<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1997 Commission File No. 0-19944
------------------------------------ ---------------------------
M~WAVE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3809819
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
216 Evergreen Street, Bensenville, Illinois 60106
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (630) 860-9542
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 and 15(d) of the Securities Exchange Act of
1934 during the preceding 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
--- ---
The registrant has 3,049,806 shares of common stock outstanding at May 9, 1997.
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PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
M~WAVE, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
ASSETS ---------------- ----------------
<Y> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... $ 1,216,859 $ 1,052,575
Accounts receivable......................................... 1,725,340 1,914,568
Inventories................................................. 1,349,645 1,030,484
Refundable income taxes..................................... 2,426,081 2,271,356
Deferred income taxes....................................... 804,088 804,088
Prepaid expenses and other.................................. 191,729 213,637
---------------- ----------------
Total current assets.................................... 7,713,742 7,286,708
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements............................ 6,224,247 6,232,488
Machinery and equipment..................................... 9,885,170 10,059,463
---------------- ----------------
Total property, plant and equipment..................... 16,109,417 16,291,951
Less accumulated depreciation............................... (3,646,209) (4,054,065)
---------------- ----------------
Property, plant and equipment-net....................... 12,463,208 12,237,886
NOTE RECEIVABLE, net of valuation
allowance of $250,000..................................... 871,718 871,718
GOODWILL........................................................ 771,853 746,407
OTHER ASSETS.................................................... 15,030 13,919
---------------- ----------------
TOTAL........................................................... $21,835,551 $21,156,638
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 1,549,997 $ 1,466,765
Accrued expenses............................................ 1,254,436 1,038,850
Current portion of long-term debt........................... 307,606 307,606
---------------- ----------------
Total current liabilities............................... 3,112,039 2,813,221
DEFERRED INCOME TAXES........................................... 1,106,786 1,143,238
LONG-TERM DEBT.................................................. 2,604,464 2,501,587
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized, 1,000,000
shares; no shares issued..................................
Common stock, $.01 par value; authorized, 10,000,000 shares
3,069,806 shares issued and 3,049,806 shares outstanding
at March 31, 1997......................................... 30,416 30,698
Additional paid-in capital.................................. 7,492,472 7,574,688
Retained earnings .......................................... 7,609,374 7,213,206
Treasury stock: 20,000 shares, at cost..................... (120,000) (120,000)
---------------- ----------------
Total stockholders' equity ............................. 15,012,262 14,698,592
---------------- ----------------
TOTAL........................................................... $21,835,551 $21,156,638
================ ================
See notes to consolidated financial statements.
</TABLE>
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M~WAVE, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1996 1997
---------- ----------
<S> <C> <C>
Net sales........................................ $6,256,558 $4,271,004
Cost of goods sold............................... 8,090,779 3,862,033
---------- ----------
Gross profit (loss) ........................... (1,834,221) 408,971
Operating expenses:
General and administrative..................... 736,692 738,002
Selling and marketing.......................... 483,403 299,741
Research and development....................... 121,355 0
---------- ----------
Total operating expenses..................... 1,341,450 1,037,743
---------- ----------
Operating loss ................................ (3,175,671) (628,772)
Other income (expense):
Interest income................................ 29,551 22,860
Interest expense............................... (58,004) (63,078)
Gain (loss) on disposal of assets.............. (149,751) 42,574
---------- ----------
Total other income (expense).................. (178,204) 2,356
---------- ----------
Loss before income taxes.................... (3,353,875) (626,416)
Credit for income taxes.......................... (1,227,531) (230,246)
---------- ----------
Net loss........................................ $(2,126,344) $(396,170)
========== ==========
Net loss per share............................... $(0.70) $(0.13)
Weighted average shares.......................... 3,020,375 3,027,433
See notes to consolidated financial statements.
