-----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, UYE2i6l/C7/uPyXVL1r3Sy4BjVJkBYeV2nghOfqz6d8xiGHQKKdaOmlZytLbfEsf CHqjz+RpaGJdCtZSqOFGMw== 0000950137-04-006821.txt : 20040816 0000950137-04-006821.hdr.sgml : 20040816 20040816115703 ACCESSION NUMBER: 0000950137-04-006821 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040816 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: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-19944 FILM NUMBER: 04977072 BUSINESS ADDRESS: STREET 1: 216 EVERGREEN ST CITY: BENSENVILLE ILLINOIS STATE: IL ZIP: 60106 BUSINESS PHONE: 6308609542 MAIL ADDRESS: STREET 1: 475 INDUSTRIAL BLVD CITY: W CHICAGO STATE: IL ZIP: 60106 10QSB 1 c87635e10qsb.txt FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2004 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 [X] 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 4,444,444 shares of common stock outstanding at June 30, 2004. 1 M-WAVE, INC. CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 (unaudited) Page 3 Consolidated Statements of Operations for the Three Months Ended June 30, 2004 and 2003 (unaudited) Page 4 Consolidated Statements of Operations for the Six Months Ended June 30, 2004 and 2003 (unaudited) Page 5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 (unaudited) Page 6 Notes to Consolidated Financial Statements (unaudited) Pages 7-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Pages 12-23 Item 3 Controls and Procedures Page 24 PART II. OTHER INFORMATION Item 1. Legal Proceedings Page 25 Item 6. Exhibits and Reports on Form 8-K Pages 26-27 Signatures Page 28
2 PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS M~WAVE, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
December 31 June 30 2003 2004 ----------- ----------- ASSETS CURRENT ASSETS: Cash $ 249,343 $ 1,191,500 Accounts receivable, net 2,051,027 3,144,749 Inventories, net 587,179 1,008,682 Refundable income taxes 685,418 618,128 Prepaid expenses and other assets 21,499 43,749 ----------- ----------- Total current assets 3,594,466 6,006,808 PROPERTY, PLANT AND EQUIPMENT: Land, buildings and improvements 2,177,356 177,238 Machinery and equipment 1,928,600 383,696 ----------- ----------- Total property, plant and equipment 4,105,956 560,934 Less accumulated depreciation 85,715 18,000 ----------- ----------- Property, plant and equipment - net 4,020,241 542,934 Land, building and improvements held for sale and idle 568,583 568,583 Investment in AM-Wave, LLC 0 617,740 ----------- ----------- TOTAL $ 8,183,290 $ 7,736,065 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 4,364,888 $ 3,589,160 Accrued expenses 739,282 540,988 Note payable, bank, net 0 2,593,527 Current portion of long-term debt 2,457,073 0 ----------- ----------- Total current liabilities 7,561,243 6,723,675 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; authorized, 1,000,000 shares; no shares issued and outstanding 0 0 Common stock, $.005 par value; authorized 10,000,000 shares; issued 2003: 6,179,112 shares, 2004: 6,180,262 shares; outstanding 2003: 4,443,294 shares, 2004: 4,444,444 shares 30,895 30,901 Additional paid-in capital 8,439,072 8,685,195 Accumulated deficit (5,562,750) (5,418,536) Treasury stock, at cost 1,735,815 shares (2,285,170) (2,285,170) ----------- ----------- Total stockholders' equity 622,047 1,012,390 ----------- ----------- TOTAL $ 8,183,290 $ 7,736,065 =========== ===========
See notes to unaudited consolidated financial statements. 3 M~WAVE, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended June 30, --------------------------- 2003 2004 ----------- ----------- NET SALES $ 4,141,050 $ 5,592,198 COST OF GOODS SOLD 4,338,479 4,887,503 ----------- ----------- Gross (loss) profit (197,429) 704,695 OPERATING EXPENSES: General and administrative 748,728 400,993 Selling and marketing 376,863 361,911 Impairment loss recognized on land and building 1,600,000 0 Impairment loss recognized on investment in AM-Wave, LLC 0 23,460 Stock compensation 0 66,069 ----------- ----------- Total operating expenses 2,725,591 852,433 ----------- ----------- Operating (loss) (2,923,020) (147,738) OTHER INCOME (EXPENSE): Interest income 45,012 10,141 Interest expense (45,514) (61,265) Gain (Loss) on sale of assets 0 0 Trade debt forgiveness 0 321,329 ----------- ----------- Total other income (expense), net (502) 270,205 ----------- ----------- (LOSS) INCOME BEFORE INCOME TAXES (2,923,522) 122,467 Income tax (benefit) expense 0 112,678 ----------- ----------- NET (LOSS) INCOME $(2,923,522) $ 9,789 =========== =========== Weighted average shares outstanding 4,443,294 4,444,444 =========== =========== BASIC (LOSS) INCOME PER SHARE $ (0.66) $ 0.00 =========== =========== Diluted weighted average shares outstanding 4,443,294 4,695,744 =========== =========== DILUTED (LOSS) INCOME PER SHARE $ (0.66) $ 0.00 =========== ===========
See notes to unaudited consolidated financial statements. 4 M~WAVE, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Six months ended June 30, -------------------------- 2003 2004 ----------- ----------- NET SALES $ 7,346,095 $ 9,508,276 COST OF GOODS SOLD 9,271,350 7,851,080 ----------- ----------- Gross (loss) profit (1,925,255) 1,657,196 OPERATING EXPENSES: General and administrative 1,325,875 870,405 Selling and marketing 743,812 641,012 Impairment loss recognized on land and building 5,177,735 0 Impairment loss recognized on investment in AM-Wave, LLC 0 159,460 Stock compensation 0 148,109 ----------- ----------- Total operating expenses 7,247,422 1,818,986 ----------- ----------- Operating (loss) (9,172,677) (161,791) OTHER INCOME (EXPENSE): Interest income 85,659 40,563 Interest expense (95,639) (61,265) Gain/(Loss) on sale of assets 0 0 Trade debt forgiveness 0 439,384 ----------- ----------- Total other income (expense), net (9,980) 418,682 ----------- ----------- (LOSS) INCOME BEFORE INCOME TAXES (9,182,657) 256,892 Income tax (benefit) expense (888,333) 112,678 ----------- ----------- NET (LOSS) INCOME $(8,294,324) $ 144,214 =========== =========== Weighted average shares outstanding 4,443,294 4,443,971 =========== =========== BASIC (LOSS) INCOME PER SHARE $ (1.87) $ 0.03 =========== =========== Diluted weighted average shares outstanding 4,443,294 4,695,271 =========== =========== DILUTED (LOSS) INCOME PER SHARE $ (1.87) $ 0.03 =========== ===========
See notes to unaudited consolidated financial statements. 5 M~WAVE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended June 30, -------------------------- 2003 2004 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $(8,294,324) $ 144,214 Adjustments to reconcile net (loss) income to net cash flows (used in) operating activities: (Gain) on disposal of property, plant, and equipment (17,000) 0 Depreciation and amortization 416,600 18,000 Trade debt forgiveness 0 439,384 Impairment loss recognized on land and building 5,177,735 0 Impairment loss recognized on investment in AM-Wave, LLC 0 159,460 Stock compensation recognized on options and warrants 0 148,109 Changes in assets and liabilities: Accounts receivable 208,161 (1,093,722) Inventories (110,108) (421,503) Refundable Income Taxes 0 67,290 Prepaid expenses and other assets 18,346 (22,250) Restricted Cash (1,836,405) 0 Accounts payable 897,869 (1,215,112) Accrued expenses (97,290) (198,294) Income taxes 2,701,174 0 ----------- ----------- Net cash flows (used in) operating activities (935,242) (1,974,424) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (53,661) (32,296) Proceeds from sale of land, building and equipment, net of disposal costs 17,000 2,714,403 ----------- ----------- Net cash flows (used in) provided by investing activities (36,661) 2,682,107 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 0 920 Net borrowings on note payable, bank 0 2,690,627 Repayment of long-term debt (38,264) (2,457,073) ----------- ----------- Net cash flows (used in) financing activities (38,264) 234,474 ----------- ----------- NET (DECREASE)/INCREASE IN CASH (1,010,167) 942,157 CASH : Beginning of period 1,514,509 249,343 ----------- ----------- End of period $ 504,342 $ 1,191,500 =========== =========== SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES: Contribution of equipment for investment in AM-Wave, LLC $ 0 $ 777,200 Stock options issued in connection with consulting agreement 0 75,995 Stock warrants issued in connection with SOA agreement 0 72,114 Stock warrants issued in connection with bank financing agreement 0 97,100
See notes to unaudited consolidated financial statements. 6 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-QSB. 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. Operating results for the three and six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2003. 2. BUSINESS ISSUES In the fiscal quarter ended June 30, 2004 M~Wave, Inc. ("M~Wave" or the "Company") focused attention on financing matters and maintaining the listing of its common stock on the NASDAQ Small Cap Market On March 30, 2004, M-Wave closed an accounts receivable purchase facility with Silicon Valley Bank. Under the facility, the Company could sell to the Bank, up to 85% of the face value of approved invoices, to a maximum aggregate of $3.125 Million. The cost of the facility includes a 1/2% one-time discount, at the Bank's prime rate of interest plus 2.5%. The effective rate of interest was approximately 13.55%. On May 14, 2004 M-Wave received a NASDAQ Staff Determination indicating it failed to satisfy the stockholder's equity, earnings or market value of publicly held shares requirements for continued listing on the NASDAQ Small Cap Market under NASDAQ Marketplace Rule 4310(c)(2)(B), and that its common stock was therefore subject to delisting from that Market unless it is able to comply with one of those requirements. The Company appealed the Staff's Determination and requested that a NASDAQ Listing Qualifications Panel reverse that Determination, in accordance with NASDAQ rules. A hearing was held in June 18, 2004 and the Company presented evidence that, subject to shareholder approval (as required 7 by NASDAQ rules) it would complete a private equity offering, and would maintain the required net worth, that would place it in compliance with the listing requirements for stockholder's equity in excess of $2.5 million. In accordance with its presentation to the NASDAQ Panel, on July 28, 2004, M-Wave issued 30,000 shares of the Company's newly designated Series A Preferred Stock to Mercator Momentum Fund LP; Mercator Momentum Fund III LP and Monarch Pointe Ltd. through Mercator Advisory Group LLC ("Mercator") for $100 per share, or an aggregate of $3 Million. The Preferred Stock is convertible to up to 3,061,000 shares of Common stock (at the floor price of $.98 per share). The Company also issued three-year warrants to purchase an aggregate of 1,530,000 shares of Common Stock at $1.27 per share to the three purchasers of the Series A Preferred Stock and to Mercator Advisory Group LLC. The transaction netted M-Wave approximately $2.6 Million net of estimated fees and expenses. The proceeds, in part, will be utilized to support growth by acquisition of smaller PCB producers' customer relationships, marketing and customer service functions, improvement of operating systems and general working capital. On June 28, 2004, the Company completed a $4.5 Million revolving credit facility with Silicon Valley Bank that improved upon the terms, eligibility and pricing from the first transaction with the Bank. The effective rate of interest, including fees, was formerly approximately 13.55%; the replacement has an effective rate of interest, including fees, of approximating 8%. Under the current facility, the Company may borrow up to 85% on eligible receivables, plus $750,000 on eligible finish goods inventory so long as the inventory financing is not more than 33% of the total accounts receivable balance with the total loan does not exceed $4.5 Million. The Company M~Wave, Inc. is a value-added service provider of high performance printed circuit boards used in a variety of digital and high frequency communications applications for a variety of telecommunications and industrial electronics applications. M~Wave satisfies its customers requirements for telecommunications commercial and industrial electronics applications by directly booking of orders, supervision and inspection of the outsourced manufacture of such boards through its global base of production partners located in the China and Southeast Asia, and, domestically, through our Strategic Operating Alliance (SOA) partner, American Standard Circuits, Inc. (ASC), located in Franklin Park and West Chicago, Illinois, where M-Wave maintains its offices. This business model is referred to as Virtual Manufacturing. Through Virtual Manufacturing we contractually supply many of the printed circuit board needs of our customers, creating a "pipeline" between those customers and production that 8 covers early prototypes and pilot production, directly into mass production, offering one seamless process. The Company delivers products when the customer needs them through consignment inventory control, demand-pull, just-in-time, in plant storehouses and other supply-chain programs. The Company began Virtual Manufacturing during 2000 by developing subcontracting relationships with global manufacturers predominately Asian, from its base in Singapore. The SOA extends this approach to our domestic manufacturing requirements. Our manufacturing partners maintain most certifications for quality, environmental and safety, including ISO, QS, UL, CE and others. Both the Company and its manufacturing partners have a 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 United States. The Company markets its products through regional sales managers supported by independent sales organizations. The Company's base of approximately 100 customers represents a sophisticated group of purchasers. 3. INVENTORIES Inventory is carried at the lower of cost (first-in, first-out) or market. Substantially all the Company's inventories are in finished goods held for sales to customers supported by annual forecasts, firm purchase orders or contracts. 4. DEBT On June 28, 2004, the Company paid off its existing accounts receivable purchase facility with Silicon Valley Bank with the proceeds of a $4.5 million, two-year revolving credit line with the Bank, secured by all assets of the Company, including its accounts receivable and inventory. Under the facility, the Company may draw up to 85% of its eligible accounts receivable under 90 days aged, and up to $750,000 of finished goods inventory, so long as that inventory represents 33% or less of the total advanced at any one time and the total loan does not exceed $4.5 Million. The effective rate of interest is approximately 8% inclusive of one-time and servicing costs. In connection with the financing, the Company issued 7-year warrants to the Bank for the purchase of 85,000 shares of the Company's common stock at $1.51 per share, which vest ratably over twenty-four months. The warrants are valued at $97,100 and will be recorded according to monthly vesting as an increase to note payable and recognized as interest expense over the vesting period, which will commence in July 2004. 9 The Company believes this financing, together with cash flow from operations, to be adequate for its working capital requirements during the balance of the current fiscal year. 5. LITIGATION The Company is not a party to any litigation whose outcome will have a material adverse effect on the financial position or results of operations of the Company. 6. STOCK-BASED COMPENSATION Stock-based employee compensation, including stock options, for the six months ended June 30, 2004 and 2003 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 (loss) income would have increased or decreased, resulting in pro forma net (loss) income and EPS as presented below: 10
SIX MONTHS ENDED JUNE 30, 2004 ------------------------------------------------ 2003 2004 3 MONTHS 6 MONTHS 3 MONTHS 6 MONTHS ----------- ----------- -------- --------- Net (loss) income, as reported $(2,923,523) $(8,294,324) $ 9,789 $ 144,214 Deduct: Stock-based employee compensation expense, net of related tax effects, determined under fair-value method for all awards $ (74,653) $ (149,306) $(57,115) $(148,109) ----------- ----------- -------- --------- Pro forma net (loss) income $(2,998,176) $(8,443,630) $(47,326) $ (3,895) =========== =========== ======== ========= EPS, as reported Basic $ (0.66) $ (1.87) $ 0.00 $ 0.03 Diluted $ (0.66) $ (1.87) $ 0.00 $ 0.03 Pro forma EPS Basic $ (0.67) $ (1.90) $ (0.01) $ 0.00 Diluted $ (0.67) $ (1.90) $ (0.01) $ 0.00
11 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2003 NET SALES Net sales were approximately $5,592,000 for the quarter ended June 30, 2004, an increase of approximately $1,451,000 or 35% above the second quarter of 2003. The increase in sales is directly related to "RF" microwave sales that increased approximately $2,200,000 in the first quarter of 2004 while the Company's digital business decreased approximately $800,000 in the second quarter of 2004. A significant portion of the Company's second quarter 2004 "RF" microwave sales were to three major customers. Net sales to Celestica were approximately $1,924,000 in the second quarter of 2004 compared to about $254,000 in the second quarter of 2003. Net sales to RF Power were approximately $272,000 in the second quarter of 2004 compared to about $93,000 in the second quarter of 2003. And net sales to Remec were approximately $473,000 in the second quarter of 2004 compared to approximately $262,000 in the second quarter of 2003. . The decrease in second quarter 2004 sales in the digital business segment of the Company were primarily the result of a significant reduction in sales to one customer. In this regard, sales to Westell were $21,000 in the second quarter of 2004 compared to $1,762,000 in the second quarter of 2003. Sales in the quarter to other customers remained generally on par with the prior year. Net sales to Federal Signal were $392,000 in the second quarter of 2004 compared to $319,000 in the second quarter of 2003. Net sales to Knowles were $434,000 in the second quarter of 2004 compared to $21,000 in the second quarter of 2003. Net sales to Rain Bird were $286,000 in the second quarter of 2004 compared to $275,000 in the second quarter of 2003. GROSS PROFIT (LOSS) AND COST OF GOODS SOLD The Company's gross profit for the second quarter of 2004 was approximately $705,000, or 12.6%, compared to a gross loss of approximately $197,000, or - -4.7%, for the second quarter of 2003. In September 2003, the Company began to phase out its manufacturing operations in preparation for the strategic operating alliance agreement (SOA) with ASC, which it consummated in February 2004. The Company presently purchases all of its printed circuit boards as finished products and distributes the finished products to its customers sourced domestically and from Asia. 12 OPERATING EXPENSES General and administrative expenses were approximately $401,000 or 7.2% of net sales in the second quarter of 2004 compared to approximately $749,000 or 18.1% of net sales in the second quarter of 2003, a decrease of approximately $348,000. General and administrative expenses consist primarily of salaries and benefits, professional services, depreciation of office, equipment and computer systems and occupancy expenses. In comparison to the second quarter of 2003, payroll related expenses decreased $45,000. This decrease was net of separation charges of $106,000 recorded during the second quarter for the company's former CFO. Professional services, which include legal, auditing, and consulting fees decreased $68,000. Depreciation expense decreased $13,000 in the second quarter of 2004. The Company also reduced its travel expense by $53,000 based on actual results, its bad debt expense by $50,000 based on experience, and its legal expense by $47,000 based on actual results during the second quarter of 2004. Selling and marketing expenses were approximately $362,000 or 6.5% of net sales in the second quarter of 2004 compared to approximately $377,000 or 9.1% of net sales in the second quarter of 2003. Selling and marketing expenses include the cost of salaries, advertising and promotion of the Company's products, and commissions paid to independent sales organizations. In comparison to the second quarter of 2003, commissions paid to independent sales organizations increased $50,000, payroll-related expenses decreased $62,000 with the reduction of regional sales managers in the third quarter of 2003, and travel expenses decreased $6,000 in the second quarter of 2004. The Company recorded an impairment loss of $23,000 in the second quarter of 2004. The charge was recorded to adjust the carrying value of the investment in AM-Wave, LLC to its estimated net realizable value. The Company recorded impairment of building charges in the second quarter of 2003 of $1,600,000. The Company estimated the fair value of the real estate at $4,000,000 in the first quarter of 2003. This amount was estimated in the first quarter of 2003 because the final appraisal was not received until June 3, 2003. The final appraisal of the real estate was $2,400,000. The additional 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. Since the revised fair value of the real estate was $2,400,000, this resulted in an additional write-down of the assets of $1,600,000 in the second quarter of 2003. 13 The Company recorded stock compensation expense in the second quarter of 2004 of approximately $66,000, of which $23,000 related to options issued in connection with the consulting agreement between the Company and Credit Support International LLC and $43,000 related to warrants issued to Gordhan Patel, owner of ASC, upon execution of the SOA. OPERATING LOSS Operating loss was approximately $148,000 in the second quarter of 2004 compared to an operating loss of approximately $2,923,000 in the second quarter of 2003. The changes in operating loss reflect primarily the changes in gross profit, impairment losses, stock compensation, and other operating expenses as discussed above, which can be summarized as follows: Increase in gross margin 922,000 Decrease in impairment losses 1,577,000 Increase in stock compensation (66,000) Decrease in other operating expenses 342,000 ---------- Decrease in operating loss $2,775,000
