10-Q 1 c64268e10-q.txt QUARTERLY REPORT 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2001 Commission File No. 0-19944 ----------------------------------- ----------------------------- M~WAVE, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 36-3809819 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) identification No.) 216 Evergreen Street, Bensenville, Illinois 60106 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (630) 860-9542 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- The registrant has 4,572,184 shares of common stock outstanding at August 3, 2001. 1 2 PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS M~WAVE, INC. CONSOLIDATED BALANCE SHEETS (Unaudited)
DECEMBER 31 JUNE 30 2000 2001 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents ........................................ $ 1,230,999 $ 849,606 Accounts receivable, net of allowance for doubtful accounts, 2000- $100,000: 2001- $100,000 .................................. 12,378,766 16,106,984 Inventories ...................................................... 8,859,795 2,503,294 Refundable income taxes .......................................... 0 613,445 Deferred income taxes ............................................ 1,118,242 803,181 Prepaid expenses and other ....................................... 47,688 72,214 ------------ ------------ Total current assets ......................................... 23,635,490 20,948,724 PROPERTY, PLANT AND EQUIPMENT: Land, buildings and improvements ................................. 6,488,057 7,487,222 Machinery and equipment .......................................... 8,731,449 11,294,893 ------------ ------------ Total property, plant and equipment .......................... 15,219,506 18,782,115 Less accumulated depreciation .................................... (6,914,345) (7,711,325) ------------ ------------ Property, plant and equipment-net ............................ 8,305,161 11,070,790 NOTE RECEIVABLE ...................................................... 195,391 191,558 OTHER ASSETS ......................................................... 54,915 53,550 ------------ ------------ TOTAL ................................................................ $ 32,190,957 $ 32,264,622 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ................................................. $ 6,516,541 $ 5,085,885 Accrued expenses ................................................. 1,603,474 1,681,284 Accrued income taxes ............................................. 146,287 0 Current credit line debt ......................................... 5,500,000 4,091,976 Current portion of long-term debt ................................ 3,229,580 3,391,187 ------------ ------------ Total current liabilities .................................... 16,995,882 14,250,332 DEFERRED INCOME TAXES ................................................ 522,593 522,593 LONG-TERM DEBT ....................................................... 166,506 137,123 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; authorized, 1,000,000 shares; no shares issued ....................................... 0 0 Common stock, $.01 par value; authorized, 10,000,000 shares 6,179,112 shares issued and 4,572,184 shares outstanding at December 31, 2000, 6,179,112 shares issued and 4,572,184 shares outstanding at June 30, 2001 ............................ 30,895 30,895 Additional paid-in capital ....................................... 8,439,072 8,439,072 Retained earnings ................................................ 7,715,283 10,563,881 Treasury stock: 1,606,928 shares, at cost ....................... (1,679,274) (1,679,274) ------------ ------------ Total stockholders' equity.................................... 14,505,976 17,354,574 ------------ ------------ TOTAL ................................................................ $ 32,190,957 $ 32,264,622 ============ ============
See notes to consolidated financial statements. 2 3 M~WAVE, Inc. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended June 30, --------------------------------- 2000 2001 ------------ ------------ Net sales .............................. $ 11,973,913 $ 15,448,962 Cost of goods sold ..................... 9,541,214 13,103,481 ------------ ------------ Gross profit ......................... 2,432,699 2,345,481 Operating expenses: General and administrative ........... 815,471 580,087 Selling and marketing ................ 367,954 457,304 ------------ ------------ Total operating expenses ........... 1,183,425 1,037,391 ------------ ------------ Operating income ..................... 1,249,274 1,308,090 Other income (expense): Interest income ...................... 18,051 8,000 Interest expense ..................... (64,167) (89,354) Rental income ........................ 51,000 51,000 ------------ ------------ Total other income (expense) ....... 4,884 (30,354) ------------ ------------ Income before income taxes ........ 1,254,158 1,277,736 Provision for income taxes ............. 495,791 505,113 ------------ ------------ Net income ............................. $ 758,367 $ 772,623 ============ ============ Weighted average shares outstanding 4,561,684 4,572,184 Basic earnings per share $ 0.17 $ 0.17 Diluted shares outstanding 4,561,684 4,600,895 Diluted earnings per share $ 0.17 $ 0.17