</TABLE>
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M~WAVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................................... $(2,126,344) $(396,169)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Gain on disposal of property, plant and equipment............... 0 (42,574)
Depreciation and amortization................................... 369,729 399,827
Deferred income taxes........................................... (552,691) 36,452
Changes in assets and liabilities:
Accounts receivable-trade....................................... (2,161) (189,228)
Inventories..................................................... 866,609 319,161
Income taxes.................................................... (262,812) 154,725
Prepaid expenses and other assets............................... 109,171 (20,796)
Accounts payable................................................ 579,266 (83,232)
Accrued expenses................................................ 313,284 (215,586)
---------- ----------
Net cash flows from operating activities..................... (705,949) (37,420)
---------- ----------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment........................... (4,279,905) (128,585)
Proceeds from sale of property, plant and equipment................. 22,100
Redemption of marketable securities................................. 312,743 0
---------- ----------
Net cash flows from investing activities..................... (3,967,162) (106,485)
FINANCING ACTIVITIES:
Common stock issued upon exercise of stock options.................. 0 32,500
Common stock issued for cash........................................ 0 49,998
Payments on long term debt.......................................... (4,241) (102,877)
Mortgage debt incurred.............................................. 2,496,007 0
---------- ----------
Net cash flows from financing activities..................... 2,491,766 (20,379)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................. (2,181,345) (164,284)
CASH AND CASH EQUIVALENTS - Beginning of period....................... 2,403,747 1,216,859
---------- ----------
CASH AND CASH EQUIVALENTS - End of period............................. $ 222,402 $1,052,575
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.......................... $ 58,004 $ 63,078
</TABLE>
See notes to consolidated financial statements.
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M~WAVE, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments necessary for a
fair presentation have been included. For further information, refer to the
consolidated financial statements contained in the Annual Report on Form 10-K
for the year ended December 31, 1996 filed March 31, 1997.
2. BUSINESS
M~Wave, through its wholly-owned subsidiaries, Poly Circuits Inc. and P C
Dynamics Corporation (collectively, the "Company"), manufactures microwave
frequency components and high frequency circuit boards on Teflon-based
laminates for commercial and military wireless communication applications.
4. INVENTORIES
Substantially all the Company's inventories are in work in process.
5. DEBT
The Company has a mortgage loan on $2,803,000 for the facility at P C
Dynamics Corporation in Frisco, Texas. Interest on this mortgage loan is at
1/2% over prime rate. The loan is payable in monthly installments of principal
and interest and is due in October 2001.
The Company has a $2,000,000 line of credit available based on 80% of
eligible accounts receivable to fund the working capital needs of the
Company. The agreement expires May 31, 1997 and is renewable semi-annually at
the mutual consent of the Company and the lender. No balance was outstanding
under the line at March 31, 1997.
6. LITIGATION
The Company is a party to various actions and proceedings related to its
normal business operations. The Company believes that the outcome of this
litigation will not have a material adverse effect on the financial position
or results of operations of the Company.
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The Company and Joseph Turek have been named as defendants in Lionheart
Partners, Inc., as general partner of Lionheart USA Micro Cap Value. L.P. v.
M~Wave, Inc. and Joseph Turek, which was filed on or about November 17, 1995 in
the United States District Court for the Northern District of Illinois.
The case was filed as a purported class action on behalf of all persons who
purchased common stock of the Company between August 8, 1995 and October 18,
1995. The complaint alleges that the defendants made materially false and
misleading statements and failed to correct public representations which had
become materially false and misleading regarding the Company's revenues and
earnings. The complaint asserts claims under Sections 10(b) and 20 of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seeks
compensatory damages in an unspecified amount.
The Company believes that this action is without merit. On April 25,
1997, the plaintiffs and the defendants entered into a settlement agreement
which, subject to court approval, would resolve all of the claims arising out
of this action, except as to claims of class members who opt out of the
settlement. The settlement provides for a $150,000 payment to the plaintiff
class plus administrative fees not to exceed $20,000. The Company's
contribution to the settlement would be approximately $85,000.
