- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM 10-QSB (MARK ONE) /X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 / / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 0-5351 ------------------------ EIP MICROWAVE, INC. (Exact name of small business issuer as specified in its charter) DELAWARE 95-2148645 (State or other jurisdiction (IRS Employer Identification of incorporation or organization) No.) 4500 CAMPUS DRIVE, SUITE 219, 92660 NEWPORT BEACH, CALIFORNIA (Zip Code) (Address of principal executive offices) (949) 851-3177 (Issuer's telephone number) (Former name, former address and former fiscal year, if changed since last report) ------------------------ Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 / / OUTSTANDING COMMON STOCK: As of April 30, 1998, Registrant had only one class of common stock, and had 6,509,152 shares of this $.01 par value common stock outstanding. Transitional Small Business Disclosure Format (check one): YES / / NO /X/ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EIP MICROWAVE, INC. FORM 10-QSB QUARTER ENDED MARCH 31, 1998 PART I FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of March 31, 1998 (unaudited) and September 30, 1997........................ Page 3 Condensed Consolidated Statements of Operations and Retained Earnings for the three months and six months Ended March 31, 1998 and 1997 (unaudited)............................. Page 4 Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 1998 and 1997 (unaudited).......... Page 5 Notes to Unaudited Condensed Consolidated Financial Statements................................................ Page 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition........................ Pages 7 - 12 PART II OTHER INFORMATION Item 2. Changes in Securities....................................... Page 13 Item 4. Submission of Matters to Vote of Security Holders........... Page 13 Item 6. Exhibits and Reports on Form 8-K............................ Page 13 Signatures............................................................. Page 14 2 EIP MICROWAVE, INC. PART I--FINANCIAL INFORMATION ITEM 1--CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS EXCEPT SHARE DATA) ASSETS MARCH 31, SEPTEMBER 30, 1998 1997 ----------- ------------- (UNAUDITED) Current assets: Cash and cash equivalents......................................... $ 885 $ 250 Short-term investments............................................ 30 30 ----------- ------ 915 280 Accounts receivable, net.......................................... 493 405 Inventories....................................................... 747 1,023 Prepaid expenses.................................................. 41 62 ----------- ------ Total current assets............................................ 2,196 1,770 Property and equipment, net......................................... 459 590 ----------- ------ $ 2,655 $ 2,360 ----------- ------ ----------- ------ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable.................................................. $ 707 $ 401 Accrued liabilities............................................... 906 629 Bank borrowings................................................... -- 296 Notes payable to affiliates....................................... -- 400 Current portion of obligations under capital leases............... 34 34 ----------- ------ Total current liabilities....................................... 1,647 1,760 Long term notes payable to affiliates............................... 0 600 Long term obligations under capital leases.......................... 46 63 ----------- ------ Total liabilities............................................... 1,693 2,423 ----------- ------ Commitments and contingencies Stockholders' equity (deficiency): Common stock, $.01 par value; authorized--10,000,000 shares; 6,509,131 issued and outstanding................................ 65 5 Additional paid-in capital........................................ 3,830 848 Retained earnings (accumulated deficit)........................... (2,933) (916) ----------- ------ Total stockholders' equity (deficiency)......................... 962 (63) ----------- ------ $ 2,655 $ 2,360 ----------- ------ ----------- ------ 3 EIP MICROWAVE, INC. PART I/ITEM 1--CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA, UNAUDITED) THREE MONTHS SIX MONTHS ENDED MARCH 31, ENDED MARCH 31, 1998 1997 1998 1997 --------- --------- --------- --------- Net sales................................................................ $ 887 $ 1,289 $ 1,885 $ 2,547 --------- --------- --------- --------- Costs and expenses: Cost of sales.......................................................... 739 802 2,049 1,595 Research, development and engineering.................................. 272 278 513 494 Selling, general and administrative.................................... 548 497 1,088 963 Interest and other, net................................................ 132 5 252 10 --------- --------- --------- --------- Total costs and expenses............................................. 