10-K405 1 c68401e10-k405.txt ANNUAL REPORT 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, 2001 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 ($.005 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 13, 2002 was approximately $26,069,000, computed on the basis of the last reported sale price per share ($5.85) of such stock on the NASDAQ National Market. 1 The Registrant has 4,456,294 common shares outstanding at March 13, 2002. 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 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 digital and high frequency applications for wireless and industrial electronics applications. M~Wave satisfies its customers requirements for wireless and industrial electronics application by using its 50,000 square foot state-of-the-art prototype and small volume facility located in West Chicago, Illinois and by outsourcing and coordinating the manufacture of such boards by a global base of suppliers located primarily in the Far East ("Virtual Manufacturing"). Virtual Manufacturing contractually supplies all the printed circuit needs of our customers by managing the complete procurement process. We deliver products when the customer needs them through either consignment inventory control or just-in-time programs. 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 property, plant and equipment. The Company added new levels of capacity in 2001 with the addition of its new facility in West Chicago, Illinois. The new state-of-the-art 50,000 square foot facility in West Chicago enables 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 a variety of telecommunications and industrial electronic applications. 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. 3 The Company markets its products through regional sales managers supported by independent sales organizations. The Company's base of approximately 100 customers represents a highly sophisticated group of purchasers. 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. 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. Approximately 90%, 94% and 64% of the Company's revenues in 2001, 2000, and 1999, respectively, were related to the cellular telephone industry. Customers and Marketing The Company's customers include microwave system manufacturers with sophisticated technologies and industrial electronic manufacturers. 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. The Company markets its products through regional sales managers supported by approximately 20 independent sales organizations, which are paid a commission to represent the Company. International sales of the Company's products have accounted for less than 5% of revenues in each of 2001, 2000 and 1999. In 2001, Lucent, Honeywell and Spectrian accounted for 90%, 2% and 2%, respectively, of the Company's revenues. In 2000, Lucent, Honeywell and Spectrian accounted for 91%, 0% and 2%, respectively, of the Company's revenues. In 1999, Lucent, Honeywell and Spectrian accounted for 36%, 0% and 13%, respectively, of the Company's revenues. On September 1, 2001, Lucent transitioned a segment of their manufacturing operations at Columbus, Ohio to Celestica. Celestica is based in Toronto, Canada. On September 1, 2001 Lucent also transferred most of their open purchase orders with the Company to Celestica. In 2001, Lucent's revenue also includes revenue shipments to Celestica. Beginning in 2002, the Company will report these revenues separately. 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 4 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, 2001, the Company had an order backlog of approximately $3,755,000 compared to $26,761,000 at December 31, 2000. Nearly all of the Company's backlog is subject to cancellation or postponement without significant penalty. The backlog at December 31, 2001 does not include expected revenues for Virtual Manufacturing Contracts. 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 88% in 2001 compared to 94% in 2000. 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 2001, one manufacturer accounted for approximately 60% 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 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 5 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 2001, one manufacturer accounted for approximately 60% 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. The Company warrants most printed circuit boards to its customers with a money-back guarantee for printed circuit boards and components. 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 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. 6 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 $382,000 in 2001 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, 2001, the Company employed approximately 152 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 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 44 Chairman and Chief Executive Officer Paul H. Schmitt 55 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
The Company purchased the West Chicago facility in the fourth quarter of 200O and began manufacturing at that facility in the fourth quarter of 2001. 8 Item 3. Legal Proceedings None Item 4. Submission of Matters to a Vote of Security Holders None. 9 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, 2000 through December 31, 2001 as reported by the NASDAQ.
Year Ended December 31 ------------------------------------------------------- 2000 2001 ------------------------- --------------------- Low High Low High --- ---- --- ---- First Quarter $ 1.63 $ 6.97 $ 6.63 $ 14.94 Second Quarter 2.00 3.88 4.03 9.05 Third Quarter 2.72 13.78 3.61 7.49 Fourth Quarter 6.13 15.81 3.60 5.40
As of December 31, 2001, 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 on October 24, 2000. The stock split was effected as a stock dividend. Stockholders of record as of the close of business on November 13, 2000, were 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 2001 and intends not to pay dividends in the foreseeable future in order to reinvest its future earnings in the business. 10 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, 2001.
