optimize the transfer of
microwave energy to excite specific molecules or ions of reactive gases for
various process
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purposes.
Competition for sales of the Company's microwave thermal process systems comes
primarily from a number of companies that manufacture conventional electric and
gas-fired furnaces which produce various ceramic and plastic materials.
Management believes the Company's microwave products represent an emerging new
technology which have the potential of reaching a much higher level of
productivity in comparison to conventional methods.
LICENSE AGREEMENT
In January 1988, the Company entered into a license agreement with Michigan
State University ("MSU"). This license agreement provides the Company with
exclusive worldwide rights to MSU's patented microwave material processing
technology and related advancements. The term of the license agreement, which
is 17 years, will run from the effective date of the agreement until the
expiration of the last to expire of the related licensed issued patents. This
license agreement forms the basis of the Company's microwave processing system
products. Therefore, this license agreement is of primary importance to the
operations of the Company. See Notes 3, 7, and 9 to the Financial Statements.
RESEARCH AND DEVELOPMENT
The research and development activities of the Company during the two years
ending December 31, 1997, were the development of diamond and diamond-like thin
film deposition equipment and processes, ECR plasma and ion sources, and
advanced metallic-powder thermal processing. The Company also incorporated its
sources into complete turnkey systems, and developed accessory packages to
enhance the performance of the plasma processing sources.
During 1997 and 1996, the Company had no customer-sponsored research and
development.
The Company recognized $125,000 of deferred customer sponsored research from
prior years.
RAW MATERIALS
The materials and components utilized in the manufacture of the Company's
microwave processing systems are purchased from outside suppliers and are
available from several sources. The Company's operations are dependent upon
the ability of its suppliers of materials and component parts to meet
performance and quality specifications and delivery schedules. However, the
Company is not dependent on a single supplier for any particular component or
part which would result in an adverse effect on the Company if that supplier
were unable to serve the Company. The
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Company has not experienced any shortages of required materials and component
parts.
The Company is currently experiencing difficulty in meeting its day-to-day cash
operating requirements. Although this problem has not, to this point in time,
interrupted the delivery of required materials and component parts to the
Company, there is no assurance that such interruptions will not occur in the
future.
EMPLOYEES
At December 31, 1997, the Company employed 5 full-time employees. Growth also
provides certain administrative services to the Company. See Note 9 to the
Financial Statements.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company is presently leasing office and manufacturing space in Plymouth,
Michigan under a renewed lease agreement covering the period of July 1, l996
through June 30, 1999. See Note 10 to the Financial Statements. The Company
through a third amendment agreement dated November 7, 1997 to renew this lease
covering the period from July 1, 1996 through June 30, 1999 under a lease
renewal agreement.
Management believes that the office space and productive capacity of the
manufacturing space of this facility is adequate for presently anticipated
needs. These facilities have been underutilized as a result of low sales order
activity during the Company's occupation of these facilities.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth quarter
of the year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock trades on the National Daily Quotation Survey ("Pink
Sheets"), or the OTC Bulletin board, under the symbol "WVMT".
There are estimated to be 95 shareholders of record for the Company's common
stock as of March 12, 1998. There are estimated to be 298 beneficial owners of
the Company's common stock as of that date.
The Company has never paid cash dividends on its common stock and does
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not expect that cash dividends on common stock will be paid in the
foreseeable future.
The high and low bid prices of the Company's common stock during the period of
January 1, 1996 through December 31, 1997 are indicated below. The quotations
indicated below represent interdealer quotations without retail markups,
markdowns or commissions, and do not reflect actual transactions.
High Low
Quarter Ended Bid Bid
-------------- ------ -----
March 31, 1997........... $ 1/50 $1/5
June 30, 1997............ 1/50 1/5
September 30, 1997....... 1/50 1/5
December 31, 1997........ 1/50 1/5
March 31, 1996........... 1/16 1/4
June 30, 1996............ 1/16 1/4
September 30, 1996....... 1/50 1/5
December 31, 1996........ 1/50 1/5
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Operating loss declined substantially as a result of significantly higher
operating revenue despite an increase in operating expenses. The increase in
operating revenue was attributable to higher microwave processing system sales,
increased sponsored contract research and development activities.
Operating expenses increased significantly primarily as a result of incurrance
of selling, general and administrative expenses due to certain employees who
were extensively involved with technical functions, devoting a considerable
amount of their time to selling and marketing activities during 1997 in
comparison to 1996.
Cost of sales declined as a result of improved utilized capacity.
Research and development expenses decreased as a result of lower company
non-sponsored activities performed in 1997. Royalty expense-affiliate
increased as a result of increased sales of the Company's microwave processing
systems.
In addition to the significant decrease in operating loss mentioned above, net
loss was reduced in 1997 by significantly higher other income,
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(net). Other income, (net) increased as a result of miscellaneous and
interest income more than offsetting a significant increase in interest
expense. The increase in miscellaneous income resulted from Growth Funding's
write-off of $1,270,000 indebtedness and allowing the Company to recognize
income. Higher Interest expense was incurred due to increased borrowing.
LIQUIDITY AND CAPITAL RESOURCES
The Company experienced extreme difficulty meeting its cash requirements during
1997. During 1997, the Company continued to defer payment of all or a portion
of the compensation of certain management personnel to conserve cash for
operating purposes. Deferred compensation costs of the Company amounted to
$248,493 as of December 31, 1997. The Company was in arrears pertaining to
other obligations in the amount of $135,118 as of December 31, 1997.
Obligations which the Company met were satisfied through sales of the Company's
microwave processing systems, customer deposits and short term borrowings
relating to lines of credit. (See Note 3 to the Financial Statements.)
The Company's operating activities provided $40,421 during 1997 compared to
utilizing cash of $73,271 during 1996.
Investing activities utilized $40,421 during 1997 compared to $73,271 during
1996. Cash utilized during 1997 pertained to capital expenditures and
increased deferred patent costs. The Company presently has no commitments
relating to capital expenditures for 1998.
As indicated in Note 3 to the Financial Statements, the Company has incurred
operating losses and generated cash flow deficits from operating activities
since its inception, therefore, the Company's ability to continue as a going
concern is contingent upon its ability to raise additional funds to support its
activities. On December 31, 1997, the Company had a negative working capital
position of $2,482,154 compared to a negative working capital position of
$3,004,700 on December 31, 1996.
The Company is attempting to generate working capital through the sale of its
microwave processing systems and through its contract research and development
activities. As of December 31, 1997, the Company had a backlog of open sales
orders, net of customer deposits, amounting to $81,007. Subject to various
qualifications and assuming no change in delivery dates or in the shipment of
orders in the normal course of business, management expects to ship all of the
above mentioned backlog and collect the applicable cash proceeds during 1998.
The Company is attempting to generate working capital through the sale of its
microwave processing systems and through its contract research and development
activities. As of December 31, 1997, the Company had a backlog of open sales
orders, net of customer deposits, amounting to $81,007. Subject to various
qualifications and assuming no change in delivery dates or in the shipment of
orders in the normal course of business, management expects to ship all of the
above mentioned backlog and collect the applicable cash proceeds during 1998.
The Company must increase its backlog of open sales orders substantially and
obtain additional product development assistance to adequately
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support its activities. The Company is continuously evaluating acquisitions of
technologies and/or entities owning such technologies which are compatible to
the Company's business strategies with the intention of increasing the
Company's revenue generating capabilities. In addition, the Company is
continuing to seek funding from various other sources such as additional term
loans, lines of credit, corporate partners and equity financing. However,
there is no assurance that the required amount of additional funds can be
raised.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are included in this report on pages
F-1 through F-19.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
The Company's current report on Form 8-K dated November 9, 1992, as amended,
pertaining to a change in the Registrant's certifying accountant is
incorporated herein by reference.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
-------------- ------- ---------------
<S> <C> <C>
Monis Schuster (3) 67 Chairman of the Board and
Chief Executive Officer
Eugene I. Schuster (1)(2)(3) 61 Acting President and Director
Sharon K. Zitnik 52 Vice President, Treasurer,
Chief Financial Officer
& Secretary
Raymond F. Decker 67 Director
</TABLE>
_______________
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Executive Committee
_________________________________________________________
DIRECTORS
Monis Schuster, 67, a founder of the Company, has been Chairman of the Board of
Directors of the Company since February 1993 and a Director of the Company from
May 1985 until February 1993. He was serving as acting President of the
Company during the August 1992 to June 1993 period. He had been Vice President
of Corporate Development and General Counsel of the Company from October 1988
to August 1992 and served as Secretary from May 1989 until June 1993. He had
been Vice President of the Company from May 1986 until September 1988. From
1983 to the present, he has been Vice President and Secretary of Venture
Funding, Ltd.("Venture"), a private capital and business development firm, and
its subsidiary, Growth Funding, Ltd ("Growth").
