-----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, QgI77oWOB7AKUUxu6Qah5GqP7QpDf5Aldo9GEADujEAxdFONVi45ue++L/mtaPN7 pWdaTxpOqb90YU8BO5wieg== 0000950137-97-001849.txt : 19970513 0000950137-97-001849.hdr.sgml : 19970513 ACCESSION NUMBER: 0000950137-97-001849 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970512 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: M WAVE INC CENTRAL INDEX KEY: 0000883842 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 363809819 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19944 FILM NUMBER: 97600764 BUSINESS ADDRESS: STREET 1: 216 EVERGREEN ST CITY: BENSENVILLE ILLINOIS STATE: IL ZIP: 60106 BUSINESS PHONE: 7088603560 MAIL ADDRESS: STREET 1: 216 EVERGREEN STREET CITY: BENSENVILLE STATE: IL ZIP: 60106 10-Q 1 FORM 10-Q DATED MARCH 31, 1997 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 1997 Commission File No. 0-19944 ------------------------------------ --------------------------- M~WAVE, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 36-3809819 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 216 Evergreen Street, Bensenville, Illinois 60106 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (630) 860-9542 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The registrant has 3,049,806 shares of common stock outstanding at May 9, 1997. 1 2 PART I - FINANCIAL INFORMATION Item 1: Financial Statements M~WAVE, Inc. CONSOLIDATED BALANCE SHEETS (Unaudited)
December 31, March 31, 1996 1997 ASSETS ---------------- ---------------- CURRENT ASSETS: Cash and cash equivalents................................... $ 1,216,859 $ 1,052,575 Accounts receivable......................................... 1,725,340 1,914,568 Inventories................................................. 1,349,645 1,030,484 Refundable income taxes..................................... 2,426,081 2,271,356 Deferred income taxes....................................... 804,088 804,088 Prepaid expenses and other.................................. 191,729 213,637 ---------------- ---------------- Total current assets.................................... 7,713,742 7,286,708 PROPERTY, PLANT AND EQUIPMENT: Land, buildings and improvements............................ 6,224,247 6,232,488 Machinery and equipment..................................... 9,885,170 10,059,463 ---------------- ---------------- Total property, plant and equipment..................... 16,109,417 16,291,951 Less accumulated depreciation............................... (3,646,209) (4,054,065) ---------------- ---------------- Property, plant and equipment-net....................... 12,463,208 12,237,886 NOTE RECEIVABLE, net of valuation allowance of $250,000..................................... 871,718 871,718 GOODWILL........................................................ 771,853 746,407 OTHER ASSETS.................................................... 15,030 13,919 ---------------- ---------------- TOTAL........................................................... $21,835,551 $21,156,638 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................................ $ 1,549,997 $ 1,466,765 Accrued expenses............................................ 1,254,436 1,038,850 Current portion of long-term debt........................... 307,606 307,606 ---------------- ---------------- Total current liabilities............................... 3,112,039 2,813,221 DEFERRED INCOME TAXES........................................... 1,106,786 1,143,238 LONG-TERM DEBT.................................................. 2,604,464 2,501,587 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; authorized, 1,000,000 shares; no shares issued.................................. Common stock, $.01 par value; authorized, 10,000,000 shares 3,069,806 shares issued and 3,049,806 shares outstanding at March 31, 1997......................................... 30,416 30,698 Additional paid-in capital.................................. 7,492,472 7,574,688 Retained earnings .......................................... 7,609,374 7,213,206 Treasury stock: 20,000 shares, at cost..................... (120,000) (120,000) ---------------- ---------------- Total stockholders' equity ............................. 15,012,262 14,698,592 ---------------- ---------------- TOTAL........................................................... $21,835,551 $21,156,638 ================ ================ See notes to consolidated financial statements.
