-----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, TqI5qDoCFedeBLyIEKnBUIZE4PY7PDly/wK5UZQ2A28HPIprXuSSjFox3wv1QSxL 2rsjwqKTI916yneUTFLz0Q== 0000950137-03-005975.txt : 20031114 0000950137-03-005975.hdr.sgml : 20031114 20031114152958 ACCESSION NUMBER: 0000950137-03-005975 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: M WAVE INC CENTRAL INDEX KEY: 0000883842 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 363809819 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19944 FILM NUMBER: 031004071 BUSINESS ADDRESS: STREET 1: 216 EVERGREEN ST CITY: BENSENVILLE ILLINOIS STATE: IL ZIP: 60106 BUSINESS PHONE: 6308609542 MAIL ADDRESS: STREET 1: 216 EVERGREEN STREET CITY: BENSENVILLE STATE: IL ZIP: 60106 10-Q 1 c81068e10vq.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 2003 Commission File No. 0-19944 M~WAVE, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 36-3809819 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) identification No.) 475 Industrial Drive, West Chicago, Illinois 60185 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (630) 562-5550 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X0 No [ ] Indicate by check mark whether the Registrant is an Yes No accelerated filer(as defined by rule 12b-6 of the Act) [ ] [X] The registrant has 4,443,294 shares of common stock outstanding at November 12, 2003. PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS M~WAVE, INC. CONSOLIDATED BALANCE SHEETS (Unaudited)
DECEMBER 31 SEPTEMBER 30 2002 2003 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................................... $ 1,514,509 $ 790,719 Accounts receivable, net of allowance for doubtful accounts, 2002- $100,000: 2003- $100,000............................................. 1,901,999 2,527,191 Inventories................................................................. 1,756,641 834,956 Refundable income taxes..................................................... 4,446,010 822,619 Deferred income taxes....................................................... 748,457 616,785 Prepaid expenses and other.................................................. 31,582 17,311 Restricted cash............................................................. 348,731 0 ------------ ------------ Total current assets.................................................... 10,747,929 5,609,581 PROPERTY, PLANT AND EQUIPMENT: Land, buildings and improvements............................................ 5,522,765 2,177,238 Machinery and equipment..................................................... 9,248,688 1,928,600 ------------ ------------ Total property, plant and equipment..................................... 14,771,453 4,105,838 Less accumulated depreciation............................................... (2,760,441) 0 ------------ ------------ Property, plant and equipment-net....................................... 12,011,012 4,105,838 ASSETS TO BE DISPOSED OF, NET................................................... 568,701 568,701 ------------ ------------ TOTAL........................................................................... $ 23,327,642 $ 10,284,120 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................................................ $ 3,707,327 $ 4,578,653 Accrued expenses............................................................ 1,316,579 1,012,861 Current portion of long-term debt........................................... 5,017,629 2,782,198 ------------ ------------ Total current liabilities............................................... 10,041,535 8,373,712 DEFERRED INCOME TAXES........................................................... 616,785 616,785 LONG-TERM DEBT.................................................................. 0 0 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; authorized, 1,000,000 shares; no shares issued.................................................. 0 0 Common stock, $.01 par value; authorized, 10,000,000 shares 6,179,112 shares issued and 4,443,294 shares outstanding at December 31, 2002, 6,179,112 shares issued and 4,443,294 shares outstanding at September 30, 2003.................................. 30,895 30,895 Additional paid-in capital.................................................. 8,439,072 8,439,072 Retained earnings .......................................................... 6,484,525 (4,891,174) Treasury stock, at cost, 1,735,815 shares, at December 31, 2002............. and 1,735,815 shares at September 30, 2003................................ (2,285,170) (2,285,170) ------------ ------------ Total stockholders' equity ............................................. 12,669,322 1,293,623 ------------ ------------ TOTAL........................................................................... $ 23,327,642 $ 10,284,120 ============ ============
See notes to consolidated financial statements. 2 M~WAVE, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended September 30, ----------------------------------- 2002 2003 ------------ ------------ Net sales....................................................................... $ 3,787,531 $ 3,518,178 Cost of goods sold.............................................................. 6,537,287 3,614,003 ------------ ------------ Gross loss.................................................................... (2,749,756) (95,825) Operating expenses: General and administrative.................................................... 545,830 513,975 Selling and marketing......................................................... 394,618 283,730 Impairment of building and equipment.......................................... 0 2,274,500 Restructuring expense......................................................... 1,752,108 0 ------------ ------------ Total operating expenses.................................................... 2,692,556 3,072,205 ------------ ------------ Operating loss................................................................ (5,442,312) (3,168,030) Other income (expense): Interest income............................................................... 45,817 48,396 Interest expense.............................................................. (50,518) (52,840) Other income.................................................................. 0 206,089 Gain (loss) on disposal of assets............................................. 0 16,682 ------------ ------------ Total other income (expense) (4,701) 218,327 ------------ ------------ Loss before income taxes.................................................... (5,447,013) (2,949,703) Provision (credit) for income taxes............................................. (2,114,422) 131,672 ------------ ------------ Net loss........................................................................ ($ 3,332,591) ($ 3,081,375) ============ ============ Weighted average shares outstanding 4,443,294 4,443,294 Basic loss per share ($ 0.75) ($ 0.69) Diluted shares outstanding 4,443,294 4,443,294 Diluted loss per share ($ 0.75) ($ 0.69)
See notes to consolidated financial statements. 3 M~WAVE, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine months ended September 30, ----------------------------------- 2002 2003 ------------ ------------ Net sales....................................................................... $ 19,397,654 $10,864,273 Cost of goods sold.............................................................. 19,611,629 12,885,354 ------------- ------------ Gross loss.................................................................... (213,975) (2,021,081) Operating expenses: General and administrative.................................................... 1,678,651 1,856,848 Selling and marketing......................................................... 1,227,920 1,027,542 Impairment of building and equipment.......................................... 0 7,452,235 Restructuring expense......................................................... 1,752,108 0 ------------ ------------ Total operating expenses.................................................... 4,658,679 10,336,625 ------------ ------------ Operating loss................................................................ (4,872,654) (12,357,706) Other income (expense): Interest income............................................................... 152,591 134,053 Interest expense.............................................................. (151,542) (148,478) Other income.................................................................. 0 206,089 Gain (loss) on disposal of assets............................................. 0 33,682 ------------ ------------ Total other income.......................................................... 1,049 225,346 ------------ ------------ Loss before income taxes.................................................... (4,871,605) ( 12,132,360) Credit for income taxes......................................................... 1,891,060 756,661 ------------ ------------ Net loss........................................................................ ($ 2,980,545) ($11,375,699) ============ ============ Weighted average shares outstanding 4,449,397 4,443,294 Basic loss per share ($ 0.67) ($2.56) Diluted shares outstanding 4,449,397 4,443,294 Diluted loss per share ($ 0.67) ($ 2.56)
See notes to consolidated financial statements. 4 M~WAVE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended September 30, ----------------------------------- 2002 2003 ------------ ------------ OPERATING ACTIVITIES: Net loss...................................................................... ($ 2,980,545) ($11,375,699) Adjustments to reconcile net loss to net cash flows from operating activities: (Gain) loss on disposal of property, plant and equipment.................. 986,108 (33,682) Depreciation and amortization............................................. 1,134,000 506,600 Impairment of buildings and equipment..................................... 0 7,452,235 Deferred income taxes..................................................... 0 131,672 Changes in assets and liabilities: Accounts receivable-trade................................................. 6,040,942 (625,192) Inventories............................................................... (609,241) 921,685 Income taxes.............................................................. (3,121,060) 3,623,391 Prepaid expenses and other assets......................................... 44,720 14,271 Restricted cash........................................................... 257,610 348,731 Accounts payable.......................................................... 685,964 871,326 Accrued expenses.......................................................... (562,610) (303,718) ------------ ------------ Net cash flows provided by operating activities........................ 1,875,888 1,531,620 ------------ ------------ INVESTING ACTIVITIES: Purchase of property, plant and equipment..................................... (2,902,083) (53,661) Proceeds from sale of property, plant and equipment........................... 0 33,682 ------------ ------------ Net cash flows used in investing activities............................ (2,902,083) (19,979) ------------ ------------ FINANCING ACTIVITIES: Long term debt................................................................ 2,302,623 0 Payments on short and long term debt......................................... (1,381,314) (2,235,431) Purchase treasury stock....................................................... (57,891) 0 ------------ ------------ Net cash flows provided by (used in) financing activities.............. 863,418 (2,235,431) ------------ ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS....................................... (162,777) (723,790) CASH AND CASH EQUIVALENTS - Beginning of period................................. 2,102,784 1,514,509 ------------ ------------ CASH AND CASH EQUIVALENTS - End of period....................................... $ 1,940,007 $ 790,719 ============ ============
5 M~WAVE,INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation, consisting only of normal recurring adjustments, have been included. For further information, refer to the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2002 filed March 31, 2003. 2. BUSINESS M~Wave, Inc., through its wholly owned subsidiary Poly Circuits, Inc., is a value-added service provider of high-performance printed circuit boards used in a variety of digital and high-frequency applications for wireless and industrial electronics applications. M~Wave satisfies its customers' requirements for wireless and industrial electronics applications by using its 50,000 square foot state-of-the-art prototype and small-volume facility located in West Chicago, Illinois and by outsourcing and coordinating the manufacture of such boards by a global base of suppliers located primarily in the Far East ("Virtual Manufacturing"). Virtual Manufacturing contractually supplies the printed circuit needs of our customers by managing the complete procurement process. We deliver products when the customer needs them through consignment, inventory control or just-in-time programs. The Company began Virtual Manufacturing during 2000 by developing subcontracting relationships with local and global manufacturers. The Company typically begins the Virtual Manufacturing process by manufacturing prototypes and pre-production printed circuits at its manufacturing facility. The Company often works closely with customer personnel during this stage to finalize fabrication details and guidelines for circuit boards. As customer requirements for circuit boards develop into higher volumes, the Company subcontracts the manufacture of the circuit boards to global manufacturers. The Company continues to monitor the production and quality control of the circuit boards and works with its customers and global manufacturers throughout the Virtual Manufacturing process. The Company believes that Virtual Manufacturing allows the 6 Company to satisfy a broader range of its customers' printed circuit board requirements without incurring substantial capital expenditures for plant, property and equipment. The Company added new levels of capacity in 2001 with the addition of its new facility in West Chicago, Illinois. The new state-of-the-art 50,000 square foot facility in West Chicago enables the Company to provide quick-turn prototypes to customers and to manufacture pre-production printed circuit boards for specific customer application. These process capabilities are an essential part of the Virtual Manufacturing process and the Company's ability to attract new customers. In addition, the Company produces customer-specified bonded assemblies consisting of a printed circuit board bonded in some manner to a metal carrier or pallet. One bonding technique used by the Company is Flexlink(TM), a patented process granted to the Company in 1993. The Company developed an enhanced version called Flexlink II(TM) in 1996. The Company's printed circuit boards and bonded assemblies are used in a variety of telecommunications and industrial electronic applications. Many of the Company's printed circuit boards are Teflon(TM) based and are advantageous for microwave systems because of their extremely low power losses, coupled with stable, predictable electrical characteristics. The production of Teflon(TM) based printed circuit boards and bonded assemblies is technologically demanding due to the precise requirements of their end-use applications and the miniaturization of the microwave frequency components. To meet these technological demands, the Company has developed manufacturing processes and designs, which reduce the cost and increase the manufacturability and reliability of customer systems. Additionally, the Company emphasizes quality engineering and design support for its customers. The Company is subject to stringent technical evaluation and ISO certification by many of its customers. In September 2003 the Company exited direct domestic manufacturing by using operating and strategic partnerships with domestic and Asian Printed Circuit Board manufacturers. Our domestic and Asian partners manufacture to our specifications and under our review from management based in Chicago and Singapore. Our manufacturing partners maintain most certifications for quality, environmental and safety including ISO, QS, UL CE and others. We have a solid reputation for timely delivery of products that are competitively priced, from plants operating at high levels for worker and environmental safety both within and outside the U.S. 7 The Company markets its products through regional sales managers supported by independent sales organizations. The Company's base of approximately 100 customers represents a highly sophisticated group of purchasers. M~Wave was incorporated in Delaware in January 1992 in connection with a 100-for-1 share exchange with the former stockholders of Poly Circuits, Inc. The Company's executive offices are located at 475 Industrial Drive, West Chicago, Illinois 60185, and its telephone number is (630) 562-5550. 3. REALIZATION OF ASSETS The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has sustained substantial losses from operations in 2002, and such losses have continued through the unaudited nine-months ended September 30, 2003. As of December 31, 2002, the Company was in default of certain debt covenants under its Industrial Revenue Bond Agreement. On March 26, 2003, the Company entered into a Forbearance Agreement where the Company agreed to comply with all the terms and conditions and the Bank agreed to forbear on its rights to call the debt from the date of the agreement through August 31, 2003. Under the terms of the Forbearance Agreement, the Company agreed to deposit in the Sinking Fund Account for the Industrial Bond Debt: (ii) $1,500,000 on the earlier of (x) receipt by the Borrower of any federal tax refund or (y) April 30, 2003; and (ii) $500,000 on the earlier of (x) receipt by the Borrower of any state tax refund or (y) June 30, 2003; and (iii) $300,000 on the earlier of (x) receipt by Borrower of the proceeds of the sale of its real estate located at 215 Park Street, Bensenville, Illinois or (y) August 15, 2003. The Company received its federal tax refund on March 31, 2003 and deposited $1,500,000 in the sinking fund in April 2003 as required. As of September 30, 2003, the Company had received the expected refund from the state but the Company has not sold the real estate located at 215 Park Street, Bensenville, Illinois. 