INTEREST INCOME Interest income from short-term investments was approximately $10,000 in the second quarter of 2004 compared to approximately $45,000 in the second quarter of 2003. Payments on a $712,000 Note from Performance Interconnect Corporation (PIC) were suspended by PIC in May 2004, and the Company is currently negotiating a settlement of the obligation due it. INTEREST EXPENSE Interest expense, primarily related to the retired Industrial Revenue Bond administrated by Bank One, was approximately $61,000 in the second quarter of 2003. Interest expense in the second quarter of 2004 was approximately $46,000, related to financing with Silicon Valley Bank. OTHER INCOME Other income of approximately $321,000 in the second quarter of 2004 primarily related to forgiveness of debt as the Company entered into settlement agreements with certain vendors. Under terms of the vendor settlement agreements, the Company pays, immediately following the signing of each agreement, 50% of the vendor balances that are under $10,000. It pays 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 then forgive one-half of the balance of 14 such trade debt upon receipt of each partial payment. As of June 30, 2004, the Company has entered into vendor settlement agreements with vendors holding approximately $3.1 million of trade debt. As of June 30, 2004, the Company has recognized a cumulative gain on the forgiveness of trade debt relating to settlements with vendors of approximately $1,127,000, of which $439,000 was recorded during 2004. The Company expects to resolve the remaining balances of debt forgiveness during the third quarter of 2004. INCOME TAXES During the second quarter, the Company completed its 2003 income tax return. As a result of a prior period exemption to the Alternative Minimum Tax, expiring in 2002, the Company revised its estimated refund by approximately $113,000, and as a result, the Company is taking a charge in the current quarter. Management believes that the Company has adequate net operating loss carryforwards available that, if utilized, would offset any taxable income generated by the Company throughout the remainder of 2004. The Company's tax credit for 2004 is limited to expected tax refunds of approximately $618,000 in 2004. 15 RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2003 NET SALES Net sales were $9,508,000 for the six months ended June 30, 2004, an increase of $2,162,000 or 29% above the first six months of 2003. The increase in sales is directly related to "RF" wireless telecommunications sales that increased $3,700,000 in the first six months of 2004 while the Company's digital business decreased $1,600,000 in the first six months of 2004. A significant portion of the Company's 2004 "RF" microwave sales were to three major customers. Net sales to Celestica were $2,621,000 in the first six months of 2004 compared to $359,000 in the first six months of 2003. Net sales to RF Power were $626,000 in the first six months of 2004 compared to $192,000 in the first six months of 2003. Net sales to Remec were $822,000 in the first six months of 2004 compared to $267,000 in the first six months of 2003. The decrease in the six months of 2004 sales in the digital business segment of the Company were primarily the result of a significant reduction in sales to one customer. In this regard, sales to Westell were $30,000 in the first six months of 2004 compared to $3,270,000 in the first six months of 2003. Sales for the six months of 2003 to other customers remained generally on par with the prior year. Net sales to Federal Signal were $653,000 in the first six months of 2004 compared to $545,000 in the first six months of 2003. Net sales to Knowles were $630,000 in the first six months of 2004 compared to $25,000 in the first six months of 2003. Net sales to Rain Bird were $581,000 in the first six months of 2004 compared to $296,000 in the first six months of 2003. GROSS PROFIT (LOSS) AND COST OF GOODS SOLD The Company's gross profit for the first six months of 2004 was $1,657,000, or 17.4%, compared to a gross loss of $1,925,000, or 26.2% for the first six months of 2003. In September 2003, the Company began to phase out its manufacturing operations in preparation for the strategic operating alliance (SOA) agreement with ASC, which it consummated in February 2004. The Company presently purchases all of its printed circuit boards as finished products and distributes the finished products to its customers. OPERATING EXPENSES General and administrative expenses were $870,000 or 9.1% of net sales for the first six months of 2004 compared to $1,326,000 or 18.1% of net sales in the first six months of 2003, a decrease of $456,000. General and administrative expenses consist primarily of salaries and benefits, professional services, depreciation of 16 office, equipment and computer systems and occupancy expenses. Payroll related expenses decreased $208,000. Included in this figure is a reduction of the Company's insurance accruals of $30,000, as well as a one-time expense of $106,000 related to the separation agreement between the company and its former CFO. Professional services, which include legal, auditing, and consulting fees decreased $24,000. Included in this figure is a reduction of the Company's legal expense by $92,000, and a one-time expense of $61,000 related to negotiation of the bank financing agreement by CSI. The Company also reduced its travel expense by $53,000 and its allowance for bad debts by $50,000 during the first six months of 2004 based on actual experience. Depreciation expense decreased $43,000 in the first six months of 2004. Selling and marketing expenses were $641,000 or 6.8% of net sales in the first six months of 2004 compared to $744,000 or 10.1% of net sales in the first six months of 2003. Selling and marketing expenses include the cost of salaries, advertising and promotion of the Company's products, and commissions paid to independent sales organizations. In comparison to the six months of 2003, commissions paid to independent sales organizations increased $31,000 due to increased sales. Payroll-related expenses decreased $119,000 with the reduction of regional sales managers in the third quarter of 2003, and travel expenses decreased $15,000 in the first six months of 2004. The Company recorded an impairment loss of $159,000 in the first six months of 2004. The charge was recorded to adjust the carrying value of the investment in AM-Wave, LLC to its estimated net realizable value. The Company recorded impairment of building, plant and equipment charges in the first six months of 2003 of $5,178,000. 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. The fair value of the real estate was estimated at $2,400,000 and the machinery and equipment at $4,014,000. This resulted in a write-down of the assets of $5,178,000. The Company recorded stock compensation expense in the first six months of 2004 of $148,000, of which $76,000 related to options issued in connection with the consulting agreement between the Company and Credit Support International, LLC and $72,000 related to warrants issued to Gordhan Patel, owner of ASC, upon execution of the SOA. 17 OPERATING LOSS Operating loss was $162,000 in the first six months of 2004 compared to an operating loss of $9,173,000 in the first six months of 2003. The changes in operating loss reflect primarily the changes in gross profit, impairment losses, stock compensation, and other operating expenses as discussed above, which can be summarized as follows: Increase in gross margin 3,603,000 Decrease in impairment losses 5,019,000 Increase in stock compensation (148,000) Decrease in other operating expenses 537,000 ---------- Decrease in operating loss $9,011,000
INTEREST INCOME Interest income from short-term investments was $41,000 in the first six months of 2004 compared to $86,000 in the first six months of 2003. Payments on a Note from Performance Interconnect Corporation (PIC) in principal amount of $712,000 were suspended by PIC in May 2004, and the Company is currently negotiating a settlement of that obligation owed to it. INTEREST EXPENSE Interest expense, primarily related to the retired Industrial Revenue Bond involving Bank One, N.A. was $96,000 in the first six months of 2003. The Company recorded interest expense in the first six months of 2004 of $61,000 related to its financing agreement with Silicon Valley Bank. OTHER INCOME Other income of approximately $439,000 in the first six months of 2004 primarily relates to forgiveness of debt as the Company entered into settlement agreements with certain vendors. Under terms of the vendor settlement agreements, the Company pays, immediately following the signing of each agreement, 50% of the vendor balances that are under $10,000. It pays 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 then forgive one-half of the balance of such trade debt upon receipt of each partial payment. As of June 30, 2004, the Company has entered into vendor settlement agreements with vendors holding approximately $3.1 million of trade debt. Through June 30, 2004, the Company has recognized a cumulative gain on the forgiveness of trade debt relating to settlements with vendors of approximately $1,127,000, of which $439,000 was 18 recorded during 2004. The Company expects to resolve the balance of debt forgiveness during the third quarter of 2004. INCOME TAXES During the second quarter, the Company completed its 2003 income tax return. As a result of a prior period exemption to the Alternative Minimum Tax, expiring in 2002, the Company revised its estimated refund by approximately $113,000, and as a result, the Company is taking a charge in the current quarter. Management believes that the Company has adequate net operating loss carryforwards available that, if utilized, will offset any taxable income generated by the Company throughout 2004. The Company's tax credit for 2004 is limited to expected tax refunds of approximately $618,000 in 2004. LIQUIDITY AND CAPITAL RESOURCES Net cash used by operations was $1,974,000 for the first six months of 2004 compared to $935,000 used by operations for the first six months of 2003. Accounts receivable increased $1,094,000 due to increased sales. Inventories increased $421,000. Accounts payable decreased by $776,000 due to payment of debt forgiveness to vendors. Capital expenditures were approximately $32,000 in the first six months of 2004 compared to $54,000 in the first six months of 2003. The Company has limited plans for capital expenditures in 2004. Based upon the current level of operations and anticipated growth, management believes that future cash flow from operations, available revolving credit, receipt of tax refunds, proceeds from the sale of certain fixed assets, and vendor payable reductions will be adequate to meet its anticipated liquidity requirements for this fiscal year, including the remaining payments due to its vendors under settlement arrangements for the payment of its delinquent third party vendor obligations. On June 28, 2004, the Company paid off its existing accounts receivable purchase facility with Silicon Valley Bank with the proceeds of a $4.5 million, two-year revolving credit line with the Bank, secured by all assets of the Company, including its accounts receivable and inventory. Under the facility, the Company may draw up to 85% of its eligible accounts receivable under 90 days aged, and up to $750,000 of finished goods inventory, so long as that inventory represents 33% or less of the total advanced at any one time and the total loan does not exceed 19 $4.5 Million. The effective rate of interest is approximately 8% inclusive of one-time and servicing costs. On February 3, 2004, the West Chicago facility was sold to an ASC affiliate and the equipment at that location was sold to a limited liability company controlled by ASC in which Company is the minority member. The Company does have a preferred and secured liquidation preference in the assets of that limited liability company. It has undertaken no financial obligations relevant to its financial condition with regard to the company. The Company sold its West Chicago plant to the affiliate of ASC for a cash price of approximately $2,000,000. ASC has leased the manufacturing portion of that plant from the new owner to enable it to manufacture as required under the SOA. The Company leased a portion of the West Chicago facility to maintain its offices from which it operates its domestic and international Virtual Manufacturing, supply chain management, and consulting businesses in close proximity to the domestic manufacturing being performed for its customers by ASC. The Company sold and transferred the major portion of its manufacturing equipment at the West Chicago facility to the newly formed limited liability company for total consideration of $1,577,200. The Company received cash of $800,000 and a 20% preferred and secured ownership interest in the LLC. ASC is the other member of the LLC and has leased the use of the equipment from it. On approximately February 3, 2004, the Company retired its debt of approximately $2,422,000 with Bank One, N. A. as part of the SOA transaction. The Company also continues plans to sell its prior plant and improvements located in Bensenville, Illinois as soon as practicable. The Company recorded stock option expense in the first six months of 2004 of $76,000 relating to options issued in connection with the consulting agreement between the Company and Credit Support International LLC. The options have an exercise price of $.67 per share, are valued at $91,192, and vest ratably over a period of 12 months. The options are recorded ratably as an increase to additional paid-in capital and recognized as stock compensation expense over the vesting period. Accordingly, the Company expects to record approximately $15,000 in the third quarter of 2004 relating to the consulting agreement. The Company issued 5-year warrants to Gordhan Patel, owner of ASC, for the purchase of 500,000 shares of the Company's common stock at $1.35 per share, which vest ratably over the two-year SOA agreement or upon an earlier sale of the Company. The warrants are valued at $346,141 and will be recorded ratably as an increase to additional paid-in capital and recognized as stock 20 compensation expense over the vesting period. Accordingly, the Company recorded stock compensation expense in the first six months of 2004 of $72,000 and expects to record approximately $43,000 in each of the remaining quarters of 2004. The Company issued 7-year warrants to Silicon Valley Bank in connection with the financing agreement entered into during 2004, for the purchase of 500,000 shares of the Company's common stock at $1.51 per share, which vest ratably over a period of 24 months. The warrants are valued at approximately $225,000 and will be recorded ratably as an increase to additional paid-in capital and recognized as stock compensation expense over the vesting period. Accordingly, the Company expects to record approximately $28,000 in each of the remaining quarters of 2004. On July 28, 2004, M-Wave issued 30,000 shares of the Company's newly designated Series A Preferred Stock to Mercator Momentum Fund LP; Mercator Momentum Fund III LP and Monarch Pointe Ltd. through Mercator Advisory Group LLC ("Mercator") for $100 per share, or an aggregate of $3 Million. The Preferred stock is convertible to up to 3,061,000 shares of Common Stock at the floor price of $.98 per share. The Company will also issue three-year warrants to purchase an aggregate of 1,530,000 shares of Common Stock at $1.27 per share to the three purchasers of the Series A Preferred Stock and to Mercator Advisory Group, LLC. The transaction netted M-Wave approximately $2.6 Million, net of estimated fees and expenses. The proceeds, in part, will be utilized to support inorganic growth by acquisition of smaller PCB producers' customer relationships, marketing and customer service functions, improvement of operating systems and general working capital. The value of the beneficial conversion feature of the preferred shares is estimated to be approximately $2 Million, and will be recorded as a preferred stock dividend in the statement of operations and an equivalent increase to the accumulated deficit during the third quarter. This expense recognition will be a one-time charge, and will result in a decrease to basic and diluted earnings per common share in the third quarter, but will have no effect on Stockholders' Equity. Below is the Company's pro forma balance sheet had the transaction been consummated as of June 30, 2004: 21 PRO FORMA BALANCE SHEET (ITEM 1)
JUNE 30 2004 ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,791,500 Accounts receivable 3,144,749 Inventories 1,008,682 Refundable income taxes 618,128 Prepaid expenses and other 43,749 ------------ Total current assets 8,606,808 PROPERTY, PLANT AND EQUIPMENT: Land, buildings and improvements 177,238 Machinery and equipment 383,696 ------------ Total property, plant and equipment 560,934 Less accumulated depreciation (18,000) ------------ Property, plant and equipment-net 542,934 ASSETS TO BE DISPOSED OF, NET 568,583 OTHER ASSETS 617,740 ------------ TOTAL $ 10,336,065 ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 3,589,160 Accrued expenses 540,988 Note Payable, Bank, Net 2,593,527 ------------ Total current liabilities 6,723,675 DEFERRED INCOME TAXES 0 LONG-TERM DEBT 0 STOCKHOLDERS' EQUITY: Preferred stock 1,756,146 Common stock 30,901 Additional paid-in capital 11,582,849 Retained earnings (7,472,336) Treasury stock (2,285,170) ------------ Total stockholders' equity 3,612,390 ------------ TOTAL $ 10,336,065 ============
(Item 1) - Assumes receipt of proceeds as of June 30, 2004 from the issuance of 30,000 shares of Series A Preferred Stock at $100 per Share, which were issued on July 28, 2004. 22 INFLATION Management believes inflation has not had a material effect on the Company's operation or on its financial position. However, expected supplier price increases that average approximately 8% may have a material effect on the Company's operations and financial position in the remainder of 2004, if the Company is unable to pass through those increases under its present contracts. FOREIGN CURRENCY TRANSACTIONS All of the Company's foreign transactions are negotiated, invoiced and paid in United States dollars. RISK FACTORS AFFECTING BUSINESS AND RESULTS OF OPERATIONS This report, as well as our other reports filed with the SEC, 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. 23 ITEM 3. CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Principal Executive Officer and the Company's Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures and internal control over financial reporting (as defined in Rules 13a-15(e) 15d-15(e), 13a-15(f), and 15d-15(f) under the Securities and Exchange Act of 1934, as amended). Based on this evaluation, the Company's Principal Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures were effective, in timely alerting them to material information relating to the Company required to be included in the Company's periodic filings with the Securities and Exchange Commission. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company has designed its disclosure controls and procedures to reach a level of reasonable assurance of achieving desired control objectives and, based on the evaluation described above, the Company's Principal Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures were effective at reaching that level of reasonable assurance. (B) CHANGES IN INTERNAL CONTROLS. There was no change in the Company's internal control over financial reporting during the six months ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting. 24 PART II - OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS None 25 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 4.1 Specimen Common Stock Certificate 10.29 Employment Agreement dated July 28, 2004 between Company and Jim Mayer. 10.30 Employment Agreement dated July 28, 2004 between Company and Joe Turek. 10.31 Employment Agreement dated May 1, 2004 between Company and Robert Duke. 10.32 Subscription Agreement dated June 28, 2004 between Company and Mercator Advisory Group. 10.33 Stock Registration Rights Agreement dated June 28, 2004 between Company and Mercator Advisory Group. 10.34 Nonstatutory Stock Option Agreement dated July 28, 2004 between Company and Jim Mayer. 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. 26 (b) Reports on Form 8-K (1) A current report on Form 8-K was filed on April 21, 2004 under item 4 relating to changes in Certifying Accountant from Grant Thornton, LLP to McGladrey & Pullen, LLP. (2) A revised current report on Form 8-K(a) was filed on May 12, 2004 under item 4 relating to changes in Certifying Accountant from Grant Thornton, LLP to McGladrey & Pullen, LLP that expands the discussion of certain periods covered under the original Report. (3) A current report on Form 8-K was filed on May 14, 2004 under item 5 regarding the appointment of Jim Mayer as the Chief Financial and Administrative Officer of the Company effective May 1, 2004. (4) A current report on Form 8-K was filed on May 19, 2004 under item 5 reporting the filing of the Company's Form 10-QSB for the fiscal quarter ended March 31, 2004 and announcing that the Company had received notice of the determination by the Staff of NASDAQ that its Common Stock would be delisted from trading on the NASDAQ SmallCap Market if the Company could not present an acceptable plan for compliance with the applicable listing standards. (5) A current report on Form 8-K was filed on June 22, 2004 under item 5 regarding the Company's report that its Board of Directors had approved a $3 Million Preferred Stock transaction with private investor: Mercator Advisory Group, LLC and its affiliated funds and the Company's report of its hearing June 18, 2004 before a NASDAQ Listing Qualifications Panel to appeal the NASDAQ Staff's de-listing determination. (6) A current report on Form 8-K was filed on July 1, 2004 under item 5 to report that the Company has closed a new working capital financing facility with Silicon Valley Bank. [7] A current report on Form 8-K was filed on August 2, 2004 under item 5 to report the results of the Company's shareholder meeting held on July 27, 2004, and the appointment of Jim Mayer as the Chief Executive Officer of the Company. 27 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: August 13, 2004 /s/ JIM MAYER ---------------------------- Jim Mayer Chief Executive Officer 28 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION - ------- ----------------------------------------------------------- -------------- 2.1 Exchange Agreement, dated as of January 31, 1992, among Poly Circuits, Inc., Joel S. Dryer, Joseph A. Turek and the Company (1) 3.1 Certificate of Incorporation of the Company (1) 3.2 Bylaws of the Company (1) 4.1 Specimen Common Stock Certificate Filed Herewith 10.1 Amended and restated M~Wave, Inc. 1992 Stock Option Plan (2) 10.2 Construction Loan Note, dated January 10, 1996, by and among the Company, P C Dynamics and American National Bank and Trust Company. (2) 10.3 Stock Purchase Agreement dated December 18, 1998 by and between the Company and First Chicago Equity Corporation. (3) 10.4 Stock Purchase Agreement dated December 18, 1998 by and between the Company and Cross Creek Partners II. (3) 10.5 Warrant dated December 18, 1998 issued to First Chicago Equity (3) 10.6 Warrant dated December 18, 1998 issued to Cross Creek Partners II (3) 10.7 Employment Agreement dated January 29, 2001 between the Company and Joseph A. Turek (4) 10.8 Employment Agreement dated January 29, 2001 between the Company and Paul H. Schmitt (4) 10.9 Loan Agreement dated July 1, 2001 between the Illinois Development Finance Authority and the Company (5) 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 (6)
29 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 (7) 10.12 Employment Agreement dated January 7, 2003 between the Company and Robert O'Connell (7) 10.13 Employment Agreement dated January 29, 2003 between Company and Paul H. Schmitt (7) 10.14 Credit Agreement dated October 1, 2003 between Bank One, NA, the Company and Poly Circuits, Inc. (8) 10.15 Consulting Agreement, dated September 1, 2003, between the Company and Credit Support International, LLC. (8) 10.16 2003 Stock Incentive Plan (8) 10.17 Asset Purchase and Sale Agreement dated February 3, 2004 by and between the Company, Poly Circuits and M-Wave, L.L.C. (8) 10.18 Agreement for Strategic Operating Alliance dated February 3, 2004 by and between the Company and American Standard Circuits, Inc. (8) 10.19 Bill of Sale dated February 3, 2004 by and between Poly Circuits and AM-Wave, L.L.C. (8) 10.20 Real Estate Sales Contract dated February 3, 2004 by and between the Company and AMI Partners, L.L.C. (8) 10.21 Limited Liability Company Operating Agreement of AM-Wave, L.L.C. dated February 3, 2004 by and between Poly Circuits and American Standard Circuits, Inc. (8) 10.22 Warranty Deed dated February 3, 2004 by and between the Company and AMI Partners, L.L.C. (8) 10.23 Industrial Lease Agreement dated February 3, 2004 by and between the Company and AMI-Partners, LLC (8) 10.24 Warrant to Purchase Stock dated March 31, 2004 by and between the Company and Silicon Valley Bank (8)
30 10.25 Accounts Receivable Financing Agreement dated March 31, 2004 by and between the Company and Silicon Valley Bank (8) 10.26 Intellectual Property Security Agreement dated March 31, 2004 by and between the Company and Silicon Valley Bank (8) 10.27 Amendment to Consulting Agreement, dated as of May 1, 2004, between the Company and Credit Support International. LLC (9) 10.28 Letter Agreement with Paul Schmitt dated May 1, 2004 (9) 10.29 Employment Agreement dated July 28, 2004 between Company and Jim Mayer Filed Herewith 10.30 Employment Agreement dated July 28, 2004 between Company and Joe Turek Filed Herewith 10.31 Employment Agreement dated May 1, 2004 between Company and Robert Duke Filed Herewith 10.32 Subscription Agreement dated June 28, 2004 between Company and Mercator Advisory Group Filed Herewith 10.33 Stock Registration Rights Agreement dated June 28, 2004 between Company and Mercator Advisory Group Filed Herewith 10.34 Nonstatutory Stock Option Agreement dated July 28, 2004 between Company and Jim Mayer Filed Herewith 31.1 Certification of the CEO Pursuant to Section 302 of the Sarbanes-Oxley Act. Filed Herewith 31.2 Certification of the CFO Pursuant to Section 302 of the Sarbanes-Oxley Act. Filed Herewith 32.1 Certification pursuant to 18 U.S.C. Section 135O, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed Herewith 32.2 Certification pursuant to 18 U.S.C. Section 135O, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed Herewith