2 3 M~WAVE, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended March 31, ---------------------------- 1996 1997 ---------- ---------- Net sales........................................ $6,256,558 $4,271,004 Cost of goods sold............................... 8,090,779 3,862,033 ---------- ---------- Gross profit (loss) ........................... (1,834,221) 408,971 Operating expenses: General and administrative..................... 736,692 738,002 Selling and marketing.......................... 483,403 299,741 Research and development....................... 121,355 0 ---------- ---------- Total operating expenses..................... 1,341,450 1,037,743 ---------- ---------- Operating loss ................................ (3,175,671) (628,772) Other income (expense): Interest income................................ 29,551 22,860 Interest expense............................... (58,004) (63,078) Gain (loss) on disposal of assets.............. (149,751) 42,574 ---------- ---------- Total other income (expense).................. (178,204) 2,356 ---------- ---------- Loss before income taxes.................... (3,353,875) (626,416) Credit for income taxes.......................... (1,227,531) (230,246) ---------- ---------- Net loss........................................ $(2,126,344) $(396,170) ========== ========== Net loss per share............................... $(0.70) $(0.13) Weighted average shares.......................... 3,020,375 3,027,433 See notes to consolidated financial statements.
3 4 M~WAVE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended March 31, ---------------------------- 1996 1997 ------------ ------------ OPERATING ACTIVITIES: Net income (loss)................................................... $(2,126,344) $(396,169) Adjustments to reconcile net loss to net cash flows from operating activities: Gain on disposal of property, plant and equipment............... 0 (42,574) Depreciation and amortization................................... 369,729 399,827 Deferred income taxes........................................... (552,691) 36,452 Changes in assets and liabilities: Accounts receivable-trade....................................... (2,161) (189,228) Inventories..................................................... 866,609 319,161 Income taxes.................................................... (262,812) 154,725 Prepaid expenses and other assets............................... 109,171 (20,796) Accounts payable................................................ 579,266 (83,232) Accrued expenses................................................ 313,284 (215,586) ---------- ---------- Net cash flows from operating activities..................... (705,949) (37,420) ---------- ---------- INVESTING ACTIVITIES: Purchase of property, plant and equipment........................... (4,279,905) (128,585) Proceeds from sale of property, plant and equipment................. 22,100 Redemption of marketable securities................................. 312,743 0 ---------- ---------- Net cash flows from investing activities..................... (3,967,162) (106,485) FINANCING ACTIVITIES: Common stock issued upon exercise of stock options.................. 0 32,500 Common stock issued for cash........................................ 0 49,998 Payments on long term debt.......................................... (4,241) (102,877) Mortgage debt incurred.............................................. 2,496,007 0 ---------- ---------- Net cash flows from financing activities..................... 2,491,766 (20,379) ---------- ---------- NET DECREASE IN CASH AND CASH EQUIVALENTS............................. (2,181,345) (164,284) CASH AND CASH EQUIVALENTS - Beginning of period....................... 2,403,747 1,216,859 ---------- ---------- CASH AND CASH EQUIVALENTS - End of period............................. $ 222,402 $1,052,575 ========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest.......................... $ 58,004 $ 63,078
See notes to consolidated financial statements. 4 5 M~WAVE, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 1996 filed March 31, 1997. 2. BUSINESS M~Wave, through its wholly-owned subsidiaries, Poly Circuits Inc. and P C Dynamics Corporation (collectively, the "Company"), manufactures microwave frequency components and high frequency circuit boards on Teflon-based laminates for commercial and military wireless communication applications. 4. INVENTORIES Substantially all the Company's inventories are in work in process. 5. DEBT The Company has a mortgage loan on $2,803,000 for the facility at P C Dynamics Corporation in Frisco, Texas. Interest on this mortgage loan is at 1/2% over prime rate. The loan is payable in monthly installments of principal and interest and is due in October 2001. The Company has a $2,000,000 line of credit available based on 80% of eligible accounts receivable to fund the working capital needs of the Company. The agreement expires May 31, 1997 and is renewable semi-annually at the mutual consent of the Company and the lender. No balance was outstanding under the line at March 31, 1997. 