8 The Company defaulted under the Forbearance Agreement dated March 26, 2003 due to its failure to make certain required payments. On October 1, 2003, M-Wave entered into a new $2,413,533 loan with Bank One, NA that will mature on December 31, 2003, and will require monthly payments of interest at the bank's prime rate. This loan replaces the unpaid portion of the Industrial Revenue Bonds (IRB) that were used to fund the acquisition of the land and construction of the company's manufacturing plant located in West Chicago, Illinois, and a related forbearance agreement with the bank. Upon signing the new loan, the Company is no longer in default of its obligations to the bank arising pursuant to the IRB. However, the Company will need to repay or negotiate the loan, or seek alternative financing, prior to the loans' maturity on December 31, 2003.Concurrent with the new loan, M-Wave paid $350,000 toward then-outstanding principal obligations, and Bank One released liens covering the Company's accounts receivable and inventory. Additional terms of the loan include assigning Bank One a lien on the Company's real estate and improvements located in Bensenville, IL, site of its former operations. Bank One is to receive a payment of $650,000 upon sale of the Bensenville assets, to be applied to the loan's principal. As of November 12, the Company has not sold the Bensenville assets. In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to obtain additional working capital, refinance its long-term debt and succeed in its future operations. 4. INVENTORIES Inventories are carried at the lower of first-in, first-out (FIFO) cost or market. Substantially all the Company's inventories are in finished goods. 5. DEBT The Company had an installment loan of $64,000 collateralized by certain fixed assets of the Company. Interest on this loan is at the prime rate. The loan is payable in monthly installments of principal and interest and is due in October 2004. On July 26, 2001, the Company signed an agreement with the Illinois Development Finance Authority to borrow up to a maximum $8,100,000 to finance its facility in West Chicago, Illinois. Borrowings can be disbursed, in accordance with the agreement, to the Company for up to three years. 9 Interest is set on a weekly basis, based upon the interest rates of comparable tax-exempt bonds under prevailing market conditions. See Footnote Number 7, Debt, in the Company's Annual Report Form 10-K, for fiscal year ended December 31, 2002, filed March 31, 2003. On October 1, 2003, M-Wave entered into a new $2,413,533 loan with Bank One, NA that will mature on December 31, 2003, and will require monthly payments of interest at the bank's prime rate. This loan replaces the unpaid portion of the Industrial Revenue Bonds (IRB) that was used to fund the acquisition of the land and construction of the company's manufacturing plant located in West Chicago, Illinois, and a related forbearance agreement with the bank. Upon signing the new loan, the Company is no longer in default of its obligations to the bank arising pursuant to the IRB. However, the Company will need to repay or negotiate the loan, or seek alternative financing, prior to the loans' maturity on December 31, 2003. Concurrent with the new loan, M-Wave paid $350,000 toward then-outstanding principal obligations, and Bank One released liens covering the Company's accounts receivable and inventory. Additional terms of the loan include assigning Bank One a lien on the Company's real estate and improvements located in Bensenville, IL, site of its former operations. Bank One is to receive a payment of $650,000 upon sale of the Bensenville assets, to be applied to the loan's principal. The terms of the Company's long-term bank debt represent the borrowing rates currently available to the Company; accordingly, the fair value of this debt approximates its carrying amount. 6. RESTRUCTURING ACTIVITIES The Board of Directors of the Company engaged Credit Support International, LLC of Texas, and specifically its Managing Member, Jim Mayer, April 15, 2003 to assist in implementing a corporate restructuring that includes financial, operating and strategic re-positioning to stem operating and financial losses. Through the efforts of Mr. Mayer and our management, in August 2003, we developed, and the Board approved, a revised business plan and operating model. The plan provides for us to exit direct domestic manufacturing by using operating and strategic partnerships with domestic and Asian PCB manufacturers that include possible joint ventures, contract manufacturing or operating alliances to accomplish the goal to "virtually" produce PCB's. As a result, we employ 56 people today, down from 152 at the end of 2001. 10 7. LITIGATION The Company is a party to various actions and proceedings related to its normal business operations. The Company believes that the outcome of this litigation will not have a material adverse effect on the financial position or results of operations of the Company. 8. IMPAIRMENT OF LONG-LIVED ASSETS TO BE HELD AND USED The Company recorded impairment of building, plant and equipment charges in the first nine months of 2003 of $7,452,000. The charges were recorded to comply with FASB statement No. 144, which requires the Company to (a) recognize an impairment loss when the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure the impairment losses as the difference between the carrying amount and the fair value of the asset. On September 30, 2003, the fair value of the real estate was estimated at $2,000,000 and the machinery and equipment at $1,929,000. This resulted in a write-down of the assets of $2,274,500 in the third quarter of 2003, and resulting in total write-down of such assets in the first nine months of 2003 of $7,452,000. 9. STOCK-BASED COMPENSATION Effective for fiscal 2003, the Company adopted the disclosure requirements under SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure," as an amendment to SFAS No. 123. Stock-based employee compensation, including stock options, for the six months ended September 30, 2003 and 2002 was accounted for under the intrinsic value-based method as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Therefore, no compensation expense was recognized for those stock options that had no intrinsic value on the date of grant. If the Company were to recognize compensation expense over the relevant service period under the fair-value method of SFAS No. 123 net earnings would have decreased, resulting in pro forma net earnings (loss) and EPS as presented below: 11
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------ 2003 2002 ------------------------------ Net loss, as reported $(11,375,699) $(2,980,545) Deduct: Stock-based employee compensation expense, net of related tax effects, determined under fair-value method for all awards (191,568) (191,568) ------------ ------------ Pro forma net loss $(11,567,267) $(3,172,113) ============ ============ EPS, as reported Basic $ (2.56) $ (0.67) Diluted (2.56) (0.67) Pro forma EPS Basic $ (2.60) $ (0.71) Diluted (2.60) (0.71)
10. SUBSEQUENT EVENTS On October 1, 2003, M-Wave entered into a new $2,413,533 loan with Bank One, NA that will mature on December 31, 2003, and will require monthly payments of interest at the bank's prime rate. This loan replaces the unpaid portion of the Industrial Revenue Bonds (IRB) that was used to fund the acquisition of the land and construction of the company's manufacturing plant located in West Chicago, Illinois, and a related forbearance agreement with the bank. Upon signing the new loan, the Company is no longer in default of its obligations to the bank arising pursuant to the IRB. However, the Company will need to repay or negotiate the loan, or seek alternative financing, prior to the loans' maturity on December 31, 2003. Concurrent with the new loan, M-Wave paid $350,000 toward then-outstanding principal obligations, and Bank One released liens covering the Company's accounts receivable and inventory. Additional terms of the loan include assigning Bank One a lien on the Company's real estate and improvements located in Bensenville, IL, site of its former operations. Bank One is to receive a payment of $650,000 upon sale of the Bensenville assets, to be applied to the loan's principal. 12 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS FOR THE QUARTER ENDED SEPTEMBER 30, 2003 COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 2002 NET SALES Net sales were $3,518,000 for the quarter ended September 30, 2003, a decrease of $269,000 or 7% below the third quarter of 2002. The decrease in net sales is related to a drop in demand in the industrial electronic applications offset partially by increased demand in high-frequency applications. Net sales to Westell were $654,000 in the third quarter of 2003 compared to $1,403,000 in the third quarter of 2002. Westell has reduced their requirements from the Company and has begun procuring their requirements directly from Asian suppliers. Net sales to Remec were $597,000 in the third quarter of 2003, compared to $0 in the third quarter of 2002. Net sales to Celestica were $394,000 compared to $784,000 in the third quarter of 2002. GROSS LOSS AND COST OF GOODS SOLD The Company's gross loss for the third quarter of 2003 was $96,000 compared to a gross loss of $2,750,000 for the third quarter of 2002. The third quarter of 2002 included costs relating to the closing of the Bensenville facility, a reduction in workforce and end of life costs relating to several products. The gross loss for the third quarter of 2003 is a result of under utilization of the manufacturing facility. On September 2, 2003 the Company began to use a third party to coordinate and supervise the manufacturing process at its West Chicago facility. The Company now out-sources and coordinates the manufacture of all its customers' requirements needs through a global base of suppliers. OPERATING EXPENSES General and administrative expenses were $514,000 or 14.6% of net sales in the third quarter of 2003 compared to $546,000 or 14.4% of net sales in the third quarter of 2002, a decrease of $32,000. General and administrative expenses consist primarily of salaries and benefits, professional services, depreciation of office, equipment and computer systems and occupancy expenses. Payroll related expenses were down $60,000. Professional services, which include legal, auditing , and consulting fees were up $104,000. Selling and marketing expenses were $284,000 or 8.1% of net sales in the third quarter of 2003 compared to $395,000 or 10.4% of net sales in the third quarter of 2002. Selling and marketing expenses include the cost of salaries, 13 advertising and promotion of the Company's products, and commissions paid to independent sales organizations. Commissions paid to independent sales organizations were down $60,000. Payroll-related expenses were down $38,000 with the reduction of regional sales managers in the third quarter of 2003. Travel expenses were down $11,000. The Company recorded impairment of Property, Plant and Equipment charges in the third quarter of 2003 of $2,275,000. The Company had the property and plant located in West Chicago, Illinois appraised in the second quarter of 2003 for $2,400,000 however the Company now believes the fair value of the property to be approximately $2,000,000. The Company also contracted to have the Equipment appraised again in the third quarter of 2003. The equipment was appraised for approximately $1,929,000 compared to a book value of $3,877,000. The impairment was recorded to comply with FASB statement No. 144, which requires the Company to (a) recognize an impairment loss when the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure the impairment losses as the difference between the carrying amount and the fair value of the asset. Since the fair value of the Property, Plant and Equipment was $3,929,000, this resulted in a write-down of the assets of $2,275,000 in the third quarter of 2003. Restructuring expenses were $1,752,000 or 46.3% of sales in the third quarter of 2002. Restructuring expenses include costs associated with the closing, cleanup and disposition of the Bensenville facilities. These expenses include (1) the net write-down and disposal of approximately $986,000 of specific assets that were not required at the West Chicago facility, (2) cleanup, sale and related expenses of $680,000 for the Bensenville facilities and (3) severance payments of $86,000. OPERATING LOSS Operating loss was ($3,168,000) in the third quarter of 2003 compared to an operating loss of ($5,442,000) in the third quarter of 2002, a decrease in loss of $2,274,000. The changes in operating loss reflect primarily the changes in net sales, gross profit and cost of goods sold, impairment charges and operating expenses as discussed above, which can be summarized as follows: Decrease in net sales $ 196,000 Increase in gross margin 2,458,000 Impairment of building and equipment (2,275,000) Restructuring expense 1,752,000 Decrease in operating expenses 143,000 ------------- Decrease in operating loss $ 2,274,000
14 INTEREST INCOME Interest income from short-term investments was $48,000 in the third quarter of 2003 compared to $46,000 in the third quarter of 2002. INTEREST EXPENSE Interest expense, primarily related to the Industrial Revenue Bond was $53,000 in the third quarter of 2003 compared to $51,000 in the third quarter of 2002. OTHER INCOME Other income of $206,000, primarily relates to forgiveness of debt as the Company entered into settlement agreements with its Vendors. Under terms of the vendor settlement agreements, the Company will pay, immediately following the signing of each agreement, 50% of the vendor balances that are under $10,000. It will pay trade balances in excess of $10,000 to vendors at 60% of the principal balance, payable in two payments staggered 60 days apart. The vendors will then forgive the balance of such trade debt. Through September 30, 2003, the Company has entered into vendor settlement agreements with vendors holding approximately $1.2 million of trade debt. Of the remaining trade debt, the Company is negotiating with one vendor to whom the Company's obligations are approximately $1.3 million, and the Company has yet to commence negotiations with certain vendors in Asia to whom the balance of approximately $600,000 is owed. INCOME TAXES In the third quarter of 2003, the Company had an effective tax rate of 4.5% compared to an effective tax credit of 38.8% in the third quarter of 2002. The Company expensed the net deferred tax asset of $131,672 in the third quarter of 2003 to provide a valuation allowance. 15 RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2002 NET SALES Net sales were $10,864,000 for the nine months ended September 30, 2003, a decrease of $8,533,000 or 44% below the first nine months of 2002. The decrease in net sales is related to a drop in demand in the high-frequency applications offset partially by increased demand in industrial electronic applications. The first nine months of 2002 also included two non-recurring events that boosted sales net sales by $3,600,000. These events were the result of (1) a cancellation charge of approximately $2.5 million paid by Lucent related to the discontinuation of several products and (2) a one-time shipment of inventory for approximately $1.0 million that the Company was holding for Westell. Had these events not occurred the net sales for the first nine months of 2002 would have been approximately $15,798,000. Net sales to Westell were $3,923,000 for the first nine months of 2003 compared to $5,093,000 for the first nine months of 2002. The net sales in 2002 to Westell included a shipment of inventory of approximately $1,000,000. Net sales to Celestica were $752,000 for the first nine months of 2003 compared to $6,898,000 for the first nine months of 2002. The reduction in net sales with Celestica is related to the completion of a specific project. Net sales to Federal Signal were $816,000 for the first nine months of 2003 compared to $125,000 for the first nine months of 2002. Federal Signal first signed a contract with the Company in February 2002. Net sales to Lucent were $2,528,000 for the first nine months of 2002, which was a cancellation charge paid by Lucent related to the discontinuation of several products. GROSS LOSS AND COST OF GOODS SOLD The Company's gross loss for the first nine months of 2003 was $2,021,000 compared to a gross loss of $214,000 for the first nine months of 2002. The first nine months of 2002 include two non-recurring events that boosted revenue by $3,600,000 and gross margin by $2,500,000. These events were a result of the end of life of several products we produced for Lucent and shipment of inventory we were holding for Westell. Had these events not occurred, the gross loss for the first nine months of 2002 would have been approximately $2,714,000. The gross loss for the first nine months of 2003 is a result of under-utilization of the manufacturing facility and a drop in demand in the telecom industry. 16 OPERATING EXPENSES General and administrative expenses were $1,857,000 or 17.1% of net sales for the first nine months of 2003 compared to $1,679,000 or 8.7% of net sales for the first nine months of 2002. General and administrative expenses consist primarily of salaries and benefits, professional services, depreciation of office, equipment and computer systems and occupancy expenses. Payroll-related expenses were up $60,000. Professional services, which include legal, auditing and consulting fees were up $229,000. Selling and marketing expenses were $1,028,000 or 9.5% of net sales for the first nine months of 2003 compared to $1,228,000 or 6.3% of net sales for the first nine months of 2002. Selling and marketing expenses include the cost of salaries, advertising and promotion of the Company's products, and commissions paid to independent sales organizations. Commissions paid to independent sales organizations were down $28,000. Payroll-related expenses were down $56,000 and advertising expenses were down $60,000. The Company recorded impairment of building, plant and equipment charges in the first nine months of 2003 of $7,452,000. The charge was recorded to comply with FASB statement No. 144, which requires the Company to (a) recognize an impairment loss when the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure the impairment losses as the difference between the carrying amount and the fair value of the asset. On September 30, 2003, the fair value of the real estate was estimated at $2,000,000 and the machinery and equipment at $1,929,000. This resulted in a write-down of the assets of $7,452,000. Restructuring expenses were $1,752,000 or 9.0% of sales in the first nine months of 2002. Restructuring expenses include costs associated with the closing, cleanup and disposition of the Bensenville facilities. These expenses include (1) the net write-down and disposal of approximately $986,000 of specific assets that were not required at the West Chicago facility, (2) cleanup, sale and related expenses of $680,000 for the Bensenville facilities and (3) severance payments of $86,000. OPERATING LOSS Operating loss was $12,358,000 for the first nine months of 2003 compared to an operating loss of $4,873,000 for the first nine months of 2002, an increase in loss of $7,485,000. The changes in operating loss reflect primarily the changes in net sales, gross profit and cost of goods sold, impairment charges and operating expenses as discussed above which could be summarized as follows: 17 Decrease in net sales $ 94,000 Decrease in gross margin (1,901,000) Impairment of building and equipment (7,452,000) Restructuring expense 1,752,000 Decrease in operating expenses 22,000 ------------- Increase in operating loss ($ 7,485,000)