Eugene I. Schuster, 61, a founder of the Company, has been a Director of the
Company since September 1985. Since September, 1994 he has also been serving
as Acting President of the Company. Since February 1986, he has been Chairman
of the Board of Directors, President and Chief Executive Officer of Quest
BioTechnology, Inc., a development stage company, which was formed to acquire
and commercialize biotechnological products and processes. Since May 1983, he
has been Chairman of the Board, President
and Chief Executive Officer of Venture and President of its subsidiary, Growth.
Since January 1988, he has been a Vice President and Director of
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Mega Financial Corp., a public company engaged in retail land sales and resort
time sharing, and Chief Executive Officer of CELLEX BIOSCIENCES, Inc., formerly
Endotronics, Inc. In May 1988, he became Chairman of the Board of Directors of
CELLEX BIOSCIENCES, Inc., a company which designs, manufactures and markets
mammalian cell culture instruments. Mr. Schuster served as Chairman of the
Board of AM Diagnostics, Inc., which manufactured computerized automated blood
chemistry equipment and the consumable diagnostic chemistries used in that
equipment, during the period of September 1990 through October 1991, and he
served as Director through November 1991.
Messrs. Eugene and Monis Schuster are brothers.
Norton, as holder of the Company's Convertible Preferred Stock, is entitled to
elect one Director to the Company's Board of Directors, but at this time does
not have anyone serving in this capacity.
In conjunction with an Investment Agreement entered into on August 19, 1994
with MSU, as long as the University (or any entity affiliated with the
University) is the owner of at least 2.5% of the Company's outstanding common
stock on a fully diluted basis, MSU shall be entitled, by notice given to the
Company, to elect one director to the Company's Board of Directors. Effective
October 27, 1995, Dr. Frederick H. Erbisch, 60, Director of Intellectual
Property of Michigan State University, was elected to serve on the Company's
Board of Directors. On October 28, 1996, Dr. Erbisch resigned from the Board
of Directors. On November 18, l996, Dr. Erbisch agreed in principle to rejoin
the Company's Board of Directors contingent with certain conditions being met.
(See Note 3 of the Financial Statements.) As of December 31, 1997,
ratification of his reappointment had not occurred, but will be addressed by
the Board of Directors at some future date.
Dr. Raymond F. Decker, 67, is Chairman and Chief Financial Officer and founder
of Thixomat, Inc., a technology transfer company specializing in semi-solid
injection molding of magnesium alloys. Dr. Decker was re-elected to the Board
of Directors on October 27, 1995. Prior to February 26, 1993, Dr. Decker has
served on the Company's Board of Directors as well as being Vice President of
New Technology for Wavemat, Inc. Dr. Decker is a member of the National
Academy of Engineering and has served as past president of Applied Science
Materials International (ASMI), the world's largest technical society in
materials. He holds a Ph.D. in Metallurgical Engineering from the University
of Michigan.
EXECUTIVE OFFICER
Sharon K. Zitnik, 52, has been Vice President, Treasurer, Secretary and Chief
Financial Officer of the Company since February 11, 1994. She had been the
Director of Finance for the Company from September 1989 until February 1994.
She also served as Manager of Finance and Administration of the Company from
August 1988 to September 1989. During the period of August 1983 through August
1988, she served as Assistant Controller of
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Froude Engineering, Inc., a capital equipment company.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company is not aware of any report under Section 16(a) of the Securities
Exchange Act of 1934 not timely filed during the year ended
December 31, 1997.
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Item 10. Executive Compensation.
SUMMARY COMPENSATION TABLE
The table shown below sets forth the aggregate compensation incurred by
the Company during the fiscal year ended December 31, 1997 on behalf of the
Company's Chief Executive Officer and Acting President:
<TABLE>
<CAPTION>
Long Term Compensation
---------------------------
Awards Payouts
--------- -------
Annual Compensation Restricted LTIP All Other
Name and Principal Fiscal -------------------------------- Stock Payouts Compen-
Position Year Salary ($) Bonus ($) Other ($) Awards ($) Options(#) ($) sation($)
- --------- ------- --------- --------- -------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Monis Schuster 1997 $44,000(2) -- -- -- -- -- --
Chairman and
Chief Executive
Officer
Eugene I. Schuster 1997 $24,000(2) -- -- -- 6,000(3) -- --
Acting President
Director (1)
- -------------
</TABLE>
(1) Effective September 2, 1994 Eugene I. Schuster assumed the position of
Acting President and Chief Operating Officer.
(2) Due to extreme difficulty the Company experienced in meeting its cash
requirements, the Company deferred all or a portion of certain executive
officer's salaries during 1997. During 1997, the Company deferred
payments of salary to Mr. Monis Schuster in the amount of $44,000 and Mr.
Eugene Schuster in the amount of $24,000. At December 31, 1996, the
Company owed Mr. Monis Schuster $127,523 and Mr. Eugene Schuster the
amount of $64,616 in deferred payments.
(3) Represents options granted pursuant to the Incentive Stock Option Plan
for Non-Employee Directors.
OPTION GRANTS DURING 1997 FISCAL YEAR
The following table summarizes the options granted to the Chief Executive
Officers of the Company during the fiscal year ended December 31, 1997:
<TABLE>
<CAPTION>
% of Total
Options Granted Exercise
Options to Non-Employee or Base
Name Granted(#) Directors in Fiscal Year Price Expiration Date
- ----- --------- ----------------------- ------------- ----------------
<S> <C> <C> <C> <C>
Eugene Schuster 6,000 50.0 $0.1100 5-10-2007
Raymond Decker 6,000 50.0 $0.1100 5-10-2007
</TABLE>
OPTION EXERCISES DURING 1997 FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The named executive officers in the Summary Compensation Table did not
exercise any options during fiscal 1997. The Company has no outstanding stock
appreciation rights.
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Shares 12/31/97 12/31/97
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- ---- ------------ -------- ------------- -------------
<S> <C> <C> <C> <C>
Monis Schuster --- --- 17,300 Exercisable ---
Eugene I. Schuster --- --- 48,000 Exercisable ---
</TABLE>
14
<PAGE> 17
INCENTIVE STOCK OPTION PLAN
The Company's Incentive Stock Option Plan, (the "ISO Plan"), adopted in
December 1985 and expired in December 1995, provides for the grant to employees
of the Company and its affiliates, of options to purchase up to 200,000 shares
of the Company's common stock. The options generally vest after the second
anniversary of the date of grant. Such options are intended to qualify as
incentive stock options within the meaning of Section 422A of the Internal
Revenue Code of 1954, as amended. The exercise price of the incentive stock
options will not be less than the fair market value of the shares on the date
of the incentive stock option grant as determined by the Compensation Committee
of the Company's Board of Directors. The Compensation Committee has the
authority in its discretion to determine the individuals to whom and the time
or times at which options shall be granted and the number of shares to be
issuable upon the exercise of each option, to interpret the plan, to prescribe,
amend and rescind rules and regulations relating to the plan, to determine the
term and provisions of respective option agreements and to make any and all
other determinations deemed necessary or advisable for the administration of
the plan. The Company's Board of Directors is considering the adoption of a
renewal of the ISO Plan, but as of December 31, 1997, had not ratified a
renewal of the plan.
No incentive stock option may be granted to a person holding 10 percent or more
of the Company's outstanding shares unless the incentive stock option exercise
price, at the time such incentive stock option is granted, is at least 110
percent of the fair market value of the shares on the date the incentive stock
option is granted. Such incentive stock options may be exercised for a term no
longer than ten years and are not transferable except by will or intestacy on
the death of the optionee.
As of December 31, 1997, 54,800 shares, net of forfeitures, were subject to
grant pursuant to this plan at exercise prices per share ranging from $.2813 to
$2.4063 per share.
Options which are forfeited are available for reissuance in accordance with
this plan.
Options to purchase 54,800 shares were exercisable at December 31, 1997.
No options have been exercised to date under the Incentive Stock Option Plan.
NON-QUALIFIED STOCK OPTION PLAN
The Company's Non-qualified Stock Option Plan, (the "NQSO Plan"), adopted in
December 1985, provides for the grant, to consultants and directors of the
Company, of non-qualified options to purchase up to 200,000 shares of the
Company's common stock. The NQSO Plan, which expired in December 1995,
provides that the exercise price of the options will not be less
15
<PAGE> 18
than the fair market value of the shares on the date of the option grant as
determined by the Compensation Committee of the Board of Directors. The
options generally vest in equal annual installments over the three-year period
from the date of grant and expire ten years after date of grant. The
Compensation Committee has the authority in its discretion to determine the
individuals to whom and the time or times at which options shall be granted and
the number of shares to be issuable upon the exercise of each option, to
interpret the plan, to prescribe, amend and rescind rules and regulations
relating to the plan, to determine the term and provisions of respective option
agreements and to make all other determinations deemed necessary or advisable
for the administration of the plan. The Company's Board of Directors is
considering the adoption of a renewal of the NQSO Plan, but as of December 31,
1997, had not ratified a renewal.
As of December 31, 1997, 43,000 shares were subject to grant pursuant to this
plan at exercise prices per share ranging from $.3750 to $1.25 per share.
