10-K405 1 c60995e10-k405.txt ANNUAL REPORT 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the fiscal year ended December 31, 2000 Commission file number 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 office) (Zip Code) Registrant's telephone number, including area code (630) 860-9542 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock ($.01 par value) ----------------------------- (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of March 8, 2001 was approximately $60,581,000, computed on the basis of the last reported sale price per share ($13.25) of such stock on the NASDAQ SmallCap Market. 2 The Registrant has 4,572,184 common shares outstanding at March 8, 2001. DOCUMENTS INCORPORATED BY REFERENCE Applicable portions of the Proxy Statement for the Annual Meeting are incorporated by reference in Part III of this Form. Index to Exhibits listed on page 41. 2 3 PART I Item 1. Business The Company M~Wave, Inc. through its wholly owned subsidiary Poly Circuits, Inc., is a value-added service provider of high performance printed circuit boards used in a variety of telecommunications applications for wireless and internet communications. M~Wave satisfies its customers needs for high performance printed circuit boards by using its 30,000 square foot manufacturing facility located in Bensenville, Illinois and by outsourcing and coordinating the manufacture of such boards by unaffiliated manufacturer located primarily in the Far East ("Virtual Manufacturing"). The Company began Virtual Manufacturing during 2000 by developing subcontracting relationships with Global manufacturers. The Company typically begins the Virtual Manufacturing process by manufacturing prototypes and pre-production printed circuits at its manufacturing facility. The Company often works closely with customer personnel during this stage to finalize fabrication details and guidelines for circuit boards. As customers' requirements for circuit boards develop into higher volumes, the Company subcontracts the manufacture of the circuit boards to Global manufacturers. The Company continues to monitor the production and quality control of the circuit boards and works with its customers and Global manufacturers throughout the Virtual Manufacturing process. The Company believes that Virtual Manufacturing allows the Company to satisfy a broader range of its customers' printed circuit board requirements without incurring substantial capital expenditures for plant, property and equipment. The Company is adding new levels of capacity and organizing its core manufacturing processes to accommodate the Virtual Manufacturing process. The Company has purchased a 50,000 square foot facility in West Chicago to enable the Company to provide quick-turn, prototypes to customers and to manufacture pre-production printed circuit boards for specific customer applications. These process capabilities are an essential part of the Virtual Manufacturing process and the Company's ability to attract new customers. In addition, the Company produces customer specified bonded assemblies consisting of a printed circuit board bonded in some manner to a metal carrier or pallet. One bonding technique used by the Company is Flexlink (TM), a patented process granted to the Company in 1993. The Company developed an enhanced version called Flexlink II(TM) in 1996. The Company's printed circuit boards and bonded assemblies are used in wireless communication systems and other devices and equipment operating in the microwave frequency spectrum of 800 MHz and above. These devices and equipment include cellular power amplifiers, global positioning satellite systems and personal communication networks. Many of the Company's printed circuit boards are Teflon(TM) based and are advantageous for microwave systems because of their extremely low power losses, coupled with stable, predictable electrical characteristics. The production of Teflon(TM) based printed circuit boards and bonded assemblies is technologically demanding due to the precise requirements of their end-use applications and the miniaturization of the microwave frequency components. To meet these technological demands, the Company has developed manufacturing processes and designs, which reduce the cost and increase the manufacturability and reliability of customer systems. Additionally, the Company emphasizes quality engineering and design support for its customers. The 3 4 Company is subject to stringent technical evaluation and ISO certification by many of its customers. The Company markets its products through Company personnel supported by approximately 18 independent sales organizations. The Company's base of approximately 100 customers represents a highly sophisticated group of purchasers. Segments within the commercial markets have experienced growth in recent years due to: (i) increased efficiency of microwave systems; (ii) a commercial market based upon increasing acceptance of microwave frequency products; (iii) a continuing need to upgrade systems based upon microwave technology; and (iv) crowding of the available frequency spectrum below 800 MHz. The Company's strategy is to increase sales of its commercial products to support the growth of its customers in these industry segments. M~Wave, Inc. was incorporated in Delaware in January 1992 in connection with a 100 for 1 share exchange with the former stockholders of Poly Circuits, Inc. The Company's executive offices are located at 216 Evergreen Street, Bensenville, Illinois, 60106, and its telephone number is (630) 860-9542. Industry and Market There are Commercial and Military-related types of customers within the market for microwave related printed circuit boards and bonded assemblies. Within both customer types there has been an "outsourcing" trend whereby end users have gotten out of internal production of printed circuit boards and bonded assemblies and moved to buying these products from "contract manufacturing" board shops. The market for microwave related printed circuit boards and bonded assemblies is expected to grow as wireless communication systems are expanded and improved. Although new growth will occur, pricing pressures will also grow thereby depressing margins for printed circuit board manufacturers. One of the most widely recognized high frequency wireless communication systems in commercial use is the cellular telephone. Cellular systems operate at the lower end of the microwave spectrum and use Teflon(TM) based printed circuit boards and bonded assemblies in power amplifier base stations. As cellular telephones increase their market penetration, additional cellular base stations will be constructed to improve geographic coverage and system capacity. Approximately 94%, 64% and 51% of the Company's revenues in 2000, 1999, and 1998, respectively, were related to the cellular telephone industry. Customers and Marketing The Company's customers include microwave system manufacturers with sophisticated technologies. The Company currently services a customer base of approximately 100. The sale of microwave printed circuit boards is technical in nature. The Company works with customer personnel who are frequently experts in microwave design and theory with added expertise in fabrication and design techniques for printed circuit boards. Typically, microwave system manufacturers provide the Company fabrication details and guidelines. The Company fabricates the products to customer specifications. The Company has adopted a program of early supplier involvement as part of its sales strategy. The Company has the opportunity to design-in its manufacturing processes as a means of reducing the cost of microwave systems. The emphasis upon a partnership underlies the Company's relationship with its customers. 4 5 Approximately 18 independent sales organizations are paid a commission to represent the Company in geographical territories. International sales of the Company's products have accounted for less than 5% of revenues in each of 2000, 1999 and 1998. In 2000, Lucent, RF Power and Spectrian accounted for 91%, 2% and 2%, respectively, of the Company's revenues. In 1999, Lucent, RF Power and Spectrian accounted for 36%, 9% and 13%, respectively, of the Company's revenues. In 1998, Lucent, RF Power and Spectrian accounted for 9%, 1% and 37%, respectively, of the Company's revenues. The loss of, or a substantial reduction in or change in the mix of orders from, Lucent would have a material adverse effect on the Company's results of operations and financial condition. The Company continues vigorously to pursue a strategy of being a source to a broader base of customers and intends to seek to be one of a few key suppliers rather than the sole supplier. As of December 31, 2000, the Company had an order backlog of approximately $26,761,000 compared to $6,662,000 at December 31, 1999. Nearly all of the Company's backlog is subject to cancellation or postponement without significant penalty. Accordingly, the Company does not believe that this backlog is necessarily indicative of the Company's future results of operations or prospects. Products and Production The Company manufactures high performance printed circuit boards and also bonds microwave related printed circuit boards to metal carriers or pallets using a variety of bonding techniques including a Company patented process called Flexlink II(TM). The use of Teflon(TM) in the manufacturing of printed circuit boards is demanding. This is so because Teflon(TM) is a thermo-plastic which, in a cured state, exhibits a high coefficient of thermal expansion and polymeric molecular cross-linking which makes plating circuitry difficult. Manufacturing microwave-related circuit boards requires tolerances measured in ten thousandths of an inch. Despite these manufacturing complexities, the Company realized a yield of approximately 94% in 2000 compared to 91% in 1999. This rate has helped the Company reduce its manufacturing costs, which is particularly important because Teflon(TM) is substantially more expensive than laminates used in low frequency applications. Because the Company manufactures a custom, made-to-order product, there is a minimal amount of finished goods inventory. The Company maintains raw material inventory, primarily purchase printed circuits and metal carriers. The Company seeks to balance its labor, materials and backlog to achieve an average of eight weeks lead-time from placement of order to shipment of product. Production can generally be increased rapidly to respond to increases in demand. The Company is ISO 9002 certified. ISO 9002 