INTEREST INCOME Interest income from short-term investments was $134,000 for the first nine months of 2003 compared to $153,000 for the first nine months of 2002. INTEREST EXPENSE Interest expense, primarily related to the Industrial Revenue Bond was $148,000 for the first nine months of 2003 compared to $152,000 for the first nine months of 2002. OTHER INCOME Other income of $206,000, primarily relates to forgiveness of debt as the Company entered into settlement agreements with its Vendors. Under terms of the vendor settlement agreements, the Company will pay, immediately following the signing of each agreement, 50% of the vendor balances that are under $10,000. It will pay trade balances in excess of $10,000 to vendors at 60% of the principal balance, payable in two payments staggered 60 days apart. The vendors will then forgive the balance of such trade debt. To date, the Company has entered into vendor settlement agreements with vendors holding approximately $1.2 million of trade debt. Of the remaining trade debt, the Company is negotiating with one vendor to whom the Company's obligations are approximately $1.3 million, and the Company has yet to commence negotiations with certain vendors in Asia to whom the balance of approximately $600,000 is owed. INCOME TAX CREDIT In the first nine months of 2003, the Company had an effective tax credit of 6.2% compared to an effective tax credit of 38.8% in the first nine months of 2002. The Company's tax credit is limited to expected tax refunds of approximately $888,000 for 2003. The Company also expensed it net deferred tax asset of $131,672 in the third quarter of 2003 to provide a valuation allowance. 18 LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operations was $1,532,000 for the first nine months of 2003 compared to $1,876,000 for the first nine months of 2002. Accounts receivable increased $625,000. Inventories decreased $922,000. The Company received approximately $4,510,000 in income tax refunds. Accounts payable increased $871,000. Depreciation and amortization was $507,000. Capital expenditures were $54,000 in the first nine months of 2003 compared to $2,902,000 in the first nine months of 2002. The Company has limited plans for capital expenditures in 2003. The Company completed financing of $8,100,000 from the Illinois Development Finance Authority's 2001 maximum limit on tax-exempt private activity bonds to finance its facility in West Chicago, Illinois on July 26, 2001. The bond replaced approximately $2,865,000 of credit line debt, which had an interest rate of 6% at the time. The term of the loan is 20 years. The Company has been making quarterly sinking fund payments of $325,000, except that the December 2002 quarterly payment was not made until February 2003. The Company deposited $325,000 in the first quarter of 2003 and an additional $1,500,000 in April 2003 into the sinking fund for the Company's outstanding industrial bond debt account per the terms of its Forbearance Agreement with Bank One. On October 1, 2003, M-Wave entered into a new $2,413,533 loan with Bank One, NA that will mature on December 31, 2003, and will require monthly payments of interest at the bank's prime rate. This loan replaces the unpaid portion of the Industrial Revenue Bonds (IRB) that were used to fund the acquisition of the land and construction of the Company's manufacturing plant located in West Chicago, Illinois, and a related forbearance agreement with the bank. Upon signing the new loan, the Company is no longer in default of its obligations to the bank arising pursuant to the IRB. However, the Company will need to repay or negotiate the loan, or seek alternative financing, prior to the loans' maturity on December 31, 2003.Concurrent with the new loan, M-Wave paid $350,000 toward then-outstanding principal obligations, and Bank One released liens covering the Company's accounts receivable and inventory. Additional terms of the loan include assigning Bank One a lien on the Company's real estate and improvements located in Bensenville, IL, site of its former operations. Bank One is to receive a payment of $650,000 upon sale of the Bensenville assets, to be applied to the loan's principal. The Company's cash balance was approximately $791,000 as of September 30, 2003. 19 There can be no assurances that the forgoing matters will not adversely impact the Company's relationship with its suppliers and customers. The terms of the Company's long-term bank debt represent the borrowing rates currently available to the Company; accordingly, the fair value of this debt approximates its carrying amount. The Company had a line of credit agreement, which expired on May 15, 2002. The Company's ability to make scheduled principal and interest payments on, or to fund working capital and anticipated capital expenditures, will depend on the Company's future performance, which is subject to general economic, financial, competitive and other factors that are beyond its control. The Company's ability to fund operating activities is also dependent upon (a) proceeds of anticipated sales of fixed assets no longer required at the Company's Bensenville facility, (b) the Company's ability to effectively manage its expenses in relation to revenues and (c) the Company's ability to access external sources of financing. The Company has been unable to date to secure additional financing. There can be no assurances that the steps being taken by the Company, even if successfully completed, will enable the Company to comply with the terms of the Promissory Note and/or fund the Company's working capital requirements. Moreover, even if the Company is able to comply with the terms of the Promissory Note, there can be no assurance that the Company will be able to fund its working capital needs. INFLATION Management believes inflation has not had a material effect on the Company's operation or on its financial position. FOREIGN CURRENCY TRANSACTIONS All of the Company's foreign transactions are negotiated, invoiced and paid in United States dollars. SIGNIFICANT EVENTS The Company continues to take the following steps to reposition the Company and improve its liquidity: - reducing staff mainly in the production segment of the Company's business; - pursuing the sale of certain fixed assets no longer being used at the Company's Bensenville facility; 20 - engaging Jim Mayer, the managing member of Credit Support International, LLC of Texas to assist the Company's management; - Negotiating and entering into vendor settlement agreements with vendors for the partial forgiveness of our trade debt; - Exploring options for the Company's owned property in West Chicago, Illinois. RISK FACTORS AFFECTING BUSINESS AND RESULTS OF OPERATIONS This report, as well as our other reports filed with the SEC and our press releases and other communications, contain forward-looking statements made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. Forward-looking statements include all statements regarding our expected financial position, results of operations, cash flows, dividends, financing plans, strategy, budgets, capital and other expenditures, competitive positions, growth opportunities, benefits from new technology, plans and objectives of management, and markets for stock. These forward-looking statements are based largely on our expectations and, like any other business, are subject to a number of risks and uncertainties, many of which are beyond our control. The risks include those stated in the section entitled "Risk Factors Affecting Business and Results of Operations" in Item 7 of our Annual Report on Form 10-K and economic, competitive and other factors affecting our operations, markets, products and services, expansion strategies and other factors discussed elsewhere in this report, our Annual Report on Form 10-K and the other documents we have filed with the Securities and Exchange Commission. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will in fact prove accurate, and our actual results may differ materially from the forward-looking statements. ITEM 4. CONTROLS AND PROCEDURES (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation as of September 30, 2003, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. (b) CHANGES IN INTERNAL CONTROLS. There was no change in the Company's internal control over financial reporting during the quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting. 21 PART II - OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS None 22 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.14 Credit Agreement, dated as of October 1, 2003, among Bank One, NA, M~Wave, Inc., and Poly Circuits, Inc. 10.15 Consulting Agreement, dated September 1, 2003, by and between the Company and Credit Support International, LLC. 31.1 Certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act. 31.2 Certification of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act. 32.1 Certification pursuant to 18 U.S.C. Section 135O, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification pursuant to 18 U.S.C. Section 135O, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K (1) A current report on Form 8-K was filed on October 14, 2003 under item 5 relating to progress made in our restructuring, including a new secured loan, the renewal of our engagement of a turnaround adviser, and our renegotiation of delinquent trade debt. 23 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. M~WAVE,INC. Date: November 12, 2003 /s/ PAUL H. SCHMITT ------------------------- Paul H. Schmitt Chief Financial Officer 24 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE - ------- ----------- ---- 2.1 Exchange Agreement, dated as of January 31, 1992, among Poly Circuits, Inc., Joel S. Dryer, Joseph A. Turek and the Company * 3.1 Certificate of Incorporation of the Company * 3.2 Bylaws of the Company * 10.1 Amended and restated M~Wave, Inc. 1992 Stock Option Plan *** 10.2 Construction Loan Note, dated January 10, 1996, by and among the Company, P C Dynamics and American National Bank and Trust Company. *** 10.3 Stock Purchase Agreement dated December 18, 1998 by and between the Company and First Chicago Equity Corporation. ***** 10.4 Stock Purchase Agreement dated December 18, 1998 by and between the Company and Cross Creek Partners II. ***** 10.5 Warrant dated December 18, 1998 issued to First Chicago Equity ***** 10.6 Warrant dated December 18, 1998 issued to Cross Creek Partners II ***** 10.7 Employment Agreement dated January 29, 2001 between the Company and Joseph A. Turek ****** 10.8 Employment Agreement dated January 29, 2001 between the Company and Paul H. Schmitt ****** 10.9 Loan Agreement dated July 1, 2001 between the Illinois Development Finance Authority and the Company ******* 10.10 Forbearance Agreement dated November 8, 2002 between the Company and Bank One, N.A., formerly known as American National Bank & Trust Company of Chicago ******** 10.11 Forbearance Agreement dated March 31, 2003 between the Company and Bank One, N.A., formerly known as American National Bank & Trust Company of Chicago *********
25 10.12 Employment Agreement dated January 7, 2003 between the Company and Robert O'Connell ********* 10.13 Employment Agreement dated January 29, 2003 between the Company and Paul H. Schmitt ********* 10.14 Credit Agreement dated October 1, 2003 between Bank One, NA, the Company and Poly Circuits, Inc. 27-52 10.15 Consulting Agreement, dated September 1, 2003, by and between the Company and Credit Support International, LLC. 53-61 21 Subsidiaries ********* 24.1 Consent of Grant Thornton LLP ********* 31.1 Certification of the CEO Pursuant to Section 302 of the Sarbanes-Oxley Act. 62 31.2 Certification of the CFO Pursuant to Section 302 of the Sarbanes-Oxley Act. 63 32.1 Certification pursuant to 18 U.S.C. Section 135O, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 64 32.2 Certification pursuant to 18 U.S.C. Section 135O, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 65
* Incorporated herein by reference to the applicable exhibit to Registrants Registration Statement on Form S-1 (Registration No. 33-45499) *** Incorporated herein by reference to the applicable exhibit to the Registrant's Annual Report on Form 10-K for year ended December 31, 1995. ***** Incorporated herein by reference to the applicable exhibit report on Form 8-K dated December 18, 1998. ****** Incorporated herein by reference to the applicable exhibit report to the Registrant's quarterly report on form 10-Q for the quarter ended March 31, 2001. ******* Incorporated herein by reference to the applicable exhibit report to the Registrant's quarterly report on form 10-Q for the quarter ended June 30, 2001 ******** Incorporated herein by reference to the applicable exhibit report to the Registrant's quarterly report on form 10-Q for the quarter ended September 30, 2002 ******** Incorporated herein by reference to the applicable exhibit report to the Registrant's annual report on form 10-K for the year ended December 31, 2002 26 EX-10.14 3 c81068exv10w14.txt CREDIT AGREEMENT DATED 10/1/03 \ EXHIBIT 10.14 ================================================================================ CREDIT AGREEMENT AMONG BANK ONE, NA, A NATIONAL BANKING ASSOCIATION; M-WAVE, INC., A DELAWARE CORPORATION AND POLY CIRCUITS, INC. AN ILLINOIS CORPORATION ================================================================================ DATED AS OF ______, 2003 27 CREDIT AGREEMENT This CREDIT AGREEMENT, is dated as of _______ (this "AGREEMENT"), is by and among BANK ONE, NA, a national banking association (the "BANK"), M-WAVE, INC., a Delaware corporation (the "COMPANY") and POLY CIRCUITS, INC., an Illinois corporation ("POLY CIRCUITS" and jointly and severally with the Company, the "BORROWER"). RECITALS The Bank and the Borrower acknowledge the following: A. The Borrower entered into a Loan Agreement, dated as of July 1, 2001 (as amended from time to time, the "ISSUER LOAN AGREEMENT") with the Illinois Development Finance Authority (the "ISSUER"), a public body corporate and politic, pursuant to which Issuer Loan Agreement the Issuer agreed to lend to the Borrower $8,100,000.00 to finance the costs of the Project (as defined in the Issuer Loan Agreement), which loan is evidenced by the ISSUER PROMISSORY NOTE (as defined in the Issuer Loan Agreement). B. The Issuer entered into a Trust Indenture, dated as of July 1, 2001 (as amended from time to time, the "INDENTURE"), naming American National Bank and Trust Company of Chicago, an Illinois banking corporation, as trustee (together with any successor trustee under the Indenture, the "TRUSTEE"), which provided for, among other things, the assignment by the Issuer of its rights under the Issuer Loan Agreement and the Issuer Promissory Note to the Trustee for the benefit of the holders of the Bonds and of the Bank. C. Pursuant to the Issuer Loan Agreement and the Indenture, the Issuer issued its Variable Rate Demand Industrial Development Revenue Bonds (M-Wave, Inc. Project) Series 2001 in the initial aggregate amount of $8,100,000 (the "BONDS"). D. As security for the payment of the Bonds, the Borrower arranged for Bank to issue a letter of credit in favor of the Trustee (the "LETTER OF CREDIT"), in the amount of $8,199,864.00 to secure the following: (i) payment of the principal of, and up to 45 days' interest at a maximum rate of 10% per annum on the Bonds, and subject to the terms and conditions of the Reimbursement Agreement dated as of July 1, 2001 between Bank and Borrower (the "REIMBURSEMENT AGREEMENT"). E. Borrower defaulted under the Reimbursement Agreement due to its failure to comply with certain financial ratios in the Reimbursement Agreement. F. After Borrower defaulted under the Reimbursement Agreement, the parties entered into Forbearance Agreements dated November 22, 2002 and January 1, 2003 (collectively, the "FORBEARANCE AGREEMENTS"). G. Borrower defaulted under the Forbearance Agreement dated January 1, 2003 due to its failure to make certain payments required hereunder. 