See notes to consolidated financial statements. 3 4 M~WAVE, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Six months ended June 30, --------------------------------- 2000 2001 ------------ ------------ Net sales .............................. $ 17,346,098 $ 37,975,082 Cost of goods sold ..................... 14,139,450 30,692,535 ------------ ------------ Gross profit ......................... 3,206,648 7,282,547 Operating expenses: General and administrative ........... 1,150,795 1,465,334 Selling and marketing ................ 549,313 928,333 ------------ ------------ Total operating expenses ........... 1,700,108 2,393,667 ------------ ------------ Operating income ..................... 1,506,540 4,888,880 Other income (expense): Interest income ...................... 37,890 27,335 Interest expense ..................... (115,235) (307,312) Rental income ........................ 102,000 102,000 ------------ ------------ Total other income (expense) ....... 24,655 (177,977) ------------ ------------ Income before income taxes ........ 1,531,195 4,710,903 Provision for income taxes ............. 605,309 1,862,305 ------------ ------------ Net income ............................. $ 925,886 $ 2,848,598 ============ ============ Weighted average shares outstanding 4,553,836 4,572,184 Basic earnings per share $ 0.20 $ 0.62 Diluted shares outstanding 4,553,836 4,622,937 Diluted earnings per share $ 0.20 $ 0.62
See notes to consolidated financial statements. 4 5 M~WAVE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended June 30, ------------------------------- 2000 2001 ----------- ----------- OPERATING ACTIVITIES: Net income ......................................................... $ 925,886 $ 2,848,598 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization .................................. 513,000 796,980 Deferred income taxes .......................................... 0 315,061 Reserve for notes receivable ................................... 430,000 0 Changes in assets and liabilities: Accounts receivable-trade ...................................... (3,497,196) (3,728,218) Inventories .................................................... (4,745,514) 6,356,501 Income taxes ................................................... 605,307 (759,732) Prepaid expenses and other assets .............................. (59,777) (19,328) Accounts payable ............................................... 3,764,093 (1,430,656) Accrued expenses ............................................... 344,580 77,810 ----------- ----------- Net cash flows (used in) provided by operating activities ... $(1,719,621) $ 4,457,016 ----------- ----------- INVESTING ACTIVITIES: Purchase of property, plant and equipment .......................... (271,723) (3,562,609) ----------- ----------- Net cash flows used in investing activities ................. $ (271,723) $(3,562,609) FINANCING ACTIVITIES: Common stock issued upon exercise of stock options ................. 47,125 0 Credit line debt ................................................... 1,500,000 (1,408,024) Net payments on short and long term debt .......................... (180,781) 0 Net borrowings on short and long term debt ........................ 0 132,224 ----------- ----------- Net cash flows provided by (used in) financing activities ... $ 1,366,344 $(1,275,800) ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS ............................ $ (625,000) $ (381,393) CASH AND CASH EQUIVALENTS - Beginning of period ...................... $ 2,586,885 $ 1,230,999 ----------- ----------- CASH AND CASH EQUIVALENTS - End of period ............................ $ 1,961,885 $ 849,606 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest ......................... $ 115,235 $ 307,312 Income tax payments .............................................. $ 0 $ 2,307,933
See notes to consolidated financial statements. 5 6 M~WAVE,INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation, consisting only of normal recurring adjustments, have been included. For further information, refer to the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2000 filed March 22, 2001. 2. BUSINESS M~Wave, Inc. through its wholly owned subsidiary Poly Circuits, Inc., is a value-added service provider of high performance printed circuit boards used in a variety of 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 manufacturers 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 6 7 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 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. 7 8 3. INVENTORIES Inventories are carried at the lower of first-in, first-out (FIFO) cost or market. Substantially all the Company's inventories are in work in process. 