6. LITIGATION The Company is a party to various actions and proceedings related to its normal business operations. The Company believes that the outcome of this litigation will not have a material adverse effect on the financial position or results of operations of the Company. 5 6 The Company and Joseph Turek have been named as defendants in Lionheart Partners, Inc., as general partner of Lionheart USA Micro Cap Value. L.P. v. M~Wave, Inc. and Joseph Turek, which was filed on or about November 17, 1995 in the United States District Court for the Northern District of Illinois. The case was filed as a purported class action on behalf of all persons who purchased common stock of the Company between August 8, 1995 and October 18, 1995. The complaint alleges that the defendants made materially false and misleading statements and failed to correct public representations which had become materially false and misleading regarding the Company's revenues and earnings. The complaint asserts claims under Sections 10(b) and 20 of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seeks compensatory damages in an unspecified amount. The Company believes that this action is without merit. On April 25, 1997, the plaintiffs and the defendants entered into a settlement agreement which, subject to court approval, would resolve all of the claims arising out of this action, except as to claims of class members who opt out of the settlement. The settlement provides for a $150,000 payment to the plaintiff class plus administrative fees not to exceed $20,000. The Company's contribution to the settlement would be approximately $85,000. 6 7 Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS FOR THE QUARTER ENDED MARCH 31, 1997 COMPARED TO THE QUARTER ENDED MARCH 31, 1996 NET SALES Net sales for the first quarter ended March 31, 1997 decreased 32% to $4,271,000 from $6,257,000 in the first quarter of 1996. The Company has been seriously affected by the slowing of the rapid growth in the domestic cellular telephone industry. Net sales to Motorola decreased by $1,063,000 or 53% to $945,000. Net sales to L K Products decreased by $525,000 or 56% to $407,000. Net sales to Hewlett Packard decreased by $246,000 or 78% to $70,000. The foregoing decreases in net sales were partially offset by an increase in net sales to Spectrian and Lockheed Martin, two of the Company's larger customers, of $406,000. The Company's three largest customers accounted for 52% of the Company's net sales for the first quarter ended March 31, 1997 compared to 57% in the first quarter of 1996. GROSS PROFIT (LOSS) AND COST OF GOODS SOLD Gross profit increased by $2,243,000 to $409,000 in the first quarter of 1997 from negative $1,834,000 in 1996. In February 1997, as a result of lower than anticipated volume, the Company reduced its employees and moved to a one-shift operation at its Bensenville facility. The first quarter of 1996 included sales adjustments for pricing and returns of $721,000 and inventory write-downs of $1,295,000 and $665,000 relating to manufacturing scrap and rework and inventory obsolescence, respectively. The Company has also made operational changes to enhance its quality control and ability to manufacture highly complex products; however, there can be no assurance as to when, or if, these changes will result in improved manufacturing process. Future production problems would continue to adversely impact the Company's gross margins and profitability, which would also result in decreased liquidity and adversely affect the Company's financial position. OPERATING EXPENSES General and administrative expenses were $738,000 or 17.3% of net sales in the first quarter of 1997 compared to $737,000 or 11.8% of net sales in the first quarter of 1996. On April 15, 1996 the Company engaged a consulting firm to provide consulting services with respect to the Company's operations, which services resulted in additional expenses of $110,000 in the first quarter of 1997. The consultants completed their work with the Company in February 1997. General and administrative expenses consist primarily of salaries and benefits, professional services, 7 8 depreciation of office equipment, computer systems and occupancy expenses. Selling and marketing expenses were $300,000 or 7.0% of net sales in the first quarter of 1997 compared to $483,000 or 7.7% of net sales in the first quarter of 1996. Sales commission expense was 3.4% of net sales in the first quarter of 1997 compared to 3.2% of net sales in the first quarter of 1996. The Company also reduced its staff in February 1997. Selling and marketing expenses include the cost of salaries, advertising and promoting the Company's products, and commissions paid to independent sales organizations. Research and development expenses which related primarily to the assembly division were $121,000 or 1.9% of net sales in the first quarter of 1996. The Company sold the Assembly Division in December 1996. OPERATING LOSS Operating loss was $629,000 in the first quarter of 1997 compared to an operating loss of $3,176,000 in the first quarter of 1996, a decrease in the operating loss of $2,547,000. The change in operating loss reflects primarily the changes in net sales, gross profit and cost of goods sold and operating expenses as discussed above. The change in operating loss can be summarized as follows: Decrease in net sales $ 582,000 Increase in gross margin 1,661,000 Decrease in operating expenses 304,000 ----------- Decrease in operating loss $ 2,547,000 On March 31, 1997, the Company had 115 employees compared to 175 on March 31, 1996. INTEREST INCOME Interest income from the notes receivable, recorded with the sale of the Assembly Division in 1996, was $23,000 in the first quarter of 1997. Interest income from short-term investments was $30,000 in the first quarter of 1996. INTEREST EXPENSE Interest expense, primarily related to the Company's mortgage obligation on its P C Dynamics facility, was $63,000 in the first quarter of 1997 compared to $58,000 in 1996. GAIN ON DISPOSAL OF FIXED ASSETS The Company recorded a gain of $43,000 on the disposal of fixed assets in the first quarter of 1997 compared to a loss of $150,000 in 1996. 8 9 INCOME TAXES The Company had an effective tax credit rate of 36.8% in the first quarter of 1997 compared to 36.6% in 1996. LIQUIDITY AND CAPITAL RESOURCES Net cash used for operations was $37,000 for the first three months of 1997 compared to $706,000 for the first three months of 1996. A reduction of inventories and increases in accrued expenses and accounts payable offset the first three months of 1997 loss from operations. The Company also had income tax refunds of $421,000. Capital expenditures were $128,000 for the first three months of 1997, $105,000 to upgrade the network system at Poly Circuits. Capital expenditures were $4.3 million in the first three months of 1996, $3.3 million for the new P C Dynamics facility in Texas. The Company has a mortgage loan of $2,803,000 on the P C Dynamics facility. Interest on this mortgage loan is at 1/2% over prime rate. The loan is payable in monthly installments of principal and interest and is due in October 2001. The Company has a $2,000,000 line of credit available based on 80% of eligible accounts receivable to fund the working capital needs of the Company. The agreement expires May 31, 1997 and is renewable semi-annually at the mutual consent of the Company and the lender. No balance was outstanding under the line at March 31, 1997. As of March 31, 1997, the Company has $2,803,000 of debt and $1,053,000 of cash and cash equivalents. Management believes that funds generated from operations, coupled with the Company's cash balance and its capacity for debt will be sufficient to fund current business operations. The Company's ability to fund its activities is directly dependent upon its sales, its ability to improve its manufacturing processes, the effective utilization of the Company's manufacturing resources and the Company's ability to access external sources of financing. There can be no assurances that such additional debt financing can be obtained and, if obtained, at reasonable terms. INFLATION Management believes inflation has not had a material effect on the Company's operation or on its financial position. FOREIGN CURRENCY TRANSACTIONS All of the Company's foreign transactions are negotiated, invoiced and paid in United States dollars. 9 10 ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS As a supplier to microwave manufacturers, the Company is dependent upon the success of its customers in developing and successfully marketing end-user microwave systems. The Company is currently working on several development programs for its customers. The development of commercial applications for microwave systems and the timing and size of production schedules for these programs is uncertain and beyond the control of the Company. There can be no assurance that these development programs will have a favorable impact on the Company's operating results. Although management believes some of these products and programs may ultimately develop into successful commercial applications, such developments could result in periodic fluctuations in the Company's operating results. As a result of these considerations, the Company has historically found it difficult to project operating results. The Company expects that a small number of customers will continue to account for a substantial majority of its sales and that the relative dollar amount and mix of products sold to any of these customers can change significantly from year to year. There can be no assurance that the Company's major customers will continue to purchase products from the Company at current levels, or that the mix of products purchased will be in the same ratio. The loss of one or more of the Company's major customers or a change in the mix of product sales could have a material adverse effect on the Company. In addition, future results may be impacted by a number of other factors, including the Company's dependence on suppliers and subcontractors for components; the Company's ability to respond to technical advances; successful award of contracts under bid; design and production delays; cancellation or reduction of contract orders; the Company's effective utilization of existing and new manufacturing resources; and pricing pressures by key customers. The Company's future success is highly dependent upon its ability to manufacture products that incorporate new technology and are priced competitively. The market for the Company's products is characterized by rapid technology advances and industry-wide competition. This competitive environment has resulted in downward pressure on gross margins. In addition, the Company's business has evolved towards the production of relatively smaller quantities of more complex products, the Company expects that it will at times encounter difficulty in maintaining its yield standards. There can be no assurance that the Company will be able to develop technologically advanced products or that future pricing actions by the Company and its competitors will not have a material adverse effect on the Company's results of operations. 