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Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS FOR THE QUARTER ENDED MARCH 31, 1997 COMPARED TO THE QUARTER ENDED
MARCH 31, 1996
NET SALES
Net sales for the first quarter ended March 31, 1997 decreased 32% to
$4,271,000 from $6,257,000 in the first quarter of 1996. The Company has been
seriously affected by the slowing of the rapid growth in the domestic cellular
telephone industry. Net sales to Motorola decreased by $1,063,000 or 53% to
$945,000. Net sales to L K Products decreased by $525,000 or 56% to $407,000.
Net sales to Hewlett Packard decreased by $246,000 or 78% to $70,000.
The foregoing decreases in net sales were partially offset by an increase
in net sales to Spectrian and Lockheed Martin, two of the Company's larger
customers, of $406,000.
The Company's three largest customers accounted for 52% of the Company's
net sales for the first quarter ended March 31, 1997 compared to 57% in the
first quarter of 1996.
GROSS PROFIT (LOSS) AND COST OF GOODS SOLD
Gross profit increased by $2,243,000 to $409,000 in the first quarter of
1997 from negative $1,834,000 in 1996. In February 1997, as a result of lower
than anticipated volume, the Company reduced its employees and moved to a
one-shift operation at its Bensenville facility. The first quarter of 1996
included sales adjustments for pricing and returns of $721,000 and inventory
write-downs of $1,295,000 and $665,000 relating to manufacturing scrap and
rework and inventory obsolescence, respectively. The Company has also made
operational changes to enhance its quality control and ability to manufacture
highly complex products; however, there can be no assurance as to when, or if,
these changes will result in improved manufacturing process. Future production
problems would continue to adversely impact the Company's gross margins and
profitability, which would also result in decreased liquidity and adversely
affect the Company's financial position.
OPERATING EXPENSES
General and administrative expenses were $738,000 or 17.3% of net sales in
the first quarter of 1997 compared to $737,000 or 11.8% of net sales in the
first quarter of 1996. On April 15, 1996 the Company engaged a consulting firm
to provide consulting services with respect to the Company's operations, which
services resulted in additional expenses of $110,000 in the first quarter of
1997. The consultants completed their work with the Company in February 1997.
General and administrative expenses consist primarily of salaries and benefits,
professional services,
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depreciation of office equipment, computer systems and occupancy expenses.
Selling and marketing expenses were $300,000 or 7.0% of net sales in the
first quarter of 1997 compared to $483,000 or 7.7% of net sales in the first
quarter of 1996. Sales commission expense was 3.4% of net sales in the first
quarter of 1997 compared to 3.2% of net sales in the first quarter of 1996. The
Company also reduced its staff in February 1997. Selling and marketing expenses
include the cost of salaries, advertising and promoting the Company's products,
and commissions paid to independent sales organizations.
Research and development expenses which related primarily to the assembly
division were $121,000 or 1.9% of net sales in the first quarter of 1996. The
Company sold the Assembly Division in December 1996.
OPERATING LOSS
Operating loss was $629,000 in the first quarter of 1997 compared to an
operating loss of $3,176,000 in the first quarter of 1996, a decrease in the
operating loss of $2,547,000. The change in operating loss reflects primarily
the changes in net sales, gross profit and cost of goods sold and operating
expenses as discussed above. The change in operating loss can be summarized as
follows:
Decrease in net sales $ 582,000
Increase in gross margin 1,661,000
Decrease in operating expenses 304,000
-----------
Decrease in operating loss $ 2,547,000
On March 31, 1997, the Company had 115 employees compared to 175 on March
31, 1996.
INTEREST INCOME
Interest income from the notes receivable, recorded with the sale of the
Assembly Division in 1996, was $23,000 in the first quarter of 1997. Interest
income from short-term investments was $30,000 in the first quarter of 1996.
INTEREST EXPENSE
Interest expense, primarily related to the Company's mortgage obligation
on its P C Dynamics facility, was $63,000 in the first quarter of 1997 compared
to $58,000 in 1996.