31 (1) Incorporated herein by reference to the applicable exhibit to Registrants Registration Statement on Form S-1 (Registration No. 33-45499) (2) Incorporated herein by reference to the applicable exhibit to the Registrant's Annual Report on Form 10-K for year ended December 31, 1995 (3) Incorporated herein by reference to the applicable exhibit report on Form 8-K dated December 18, 1998 (4) 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 (5) 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 (6) 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 (7) 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 (8) 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, 2003 (9) Incorporated herein by reference to the applicable exhibit report to the Registrant's quarterly report on form 10-QSB for the quarter ended March 31, 2004 32 EX-4.1 2 c87635exv4w1.txt SPECIMEN COMMON STOCK CERTIFICATE Exhibit 4.1 NUMBER M-WAVE SHARES MW2481 INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE THIS CERTIFICATE IS TRANSFERRABLE IN COMMON STOCK CHICAGO, ILLINOIS OR NEW YORK, NEW YORK CUSIP 554034 10 8 - -------------------------------------------------------------------------------- THIS CERTIFIES THAT SPECIMEN Is the owner of - -------------------------------------------------------------------------------- FULLY-PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF THE PAR VALUE OF $0.005 EACH, OF M-WAVE, Inc. Transferable on the books of the Corporation by the holder hereof, in person, or by duly authorized attorney, upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. SECRETARY CHAIRMAN OF THE BOARD EX-10.29 3 c87635exv10w29.txt EMPLOYMENT AGREEMENT WITH JIM MAYER Exhibit 10.29 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of July 28, 2004, by and between M-Wave, Inc., a Delaware corporation (the "Company"), and Gerald M. ("Jim") Mayer ("Employee"). WITNESSETH: A. Since April 2003, a financial advisory company (herein, "CSI"), controlled by Employee, has served the Company in the restructuring of its operations and financial condition and, in connection with the current agreement between CSI and the Company, Employee presently serves as the Chief Financial Officer and the Chief Administrative Officer and Secretary of the Company. B. The Company, pursuant to action of its Board of Directors taken at a meeting held on July 27, 2004, desires to terminate the agreement between it and CSI and to retain the benefits of Employee's knowledge, skill, and experience and employ Employee under a personal employment agreement, upon the terms and subject to the conditions of this Agreement. C. Employee desires to cause CSI to terminate its agreement with the Company and to be personally employed by the Company upon the terms and subject to the conditions of this Agreement. AGREEMENTS: NOW THEREFORE, in consideration of the mutual covenants and agreements set forth below, and for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and Employee hereby covenant and agree as follows: 1. Duties. During the Term of this Agreement, Employee agrees to be employed by and to serve the Company as its Chief Executive Officer, and the Company agrees to employ and retain Employee in such capacity, subject to the terms of this Agreement. Employee also agrees to continue to serve without additional compensation as the Secretary of the Company at the will of the Board of Directors of the Company. Employee shall devote all of his business time, energy and skill to the affairs of the Company, subject to the direction of the Board of Directors of the Company. Employee shall have powers and duties commensurate with his position as provided for herein. Employee shall comply with the general management policies of the Company as announced from time to time. 1 2. Term. The term ("Term") of this Agreement shall be for the period commencing on July 28, 2004 ("Effective Date") and ending on December 31, 2006, and shall automatically renew for additional one-year periods thereafter unless either party provides written notice of termination at least ninety (90) days prior to the expiration of the Term or the then applicable renewal term. 3. Salary, Benefits and Bonus Compensation. 3.1. Salary. Commencing on the Effective Date of this Agreement, during the initial year of the Term the Company agrees to pay Employee salary at the rate of $208,000 per annum pursuant to the Company's regular payroll practices and schedules, and subject to withholding for taxes and applicable benefits. During the remainder of the Term, the Company agrees to pay Employee a salary at the rate of $239,000 per annum pursuant to the Company's regular payroll practices and schedules, and subject to withholding for taxes and applicable benefits. The Board of Directors of the Company may increase, but may not decrease, Employee's salary during the Term. 3.2. Additional Benefits. During the Term, Employee shall be entitled to the following fringe benefits: 3.2.1. Employee Benefits. Employee shall be eligible to participate in the Company's group health, dental and other insurance or benefit plans, including stock option grants, stock awards, bonuses, pension and deferred compensation, as may be generally available to executive employees of the Company. 3.2.2. Business Expenses. The Company shall reimburse Employee for all reasonable and necessary expenses incurred in carrying out his duties under this Agreement, including but not limited to travel and entertainment, and cell phone expenses, in accordance with the Company's policies in effect from time to time. Employee shall present to the Company an account of such expenses in such form as may be required by the Company on a monthly basis. 3.2.3. Paid Time Off. Employee shall be entitled to three (3) weeks of vacation per calendar year occurring during the Term, and other paid time off pursuant to the Company's policies, during which time Employee's compensation shall be paid in full. 3.2.4 Signing Bonus. As a bonus for signing this Agreement, the Company hereby grants Employee an option to purchase 400,000 shares of Common Stock of the Company at an exercise price of $1.16 per share, being the closing price of the Company's Common Stock on the NASDAQ SmallCap Market on the Effective Date. Such option, when vested, shall be exercisable in whole or in part on or before July 27, 2009 and shall not be vested at grant but, except as otherwise provided in Section 3.2.6 hereof, shall become fully vested on October 28, 2004. 2 3.2.5 Cash Bonus. Employee shall be eligible to receive an annual cash bonus ("Cash Bonus") with respect to the fiscal year ending December 31, 2005 and the fiscal year ending December 31, 2006 equal to ten percent (10%) of the amount by which the Company's Gross Margin (as defined below) for such fiscal year exceeds $4,500,000. For the purposes of this Agreement, "Gross Margin" shall be as reflected in the Company's financial statements and determined by its regularly engaged independent accountants in a manner consistent with past practice. Payment of each Cash Bonus is to be made to Employee as soon as practicable after the end of the fiscal year for which it is earned. Notwithstanding the foregoing, Employee's Cash Bonus shall not exceed $200,000 with respect to any fiscal year occurring during the Term. 3.2.6 Change of Control. In the event that the Company is subject to a Change of Control (as defined in Section 6.1.5 herein) and (i) the Company or its successor terminates Employee's employment with the Company hereunder for any reason other than as set forth in Section 4.1 herein during the one (1) year period following the date of the Change of Control or (ii) Employee terminates his employment with the Company hereunder for any reason during the thirty (30) day period which commences on the date which is ninety (90) days after the date of the Change of Control, then upon such termination of his employment Employee shall receive the following severance benefits: (a) a lump sum payment equal to 150% of the then remaining unpaid salary due Employee during the Term pursuant to Section 3.1 herein; (b) all accrued but unpaid benefits due Employee relating to Section 3.2.4 or Section 3.2.5 of this Agreement, to be paid as provided therein; (c) all other accrued and unpaid benefits due Employee under this Agreement, including reimbursement of expenses incurred; and (d) notwithstanding the provisions of any agreement or employee benefit plan to the contrary, all outstanding stock options, rights to receive restricted stock or the like shall immediately become fully vested and any restrictions on such restricted stock shall be deemed terminated. 4. Termination of Employment. 4.1. Termination for Cause. Termination for Cause (as defined in Subsection 6.1.1 herein) of Employee's employment may be effected by the Company at any time without liability except as specifically set forth in this Subsection. The termination shall be effected by written notification to Employee and shall be effective as of the time set forth in such notice. At the effective time of a Termination for Cause, the Company shall pay Employee all of his 3 accrued and unpaid salary pursuant to Section 3.1 of this Agreement and any reasonable and necessary business expenses incurred by Employee in connection with his duties hereunder, all to the date of termination. 4.2 Termination By Company Other Than for Cause. The Company may effect a Termination Other Than for Cause (as defined in Subsection 6.1.2 herein) of Employee's employment at any time upon giving written notice to Employee of such termination and without liability except as specifically set forth in this Subsection. The termination shall be effective as of the time set forth in such notice. At the effective time of any Termination Other Than for Cause, the Company shall pay Employee his salary as set forth in Section 3.1 of this Agreement for the remainder of the Term and any reasonable and necessary business expenses incurred by Employee in connection with his duties hereunder to the date of termination, and Employee shall receive the benefits contemplated by Subsections 3.2.6 (b) and (c) of this Agreement. 4.3 Termination by Reason of Disability. If Employee, in the reasonable judgment of the Board of Directors of the Company, has failed to perform the essential elements of his position under this Agreement on account of illness or physical or mental incapacity, and such illness or incapacity continues for a consecutive period of more than three (3) months, then the question of whether Employee's illness or incapacity is reasonably likely to continue shall be submitted to the Company or, if disability insurance is maintained by Employee, Employee's disability insurance carrier for determination. In the event the Company or such insurance carrier determines that Employee is subject to such an illness or incapacity, and is unable to perform the essential elements of his position with or without a reasonable accommodation by the Company, the Company shall have the right to terminate Employee's employment ("Termination for Disability") by written notification to Employee and shall immediately pay to Employee all of his accrued and unpaid salary as set forth in Section 3.1 of this Agreement and any reasonable and necessary business expenses incurred by Employee in connection with his duties hereunder, to the date of termination, and Employee shall receive the benefits contemplated by Subsections 3.2.6 (b) and (c) of this Agreement. 4.4 Death. In the event of Employee's death during the term of employment, Employee's employment shall be deemed to have terminated as of the last day of the month during which his death occurs, and the Company shall pay to his estate all of his accrued and unpaid salary as set forth in Section 3.1 of this Agreement and any reasonable and necessary business expenses incurred by Employee in connection with his duties hereunder, to the date of termination, and Employee shall receive the benefits contemplated by Subsections 3.2.6 (b) and (c) of this Agreement. 4.5. Termination By Employee With Good Reason. In the event that Employee terminates his employment with Good Reason (as defined in Subsection 6.1.3 herein), the Company shall pay Employee his salary as set forth in Section 3.1 of this Agreement for the remainder of the Term and any reasonable and necessary business expenses incurred by Employee in connection with his duties hereunder to the date of termination, and Employee shall receive the benefits contemplated by Subsections 3.2.6 (b) and (c) of this Agreement. 4 4.6. Voluntary Termination. In the event of a Voluntary Termination (as defined in Subsection 6.1.4 herein) by Employee, the Company shall pay all of his accrued and unpaid salary as set forth in Section 3.1 of this Agreement and any reasonable and necessary business expenses incurred by Employee in connection with his duties hereunder, all to the date of termination. 5. Protection of the Company's Business. In consideration of his employment by the Company, and recognizing the Company's concerns regarding the protection of its business, Employee agrees as follows: 5.1 Non-Competition. Employee agrees that during the Non-Competition Period, as defined hereinafter, he shall not enter into any agreement with, or engage in, or be connected or associated with, or own any interest in, or work for any individual, firm or corporation or other entity which is engaged in or connected with any business which is in competition with the Company in the continental United States or any other country in which the Company is doing business or is reasonably expected to do business, unless he obtains the express written approval of the Board in its sole discretion after full disclosure of the nature of the intended arrangement. The "Non-Competition Period" means the period of the Employee's employment during the Term and a period of one year following the Employee's termination of employment for any reason. 5.2 Non-Solicitation. Employee agrees that during the Non-Competition Period, he shall not (a) encourage any employee of the Company or any of its subsidiaries to leave employment with the Company or subsidiary or (b) solicit any customers of the Company or any of its subsidiaries to reduce or no longer do business with the Company, directly or indirectly. 5.3 Non-Disclosure. Employee agrees not to disclose either during the period of his employment hereunder or at any time thereafter to any person, firm, or corporation any information that the Company desires to protect and keep secret and confidential concerning the business or affairs of the Company which he may have acquired in the course of, or as incident to, his employment hereunder for his own benefit or to the detriment or intended detriment of the Company. 5.4 Injunction. Employee acknowledges that the Company is relying on the provisions of this Section 5 to protect its legitimate business interests and that the same are not an unreasonable restriction on him, and that monetary damages will not be an adequate remedy to a breach of this Section, and that it would be impossible for the Company to measure damages in the event of such a breach. Therefore, Employee agrees that, in addition to other rights that the Company may have, the Company is entitled to an injunction, without posting bond, preventing Employee from doing any act that would be in breach of this Section 5. 5 6. Definitions. 6.1 Definitions. For purposes of this Agreement, the following terms shall have the following meanings: 6.1.1. "Termination for Cause" shall mean termination by the Company of Employee's employment by the Company by reason of (i) a material breach of Employee's duty of loyalty to the Company or any act of dishonesty or fraud with respect to the Company, (ii) the commission by Employee of a felony or a crime involving moral turpitude, or the commission by Employee of such other act causing significant harm to the Company's standing or reputation, (iii) conduct tending to bring the Company into public disgrace or disrepute or which could reasonably subject the Company to legal action, including but not limited to sexual or other illegal harassment, (iv) repeated failure, after written notice to perform duties reasonably directed by the Company, (v) gross negligence or willful misconduct with respect to the Company, or (vi) failure to comply with the terms and provisions of Section 5 of this Agreement. . "Cause" shall not mean, with respect to the acts or omissions of Employee, (a) bad judgment or negligence other than habitual neglect of duty; or (b) any act or omission believed by Employee in good faith to have been in or not opposed to the interest of the Company, or any parent or subsidiary or successor to the Company (without intention of Employee to gain therefrom, directly or indirectly, a profit to which he was not legally entitled); or (c) any act or omission in respect of which a determination could properly have been made by the Board of Directors of the Company or any parent or subsidiary or successor of the Company, that Employee 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. 6.1.2. "Termination Other Than for Cause" shall mean termination by the Company of Employee's employment by the Company, other than a Termination for Cause or Termination for Disability, for any or no reason, including, without limitation, constructive termination or discharge of Employee by reason of the Company's material breach of its obligations under this Agreement. 6.1.3. "Termination by Employee with Good Reason" shall mean Employee's resignation of employment with the Company because of a material change in the terms or conditions of Employee's employment with the Company to Employee's detriment, including but not limited to (i) a material reduction in Employee's job duties, or the substitution of job duties requiring substantially less skill, independent judgment or experience, (ii) the diminution of rank or title accorded to Employee, (iii) a reduction of more than 10% in Employee's compensation, including employee benefits and any applicable equity compensation, or (iv) the relocation of Employee's primary work location to a new location more than 50 miles away from the previous location. 6 6.1.4. "Voluntary Termination" shall mean termination by Employee of Employee's employment with the Company other than a Termination by Employee for Good Reason. To effect Voluntary Termination, Employee shall give no less than four (4) weeks' written notice to the Company, and shall remain available to the Company, at the Company's option, for the entire period until the date of termination. 6.1.5 "Change of Control" shall mean an event as a result of which: (i) any "person" (as such term is used in Sections 13d) and 14(d) of the Securities and Exchange Act of 1934 (the "Exchange Act")), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, except that a person shall be deemed for such purposes to have "beneficial ownership" of all securities that such person has a right to acquire, whether such right is exercisable immediately or only after the passage of time or upon the satisfaction of performance criteria or other conditions), directly or indirectly, of more than 50% of the total voting power of the voting stock of the Company (or its successors and assigns); (ii) the Company consolidates with, or merges with or into another corporation or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any person, or any corporation consolidates with, or merges with or into, the Company, in any such event pursuant to a transaction in which the outstanding voting stock of the Company is changed into or exchanged for cash, securities or other property, other than any such transaction where (A) the outstanding voting stock of the Company is changed into or exchanged for (x) voting stock of the surviving or transferee corporation or (y) cash, securities (whether or not including voting stock) or other property, and (B) the holders of the voting stock of the Company immediately prior to such transaction own, directly or indirectly, not less than 50% of the voting power of the voting stock of the surviving corporation immediately after such transaction; (iii) any person or group, other than the stockholders of the Company as a whole has a right to designate or has designated the majority of the Board of Directors of the Company or the designees/affiliates of such person or group constitute a majority of the Board or (iv) the Company is liquidated or dissolved or adopts a plan of liquidation. 7. Remedies. 7.1 Costs. If litigation is brought to enforce or interpret or is maintained to defend any provision contained herein, the court shall award reasonable attorneys' fees and disbursements to the prevailing party as determined by the court. 7.2 Severability. THE PARTIES HAVE CAREFULLY CONSIDERED ALL OF SECTIONS 4, 5, AND 6 OF THIS AGREEMENT AND AGREE THAT THEY REPRESENT A PROPER BALANCING OF THEIR INTERESTS AND WILL NOT PREVENT EMPLOYEE FROM EARNING A LIVING AFTER TERMINATION OF HIS EMPLOYMENT. It is the express intent of the parties hereto that the obligations of, and restrictions on, the parties as provided in such Sections shall be enforced and given effect to the fullest extent legally permissible. If, in any judicial proceeding, a court shall refuse to enforce one or more of the covenants or agreements contained in this Agreement because the duration 7 thereof is too long, the scope thereof is too broad or some other reason, for the purpose of such proceeding, the court may reduce such duration or scope to the extent necessary to permit the enforcement of such obligations and restrictions. 8. Miscellaneous. 8.1 Waiver. The waiver of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of the same or other provision hereof. 8.2 Entire Agreement; Modifications. This Agreement represents the entire understanding between the parties with respect to the subject matter hereof, and this Agreement supersedes any and all prior understandings, agreements, plans and negotiations, whether written or oral, with respect to the subject matter hereof, including, without limitation, any understandings, agreements or obligations respecting any past or future compensation, bonuses, reimbursements or other payments to Employee from the Company. All modifications to this Agreement must be in writing and signed by the party against whom enforcement of such modification is sought. 8.3 Notices. All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery, or first-class mail, certified or registered with return receipt requested, or by commercial overnight courier or by fax and shall be deemed to have been duly given upon hand delivery, receipt if mailed, the first business day following delivery to a commercial overnight courier or upon receipt of a fax, addressed as follows: If to the Company: M-Wave, Inc. 475 Industrial Drive West Chicago, Illinois 60185 With a copy to: Carl R. Klein, Esq. Freeborn & Peters, LLP 311 South Wacker Drive, Suite 3000 Chicago, IL 60606 8 If to Employee: Gerald M. ("Jim") Mayer 600 Renaissance Blvd. Oakbrook Terrace, Illinois 60181 With a copy to: Robert D.Gorman, Esq. Levun, Goodman & Cohen 500 Skokie Blvd., Ste 650 Northbrook, Illinois 60062 Any party may change such party's address for notices by notice given pursuant to this Section 8.3. 8.4 Headings. The Section headings herein are intended for reference and shall not by themselves determine the construction or interpretation of this Agreement. 8.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois without application of its conflict of laws rules. 8.6 Severability. Should a court or other body of competent jurisdiction determine that any provision of this Agreement is excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and all other provisions of the Agreement shall be deemed valid and enforceable to the extent possible. 8.7 Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective executors, administrators, heirs, successors and assigns. The provisions of this Agreement relating to the duties and obligations of the Company are transferable, assignable and delegable by the Company. Those provisions relating to the duties and obligations of the Employee are not transferable, assignable or delegable. 8.8 Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same Agreement. 8.9 Withholdings; Setoff. All compensation and benefits to Employee hereunder shall be reduced by all federal, state, local and other withholdings and similar taxes and payments required by applicable law. The Company may withhold amounts due it from Employee arising out of Employee's employment relationship with the Company, including for example, overpayments of compensation and personal charges incurred on Company accounts, from amounts due under this Agreement to Employee. 