is an international standard for compliance with a manufacturing quality system that is recognized through out the world. During 2000, one manufacturer accounted for approximately 67% of the printed circuit boards supplied to the Company. There are numerous manufacturers of printed circuits in the world today. However, a disruption of printed circuits could have an adverse affect on the Company's operation. The Company believes that its relationship with principal suppliers are good. Product Development The Company's product development efforts have been a part of its ongoing activities. The Company has developed the Flexlink(TM) process, the bonding of materials with dissimilar coefficients of thermal expansion, and the fusion bonding of Teflon based laminate for multi-layer circuit fabrication. The Company was granted a patent in 1993 by the United States 5 6 Patent Office for its Flexlink(TM) process. The Company developed an enhanced version called Flexlink II(TM) in 1996. The Company relies heavily on its process engineering capabilities to further its corporate objectives. The Company's future results of operations are dependent on its ability to continue to initiate or respond to technical changes and to make the necessary ongoing capital investments. The Company focuses on improving current manufacturing processes and developing new processes in pursuit of its goal to increase quality, offer enhanced systems design flexibility to its customers, and respond to the increasing complexity of its customers' products. Virtual Manufacturing The Company out-sources the manufacture of printed circuit boards as part of its Virtual Manufacturing process to unaffiliated manufacturers located primarily in Far East locations. Many of these suppliers are ISO 9000 certified. The Company believes that it maintains good business relationships with its overseas manufacturers. The Company does not maintain long-term purchase contracts with manufacturers and operates principally on a purchase order basis. The Company believes that it is not currently dependent on any single manufacturer. However, during 2000, one manufacturer accounted for approximately 67% of the printed circuit boards supplied to the Company. The Company believes that the loss of any one single manufacturer would not have a long-term material adverse effect on the Company because other manufacturers would be able to increase production to fulfill the Company's requirements. However, the loss of a supplier could, in the short term, adversely effect the Company's business until alternative supply arrangements were secured. The Company's purchase orders are generally made in United States dollars in order to maintain continuity in the Company's pricing structure and to limit exposure to currency fluctuations. Quality assurance is particularly important to the Company and its product shipments are required to satisfy quality control tests established by its internal product design and engineering department. The Company typically performs quality control inspections prior to shipment of printed circuit boards to its customers. Competition The market for the Company's products is highly competitive. The Company competes for customers primarily on the basis of quality and on time delivery of its products and the Company's technical support. The Company faces substantial competition from many companies, including many that have greater financial and other resources, broader product lines, greater customer service capabilities and larger and more established customer bases. Alternative methods of manufacturing microwave-related boards exist, including ceramic and thick film technologies. Also, new materials are being introduced that are not Teflon(TM) based and are easier to manufacture. These materials fit within existing manufacturing capabilities of other board shops. Increased competition could cause the Company to lose market share and/or accelerate the decline in the prices of the Company's products. These factors could have a material adverse effect on the Company's results of operations and financial condition. Environmental Regulations The Company and the industry in which it operates are subject to environmental laws and regulations concerning, among other things, emissions into the air, discharges into 6 7 waterways, the generation, handling and disposal of waste materials and certain record-keeping requirements. The Company periodically generates and handles materials that are considered hazardous waste under applicable law and contracts for the off-site disposal of these materials. During the ordinary course of its operations, the Company has received citations or notices from regulatory authorities that such operations may not be in compliance with applicable environmental regulations. Upon such receipt, the Company works with authorities to resolve the issues raised by such citations or notices. The Company's past expenditures relating to environmental compliance have not had a material effect on the financial position or results of operations of the Company. The Company believes that the overall impact of compliance with regulations and legislation protecting the environment will not have a material effect on its future financial position or results of operations, although no assurance can be given. Based on information available to the Company, which in most cases includes an estimate of liability, legal fees and other factors, a reserve for indicated environmental liabilities has been made in the aggregate amount of approximately $50,000. The Company spent approximately $450,000 in 2000 complying with EPA regulations. Patents Due to rapidly changing technology, the Company believes its success depends primarily upon the engineering, marketing, manufacturing and support skills of its personnel, rather than upon patent protection. The Company was granted a patent in 1993 by the United States Patent Office for its Flexlink(TM) process. The Company developed an enhanced version called Flexlink II(TM) in 1996. The Company was granted three patents in 1998. Two patents were granted to the Company for a printed circuit board process using plasma spraying of conductive metal. The plasma spraying process eliminates a significant portion of the wet process currently used to produce printed circuit boards. Employees On December 31, 2000, the Company employed approximately 154 persons. The Company closely monitors the number of employees in response to its periodic production requirements and believes it is positioned appropriately to change the number of employees as changes in production warrant. None of the Company's employees are represented by a labor union and the Company has never experienced a work stoppage, slowdown or strike. The Company considers its labor relations to be very good. 7 8 Executive Officers of the Registrant The following is a list of Company's executive officers as of December 31, 2000: Name Age Position ---- --- -------- Joseph A. Turek 43 Chairman and Chief Executive Officer Paul H. Schmitt 54 Secretary and Treasurer Joseph A. Turek is the founder of the Company and has acted as Chairman and Chief Executive Officer since June 1993, and has served as director of the Company since 1988. Mr. Turek served for more than five years in various positions at West-Tronics, Inc., a manufacturer of low frequency circuit boards and a contract assembler of electronic products, with his last position as President in 1987 and 1988. Paul H. Schmitt joined the Company in September 1992 as Treasurer. From 1990 to 1992, Mr. Schmitt was with Reynolds Products, a Division of Alco Standard Corporation, where he held the position of Controller. From 1983 to 1990, he served as Controller for Garden City Envelope Company. Item 2. Properties Facilities The following table lists the manufacturing, administrative, marketing facilities of the Company:
Lease Location Function Square Feet Expiration Date -------- -------- ----------- --------------- Bensenville, Illinois Manufacturing 14,000 Owned Bensenville, Illinois Administrative 13,000 June 30, 2002 (Subject to option to renew for three years) Bensenville, Illinois Manufacturing 3,000 August 31, 2002 Bensenville, Illinois Manufacturing 3,000 August 31, 2002 West Chicago, Illinois Manufacturing 50,000 Owned Frisco, Texas Leased 44,000 Owned
The Company purchased the West Chicago facility in the fourth quarter of 200O and plans to begin manufacturing at that facility in early 2001. 8 9 The Company's 44,000 square foot building in Frisco, Texas facility is subject to a mortgage securing the Company's obligation to repay notes totaling $1,662,000 at December 31, 2000. In December 1997, the Company announced that the P C Dynamics facility located in Frisco, Texas does not have a place in the Company's strategic plans. The Company sold substantially all the assets of PC Dynamics Corporation on March 25, 1999, but retained ownership of the building. 9 10 Item 3. Legal Proceedings None Item 4. Submission of Matters to a Vote of Security Holders None. 10 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Registrant's common stock is traded on the NASDAQ Small Cap Market (trading symbol MWAV). The following table sets forth, for the calendar periods indicated, the range of the high and low last reported sales prices of the common stock from January 1, 1999 through December 31, 2000 as reported by the NASDAQ. Year Ended December 31 ------------------------------------------- 2000 1999 ------------------ ------------------ Low High Low High --- ---- --- ---- First Quarter $ 1.63 $ 6.97 $ 0.50 $ 1.06 Second Quarter 2.00 3.88 0.56 1.97 Third Quarter 2.72 13.78 0.91 1.56 Fourth Quarter 6.13 15.81 0.84 1.88 As of December 31, 2000, there were approximately 700 shareholders of record owning the common stock of the Company. The Registrant approved a two-for-one split of its common stock. The stock split was effected as a stock dividend. Stockholders of record as of the close of business on November 13, 2000, was issued a certificate representing one additional share for each share of its common stock held on the record date. The certificates were distributed on November 28, 2000. The Company did not pay any dividends on its common stock in 2000 and intends not to pay dividends in the foreseeable future in order to reinvest its future earnings in the business. 11 12 Item 6. Selected Financial Data The following table sets forth selected consolidated financial information with respect to the Company for each of the five years in the period ended December 31, 2000.