GAIN ON DISPOSAL OF FIXED ASSETS
The Company recorded a gain of $43,000 on the disposal of fixed assets in
the first quarter of 1997 compared to a loss of $150,000 in 1996.
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INCOME TAXES
The Company had an effective tax credit rate of 36.8% in the first quarter
of 1997 compared to 36.6% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operations was $37,000 for the first three months of
1997 compared to $706,000 for the first three months of 1996. A reduction of
inventories and increases in accrued expenses and accounts payable offset the
first three months of 1997 loss from operations. The Company also had income
tax refunds of $421,000.
Capital expenditures were $128,000 for the first three months of 1997,
$105,000 to upgrade the network system at Poly Circuits. Capital expenditures
were $4.3 million in the first three months of 1996, $3.3 million for the new
P C Dynamics facility in Texas.
The Company has a mortgage loan of $2,803,000 on the P C Dynamics
facility. Interest on this mortgage loan is at 1/2% over prime rate. The loan is
payable in monthly installments of principal and interest and is due in October
2001.
The Company has a $2,000,000 line of credit available based on 80% of
eligible accounts receivable to fund the working capital needs of the Company.
The agreement expires May 31, 1997 and is renewable semi-annually at the mutual
consent of the Company and the lender. No balance was outstanding under the
line at March 31, 1997.
As of March 31, 1997, the Company has $2,803,000 of debt and $1,053,000 of
cash and cash equivalents. Management believes that funds generated from
operations, coupled with the Company's cash balance and its capacity for debt
will be sufficient to fund current business operations. The Company's ability
to fund its activities is directly dependent upon its sales, its ability to
improve its manufacturing processes, the effective utilization of the Company's
manufacturing resources and the Company's ability to access external sources of
financing. There can be no assurances that such additional debt financing can
be obtained and, if obtained, at reasonable terms.
INFLATION
Management believes inflation has not had a material effect on the
Company's operation or on its financial position.
FOREIGN CURRENCY TRANSACTIONS
All of the Company's foreign transactions are negotiated, invoiced and
paid in United States dollars.
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ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
As a supplier to microwave manufacturers, the Company is dependent upon
the success of its customers in developing and successfully marketing end-user
microwave systems. The Company is currently working on several development
programs for its customers. The development of commercial applications for
microwave systems and the timing and size of production schedules for these
programs is uncertain and beyond the control of the Company. There can be no
assurance that these development programs will have a favorable impact on the
Company's operating results. Although management believes some of these
products and programs may ultimately develop into successful commercial
applications, such developments could result in periodic fluctuations in the
Company's operating results. As a result of these considerations, the Company
has historically found it difficult to project operating results.
The Company expects that a small number of customers will continue to
account for a substantial majority of its sales and that the relative dollar
amount and mix of products sold to any of these customers can change
significantly from year to year. There can be no assurance that the Company's
major customers will continue to purchase products from the Company at current
levels, or that the mix of products purchased will be in the same ratio. The
loss of one or more of the Company's major customers or a change in the mix of
product sales could have a material adverse effect on the Company.
In addition, future results may be impacted by a number of other factors,
including the Company's dependence on suppliers and subcontractors for
components; the Company's ability to respond to technical advances; successful
award of contracts under bid; design and production delays; cancellation or
reduction of contract orders; the Company's effective utilization of existing
and new manufacturing resources; and pricing pressures by key customers.
The Company's future success is highly dependent upon its ability to
manufacture products that incorporate new technology and are priced
competitively. The market for the Company's products is characterized by rapid
technology advances and industry-wide competition. This competitive environment
has resulted in downward pressure on gross margins. In addition, the Company's
business has evolved towards the production of relatively smaller quantities of
more complex products, the Company expects that it will at times encounter
difficulty in maintaining its yield standards. There can be no assurance that
the Company will be able to develop technologically advanced products or that
future pricing actions by the Company and its competitors will not have
a material adverse effect on the Company's results of operations.
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PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company and Joseph Turek have been named as defendants in Lionheart
Partners. Inc., as general partner of Lionheart USA Micro Cap Value, L.P. v.