9 8.10 Survival. The provisions set forth in Section 3.2 and Article 4 hereof shall survive the expiration or earlier termination of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date first above written. EMPLOYEE M-WAVE, INC. ____________________________ By: ________________________________ Gerald M. ("Jim") Mayer Its: ________________________________ 10 EX-10.30 4 c87635exv10w30.txt EMPLOYMENT AGREEMENT WITH JOE TUREK Exhibit 10.30 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of July 28, 2004, by and between M-Wave, Inc., a Delaware corporation (the "Company"), and Joseph A. Turek ("Employee"). WITNESSETH: A. Employee has served in senior management of the Company since its inception and the Company, pursuant to action taken by the Board of Directors at meeting held on July 27, 2004, desires to continue to obtain the benefits of Employee's knowledge, skill, and experience by employing Employee upon the terms and subject to the conditions of this Agreement. B. Employee desires to be employed by the Company upon the terms and subject to the conditions of this Agreement. AGREEMENTS: NOW THEREFORE, in consideration of the mutual covenants and agreements set forth below, and for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and Employee hereby covenant and agree as follows: 1. Duties. During the Term of this Agreement, Employee agrees to be employed by and to serve the Company as President, Chief Operating Officer and Chairman of the Board of Directors, and the Company agrees to employ and retain Employee in such capacity, subject to the terms and conditions of this Agreement. Employee shall devote all his business time, energy and skill to the affairs of the Company. Subject to the direction of the Board of Directors of the Company, Employee shall have powers and duties commensurate with his position as provided for herein.. Employee shall comply with the general management policies of the Company as announced from time to time. 2. Term. The term ("Term") of this Agreement shall be for the period commencing on July 28, 2004 ("Effective Date") and ending on December 31, 2006, and shall automatically renew for additional one-year periods unless either party provides written notice of termination at least ninety (90) days prior to the expiration of the Term or the then applicable renewal term. 3. Salary, Benefits and Bonus Compensation. 3.1. Salary. Commencing on the Effective Date and for the initial year of the Term, the Company agrees to pay Employee salary at the rate of $195,000 per annum, and during the remainder of the Term, the Company agrees to pay Employee salary at the rate of $215,000 per annum, all such salary to be paid pursuant to the Company's regular payroll practices and schedules and subject to withholding for taxes and applicable benefits. The Board of Directors of the Company may increase, but may not decrease, Employee's salary during the Term. 3.2. Additional Benefits. During the term of his employment, Employee shall be entitled to the following fringe benefits: 3.2.1. Employee Benefits. Employee shall be eligible to participate in the Company's group health, dental and other insurance or benefit plans, including stock option grants, bonuses, pension and deferred compensation, as may be generally available to executive employees of the Company. 3.2.2. Business Expenses. The Company shall reimburse Employee for all reasonable and necessary expenses incurred in carrying out his duties under this Agreement, including but not limited to travel and entertainment, and cell phone expenses, in accordance with the Company's policies in effect from time to time. Employee shall present to the Company an account of such expenses in such form as may be required by the Company on a monthly basis. 3.2.3. Paid Time Off. Employee shall be entitled to three (3) weeks of vacation per calendar year occurring during the Term, and other paid time off pursuant to the Company's policies, during which time Employee's compensation shall be paid in full. 3.2.4 Annual Cash Bonus. Employee shall be eligible to receive an annual cash bonus ("Cash Bonus") during the Term determined and paid as follows: a) with respect to the fiscal year ending December 31, 2004, in the event the Company's Gross Margin (as defined below) exceeds $3,726,000, an amount determined by the following formula: $15,000 x Gross Margin = Cash Bonus ------------ $3,726,000 b) with respect to the fiscal year ending December 31, 2005 and the fiscal year ending December 31, 2006, an amount equal to ten percent (10%) of the amount by which the Company's Gross Margin for such fiscal year exceeds $4,500,000; c) for the purposes of this Section 3.2.4, "Gross Margin" shall be as reflected in the Company's financial statements and determined by its regularly engaged independent accountants in a manner consistent with past practice; d) payment of each Cash Bonus is to be made to Employee as soon as practicable after the end of the fiscal year for which it is earned; and e) notwithstanding the foregoing, Employee's Cash Bonus shall not exceed $200,000 with respect to any fiscal year occurring during the Term. 3.2.5 Change of Control. In the event that the Company is subject to a Change of Control (as defined in Section 6.1.5 herein) and (i) the Company or its successor terminates Employee's employment with the Company hereunder for any reason other than as set forth in Section 4.1 herein during the one (1) year period following the date of the Change of Control or (ii) Employee terminates his employment with the Company hereunder for any reason during the thirty (30) day period which commences on the date which is ninety (90) days after the date of the Change of Control, then upon such termination of this Agreement Employee shall receive the following severance benefits: (a) a lump sum payment equal to 150% of the then remaining unpaid salary due Employee during the Term pursuant to Section 3.1 herein; (b) all accrued but unpaid benefits due Employee relating to Section 3.2.4, to be paid as provided therein; (c) all other accrued and unpaid benefits due Employee under this Agreement, including reimbursement of expenses incurred; and (d) notwithstanding the provisions of any agreement or employee benefit plan to the contrary, all outstanding stock options, rights to receive restricted stock or the like shall immediately become fully vested and any restrictions of such restricted stock shall be deemed terminated. 4. Termination of Employment. 4.1 Termination for Cause. Termination for Cause (as defined in Subsection 6.1.1 herein) of Employee's employment may be effected by the Company at any time without liability except as specifically set forth in this Section. The termination shall be effected by written notification to Employee and shall be effective as of the time set forth in such notice. At the effective time of a Termination for Cause, the Company shall pay Employee all of his accrued and unpaid salary pursuant to Section 3.1 of this Agreement and any reasonable and necessary business expenses incurred by Employee in connection with his duties hereunder, all to the date of termination. 4.2 Termination By Company Other Than for Cause. The Company may effect a Termination Other Than for Cause (as defined in Section 6.1.2 herein) of Employee's employment at any time upon giving written notice to Employee of such termination and without liability except as specifically set forth in this Subsection. The termination shall be effective as of the time set forth in such notice. At the effective time of any Termination Other Than for Cause, the Company shall pay Employee his salary as set forth in section 3.1 of this Agreement for the remainder of the Term and any reasonable and necessary business expenses incurred by Employee in connection with his duties hereunder to the date of termination, and Employee shall receive the benefits contemplated by Subsections 3.2.5 (b) and (c) of this Agreement. 4.3 Termination by Reason of Disability. If Employee, in the reasonable judgment of the Board of Directors of the Company, has failed to perform the essential elements of his position under this Agreement on account of illness or physical or mental incapacity, and such illness or incapacity continues for a consecutive period of more than three (3) months, then the question of whether Employee's illness or incapacity is reasonably likely to continue shall be submitted to the Company or, if disability insurance is maintained by Employee, Employee's disability insurance carrier for determination. In the event the Company or such insurance carrier determines that Employee is subject to such an illness or incapacity, and is unable to perform the essential elements of his position with or without a reasonable accommodation by the Company, the Company shall have the right to terminate Employee's employment ("Termination for Disability") by written notification to Employee and shall immediately pay to Employee all of his accrued and unpaid salary as set forth in Section 3.1 of this Agreement and any reasonable and necessary business expenses incurred by Employee in connection with his duties hereunder, to the date of termination, and Employee shall receive the benefits contemplated by Subsections 3.2. 5 (b) and (c) of this Agreement. 4.4 Death. In the event of Employee's death during the Term, Employee's employment shall be deemed to have terminated as of the last day of the month during which his death occurs, and the Company shall pay to his estate all of his accrued and unpaid salary as set forth in Section 3.1 of this Agreement and any reasonable and necessary business expenses incurred by Employee in connection with his duties hereunder, to the date of termination, and Employee shall receive the benefits contemplated by Subsections 3.2.5 (b) and (c) of this Agreement. 4.5. Termination By Employee With Good Reason. In the event that Employee terminates his employment with Good Reason (as defined in Subsection 6.1.3 herein), the Company shall pay Employee his salary as set forth in Section 3.1 of this Agreement for the remainder of the Term and any reasonable and necessary business expenses incurred by Employee in connection with his duties hereunder to the date of termination, and Employee shall receive the benefits contemplated by Subsections 3.2.5 (b) and (c) of this Agreement. 4.6. Voluntary Termination. In the event of a Voluntary Termination (as defined in Subsection 6.1.4 herein) by Employee, the Company shall pay all of his accrued and unpaid salary as set forth in Section 3.1 of this Agreement and any reasonable and necessary business expenses incurred by Employee in connection with his duties hereunder, all to the date of termination. 5. Protection of the Company's Business. In consideration of his employment by the Company, and recognizing the Company's concerns regarding the protection of its business, Employee agrees as follows: 5.1 Non-Competition. Employee agrees that during the Non-Competition Period, as defined hereinafter, he shall not enter into any agreement with, or engage in, or be connected or associated with, or own any interest in, or work for any individual, firm or corporation or other entity which is engaged in or connected with any business which is in competition with the Company in the continental United States or any other country in which the Company is doing business or is reasonably expected to do business, unless he obtains the express written approval of the Board in its sole discretion after full disclosure of the nature of the intended arrangement. The "Non-Competition Period" means the period of the Employee's employment during the Term and a period of one year following the Employee's termination of employment for any reason. 5.2 Non-Solicitation. Employee agrees that during the Non-Competition Period, he shall not (a) encourage any employee of the Company or any of its subsidiaries to leave employment with the Company or subsidiary or (b) solicit any customers of the Company or any of its subsidiaries to reduce or no longer do business with the Company, directly or indirectly. 5.3 Non-Disclosure. Employee agrees not to disclose either during the period of his employment hereunder or at any time thereafter to any person, firm, or corporation any information that the Company desires to protect and keep secret and confidential concerning the business or affairs of the Company which he may have acquired in the course of, or as incident to, his employment hereunder for his own benefit or to the detriment or intended detriment of the Company. 5.4 Injunction. Employee acknowledges that the Company is relying on the provisions of this Section 5 to protect its legitimate business interests and that the same are not an unreasonable restriction on him, and that monetary damages will not be an adequate remedy to a breach of this Section, and that it would be impossible for the Company to measure damages in the event of such a breach. Therefore, Employee agrees that, in addition to other rights that the Company may have, the Company is entitled to an injunction, without posting bond, preventing Employee from doing any act that would be in breach of this Section 5. 6. Definitions. 6.1 Definitions. For purposes of this Agreement, the following terms shall have the following meanings: 6.1.1. "Termination for Cause" shall mean termination by the Company of Employee's employment by the Company by reason of (i) a material breach of Employee's duty of loyalty to the Company or any act of dishonesty or fraud with respect to the Company, (ii) the commission by Employee of a felony, a crime involving moral turpitude or other act causing significant harm to the Company's standing or reputation, (iii) conduct tending to bring the Company into public disgrace or disrepute or which could reasonably subject the Company to legal action, including but not limited to sexual or other illegal harassment, (iv) repeated failure, after written notice, to perform duties reasonably directed by the Company, (v) gross negligence or willful misconduct with respect to the Company, or (vi) failure to comply with the terms and provisions of Section 5 of this Agreement. "Cause" shall not mean, with respect to the acts or omissions of Employee, (a) bad judgment or negligence other than habitual neglect of duty; or (b) any act or omission believed by Employee in good faith to have been in or not opposed to the interest of the Company, or any parent or subsidiary or successor to the Company (without intention of Employee to gain therefrom, directly or indirectly, a profit to which he was not legally entitled); or (c) any act or omission in respect of which a determination could properly have been made by the Board of Directors of the Company or any parent or subsidiary or successor of the Company, that Employee 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. 6.1.2. "Termination Other Than for Cause" shall mean termination by the Company of Employee's employment by the Company, other than a Termination for Cause or Termination for Disability, for any or no reason, including, without limitation, constructive termination or discharge of Employee by reason of the Company's material breach of its obligations under this Agreement. 6.1.3. "Termination by Employee with Good Reason" shall mean Employee's resignation of employment with the Company because of a material change in the terms or conditions of Employee's employment with the Company to Employee's detriment, including but not limited to (i) a material reduction in Employee's job duties, or the substitution of job duties requiring substantially less skill, independent judgment or experience, (ii) the diminution of rank or title accorded to Employee, (iii) a reduction of more than 10% in Employee's compensation, including employee benefits and any applicable equity compensation or (iv) the relocation of Employee's primary work location to a new location more than 50 miles away from the previous location. 6.1.4. "Voluntary Termination" shall mean termination by Employee of Employee's employment with the Company. To effect Voluntary Termination, Employee shall give no less than four (4) weeks' written notice to the Company, and shall remain available to the Company, at the Company's option, for the entire period until the date of termination. 6.1.5 "Change of Control" shall mean an event as a result of which: (i) any "person" (as such term is used in Sections 13d) and 14(d) of the Securities and Exchange Act of 1934 (the "Exchange Act")), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, except that a person shall be deemed for such purposes to have "beneficial ownership" of all securities that such person has a right to acquire, whether such right is exercisable immediately or only after the passage of time or upon the satisfaction of performance criteria or other conditions), directly or indirectly, of more than 50% of the total voting power of the voting stock of the Company (or its successors and assigns); (ii) the Company consolidates with, or merges with or into another corporation or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any person, or any corporation consolidates with, or merges with or into, the Company, in any such event pursuant to a transaction in which the outstanding voting stock of the Company is changed into or exchanged for cash, securities or other property, other than any such transaction where (A) the outstanding voting stock of the Company is changed into or exchanged for (x) voting stock of the surviving or transferee corporation or (y) cash, securities (whether or not including voting stock) or other property, and (B) the holders of the voting stock of the Company immediately prior to such transaction own, directly or indirectly, not less than 50% of the voting power of the voting stock of the surviving corporation immediately after such transaction; (iii) any person or group, other than the stockholders of the Company as a whole has a right to designate or has designated the majority of the Board of Directors of the Company or the designees/affiliates of such person or group constitute a majority of the Board or (iv) the Company is liquidated or dissolved or adopts a plan of liquidation. 7. Remedies. 7.1 Costs. If litigation is brought to enforce or interpret or is maintained to defend any provision contained herein, the court shall award reasonable attorneys' fees and disbursements to the prevailing party as determined by the court. 7.2 Severability. THE PARTIES HAVE CAREFULLY CONSIDERED ALL OF SECTIONS 4, 5 AND 6 OF THIS AGREEMENT AND AGREE THAT THEY REPRESENT A PROPER BALANCING OF THEIR INTERESTS AND WILL NOT PREVENT EMPLOYEE FROM EARNING A LIVING AFTER TERMINATION OF HIS EMPLOYMENT. It is the express intent of the parties hereto that the obligations of, and restrictions on, the parties as provided in such Sections shall be enforced and given effect to the fullest extent legally permissible. If, in any judicial proceeding, a court shall refuse to enforce one or more of the covenants or agreements contained in this Agreement because the duration thereof is too long, the scope thereof is too broad or some other reason, for the purpose of such proceeding, the court may reduce such duration or scope to the extent necessary to permit the enforcement of such obligations and restrictions. 8. Miscellaneous. 8.1 Waiver. The waiver of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of the same or other provision hereof. 8.2 Entire Agreement; Modifications. This Agreement represents the entire understanding between the parties with respect to the subject matter hereof, and this Agreement supersedes any and all prior understandings, agreements, plans and negotiations, whether written or oral, with respect to the subject matter hereof, including, without limitation, any understandings, agreements or obligations respecting any past or future compensation, bonuses, reimbursements or other payments to Employee from the Company. All modifications to this Agreement must be in writing and signed by the party against whom enforcement of such modification is sought. 8.3 Notices. All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery, or first-class mail, certified or registered with return receipt requested, or by commercial overnight courier or by fax and shall be deemed to have been duly given upon hand delivery, receipt if mailed, the first business day following delivery to a commercial overnight courier or upon receipt of a fax, addressed as follows: If to the Company: M-Wave, Inc. 475 Industrial Drive West Chicago, Illinois 60185 If to Employee: Joseph A. Turek 475 Industrial Drive West Chicago, Illinois 60185 Any party may change such party's address for notices by notice given pursuant to this Section 8.3. 8.4 Headings. The Section headings herein are intended for reference and shall not by themselves determine the construction or interpretation of this Agreement. 8.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois without application of its conflict of laws rules. 8.6 Severability. Should a court or other body of competent jurisdiction determine that any provision of this Agreement is excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and all other provisions of the Agreement shall be deemed valid and enforceable to the extent possible. 8.7 Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective executors, administrators, heirs, successors and assigns. The provisions of this Agreement relating to the duties and obligations of the Company are transferable, assignable and delegable by the Company. Those provisions relating to the duties and obligations of the Employee are not transferable, assignable or delegable. 8.8 Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same Agreement. 8.9 Withholdings; Setoff. All compensation and benefits to Employee hereunder shall be reduced by all federal, state, local and other withholdings and similar taxes and payments required by applicable law. The Company may withhold amounts due it from Employee arising out of Employee's employment relationship with the Company, including for example, overpayments of compensation and personal charges incurred on Company accounts, from amounts due under this Agreement to Employee. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date first above written. EMPLOYEE M-WAVE, INC. ____________________________ By: _________________________________ Joseph A. Turek Its: ________________________________ EX-10.31 5 c87635exv10w31.txt EMPLOYMENT AGREEMENT WITH ROBERT DUKE Exhibit 10.31 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of May 1, 2004, by and between M-Wave, Inc., a Delaware corporation (the "Company"), and Robert Duke ("Employee"). WITNESSETH: A. Employee has served the Company as a key employee for several years and the Company desires to continue to obtain the benefits of Employee's knowledge, skill, and experience by employing Employee upon the terms and subject to the conditions of this Agreement. B. Employee desires to be employed by the Company upon the terms and subject to the conditions of this Agreement. AGREEMENTS: NOW THEREFORE, in consideration of the mutual covenants and agreements set forth below, and for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and Employee hereby covenant and agree as follows: 1. Duties. During the Term of this Agreement, Employee agrees to be employed by and to serve the Company as a corporate officer as Vice President, Sales and Marketing and the Company agrees to employ and retain Employee in such capacity, subject to the terms and conditions of this Agreement. Employee shall devote all his business time, energy and skill to the affairs of the Company. Subject to the direction of the Board of Directors of the Company, Employee shall have powers and duties commensurate with his position as provided for herein.. Employee shall comply with the general management policies of the Company as announced from time to time. 2. Term. The term of this Agreement shall be for a period of two (2) years and eight (8) months (the "Term"), from May 1, 2004 until December 31, 2006, and shall automatically renew for additional one-year periods unless either party provides written notice of termination at least ninety (90) days prior to the expiration of the Term or the then applicable renewal term. 3. Salary, Benefits and Bonus Compensation. 3.1. Salary. Commencing on the Effective Date of this Agreement, (a) during the period of May 1, 2004 until August 31, 2004 the Company agrees to pay Employee salary at the rate of $125,000 per annum, (b) during the period of September 1, 2004 until August 31, 2005 the Company agrees to pay Employee salary at the rate of $150,000 per annum and (c) for the remainder of the Term, the Company agrees to pay Employee salary at the rate of $165,000 per annum; such salary to be paid pursuant to the Company's regular payroll practices and schedules and subject to withholding for taxes and applicable benefits. The Board of Directors of the Company may increase, but may not decrease, Employee's salary during the Term. 3.2. Additional Benefits. During the term of his employment, Employee shall be entitled to the following fringe benefits: 3.2.1. Employee Benefits. Employee shall be eligible to participate in the Company's group health, dental and other insurance or benefit plans, including stock option grants, bonuses, pension and deferred compensation, as may be generally available to executive employees of the Company. 3.2.2. Business Expenses. The Company shall reimburse Employee for all reasonable and necessary expenses incurred in carrying out his duties under this Agreement, including but not limited to travel and entertainment, and cell phone expenses, in accordance with the Company's policies in effect from time to time. Employee shall present to the Company an account of such expenses in such form as may be required by the Company on a monthly basis. 