10 11 PART II - OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS The Company and Joseph Turek have been named as defendants in Lionheart Partners. Inc., as general partner of Lionheart USA Micro Cap Value, L.P. v. M~Wave, Inc. and Joseph Turek. which was filed on or about November 17, 1995 in the United States District Court for the Northern District of Illinois. The case was filed as a purported class action on behalf of all persons who purchased common stock of the Company between August 8, 1995 and October 18, 1995. The complaint alleges that the defendants made materially false and misleading statements and failed to correct public representations which had become materially false and misleading regarding the Company's revenues and earnings. The complaint asserts claims under Sections 10(b) and 20 of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seeks compensatory damages in an unspecified amount. The Company believes that this action is without merit. On April 25, 1997, the plaintiffs and the defendants entered into a settlement agreement which, subject to court approval, would resolve all of the claims arising out of this action, except as to claims of class members who opt out of the settlement. The settlement provides for a $150,000 payment to the plaintiff class plus administrative fees not to exceed $20,000. The Company's contribution to the settlement would be approximately $85,000. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.9 Employment Agreement between the Company and Michael Bayles 27 Financial Data (b) The Company filed a report on Form 8-K dated February 25, 1997 announcing the reduction in workforce at their Bensenville location. 11 12 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned "hereunto duly authorized. M~WAVE, INC. Date: May 9, 1997 /s/ PAUL H. SCHMITT --------------------------- Paul H. Schmitt Chief Financial Officer 12 13 EXHIBIT INDEX EXHIBIT NO DESCRIPTION - -------- ----------------------------------------------------------- 10.9 Employment Agreement between the Company and Michael Bayles 27 Financial Data 13 EX-10.9 2 EMPLOYMENT AGREEMENT / MICHAEL BAYLES 1 EXHIBIT 10.9 February 6, 1997 Mr. Michael Bayles 4130 Grand Ave. Western Springs, IL 60558 Dear Michael: We are pleased to formally offer you the position of President and Chief Operating Officer of M-Wave, Inc. (the "Company"), beginning effective February 10, 1997 (the "Effective Date"). The following is intended to set forth the terms and conditions of your employment with the Company: 1. Duties: You will have full authority over the administration and business operations of the Company as described in the attached position description, and such other duties as may be delegated to you by the Board of Directors. You will work with the Chairman and Chief Executive Officer, and will report directly to the Board of Directors. Effective February 10, 1997, you agree to devote your entire business time, energy and skills to the affairs of the Company and its subsidiaries and affiliated businesses, if any, and to the promotion of their interests. You may, with the approval of the Board of Directors, serve as a director of other corporations. 2. Compensation: Your salary and bonus will be reviewed annually by the Board of Directors. (a) Salary: Your annual base salary will be $190,000 ("Base Salary"). Annual base salary will be earned beginning on February 10, 1997 and will be determined on a calendar year basis. (b) Bonus: If you remain employed until February 3, 1998, you will receive a signing bonus on that date equal to $47,500. In addition, you will be entitled to an annual target bonus of up to 50% of Base Salary (for 1997, up to 25% of Base Salary). Specific bonus awards will be determined under a bonus plan tied to the target annual net income of the Company and for each year, will be paid within 60 days following the receipt of audited financial statements for such year. If your employment is terminated by the Company for any reason other than Cause, (as defined in Item 4) or if you die or become disabled (as defined below), you will receive a portion of the bonus equal to the amount that would be payable as a bonus based upon the actual annual net income for the year in which your termination occurs (or such other target as may be established for the bonus plan for such year) multiplied by a fraction, the numerator of which is the number of calendar months in the year during which you were employed (rounded to the nearest whole month), and the denominator of which is 12. No bonus will be paid with respect to any year in which your employment terminates for Cause, or in which you resign. (i)For calendar year 1997, the bonus award will be tied to net income based upon the existing business plan as described below: 2