M~Wave, Inc. and Joseph Turek. which was filed on or about November 17, 1995 in
the United States District Court for the Northern District of Illinois.
The case was filed as a purported class action on behalf of all persons who
purchased common stock of the Company between August 8, 1995 and October 18,
1995. The complaint alleges that the defendants made materially false and
misleading statements and failed to correct public representations which had
become materially false and misleading regarding the Company's revenues and
earnings. The complaint asserts claims under Sections 10(b) and 20 of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seeks
compensatory damages in an unspecified amount.
The Company believes that this action is without merit. On April 25,
1997, the plaintiffs and the defendants entered into a settlement agreement
which, subject to court approval, would resolve all of the claims arising out
of this action, except as to claims of class members who opt out of the
settlement. The settlement provides for a $150,000 payment to the plaintiff
class plus administrative fees not to exceed $20,000. The Company's
contribution to the settlement would be approximately $85,000.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.9 Employment Agreement between the Company and Michael Bayles
27 Financial Data
(b) The Company filed a report on Form 8-K dated February 25, 1997 announcing
the reduction in workforce at their Bensenville location.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned "hereunto duly authorized.
M~WAVE, INC.
Date: May 9, 1997 /s/ PAUL H. SCHMITT
---------------------------
Paul H. Schmitt
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT
NO DESCRIPTION
- -------- -----------------------------------------------------------
10.9 Employment Agreement between the Company and Michael Bayles
27 Financial Data
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EXHIBIT 10.9
February 6, 1997
Mr. Michael Bayles
4130 Grand Ave.
Western Springs, IL 60558
Dear Michael:
We are pleased to formally offer you the position of President and Chief
Operating Officer of M-Wave, Inc. (the "Company"), beginning effective February
10, 1997 (the "Effective Date"). The following is intended to set forth the
terms and conditions of your employment with the Company:
1. Duties:
You will have full authority over the administration and business
operations of the Company as described in the attached position
description, and such other duties as may be delegated to you by
the Board of Directors. You will work with the Chairman and Chief
Executive Officer, and will report directly to the Board of
Directors.
Effective February 10, 1997, you agree to devote your entire
business time, energy and skills to the affairs of the Company and
its subsidiaries and affiliated businesses, if any, and to the
promotion of their interests. You may, with the approval of the
Board of Directors, serve as a director of other corporations.
2. Compensation:
Your salary and bonus will be reviewed annually by the Board of Directors.
(a) Salary: Your annual base salary will be $190,000 ("Base Salary"). Annual
base salary will be earned beginning on February 10, 1997 and
will be determined on a calendar year basis.
(b) Bonus: If you remain employed until February 3, 1998, you will receive a
signing bonus on that date equal to $47,500. In addition, you
will be entitled to an annual target bonus of up to 50% of Base
Salary (for 1997, up to 25% of Base Salary). Specific bonus
awards will be determined under a bonus plan tied to the target
annual net income of the Company and for each year, will be paid
within 60 days following the receipt of audited financial
statements for such year. If your employment is terminated by
the Company for any reason other than Cause, (as defined in Item
4) or if you die or become disabled (as defined below), you will
receive a portion of the bonus equal to the amount that would be
payable as a bonus based upon the actual annual net income for
the year in which your termination occurs (or such other target
as may be established for the bonus plan for such year)
multiplied by a fraction, the numerator of which is the number of
calendar months in the year during which you were employed
(rounded to the nearest whole month), and the denominator of
which is 12. No bonus will be paid with respect to any year in
which your employment terminates for Cause, or in which you
resign.
(i)For calendar year 1997, the bonus award will be tied to net
income based upon the existing business plan as described below:
<PAGE> 2
<TABLE>
<CAPTION>
--------------------------------------
TARGET
NET % TARGET AWARD AS BONUS
INCOME INCOME % SALARY AWARD
-------- -------- -------- -------
<S> <C> <C> <C>
$760,000 80% 5% $9,500
$855,000 90% 15% $28,000
$950,000 100% 25% $47,000
--------------------------------------
</TABLE>
If Net Income for the year falls between $760,000 and $855,000 or
between $855,000 and $950,000, the amount of your bonus will be
computed using linear interpolation. For example, if Net Income is
$800,000, your bonus award would be $17,500.