Year Ended December 31 ------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Statement of Operations Data: Net sales $57,559,962 $11,305,643 $13,120,054 $16,697,311 $22,643,968 Gross profit (loss) 9,888,795 1,022,662 2,433,440 2,703,768 (701,051) Operating income (loss) 5,904,442 (1,106,419) 182,774 (4,360,400) (6,219,548) Income (loss) before income taxes 5,945,268 (1,086,391) 173,923 (4,523,648) (6,820,869) Net income (loss) 3,939,962 (688,905) 18,503 (3,163,652) (4,357,393) Weighted average shares 4,561,957 4,535,342 6,039,626 6,088,578 6,042,082 Basic earnings (loss) per share 0.86 (0.15) 0.00 (0.52) (0.72) Diluted shares 4,641805 4,535,342 6,042,422 6,088,578 6,042,082 Diluted earnings (loss) per share 0.86 (0.15) 0.00 (0.52) (0.72) Balance Sheet Data: Working capital $ 6,639,608 $ 5,931,634 $ 5,342,657 $ 5,679,330 $ 4,601,703 Total assets 32,190,957 16,368,186 15,768,374 16,692,337 21,835,551 Long-term debt 166,566 1,886,799 1,990,337 2,268,028 2,604,464 Stockholders' equity 14,505,976 10,475,577 11,167,648 11,931,109 15,012,262
On October 24, 2000 the Board of Directors declared a two-for-one split of its common stock, effected in the form of a stock dividend paid on November 28, 2000 to shareholders of record on November 13, 2000. All agreements concerning stock options in shares of the Company's common stock provide for the issuance of additional shares due to the declaration of the stock split. All references to the number of shares, except shares authorized, and to per share information in the consolidated financial statements have been adjusted to reflect the stock split on a retroactive basis. 12 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Listed below are the related expenses for 2000, 1999 and 1998 as a percent of sales. 2000 1999 1998 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Cost of goods sold 82.8 91.0 81.5 ------- ------- ------- Gross profit 17.2 9.0 18.5 ------- ------- ------- Operating expenses: General and administrative 4.3 13.4 12.5 Selling and marketing 2.7 5.4 4.6 ------- ------- ------- Total operating expenses 7.0 18.8 17.1 ------- ------- ------- Operating income (loss) 10.2 (9.8) 1.4 Interest income (expense) - net (0.4) (0.0) (0.3) Rental income 0.4 1.4 0.0 Insurance settlement 0.1 0.0 0.0 Gain (loss) on disposal of equipment 0.0 (1.2) 0.2 ------- ------- ------- Total other income (expense) 0.1 0.2 (0.1) ------- ------- ------- Income (loss) before income taxes 10.3 (9.6) 1.3 Income tax expense (benefit) 3.5 (3.5) 1.2 ------- ------- ------- Net income (loss) 6.8% (6.1)% 0.1% ======= ======= ======= COMPARISON OF 2000 AND 1999 Net Sales Net sales for 2000 increased 409% to $57.6 million from $11.3 million in 1999. The increase in net sales is directly related to "Virtual Manufacturing." Virtual Manufacturing allows the Company to increase their manufacturing capabilities without the brick and mortar by using Global suppliers to manufacture all types of high quality printed circuits at much lower costs than domestic suppliers like M~Wave, Inc. The Company has developed sub-contracting relationships in 2000 with Global suppliers to create a "Virtual Manufacturing" business. The Company begins the process by manufacturing prototype and pre-production printed circuits at our wholly-owned subsidiary, Poly Circuits. Then as our customer requirements develop into higher volumes we broaden our capability by sub-contracting printed circuits to our Global partners while adding value to our customers for this service. Added value can be in the form of Supply Chain Management, Bonding, Plating or Inventory Control. Virtual Manufacturing allows us to build a product pipeline for our customers to handle more of their printed circuit requirements with out the brick and mortar. Virtual manufacturing accounted for approximately 76% of the Company's net sales for 2000. Net sales to Lucent increased by $48,097,000 to $52,210,000 The Company's three largest customers accounted for 95% of the Company's net sales in 2000 compared to 64% in 1999. 13 14 Gross Profit and Cost of Goods Sold Gross profit increased $8.9 million in 2000 from $1.0 million in 1999 to $9.9 million in 2000. Gross margin increased to approximately 17% in 2000 from approximately 9% in 1999. The increase in gross profit and gross margin is a result of increased sales and efficiencies and the Company's decision to adopt Virtual Manufacturing. During 2000, one manufacturer accounted for approximately 67% of the printed circuit boards supplied to the Company. The Company also recorded a charge of $1,890,000 for Inventory Obsolescence relating to a portion of the inventory on hand that is nearing end of life. The Company now has a total reserve for inventory obsolescence of $2,027,000. The inventory obsolescence reserve requires the use of estimates. The Company believes the techniques and assumptions used in establishing the reserve is appropriate. Please see Financial Statement Schedules on page 40. Operating Expenses General and administrative expenses were $2,458,000 or 4.3% of net sales in 2000, compared to $1,519,000 or 13.4% of net sales in 1999. General and administrative expenses consist primarily of salaries and benefits, professional services, depreciation of office equipment, computer systems and occupancy expenses. Payroll related expenses were up $375,000 due to additional employees and bonus paid to administrative personnel. Professional fees were up $290,000 principally relating to the acquisition of the new facility in West Chicago, Illinois. The Company also recorded a reserve of $447,000 relating to the Note Receivable from Performance Interconnect. Selling and marketing expenses were $1,527,000 or 2.7% of net sales in 2000, compared to $610,000 or 5.4% of net sales in 1999. Selling and marketing expenses include the cost of salaries, advertising and promoting the Company's products and the commissions paid to independent sales organizations. Commissions and expenses relating to independent sales organizations were up $599,000 as a result of increased sales. Payroll related expenses were up $292,000 due to additional employees and bonuses paid to selling and marketing personnel. Operating Income Operating income was $5,904,000 or 10.3% of net sales in 2000, compared to an operating loss of ($1,106,000) or 9.8% of net sales in 1999. The change in operating income can be summarized as follows: Increase in net sales $4,184,000 Increase in gross margin 4,682,000 Increase in operating expenses (1,855,000) -------------- Increase in operating income $7,011,000 ============== Interest Income Interest income from short-term investments was $114,000 in 2000 compared to $206,000 in 1999. The Company had less cash to invest in 2000. Interest Expense Interest expense, primarily related to the Company's mortgage obligation on its P C Dynamics facility and short-term borrowing, was $339,000 in 2000 compared to $212,000 in 1999. 14 15 Rental income Rental income, primarily relating to the P C Dynamics facility, was $204,000 in 2000 compared to $161,000 in 1999. Insurance Settlement The Company recorded a one-time gain of $62,000 in 2000 relating to the fire at the PC Dynamics facility in 1994. Gain (loss) on disposal of fixed assets The Company recorded a loss of $135,000 in 1999 relating to the disposal of fixed assets which are no longer usable in the Company's business. Income Taxes The Company had an effective tax rate of 33.7% in 2000, and an effective tax credit of 36.6% in 1999. COMPARISON OF 1999 AND 1998 Net Sales Net sales for 1999 decreased 13% to $11.3 million from $13.1 million in 1998. The decrease in sales was due to Company selling off substantially all of the assets of P C Dynamics Corporation. Net sales of P C Dynamics declined $3,713,000. Net sales to Spectrian decreased by $3,318,000 or 69% to $1,471,000. Many of products produced for Spectrian are now manufactured off-shore. Net sales to Lucent increased by $2,932,000 or 248% to $4,113,000. Net sales to Motorola increased by $672,000 or 72% to $1,599,000. Net sales to R F Power increased by $871,000 or 657% to $1,004,000. The Company's three largest customers accounted for 64% of the Company's net sales in 1999 compared to 60% in 1998. Gross Profit and Cost of Goods Sold Gross profit decreased $1.4 million in 1999 from $2.4 million in 1998 to $1.0 million in 1999. Gross margin decreased to approximately 9% in 1999 from approximately 19% in 1998. Part of the difference ($718,000) was the result of the Company selling off substantially all of the assets of P C Dynamics Corporation. Gross margin for the remainder of the Company decreased approximately $621,000 due to manufacturing inefficiencies caused by start-up orders with a major customer and rework of products scrapped in the manufacturing process. The Company experienced excessive scrap and rework costs of $230,000 in the second quarter of 1999 relating to Lucent start-up orders. Future production problems would adversely impact the Company's gross margins and profitability, which would also result in decreased liquidity and adversely affect the Company's financial position. Teflon based laminate is the largest single component of the Company's cost of goods sold, representing 18.0% and 18.8% of net sales during 1999 and 1998, respectively. The Company did not experience significant changes in the cost of Teflon based laminate during 1999 and 1998. During 1999 and 1998, one manufacturer accounted for approximately 41% and 66%, respectively, of the Teflon based laminate supplied to the Company. 