-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UsR8gA/cg8SaxRDtHRv/faHhF26h8Wa5lkmFPUqlO4GD8xdbQhWBYjZiYKraloJa 0L83V40CdC2lXykHv7nBZw== 0001047469-97-004757.txt : 19971117 0001047469-97-004757.hdr.sgml : 19971117 ACCESSION NUMBER: 0001047469-97-004757 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EIP MICROWAVE INC CENTRAL INDEX KEY: 0000026782 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 952148645 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-37289 FILM NUMBER: 97718931 BUSINESS ADDRESS: STREET 1: 3 CIVIC PLZA STREET 2: STE 265 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 7147201766 MAIL ADDRESS: STREET 1: 1745 MCCANDLESS DRIVE CITY: MILPITAS STATE: CA ZIP: 95035 FORMER COMPANY: FORMER CONFORMED NAME: JENOA INC DATE OF NAME CHANGE: 19800103 FORMER COMPANY: FORMER CONFORMED NAME: DANA ELECTRONICS INC DATE OF NAME CHANGE: 19780228 FORMER COMPANY: FORMER CONFORMED NAME: DANALAB INC DATE OF NAME CHANGE: 19750224 SB-2/A 1 SB-S/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 1997 Registration No. 333-37289 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 2 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 EIP MICROWAVE, INC. (Name of small business issuer in its charter) DELAWARE 3825 95-2148645 (State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or Classification Code Number) Identification No.) organization) 3 Civic Plaza Suite 265 Newport Beach, California 92660 714-720-1766 (Address and telephone number of principal executive offices) 1745 McCandless Drive Milpitas, California 95035 408-945-1477 (Address of principal place of business) Lewis R. Foster 1745 McCandless Drive Milpitas, California 95035 408-945-1477 (Name, address and telephone number of agent for service) Copies to: Michael E. Johnson, Esq., Bainbridge Group, A Law Corporation 18301 Von Karman Avenue, Suite 410 Irvine, California 92612 714-442-6600 APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.[ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.[ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- Title of each Amount to be Proposed Proposed class of registered maximum maximum Amount of securities offering price aggregate registration to be per share offering price fee registered - -------------------------------------------------------------------------------- Common Stock, 1,699,628 $1.70 $2,889,368 $875.57* par value $0.01 per share - -------------------------------------------------------------------------------- /*/ The registration fee is calculated pursuant to Rule 457(o). A registration fee of $714.62 was paid upon the filing of the initial registration statement on October 6, 1997, and an additional registration fee of $160.95 was paid upon the filing of amendment No. 1 to this registration statement. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine. PROSPECTUS EIP MICROWAVE, INC. 1,699,628 Shares of Common Stock (Par value, $0.01 per Share) RIGHTS OFFERING EIP Microwave, Inc., a Delaware corporation (the "Company"), offers 1,699,628 shares (the "Shares") of its Common Stock, $0.01 par value, at $1.70 per Share to its stockholders of record on November 7, 1997 (the "Record Date") who reside in states either where state registration of this offering is not required or, if required, in the judgment of the Company can reasonably be effected ("Stockholders of Record"). Each Stockholder of Record's right to subscribe is not transferable. See "Prospectus Summary--The Rights Offering, - --Method of Exercising Rights" for information on how to subscribe. The Company's Common Stock is quoted on the NASD's Bulletin Board under the symbol "EIPM". On November 7, 1997, the closing bid and closing ask prices of the Company's Common Stock were $2.15 and $3.00, respectively. THE RIGHTS WILL EXPIRE AT 5:00 P.M., CALIFORNIA TIME, ON DECEMBER 15, 1997, UNLESS EXTENDED BY THE COMPANY. IN NO EVENT WILL THE EXPIRATION DATE BE EXTENDED BEYOND MARCH 7, 1997. FAILURE TO EXERCISE RIGHTS COULD RESULT IN SUBSTANTIAL DILUTION TO NON-EXERCISING STOCKHOLDERS. SEE "RISK FACTORS--DILUTION FROM RIGHTS OFFERING." The Rights Offering is being made on an any or all basis, which means that the Company may accept any subscription received even if all 1,699,268 Shares offered are not purchased. See "Risk Factors--No Minimum Size of Rights Offering." J. Bradford Bishop, Chairman and Chief Executive Officer of the Company, and John F. Bishop, Vice Chairman, Secretary and Treasurer of the Company, both of whom are principal stockholders and members of the Board of Directors of the Company, have committed to the Company that they will subscribe for at least $1,360,000 in Common Stock in the Rights Offering if other stockholders purchase at least $800,000 in Common Stock in the Rights Offering. See "Risk Factors--Control by Management and Principal Stockholders", and - --"Dilution from Rights Offering." THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 2 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- Price to Public Underwriting Proceeds to Issuer Discounts and (1) Commissions - -------------------------------------------------------------------------------- Per Share $1.70 $0 $1.70 - -------------------------------------------------------------------------------- Total: 1,699,628 $2,889,368 $0 $2,889,368 Shares - -------------------------------------------------------------------------------- (1) Before deducting estimated expenses of the offering of $63,000 payable by the Company. The date of this Prospectus is November 14, 1997. The Company is a "reporting company," as such term is employed in the Securities Exchange Act of 1934. It is not listed on any exchange, and its Common Stock is not eligible for quotation on the NASDAQ SmallCap Market ("NASDAQ") but is quoted on the NASD's "Bulletin Board." Reports and other information filed by the Company may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, DC 20549, and at the Regional Offices of the Commission located at 5670 Wilshire Boulevard, 11th Floor, Los Angeles, CA 90036-3648, 7 World Trade Center, New York, NY 10048 and Citicorp Center, 500 Madison Street, Suite 1400, Chicago, IL 60661. Copies of such material can be obtained upon written request addressed to the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, DC 20549, at prescribed rates. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission; the address of such site is http://www.sec.gov. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission in Washington, D.C. a Registration Statement under the Securities Act of 1933, as amended, with respect to the Common Stock offered by this Prospectus. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits listed in the Registration Statement. The Registration Statement can be examined at the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies may be obtained upon payment of the prescribed fees. The Company will provide without charge to each person to whom a copy of this Prospectus is delivered, on the written or oral request of such person, a copy of any or all documents incorporated by reference into this Prospectus that are not delivered herewith, except the exhibits to such documents (unless such exhibits are specifically incorporated by reference in such documents). Requests for such copies should be directed to the Company's principal place of business: EIP Microwave, Inc., 1745 McCandless Drive, Milpitas, CA 95035-8024, Attn: Lewis R. Foster, Tel. (408) 945-1477. The Company's Common Stock is not listed on any exchange. See "Risk Factors--Delisting from NASDAQ." TABLE OF CONTENTS Contents Page Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 The Rights Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Method of Exercising Rights. . . . . . . . . . . . . . . . . . . . . . . 2 Opportunity to Increase Holdings . . . . . . . . . . . . . . . . . . . . 2 Avoiding Dilution. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Qualified Opinion of Price Waterhouse LLP. . . . . . . . . . . . . . . . 2 Default under Bank Line. . . . . . . . . . . . . . . . . . . . . . . . . 2 Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Recurring Material Losses and Accumulated Deficit. . . . . . . . . . . . 2 Future Cash Requirements . . . . . . . . . . . . . . . . . . . . . . . . 3 Repayment of Existing Debt . . . . . . . . . . . . . . . . . . . . . . . 3 Dependence on New OEM Relationship . . . . . . . . . . . . . . . . . . . 4 Dependence on Government Contractors . . . . . . . . . . . . . . . . . . 4 Dependence on Key Suppliers. . . . . . . . . . . . . . . . . . . . . . . 4 Uncertainty of Product Development and Introduction. . . . . . . . . . . 4 Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Dependence on Key Personnel. . . . . . . . . . . . . . . . . . . . . . . 5 Control by Management and Principal Stockholders . . . . . . . . . . . . 5 Offering Price Not Based on Actual Value . . . . . . . . . . . . . . . . 5 Dividends Not Likely . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Dilution from Rights Offering. . . . . . . . . . . . . . . . . . . . . . 6 Possible Future Dilution . . . . . . . . . . . . . . . . . . . . . . . . 6 No Minimum Size of Rights Offering . . . . . . . . . . . . . . . . . . . 6 Possible Extension of Expiration Date. . . . . . . . . . . . . . . . . . 6 Delisting from Nasdaq. . . . . . . . . . . . . . . . . . . . . . . . . . 6 Limited Trading Volume and Volatility of Stock Price in Public Market. . 7 Market Restrictions on Broker-Dealers. . . . . . . . . . . . . . . . . . 7 Potential Anti-Takeover Effects of Delaware Law. . . . . . . . . . . . . 7 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Determination of Offering Price. . . . . . . . . . . . . . . . . . . . . . . 8 Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 The Rights Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Subscription Expiration Date . . . . . . . . . . . . . . . . . . . . . . 8 Basic Subscription Rights. . . . . . . . . . . . . . . . . . . . . . . . 8 Method of Exercising Rights. . . . . . . . . . . . . . . . . . . . . . . 8 Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Purchase and Sale of Rights . . . . . . . . . . . . . . . . . . . . 9 Delivery of Certificates. . . . . . . . . . . . . . . . . . . . . . 9 Over-Subscription Privilege . . . . . . . . . . . . . . . . . . . . 9 Information Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Market for the Company's Common Stock and Related Stockholder Matters . . .10 The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 General/Products . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Markets/Principal Customers. . . . . . . . . . . . . . . . . . . . . . .12 Methods of Distribution. . . . . . . . . . . . . . . . . . . . . . . . .12 Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Research, Development and Engineering. . . . . . . . . . . . . . . . . .13 Raw Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Patents, Copyrights, Trademarks and Intellectual Property. . . . . . . .13 Government Approval of Principal Products. . . . . . . . . . . . . . . .14 Effect of Existing or Probable Governmental Regulations. . . . . . . . .14 Compliance with Provisions on Environmental Protection . . . . . . . . .14 i Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 Bank Line of Credit. . . . . . . . . . . . . . . . . . . . . . . . . . .14 Bishop Family Trust Loan Facility. . . . . . . . . . . . . . . . . . . .15 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Acquisition Discussions. . . . . . . . . . . . . . . . . . . . . . . . .16 Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . .16 Financial Condition. . . . . . . . . . . . . . . . . . . . . . . . . . .17 Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Directors, Executive Officers and Key Employees. . . . . . . . . . . . .18 Compensation of Directors. . . . . . . . . . . . . . . . . . . . . . . .19 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . .19 Option Grants in Fiscal 1996. . . . . . . . . . . . . . . . . . . .20 Aggregate Option/SAR Exercises in Fiscal 1996 and FY-End Option/SAR Values. . . . . . . . . . . . . . . . . . . . . . . . .21 Interest of Management and Others in Certain Transactions. . . . . . . . . .21 Commitment of the Bishops to Purchase Common Stock in Rights Offering. .21 Bishop Family Trust Loan Facility. . . . . . . . . . . . . . . . . . . .22 Subordinated Loan. . . . . . . . . . . . . . . . . . . . . . . . . . . .22 Bridge Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 Employment Agreement . . . . . . . . . . . . . . . . . . . . . . . . . .22 Legal Counsel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 Security Ownership of Certain Beneficial Owners and Management . . . . . .23 Description of Securities. . . . . . . . . . . . . . . . . . . . . . . . . .25 Authorized Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 Dividend Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 Liquidation Rights . . . . . . . . . . . . . . . . . . . . . . . . . . .25 Preemptive Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . .25 Dissenter's Rights . . . . . . . . . . . . . . . . . . . . . . . . . . .25 Certain Anti-Takeover Provisions . . . . . . . . . . . . . . . . . . . .26 Transfer Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 Legal Matters and Interests of Counsel . . . . . . . . . . . . . . . . . . .26 Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 Change in Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . .26 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 Disclosure of Commission Position on Indemnification for Securities Act Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1 ii PROSPECTUS SUMMARY THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. SEE "RISK FACTORS" BEGINNING ON PAGE 2 FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS. THE COMPANY EIP Microwave, Inc., a Delaware corporation (the "Company"), is engaged in the development, manufacture and sale of high frequency microwave and radio frequency (RF) test and measurement instruments. The Company's principal executive offices are located at 3 Civic Plaza, Suite 265, Newport Beach, CA 92660, Tel. (714) 720-1766. The Company recently introduced a new line of microwave frequency counters which it began distributing in October 1997, on a private label basis worldwide through an OEM relationship with Hewlett-Packard Company ("Hewlett-Packard"). The Company also recently received a five-year indefinite quantity, fixed price subcontract from ManTech Systems Engineering Corporation, a government contractor ("ManTech"), for the supply of RF synthesized signal generators and RF down converters, with total sales value to the Company that could range from approximately $3.5 to $20 million. Further, management expects that current development efforts will result in the introduction of test instrumentation for the wireless telecommunications market in 1998. The proceeds from the Rights Offering will assist the Company in meeting the cash requirements to continue its business and pursue these opportunities through fiscal 1998. See "The Company--General Products," "--Markets/Principal Customers," "--Methods of Distribution" and "--Research, Development and Engineering." THE RIGHTS OFFERING The Company offers 1,699,628 shares (the "Shares") of its Common Stock, $0.01 par value, to its stockholders of record on November 7, 1997 (the "Record Date"), who reside in states either where state registration of this offering is not required or, if required, in the judgment of the Company can reasonably be effected ("Stockholders of Record"). The Shares are offered at a purchase price of $1.70 per Share (the "Subscription Price"). The Rights Offering entitles the Stockholders of Record to subscribe at the Subscription Price for Shares on the basis of four Shares for each share of Common Stock held on the Record Date (the "Basic Subscription Rights"). In addition, each Stockholder of Record may over-subscribe to purchase as many additional Shares as desired. If there are not sufficient Shares to honor all over-subscriptions, the available Shares will be allocated among those who over-subscribe based solely on the number of shares subscribed for by each over-subscribing holder pursuant to the Basic Subscription Rights. J. Bradford Bishop, Chairman and Chief Executive Officer of the Company, and John F. Bishop, Vice Chairman, Secretary and Treasurer of the Company, both of whom are principal stockholders and members of the Board of Directors of the Company, have committed to the Company that they will subscribe for at least $1,360,000 in Common Stock in the Rights Offering if other stockholders purchase at least $800,000 in Common Stock in the Rights Offering. See "Risk Factors--Control by Management and Principal Stockholders", and - --"Dilution from Rights Offering." The Rights Offering is being made directly by the Company to its Stockholders of Record. No underwriters are involved. No commissions are being paid. All net proceeds from subscriptions go directly to the Company in their entirety. Common Stock offered 1,699,628 shares Common Stock to be outstanding after the offering 2,124,535 shares (1) Use of proceeds Develop new products, fund working capital requirements and repay debt. 1 (1) Assuming all the Shares offered herein are subscribed and sold. METHOD OF EXERCISING RIGHTS Stockholders of Record may not transfer their rights to purchase the Shares. Subscriptions must be made in writing by completing and signing the enclosed subscription agreement and mailing or delivering it, with a good and sufficient check for the subscribed amount, to the Company. Completed subscription agreements and checks must, in any event, be received by the Company no later than 5:00 P.M., California time, on December 15, 1997, unless extended by the Company (such date, as it may be extended on one or more occasions, is referred to herein as the "Expiration Date"). Checks should be made payable to "EIP MICROWAVE, INC." Should the offering be oversubscribed, the Company will promptly return to subscribers that portion of their subscription amounts that could not be filled, without any interest. OPPORTUNITY TO INCREASE HOLDINGS While brokerage costs and commissions vary among brokerage firms, a $25 minimum cost per transaction is in the lower range of such costs. Based on the Subscription Price of $1.70, a holder of fewer than fifteen shares would lose money in a sale of his present shares. The Rights Offering thus provides an opportunity for these holders of a few shares to increase their holdings to an amount which is a commercially marketable number of shares. No broker's commission is involved in a purchase of shares in the Rights Offering. AVOIDING DILUTION Each Stockholder of Record may avoid dilution of his or her percentage interest in the Company by subscribing for all Shares subject to his or her Basic Subscription Rights. See "Risk Factors--Dilution from the Rights Offering." QUALIFIED OPINION OF PRICE WATERHOUSE LLP The report of Price Waterhouse LLP on the Company's financial statements for the year ended September 30, 1996 has been reissued with dual dates of December 23, 1996 and October 23, 1997. The reissued report includes an explanatory paragraph to express substantial doubt regarding the Company's ability to continue as a going concern. See "Risk Factors--Recurring Material Losses and Accumulated Deficit". DEFAULT UNDER BANK LINE At November 7, 1997, the Company had outstanding borrowings in the aggregate principal amount of $179,000 under it's $500,000 bank line of credit (the "Bank Line") with Silicon Valley Bank ("SVB"), and the Company was in default of certain financial covenants under the Bank Line. See "Risk Factors--Default Under Bank Line" and "The Company--Bank Line of Credit." RISK FACTORS AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER, IN ADDITION TO THE INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS IN EVALUATING THE COMPANY AND THE COMMON STOCK OFFERED HEREBY. THESE RISK FACTORS COULD CAUSE ACTUAL RESULTS OR EVENTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD-LOOKING STATEMENT MADE BY OR ON BEHALF OF THE COMPANY. RECURRING MATERIAL LOSSES AND ACCUMULATED DEFICIT The Company operated at a loss of $453,000 in the fiscal year ended September 30, 1994, made a profit of $125,000 in the fiscal year ended September 30, 1995, operated at a loss of $493,000 in the fiscal year ended September 30, 1996, and operated at a loss of $793,000 in the nine months ended June 30, 1997. Management of the Company expects that the loss for the fiscal year ended September 30, 1997 will be approximately $1,285,000. Net cash used in operations and investing activities by the Company in the fiscal years ended September 30, 1994, 1995 and 1996, was $36,000, $85,000 and $89,000, respectively. Net cash used in such activities in the nine months ended June 30, 1997 was $796,000, and management expects that net cash used in such activities by the Company for the fiscal year ended September 30, 1997, will be approximately $1,050,000. At the end of fiscal year 1996, the Company's retained earnings were $374,000, and stockholders' equity was $1,227,000. At June 30, 1997, the Company's accumulated deficit was $419,000, and stockholders' equity was $434,000. Management expects that, at September 30, 1997, its accumulated deficit will be approximately $900,000, and stockholders equity will be approximately ($60,000). The Company had no indebtedness at September 30, 1994. At September 30, 1995 and 1996, the Company's ratio of interest-bearing indebtedness to total interest-bearing indebtedness and stockholders' equity was 1% and 20%, respectively. This ratio at June 30, 1997, was 73%, and management expects that, at September 30, 1997, this ratio will be approximately 105%. There can be, and is, no assurance that profitable operations and positive cash flow can be achieved or maintained or that any funds obtained from the offering described herein will be sufficient to carry the Company to a time when profitable operations and positive cash flow should sustain the Company. Continued losses could negatively impact 2 the Company's working capital and the extension of credit by its lenders and could cause such lenders to declare a default under the Company's loan agreements, and declare all outstanding loans immediately due and payable. See "Risk Factors--Repayment of Existing Debt." The report of Price Waterhouse LLP on the Company's financial statements for the year ended September 30, 1996 has been reissued with dual dates of December 23, 1996 and October 23, 1997. The reissued report includes an explanatory paragraph to express substantial doubt regarding the Company's ability to continue as a going concern. There can be no assurance that the Company will not continue to incur significant operating losses or that required additional financing will be available to meet the Company's business plan in fiscal 1998 and beyond. FUTURE CASH REQUIREMENTS The Company believes that borrowings under existing or replacement debt facilities and proceeds from the Rights Offering in an aggregate amount equal to approximately $3,500,000 will be necessary to satisfy the Company's cash requirements for implementing its business plan during the remainder of the fiscal year ending September 30, 1998. The actual cash resources required will depend upon numerous factors, including those described under "Risk Factors--Dependence on New OEM Relationship," "--Dependence on Government Contractors," and "--Uncertainty of Product Development and Introduction", and the cash requirements could be materially greater than $3,500,000. The Company expects to meet such cash requirements with borrowings under its existing or replacement debt facilities, and proceeds from the Rights Offering. There is no assurance that the Company will be successful in obtaining all such capital from the Rights Offering or from such debt facilities. If the Company is unable to obtain such capital from the Rights Offering or from such debt facilities on a timely basis, the Company will be required to significantly curtail its planned operations and its business, financial condition and results of operations could be materially adversely affected. DEFAULT UNDER BANK LINE At November 7, 1997, the Company had outstanding borrowings in the aggregate principal amount of $179,000 under its $500,000 bank line of credit (the "Bank Line") with Silicon Valley Bank ("SVB"), and the Company was in default of certain financial covenants under the Bank Line. See "The Company--Bank Line of Credit." As a result of the default, SVB has the right to declare all outstanding amounts under the Bank Line immediately due and payable. The Company is engaged in ongoing discussions with SVB concerning the Bank Line, and SVB has made a non-binding proposal to the Company to, among other things, amend the Bank Line to, among other things, modify the financial covenants and allow the Company to receive advances under the Bank Line, increase the interest rate charged to SVB's prime rate plus 5% per annum, and change the expiration date for the Bank Line to January 31, 1998. There can be no assurance that the Company and SVB will enter into an amendment of the Bank Line in accordance with the non-binding proposal. The Company is continuing to pursue discussions with other lenders concerning a replacement working capital facility; however, there can be no assurance that the Company will be able to obtain a satisfactory working capital facility. Even if the Company is able to obtain a working capital facility from another lender, there can be no assurance as to the terms of such facility; and the terms of such facility could be even less attractive to the Company than the terms of the existing Bank Line or the non-binding proposal from SVB. If the Company is unable to obtain a satisfactory working capital facility, the Company and its business could be materially adversely affected. REPAYMENT OF EXISTING DEBT In addition to the Bank Line, the Company has a $1,450,000 term and revolving advance loan facility with the Bishop Family Trust which expires in October 1998. At November 7, 1997, the Company had outstanding borrowings in the aggregate principal amount of $1,200,000 under the Bishop Family Trust Loan Facility. All such loans are payable in full upon expiration. See "The Company--Bank Line of Credit" and "--Bishop Family Trust Loan Facility". There can be no assurance that the Company will be able to extend, repay or refinance its loans under the Bank Line or the Bishop Family Trust Loan Facility. Further, such loans are subject to various covenants relating to the Company's performance and financial condition. If the Company does not maintain compliance with such covenants, the lenders have the right to declare all outstanding amounts immediately due and payable. At November 7, 1997 the Company was in default under the Bank Line, and there can be no assurance that the Company will be able to maintain compliance with the covenants under the Bishop Family Trust Loan Facility. 3 DEPENDENCE ON NEW OEM RELATIONSHIP The Company recently introduced a new line of microwave frequency counters which it began distributing in October 1997, on a private label basis worldwide through an OEM relationship with Hewlett-Packard Company ("Hewlett-Packard"). The Company expects that this OEM relationship will account for more than 15% of its revenues in fiscal year 1998. However, Hewlett-Packard is not obligated to purchase a minimum quantity of products, and the failure of Hewlett-Packard to purchase the product quantity expected by the Company would have a material, negative impact upon the Company's business and prospects of profits. There can be no assurance that the Company will be able to maintain a successful relationship with Hewlett-Packard and generate revenues or profits from the relationship. DEPENDENCE ON GOVERNMENT CONTRACTORS Approximately 35% of the Company's revenues in the last two fiscal years have been derived from the sale of products to government contractors. The Company recently received a five-year indefinite quantity, fixed price supply subcontract from ManTech Systems Engineering Corporation, a government contractor ("ManTech"), for the supply of RF synthesized signal generators and RF down converters, with total sales value to the Company that could range from approximately $3.5 to $20 million. The Company has received an initial purchase order under the subcontract in the amount of $227,000. Further production purchase order releases under the subcontract are subject to satisfactory completion of field testing of the U.S. Marine Corps' Third Echelon Test Set (TETS) systems and the Company's components. The Company will incur substantial expenses in preparing to satisfy its obligations under this subcontract. However, despite the incurrence of such expenses, this and other subcontracts with government contractors are subject to cancellation provisions in favor of the government contractor. The subcontract with ManTech is subject to termination by ManTech in the event the government terminates its contract with ManTech. Further, this subcontract can be terminated if the Company's components do not satisfy field testing requirements or the Company otherwise defaults under the subcontract. There can be no assurance that such subcontracts will not be canceled. Further, there can be no assurance that the Company will receive additional subcontracts from government contractors. DEPENDENCE ON KEY SUPPLIERS A number of the Company's products require specialized components currently available only through single sources of supply. The loss of any of these sources, or the inability of any such source to meet the Company's production and quality control requirements, could be detrimental to the Company with respect to the specific products involved. If any of the Company's single source suppliers is not able to deliver these specialized components, the Company would be required to implement alternative supply strategies (such as changing to one or more other suppliers, which could require product design or specification changes and would likely cause delays in shipment of the Company's products) or discontinue sales of the affected products. UNCERTAINTY OF PRODUCT DEVELOPMENT AND INTRODUCTION The Company's success depends to a large degree on its ability to develop and introduce in a timely manner new or updated products which are affordable, functional in purpose, distinctive in quality and design and tailored to the purchasing patterns of the Company's customers and potential customers. Misjudgments as to customer interest in new or updated products could lead to excess inventories and markdowns and could have a material adverse effect on the Company's financial condition and results of operations. There can be no assurance that new products under development will be successfully developed and introduced. Further, due to the uncertainty associated with any product development and introduction (such as delays in development and lack of market acceptance of a new product), there can be no assurances that the Company's development and introduction efforts will be successful. If products under development are not successfully introduced, the Company's business, financial condition and results of operations would be materially adversely effected. COMPETITION The markets in which the Company's products are sold have become increasingly competitive. Most of the Company's principal competitors have substantially greater financial resources. The Company's results of 4 operations can be significantly affected by pricing pressures arising from customer demand and pricing strategies by the Company's competitors, and the timing and market acceptance of new product introductions by competitors of the Company. There can be no assurance that pricing pressures will not have a material adverse effect on the Company, or that the Company's competitors will not succeed in developing products that would render the Company's technology and products obsolete and noncompetitive. DEPENDENCE ON KEY PERSONNEL The loss of the services of any of the Company's management and other key employees, for any reason, may have a materially adverse effect on the prospects of the Company. See "Management--Directors, Executive Officers and Key Employees." CONTROL BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS J. Bradford Bishop, a member of the Board of Directors and Chairman and Chief Executive Officer of the Company, is the son of John F. Bishop, a member of the Board of Directors and Vice Chairman, Secretary and Treasurer of the Company. J. Bradford Bishop and John F. Bishop (together, the "Bishops") beneficially own 191,400 shares of Common Stock in the aggregate, representing approximately 45% of the currently outstanding shares of Common Stock (excluding outstanding options to purchase Common Stock). If outstanding options are included, the Bishops beneficially own 196,400 shares of Common Stock, representing approximately 46% of the currently outstanding shares of Common Stock. In addition, John F. Bishop is a trustee of the Bishop Family Trust, which has entered into loan facilities providing for up to $1,450,000 in loans to the Company. See "The Company--Bishop Family Trust Loan Facility." By virtue of such stock ownership and their position with the Company, the Bishops may have the practical ability to determine the election of all directors and control the outcome of substantially all matters submitted to the Company's stockholders. Such concentration of ownership and lending relationship could have the effect of making it more difficult for a third party to acquire, or discourage a third party from seeking to acquire, control of the Company without the approval of the Bishops. This concentration of ownership would also enable the Bishops to acquire all Common Stock of the Company with a smaller incremental investment than would be required of other potential third party acquirors. Further, the Bishops have committed to the Company that they will subscribe for at least $1,360,000 in Common Stock in the Rights Offering if other stockholders purchase at least $800,000 in Common Stock in the Rights Offering. If other stockholders do not exercise their Basic Subscription Rights in full, the Bishops could substantially increase their pro rata ownership of the Company's Common Stock. See "Risk Factors--Dilution from Rights Offering." OFFERING PRICE NOT BASED ON ACTUAL VALUE The price at which the Common Stock is being sold is not based on an independent valuation of the Company or its assets or other recognized criteria of investment value. The Subscription Price does not indicate that the Common Stock has a value of or could be resold at that price. In addition, the Subscription Price of $1.70 is significantly less than the price at which the Common Stock has traded at various times during the last twelve months, and represents a 28% discount to the average closing price of the Common Stock in the 30 