Year Ended December 31, ---------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Statement of Operations Data: Net sales $54,824,432 $57,559,962 $ 11,305,643 $13,120,054 $ 16,697,311 Gross profit 10,371,594 9,888,795 1,022,662 2,433,440 2,703,768 Operating income (loss) 6,112,791 5,904,442 (1,106,419) 182,774 (4,360,400) Income (loss) before income taxes 6,268,444 5,945,268 (1,086,391) 173,923 (4,523,648) Net income (loss) 3,796,789 3,939,962 (688,905) 18,503 (3,163,652) Weighted average shares 4,536,204 4,561,957 4,535,342 6,039,626 6,088,578 Basic earnings (loss) per share 0.84 0.86 (0.15) 0.00 (0.52) Diluted shares 4,565,021 4,641,805 4,535,342 6,042,422 6,088,578 Diluted earnings (loss) per share 0.83 0.86 (0.15) 0.00 (0.52) Balance Sheet Data: Working capital $ 8,384,609 $ 6,639,608 $ 5,931,634 $ 5,342,657 $ 5,679,330 Total assets 27,297,732 32,190,957 16,368,186 15,768,374 16,692,337 Long-term debt 2,743,527 166,566 1,886,799 1,990,337 2,268,028 Stockholders' equity 17,754,760 14,505,976 10,475,577 11,167,648 11,931,109
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. 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Listed below are the related expenses for 2001, 2000 and 1999, as a percent of sales.
2001 2000 1999 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Cost of goods sold 81.1 82.8 91.0 ----- ----- ----- Gross profit 18.9 17.2 9.0 ----- ----- ----- Operating expenses: General and administrative 5.0 4.3 13.4 Selling and marketing 2.8 2.7 5.4 ----- ----- ----- Total operating expenses 7.8 7.0 18.8 ----- ----- ----- Operating income (loss) 11.1 10.2 (9.8) Interest income (expense) - net (0.5) (0.4) (0.0) Rental income 0.3 0.4 1.4 Insurance settlement 0.0 0.1 0.0 Gain (loss) on disposal of equipment 0.5 0.0 (1.2) ----- ----- ----- Total other income (expense) 0.3 0.1 0.2 ----- ----- ----- Income (loss) before income taxes 11.4 10.3 (9.6) Income tax expense (benefit) 4.5 3.5 (3.5) ----- ----- ----- Net income (loss) 6.9% 6.8% (6.1)% ===== ===== =====
COMPARISON OF 2001 AND 2000 Net Sales Net sales for 2001 decreased 5% to $54.8 million from $57.6 million in 2000. The small decrease in net sales is related to the telecommunication industry as a whole, which saw demands reduced by up to 50% from 2000 requirements. The Company was able to offset the decrease in demand for telecommunication related products by promoting its "Virtual Manufacturing business model" and entering into the industrial electronics market. Virtual Manufacturing allows the Company to increase its 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 developed sub-contracting relationships in 2000 and 2001 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 the Company to build a product pipeline for our customers to handle more of their printed circuit requirements without the brick and mortar. The Company has signed contracts with five new virtual manufacturing customers. Virtual manufacturing accounted for approximately 90% of the Company's net sales for 2001 and 76% of the Company's net sales in 2000. 12 The Company's three largest customers; Lucent, Honeywell and Spectrian, accounted for 94% of the Company's net sales in 2001 compared to 95% in 2000. Net sales to Lucent related business decreased by $2,836,000 to $49,374,000 in 2001. On September 1, 2001, Lucent transitioned a segment of their manufacturing operations at Columbus, Ohio to Celestica. Celestica is based in Toronto, Canada. On September 1, 2001 Lucent also transferred most of their open purchase orders with the Company to Celestica. In 2001, Lucent's revenue also includes revenue shipments to Celestica. Beginning in 2002, the Company will report these revenues separately. Gross Profit and Cost of Goods Sold Gross profit increased $482,000 in 2001 from $9.9 million in 2000 to $10.4 million in 2001. Gross margin increased to approximately 19% in 2001 from approximately 17% in 2000. The increase in gross profit is a result of improved margins and the Company's decision to enter into the industrial electronics market. During 2001, one manufacturer accounted for approximately 60% of the printed circuit boards supplied to the Company. The Company has a total reserve for inventory obsolescence of $2,027,000; substantially related to specific inventory. 