15 16 Operating Expenses General and administrative expenses were $1,519,000 or 13.4% of net sales in 1999, compared to $1,635,000 or 12.5% of net sales in 1998. General and administrative expenses consist primarily of salaries and benefits, professional services, depreciation of office equipment, computer systems and occupancy expenses. Payroll related expenses were down $267,000 due to the Company selling off substantially all of the assets of P C Dynamics Corporation. Depreciation and Amortization was up $62,000. Selling and marketing expenses were $610,000 or 5.4% of net sales in 1999, compared to $616,000 or 4.7% of net sales in 1998. Selling and marketing expenses include the cost of salaries, advertising and promoting the Company's products and the commissions paid to independent sales organizations. Commissions and expenses relating to independent sales organizations were down $54,000 as a result of lower sales. Operating Income Operating loss was $1,106,000 or 9.8% of net sales in 1999, compared to an operating income of $183,000 or 1.4% of net sales in 1998. The change in operating income can be summarized as follows: Decrease in net sales $(337,000) Decrease in gross margin (1,074,000) Decrease in operating expenses 122,000 -------------- Decrease in operating income $(1,289,000) ============== Interest Income Interest income from short-term investments was $206,000 in 1999 compared to $172,000 in 1998. Interest Expense Interest expense, primarily related to the Company's mortgage obligation on its P C Dynamics facility, was $212,000 in 1999 compared to $219,000 in 1998. Rental income Rental income, primarily relating to the P C Dynamics facility, was $161,000 in 1999. Gain (loss) on disposal of fixed assets The Company recorded a loss of $135,000 in 1999 compared to a gain of $39,000 in 1998 relating to the disposal of fixed assets which are no longer usable in the Company's business. Income Taxes The Company had an effective tax credit rate of 36.6% in 1999, and an effective tax rate of 89.4% in 1998. The rate of 89.4% in 1998 reflects changes in estimated tax refunds. 16 17 Earnings per share In 1997, the Company adopted Statement of Financial Accounting Standards No. 128 - "Earnings per Share" ("SFAS 128"). As required by SFAS 128, all current and prior year earnings (loss) per share data have been restated to conform to the provisions of SFAS 128. Liquidity and Capital Resources Net cash provided (used) by operations was $(5,673,000), $(1,918,000) and $1,338,000 in 2000, 1999 and 1998, respectively. In 2000, inventories increased $6,829,000 due mainly to increased sales and an inventory consignment agreement with Lucent. Accounts receivable was up $9,859,000 due to increased sales in 2000. DSO is at 45 days. Depreciation and amortization was $1,059,000, up $51,000. Accounts Payable was up $4,542,000 due mainly to increased sales and increased requirement of raw materials and supplies. Purchases of property, plant and equipment were $2,421,000, $474,000, and $277,000 in 2000, 1999 and 1998, respectively. The Company purchased a new facility in 2000 at a cost of approximately $1,600,000. The expenditures were partially financed through borrowings of approximately $7,000,000. The Company has a line of credit from American National Bank and Trust Company of Chicago which provides for a maximum borrowings of $6,000,000 based on 80% of eligible account receivables through May 2001 at an interest rate of prime plus 0.5%. At December 31, 2000, the Company borrowed $5,500,000. On January 9, 2001 the Company's line of credit borrowing limit was increased from $6,000,000 to $10,000,000. Interest is at prime rate plus 1/2%. On December 18, 1998, the Company repurchased 1,563,928 shares of its common stock owned by First Chicago Equity Corporation (""FCEC") and its affiliates. The aggregate consideration paid by the Company consisted of $781,964 plus warrants to purchase up to 1,563,928 shares of the Company's common stock with an exercise price of $0.50 per share (increasing by $0.025 per share each anniversary date of the warrants). The warrants are exercisable only if the Company engages in an extraordinary transaction (e.g., a merger, a consolidation, combination or dissolution) within five years of the issue date of the warrants. As of December 31, 2000, the Company has $8,896,000 of debt and $1,231,000 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. On March 25, 1999, PC Dynamics Corporation, a wholly owned subsidiary of the Company, sold substantially all of its machinery and equipment, inventory and accounts receivable and assigned substantially all of its outstanding contracts and orders to Performance Interconnect Corp., a Texas Corporation ("PIC"). The purchase price paid by PIC consisted of: (i) $893,319 Cash (ii) a promissory note in the principal amount of $773,479, which is payable in nine (9) equal monthly installments commencing on July 1, 1999. (iii) a promissory note in the principal amount of $293,025, which is payable in monthly installments of $50,000 commencing on May 1,1999 until paid. The Company has collected the full amount of this note. PC Dynamics and PIC also entered into a royalty agreement which provides for PIC to pay PC Dynamics a royalty equal to 8.5% of the net invoice value of certain microwave frequency 17 18 components and circuit boards sold by PIC for eighteen months following the closing. PIC shall not be required to pay P C Dynamics in excess of $500,000 in aggregate royalty payments. In addition, PC Dynamics has leased its facility in Texas to PIC for $17,000 per month for three years. PIC has the right under the lease to purchase the facility from PC Dynamics for $2,000,000 at anytime during the term of the lease. If PIC exercises its right to purchase the facility, the remaining balance due on the royalty agreement is payable in monthly installments of $25,000 until a minimum of $500,000 is paid. This agreement was amended in the third quarter of 1999 whereas the Company agreed to revise the payment schedule for Promissory Note I from 9 equal monthly installments to 30 equal monthly installments in return for not pursuing the purchase of the facility in Texas. The Company has collected $133,000 through December 31,2000. The royalty agreement was also revised to $500,000 payable in equal monthly installments of $25,000 until paid. The Company has collected $145,000 through December 31,2000. Inflation Management believes inflation has not had a material effect on the Company's operation or on its financial position. New Accounting Pronouncements Financial Accounting Standards Board Interpretation No. 44 - Accounting for certain transactions involving stock compensation. This interpretation should have no material effect on the Company. Statement of Financial Standard 133 "Accounting for Derivative Instruments on Hedging Activities." This new statement should have no material effect on the Company. Statement of Financial Standard 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities." This new statement should have no material effect on the Company. Foreign Currency Transactions All of the Company's foreign transactions are negotiated, invoiced and paid in United States dollars. 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 the Company's 18 19 largest customer or a change in the mix of product sales would 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 the "Virtual Manufacturing" process; 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 past 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. The Company is dependent upon unaffiliated foreign companies for the manufacture of printed circuit boards as part of its Virtual Manufacturing process. The Company's arrangements with manufacturers are subject to the risks of doing business abroad, such as import duties, trade restrictions, production delays due to unavailability of parts or components, transportation delays, work stoppages, foreign currency fluctuations, political instability and other factors which could have an adverse effect on the Company's business, financial condition and results of operations. The Company believes that the loss of any one or more of its suppliers would not have a long term material adverse effect on its business, financial condition and results of operations because other manufacturers would be able to increase production to fulfill its requirements. However, the loss of certain suppliers, could, in the short term adversely affect its business until alternative supply arrangements were secured. Although the Company has experienced substantial growth in revenue in the last year and intends to continue to grow rapidly, there can be no assurance that the growth experienced by the Company will continue or that the Company will be able to achieve the growth contemplated by its business strategy. The Company's ability to continue to grow may be affected by various factors, many of which are not within the Company's control, including competition and the telecommunications industry. This growth has placed, and is expected to continue to place, significant demands on all aspects of the Company's business. Including its administrative, technical and financial personnel and systems. The company's future operating results will substantially depend on the ability of its officers and key employees to manage such anticipated growth, to attract and retain additional highly qualified management, technical and financial personnel, and to implement and/or improve its technical, administrative, financial control and reporting systems. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data Consolidated financial statements and the related notes for each of the three years in the period ended December 31, 2000 are filed in response to this Item pursuant to Item 14. 19 20 The supplementary data regarding quarterly results of operations, set forth under the caption "Selected Quarterly Financial Data (Unaudited)" following the aforementioned consolidated financial statements, are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 20 21 PART III Item 10. Directors and Executive Officers of the Registrant Information required by this Item with respect to Executive Officers of the Company is set forth in Part I, Item 4 and is incorporated herein by this reference. Information required by this Item with respect to members of the Board of Directors of the Company will be contained in the Proxy Statement for the Annual Meeting of Stockholders (the "2001 Proxy Statement"), and is incorporated herein by this reference. Item 11. Executive Compensation Information required by this Item will be contained in the 2001 Proxy Statement and is incorporated herein by this reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information required by this Item will be contained in the 2001 Proxy Statement and is incorporated herein by this reference. Item 13. Certain Relationships and Related Transactions Information required by this Item will be contained in the 2001 Proxy Statement and is incorporated herein by this reference. 