If Net Income exceeds $950,000, you will receive additional
incentive compensation at a rate of 5 % of the Net Income in excess
of $950,000 For example, if Net Income for 1997 is $1.95 million
($1.0 million above $950,000), you will receive incremental
incentive compensation of $50,000 for a total award (including your
signing bonus) of $145,000.
(ii) For subsequent years the annual bonus targets will be
determined by the Compensation Committee of the Board of Directors
not later than 90 days following the first day of the calendar year
with respect to which the bonus is payable
(c) Fringe Benefits:
you will be entitled to participate in the benefit programs
currently available to senior management employees of the Company,
or which are made available to such employees by the Board of
Directors. Currently, senior management employees may participate
in the Company's 401(k) plan, and receive health insurance coverage
and disability insurance coverage. In addition, you will be
entitled to 5 paid vacation days and six personal absence days per
year.
(d) Death or Disability:
If you should die while employed or have a termination of
employment due to disability, any salary and bonus which has been
earned but remains unpaid as of the date of death or termination
due to disability (including bonus, if any, earned with respect to
the calendar year ending immediately prior to the date of your
death or termination) will be paid to you or your designated
beneficiary. All other benefits will terminate on the date of your
death or termination due to disability
Disability shall mean your inability to perform the essential
functions of your job, with or without reasonable accommodation.
3. Equity Ownership:
(a) Stock Options:
(i) Amount. The Company will recommend to the Compensation
Committee that you be granted stock options with respect to 210,000
shares of the Company's common stock ("Stock")
(ii) Price. The Company will further recommend to the Compensation
Committee that the options be exercisable in three blocks as
follows: 50,000 of the options will be exercisable at a price equal
to the fair market value of the Stock on the date of grant; 70,000
of the options will be exercisable at a price of $7.50 per share,
and 90,000 of the options will be exercisable at a price of $10.00
per share
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(iii) Vesting. The options will vest as follows: 40% of each block
of options will vest on the first anniversary of the Effective
Date; 35 % of each block will vest on the second anniversary of the
Effective Date and the remaining 25 % of each block will vest on
the third anniversary of the Effective Date Vesting will accelerate
upon a Change of Control, as defined in the Company's 1992 Stock
Option Plan, as amended from time to time.
(iv) Differential Payment. If the fair market value of Stock on the
grant date exceeds $2.75, then upon exercise of the first block of
options (i.e. the 50,000 with respect to which the exercise price
is the fair market value on the grant date), the Company will pay
you , on a per share basis in cash, the difference, if any, between
the fair market value of the Stock on the date of grant and $2.75.
(b) Investment:
You agree that upon the Effective Date, you will purchase Stock
with a value of at least $50,000, based upon the then fair market
value of such Stock. The purchase price, plus interest, of the
Stock will be payable to the Company no later than 90 days after
the Effective Date in accordance with the terms of a demand note
that you will enter into with the Company.
(c) Shareholder Terms:
(i) Repurchase Rights for Shares Acquired by Option Exercise. If
you resign or your employment is terminated for Cause (as defined
in Item 4, below) or for Underperformance (as defined in this
paragraph), the Company will be entitled to repurchase any Stock
you own on the date of termination up to the number of shares of
Stock received by you upon the exercise of your options at the
exercise price for such options, and any unexercised options will
be cancelled as of the termination date. If your employment is
terminated for any other reason, (i) the Company will be entitled
to repurchase any Stock you own on the date of termination up to
the number of shares of Stock received by you upon the exercise
of your options at the fair market value (as defined in the
Company's 1992 Stock Option Plan) of such Stock on such date, and
(ii) the Company will be entitled to cash out any options granted
to you which have vested by such date at a price equal to the
difference between the fair market value (as defined in the
Company's 1992 Stock Option Plan) of the Stock with respect to
which the options are granted on the date of termination and the
exercise price for such options. Underperformance means your
failure to perform consistent with the duties and responsibilities
of your position.