3.2.3. Paid Time Off. Employee shall be entitled to three (3) weeks of vacation per calendar year occurring during the Term, and other paid time off pursuant to the Company's policies, during which time Employee's compensation shall be paid in full. 3.2.4 Annual Cash Bonus. Employee shall be eligible to receive an annual cash bonus ("Cash Bonus") during the Term determined and paid as follows: a) with respect to the fiscal year ending December 31, 2004, in the event the Company's Gross Margin (as defined below) exceeds $3,726,000, an amount determined by the following formula: $10,000 x Gross Margin = Cash Bonus ------------ $3,726,000 b) with respect to the fiscal year ending December 31, 2005 and the fiscal year ending December 31, 2006, an amount equal to five percent (5%) of the amount by which the Company's Gross Margin for such fiscal year exceeds $4,500,000; c) for the purposes of this Section 3.2.4, "Gross Margin" shall be as reflected in the Company's financial statements and determined by its regularly engaged independent accountants in a manner consistent with past practice; d) payment of each Cash Bonus is to be made to Employee as soon as practicable after the end of the fiscal year for which it is earned; and e) notwithstanding the foregoing, Employee's Cash Bonus shall not exceed $100,000 with respect to any fiscal year occurring during the Term. 3.2.5 Change of Control. In the event that the Company is subject to a Change of Control (as defined in Section 6.1.5 herein) and (i) the Company or its successor terminates Employee's employment with the Company hereunder for any reason other than as set forth in Section 4.1 herein during the one (1) year period following the date of the Change of Control or (ii) Employee terminates his employment with the Company hereunder for any reason during the thirty (30) day period which commences on the date which is ninety (90) days after the date of the Change of Control, then upon such termination of this Agreement Employee shall receive the following severance benefits: (a) a lump sum payment equal to 150% of the then remaining unpaid salary due Employee during the Term pursuant to Section 3.1 herein; (b) all accrued but unpaid benefits due Employee relating to Section 3.2.4, to be paid as provided therein; (c) all other accrued and unpaid benefits due Employee under this Agreement, including reimbursement of expenses incurred; and (d) notwithstanding the provisions of any agreement or employee benefit plan to the contrary, all outstanding stock options, rights to receive restricted stock or the like shall immediately become fully vested and any restrictions on such restricted stock shall be deemed terminated. 4. Termination of Employment. 4.1 Termination for Cause. Termination for Cause (as defined in Subsection 6.1.1 herein) of Employee's employment may be effected by the Company at any time without liability except as specifically set forth in this Section. The termination shall be effected by written notification to Employee and shall be effective as of the time set forth in such notice. At the effective time of a Termination for Cause, the Company shall pay Employee all of his accrued and unpaid salary pursuant to Section 3.1 of this Agreement and any reasonable and necessary business expenses incurred by Employee in connection with his duties hereunder, all to the date of termination. 4.2 Termination By Company Other Than for Cause. The Company may effect a Termination Other Than for Cause (as defined in Section 6.1.2 herein) of Employee's employment at any time upon giving written notice to Employee of such termination and without liability except as specifically set forth in this Subsection. The termination shall be effective as of the time set forth in such notice. At the effective time of any Termination Other Than for Cause, the Company shall pay Employee his salary as set forth in section 3.1 of this Agreement for the remainder of the Term and any reasonable and necessary business expenses incurred by Employee in connection with his duties hereunder to the date of termination, and Employee shall receive the benefits contemplated by Subsections 3.2.5 (b) and (c) of this Agreement. 4.3 Termination by Reason of Disability. If Employee, in the reasonable judgment of the Board of Directors of the Company, has failed to perform the essential elements of his position under this Agreement on account of illness or physical or mental incapacity, and such illness or incapacity continues for a consecutive period of more than three (3) months, then the question of whether Employee's illness or incapacity is reasonably likely to continue shall be submitted to the Company or, if disability insurance is maintained by Employee, Employee's disability insurance carrier for determination. In the event the Company or such insurance carrier determines that Employee is subject to such an illness or incapacity, and is unable to perform the essential elements of his position with or without a reasonable accommodation by the Company, the Company shall have the right to terminate Employee's employment ("Termination for Disability") by written notification to Employee and shall immediately pay to Employee all of his accrued and unpaid salary as set forth in Section 3.1 of this Agreement and any reasonable and necessary business expenses incurred by Employee in connection with his duties hereunder, to the date of termination, and Employee shall receive the benefits contemplated by Subsections 3.2. 5 (b) and (c) of this Agreement. 4.4 Death. In the event of Employee's death during the Term, Employee's employment shall be deemed to have terminated as of the last day of the month during which his death occurs, and the Company shall pay to his estate all of his accrued and unpaid salary as set forth in Section 3.1 of this Agreement and any reasonable and necessary business expenses incurred by Employee in connection with his duties hereunder, to the date of termination, and Employee shall receive the benefits contemplated by Subsections 3.2.5 (b) and (c) of this Agreement. 4.5. Termination By Employee With Good Reason. In the event that Employee terminates his employment with Good Reason (as defined in Subsection 6.1.3 herein), the Company shall pay Employee his salary as set forth in Section 3.1 of this Agreement for the remainder of the Term and any reasonable and necessary business expenses incurred by Employee in connection with his duties hereunder to the date of termination, and Employee shall receive the benefits contemplated by Subsections 3.2.5 (b) and (c) of this Agreement. 4.6. Voluntary Termination. In the event of a Voluntary Termination (as defined in Subsection 6.1.4 herein) by Employee, the Company shall pay all of his accrued and unpaid salary as set forth in Section 3.1 of this Agreement and any reasonable and necessary business expenses incurred by Employee in connection with his duties hereunder, all to the date of termination. 5. Protection of the Company's Business. In consideration of his employment by the Company, and recognizing the Company's concerns regarding the protection of its business, Employee agrees as follows: 5.1 Non-Competition. Employee agrees that during the Non-Competition Period, as defined hereinafter, he shall not enter into any agreement with, or engage in, or be connected or associated with, or own any interest in, or work for any individual, firm or corporation or other entity which is engaged in or connected with any business which is in competition with the Company in the continental United States or any other country in which the Company is doing business or is reasonably expected to do business, unless he obtains the express written approval of the Board in its sole discretion after full disclosure of the nature of the intended arrangement. The "Non-Competition Period" means the period of the Employee's employment during the Term and a period of one year following the Employee's termination of employment for any reason. 5.2 Non-Solicitation. Employee agrees that during the Non-Competition Period, he shall not (a) encourage any employee of the Company or any of its subsidiaries to leave employment with the Company or subsidiary or (b) solicit any customers of the Company or any of its subsidiaries to reduce or no longer do business with the Company, directly or indirectly. 5.3 Non-Disclosure. Employee agrees not to disclose either during the period of his employment hereunder or at any time thereafter to any person, firm, or corporation any information that the Company desires to protect and keep secret and confidential concerning the business or affairs of the Company which he may have acquired in the course of, or as incident to, his employment hereunder for his own benefit or to the detriment or intended detriment of the Company. 5.4 Injunction. Employee acknowledges that the Company is relying on the provisions of this Section 5 to protect its legitimate business interests and that the same are not an unreasonable restriction on him, and that monetary damages will not be an adequate remedy to a breach of this Section, and that it would be impossible for the Company to measure damages in the event of such a breach. Therefore, Employee agrees that, in addition to other rights that the Company may have, the Company is entitled to an injunction, without posting bond, preventing Employee from doing any act that would be in breach of this Section 5. 6. Definitions. 6.1 Definitions. For purposes of this Agreement, the following terms shall have the following meanings: 6.1.1. "Termination for Cause" shall mean termination by the Company of Employee's employment by the Company by reason of (i) a material breach of Employee's duty of loyalty to the Company or any act of dishonesty or fraud with respect to the Company, (ii) the commission by Employee of a felony, a crime involving moral turpitude or other act causing significant harm to the Company's standing or reputation, (iii) conduct tending to bring the Company into public disgrace or disrepute or which could reasonably subject the Company to legal action, including but not limited to sexual or other illegal harassment, (iv) repeated failure, after written notice, to perform duties reasonably directed by the Company, (v) gross negligence or willful misconduct with respect to the Company, or (vi) failure to comply with the terms and provisions of Section 5 of this Agreement. "Cause" shall not mean, with respect to the acts or omissions of Employee, (a) bad judgment or negligence other than habitual neglect of duty; or (b) any act or omission believed by Employee in good faith to have been in or not opposed to the interest of the Company, or any parent or subsidiary or successor to the Company (without intention of Employee to gain therefrom, directly or indirectly, a profit to which he was not legally entitled); or (c) any act or omission in respect of which a determination could properly have been made by the Board of Directors of the Company or any parent or subsidiary or successor of the Company, that Employee 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. 6.1.2. "Termination Other Than for Cause" shall mean termination by the Company of Employee's employment by the Company, other than a Termination for Cause or Termination for Disability, for any or no reason, including, without limitation, constructive termination or discharge of Employee by reason of the Company's material breach of its obligations under this Agreement. 6.1.3. "Termination by Employee with Good Reason" shall mean Employee's resignation of employment with the Company because of a material change in the terms or conditions of Employee's employment with the Company to Employee's detriment, including but not limited to (i) a material reduction in Employee's job duties, or the substitution of job duties requiring substantially less skill, independent judgment or experience, (ii) the diminution of rank or title accorded to Employee, (iii) a reduction of more than 10% in Employee's compensation, including employee benefits and any applicable equity compensation or (iv) the relocation of Employee's primary work location to a new location more than 50 miles away from the previous location. 6.1.4. "Voluntary Termination" shall mean termination by Employee of Employee's employment with the Company. To effect Voluntary Termination, Employee shall give no less than four (4) weeks' written notice to the Company, and shall remain available to the Company, at the Company's option, for the entire period until the date of termination. 6.1.5 "Change of Control" shall mean an event as a result of which: (i) any "person" (as such term is used in Sections 13d) and 14(d) of the Securities and Exchange Act of 1934 (the "Exchange Act")), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, except that a person shall be deemed for such purposes to have "beneficial ownership" of all securities that such person has a right to acquire, whether such right is exercisable immediately or only after the passage of time or upon the satisfaction of performance criteria or other conditions), directly or indirectly, of more than 50% of the total voting power of the voting stock of the Company (or its successors and assigns); (ii) the Company consolidates with, or merges with or into another corporation or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any person, or any corporation consolidates with, or merges with or into, the Company, in any such event pursuant to a transaction in which the outstanding voting stock of the Company is changed into or exchanged for cash, securities or other property, other than any such transaction where (A) the outstanding voting stock of the Company is changed into or exchanged for (x) voting stock of the surviving or transferee corporation or (y) cash, securities (whether or not including voting stock) or other property, and (B) the holders of the voting stock of the Company immediately prior to such transaction own, directly or indirectly, not less than 50% of the voting power of the voting stock of the surviving corporation immediately after such transaction; (iii) any person or group, other than the stockholders of the Company as a whole has a right to designate or has designated the majority of the Board of Directors of the Company or the designees/affiliates of such person or group constitute a majority of the Board or (iv) the Company is liquidated or dissolved or adopts a plan of liquidation. 7. Remedies. 7.1 Costs. If litigation is brought to enforce or interpret or is maintained to defend any provision contained herein, the court shall award reasonable attorneys' fees and disbursements to the prevailing party as determined by the court. 7.2 Severability. THE PARTIES HAVE CAREFULLY CONSIDERED ALL OF SECTIONS 4, 5 AND 6 OF THIS AGREEMENT AND AGREE THAT THEY REPRESENT A PROPER BALANCING OF THEIR INTERESTS AND WILL NOT PREVENT EMPLOYEE FROM EARNING A LIVING AFTER TERMINATION OF HIS EMPLOYMENT. It is the express intent of the parties hereto that the obligations of, and restrictions on, the parties as provided in such Sections shall be enforced and given effect to the fullest extent legally permissible. If, in any judicial proceeding, a court shall refuse to enforce one or more of the covenants or agreements contained in this Agreement because the duration thereof is too long, the scope thereof is too broad or some other reason, for the purpose of such proceeding, the court may reduce such duration or scope to the extent necessary to permit the enforcement of such obligations and restrictions. 8. Miscellaneous. 8.1 Waiver. The waiver of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of the same or other provision hereof. 8.2 Entire Agreement; Modifications. This Agreement represents the entire understanding between the parties with respect to the subject matter hereof, and this Agreement supersedes any and all prior understandings, agreements, plans and negotiations, whether written or oral, with respect to the subject matter hereof, including, without limitation, any understandings, agreements or obligations respecting any past or future compensation, bonuses, reimbursements or other payments to Employee from the Company. All modifications to this Agreement must be in writing and signed by the party against whom enforcement of such modification is sought. 8.3 Notices. All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery, or first-class mail, certified or registered with return receipt requested, or by commercial overnight courier or by fax and shall be deemed to have been duly given upon hand delivery, receipt if mailed, the first business day following delivery to a commercial overnight courier or upon receipt of a fax, addressed as follows: If to the Company: M-Wave, Inc. 475 Industrial Drive West Chicago, Illinois 60185 If to Employee: Robert Duke 5N 571 Abilene Bloomingdale, Illinois 60108 Any party may change such party's address for notices by notice given pursuant to this Section 8.3. 8.4 Headings. The Section headings herein are intended for reference and shall not by themselves determine the construction or interpretation of this Agreement. 8.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois without application of its conflict of laws rules. 8.6 Severability. Should a court or other body of competent jurisdiction determine that any provision of this Agreement is excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and all other provisions of the Agreement shall be deemed valid and enforceable to the extent possible. 8.7 Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective executors, administrators, heirs, successors and assigns. The provisions of this Agreement relating to the duties and obligations of the Company are transferable, assignable and delegable by the Company. Those provisions relating to the duties and obligations of the Employee are not transferable, assignable or delegable. 8.8 Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same Agreement. 8.9 Withholdings; Setoff. All compensation and benefits to Employee hereunder shall be reduced by all federal, state, local and other withholdings and similar taxes and payments required by applicable law. The Company may withhold amounts due it from Employee arising out of Employee's employment relationship with the Company, including for example, overpayments of compensation and personal charges incurred on Company accounts, from amounts due under this Agreement to Employee. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date first above written. EMPLOYEE M-WAVE, INC. ____________________________ By: _________________________________ Robert Duke Its: ________________________________ EX-10.32 6 c87635exv10w32.txt SUBSCRIPTION AGREEMENT Exhibit 10.32 M-WAVE, INC. SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK AND COMMON STOCK WARRANTS SUBSCRIPTION AGREEMENT June __, 2004 Mercator Advisory Group LLC Mercator Momentum Fund, LP Mercator Momentum Fund III, LP Monarch Pointe Fund, Ltd. 555 South Flower Street, Suite 4500 Los Angeles, California 90071 Ladies and Gentlemen: M-Wave, Inc., a Delaware corporation (the "COMPANY"), hereby confirms its agreement with Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP, and Monarch Pointe Fund, Ltd. (collectively, the "PURCHASERS"), and Mercator Advisory Group, LLC ("MAG") as set forth below. 1. The Securities. Subject to the terms and conditions herein contained, the Company proposes to issue and sell to the Purchasers an aggregate of: (a) 30,000 shares (the "SHARES") of its Series A Convertible Preferred Stock (the "SERIES A STOCK"), which shall be convertible into shares (the "CONVERSION SHARES") of the Company's Common Stock (the "COMMON STOCK") in accordance with the formula set forth in the Certificate of Designations further described below and (b) four (4) warrants, substantially in the form attached hereto at Exhibit A (the "WARRANTS"), to acquire up to 1,530,000 shares of Common Stock (the "WARRANT SHARES"). The rights, preferences and privileges of the Series A Stock are as set forth in the Certificate of Designations of Series A Preferred Stock as filed with the Secretary of State of the State of Delaware (the "CERTIFICATE OF DESIGNATIONS") in the form attached hereto as Exhibit B. The numbers of Conversion Shares and Warrant Shares that any Purchaser may acquire at any time are subject to limitation in the Certificate of Designations and in the Warrants, respectively, so that the aggregate number of shares of Common Stock of which such Purchaser and all persons affiliated with such Purchaser have beneficial ownership (calculated pursuant to Rule 13d-3 of the Securities Exchange Act of 1934, as amended) does not at any time exceed 9.99% of the Company's then outstanding Common Stock. The Shares and the Warrants are sometimes herein collectively referred to as the "SECURITIES." This Agreement and the Certificate of Designations are sometimes herein collectively referred to as the "TRANSACTION DOCUMENTS." The Securities will be offered and sold to the Purchasers without such offers and sales being registered under the Securities Act of 1933, as amended (together with the rules and regulations of the Securities and Exchange Commission (the "SEC") promulgated thereunder, the "SECURITIES ACT"), in reliance on exemptions therefrom. In connection with the sale of the Securities, the Company has made available (including electronically via the SEC's EDGAR system) to Purchasers its periodic and current reports, forms, schedules, proxy statements and other documents (including exhibits and all other information incorporated by reference) filed with the SEC under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"). These reports, forms, schedules, statements, documents, filings and amendments, are collectively referred to as the "DISCLOSURE DOCUMENTS." All references in this Agreement to financial statements and schedules and other information which is "contained," "included" or "stated" in the Disclosure Documents (or other references of like import) shall be deemed to mean and include all such financial statements and schedules, documents, exhibits and other information which is incorporated by reference in the Disclosure Documents. 