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 39. Operating Expenses General and administrative expenses were $2,722,000 or 5.0% of net sales in 2001, compared to $2,458,000 or 4.3% of net sales in 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 down $285,000 due to a reduction in bonus paid to administrative personnel. Depreciation expense was up $142,000 principally relating to the acquisition of the new facility in West Chicago, Illinois. The Company also recorded a reserve of $195,000 relating to the Note Receivable from Performance Interconnect as outlined in Liquidity and Capital Resources. Selling and marketing expenses were $1,536,000 or 2.8% of net sales in 2001, compared to $1,527,000 or 2.7% of net sales in 2000. Selling and marketing expenses include the cost of salaries, advertising and promoting the Company's products and the commissions paid to independent sales organizations. There was very little change in selling and marketing expenses. Operating Income Operating income was $6,112,000 or 11.1% of net sales in 2001, compared to $5,904,000 or 10.3% of net sales in 2000. The change in operating income can be summarized as follows: Decrease in net sales ($470,000) Increase in gross margin 953,000 Increase in operating expenses (275,000) -------- Increase in operating income $208,000 ========
Interest Income Interest income from short-term investments was $112,000 in 2001 compared to $114,000 in 2000. Interest Expense 13 Interest expense, primarily related to new borrowings for the West Chicago facility, was $425,000 in 2001 compared to $339,000 in 2000. Rental income Rental income, primarily relating to the P C Dynamics facility, was $176,000 in 2001 compared to $204,000 in 2000. The Company sold the P C Dynamics facility in the fourth quarter of 2001. 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 on disposal of fixed assets The Company recorded a gain of $291,000 in 2001 relating to the sale of the P C Dynamics facility in the fourth quarter of 2001. Income Taxes The Company had an effective tax rate of 39.4% in 2001 compared to 33.7% in 2000. The increase relates to the usage of tax credits and net operating loss carry forward in 2000. 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 its manufacturing capabilities without the brick and mortar by using global suppliers to manufacture all types of high quality printed circuits at much lower costs. 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 without the brick and mortar. Virtual manufacturing, which began in 2000, accounted for approximately 76% of the Company's net sales for 2000. The Company's three largest customers accounted for 95% of the Company's net sales in 2000 compared to 64% in 1999. Net sales to Lucent, its largest customer, increased by $48,097,000 to $52,210,000. 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 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 at end of product life cycle. The Company now had 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 14 assumptions used in establishing the reserve is appropriate. Please see Financial Statement Schedules on page 38. 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 environmental matters with the new facility in West Chicago, Illinois. The Company also recorded a reserve of $447,000 relating to the Note Receivable from Performance Interconnect as outlined in Liquidity and Capital Resources. 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 (1,856,000) ---------- Increase in operating income $7,010,000 ==========
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. 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 15 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 rate of 36.6% in 1999. The decrease relates to the usage of tax credits and net operating carry forwards from previous year in 2000. Liquidity and Capital Resources Net cash provided (used) by operations was $11,410,000, $(5,673,000) and ($1,918,000) in 2001, 2000 and 1999, respectively. Inventories decreased $7,296,000 at year ended December 31, 2001, due to lower sales revenue in the fourth quarter of 2001 compared to sales revenue in the fourth quarter of 2000. Accounts receivable was down $3,549,000 due to decreased sales in the fourth quarter of 2001 compared to the fourth quarter of 2000. Days of sales outstanding is at 58 days, 45 days and 54 days at December 31, 2001, 2000 and 1999, respectively. Depreciation and amortization in 2001 was $1,367,000, up $308,000 due to the capital equipment purchased for the new facility in West Chicago, Illinois. Accounts Payable was down $3,404,000 due mainly to decreased purchases in the fourth quarter of 2001 compared to the fourth quarter of 2000. Purchases of property, plant and equipment were $7,558,000, $2,421,000, and $474,000 in 2001, 2000 and 1999, respectively. The Company purchased a new facility in 2000 at a cost of approximately $1,600,000. Capital expenditures relating to the new West Chicago Facility were $6,374,000 in 2001. The Company plans to spend approximately $3,000,000 in 2002 on capital expenditures mainly relating to the new facility in West Chicago. The expenditures were partially