days prior to the Record Date. The effect of the Rights Offering will likely be to decrease the current market value of the Common Stock. See "Determination of Offering Price." DIVIDENDS NOT LIKELY Dividends have not been paid on the Company's Common Stock in more than six years. For the foreseeable future it is anticipated that earnings which may be generated from operations of the Company, if any, will be used to finance the growth of the Company and repay debt and that cash dividends will not be paid to holders of the Common Stock. Under the terms of agreements with the Company's senior and subordinated lenders, the Company may not pay or declare dividends without the lenders' prior written consent. DILUTION FROM RIGHTS OFFERING Stockholders who do not exercise their Basic Subscription Rights will realize a dilution of their percentage voting interest and ownership interest in future net earnings, if any, of the Company. The amount of dilution will depend on the number of shares of Common Stock purchased by other stockholders in the Rights 5 Offering. The Bishops have committed to the Company that they will subscribe for at least $1,360,000 in Common Stock in the Rights Offering if other stockholders purchase at least $800,000 in Common Stock in the Rights Offering. Assuming the Bishops purchase $1,360,000 of Common Stock and other stockholders only purchase $800,000 of Common Stock, the Bishops would beneficially own approximately 58% of the Company's Common Stock, and the effective percentage ownership of any non-exercising stockholder will be reduced by approximately 75%. The dilutive impact on non-exercising stockholders will be even greater if the Bishops or other stockholders purchase additional shares. If all stockholders fully exercise their Basic Subscription Rights, the effective percentage ownership of each stockholder will remain unchanged. POSSIBLE FUTURE DILUTION In addition to the shares registered for the Rights Offering described herein, the Company earlier registered 200,000 shares of Common Stock which will be available for issuance upon exercise of options granted or to be granted under the Company's Second Amended and Restated 1994 Stock Option Plan. Further, the Company has the right to issue additional shares of Common Stock to the Bishop Family Trust in lieu of cash payment of facility fees. See "The Company--Bishop Family Trust Loan Facility". The issuance of any such additional shares would dilute the percentage ownership and could dilute the net tangible book value per share of stockholders of the Company. Further, if additional financing is required, additional dilution may take place. NO MINIMUM SIZE OF RIGHTS OFFERING The Rights Offering is being made on an any or all basis, which means that the Company may accept any subscription received even if all 1,699,628 Shares offered are not purchased. Although the Bishops have committed to the Company that they will subscribe for at least $1,360,000 in Common Stock in the Rights Offering if other stockholders purchase at least $800,000 in Common Stock in the Rights Offering, there is no minimum amount of proceeds required for the Company to consummate the Rights Offering. For example, the Company may realize no proceeds from the Rights Offering or only a minimal amount of proceeds that would not result in a material improvement in the Company's ability to meet its operating objectives. Approximately $610,000 of the funds committed by the Bishops in the Rights Offering will be used by the Company to repay debt under the Bishop Family Trust Loan Facility. Proceeds from the purchase of Common Stock by other stockholders in the Rights Offering may also be used to repay debt under the Bishop Family Trust Loan Facility. See "Use of Proceeds" and "The Company--Bishop Family Trust Loan Facility." Even if other stockholders purchase $800,000 in Common Stock and the Bishops purchase $1,360,000 in Common Stock in the Rights Offering, the Company will still need additional funds from the Rights Offering or other sources to meet its cash needs for fiscal 1998. No assurances can be given as to the amount of gross proceeds that the Company will realize from the Rights Offering, or the adequacy of such proceeds to meet the Company's cash requirements. See "Use of Proceeds," "Plan of Distribution," and "Risk Factors--Future Cash Requirements." POSSIBLE EXTENSION OF EXPIRATION DATE The Company has reserved the right to extend the Expiration Date to as late as March 7, 1998. Funds deposited in payment of the Subscription Price may not be withdrawn and no interest will be paid thereon to stockholders. DELISTING FROM NASDAQ Previously, the Company's Common Stock was traded on the NASDAQ SmallCap Market ("NASDAQ"). However, the Company failed to maintain the minimum standards required by NASDAQ to maintain its listing on NASDAQ. The Common Stock was suspended from trading and delisted from NASDAQ on June 25, 1997, as a result of the Company's failure to maintain capital and surplus of at least $1,000,000. The delisting of the Company's Common Stock from NASDAQ could have an adverse effect on the market value of the Common Stock. See "Market for the Company's Common Stock and Related Stockholder Matters." LIMITED TRADING VOLUME AND VOLATILITY OF STOCK PRICE IN PUBLIC MARKET The Company's Common Stock is thinly traded and may experience significant price and volume fluctuations which could adversely affect the market price of the Common Stock without regard to the operating 6 performance of the Company. There is no assurance that a more active public market for such securities will develop after the conclusion of the Rights Offering described herein or, if a more active trading market develops, that it will be sustained. MARKET RESTRICTIONS ON BROKER-DEALERS The Company's Common Stock is covered by a Securities and Exchange Commission rule that imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally institutions with assets in excess of $5 million or individuals with net worth in excess of $1 million or annual income exceeding $200,000 or $300,000 jointly with their spouse). For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser's written agreement to the transaction prior to the sale. Consequently, the rule may affect the ability of broker-dealers to sell the Company's securities and also may affect the ability of persons purchasing Shares in this offering to sell their Shares in the secondary market. Further, the Company's Common Stock is quoted on an NASD inter-dealer system called the "Bulletin Board" and, following the Rights Offering, the Company still will not have $4 million in net tangible assets or $50 million in stockholders' equity, one of which is required for it to qualify for quotation on NASDAQ, and the Shares are not expected soon to command a market price of $5 per share, the price required for a non-NASDAQ-quoted security to escape the trading severities imposed by the Securities and Exchange Commission on so-called "penny stocks." These trading severities tend to reduce broker-dealer and investor interest in penny stocks and could operate (i) to inhibit the ability of the Company's stock to reach a $4 per share trading price that would make it eligible for quotation on NASDAQ even should it otherwise qualify for quotation on NASDAQ and (ii) to inhibit the ability of the Company to use its stock for business acquisition purposes. See "Market for the Company's Common Stock and Related Stockholder Matters." POTENTIAL ANTI-TAKEOVER EFFECTS OF DELAWARE LAW Certain provisions of Delaware law, the Company's Certificate of Incorporation and its Bylaws could delay, impede or make more difficult a merger, tender offer or proxy context involving the Company, even if such events could be beneficial to the interests of the stockholders. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of Common Stock. See "Description of Securities--Certain Anti-Takeover Provisions." USE OF PROCEEDS The net proceeds to the Company from the sale of all 1,699,628 shares of Common Stock offered by the Company hereby are estimated to be $2,826,368, based on a Subscription Price of $1.70 per share and after deducting the offering expenses payable by the Company. The Company expects that the proceeds of the offering will be used to develop new products, fund working capital requirements and repay debt. The Company expects to repay a portion of its Loan Facility with the Bishop Family Trust in an amount equal to $610,000 from the proceeds from the sale of Common Stock to the Bishops in the Rights Offering. Further, the Company may repay additional principal under the Loan Facility to the extent the Company believes funds are available in excess of its internal cash requirements for fiscal 1998. See "The Company--Bishop Family Trust Loan Facility". The Company intends to invest the aggregate net proceeds from this offering in short-term, investment-grade, interest-bearing securities until such time as funds are needed. 7 DETERMINATION OF OFFERING PRICE The Rights Offering is being conducted by the Company based on the commitment of the Bishops to subscribe for at least $1,360,000 in Common Stock in the Rights Offering if other stockholders purchase at least $800,000 in the Rights Offering. The terms of the Rights Offering were approved by the three independent members of the Company's Board of Directors (the "Independent Directors"). The Subscription Price reflects a 28% discount to the average closing price of the Company's Common Stock in the 30 days prior to the Record Date. The terms of the Rights Offering were unanimously recommended by the Independent Directors and approved by the Company's Board of Directors on November 7, 1997. The principal factors in the recommendation and approval of the terms of the Rights Offering were the Company's need for additional capital to continue development of new products and for working capital purposes, the nonavailability of such capital from other sources and the opportunity for stockholders to participate in the financing through the Rights Offering. The Company has not sought an independent third party opinion with respect to the value of the Company or the appropriateness of the Subscription Price. The Subscription Price has no relation to the market value of the Common Stock of the Company, the value of the Company's assets or the Company's prospects as a going concern. PLAN OF DISTRIBUTION THE RIGHTS OFFERING The Company offers 1,699,628 shares (the "Shares") of its Common Stock, $0.01 par value, only to its stockholders of record on November 7, 1997 (the "Record Date"), who reside in states either where state registration of this offering is not required or, if required, in the judgment of the Company can reasonably be effected ("Stockholders of Record"). The Shares are offered at a purchase price of $1.70 per Share (the "Subscription Price"). The Rights Offering is being made directly from the Company to its Stockholders of Record. No underwriters are involved. No commissions are being paid. All net proceeds from subscriptions go directly to the Company in their entirety. SUBSCRIPTION EXPIRATION DATE The Rights Offering will expire at 5:00 P.M., California time, on December 15, 1997, unless extended by the Company (such date, as it may be extended on one or more occasions, is referred to herein as the "Expiration Date"). In no event will the Expiration Date be extended beyond March 7, 1998. If the Company elects to extend the term of the Rights Offering, it will issue a press release to such effect not later than the first day The Nasdaq National Market is open for trading following the most recently announced Expiration Date. Funds provided in payment of the Subscription Price will be held by the Company, until the closing, which will occur promptly following the Expiration Date. The subscription for Common Stock in the Rights Offering is irrevocable once made, and no interest will be paid to subscribing stockolders. AS DESCRIBED BELOW, SUBSCRIPTIONS MUST BE RECEIVED BEFORE THE EXPIRATION DATE AFTER WHICH TIME THE RIGHT TO SUBSCRIBE WILL BE VOID AND VALUELESS. BASIC SUBSCRIPTION RIGHTS The Rights Offering entitles the Stockholders of Record to subscribe at the Subscription Price for Shares on the basis of four Shares for each share of Common Stock held on the Record Date (the "Basic Subscription Rights"). Exercise of the Basic Subscription Rights will also entitle the holders to the Over-Subscription Privilege described below. See "Plan of Distribution--Method of Exercising Rights" and "--Over-Subscription Privilege" below. METHOD OF EXERCISING RIGHTS To subscribe for Common Stock, a Stockholder of Record should fill in Section 1 on the Subscription Agreement and sign and transmit it along with the required payment, in the envelope provided, to the Company at 8 1745 McCandless Drive, Milpitas, California 95035. The Subscription Agreement must arrive on or before the Expiration Date. PAYMENT. The Subscription Agreement must be accompanied by payment of the full Subscription Price in U.S. Dollars for all shares. Such payment may be made by mail. Payment may be made by certified check or bank draft drawn upon a United States bank, or postal, telegraphic or express money order, payable to the order of "EIP Microwave, Inc." Sufficient mailing time should be allowed for the Subscription Agreement and payment to be RECEIVED by the Company before the expiration of the subscription period at 5:00 P.M., California time, December 15, 1997, unless extended by the Company (such date, as it may be extended on one or more occasions, is referred to herein as the "Expiration Date"), after which time the right to subscribe will be void and valueless. Payment may also be made by hand delivery to the Company, in cash or by certified check or bank draft drawn upon a United States bank, or postal, telegraphic or express money order, payable to the order of "EIP Microwave, Inc." The Rights Offering is being made on an any or all basis, which means that the Company may accept any subscription received even if all 1,699,628 Shares offered are not purchased. The Bishops have committed to the Company that they will subscribe for at least $1,360,000 in Common Stock in the Rights Offering if other stockholders purchase at least $800,000 in Common Stock in the Rights Offering. See "Risk Factors--Control by Management and Principal Stockholders," "--Dilution from Rights Offering," and "--No Minimum Size of Rights Offering." The Company reserves the right to reject any Subscription Agreement and payment not properly submitted. The Company has no duty to give notification of defects in any Subscription Agreement and/or payment and will have no liability for failure to give such notification. The Company will return any Subscription Agreement and/or payment not properly submitted. Any questions or requests for assistance concerning the method of exercising subscription rights or requests for additional copies of this Prospectus, the Subscription Agreement or the Instructions to the Subscription Agreement should be directed to the Information Agent at 1-800-631-8985. PURCHASE AND SALE OF RIGHTS. Subscription rights may not be transferred, divided, combined, purchased or sold. DELIVERY OF CERTIFICATES. Certificates for Shares issuable on exercise of subscription rights will be mailed as soon as practicable after the Expiration Date. OVER-SUBSCRIPTION PRIVILEGE. If some stockholders do not fully exercise all of their Basic Subscription Rights, the remaining Shares will be offered to those holders of Basic Subscription Rights who wish to acquire more than the number of shares to which their Basic Subscription Rights entitle them (the "Over-Subscription Privilege"). Each holder of Basic Subscription Rights who fully exercises Basic Subscription Rights will be entitled to participate in such Over-Subscription Privilege and will be asked to indicate on the Subscription Agreement how many additional shares that stockholder would be willing to acquire pursuant to the Over-Subscription Privilege. Each stockholder wishing to exercise its Over-Subscription Privilege must exercise its Over-Subscription Privilege and must tender payment for the Shares subscribed for pursuant to the Over-Subscription Privilege at the time it exercises its Basic Subscription Rights. If there remain sufficient Shares after the exercise of Basic Subscription Rights, all over-subscriptions will be honored in full. If there are not sufficient Shares to honor all over-subscriptions, the available Shares will be allocated among those who over-subscribe based solely on the number of shares subscribed for by each over-subscribing holder pursuant to the Basic Subscription Rights. For example, if after the exercise of the Basic Subscription Rights (1) there remain 150,000 Shares that were not subscribed for pursuant to Basic Subscription Rights, (2) two stockholders each indicated that they wished to acquire Shares through the Over-Subscription Privilege, (3) the first stockholder oversubscribed for 150,000 Shares and the second stockholder oversubscribed for 200,000 Shares and each tendered payment for that number of shares and (4) the first stockholder acquired 100,000 shares pursuant to its full Basic Subscription Rights and the second stockholder acquired 200,000 shares pursuant to its full Basic Subscription Rights; then the first stockholder would be entitled to one-third or 50,000 Shares and the second stockholder would be entitled to two-thirds or 100,000 Shares. 9 The allocation process may involve a series of allocations in order to assure that the shares available for over-subscription are distributed proportionately among all over-subscribing holders. Accordingly, the degree to which each stockholder's request for Shares pursuant to the Over-Subscription Privilege will be honored will depend on the number of Shares requested, the number of shares acquired by the exercise of Basic Subscription Rights and the total number of Shares available for over-subscription. After the expiration of the subscription rights, the Company will send notice of the number of Shares acquired pursuant to the Over-Subscription Privilege to each stockholder that over-subscribed and promptly remit to such stockholder, without any interest, any payment tendered for shares not acquired under the Over-Subscription Privilege. INFORMATION AGENT The Company has appointed Corporate Investor Communications, Inc. ("CIC") as Information Agent for the Rights Offering. Any questions or requests for additional copies of this Prospectus, the Subscription Agreement or the Instructions to the Subscription Agreement may be directed to the Information Agent at the telephone number and address below. Corporate Investor Communications, Inc. 111 Commerce Road Carlstadt, NJ 07072-2586 (201) 896-1900 Or call Toll Free (800) 631-8985 The Company will pay the fees and expenses of the Information Agent and has also agreed to indemnify the Information Agent from certain liabilities in connection with the Rights Offering. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS As of the date of this Prospectus, there are 424,907 shares of Common Stock of the Company owned of record by approximately 254 stockholders. An additional 200,000 shares of Common Stock of the Company are reserved for issuance against the exercise of Company stock options. The following sets forth for each calendar quarter since January 1995, the range of high and low closing bids for the Company's Common Stock as reported to the Company by NASDAQ. For the period through June 25, 1997, the Common Stock was listed on the NASDAQ SmallCap Market under the symbol EIPM. For the period since June 25, 1997, the Common Stock has been quoted on the NASD Bulletin Board under the symbol EIPM. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. Calendar Quarter High ($) Low ($) ---------------- -------- ------- 4th quarter 1997 (through November 7, 1997) 2.75 2.125 3rd quarter 1997 3.625 1.25 2nd quarter 1997 6.00 1.25 1st quarter 1997 2.00 1.00 4th quarter 1996 5.00 1.00 3rd quarter 1996 6.75 3.50 10 Calendar Quarter High ($) Low ($) ---------------- -------- ------- 2nd quarter 1996 7.50 2.00 1st quarter 1996 7.25 2.75 4th quarter 1995 5.50 1.50 3rd quarter 1995 7.75 5.50 2nd quarter 1995 9.25 1.25 1st quarter 1995 7.00 1.75 The Company's stock is quoted on an NASD inter-dealer system called the "Bulletin Board." While some Bulletin Board stocks are actively traded, they do not draw the interest of the NASD brokerage community held by NASDAQ stocks or exchange-listed stocks. The eligibility requirements for listing the Company's stock on exchanges are generally as high or higher than the requirements for eligibility for quotation on NASDAQ, and the Company has no present plans to list its stock on an exchange. The Company's stock will not be eligible for quotation on the NASDAQ SmallCap Market ("NASDAQ") unless it meets various NASDAQ requirements, which it will not meet even if all the Shares offered herein are subscribed. No assurance can be made that the Common Stock will ever become eligible for quotation on NASDAQ. Further, holders of the Shares offered herein face the prospect of an indefinite period during which the Shares will be subject to trading severities imposed on Bulletin Board, so-called "penny stocks" (stocks that trade at less than $5 per share) by regulations of the Securities and Exchange Commission. The effect of these trading severities is to reduce broker-dealer and investor interest in trading or owning "penny stocks" and, hence, could inhibit the ability of the Company's stock to reach a trading level of $4 per share or higher and thereby become eligible for quotation on NASDAQ even if the Company meets NASDAQ's assets and stockholders' equity requirements in the future. THE COMPANY THE FOLLOWING DISCUSSION CONTAINS TREND INFORMATION AND OTHER FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. THE ACTUAL RESULTS OF EIP MICROWAVE, INC. (THE "COMPANY") COULD DIFFER MATERIALLY FROM THE COMPANY'S HISTORICAL RESULTS OF OPERATIONS AND THOSE DISCUSSED IN THE FORWARD- LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE IDENTIFIED UNDER THE HEADING "RISK FACTORS" ABOVE. DUE TO SUCH RISK FACTORS AND OTHER FACTORS, PAST RESULTS ARE NOT A RELIABLE PREDICTOR OF FUTURE RESULTS. GENERAL/PRODUCTS The Company was incorporated under the laws of the State of Delaware in 1987 under the name EIP Microwave, Inc. The predecessor corporation was organized under the laws of California in 1961, and merged with the Company in 1987. The Company is engaged in a single industry segment constituting the development, manufacture and sale of high frequency microwave and radio frequency (RF) test and measurement instruments. These instruments include microwave heterodyne-type automatic frequency counters, microwave and RF pulse frequency counters, microwave and RF synthesized signal generators, pulse generators, and downconverters. All of these products are electronic devices which are used in the design, manufacture and maintenance of microwave and RF products and systems throughout the world. Stand-alone microwave frequency counters represented 50% of net sales in fiscal 1996, 64% of net sales in fiscal 1995, and 75% of net sales in fiscal 1994. The balance of sales in those periods was mainly derived from the Company's VXIbus-based products. VXIbus is a hardware and software standard for modular instrumentation. EIP 11 manufactures individual modules in the VXIbus format that provide various functions, including frequency measurement, synthesized signal generation, downconversion and modulation. These modules plug in to standardized racks that supply power and computer resources. During fiscal 1997, the Company introduced a new line of microwave frequency counters suitable for use in laboratory, manufacturing and field service environments. These products are portable and can be operated on their own internal batteries. The Company began distributing these products in October 1997, on a private label basis worldwide through an OEM relationship with Hewlett-Packard Company ("Hewlett-Packard"). During fiscal 1994, the Company introduced a microwave pulse frequency counter with peak power measurement capability. The Company designs and manufactures its own YIG (Yitrium iron garnet) filters, which are a key feature of many EIP microwave products. Additionally, the Company manufactures hybrid microwave integrated circuits (MICs) and proprietary microwave subassemblies used in its microwave products. Management believes that the Company's YIG and MIC capabilities provide its microwave products with competitively superior performance, protection from overload, and compact size. MARKETS/PRINCIPAL CUSTOMERS The Company has a variety of customers worldwide for its microwave products, including the military, government agencies, government subcontractors, the telecommunications industry, the aerospace industry, and research and development facilities. The primary customers for the Company's RF products are telecommunication companies. The Company's principal customers, and the percent of its net sales attributable to such customers, are Northrup-Grumman (29% for the nine months ended June 30, 1997, 22% in fiscal 1996, 11% in fiscal 1995, and 14% in fiscal 1994) and Marconi (19% in fiscal 1995). Other important customers that provided less than 10% of revenues to the Company in such periods were Hewlett-Packard Company, Lockheed Martin, Kelly Air Force, Hughes Aircraft, and Harris Corporation. The Company's sales of microwave products to the United States Government and its contractors comprised approximately 38%, 33%, 36%, and 44%, of net sales for the nine months ended June 30, 1997, and the fiscal years 1996, 1995, and 1994, respectively. In September 1997, the Company received a five-year indefinite quantity, fixed price supply subcontract from a ManTech Systems Engineering Corporation, a government contractor ("ManTech"), with total sales value to the Company that could range from approximately $3.5 to $20 million. Foreign sales represented 31% of net sales in the nine months ended June 30, 1997, 36% of net sales in fiscal 1996, 43% of net sales in fiscal 1995, and 36% of net sales in fiscal 1994. METHODS OF DISTRIBUTION The Company has entered into a five-year OEM Agreement with Hewlett-Packard Company ("Hewlett-Packard"). The Agreement contemplates the worldwide distribution of the Company's recently developed line of microwave frequency counters through Hewlett-Packard on a private label basis. The Company began distributing this new line of products in October 1997. The Company uses independent manufacturers' representatives for distribution of its other products in the United States and in foreign countries. The Company provides service and technical support to its manufacturers' representatives, and directly to its customers. From November 1992 until December 1995, the Company's products were distributed in a number of foreign countries through an exclusive distribution agreement with Marconi Instruments, a subsidiary of The General Electric Company, Plc. of England. Foreign sales through Marconi Instruments represented 19% and 16% of net sales in fiscal 1995 and 1994, respectively. The Company has since established agreements with other independent manufacturers' representatives in these countries previously covered by Marconi Instruments. COMPETITION The Company believes there are three to six competitors in the respective markets in which it competes; however, reliable data on sales and profits of most of the Company's competitors is not readily available because the 12 competitors are either privately held or are separate divisions of large publicly held companies which do not separately report financial results for competing divisions. The markets in which the Company's frequency counters are sold are well-defined and narrow markets which have become increasingly competitive both in the United States and abroad. Within these narrow markets, the Company believes it holds a significant competitive position, generally believed to be number two or three in market share. The Company encounters competition, however, from certain firms which are substantially larger and have greater financial resources than the Company; the market leader is believed to be Hewlett-Packard. Other companies selling products in the same markets as the Company include Anritsu, Advantest, Racal, and XL Microwave. The market for microwave synthesized signal generators is considered to be larger than the microwave frequency counter market. As the market for this type of product is still developing, the Company has not been able to determine market share. At present, the only other known supplier of VXIbus microwave synthesized signal generators is Giga-tronics. The Company's VXIbus pulse generator and downconverter are sold primarily as companion products for integrated systems. Competitors for the pulse generator include Wavetek and Tektronix. There is no known current direct competition for the VXIbus downconverter. Competition is based upon performance, reliability, product design, availability and price and is characterized by technological change. RESEARCH, DEVELOPMENT AND ENGINEERING Management believes that the Company's future success is dependent to a significant extent upon engineering and new product development. Expenditures for research, development and engineering during the past three years have ranged between 17% and 11% of annual net sales. Research, development and engineering expenditures were $978,000, $742,000, and $620,000, for fiscal years ended September 30, 1996, 1995, and 1994, respectively, and $722,000 and $724,000, for the nine months ended June 30, 1997, and 1996, respectively. Management expects that current development efforts will result in the introduction of new test instrumentation for the wireless telecommunications market in 1998. All of the Company's research, development and engineering activities have been Company-funded. RAW MATERIALS The principal raw materials used by the Company in its manufacturing operations include capacitors, resistors, semiconductors, integrated circuits, transformers, printed circuit boards, display devices, and metal and plastic cases, most of which are purchased from outside suppliers. For the majority of materials, the Company has access to many suppliers, and believes that it is not dependent upon any one supplier, and that adequate alternate sources for its materials are, for the most part, readily available. There are, however, many applications which require specialized components currently available, in each instance, only through a single source of supply. The loss of any of these sources, or the inability of any such source to meet the Company's production and quality control requirements, could be detrimental to the Company with respect to the specific products involved. EMPLOYEES The Company had 52 employees at September 30, 1996, 49 of whom were full time employees, and had 45 employees at September 30, 1997, 39 of whom were full time employees. The Company believes that its employee relations are good, but can make no assurances that it will continue to be able to attract and retain qualified employees. The Company also has engaged the services of consultants when appropriate. PATENTS, COPYRIGHTS, TRADEMARKS AND INTELLECTUAL PROPERTY The Company holds no patents, trademarks, franchises, concessions or royalty agreements that have a material importance to or effect on its frequency counter, pulse counter, synthesized signal generator, pulse 13 generator, or downconverter product lines. However, the Company has obtained a license from a third party for digital modulation implementations relating to products under development by the Company. The Company relies on trade secrets and technical know-how in order to maintain its competitive advantage and scientific expertise. It is the practice of the Company to enter into confidentiality agreements with employees, consultants, and any third party to whom it discloses confidential information. There can be no assurance that such confidential information will not be disclosed, that similar trade secrets or expertise will not be independently developed, or that access to such information could not be gained inadvertently. GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTS Government approval is not required for any of the Company's principal products. EFFECT OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS The Company believes it is in compliance with applicable governmental regulations. The Company is not aware of any probable governmental regulation which would have a detrimental or disruptive effect on the Company. COMPLIANCE WITH PROVISIONS ON ENVIRONMENTAL PROTECTION The Company does not believe that compliance with federal, state, and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, will have any material effect upon the capital expenditures, earnings, or competitive position of the Company. PROPERTY The Company leases a 20,331 square foot one story, concrete structure located in Milpitas, California, which contains production, warehouse and office facilities. The lease term continues until October 1998, with an option to renew for an additional three years. The annual rent for the current term is $226,000 plus applicable real property taxes and insurance. The Company also leases 978 square feet of space as the Company's corporate offices located in Newport Beach, California. The lease term is on a month-to-month basis with a monthly rent of $1,320. The current facilities are believed by the Company to be suitable and adequate for its present requirements. The Company owns and uses machinery, equipment, and furniture with an original cost of approximately $5,319,000 at September 30, 1996 and approximately $5,403,000 at June 30, 1997. The Company also leases and uses equipment with capital lease obligations of $129,000 at September 30, 1996 and $105,000 at June 30, 1997. This personal property is believed to be in acceptable condition. The Company's management believes the facilities and all machinery and equipment of the Company are adequately insured to cover loss of equipment or occupancy privileges. The Company does not have any investments in real estate, real estate mortgages or securities of persons primarily engaged in real estate activities, and has no present policy or limitations with respect to any such future investments. BANK LINE OF CREDIT At November 7, 1997, the Company had outstanding borrowings in the aggregate principal amount of $179,000 under its bank line of credit (the "Bank Line") with Silicon Valley Bank ("SVB"). The Bank Line provides for borrowings up to 60% of eligible accounts receivable, not to exceed $500,000. Interest is charged at SVB's prime rate plus 3% per annum, provided that the interest rate in effect each month shall not be less than 10% per annum, and is payable monthly (11.5% as of November 7, 1997). The Bank Line expires on March 4, 1998. The Bank Line contains various restrictive covenants requiring, among other matters, the maintenance of minimum levels of tangible net worth and certain financial ratios, including a minimum quick ratio and a maximum debt to net worth ratio, and the achievement of profitability. The Bank Line also precludes or limits the Company's 14 ability to take certain actions, such as paying dividends, making loans, making acquisitions or incurring indebtedness, without the bank's prior written consent. The Bank Line is secured by substantially all of the Company's assets. At November 7, 1997, the Company was in default of certain financial covenants under the Bank Line. The Bank Line permits losses for the quarter ended June 30, 1997 in an amount up to $165,000 (and the Company's losses for such fiscal quarter were $278,000), permits losses for the quarter ended September 30, 1997 in an amount up to $110,000 (and the Company expects that its losses for such fiscal quarter will be approximately $492,000) and requires a tangible net worth, including loans from affiliates, of at least $975,000 (and the Company expects that its tangible net worth, including loans from affiliates, at September 30, 1997, will be approximately $940,000). The Company is engaged in ongoing discussions with SVB concerning the Bank Line, and SVB has made a non-binding proposal to the Company to amend the Bank Line to, among other things, modify the financial covenants and allow the Company to receive advances under the Bank Line, increase the interest rate charged to SVB's prime rate plus 5% per annum, and change the expiration date for the Bank Line to January 31, 1998. There can be no assurance that the Company and SVB will enter into an amendment of the Bank Line in accordance with the non-binding proposal. The Company is continuing to pursue discussions with other lenders concerning a working capital facility; however, there can be no assurance that the Company will be able to obtain a satisfactory working capital facility. Even if the Company is able to obtain a working capital facility from another lender, there can be no assurance as to the terms of such facility; and the terms of such facility could be even less attractive to the Company than the terms of the existing Bank Line or the non-binding proposal from SVB. If the Company is unable to obtain a satisfactory working capital facility, the Company and its business could be materially adversely affected. BISHOP FAMILY TRUST LOAN FACILITY At November 7, 1997, the Company had outstanding borrowings in the aggregate principal amount of $1,200,000 under a loan and security agreement (the "Loan Facility") with John F. Bishop and Ann R. Bishop, trustees of the Bishop Family Trust (the "Bishop Family Trust"). The Loan Facility provides for a term loan of $1,000,000 and revolving advances up to $450,000. Interest is charged at the prime rate plus 5% per annum and is payable monthly (13.5% as of November 7, 1997). The Loan Facility expires on October 15, 1998. The Loan Facility contains various restrictive covenants requiring, among other matters, the achievement of profitability on a rolling 3-month basis commencing in August 1998, and the maintenance of minimum revenues from its OEM relationship with Hewlett-Packard Company commencing in January 1998. The Loan Facility also precludes or limits the Company's ability to take certain actions, such as paying dividends, making loans, making acquisitions or incurring indebtedness, without the Bishop Family Trust's prior written consent. The Loan Facility is secured by substantially all of the Company's assets. The Bishop Family Trust has subordinated the Loan Facility to the Bank Line. At November 7, 1997, the Company was in compliance with the restrictive covenants of the Loan Facility. Under the terms of the Loan Facility, the Company will be obligated to pay facility fees of up to $282,000 to the Bishop Family Trust in the manner described below. A. A facility fee of $70,500 was fully earned on October 22, 1997 and will be payable by the Company on January 22, 1998. B. If the principal amount of the obligations outstanding under the Loan Facility on January 22, 1998 exceeds $1,000,000, then an additional facility fee of $70,500 will be fully earned on such date and will be payable by the Company on January 22, 1998. C. If the principal amount of the obligations outstanding under the Loan Facility on April 22, 1998 exceeds $1,000,000, then an additional facility fee of $141,000 will be fully earned on such date and will be payable by the Company on April 22, 1998. The Company will have the right to pay the facility fee in cash or by issuance of Common Stock. The number of shares of Common Stock issuable as payment for a facility fee will equal (a) the applicable facility fee divided by (b) the Fair Market Value (as defined in the Loan Facility) per share of Common Stock on the date such facility fee is payable to the Bishop Family Trust. 