-------------------------------------- TARGET NET % TARGET AWARD AS BONUS INCOME INCOME % SALARY AWARD -------- -------- -------- ------- $760,000 80% 5% $9,500 $855,000 90% 15% $28,000 $950,000 100% 25% $47,000 --------------------------------------
If Net Income for the year falls between $760,000 and $855,000 or between $855,000 and $950,000, the amount of your bonus will be computed using linear interpolation. For example, if Net Income is $800,000, your bonus award would be $17,500. If Net Income exceeds $950,000, you will receive additional incentive compensation at a rate of 5 % of the Net Income in excess of $950,000 For example, if Net Income for 1997 is $1.95 million ($1.0 million above $950,000), you will receive incremental incentive compensation of $50,000 for a total award (including your signing bonus) of $145,000. (ii) For subsequent years the annual bonus targets will be determined by the Compensation Committee of the Board of Directors not later than 90 days following the first day of the calendar year with respect to which the bonus is payable (c) Fringe Benefits: you will be entitled to participate in the benefit programs currently available to senior management employees of the Company, or which are made available to such employees by the Board of Directors. Currently, senior management employees may participate in the Company's 401(k) plan, and receive health insurance coverage and disability insurance coverage. In addition, you will be entitled to 5 paid vacation days and six personal absence days per year. (d) Death or Disability: If you should die while employed or have a termination of employment due to disability, any salary and bonus which has been earned but remains unpaid as of the date of death or termination due to disability (including bonus, if any, earned with respect to the calendar year ending immediately prior to the date of your death or termination) will be paid to you or your designated beneficiary. All other benefits will terminate on the date of your death or termination due to disability Disability shall mean your inability to perform the essential functions of your job, with or without reasonable accommodation. 3. Equity Ownership: (a) Stock Options: (i) Amount. The Company will recommend to the Compensation Committee that you be granted stock options with respect to 210,000 shares of the Company's common stock ("Stock") (ii) Price. The Company will further recommend to the Compensation Committee that the options be exercisable in three blocks as follows: 50,000 of the options will be exercisable at a price equal to the fair market value of the Stock on the date of grant; 70,000 of the options will be exercisable at a price of $7.50 per share, and 90,000 of the options will be exercisable at a price of $10.00 per share 2 3 (iii) Vesting. The options will vest as follows: 40% of each block of options will vest on the first anniversary of the Effective Date; 35 % of each block will vest on the second anniversary of the Effective Date and the remaining 25 % of each block will vest on the third anniversary of the Effective Date Vesting will accelerate upon a Change of Control, as defined in the Company's 1992 Stock Option Plan, as amended from time to time. (iv) Differential Payment. If the fair market value of Stock on the grant date exceeds $2.75, then upon exercise of the first block of options (i.e. the 50,000 with respect to which the exercise price is the fair market value on the grant date), the Company will pay you , on a per share basis in cash, the difference, if any, between the fair market value of the Stock on the date of grant and $2.75. (b) Investment: You agree that upon the Effective Date, you will purchase Stock with a value of at least $50,000, based upon the then fair market value of such Stock. The purchase price, plus interest, of the Stock will be payable to the Company no later than 90 days after the Effective Date in accordance with the terms of a demand note that you will enter into with the Company. (c) Shareholder Terms: (i) Repurchase Rights for Shares Acquired by Option Exercise. If you resign or your employment is terminated for Cause (as defined in Item 4, below) or for Underperformance (as defined in this paragraph), the Company will be entitled to repurchase any Stock you own on the date of termination up to the number of shares of Stock received by you upon the exercise of your options at the exercise price for such options, and any unexercised options will be cancelled as of the termination date. If your employment is terminated for any other reason, (i) the Company will be entitled to repurchase any Stock you own on the date of termination up to the number of shares of Stock received by you upon the exercise of your options at the fair market value (as defined in the Company's 1992 Stock Option Plan) of such Stock on such date, and (ii) the Company will be entitled to cash out any options granted to you which have vested by such date at a price equal to the difference between the fair