Options which are forfeited are available for reissuance in accordance with
this plan.
The Company granted no options under this plan for the year 1996.
No options have been exercised to date under the Non-qualified Stock Option
Plan.
COMPENSATION OF DIRECTORS
The Company presently reimburses Directors for their expenses, if any, for
attending board meetings and compensates each non-employee director at the rate
of $1,000 per meeting attended.
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
The Stock Option Plan for Non-Employee Directors (the "NEDSO Plan") provides
for the grant of options to purchase a maximum of 200,000 shares of the
Company's common stock to directors who are not employees of the Company. The
NEDSO Plan also provides that, on May 10, 1990 and May 10 of each subsequent
year through and including the year 2000, each eligible director will be
granted an option to purchase 6,000 shares with an exercise price equal to the
quoted market price of the Company's common stock on the date of the option
grant. Options, once granted, are immediately exercisable and expire 10 years
from date of grant.
During 1997, options to purchase 6,000 shares of the Company's common stock
were granted to Eugene Schuster and Raymond Decker respectively at an exercise
price of $.1100 per share.
As of December 31, 1997, 138,000 shares were subject to grant pursuant to
16
<PAGE> 19
this plan at exercise prices per share ranging from $.1100 to $2.25 per share.
No options granted under the NEDSO Plan have been exercised to date.
17
<PAGE> 20
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Set forth below is information concerning stock ownership of the Company's
Common Stock, $.01 par value ("Shares") of each person known by the Company to
own beneficially 5% or more of the Shares, each director and officer and all
directors and officers of the Company as a group, based upon the number of
outstanding Shares as of March 12, 1998.
<TABLE>
<CAPTION>
Shares Subject
to Purchase Upon
the Exercise of
Warrants, Stock
Options & the
Name and Address Shares Conversion of
Of Beneficial Beneficially Convertible Pre- Percentage
Owner Owned (1) ferred Stock (4) of Total
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Eugene I. Schuster
321 Fisher Bldg.
Detroit, MI 48202 7,447,522(2) 4,139,023 80.9%
Venture Funding, Ltd.
321 Fisher Bldg.
Detroit, MI 48202 7,404,522(2) 4,097,023 80.5%
Norton Diamond Film
One New Bond St.
Worcester, MA 01615 1,066,667 293,926(3) 13.0%
Michigan State Univ.
412 Administration Bldg.
East Lansing, MI 48224 670,989 66,666 7.2%
Monis Schuster
44191 Plymouth Oaks
Blvd., Suite 100
Plymouth, MI 48170 7,429,022(2) 4,114,323 80.7%
Sharon K. Zitnik
44191 Plymouth Oaks
Blvd., Suite 100
Plymouth, MI 48170 2,000 237,500 2.3%
Raymond F. Decker
717 East Huron
Ann Arbor, MI 48104 80,327 66,666 1.4%
All Directors and
officers as a group
(4 persons) 8,225,338 4,533,155 86.7%
</TABLE>
- -------------
18
<PAGE> 21
(1) All Shares are beneficially owned and sole voting and investment power is
held by the person named, except as otherwise noted.
(2) Eugene I. Schuster and Monis Schuster are principal shareholders,
officers and directors of Venture Funding, Ltd., ("Venture"), and,
therefore, may be deemed to hold voting and investment power over the
Shares owned by Venture, and, thus, control the 7,404,522 Shares owned by
Venture.
(3) Represents the number of Shares into which each Share of Convertible
Preferred Stock held by Norton Company could be converted. Norton Company
is the holder of 4,000 Shares of the Company's Convertible Preferred Stock
with a conversion rate currently equivalent to 51.02 Shares of Common
Stock plus accumulated unpaid dividends, for each Share of Convertible
Preferred Stock held.
(4) Includes Shares such persons have the right to purchase upon the exercise
of outstanding stock options currently exercisable or exercisable within
60 days after March 12, 1998, and also includes Shares of Common Stock
into which each Share of Convertible Preferred Stock could be presently
converted.
_________________________________________________
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT AND CONTRIBUTION
OF CAPITAL
Growth provided the Company with certain accounting, shareholder and public
relations services on a month-to-month basis for a monthly fee of $3,500 plus
out-of-pocket expenses. On October 27, 1995, the Management and Administrative
Services Agreement with Growth was canceled by resolution of the Company's
Board of Directors. If such services are required in the future, the Company
will hire Growth on an hourly basis.
BORROWINGS
On January 29, 1992, the Company entered into a $125,000 line of credit
arrangement evidenced by a promissory note with Venture. The amounts borrowed
pursuant to this line of credit are payable by the Company upon demand. The
Company had utilized the entire line of credit during 1992. The applicable
interest rate is at two percentage points above the prime rate of a major bank
with such interest rate ranging from 8.0 percent per annum to 9.25 percent per
annum for the period of January 29, 1992 through August 17, 1994. This
obligation with related interest was extinguished by inclusion in a Convertible
Debenture issues by the Company to Growth on August 18, 1994.
On April 7, 1994, the Company finalized a $350,000 revolving line of
19
<PAGE> 22
credit Promissory Note with Growth, a wholly-owned subsidiary of Venture, a
significant shareholder of the Company, with such credit line carrying an
interest rate on outstanding balances of 2 percent above the prevailing prime
rate of a major bank with such interest rate ranging from 8.25 percent per
annum to 10.75 percent per annum for the period of April 7, 1994 through
December 31, 1997. The Company had utilized this entire line of credit during
1994. Amounts borrowed pursuant to this line of credit are payable by the
Company on demand. The Company has made payments of $12,000 in 1995, reducing
the line of credit Promissory Note to $338,000. In addition, this Promissory
Note is to be repaid, pursuant to an Agreement between the Company and Norton,
dated August 3, 1994, in which Norton agreed to waive their standard 20%
discount from the prevailing list price for its purchases from the Company
provided this 20% discount is used to first repay accrued interest and then
principal owing on the outstanding balance to Venture until the balance is
repaid in full. In December, 1997 this revolving line of credit obligation was
written off of Wavemat's books by Growth in order to strengthen the Company's
position (See note 9 to Financial Statements.)
On August 18, 1994, the Company issued a Convertible Debenture ("Debenture") to
Growth, for the principal amount of $724,575 with the interest accruing on the
outstanding balance at a rate of 2 percent above the prime rate of a major bank
with such rate ranging from 9.75 percent per annum to 11.00 percent per annum
for the period from August 12, 1994 through December 31, 1996. The Debenture
amount of $724,575 represents amounts owed by the Company to Venture in
relation to a promissory note ($125,000), plus related accrued interest
($23,603), deferred compensation ($261,139), accrued royalties ($212,591), and
other miscellaneous liabilities ($102,242). The Debenture has an exercise price
of $.5630 per share of common stock.
On December 1, 1994, the Company entered into a $100,000 line of credit
arrangement evidenced by a promissory note with Growth. The amounts borrowed
pursuant to this line of credit are payable by the Company on demand. The
Company had utilized $100,000 of the line of credit by December 31, 1995. The
applicable interest rate is at 2 percentage points above the prime rate of a
major bank with such interest rate ranging from 9.75 percent per annum to 10.5
percent per annum for the period ending December 31, 1997. In December, 1997
this revolving line of credit obligation was written off of Wavemat's books by
Growth in order to strengthen the Company's position. (See note 9 to Financial
Statements.)
On January 4, 1995, the Company entered into a line of credit arrangement
evidenced by a promissory note with Growth. The amounts borrowed pursuant to
this line of credit are payable on demand. The Company has drawn $1,525,000 on
this line of credit as of December 31, 1997. The applicable interest rate is 2
percentage points above the prime rate of a major bank with such interest rates
ranging from 10.25 percent per annum to 11.00 percent per annum for the period
from January 4, 1995 through December 31, 1997. In December, 1997, $578,745 of
this revolving line of credit was written off of Wavemat's books by Growth in
order to strengthen the Company's position. (See note 9 to Financial
Statements.)
On October 27, 1995, by resolution of the Board of Directors, the
exercise price of the Debenture issued to Growth on August 18, 1994 was
20
<PAGE> 23
reduced from $.5630 to $.1563 per share of common stock, the average of the
bid-ask price of the Company's common stock on that date in consideration for
financing and contributions of capital provided to the Company during 1995. On
the same date, $600,000 of the debt owed Growth under the Debenture was
converted to 3,838,772 shares of the Company's common stock. There remains due
a balance of $124,574 under the Convertible Debenture.
On December 3, l997, the Company entered into a $25,000 line of credit
arrangement evidenced by a promissory note with Growth. The amounts borrowed
pursuant to the line of credit are payable by the Company on demand. The
Company had utilized $25,000 of the available line of credit on December 31,
l996. The applicable interest rate is at 2 percentage points above the prime
rate of a major bank with such interest being 10.25 percent per annum for l997.