15 LEGAL PROCEEDINGS There are no pending legal proceedings to which the Company or its subsidiary is a party or of which any of their property is the subject. The Company is not aware of any such legal proceeding contemplated by a governmental authority. ACQUISITION DISCUSSIONS Since 1995, the Company has held discussions with several other companies with respect to a possible acquisition of certain of the Company product lines by such other companies. No offers have been made. The Board of Directors will consider any future acquisition offers made to the Company in light of what appears to be in the best interest of the Company's stockholders. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THE FOLLOWING DISCUSSION CONTAINS TREND INFORMATION AND OTHER FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE COMPANY'S HISTORICAL RESULTS OF OPERATIONS AND THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE IDENTIFIED UNDER THE HEADING "RISK FACTORS" ABOVE. DUE TO SUCH RISK FACTORS AND OTHER FACTORS, PAST RESULTS ARE NOT A RELIABLE PREDICTOR OF FUTURE RESULTS. IN ADDITION, THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES HEREIN, AND IS QUALIFIED ENTIRELY BY THE FOREGOING AND BY OTHER MORE DETAILED FINANCIAL INFORMATION APPEARING ELSEWHERE. RESULTS OF OPERATIONS Net sales for the nine months ended June 30, 1997, were $3,560,000, a 27% decrease from net sales of $4,886,000 for the same period the prior year. The decrease in net sales for this period was primarily attributable to lower export sales of frequency counters. Net sales for fiscal 1996 were $6,492,000, a 3% decrease from fiscal 1995 sales of $6,721,000. The decrease in net sales in fiscal 1996, compared to the prior year, was primarily attributable to market softness for the Company's products. The 25% increase in fiscal 1995 net sales, compared to fiscal 1994 net sales of $5,389,000 was primarily attributable to increased international sales (43% of fiscal 1995 net sales vs. 36% of fiscal 1994 net sales), orders from government contractors (36% of fiscal 1995 net sales vs. 44% of fiscal 1994 net sales), and sales of products configured in the VXIbus format (28% of fiscal 1995 net sales vs. 14% of fiscal 1994 net sales). Foreign exchange rate fluctuations did not have a material impact on net sales or gross profit margins for the last three fiscal years. Gross margin increased to 39% for the nine months ended June 30, 1997, from 37% for the same period the prior year. The increase in gross margin percentage for this period was due almost entirely to an improved gross margin for VXIbus products. An increase in sales of higher gross margin units had a relatively small impact. The Company's gross profit margin decreased in fiscal 1996 to 37%, from 46% in fiscal 1995, and 44% in fiscal 1994. The decrease in the fiscal 1996 gross profit margin, compared to fiscal 1995 and fiscal 1994, is primarily due to a sales mix shift from higher margin stand-alone counter products to lower margin VXIbus products and lower than expected gross profit margin on these VXIbus products. Each of these factors had a comparable impact on the decrease in gross profit margin. Inflation did not have a material effect on revenues nor gross profit during the nine months ended June 30, 1997 or the fiscal years 1996 or 1995. Incoming orders for the nine months ended June 30, 1997, were $3,213,000, a 36% decrease from orders of $5,007,000 for the same period a year ago. The decrease in orders for the nine months ended June 30, 1997, resulted primarily from a shortfall in domestic and international large order bookings, particularly the lack of a large VXI order in the nine months ended June 30, 1997, and international base level bookings. Each of these factors had a comparable impact on the decrease in orders. Backlog at June 30, 1997, was $404,000, a 69% decrease from a backlog of $1,292,000 at the end of the third fiscal quarter the prior year. Incoming orders for fiscal 1996 were 16 $6,115,000, a 14% decrease from $7,127,000 for the prior year. Backlog at September 30, 1996, was $763,000, a 37% decrease from $1,210,000 at September 30, 1995. The decrease in orders and backlog in fiscal 1996, compared to the prior year, was primarily due to a 36% decrease in large government-related orders. Incoming orders for the fiscal 1995 year increased 20% from $5,929,000 for the same period of the previous year. Backlog at September 30, 1995 increased 40% from $862,000 at September 30, 1994. The increases in orders and backlog for fiscal 1995, compared to fiscal 1994, were due almost entirely to increased orders for products configured in the VXIbus format and to a much lesser extent to increased international orders and orders from government contractors. Research, development and engineering expenses were $722,000 for the nine months ended June 30, 1997, comparable to $724,000 for the same period the prior year. Research, development and engineering expenditures increased 32% to $978,000 in fiscal 1996, from $742,000 in the prior fiscal year. The increase in fiscal 1996, compared to fiscal 1995, was a result of increased new product development expenditures, primarily to support a new frequency measurement product line introduced in fiscal 1997. Research, development and engineering expenditures in fiscal 1995 increased 20%, compared to $620,000 in fiscal year 1994, due to increased new product development expenditures. The majority of the fiscal 1996 and 1995 investment was in the development of non-VXIbus standard product. Selling, general and administrative expenses decreased 9% to $1,416,000 for the nine months ended June 30, 1997, compared to $1,548,000 in the same period the prior year. The decrease in selling, general and administrative expenses was due almost entirely to decreased commission expense resulting from decreased sales volume. Overall expense control had a small impact. Selling, general and administrative expenses decreased 9% in fiscal 1996 to $2,084,000, compared to $2,289,000 in fiscal 1995, primarily due to the decrease in commission expense resulting from lower sales volume (approximately 60% of the change), and a decrease in advertising expenses (approximately 20% of the change). Selling, general and administrative expenses increased 4% in fiscal 1995, compared to $2,197,000 in fiscal 1994, primarily due to increased commission expense resulting from increased sales volume. The Company recorded a net loss of $793,000 for the nine months ended June 30, 1997, as compared to a net loss of $319,000 recorded for the same period the prior year. Gains on sale of capital equipment of $98,000 reduced the net loss for the nine months ended June 30, 1997. Further, the net loss for the nine months ended June 30, 1996 reflects a credit of $111,000 due to the waiver of fees owed by the Company to members of the Board of Directors, and a gain on sale of capital equipment of $50,000. The increase in losses for the nine month period ended June 30, 1997, compared to the same period the prior year, is primarily due to decreased sales. The Company recorded a net loss of $493,000 in fiscal 1996, as compared to net earnings of $125,000 in fiscal 1995, and a net loss of $453,000 in fiscal 1994. Gains on sales of fixed assets of $14,000 and $56,000 in fiscal 1996 and fiscal 1995, respectively, reduced the net loss or increased the net earnings in such years. As described above, the net loss for fiscal 1996 reflects a credit of $111,000 due to the waiver of fees owed by the Company to members of the Board of Directors. The Company earned interest and dividend income of $26,000, $25,000, and $4,000, during fiscal 1996, 1995, and 1994, respectively. The increase in interest and dividend income earned in fiscal 1996 and fiscal 1995, as compared to fiscal 1994, was primarily due to increased earnings performance in short-term securities. The Company believes that it will incur costs of addressing Year 2000 issues in amounts of approximately $150,000 in fiscal 1998 and $50,000 in fiscal 1999, for hardware, software, installation, and related training, for a new business management and accounting system. FINANCIAL CONDITION At June 30, 1997, the Company's cash, cash equivalents and short-term investment balance was $284,000, as compared with a cash, cash equivalents and short-term investment balance of $540,000 at September 30, 1996, and $445,000 at September 30, 1995. The Company's accounts payable balance was $314,000 at June 30, 1997, compared to $706,000 at September 30, 1996, and $610,000 at September 30, 1995. At June 30, 1997 and at September 30, 1996, the Company had no material commitments for capital expenditures. 17 At June 30, 1997, working capital decreased $216,000 from September 30, 1996, and decreased by $724,000 in fiscal 1996, after an increase of $313,000 in fiscal 1995. The Company's current ratio decreased to 1.36:1 at June 30, 1997, from 1.42:1 at September 30, 1996, and 2.09:1 at September 30, 1995. At June 30, 1997, the Company had outstanding borrowings in the aggregate principal amount of $295,500 under its bank line of credit (the "Bank Line"), borrowings in the aggregate principal amount of $600,000 under subordinated notes (the "Subordinated Notes") payable to the Bishops, and borrowings in the aggregate principal amount of $150,000 under a demand note (the "Bridge Loan") to the Bishops. The Subordinated Notes and the Bridge Loan were repaid on October 15, 1997 with the proceeds from the Loan Facility with the Bishop Family Trust. MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The following table sets forth information regarding the directors and executive officers of the Company, including age, period served as a director, present position with the Company, and other business experience during the past five years, and any other public company for which the individual is a director. NAME AGE POSITION - ----- ---- --------- J. Bradford 46 Director since 1978. Chairman of the Board and Chief Bishop (1) Executive Officer of the Company since 1994. President of the Company from 1990 to 1992. President of Continental Paper Recycling, and former Chief Executive Officer, Carson Energy Group, a power plant development company. John F. Bishop 73 Director since 1961. Vice Chairman of the Board (1) since 1994. Treasurer since 1985. Secretary since 1990. Former Chairman of the Board, President, and Treasurer of Cushman Electronics, Inc., a manufacturer of test instruments for telephone communication systems. Michael E. 37 Director since 1996. Johnson President, Bainbridge Group, a Law Corporation. Former counsel, Jones, Day, Reavis & Pogue, a law firm. Robert D. 73 Director since 1978. Johnson Former Vice Chairman and Director, Cushman (2)(3)(4) Electronics, Inc., and former Director, EIP/Cushman, Inc. J. Sidney Webb, 77 Director since 1981. Jr. (2)(3)(4) Chairman of the Board, The Titan Corporation, manufacturer of defense and industrial products and systems; Director, Plantronics, Inc., supplier of communication headset products and services to users and providers worldwide. Lewis R. Foster 59 President and Chief Operating Officer of the Company since 1996. Co-founder and President of Sailpower Systems, Inc., a manufacturer of proprietary products for the international marine market, from 1987-1997. Vice President of de Recat & Associates, Inc., a career management consulting firm, from 1987 until 1994. President of the Company from 1976-1986. Ivan N. Andres 49 Vice President, Marketing and Sales of the Company since 1994. Director of Marketing of On-Demand Environmental Systems, an air pollution control company, from 1992-1994. Independent consultant from 1991-1992. Director of Marketing of Acurrel, a microwave instrumentation company, prior to 1991. 18 - -------------------- (1) J. Bradford Bishop is the son of John F. Bishop. (2) Member of Compensation Committee. (3) Member of Audit Committee. (4) Member of Stock Option Committee. COMPENSATION OF DIRECTORS Non-management Directors are paid a monthly retainer of $600, and receive $600 per day for attendance at Board Meetings. They also receive $200 per day for committee meetings held on the same day as Board meetings and $400 per day if held on a separate day. Committee chairmen receive $100 per day in addition to the above. Directors who are officers of the Company receive no compensation for service on the Board of Directors or committees thereof. Accrued and unpaid retainers and fees for non-management Directors as of February 13, 1996 (the "Accrued Directors Fees") were owed to Messrs. Robert D. Johnson, James J. Shelton and J. Sidney Webb in amounts equal to approximately $30,600, $29,100 and $30,900, respectively. As of February 13, 1996, each of Messrs. Johnson and Webb agreed to waive all Accrued Directors Fees owing to him in exchange for the grant by the Company of an option to purchase 5,000 shares of Common Stock of the Company under the terms of the Company's Amended and Restated 1994 Stock Option Plan, with the exception that such options would be immediately vested and exercisable and would not terminate upon ceasing to be a Director or upon death or disability. On February 7, 1996, Mr. Shelton's term of office as Director expired and, as of February 13, 1996, he agreed to waive all Accrued Directors Fees owing to him, in exchange for amending his Nonqualified Stock Option Agreement with the Company to eliminate the requirement that his options terminate three months after he ceases to be a Director and the requirement that he continuously serve as a Director of the Company as a condition to him becoming vested in the options to purchase the remaining 6,667 shares of Common Stock under the Nonqualified Stock Option Agreement. EXECUTIVE COMPENSATION The following table sets forth all compensation for services in all capacities accrued by the Company during the fiscal years ended September 30, 1996, 1995, and 1994, for the Company's Chief Executive Officer and certain of its most highly compensated executive officers. The Company issued no restricted stock awards and there were no long term incentive plan payouts.
Long Term Compensation Annual Compensation Awards ------------------------------------------- ---------------------------------------- (A) (B) (C) (D) (E) (F) (G) Name and Year Salary Bonus Other Annual Securities Underlying All Other Principal Position ($) ($) Compensation Options/SARs Compensation ($) (#) ($) (1) (5) J. Bradford Bishop, 1996 0 0 0 15,000(6) 0 Chairman and Chief 1995 0 0 0 0 0 Executive Officer 1994 0 0 2,160(2) 0 0 John F. Bishop, Vice 1996 58,500 0 11,853(3) 0 328 Chairman, President, 1995 75,000 0 25,677(3) 0 362 Treasurer and Secretary 1994 75,000 0 14,449(3) 0 283 John J. Ardizzone, Jr., 1996 84,614 0 12,973(4) 3,000(6) 588 Vice President 1995 78,750 14,000 11,461(4) 10,000(6) 554 Operations and Chief 1994 71,542 0 8,713(4) 0 460 Financial Officer
19
(A) (B) (C) (D) (E) (F) (G) Name and Year Salary Bonus Other Annual Securities Underlying All Other Principal Position ($) ($) Compensation Options/SARs Compensation ($) (#) ($) (1) (5) Ivan Andres, 1996 73,819 19,000 6,559(7) 2,500(6) 554 Vice President, 1995 73,755 28,000 *(8) 8,000(6) 530 Marketing and Sales 1994 9,232 0 *(8) 0 0
- ------------------- (1) Amounts in this column include compensation to officers from (a) the Company's supplemental medical reimbursement plan in which all officers are eligible to participate, (b) the Company's tax and financial counseling reimbursement plan in which all officers are eligible to participate, (c) the Company's legal services reimbursement plan in which the Vice Chairman is eligible to participate, (d) the payment of car allowances to certain officers in lieu of providing a company car, (e) the payment of private club dues for certain officers and (f) contributions by the Company on behalf of certain officers pursuant to its Retirement/Savings Plan which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. The type and amount of each perquisite or other personal benefit which exceeds 25% of the total perquisites and other personal benefits reported for such officer are identified in a footnote. (2) On behalf of Mr. J.B. Bishop, the Company paid $2,160 under the supplemental medical reimbursement plan in fiscal 1994. (3) On behalf of Mr. J.F. Bishop, the Company paid $7,522 under the supplemental medical reimbursement plan and paid $4,006 for private club dues in fiscal 1996, paid $12,776 under the legal services reimbursement plan in fiscal 1995, and paid $4,267 for private club dues in fiscal 1994. Amounts do not include non-cash compensation to Mr. J.F. Bishop in the form of expenses related to personal use of a Company-supplied automobile, which amount did not exceed 10% of the cash compensation of Mr. J.F. Bishop. (4) On behalf of Mr. Ardizzone, the Company paid $3,924 under the supplemental medical reimbursement plan, paid $4,200 in car allowances and contributed $2,699 under the Retirement/Savings Plan in fiscal 1996, paid $4,200 in car allowances and contributed $2,956 under the Retirement/Savings Plan in fiscal 1995, and paid $4,200 in car allowances in fiscal 1994. (5) Amounts in this column consist of payments by the Company of premiums for term life insurance. (6) Options to purchase common stock awarded under the Company's Amended and Restated 1994 Stock Option Plan. (7) On behalf of Mr. Andres, the Company paid $4,200 in car allowances and contributed $2,305 under the Retirement/ Savings Plan in fiscal 1996. (8) Perquisites and personal benefits provided to the named executive officer under various Company programs did not exceed $50,000 or 10% of such individual's salary and bonus. OPTION GRANTS IN FISCAL 1996. The following table provides information on options granted under the Company's Second Amended and Restated 1994 Stock Option Plan in fiscal 1996 to the named executive officers:
Individual Grants - ------------------------------------------------------------------------------------------------------------------ Number of Securities % of Total Underlying Options Exercise or Base Options Granted to Employees in Price Expiration Name Granted (#) Fiscal Year (1) ($/Sh) Date J. Bradford Bishop 15,002(2) 54.5% $4.2625 2/13/01 John F. Bishop ---- ---- ---- ---- John J. Ardizzone, Jr. (4) 3,000(3) 10.9% $3.875 2/13/06 Ivan Andres 2,500(3) 9.1% $3.875 2/13/06
(1) Percentage based on grants to employees during the last fiscal year of options to purchase 27,500 shares of Common Stock. (2) The options granted to the named individual become exercisable with respect to one-third of such shares on February 13, 1997 and will become exercisable with respect to an additional one third on February 13 of each of the following two years. 20 (3) The options granted to the named individuals become exercisable with respect to 20% of such shares on February 13, 1997 and will become exercisable with respect to an additional 20% on February 13 of each of the following four years. (4) The options granted to Mr. Ardizzone were canceled in connection with his resignation in October 1996. AGGREGATE OPTION/SAR EXERCISES IN FISCAL 1996 AND FY-END OPTION/SAR VALUES. The following table provides information regarding option and SAR exercises in fiscal 1996 by the named executive officers and the value of such officers' unexercised options at September 30, 1996:
- ---------------------------------------------------------------------------------------------------------------------------------- Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options/ Options/ SARs at FY-End($) Shares SARs at FY-End (#) (1) Acquired on Value Exercisable (E)/ Exercisable (E)/ Name Exercise (#) Realized ($) Unexercisable (U) Unexercisable (U) - ---------------------------------------------------------------------------------------------------------------------------------- J. Bradford Bishop --- --- 15,000 options(U) $22,313/options(U) - ---------------------------------------------------------------------------------------------------------------------------------- John F. Bishop --- --- --- --- - ---------------------------------------------------------------------------------------------------------------------------------- John J. Ardizzone, Jr. (2) 2,000(3) $6,000 6,750 options(E) $ 6,750/options(E) 11,000 options(U) $32,625/options(U) 4,000 SARs(U) $12,000/SARS(U) - ---------------------------------------------------------------------------------------------------------------------------------- Ivan Andres 1,600(4) $5,800 8,900 options(U) $26,288/options(U) - ----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------ (1) The options and SARs at fiscal year end were in-the-money based on a fair market value per share of Common Stock of $5.75, which represents the mean between the bid and asked prices of a share on the NASDAQ System at the close of business on September 30, 1996. (2) All unexercised options and SARs of Mr. Ardizzone were canceled in connection with his resignation in October 1996. (3) Represents SARs exercised by the named individual. (4) Represents shares acquired by exercise of options by the named individual. INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS COMMITMENT OF THE BISHOPS TO PURCHASE COMMON STOCK IN RIGHTS OFFERING J. Bradford Bishop, Chairman and Chief Executive Officer of the Company, and John F. Bishop, Vice Chairman, Secretary and Treasurer of the Company, both of whom are principal stockholders and members of the Board of Directors of the Company (the "Bishops") have committed to the Company that they will purchase $1,360,000 in Common Stock by exercise of Rights distributed to them if other stockholders purchase at least $800,000 in Common Stock upon exercise of Rights distributed to them (the "Commitment"). Thus, the Bishops' subscription for Shares in the Rights Offering is conditional, whereas subscriptions by other stockholders are unconditional. In order to avoid being diluted in the Rights Offering, other stockholders will be required to submit unconditional subscription agreements prior to the expiration date. In the opinion of management and the disinterested members of the Board of Directors, the terms of the Commitment are fair and reasonable and as favorable to the Company as those which could be obtained from unrelated third parties. BISHOP FAMILY TRUST LOAN FACILITY The Company has entered into a Loan Facility with the Bishop Family Trust. See "The Company--Bishop Family Trust Loan Facility" above. In the opinion of management and the disinterested members of the Board of Directors, the terms of the Loan Facility are fair and reasonable and as favorable to the Company as those which could be obtained from unrelated third parties. 21 SUBORDINATED LOAN The Company entered into Subordinated Loan Agreement dated as of December 16, 1996 with J. Bradford Bishop, Chairman and Chief Executive Officer of the Company, and John F. Bishop, Vice Chairman, Treasurer and Secretary of the Company (together, the "Bishops"). The Bishops advanced $600,000 to the Company under the Subordinated Loan Agreement. Interest accrued thereon at 8% per annum, payable quarterly. In connection with the Subordinated Loan Agreement, the Company issued warrants to the Bishops to purchase 90,000 shares of Common Stock at $3.00 per share. The Subordinated Loan Agreement terminated on October 15, 1997, and all principal thereunder was repaid in full on such date with the proceeds from the Loan Facility with the Bishop Family Trust. As consideration for the early repayment of such obligations, the warrants issued to the Bishops were canceled on October 15, 1997. In the opinion of management and the disinterested members of the Board of Directors, the terms of the Subordinated Loan Agreement, including the warrants to be issued thereunder, were fair and reasonable and as favorable to the Company as those which could be obtained from unrelated third parties. BRIDGE LOANS The Company has received several bridge loans from the Bishops payable on demand (the "Bridge Loans"), which amounted to $400,000, plus interest, on October 15, 1997. Interest accrued thereon at 10% per annum. All principal of the Bridge Loans was repaid in full on such date with the proceeds from the Loan Facility with the Bishop Family Trust. In the opinion of management and the disinterested members of the Board of Directors, the terms of the Bridge Loans were fair and reasonable and as favorable to the Company as those which could be obtained from unrelated third parties. EMPLOYMENT AGREEMENT On October 1, 1995, the Company entered into an Employment Agreement with John F. Bishop, Vice-Chairman of the Board, Treasurer and Secretary of the Company, whereby Mr. Bishop will provide his services for a monthly salary of $6,500 for an initial term of two years. On the first day of each month, the initial term is automatically extended for an additional month, unless either party notifies the other in writing of his or its desire not to extend the term. In the event the Company elects not to extend the term or there is a change in control of the Company (the date of such event is referred to as the "Transition Date"), Mr. Bishop will continue to perform services for the Company for a three month transition period and the Company will maintain his compensation and other benefits for the three month transition period and an additional twenty-one months. Should Mr. Bishop become permanently disabled, the Company shall pay to him fifty percent (50%) of the agreed salary for the remainder of the term. Effective January 1, 1997, Mr. Bishop agreed to reduce his monthly salary to $3,250 until the Transition Date. In addition to the foregoing compensation, the Company will provide Mr. Bishop with a private office at 3 Civic Center Plaza, Suite 265, Newport Beach, California (or a comparable location in the City of Newport Beach), secretarial and administrative assistance, office equipment and supplies and other facilities and services suitable to his position. Mr. Bishop is also entitled to all employee benefits provided to senior management personnel of the Company and to participate in the Company's medical reimbursement plan which is supplemental to the medical plan covering all employees, the tax and financial counseling reimbursement plan and the legal reimbursement plan provided by the Company as well as Company paid life insurance. In addition to his monthly compensation, Mr. Bishop is entitled under the Employment Agreement to the full and unrestricted use of the currently provided 1989 Mercedes Benz Model 560 automobile or its successor automobile if replaced at any time prior to the end of his employment term. The Company provides all gasoline, maintenance, repair and insurance with respect to the automobile during the term of the Agreement. In consideration for Mr. Bishop's prior agreement to reduce his monthly salary to $1 per month for the period from February 1992 through July 1992 and the deduction of $217 per month from his monthly salary for the period from August 1992 through October 1995, the Company granted to Mr. Bishop the right to acquire the automobile with full credit for the foregone salary totaling $56,846. Mr. Bishop has the right to acquire the automobile at any time during the two months immediately preceding the end of his employment term. If the automobile's Kelly Blue Book value is in excess of $56,846, Mr. Bishop shall pay to the Company the difference at the time Mr. Bishop acquires the 22 automobile. If the value of the automobile is less than $56,846, the Company shall pay the difference to Mr. Bishop at the time he acquires the automobile. In the event that Mr. Bishop's employment is terminated prior to the end of his employment term, he shall have the right to acquire the automobile at that time. In the event of Mr. Bishop's death, the right to acquire the automobile shall be exercisable by Mr. Bishop's widow or the executor of his estate. The Company may terminate the Employment Agreement only if Mr. Bishop were to be convicted of a felony, if he willfully fails to fulfill his duties, if he commits gross negligence in the performance of his duties, if he intentionally misappropriates significant funds of the Company or if he dies. Mr. Bishop may terminate the agreement at any time on thirty days notice to the Company. Under the Employment Agreement, Mr. Bishop may not disclose confidential information of the Company at any time. This provision survives termination of the Employment Agreement. Mr. Bishop is further prohibited from soliciting employees or customers of the Company for at least one (1) year following termination of the Employment Agreement. LEGAL COUNSEL Bainbridge Group, a Law Corporation ("Bainbridge Group") provides ongoing legal services for the Company. Michael E. Johnson, a director of the Company, is President of Bainbridge Group. In the opinion of management and the disinterested members of the Board of Directors, the terms of the relationship between the Company and Bainbridge Group are fair and reasonable and as favorable to the Company as those which could be obtained from unrelated third parties. The Company obtains legal services from an affiliate at rates normally charged to a third party. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of October 14, 1997, certain information as to the Common Stock of the Company beneficially owned, directly or indirectly, by each person who is known to the Company to beneficially own more than 5% of the outstanding Common Stock, by each director, by each nominee for director, by each executive officer named in the Summary Compensation Table, and by all executive officers and directors of the Company as a group. The persons named hold sole voting and investment power with respect to the shares shown opposite their respective names, unless otherwise indicated. (Note -- "Direct" means Common Stock held individually, or held in joint tenancy or as community property with spouse. "Indirect" means Common Stock held by spouse as separate property, or held of record by the stockholder for the benefit of another person, or held of record by the stockholder as trustee of a trust.)