28 H. After Borrower defaulted under the Forbearance Agreement dated January 1, 2003, Bank notified the Trustee of the default, the Trustee accelerated the Bonds and the Trustee drew on the Letter of Credit to pay the Bondholders. I. As a result of Borrower's defaults and the Trustee's draw on the Letter of Credit, Borrower is indebted to Bank under the Reimbursement Agreement in the principal amount of $2,718.532.80. J. Pursuant to the Indenture, the Bank is entitled to be subrogated to the rights of the Trustee under the Issuer Loan Agreement and the Issuer Promissory Note. K. Borrower has requested, and subject to the terms and conditions hereof, Bank has agreed that the indebtedness of Borrower to Bank under the Reimbursement Agreement be evidenced by a Promissory Note in the principal amount of $2,413,532.80, dated of even date herewith (the "NOTE") executed by Borrower. AGREEMENTS In consideration of the Recitals and issuance of the Letter of Credit, the Bank and the Borrower agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: 1.1 "AFFILIATE" means any person, corporation or other entity directly or indirectly controlling, controlled by or under common control with the Borrower. 1.2 "ARTICLES OF INCORPORATION" means the articles of incorporation of each of the Company and Poly Circuits. 1.3 "ASSIGNMENT OF CONTRACTS AND PERMITS" means the Assignment of Contracts and Permits between the Borrower and the Bank, dated as of July 1, 2001 relating to the assignment by the Borrowers of its right, title and interest under any and all architectural and construction agreements, permits, reservations, utility agreements, and escrows related to the construction of the Project. 1.4 "ASSIGNMENT OF SECURITY AND PROMISSORY NOTE" means the Assignment of Security and Promissory Note of even date herewith, whereby the Trustee assigns to the Bank the Trustee's interest in the Security (as defined in the Indenture) and the Issuer Promissory Note. 1.5 "AUTHORIZED REPRESENTATIVE" means, with respect to the Company, either Joseph Turek or Paul Schmitt, or any other officer, employee or other person authorized to perform the act in question by the by-laws or a resolution of the Company filed with the Bank; and, with respect to Poly Circuits either Joseph Turek or Paul Schmitt, or any officer, employee or other person authorized to perform the act in question by the by-laws or a resolution of Poly Circuits filed with the Bank. 29 1.6 "BENSENVILLE ENVIRONMENTAL INDEMNITY" means the Environmental Indemnity Agreement between the Borrower and the Bank of even date herewith related to the certification that the Bensenville Property complies with, and will continue to comply with, all Environmental Laws. 1.7 "BENSENVILLE MORTGAGE" means the Real Estate Mortgage, Security Agreement and Assignment of Rents and Leases dated of even date herewith, as modified from time to time, from Poly Circuits, which grants the Bank a first mortgage lien on the Bensenville Property, and secures amounts due and performance under the Loan Documents, the Bond Documents and the Restructure Documents. 1.8 "BENSENVILLE PROPERTY" means the real estate located at 215 Park Street, Bensenville, Illinois, owned by the Borrower and described in the Bensenville Mortgage, together with all present and future buildings, structures and other improvements, fixtures, equipment, appliances and goods located on the Bensenville property which are owned by the Borrower and are to become fixtures. 1.9 "BOND DOCUMENTS" means the Indenture, the Bonds, the Issuer Loan Agreement, the Bond Purchase Agreement, the Arbitrage Regulation Agreement, the Tax Certificate, the Preliminary Offering Memorandum, the Offering Memorandum, the Promissory Note, the Reimbursement Agreement and the Remarketing Agreement. 1.10 "BORROWER'S ARCHITECT" means PLD Associates, 1249 Old Mill Lane, Elk Grove Village, Illinois 60007. 1.11 "BORROWER'S CONTRACTOR" means NEPCO, Inc., with an address at 240 East Lincoln Street, Mt. Prospect, Illinois 60056. 1.12 "CAPITALIZED LEASE" means any lease, the obligations under which have been, or in accordance with GAAP are required to be, recorded as a capital lease liability on the balance sheet of the Borrower. 1.13 "CODE" means the Internal Revenue Code of 1986, as amended. 1.14 "COLLATERAL" means all of the property and interests in property (i) described in the Issuer Loan Agreement, (ii) described in the Mortgage, (iii) described in the Security Agreement, and (iv) described in any of the other Loan Documents, and all other property and interests in property which shall, from time to time, secure the Obligations. 1.15 "CONTINGENT LIABILITIES" means, as of each date of determination, all obligations and liabilities of the Borrower which, under GAAP, would be reflected as a contingent liability in the balance sheet of the Borrower or in a note thereto. 1.16 "CONTROLLED GROUP" means a group of trades or businesses (whether or not incorporated) under common control as defined in the regulations issued pursuant to Section 414(c) of the Code or such other regulations prescribed by the Pension Benefit Guaranty Corporation pursuant to Section 4001(b)(1) of ERISA, of which the Borrower is a part. 30 1.17 "DEFAULT" means any act, event, condition or omission which, with the giving of notice or lapse of time, would constitute an Event of Default if uncured or unremedied. 1.18 "ENVIRONMENTAL LAWS" means all federal, state and local laws including statutes, regulations, ordinances, codes, rules and other governmental restrictions and requirements relating to the discharge of air pollutants, water pollutants or process waste water or otherwise relating to the environment or hazardous substances now or hereafter in effect including, but not limited to, the Federal Solid Waste Disposal Act, the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource Conservation and Recovery Act of 1976, the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, regulations of the Environmental Protection Agency, regulations of the Nuclear Regulatory Agency and regulations of the Illinois Environmental Protection Agency. 1.19 "ERISA" means, at any date, the Employee Retirement Income Security Act of 1974, and the regulations thereunder, all as the same shall be in effect at such date. 1.20 "EVENT OF DEFAULT" means the occurrence of any of the events described in Section 9.1. 1.21 "FIFTH MORTGAGE MODIFICATION AGREEMENT" means the Fifth Mortgage Modification Agreement of even date herewith between Borrower and Bond which modifies and amends the West Chicago Mortgage. 1.22 "FIRST AMENDMENT TO INSTALLMENT NOTE" means the First Amendment to Installment Note (Secured) of even date herewith executed by Borrower. 1.23 "FIRST AMENDMENT TO SECURITY AGREEMENT" means the First Amendment to Security Agreement between the Borrower and the Bank of even date herewith, which amends the Security Agreement. 1.24 "GAAP" means generally accepted accounting principles in effect in the United States from time to time, applied consistently from year to year. 1.25 "GUARANTY" means any agreement, undertaking or arrangement pursuant to which the Borrower guarantees, endorses or otherwise becomes or is contingently liable for an obligation of any other person or entity or any other liability which would be classified as contingent in accordance with GAAP. 1.26 "INDEBTEDNESS" means all items which, in accordance with GAAP, would be classified as liabilities on the balance sheet of the Borrower, including all Capitalized Leases. 1.27 "INSTALLMENT NOTE" means the Installment Note (Secured) of Borrower dated October 27, 1999 in the original principal amount of $293,834, as amended by the Amendment to Installment Note. 1.28 "ISSUER LOAN AGREEMENT" means the Issuer Loan Agreement between the Issuer and the Borrower, dated as of July 1, 2001 relating to the use of the proceeds of the Bonds. 31 1.29 "ISSUER PROMISSORY NOTE" means that certain Promissory Note in the form of the Promissory Note attached to the Issuer Loan Agreement between the Borrower and the Issuer. 1.30 "LEASE OBLIGATIONS" means, at any date, the obligations of the Borrower under leases of real or personal property for a remaining term of one (1) year or longer (including taxes, insurance, maintenance and similar expenses which the Borrower is required to pay under any such lease) whether or not such obligations are reflected as liabilities on the balance sheet of the Borrower or in a note thereto. 1.31 "LETTER OF CREDIT" means, collectively, the Letter of Credit issued by the Bank pursuant to the terms of the Reimbursement Agreement. 1.32 "LOAN DOCUMENTS" means the Reimbursement Agreement and all agreements, instruments and documents executed in connection with or contemplated by the Reimbursement Agreement, the Pledge and Security Agreement, the Security Agreement, the Assignment of Contracts and Permits, the Contractor's Letter, the Architect's Certificate, the West Chicago Environmental Indemnity Agreement, the West Chicago Mortgage, the Installment Note, including, without limitation, security agreements, guaranties, mortgages, pledges, powers of attorney, consents, assignments, contracts, certificates, notices, leases, financing statements and all other written matter heretofore, now and/or from time to time hereafter executed by and/or on behalf of Borrower and delivered to or for the benefit Bank or any affiliated bank, as the same may be amended, restated or modified from time to time hereafter. 1.33 "MULTIEMPLOYER PLAN" means any pension benefit plan subject to Title IV of ERISA as defined in Section 4001(a)(3) of ERISA, to which the Borrower or any member of the Controlled Group is required to contribute on behalf of its employees. 1.34 "OBLIGATIONS" means all of Borrower's liabilities, obligations and indebtedness to Bank of any and every kind and nature (including, without limitation, interest charges, expenses, reasonable attorneys' fees and other sums chargeable to Borrower by Bank and future advances made to or for the benefit of Borrower), whether arising under this Credit Agreement, the Note, the Installment Note (Secured), the Bond Documents, the Loan Documents and the Restructure Documents, or acquired by Bank from any other source, whether heretofore, now or hereafter owing, arising, due, or payable from Borrower to Bank and howsoever evidenced, created, incurred, acquired or owing, whether primary, secondary, direct, contingent, fixed, or otherwise, including obligations of performance. 1.35 "OPERATIVE DOCUMENTS" means the Loan Documents, the Bond Documents and all amendments, modifications, extensions, renewals or replacements thereof. 1.36 "PERMITTED LIENS" means (a) liens, charges or encumbrances listed on Schedule 1 attached hereto; (b) liens for taxes, assessments or governmental charges not delinquent or being contested in good faith by the Borrower for which adequate reserves are established and maintained in accordance with GAAP; (c) liens or deposits in connection with worker's compensation or other insurance or to secure the performance of bids, trade contracts 32 (other than for borrowed money), leases, public or statutory obligations, surety or appeal bonds or other obligations of like nature incurred in the ordinary course of business; (d) easements, restrictions, minor title irregularities and similar matters which have no material adverse effect as a practical matter upon the ownership or use of its property by the Borrower; and (e) liens under the Loan Documents, the Bond Documents or the Restructure Documents or to secure any indebtedness owing to the Bank or any affiliate of the Bank. 1.37 "PLAN" means any pension benefit plan subject to Title IV of ERISA, including any Multiemployer Plan, maintained by the Borrower or any member of the Controlled Group or any such Plan to which the Borrower or any member of the Controlled Group is required to contribute on behalf of its employees. 1.38 "PLANS AND SPECIFICATIONS" means the plans and specifications dated January 5, 2001 (Phase 1), January 23, 2001 (Phase 2), and January 9, 2001 (Phase 3) prepared by Borrower's Architect. 1.39 "PLEDGE AND SECURITY AGREEMENT" means the Pledge and Security Agreement from Borrower to Bank dated as of July 1, 2001. 1.40 "PRIME RATE" means the rate of interest announced by the Bank from time to time as its prime rate for interest rate determinations. The Prime Rate may or may not be the lowest interest rate charged by the Bank. 1.41 "PROJECT" means the Project as defined in the Issuer Loan Agreement. 1.42 "RESTRUCTURE DOCUMENTS" means this Credit Agreement, the Note, the First Amendment to Installment Note (Secured), the Bensenville Mortgage, the Bensenville Environmental Indemnity, the Fifth Mortgage Modification Agreement, the First Amendment to Security Agreement, the Assignment of Security and Promissory Note, all other documents, agreements and instruments now or hereafter executed in connection therewith, and all amendments, modifications, extensions, renewals and replacements thereof entered into from time to time. 1.43 "SECURITY AGREEMENT" means the Security Agreement dated as of July 1, 2001 herewith executed by Borrower in favor or the Bank to secure the Obligations. 1.44 "WEST CHICAGO ENVIRONMENTAL INDEMNITY AGREEMENT" means the Environmental Indemnity Agreement between the Borrowers and the Bank dated November 15, 2000 relating to the certification by the Borrowers that the West Chicago Property complies with, and will continue to comply with, all Environmental Laws, and the Reaffirmation of Environmental Indemnity Agreement dated as of July 1, 2001. 1.45 "WEST CHICAGO MORTGAGE" means the Real Estate Mortgage, Security Agreement and Assignment of Rents and Leases dated as of November 15, 2000, as modified from time to time, from the Borrower granting the Bank a first mortgage lien on the West Chicago Property, and securing amounts due and performance under the Loan Documents and the Bond Documents. 33 1.46 "WEST CHICAGO PROPERTY" means the real estate located at 475 Industrial Drive, West Chicago, Illinois owned by the Borrower and described in the West Chicago Mortgage, together with all present and future buildings, structures and other improvements, fixtures, equipment, appliances and goods which are owned by the Borrower and are to become fixtures and which are located on the real estate described in the West Chicago Mortgage. 1.47 ADDITIONAL TERMS. Other capitalized terms herein not otherwise defined shall have the meanings given to them in the Operative Documents. 2. CREDIT AND NOTE. 2.1 AMOUNT OF CREDIT. The unpaid amounts due to Bank from Borrower under the Reimbursement Agreement in the amount of $2,718,532.80 shall be repaid as provided herein, subject to all of the terms and conditions of this Credit Agreement. 2.2 NOTE. The amounts due under the Reimbursement Agreement shall be evidenced by the Note in the principal amount of $2,413,532.80. The Note shall mature and all amounts unpaid thereunder shall be due and payable on December 31, 2003. 2.3 INSTALLMENT NOTE. The unpaid principal amount of $68,026.48 due to Bank from Borrower under the Installment Note shall be paid to the Bank on December 31, 2003. 2.4 SETOFF. The Bank, and each affiliate of the Bank, is authorized to charge any account of the Borrower at Bank or at such affiliate for all amounts payable under Section 2 or Section 3 hereof. 3. INTEREST AND PRINCIPAL PAYMENTS. 3.1 INTEREST. (a) The unpaid principal amount from time to time outstanding under the Note shall bear interest at the per annum rate (i) before maturity, whether by acceleration or otherwise, equal to the Prime Rate, and (ii) after maturity, until paid at a rate equal to two percent (2%) in addition to the interest rate in effect prior to maturity (the "DEFAULT RATE"). (b) The unpaid principal amount under the Installment Note shall bear interest as provided in the Installment Note. 3.2 PRINCIPAL REPAYMENTS. Borrower shall make payments on account of the principal amount due under the Note and the Installment Note according to the following schedule: (a) Within five (5) days of the sale of the Bensenville Property, $650,000. (b) A final payment of all principal, interest and other amounts due to the Bank, if any, on December 31, 2003. 34 3.3 PREPAYMENTS. Amounts due under the Note and the Installment Note (Secured) may be prepaid by Borrower at any time without penalty or premium. 3.4 APPLICATION OF PAYMENTS. Payments received by the Bank from the Borrower shall be applied first to costs and expenses incurred by the Bank in connection with the Obligations, then to accrued and unpaid interest under the Note and the Installment Note (Secured), then to principal under the Note and the Installment Note (Secured), as the Bank may determine in its discretion. 3.5 COMPUTATIONS. All computations of interest and fees under this Agreement shall be for actual days elapsed on a 360 day year. 4. SECURITY. 4.1 SECURITY AGREEMENT. The Obligations are secured pursuant to the Security Agreement dated as of July 1, 2001 between Borrower and the Bank, as amended by the First Amendment to Security Agreement and from time to time thereafter. 4.2 WEST CHICAGO MORTGAGE. The Obligations are further secured pursuant to the West Chicago Mortgage, as now or hereafter amended from time to time, including by the Fifth Mortgage Modification Agreement. 4.3 BENSENVILLE MORTGAGE. The Obligations are further secured pursuant to the Bensenville Mortgage, as amended from time to time hereafter. 4.4 ASSIGNED SECURITY. The Obligations are further secured by the Security, as defined in Section 301 of the Indenture, pursuant to the Assignment of Security and Promissory Note of even date herewith executed by the Trustee in favor of the Bank. 5. REPRESENTATIONS AND WARRANTIES. In order to induce the Bank to issue the Letter of Credit, the Borrower represents and warrants: 5.1 ORGANIZATION; AUTHORITY. (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, is duly authorized and/or qualified to conduct business, is in good standing in the State of Delaware and every other jurisdiction in which the nature of its business or the ownership of its properties requires such qualification and, the Company has the power to own its properties and carry on its business as currently being conducted; and, (b) Poly Circuits is a corporation duly organized, validly existing and in good standing under the laws of the State of Illinois, is duly authorized and/or qualified to conduct business, is in good standing in the State of Illinois and every other jurisdiction in which the nature of its business or the ownership of its properties requires such qualification and, Poly Circuits has the power to own its properties and carry on its business as currently being conducted. 