21 22 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements Page in the Form 10-K --------- Independent Certified Public Accountants Report 23 Consolidated Balance Sheets December 31, 2000 and 1999 24 Consolidated Statements of Operations Years Ended December 31, 2000, 1999 and 1998 25 Consolidated Statements of Stockholders' Equity Years Ended December 31, 2000, 1999 and 1998 26 Consolidated Statements of Cash Flows Years Ended December 31, 2000, 1999 and 1998 27-28 Notes to Consolidated Financial Statements 29-37 Selected Quarterly Financial Data (Unaudited) 38 Subsidiaries 43 (a) 2. Financial Statement Schedules Allowance for Doubtful Accounts 39 Inventory Obsolescence 39 (a) 3. Exhibits The exhibits filed herewith are set forth on the Index to Exhibits filed as part of this report. 22 23 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors M~Wave, Inc. We have audited the accompanying consolidated balance sheets of M~Wave, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the management of M~Wave, Inc. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of M~Wave, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. We have also audited Schedule II of M~Wave, Inc.,and subsidiaries for the years ended December 31, 2000, 1999 and 1998. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therin. GRANT THORNTON LLP Chicago, Illinois January 26, 2001 23 24 M~WAVE, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 --------------------------------------------------------------------------------
ASSETS 2000 1999 ------ ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 1,230,999 $ 2,586,885 Accounts receivable, net of allowance for doubtful accounts: 2000 - $100,000; 1999 - $10,000 12,378,766 2,520,070 Inventories 8,859,795 2,030,417 Deferred income taxes 1,118,242 1,566,391 Prepaid expenses and other assets 47,688 71,957 ----------- ----------- Total current assets 23,635,490 8,775,720 PROPERTY, PLANT AND EQUIPMENT: Land, buildings and improvements 6,488,057 4,863,247 Machinery and equipment 8,731,449 7,934,816 ----------- ----------- Total property, plant and equipment 15,219,506 12,798,063 Less accumulated depreciation 6,914,345 5,855,688 ----------- ----------- Property, plant and equipment - net 8,305,161 6,942,375 NOTE RECEIVABLE 195,391 645,391 OTHER ASSETS 54,915 4,700 ----------- ----------- TOTAL $32,190,957 $16,368,186 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 6,516,541 $ 1,974,067 Accrued expenses 1,603,474 508,456 Accrued income taxes 146,287 0 Current line of credit 5,500,000 0 Current portion of long-term debt 3,229,580 361,563 ----------- ----------- Total current liabilities 16,995,882 2,844,086 DEFERRED INCOME TAXES 522,593 1,161,724 LONG-TERM DEBT 166,506 1,886,799 COMMITMENTS AND CONTINGENCIES 0 0 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; authorized, 1,000,000 shares; no shares issued 0 0 Common stock, $.005 par value; authorized, 10,000,000 shares; 6,179,112 shares issued and 4,572,184 shares outstanding at December 31, 2000, 6,139,612 shares issued and 4,535,684 shares outstanding at December 31, 1999 30,895 30,698 Additional paid-in capital 8,439,072 8,348,832 Retained earnings 7,715,283 3,775,321 Treasury stock, 1,606,928 shares at cost (1,679,274) (1,679,274) ----------- ----------- Total stockholders' equity 14,505,976 10,475,577 ----------- ----------- TOTAL $32,190,957 $16,368,186 =========== ===========
See notes to consolidated financial statements. 24 25 M~WAVE, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 --------------------------------------------------------------------------------
2000 1999 1998 ---- ---- ---- NET SALES $57,559,962 $11,305,643 $13,120,054 COST OF GOODS SOLD 47,671,167 10,282,981 10,686,614 ----------- ----------- ----------- Gross profit 9,888,795 1,022,662 2,433,440 OPERATING EXPENSES: General and administrative 2,457,677 1,519,006 1,635,001 Selling and marketing 1,526,676 610,075 615,665 ----------- ----------- ----------- Total operating expenses 3,984,353 2,129,081 2,250,666 Operating income (loss) 5,904,442 (1,106,419) 182,774 OTHER INCOME (EXPENSE): Interest income 114,173 205,871 171,597 Interest expense (339,312) (211,759) (219,254) Rental income 204,000 161,000 0 Insurance settlement 61,965 0 0 Gain (loss) on disposal of equipment 0 (135,084) 38,806 ----------- ----------- ----------- Total other income (expense), net 40,826 20,028 (8,851) ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES 5,945,268 (1,086,391) 173,923 Income tax expense (benefit) 2,005,306 (397,486) 155,420 ----------- ----------- ----------- NET INCOME (LOSS) $ 3,939,962 $ (688,905) $ 18,503 =========== =========== =========== Weighted average shares outstanding 4,561,957 4,535,342 6,039,626 =========== =========== =========== BASIC EARNINGS (LOSS) PER SHARE $ 0.86 $ (0.15) $ 0.00 =========== =========== =========== Diluted shares outstanding 4,641,805 4,535,342 6,042,422 =========== =========== =========== DILUTED EARNINGS (LOSS) PER SHARE $ 0.85 $ (0.15) $ 0.00 =========== =========== ===========
See notes to consolidated financial statements. 25 26 M~WAVE, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 --------------------------------------------------------------------------------
Additional Total Common Paid-in Retained Treasury Stockholders' Stock Capital Earnings Stock Equity ----- ------- -------- ----- ------ BALANCE JANUARY 1,1998 $ 30,698 $7,574,688 $4,445,723 $ (120,000) $11,931,109 ========= ========== ========== =========== =========== Treasury stock purchased: 1,563,928 shares and issuance of stock warrants 0 774,144 0 (1,556,108) (781,964) Net income 0 0 18,503 0 18,503 --------- ---------- ---------- ----------- ----------- BALANCE DECEMBER 31,1998 $ 30,698 $8,348,832 $4,464,226 $(1,676,108) $11,167,648 ========= ========== ========== =========== =========== Treasury stock purchased: 3,000 shares 0 0 0 (3,166) (3,166) Net loss 0 0 (688,905) 0 (688,905) --------- ---------- ---------- ----------- ----------- BALANCE DECEMBER 31,1999 $ 30,698 $8,348,832 $3,775,321 $(1,679,274) $10,475,577 ========= ========== ========== =========== =========== Common stock issued: Stock options (39,500 shares) 197 90,240 0 0 90,437 Net income 0 0 3,939,962 0 3,939,962 --------- ---------- ---------- ----------- ----------- BALANCE DECEMBER 31,2000 $ 30,895 $8,439,072 $7,715,283 $(1,679,274) $14,505,976 ========= ========== ========== =========== ===========
See notes to consolidated financial statements. 26 27 M~WAVE, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 --------------------------------------------------------------------------------
2000 1999 1998 ---- ---- ---- Cash flows from: OPERATING ACTIVITIES: Net income (loss) $ 3,939,962 $ (688,905) $ 18,503 (Gain) loss on disposal of equipment 0 135,084 (38,806) Depreciation and amortization 1,058,657 1,008,216 770,760 Reserve for notes receivable 450,000 0 0 Deferred income taxes (190,982) (397,486) 302,077 Changes in assets and liabilities: Accounts receivable (9,858,696) (1,362,463) (37,678) Inventories (6,829,378) (1,220,475) (688,756) Income taxes 146,287 0 1,032,850 Prepaid expenses and other assets (25,946) 10,109 (66,877) Accounts payable 4,542,474 656,522 467,738 Accrued expenses 1,095,018 (58,757) (421,410) ----------- ---------- ----------- Net cash flows (used in) / provided by operating activities (5,672,604) (1,918,155) 1,338,401 ----------- ----------- ----------- Cash flows from: INVESTING ACTIVITIES: Purchase of property, plant and equipment (2,421,443) (473,803) (277,324) Proceeds on sale of fixed assets 0 4,619 176,800 Purchase treasury stock 0 (3,166) (781,964) Collection of notes receivable 0 421,113 0 Proceeds from the sale of PC Dynamics property, plant and equipment 0 581,965 0 Proceeds from sale of PC Dynamics net working capital and other 0 311,354 0 ----------- ----------- ---------- Net cash flows (used in/provided by investing activities (2,421,443) 842,082 (882,488) ----------- ----------- ----------
27 28
2000 1999 1998 ---- ---- ---- Cash flows from: FINANCING ACTIVITIES: Common stock issued upon exercise of stock options 90,437 0 0 Proceeds from credit line debt 5,500,000 0 0 Proceeds from long-term debt 1,509,286 293,834 0 Repayment of long-term debt (361,562) (343,413) (277,691) ----------- ----------- ---------- Net cash flows (used in)/provided by financing activities 6,738,161 (49,579) (277,691) ----------- ----------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,355,886) (1,125,652) 178,222 CASH AND CASH EQUIVALENTS: Beginning of year 2,586,885 3,712,537 3,534,315 ----------- ----------- ---------- End of year $ 1,230,999 $ 2,586,885 $3,712,537 =========== =========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: 2000 1999 1998 ---- ---- ---- Cash paid during the year for: Interest $339,312 $211,759 $219,254 Income tax refunds/(payments) (2,050,000) 0 1,179,506