Name and Address of Amount of Nature of Percent Beneficial Owner Beneficial Ownership Beneficial Ownership of Class ---------------- -------------------- -------------------- -------- CEDE & Company 186,100 Indirect(1) 43.80% Depository Trust Company 7 Hanover Square New York, New York 10004 John F. Bishop (2) 128,927 Indirect (3) 30.34% J. Bradford Bishop (2) 62,473 Indirect (4) 15.69% 5,000 Direct (6) J. Sidney Webb (2) 800 Indirect (5) 2.86% 11,667 Direct (6) Robert D. Johnson (2) 200 Indirect (7) 2.72% 11,667 Direct(6) Michael E. Johnson (2) 3,333 Direct (6) * 23 Name and Address of Amount of Nature of Percent Beneficial Owner Beneficial Ownership Beneficial Ownership of Class ---------------- -------------------- -------------------- -------- Ivan Andres (2) 2,100 Direct (6) * John J. Ardizzone, Jr. (2) 0 --- * All Executive Officers and 226,167 --- 49.31% Directors as a Group (7 persons) (8)
- ---------------------------- * Less than 1% of the class (1) CEDE & Company is a nominee of the Depository Trust Company, which is a wholly owned subsidiary of the New York Stock Exchange, Inc. CEDE disclaims any beneficial interest in shares of the Company's Common Stock held in its name. (2) The mailing address for such individual is in care of EIP Microwave, Inc., 1745 McCandless Drive, Milpitas, CA 95035. (3) Consists of (i) 118,260 shares held by J.F. Bishop and his spouse as trustees of the Bishop Family Trust, and (ii) 10,667 shares held by J.F. Bishop as trustee for the benefit of certain of his children. (4) Consists of (i) 22,473 shares held by J.B. Bishop and his spouse as trustees of a revocable trust, and (ii) 40,000 shares held by J.B. Bishop and his spouse as trustees of the Bishop 1993 Children's Trust. (5) Held by J.S. Webb as trustee of the Webb Family Trust. (6) Consists of shares for which the named individual has the right to acquire beneficial ownership within 60 days after the Record Date by exercise of options granted under the Company's Second Amended and Restated 1994 Stock Option Plan. (7) Held by R.D. Johnson and his spouse as trustees of the Robert D. Johnson and Dorothy A. Johnson Trust. (8) Total includes the shares indirectly held by Messrs. J.F. Bishop, J.B. Bishop, J.S. Webb and R.D. Johnson as trustees, as noted above. 24 DESCRIPTION OF SECURITIES The following description of the securities of the Company and certain provisions of the Company's Certificate of Incorporation and Bylaws is a summary and is qualified in its entirety by the provisions of the Certificate of Incorporation and Bylaws, which have been filed as exhibits to the Company's Registration Statement. AUTHORIZED STOCK The Company is authorized to issue 10,000,000 shares of Common Stock, $0.01 par value. As of the date of this Prospectus the Company had 424,907 shares of Common Stock issued and outstanding. VOTING RIGHTS Holders of the shares of Common Stock are entitled to one vote per share on all matters submitted to a vote of the stockholders. Except as described in the following paragraph, shares of Common Stock do not have cumulative voting rights, which means that the holders of a majority of the shares voting for the election of the board of directors can elect all members of the board of directors. As a Delaware corporation doing business in California, the Company is subject to certain provisions of the California General Corporation law (the "California Law") if certain property, payroll and sales factors are met and more than 50% of the Common Stock is held of record by persons having addresses in California (excluding shares held by broker-dealers, banks or other nominees). The Company believes that it meets the statutory test for applicability of certain provisions of California Law to the Company. One of these provisions, Section 708, entitles a stockholder to cumulate his or her votes at an election of directors. Accordingly, with respect to the election of directors only, if one or more stockholders give notice at the Annual Meeting before the voting of their intention to cumulate their votes, all stockholders entitled to vote shall have the right to so cumulate their votes and to give one candidate, who has been nominated prior to the voting, a number of votes equal to the number of directors to be elected multiplied by the number of votes to which his or her shares are entitled, or to distribute such votes among two or more such candidates on the same principle in such proportions as each stockholder may determine. If such vote is not conducted by cumulative voting, stockholders may vote in favor of all nominees, withhold their votes as to all nominees, or vote in favor of specific nominees and withhold their votes as to other nominees. DIVIDEND RIGHTS Holders of record of shares of Common Stock are entitled to receive dividends when and if declared by the board of directors out of funds of the Company legally available therefor. The Company does not anticipate paying dividends in the near future. LIQUIDATION RIGHTS Upon any liquidation, dissolution or winding up of the Company, holders of shares of Common Stock are entitled to receive a pro rata share of the assets of the Company available for distribution to stockholders. PREEMPTIVE RIGHTS Holders of Common Stock do not have any preemptive rights to subscribe for or to purchase any stock, obligations or other securities of the Company. DISSENTER'S RIGHTS Under current Delaware law, a stockholder is afforded dissenters' rights which if properly exercised may require the corporation to repurchase its shares. Dissenters' rights commonly arise in extraordinary transactions such as mergers, consolidations, reorganizations, substantial asset sales, liquidating distributions, and certain amendments to the Company's certificate of incorporation. 25 CERTAIN ANTI-TAKEOVER PROVISIONS The Company's Certificate of Incorporation and Bylaws contain provisions that could delay, defer or prevent a change in control of the Company. The Company has a classified Board of directors. The Board is divided into three classes, each class consisting of two directors. There is one vacancy in the class whose term expires at the 1998 Annual Meeting. The terms of directors in the two remaining classes expire at the 1999 Annual Meeting and the 2000 Annual Meeting, respectively. Further, the Bylaws set forth procedures for the nomination of director candidates by the Board of Directors or stockholders, and require that a stockholder give specified notice of its intent to nominate a director candidate at least 90 days prior to the Annual Meeting. The Company's Certificate of Incorporation restricts the ability of the Company to engage in specified transactions with any interested person. An "interested person" is defined to include any individual or entity who is the beneficial owner of 10% or more of the Common Stock. Such transactions are prohibited, unless the transaction is approved by (i) the holders of two-thirds of the outstanding shares of Common Stock and a majority of such shares not held by the interested person, or (ii) a majority of the directors who are unaffiliated with the interested person and who were directors prior to the time the interested person became an interested person (or are successors to such directors). Other requirements may also be applicable for certain transactions. TRANSFER AGENT ChaseMellon Shareholder Services, L.L.C. serves as the transfer agent of the Company. LEGAL MATTERS AND INTERESTS OF COUNSEL The validity of the authorization and issuance of the securities offered hereby will be passed upon for the Company by Bainbridge Group, a Law Corporation, of Irvine, California. Bainbridge Group also provides ongoing legal services for the Company. Michael E. Johnson, President of Bainbridge Group, is a director of the Company and is the holder of options to purchase 10,000 shares of common stock of the Company. EXPERTS The consolidated balance sheets of EIP Microwave, Inc. and subsidiaries as of September 30, 1996, and 1995, and the consolidated statements of operations and retained earnings (accumulated deficit), stockholders' equity and cash flows for the years then ended, have been included herein and in the Registration Statement in reliance upon the report of Price Waterhouse LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The report of Price Waterhouse LLP covering the aforementioned financial statements contains an explanatory paragraph. The explanatory paragraph states the Company has incurred significant recent losses from operations and may need to obtain additional financing to meet its business plans for fiscal 1998 and beyond that raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. CHANGE IN ACCOUNTANTS The Company engaged Meredith, Cardozo, Lanz & Chiu LLP as its new independent accountants as of October 9, 1997. On October 9, 1997, EIP Microwave, Inc. (the "Company") dismissed Price Waterhouse LLP as its independent accountants. The reports of Price Waterhouse LLP on the financial statements for the years ended September 30, 1995 and 1996 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle, except that their reissued report on the financial statements for the year ended September 30, 1996, which was dual dated December 23, 1996 and October 23, 1997 includes an explanatory paragraph to express substantial doubt regarding the Company's ability to continue as a going concern. The Company's Audit Committee participated in and approved the decision to change independent accountants. In connection with its audits for the two most recent fiscal years and through October 9, 1997, 26 there have been no disagreements with Price Waterhouse LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Price Waterhouse LLP would have caused them to make reference thereto in their report on the financial statements for such years. Price Waterhouse LLP furnished the Company with a letter addressed to the Securities and Exchange Commission stating that it agrees with the statements in this paragraph. INDEMNIFICATION Under Delaware corporation law, a corporation is authorized to indemnify officers, directors, employees and agents who are made or threatened to be made parties to any civil, criminal, administrative or investigative suit or proceeding by reason of the fact that they are or were a director, officer, employee or agent of the corporation or are or were acting in the same capacity for another entity at the request of the corporation. Such indemnification includes expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such persons if they acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation or, with respect to any criminal action or proceeding, if they had no reasonable cause to believe their conduct was unlawful. In the case of any action or suit by or in the right of the corporation against such persons, the corporation is authorized to provide similar indemnification, provided that, should any such persons be adjudged to be liable for negligence or misconduct in the performance of duties to the corporation, the court conducting the proceeding must determine that such persons are nevertheless fairly and reasonably entitled to indemnification. To the extent any such persons are successful on the merits in defense of any such action, suit or proceeding, Delaware law provides that they shall be indemnified against reasonable expenses, including attorney fees. A corporation is authorized to advance anticipated expenses for such suits or proceedings upon an undertaking by the person to whom such advance is made to repay such advances if it is ultimately determined that such person is not entitled to be indemnified by the corporation. Indemnification and payment of expenses provided by Delaware law are not deemed exclusive of any other rights by which an officer, director, employee or agent may seek indemnification or payment of expenses or may be entitled to under any by-law, agreement, or vote of stockholders or disinterested directors. In such regard, a Delaware corporation is empowered to, and may, purchase and maintain liability insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation. Article Ninth of the Company's Certificate of Incorporation eliminates, to the fullest extent permitted by law, the personal liability of directors for monetary damages in certain instances for breach of a director's fiduciary duty of care. Article IX of the Company's Bylaws provides that (i) each director, officer and employee of the Company shall be indemnified by the Company to the fullest extent authorized by Delaware law subject to certain limitations, (ii) each indemnitee is entitled to be paid by the Company for its expenses in defending proceedings in advance of final determination, (iii) the right of indemnification provided therein shall not be exclusive, (iv) the Company is authorized to enter into contracts with any director, officer, employee or agent of the Company which provide for indemnification equivalent to or greater than provided in Article IX, and (v) the Company is required to maintain insurance to the extent reasonably available to protect itself and any such director, officer, employee or agent. Consistent with Article IX of the Company's Bylaws, the Company has entered into individual Indemnification Agreements with its directors and officers. The Indemnification Agreements, among other things, provide mandatory indemnification protection in excess of that provided by Delaware corporation law. The Indemnification Agreements provide certain procedures relating to indemnification and advancement of expenses. In addition, the Company currently carries limited insurance coverage for its directors and officers. The Indemnification Agreements provide protections beyond those currently available from the Company's existing director's and officer's liability insurance. As a result of the foregoing, the Company may, at some future time, be legally obligated to pay judgments (including amounts paid in settlement) and expenses in regard to civil or criminal suits or proceedings brought against one or more of its officers, directors, employees or agents, as such, with respect to the Company. 27 DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. 28 EIP MICROWAVE, INC. Index to Financial Statements for the Years ended September 30, 1996 and 1995 and Nine Months ended June 30, 1997 and 1996 - -------------------------------------------------------------------------------- Contents Page - -------------------------------------------------------------------------------- Report of Independent Accountants F-2 - -------------------------------------------------------------------------------- Financial Statements - -------------------------------------------------------------------------------- Consolidated Balance Sheet as of F-3 September 30, 1995, and 1996, and June 30, 1997 (unaudited) - -------------------------------------------------------------------------------- Consolidated Statements of Operations and Retained F-4 Earnings (Accumulated Deficit) for the Years Ended September 30, 1995 and 1996, and the Nine Months Ended June 30, 1996 and June 30, 1997 (unaudited) - -------------------------------------------------------------------------------- Statements of Stockholders' Equity for the F-4 Years Ended September 30, 1995 and 1996, and the Nine Months Ended June 30, 1997 (unaudited) - -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows for the F-5 Years Ended September 30, 1995 and 1996, and the Nine Months Ending June 30, 1996 and 1997 (unaudited) - -------------------------------------------------------------------------------- Notes to Financial Statements F-6 - -------------------------------------------------------------------------------- F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of EIP Microwave, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of EIP Microwave, Inc. and its subsidiary at September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred significant recent losses from operations and may need to obtain additional financing to meet its business plans for fiscal 1998 and beyond that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ PRICE WATERHOUSE LLP - ------------------------ PRICE WATERHOUSE LLP San Jose, California December 23, 1996, except for the third paragraph of Note 1, the second paragraph of Note 6 and Note 9, which are as of October 23, 1997. F-2 CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share data) ASSETS
June 30, September 30, September 30, 1997 1996 1995 ---- ---- ---- (unaudited) Current assets: Cash and cash equivalents $ 257 $ 216 $ 126 Short-term investments 27 324 319 -------- -------- -------- 284 540 445 Accounts receivable, net 308 686 1,064 Inventories 1,125 1,067 1,133 Prepaid expenses 71 59 74 -------- -------- -------- Total current assets 1,788 2,352 2,716 -------- -------- -------- Property and equipment, net 630 631 271 -------- -------- -------- Other assets - - 30 $ 2,418 $ 2,983 $ 3,017 -------- -------- -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 314 $ 706 $ 610 Accrued liabilities 519 546 676 Advanced payments from customers - 190 - Bank borrowings 296 185 - Notes payable to affiliates 150 - - Current portion of obligations under capital leases 34 34 15 Total current liabilities 1,313 1,661 1,301 -------- -------- -------- Long term notes payable to affiliates 600 - - Long term obligations under capital leases 71 95 - Total Liabilities 1,984 1,756 1,301 -------- -------- -------- Commitments and contingencies (Note 5) Stockholders' equity: Common stock $.01 par value, authorized 5 5 5 - 10,000,000 shares; 424,907 issued and outstanding Additional paid-in-capital 848 848 844 Retained earnings (accumulated deficit) (419) 374 867 -------- -------- -------- Total stockholders' equity 434 1,227 1,716 -------- -------- -------- $ 2,418 $ 2,983 $ 3,017 -------- -------- -------- -------- -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-3 CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT) (In thousands, except per share data)
Nine Months Years Ended Ended June 30, September 30, 1997 1996 1996 1995 --------------------- --------------------- (unaudited) Net sales $ 3,560 $ 4,886 $ 6,492 $ 6,721 Costs and expenses: Cost of sales 2,170 3,075 4,064 3,646 Research, development and engineering 722 724 978 742 Selling, general and administrative 1,416 1,548 2,084 2,289 Interest and other, net 45 (142) (141) (81) -------- -------- -------- -------- Total costs and expenses 4,353 5,205 6,985 6,596 -------- -------- -------- -------- Net income (loss) (793) (319) (493) 125 Retained earnings at beginning of period 374 867 867 742 Retained earnings (accumulated deficit) at end of period $ (419) $ 548 $ 374 $ 867 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) per share $ (1.87) $ (.75) $ (1.16) $ 0.30 -------- -------- -------- -------- -------- -------- -------- -------- Weighted average common shares outstanding 425 423 423 423 -------- -------- -------- -------- -------- -------- -------- -------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Additional Common Stock Paid-in Retained (Dollars in thousands) Shares Amount Capital Earnings Total Balance at September 30, 1994 423,307 $ 5 $ 844 $ 742 $1,591 ------------------------------------------------------------------- Stock Issues - - - - - ------------------------------------------------------------------- Net Income - - - 125 125 ------------------------------------------------------------------- Balance at September 30, 1995 423,307 5 844 867 1,716 ------------------------------------------------------------------- Stock Issues 1,600 - 4 - 4 Net Income - - - (493) (493) ------------------------------------------------------------------- Balance at September 30, 1996 424,907 5 848 374 1,227 ------------------------------------------------------------------- Stock Issues (unaudited) - - - - - Net income (unaudited) - - - (793) (793) ------------------------------------------------------------------- Balance at June 30, 1997 (unaudited) 424,907 5 848 (419) 434 ------------------------------------------------------------------- -------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-4 CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (decrease) in cash (Dollars in thousands, unaudited)
Nine Months Years Ended Ended June 30 September 30 1997 1996 1996 1995 ------------------- ------------------- (unaudited) Cash flows from operating activities: Net income (loss) $ (793) $ (319) $ (493) $ 125 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 190 134 147 220 Gain on sale of capital equipment (98) (50) (50) (146) Change in assets and liabilities: Accounts receivable, net 378 277 378 (350) Inventories (58) 117 66 (149) Prepaid expenses (12) 33 45 ( 36) Accounts payable (392) 1 96 83 Accrued liabilities (27) (151) (130) 65 Advanced payment from customers (190) - 190 - -------- -------- -------- -------- Cash provided by (used in) operating activities (1,002) 42 249 (188) -------- -------- -------- -------- Cash flows from investing activities: Purchase of short-term investments - (19) (213) (11) Sale of short-term investments 297 - 208 - Capital expenditures (192) (347) (394) (41) Proceeds from sale of capital equipment 101 61 61 155 -------- -------- -------- -------- Cash provided by (used in) investing activities 206 (305) (338) 103 -------- -------- -------- -------- Cash flows from financing activities: Proceeds from bank borrowings 111 185 185 - Proceeds from notes payable to affiliates 750 - - - Proceeds from sales of common stock to employees - - 4 - Repayment of obligations under capital leases (24) - (10) - -------- -------- -------- -------- Cash provided by financing activities 837 185 179 - -------- -------- -------- -------- Increase (decrease) in cash and cash equivalents 41 (78) 90 (85) Cash and cash equivalents at beginning of period 216 126 126 211 -------- -------- -------- -------- Cash and cash equivalents at end of period $ 257 $ 48 $ 216 $ 126 -------- -------- -------- -------- -------- -------- -------- -------- Supplemental information Equipment acquired pursuant to capital leases - - 124 -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1996 NOTE 1. THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY The Company is engaged in a single industry segment constituting the development, manufacture, and sale of high frequency microwave and radio frequency (RF) test and measurement instruments. The Company's stand-alone microwave frequency counters represented 50% of net sales in 1996, 64% of net sales in 1995, and 75% of net sales in 1994. Substantially all of its activities are conducted in the United States, and the Company has no foreign manufacturing operations nor material amounts of foreign assets. Export sales to customers in Western Europe, Pacific Rim countries and in other parts of the world, as a percent of net sales respectively, were approximately 20%, 11% and 5% in 1996, 25%, 13% and 5% in 1995, and 17%, 9% and 10% in 1994. Profit margins are similar on foreign and domestic sales. Direct sales to the United States government and its contractors as a percent of net sales were approximately 33% in 1996 (22% to one government subcontractor), 36% in 1995 (11% to one government subcontractor), and 38% and 26% for the nine months ended June 30, 1997 and 1996, respectively (29 and 19% to one government subcontractor, respectively). LIQUIDITY As shown in the accompanying financial statements, the Company incurred a loss from operations for the year ended September 30, 1996 of $493,000 and has experienced significant fluctuations in operating results in the past. The fiscal 1997 operating plan anticipates the release of a new frequency measurement product. To the extent that product development is delayed or the new product introduction does not achieve sufficient market acceptance, the Company's financial position and results of operations will be adversely impacted. The Company has incurred significant recent losses from operations and additional financing will be required for the Company to meet its business plan for fiscal 1998 and beyond. There can be no assurance that the Company will not incur additional losses until its recently introduced and existing products generate significant revenues. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company's business plan for fiscal 1998 involves three key operating objectives: (1) increasing the manufacture and shipment of microwave frequency counters to Hewlett-Packard Company for distribution on a private label basis worldwide through an OEM relationship; (2) completing field testing of the Company's RF synthesized signal generators and RF down converters under its five-year indefinite quantity, fixed price subcontract with ManTech Systems Engineering Corporation, and preparing for shipment of production quantities of these products in the fourth fiscal quarter of 1998; and (3) completing current development efforts and introducing new test instrumentation for the wireless telecommunications market. Management believes that it can successfully implement these key operating objectives. The Company's ability to generate sufficient cash to support its business plan during the 1998 fiscal year depends on the ability of management to obtain additional debt and equity financing, through the Rights Offering and other capital sources. Management is currently pursuing additional debt financing. If the Company is unable to obtain such financing, it will be required to reduce discretionary spending in order to maintain its operations at a reduced level. Management believes that it will be able to reduce discretionary spending if required. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany transactions and accounts have been eliminated. CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. F-6 SHORT-TERM INVESTMENTS Short-term investments, consisting of publicly traded preferred stocks and government bonds, are stated at fair value. The Company has adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires companies to classify investments in debt and equity securities with readily determinable fair values as "held-to-maturity", "available for sale", or "trading" and establishes accounting and reporting requirements for each classification. The Company classifies all securities held as available for sale. Securities classified as available for sale are reported at their fair market value with unrealized gains and losses reported as a separate component of stockholders' equity. Such unrealized gains and losses were immaterial as of September 30, 1996 and 1995, and June 30, 1997. The Company's government bonds have a maturity of one year or less. Publicly traded preferred stocks are considered highly liquid and are classified as short-term investments. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents and short-term investments and trade accounts receivable. The Company places its cash, cash equivalents and short-term investments in a variety of financial instruments such as certificates of deposit and marketable equity securities. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The Company maintains an allowance for uncollectible accounts receivable based upon the expected collectibility of all accounts receivable balances. At September 30, 1996, the accounts receivable balance from three customers represented 32%, 12%, and 10% of net trade receivables, and at June 30, 1997 14%, 11%, and 7% of net trade receivables. INVENTORIES Inventories are stated at the lower of standard cost, which approximates actual cost (determined on a first-in, first-out basis), or market. PROPERTY AND EQUIPMENT Purchased property and equipment are stated at cost and are depreciated using the straight-line method over lives ranging from three to eight years. Self-constructed demonstrator products are stated at their standard manufacturing cost. REVENUE RECOGNITION AND WARRANTY Sales are recognized at the time of shipment provided no significant obligations remain and collectibility is probable. The Company provides for the estimated costs of fulfilling its warranty obligation at the time the related sale is recorded. INCOME TAXES The Company utilizes an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequence of events that have been recognized in the Company's financial statements or tax returns. NET INCOME (LOSS) PER SHARE The calculation of net income (loss) per share is based upon the weighted average number of shares outstanding during the year. Common stock equivalents were not materially dilutive for the year ended September 30, 1995. As a result of the losses incurred in fiscal 1996 and 1994, and for the nine months ended June 30, 1997 and 1996, the common equivalent shares were antidilutive and, accordingly, were excluded from the computation of loss per share for those years. F-7 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Only the disclosure requirements of this standard will be adopted by EIP for the year ending September 30, 1997, and therefore there will be no impact on EIP's consolidated financial position or results of operations. In February 1997, the Financial Account Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128, which is effective for the Company's fiscal year ending September 30, 1998, redefines earning per share under generally accepted accounting principles. Under the new standard, primary earnings per share is replaced by basic earnings per share, and fully diluted earnings per share is replaced by diluted earnings per share. The adoption of SFAS 128 is not expected to have a material impact on the Company since earnings per share reported under Accounting Principles Board Opinion No. 15 approximates diluted earnings per share, which will be reported under SFAS 128. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Standards No. 129 ("SFAS 129"), "Disclosure of Information about Capital Structure". SFAS 129 requires disclosure of certain information related to the Company's capital structure and is not anticipated to have a material impact on the Company's financial position or results of operations. In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income." SFAS 130 establishes standards for reporting comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income as defined includes all changes in equity (net assets) during a period from nonowner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments and unrealized gain/loss on available-for-sale securities. The disclosure prescribed by SFAS must be made beginning with the first quarter of 1998. In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company has not yet determined the impact, if any, of adopting this new standard. The disclosures prescribed by SFAS 131 are effective in 1998. INTERIM RESULTS (UNAUDITED) The accompanying balance sheet as of June 30, 1997, the statements of operations and of cash flows for the nine months ended June 30, 1996 and 1997 are unaudited. In the opinion of management, the statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the results of interim periods. The data disclosed in these notes to financial statements for these periods are also unaudited. NOTE 2. CONSOLIDATED BALANCE SHEET DETAIL (Dollars in thousands) September 30, June 30, 1996 1995 1997 Accounts receivable: (unaudited) Trade $ 736 $1,138 $ 358 Less - allowance for doubtful accounts (50) (74) (50) ----------------- ------ $ 686 1,064 $ 308 F-8 ----------------- ------ ----------------- ------ Inventories: Raw materials $ 719 $ 633 $ 599 Work-in-process 320 489 411 Finished goods 28 11 115 ----------------- ------ ----------------- ------ $1,067 $1,133 $1,125 ----------------- ------ ----------------- ------ Property plant and equipment: Machinery and equipment $3,121 $3,168 $3,124 Computer equipment and software 1,054 1,160 1,060 Demonstrator equipment 337 359 350 Furniture, fixtures and other fixed assets 807 471 869 ----------------- ------ ----------------- ------ 5,319 5,158 5,403 Less: accumulated depreciation (4,688) (4,887) (4,773) ----------------- ------ ----------------- ------ $ 631 $ 271 $ 630 ----------------- ------ ----------------- ------ Accrued liabilities: Salaries, wages and benefits $ 215 $ 157 $ 260 Commissions 83 61 11 Warranty 53 66 32 Other 195 392 216 ----------------- ------ $ 546 $ 676 $ 519 ----------------- ------ ----------------- ------ NOTE 3. EMPLOYEE BENEFIT PLANS RETIREMENT PLAN The Company has a Retirement/Savings Plan which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. All employees who have completed three months of service on or before the semiannual entry period are eligible to participate in the Retirement Plan. The Retirement Plan allows participants to contribute up to 12% of their earnings to the Retirement Plan and deduct this amount from their wages for federal income tax purposes. The Company will contribute 50 cents for each dollar contributed by the employee up to 3% of total wages. Company contributions in fiscal years 1996, 1995, and for the nine months ended June 30, 1997, totaled $49,000, $38,000 and $30,000, respectively. INCENTIVE COMPENSATION The Company has an incentive compensation plan which provides for awards of bonuses to officers and key employees based principally on achieving stipulated Company financial objectives. In making specific awards, consideration is given to the individual's contribution to the success of the Company, to the success and performance of the unit or department of which the individual is a member, and to the achievement of individual performance goals established at the beginning of the fiscal year. The formula for computing bonuses has been subject to annual modification and may in the future be again modified at the discretion of the Board of Directors. No bonuses were awarded for the nine months ended June 30, 1997 and 1996, nor for fiscal 1996. Bonuses of $61,000 were awarded for fiscal 1995 results. No bonuses were awarded for fiscal 1994 results. STOCK APPRECIATION RIGHTS PLAN On November 11, 1992, the Board of Directors adopted a Stock Appreciation Rights Plan ("SAR Plan"). The SAR Plan provides for the award of appreciation rights ("SARs") to officers and key management employees of the F-9 Company entitling such participants to receive the increase, if any, in the value of one share of Company common stock from the date of the award to the date(s) of valuation established at the time of the award. Generally, SARs are deemed vested in five equal annual installments. Each award vested will be paid in cash on a scheduled payment date. During the nine months ended June 30, 1997, and during fiscal 1996, 1995 and 1994, no SARs were awarded. A total of 760, 2,760, 2,760 and 7,760 SARs were vested during the nine months ended June 30, 1997, and during fiscal 1996, 1995 and 1994, respectively. A total of 4,000, 0, 960, and 24,040 SARs were canceled during the nine months ended June 30, 1997, and during fiscal 1996, 1995, and 1994, respectively, leaving an aggregate of 760 SARs outstanding at June 30, 1997. The Company accrues a compensation liability over the vesting period based on the increase in the market value of the common stock over the award price. The liability recorded in the nine months ended June 30, 1997, and during fiscal 1996 and 1995 was $1,900, $7,900 and $20,293, respectively. No compensation liability was recorded for fiscal 1994 relating to the SAR Plan. STOCK OPTION PLAN Under the Company's Second Amended and Restated 1994 Stock Option Plan (the "Plan"), as in effect on June 30, 1997, stock options may be awarded to directors, consultants and employees to purchase up to 200,000 shares of common stock at exercise prices determined by the Board of Directors. The options can generally be awarded for periods up to 10 years and are subject to vesting schedules as determined by the Board of Directors. The following table summarizes option activity under the Plan: Options Options Options Available Outstanding Price Per Share Balance at September 30, 1994 - - $ - Options authorized 80,000 - - Options granted (57,500) 57,500 2.375 --------------------------------------- Balance at September 30, 1995 22,500 57,500 $ 2.375 --------------------------------------- --------------------------------------- Additional options authorized 20,000 - - Options granted (37,500) 37,500 $3.875-4.263 Options exercised - (1,600) 2.375 --------------------------------------- Balance at September 30, 1996 5,000 93,400 $2.375-4.263 --------------------------------------- --------------------------------------- Additional options authorized (unaudited) 100,000 - - Option granted (unaudited) (50,000) 50,000 $ 4.75 Options canceled (unaudited) 13,000 (13,000) $2.375-3.875 --------------------------------------- Balance at June 30, 1997 (unaudited) 68,000 130,400 $ 2.375-4.75 --------------------------------------- --------------------------------------- As of June 30, 1997, 46,431 awarded options are exercisable. NOTE 4. INCOME TAXES Deferred tax assets (liabilities) are summarized as follows: (Dollars in thousands) 1996 1995 Net operating loss carryforwards $ 1,104 $ 1,016 Tax credit carryforwards 106 106 Inventory and other valuation reserves 221 190 F-10 Other - - ---------------------------- Gross deferred tax asset 1,431 1,312 ---------------------------- Depreciation expense - - Other - - ---------------------------- Gross deferred tax liability - - ---------------------------- Deferred tax asset valuation allowance $ (1,431) $ (1,312) ---------------------------- ---------------------------- The Company provides a valuation allowance for deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. The U.S. net operating loss carryforward of approximately $2,800,000 at September 30, 1996, expires by fiscal year 2010 if not offset against taxable income. The amount of and the benefit from net operating losses that can be carried forward may be impaired in certain circumstances. Events which may cause changes in the Company's tax carryovers include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. NOTE 5. COMMITMENTS AND CONTINGENCIES The Company has signed a lease for 20,331 square feet in a building located in Milpitas, California, for an initial term of three years ending October 31, 1998. The lease provides for rentals of $226,000, $226,000, and $19,000 for fiscal years 1997, 1998 and 1999 plus applicable real property taxes and insurance, and contains one three year renewal option. Future lease commitments for the next five fiscal years for all other leases as of September 30, 1996 were as follows (in thousands): Fiscal year ending September 30, Capital Leases Operating Leases - -------------------------------- -------------- ---------------- 1997 $ 46 $ 34 1998 36 32 1999 28 24 2000 26 23 Thereafter 19 16 -------- -------- Total minimum lease payments $ 155 $ 129 -------- -------- -------- Less amount representing interest (26) -------- Present value of minimum lease payments 129 Less current portion (34) -------- Long-term lease obligation $ 95 -------- -------- The Company also leases certain equipment on a month-to-month basis. Total rental expense under all operating leases was $258,000, $300,000, and $364,000, in fiscal years 1996, 1995, and 1994, respectively. On October 1, 1995, the Company entered into an Employment Agreement (the "Agreement") with John F. Bishop, Vice-Chairman of the Board, Treasurer, and Secretary of the Company, whereby Mr. Bishop will provide his services for a monthly salary of $6,500 for an initial term of two years. On the first day of each month, the F-11 initial term is automatically extended for an additional month, unless either party notifies the other in writing of his or its desire not to extend the term. In the event the Company elects not to extend the term or there is a change in control of the Company (the date of such event is referred to as the "Transition Date"), Mr. Bishop will continue to perform services for the Company for a three month transition period and the Company would maintain his compensation and other benefits for the three month transition period and an additional twenty-one months. Effective January 1, 1997, Mr. Bishop has agreed to reduce his monthly salary to $3,250 until the Transition Date. The Agreement also allows Mr. Bishop the use of an automobile and the right to receive title to the automobile, arising out of his agreement to forgo $56,846 of salary in prior years. Maintenance, insurance and gasoline costs for the automobile and an office location are also part of the Agreement. The corporate office is currently located in Newport Beach, California, leased at a monthly rate of $1,320 on a month-to-month basis. NOTE 6. BANK BORROWINGS As of September 30, 1996, the Company had a bank line of credit ("line") which provided for borrowings up to $500,000, not to exceed 60% of eligible accounts receivable. The balance outstanding was $185,000 as of September 30, 1996. The line bears interest at the bank's prime rate plus 3% per annum, provided that the interest rate in effect each month shall not be less than 10% per annum, and is payable monthly (11.25% as of September 30, 1996). The line contains various restrictive covenants requiring, among other matters, the maintenance of minimum levels of tangible net worth and profitability and certain financial ratios, including minimum quick ratio and maximum debt to net worth ratio. The line also precludes or limits the Company in taking certain actions, such as paying dividends, making loans, making acquisitions or incurring indebtedness, without the bank's prior written consent. The line is secured by substantially all of the Company's assets. As of November 15, 1996, the bank extended the maturity date of the line to January 15, 1997 and amended certain restrictive covenants, but limited borrowings to the $185,000 outstanding. On January 15, 1997, the bank line was revised to provide for borrowings up to $500,000. At October 1, 1997, the outstanding borrowings were $295,500. As of October 23, 1997, the Company was not in compliance with the restrictive covenants of the line, as so amended. In the event that the Company is unable to maintain compliance with financial covenants, J. Bradford Bishop, the Chairman and Chief Executive Officer of the Company, and John F. Bishop, the Vice Chairman, Treasurer and Secretary of the Company (the "Bishops") have agreed to finance up to $500,000 of working capital (in addition to funds provided under the subordinated loan facility (note 7)) on terms acceptable to the Bishops and the Company to replace the line of credit. NOTE 7. SUBSEQUENT EVENT On December 16, 1996, the Company entered a subordinated loan agreement with the Bishops. This agreement provides for borrowings up to a maximum aggregate amount of $600,000 by the Company. The commitment of the Bishops to make advances to the Company expires on February 1, 1998, and all advances must be repaid by February 1, 2000. Interest is charged at 8% per annum, and is payable quarterly. The advances are secured by substantially all of the assets of the Company and are subordinated to the Company's bank line of credit. The agreement contains various restrictive covenants. In connection with the subordinated loan agreement, the Company will issue warrants entitling the Bishops to purchase up to 90,000 shares of the Company's common stock at $3.00 per share. The warrants expire on December 16, 2001. Future performance and levels of capital expenditures could reduce the total amount of funds available under the bank line of credit and the subordinated loan agreement at any given time. NOTE 8. BOARD OF DIRECTORS' FEES During fiscal 1996, the Board of Directors waived fees owed to them by the Company totaling $112,000. The reversal of previously accrued fees was included in "Interest and other, net" cost and expenses in the statement of operations, and thereby reduced the net loss for the year ended September 30, 1996. NOTE 9. RECENT EVENTS (UNAUDITED) On October 15, 1997, the subordinated loan with the Bishops (Note 7) was extinguished with funds provided by a loan entered into with the Bishop Family Trust. As consideration for the early repayment of such F-12 obligations, the warrants issued to the Bishops were canceled on October 15, 1997. This new loan facility provides for a term loan of 1,000,000 and revolving advances up to $450,000. Interest is charged at the prime rate plus 5% per annum and is payable monthly (13.5% as of October 23, 1997). The loan facility expires on October 15, 1998. Funds made available by this facility were also used to extinguish bridge loans of $400,000 which had been received from the Bishops in May and August 1997. At October 23, 1997, the Company had outstanding borrowings of $1,200,000 under the loan facility. At this time the Company is not in compliance with the restrictive covenants of the loan facility. The Company has recently introduced a new line of counter products for distribution worldwide through a new OEM relationship. The Company has completed the testing phase with the OEM customer and has commenced preparation for production of the new line of products. The Company expects that this OEM relationship will account for a material portion of its revenues in fiscal year 1998 and thereafter. F-13 APPENDIX I FORM OF SUBSCRIPTION AGREEMENT (PLEASE CAREFULLY REVIEW THE ATTACHED INSTRUCTIONS) EIP Microwave, Inc. Subscription Agreement This Subscription Agreement (the "Subscription Agreement") represents a subscription to acquire the number of shares (the "Shares") of common stock of EIP Microwave, Inc. (the "Company") set forth below at a subscription price of $1.70 per share for the total subscription price set forth below. The registered owner named below is entitled to subscribe for the Shares pursuant to subscription rights granted to stockholders upon the terms and conditions set forth in the related Prospectus. For each Share subscribed for, the subscription price of $1.70 must be forwarded directly to EIP Microwave, Inc. The subscription rights expire at 5:00 p.m., California time, on December 15, 1997, unless extended by the Company. No subscription agreements will be accepted thereafter. Stockholder Name: _________________________ Stockholder Address: _________________________ Number of shares owned by Stockholder on November 7, 1997: _________________________ Number of shares subject to Basic Subscription Rights: (number of shares shown above x 4) _________________________ SECTION 1 - Subscription and Signature I hereby irrevocably subscribe for the number of Shares indicated below, on the terms specified in the related Prospectus. A. Basic Subscription: _____________ shares B. Over-Subscription: _____________ shares (No more than 1,699,628 less the number subscribed for in A.) C. Total subscription (A + B): _____________ shares D. Total cost (C x $1.70): $____________ Signature of Telephone Stockholder: ______________________________ Number: (____)________________ SECTION 2 - Address for delivery of stock certificate if different from above. _____________________________________ _____________________________________ _____________________________________ A-1 INSTRUCTIONS FOR USE OF SUBSCRIPTION AGREEMENT ---------------------- CONSULT THE INFORMATION AGENT, YOUR BANK OR BROKER AS TO ANY QUESTIONS Each stockholder of EIP Microwave, Inc. (the "Company") has the right to subscribe for four Shares for each full share of common stock of the Company (the "Basic Subscription Rights") owned of record at the close of business on November 7, 1997 (the "Record Date"). The number of Shares you are entitled to subscribe for appears on the front of the Subscription Agreement or can be calculated by multiplying the number of shares of common stock owned of record on the record date by four. The subscription price is $1.70 for each Share. You may also subscribe for Shares pursuant to an over-subscription privilege (the "Over-Subscription Privilege"). To exercise your rights, you must complete the appropriate sections of the Subscription Agreement. If you wish to exercise your rights for the Over-Subscription Privilege, you must do so by no later than 5:00 p.m., California time, on December 15, 1997, unless extended by the Company. Rights may be exercised only through the Company. To exercise your rights please complete and return the Subscription Agreement. 1. Complete "SECTION 1--Subscription and Signature." A. Basic Subscription Rights. Enter the number of shares you intend to purchase under your Basic Subscription Rights. The maximum number of shares you may purchase on basic subscription appears on the front of the Subscription Agreement or can be calculated by multiplying the number of shares of common stock owned of record on the record date by four. B. Over-Subscription Privilege. Enter the number of shares you desire to purchase under your Over-Subscription Privilege. The Over-Subscription Privilege is available only if you exercised all of your Basic Subscription Rights. The maximum number of shares that you can purchase pursuant to the Over-Subscription Privilege is 1,699,628 shares less the number of shares you purchased on Basic Subscription Rights. The number of shares that will actually be purchased by you will be subject to allotment if there are not enough shares remaining after the Basic Subscription Rights to completely fill all requests for purchases on over-subscription. C. Total Subscription. Enter the total number of shares you want to purchase in the offer. This number is the sum of the number of shares you are purchasing on Basic Subscription Rights plus the number of shares you desire to purchase under the Over-Subscription Privilege. D. Total cost. Enter the total cost of your subscription. Your total cost is the dollar number obtained when you multiply the number of shares shown under total subscription by $1.70, the subscription price per share. 2. Sign the Subscription Agreement in the space provide at the bottom of Section 1. Include your daytime telephone number in the space provided. 3. Enclose the executed Subscription Agreement, together with a check or money order made payable to "EIP Microwave, Inc." in the amount of the total cost (Item D. of Section 1) in the envelope provided. If you use your own envelope, address it to EIP Microwave, Inc., 1745 McCandless Drive, Milpitas, California 95035-8024. You may also personally deliver your Subscription Agreement and payment to EIP Microwave, Inc., at the same address. 4. Mail or deliver your executed Subscription Agreement and payment for the total cost on a timely basis so that it is received by the Company by no later than 5:00 p.m., California time, on December 15, 1997 unless extended by the Company (such date, as it may be extended on one or more occasions, is referred to herein as the "Expiration Date"). If the Company has not received your Subscription Agreement and payment for the total cost by 5:00 p.m., California time, on the Expiration Date, you will not be entitled to purchase shares pursuant to the rights. Accordingly, if you are sending your executed Subscription Agreement and payment A-2 by mail, please allow sufficient time for them to be received by the Company prior to 5:00 p.m., California time, on the Expiration Date. The Rights Offering is being made on any or all basis, which means that the Company may accept any subscription received even if all 1,699,628 Shares offered are not subscribed for in the Rights Offering. J. Bradford Bishop, Chairman and Chief Executive Officer of the Company, and John F. Bishop, Vice Chairman, Secretary and Treasurer of the Company, both of whom are principal stockholders and members of the Board of Directors of the Company, have committed to the Company that they will purchase $1,360,000 in Common Stock by exercise of Rights distributed to them if other stockholders purchase at least $800,000 in Common Stock upon exercise of Rights distributed to them. The Company reserves the right to reject any subscription agreement and payment not properly submitted. The Company has no duty to give notification of defects in any subscription agreement and/or payment and will have no liability for failure to give such notification. The Company will return any subscription agreement and/or payment not properly submitted. Stockholders should carefully review the related Prospectus prior to making an investment decision with respect to the rights referred to in this Subscription Agreement. 5. Information Agent. The address, telephone and telecopier numbers of the Information Agent are as follows: Corporate Investor Communications, Inc. ("CIC") 111 Commerce Road Carlstadt, NJ 07072-2586 Telephone: (201) 896-1900 or Toll Free: (800) 631-8985 Telecopier: (201) 896-0910 A-3 PART II INDEMNIFICATION OF DIRECTORS AND OFFICERS Under Delaware corporation law, a corporation is authorized to indemnify officers, directors, employees and agents who are made or threatened to be made parties to any civil, criminal, administrative or investigative suit or proceeding by reason of the fact that they are or were a director, officer, employee or agent of the corporation or are or were acting in the same capacity for another entity at the request of the corporation. Such indemnification includes expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such persons if they acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation or, with respect to any criminal action or proceeding, if they had no reasonable cause to believe their conduct was unlawful. In the case of any action or suit by or in the right of the corporation against such persons, the corporation is authorized to provide similar indemnification, provided that, should any such persons be adjudged to be liable for negligence or misconduct in the performance of duties to the corporation, the court conducting the proceeding must determine that such persons are nevertheless fairly and reasonably entitled to indemnification. To the extent any such persons are successful on the merits in defense of any such action, suit or proceeding, Delaware law provides that they shall be indemnified against reasonable expenses, including attorney fees. A corporation is authorized to advance anticipated expenses for such suits or proceedings upon an undertaking by the person to whom such advance is made to repay such advances if it is ultimately determined that such person is not entitled to be indemnified by the corporation. Indemnification and payment of expenses provided by Delaware law are not deemed exclusive of any other rights by which an officer, director, employee or agent may seek indemnification or payment of expenses or may be entitled to under any by-law, agreement, or vote of stockholders or disinterested directors. In such regard, a Delaware corporation is empowered to, and may, purchase and maintain liability insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation. Article Ninth of the Company's Certificate of Incorporation eliminates, to the fullest extent permitted by law, the personal liability of directors for monetary damages in certain instances for breach of a director's fiduciary duty of care. Article IX of the Company's Bylaws provides that (i) each director, officer and employee of the Company shall be indemnified by the Company to the fullest extent authorized by Delaware law subject to certain limitations, (ii) each indemnitee is entitled to be paid by the Company for its expenses in defending proceedings in advance of final determination, (iii) the right of indemnification provided therein shall not be exclusive, (iv) the Company is authorized to enter into contracts with any director, officer, employee or agent of the Company which provide for indemnification equivalent to or greater than provided in Article IX, and (v) the Company is required to maintain insurance to the extent reasonably available to protect itself and any such director, officer, employee or agent. Consistent with Article IX of the Company's Bylaws, the Company has entered into individual Indemnification Agreements with its directors and officers. The Indemnification Agreements, among other things, provide mandatory indemnification protection in excess of that provided by Delaware corporation law. The Indemnification Agreements provide certain procedures relating to indemnification and advancement of expenses. In addition, the Company currently carries limited insurance coverage for its directors and officers. The Indemnification Agreements provide protections beyond those currently available from the Company's existing director's and officer's liability insurance. As a result of the foregoing, the Company may, at some future time, be legally obligated to pay judgments (including amounts paid in settlement) and expenses in regard to civil or criminal suits or proceedings brought against one or more of its officers, directors, employees or agents, as such, with respect to the Company. To the extent of the indemnification rights provided by the Delaware statutes and provided by the Company's charter, bylaws and indemnification agreements, and to the extent of the Company's abilities to meet such indemnification obligations, the officers, directors and agents of the Company would be beneficially affected. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION II-1 The following are all expenses of this issuance and distribution. There are no underwriting discounts or commissions. - ------------------------------------------------- Item Amount (1) - ------------------------------------------------- SEC Registration fees $876 - ------------------------------------------------- Blue sky fees $4,000 - ------------------------------------------------- Printing $5,000 - ------------------------------------------------- Transfer Agent $1,000 - ------------------------------------------------- Information Agent $7,000 - ------------------------------------------------- Legal $35,000 - ------------------------------------------------- Accounting $5,000 - ------------------------------------------------- Miscellaneous $5,124 - ------------------------------------------------- TOTAL $63,000 - ------------------------------------------------- (1) Estimate RECENT SALES OF UNREGISTERED SECURITIES On April 10, 1997 the Company issued warrants to purchase 90,000 shares of its Common Stock to John F. Bishop and J. Bradford Bishop (together, the "Bishops") in consideration for the loan of $600,000 by the Bishops to the Company pursuant to the Subordinated Loan Agreement. These warrants were canceled on October 15, 1997. See "Interests of Management and Others in Certain Transactions--Subordinated Loan." The Company issued debt securities to Silicon Valley Bank evidencing cash loans of up to $500,000. See "The Company--Bank Line." The Company also issued debt securities to the Bishops evidencing cash loans of up to $1,000,000, and such loans have been repaid with the proceeds of the Bishop Family Trust Loan Facility. See "Interests of Management and Others in Certain Transactions--Subordinated Loan" and "--Bridge Loans." In addition, the Company issued debt securities to the Bishop Family Trust evidencing cash loans through November 10, 1997 of $1,200,000. See "The Company--Bishop Family Trust Loan Facility." No underwriting discounts or commissions were paid in connection with the issuance of the foregoing debt securities. The securities were not registered under the Securities Act of 1933 in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act or by Regulation D of the Commission. II-2 EXHIBITS Filed as part of this Form SB-2 Registration Statement or incorporated by reference are the following exhibits. Exhibit Number 3(a) Company's Certificate of Incorporation, filed on April 29, 1987, and Certificate of Amendment of Certificate of Incorporation, filed February 8, 1993, previously filed on February 12, 1993, as Exhibit 3(a) to Form 10-QSB Quarterly Report for quarter ended December 31, 1992, and incorporated herein by reference. 3(b) Company's Bylaws, previously filed June 25, 1987 (File No. 0-5351), as Exhibit 3(b) to Form 8-K, and incorporated herein by reference. 5(a) Opinion of Bainbridge Group, a Law Corporation, as to the legality of the securities covered by the Form SB-2 Registration Statement. 10(a) Standard Form Lease dated August 18, 1995, by and between Berg & Berg Developers, as landlord, and the Company, as tenant, covering the Company's manufacturing facility located at 1745 McCandless Drive, Milpitas, California, previously filed on December 29, 1995, as Exhibit 10(a) to Form 10-KSB Annual Report for fiscal year ended September 30, 1995 (the "1995 Annual Report"), and incorporated herein by reference. 10(b) Loan and Security Agreement dated March 10, 1992, between the Company and Silicon Valley Bank, previously filed on May 14, 1992, as Exhibit 10(a) to Form 10-Q Quarterly Report for quarter ended March 31, 1992, and incorporated herein by reference. 10(c) Amendment to Loan Agreement dated December 20, 1994, between the Company and Silicon Valley Bank, previously filed on December 29, 1994, as Exhibit 10(h) to the 1994 Annual Report, and incorporated herein by reference. 10(d) Loan Modification Agreement dated as of November 27, 1995, between the Company and Silicon Valley Bank, previously filed on December 29, 1995, as Exhibit 10(i) to the 1995 Annual Report, and incorporated herein by reference. 10(e) Loan Modification Agreement dated as of June 28, 1996, between the Company and Silicon Valley Bank, previously filed on August 13, 1996, as Exhibit 10(a) to Form 10-QSB Quarterly Report for quarter ended June 30, 1996, and incorporated herein by reference. 10(f) Loan Modification Agreement dated as of November 15 , 1996 between the Company and Silicon Valley Bank, previously filed on December 30, 1996, as Exhibit 10(f) to Form 10-KSB Annual Report for fiscal year ended September 30, 1996 (the "1996 Annual Report"), and incorporated herein by reference. 10(g) Loan Modification Agreement dated as of January 15, 1997, between the Company and Silicon Valley Bank, previously filed on May 13, 1997, as Exhibit 10(a) to Form 10-QSB Quarterly Report for quarter ended March 31, 1997, and incorporated herein by reference. 10(h) Loan Modification Agreement dated as of March 5, 1997, between the Company and Silicon Valley Bank, previously filed on May 13, 1997, as Exhibit 10(a) to Form 10-QSB Quarterly Report for quarter ended March 31, 1997, and incorporated herein by reference. II-3 10(i) Loan and Security Agreement dated as of October 15, 1997, between the Company and the Bishop Family Trust. 10(j) Fixed Price Subcontract dated August 15, 1997, between the Company and ManTech Systems Engineering Corporation. *10(k) Employment Agreement dated as of October 1, 1995, between the Company and John F. Bishop, previously filed on December 29, 1995, as Exhibit 10(k) to the 1995 Annual Report, and incorporated herein by reference. *10(l) Amendment dated November 20, 1996 to Employment Agreement between the Company and John F. Bishop, previously filed on December 30, 1996, as Exhibit 10(i) to the 1996 Annual Report, and incorporated herein by reference. *10(m) Company's medical reimbursement plan (entitled "Full Medical Coverage") covering certain officers, previously filed on December 23, 1981 (File No. 0-5351), as Exhibit 10(o) to Form 10-K Annual Report for fiscal year ended September 30, 1981, and incorporated herein by reference. *10(n) Company's Tax and Financial Counseling reimbursement plan covering officers, previously filed on December 23, 1981 (File No. 0-5351), as Exhibit 10(p) to Form 10-K Annual Report for fiscal year ended September 30, 1981, and incorporated herein by reference. *10(o) Written description of EIP Bonus Plan for Fiscal 1997, previously filed on December 30, 1996, as Exhibit 10(l) to the 1996 Annual Report, and incorporated herein by reference. *10(p) Second Amended and Restated 1994 Stock Option Plan, previously filed on December 30, 1996, as Exhibit 10(n) to the 1996 Annual Report, and incorporated herein by reference. *10(q) Non-qualified Stock Option Agreement-Form, previously filed on December 29, 1995, as Exhibit 10(v) to the 1995 Annual Report, and incorporated herein by reference. *10(r) Incentive Stock Option Agreement-Form, previously filed on December 29, 1995, as Exhibit 10(w) to the 1995 Annual Report, and incorporated herein by reference. 10(s) Indemnification Agreement dated July 15, 1992, between the Company and J. Bradford Bishop, previously filed on December 20, 1992, as Exhibit 10(n) to Form 10-KSB Annual Report for fiscal year ended September 30, 1992 (the "1992 Annual Report"), and incorporated herein by reference. 10(t) Indemnification Agreement dated July 15, 1992, between the Company and Robert D. Johnson, previously filed on December 20, 1992, as Exhibit 10(o) to the 1992 Annual Report for fiscal year ended September 30, 1992, and incorporated herein by reference. 10(u) Indemnification Agreement dated July 15, 1992, between the Company and James J. Shelton, previously filed on December 20, 1992, as Exhibit 10(p) to the 1992 Annual Report for fiscal year ended September 30, 1992, and incorporated herein by reference. 10(v) Indemnification Agreement dated July 15, 1992, between the Company and J. Sidney Webb, Jr., previously filed on December 20, 1992, as Exhibit 10(q) to the 1992 Annual Report for fiscal year ended September 30, 1992, and incorporated herein by reference. 10(w) Indemnification Agreement dated July 15, 1992, between the Company and John F. Bishop, previously filed on December 23, 1993, as Exhibit 10(m) to Form 10-KSB Annual Report, for fiscal year 1993 (the "1993 Annual Report"), and incorporated herein by reference. - ----------------------------------- * Management contract or compensatory plan or arrangement. II-4 10(x) Indemnification Agreement dated February 13, 1996, between the Company and Michael E. Johnson, previously filed on May 9, 1996, as Exhibit 10(a) to Form 10-QSB Quarterly Report for quarter ended March 31, 1996, and incorporated herein by reference. 10(y) Indemnification Agreement dated February 19, 1997, between the Company and Lewis R. Foster, previously filed on May 13, 1997, as Exhibit 10(c) to Form 10-QSB Quarterly Report for quarter ended March 31, 1997, and incorporated herein by reference. 10(z) Indemnification Agreement dated February 19, 1997, between the Company and Ivan Andres, previously filed on May 13, 1997, as Exhibit 10(d) to Form 10-QSB Quarterly Report for quarter ended March 31, 1997), and incorporated herein by reference. 10(aa) OEM Purchase Agreement effective on May 28, 1997, previously filed on August 14, 1997, as Exhibit 10(a) to Form 10-QSB Quarterly Report for quarter ended June 30, 1997, and incorporated herein by reference. 16 Letter dated November 13, 1997 from Price Waterhouse LLP to the Securities and Exchange Commission, previously filed on November 14, 1997, as Exhibit 16 to Form 8-K/A Current Report, and incorporated herein by reference. 21 Subsidiaries of the Company, previously filed on December 30, 1996, as Exhibit 21 to the 1996 Annual Report, and incorporated herein by reference. 23(a) Consent of Bainbridge Group, a Law Corporation, to the reference to it as counsel who has passed upon certain information contained in the Prospectus. 23(b) Consent of Price Waterhouse LLP. - ----------------------------------- UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-5 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this amendment to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Milpitas, California on November 13, 1997. EIP MICROWAVE, INC. By: /s/ Lewis R. Foster ------------------------------------- Lewis R. Foster President and Chief Operating Officer In accordance with the requirements of the Securities Act of 1933, this amendment to the registration statement was signed by the following persons in the capacities and on the dates indicated. November 13, 1997 /s/ Lewis R. Foster ---------------------------------------- Lewis R. Foster President and Chief Operating Officer November 13, 1997 /s/ John F. Bishop ---------------------------------------- John F. Bishop Vice Chairman, Treasurer, Secretary, and Director (Principal Financial Officer) ---------------------------------------- Michael E. Johnson Director November 13, 1997 /s/ Robert D. Johnson ---------------------------------------- Robert D. Johnson Director November 13, 1997 /s/ J. Sidney Webb ---------------------------------------- J. Sidney Webb Director November 13, 1997 /s/ J. Bradford Bishop ---------------------------------------- J. Bradford Bishop Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) November 13, 1997 /s/ E. O. Bince ---------------------------------------- E. O. Bince Controller (Principal Accounting Officer) II-6 INDEX TO EXHIBITS Exhibit No. Description - ----------- ----------- 5(a) Opinion of Bainbridge Group, a Law Corporation, as to the legality of the securities covered by the Form SB-2 Registration Statement. 10(i) Loan and Security Agreement dated as of October 15, 1997, between the Company and the Bishop Family Trust. 10(j) Fixed Price Subcontract dated August 15, 1997, between the Company and ManTech Systems Engineering Corporation. (1) 23(a) Consent of Bainbridge Group, a Law Corporation, to the reference to it as counsel who has passed upon certain information contained in the Prospectus. 23(b) Consent of Price Waterhouse, LLP. - ----------------------------------- (1) Portions of this document are confidential, and have been omitted pursuant to 17 C.F.R. Section 240.24b-2 and filed separately with the Securities and Exchange Commission. II-7 EX-5.