1,691 1,582 3,902 3,062 --------- --------- --------- --------- Net (loss)............................................................... (804) (293) (2,017) (515) Accumulated retained earnings (deficit) at beginning of period........... (2,129) 152 (916) 374 --------- --------- --------- --------- Accumulated deficit at end of period..................................... $ (2,933) $ (141) $ (2,933) $ (141) --------- --------- --------- --------- --------- --------- --------- --------- Net (loss) per share..................................................... $ (.68) $ (.69) $ (2.54) $ (1.21) --------- --------- --------- --------- --------- --------- --------- --------- Weighted average common shares outstanding............................... 1,177 425 795 425 --------- --------- --------- --------- --------- --------- --------- --------- 4 EIP MICROWAVE, INC. PART I/ITEM 1--CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS, UNAUDITED) SIX MONTHS ENDED ------------------------ MARCH 31, MARCH 31, 1998 1997 ----------- ----------- Cash flows from operating activities: Net loss............................................................... $ (2,017) $ (515) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization........................................ 101 133 Write down of inventory.............................................. 600 -- (Gain) loss on sale of capital equipment............................. (6) (93) Change in assets and liabilities: Accounts receivable................................................ (88) (106) Inventories........................................................ (324) 48 Prepaid expenses................................................... 21 11 Accounts payable................................................... 306 (152) Accrued liabilities................................................ 277 (64) Advanced payments from customers................................... -- (190) ----------- ----- Cash used in operating activities........................................ (1,130) (928) ----------- ----- Cash flows from investing activities: Purchase of short-term investments..................................... -- -- Sale of short-term investments......................................... -- 298 Capital expenditures................................................... -- (113) Proceeds from the sale of capital equipment............................ 36 93 ----------- ----- Cash provided by investing activities.................................... 36 278 ----------- ----- Cash flows from financing activities: Proceeds from notes payable to affiliates.............................. 1,150 -- Repayment of notes payable to affiliates............................... (2,150) 600 Repayment of bank borrowings........................................... (296) (34) Repayment of obligations under capital leases.......................... (17) (17) Proceeds from issuance of common stock................................. 3,042 -- ----------- ----- Cash provided by financing activities.................................... 1,729 549 ----------- ----- Increase (decrease) in cash and cash equivalents......................... 635 (101) Cash and cash equivalents at beginning of period......................... 250 216 ----------- ----- Cash and cash equivalents at end of period............................... $ 885 $ 115 ----------- ----- ----------- ----- 5 EIP MICROWAVE, INC. PART I/ITEM 1--CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (a) The condensed consolidated financial statements presented in this Form 10-QSB have been prepared from the accounting records without audit on a basis consistent with the financial statements included in the Company's annual report filed with the Securities and Exchange Commission for the preceding fiscal year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished reflects all adjustments and disclosures which are, in the opinion of management, of a normal, recurring nature, and necessary for a fair statement of the results for the interim periods. This report should be read in conjunction with the Company's 1997 Annual Report on Form 10-KSB. The results of operations for the interim periods presented are not necessarily indicative of the results expected for the entire year. (b) Composition of certain balance sheet captions (Dollars in thousands): SEPTEMBER MARCH 31, 30, 1998 1997 ----------- ----------- (UNAUDITED) Accounts receivable: Trade.............................................. $ 543 $ 455 Less allowance for doubtful accounts............... (50) (50) ----------- ----------- $ 493 $ 405 ----------- ----------- Inventories: Raw materials...................................... $ 224 $ 531 Work-in-process.................................... 523 452 Finished goods..................................... 0 40 ----------- ----------- $ 747 $ 1,023 ----------- ----------- Property and equipment: Cost............................................... $ 5,279 $ 5,311 Accumulated depreciation........................... (4,820) (4,721) ----------- ----------- $ 459 $ 590 ----------- ----------- (c) The calculation of net income (loss) per share is based upon the weighted average number of common and common equivalent shares outstanding during the year. As a result of the losses incurred during the three months and six months ended March 31, 1998 and 1997, the common and common equivalent shares were antidilutive and, accordingly, were excluded from the computation of loss per share for those periods. 