4. DEBT The Company has a mortgage loan of $1,510,000 for the facility at P C Dynamics Corporation in Frisco, Texas. Interest is at the prime rate (6.75% at June 30, 2001) plus 1/2%. The loan is payable in monthly installments of principal and interest and is due in October 2001. The Company has an installment loan of $196,000 collateralized by ertain fixed assets of the Company. Interest on this loan is at the prime ate. The loan is payable in monthly installments of principal and interest nd is due in October 2004. The Company has a Land Acquisition loan, for the purpose of financing the acquisition of certain property in West Chicago, Illinois, of $1,509,000 collateralized by certain assets of the Company. Interest on this loan is at the prime rate. Interest is due monthly. The loan is due on September 30, 2001. The Company has an Equipment loan, for the purpose of financing equipment for the facility in West Chicago, Illinois, of $313,000 collateralized by certain assets of the Company. Interest on this loan is at the prime rate. Interest is due monthly. The loan is due on September 30, 2001. The Company has a $10,000,000 line of credit available based on 80% of the eligible accounts receivable and 50% of eligible inventory to fund the working capital needs of the Company. Interest is at the prime rate (6.75% at June 30, 2001) plus 1/2%. The agreement expires May 15, 2002 and is renewable annually at the mutual consent of the Company and the lender. The outstanding balance under the line of credit at June 30, 2001 was $4,092,000. 5. 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. 6. SUBSEQUENT EVENT The Company completed financing of $8.1 million from the Illinois Development Finance Authority's 2001 maximum limit on tax-exempt private 8 9 activity bonds to finance its facility in West Chicago, Illinois on July 26, 2001. The bond will replace approximately $1,822,000 of our current debt, which has an interest rate of 6.75%. The interest on the bond is set weekly; the current rate for the week ending August 1, 2001 was 2.85%. 7. RECENT ACCOUNTING PRONOUNCEMENTS SFAS NO. 141 "BUSINESS COMBINATIONS", AND SFAS 142, "GOODWILL AND INTANGIBLE ASSETS" On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Although it is still reviewing the provisions of these Statements, management's preliminary assessment is that these Statements will not have a material impact on the Company's financial position or results of operations. SFAS NO. 133 "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" On January 1, 2001, the Company adopted Statement of Financial Accounting Standards SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133") as amended, which requires that all derivative instruments be recognized in the financial statements. For the third quarter ending September 30, 2001, the Company will enter into a $3,930,000 interest rate swap agreement to manage its exposure to fluctuations in interest rates. The adoption of SFAS No. 133 will not have a material impact on the Company's financial position or results of operations. 9 10 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS FOR THE QUARTER ENDED JUNE 30, 2001 COMPARED TO THE QUARTER ENDED JUNE 30, 2000 NET SALES Net sales were $15,449,000 for the second quarter ended June 30, 2001, an increase of $3,475,000 or 29% above the second quarter of 2000. The increase in net sales is directly related to "Virtual Manufacturing." Virtual Manufacturing accounted for approximately $13,113,000 of net sales in the second quarter of 2001 compared to $9,716,000 of net sales in the second quarter of 2000. Net sales to Lucent were $13,321,000 in the second quarter of 2001 compared to $10,537,000 in the second quarter of 2000. $5,300,000 of the net sales in the second quarter of 2001 relates to the complete and final settlement of one program with Lucent. Lucent accounted for 86% of the Company's net sales for the second quarter ended June 30, 2001 compared to 88% in the second quarter of 2000. GROSS PROFIT AND COST OF GOODS SOLD The Company's gross profit for the second quarter of 2001 was $2,345,000 compared to $2,433,000 for the second quarter of 2000. Gross Margin decreased to approximately 15% in the second quarter of 2001 from approximately 20% in the second quarter of 2000. $5,300,000 of the net sales in the second quarter of 2001 relates to the complete and final settlement of one program with Lucent. This transaction was recorded at approximately inventory value. Thus the adjusted gross margin excluding the $5,300,000 in net sales and costs was approximately 23%. OPERATING EXPENSES General and administrative expenses were $580,000 or 3.8% of net sales in the second quarter of 2001 compared to $815,000 or 6.8% of net sales in the second quarter of 2000. General and administrative expenses consist primarily of salaries and benefits, professional services, depreciation of office equipment, computer systems and occupancy expenses. The Company recorded a reserve of $400,000 in the second quarter of 2000 relating to the promissory note from Performance Interconnect Corporation. Payroll related expenses were up $60,000 due to additional employees. Professional services, which include legal and auditing fees, were up $95,000. 