(A) 2 EXHIBIT 5(A) EXHIBIT 5(a) BAINBRIDGE GROUP November 13, 1997 EIP Microwave, Inc. 3 Civic Plaza, Suite 265 Newport Beach, California 92660 Gentlemen: In connection with the preparation and filing of a Form SB-2/A Registration Statement under the Securities Act of 1933, to be filed by EIP Microwave, Inc. for the purpose of registering 1,699,628 shares of its Common Stock (the "Shares") to be offered to its stockholders of record on a date to be selected by its board of directors prior to the effective date of the Registration Statement, we have acted as counsel to EIP Microwave, Inc. (the "Company") in the preparation of the Form SB-2/A Registration Statement. We advise you that we are familiar with the originals or copies, certified or otherwise identified to our satisfaction, of documents, corporate records, or other instruments relating to the incorporation of the Company and the authorization and the issuance of the Shares, including the following: (a) Certificate of Incorporation of the Company; (b) By-laws of the Company; (c) Corporate proceedings and filings reflected in the minutes of the Company as certified to by the secretary of the Company; (d) Specimen certificates representing the Shares; and (e) The Form SB-2/A Registration Statement relating to the Shares and to be filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended. Based solely on the foregoing, we are of the opinion that: 1. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. 2. The Company has corporate power to conduct the business now being conducted and is duly authorized and in good standing to do business in the jurisdiction in which its ownership of property or the conduct of its business legally requires that authorization. 3. The Company has an authorized capitalization as set forth in the Registration Statement, and the Shares conform to the statements concerning them in the Registration Statements. 4. The Shares have been duly and validly authorized. The Shares, when issued, will be legally issued, fully paid and non-assessable. 5. No consent, approval, authorization, or other order of any regulatory authority or third party is legally required for the valid issuance of the Shares other than the order making effective the registration of the Shares, which order must be issued by the Securities and Exchange Commission, and other than similar action to be taken by the state securities regulatory agencies of states which require registration of, or filings with respect to, the Shares in those states. 6. The consummation of the offering and sale of the Shares as contemplated in the Registration Statements will not result in a breach of any of the terms and provisions of, or constitute a default under, any notes, indenture, mortgage, deed of trust, or other agreement or instrument to which the Company to its knowledge is now a party, or the Certificate of Incorporation of the Company. 7. We do not know, and you have advised us that you do not know, of any legal or governmental proceeding pending or threatened to which the Company is a party, or of which the property of the Company is the subject, of a character required to be disclosed in the Registration Statements that is not disclosed and properly described in this document; and you and we do not know of any contracts of a character to be disclosed in the Registration Statement that are not disclosed, filed and properly summarized in such document. 8. The Registration Statement and any further amendments and supplements made by the Company prior to the effective date of the Form SB-2/A Registration Statement comply as to form in all material respects with the requirements of the Securities Act of 1933, as amended, and the applicable rules and regulations of the Securities and Exchange Commission. We have no reason to believe that the Registration Statement contains any untrue statement of a material fact or omits to state any material fact required to be stated in the document or necessary to make the statements in it not misleading. We hereby consent to the filing of this opinion as Exhibit 5(a) to the Form SB-2/A Registration Statement to be filed by the Company on or about November 13, 1997. Sincerely, BAINBRIDGE GROUP /s/ Michael E. Johnson ----------------------------------- Michael E. Johnson, President EX-10.(I) 3 EXHIBIT 10(I): LOAN AND SECURITY AGREEMENT EXHIBIT 10(i) THE SECURITIES REPRESENTED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933; THEY HAVE BEEN ACQUIRED BY THE HOLDER FOR INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT AS MAY BE AUTHORIZED UNDER THE SECURITIES ACT OF 1933 AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER. LOAN AND SECURITY AGREEMENT This LOAN AND SECURITY AGREEMENT is entered into as of October 15, 1997 between JOHN F. BISHOP AND ANN R. BISHOP, TRUSTEES OF THE BISHOP FAMILY TRUST ("Lender"), located at 2 Inverness Lane, Newport Beach, California 92660, and EIP MICROWAVE, INC., a Delaware corporation ("Borrower"), located at 1745 McCandless Drive, Milpitas, California 95035-8024. The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION 1.1 TERMS. In addition to the terms that are defined within this Agreement, the following terms shall have the following definitions when used in this Agreement: "Account Debtor" means any Person who is or who may become obligated under, with respect to, or on account of an Account. "Accounts" means all presently existing and hereafter arising accounts receivable, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods or the rendition of services by Borrower, whether or not earned by performance, all credit insurance, guaranties, and other security therefor, as well as all goods returned to or reclaimed by Borrower, and Borrower's Books relating to any of the foregoing. "Agreement" means this Loan and Security Agreement and any riders, addenda, extensions, supplements, amendments or modifications to or in connection with this Loan and Security Agreement. "Authorized Officer" means any officer of Borrower. "Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C. Sections 101 et seq.), as amended, and any successor statute. "Borrower's Books" means all of Borrower's books and records including all of the following: ledgers, records indicating, summarizing or evidencing Borrower's assets (including the Collateral) or liabilities; all information relating to Borrower's business operations or financial condition; and all computer programs, disk or tape files, printouts, runs or other computer prepared information, and the equipment containing such information. "Business Day" means any day which is not a Saturday, Sunday or legal holiday. "Code" means the California Uniform Commercial Code, as amended from time to time. "Collateral" means all of the following: the Accounts; the Equipment; the General Intangibles; the Inventory; the Negotiable Collateral; any money or other assets of Borrower which 1 hereafter come into the possession, custody or control of Lender; and all proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the Collateral, and any and all Accounts, Equipment, General Intangibles, Inventory, Negotiable Collateral, money, deposit accounts or other tangible or intangible property resulting from the sale or other disposition of the Collateral, or any portion thereof or interest therein, and the proceeds thereof. "Common Stock" means the common stock, $0.01 par value per share, of Borrower. "Environmental Law" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, the Resource Conservation and Recovery Act of 1976, the Hazardous Materials Transportation Act, the Toxic Substances Control Act, the regulations pertaining to such statutes, and any other safety, health or environmental statutes, laws, regulations or ordinances of the United States or of any state, county or municipality in which Borrower conducts its business or the Collateral is located. "Equipment" means all of Borrower's present and hereafter acquired computers, office machines, equipment, machinery. machine tools, motors, furniture, furnishings, fixtures, motor vehicles, rolling stock, processors, tools, parts, dies, jigs, goods (other than consumer goods, farm products or inventory), wherever located, and any interest of Borrower in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions and improvements to any of the foregoing, wherever located. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "ERISA Affiliate" means each trade or business (whether or not incorporated and whether or not foreign) which is or may hereafter become a member of a group of which Borrower is a member and which is treated as a single employer under ERISA Section 4001(b)(1), or IRC Section 414. "Event of Default" means the events specified in SECTION 8. "Fair Market Value" per share of Common Stock means: (a) if the Common Stock is traded on an exchange, then the average closing price at which a share of Common Stock is traded on the 10 trading days prior to the date of determination; (b) if the Common Stock is traded over-the-counter on the NASDAQ System, then the average of the bid and asked closing prices of a share of Common Stock on said System on the 10 trading days prior to the date of determination; (c) if the Common Stock is designated a National Market System security, then the average closing price at which a share of Common Stock traded on the 10 trading days prior to the date of determination; and (d) if neither (a), (b) nor (c) applies, then the fair market value of the Common Stock on the date of determination, as determined by the Board of Directors of Borrower in good faith (which determination shall be conclusive and binding on all persons). "General Intangibles" means all of Borrower's present and future general intangibles and other personal property (including contract rights, rights arising under common law, statutes or regulations, choses or things in action, goodwill, patents, trade names, trademarks, service marks, trade secrets, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, monies due under any royalty or licensing agreements, route lists, infringement claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, deposit accounts, insurance premium rebates, tax refunds and tax refund claims) other than goods and Accounts, and Borrower's Books relating to any of the foregoing. "Hazardous Material" means any substance, material, emission or waste which is or hereafter becomes regulated or classified as a hazardous substance, hazardous material, toxic substance or solid waste under any Environmental Law, asbestos, petroleum products, urea formaldehyde, 2 polychlorhated biphenyls (PCBs), radon and any other hazardous or toxic substance, material, emission or waste. "Insolvency Proceeding" means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with its creditors or proceedings seeking reorganization, liquidation, arrangement or other similar relief. "Inventory" means all present and future inventory in which Borrower has any interest, including goods held for sale or lease or to be furnished under a contract of service, Borrower's present and future raw materials, work in process, finished goods and materials used in or consumed in Borrower's business, goods which have been returned to, repossessed by or stopped in transit by Borrower, packing and shipping materials, wherever located, any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Lender Expenses" means all of the following: costs and expenses including taxes, assessments and insurance premiums) required to be paid by Borrower under any of the Loan Documents which are paid or advanced by Lender; filing, recording, publication, appraisal (including periodic Collateral appraisals), real estate survey, environmental audit and search fees assessed, paid or incurred by Lender in connection with Lender's transactions with Borrower; costs and expenses incurred by Lender in the disbursement or collection of funds to or from Borrower; charges resulting from the dishonor of checks; costs and expenses paid or incurred by Lender to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated; costs and expenses paid or incurred by Lender that result from third party claims against Lender covered by Borrower's indemnification of Lender in SECTION 11.4; costs and expenses paid or incurred by Lender in enforcing or defending the Loan Documents; and Lender's reasonable attorneys fees and expenses incurred in advising, structuring, drafting, reviewing, administering, amending, terminating, enforcing, defending or otherwise representing Lender in connection with the Loan Documents or the Obligations (including attorneys fees and expenses incurred in connection with a workout, a restructuring, an action to lift the automatic stay of Section 362 of the Bankruptcy Code, any other action or participation by Lender in an Insolvency Proceeding concerning Borrower or any guarantor of the Obligations or any defense or participation by Lender in any lender liability, preference or fraudulent conveyance actions). "Loan Documents" means, collectively, this Agreement, any Notes, any security agreements, pledge agreements, deeds of trust, mortgages or other encumbrances or agreements which secure the Obligations, any guaranties of the Obligations, any lock box or blocked account agreements and any other agreement entered into between Borrower or any guarantor of the Obligations and Lender relating to or in connection with this Agreement. "Multiemployer Plan" means a multiemployer plan as defined in ERISA Sections 3(37) or 4001(a)(3) or IRC Section 414(f) which covers employees of Borrower or any ERISA Affiliate. "Negotiable Collateral" means all of Borrower's present and future letters of credit, notes, drafts, instruments, certificated and uncertificated securities, documents, leases and chattel paper, and Borrower's Books relating to any of the foregoing. "Note" means any promissory note made by Borrower to the order of Lender concurrently herewith or at any time hereafter. 3 "Obligations" means loans, advances, debts, liabilities (including all amounts charged to Borrower's loan account pursuant to any agreement authorizing Lender to charge Borrower's loan account), obligations, fees, lease payments, guaranties, covenants and duties owing by Borrower to Lender of any kind and description (whether pursuant to or evidenced by the Loan Documents, by any note or other instrument or by any other agreement between Lender and Borrower, and irrespective of whether for the payment of money), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, including any debt, liability or obligation owing from Borrower to others which Lender may obtain by assignment or otherwise, and all interest thereon, including any interest that, but for the provisions of the Bankruptcy Code, would have accrued, and all Lender Expenses which Borrower is required to pay or reimburse pursuant to the Loan Documents, by law or otherwise. "Person" means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability company, joint ventures, trusts, land trusts, business trusts or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. "Plan" means any plan described in ERISA Section 3(2) maintained for employees of Borrower or any ERISA Affiliate, other than a Multiemployer Plan. "Reference Rate" means the variable rate of interest, per annum, published by The Wall Street Journal as the "Prime Rate" and based on "the base rate on corporate loans posted by at least 75% of the nation's 30 largest banks". The Reference Rate is nothing more nor less than an index for determining the interest rate payable under the terms of this Agreement. The Reference Rate is not necessarily the best rate, or any other definition of rates, offered by the banks that establish the rate or by Lender. In the event The Wall Street Journal ceases to publish the "Prime Rate", Lender may substitute any similar index for the Reference Rate. "Term Loan" means any term loan made by Lender to Borrower, evidenced by and repayable in accordance with the terms and conditions of a Note. 1.2 CONSTRUCTION. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting and the term "or" has the inclusive meaning generally represented by the phrase "and/or". The words hereof, herein, hereby, hereunder, and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Section, subsection, clause, exhibit and schedule references are to this Agreement unless otherwise specified. Any reference in this Agreement or in any of the other Loan Documents to this Agreement or any of the other Loan Documents shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions and supplements thereto and thereof. 1.3 ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles ("GAAP") as in effect from time to time. When used herein, the term financial statements shall include the notes and schedules thereto. 1.4 RIDERS, EXHIBITS, ETC. The Conditions Precedent Rider to this Agreement and all of the other riders, exhibits, addenda and schedules to this Agreement shall be deemed incorporated herein by reference. 1.5 CODE. Any terms used in this Agreement which are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein. 2. ADVANCES AND TERMS OF PAYMENT 2.1 LOANS. 4 A. REVOLVING ADVANCES; REVOLVING ADVANCE LIMIT. Upon the request of Borrower, made at any time or from time to time during the term hereof, and so long as no Event of Default has occurred and is continuing, Lender shall, in its sole discretion, make advances (the "Revolving Advances") to Borrower; provided, however, that in no event shall the aggregate amount of the outstanding Revolving Advances be greater than, at any time, the sum of Four Hundred Fifty Thousand Dollars ($450,000) (the "Revolving Advance Limit"). Lender may reduce the Revolving Advance Limit or establish reserves with respect to borrowing availability if Lender determines, in its sole discretion, that there has occurred, or is likely to occur, an impairment of the prospect of repayment of all or any portion of the Obligations, the value of the Collateral or the validity or priority of Lender's security interests in the Collateral. The Revolving Advances will be evidenced by and repayable in accordance with the terms and conditions of a Note of even date herewith. Any Revolving Advances made by Lender to Borrower shall constitute Obligations and shall be secured by the Collateral. The occurrence of a default under such Note or under any Note made in respect of any Revolving Advances shall constitute an Event of Default hereunder. B. TERM LOAN. Concurrently with the funding of the initial Revolving Advance, Lender will make a term Loan to Borrower in the original principal amount of One Million Dollars ($1,000,000 ), to be evidenced by and repayable in accordance with the terms and conditions of a Note of even date herewith. Such Term Loan and any other Term Loan subsequently made by Lender to Borrower shall constitute Obligations and shall be secured by the Collateral. The occurrence of a default under such Note or under any Note made in respect of any subsequent Term Loan shall constitute an Event of Default hereunder. C. ADVANCE LIMIT. The sum of the Revolving Advance Limit PLUS the principal amount of all Term Loans outstanding from time to time, if any, is referred to herein as the Advance Limit. 2.2 OVERADVANCES. All Revolving Advances made hereunder shall be added to and deemed part of the Obligations when made. If, at any time and for any reason, the aggregate amount of the outstanding Revolving Advances exceeds the dollar limitations contained in SECTION 2.1A (an "Overadvance"), then Borrower shall, upon demand by Lender, immediately pay to Lender, in cash, the amount of such excess. 2.3 OVERADVANCE FEE. Without affecting Borrower's obligation to immediately repay to Lender the amount of each Overadvance in accordance with the provisions of SECTION 2.2, in the event Lender agrees to permit any Overadvance to exist and continue, and in consideration for permitting such Overadvance to exist and continue, Borrower shall pay to Lender a fee in an amount equal to two percent (2.0%) per month on the amount of the Overadvance for each day any Overadvance exists. All such fees shall be computed on the basis of a thirty (30) day month for the actual number of days elapsed. 2.4 AUTHORIZATION TO MAKE REVOLVING ADVANCES. Borrower hereby authorizes Lender to make the Revolving Advances based upon telephonic or other instructions received from anyone purporting to be an Authorized Officer, or at the discretion of Lender without instructions from or notice to Borrower, if such Revolving Advances are necessary to satisfy any Obligations. All requests for Revolving Advances hereunder shall specify the date on which the requested Revolving Advance is to be made (which day shall be a Business Day) and the amount of the requested Revolving Advance. Requests received after 11:00 am. Pacific time on any day shall be deemed to have been made as of the opening of business on the immediately following Business Day. All Revolving Advances made under this Agreement shall be conclusively presumed to have been made to, at the request of, and for the benefit of Borrower when deposited to the credit of Borrower or otherwise disbursed in accordance with the instructions of Borrower or in accordance with the terms and conditions of this Agreement. 2.5 INTEREST. 5 A. BASIC RATE; DEFAULT RATE. Except where specified to the contrary in any Loan Document, the aggregate outstanding amount of all Obligations shall bear interest at the rate of five percent (5%) per annum above the Reference Rate. The aggregate outstanding amount of all Obligations shall bear interest, from and after written notice by Lender to Borrower of the occurrence of an Event of Default and without constituting a waiver of any such Event of Default, at the rate of eight percent (8%) per annum above the Reference Rate; PROVIDED, HOWEVER, that in the event an Insolvency Proceeding is commenced by or against Borrower, Lender may charge such default rate of interest without providing written notice thereof to Borrower. All interest payable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed, based on the aggregate amount of the Obligations that are outstanding on each day. Interest shall continue to accrue until all of the Obligations are paid in full. B. INITIAL RATE. The Reference Rate as of the date of this Agreement is eight and one half percent (8.50%) per annum, and, therefore, the effective rate of interest hereunder as of the date of this Agreement is thirteen and one half percent (13.50%) per annum. The interest rate payable by Borrower under the terms of this Agreement shall be adjusted in accordance with any change in the Reference Rate from time to time on the date of any such change. All interest payable by Borrower shall be due and payable on the first day of each calendar month during the term of this Agreement. 2.6 VERIFICATION AND COLLECTION OF ACCOUNTS. Lender or Lender's designee may, at any time, with or without notice to Borrower, (a) notify Account Debtors of Borrower that the Accounts have been assigned to Lender and that Lender has a security interest in the Accounts; (b) contact Account Debtors of Borrower, either in writing or by telephone, for the purpose of verifying the validity, amount or any other matter relating to any Accounts; and (c) collect the Accounts directly and charge the collection costs and expenses to Borrower's loan account. Unless and until Lender begins direct collection of the Accounts or gives Borrower other written instructions, Borrower shall collect all Accounts and the proceeds of other Collateral for the benefit of Lender, receive in trust all payments thereon as Lender's trustee and, if requested by Lender, immediately deliver said payments to Lender in their original form as received by Borrower (subject to the terms of any lockbox, blocked account or similar agreement entered into for the purpose of collection of the Accounts). 2.7 CREDITING PAYMENTS. For the purpose of calculating the availability of Revolving Advances under SECTION 2.1A, the receipt by Lender of any wire transfer of funds, check or other item of payment shall be applied immediately to provisionally reduce the Obligations, but such receipt shall not be considered a payment on account unless such wire transfer is of immediately available federal funds and is made to the appropriate deposit account of Lender or unless and until such check or other item of payment is honored when presented for payment. In the event any check or other item of payment is not honored when presented for payment, Borrower shall be deemed not to have made such payment and interest shall be recalculated accordingly. Notwithstanding anything to the contrary contained herein, any wire transfer, check or other item of payment received by Lender after 11:00 am. Pacific time shall be deemed to have been received by Lender as of the opening of business on the immediately following Business Day. 2.8 ANNUAL FEE. Borrower shall pay Lender an annual fee (the "Annual Fee") in the amount of Eleven Thousand Five Hundred Dollars ($11,500). The Annual Fee shall be fully earned and is due and payable on the date that the initial Revolving Advance is made hereunder. After the anniversary of the date of this Agreement, the Annual Fee shall be prorated and paid on a monthly basis by Borrower for all renewal terms or so long as any of the Obligations are outstanding. 2.9 FACILITY FEE. Borrower shall pay Lender facility fees (the "Facility Fees") as follows: A. A Facility Fee of Seventy Thousand Five Hundred Dollars ($70,500) shall be fully earned on the date that the initial Revolving Advance is made hereunder and shall be payable 6 by Borrower on the date that is three months after the date that the initial Revolving Advance is made hereunder (the "3-Month Date"). B. If the principal amount of the Obligations outstanding on the 3-Month Date exceeds $1,000,000, then an additional Facility Fee of Seventy Thousand Five Hundred Dollars ($70,500) shall be fully earned and shall be payable by Borrower on the 3-Month Date. C. If the principal amount of the Obligations outstanding on the date that is six months after the date that the initial Revolving Advance is made hereunder (the "6-Month Date") exceeds $1,000,000, then an additional Facility Fee of One Hundred Forty One Thousand ($141,000) shall be fully earned and shall be payable by Borrower on the 6-Month Date. Borrower shall have the right to pay the Facility Fee in cash or by issuance of Common Stock. The number of shares of Common Stock issuable as payment for a Facility Fee shall equal (a) the applicable Facility Fee divided by (b) the Fair Market Value per share of Common Stock on the date such Facility Fee is payable to Lender. 2.10-2.11 [INTENTIONALLY OMITTED] 2.12 AUDIT FEE. Borrower shall pay Lender an audit fee in an amount equal to Five Hundred Dollars ($500) for each audit of Borrower performed by Lender subsequent to the making of the initial Revolving Advance hereunder. 2.13 LATE REPORTING FEE. Borrower shall pay Lender a fee in an amount equal to Fifty Dollars ($50) per document per day for each Business Day any report, financial statement or schedule required to be delivered to Lender by this Agreement is past due. 2.14 MISCELLANEOUS FEES. Borrower shall pay Lender its customary fees for wire transfers (including, a premium for early and late transfers), returned checks, letter of credit guarantees and any other services provided by Lender to Borrower that are incidental to this Agreement. Upon Borrower's request, Lender shall provide Borrower with a written schedule of the amounts of all such miscellaneous fees. 2.15 MAXIMUM CHARGES. In no event shall interest on the Obligations exceed the highest lawful rate in effect from time to time. It is not the intention of the parties hereto to make an agreement which violates any applicable state or federal usury laws. In no event shall Borrower pay or Lender accept or charge any interest which, together with any other charges upon the principal or any portion thereof, exceeds the maximum lawful rate of interest allowable under any applicable state or federal usury laws. Should any provision of this Agreement or any existing or future Notes or Loan Documents between the parties be construed to require the payment of interest which, together with any other charges upon the principal or any portion thereof, exceeds the maximum lawful rate of interest, then any such excess shall be applied to the remaining principal balance, if any, and the remainder refunded to Borrower. 3. TERM OF AGREEMENT AND EARLY TERMINATION 3.1 TERM. This Agreement shall become effective in accordance with Section 14.1 and shall continue in full force and effect for a term ending one (1) year after the date hereof and shall be deemed automatically renewed for successive terms of one (1) month thereafter until terminated as of the end of the initial term or any renewal term (each a "Term") by either party giving the other at least sixty (60) days written notice. 3.2 EARLY TERMINATION. Borrower, subject to the payment of the fee described below, may terminate this Agreement other than at the end of the then current Term by giving Lender prior 7 written notice of its intention to effect an early termination of this Agreement. Lender may terminate this Agreement at any time upon or after the occurrence of an Event of Default. In view of the impracticability and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Lender's lost profits as a result of an early termination of this Agreement, in either of the instances described in the preceding two sentences, Borrower shall pay to Lender, upon the effective date of such early termination and in addition to all other Obligations, an early termination fee (the "Early Termination Fee") in an amount equal to Eight Thousand Dollars ($8,000) per month for the period commencing on the effective date of such early termination and ending on the first anniversary of the date hereof. No Early Termination Fee is payable for an early termination following the first anniversary of the date hereof. The Early Termination Fee shall be presumed to be the amount of damages sustained by Lender as the result of the early termination and Borrower agrees that it is reasonable under the circumstances currently existing. The Early Termination Fee shall be deemed included in the Obligations. Notwithstanding anything herein to the contrary, if and to the extent the Early Termination Fee constitutes interest under applicable law, the Early Termination Fee, when added to all other interest contracted for, charged or received under this Agreement or any other Loan Documents, shall not exceed, and shall be limited to an amount which constitutes, interest at the maximum lawful rate of interest allowable under applicable law. 3.3 EFFECT OF TERMINATION. Upon termination of this Agreement, all of the Obligations shall be immediately due and payable in full. No termination of this Agreement shall relieve or discharge Borrower of Borrower's duties, obligations and covenants hereunder until all of the Obligations have been fully and indefeasibly paid and satisfied, and Lender's continuing security interest in the Collateral shall remain in effect until all of the Obligations have been fully and indefeasibly paid and satisfied. 4. CREATION OF SECURITY INTEREST 4.1 GRANT OF SECURITY INTEREST. Borrower hereby grants to Lender a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrower of each and all of its covenants and duties under the Loan Documents. Lender's security interest in the Collateral shall attach to all Collateral without further act on the part of Lender or Borrower. Other than sales of Inventory (including Inventory consisting of Equipment but not Equipment used in the production of goods sold by Borrower) to buyers in the ordinary course of business, Borrower has no authority, express or implied, to dispose of any item or portion of the Collateral. 4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, Borrower shall, upon the request of Lender, immediately endorse and assign such Negotiable Collateral to Lender and deliver physical possession of such Negotiable Collateral to Lender. 4.3 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall execute and deliver to Lender, concurrently with Borrower's execution and delivery of this Agreement and at any time thereafter at the request of Lender, all financing statements, continuation financing statements, fixture filings, security agreements, chattel mortgages, pledges, assignments, endorsements of certificates of title, applications for title, affidavits, reports, notices, schedules of accounts, letters of authority, and all other documents that Lender may reasonably request, in form satisfactory to Lender, to perfect and continue perfected Lender's security interest in the Collateral and in order to fully consummate all of the transactions contemplated hereunder and under the other Loan Documents. 4.4 POWER OF ATTORNEY. Borrower hereby irrevocably designates, makes, constitutes and appoints Lender (and any of Lender's officers, employees or agents designated by Lender) as Borrower's true and lawful attorney-in-fact, and Lender, or Lender's agent. may, without notice to Borrower and in either Borrower's or Lender's name, but at the cost and expense of Borrower, at such time 8 or times as Lender in its sole discretion may determine: (a) demand payment of the Accounts from the Account Debtors, enforce payment of the Accounts by legal proceedings or otherwise, and generally exercise all of Borrower's rights and remedies with respect to the collection of the Accounts; (b) take control, in any manner, of any item of payment or proceeds relating to any Collateral; (c) prepare, file and sign Borrower's name to a proof of claim in bankruptcy or similar document against any Account Debtor or to any notice of lien, assignment or satisfaction of lien or similar document in connection with any of the Collateral; (d) sign Borrower's name on any of documents described in Section 4.3 or on any other similar documents to be executed, recorded or filed in order to perfect or continue perfected Lender's security interest in the Collateral; (e) sign Borrower's name on any invoices, bills of lading, freight bills, chattel paper, documents, instruments or similar documents or agreements relating to the Accounts, Inventory or other Collateral, drafts against Account Debtors, schedules and assignments of Accounts, verifications of Accounts and notices to Account Debtors; (f) send requests for verification of Accounts; (g) endorse Borrower's name on any checks, notes, acceptances, money orders, drafts or other items of payment or proceeds relating to any Collateral that may come into Lender's possession and deposit the same to the account of Lender for application to the Obligations; (h) do all other acts and things necessary, in Lender's determination, to fulfill Borrower's obligations under this Agreement or any of the other Loan Documents; (i) at any time that an Event of Default has occurred and is continuing, notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by Lender, to receive and open all mail addressed to Borrower, and to retain all mail relating to the Collateral and forward all other mail to Borrower; (j) at any time that an Event of Default has occurred and is continuing, use the information recorded on or contained in any data processing equipment and computer hardware and software relating to the Accounts, Inventory, Equipment and any other Collateral and to which Borrower has access; (k) at any time that an Event of Default has occurred and is continuing, make, settle and adjust all claims under Borrower's policies of insurance, make all determinations and decisions with respect to such policies of insurance and endorse the name of Borrower on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance; (l) at any time that an Event of Default has occurred and is continuing, sell or assign any of the Accounts and other Collateral upon such terms, for such amounts and at such time or times as Lender deems advisable; and (m) at any time that an Event of Default has occurred and is continuing, settle, adjust or compromise disputes and claims respecting the Accounts directly with Account Debtors, for amounts and upon terms that Lender determines to be reasonable, and, in furtherance thereof, execute and deliver any documents and releases that Lender determines to be necessary. The appointment of Lender as Borrower's attorney-in-fact and each and every one of Lender's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and this Agreement has been terminated. 