6 EIP MICROWAVE, INC. PART I/ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THE FOLLOWING DISCUSSION CONTAINS TREND INFORMATION AND OTHER FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE COMPANY'S HISTORICAL RESULTS OF OPERATIONS AND THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE IDENTIFIED UNDER THE HEADING "CERTAIN FACTORS" BELOW. DUE TO SUCH RISK FACTORS AND OTHER FACTORS, PAST RESULTS ARE NOT A RELIABLE PREDICTOR OF FUTURE RESULTS. IN ADDITION, THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES HEREIN, AND IS QUALIFIED ENTIRELY BY THE FOREGOING AND BY OTHER MORE DETAILED FINANCIAL INFORMATION APPEARING ELSEWHERE. RESULTS OF OPERATIONS Net sales for the three months ended March 31, 1998, were $887,000, a 31% decrease from sales of $1,289,000 in the same period last year. Net sales for the six months ended March 31, 1998, were $1,885,000, a 26% decrease from sales of $2,547,000 in the same period last year. The decrease in sales for both periods was primarily attributable to lower sales of VXI products and reduced export sales. Gross margin decreased to 17% in the second fiscal quarter of 1998, from 38% in the second fiscal quarter of 1997. Gross margin was (9)% for the six months ended March 31, 1998, as compared to 37% for the same period last year. The decrease in gross margin percentage for both periods was largely due to lower sales levels without corresponding reductions in fixed manufacturing overhead. In addition, the decrease in gross margin for the six months ended March 31, 1998, was due to a write-down of inventory by $600,000 to reserve for potential obsolescence related to discontinuance of selected products. Incoming orders for the second fiscal quarter were $856,000, a 44% decrease from orders of $1,528,000 for the same period a year ago. Incoming orders for the six months ended March 31, 1998, were $1,802,000 a 25% decrease from orders of $2,404,000 for the same period a year ago. Backlog at March 31, 1998, was $351,000, a 38% decrease from a backlog of $566,000 at the end of the second fiscal quarter last year. The decrease in orders for both periods and backlog resulted primarily from a decrease in large orders and export orders. Research, development and engineering expenses decreased 2% to $272,000 in the second fiscal quarter of 1998, compared to $278,000 for the same quarter last year. Research, development and engineering expenses increased 4% to $513,000 for the six months ended March 31, 1998, compared to $494,000 for the same period last year. The relatively small change in research, development and engineering expenses for both periods was primarily attributable to changes in new product development expenditures. Selling, general and administrative expenses increased 10% to $548,000 during the second fiscal quarter of 1998, compared to $497,000 for the same quarter last year. Selling, general and administrative expenses increased 13% to $1,088,000 for the six months ended March 31, 1998, compared to $963,000 for the same period last year. The increase in selling, general and administrative expenses for both periods was due primarily to expenses related to the Rights Offering. Interest and other expense was $132,000 during the second quarter of 1998, compared to $5,000 for the same quarter last year. Interest and other expense was $252,000 during the six months ended March 31, 1998, compared to $10,000 for the same period last year The increases were primarily due to a higher level of outstanding debt and a higher effective interest rate on such debt. 7 The Company recorded a net loss of $804,000 for the second fiscal quarter of 1998, as compared to a net loss of $293,000 during the same period last year. A net loss of $2,017,000 was recorded for the six months ended March 31, 1998, as compared to a net loss of $515,000 for the same period last year. Gains on sale of capital equipment of $6,000 are included in interest and other in the net losses for the six months ended March 31, 1998. The increased loss for the second fiscal quarter of 1998 is primarily due to lower sales levels without corresponding reduction in fixed manufacturing overhead. The increase in the loss for the six months ended March 31, 1998, compared to the same period last year, is primarily attributable to the inventory write-off, lower sales and increased operating expenses. FINANCIAL CONDITION On March 20, 1998 the Company issued approximately 5,802,000 shares of common stock pursuant to a rights offering (the "Rights Offering") to its stockholders. Gross proceeds from the Rights Offering were approximately $742,000 paid in cash and approximately $2,159,000 paid in cancellation of Company indebtedness. At March 31, 1998, the Company's cash, cash equivalents and short-term investment balance was $915,000, compared to $280,000 at September 30, 1997, primarily due to cash generated from the Rights Offering noted above. At March 31, 1998, the Company had no material commitments for capital expenditures. At March 31, 1998, working capital increased $530,000 from September 30, 1997, and the Company's current ratio increased to 1.33:1 from 1.01:1 over the same time period, primarily due to cash generated from the Rights Offering noted above. The Company had a $500,000 working capital facility with a