10 11 Selling and marketing expenses were $457,000 or 3.0% of net sales in the second quarter of 2001 compared to $368,000 or 3.1% of net sales in the second quarter of 2000. Selling and marketing expenses include the cost of salaries, advertising and promoting the Company's products, and commissions paid to independent sales organizations. Commissions paid to independent sales organizations were up $91,000. OPERATING INCOME Operating income was $1,308,000 or 8.5% of net sales in the second quarter of 2001 compared to an operating income of $1,249,000 or 10.4% of net sales in the second quarter of 2000, an increase of $59,000. The changes in operating income reflect primarily the changes in net sales, gross profit and cost of goods sold and operating expenses as discussed above. The change in operating income can be summarized as follows: Increase in net sales $ 706,000 Decrease in gross margin (793,000) Decrease in operating expenses 146,000 --------- Increase in operating income $ 59,000 INTEREST INCOME Interest income from short-term investments was $8,000 in the second quarter of 2001 compared to $18,000 in the second quarter of 2000. Rental income from the P C Dynamics facility was $51,000 in the second quarter of 2001 and the second quarter of 2000. INTEREST EXPENSE Interest expense, primarily related to the Company's mortgage obligation on its P C Dynamics facility and short-term credit facility was $89,000 in the second quarter of 2001 compared to $64,000 in the second quarter of 2000. INCOME TAXES In the second quarter of 2001 and the second quarter of 2000 the Company had an effective tax credit rate of 39.5%. 11 12 RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2000 NET SALES Net sales were $37,975,000 for the six months ended June 30, 2001, an increase of $20,629,000 or 119% above the first six months of 2000. The increase in net sales is directly related to "Virtual Manufacturing." Virtual Manufacturing accounted for approximately $33,557,000 of net sales in the six months ended June 30, 2001 compared to $13,835,000 of net sales for the first six months of 2000. Net sales to Lucent were $33,524,000 for the six months ended June 30, 2001 compared to $14,948,000 for the first six months of 2000. Lucent accounted for 88% of the Company's net sales for the six months ended June 30, 2001 compared to 86% for the first six months of 2000. GROSS PROFIT AND COST OF GOODS SOLD The Company's gross profit for the six months ended June 30, 2001 was $7,283,000 compared to $3,207,000 for the first six months of 2000. Gross Margin increased to approximately 19.2% for the six months ended June 30, 2001 from approximately 18.5% in the first six months of 2000. $5,300,000 of the net sales in the first six months of 2001 relates to the complete and final settlement of one program with Lucent. This transaction was recorded at approximately inventory value. Thus the adjusted gross margin excluding the $5,300,000 in net sales and costs was approximately 22.3%. The increase is a result of increased sales and improved efficiencies and the Company's decision to adopt Virtual Manufacturing. OPERATING EXPENSES General and administrative expenses were $1,465,000 or 3.9% of net sales for the six months ended June 30, 2001 compared to $1,151,000 or 6.6% of net sales in the first six months of 2000. 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 $428,000 due to additional employees. Professional services, which include legal and auditing fees, were up $201,000. Selling and marketing expenses were $928,000 or 2.4% of net sales for the six months ended June 30, 2001 compared to $549,000 or 3.2% of net sales in the first six months of 2000. Selling and marketing expenses include the cost of salaries, advertising and promoting the Company's products, and commissions 12 13 paid to independent sales organizations. Commissions paid to independent sales organizations were up $302,000. OPERATING INCOME Operating income was $4,889,000 or 12.9% for the six months ended June 30, 2001 compared to an operating income of $1,507,000 or 8.7% of net sales in the first six months of 2000, an increase of $3,382,000. The changes in operating income reflect primarily the changes in net sales, gross profit and cost of goods sold and operating expenses as discussed above. The change in operating income can be summarized as follows: Increase in net sales $3,814,000 Increase in gross margin 262,000 Increase in operating expenses (694,000) ---------- Increase in operating income $3,382,000 INTEREST INCOME Interest income from short-term investments was $27,000 for the six months ended June 30, 2001 compared to $38,000 in the first six months of 2000. Rental income from the P C Dynamics facility was $102,000 for the six months ended June 30, 2001 and the first six months of 2000. INTEREST EXPENSE Interest expense, primarily related to the Company's mortgage obligation on its P C Dynamics facility and short-term credit facility was $307,000 for the six months ended June 30, 2001 compared to $115,000 in the first six months of 2000. INCOME TAXES For the six months ended June 30, 2001 and the first six months of 2000 the Company had an effective tax credit rate of 39.5%. LIQUIDITY AND CAPITAL RESOURCES Net cash provided from operations was $4,457,000 for the six months ended June 30, 2001 compared to using ($1,720,000) for the first six months of 2000. Accounts receivables increased $3,728,000. Inventories decreased $6,357,000. $5,300,000 of the reduction relates to the final settlement of one program with Lucent that was recorded at approximately inventory value. Accounts payable decreased $1,431,000. Depreciation and amortization was $797,000. 