On December 20, 1996, the Company entered into a $3,500 line of credit
arrangement evidenced by a promissory note with Growth. The amounts borrowed
pursuant to the line of credit are payable by the Company on demand. The
Company had utilized $3,500 of the available line of credit on December 31,
l996. The applicable interest rate is at 2 percentage points above the prime
rate of a major bank with such interest being 10.25 percent per annum for l997.
On January 9, 1997, the Company entered into a $3,500 line of credit
arrangement evidenced by a promissory note with Growth. The amounts borrowed
pursuant to the line of credit are payable by the Company on demand. The
Company had utilized $3,500 of the line of credit by March 31, 1997. The
applicable interest rate is at 2 percentage points above the prime rate of a
major bank with such interest rate ranging from 10.25 percent per annum to
10.50 percent per annum for the period from January 9, 1997 through December
31, 1997.
On June 16, 1997, the Company entered into a $125,000 line of credit
arrangement with a bank with such credit line carrying an interest rate on
outstanding balances of two percent above the prevailing prime rate of a major
bank. The Company paid no commitment fee for the arrangement of the line of
credit. This line of credit is secured pursuant to a guarantee agreement
between Venture Funding, Ltd. ("Venture"), a significant shareholder of the
Company and the lending bank. The Company has drawn $125,000 against this line
of credit and has accrued $5,979 of interest pertaining to this obligation at an
interest rate of 10.50 percent as of November 28, 1997. The amounts borrowed
pursuant to this line of credit were extinguished by the Company on November
28, 1997.
WARRANTS TO PURCHASE COMMON STOCK
On August 9, 1994, pursuant to a resolution of the Company's Board of
Directors, a warrant was issued by the Company to Venture, a significant
shareholder of the Company, for the purchase of 1,300,000 shares of the
Company's common stock at an exercise price of $.5313 per share. This warrant
could be exercised at any time and from time to time during the five year
period from August 9, 1994 to August 9, 1999. On October 27, 1995, the
Company's Board of Directors, by resolution, reduced the
21
<PAGE> 24
exercise price of the warrant to $.1563 per share of common stock, the
average of the bid-ask price of the Company's common stock on that date. The
issuance of the warrant and reduction in the exercise price were in
consideration for providing financing to the Company.
On October 27, 1995, a warrant was issued by the Company to Growth, a
wholly-owned subsidiary of Venture, for the purchase of 2,000,000 shares of the
Company's common stock at an exercise price of $.1563 per share. This warrant
may be exercised at any time, and from time to time during the five year period
from October 27, 1995 to October 27, 2000. This warrant was issued in
consideration for Growth providing financing to the Company.
On October 27, 1995, the Company's Board of Directors passed a resolution
authorizing the issuance of warrants for 100,000 shares each of the Company's
common stock at a exercise price of $.1563 per share to Raymond F. Decker and
Michigan State University, a substantial shareholder of the Company. These
warrants will vest in one-third amounts at the end of the first, second and
third year of the terms of Raymond F. Decker and Michigan State University
(Frederick H. Erbisch), or their successors as members of the Board of
Directors. Vesting will occur so long as they are members of the Board of
Directors. On December 31, 1997, 66,666 warrants were exercisable by Raymond
F. Decker and Michigan State University, respectively.
On October 27, 1995, the Company's Board of Directors passed a resolution
authorizing the issuance of a warrant for 500,000 shares of the Company's
common stock at an exercise price of $.1563 per share to Sharon Zitnik. These
warrants will vest equally each year over a five year period, so long as Sharon
Zitnik remains an employee of the Company. On December 31, 1997, 200,000
warrants were exerciseable by Ms. Zitnik.
On October 27, 1994, the Company's Board of Directors passed a resolution
authorizing the issuance of a warrant for 100,000 shares of the Company's
common stock at a exercise price of $.1563 per share to Robert Rudnick. These
warrants will vest equally each year over a four year period, so long as Robert
Rudnick remains an employee of the Company. On December 31, 1997, 50,000
warrants were exerciseable by Robert Rudnick.
The above warrants issued to Sharon Zitnik and Robert Rudnick were granted in
consideration for exceptional contributions performed for the Company over the
past several years.
On October 27, 1995, the Company's Board of Directors passed a resolution
authorizing the issuance of a warrant for 100,000 shares of the Company's
common stock at an exercise price of $.1563 per share to Dennis Schweiger, who
has been working part-time and as a consultant for the Company. These warrants
will vest equally over a four year period so long as he remains a consultant to
the Company at the end of each year during the four year period. These
warrants were granted in consideration for exceptional contributions performed
for the Company. On December 31, 1997, 50,000 warrants were exerciseable by
Dennis Schweiger.
On October 27, 1995, the Company's Board of Directors passed a resolution
22
<PAGE> 25
authorizing the issuance of a warrant for 2,000 shares of the Company's common
stock at an exercise price of $.1563 per share to Gordon St. John. These
warrants are immediately vested and can be exercised at any time over a five
year period. These warrants were granted for exceptional service performed for
the Company. On December 31, l997, 2,000 warrants were exerciseable by Gordon
St. John.
23
<PAGE> 26
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
<TABLE>
<CAPTION>
NUMBER OF
EXHIBIT DESCRIPTION OF EXHIBIT
- --------- --------------------------
<S> <C>
2(a) Certificate of Ownership and Merging Wavemat, Inc. into University
Science Partners, Inc. effective December 28, 1988. (6)
3(a) Articles of Incorporation of the Company. (1)
3(b) By-Laws of the Company. (1)
3(c) Certificate of Amendment to Certificate of Incorporation effective
May 5, 1989. (8)
10(f) Form of Registration Rights Agreement between the Company and
certain of its shareholders. (1)
10(g) Form of Indemnification Agreement between the Company and its
directors. (1)
10(j) Research and Funding Agreement, dated April 1, 1987, with Michigan
State University. (2)
10(m) Exclusive License Agreement, dated January 15, 1988, between
Wavemat and Michigan State University. (4) (5).
10(o) Research Agreement, dated January 15, 1988, between Wavemat and
Michigan State University. (4) (5)
10(p) Agreement, dated March 3, 1988, between Wavemat and Norton Company.
(4)
10(x) Research and Development Agreement, dated as of October 1, 1988,
between Wavemat Inc. and Growth Funding, Ltd. (6)
10(y) Cross License Agreement, dated as of October 1, 1988, between
Wavemat Inc. and Growth Funding, Ltd. (6)
10(z) Commercialization Agreement, dated as of October 1, 1988, between
Wavemat Inc. and Growth Funding, Ltd. (7)
10(a)(f) Incentive Stock Option Plan, as Amended, of the Company. (12)
10(a)(g) Non-Qualified Stock Option Plan, as Amended, of the Company. (12)
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
NUMBER OF
EXHIBIT DESCRIPTION OF EXHIBIT
- --------- ----------------------------------------------------
<S> <C>
10(a)(h) Restated Agreement between the Company and Materials
Science Partner, Inc. dated October 1, 1988. (12)
10(a)(i) Certificate of Designations, Preferences and Rights of Series A
5-1/2% Convertible Preferred Stock. (9)
10(a)(j) License Agreement, dated December 29, 1989, between Wavemat and
Norton Company. (10)
10(a)(k) Preferred Stock Purchase Agreement, dated December 29, 1989, between
Wavemat and Norton Company. (10)
10(a)(l) Research and Development Agreement, dated December 29, 1989, between
Wavemat and Norton Company. (10)
10(a)(m) Supply Agreement, dated December 29, 1989, between Wavemat and Norton
Company. (10)
10(a)(n) Lease Agreement between the Company and P.M. Associates, II dated
March 13, 1990. (12)
10(a)(o) Stock Option Plan for Non-Employee Directors. (12)
10(a)(p) Sale Agreement, dated January 28, 1991, between Wavemat and Thixomat
Inc. (12)
10(a)(q) Amendment to Research and Development Agreement between Wavemat and
Growth Funding, Ltd., dated October 1, 1988, with such Amendment dated
November 1, 1990. (12)
10(a)(r) Amendment to Cross License Agreement between Wavemat and Growth
Funding, Ltd., dated October 1, 1988, with such Amendment dated
November 1, 1990. (12)
10(a)(s) Amendment to Commercialization Agreement between Wavemat and Growth
Funding, Ltd., dated October 1, 1988, with such Amendment dated
November 1, 1990. (12)
10(a)(t) Lease Agreement, dated July 11, 1990, between Wavemat and Sterling
Savings Bank. (12)
10(a)(u) Stock Purchase Warrant to purchase 300,000 shares of common stock of
Wavemat, dated March 1, 1989, issued to Growth Funding, Ltd. (12)
10(a)(v) Amendment to Stock Purchase Warrant to purchase 300,000 shares of
common stock of Wavemat, dated March 1, 1989, issued to Growth Funding,
Ltd., with such warrant dated July 12, 1990. (12)
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
NUMBER OF
EXHIBIT DESCRIPTION OF EXHIBIT
- --------- --------------------------
<S> <C>
10(a)(w) Employment Agreement between the Company and Richard J. Dexter dated
June 7, 1993. (14)
10(a)(x) Wavemat Inc. Employee Savings and Retirement Plan adopted
September 1, 1993. (14)
10(a)(4) Amendment to Supply Agreement, dated December 29, 1989, between
Wavemat and Norton Diamond Film with such amendment dated
August 9, 1994.