market value (as defined in the Company's 1992 Stock Option Plan) of the Stock with respect to which the options are granted on the date of termination and the exercise price for such options. Underperformance means your failure to perform consistent with the duties and responsibilities of your position. (ii) Repurchase Rights for Other Stock. If your employment is terminated for any reason, the Company will be entitled to repurchase any other Stock you own as of the termination date at the fair market value (as defined in the Company's 1992 Stock Option Plan) of such Stock on such date. (iii) Tag-Along and Drag-Along. In the event that First Chicago and I sell all or substantially all of our Stock in a single transaction or related transactions, then we will use our good faith efforts to include you in the sale upon the same terms and conditions. In the event that First Chicago and I, propose to sell all of our Stock in a single transaction or related transactions, then upon reasonable notice you shall sell all of your Stock in such sale upon the same terms and conditions. 3 4 4.Termination: Your employment, and this letter agreement, will terminate on the first to occur of (i) your death? (ii) your disability, or (iii) your termination of employment for any reason. If your employment terminates due to death or disability, you will be entitled to the benefits described in paragraph 2(d) above. If your employment terminates for any reason other than death or disability, you will be entitled to, and the Company's sole obligation will be to provide you with, the followings (A)Termination by the Company in its sole discretion for Cause, where Cause means: (I) your commission of any felony or other crime involving dishonesty, fraud or moral turpitude, (II) your habitual negligence in the performance of your duties (not including bad judgment or negligence other than habitual neglect of such duties), or (III) your engagement in conduct which is injurious to the Company, monetarily or otherwise; in which case you will be entitled to receive all amounts and benefits accrued to the date of such termination, but no further benefits will accrue; (B) Termination by the Company in its sole discretion without Cause, in which case the Company will continue to pay you your Base Salary and health insurance premiums for six months, or if earlier, until the date you obtain alternative employment; or C) Your resignation, with respect to which you agree to provide the Company no less than 60 days' advance notice, and in which case, you will be entitled to receive all amounts and benefits accrued to the date of such termination, but no further benefits will accrue. 5. Non-Competition/Non-Solicitation: (a) You agree that for a period of two years following the date that your employment terminates in accordance with the terms hereof (the "Non-Competition period"), you will not enter into or engage in or be connected with or engage to work for any individual, firm or corporation which is engaged in or corrected with any business which is in competition with the Company in the continental United States or any other country in which the Company is doing business or is reasonably expected to do business, unless you obtain the express written approval of the Board of Directors after full disclosure of the nature of the intended arrangement. (b) You further agree that during the Non-Competition Period, you will not (a) encourage any employee of the Company or any of its subsidiaries to leave his employment with the Company or subsidiary, or (b) solicit any customers of the Company or any of its subsidiaries. (c) You agree not to disclose either during the period of your employment or at any time thereafter to any person, Firm, or corporation any information that the Company desires to protect and keep secret and confidential concerning the business or affairs of the Company which you may have acquired in the course of, or incident to, your employment for your own benefit or to the detriment or intended detriment of the Company 6. Entire Agreement: This letter agreement constitutes the entire agreement between you and the Company with respect to the terms and conditions of your employment by the Company, and supersedes all prior oral or written proposals, negotiations, representations, communications, writings, and agreements between you and the Company. 4 5 Michael, we believe you possess the unique combination of business and interpersonal skills that will allow you to make a substantial contribution to M-Wave, and look forward to a mutually satisfying and rewarding partnership. Please indicate your acceptance of our offer by signing and dating this letter agreement below, and return it to me at your earliest convenience. Sincerely, Joseph A. Turek Chief Executive Officer Accepted this 10 day of February, 1997 __________________________________ Michael Bayles 5 EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 1,052,575 0 1,914,568 0 1,030,484 7,286,708 16,291,951 (4,054,065) 21,156,638 2,813,221 2,501,587 0 0 30,698 14,787,894 21,156,638 4,271,004 0 3,862,033 1,037,743 2,356 0 0 (626,416) (230,246) (396,170) 0 0 0 (396,170) (0.13) 0
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