5.2 AUTHORIZATION AND BINDING EFFECT. The execution and delivery of this Credit Agreement, the Note, the Bensenville Mortgage, the First Amendment to Security Agreement, the Fifth Mortgage Modification Agreement and any other Restructure Documents to which it is a party, and the performance by the Borrower of its obligations thereunder, are 35 within its power, have been duly authorized by proper action on the part of the Company and Poly Circuits, are not in violation of any existing law, rule or regulation of any governmental agency or authority, any order or decision of any court, the Articles of Incorporation and by-laws of the Company or Poly Circuits, restriction or undertaking to which or by which Borrower is bound, and do not require the approval or consent which has not been secured in writing of any governmental body, agency or authority or any other person or entity. The Restructure Documents to which the Borrower is a party, when executed and delivered, will constitute, the valid and binding obligations of the Borrower enforceable in accordance with their terms, except as limited by bankruptcy, insolvency or similar laws of general application affecting the enforcement of creditors' rights and except to the extent that general principles of equity might affect the specific enforcement thereof. 5.3 FINANCIAL STATEMENTS. Each Borrower has furnished to the Bank the balance sheet of such Borrower as of June 30, 2003, together with related statements of income, and cash flows for the year ended on that date. Such financial statements were prepared in accordance with GAAP consistently applied throughout the periods involved, except as set forth in the attached notes thereto, are correct and complete and fairly present the financial condition of such Borrower as of such date and the results of its operations and cash flow for the period ended on such date. There has been no material adverse change in the condition or prospects of either Borrower, financial or otherwise, since the date of the most recent financial statement furnished to the Bank, that has not been disclosed to the Bank. 5.4 LITIGATION. Except for the matters described on Schedule 5.4 attached hereto, there is no litigation or administrative proceeding pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower, the properties of the Borrower which, if determined adversely, would have an adverse effect upon the business, financial condition or properties of the Borrower or the ability of the Borrower to perform its obligations under the Loan Documents and the Restructure Documents. 5.5 INDEBTEDNESS; NO DEFAULT. The Borrower has no Indebtedness, Guaranties or Lease Obligations except as permitted under Sections 8.1 and 8.3 hereof. Except as listed on Schedule 5.5 hereto, there exists no default nor has any act or omission occurred which, with the giving of notice or the passage of time, would constitute a default under the provisions of any Operative Document, Restructure Document or any instrument evidencing Indebtedness or any agreement relating thereto or any other agreement or instrument to which the Borrower is a party. 5.6 OWNERSHIP OF PROPERTIES; LIENS AND ENCUMBRANCES. The Borrower has good and marketable title to all property, real and personal, reflected on the most recent financial statements of the Borrower furnished to the Bank, and all property purported to have been acquired since the date of such financial statement, except property sold or otherwise disposed of in the ordinary course of business subsequent to such date; and all such property is free of any lien, security interest, mortgage, encumbrance or charge of any kind, except Permitted Liens, and is free of any agreement not to grant a security interest, mortgage or lien. All owned and leased buildings and equipment of the Borrower are in good condition, repair and working order and conform to all applicable laws, ordinances and regulations. 36 5.7 TAX RETURNS FILED. The Borrower has filed when due, subject to extensions of filing dates permitted under the Code, all federal and state income and other tax returns which are required to be filed. The Borrower has paid or made provision for all taxes shown on said returns and on all assessments received by it to the extent that such taxes have become due except any such taxes which are being contested in good faith by appropriate proceedings and for which adequate security has been established with Bank. The Borrower has no knowledge of any liabilities which may be asserted against it upon audit of its federal or state tax returns. 5.8 MARGIN STOCK. The Borrower will not use, directly or indirectly, any part of the proceeds of any Indebtedness to the Bank for the purpose of purchasing or carrying, or to extend credit to others for the purpose of purchasing or carrying, any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, or any amendments thereto. The Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock. 5.9 INVESTMENT COMPANY. The Borrower is not an "investment company" or a company controlled by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 5.10 ERISA LIABILITIES. The Borrower has (i) no liability to or with respect to any Plan, the Internal Revenue Service or to the Pension Benefit Guaranty Corporation in connection with any Plan (except that any employees of Borrower may participate in a 401(k) Plan maintained by an Affiliate of Borrower provided that Bank has reviewed and approved such Plan, which approval shall not be unreasonably withheld), and (ii) received no notice to the effect that it is not in full compliance with any of the requirements of ERISA, and the regulations promulgated thereunder and, to the best of its knowledge, there exists no event described in Section 4043(t)(3) thereof ("REPORTABLE EVENT"). 5.11 NO BURDENSOME AGREEMENTS. The Borrower is not a party to or bound by any agreement, instrument or undertaking, or subject to any other restriction (i) which materially adversely affects or may in the future so affect the property, financial condition or business operations of the Borrower, or (ii) under or pursuant to which the Borrower is or will be required to place (or under which any other person may place) a lien upon any of its properties securing Indebtedness either upon demand or upon the happening of a condition, with or without such demand. 5.12 TRADEMARKS, ETC. The Borrower possesses adequate trademarks, trade names, copyrights, patents, permits, service marks and licenses, or rights thereto, for the present and planned future conduct of their businesses substantially as now conducted, without any known conflict with the rights of others which might result in an adverse effect on the Borrower. 5.13 DUMP SITES. With respect to the period during which the Borrower owned or occupied its real estate, and to the best of the Borrower's knowledge, after due inquiry, with respect to the time before the Borrower owned or occupied its real estate except as disclosed with respect to the West Chicago Property in the Environmental Assessments by K-Plus 37 Environmental (the "Environmental Assessments"), no person or entity has caused or permitted materials to be stored, deposited, treated, recycled or disposed of on, under or at any real estate owned or occupied by the Borrower in a manner which would require cleanup, removal or some other remedial action under Environmental Laws. 5.14 TANKS. There are not now, nor have there ever been on any real estate owned or occupied by the Borrower storage tanks which contained materials which, if known to be present in soils or groundwater, would require cleanup, removal or some other remedial action under Environmental Laws except as disclosed with respect to the West Chicago Property in the Environmental Assessments. 5.15 OTHER ENVIRONMENTAL CONDITIONS. There are no conditions existing currently or, to the best of Borrower's knowledge, after due inquiry, likely to exist during the term of this Agreement which would subject the Borrower to damages, penalties, injunctive relief or cleanup costs under any Environmental Laws or which require or are likely to require cleanup, removal, remedial action or other response pursuant to Environmental Laws by the Borrower except as disclosed with respect to the West Chicago Property in the Environmental Assessments. 5.16 CHANGES IN LAWS. To the best of the Borrower's knowledge, after due inquiry, there are no proposed or pending changes in Environmental Laws that would adversely affect the Borrower. 5.17 ENVIRONMENTAL JUDGMENTS, DECREES AND ORDERS. The Borrower is not subject to any judgment, decree, order or citation related to or arising out of Environmental Laws and has not been named as a potentially responsible party by a governmental body or agency in a matter arising under any Environmental Laws. 5.18 ENVIRONMENTAL PERMITS AND LICENSES. The Borrower has all permits, licenses and approvals required under applicable Environmental Laws. 5.19 ACCURACY OF INFORMATION. All information furnished by the Borrower to the Bank is true, correct and complete in all material respects as of the date furnished and does not contain any untrue statement of a material fact or omit to state a material fact necessary to make such information not misleading. All of the Borrower's representations and warranties contained in the Restructure Documents are true and correct on the date hereof and are incorporated herein by reference. 5.20 OTHER PERMITS AND LICENSES. The Borrower has all permits, licenses and approvals necessary for the construction and operation of the Project, or will obtain such permits, licenses and approvals prior to the disbursement of funds from the Project Fund for construction purposes. 5.21 SOLVENCY. Borrower is solvent as of the date hereof. 5.22 COMPLIANCE WITH LAWS. The use by Borrower of the West Chicago Property and the Bensenville Property do not violate any presently existing applicable statute, law, regulation, rule, ordinance or order of any kind whatsoever (including, but not limited to, 38 any presently existing zoning or building laws or ordinances, any environmental protection laws or regulations, or any rules, regulations or orders of any governmental agency), or any building permit issued with respect to either property or any condition, easement, right-of-way, covenant or restriction of record affecting either property. 5.23 ZONING. Each of the West Chicago Property and Bensenville Property is duly and validly zoned for the uses thereof proposed by Borrower. Such zoning is unconditional, in full force and effect and no legal or administrative proceedings are pending or threatened with respect thereto. 6. CONDITIONS PRECEDENT TO CLOSING. 6.1 RESTRUCTURE DOCUMENTS. The Bank shall not be required to enter into the Restructure Documents under this Credit Agreement unless on the date of such issuance all legal matters incident to the Restructure Documents shall be satisfactory to the Bank and its counsel, and the Borrower shall have furnished to the Bank on such date all the documents required to be delivered by the Borrower to the Bank pursuant to this Agreement. 6.2 CONDITIONS PRECEDENT TO CLOSING. On the date of execution hereof, the Borrower shall have furnished or caused to be furnished to the Bank the following: (a) From the Company: (i) Copies, certified on the date of execution by the Secretary or Assistant Secretary of the Company, of resolutions of the Board of Directors of the Company authorizing the execution of the Restructure Documents to which the Company is a party. The Bank shall be entitled to rely on such resolutions until informed of any change in writing by the Company. (ii) An incumbency certificate, executed by the Secretary or Assistant Secretary of the Company, that identifies by name and title and bears the signature of the officers of the Company authorized to sign any applicable Restructure Documents and to effect the transactions contemplated thereunder. The Bank shall be entitled to rely on such incumbency certificates until informed of any change in writing by the Company. (b) From Poly Circuits: (i) Copies, certified on the date of execution by the Secretary or Assistant Secretary of Poly Circuits, of resolutions of the Board of Directors of Poly Circuits authorizing the execution of the Restructure Documents to which Poly Circuits is a party. The Bank shall be entitled to rely on such resolutions until informed of any change in writing by the Company. (ii) An incumbency certificate, executed by the Secretary or Assistant Secretary of Poly Circuits, that identifies by name and title and bears the signature of the officers of Poly Circuits authorized to sign any applicable Restructure Documents and to effect the transactions contemplated thereunder. The Bank shall be entitled to rely on such incumbency certificates until informed of any change in writing by Poly Circuits. 39 (c) From the Company and Poly Circuits: (i) Payment to the Bank of $350,000.00. (ii) An original copy of the following executed documents: 1. Note 2. Credit Agreement 3. Fifth Mortgage Modification Agreement 4. Bensenville Mortgage 5. Bensenville Environmental Indemnity 6. First Amendment to Security Agreement 7. Assignment of Promissory Note and Security from the Trustee 8. First Amendment to Installment Note 9. UCC Financing Statements from Poly Circuits (iii) A certificate of insurance evidencing the Borrower's insurance, as required hereunder and under the West Chicago Mortgage and the Bensenville Mortgage. (iv) Payment in full of all fees and disbursements of the Bank's counsel in connection with the Restructure Documents. (v) A title insurance policy issued by Chicago Title Insurance Company, insuring the Bensenville Mortgage as a first priority lien on the Bensenville Property and showing no title exceptions other than Permitted Liens. (vi) A date down endorsement to the current title insurance policy from CTIC, insuring the West Chicago Mortgage through the date hereof as a first priority lien on the West Chicago Property and showing no title exceptions other than Permitted Liens. (vii) UCC lien, tax lien and judgment search results for each Borrower showing no liens other than Permitted Liens. (viii) Such other documents including, without limitation, waivers or consents, as the Bank may reasonably request to complete the transactions contemplated by this Agreement. 40 6.3 DISBURSEMENT OF FUNDS. No disbursement of funds will be made by Bank hereunder as this Credit Agreement and the Note evidence current obligations of Borrower under the Reimbursement Agreement. 7. AFFIRMATIVE COVENANTS. The Borrower agrees that it will, while any of the Obligations remain unpaid: 7.1 INTERIM FINANCIAL STATEMENTS; COVENANT COMPLIANCE WORKSHEETS AND REPORTS. Furnish to the Bank within forty-five (45) days after the end of each month of each fiscal year of the Borrower a balance sheet of the Borrower as of the end of each such month and related statements of income and cash flows for the period from the beginning of the fiscal year to the end of such month, prepared in the manner set forth in Section 7.1 hereof for the annual statements, subject to normal year-end adjustments, certified by an authorized officer of the Borrower and accompanied by the certificate of such officer to the effect that there exists no Default or Event of Default or, if any Default or Event of Default exists, specifying the nature thereof, the period of existence thereof and what action the Borrower proposes to take with respect thereto. 7.2 ADDITIONAL FINANCIAL INFORMATION. Furnish to the Bank within ten (10) business days, such other or additional financial information as reasonably requested by the Bank. 7.3 MANAGEMENT LETTERS. Furnish to the Bank, promptly upon receipt, copies of all management letters submitted to the Borrower by independent certified public accountants. 7.4 FINANCIAL RATIOS. The Borrower, on a consolidated basis, shall maintain the following financial covenant: (a) Borrower shall not at any time permit its tangible net worth as determined in accordance with GAAP, to be less than $3,000,000 (the "Minimum Tangible Net Worth Amount"). 7.5 BOOKS AND RECORDS. Keep proper, complete and accurate books of record and account and permit any representatives of the Bank to visit and inspect any of the properties and examine and copy any of the books and records of the Borrower at any reasonable time and as often as may reasonably be desired. 7.6 INSURANCE. Maintain insurance, with insurance companies reasonably satisfactory to the Bank, as follows: (a) Casualty and Public Liability Insurance: (i) Casualty and extended coverage insurance ("ALL RISKS" form) insuring the Borrower's real and personal property (others than land) in an amount equal to the actual cash value thereof; provided, however, that such amount shall not be less than $5,000,000; and 41 (ii) General public liability and property damage insurance in amounts of not less than $3,000,000 per occurrence for bodily injury and $3,000,000 per occurrence for property damage (such amounts shall be subject to increase and adjustment to at least equal those amounts generally maintained by similarly situated business in the geographic area in which Borrower's facilities are located). (b) Other Insurance: (i) Such worker's compensation insurance and similar insurance as may be required by law; (ii) Business interruption insurance in such amounts as may be reasonably required by the Bank; and (iii) Such other insurance as is required to be maintained by Borrower as set forth in the Loan Documents or as Bank in its discretion may reasonably deem appropriate. Photocopies of all policies and original certificates shall be delivered to the Bank. Such policies shall contain standard mortgagee and lender's loss payable clauses in favor of the Bank and its successors and assigns and an endorsement that all losses payable thereunder shall be payable to the Bank or its successors or assigns. The Borrower shall obtain a written obligation on the part of each insurance carrier for the insurance coverage identified in paragraph (a) above to notify the Bank in writing at least thirty (30) days prior to any cancellation or material alteration of its policy and, if requested by the Bank, to furnish it evidence of the payment of the premiums for the policy. The Borrower shall obtain a written obligation on the part of each insurance carrier for the insurance coverage identified in paragraph (b) above to alteration of its policy, but in any event, as soon as the Borrower receives notice of such cancellation or material modification, and, if requested by the Bank, to furnish it evidence of the payment of the premiums for the policy. 