10(a)(z) Stock Purchase Wavemat, dated August 9, 1994, between Wavemat, Inc.
and Venture Funding, Ltd.
10(b)(a) Investment Agreement dated August 19, 1994 between Wavemat, Inc. and
Michigan State University.
- ----------
</TABLE>
16.1 Arthur Andersen & Company letter addressed to Securities and Exchange
Commission dated November 12, 1992. (13)
1. Previously filed with Registration Statement on Form S-18 (No.
33-9290-C), incorporated herein by reference.
2. Previously filed with Form 10-Q for the quarter ended June 30, 1988, and
incorporated herein by reference.
3. Previously filed with Form 10-Q for the quarter ended September 30, 1988,
and incorporated herein by reference.
4. Previously filed with Form 10-K for the year ended December 31, 1987, and
incorporated herein by reference.
5. Confidential treatment has been granted for certain portions of this
Exhibit.
6. Previously filed with Form 10-K for the year ended December 31, 1988, and
incorporated by reference herein.
7. Previously filed with Form 10-Q for the quarter ended March 31, 1989.
8. Previously filed with Form 10-Q for the quarter ended March 31, 1989.
9. Previously filed on Form 8-K dated December 29, 1989.
10. To be filed upon amendment.
11. Previously filed with Form 10-K for the year ended December 31,
26
<PAGE> 29
1989, and incorporated herein by reference.
12. Previously filed with Form 10-K for the year ended December 31, 1990, and
incorporated herein by reference.
13. Previously filed with Form 8-K dated November 9, 1992.
14. Filed herewith.
(b) No reports on Form 8-K were filed during the last quarter of the
Company's year ended December 31, 1996.
27
<PAGE> 30
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Statements of Operations for F-2
Each of the Two Years
in the Period Ended
December 31, 1997
Statement of Financial Position F-3
at December 31, 1997
Statements of Cash Flows F-4
for Each of the Two
Years in the Period Ended
December 31, 1997
Statements of Shareholders' F-5
Deficit for Each of the
Two Years in the Period
Ended December 31, 1997
Notes to Financial Statements F-6
</TABLE>
F-1
<PAGE> 31
WAVEMAT INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------------
1997 1996
(Unaudited) (Unaudited)
OPERATING REVENUE: --------------- ---------------
<S> <C> <C>
Microwave processing system sales $340,251 $247,716
Microwave processing system sales
- affiliate --- 17,306
Contract research and development
- affiliate 125,000 ---
--------------- ---------------
Total operating revenue 465,251 265,022
--------------- ---------------
OPERATING COSTS AND EXPENSES:
Cost of sales 341,489 385,012
Research and development 65,002 90,761
Selling, general and administrative 594,133 510,280
Royalty expense - affiliate 16,882 (7,913)
--------------- ---------------
Total operating costs and expenses 1,017,506 978,140
--------------- ---------------
Operating loss (552,255) (713,118)
OTHER INCOME (EXPENSE):
Interest income 211 113
Miscellaneous income 1,270,000 ---
Interest expense (8,090) (2,461)
Interest expense - affiliate (200,357) (156,067)
--------------- ---------------
Other income (expense), net 1,061,764 (158,415)
--------------- ---------------
NET PROFIT (LOSS) $509,509 ($871,533)
=============== ===============
NET LOSS PER SHARE OF
COMMON STOCK $0.05 ($0.09)
=============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 10,182,125 10,182,125
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE> 32
WAVEMAT INC.
STATEMENT OF FINANCIAL POSITION
(Unaudited)
<TABLE>
<CAPTION>
ASSETS December 31,
1997
CURRENT ASSETS: ----------------
<S> <C>
Accounts receivable $ 46,329
Inventory 104,431
Prepaid expenses 3,679
----------------
Total current assets 154,439
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 76,335
LICENSE AGREEMENT, net 15,113
PURCHASED TECHNOLOGY, net 216,667
DEFERRED PATENT COSTS - affiliate 192,209
OTHER ASSETS 18,504
----------------
Total assets $ 673,267
================
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank overdraft $ 10,706
Short-term borrowings - affiliate 1,110,190
Accounts payable 333,751
Accounts payable - affiliate 66,402
Accrued liabilities 1,029,088
Customer deposits 8,813
Customer deposits - affiliate 77,643
----------------
Total current liabilities 2,376,198
SHAREHOLDERS' DEFICIT:
Preferred stock, $.10 par value, 1,000,000 shares authorized
and 4,000 shares ($399,600 aggregate liquidation preference)
issued and outstanding 400,000
Common stock, $.01 par value, 20,000,000 shares authorized and
10,182,125 shares issued and outstanding 101,821
Additional paid-in capital 4,677,174
Accumulated deficit (7,142,321)
----------------
Shareholders' deficit (1,702,931)
----------------
Total liabilities and shareholders' deficit $ 673,267
================
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 33
WAVEMAT INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------
1997 1996
(Unaudited) (Unaudited)
------------ ----------
<S> <C> <C>
CASH, BEGINNING OF PERIOD $ --- $ ---
------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss 509,509 (871,533)
Adjustments to reconcile net loss
to net cash provided by (used in) operating
activities:
Depreciation and amortization 53,296 53,132
Changes in current assets and liabilities:
Accounts receivable (26,853) 38,480
Inventory (43,230) 54,529
Prepaid expenses 719 1,330
Bank overdraft (84,995) 79,371
Short-term borrowings -affiliate (572,875) 431,200
Accounts payable 31,036 (51,825)
Accounts payable - affiliate 8,290 20,755
Accrued liabilities 243,425 296,009
Customer deposits (27,301) 21,823
Customer deposits - affiliate (50,600) ---
Noncash expenses relating to capital contribution ---
------------ ----------
Net cash provided by operating activities 40,421 73,271
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold
improvements (27,129) (42,629)
Increase in deferred patent costs (13,292) (30,642)
------------ ----------
Net cash (used in) provided by investing activities (40,421) (73,271)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
------------ ----------
Net cash provided by financing activities --- ---
------------ ----------
DECREASE IN CASH --- ---
------------ ----------
CASH, END OF PERIOD $ --- $ ---
============ ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 34
WAVEMAT INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------------- ---------------------------------------------------------
Additional
Number of Number of Paid-in
shares Amount Warrants shares Amount Capital
------------ ----------- ------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 4,000 $400,000 4,102,000 10,182,125 101,822 4,677,174
Net (loss) for 1996 --- --- --- --- --- ---
------------ ----------- ------------- ------------ ------------ -----------
BALANCE AT DECEMBER 31, 1996 4,000 400,000 4,102,000 10,182,125 101,822 4,677,174
Net profit for 1997 --- --- --- --- --- ---
------------ ----------- ------------- ------------ ------------ -----------
BALANCE AT DECEMBER 31, 1997 4,000 $400,000 4,102,000 10,182,125 101,822 4,677,174
============ =========== ============= ============ ============ ===========
<CAPTION>
Total
Accumulated Shareholders'
Deficit Deficit
------------ --------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ (6,780,297) $ (1,601,301)
Net (loss) for 1996 (871,533) (871,533)
-------------- ----------------
BALANCE AT DECEMBER 31, 1996 (7,651,830) (2,472,834)
Net profit for 1997 509,509 509,509
-------------- ----------------
BALANCE AT DECEMBER 31, 1997 $ (7,142,321) $ (1,963,325)
============== ================
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 35
WAVEMAT INC.
NOTES TO FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
Except as the context otherwise indicates, the term the "Company" refers to
Wavemat Inc.
INVENTORY
Inventory is valued at the lower of cost or market, determined by the first-in,
first-out method.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Equipment pertaining to
capital leases are stated at fair market value as of the inception date of the
lease. Depreciation and amortization is provided using the straight-line method
over estimated useful lives ranging from five to ten years.
Maintenance and repairs are charged to expense as incurred. The cost of renewals
and betterments is capitalized, and the cost and accumulated depreciation
associated with assets retired or sold are eliminated. Gains or losses on
disposal of equipment and leasehold improvements are credited or charged to
income.
LICENSE AGREEMENT
Costs incurred in obtaining the license agreement have been capitalized and are
being amortized by the straight-line method over the estimated useful life of
the license agreement of 17 years.
PURCHASED TECHNOLOGY
The cost of purchased technology is being amortized by the straight-line method
over an estimated useful life of 12 years.
DEFERRED PATENT COSTS
Costs incurred in relation to patent applications are capitalized as deferred
patent costs. If and when a patent is issued, the related patent application
costs will be transferred to the patent classification and will be amortized by
the straight-line method over the useful life of the applicable patent. If it is
determined that a patent will not be issued, the related patent application
costs will be expensed at the time such determination is made.
REVENUE RECOGNITION
Sales are recognized in the period in which the related products are shipped.