bank that expired on January 31, 1998 and the Company repaid all amounts outstanding thereunder in the amount of $179,000 on January 22, 1998. At March 20, 1998 the Company had outstanding borrowings in the aggregate principal amount of $1,250,000 under a loan and security agreement (the "Loan Facility") with John F. Bishop and Ann R. Bishop, trustees of the Bishop Family Trust (the "Bishop Family Trust"), $600,000 of which was assigned to J. Bradford Bishop. Under the terms of the Loan Facility, a facility fee of $141,000 (the "Facility Fee") became payable by the Company to the Bishop Family Trust on January 22, 1998. At March 20, 1998, the Company had outstanding borrowings in the aggregate principal amount of $900,000 under demand loans (the "Demand Loans") from J. Bradford Bishop. In return for shares of Common Stock issued pursuant to the terms of the Rights Offering, on March 20, 1998, the Company repaid in full the principal amount of its indebtedness to J. Bradford Bishop and the Bishop Family Trust in the amount of $1,500,000 and $650,000 respectively. In addition to cash on hand and funds generated from operations, the Company believes that borrowings under future debt facilities in an aggregate amount equal to approximately $1,000,000 will be necessary to satisfy the Company's cash requirements for implementing its business plan during the remainder of the fiscal year ending September 30, 1998. See "Certain Factors--Future Cash Requirements" below. CERTAIN FACTORS IN ADDITION TO THE FACTORS DISCUSSED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-QSB, THE FOLLOWING ARE IMPORTANT FACTORS WHICH COULD CAUSE ACTUAL RESULTS OR EVENTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD-LOOKING STATEMENT MADE BY OR ON BEHALF OF THE COMPANY. RECURRING MATERIAL LOSSES AND ACCUMULATED DEFICIT The Company made a profit of $125,000 in the fiscal year ended September 30, 1995, operated at a loss of $493,000 in the fiscal year ended September 30, 1996, operated at a loss of $1,290,000 in the fiscal year ended September 30, 1997 and operated at a loss of $2,017, 000 for the six months ended March 31, 8 1998. Net cash used in operations and investing activities by the Company in the fiscal years ended September 30, 1995, 1996 and 1997, and in the six months ending March 31, 1998, was $85,000, $89,000, $1,045,000 and $1,094,000, respectively. At the end of fiscal year 1996, the Company's retained earnings were $374,000, and stockholders' equity was $1,227,000. At the end of fiscal year 1997, the Company's accumulated deficit was $916,000, and stockholders' deficiency was $63,000. At March 31, 1998, the Company's accumulated deficit was $2,933,000, and stockholders' equity was $962,000. At September 30, 1996, September 30, 1997, and March 31, 1998, the Company's ratio of interest-bearing indebtedness to total interest-bearing indebtedness and stockholders' equity was 20%, 105%, and 8%, respectively. There can be, and is, no assurance that profitable operations and positive cash flow can be achieved or maintained or that the funds obtained from the Rights Offering and any funds obtained from future debt facilities will be sufficient to carry the Company to a time when profitable operations and positive cash flow would sustain the Company. Continued losses would negatively impact the Company's working capital and the extension of credit by any future lenders. See "Future Cash Requirements." The report of Meredith, Cardozo, Lanz & Chiu LLP on the Company's financial statements for the year ended September 30, 1997, and issued as of November 20, 1997, includes an explanatory paragraph to express substantial doubt regarding the Company's ability to continue as a going concern. The report of Price Waterhouse LLP on the Company's financial statements for the year ended September 30, 1996 has been reissued with dual dates of December 23, 1996 and October 23, 1997. The reissued report includes an explanatory paragraph to express substantial doubt regarding the Company's ability to continue as a going concern. There can be no assurance that the Company will not continue to incur significant operating losses or that required additional financing will be available to meet the Company's business plan in fiscal 1998 and beyond. FUTURE CASH REQUIREMENTS The Company believes that borrowings under future debt facilities in an aggregate amount equal to approximately $1,000,000 will be necessary to satisfy the Company's cash requirements for implementing its business plan during the remainder of the fiscal year ending September 30, 1998. The actual cash resources required will depend upon numerous factors, including those described under "Certain Factors--Dependence on New OEM Relationship," "--Dependence on Government Contractors," "--Uncertainty of Product Development and Introduction," and "--Uncertainty of External Strategic Opportunities" and the cash requirements could be materially greater than $1,000,000. With the net proceeds from the Rights Offering, the Company repaid all outstanding amounts under its existing debt facilities. The Company plans to enter into one or more new debt facilities with third party lenders (the "Future Debt Facilities") to provide for the remaining cash required to implement its business plan for the