7.7 CONDITION OF PROPERTY. Keep its properties (whether owned or leased) in good condition, repair and working order. 7.8 PAYMENT OF TAXES. Pay and discharge all lawful taxes, assessments and governmental charges upon it or against its properties prior to the date on which penalties are attached thereto, unless and to the extent only that the same shall be contested in good faith and by appropriate proceedings by the Borrower and security satisfactory to Bank is deposited with Bank. 7.9 COMPLIANCE WITH LAW. Do all things necessary to (i) maintain both the Company's and Poly Circuits' existence in good standing in their state of organization and in any other state where the ownership of property or the conduct of business make qualification necessary, (ii) preserve and keep in full force and effect its rights and franchises necessary to continue its business and (iii) comply with all applicable laws, rules, regulations, ordinances, writs, judgments, injunctions, decrees and awards to which it may be subject including but not limited to all applicable Environmental laws, now or hereafter in effect except those being contested in good faith and involving no possibility of criminal liability. 42 7.10 COMPLIANCE WITH OTHER OPERATIVE DOCUMENTS. Timely comply with all of its obligations under the other Operative Documents, as applicable, except as modified by the Restructure Documents. 7.11 NOTICE OF DEFAULT OR CLAIMED DEFAULT. Furnish to the Bank (i) immediately after Borrower obtains knowledge of any Default or Event of Default, a written notice specifying the nature and period of existence thereof and what action the Borrower is taking or proposes to take with respect thereto; (ii) immediately after becoming aware that the holder of any other Indebtedness issued or assumed by the Borrower, or the lessor under any lease as to which the Borrower is the lessee, has given notice or has taken any action with respect to a claimed default thereunder, or under any agreement under which any such Indebtedness was issued or secured, a written notice specifying the notice given or action taken, the nature of the claimed default and what action the Borrower is taking or proposes to take with respect thereto; (iii) immediately after receipt, copies of any correspondence, notice, pleading, citation, indictment, complaint, order, decree or other document regarding any financial contribution alleged to be payable by the Borrower or regarding a cleanup, removal, remedial action or other response by or on the part of the Borrower under any Environmental Law or which seeks damages or civil, criminal or punitive penalties from the Borrower for an alleged violation of any Environmental Law; and (iv) written notice of any condition or event which would make any warranty contained in Section 5 inaccurate in any material respect, immediately after the Borrower becomes aware of such condition or event. 7.12 ACCOUNTS. Maintain with the Bank all bank accounts and accounts for the deposit of Borrower's funds including without limitation all of the Borrower's primary depository and disbursement accounts, and all of the Borrower's operating and payroll accounts. 7.13 INSPECTION. Permit the Bank and its agents, at any time or times during Borrower's usual business hours, without prior notice, to examine and make copies of all of Borrower's books and records, visit and inspect the Borrower's properties and discuss Borrower's affairs with any of its officers or directors. 8. NEGATIVE COVENANTS. The Borrower covenants that, without the prior written consent of the Bank, the Borrower will not, while any of the Obligations remain unpaid: 8.1 LIMITATIONS ON INDEBTEDNESS. Create, assume or permit to exist any Indebtedness, except (i) Indebtedness owed to the Bank; (ii) trade credit incurred to acquire goods, services and supplies in the ordinary course of Borrower's business; and (iii) wages or other compensation due to employees and agents for services actually performed. 8.2 LIMITATIONS ON GUARANTIES. Create, incur, assume or permit to exist any Guaranties. 8.3 LIMITATIONS ON LIENS AND ENCUMBRANCES. Create, assume or permit to exist any mortgage, security interest, lien or charge of any kind, including any restriction against mortgages, security interests, liens or charges, upon any of its property or assets, whether now owned or hereafter acquired, except Permitted Liens. Borrower may contest any liens or 43 charges, provided that such contest is in good faith, prior to judgment of foreclosure and Borrower has adequate reserves set side on its books to pay any contested lien or charge. 8.4 LIMITATIONS ON MERGERS, ETC. Merge or consolidate with, or enter into any other agreement to merge or consolidate with any corporation or entity or to sell, lease, transfer or otherwise dispose of, in a single transaction or a series of transactions, all or a substantial part of its assets. 8.5 LIMITATIONS ON ACQUISITIONS, ADVANCES AND INVESTMENTS. Create any subsidiary, acquire any other business or partnership or joint venture interest or make any loans, advances or extensions of credit to, or any investments in, any person or entity except (i) the purchase of United States government bonds and obligations; (ii) extensions of credit to customers or advances to suppliers or employees in the usual course of business of the Borrower; (iii) the purchase of bank certificates of deposit and commercial paper having a maturity not exceeding one year; (iv) deposits in deposit accounts at Bank; and (v) investments in bank repurchase agreements. 8.6 LINES OF BUSINESS. Engage in any business other than those in which it is now engaged and any business directly related thereto. 8.7 SALES OF RECEIVABLES. Discount or sell with recourse, or sell for less than the face amount thereof, any of its accounts receivable. 8.8 SALE AND LEASEBACK. Sell or transfer any fixed assets and then or thereafter rent or lease as lessee any such assets, except in the ordinary course of its business. 8.9 DISPOSITION OF ASSETS. Sell, convey, lease, abandon or transfer any of Borrower's assets other than (i) sales, transfers and other dispositions in the ordinary course of Borrower's business consistent with its past practice, and (ii) sales, transfers and other dispositions of obsolete assets and assets no longer used or useful in the conduct of Borrower's business. 8.10 TRANSACTIONS WITH AFFILIATES. Enter into or be a party to any transaction with any Affiliate except or in the ordinary course of business and upon fair and reasonable terms which are no less favorable that a comparable arm's length transaction with an entity which is not an Affiliate. 8.11 LEASES. Enter into any lease of any of the West Chicago Property or the Bensenville Property or any portion thereof, except such leases as are approved by the Bank, or otherwise permit any third party to use or occupy the West Chicago Property. 8.12 ERISA. Become a party to or bound by or with respect to any Plan, except that any employees of Borrower may participate in a 401(k) Plan maintained by an Affiliate of Borrower provided that Bank has reviewed and approved such Plan, which approval shall not be unreasonably withheld. Any such Plan and the administration thereof will at all times comply with ERISA and all other applicable laws and regulations. 44 8.13 LOANS, ADVANCES, ETC. Make, or permit to remain outstanding, loans or advances to or become or remain a guarantor or surety or pledge its credit or assets or become liable in any manner on undertakings of others. 8.14 DIVIDENDS. Make, pay, declare or authorize any dividend, distribution or other payment to the shareholders of Borrower. 8.15 CHANGE IN MANAGEMENT. Permit any change in the position or responsibilities of Joseph Turek. 8.16 NATURE OF BUSINESS. Borrower will not, without the prior written consent of Bank, engage in any business other than the business in which Borrower is engaged on the date hereof or businesses reasonably related thereto. 9. EVENTS OF DEFAULT AND REMEDIES UPON AN EVENT OF DEFAULT. 9.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following shall constitute an Event of Default: (a) Failure to Pay or Perform Obligations. The Borrower shall fail to pay or perform any of the Obligations when due or required and such failure shall continue for two (2) days after written notice thereof to Borrower; or (b) Falsity of Representations and Warranties. Any representation or warranty made in any Restructure Document is false or inaccurate in any material respect on the date as of which made or as of which the same is to be effective; or (c) Breach of Covenants. The Borrower shall fail to comply with any term, covenant or agreement contained herein or in any of the Loan Documents, Bond Documents or Restructure Documents; or (d) Default Under Other Agreements. The Borrower shall fail to pay when due any Indebtedness issued or assumed by Borrower or shall fail to comply with the terms of any agreement under which any such Indebtedness was created, and such default continues beyond the period of grace, if any, therein provided; or (e) Entry of Final Judgments. A final judgment is entered against the Borrower which, together with all unsatisfied final judgments entered against the Borrower, exceeds the sum of $10,000, and such judgment shall remain unsatisfied or unstayed for a period of thirty (30) days after the entry thereof; or (f) Insolvency, Failure to Pay Debts or Appointment of Receiver Etc. The Borrower becomes insolvent or the subject of state insolvency proceedings, fails generally to pay its debts as they become due or makes an assignment for the benefit of creditors; or a receiver, trustee, custodian or other similar official is appointed for, or takes possession of any substantial part of the property of, the Borrower; or 45 (g) Subject of United States Bankruptcy Proceedings. The taking of action by the Borrower to authorize it to become the subject of proceedings under the United States Bankruptcy Code; or the execution by the Borrower of a petition to become a debtor under the United States Bankruptcy Code; or the filing of an involuntary petition against the Borrower under the United States Bankruptcy Code which remains undismissed for a period of sixty (60) days; or the entry of an order for relief under the United States Bankruptcy Code against the Borrower; or (h) Validity of Agreement. Any material provision of this Agreement or any of the other Loan Documents, Bond Documents or Restructure Documents shall at any time for any reason cease to be valid and binding on the Borrower, or shall be declared to be null and void, or the validity or enforceability thereof against the Borrower shall be contested by the Borrower or any governmental agency or authority, or the Borrower shall deny that it has any or further liability or obligation under this Agreement; or (i) Control. Control of Borrower shall become vested in any person or entity or combination thereof other than Joseph Turek. "CONTROL" as used in this paragraph shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of the Borrower, whether through the ownership of interests in the Borrower, by contract or otherwise; or (j) Reportable Event. The occurrence of any "REPORTABLE EVENT," as defined in the Employee Retirement Income Security Act of 1974 and any amendments thereto, which is determined to constitute grounds for termination by the Pension Benefit Guaranty Corporation of any employee pension benefit plan maintained by or on behalf of the Borrower for the benefit of any of its employees or for the appointment by the United States District Court of a trustee to administer such plan and such reportable event is not corrected and such determination is not revoked within 30 days after notice thereof has been given to the plan administrator or Borrower; or the institution of proceedings by the Pension Benefit Guaranty Corporation to terminate any such employee benefit pension plan or to appoint a trustee to administer such plan; or the appointment of a trustee by the United States District Court to administer any such employee benefit pension plan. (k) Material Adverse Change. The occurrence of any material adverse change in the condition or prospects of either Borrower, financial or otherwise, from and after the date hereof. 9.2 REMEDIES UPON AN EVENT OF DEFAULT. If any Event of Default shall have occurred and be continuing, then unless the Bank otherwise elects in writing, amounts unpaid under the Note and any other Obligations of Borrower shall become immediately due and payable without any notice, opportunity to cure or other action of any kind by the Bank, and the Bank shall be entitled to exercise all rights and remedies as are available to the Bank under this Agreement, any of the Operative Documents, any of the Restructure Documents or applicable law. Such remedies shall be cumulative and may be exercised by the Bank consecutively or simultaneously, as the Bank may deem appropriate. 46 10. SETOFF. As security for the payment of the Obligations, the Borrower grants to the Bank a security interest in and lien on any credit balance now or hereafter owed the Borrower by the Bank or by any affiliate of the Bank. In addition, the Borrower agrees that the Bank or any such affiliate may, at any time after the occurrence of an Event of Default, without prior notice or demand, set off against any such credit balance or other money all or any part of the unpaid balance of the Obligations. 11. INDEMNIFICATION. The Borrower agrees to defend, indemnify and hold harmless the Bank, its directors, officers, employees and agents from and against any and all claims, damages, losses, liability, costs or expenses (including reasonable attorneys' fees) incurred in connection with any and all claims and proceedings (whether brought by a private party or governmental agency) as a result of, or arising out of or related to: (a) bodily injury, property damage, abatement or remediation, environmental damage or impairment or any other injury or damage resulting from or relating to any hazardous or toxic substance or contaminated material (as determined under Environmental Laws) located on or migrating into, from or through property previously, now or hereafter owned or occupied by the Borrower, which the Bank may incur due to the exercise of any of its rights under the Restructure Documents or the Operative Documents; or (b) the performance of and exercise of the Bank's rights under any of the Restructure Documents or Operative Documents or any other action taken by the Bank in good faith in connection with the transactions contemplated by the Loan Documents. The Bank will promptly give the Borrower written notice of the assertion of any claim which it believes is subject to the indemnities set forth in this Section and will, upon the request of the Borrower, promptly furnish to the Borrower all material in its possession relating to such claim or the defense thereof. By written notice to the Bank that it intends to defend the claim, Borrower may assume the defense of the claim, with counsel satisfactory to the Bank and, after notice from the Borrower to the Bank of its election to assume the defense, the Borrower will not be liable to the Bank for any legal or other expenses except as provided below and except for the reasonable costs of investigation subsequently incurred by the Bank in connection with the defense. The Bank will have the right to employ its own counsel in any such action, but the fees and expenses of such counsel will be at the expense of the Bank unless (1) the employment of counsel by the Bank has been authorized in writing by the Borrower, (2) the Bank has reasonably concluded that there may be legal defenses available to it that are different from or in addition to those available to the Borrower (in which case the Borrower will not have the right to assume or direct the defense of such action on behalf of the Bank) or (3) the Borrower has not in fact employed counsel satisfactory to the Bank to assume the defense of such claim within a reasonable time after receiving notice of the assertion of the claim, in each of which cases the reasonable fees and expenses of counsel will be incurred at the expense of the Borrower and the Borrower must promptly reimburse all such fees and expenses as they are incurred. 47 This indemnity will survive foreclosure of any security interest or mortgage or conveyance in lieu of foreclosure and the payment of the Obligations and the discharge and release of any Restructure Documents or Operative Documents. 12. INSURANCE PROCEEDS AND CONDEMNATION AWARDS FUND. In the event that (i) an insured casualty loss to any of the Property shall occur or (ii) a partial taking or condemnation of any of the West Chicago Property or the Bensenville Property shall occur, then the Borrower shall deposit or cause to be deposited with the Bank all insurance proceeds and condemnation awards which the Borrower shall be entitled to receive in connection with such loss, taking, or condemnation, and which are not to be used to restore or to rebuild such Property in accordance with the provisions of the Loan Documents and the Restructure Documents. All moneys deposited hereunder shall be applied by the Bank to repay the Obligations. 