Contract research and development revenues are recognized during the period in
which the related research and development activities are conducted.
F-6
<PAGE> 36
WAVEMAT INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(1) SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
NET LOSS PER SHARE OF COMMON STOCK
The computation of net loss per share of common stock is based upon the weighted
average number of shares of common stock outstanding during each period
presented. Stock options, warrants and convertible preferred stock have been
excluded from the computation because the effect is antidilutive.
FINANCIAL STATEMENT RECLASSIFICATION
Certain reclassifications have been made to the financial statements of prior
years to conform to the 1997 presentation.
(2) DETAILS TO STATEMENT OF FINANCIAL POSITION
Inventory consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Raw Materials $ 78,752
Work-in-Process 70,334
--------
$149,086
========
</TABLE>
A summary of Equipment and Leasehold Improvements at December 31,
1997 follows:
<TABLE>
<S> <C>
Machinery & equipment $615,931
Leasehold improvements 61,612
--------
677,543
Less: Accumulated
depreciation and
amortization 601,208
--------
$ 76,335
========
</TABLE>
A summary of the License Agreement at December 31, 1997 follows:
<TABLE>
<S> <C>
License agreement $36,271
Less: Accumulated
amortization 21,158
-------
$15,113
=======
</TABLE>
A summary of Purchased Technology at December 31, 1997 follows:
<TABLE>
<S> <C>
Purchased Technology $325,000
Less: Accumulated Amortization 108,333
--------
$216,667
========
</TABLE>
F-7
<PAGE> 37
WAVEMAT INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
A summary of Accrued Liabilities at December 31, 1997 follows:
<TABLE>
<S> <C>
Royalties - affiliate 23,733
Deferred compensation 284,493
Commissions 78,391
Accrued interest - affiliate 482,090
Accrued legal and audit 39,213
Other 157,168
-----------
$ 1,029,088
===========
</TABLE>
------------------------------------------------------
(3) DEBT
On January 29, 1992, the Company entered into a $125,000 line of credit
arrangement evidenced by a promissory note with Venture. The amounts borrowed
pursuant to this line of credit are payable by the Company upon demand. The
Company had utilized the entire line of credit during 1992. The applicable
interest rate is at two percentage points above the prime rate of a major bank
with such interest rate ranging from 8.0 percent per annum to 9.25 percent per
annum for the period of January 29, 1992 through August 17, 1994. This
obligation with related interest was extinguished by inclusion in a Convertible
Debenture issues by the Company to Growth on August 18, 1994.
On April 7, 1994, the Company finalized a $350,000 revolving line of credit
Promissory Note with Growth, a wholly-owned subsidiary of Venture and
significant shareholder of the Company, with such credit line carrying an
interest rate on outstanding balances of 2 percent above the prevailing prime
rate of a major bank with such interest rate ranging from 8.25 percent per annum
to 10.75 percent per annum for the period of April 7, 1994 through December 31,
1996. The Company had utilized this entire line of credit during 1994. Amounts
borrowed pursuant to this line of credit are payable by the Company on demand.
The Company has made payments of $12,000 in 1995, reducing the line of credit
Promissory Note to $338,000. In addition, this Promissory Note is to be repaid,
pursuant to an Agreement between the Company and Norton dated August 3, 1994, in
which Norton agreed to waive their standard 20% discount from the prevailing
list price for its purchases from the Company provided this 20% discount is used
to first repay accrued interest and then principal owing on the outstanding
balance to Venture until the balance is repaid in full. In December, 1997, this
revolving line of credit obligation was written off of Wavemat's books by Growth
in order to strengthen the Company's position. (See note 9 to Financial
Statements.)
On August 18, 1994, the Company issued a Convertible Debenture ("Debenture") to
Growth, for the principal amount of $724,575 with the interest accruing on the
outstanding balance at a rate of 2 percent above the prime rate of a major bank
with such rate ranging from 9.75 percent
F-8
<PAGE> 38
WAVEMAT INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(3) DEBT - CONTINUED
per annum to 11.00 percent per annum for the period from August 12, 1994
through December 31, 1995. The Debenture amount of $724,575 represents
amounts owed by the Company to Venture in relation to a promissory note of
($125,000), plus related accrued interest ($23,603), deferred compensation
($261,139), accrued royalties ($212,591), and other miscellaneous liabilities
($102,242). The Debenture has an exercise price of $.5630 per share of common
stock.
On October 27, 1995, by resolution of the Board of Directors, the exercise price
of the Debenture issued to Growth on August 18, 1994 was reduced from $.5630 to
$.1563 per share of common stock, the average of the bid-ask price of the
Company's common stock on that date in consideration for financing and
contributions of capital provided to the Company during 1995. On the same date,
$600,000 of the debt owed Growth under the Debenture was converted to 3,838,772
shares of the Company's common stock. There remains a balance due of $124,574
under the Convertible Debenture.
On December 1, 1994, the Company entered into a $100,000 line of credit
arrangement evidenced by a promissory note with Growth. The amounts borrowed
pursuant to this line of credit are payable by the Company on demand. The
Company had utilized $100,000 of the line of credit by December 31, 1995. The
applicable interest rate is at 2 percent points above the prime rate of a major
bank with such interest rate ranging from 9.75 percent per annum to 10.5 percent
per annum for the period ending December 31, 1997. In December, 1997, this
revolving line of credit obligation was written off of Wavemat's books by Growth
in order to strengthen the Company's position. (See note 9 to Financial
Statements.)
On January 4, 1995, the Company entered into a line of credit arrangement
evidenced by a promissory note with Growth. The amounts borrowed pursuant to
this line of credit are payable on demand. The Company has drawn $1,995,220 on
this line of credit as of December 31, 1997. The applicable interest rate is 2
percentage points above the prime rate of a major bank with such interest rates
ranging from 10.50 percent per annum to 11.00 percent per annum for the period
from January 4, 1995 through December 31, 1997. In December, 1997, $578,745 of
this revolving line of credit was written off of Wavemat's books by Growth in
order to strengthen the Company's position. (See note 9 to Financial
Statements.)
F-9
<PAGE> 39
WAVEMAT INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
On October 30, 1996, MSU informed the Company that it was in default of its
payment and reporting obligation under the Exclusive License Agreement, dated
January 15, 1988. On December 6, 1996 the Company reached an agreement with
MSU concerning outstanding royalties and patent obligations in the amount of
$141,258. The Company agreed to pay this amount by December 31, 1996 and this
amount was unconditionally guaranteed by Venture Funding, an affiliate of the
Company. This guarantee shall not apply to Wavemat's obligations in excess of
after the date of the letter agreement. Wavemat defaulted on reimbursement of
$40,500 on December 31, 1996 and Growth paid the $40,500 relating to royalty
obligations on February 12, 1997 on the Company's behalf. In consideration of
Wavemat entering into a commercial sales agreement with Norton company,
allowing for the development and commercialization of 2.45 Ghz Microwave
Processing Systems, MSU granted the Company an extension on the remaining
$100,758 and current balances until February 28, 1997 under the condition that
Wavemat enter into the sales agreement with Norton by September 30, 1997. MSU
extended the February due date through September 30, 1997. In addition, MSU
has agreed to forgive annual minimum royalty requirements with the Company.
Wavemat defaulted on the payment relating to the $100,758 regarding patent
obligations and Growth made a payment of $136,080 on behalf of Wavemat on
November 7, 1997, which included the above amount as well as additional patent
maintenance obligations incurred in 1997.
(3) DEBT - CONTINUED
All interest costs incurred by the Company have been charged to expense.
Interest payments of $8,367 and $697 were made in 1997 and 1996, respectively.
(4) SHAREHOLDERS' DEFICIT
On August 9, 1994, pursuant to a resolution of the Company's Board of
Directors, a warrant was issued by the Company to Venture, a significant
shareholder of the Company, for the purchase of 1,300,000 shares of the
Company's common stock at an exercise price of $.5313 per share. This warrant
could be exercised at any time and from time to time during the five year
period from August 9, 1994 to August 9, 1999. On October 27, 1995, the
Company's Board of Directors, by resolution, reduced the exercise price of the
warrant to $.1563 per share of common stock, the average of the bid-ask price
of the Company's common stock on that date. The issuance of the warrant and
reduction in the exercise price were in consideration for providing financing
to the Company.
On August 19, 1994, the Company entered into an Investment Agreement with MSU,
an affiliate of the Company, in which $377,767 of the Company's accumulated
obligations related to MSU were extinguished in exchange for 670,989 shares of
the Company's common stock. The exchange price per share of common stock was
$.5630. In addition, for as long as MSU (or any other entity affiliated with
MSU, including the Michigan State Foundation) is the owner of at least 2.5% of
the Company's outstanding common stock on a fully diluted bases, then MSU shall
be entitled on notice given to the Company to have one of MSU's nominees
elected to and maintained on the Board of Directors of the Company.