financed through borrowings of approximately $3,955,000 and cash provided by operations. On November 13, 2001, the Company sold its facility located in Frisco, Texas. The Company received $2,388,000 from the sale of the facility. $1,445,000 was used to satisfy the debt associated with the facility and $943,000 was used to reduce credit line debt at the time of the sale. The Company completed financing of $8,100,000 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 replaced approximately $2,865,000 of credit line debt, which had an interest rate of 6% at the time. The interest on the bond is set weekly: the current rate for the week ending February 22, 2002 was approximately 1.55%. The outstanding balance as December 31, 2001 was $3,955,000. The term of the loan is 20 years with the first payment of $1,320,000 due in July 2002. The Company has been making monthly sinking fund payments of $120,000 per the terms of the agreement. The Company also entered into a five-year agreement on September 4, 2001 with American National Bank and Trust Company of Chicago hedging $4,000,000 of the Industrial Bond Debt at a 4.24% rate of interest. The Company has an installment loan of $167,000 collateralized by certain fixed assets of the Company. Interest on this loan is at the prime rate (4.75% at December 31, 2001). The loan is payable in monthly installments of principal and interest and is due October 2004. The Company has a line of credit from American National Bank and Trust Company of Chicago which provides for a maximum borrowings of $10,000,000 based on 80% of eligible account receivables and 50% on eligible inventory to fund the working capital needs of the Company. Interest is at Prime (4.75% at December 31, 2001) plus 1/2%. The agreement expires May 31, 2002 and is renewable annually at the mutual consent of the Company and the lender. There was no outstanding balance under the line of credit at December 31, 2001. 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 16 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, 2001, the Company has $4,122,000 of debt and $2,707,000 of cash and cash equivalents. The Company has $4,145,000 of financing available from the tax-exempt bond with Illinois Development Finance Authority. The Company also has a line of credit from American National Bank and Trust Company of Chicago which provides for a maximum borrowings of $10,000,000 based on 80% of eligible account receivables and 50% on eligible inventory to fund the working capital needs of the Company. 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 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. On November 8, 2001, Performance Interconnect (PIC) exercised its right and purchased the facility located in Frisco, Texas per the terms of the agreement dated March 25, 1999. The Company also amended the Promissory Note with Performance Interconnect whereas PIC agreed to pay the Company $711,649 in 29 equal monthly installments of principal and interest (prime plus 1%) of $10,140.69 commencing December 15, 2001 with the entire unpaid balance of principal and interest due May 15, 2004. As of December 31, 2001, the Company collected approximately $20,000 per the terms of the new agreement. Inflation Management believes inflation has not had a material effect on the Company's operation or on its financial position. 17 New Accounting Pronouncements Statement of Financial Accounting Standard No. 141 "Business Combinations." This new statement should have no material effect on the Company. Statement of Financial Accounting Standard 142 "Goodwill and other Intangible Assets." This new statement should have no material effect on the Company. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequent Occurring Events and Transactions," for the disposal of a segment of a business. The Company plans to adopt SFAS No. 144 at January 1, 2002, and has determined that adoption will not have a material effect on its results of operations or 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. 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 18 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. The Company's ability 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, 2001 are filed in response to this Item pursuant to Item 14. 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. 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 20 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 "2002 Proxy Statement"), and is incorporated herein by this reference. Item 11. Executive Compensation Information required by this Item will be contained in the 2002 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 2002 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 2002 Proxy Statement and is incorporated herein by this reference. 