13. WAIVER AND RELEASE OF CLAIMS. Borrower represents to the Bank that it has no defenses, setoffs, claims or counterclaims of any kind or nature whatsoever against the Bank, including without limitation, defenses, setoffs, claims or counterclaims in connection with the Bonds, the Indenture, the Letter of Credit, the Reimbursement Agreement, any of the Operative Documents, any of the Restructure Documents, the ISDA Master Agreement between Borrower and Bank dated July 13, 2001 and all Schedules thereto (the "Swap Agreement"), the Forbearance Agreements or any action taken or not taken by the Bank with respect to the Borrower, any such documents, or any accounts of the Borrower with the Bank. Without limiting the generality of the foregoing, and in consideration of Bank's agreements hereunder, Borrower hereby releases and forever discharges the Bank, its affiliates and each of their officers, agents, employees, attorneys, insurers, successors and assigns (collectively the "Released Parties"), from and against any and all liabilities, rights, claims, losses, expenses or causes of action whatsoever, known or unknown, including without limitation all liabilities, rights, claims, losses, expenses or causes of action, arising out of any action or inaction by any of the Released Parties to the date hereof with respect to the Bonds, the Indenture, the Letter of Credit, the Reimbursement Agreement, any of the Operative Documents, this Agreement, the Swap Agreement, the Forbearance Agreements, no matter in any way related thereto or arising in conjunction therewith. The Borrower also waives, releases and forever discharges the Released Parties and each of them from and against any and all known or unknown rights to setoff, defenses, claims, counterclaims, causes of action, and any other bar to the enforcement of this Agreement, the Bonds, the Indenture, the Letter of Credit, the Reimbursement Agreement, any of the Operative Documents, any of the Restructure Documents, the Swap Agreement, or the Forbearance Agreements. 14. DISCLAIMER OF RELIANCE. Borrower expressly disclaims any reliance on any oral representation made by the Released Parties or any of them in respect to the subject matter of this Agreement. Borrower acknowledges and agrees that the Bank is specifically relying upon the representations, warranties, releases and agreements contained herein. 15. WAIVER BY BANK. Bank's failure, at any time or times, to require strict performance by Borrower of any provision of this Credit Agreement or of any Operative Document or Restructure Document shall not constitute a waiver, or affect or diminish any right of Bank thereafter to demand strict compliance and performance therewith. Any suspension or waiver by Bank of an Event of Default under this Agreement or any Operative Document or 48 Restructure Document shall not suspend, waive or affect any other Event of Default under this Credit Agreement or the Operative Documents or Restructure Documents, whether the same is prior or subsequent thereto and whether of the same or of a different type. None of the undertakings, agreements, warranties, covenants and representations of Borrower contained in this Credit Agreement or the Operative Document or Restructure Document and no Event of Default under this Credit Agreement or the Operative Documents or Restructure Documents shall be deemed to have been suspended or waived by Bank, unless such suspension or waiver is by an instrument in writing signed by an officer of Bank and directed to Borrower specifying such suspension or waiver. 16. BINDING EFFECT. This Agreement inures to the benefit of and is binding upon the Bank, and its successors and assigns, and the Borrower, and its successors and assigns, provided that none of the rights of the Borrower hereunder may be assigned without the prior written consent of the Bank. 17. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws (without regard to the conflicts of laws rules) of the State of Illinois. 18. EXPENSES. The Borrower agrees, whether or not the transaction hereby contemplated shall be consummated, to pay on demand (a) all out-of-pocket expenses incurred by the Bank in connection with the negotiation, execution, preparation, filing, recording, administration, amendment or enforcement of any Operative Document or Restructure Document including the reasonable fees and expenses of the Bank's counsel and (b) all out-of-pocket expenses, including the reasonable fees and expenses of the Bank's counsel, incurred by the Bank in connection with any litigation, proceeding or dispute in any way related to the Bank's relationship with the Borrower, whether arising hereunder or otherwise. The obligations of the Borrower under this Section will survive payment of the Obligations. 19. NOTICES. Except as otherwise provided in this Agreement, any notice required shall be in writing and shall be deemed to have been validly served, given or delivered upon delivery by messenger or overnight courier service; the day of transmission by telecopy or facsimile; or two (2) business days after deposit in the United States certified or registered mails, with proper postage prepaid, addressed to the party to be notified as follows: (a) If to Bank, at: Bank One, NA 120 South LaSalle Street Chicago, Illinois 60603 Attention: Peter J. Flory 49 with a copy to: Wildman, Harrold, Allen & Dixon 2300 Cabot Drive Suite 455 Lisle, Illinois 60532 Attention: David Hight (b) If to Borrower, at: M-Wave, Inc. Poly Circuits, Inc. 475 Industrial Drive West Chicago, Illinois 60185 Attn: Paul H. Schmitt with a copy to: Freeborn & Peters 311 S. Wacker Drive Suite 3000 Chicago, Illinois 60606 Attention: Carl Klein or to such other address as each party may designate for itself by like notice. 20. JURISDICTION; SERVICE OF PROCESS; WAIVER OF JURY TRIAL. THIS CREDIT AGREEMENT HAS BEEN DELIVERED AT CHICAGO, ILLINOIS, AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF ILLINOIS. EACH OF THE BORROWER AND LENDER (I) WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS AGREEMENT OR ANY OF THE LOAN DOCUMENTS OR RESTRUCTURE DOCUMENTS; (II) IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN DUPAGE COUNTY, ILLINOIS OVER ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS AGREEMENT OR ANY OF THE LOAN DOCUMENTS; (III) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT BORROWER MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING; (IV) AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW; AND (V) AGREES NOT TO INSTITUTE ANY LEGAL ACTION OR PROCEEDING AGAINST BANK OR ANY OF BANK'S DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR PROPERTY, CONCERNING ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE LOAN DOCUMENTS OR RESTRUCTURE DOCUMENTS IN ANY COURT OTHER THAN ONE LOCATED IN 50 DUPAGE COUNTY, ILLINOIS. BORROWER WAIVES PERSONAL SERVICE OF THE SUMMONS AND COMPLAINT, OR OTHER PROCESS OR PAPERS ISSUED IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS AGREEMENT OR ANY OF THE LOAN DOCUMENTS OR RESTRUCTURE DOCUMENTS, AND AGREES THAT SERVICE OF SUCH SUMMONS AND COMPLAINT, OR OTHER PROCESS OR PAPERS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER AT THE ADDRESS SET FORTH IN SECTION 19. SHOULD BORROWER FAIL TO APPEAR OR ANSWER ANY SUMMONS, COMPLAINT, PROCESS OR PAPERS SERVED WITHIN THIRTY (30) DAYS AFTER THE DELIVERY THEREOF, IT SHALL BE DEEMED IN DEFAULT AND AN ORDER AND/OR JUDGMENT MAY BE ENTERED AGAINST IT AS DEMANDED OR PRAYED FOR IN SUCH SUMMONS, COMPLAINT, PROCESS OR PAPERS. NOTHING IN THIS PARAGRAPH SHALL AFFECT OR IMPAIR BANK'S RIGHT TO SERVE LEGAL PROCESS IN ANY MANNER PERMITTED BY LAW OR BANK'S RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. 21. ENTIRE AGREEMENT. This Credit Agreement and the other Operative Documents and Restructure Documents shall constitute the entire agreement of the parties pertaining to the subject matter hereof and supersede all prior or contemporaneous agreements and understandings of the parties in connection therewith. 22. COUNTERPARTS. This Agreement may be executed in separate counterparts, each of which, when so executed, shall be deemed to be an original and all of which, when taken together, shall constitute one and the same agreement. 23. HEADINGS. Section and paragraph or sub-section headings in this Agreement are for convenience and reference only and shall not govern, or be used in, the interpretation of any of the provisions of this Agreement. 24. JOINT AND SEVERAL LIABILITY. The liabilities and obligations of the Company and Poly Circuits hereunder shall be joint and several. 51 IN WITNESS WHEREOF, this Reimbursement Agreement has been duly executed, is dated and effective as of the day and year specified at the beginning hereof. BANK ONE, NA, M-WAVE, INC., a Delaware corporation a national banking association By: _________________________________ Name:_________________________ By: ________________________________ Title:________________________ Name: Paul H. Schmitt Title: Chief Financial Officer POLY CIRCUITS, INC., an Illinois corporation By: _________________________________ Name: Paul H. Schmitt Title: Chief Financial Officer 52 EX-10.15 4 c81068exv10w15.txt CONSULTING AGREEMENT, DATED 9/1/03 EXHIBIT 10.15 CONSULTING AGREEMENT This Consulting Agreement is effective as of the September 1, 2003, by and between M-Wave, Inc., a Delaware corporation, ("M-Wave"), and Credit Support International, LLC, a Texas limited liability company ("Consultant"). W I T N E S S E T H: WHEREAS, M-Wave has requested that Consultant provide assistance and consultation in certain strategic areas of its business, including, but not limited to, assistance in the development and implementation of a strategic business restructuring plan, augmentation of management skills, consultation with the Board of Directors of M-Wave on various matters, and the negotiation of additional debt and equity investments in M-Wave; and, WHEREAS, Consultant is willing to provide such services to M-Wave upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the adequacy, sufficiency and receipt of which are hereby acknowledged, M-Wave and Consultant hereby agree as follows: 1. Term. The term of this Agreement shall be for a period of one (1) year commencing on September 1, 2003 ("Term"). 2. Termination. a. Either party may terminate this Agreement, without cause, upon delivery to the other party of at least sixty (60) days written notice thereof ("Notice Period"), and, thereafter, this Agreement shall be deemed terminated upon the expiration of said Notice Period. In the event that this Agreement is terminated by M-Wave without cause, M-Wave shall, within ten (10) days of the effective date of such termination, pay to Consultant a termination fee equal to the sum of Ninety-Six Thousand Dollars ($96,000.00) reduced, but not below zero, by the amount of all Base Fees (as such term is defined in Section 5(a) below) paid by M-Wave to Consultant under this Agreement. b. Either party may terminate this Agreement for "Cause" as defined below, upon delivery to the other party of written notice thereof, which notice shall state the basis under which Cause exists. In event of a termination of this Agreement for Cause, M-Wave shall pay to Consultant all fees and reimbursements though the termination of this Agreement. c. For the purpose of this Section 2, "Cause" shall mean the occurrence of any of the following: (i) conviction of Consultant or of Gerald M. Mayer (the provider of Consultant's services hereunder as contemplated by Section 4 below) of any felony or other crime involving dishonesty, fraud or moral turpitude; (ii) the Consultant's habitual neglect of its duties hereunder, after written notice thereof is delivered to Consultant, and the 53 provision of a reasonable opportunity to cure same; or (iii) a material breach of this Agreement by either party hereto. Cause shall not mean with respect to the acts or omissions of Consultant any of the following: (1) bad judgment or negligence other than habitual neglect of duty; or (2) any act or omission believed by Consultant in good faith to have been in or not opposed to the interest of M-Wave, any parent or subsidiary of M-Wave or any successor to M-Wave (without intent of Consultant to gain therefrom, directly or indirectly, a profit to which it was not legally entitled); or (3) any act or omission in respect of which a determination could properly have been made by the Board of Directors of M-Wave or any parent or subsidiary of M-Wave, that the Consultant met the applicable standard of conduct for indemnification or reimbursement as applicable to officers and directors under the bylaws or the laws and regulations under which such company is governed, in each case in effect at the time of such act or omission. 3. Services. During the Term, Consultant hereby agrees to provide M-Wave with the following services ("Consulting Services"): a. Assist in the development and execution of a turnaround business strategy for M-Wave, approved by its Board of Directors. b. Evaluate M-Wave's present operating, financial, strategic planning, and going concern issues in order to recommend a staged and prioritized turnaround/restructuring plan or, if appropriate in the view of Consultant, an orderly liquidation to M-Wave's Board of Directors and management for consideration, including, but not limited to, divestiture, sale, merger, strategic alliance, or other device. c. Provide oversight in the development and implementation of the M-Wave business plan being prepared by M-Wave's management team. This shall include evaluation of potential diversification, both internal and external to M-Wave, and the evaluation of potential mergers, joint ventures or other business alliances. d. Utilization of personal and business contacts to further M-Wave's business objectives, both in terms of its business opportunities (including new sales), as well as financing activities, in accordance with its present and changing business models. e. Provide counsel to the Board of Directors regarding committees, internal and external reporting procedures, evaluation, guidance and oversight of the management team. f. Evaluate outside service provider firms recommended to Board of Directors or Audit Committee, including public accounting firms, law firms, public relations firms, investment bankers and investment research firms. 54 g. Provide assistance and recommend structural changes to the Board of Directors, including, but not limited to, member deletions and additions. h. Serve in an ombudsman capacity to receive confidential information from any party, inside or outside M-Wave, wherein conflicts of interest, threats, or improper conduct may adversely impact M-Wave. i. Consult on compliance with NASDAQ and Securities and Exchange Commission rules and regulations and compliance with the Sarbanes-Oxley Act of 2003 and the rules thereunder. j. Assist M-Wave in obtaining debt financing and/or equity investments. k. Negotiate with delinquent trade vendors and develop alternative repayment plans. l. Analyze and assist in development of a "zero-based" budget, and assist in achieving a zero or minimal cash burn. 4. Performance of Services. Except as may otherwise be approved by M-Wave in writing, Consultant shall cause all consulting services set forth hereunder to be performed by Gerald M. Mayer ("Mayer"). Consultant's services shall be performed at M-Wave's offices located in West Chicago, Illinois, New York, New York, East Stroudsburg, Pennsylvania, or at such other location(s) as the Board of Directors of M-Wave shall reasonably designate upon proper notice. It is anticipated that Consultant's services shall require that Consultant devote at least forty (40) hours per week to its obligations hereunder. Notwithstanding the foregoing, M-Wave acknowledges and agrees that Mayer may perform duties on behalf of Consultant which do not relate to M-Wave, provided same do not materially interfere with the services to be provided by Consultant pursuant hereto. Consultant shall report directly to the Board of Directors of M-Wave. 5. Compensation, Bonuses, and Stock Options. In consideration of the Consulting Services rendered by Consultant to M-Wave pursuant to this Agreement, M-Wave shall pay to Consultant compensation as follows: a. Base Fees. M-Wave shall pay to Consultant a monthly fee ("Base Fee") of Twelve Thousand Dollars ($12,000.00). The Base Fee shall be payable in advance and in twice monthly installments of Six Thousand Dollars ($6,000.00) each, such payments being paid on the 1st and 15th day of each calendar month during the Term. The Base Fee may be periodically adjusted upward based on Consultant's performance upon the approval of the Compensation Committee of the Board of Directors of M-Wave. b. Bonus Fees. In addition to the Base Fee, M-Wave shall pay to Consultant, additional cash compensation ("Bonus Fee") equal to fifty percent (50%) of the Base Fee each month during the Term after all of the following events have occurred (inclusive of the 55 month the last of the following occurs): (i) M-Wave generates positive earnings before interest, taxes, depreciation and amortization ("EBITDA") in accordance with generally accepted accounting principles consistently applied (without regard to receipt of tax refunds or proceeds of sale of property outside the ordinary course of business) for two (2) consecutive months (but in any case not earlier than the third month after the effective date of this Agreement); (ii) M-Wave makes payment of all its obligations to Bank One; (iii) M-Wave closes upon the sale of its former manufacturing plant and adjacent vacant land located in Bensenville, Illinois; (iv) M-Wave receives any tax refund due from the State of Illinois for the tax year ended in 2002; and (v) M-Wave secures a line of credit in the minimum amount of One Million Five Hundred Thousand Dollars ($1,500,000), which line of credit may be secured by some or all of the assets of M-Wave. . c. Success Fee. M-Wave shall also pay to Consultant a fee ("Success Fee") for any completed transactions described below (each a "Qualifying Transaction") in which Consultant either (i) procures or introduces the transaction participant to M-Wave or (ii) participates in the negotiating of such transaction. The Success Fee shall be based on the entire transaction