remainder of fiscal 1998. The Company is continuing to pursue discussions with other lenders concerning the Future Debt Facilities; however, there can be no assurance that the Company will be able to obtain the Future Debt Facilities. Even if the Company is able to obtain Future Debt Facilities, there can be no assurance as to the terms thereof. If the Company is unable to obtain Future Debt Facilities, the Company and its business will likely be materially adversely affected. There is no assurance that the Company will be successful in obtaining all such capital from the Future Debt Facilities. If the Company is unable to obtain such capital on a timely basis, the Company will be required to consider, among other actions, a substantial reduction in its research and development expenses which will impact the introduction of new products, a substantial reduction in other operating expenses and the sale of one or more product lines of the Company. Such actions to significantly curtail its planned operations will likely have a materially adverse affect on the Company's business, financial condition and results of operations. 9 Assuming that the Company is able to obtain the Future Debt Facilities, the Company expects that the Future Debt Facilities will impose various covenants relating to the Company's performance and financial condition. If the Company does not maintain compliance with such covenants, the lender will have the right to declare all outstanding amounts immediately due and payable. There can be no assurance that the Company will be able to maintain compliance with the covenants under the Future Debt Facilities. INVENTORY RESERVE The Company recorded a write-down of inventory by $600,000 in the first fiscal quarter of 1998 to reserve for potential obsolescence related to discontinuance of selected products. While management believes the amount of the inventory reserve is appropriate under current circumstances, there can be no assurance that the amount of the reserves will be sufficient to account for the discontinuance of such products. See "Results of Operations." DEPENDENCE ON NEW OEM RELATIONSHIP The Company recently introduced a new line of microwave frequency counters, which it began distributing in October 1997, on a private label basis worldwide through an OEM relationship with Hewlett-Packard Company ("Hewlett-Packard"). The Company expects that this OEM relationship will account for approximately 35% of its revenues in fiscal year 1998. However, Hewlett-Packard is not obligated to purchase a minimum quantity of products, and the failure of Hewlett-Packard to purchase the product quantity expected by the Company would have a material, negative impact upon the Company's business. There can be no assurance that the Company will be able to maintain a successful relationship with Hewlett-Packard and generate revenues or profits from the relationship. DEPENDENCE ON GOVERNMENT CONTRACTORS Approximately 37% of the Company's revenues in the last two fiscal years have been derived from the sale of products to government contractors. The Company recently received a five-year indefinite quantity, fixed price supply subcontract from ManTech Systems Engineering Corporation, a government contractor ("ManTech"), for the supply of RF synthesized signal generators and RF down converters, with total sales value to the Company that could range from approximately $3.5 to $20 million. The Company has received an initial purchase order under the subcontract in the amount of $227,000. Further production purchase order releases under the subcontract are subject to satisfactory completion of field testing of the U.S. Marine Corps' Third Echelon Test Set (TETS) systems and the Company's components. The Company will incur substantial expenses in preparing to satisfy its obligations under this subcontract. However, despite the incurrence of such expenses, this and other subcontracts with government contractors are subject to cancellation provisions in favor of the government contractor. The subcontract with ManTech is subject to termination by ManTech in the event that the government terminates its contract with ManTech. Further, this subcontract can be terminated if the Company's components do not satisfy field testing requirements or the Company otherwise defaults under the subcontract. There can be no assurance that the Company will receive additional subcontracts from government contractors. DEPENDENCE ON KEY SUPPLIERS A number of the Company's products require specialized components currently available only through single sources of supply. The loss of any of these sources, or the inability of any such source to meet the Company's production and quality control requirements, could be detrimental to the Company with respect to the specific products involved. If any of the Company's single source suppliers is not able to deliver these specialized components, the Company would be required to implement alternative supply strategies (such as changing to one or more other suppliers, which could require product design or specification changes and would likely cause delays in shipment of the Company's products) or discontinue sales of the affected products. 