See notes to consolidated financial statements. 28 29 M~WAVE, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 -------------------------------------------------------------------------------- 1. ORGANIZATION AND OPERATIONS M~Wave, Inc. ("M~Wave"), a Delaware corporation, was formed on January 31, 1992. On January 31, 1992, Poly Circuits, Inc. ("Poly Circuits") became a wholly owned subsidiary of M~Wave through an exchange in which the former stockholders of Poly Circuits received 100 shares of M~Wave common stock for each outstanding share of Poly Circuits. M~Wave, Inc. has two wholly owned subsidiaries, Poly Circuits, Inc. and PC Dynamics Corporation. M~Wave, Inc., currently operates through its wholly-owned subsidiary Poly Circuits, Inc. (the "Company"), to manufacture microwave frequency components and high frequency circuit boards on Teflon-based laminates for commercial and military wireless communication applications. 2. SIGNIFICANT ACCOUNTING POLICIES Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation - The consolidated financial statements include the accounts of M~Wave and its wholly owned subsidiaries. Significant intercompany transactions and account balances have been eliminated. Revenue Recognition - The Company recognizes revenue when product is shipped to customers. Cash and Cash Equivalents - Cash and cash equivalents comprise cash in banks and highly liquid investments that are both readily convertible to known amounts of cash or purchased with a maturity of three months or less. Inventories - Inventories are carried at the lower of first-in, first-out (FIFO) cost or market. Substantially all the Company's inventories are work-in-process. Property, Plant and Equipment - Property, plant and equipment are recorded at cost. The Company calculates depreciation using the straight-line method at annual rates as follows: Building and improvements 3% to 20% Machinery and equipment 10% to 20% Fair Value of Financial Instruments - The fair value of financial instruments are not materially different from there carrying values. Income Taxes - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of 29 30 existing assets and liabilities and their respective tax basis at enacted tax rates when such amounts are supposed to be realized or settled. Net Earnings (Loss) Per Share - The Company's basic net earnings (loss) per share amounts have been computed by dividing net earnings (loss) by the weighted average number of outstanding common shares. The Company's diluted net earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of outstanding common shares and common share equivalents relating to stock options, when dilutive, based on cumulative year-to-date net earnings or losses. Basis of Presentation - Certain prior year amounts have been reclassified to conform with the 2000 presentation. 3. SALE OF P C DYNAMICS CORPORATION On March 25, 1999, PC Dynamics Corporation, a wholly owned subsidiary of the Company, sold substantially all of its machinery and equipment, inventory and accounts receivable and assigned substantially all of its outstanding contracts and orders to Performance Interconnect Corp., a Texas Corporation ("PIC"). The purchase price paid by PIC consisted of: (i) $893,319 Cash (ii) a promissory note in the principal amount of $773,479, payable in nine (9) equal monthly installments commencing on July 1, 1999. (iii) a promissory note in the principal amount of $293,025, payable in monthly installments of $50,000 commencing on May 1, 1999 until paid. The Company has collected the full amount of this note. PC Dynamics and PIC also entered into a royalty agreement which provides for PIC to pay PC Dynamics a royalty equal to 8.5% of the net invoice value of certain microwave frequency components and circuit boards sold by PIC for eighteen months following the closing. PIC shall not be required to pay P C Dynamics in excess of $500,000 in aggregate royalty payments. In addition, PC Dynamics has leased its facility in Texas to PIC for $17,000 per month for three years. PIC has the right under the lease to purchase the facility from PC Dynamics for $2,000,000 at anytime during the term of the lease. If PIC exercises its right to purchase the facility, the remaining balance due on the royalty agreement is payable in monthly installments of $25,000 until a minimum of $500,000 is paid. This agreement was amended in the third quarter of 1999 whereas the Company agreed to revise the payment schedule for Promissory Note I from 9 equal monthly installments to 30 equal monthly installments in return for not pursuing the purchase of the facility in Texas. The Company has collected $133,000 through December 31,2000. The royalty agreement was also revised to $500,000 payable in equal monthly installments of $25,000 until paid. The Company has collected $145,000 through December 31,2000. 4. ACCRUED EXPENSES Accrued expenses at December 31, 2000 and 1999 were comprised of: 2000 1999 ---- ---- Salaries and wages $687,862 $113,798 Commissions 330,243 128,406 Professional fees 175,178 84,500 30 31 Property and other taxes 87,515 42,536 Other 322,676 139,216 ---------- -------- Total accrued expenses $1,603,474 $508,456 ========== ======== 5. LONG-TERM DEBT The Company has a bank credit agreement which includes a revolving line of credit and the mortgage loan described below. Line of credit availability is based on 80% of eligible accounts receivable and 50% of eligible inventory, with a borrowing limit of $6,000,000. Interest is at the prime rate (9.50% at December 31, 2000) plus 1/2%. The agreement expires May 31, 2001 and is renewable annually at the mutual consent of the Company and the lender. The outstanding balance under the line at December 31, 2000 and 1999 was $5,500,000 and $0, respectively. Long-term debt is comprised of the following at December 31, 2000 and 1999:
2000 1999 ----- ---- Mortgage notes payable, 1/2% over prime rate, payable in monthly principal installments of approximately $25,000 due October 2001, collateralized by PC Dynamics facility $1,661,527 $1,964,323 Land acquisition note, at the prime rate, for the purpose of financing the acquisition of certain property in West Chicago, Illinois. Collaterized by certain assets. Interest is due monthly. The Note is due on September 30, 2001. 1,509,286 0 Installment note, collateralized by certain fixed assets, at the prime rate, payable in monthly principal installments of approximately $4,900 due October 31, 2004. 225,273 284,039 ---------- ---------- 3,396,086 2,248,362 Less current portion 3,229,580 361,563 ---------- ---------- Total long-term debt $ 166,506 $1,886,799 ========== ==========
Scheduled future maturities of long-term debt are as follows at December 31, 1999: 2001 3,229,580 2002 58,767 2003 58,767 2004 48,972 ---------- $3,396,086 The terms of the Company's long-term bank debt represent the borrowing rates currently available to the Company; accordingly, the fair value of this debt approximates its carrying amount. Revolving credit borrowings and the mortgage notes are cross-defaulted and cross-collateralized. The credit agreement, as amended December 22, 2000 requires the Company to maintain a stipulated amount of tangible net worth and cash flow coverage ratio, as defined. The Company was in compliance with the covenants at December 31, 2000. 31 32 6. INCOME TAXES The provision (benefit) for income taxes consists of: 2000 1998 1998 ---- ---- ---- Current $2,196,287 $ 0 $ (146,657) Deferred (190,981) (397,486) 302,077 ---------- ----------- ---------- Total $2,005,306 $ (397,486) $ 155,420 ========== =========== ========== The primary components comprising the net deferred tax assets (liabilities) are as follows:
2000 1999 1998 ---- ---- ---- Deferred tax assets Impairment of fixed assets to be disposed of $ 0 $ 0 $ 1,015,735 Impairment and amortization of goodwill 0 485,451 294,766 Receivable reserves 117,000 24,595 24,595 Inventory reserves 790,623 103,917 204,823 Accrued expenses and other 210,619 68,364 3,818 Tax credits and loss carryforwards 0 974,064 166,177 ---------- ---------- ---------- Deferred tax assets 1,118,242 1,656,391 1,709,914 Valuation Allowance 0 (90,000) 0 Deferred tax liabilities Depreciation (522,593) (1,161,724) (1,702,735) ---------- ----------- ----------- Net deferred tax assets (liabilities) $ 595,649 $ 404,667 $ 7,179 ========== =========== ==========
The effective tax rate differs from the Federal statutory tax rate for the following reasons: 2000 1999 1998 ---- ---- ---- Federal statutory rate 34.0% 34.0% 34.0% State income taxes, net of Federal benefit 2.5 2.5 2.5 Other adjustments (2.8) 0.1 52.9 ----- ---- ---- Effective rate 33.7% 36.6% 89.4% ===== ===== ===== 7. SIGNIFICANT CUSTOMERS AND SUPPLIERS The percentages of net sales attributable to major customers by year were as follows: 2000 1999 1998 ---- ---- ---- Customer A 91% 36% 9% Customer B 2 9 1 Customer C 2 13 37 The loss of, or a substantial reduction in or change in the mix of orders from, any one of the Company's major customers could have a material adverse effect on the Company's results of operations and financial condition. Approximately 94%, 64% and 51% of the Company's revenues in 2000,1999 and 1998 respectively, were related to the cellular telephone industry. 32 33 During 2000, the largest single component of the Company's cost of goods sold was purchased printed circuit boards that accounted for approximately 29% of net sales. One manufacturer accounted for approximately 67% of the purchased printed circuit boards. In 1999, purchased printed circuit boards accounted for approximately 5% of net sales. During 2000, 1999 and 1998, one manufacturer accounted for approximately 41%, 41% and 66%, respectively, of the Teflon-based laminates ("Teflon based laminate") supplied to the Company. Teflon based laminate is a significant cost component of the Company's cost of goods sold representing approximately 4.3%, 18.0%, and 18.8% of net sales during 2000, 1999 and 1998, respectively. There are only four U. S. manufacturers of Teflon based laminate. Any disruption or termination of these sources of Teflon based laminate could adversely affect the Company's operations. 8. COMMON STOCK EQUITY On October 24, 2000 the Board of Directors declared a two-for-one split of its common stock, effected in the form of a stock dividend paid on November 28, 2000 to shareholders of record on November 13, 2000. All agreements concerning stock options in shares of the Company's common stock provide for the issuance of additional shares due to the declaration of the stock split. All references to the number of shares, except shares authorized, and to per share information in the consolidated financial statements have been adjusted to reflect the stock split on a retroactive basis. 