value (including all debt, cash and/or equity) of a Qualifying Transaction, as set forth below: (1) Two percent (2%) of the maximum principal loan amount available under any loan, debt, line of credit, or other credit facility (either term or revolving) in which the lender thereof is granted a senior secured position in some or all of M-Wave's assets and/or equipment. (2) Three percent (3%) of the maximum principal loan amount available under any loan, debt, line of credit or other credit facility (either term or revolving) in which the lender thereof is granted a subordinated security interest in some or all of the assets and/or equipment of M-Wave, including, but not limited to, subordinated debt, mezzanine debt or "Tranche B" debt. (3) Four percent (4%) of the total gross consideration received by M-Wave in any private placement of shares of M-Wave's stock (either common or preferred), without reduction for any deal fees and expenses. (4) Except for the Strategic Operating Alliance with American Standard Circuits, three percent (3%) of the gross sales price, economic value or total consideration, without reduction for any deal fees or expenses, with respect to any of the following: (i) any sale of all or a material portion of M-Wave's assets outside the ordinary course of business; (ii) any going private transaction; (iii) the merger of M-Wave with any other entity; or (iv) the acquisition by M-Wave of any other entity. M-Wave and Consultant shall agree upon the amount of the Success Fee, or the methodology for quantifying the Success Fee, with respect to each potential Qualifying Transaction prior to the initiation of discussions with a potential transaction participant or as soon as practicable thereafter. The Success Fee shall be paid by M-Wave to Consultant at the closing of the Qualifying Transaction. Upon receipt of a written request therefor, M- 56 wave shall direct a transaction participant to hold in escrow a sum equal to the Success Fee and to pay such escrowed sum directly to Consultant. The Success Fee shall be paid to Consultant for any Qualifying Transaction that is consummated subsequent to the expiration or earlier termination of this Agreement. d. Stock Options. Promptly upon execution of this Consulting Agreement, M-Wave shall grant to Mayer stock options for the purchase of One Hundred Forty Four Thousand (144,000) shares of M-Wave common stock ("Stock Options") in the form as shall be agreed to by M-Wave and Consultant. Such grant of Stock Options shall provide for the following terms: (1) The Stock Options shall vest at a rate equal to Twelve Thousand (12,000) Options per complete calendar month that this Agreement is in effect; provided, however, that no Stock Options shall vest with respect to any month in which a Bonus Fee is paid, and the Stock Options which do not vest as a result of this Paragraph shall be terminated and null and void (the "Terminated Options"). (2) The exercise price ("Stock Option Exercise Price") of each Stock Option shall be the average closing price of M-Wave's common stock as reported on the NASDAQ Small Cap Market for the twenty (20) trading days immediately prior to the date of the grant of such Stock Options. (3) Vested Stock Options may be exercised, in one lump sum or from time-to-time, at any time on or prior to the fifth (5th) anniversary of the grant thereof. (4) In the event that during the Term, M-Wave is no longer subject to the periodic reporting provisions of the Securities Exchange Act of 1934, as a result of a "going private" transaction or other transaction approved by the Board of Directors and its shareholders (if necessary under applicable law), then within thirty (30) days of the occurrence of such event, M-Wave shall issue to Mayer, in exchange for his Stock Options (whether or not vested), the number of shares of M-Wave common stock determined by multiplying: (i) the total number of shares of M-Wave common stock either outstanding or reserved for issuance upon the exercise or conversion of options or rights to acquire such shares at an exercise price or conversion price which is less than the "The Stock Option Exercise Price" times (ii) two and one-half (2.5%) percent times (iii) a fraction, the denominator of which is one-hundred-forty-four thousand (144,000), and the numerator of which is one-hundred-forty-four thousand (144,0000) less the number of Terminated Options. Mayer shall be granted such shares in exchange for the outstanding Stock Options and without payment of any additional consideration. M-Wave shall promptly issue 57 to Mayer a stock certificate representing such shares bearing an appropriate restrictive legend that such shares have not been registered for sale under the Securities Act of 1933. The shares so issued shall be deemed fully paid and non-assessable. 6. Fees, Allowances and Expense Reimbursement. M-Wave shall pay Consultant the following fees, allowances and expense reimbursements: a. An annual health care coverage allowance in the amount of Three Thousand Six Hundred Dollars ($3,600.00), payable in twelve (12) equal monthly payments, with the first such monthly payment being due and payable upon execution hereof and the remaining eleven (11) monthly payments being due and payable on the first day of each calendar month thereafter. b. A monthly travel and housing allowance in the amount of Two Thousand Eight Hundred Dollars ($2,800.00), payable in advance on the first day of each calendar month during the Term, with the first such monthly payment being due and payable upon the execution hereof. c. Reimbursement of the all out of pocket expenses incurred by Consultant for any professional liability insurance, directors and officers insurance, or bonding costs reasonably determined by Consultant to be required in the performance of Consultant's duties hereunder in accordance with past practices. M-Wave shall promptly reimburse Consultant for such expenses upon receipt of invoice therefor. d. Reimbursement of legal fees incurred by Consultant in negotiating this Agreement and the performance of Consultant's duties pursuant hereto in the amount not to exceed Two Thousand Five Hundred Dollars ($2,500.00) during the Term. M-Wave shall promptly reimburse Consultant for such fees upon receipt of an invoice therefor. e. Reimbursement of any other fees and expenses as shall be incurred by Consultant in the performance of its duties hereunder, which expenses have been approved by M-Wave. M-Wave shall promptly reimburse Consultant for such fees upon receipt of invoice therefor. 7. Put Option. M-Wave hereby grants to Mayer the following put option ("Put Option"): a. In the event the Stock Options are exchanged for shares of M-Wave's common stock ("Conversion Shares") pursuant to Subparagraph 5(d)(4) above, Mayer shall have an option (on one occasion) to require M-Wave to acquire up to all the Conversion Shares on the terms set forth below. The Put Option granted in this Section 7(a) may be exercised by Mayer at any time on or before the fifth anniversary of the date of issuance to him of the Stock Options, by delivery of a written notice thereof to M-Wave. If Mayer so exercises such option, M-Wave shall be obligated to purchase each such Conversion Share at a per share price equal to the quotient derived by (i) the product of the M-Wave's 58 earnings before interest, taxes, depreciation and amortization (determined in accordance with generally accepted accounting principles consistently applied) for the twelve (12) month period ending on the last day of the last complete calendar quarter immediately preceding the date on which such option is exercised, multiplied by four (4), and divided by (ii) the number of shares of the common stock of M-Wave issued and outstanding on the date of exercise of the Put Option. ("Conversion Option Price"). The Conversion Option Price shall be paid to Mayer in accordance with Paragraph 7(b) below. b. M-Wave shall pay to Mayer the Conversion Option Price, as applicable, in twelve (12) equal monthly installments of principal and interest, with interest accruing at a rate equal to the applicable federal rate for short term obligations as in effect on the date of exercise of the applicable Put Option, as such rate is determined by the Internal Revenue Service. The first such payment shall be due on the first day of the first month following the month in which such option is exercised, with additional payments being due on the first day of each subsequent month until paid in full. 8. Confidential Information. Consultant and M-Wave agree that any information received by such party, and its respective, officers, directors, members, employees and agents (collectively, the "Receiving Party"), which was provided by the other party, or its respective, officers, directors, members, employees and agents (collectively, the "Disclosing Party") and which concerns the personal, financial, business plans, legal or other affairs of the Disclosing Party and which is not readily available to the general public ("Confidential Information"), will be treated by the Receiving Party as fully confidential; and, except as may be required in the performance of the Receiving Party's duties and obligations herein provided, the Receiving Party covenants and agrees not to disclose such Confidential Information to any other persons, firms or organizations without the expressed written permission of the Disclosing Party. 9. Indemnification. M-Wave shall indemnify, defend and hold harmless Consultant, and its members, employees and agents (collectively, the "Indemnitee") from and against any threatened or pending action, suit or proceeding, whether civil, criminal, administrative or investigative to which an Indemnitee is made a party or is threatened to be made a party by reason of the fact that the Indemnitee is or was a acting as an advisor to the Board of Directors of M-Wave, or as a director, officer or agent of M-Wave, or any subsidiary of M-Wave, or is or was serving or at any time serves at the request of M-Wave as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, whether for profit or not, against any and all expenses (including, without limitation, attorneys' fees), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of M-Wave, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of M-Wave, or, with respect to any criminal action or proceeding, that Indemnitee had reasonable cause to believe that Indemnitee's conduct was unlawful. 59 10. Independent Contractor. It is specifically agreed and understood that in performing the services herein specified, Consultant and its employees are acting as an independent contractor and not as an agent or employee of M-Wave. Further, nothing contained in this Agreement shall be construed to create the relationship of principal and agent, partnership, joint venture or any other relationship between the parties hereto other than the relationship of independent contractors. 11. Governing Law. This Agreement shall be governed and controlled by the laws of the state of Illinois as to interpretation, enforcement, validity, construction, and effect and in all other respects. 12. Notices. Any notices relating to this Agreement shall be given in writing and shall be deemed sufficiently given, served, and received for all purposes upon the first to occur of actual receipt or delivery by generally recognized overnight courier service or by fax or three (3) days after deposit in the United States Mail, certified or registered, return receipt requested, with postage prepaid, addressed as follows: If to M-Wave: If to Consultant: 475 Industrial Drive 904 Thornberry Court West Chicago, IL 60185 East Stroudsburg, PA 18301 or at such other address(es) as shall be designated by either party in writing and delivered to the other party hereto. 13. Successors and Assigns. Neither party may assign this Agreement without the express written consent of the other party. Notwithstanding the foregoing, Consultant may assign this Agreement to Mayer without the prior consent of M-Wave. This Agreement shall be binding upon and the benefits thereof, shall inure to the parties hereto and their respective legal representatives, heirs, successors, and assigns. 14. Dispute Resolution Provisions. a. Informal Resolution. If any dispute arises out of this Agreement, the parties shall promptly notify one another of the dispute and/or any alleged breach of this Agreement or default of this Agreement in writing. Each party shall promptly designate a representative to resolve the dispute. The representatives shall meet within ten (10) days following the first receipt by a party of such written notice and shall attempt to resolve the dispute within fifteen (15) days of the meeting. Disputes that are not resolved by a meeting of the representatives shall be submitted with the consent of both parties to a mediation process. If mediation is mutually acceptable, the parties will, within twenty (20) days of agreeing to mediate, select a mediator for the purposes of resolving the dispute. b. Arbitration. Any matter not resolved by designated representatives or by the mutually agreed upon mediation process shall be resolved by binding arbitration before a single arbitrator in Chicago, Illinois, in accordance with the commercial rules of the American Arbitration Association then in effect, and judgment on the arbitration award may 60 be entered in any court having jurisdiction. Either party may submit any dispute to arbitration hereunder within thirty (30) days after the end of the negotiation period referenced above or an unsuccessful mediation. The parties shall select the arbitrator within thirty (30) days thereafter and shall instruct the arbitrator to render a determination of the matter within thirty (30) days after the date of submission to arbitration. The procedures specified in this paragraph shall be the sole and exclusive procedures for the resolution of disputes between the parties arising out of or relating to this Agreement; provided, however, that a party may seek a preliminary injunction or other injunctive judicial relief in a court of competent jurisdiction, if, in the judgment of that party, such action is necessary to avoid irreparable damage. Despite the initiation of any such judicial proceedings, the parties will continue to participate in good faith in the procedures specified in this paragraph. The arbitrator's fee shall be shared equally between Consultant and M-Wave. The arbitrator shall have the authority to award reasonable attorneys' fees and expenses to the prevailing party, including fees and expenses incurred in the arbitration or in any litigation concerning the dispute, including but not limited to litigation to compel arbitration or stay court proceedings. In the absence of such an award, attorneys' fees and expenses shall be borne by the party engaging such attorney or incurring such expenses. 15. Joint Drafting. Each of the parties hereto has joined in and contributed to drafting this Agreement; there shall be no presumption favoring or burdening any one or more parties hereto based upon draftsmanship. 16. Survival. The provisions of Sections 5, 7, 8, 9, and 14 shall survive the expiration or early termination of this Agreement. 17. Entire Agreement. This Agreement constitutes the entire agreement between the parties and shall be deemed to supersede and cancel any other agreement between the parties relating to the transactions contemplated in this agreement. None of the previous and contemporaneous negotiations, preliminary drafts, or previous versions of this agreement leading up to its execution and not set forth in this Agreement shall be used by any of the parties to construe or affect the validity of this Agreement. Each party acknowledges that no representation, inducement, or condition not set forth in this Agreement has been made or relied on by either party. IN WITNESS WHEREOF, M-Wave and Consultant have caused this Agreement to be executed by its duly authorized member, officer or agent as of the day and year first above written. M-Wave: Consultant: M-Wave, Inc. Credit Support International, LLC By: _______________________________ By: _____________________________ Joseph A. Turek Gerald M. Mayer Its: Chairman of the Board Its: Manager 61 EX-31.1 5 c81068exv31w1.txt 302 CERTIFICATION OF CEO EXHIBIT 31.1 CERTIFICATIONS I, Joseph A. Turek, Chairman and Chief Executive Officer of M-Wave, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of M-Wave, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are adversely affect the registrant's ability to record, process, summarize and report financial information; and b any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting; and Date: November 12, 2003 By: /s/ Joseph A. Turek ------------------------------------ JOSEPH A. TUREK CHAIRMAN AND CHIEF EXECUTIVE OFFICER 62 EX-31.2 6 c81068exv31w2.txt 302 CERTIFICATION OF CFO EXHIBIT 31.2 CERTIFICATIONS I, Paul H. Schmitt, Chief Financial Officer of M-Wave, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of M-Wave Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are adversely affect the registrant's ability to record, process, summarize and report financial information; and b any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting; and Date: November 12, 2003 By: /s/ Paul H. Schmitt ------------------------------ PAUL H. SCHMITT CHIEF FINANCIAL OFFICER 63 EX-32.1 7 c81068exv32w1.txt 906 CERTIFICATION EXHIBIT 32.1 CERTIFICATION UNDER SECTION 906 of the SARBANES-OXLEY ACT OF 2002 I, Joseph A. Turek, Chief Executive Officer of M-Wave, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 12, 2003 /s/ Joseph A. Turek ----------------------- Joseph A. Turek Chief Executive Officer This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 64 EX-32.2 8 c81068exv32w2.txt 906 CERTIFICATION EXHIBIT 32.2 CERTIFICATION UNDER SECTION 906 of the SARBANES-OXLEY ACT OF 2002 I, Paul H. Schmitt, Chief Financial Officer of M-Wave, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 12, 2003 /s/ Paul H. Schmitt ----------------------- Paul H. Schmitt Chief Financial Officer This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 65 -----END PRIVACY-ENHANCED MESSAGE-----