<PAGE> 40
WAVEMAT INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(4) SHAREHOLDER'S DEFICIT - CONTINUED
The Company has 4,000 shares of Series A 5-1/2% Convertible Preferred Stock
("Convertible Preferred Stock") outstanding. The dividends relating to the
Convertible Preferred Stock are cumulative and amount to $22,000 per annum in
the aggregate. The Company is in arrears pertaining to the declaration and
payment of these dividends in the amount of $176,000 as of December 31, 1997.
The holder of the Convertible Preferred Stock is entitled to vote on all
matters submitted to a vote of the shareholders of the Company, voting together
with holders of the Company's common stock as one class. For each share of
Convertible Preferred Stock held, the holder shall be entitled to a number of
votes equal to the number of shares of common stock into which each share of
Convertible Preferred Stock could be converted. The holder of the Convertible
Preferred Stock is entitled at all times, voting as a separate class, to elect
one director to the Company's Board of Directors.
At any time after December 31, 1992, the holder of shares of Convertible
Preferred Stock is entitled to cause one or all of such shares to be converted
into shares of common stock at an initial conversion price equal to $2.38 per
share of common stock, subject to adjustment, with each share of Convertible
Preferred Stock being valued at $100 plus all accrued and unpaid dividends
thereon through the date of conversion; that is, a conversion rate equivalent
to 42.02 shares of common stock plus accrued dividends for each share of
Convertible Preferred Stock. During the period of July 1, 1991 through
December 31, 1993, due to the effects of anti-dilution provisions and product
order criteria, the conversion price was changed to $1.96 per share of common
stock, which represents a conversion rate equivalent to 51.02 shares of common
stock plus accrued dividends for each share of Convertible Preferred Stock.
The conversion of each share of Convertible Preferred Stock into common stock
shall automatically occur upon the closing of a public offering of the
Company's common stock, if that offering meets certain conditions. The
Convertible Preferred Stock shall be callable, in whole or in part, at the
option of the Company at any time after December 31, 1994, at a price per share
of $100 plus accrued and unpaid dividends thereon.
The Board of Directors is authorized to issue up to 1,000,000 shares of
preferred stock from time to time in one or more series and, subject to the
limitations contained in the Certificate of Incorporation and any limitations
prescribed by law, to establish and designate series and to fix the number of
shares and the relative rights, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions) and liquidation
preferences.
On October 27, 1995, a warrant was issued by the Company to Growth Funding,
Ltd., a wholly owned subsidiary of Venture Funding, Ltd., for the purchase of
2,000,000 shares of the Company's common stock at an
<PAGE> 41
WAVEMAT INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(4) SHAREHOLDER'S DEFICIT - CONTINUED
exercise price of $.1563 per share. This warrant may be exercised at any time,
and from time to time during the five year period from October 27, 1995 to
October 27, 2000. This warrant was issued in consideration for Growth
providing financing to the Company.
On October 27, 1995, the Company's Board of Directors passed a resolution
authorizing the issuance of warrants for 100,000 shares each of the Company's
common stock at a exercise price of $.1563 per share to Raymond F. Decker and
Michigan State University, a substantial shareholder of the Company. These
warrants will vest in one-third amounts at the end of the first, second and
third year of the terms of Raymond F. Decker and Michigan State University or
their successors as members of the Board of Directors. Vesting will occur so
long as they are members of the Board of Directors.
On October 27, 1995, the Company's Board of Directors passed a resolution
authorizing the issuance of a warrant for 500,000 shares of the Company's
common stock at an exercise price of $.1563 per share to Sharon Zitnik. These
warrants will vest equally each year over a five year period, so long as Sharon
Zitnik remains an employee of the Company. On December 31, 1997, 200,000
warrants were exercisable by Ms. Zitnik.
On October 27, 1994, the Company's Board of Directors passed a resolution
authorizing the issuance of a warrant for 100,000 shares of the Company's
common stock at a exercise price of $.1563 per share to Robert Rudnick. These
warrants will vest equally each year over a four year period, so long as Robert
Rudnick remains an employee of the Company. On December 31, 1997, 50,000
warrants were exercisable by Robert Rudnick.
The above warrants issued to Sharon Zitnik and Robert Rudnick were granted in
consideration for exceptional contributions performed for the Company over the
past several years.
On October 27, 1995, the Company's Board of Directors passed a resolution
authorizing the issuance of a warrant for 100,000 shares of the Company's
common stock at an exercise price of $.1563 per share to Dennis Schweiger, who
has been working part-time and as a consultant for the Company. These warrants
will vest equally over a four year period so long as he remains a consultant to
the Company at the end of each year during the four year period. These
warrants were granted in consideration for exceptional contributions performed
for the Company. On December 31, 1997, 50,000 warrants were exercisable by
Dennis Schweiger.
<PAGE> 42
WAVEMAT INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(5) STOCK OPTION PLANS
INCENTIVE STOCK OPTION PLAN
In December 1985, the Company adopted an Incentive Stock Option Plan, which
expired in December 1995. Under the terms of this plan, the Company may grant
options to employees of the Company to purchase a maximum of 200,000 shares of
the Company's common stock at prices not less than the quoted market price of
the common stock on the date of grant. The options generally vest after the
second anniversary of the date of grant and may be exercised for a term no
longer than ten years. The Compensation Committee of the Company's Board of
Directors has the authority, in its discretion, to determine the employees to
whom and the time or times at which options shall be granted and the number of
shares issuable upon the exercise of each option. The Company's Board of
Directors is considering the adoption of a renewal of the ISO Plan, but as of
December 31, 1997, had not ratified a renewal of the plan.
As of December 31, 1997, 54,800 shares, net of forfeitures, were subject to
grant pursuant to this plan at exercise prices per share ranging from $.2813 to
$2.4063 per share.
No options were granted in 1997.
Options which are forfeited are available for reissuance in accordance with
this plan.
Options to purchase 54,800 shares were exercisable at December 31, 1997.
No options have been exercised to date under the Incentive Stock Option Plan.
NON-QUALIFIED STOCK OPTION PLAN
In December 1985, the Company also adopted a Non-Qualified Stock Option Plan,
which expired in December 1995. Under the terms of this plan, the Company may
grant options to consultants and directors of the Company for the purchase of a
maximum of 200,000 shares of the Company's common stock at prices not less
than the quoted market price of the common stock on the date of grant.
Options, once granted, vest equally over a three-year period and expire ten
years after the date of grant. The Compensation Committee of the Board of
Directors has the authority, in its discretion, to determine the individuals to
whom, and the time or times at which options shall be granted and the number of
shares issuable upon the exercise of each option. The Company's Board of
Directors is considering the adoption of a renewal of the NQSO Plan, but as of
December 31, 1997, had not ratified a renewal.
As of December 31, 1997, 43,000 shares were subject to grant pursuant to this
plan at exercise prices per share ranging from $.3750 to $1.25 per share.
<PAGE> 43
WAVEMAT INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(5) STOCK OPTION PLANS - CONTINUED
NON-QUALIFIED STOCK OPTION PLAN - CONTINUED
Options which are forfeited are available for reissuance in accordance with
this plan.
No options were granted pursuant to this plan during 1997.
Options to purchase 43,000 shares were exercisable at December 31, 1997.
No options have been exercised to date under the Non-Qualified Stock Option
Plan.
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
On May 10, 1990, the Company adopted the Stock Option Plan for Non-employee
Directors (the "NEDSO Plan"). The NEDSO Plan provides for the grant of options
to purchase a maximum of 200,000 shares of the Company's common stock to
directors who are not employees of the Company. The NEDSO Plan also provides
that, on May 10, 1990 and May 10 of each subsequent year
through and including the year 2000, each eligible director will be granted an
option to purchase 6,000 shares with an exercise price equal to the quoted
market price of the Company's common stock on the date of the option grant.
Options once granted are immediately exercisable and expire 10 years from date
of grant.
As of December 31, 1997, 138,000 shares were subject to grant pursuant to this
plan at exercise prices per share ranging from $.1563 to $2.25 per share.
On May 10, 1997 and 1996, the Company granted options under this plan for the
purchase of 12,000 shares and 6,000 shares at an exercise price of $.1100 and
$.1563 per share respectively.
No options granted under the NEDSO Plan have been exercised to date.
Wavemat adopted SFAS No. 123 concerning stock based compensation in 1996.
Wavemat elected the "intrinsic" valve method prescribed under A.P.B. 25. Under
the intrinsic method, compensation cost is the excess, if any, of the quoted
market price of stock at the grant date over amount employee must pay to
acquire the stock. Since the exercise prices of the options are as of date of
grants, there would be no compensation costs recognizded. Therefore, no
statement has to be shown concerning SFAS No. 123 for 1997 and 1996.
(6) INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("FAS 109"). There
was no cumulative effect of this change in accounting for income taxes as of
January 1, 1993.
No provision for income taxes has been recognized for 1997 and 1996.