4.5 RIGHT TO INSPECT. Lender, through any of its officers, employees or agents, shall have the right at any time or times during Borrower's usual business hours, or during the usual business hours of any third party having control over any of Borrower's Books. to inspect Borrower's Books in order to verify the amount or condition of, or any other matter relating to, the Collateral or Borrower's financial condition. Lender also shall have the right at any time or times during Borrower's usual business hours to inspect and examine the Inventory and the Equipment and to check and test the same as to quality, quantity, value and condition. If an Event of Default has occurred or if Lender reasonably believes that an Event of Default has occurred, Lender may conduct any of the inspections referenced in this SECTION 4.5 at any time without regard to Borrower's or any third party's usual business hours. 5. REPRESENTATIONS AND WARRANTIES Borrower makes the following representations and warranties to Lender and each such representation and warranty shall be deemed to be repeated with each Revolving Advance made by Lender and shall be conclusively presumed to have been relied on by Lender regardless of any investigation made or information possessed by Lender. The following representations and warranties shall be cumulative and in addition to any and all other representations and warranties which Borrower shall now or hereafter give, or cause to be given, to Lender. 9 5.1 NO PRIOR ENCUMBRANCES; SECURITY INTERESTS. Borrower has good and indefeasible title to the Collateral, free and clear of liens, claims, security interests or encumbrances, except (a) the security interests granted to Lender by Borrower, (b) the security interests disclosed in the UCC searches attached hereto as SCHEDULE A and (c) any security interest which Borrower has disclosed in writing to Lender and to which Lender has given its prior written consent. 5.2 ACCOUNTS. All of Borrower's Accounts constitute bona fide vesting obligations created by the sale and delivery of Inventory or the rendition of services to Account Debtors in the ordinary course of Borrower's business, and, in the case of Accounts created by the sale and delivery of Inventory, the Inventory giving rise to such Accounts has been delivered to the Account Debtor. 5.4 LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and Equipment are not stored with a bailee, warehouseman, processor or similar party unless Lender has consented thereto in writing and are located only at the following locations: 1745 McCandless Drive, Milpitas, California 95035-8024, and 3 Civic Plaza, Suite 265, Newport Beach, California 92660; however demonstration units typically are not stored at this location and are in the possession of sales personnel, representatives and/or customers in the ordinary course of business. 5.5 INVENTORY RECORDS. Borrower keeps correct and accurate records itemizing and describing the kind, type, quality and quantity of the inventory and Borrower's cost therefor. 5.6 LOCATION OF PRINCIPAL OFFICE. The principal office of Borrower is located at the address stated in the first paragraph of this Agreement. 5.7 DUE INCORPORATION AND QUALIFICATION. Borrower is a corporation duly organized and existing and in good standing under the laws of the state of its incorporation and is qualified or licensed to do business in, and is in good standing in, any state in which the failure to be qualified or licensed and in good standing could have a material adverse effect on Borrower's business or the Collateral. 5.8 FICTITIOUS NAME(S). Borrower is conducting its business at the present time under the following trade or fictitious name(s) : none. Borrower has complied with the fictitious name laws of all jurisdictions in which compliance is required in connection with its use of such name(s). During the five (5) years prior to the date of this Agreement, Borrower conducted business under the following trade or fictitious name(s) in addition to those stated above: none 5.9 PERMITS AND LICENSES. Borrower holds all licenses, permits, franchises, approvals and consents as are required in the conduct of its business and the ownership and operation of its properties. 5.10 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery and performance of the Loan Documents to which Borrower is a party are within Borrower's corporate powers, have been duly authorized and are not in conflict with nor constitute a breach of any provision contained in Borrower's Articles or Certificate of Incorporation or Bylaws, nor will they create a default under any material agreement to which Borrower is a party. 5.11 LITIGATION. There are no actions or proceedings pending by or against Borrower before any court or administrative agency and Borrower has no knowledge or notice of any pending, threatened or imminent litigation, governmental investigations, or claims, complaints, actions or prosecutions involving Borrower or any guarantor of the Obligations, except for ongoing collection matters in which Borrower is the plaintiff and such matters as have been disclosed to Lender in writing. 5.12 TAXES. All assessments and taxes, whether real, personal or otherwise, due or payable by, or imposed, levied or assessed against Borrower or any of its property or in connection with Borrower's business have been paid in full prior to delinquency or the expiration of any extension period. 10 5.13 NO MATERIAL ADVERSE CHANGE IN FINANCIAL CONDITION. All financial statements relating to Borrower which have been or may hereafter be delivered by Borrower to Lender have been prepared in accordance with GAAP and fairly present Borrower's financial condition as of the date thereof and Borrower's results of operations for the period then ended. There has been no material adverse change in the financial condition of Borrower since the date of the most recent of such financial statements submitted to Lender. 5.14 SOLVENCY. Borrower is solvent and able to pay its debts (including trade debts) as they mature. No transfer of property is being made by Borrower and no obligation is being incurred by Borrower in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay or defraud either present or future creditors of Borrower. 5.15 ERISA. Neither Borrower, nor any ERISA Affiliate nor any Plan is or has been in violation of any of the provisions of ERISA, any of the qualification requirements of IRC Section 401(a), or any of the published interpretations thereof. No lien upon the assets of Borrower has arisen with respect to any Plan. No prohibited transaction within the meaning of ERISA Section 406 or IRC Section 4975(c) has occurred with respect to any Plan. Neither Borrower nor any ERISA Affiliate has incurred any withdrawal liability with respect to any Multiemployer Plan. Borrower and each ERISA Affiliate have made all contributions required to be made by them to any Plan or Multiemployer Plan when due. There is no accumulated funding deficiency in any Plan, whether or not waived. 5.16 ENVIRONMENTAL LAWS AND HAZARDOUS MATERIALS. Borrower has complied with all Environmental Laws. Except as previously disclosed to Lender in writing, Borrower has not caused or permitted any Hazardous Materials to be located, incorporated, generated, stored, manufactured, transported to or from, released, disposed of or used at, upon, under or within any premises at which Borrower conducts its business, or in connection with Borrower's business. To the best of Borrower's knowledge, no prior owner or operator of any premises at which Borrower conducts its business has caused or permitted any of the above to occur at, upon, under or within any of such premises. 5.17 INTELLECTUAL PROPERTY. Borrower does not own or have rights as licensee in or to any trademarks or patents or have any trademark or patent applications pending, except as disclosed in SCHEDULE B attached hereto. 5.18 LABOR AND EMPLOYMENT DISPUTES. There are no pending grievances, disputes or controversies with any union or other organization of Borrower's employees, or pending threats of strikes or work stoppages, or demands for collective bargaining by any union or other organization of Borrower's employees. 5.19 SENIOR INDEBTEDNESS. Borrower shall perform and comply with all obligations with respect to any senior indebtedness to which the Obligations under the Loan Documents are subordinated. 6. AFFIRMATIVE COVENANTS Borrower covenants and agrees that during the term of this Agreement and until payment in full of the Obligations, and unless Lender shall otherwise consent in writing (which consent may be granted or denied in Lender's sole and absolute discretion), Borrower shall do all of the following: 6.1 ACCOUNTING SYSTEM. Borrower at all times shall maintain a standard and modern system of accounting in accordance with GAAP with ledger and account cards or computer tapes, disks, printouts and records pertaining to the Collateral which contain information as may from time to time be requested by Lender. Borrower also shall keep proper books of account showing all sales, claims and allowances on its Inventory. 11 6.2 COLLATERAL REPORTS. Borrower shall deliver to Lender, no later than the fifteenth day of each month during the term of this Agreement, a detailed aging of the Accounts, a reconciliation statement and a summary aging, by vendor, of all accounts payable and any book overdraft. Borrower shall deliver to Lender, as Lender may from time to time require, collection reports, sales journals, invoices, original delivery receipts, customers' purchase orders, shipping instructions, bills of lading and other documentation respecting shipment arrangements. Absent such a request by Lender, copies of all such documentation shall be held by Borrower as custodian for Lender. 6.3 RETURNS. Returns and allowances, if any, as between Borrower and its Account Debtors, shall be permitted by Borrower on the same basis and in accordance with the usual and customary practices of Borrower as they exist at the time of the execution and delivery of this Agreement. If any Account Debtor returns any Inventory to Borrower, Borrower shall promptly determine the reason for such return and, if Borrower accepts such return, issue a credit memorandum (with a copy to be sent to Lender) in the appropriate amount to such Account Debtor. Borrower shall promptly notify Lender of all returns and recoveries and of all disputes and claims. 6.4 DESIGNATION OF INVENTORY. Borrower shall now and from time to time hereafter. but not less frequently than monthy, execute and deliver to Lender a designation of Inventory specifying Borrower's cost and the wholesale market value of Borrower's raw materials, work in process and finished goods, and further specifying such other information as Lender may reasonably request. 6.5 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall deliver to Lender: (a) as soon as available, but in any event within thirty (30) days after the end of each of Borrower's fiscal quarters during each of Borrower's fiscal years, a company prepared balance sheet and profit and loss statement covering Borrower's operations during such period; and (b) as soon as available, but in any event within ninety (90) days after the end of each of Borrower's fiscal years, financial statements of Borrower for each such fiscal year, audited by independent certified public accountants acceptable to Lender. Notwithstanding the foregoing, Lender reserves the right to require Borrower to provide Lender with company prepared financial statements on a monthly (rather than quarterly) basis. All such annual financial statements shall include a balance sheet and profit and loss statement, together with the accountants' letter to management. Borrower shall also deliver Borrower's Form 10-Qs, 10-Ks or 8-Ks, and any other filings made by Borrower with the Securities and Exchange Commission, if any, as soon as the same become available, and any other report reasonably requested by Lender relating to the Collateral or the financial condition of Borrower, including financial projections, and a certificate signed by the chief financial officer or chief executive officer of Borrower to the effect that all reports, statements or computer prepared information of any kind or nature delivered or caused to be delivered to Lender under this Section 6.5 fairly present the financial condition of Borrower and that there exists on the date of delivery of such certificate to Lender no condition or event which constitutes an Event of Default. 6.6 LITIGATION. Borrower shall promptly notify Lender in writing of any litigation, governmental investigations or criminal prosecutions involving Borrower, other than collection matters in which Borrower is the plaintiff. 6.7 TAX RETURNS, RECEIPTS. Borrower shall deliver to Lender copies of each of Borrower's federal income tax returns, and any amendments thereto, within thirty (30) days after the filing thereof with the Internal Revenue Service. Furthermore, Borrower shall deliver to Lender, promptly upon request by Lender, satisfactory evidence of Borrower's payment of all federal withholding taxes required to be paid by Borrower. 6.8 GUARANTOR TAX RETURNS. Borrower shall cause each guarantor of the Obligations to deliver to Lender copies of such guarantor's federal income tax returns within thirty (30) days after the filing thereof with the Internal Revenue Service. 12 6.9 TITLE TO EQUIPMENT. Upon Lender's request, Borrower shall immediately deliver to Lender, properly endorsed, any and all evidences of ownership of, or certificates of title or applications for title to, any items of Equipment. 6.10 MAINTENANCE OF EQUIPMENT. Borrower shall keep and maintain the Equipment in good operating condition and repair and shall make all necessary replacements thereto so that the value and operating efficiency thereof shall at all times be maintained and preserved. Borrower shall not permit any item of Equipment to become a fxture to real estate or an accession to other property, and the Equipment is now and shall at all times remain personal property. 6.11 TAXES. All assessments and taxes, whether real, personal or otherwise, due or payable by, or imposed, levied or assessed against Borrower or any of its property or in connection with Borrower's business shall be paid in full prior to delinquency or the expiration of any extension period. Borrower shall make due and timely payment or deposit of all federal, state and local taxes, assessments or contributions required of it by law and will execute and deliver to Lender, on demand, appropriate certificates attesting to the payment or deposit thereof. Borrower shall make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, including those laws conceming F.I.C.A., F.U.T.A., state disability and local, state and federal income taxes, and shall, upon request, fumish Lender with proof satisfactory to Lender indicating that Borrower has made such payments or deposits. 6.12 INSURANCE. Borrower, at its expense, shall keep and maintain the Collateral insured against all risk of loss or damage from fire, theft, vandalism, malicious mischief, explosion, sprinklers and all other hazards and risks of physical damage included within the meaning of the term "extended coverage" in such amounts as are ordinarily insured against by other similar businesses. Borrower shall also keep and maintain comprehensive general public liability insurance and property damage insurance, and insurance against loss from business interruption, insuring against all risks relating to or arising from Borrower's ownership and use of the Collateral and Borrower's other assets and the operation of Borrower's business. All such policies of insurance shall be in such form, with such companies and in such amouns as may be satisfactory to Lender. Borrower shall deliver to Lender certified copies of such policies of insurance and evidence of the payments of all premiums therefor. All such policies of insurance (except those of public liability and property damage) shall contain a Lender's Loss Payable endorsement in a form satisfactory to Lender, naming Lender as sole loss payee thereof, and shall contain a waiver of warranties. All proceeds payable under any such policy shall be payable to Lender to be applied to the Obligations. 6.13 NO OFFSETS OR COUNTERCLAIMS. All payments hereunder and under the other Loan Documents made by or on behalf of Borrower shall be made without offset or counterclaim, and Borrower hereby waives any right to offset, against the repayment of the Obligations, any claims it may have against Lender. 6.14 LENDER EXPENSES. Borrower shall immediately and without demand reimburse Lender for all sums expended by Lender which constitute Lender Expenses and Borrower hereby authorizes and approves all Revolving Advances and payments by Lender for items constituting Lender Expenses. Borrower acknowledges that Lender Expenses include, among other things, (a) Lender's reasonable attorneys fees and expenses incurred in defending or otherwise representing Lender concerning the Loan Documents or the Obligations and (b) charges resulting from the dishonor of checks. Since Lender Expenses are a part of the Obligations which are secured by the Collateral, Lender shall not be required to discharge any lien or terminate any security interest in the Collateral unless and until (y) Borrower and Lender execute a mutual general release of liability and indemnification in favor of and acceptable to Lender and (z) to the extent another financial institution refinances the Obligations, such financial institution delivers an agreement. acceptable to Lender, to indemnify Lender for loss arising from checks delivered to Lender for collection and payment of the Obligations which are returned for non-payment or for any other reason. 13 6.15 COMPLIANCE WITH LAW. Borrower shall comply with the requirements of all applicable laws, rules, regulations and orders of governmental authorities relating to Borrower and the conduct of Borrower's business, including the Fair Labor Standards Act and the Americans with Disabilities Act. 6.16 LOCATION OF INVENTORY AND EQUIPMENT. Borrower shall keep the Inventory and Equipment only at the locations identified in SECTION 5.5. 6.17 ENVIRONMENTAL LAWS AND HAZARDOUS MATERIALS. Borrower shall not permit any lien under any Environmental Law to be filed against any of the Collateral or any of Borrower's real property in which Lender holds a lien, and will promptly notify Lender of any proceeding, inquiry or claim relating to any alleged violation of any Environmental Law, or any alleged loss, damage or injury resulting from any Hazardous Material. Lender shall have the right to join and participate in, as a party if it so elects, any legal or administrative proceeding initiated against Borrower or any guarantor of the Obligations with respect to any Hazardous Material or in connection with any Environmental Law. 6.18 MANUFACTURING, DEVELOPMENT AND PROFITABILITY MILESTONES. A. Commencing January 1, 1998, Borrower's sales of products under the OEM Purchase Agreement dated May 28, 1997, shall be at least $200,000 per quarter. B. Borrower shall perform all of its obligations under the Collaboration Agreement with Work GmbH and, unless the Collaboration Agreement is otherwise terminated, Borrower shall use best efforts to cause Work GmbH to deliver five fully functional pilot run Modules to Borrower under the terms of the Collaboration Agreement no later than March 30, 1998. C. Commencing with the three months ending August 31, 1998, Borrower shall maintain positive net income on a rolling three month basis (excluding any fees payable under this Agreement). 7. NEGATIVE COVENANTS Borrower covenants and agrees that during the term of this Agreement and until payment in full of the Obligations, Borrower will not do any of the following without Lender's prior written consent (which consent may be granted or denied in Lender's sole and absolute discretion): 7.1 INDEBTEDNESS. Create, incur, assume, permit or otherwise become liable with respect to any indebtedness ouside of the ordinary and usual course of Borrower's business, except (a) indebtedness set forth in Borrower's latest financial statements submitted to Lender prior to the date of this Agreement and renewals or extensions of such indebtedness and (b) the Obligations. 7.2 LIENS. Create, incur, assume or permit to exist any security interest, lien, pledge, mortgage or encumbrance on any Collateral or on any of Borrower's real property in which Lender holds a lien, except (a) the security interests granted to Lender by Borrower, (b) the security interests disclosed in the UCC searches attached hereto as SCHEDULE A and (c) any security interest which Borrower has disclosed in writing to Lender and to which Lender has given its prior written consent. 7.3 EXTRAORDINARY TRANSACTIONS. Enter into any transaction not in the ordinary and usual course of Borrower's business, including the sale, lease or other disposition of, whether by sale or otherwise, any of Borrower's assets other than sales of Inventory (including Inventory consisting of Equipment but not Equipment used in the production of goods sold by Borrower) in the ordinary and usual course of Borrower's business; or make any advance, loan or capital contribution to any Person except in the ordinary and usual course of Borrower's business. 14 7.4 CHANGE NAME. Change Borrower's name, business structure or identity, or add any new fictitious name. 7.5 FUNDAMENTAL CHANGES. Enter into any acquisition, merger, consolidation. reorganization or recapitalization, or reclassify its capital stock, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or acquire by purchase or otherwise all or substantially all of the assets, stock or other beneficial ownership interest of any other Person. 7.6 GUARANTY. Guaranty or otherwise become in any way liable with respect to the obligations of any third party except by endorsement of instruments or items of payment for deposit to the account of Borrower for negotiation and delivery to Lender. 7.7 RESTRUCTURE. Make any change in Borrower's capital structure or in the principal nature of Borrower's business operations. 7.8 PREPAYMENTS. Prepay any indebtedness owing to any third party. 7.9 [INTENTIONALLY OMITTED] 7.10 COMPENSATION. Pay total compensation, including salaries, withdrawals, fees, bonuses, commissions, drawing accounts, management fees or other paymants, whether directly or indirectly, in money or otherwise, during any fiscal year to all of Borrower's executives, officers, shareholders, affiliates, and directors (or any relatives thereof) in an aggregate amount in excess of one hundred thirty percent (130 %) of those paid in the prior fiscal year. 7.11 LOANS TO INSIDERS. Make any loans, advances or extensions of credit to any officer, director, executive, employee or shareholder of Borrower, or any relative of any of the foregoing, or to any entity which is a subsidiary of, related to, affiliated with or has common shareholders, officers or directors with Borrower, which when aggregated with all other loans, advances or extensions of credit to any or all of the above Persons at any time outstanding during the term of this Agreement, exceeds Ten Thousand Dollars ($10,000 ). 7.12 CAPITAL EXPENDITURES. Make any capital expenditure, or any commitment therefor, in excess of Four Hundred Thousand Dollars ($400,000) for any individual transaction or where the aggregate amount of such capital expenditures, made or committed for in any fiscal year, is in excess of Four Hundred Thousand Dollars ($400,000). 7.13 CONSIGNMENTS. Consign any Inventory; or sell any Inventory on bill and hold, sale on approval or other conditional terms of sale. 7.14 DISTRIBUTIONS. Make any distribution or declare or pay any dividends (in cash or in stock) on, or purchase, acquire, redeem or retire any of Borrower's capital stock, of any class, whether now or hereafter outstanding. 7.15 ACCOUNTING METHODS. Modify or change its method of accounting or enter into, modify or terminate any agreement currently existing or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of Borrower's accounting records without said accounting firm or service bureau agreeing to provide Lender information regarding the Collateral or Borrower's fnancial condition. Borrower waives the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Lender pursuant to or in accordance with this Agreement, and agrees that Lender may contact directly any such accounting firm or service bureau in order to obtain such information. 7.16 SUSPENSION. Suspend or go out of business. 15 7.17 LOCATION OF PRINCIPAL OFFICE. Relocate its principal office to a new location unless Lender is given thirty (30) days prior written notice thereof. 8. EVENTS OF DEFAULT The occurrence of any one or more of the following events shall constitute an "Event of Default" under this Agreement. 8.1 FAILURE TO PAY. Borrower fails to pay when due and payable, or when declared due and payable, any portion of the Obligations (whether principal, interest, fees and charges due Lender, reimbursement of Lender Expenses, or other amounts constituting Obligations); 8.2 FAILURE TO PERFORM. Borrower fails or neglects to perform, keep or observe any term, provision, condition, representation, warranty, covenant or agreement contained in this Agreement, in any of the other Loan Documents or in any other present or future agreement between Borrower and Lender; 8.3 MISREPRESENTATION. Any misstatement or misrepresentation now or hereafter exists in any warranty, representation, statement or report made to Lender by Borrower or any officer, employee, agent or director of Borrower, or if any such warranty or representation is withdrawn by any of them; 8.4 MISREPRESENTATION OF COLLATERAL. Any writing, document, aging, certificate or other evidence of the Accounts shall be incomplete, incorrect or misleading at the time the same is furnished to Lender; or Borrower shall fail to immediately remit to Lender proceeds of Accounts and other Collateral, pursuant to the terms of SECTION2.6; 8.5 MATERIAL ADVERSE CHANGE. There is a material adverse change in Borrower's business or financial condition; 8.6 MATERIAL IMPAIRMENT. There is a material impairment of the prospect of repayment of any portion of the Obligations owing to Lender or a material impairment of the value or priority of Lender's security interests in the Collateral; 8.7 LEVY OR ATTACHMENT. Any material portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any judicial officer; 8.8 INSOLVENCY BY BORROWER. An Insolvency Proceeding is commenced by Borrower; 8.9 INSOLVENCY AGAINST BORROWER. An Insolvency Proceeding is commenced against Borrower; 8.10 INJUNCTION AGAINST BORROWER. Borrower is enjoined, restrained or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; 8.11 GOVERNMENT LIEN. A notice of lien, levy or assessment is filed of record with respect to any of Borrower's assets by the United States government, or any department, agency or instrumentality thereof, or by any state, county, municipal or other governmental agency, or any taxes or debts owing at any time hereafter to any one or more of such entities becomes a lien, whether choate or otherwise, upon any of Borrower's assets and the same is not paid on the payment date thereof; 8.12 JUDGMENT. A judgment is entered against Borrower; 16 8.13 CROSS DEFAULT TO MATERIAL AGREEMENTS. There is a default in any material agreement to which Borrower is a party with one or more third parties or by which Borrower or Borrower's property or assets are bound; 8.14 SUBORDINATED DEBT PAYMENTS. Borrower makes any payment on account of indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination agreement applicable to such indebtedness; 8.15 LOSS OF GUARANTOR. Any guarantor of the Obligations dies, terminates his/her/its guaranty, becomes the subject of an Insolvency Proceeding, or contests his/her/its obligations under such a guaranty; or if any such guaranty of the Obligations ceases to be valid or enforceable for any reason; 8.16 ERISA VIOLATION. A prohibited transaction within the meaning of ERISA Section 406 or IRC Section 4975(c) shall occur with respect to a Plan which could have a material adverse effect on the financial condition of Borrower; any lien upon the assets of Borrower in connection with any Plan shall arise; Borrower or any ERISA Affiliate shall completely or partially withdraw from a Multiemployer Plan and such withdrawal could, in the opinion of Lender, have a material adverse effect on the financial condition of Borrower, Borrower or any of its ERISA Affiliates shall fail to make full payment when due of all amounts which Borrower or any of its ER1SA Affiliates may be required to pay to any Plan or any Multiemployer Plan as one or more contributions thereto; Borrower or any of its ERISA Affiliates creates or permits the creation of any accumulated funding deficiency, whether or not waived; the voluntary or involuntary termination of any Plan which termination could, in the opinion of Lender, have a material adverse effect on the financial condition of Borrower, or Borrower shall fail to notify Lender promptly and in any event within ten (10) days of the occurrence of any event which constitutes an Event of Default under this clause or would constitute such an Event of Default upon the exercise of Lender's judgment; or 8.17 CRIMINAL PROCEEDINGS. Criminal proceedings are instituted against Borrower, any member of Borrower's senior management or any guarantor of the Obligations that could result in the forfeiture or loss of Collateral or a material impairment of the financial condition of Borrower or any guarantor of the Obligations. Notwithstanding anything contained in this SECTION 8 to the contrary, Lender shall refrain from exercising its rights and remedies and an Event of Default shall not be deemed to have occurred by reason of the occurrence of any of the events set forth in SECTIONS 8.7, 8.9, 8.11 or 8.12 of this Agreement if, within ten (10) days from the date thereof, the same is released, discharged, dismissed, bonded against or satisfied; provided, however, Lender shall not be obligated to make Revolving Advances to Borrower during such period. 9. LENDER'S RIGHTS AND REMEDIES 9.1 RIGHTS AND REMEDIES. Upon the occurrence of an Event of Default, Lender may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower; (a) Declare all Obligations, whether evidenced by this Agreement, any of the other Loan Documents or otherwise, immediately due and payable in full; (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement, any of the other Loan Documents or any other agreement between Borrower and Lender; 17 (c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of Lender, but without affecting Lender's rights and security interest in the Collateral and without affecting the Obligations; (d) Settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms which Lender considers advisable and, in such cases, Lender will credit Borrower's loan account with only the net amounts received by Lender in payment of such disputed Accounts, after deducting all Lender Expenses incurred or expended in connection therewith; (e) Cause Borrower to hold all returned Inventory in trust for Lender, segregate all returned Inventory from all other property of Borrower or in Borrower's possession and conspicuously label said returned Inventory as the property of Lender; (f) Without notice to or demand upon Borrower or any guarantor, make such payments and do such acts as Lender considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Lender so requires and to deliver or make the Collateral available to Lender at a place designated by Lender. Borrower authorizes Lender to enter any premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest or compromise any encumbrance, charge or lien that in Lender's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned premises, Borrower hereby grants Lender a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Lender's rights or remedies provided herein, at law, in equity, or otherwise; (g) Without notice to Borrower (such notice being expressly waived) and without constituting a retention of any collateral in satisfaction of an obligation (within the meaning of Section 9505 of the Code), set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Lender (including any amounts received in a lockbox or blocked account), or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Lender; (h) Hold, as cash collateral, any and all balances and deposits of Borrower held by Lender (including any amounts received in a lockbox or blocked account) to secure the Obligations; (i) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale and sell (in the manner provided for herein) the Collateral. Lender is hereby granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale and selling any Collateral. Borrower's rights under all licenses and all franchise agreements shall inure to Lender's benefit; (j) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Lender determines is commercially reasonable. It is not necessary that the Collateral be present at any such sale; (k) Lender shall give notice of the disposition of the Collateral as follows: (1) Lender shall give the Borrower and each holder of a security interest in the Collateral who has filed with Lender a written request for notice, a notice in writing of the time and place of public sale or, if the sale is a private sale or some other disposition other than a public sale is to be made, then the time on or after which the private sale or other disposition is to be made; 18 (2) The notice shall be personally delivered or mailed, postage prepaid, to Borrower as provided in Section 12, at least five (5) calendar days before the date fixed for the sale, or at least five (5) calendar days before the date on or after which the private sale or other disposition is to be made, unless the Collateral is perishable or threatens to decline speedily in value. Notice to Persons other than Borrower claiming an interest in the Collateral shall be sent to such addresses as they have furnished to Lender: (3) If the sale is to be a public sale, Lender shall also give notice of the time and place by publishing a notice one time at least five (5) calendar days before the date of the sale in a newspaper of general circulation in the county in which the sale is to be held; (l) Lender may credit bid and purchase at any public sale; (m) Any deficiency that exists after disposition of the Collateral as provided above shall be paid immediately by Borrower. Any excess will be remitted without interest by Lender to the party or parties legally entitled to such excess; and (n) In addition to the foregoing, Lender shall have all rights and remedies provided by law and any rights and remedies contained in any other Loan Documents. All such rights and remedies shall be cumulative. 