2. Representations and Warranties of the Company. Except as set forth in the Disclosure Documents and on the Disclosure Schedule contained in Schedules A through D attached hereto and made a part hereof (the "DISCLOSURE SCHEDULE" delivered by the Company to Purchasers on the date that this Subscription Agreement and the Certificate of Designations are fully executed by all parties (the "EXECUTION DATE"), the Company represents and warrants to and agrees with Purchasers and MAG as follows: (a) The Disclosure Documents as of their respective dates did not, and will not (after giving effect to any updated disclosures therein) as of the Execution Date, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The Disclosure Documents and the documents incorporated or deemed to be incorporated by reference therein, at the time they were filed or hereafter are filed with the SEC, complied and will comply, at the time of filing, in all material respects with the requirements of the Securities Act and/or the Exchange Act, as the case may be, as applicable. (b) Schedule A attached hereto sets forth a complete list of the subsidiaries of the Company (the "Subsidiaries"). Each of the Company and its Subsidiaries has been duly incorporated and each of the Company and the Subsidiaries is validly existing in good standing as a corporation under the laws of its jurisdiction of incorporation, with the requisite corporate power and authority to own its properties and conduct its business as now conducted as described in the Disclosure Documents and is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified would not, individually or in the aggregate, have a material adverse effect on the business, condition (financial or other), properties, prospects or results of operations of the Company and the Subsidiaries, taken as a whole (any such event, a "MATERIAL ADVERSE EFFECT"); as of the Execution Date, the Company will have the authorized, issued and outstanding capitalization set forth in on Schedule B attached hereto (the "COMPANY CAPITALIZATION"); except as set forth in the Disclosure Documents or on Schedule A, the Company does not have any subsidiaries or own directly or indirectly any of the capital stock or other equity or long-term 2 debt securities of or have any equity interest in any other person; all of the outstanding shares of capital stock of the Company and the Subsidiaries have been duly authorized and validly issued, are fully paid and non-assessable and were not issued in violation of any preemptive or similar rights and are owned free and clear of all liens, encumbrances, equities, and restrictions on transferability (other than those imposed by the Securities Act and the state securities or "Blue Sky" laws) or voting; except as set forth in the Disclosure Documents, all of the outstanding shares of capital stock of the Subsidiaries are owned, directly or indirectly, by the Company; except as set forth in the Disclosure Documents, no options, warrants or other rights to purchase from the Company or any Subsidiary, agreements or other obligations of the Company or any Subsidiary to issue or other rights to convert any obligation into, or exchange any securities for, shares of capital stock of or ownership interests in the Company or any Subsidiary are outstanding; and except as set forth in the Disclosure Documents or on Schedule C, there is no agreement, understanding or arrangement among the Company or any Subsidiary and each of their respective stockholders or any other person relating to the ownership or disposition of any capital stock of the Company or any Subsidiary or the election of directors of the Company or any Subsidiary or the governance of the Company's or any Subsidiary's affairs, and, if any, such agreements, understandings and arrangements will not be breached or violated as a result of the execution and delivery of, or the consummation of the transactions contemplated by, the Transaction Documents. (c) The Company has the requisite corporate power and authority to execute, deliver and perform its obligations under the Transaction Documents. Each of the Transaction Documents has been duly and validly authorized by the Company and, when executed and delivered by the Company, will constitute a valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms except as the enforcement thereof may be limited by (A) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws now or hereafter in effect relating to or affecting creditors' rights generally or (B) general principles of equity and the discretion of the court before which any proceeding therefore may be brought (regardless of whether such enforcement is considered in a proceeding at law or in equity) (collectively, the "ENFORCEABILITY EXCEPTIONS"). (d) The Shares and the Warrants have been duly authorized and, when issued upon payment thereof in accordance with this Agreement, will have been validly issued, fully paid and non-assessable. The Conversion Shares issuable have been duly authorized and validly reserved for issuance, and when issued upon conversion of the Shares in accordance with the terms of the Certificate of Designations, will have been validly issued, fully paid and non-assessable. The Warrant Shares have been duly authorized and validly reserved for issuance, and when issued upon exercise of the Warrants in accordance with the terms thereof, will have been validly issued, fully paid and non-assessable. The Common Stock of the Company conforms to the description thereof contained in the Disclosure Documents. The stockholders of the Company have no preemptive or similar rights with respect to the Common Stock. (e) No consent, approval, authorization, license, qualification, exemption or order of any court or governmental agency or body or third party is required for the performance of the Transaction Documents by the Company or for the consummation by the Company of any of the transactions contemplated thereby, or the application of the proceeds of 3 the issuance of the Securities as described in this Agreement, except for such consents, approvals, authorizations, licenses, qualifications, exemptions or orders (i) as have been obtained on or prior to the Closing Date, (ii) as are not required to be obtained on or prior to the Closing Date that will be obtained when required, or (iii) the failure to obtain which would not, individually or in the aggregate, have a Material Adverse Effect. (f) Except as set forth on Schedule D, none of the Company or the Subsidiaries is (i) in material violation of its articles of incorporation or bylaws (or similar organizational document), (ii) in breach or violation of any statute, judgment, decree, order, rule or regulation applicable to it or any of its properties or assets, which breach or violation would, individually or in the aggregate, have a Material Adverse Effect, or (iii) except as described in the Disclosure Documents, in default (nor has any event occurred which with notice or passage of time, or both, would constitute a default) in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan agreement, note, lease, license, franchise agreement, permit, certificate or agreement or instrument to which it is a party or to which it is subject, which default would, individually or in the aggregate, have a Material Adverse Effect. (g) Subject to shareholder approval required by the NASDAQ Small Cap Market rules, the execution, delivery and performance by the Company of the Transaction Documents and the consummation by the Company of the transactions contemplated thereby and the fulfillment of the terms thereof will not (a) violate, conflict with or constitute or result in a breach of or a default under (or an event that, with notice or lapse of time, or both, would constitute a breach of or a default under) any of (i) the terms or provisions of any contract, indenture, mortgage, deed of trust, loan agreement, note, lease, license, franchise agreement, permit, certificate or agreement or instrument to which any of the Company or the Subsidiaries is a party or to which any of their respective properties or assets are subject, (ii) the Certificate of Designations or bylaws of any of the Company or the Subsidiaries (or similar organizational document) or (iii) any statute, judgment, decree, order, rule or regulation of any court or governmental agency or other body applicable to the Company or the Subsidiaries or any of their respective properties or assets or (b) result in the imposition of any lien upon or with respect to any of the properties or assets now owned or hereafter acquired by the Company or any of the Subsidiaries; which violation, conflict, breach, default or lien would, individually or in the aggregate, have a Material Adverse Effect. (h) The audited consolidated financial statements included in the Disclosure Documents present fairly the consolidated financial position, results of operations, cash flows and changes in shareholders' equity of the entities, at the dates and for the periods to which they relate and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis; the interim un-audited consolidated financial statements included in the Disclosure Documents present fairly the consolidated financial position, results of operations and cash flows of the entities, at the dates and for the periods to which they relate subject to year-end audit adjustments and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis with the audited consolidated financial statements included therein; the selected financial and statistical data included in the Disclosure Documents present fairly the information shown therein and have been prepared and 4 compiled on a basis consistent with the audited financial statements included therein, except as otherwise stated therein; and each of the auditors previously engaged by the Company or to be engaged in the future by the Company is an independent certified public accountant as required by the Securities Act for an offering registered thereunder. (i) Except as described in the Disclosure Documents, there is not pending or, to the knowledge of the Company, threatened any action, suit, proceeding, inquiry or investigation, governmental or otherwise, to which any of the Company or the Subsidiaries is a party, or to which their respective properties or assets are subject, before or brought by any court, arbitrator or governmental agency or body, that, if determined adversely to the Company or any such Subsidiary, would, individually or in the aggregate, have a Material Adverse Effect or that seeks to restrain, enjoin, prevent the consummation of or otherwise challenge the issuance or sale of the Securities to be sold hereunder or the application of the proceeds therefrom or the other transactions described in the Disclosure Documents. (j) The Company and the Subsidiaries own or possess adequate licenses or other rights to use all patents, trademarks, service marks, trade names, copyrights and know-how that are necessary to conduct their businesses as described in the Disclosure Documents. None of the Company or the Subsidiaries has received any written notice of infringement of (or knows of any such infringement of) asserted rights of others with respect to any patents, trademarks, service marks, trade names, copyrights or know-how that, if such assertion of infringement or conflict were sustained, would, individually or in the aggregate, have a Material Adverse Effect. (k) Each of the Company and the Subsidiaries possesses all licenses, permits, certificates, consents, orders, approvals and other authorizations from, and has made all declarations and filings with, all federal, state, local and other governmental authorities, all self-regulatory organizations and all courts and other tribunals presently required or necessary to own or lease, as the case may be, and to operate its respective properties and to carry on its respective businesses as now or proposed to be conducted as set forth in the Disclosure Documents ("PERMITS"), except where the failure to obtain such Permits would not, individually or in the aggregate, have a Material Adverse Effect and none of the Company or the Subsidiaries has received any notice of any proceeding relating to revocation or modification of any such Permit, except as described in the Disclosure Documents and except where such revocation or modification would not, individually or in the aggregate, have a Material Adverse Effect. (l) Subsequent to the respective dates as of which information is given in the Disclosure Documents and except as described therein, (i) the Company and the Subsidiaries have not incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions not in the ordinary course of business or (ii) the Company and the Subsidiaries have not purchased any of their respective outstanding capital stock, or declared, paid or otherwise made any dividend or distribution of any kind on any of their respective capital stock or otherwise (other than, with respect to any of such Subsidiaries, the purchase of capital stock by the Company), (iii) there has not been any material increase in the long-term indebtedness of the Company or any of the Subsidiaries, (iv) there has not occurred any event or condition, individually or in the aggregate, that has a Material Adverse Effect, and 5 (v) the Company and the Subsidiaries have not sustained any material loss or interference with respect to their respective businesses or properties from fire, flood, hurricane, earthquake, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding. (m) There are no material legal or governmental proceedings nor are there any material contracts or other documents required by the Securities Act to be described in a prospectus that are not described in the Disclosure Documents. Except as described in the Disclosure Documents, none of the Company or the Subsidiaries is in default under any of the contracts described in the Disclosure Documents, has received a notice or claim of any such default or has knowledge of any breach of such contracts by the other party or parties thereto, except for such defaults or breaches as would not, individually or in the aggregate, have a Material Adverse Effect. (n) Each of the Company and the Subsidiaries has good and marketable title to all real property described in the Disclosure Documents as being owned by it and good and marketable title to the leasehold estate in the real property described therein as being leased by it, free and clear of all liens, charges, encumbrances or restrictions, except, in each case, as described in the Disclosure Documents or such as would not, individually or in the aggregate, have a Material Adverse Effect. All material leases, contracts and agreements to which the Company or any of the Subsidiaries is a party or by which any of them is bound are valid and enforceable against the Company or any such Subsidiary, are, to the knowledge of the Company, valid and enforceable against the other party or parties thereto and are in full force and effect. (o) Each of the Company and the Subsidiaries has filed all necessary federal, state and foreign income and franchise tax returns, except where the failure to so file such returns would not, individually or in the aggregate, have a Material Adverse Effect, and has paid all taxes shown as due thereon; and other than tax deficiencies which the Company or any Subsidiary is contesting in good faith and for which adequate reserves have been provided in accordance with generally accepted accounting principles, there is no tax deficiency that has been asserted against the Company or any Subsidiary that would, individually or in the aggregate, have a Material Adverse Effect. (p) None of the Company or the Subsidiaries is, or immediately after the Closing Date will be, required to register as an "investment company" or a company "controlled by" an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "INVESTMENT COMPANY ACT"). (q) None of the Company or the Subsidiaries or, to the knowledge of any of such entities' directors, officers, employees, agents or controlling persons, has taken, directly or indirectly, any action designed, or that might reasonably be expected, to cause or result in the stabilization or manipulation of the price of the Common Stock. (r) None of the Company, the Subsidiaries or any of their respective Affiliates (as defined in Rule 501(b) of Regulation D under the Securities Act) directly, or through any agent, engaged in any form of general solicitation or general advertising (as those 6 terms are used in Regulation D under the Securities Act) in connection with the offering of the Securities or engaged in any other conduct that would cause such offering to be constitute a public offering within the meaning of Section 4(2) of the Securities Act. Assuming the accuracy of the representations and warranties of the Purchasers in Section 6 hereof, it is not necessary in connection with the offer, sale and delivery of the Securities to the Purchasers in the manner contemplated by this Agreement to register any of the Securities under the Securities Act. (s) There is no strike, labor dispute, slowdown or work stoppage with the employees of the Company or any of the Subsidiaries which is pending or, to the knowledge of the Company or any of the Subsidiaries, threatened. (t) Each of the Company and the Subsidiaries carries general liability insurance coverage comparable to other companies of its size and similar business. (u) Each of the Company and the Subsidiaries maintains internal accounting controls which provide reasonable assurance that (A) transactions are executed in accordance with management's authorization, (B) transactions are recorded as necessary to permit preparation of its financial statements and to maintain accountability for its assets, (C) access to its material assets is permitted only in accordance with management's authorization and (D) the values and amounts reported for its material assets are compared with its existing assets at reasonable intervals. (v) Except for a fee payable to MAG and a fee payable to Credit Support International and James A. Skelton in the amount of $120,000, the Company does not know of any claims for services, either in the nature of a finder's fee or financial advisory fee, with respect to the offering of the Shares and the transactions contemplated by the Transaction Documents. (w) The Common Stock is traded on the NASDAQ Small Cap Market. Except as described in the Disclosure Documents, the Company currently is not in violation of, and subject to approval of the Company's shareholders, the consummation of the transactions contemplated by the Transaction Documents will not violate, any rule of the NASDAQ Small Cap Market. (x) The Company is eligible to use SB-2 for the resale of the Conversion Shares and the Warrant Shares by Purchasers or their transferees and the Warrant Shares by MAG or its transferees. The Company has no reason to believe that it is not capable of satisfying the registration or qualification requirements (or an exemption therefrom) necessary to permit the resale of the Conversion Shares and the Warrant Shares under the securities or "blue sky" laws of any jurisdiction within the United States. 3. Purchase, Sale and Delivery of the Shares. On the basis of the representations, warranties, agreements and covenants herein contained and subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the Purchasers, and Purchasers agree to purchase from the Company, 30,000 Shares of Series A Stock at $100.00 per Share in the amounts shown on the signature page hereto. In connection with the purchase and sale of Shares, for no additional consideration, the Purchasers and MAG will receive Warrants to 7 purchase up to an aggregate of 1,530,000 shares of Common Stock allocated pursuant to MAG's instructions at the Closing, , subject to adjustment as set forth in the Warrants. One or more certificates in definitive form for the Shares that the Purchasers have agreed to purchase, as well as the Warrants, shall be delivered by or on behalf of the Company, against payment by or on behalf of the Purchasers, of the purchase price therefor by wire transfer of immediately available funds to the account of the Company previously designated by it in writing. Such delivery of and payment for the Shares and the Warrants shall be made at the offices of Mercator Advisory Group, LLC, 555 South Flower Street, Suite 4500, Los Angeles, California 90071, at not later than 5:00 p.m. (Los Angeles Time) two trading days after the Company obtains shareholder approval required by the NASDAQ Small Cap Market for the transactions contemplated in the Transaction Documents (the "CLOSING"), or at such date as the Purchasers and the Company may agree upon, such time and date of delivery against payment being herein referred to as the "CLOSING DATE." In the event that the Company is delisted from the NASDAQ Small Cap Market and, therefore, shareholder approval is not required, then, subject to the provisions of Section 8(b), the Closing shall take place two trading days after the Company commences trading on the OTC Bulletin Board or similar market. No later than three (3) days after completion of the Closing, the Company agrees to pay to MAG a Due Diligence fee of $160,000, payable by wire transfer of immediately available funds to an account of MAG previously designated by it in writing. 4. Certain Covenants of the Company. The Company covenants and agrees with each Purchaser as follows: (a) None of the Company or any of its Affiliates will sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any "security" (as defined in the Securities Act) which could be integrated with the sale of the Securities in a manner which would require the registration under the Securities Act of the Securities. (b) The Company will not become, at any time prior to the expiration of three years after the Closing Date, an open-end investment company, unit investment trust, closed-end investment company or face-amount certificate company that is or is required to be registered under the Investment Company Act. (c) None of the proceeds of the Series A Stock will be used to reduce or retire any insider note or convertible debt held by an officer or director of the Company. (d) Subject to Section 10 of this Agreement, the Conversion Shares and the Warrant Shares will be traded on the NASDAQ Small Cap Market, or such market on which the Company's shares are subsequently listed or traded, immediately following their issuance. (e) The Company will use commercially reasonable efforts to do and perform all things required to be done and performed by it under this Agreement and the other Transaction Documents and to satisfy all conditions precedent on its part to the obligations of the Purchasers to purchase and accept delivery of the Securities. 8 (f) The Purchasers shall have a right of first refusal on any financing in which the Company is the issuer of debt or equity securities between the Execution Date and the date of effectiveness of the Registration Statement. 5. Conditions of the Purchasers' Obligations. The obligation of each Purchaser to purchase and pay for the Securities is subject to the following conditions unless waived in writing by the Purchaser: (a) The representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects (other than representations and warranties with a Material Adverse Effect qualifier, which shall be true and correct as written) on and as of the Execution Date; the Company shall have complied in all material respects with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Execution Date. (b) None of the issuance and sale of the Securities pursuant to this Agreement or any of the transactions contemplated by any of the other Transaction Documents shall be enjoined (temporarily or permanently) and no restraining order or other injunctive order shall have been issued in respect thereof; and there shall not have been any legal action, order, decree or other administrative proceeding instituted or, to the Company's knowledge, threatened against the Company or against any Purchaser relating to the issuance of the Securities or any Purchaser's activities in connection therewith or any other transactions contemplated by this Agreement, the other Transaction Documents or the Disclosure Documents. (c) The Purchasers shall have received certificates, dated the Execution Date and signed by the Chief Executive Officer and the Chief Financial Officer of the Company, to the effect of paragraphs 5(a) and (b). (d) The Purchasers shall have received an opinion of Freeborn & Peters, LLP legal counsel to the Company, with respect to the authorization of the Shares, the Warrants and the Warrant Shares and other customary matters in the form attached hereto as Exhibit C. (e) The Company shall have obtained, on or before forty (40) days after the Execution Date, shareholder approval required pursuant to NASDAQ Small Cap Market rules for the transaction contemplated in the Transaction Documents. 