21 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, 2001 and 2000 24 Consolidated Statements of Operations Years Ended December 31, 2001, 2000 and 1999 25 Consolidated Statements of Stockholders' Equity Years Ended December 31, 2001, 2000 and 1999 26 Consolidated Statements of Cash Flows Years Ended December 31, 2001, 2000 and 1999 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. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACOUNTANTS 22 Board of Directors M~Wave, Inc. We have audited the accompanying consolidated balance sheets of M~Wave, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. 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, 2001 and 2000, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2001, 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, 2001, 2000 and 1999. 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 25, 2002 23 M~WAVE, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000
ASSETS 2001 2000 ---- ---- CURRENT ASSETS: Cash and cash equivalents $2,102,784 $ 1,230,999 Accounts receivable, net of allowance for doubtful accounts: 2001 - $100,000; 2000 - $10,000 8,829,686 12,378,766 Inventories 1,564,008 8,859,795 Deferred income taxes 1,313,644 1,118,242 Prepaid expenses and other assets 105,613 47,688 Restricted cash 604,489 0 ----------- ----------- Total current assets 14,520,224 23,635,490 PROPERTY, PLANT AND EQUIPMENT: Land, buildings and improvements 7,219,799 6,488,057 Machinery and equipment 13,062,860 8,731,449 ----------- ----------- Total property, plant and equipment 20,282,659 15,219,506 Less accumulated depreciation 7,836,882 6,914,345 ----------- ----------- Property, plant and equipment - net 12,445,777 8,305,161 NOTE RECEIVABLE 0 195,391 OTHER ASSETS 331,731 54,915 ----------- ---------- TOTAL $27,297,732 $32,190,957 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 3,112,370 $ 6,516,541 Accrued expenses 1,491,547 1,603,474 Accrued income taxes 152,931 146,287 Current line of credit 0 5,500,000 Current portion of long-term debt 1,378,767 3,229,580 ----------- ----------- Total current liabilities 6,135,615 16,995,882 DEFERRED INCOME TAXES 663,830 522,593 LONG-TERM DEBT 2,743,527 166,506 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 4,456,294 shares outstanding at December 31, 2001, 6,179,112 shares issued and 4,572,184 shares outstanding at December 31, 2000 30,895 30,895 Additional paid-in capital 8,439,072 8,349,072 Retained earnings 11,512,072 7,715,283 Treasury stock, 1,606,928 shares at cost, 1,722,815 at December 31, 2001 and 1,606,928 at December 31,2000 (2,227,279) (1,679,274) ----------- ----------- Total stockholders' equity 17,754,760 14,505,976 ----------- ----------- TOTAL $27,297,732 $32,190,957 =========== ===========
See notes to consolidated financial statements. 24 M~WAVE, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999 ---- ---- ---- NET SALES $ 54,824,432 $ 57,559,962 $ 11,305,643 COST OF GOODS SOLD 44,452,838 47,671,167 10,282,981 ------------ ------------ ------------ Gross profit 10,371,594 9,888,795 1,022,662 OPERATING EXPENSES: General and administrative 2,722,392 2,457,677 1,519,006 Selling and marketing 1,536,411 1,526,676 610,075 ------------ ------------ ------------ Total operating expenses 4,258,803 3,984,353 2,129,081 ------------ ------------ ------------ Operating income (loss) 6,112,791 5,904,442 (1,106,419) OTHER INCOME (EXPENSE): Interest income 112,392 114,173 205,871 Interest expense (424,661) (339,312) (211,759) Rental income 176,800 204,000 161,000 Insurance settlement 0 61,965 0 Gain (loss) on disposal of equipment 291,122 0 (135,084) ------------ ------------ ------------ Total other income (expense), net 155,653 40,826 20,028 ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES 6,268,444 5,945,268 (1,086,391) Income tax expense (benefit) 2,471,655 2,005,306 (397,486) ------------ ------------ ------------ NET INCOME (LOSS) $ 3,796,789 $ 3,939,962 $ (688,905) ============ ============ ============ Weighted average shares outstanding 4,536,204 4,561,957 4,535,342 ============ ============ ============ BASIC EARNINGS (LOSS) PER SHARE $ 0.84 $ 0.86 $ (0.15) ============ ============ ============ Diluted shares outstanding 4,565,021 4,641,805 4,535,342 ============ ============ ============ DILUTED EARNINGS (LOSS) PER SHARE $ 0.83 $ 0.85 $ (0.15) ============ ============ ============