10 UNCERTAINTY OF PRODUCT DEVELOPMENT AND INTRODUCTION The Company's success depends to a large degree on its ability to develop and introduce in a timely manner new or updated products which are affordable, functional in purpose, distinctive in quality and design and tailored to the purchasing patterns of the Company's customers and potential customers. Misjudgments as to customer interest in new or updated products could lead to excess inventories and markdowns and could have a material adverse effect on the Company's financial condition and results of operations. There can be no assurance that new products under development will be successfully developed and introduced. Further, due to the uncertainty associated with any product development and introduction (such as delays in development and lack of market acceptance of a new product), there can be no assurances that the Company's development and introduction efforts will be successful. If products under development are not successfully introduced, the Company's business, financial condition and results of operations would be materially adversely effected. UNCERTAINTY OF EXTERNAL STRATEGIC OPPORTUNITIES The Company is pursuing strategic opportunities to acquire other companies or their technology or products. The Company believes that opportunities are available that will have strategic benefit to the Company; however, there can be no assurance that the Company will be able to successfully identify, negotiate and consummate such acquisition opportunities. Such acquisitions could enable the Company to generate additional revenues and to increase its gross profit by an amount that exceeds any increase in operating expenses; however, there can be no assurance that the Company would be able to obtain such financial benefits. Further, the Company's current financial condition does not enable it to make such acquisitions without incurring debt or issuing equity to finance such acquisitions. COMPETITION The markets in which the Company's products are sold have become increasingly competitive. Most of the Company's principal competitors have substantially greater financial resources. The Company's results of operations can be significantly affected by pricing pressures arising from customer demand and pricing strategies by the Company's competitors, and the timing and market acceptance of new product introductions by competitors of the Company. There can be no assurance that pricing pressures will not have a material adverse effect on the Company, or that the Company's competitors will not succeed in developing products that would render the Company's technology and products obsolete and noncompetitive. Due to the foregoing and other factors, past results are not reliable predictors of future results. In addition, the securities of many technology and developmental companies, such as the Company, have historically been subject to extensive price and volume fluctuations that may adversely affect the market price of their common stock. 11 EIP MICROWAVE, INC. PART II--OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES On March 20, 1998, the Company issued 282,000 shares of Common Stock to the Bishop Family Trust as full payment of the facility fees of $141,000 incurred by the Company under the Loan Facility with the Bishop Family Trust. These securities were issued in reliance on the exemption from registration in Section 4(2) of the Securities Act of 1933. See Part I/Item 2--Financial Condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Stockholders on February 11, 1998. Two items were voted on by the stockholders. (1) Mr. Robert D. Johnson was re-elected and Mr. James N. Cutler, Jr. was elected as Class III members of the Board of Directors with terms expiring at the 2001 Annual Meeting of Stockholders. The votes cast for or withheld from the nominees were as follows: For Robert D. Johnson--357,594; Withheld--6,310, for James N. Cutler, Jr.--357,614; Withheld--6,290. John F. Bishop and J. Bradford Bishop, each a Class I director, and Michael E. Johnson and J. Sidney Webb, each a Class II director, were not up for re-election and continue in office. (2) The stockholders approved the Company's 1998 Stock Plan, as adopted by the Board of Directors, and the reservation and authorization of 1,500,000 shares of Common Stock, reserved for issuance under the terms of the Plan. Vote to approve as follows: For--229,196; Against-- 9,186; Abstain--108; Broker Non-Votes--125,414. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 27 Financial Data Schedule. (b) Reports on Form 8-K. The Company did not file with the Commission any reports on Form 8-K in the quarter ended March 31, 1998. 12 EIP MICROWAVE, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATE: May 5, 1998 BY: /s/ J. BRADFORD BISHOP -------------------------------------- J. Bradford Bishop CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND DIRECTOR (PRINCIPAL EXECUTIVE OFFICER) DATE: May 5, 1998 BY: /s/ JOHN F. BISHOP -------------------------------------- John F. Bishop VICE CHAIRMAN, TREASURER, SECRETARY AND DIRECTOR (PRINCIPAL FINANCIAL OFFICER) 13 EIP MICROWAVE, INC. INDEX TO EXHIBITS SEQUENTIALLY EXHIBIT NO. DESCRIPTION NUMBERED PAGE - ----------- ------------------------------------------------------------------------------------- -------------- 27 Financial Data Schedule -- 14