6. Representations and Warranties of the Purchasers and MAG. (a) Each Purchaser and MAG represents and warrants to the Company that the Securities to be acquired by it hereunder (including the Conversion Shares and the Warrant Shares that it may acquire upon conversion or exercise thereof, as the case may be) are being acquired for its own account for investment and with no intention of distributing or reselling such Securities (including the Conversion Shares and the Warrant Shares that it may acquire upon conversion or exercise thereof, as the case may be) or any part thereof or interest 9 therein in any transaction which would be in violation of the securities laws of the United States of America or any State. Nothing in this Agreement, however, shall prejudice or otherwise limit a Purchaser's or MAG's right to sell or otherwise dispose of all or any part of such Conversion Shares or Warrant Shares under an effective registration statement under the Securities Act and in compliance with applicable state securities laws or under an exemption from such registration. By executing this Agreement, each Purchaser and MAG further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to any Person with respect to any of the Securities. (b) Each Purchaser and MAG understands that the Securities (including the Conversion Shares and the Warrant Shares that it may acquire upon conversion or exercise thereof, as the case may be) have not been registered under the Securities Act and may not be offered, resold, pledged or otherwise transferred except (a) pursuant to an exemption from registration under the Securities Act (and, if requested by the Company, based upon an opinion of counsel acceptable to the Company) or pursuant to an effective registration statement under the Securities Act and (b) in accordance with all applicable securities laws of the states of the United States and other jurisdictions. Each Purchaser and MAG agrees to the imprinting, so long as appropriate, of the following legend on the Securities (including the Conversion Shares and the Warrant Shares that it may acquire upon conversion or exercise thereof, as the case may be): THE SHARES OF STOCK EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED ("TRANSFERRED") IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. IN THE ABSENCE OF SUCH REGISTRATION, SUCH SHARES MAY NOT BE TRANSFERRED UNLESS, IF THE COMPANY REQUESTS, THE COMPANY HAS RECEIVED A WRITTEN OPINION FROM COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY STATING THAT SUCH TRANSFER IS BEING MADE IN COMPLIANCE WITH ALL APPLICABLE FEDERAL AND STATE SECURITIES LAWS. Further with regard to the Series A Stock and the Warrants, the following legend shall be included: ADDITIONAL RESTRICTIONS ON TRANSFER PURSUANT TO AGREEMENTS EXIST AND ARE AVAILABLE UPON REQUEST FROM THE COMPANY. The legend set forth above may be removed if and when the Conversion Shares or the Warrant Shares, as the case may be, are disposed of pursuant to an effective registration statement under the Securities Act or in the opinion of counsel to the Company experienced in the area of United States Federal securities laws such legends are no longer required under applicable requirements of the Securities Act. The Shares, the Warrants, the Conversion Shares and the Warrant Shares shall also bear any other legends required by applicable Federal or state securities laws, which legends may be removed when in the opinion of counsel to the Company experienced in the applicable securities laws, the same are no longer required under the applicable requirements of such securities laws. The Company agrees that it will provide each Purchaser, upon request, with a substitute certificate, not bearing such legend at such time as 10 such legend is no longer applicable. Each Purchaser and MAG agrees that, in connection with any transfer of the Conversion Shares or the Warrant Shares by it pursuant to an effective registration statement under the Securities Act, such it will comply with all prospectus delivery requirements of the Securities Act. The Company makes no representation, warranty or agreement as to the availability of any exemption from registration under the Securities Act with respect to any resale of the Shares, the Conversion Shares or the Warrant Shares. (c) Each Purchaser and MAG is an "accredited investor" within the meaning of Rule 501(a) of Regulation D under the Securities Act. Neither Purchaser nor MAG learned of the opportunity to acquire Shares or any other security issuable by the Company through any form of general advertising or public solicitation. (d) Each Purchaser and MAG represents and warrants to the Company that it has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, having been represented by counsel, and has so evaluated the merits and risks of such investment and is able to bear the economic risk of such investment and, at the present time, is able to afford a complete loss of such investment. (e) Each Purchaser represents and warrants to the Company that (i) the purchase of the Securities to be purchased by it has been duly and properly authorized and this Agreement has been duly executed and delivered by it or on its behalf and constitutes the valid and legally binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity; (ii) the purchase of the Securities to be purchased by it does not conflict with or violate its charter, by-laws or any law, regulation or court order applicable to it; and (iii) the purchase of the Securities to be purchased by it does not impose any penalty or other onerous condition on the Purchaser under or pursuant to any applicable law or governmental regulation. (f) Each Purchaser and MAG represents and warrants to the Company that neither it nor any of its directors, officers, employees, agents, partners, members, or controlling persons has taken, or will take, directly or indirectly, any actions designed, or that might reasonably be expected to cause or result in, the destabilization or manipulation of the price of the Common Stock. (g) Each Purchaser and MAG acknowledges it or its representatives have reviewed the Disclosure Documents and further acknowledges that it or its representatives have been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and the merits and risks of investing in the Securities; (ii) access to information about the Company and the Company's financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment in the Securities; and (iii) the opportunity to obtain such additional information which the 11 Company possesses or can acquire without unreasonable effort or expense that is necessary to verify the accuracy and completeness of the information contained in the Disclosure Documents. (h) Each Purchaser and MAG represents and warrants to the Company that it has based its investment decision solely upon the information contained in the Disclosure Documents and such other information as may have been provided to it or its representatives by the Company in response to its inquiries, and has not based its investment decision on any research or other report regarding the Company prepared by any third party ("THIRD PARTY REPORTS"). Each Purchaser and MAG understands and acknowledges that (i) the Company does not endorse any Third Party Reports and (ii) its actual results may differ materially from those projected in any Third Party Report. (i) Each Purchaser and MAG understands and acknowledges that (i) any forward-looking information included in the Disclosure Documents is subject to risks and uncertainties, including those risks and uncertainties set forth in the Disclosure Documents; and (ii) the Company's actual results may differ materially from those projected by the Company or its management in such forward-looking information. (j) Each Purchaser and MAG understands and acknowledges that (i) the Securities are offered and sold without registration under the Securities Act in a private placement that is exempt from the registration provisions of the Securities Act and (ii) the availability of such exemption depends in part on, and that the Company and its counsel will rely upon, the accuracy and truthfulness of the foregoing representations and Purchaser hereby consents to such reliance. 7. Covenants of Purchasers a. Not to Short Stock. Purchasers and MAG, on behalf of themselves and their affiliates and the permitted assignee of any Conversion Shares or Warrant Shares, hereby covenant and agree not to, directly or indirectly, offer to "short sell", contract to "short sell" or otherwise "short sell" any securities of the Company, including, without limitation, shares of Common Stock that will be received as a result of the conversion of the Series A Stock or the exercise of the Warrants. b. Volume Limitation. Purchasers and MAG, on behalf of themselves and their affiliates, hereby covenant and agree not to, directly or indirectly, sell in the aggregate during any trading day shares of Common Stock totaling more than 15% of the total shares of Common Stock traded on such day. c. Private Sales. Purchasers and MAG, on behalf of themselves and their affiliates, hereby covenant and agree not to, directly or indirectly, engage in a private sale of (i) any Series A Stock , (ii) any Warrants or (iii) more than 688,684 shares of the Conversion Shares or Warrants Shares in the aggregate to any third party. Any such sale would be made in accordance with and subject to the provisions of the Securities Act. 12 8. Termination. (a) This Agreement may be terminated in the sole discretion of the Company by notice to each Purchaser if at the Execution Date: (i) the representations and warranties made by any Purchaser in Section 6 are not true and correct in all material respects; or (ii) as to the Company, the sale of the Securities hereunder (i) is prohibited or enjoined by any applicable law or governmental regulation or (ii) subjects the Company to any penalty, or in its reasonable judgment, other onerous condition under or pursuant to any applicable law or government regulation that would materially reduce the benefits to the Company of the sale of the Securities to such Purchaser, so long as such regulation, law or onerous condition was not in effect in such form at the date of this Agreement. (b) This Agreement may be terminated by any Purchaser by notice to the Company given in the event that (i) the Company shall have failed, refused or been unable to satisfy all material conditions on its part to be performed or satisfied hereunder on or prior to the Execution Date, (ii) the Company shall have failed to obtain the shareholder approval required pursuant to NASDAQ Small Cap Market rules for the transaction contemplated in the Transaction Documents on or before forty (40) days after the Execution Date, or (iii) if after the Execution Date but prior to the Closing Date, trading in securities of the Company on the NASDAQ Small Cap Market shall have been suspended and the Company ceases to be publicly traded. (c) This Agreement may be terminated by mutual written consent of all parties. 9. Registration. Within 30 days from the Closing Date, the Company shall use its best efforts to prepare and file with the SEC a Registration Statement covering the resale of the maximum number of Conversion Shares issuable upon conversion of the Shares and the Warrant Shares (collectively, the "REGISTRABLE SECURITIES"), for an offering to be made on a continuous basis pursuant to Rule 415 (the "REGISTRATION STATEMENT") based on a Floor Price of $0.98 per share. The Company shall use its best efforts to ensure that the Registration Statement is declared effective by the SEC within 120 days of filing the Registration Statement. 10. Event of Default. If an Event of Default (as defined below) occurs and remains uncured for a period of 5 days, the Purchasers shall have the right to exercise any or all of the rights given to the Purchasers relating to the Securities, as further described in the Certificate of Designations. In addition, the price at which the share of Series A stock may be converted into Common Stock shall be reduced from 85% of the Market Price (as defined in the Certificate of Designations) to 75% of the Market Price, subject to the Ceiling Price and Floor Price as those terms are defined in the Certificate of Designations. The Holder need not provide and the Company hereby waives any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all 13 other remedies available to it under applicable law. Such declaration may be rescinded and annulled by Holder at any time prior to payment hereunder. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon. An "EVENT OF DEFAULT" shall be the commencement by the Company of a voluntary case or proceeding under the bankruptcy laws or the Company's failure to: (i) discharge or stay a bankruptcy proceeding within 60 days of such action being taken against the Company, (ii) file the Registration Statement with the SEC within 30 days after the Closing Date, (iii) have the Registration Statement deemed effective by the SEC within 120 days after the date of filing of the Registration Statement; (iv) fail to maintain trading of the Company's Common Stock on the NASDAQ Small Cap Market or other publicly traded market (v) pay the expenses referred to below or the Due Diligence Fee within three (3) days of the Closing; or (vi) deliver to Purchasers, or Purchasers' broker, as directed, Common Stock that Purchasers have converted or acquired by warrant exercise within three (3) business days of such conversions or exercise. IN THE EVENT THAT THE COMPANY FAILS TO FILE THE REGISTRATION STATEMENT WITH THE SEC WITHIN 30 DAYS AFTER THE CLOSING DATE, AS A REMEDY FOR SUCH AN EVENT OF DEFAULT, COMPANY SHALL PAY TO PURCHASERS ON A PRO RATA BASIS BASED ON THEIR INVESTMENT, IN CASH, THE AMOUNT EQUAL TO ONE PERCENT (1%) OF THE PURCHASE PRICE FOR EACH DAY THAT THE REGISTRATION STATEMENT FILING IS DELAYED. PURCHASERS AND COMPANY ACKNOWLEDGE AND AGREE THAT THEY HAVE MUTUALLY DISCUSSED THE IMPRACTICALITY AND EXTREME DIFFICULTY OF FIXING THE ACTUAL DAMAGES PURCHASERS WOULD INCUR IN THE CASE OF SUCH AN EVENT OF DEFAULT, AND THAT AS A RESULT OF SUCH DISCUSSION THE PARTIES AGREE THAT THE AMOUNT OF ONE PERCENT OF THE PURCHASE PRICE REPRESENTS A REASONABLE ESTIMATE OF THE ACTUAL DAMAGES WHICH PURCHASERS WOULD INCUR IN THE CASE OF SUCH AN EVENT OF DEFAULT. BY SIGNING IN THE SPACES WHICH FOLLOW, PURCHASERS AND COMPANY SPECIFICALLY AND EXPRESSLY AGREE TO ABIDE BY THE TERMS AND PROVISIONS OF THIS PARAGRAPH CONCERNING LIQUIDATED DAMAGES. 14 Purchasers: Company: Mercator Momentum Fund, LP M-Wave, Inc., a California limited partnership a __________ corporation By: Mercator Advisory Group LLC Its: General Partner By: ___________________________ ____________________________ ___________________________ David Firestone [Printed Name and Title] Managing Member Mercator Momentum Fund III, LP Monarch Pointe Fund, Ltd., a California limited partnership a BVI Company By: Mercator Advisory Group LLC Its: General Partner _______________________________ By: David Firestone ____________________________ Its: President David Firestone Managing Member 11. Notices. All communications hereunder shall be in writing and shall be hand delivered, mailed by first-class mail, couriered by next-day air courier or by facsimile and confirmed in writing (i) if to the Company, at the addresses set forth below, or (ii) if to a Purchaser or MAG, to the address set forth for such party on the signature page hereto, with a copy to Sheppard, Mullin, Richter & Hampton, LLP, 333 South Hope Street, Los Angeles, California 90071, Attention: David Ulich, Esq. If to the Company: M-Wave, Inc. 475 Industrial DrivE West Chicago, Illinois 60185 Attention: Jim Mayer Telephone: 630-562-4751 Facsimile: 630-562-1775 15 with a copy to: Freeborn & Peters LLP 311 South Wacker Drive Suite 3000 Chicago, Illinois 60606 Attn: Carl R. Klein Telephone: 312-360-6759 Facsimile: 312-360-6571 All such notices and communications shall be deemed to have been duly given: (i) when delivered by hand, if personally delivered; (ii) five business days after being deposited in the mail, postage prepaid, if mailed certified mail, return receipt requested; (iii) one business day after being timely delivered to a next-day air courier guaranteeing overnight delivery; (iv) the date of transmission if sent via facsimile to the facsimile number as set forth in this Section or the signature page hereof prior to 6:00 p.m. (Pacific time) on a business day, or (v) the business day following the date of transmission if sent via facsimile at a facsimile number set forth in this Section or on the signature page hereof after 6:00 p.m. (Pacific time) or on a date that is not a business day. Change of a party's address or facsimile number may be designated hereunder by giving notice to all of the other parties hereto in accordance with this Section. 12. Survival Clause. The respective representations, warranties, agreements and covenants of the Company and the Purchasers set forth in this Agreement shall survive until the first anniversary of the Closing. 13. Fees and Expenses. Within three (3) days of Closing, the Company agrees to pay Purchasers' legal expenses incurred in connection with the preparation and negotiation of the Transaction Documents up to $15,000. The $5,000 paid by Company on June 10, 2004 will be credited against this amount. 14. Enforcement. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the Warrants or the Certificate of Designations, the prevailing party or parties shall be entitled to receive from the other party or parties reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which the prevailing party or parties may be entitled. 15. Successors. This Agreement shall inure to the benefit of and be binding upon Purchasers, MAG and the Company and their respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained; this Agreement and all conditions 16 and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person. Neither the Company nor any Purchaser may assign this Agreement or any rights or obligation hereunder without the prior written consent of the other party. 16. No Waiver; Modifications in Writing. No failure or delay on the part of the Company, MAG or any Purchaser in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the Company, MAG or any Purchaser at law or in equity or otherwise. No waiver of or consent to any departure by the Company, MAG or any Purchaser from any provision of this Agreement shall be effective unless signed in writing by the party entitled to the benefit thereof, provided that notice of any such waiver shall be given to each party hereto as set forth below. Except as otherwise provided herein, no amendment, modification or termination of any provision of this Agreement shall be effective unless signed in writing by or on behalf of each of the Company, MAG and the Purchasers. Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by the Company, MAG or any Purchaser from the terms of any provision of this Agreement shall be effective only in the specific instance and for the specific purpose for which made or given. Except where notice is specifically required by this Agreement, no notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. 17. Entire Agreement. This Agreement, together with Transaction Documents, constitutes the entire agreement among the parties hereto and supersedes all prior agreements, understandings and arrangements, oral or written, among the parties hereto with respect to the subject matter hereof and thereof. Disclosure by the Company in any Schedule to this Agreement shall be deemed applicable to all applicable provisions hereof. 18. Severability. If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby. 19. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO PROVISIONS RELATING TO CONFLICTS OF LAW TO THE EXTENT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. THE PARTIES HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREE THAT ACTIONS, SUITS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT MAY BE BROUGHT ONLY IN STATE OR FEDERAL COURTS LOCATED IN THE CITY OF LOS ANGELES, CALIFORNIA AND HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS FOR SUCH PURPOSE. 17 20. Counterparts. This Agreement may be executed in two or more counterparts and may be delivered by facsimile transmission, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 21. If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this Agreement shall constitute a binding agreement among the Company, the Purchasers and MAG. Very truly yours, M-Wave, Inc. By: ___________________________ Name: ____________________ Title: ____________________ ACCEPTED AND AGREED: 18 Mercator Momentum Fund, LP Mercator Momentum Fund III, LP By: Mercator Advisory Group LLC By: Mercator Advisory Group LLC Its: General Partner Its: General Partner ___________________________ ___________________________ Harry Aharonian Harry Aharonian Portfolio Manager Portfolio Manager Number of Shares Purchased at Number of Shares Purchased at Closing: 9,070 Closing: 12,900 Purchase Price: $907,000 Purchase Price: $1,290,000 Monarch Pointe Fund, Ltd. Mercator Advisory Group LLC _______________________________ ______________________________ By: Harry Aharonian By: Harry Aharonian Its: Portfolio Manager Its: Portfolio Manager Number of Shares Purchased at Closing: 8,030 Purchase Price: $803,000 Mercator Advisory Group, LLC Addresses for Notice: By: _________________________ Mercator Advisory Group, LLC Harry Aharonian 555 South Flower Street, Suite 4500 Portfolio Manager Los Angeles, California 90071 Attention: David Firestone Facsimile: (213) 533-8285 with copy to: David C. Ulich, Esq. Sheppard, Mullin, Richter & Hampton LLP 333 South Hope Street, 48th Floor Los Angeles, California 90071 Facsimile: (213) 620-1398 19 Schedule A Direct and Indirect Subsidiaries of M-Wave, Inc. Poly Circuits, Inc., an Illinois corporation -1- Schedule B Company Capitalization See the Balance Sheet of the Company set forth in the Form 10-QSB included in the Disclosure Documents. (The Company intends to obtain shareholder approval for an amendment to its Articles of Incorporation to increase its authorized shares of common stock from 10,000,000 to 20,000,000 at the meeting contemplated in Section 8 (b) of this Agreement.) The Company expects to close a new revolving line of credit with Silicon Valley Bank within the next two weeks which will increase the amount of its credit line to by $1,500,000 to $4,500,000 and lower its effective cost of credit from 13.6% per annum to 8% per annum -1-1 Schedule C Agreements regarding ownership or disposition of capital stock None, but see Schedule D below concerning a related matter -1- Schedule D Violations/Breaches The Company is in arrears in its obligations to two vendors for payment of amounts due under settlement arrangements providing for discounted payment of past due invoices, These obligations are in the approximate amount of $800,000 to one vendor and $175,000 to another vendor. The Company expects to receive proceeds from a Federal tax refund and from the sale of its prior manufacturing plant in Bensenville, Illinois within in the next 45 days and to use the proceeds thereof to resolve these obligations. Both vendors are cooperating with the Company in this regard. The Company is allegedly delinquent on obligations relating to its lease of certain facilities in Bensenville, Illinois. Its exposure does not exceed $150,000. It has offered to resolve the dispute by the payment of $50,000 in cash and the issuance of warrants to purchase 25,000 shares of its common stock at $1.00 per share. Negotiations of the dispute are ongoing. -1- Exhibit A Warrant (attached hereto) -2- Exhibit B Certificate of Designations of Series A Convertible Preferred Stock of M-Wave, Inc. -3- Exhibit C Form of Legal Opinion (Delivered to Purchasers at the Closing) 1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, with corporate power to own its properties and to conduct its business. 2. The Company has the corporate power to execute, deliver and perform the transaction documents, including the Exhibits thereto (the "Transaction Documents"). The Transaction Documents have been duly authorized by all requisite corporate action by the Company and constitute the valid and binding obligations of the Company, enforceable in accordance with their terms (subject to bankruptcy, equitable principles and other customary exceptions). (a) As of the date hereof, in accordance with its Articles of Incorporation on file with the Secretary of State of Delaware, the authorized capital stock of the Company consists of 1,000,000 shares of Preferred Stock, and 20,000,000 shares of Common Stock. (b) The shares of the Company's Series A Stock have been duly authorized and, upon issuance, delivery, and payment therefor as described in the Subscription Agreement, will be validly issued, fully paid and nonassessable. (c) The shares of the Company's Common Stock initially issuable upon conversion of the shares of Series A Stock sold have been duly authorized and reserved for issuance and, upon issuance and delivery upon conversion of the Shares as described in the Certificate of Designations, will be validly issued, fully paid and nonassessable. (d) The shares of the Company's Common Stock issuable upon exercise of the Warrants have been duly authorized and reserved for issuance, and upon issuance, delivery, and payment therefor in accordance with the Warrants, will be validly issued, fully paid and nonassessable. 3. The Company's execution and delivery of the Transaction Documents and the issue and sale of the Shares and the Warrants, on the terms and conditions set forth in the Subscription Agreement, and the Stock Purchase Agreement, will not violate any law of the United States or the State of Delaware any rule or regulation of any governmental authority or regulatory body of the United States or the State of Delaware or any provision of the Company's Articles of Incorporation or Bylaws. 4. No consent, approval, order or authorization of, and no notice to or filing with, any governmental agency or body or any court is required to be obtained or made by the Company for the issuance and sale of the Shares and the Warrants pursuant to the Transaction -4- Documents or Agreement, except such as have been obtained or made and such as may be required under applicable securities laws. 5. On the assumption that the representations of the Company and the Purchasers in the Subscription Agreement are correct and complete, the offer and sale of the Shares and the Warrants pursuant to the terms of the Subscription Agreement are exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended, , and, under such securities laws as they presently exist, the issuance of the Company's Common Stock upon conversion of the Shares and exercise of the Warrants would also be exempt from such registration. 