See notes to consolidated financial statements. 25 M~WAVE, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Additional Total Common Paid-in Retained Treasury Stockholders' Stock Capital Earnings Stock Equity BALANCE JANUARY 1, 1999 $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 ======= ========== =========== =========== ============ Treasury stock purchased: 115,887 shares 0 0 0 (548,005) (548,005) Net income 0 0 3,796,789 0 3,796,789 ------- ---------- ----------- ----------- ------------ BALANCE DECEMBER 31,2001 $30,895 $8,439,072 $ 11,512,072 $ (2,227,279) $ 17,754,760 ======= ========== =========== =========== ============
See notes to consolidated financial statements. 26 M~WAVE, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999 ---- ---- ---- Cash flows from: OPERATING ACTIVITIES: Net income (loss) $ 3,796,789 $ 3,939,962 $ (688,905) (Gain) loss on disposal of equipment (291,122) 0 135,084 Depreciation and amortization 1,367,276 1,058,657 1,008,216 Reserve for notes receivable 195,391 450,000 0 Deferred income taxes (54,165) (190,982) (397,486) Changes in assets and liabilities: Accounts receivable 3,549,080 (9,858,696) (1,362,463) Inventories 7,295,787 (6,829,378) (1,220,475) Prepaid expenses and other assets (334,741) (25,946) 10,109 Restricted cash (604,489) 0 0 Accounts payable (3,404,171) 4,542,474 656,522 Accrued expenses (111,927) 1,095,018 (58,757) Income taxes 6,664 146,287 0 ------------ ----------- ----------- Net cash flows provided by (used in) operating activities 11,410,352 (5,672,604) (1,918,155) ------------ ----------- ----------- Cash flows from: INVESTING ACTIVITIES: Purchase of property, plant and equipment (7,558,146) (2,421,443) (473,803) Proceeds on sale of fixed assets 0 0 4,619 Purchase of treasury stock (548,005) 0 (3,166) Collection of notes receivable 0 0 421,113 Proceeds from the sale of PC Dynamics property, plant and equipment 2,341,376 0 581,965 Proceeds from sale of PC Dynamics net working capital and other 0 0 311,354 ------------ ----------- ----------- Net cash flows (used in) provided by investing activities (5,764,775) (2,421,443) 542,082 ------------ ----------- -----------
27 Cash flows from: FINANCING ACTIVITIES: Common stock issued upon exercise of stock options 0 90,437 0 Credit line debt (5,500,000) 5,500,000 0 Proceeds from long-term debt 3,955,859 1,509,286 293,834 Repayment of long-term debt (3,229,651) (361,562) (343,413) ----------- ----------- ----------- Net cash flows (used in) provided by financing activities (4,773,792) 6,738,161 (49,579) ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 871,785 (1,355,886) (1,125,652) CASH AND CASH EQUIVALENTS: Beginning of year 1,230,999 2,586,885 3,712,537 ----------- ----------- ----------- End of year $ 2,102,784 $ 1,230,999 $ 2,586,885 =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
2001 2000 1999 ---- ---- ---- Cash paid during the year for: Interest $ 424,661 $ 339,312 $ 211,759 Income tax payments (2,520,133) (2,050,000) 0
See notes to consolidated financial statements. 28 M~WAVE, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 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 operating through its wholly-owned subsidiary Poly Circuits, Inc. (the "Company"), is a value-added service provider of high performance printed circuit boards used in a variety of telecommunications applications for wireless and internet communications and digital applications. M~Wave satisfies its customers needs for high performance printed circuit boards by using its 50,000 square foot state-of-the-art facility located in West Chicago, Illinois and by outsourcing and coordinating the manufacture of such boards by unaffiliated manufacturers located primarily in the Far East ("Virtual Manufacturing") 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. The Company recognizes revenue for Consignment inventory products when the Customer uses the Consigned inventory. 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. Restricted Cash -- In connection with the Industrial Revenue Bond the Company is required to make monthly sinking fund payments of $120,000 per month. Beginning July 2002, and continuing each July thereafter, the balance in the sinking fund is disbursed to the bondholders. Derivative Instruments -- In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was later amended by Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" and by statement No. 138, "Accounting for Certain Derivatives Instruments and Certain Hedging Activities - an Amendment 29 of FASB Statement No. 133" (collectively, "SFAS No., 133"). SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities measured at fair value. The accounting treatment of gains and losses resulting from changes in the value of derivatives depends on the use of the derivatives and whether they qualify for hedging accounting. The Company has adopted SFAS No. 133 as of January 1, 2001. Adoption of SFAS No. 133 is recorded as a cumulative effect of a change in accounting principles and would not result in restatement of previously issued financial statements. However, the effect of adoption of SFAS No. 133 was not material. The Company has entered into a $4,000,000 interest rate swap agreement as a means of managing its interest rate exposure under its Industrial Revenue Bond. The agreement has the effect of converting the variable rate to a fixed rate. Net amounts paid or received are reflected as adjustments to interest expense. 