9. STOCK OPTION PLAN In February 1992, the Board of Directors and stockholders of the Company approved a non-qualified Stock Option Plan (the "Stock Option Plan") under which 600,000 shares of common stock are reserved for issuance upon exercise of stock options. The Stock Option Plan is designed as an incentive for retaining key employees and directors. In June 1995, the Board of Directors and stockholders of the Company approved an amendment and restatement of the Company's 1992 Stock Option Plan. The principal changes that resulted from the amendment are (1) an increase in the aggregate number of shares of Common Stock of the Company available for the exercise of options granted under the plan from 600,000 to 1,000,000; (2) a limit on the number of shares as to which options may be granted to any grantee in any calendar year to 150,000; (3) a grant of discretion to the Compensation Committee to extend the exercisability of options after a grantee's termination of employment (other than for Cause, as defined in the Plan) from 30 days to any longer period up to the full remaining term of the option; and (4) a provision for the acceleration of the exercisability of all outstanding options (regardless of when granted) in the event of a Change of Control of the Company. In June 1997 the Board of Directors and stockholders of the Company approved an amendment and restatement of the Company's 1992 Stock Option Plan. The principal changes that resulted from the amendment are (1) to increase the aggregate number of shares of Common Stock of the Company available for the exercise of options granted under the plan from 1,000,000 to 1,500,000 and (2) to increase the limit on the number of shares as to which options may be granted to any grantee in any calendar year from 150,000 to 430,000. The exercise price of each non-qualified stock option granted to employees of the Company under the Stock Option Plan must equal at least 80% of the fair market value of the underlying shares of common stock on the date of the grant, and the maximum term of such an option may not exceed 10 years. For all options granted to date, except for 150,000 options granted in 1995 and 420,000 shares granted in 1998, exercise price has equaled fair market value at the date of 33 34 grant, the term of the option has been 10 years, and the options vest as to 25% on each of the first four anniversary dates of the grant. Exercise prices, as a percentage of fair market value at date of grant, on 150,000 options granted in 1995 are 110% as to 50,000 options, 120% as to 50,000 options and 130% as to 50,000 options. These options vest as to 33 1/3% on December 31, 1995, December 31, 1996, December 31, 1997 and the term is ten years. Exercise prices for the 420,000 shares granted in 1998 are 100,000 shares at $2.75 , 140,000 at $6.10 and 180,000 shares at $8.80. These options vest at 40% on May 1, 1998, 35% on May 1, 1999 and 25% on May 1, 2000, and the term is ten years. Stock option activity under the Plan was as follows: Number of Shares Weighted Average Under Option Exercise Price -------------------------------------------------------------------------- Balance, January 1, 1998 721,750 $ 4.37 -------------------------------------------------------------------------- Granted 440,000 3.11 Forfeited (436,250) 3.64 Exercised 0 0 -------------------------------------------------------------------------- Balance, December 31, 1998 725,500 $ 4.04 -------------------------------------------------------------------------- Granted 20,000 0.66 Forfeited (470,000) 3.60 Exercised 0 0 -------------------------------------------------------------------------- Balance, December 31, 1999 275,500 $ 5.30 Granted 20,000 13.78 Forfeited (20,000) 0.66 Exercised (39,500) (2.29) -------------------------------------------------------------------------- Balance, December 31, 2000 236,000 $ 6.92 Exercisable at year-end: 1998 438,500 4.74 1999 255,500 5.66 2000 216,000 4.40 The weighted average exercise price of the options granted in 2000 were $13.78.The weighted average exercise price of the options granted in 1999 were $0.66. The weighted average exercise price of the options granted in 1998 were $3.11. The range of exercise prices of the 236,000 options outstanding at December 31, 2000 is $1.63 to $13.78 and the weighted average remaining contractual life is 3 years. At December 31, 2000, 1,264,000 shares were available for grant. The Company applies Accounting Principles Board Opinion No. 25 in accounting for stock options. Accordingly, no compensation cost has been recognized for options granted. Had compensation cost for options granted been determined based on the fair value at the grant 34 35 date, consistent with the method prescribed by Financial Accounting Standards Board Statement No. 123, the Company's net income (loss) and related per share amounts would have been adjusted to the following pro forma amounts: 2000 1999 1998 ---- ---- ---- Net income(loss) As reported $3,939,962 $(688,905) $ 18,503 Pro forma 3,895,958 (958,875) (353,005) Basic net income (loss) per share As reported Basic $ 0.86 $ (0.16) Diluted 0.85 (0.16) Pro forma Basic 0.85 (0.22) (0.06) Diluted 0.84 (0.22) (0.06) Options outstanding and exercisable at December 31, 2000, by price range:
Outstanding ----------------------------------- Exercisable Range of Weighted average ------------------------- exercise Remaining Weighted average Weighted average prices Shares contractual life exercise price Shares exercise price ------ ------ ---------------- -------------- ------ -------------- $ 1.62 to 3.50 46,000 1.5 $ 2.44 46,000 $ 2.44 3.51 to 7.99 170,000 4.3 7.32 170,000 7.32 8.00 to 14.00 20,000 9.8 13.78 0 0 ------- ------- 236,000 216,000
The weighted average fair value of options granted in 2000, and 1999 was $13.78 and $0.66, respectively, and was estimated at the grant date using the Black-Scholes options pricing model with the following weighted average assumptions: expected volatility of 128% and 143%, respectively: risk free interest rate of 5.98% and 4.93%, respectively; expected life of 10 and 9 years respectively; and no dividend yield. 10. EMPLOYEE BENEFIT PLAN The Company maintains a defined contribution retirement plan covering substantially all full-time employees. The plan allows for employees to defer up to 15% of their pretax annual compensation, as defined in the plan. The Company will match up to 25% of the first 4% of base compensation that a participant contributes. The Company matching contributions were $15,711, $11,655 and $9,660 for 2000, 1999 and 1998. Additionally, discretionary amounts may be contributed by the Company. There were no discretionary contributions for 2000, 1999 and 1998. 11. LEASE COMMITMENTS The Company rents manufacturing and administrative space under operating leases. Rent expense under these leases for the years ended December 31, 2000, 1999 and 1998 was $96,000, $82,090, and $77,100, respectively. Future minimum annual lease commitments at December 31, 2000 are as follows: Year ---- 2001 $ 98,800 2002 56,400 --------- Total $ 155,200 ========= 35 36 The Company is leasing one of its facilities to an unrelated third party for $17,000 per month. The leasee may purchase the facility from the Company at anytime during the lease for $2,000,000. The lease term expires on March 29, 2002. 12. 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. 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. On April 25, 1997, the plaintiffs and the defendants entered into a settlement agreement which resolves all of the claims arising out of this action, except as to claims of class members who opt out of the settlement. This settlement received court approval on July 8, 1997. The settlement provided for a $150,000 payment to the plaintiff class plus administrative fees not to exceed $20,000. The Company paid $85,000 in 1998 in settlement of the class action suit. The remainder was paid by the Company's insurance carrier. 13. ENVIRONMENTAL MATTERS The Company periodically generates and handles materials that are considered hazardous waste under applicable law and contracts for the off-site disposal of these materials. During the ordinary course of its operations, the Company has on occasion received citations or notices from regulatory authorities that such operations may not be in compliance with applicable environmental regulations. Upon such receipt, the Company works with such authorities to resolve the issues raised by such citations or notices. The Company's past expenditures relating to environmental compliance have not had a material effect on the financial position of the Company. The Company believes the overall impact of compliance with regulations and legislation protecting the environment will not have a material effect on its future financial position or results of operations, although no assurance can be given. 14. IMPAIRMENT OF GOODWILL AND LONG-LIVED ASSETS TO BE DISPOSED OF During the fourth quarter of 1997, the Company decided to reposition the P C Dynamics subsidiary located in Frisco, Texas. Management decided the P C Dynamics division did not have a future place in the Company's strategic plans. As such, management was actively marketing P C Dynamics for sale. In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of," the Company recorded a goodwill impairment charge of $670,000. The Company also recorded a $2,604,448 impairment of building and equipment for the write down of the P C Dynamics building and equipment to an estimate of market value. The market value was determined based on appraisals. 36 37 For the year ended December 31, 1998 P C Dynamics' financial results included $4,485,684 of net sales and operating profits of $378,366 15. TREASURY SHARES On December 18, 1998, the Company repurchased 1,563,928 shares of its common stock owned by First Chicago Equity Corporation (""FCEC") and its affiliates. The aggregate consideration paid by the Company consisted of $781,964 plus warrants to purchase up to 1,563,928 shares of the Company's common stock with an exercise price of $0.50 per share (increasing by $0.025 per share each anniversary date of the warrants). The warrants are exercisable only if the Company engages in an extraordinary transaction (e.g., a merger, a consolidation, combination or dissolution) within five years of the issue date of the warrants. 16. SUBSEQUENT EVENT On January 9, 2001 the Company's line of credit borrowing limit was increased from $6,000,000 to $10,000,000. Interest is at the prime rate plus 1/2%. * * * * * * 37 38 M~WAVE, Inc. and Subsidiaries SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) -------------------------------------------------------------------------------- Set forth below is a summary of the Company's unaudited quarterly results for each quarter during 2000 and 1999. In management's opinion, these results have been prepared on the same basis as the audited financial statements contained elsewhere herein and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the information for the periods when read in conjunction with the financial statements and notes thereto.