9.2 NO WAIVER. No delay on the part of Lender in exercising any right, power or privilege under this Agreement shall operate as a waiver, nor shall any single or partial exercise of any right, power or privilege under this Agreement or otherwise, preclude other or further exercise of the right, power or privilege or the exercise of any other right, power or privilege. 19 10. TAXES AND EXPENSES REGARDING THE COLLATERAL If Borrower fails to pay any monies (whether taxes, assessments, insurance premiums or otherwise) due to third parties regarding the Collateral, or fails to make any deposits or furnish any required proof of payment or deposit, or fails to perform any of Borrower's other covenants under the terms of this Agreement, then in its discretion and without prior notice to Borrower, Lender may do any or all of the following: (a) make any payment which Borrower has failed to pay or any part thereof; (b) set up such reserves in Borrower's loan account as Lender deems necessary to protect Lender from the exposure created by such failure; (c) obtain and maintain insurance policies of the type described in SECTION 6.12 and take any action with respect to such policies as Lender deems prudent; or (d) take any other action deemed necessary by Lender to preserve and protect its interests and rights under this Agreement. Any payments made by Lender shall not constitute an agreement by Lender to make similar payments in the future or a waiver by Lender of any Event of Default under this Agreement. Lender need not inquire as to, or contest the validity of, any such expense, tax, security interest, encumbrance or lien and the receipt of notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 11. WAIVERS AND INDEMNIFICATIONS 11.1 WAIVERS. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, notice of nonpayment at maturity, notice of intention to accelerate and notice of acceleration, so that Lender may exercise any and all rights and remedies under the Loan Agreement or any other Loan Documents, or as otherwise provided at law or in equity, immediately upon the occurrence of any Event of Default, without any further notice, grace or opportunity to cure whatsoever. Borrower further waives notice prior to Lender's taking possession or control of the Collateral, any bond or security which might be required by any court prior to allowing Lender to exercise any of Lender's remedies, and the benefit of all valuation. appraisement and exemption laws. Borrower agrees that Lender may compromise, settle or release without notice to Borrower any accounts, documents, instruments, chattel paper or guaranties at any time held by Lender on which Borrower may in any way be liable. 11.2 NO MARSHALING. Borrower, on its own behalf and on behalf of its successors and assigns. hereby expressly waives all rights, if any, to require a marshaling of assets by Lender or to require that Lender first resort to some or any portion of the Collateral before foreclosing upon, selling or otherwise realizing on any other portion thereof. 11.3 LENDER'S LIABILITY FOR COLLATERAL. So long as Lender complies with its obligations, if any, under Section 9207 of the Code, Lender shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency or other Person. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower. 11.4 INDEMNIFICATION. Borrower shall defend, indemnify and hold harmless Lender, its directors, officers. agents, employees, participants and assigns, from and against any and all claims, demands, costs, suits, actions, causes of action, liabilities, damages, losses, obligations, judgments and expenses, including attorneys fees and costs, of any nature whatsoever, in any way relating to or arising from the transactions contemplated by this Agreement or any other Loan Document (including those relating to or arising from any alleged or actual violation of any Environmental Law, or any loss, damage or injury resulting from any Hazardous Material); provided that the foregoing indemnification shall not extend to liabilities, damages, losses, obligations, judgments and expenses arising from the gross negligence or willful misconduct of Lender. This indemnification provision shall survive the termination of this Agreement. The indemnities provided for herein shall not require payment as a condition to recovery. 20 12. NOTICES Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement, the Loan Documents or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, or by receipted overnight delivery service to Borrower or to Lender, as the case may be, at their addresses set forth below: If to Borrower: EIP MICROWAVE, INC. 1745 McCandless Drive Milpitas, California 95035 Attn: President If to Lender: JOHN F. BISHOP AND ANN R. BISHOP, TRUSTEES OF THE BISHOP FAMILY TRUST 2 Inverness Lane Newport Beach, California 92660 The parties hereto may change the address at which they are to receive notices hereunder by notice in writing in the foregoing manner given to the other. All notices or demands sent in accordance with this SECTION 12, other than notices by Lender in connection with Sections 9504 and 9505 of the Code, shall be deemed received on the earlier of the date of actual receipt or three (3) calendar days after the deposit thereof in the mail. Borrower acknowledges and agrees that notices sent by Lender in connection with Sections 9504 or 9505 of the Code shall be deemed sent when deposited in the mail or otherwise sent by Lender in accordance with the delivery methods set forth above. 13. DESTRUCTION OF BORROWER'S DOCUMENTS All documents, schedules, invoices, agings or other papers delivered to Lender may be destroyed or otherwise disposed of by Lender four (4) months after they are delivered to or received by Lender unless Borrower requests, in writing, the return of said documents, schedules, invoices, agings or other papers and makes arrangements, at Borrower's expense, for their retum. 14. GENERAL PROVISIONS 14.1 EFFECTIVENESS. This Agreement and the other Loan Documents shall be binding and deemed effective when executed by Borrower and Lender. 14.2 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided, however, that Borrower may not assign this Agreement or any rights hereunder without Lender's prior written consent and any prohibited assignment shall be absolutely void. No consent to an assignment by Lender shall release Borrower from its Obligations. Lender may assign this Agreement and its rights and duties hereunder. Lender reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in Lender's rights and benefits hereunder. In connection therewith, Lender may disclose all documents and information which Lender now or hereafter may have relating to Borrower or Borrower's business. 14.3 SECTION HEADINGS. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each paragraph applies equally to this entire Agreement. 14.4 INTERPRETATION. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Lender or Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. 21 14.5 SEVERABILITY OF PROVISIONS. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 14.6 AMENDMENTS IN WRITING. Neither this Agreement nor any provision hereof shall be amended, modified, waived or terminated orally or by course of conduct or pattern of dealing, but only by a written agreement signed by an authorized representative of Lender. Any purported amendment, modification, waiver or termination of this Agreement or any provision hereof that is not in writing and signed by an authorized representative of Lender shall be void and of no effect. 14.7 INTEGRATION. This Agreement, together with the other Loan Documents, reflects the entire agreement between the parties with respect to the subject matter hereof. This Agreement, together with the other Loan Documents, supersedes all prior agreements, understandings and negotiations, if any, which are merged into this Agreement and the other Loan Documents. 14.8 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts each of which, when executed and delivered, shall be deemed to be an original and all of which, when taken together, shall constitute but one and the same Agreement. 14.9 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the incurrence or payment of the Obligations by Borrower or any guarantor of the Obligations or the transfer by either or both of such parties to Lender of any property of either or both of such parties should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences and other voidable or recoverable payments of money or transfers of property (a "Voidable Transfer"), and if Lender is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that Lender is required or elects to repay or restore, and as to all reasonable costs, expenses and attorneys fees of Lender related thereto, the liability of Borrower or such guarantor automatically shall be revived, reinstated and restored and shall exist as though such Voidable Transfer had never been made. 14.10 CONSULTATION WITH COUNSEL. Borrower and Lender acknowledge that they have been given the opportunity to consult with counsel and other advisors of their choice prior to entering into this Agreement. 14.11 LIMITATION OF LIABILITY. No claim may be made by Borrower or any other Person against Lender or the officers, directors, employees or agents of Lender for any special, indirect, punitive or consequential damages in respect of any claim for breach of contract or any other theory of liability arising out of or related to the transactions contemplated by this Agreement, or any act, omission or event occurring in connection therewith, and Borrower hereby waives, releases and agrees not to sue upon any claim for any such damages. 14.12 TELEFACSIMILE EXECUTION. Delivery of an executed counterpart of this Agreement or any other Loan Document by telefacsimile transmission shall be equally as effective as delivery of an executed hard copy of the same. Any party delivering an executed counterpart of this Agreement or any other Loan Document by telefacsimile transmission shall also deliver an executed hard copy of the same, but the failure by such party to deliver an executed hard copy shall not affect the validity, enforceability and binding effect of this Agreement or such other Loan Document. 15. CHOICE OF LAW AND VENUE THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA; PROVIDED, HOWEVER, THAT THE LAWS OF THE STATE IN WHICH THE COLLATERAL IS LOCATED SHALL GOVERN WITH RESPECT TO (A) 22 THE CREATION OF LIENS ON COLLATERAL LOCATED lN SUCH STATE AND (B) THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE OF LENDER'S LIENS UPON ANY PORTION OF THE COLLATERAL LOCATED IN SUCH STATE AND THE ENFORCEMENT IN SUCH STATE OF LENDER'S OTHER REMEDIES WITH RESPECT TO THE COLLATERAL LOCATED IN SUCH STATE. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND LITIGATED ONLY 1N THE STATE COURTS LOCATED IN THE COUNTY OF ORANGE, STATE OF CALIFORNIA, THE FEDERAL COURTS WHOSE VENUE INCLUDES THE COUNTY OF ORANGE, STATE OF CALIFORNIA, OR, AT THE SOLE OPTION OF LENDER, IN ANY OTHER COURT IN WHICH LENDER SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. THE PARTIES EXPRESSLY SUBMIT AND CONSENT IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN ANY SUCH COURT, AND THE PARTIES HEREBY WAIVE ANY OBJECTION WHICH EITHER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION AND HEREBY CONSENT TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY ANY SUCH COURT. FURTHERMORE, BORROWER AND LENDER EACH WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF "FORUM NON CONVENIENS" OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 15. 16. WAIVER OF JURY TRIAL BORROWER AND LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN OR THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND LENDER REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 23 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of October 15, 1997. EIP MICROWAVE, INC., JOHN F. BISHOP AND ANN R. BISHOP, a Delaware corporation TRUSTEES OF THE BISHOP FAMILY TRUST Signed by: /s/ Lewsis R. Foster Signed by: /S/ John F. Bishop -------------------- ------------------- Print Name: Lewis R. Foster Print Name: John F. Bishop Title/Capacity: President Title/Capacity: Trustee Signed by: /s/ Ann R. Bishop ------------------- Print Name: Ann R. Bishop Title/Capacity: Trustee 24 SCHEDULE A TO THE LOAN AND SECURITY AGREEMENT UCC SEARCHES 25 SCHEDULE B TO THE LOAN AND SECURITY AGREEMENT INTELLECTUAL PROPERTY Borrower does not own or have rights as licensee in or to any trademarks or patents or have any trademark or patent applications pending, except as disclosed below. 26 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933; THEY HAVE BEEN ACQUIRED BY THE HOLDER FOR INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT AS MAY BE AUTHORIZED UNDER THE SECURITIES ACT OF 1933 AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER. TERM NOTE $1,000,000 October 15, 1997 FOR VALUE RECEIVED, the undersigned, EIP MICROWAVE, INC., a Delaware corporation ("Borrower"), hereby promises to pay JOHN F. BISHOP AND ANN R. BISHOP, TRUSTEES OF THE BISHOP FAMILY TRUST ("Lender"), or order, at 2 Inverness, Newport Beach, California 92660, or at such other address as the holder hereof may specify in writing, the principal sum of One Million Dollars ($1,000,000), or such lesser principal amount as is outstanding from time to time, plus interest in the manner and upon the terms and conditions set forth below. 1. DEFINED TERMS. Any and all initially capitalized terms used herein shall have the meanings ascribed to them in that certain Loan and Security Agreement dated as of October 15, 1997 (the "Loan Agreement"), unless specifically defined herein. 2. RATE OF INTEREST. The outstanding principal balance of this Secured Promissory Note (this "Note") shall bear interest at the rate of five percent (5.0%) per annum above the Reference Rate. The Reference Rate as of the date of this Note is eight and one half percent (8.50%) per annum, and, therefore, the effective rate of interest hereunder as of the date of this Note is thirteen and one-half percent (13.50 %) per annum. The interest rate payable under the terms of this Note shall be adjusted in accordance with any change in the Reference Rate from time to time on the date of any such change. Any interest not paid when due may be compounded by adding it to the principal and thereafter shall bear interest at the rate provided herein. Upon the occurrence of an Event of Default under the Loan Agreement, at Lender's option, the rate of interest on this Note, without constituting a waiver of any such Event of Default, shall be increased to eight percent (8.0 %) per annum above the Reference Rate. All interest payable under this Note shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. Interest shall continue to accrue until this Note is paid in full. 3. SCHEDULE OF PAYMENTS; COTERMINOUS WITH LOAN AGREEMENT. Principal and interest shall be due and payable on the dates and in the manner set forth below: (a) The unpaid principal balance of this Note and all accrued interest and other charges shall be due and payable in full on the first anniversary of the date hereof. (b) All interest payable by Borrower shall be due and payable on the first day of each month commencing on the first day of the month following the date hereof and continuing thereafter until this Note is paid in full. (c) Notwithstanding anything to the contrary in this Note or any of the other Loan Documents, all unpaid principal, accrued interest and other charges owing under this Note shall be due and payable in full upon the termination of the Loan Agreement for any reason whatsoever. 4. PREPAYMENT. Borrower shall be entitled to prepay this Note in whole or in part from time to time. In conjunction with a termination of the Loan Agreement which constitutes an early termination pursuant to Section 3.2 of the Loan Agreement, the unpaid principal amount of this Note shall be subject to the Early Termination Fee described in Section 3.2 of the Loan Agreement. Any such Early Termination Fee in respect of the unpaid principal amount of this Note shall be presumed to be the amount 27 of damages sustained by Lender as the result of the prepayment and Borrower agrees that it is a reasonable fee under the circumstances currently existing. 5. RIGHT OF ACCELERATION. Upon Borrower's failure to make any payment under this Note when due or the occurrence of any other Event of Default under the Loan Agreement, Lender may, at its election and without notice to Borrower, declare the entire balance hereof immediately due and payable in full. 6. LATE CHARGE. If any installment of principal or interest is not paid within ten (10) days of the date on which it is due, Lender may assess a late charge equal to ten percent (10.0%) of the amount of such late payment. This charge is a result of the reasonable endeavor by Borrower and Lender to estimate Lender's added costs and damages resulting from Borrower's failure to make timely payments under this Note; hence, Borrower agrees that the charge shall be presumed to be the amount of damage sustained by Lender since it is impracticable to determine the actual amount necessary to reimburse Lender for its damages. 7. SECURITY. Borrower understands and agrees that this Note is secured by, among other things, the security interests granted to Lender under the Loan Agreement and other Loan Documents, and that this Note is subject to all the terms and conditions thereof including without limitation the remedies specified therein. 8. WAIVERS. Borrower hereby waives presentment for payment, protest, demand, notice of dishonor, notice of nonpayment, notice of maturity, notice of intent to accelerate, notice of acceleration, presentment for the purpose of accelerating maturity and diligence in collection. 9. SUCCESSORS AND ASSIGNS. This Note shall bind and inure to the benefit of the respective successors and assigns of Borrower and Lender; PROVIDED, HOWEVER, that Borrower may not assign this Note or any rights or duties hereunder without Lender's prior written consent and any prohibited assignment shall be absolutely void. No consent to an assignment by Lender shall release Borrower from its obligations hereunder. Lender and its successors and assigns may assign this Note and its rights and duties hereunder. Lender reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in Lender's rights and benefits hereunder. In connection therewith, Lender may disclose all documents and information which Lender now or hereafter may have relating to Borrower or Borrower's business. 10. GENERAL PROVISIONS. (a) If this Note is not paid when due, Borrower promises to pay all costs of collection, foreclosure fees and reasonable attorneys fees incurred by Lender, whether or not suit is filed hereon. (b) This Note may not be changed, modified, amended or terminated except by a writing duly executed by Borrower and Lender. (c) No waiver of any rights under this Note is valid or effective unless made in writing and signed by Lender. (d) No delay or omission on the part of Lender in exercising any right shall operate as a waiver thereof or of any other right. (e) A waiver by Lender upon any one occasion shall not be construed as a bar or waiver of any right or remedy on any future occasion. (f) Should any one or more of the provisions of this Note be determined illegal or unenforceable, all other provisions shall nevertheless remain effective. 28 (g) Section headings used in this Note are solely for convenience of reference, shall not constitute a part of this Note for any other purpose and shall not affect the construction of this Note. 11. CHOICE OF LAW AND VENUE. THE VALIDITY OF THIS NOTE, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. BORROWER AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS NOTE SHALL BE TRIED AND LITIGATED ONLY IN THE STATE COURTS LOCATED IN THE COUNTY OF ORANGE, STATE OF CALIFORNIA, THE FEDERAL COURTS WHOSE VENUE INCLUDES THE COUNTY OF ORANGE, STATE OF CALIFORNIA, OR, AT THE SOLE OPTION OF LENDER, IN ANY OTHER COURT IN WHICH LENDER SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN ANY SUCH COURT, AND BORROWER HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY ANY SUCH COURT. FURTHERMORE, BORROWER WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO ASSERT THE DOCTRINE OF "FORUM NON CONVENIENS" OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 11. 12. WAIVER OF JURY TRIAL. BORROWER HEREBY WAIVES ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS NOTE OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER REPRESENTS THAT IT HAS REVIEWED THIS WAIVER AND KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS NOTE MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. IN WITNESS WHEREOF, Borrower has caused this Note to be executed and delivered in Milpitas, California. BORROWER: EIP MICROWAVE, INC., a Delaware corporation, Signed By: /s/ Lewis R. Foster ------------------------ Print Name: Lewis R. Foster Title/Capacity: President 29 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933; THEY HAVE BEEN ACQUIRED BY THE HOLDER FOR INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT AS MAY BE AUTHORIZED UNDER THE SECURITIES ACT OF 1933 AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER. REVOLVING ADVANCES NOTE $450,0000 October 15, 1997 FOR VALUE RECEIVED, the undersigned, EIP MICROWAVE, INC., a Delaware corporation ("Borrower"), hereby promises to pay JOHN F. BISHOP AND ANN R. BISHOP, TRUSTEES OF THE BISHOP FAMILY TRUST ("Lender"), or order, at 2 Inverness, Newport Beach, California 92660, or at such other address as the holder hereof may specify in writing, the principal sum of Four Hundred Fifty Thousand Dollars ($450,000), or such lesser principal amount of Revolving Advances as is outstanding from time to time, plus interest in the manner and upon the terms and conditions set forth below. 1. DEFINED TERMS. Any and all initially capitalized terms used herein shall have the meanings ascribed to them in that certain Loan and Security Agreement dated as of October 15, 1997 (the "Loan Agreement"), unless specifically defined herein. 2. RATE OF INTEREST. The outstanding principal balance of this Secured Promissory Note (this "Note") shall bear interest at the rate of five percent (5.0%) per annum above the Reference Rate. The Reference Rate as of the date of this Note is eight and one half percent (8.50%) per annum, and, therefore, the effective rate of interest hereunder as of the date of this Note is thirteen and one-half percent (13.50 %) per annum. The interest rate payable under the terms of this Note shall be adjusted in accordance with any change in the Reference Rate from time to time on the date of any such change. Any interest not paid when due may be compounded by adding it to the principal and thereafter shall bear interest at the rate provided herein. Upon the occurrence of an Event of Default under the Loan Agreement, at Lender's option, the rate of interest on this Note, without constituting a waiver of any such Event of Default, shall be increased to eight percent (8.0 %) per annum above the Reference Rate. All interest payable under this Note shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. Interest shall continue to accrue until this Note is paid in full. 3. SCHEDULE OF PAYMENTS; COTERMINOUS WITH LOAN AGREEMENT. Principal and interest shall be due and payable on the dates and in the manner set forth below: (a) The unpaid principal balance of this Note and all accrued interest and other charges shall be due and payable in full on the first anniversary of the date hereof. (b) All interest payable by Borrower shall be due and payable on the first day of each month commencing on the first day of the month following the date hereof and continuing thereafter until this Note is paid in full. (c) Notwithstanding anything to the contrary in this Note or any of the other Loan Documents, all unpaid principal, accrued interest and other charges owing under this Note shall be due and payable in full upon the termination of the Loan Agreement for any reason whatsoever. 4. PREPAYMENT. Borrower shall be entitled to prepay this Note in whole or in part from time to time. 30 5. RIGHT OF ACCELERATION. Upon Borrower's failure to make any payment under this Note when due or the occurrence of any other Event of Default under the Loan Agreement, Lender may, at its election and without notice to Borrower, declare the entire balance hereof immediately due and payable in full. 6. LATE CHARGE. If any installment of principal or interest is not paid within ten (10) days of the date on which it is due, Lender may assess a late charge equal to ten percent (10.0%) of the amount of such late payment. This charge is a result of the reasonable endeavor by Borrower and Lender to estimate Lender's added costs and damages resulting from Borrower's failure to make timely payments under this Note; hence, Borrower agrees that the charge shall be presumed to be the amount of damage sustained by Lender since it is impracticable to determine the actual amount necessary to reimburse Lender for its damages. 7. SECURITY. Borrower understands and agrees that this Note is secured by, among other things, the security interests granted to Lender under the Loan Agreement and other Loan Documents, and that this Note is subject to all the terms and conditions thereof including without limitation the remedies specified therein. 8. WAIVERS. Borrower hereby waives presentment for payment, protest, demand, notice of dishonor, notice of nonpayment, notice of maturity, notice of intent to accelerate, notice of acceleration, presentment for the purpose of accelerating maturity and diligence in collection. 9. SUCCESSORS AND ASSIGNS. This Note shall bind and inure to the benefit of the respective successors and assigns of Borrower and Lender; PROVIDED, HOWEVER, that Borrower may not assign this Note or any rights or duties hereunder without Lender's prior written consent and any prohibited assignment shall be absolutely void. No consent to an assignment by Lender shall release Borrower from its obligations hereunder. Lender and its successors and assigns may assign this Note and its rights and duties hereunder. Lender reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in Lender's rights and benefits hereunder. In connection therewith, Lender may disclose all documents and information which Lender now or hereafter may have relating to Borrower or Borrower's business. 10. GENERAL PROVISIONS. (a) If this Note is not paid when due, Borrower promises to pay all costs of collection, foreclosure fees and reasonable attorneys fees incurred by Lender, whether or not suit is filed hereon. (b) This Note may not be changed, modified, amended or terminated except by a writing duly executed by Borrower and Lender. (c) No waiver of any rights under this Note is valid or effective unless made in writing and signed by Lender. (d) No delay or omission on the part of Lender in exercising any right shall operate as a waiver thereof or of any other right. (e) A waiver by Lender upon any one occasion shall not be construed as a bar or waiver of any right or remedy on any future occasion. (f) Should any one or more of the provisions of this Note be determined illegal or unenforceable, all other provisions shall nevertheless remain effective. (g) Section headings used in this Note are solely for convenience of reference, shall not constitute a part of this Note for any other purpose and shall not affect the construction of this Note. 31 11. CHOICE OF LAW AND VENUE. THE VALIDITY OF THIS NOTE, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. BORROWER AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS NOTE SHALL BE TRIED AND LITIGATED ONLY IN THE STATE COURTS LOCATED IN THE COUNTY OF ORANGE, STATE OF CALIFORNIA, THE FEDERAL COURTS WHOSE VENUE INCLUDES THE COUNTY OF ORANGE, STATE OF CALIFORNIA, OR, AT THE SOLE OPTION OF LENDER, IN ANY OTHER COURT IN WHICH LENDER SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN ANY SUCH COURT, AND BORROWER HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY ANY SUCH COURT. FURTHERMORE, BORROWER WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO ASSERT THE DOCTRINE OF "FORUM NON CONVENIENS" OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 11. 12. WAIVER OF JURY TRIAL. BORROWER HEREBY WAIVES ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS NOTE OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER REPRESENTS THAT IT HAS REVIEWED THIS WAIVER AND KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS NOTE MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. IN WITNESS WHEREOF, Borrower has caused this Note to be executed and delivered in Milpitas, California. BORROWER: EIP MICROWAVE, INC., a Delaware corporation, Signed By: /s/ Lewis R. Foster ------------------------ Print Name: Lewis R. Foster Title/Capacity: President 32 EX-10.(J) 4 EXHIBIT 10(J): FIXED PRICE SUBCONTRACT EXHIBIT 10(j) - ------------------------------------------------------------------------------- NOTE: Information has been redacted from the following agreement. The location of such redacted information is identified by asterisks (*). Such information is confidential and has been omitted pursuant to 17 C.F.R. Reg. Section 240.24b-2 and filed separately with the Securities and Exchange Commission. - ------------------------------------------------------------------------------- FIXED PRICE SUBCONTRACT #EIP-001-97 BETWEEN MANTECH SYSTEMS ENGINEERING CORPORATION AND EIP MICROWAVE, INCORPORATED This is an indefinite quantity, fixed price supply contract (Subcontract) between ManTech Systems Engineering Corporation ("Buyer"), having offices located at 14119A Sullyfield Circle, Second Floor, Chantilly, VA 20151 and EIP Microwave, Inc. ("Seller"), with offices at 1745 McCandless Drive, Milpitas, CA 95035, for the supply by Seller of Radio Frequency Signal Generator and Radio Frequency Down Converter. The effective date of this Subcontract is August 15 , 1997. The Subcontract will be for a term of five years commencing on the effective date. The following Sections attached hereto, are incorporated herein: SECTION DESCRIPTION Section A Supplies and Services to Be Furnished Section B Delivery Schedule/Period of Performance Section C Description and/or Specifications of Supplies and/or Services to Be Furnished Section D Procurement Requirements Section E Warranty Plan Section F Purchase Order Terms and Conditions, T-1 (9-91) Section G Part II, Contract Clauses Section H Purchase Description and Statement of Work AGREED: AGREED: ManTech (Buyer) EIP Microwave, Inc. (Seller) By: /s/ John J. Ressa By: /s/ Lewis R. Foster ----------------------------- ----------------------------------- Authorized Signature Authorized Signature Name Printed: John J. Ressa Name Printed: Lewis R. Foster --------------------- ------------------------- Title: Senior Vice President Title: President --------------------------- ---------------------------------- Date Signed: 9 September 1997 Date Signed: 5 September 1997 --------------------- ----------------------------- 1 *** SECTION G - PART II, CONTRACT CLAUSES Incorporated by reference to Part II - Contract Clauses of U.S. Marine Corps Contract No. M67854-97-D-3047 with ManTech Systems Engineering Corporation. SECTION H - PURCHASE DESCRIPTION AND STATEMENT OF WORK Incorporated by reference to Purchase Description and Statement of Work of U.S. Marine Corps Contract No. M67854-97-D-3047 with ManTech Systems Engineering Corporation. EX-23.(A) 5 EXHIBIT 23(A) EXHIBIT 23(a) BAINBRIDGE GROUP November 13, 1997 EIP Microwave, Inc. 3 Civic Plaza, Suite 265 Newport Beach, California 92660 Gentlemen: The undersigned is named in a Form SB-2/A Registration Statement of EIP Microwave, Inc., a Delaware corporation (the "Company"), which registration statement filed with the Securities and Exchange Commission in connection with a rights offering of 1,699,628 shares of Common Stock of the Company to its stockholders. The capacity in which the undersigned is named in such SB-2 Registration Statement is that of counsel to the Company and as a person who has given an opinion on the validity of the securities being registered and upon other legal matters concerning the registration or offering of the securities described therein. The undersigned hereby consents to being named in such SB-2 Registration Statement in the capacity therein described. Sincerely, BAINBRIDGE GROUP /s/ Michael E. Johnson ----------------------------- Michael E. Johnson, President EX-23.(B) 6 EXHIBIT 23.(B) Exhibit 23(b) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form SB-2 (No. 333-37289) of our report dated December 23, 1996, except for the third paragraph of Note 1, the second paragraph of Note 6 and Note 9, which are as of October 23, 1997, relating to the financial statements of EIP Microwave, Inc., which appears in such Prospectus. We also consent to the references to us under the heading "Experts" in such Prospectus. /s/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP San Jose, California November 13, 1997 -----END PRIVACY-ENHANCED MESSAGE-----