6. We know of no pending or overtly threatened action, proceeding or governmental investigation with respect to the Company's sale of Series A Stock and Warrants pursuant to the Transaction Documents. -5- Exhibit D Registration Rights Agreement -6- EX-10.33 7 c87635exv10w33.txt STOCK REGISTRATION RIGHTS AGREEMENT Exhibit 10.33 EXHIBIT D TO SUBSCRIPTION AGREEMENT REGISTRATION RIGHTS AGREEMENT AGREEMENT dated as of June ___, 2004, between MERCATOR MOMENTUM FUND, L.P., MERCATOR MOMENTUM FUND III, L.P, MONARCH POINTE FUND, LTD. (collectively, the "Funds") and MERCATOR ADVISORY GROUP, LLC ("Mercator") (the Funds and Mercator are referred to individually as a "Holder" and collectively as the "Holders"), and M-Wave, Inc., a Delaware corporation (the "Company"). WHEREAS, the Funds are purchasing, for $3,000,000, an aggregate of 30,000 shares of Series A Convertible Preferred Stock (together, the "Series A Stock") from the Company, and have the right to cause their Series A Stock to be converted into shares of Common Stock (the "Common Stock"), of the Company, pursuant to the conversion formula set forth in the Certificate of Designations; WHEREAS, each Fund and Mercator is acquiring a Warrant (together, the "Warrants") from the Company, and the Holders, together, have the right to purchase in the aggregate up to 1,530,000 shares of the Common Stock through the exercise of the Warrants; WHEREAS, the Company desires to grant to the Holders the registration rights set forth herein with respect to the shares of Common Stock issuable upon the conversion of the Series A Stock and the exercise of the Warrants. NOW, THEREFORE, the parties hereto mutually agree as follows: 1. REGISTRABLE SECURITIES. As used herein the terms "Registrable Security" means each of the shares of Common Stock (i) issued upon the conversion of the Series A Stock (the "Conversion Shares") or (ii) upon exercise of the Warrants (the "Warrant Shares"), provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination that (a) it has been effectively registered under the Securities Act of 1933, as amended (the "Securities Act"), and disposed of pursuant thereto, or (b) registration under the Securities Act is no longer required for the immediate public distribution of such security. The term "Registrable Securities" means any and/or all of the securities falling within the foregoing definition of a "Registrable Security." In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of "Registrable Security" as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1. 2. REGISTRATION. (a) The Company shall file a registration statement (the "Registration Statement") with the Securities and Exchange Commission (the "Commission") within thirty (30) days after the Closing (as that term is defined in the Subscription Agreement executed by the Holders), in order to register the resale of the Registrable Securities under the Securities Act. Once effective, the Company shall maintain the effectiveness of the Registration Statement until the earlier of (i) the date that all of the Registrable Securities have been sold, or (ii) the date that the Company receives an opinion of counsel to the Company that all of the Registrable Securities may be freely traded without registration under the Securities Act, under Rule 144 promulgated under the Securities Act or otherwise. (b) The Company will initially include in the Registration Statement as Registrable Securities four million five hundred ninety-one thousand two hundred twenty-four (4,591,224) shares of Common Stock. (c) Depending on whether the Registration Statement has previously become effective with the Commission, the Company shall register additional shares under Section 2(c) either by amending the Registration Statement to increase the number of shares that it covers or by filing a new registration statement. Any such new registration statement shall thereafter be deemed part of the Registration Statement for the purposes of this Agreement. 3. COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. The Company covenants and agrees as follows: (a) The Company shall use its best efforts to cause the Registration Statement to become effective with the Commission as promptly as possible and in no event more than 120 days after the date of filing the Registration Statement. If any stop order shall be issued by the Commission in connection therewith, the Company shall use its best efforts to obtain promptly the removal of such order. Following the effective date of the Registration Statement, the Company shall, upon the request of any Holder, forthwith supply such reasonable number of copies of the Registration Statement, preliminary prospectus and prospectus meeting the requirements of the Securities Act, and any other documents necessary or incidental to the public offering of the Registrable Securities, as shall be reasonably requested by the Holder to permit the Holder to make a public distribution of the Holder's Registrable Securities. The obligations of the Company hereunder with respect to the Holder's Registrable Securities are subject to the Holder's furnishing to the Company such appropriate information concerning the Holder, the Holder's Registrable Securities and the terms of the Holder's offering of such Registrable Securities as the Company may reasonably request in writing. (b) The Company shall pay all costs, fees and expenses in connection with the Registration Statement filed pursuant to Section 2 hereof including, without limitation, the Company's legal and accounting fees, printing expenses, and blue sky fees and expenses; provided, however, that each Holder shall be solely responsible for the fees of any counsel retained by the Holder in connection with such registration and any transfer taxes or underwriting discounts, commissions or fees applicable to the Registrable Securities sold by the Holder pursuant thereto. (c) The Company will take all necessary actions which may be required to qualify or register the Registrable Securities included in the Registration Statement for the offer and sale under the securities or blue sky laws of such states as are reasonably requested by each Holder of such securities, provided that the Company shall not be obligated to execute or file any 2 general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction. 4. ADDITIONAL TERMS. (a) The Company shall indemnify and hold harmless the Holders and each underwriter, within the meaning of the Securities Act, who may purchase from or sell for any Holder, any Registrable Securities, from and against any and all losses, claims, damages and liabilities caused by any untrue statement of a material fact contained in the Registration Statement, any other registration statement filed by the Company under the Securities Act with respect to the registration of the Registrable Securities, any post-effective amendment to such registration statements, or any prospectus included therein or caused by any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission based upon information furnished or required to be furnished in writing to the Company by the Holders or underwriter expressly for use therein, which indemnification shall include each person, if any, who controls any Holder or underwriter within the meaning of the Securities Act and each officer, director, employee and agent of each Holder and underwriter; provided, however, that the indemnification in this Section 4(a) with respect to any prospectus shall not inure to the benefit of any Holder or underwriter (or to the benefit of any person controlling any Holder or underwriter) on account of any such loss, claim, damage or liability arising from the sale of Registrable Securities by the Holder or underwriter, if a copy of a subsequent prospectus correcting the untrue statement or omission in such earlier prospectus was provided to such Holder or underwriter by the Company prior to the subject sale and the subsequent prospectus was not delivered or sent by the Holder or underwriter to the purchaser prior to such sale and provided further, that the Company shall not be obligated to so indemnify any Holder or any such underwriter or other person referred to above unless the Holder or underwriter or other person, as the case may be, shall at the same time indemnify the Company, its directors, each officer signing the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act, from and against any and all losses, claims, damages and liabilities caused by any untrue statement of a material fact contained in the Registration Statement, any registration statement or any prospectus required to be filed or furnished by reason of this Agreement or caused by any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, insofar as such losses, claims, damages or liabilities are caused by any untrue statement or omission based upon information furnished in writing to the Company by the Holder or underwriter expressly for use therein. (b) If for any reason the indemnification provided for in the preceding section is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, claim, damage, liability or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by the indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations. 3 (c) Neither the filing of a Registration Statement by the Company pursuant to this Agreement nor the making of any request for prospectuses by the Holder shall impose upon any Holder any obligation to sell the Holder's Registrable Securities. (d) Each Holder, upon receipt of notice from the Company that an event has occurred which requires a Post-Effective Amendment to the Registration Statement or a supplement to the prospectus included therein, shall promptly discontinue the sale of Registrable Securities until the Holder receives a copy of a supplemented or amended prospectus from the Company, which the Company shall provide as soon as practicable after such notice. (e) If the Company fails to keep the Registration Statement referred to above continuously effective during the requisite period, then the Company shall, promptly upon the request of any Holder, use its best efforts to update the Registration Statement or file a new registration statement covering the Registrable Securities remaining unsold, subject to the terms and provisions hereof. (f) Each Holder agrees to provide the Company with any information or undertakings reasonably requested by the Company in order for the Company to include any appropriate information concerning the Holder in the Registration Statement or in order to promote compliance by the Company or the Holder with the Securities Act. (g) The Company agrees that it shall cause each of its directors, officers and shareholders owning ten percent (10%) or more of the Company's outstanding Common Stock to refrain from selling any shares of the Company's Common Stock until the Registration Statement has been declared effective. (h) Each Holder, on behalf of itself and its affiliates and the permitted assignee of any Conversion Shares or Warrant Shares, hereby covenants and agrees not to, directly or indirectly, offer to "short sell", contract to "short sell" or otherwise "short sell" any securities of the Company, including, without limitation, shares of Common Stock that will be received as a result of the conversion of the Series A Stock or the exercise of the Warrants. GOVERNING LAW. The Registrable Securities will be, if and when issued, delivered in California. This Agreement shall be deemed to have been made and delivered in the State of California and shall be governed as to validity, interpretation, construction, effect and in all other respects by the internal substantive laws of the State of California, without giving effect to the choice of law rules thereof. 5. AMENDMENT. This Agreement may only be amended by a written instrument executed by the Company and the Holders. 6. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof. 7. EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. 4 8. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed duly given when delivered by hand or mailed by registered or certified mail, postage prepaid, return receipt requested, as follows: If to the Holders, Mercator Advisory Group, LLC Mercator Momentum Fund, L.P. Mercator Momentum Fund III, L.P. Monarch Pointe Fund, Ltd. 555 South Flower Street, Suite 4500 Los Angeles, CA 90071 Attention: David Firestone With a copy to Sheppard Mullin Richter & Hampton LLP 333 South Hope Street 48th Floor Los Angeles, CA 90071-1448 Telephone No.: (213) 620-1780 Facsimile No.: (213) 620-1398 Attention: David C. Ulich If to the Company, M-Wave, Inc. 475 Industrial Drive _West Chicago, Illinois 60185 Telephone No.: 630-562-4751 Facsimile No.: 630-562-1775 Attention: Jim Mayer With a copy to Freeborn & Peters, LLP Suite 3000 311 South Wacker Drive Chicago, Illinois 60606 Telephone No.: 312-360-5769 Facsimile No.: 312-360-5671 Attention: Carl R. Klein 9. BINDING EFFECT; BENEFITS. Any Holder may assign its rights hereunder. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective heirs, legal representatives, successors and assigns. Nothing herein contained, express or implied, is intended to confer upon any person other than the parties hereto and their respective heirs, legal representatives and successors, any rights or remedies under or by reason of this Agreement. 10. HEADINGS. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement. 5 11. SEVERABILITY. Any provision of this Agreement which is held by a court of competent jurisdiction to be prohibited or unenforceable in any jurisdiction(s) shall be, as to such jurisdiction(s), ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. 12. JURISDICTION. Each of the parties irrevocably agrees that any and all suits or proceedings based on or arising under this Agreement may be brought only in and shall be resolved in the federal or state courts located in the City of Los Angeles, California and consents to the jurisdiction of such courts for such purpose. Each of the parties irrevocably waives the defense of an inconvenient forum to the maintenance of such suit or proceeding in any such court. Each of the parties further agrees that service of process upon such party mailed by first class mail to the address set forth in Section 9 shall be deemed in every respect effective service of process upon such party in any such suit or proceeding. Nothing herein shall affect the right of other party to serve process in any other manner permitted by law. Each of the parties agrees that a final non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. 13. ATTORNEYS' FEES AND DISBURSEMENTS. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party or parties shall be entitled to receive from the other party or parties reasonable attorneys' fees and disbursements in addition to any other relief to which the prevailing party or parties may be entitled. [The balance of this page is intentionally left blank.] 6 IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the date first above written. M-WAVE, INC. By: _________________________________________ Name: Joseph A.Turek Its: President HOLDERS: MERCATOR MOMENTUM FUND, L.P. BY: MERCATOR ADVISORY GROUP, LLC, GENERAL PARTNER By:_________________________________________ Name: David Firestone Its: Managing Member MERCATOR MOMENTUM FUND III, L.P. BY MERCATOR ADVISORY GROUP, LLC By: _________________________________________ Name: David Firestone Its: Managing Member MERCATOR ADVISORY GROUP, LLC By: _________________________________________ Name: David Firestone Its: Managing Member MONARCH POINTE FUND, LTD. By: _________________________________________ Name: David Firestone Its: President 7 EX-10.34 8 c87635exv10w34.txt NONSTATUTORY STOCK OPTION AGREEMENT Exhibit 10.34 NONSTATUTORY STOCK OPTION AGREEMENT This Nonstatutory Stock Option Agreement (the "Agreement"), made on the 28th day of July 2004, by and between M-WAVE, INC. (the "Company") and GERALD M. ("JIM") MAYER (the "Optionee") evidences the grant, by the Company, of a Nonstatutory Stock Option (the "Option") to the Optionee on the date hereof (the "Date of Grant"), in accordance with Section 3.2.4 of the Employment Agreement (the "Employment Agreement") of even date herewith between the Optionee and the Company pursuant to which the Optionee shall serve as the Chief Executive Officer of the Company. The Company and the Optionee agree as follows: 1. Shares Optioned and Option Price. The Optionee shall have an Option to purchase 400,000 shares of the Company's common stock, par value $.005 per share (the "Common Stock"), at a price of $1.16 for each share ("Exercise Price"), being the closing price of the Common Stock on the NASDAQ SmallCap Market on the Date of Grant. The Option shall be subject to all the terms and conditions of the Agreement. 2. Option Status. The Option is intended to be a nonstatutory option and shall not be deemed to meet the requirements of Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"). 3. Vesting of Option. Subject to the conditions and limitations of this Agreement, all shares for which the Option is granted shall become vested and exercisable as of the close of business on October 28, 2004. 4. Exercise Period. Subject to the conditions and limitations of this Agreement and except as may be otherwise set forth in the Employment Agreement,, the Option may be exercised, from time to time, with respect to all or any number of the then vested, unexercised shares of Common Stock remaining subject to the Option during the period beginning on the Date of Grant and ending on the earliest to occur of the following dates: (a) the last day of the five-year period beginning on the Date of Grant; (b) the 90th day after the date that the Optionee's service as an employee of the Company terminates, unless (c) below applies to the Optionee; or (c) the date that the Optionee's service as an employee of the Company terminates for Cause (as defined in the Employment Agreement). The Option may not be exercised to the extent that it is not vested and, after the date that the Optionee's service as an employee of the Company terminates, may not be exercised to the extent that the Option is not vested on such date of termination. For purposes of determining the period in which the Option may be exercised under this paragraph 4, any period that the Optionee is a member of a board of directors of the Company or is retained by the Company as a consultant for regular and substantial services shall be considered service as an employee. Page 1 5. Exercise of Option. During the period that the Option is exercisable, it may be exercised in full or in part by (a) the Optionee, (b) in the event of the Optionee's death, by the person or persons to whom the Option was transferred by will or the laws of descent and distribution or (c) if the Option has been transferred with the consent of the Company, by the permitted transferee hereof, by delivering or mailing written notice of the exercise to the Company along with full payment of the exercise price. Payment of the exercise price shall be made in cash (including personal check) or, to the extent permitted by the Company, in shares of Common Stock with an aggregate fair market value (as reasonable determined by the Board of Directors of the Company) equal to the exercise price on the date that the notice is received by the Company. The written notice shall be signed by each person entitled to exercise the Option and shall specify the address and social security number of each such person. If any person other than the Optionee purports to be entitled to exercise all or any portion of the Option, the written notice shall be accompanied by proof, satisfactory to the Company, of that entitlement. The written notice will be effective and the Option shall be deemed exercised to the extent specified in the notice on the date that the written notice (together with required accompaniments) is received by the Company. 6. Transfer of Shares on Exercise. As soon as practicable after receipt of an effective written notice of exercise and full payment of the purchase price, the Company shall cause ownership of the appropriate number of shares of Common Stock to be transferred to the person or persons exercising the Option by having a certificate or certificates for those shares registered in the name of such person or persons and shall have each certificate delivered to the appropriate person. 7. Tax Withholding. The Company shall require payment of any tax required by law to be withheld by the Company with respect to exercise of the Option prior to transfer of the shares. To the extent permitted by the Company, the amount required to be withheld may be paid by surrender of shares of Common Stock or by the Company's retention of shares of Common Stock otherwise deliverable on exercise, valued in each case at their fair market value (as reasonably determined by the Board of Directors of the Company) on the date of exercise. 8. Restrictions on Transfers of Rights. The rights of the Optionee under this Agreement may not be transferred except by will or the laws of descent and distribution or pursuant to a qualified domestic relations order (as defined in the Code), and the rights under this Agreement may be exercised during the lifetime of the Optionee only by the Optionee; provided, however, that the Company may, in its discretion, permit the Optionee to transfer the Option: (a) to family members; (b) to custodianships under the Uniform Transfers to Minors Act or any similar statute; (c) to trusts for the benefit of the Optionee and his family members; (d) to family partnerships; and (e) on termination or dissolution of such custodianship, trust, or family partnership, to the person or persons who, in accordance with the terms of such custodianship, trust, or partnership, are entitled to receive the transferred Option. 9. No Shareholder Rights before Exercise. The Optionee shall not have any rights of a shareholder of the Company with respect to any Common Stock subject to the Option unless and until such shares are issued upon exercise of the Option. Page 2 10. Entire Agreement. The Agreement represents the entire agreement between the Company and the Optionee in connection with the Option. 11. Adjustment. The number of shares of Common Stock to which the Option relates and the Exercise Price shall be subject to appropriate adjustment (as reasonably determined by the Board of Directors of the Company) in the event of a stock dividend, stock split, reverse stock split, share combination, recapitalization, merger, consolidation, asset spin-off, reorganization or similar event, of or by the Company. IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the Optionee have signed this Agreement as of the day and year first above written. M-WAVE, INC.: By: _________________________________________ Its: President OPTIONEE: _____________________________________________ Gerald M. ("Jim") Mayer Page 3 EX-31.1 9 c87635exv31w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 302 EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Joseph A. Turek, as Chief Executive Officer of M~Wave, Inc., at June 30, 2004, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of M~Wave, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and 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 small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this 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 33 external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the small business issuer'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 small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer'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 small business issuer's internal control over financial reporting. Date: August 13, 2004 /s/ Joseph A. Turek - ---------------------------- Joseph A. Turek Chief Executive Officer at June 30, 2004 34 EX-31.2 10 c87635exv31w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 302 EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Jim Mayer, Chief Financial Officer of M~Wave, Inc., at June 30, 2004, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of M~Wave, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and 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 small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this 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 35 external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the small business issuer'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 small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer'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 small business issuer's internal control over financial reporting. Date: August 13, 2004 /s/ Jim Mayer - ------------------------------ Jim Mayer Chief Financial Officer at June 30, 2004 36 EX-32.2 11 c87635exv32w2.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 EXHIBIT 32.2 Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of M~Wave, Inc. (the "Company") certifies that the Quarterly Report on Form 10-QSB of the Company for the quarter ended June 30, 2004 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and information contained in that Form 10-QSB fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 13, 2004 /s/ Joseph A. Turek -------------------------------------------- Joseph A. Turek Chief Executive Officer at June 30, 2004 /s/ Jim Mayer --------------------------------------------- Jim Mayer Chief Financial Officer at June 30, 2004 This certification is made solely for purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose. 37 -----END PRIVACY-ENHANCED MESSAGE-----