Three Months Ended ------------------------------------------------------- March 31, June 30, September 30, December 31, 2000 2000 2000 2000 ---- ---- ---- ---- Net sales $5,372,185 $11,973,913 $18,122,341 $22,091,523 Gross profit 773,949 2,432,699 3,076,036 3,606,111 Net income (loss) 167,519 758,367 1,193,935 1,820,141 Weighted average shares 4,546,053 4,553,869 4,558,524 4,572,184 Basic earnings (loss) per share 0.04 0.17 0.26 0.40 Diluted shares 4,546,053 4,553,869 4,558,524 4,572,184 Diluted earnings (loss) per share 0.04 0.17 0.26 0.40 Three Months Ended ------------------------------------------------------- March 31, June 30, September 30, December 31, 1999 1999 1999 1999 ---- ---- ---- ---- Net sales $3,682,818 $1,896,866 $2,169,003 $3,556,956 Gross profit 776,582 (16) (308,022) 554,118 Net income (loss) 9,740 (225,968) (494,878) 22,201 Weighted average shares 4,385,684 4,385,684 4,385,684 4,534,330 Basic earnings (loss) per share 0.00 (0.05) (0.11) 0.00 Diluted shares 4,385,684 4,385,684 4,385,684 4,534,330 Diluted earnings (loss) per share 0.00 (0.05) (0.11) 0.00
On October 24, 2000 the Board of Directors declared a two-for-one split of its common stock, effected in the form of a stock dividend paid on November 28, 2000 to shareholders of record on November 13, 2000. All agreements concerning stock options in shares of the Company's common stock provide for the issuance of additional shares due to the declaration of the stock split. All references to the number of shares, except shares authorized, and to per share information in the consolidated financial statements have been adjusted to reflect the stock split on a retroactive basis. 38 39 FINANCIAL STATEMENT SCHEDULES Schedule II M~Wave, Inc. and Subsidiaries Schedule II - Reserve for Inventory Obsolescence For the years ended December 31, 2000, 1999 and 1998
Description Balance at Charged to Balance at ----------- Beginning of costs and end of Reserve for Inventory Obsolescence period expenses Deductions period ------ -------- ---------- ------ 2000 $137,000 $1,890,000 $0 $2,027,000 1999 246,000 0 109,000 137,000 1998 468,000 0 222,000 246,000
M~Wave, Inc. and Subsidiaries Schedule II - Allowance for Doubtful Accounts For the years ended December 31, 2000, 1999 and 1998
Description Balance at Charged to Balance at ----------- Beginning of costs and end of Reserve for Inventory Obsolescence period expenses Deductions period ------ -------- ---------- ------ 2000 $10,000 $90,000 $0 $100,000 1999 10,000 0 0 10,000 1998 10,000 0 0 10,000
(a) Accounts charged off as uncollectable, less recovery 39 40 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. M~WAVE, Inc. By: /s/ Joseph A. Turek -------------------------------- Joseph A. Turek Chairman of the Board, Chief Executive Officer March 15, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Joseph A. Turek /s/ Gregory E. Meyer ---------------------------------- ------------------------------- Joseph A. Turek Gregory E. Meyer Director Director March 15, 2001 March 15, 2001 /s/ Lavern D. Kramer /s/ Gary Castagna ---------------------------------- ------------------------------ Lavern D. Kramer Gary Costagna Director Director March 15, 2001 March 15, 2001 /s/ Paul H. Schmitt /s/ Don Lepore ---------------------------------- ------------------------------- Paul H. Schmitt Don Lepore Treasurer and Secretary Director (Principal Accounting and March 15, 2001 Financial Officer) March 15, 2001 40 41 EXHIBIT INDEX
Exhibit No. Description Page ------- ----------- ---- 2.1 Exchange Agreement, dated as of January 31, 1992, among Poly * Circuits, Inc., Joel S. Dryer, Joseph A. Turek and the Company 3.1 Certificate of Incorporation of the Company * 3.2 Bylaws of the Company * 10.1 Amended and restated M~Wave, Inc. 1992 Stock Option Plan **** 10.2 Lease, dated June 22, 1989, by and between Louis R. and Ruth DeMichele and the Company * 10.3 Amended Form of Sales Representative Agreement generally used by and between the Company and its sales representatives * 10.4 Employment Agreement between the Company and Joseph A. Turek **** 10.5 Registration Rights Agreement dated July 21, 1993, between the Company and certain holders of Company common stock ** 10.6 Shareholders Agreement, dated July 21, 1993, by and among First Capital Corporation of Chicago, Cross Creek Partners II, and Joseph A. Turek ** 10.7 Asset Purchase Agreement, dated as of August 5, 1994, by and among the Company, P C Dynamics acquisition, P CD Holdings, Inc. and P C Dynamics Corporation. *** 10.8 Construction Loan Note, dated January 10, 1996, by and among the Company, P C Dynamics and American National Bank and Trust Company. ***** 10.9 Employment Agreement between the Company and Michael Bayles ****** 10.10 Stock Purchase Agreement dated December 18, 1998 by and between the Company and First Chicago Equity Corporation. ******* 10.11 Stock Purchase Agreement dated December 18, 1998 by and between the Company and Cross Creek Partners II. ******* 10.12 Warrant dated December 18, 1998 issued to First Chicago Equity ******* 10.13 Warrant dated December 18, 1998 issued to Cross Creek Partners II ******* 21 Subsidiaries 43 24.1 Consent of Grant Thornton LLP 44
41 42 *Incorporated herein by reference to the applicable exhibit to the Registrant's Registration Statement on Form S-1 (Registration No. 33-45499). **Incorporated herein by reference to the applicable exhibit to the Registrant's Annual Report on Form 10-K for year ended December 31, 1993 (Registration No. 0-19944). ***Incorporated herein by reference to the applicable Report on Form 8-K dated August 5, 1994. ****Incorporated herein by reference to the applicable exhibit to the Registrants quarterly report on form 10-Q for the quarter ended June 30, 1995. *****Incorporated herein by reference to the applicable exhibit to the Registrant's Annual Report on Form 10-K for year ended December 31, 1995. ******Incorporated herein by reference to the applicable exhibit to the Registrants quarterly report on form 10-Q for the quarter ended March 31, 1997. *******Incorporated herein by reference to the applicable exhibit report on Form 8-K dated December 18, 1998. ********Incorporated herein by reference to the applicable exhibit report on Form 8-K dated December 27, 2000. 42