13 14 Capital expenditures mainly relating to the new West Chicago facility were $3,563,000 for the six months ended June 30, 2001. Capital expenditures to improve manufacturing processes were $272,000 in the first six months of 2000. The Company has a mortgage loan of $1,510,000 for the facility at P C Dynamics Corporation in Frisco, Texas. Interest is at the prime rate (6.75% at June 30, 2001) plus 1/2%. The loan is payable in monthly installments of principal and interest and is due in October 2001. The Company has an installment loan of $196,000 collateralized by certain fixed assets of the Company. Interest on this loan is at the prime rate. The loan is payable in monthly installments of principal and interest and is due in October 2004. The Company has a Land Acquisition loan, for the purpose of financing the acquisition of certain property in West Chicago, Illinois, of $1,509,000 collateralized by certain assets of the Company. Interest on this loan is at the prime rate. Interest is due monthly. The loan is due on September 30, 2001. The Company has an Equipment loan, for the purpose of financing equipment for the facility in West Chicago, Illinois, of $313,000 collateralized by certain assets of the Company. Interest on this loan is at the prime rate. Interest is due monthly. The loan is due on September 30, 2001. The Company has a $10,000,000 line of credit available based on 80% of the eligible accounts receivable and 50% of eligible inventory to fund the working capital needs of the Company. Interest is at the prime rate (6.75% at June 30, 2001) plus 1/2%. The agreement expires May 15, 2001 and is renewable annually at the mutual consent of the Company and the lender. The outstanding balance under the line of credit at June 30, 2001 was $4,092,000. As of June 30, 2001, the Company has $7,620,000 of debt and $850,000 of cash and cash equivalents. Management believes that funds generated from operations, coupled with the Company's cash and investment balances and its capacity for debt will be sufficient to fund current business operations. The Company completed financing of $8.1 million from the Illinois Development Finance Authority's 2001 maximum limit on tax-exempt private activity bonds to finance its facility in West Chicago, Illinois on July 26, 2001. The bond will replace approximately $1,822,000 of our current debt, which has an interest rate of 6.75%. The interest on the bond is set weekly; the current rate for the week ending August 1, 2001 was 2.85%. 14 15 INFLATION Management believes inflation has not had a material effect on the Company's operation or on its financial position. FOREIGN CURRENCY TRANSACTIONS All of the Company's foreign transactions are negotiated, invoiced and paid in United States dollars. 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 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. 15 16 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 in 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. 16 17 PART II - OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS None ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company's Annual Meeting of Stockholders was held on June 19, 2001. (b) At the Company's Annual Meeting of Stockholders, the Stockholders reelected to the Company's Board of Directors Messrs. Lavern D. Kramer and Gary L. Castagna. Messrs. Kramer and Castagna are class III Directors and will serve a term ending upon the election of Class III Directors at the 2004 Annual Meeting of Stockholders. The aggregate number of votes cast for, against or withheld, for the election of Mr. Kramer was as follows: 4,419,661 for, 0 against and 6,485 withheld. The aggregate number of votes cast for, against or withheld, for the election of Mr. Castagna was as follows: 4,409,171 for, 0 against and 16,975 withheld. (c) The Board of Directors is divided into three classes, each of whose members serve for a staggered three-year term. The Board is comprised of one Class I Director (Gregory E. Meyer) whose term expires at the 2002 Annual Meeting of Stockholders, two Class II Director (Joseph A. Turek and Donald A. Lepore) whose term expires at the 2003 Annual Meeting of Stockholders and two Class III Directors (Lavern D. Kramer and Gary L. Castagna) whose term expires at the 2001 Annual Meeting of Stockholders. (d) At the Company's Annual Meeting of Stockholders, the Stockholders ratified the appointment of Grant Thornton LLP as auditors of the Company for the 2001 calendar year. The aggregate number of votes cast for, against or withheld, for the ratification of Grant Thornton LLP as auditors was 4,418,386, 2,700 and 5,060, respectively. 17 18 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.19 Employment agreement dated June 2, 2001 between the Company and Robert Duke 10.20 Loan Agreement 18 19 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. M~WAVE,INC. Date: August 3, 2001 /s/ PAUL H. SCHMITT ------------------------------ Paul H. Schmitt Chief Financial Officer 19 20 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ------- --------------------------------------------------------------- 10.19 Employment agreement dated June 2, 2001 between the Company and Robert Duke 10.20 Loan Agreement 20