(ii) Repurchase Rights for Other Stock. If your employment is
terminated for any reason, the Company will be entitled to
repurchase any other Stock you own as of the termination date at
the fair market value (as defined in the Company's 1992 Stock
Option Plan) of such Stock on such date.
(iii) Tag-Along and Drag-Along. In the event that First Chicago
and I sell all or substantially all of our Stock in a single
transaction or related transactions, then we will use our good
faith efforts to include you in the sale upon the same terms and
conditions. In the event that First Chicago and I, propose to
sell all of our Stock in a single transaction or related
transactions, then upon reasonable notice you shall sell all of
your Stock in such sale upon the same terms and conditions.
3
<PAGE> 4
4.Termination:
Your employment, and this letter agreement, will terminate on the
first to occur of (i) your death? (ii) your disability, or (iii)
your termination of employment for any reason. If your employment
terminates due to death or disability, you will be entitled to
the benefits described in paragraph 2(d) above. If your
employment terminates for any reason other than death or
disability, you will be entitled to, and the Company's sole
obligation will be to provide you with, the followings
(A)Termination by the Company in its sole discretion for Cause,
where Cause means: (I) your commission of any felony or other crime
involving dishonesty, fraud or moral turpitude, (II) your habitual
negligence in the performance of your duties (not including bad
judgment or negligence other than habitual neglect of such duties),
or (III) your engagement in conduct which is injurious to the
Company, monetarily or otherwise; in which case you will be entitled
to receive all amounts and benefits accrued to the date of such
termination, but no further benefits will accrue;
(B) Termination by the Company in its sole discretion without
Cause, in which case the Company will continue to pay you your Base
Salary and health insurance premiums for six months, or if earlier,
until the date you obtain alternative employment; or
C) Your resignation, with respect to which you agree to provide the
Company no less than 60 days' advance notice, and in which case,
you will be entitled to receive all amounts and benefits accrued to
the date of such termination, but no further benefits will accrue.
5. Non-Competition/Non-Solicitation:
(a) You agree that for a period of two years following the date that
your employment terminates in accordance with the terms hereof (the
"Non-Competition period"), you will not enter into or engage in or
be connected with or engage to work for any individual, firm or
corporation which is engaged in or corrected with any business
which is in competition with the Company in the continental United
States or any other country in which the Company is doing business
or is reasonably expected to do business, unless you obtain the
express written approval of the Board of Directors after full
disclosure of the nature of the intended arrangement.
(b) You further agree that during the Non-Competition Period, you will
not (a) encourage any employee of the Company or any of its
subsidiaries to leave his employment with the Company or
subsidiary, or (b) solicit any customers of the Company or any of
its subsidiaries.
(c) You agree not to disclose either during the period of your
employment or at any time thereafter to any person, Firm, or
corporation any information that the Company desires to protect and
keep secret and confidential concerning the business or affairs of
the Company which you may have acquired in the course of, or
incident to, your employment for your own benefit or to the
detriment or intended detriment of the Company
6. Entire Agreement:
This letter agreement constitutes the entire agreement between
you and the Company with respect to the terms and conditions of
your employment by the Company, and supersedes all prior oral or
written proposals, negotiations, representations, communications,
writings, and agreements between you and the Company.
4
<PAGE> 5
Michael, we believe you possess the unique combination of business and
interpersonal skills that will allow you to make a substantial contribution to
M-Wave, and look forward to a mutually satisfying and rewarding partnership.
Please indicate your acceptance of our offer by signing and dating this letter
agreement below, and return it to me at your earliest convenience.
Sincerely,
Joseph A. Turek
Chief Executive Officer
Accepted this 10 day of February, 1997
__________________________________
Michael Bayles
5
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