On December 31, 1997, the Company had net operating loss carryforwards for
financial reporting purposes of $7,142,321 which will, if unused, expire
<PAGE> 44
WAVEMAT INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(6) INCOME TAXES - CONTINUED
from 2004 to 2012. For tax reporting purposes, the Company had net operating
loss carry forward to offset future taxable income estimated at $6,590,000
which will, if unused, expire from 2004 to 2012.
In accordance with certain provisions of the Tax Reform Act of 1986, a change
in ownership of greater than 50 percent of a corporation within a three-year
period will place an annual limitation on the corporation's ability to utilize
its existing tax benefit carryforwards. Such a change in ownership occurred on
December 31, 1993 in relation to the issuance of 1,000,000 shares of common
stock in consideration for the acquisition of technology. As a result, an
annual limitation of approximately $58,000 applies to operating loss carry
forward of approximately $4,126,700 existing as of December 31, 1993.
Therefore, the Company does not expect to utilize the tax benefits of a
significant amount of its net operating loss carry forward existing as of
December 31, 1993. There were no changes of ownership greater than 50% in
1996, and therefore the Company may utilize the tax benefit carryforwards of
operating losses relating to 1997 without limitation. The Company's
utilization of its tax benefit carryforwards may be further restricted in the
event of subsequent changes in ownership of the Company. See Note 4.
Temporary differences and carryforwards which give rise to deferred tax assets
and liabilities as of December 31, 1997 were minimal.
<PAGE> 45
WAVEMAT INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(7) LICENSE, RESEARCH AND DEVELOPMENT, ROYALTY AND PATENT MAINTENANCE
OBLIGATIONS
In January 1988, the Company entered into a license agreement with a major
university. The license agreement provides the Company with exclusive
worldwide rights to the MSU's patented microwave plasma processing technology
and advancements. The license agreement required the Company to pay a sign-up
fee of $40,000 of which the Company owes $25,000, which was to be paid by
January 1, 1992. The license agreement also provides for royalty payments to
be made by the Company to the MSU based on the Company's net sales in relation
to the license agreement. The royalty payments shall be based upon established
percentages of certain levels of related sales.
On October 30, 1996, MSU informed Wavemat that the Company was in default of
its payment and reporting obligation under the Exclusive License Agreement,
dated January 15, 1988. On December 6, 1996 the Company reached and agreement
with MSU concerning outstanding royalties and patent obligations in the amount
of $141,258. The Company agreed to pay this amount by December 31, 1996 and
this amount was unconditionally guaranteed by Venture Funding, an affiliate of
the Company. This guarantee shall not apply to Wavemat's obligations in excess
of $141,258 and in no event shall this guarantee extend to Wavemat's
indebtedness after the date of the letter agreement. In consideration of
Wavemat entering into a commercial sales agreement with Norton Company,
allowing for the development and commercialization of 2.45 Ghz Microwave
Processing Systems, MSU granted the Company an extension on the remaining
$100,758 until February 28, 1997 under the condition that Wavemat enter into
the sales agreement with Norton by September 30, 1997. MSU has extended the
February due date through September 30, 1997.
Wavemat defaulted on the payment relating to the $100,758 regarding patent
obligations and Growth made a payment of $136,080 on behalf of Wavemat on
November 7, 1997, which included the above amount as well as additional patent
maintenance obligations incurred in 1997.
The Company incurred royalty expense of $16,882 and ($7,913) in relation to this
license agreement during 1997 and 1996, respectively. On December 31, 1996,
the Company owed MSU $23,733 in accrued royalties. See Note 3.
(8) EMPLOYEE SAVINGS AND RETIREMENT PLAN
Effective September 1, 1993, the Company adopted a retirement savings plan
covering all employees eligible to participate in the plan (eligible employees
of the Company as of the first day of a plan year or as of a date six months
thereafter). Eligible employees may make annual earnings reduction
contributions of up to 15 percent of compensation limited to $8,994 on a
pre-tax basis to their plan accounts. The Company may also make discretionary
contributions to this plan, subject to approval of the Board of Directors,
which are then allocated to the accounts of the participants in proportion to
each participant's annual compensation from the Company.
The Company may terminate the plan at any time. Upon termination, all
<PAGE> 46
amounts credited to the accounts of participants will become fully vested.
The Company made no discretionary contributions to the plan during 1997.
(9) RELATED PARTY TRANSACTIONS
(9) RELATED PARTY TRANSACTIONS - CONTINUED
In January 1988, the Company entered into a license agreement with MSU. The
license agreement provides the Company with exclusive worldwide rights to MSU's
patented microwave plasma processing technology and advancements. The license
agreement required the Company to pay a sign-up fee of $40,000. thereof. The
license agreement also provides for royalty payments to MSU by the Company on
the Company's net sales. The royalty payments are based on established
percentages of certain levels of related sales. The Company incurred related
royalty expenses of $16,788 and ($7,913) in relation to this license agreement
during 1997 and 1996, respectively. On December 31, l997, the Company owed MSU
$23,733 in accrued royalties. See, Note 3.
On December 31, 1993, the Company owed MSU a total of $203,755 in relation to
research and development activities, performed prior to 1991, and patent
maintenance fees incurred by MSU on behalf of the Company.
On August 9, l994, $377,767 of the Company's accumulated obligations to MSU
were extinguished in exchange for 670,989 shares of the Company's common stock.
The $377,767 was comprised of amounts owed in relation to license fees
($25,000), research and development expenses ($102,528), royalties ($153,586)
and patent maintenance fees ($96,653).
On August 3, 1994, the Company entered into an agreement with Norton, an
affiliate of the Company, in which Norton will waive their standard 20%
discount from the prevailing list price for its purchases from the Company.
This waiver of the 20 discount is contingent upon repayment to Growth, a
significant shareholder of the Company, first of any accrued interest and then
the outstanding principal until the outstanding debt to Growth is repaid in
full.
On August 9, 1994, the Company received an amendment to an exclusive license
agreement entered into in 1989 with Norton, which grants a non-transferable,
non-exclusive sublicense to manufacture and sell diamond-like carbon (DLC) CVD
processing equipment. As consideration for the
<PAGE> 47
license, the Company agrees to pay Norton a royalty of .5% of the net sales of
DLC processing equipment.
On January 17, 1995, the Company reached an agreement with Norton to permit
sales to universities and government laboratories of certain types of diamond
thin film chemical vapor deposition (CVD) processing systems currently being
used by Norton.
In December, 1997, following strategic discussions with Growth regarding the
Company's financial condition, Growth agreed to write-off $1,270,000 of
indebtedness and allow the Company to recognize income.
See Note 3 for information pertaining to borrowings of the Company from Venture
and Growth.
See Note 4 for a description of capital transactions between the Company and
Venture, Growth and the affiliates.
<PAGE> 48
WAVEMAT INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(10) COMMITMENTS AND CONTINGENCIES
GOING CONCERN
The Company has incurred operating losses and generated cash flow deficits from
operating activities since inception, therefore, the Company's ability to
continue as a going concern is contingent upon its ability to raise additional
funds to support its activities.
The Company is relying on sales of its microwave processing systems and
proceeds from contract research and development activities to provide
additional working capital. The Company is also continuously evaluating
acquisitions of technologies and/or entities owning such technologies which are
compatible to the Company's business strategies with the intention of
increasing the Company's revenue generating capabilities. In addition, the
Company is continuing to seek capital from various other sources of funding
such as term loans, lines of credit, corporate partners and sales of equity
securities. However, there is no assurance that the required amount of
additional funds can be raised.
LEASES
The Company is presently negotiating a third amendment to its operating lease
pertaining to its manufacturing and office space. The Company was in arrears
of $153,350 in lease payments, of which Growth Funding Ltd. paid $76,675 on
Wavemat's behalf on November 7, 1997. The remaining payment is being
negotiated with the landlord.
Year Amount
- ---- ------
1998 $120,132
1999 60,066
--------
Total future minimum lease payments $180,198
========
<PAGE> 49
On December 31, 1995, the Company was in arrears in relation to minimum lease
payments and executory costs pertaining to this lease in the amounts of $64,959
and $64,964, respectively. The $64,964 is included in minimum lease payments
for 1995. The Company continues in negotiations with the lessor pertaining to
the extinguishment of the amounts in arrears.
<PAGE> 50
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
WAVEMAT INC.
----------------------------------
Registrant
/s/ Monis Schuster
----------------------------------
Date: April 16, 1998 Monis Schuster, Chairman of the
Board and Chief Executive Officer
(Principal Executive Officer)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated
on April 15, 1997.
/s/ Monis Schuster
----------------------------------
Monis Schuster, Chairman of the
Board and Chief Executive Officer
(Principal Executive Officer)
and Director
/s/ Eugene I. Schuster
----------------------------------
Eugene I. Schuster, Acting
President and Director
/s/ Sharon K. Zitnik
----------------------------------
Sharon K. Zitnik, Vice President,
Secretary, Treasurer and Chief
Financial Officer (Principal
Financial and Accounting Officer)
/s/ Raymond F. Decker
----------------------------------
Raymond F. Decker, Director
<PAGE> 51
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