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 their 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 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. New Accounting Adoption - In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequent Occurring Events and Transactions," for the disposal of a segment of a business. The Company plans to adopt SFAS No. 144 at January 1, 2002, and has determined that adoption will not have a material effect on its results of operations of financial position upon adoption. Basis of Presentation - Certain prior year amounts have been reclassified to conform with the 2001 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: 30 (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. On November 8, 2001, Performance Interconnect (PIC) exercised its right and purchased the facility located in Frisco, Texas per the terms of the agreement dated March 25, 1999. The Company also amended the Promissory Note with Performance Interconnect whereas PIC agreed to pay the Company $711,649 in 29 equal monthly installments of principal and interest (prime plus 1%) of $10,140.69 commencing December 15, 2001 with the entire unpaid balance of principal and interest due May 15, 2004. As of December 31, 2001, the Company collected approximately $20,000 per the terms of the new agreement. 4. ACCRUED EXPENSES Accrued expenses at December 31, 2001 and 200 were comprised of:
2001 2000 ---- ---- Salaries and wages $ 684,205 $ 687,862 Commissions 115,187 330,243 Professional fees 206,713 175,178 Property and other taxes 164,030 87,515 Other 321,412 322,676 ---------- ---------- Total accrued expenses $1,491,547 $1,603,474 ========== ==========
5. 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 $10,000,000. Interest is at the prime rate (4.75% at December 31, 2001) plus 1/2%. The agreement expires May 31, 2002 and is renewable annually 31 at the mutual consent of the Company and the lender. The outstanding balance under the line at December 31, 2001 and 2000 was $0 and $5,500,000, respectively. Long-term debt is comprised of the following at December 31, 2001 and 2000:
2001 2000 ----- ---- Mortgage notes payable, 1/2% over prime rate, payable in monthly principal installments of approximately $25,000 paid November 2001, collateralized by PC Dynamics facility $ 0 $1,661,527 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 was paid in November, 2001 0 1,509,286 Industrial Revenue Bond, for the purpose of financing property, machinery and equipment located in West Chicago, Illinois. The term is 20 years with the first payment due July, 2002 3,955,788 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 166,506 225,273 ---------- ---------- 4,122,294 3,396,086 Less current portion 1,378,767 3,229,580 ---------- ---------- Total long-term debt $2,743,527 $ 166,506 ========== ==========
Scheduled future maturities of long-term debt are as follows at December 31, 2001: 2002 $1,378,767 2003 1,378,767 2004 1,364,760 ---------- $4,122,294 ==========
On July 26, 2001, the Company signed an agreement with the Illinois Development Finance Authority to borrow up to a maximum $8,100,000 to finance its facility in West Chicago, Illinois. Borrowings can be disbursed, in accordance with the agreement, to the Company for up to three years. Interest is set on a weekly basis, based upon the interest rates of comparable tax-exempt bonds under prevailing market conditions. The interest rate at December 31, 2001 was 2%. The term of the bond is 20 years with the first payment of $1,320,000 due in July 2002. 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 May 15, 2001 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, 2001. 6. INCOME TAXES The provision (benefit) for income taxes consists of: 32
2001 2000 1999 ---- ---- ---- Current $ 2,525,820 $ 2,196,288 $ 0 Deferred (54,165) (190,982) (397,486) ----------- ----------- ----------- Total $ 2,471,655 $ 2,005,306 $ (397,486) =========== =========== ===========
The primary components comprising the net deferred tax assets (liabilities) are as follows:
2001 2000 1999 ---- ---- ---- Deferred tax assets Impairment and amortization of goodwill $ 0 $ 0 $ 485,451 Receivable reserves 368,544 117,000 24,595 Inventory reserves 790,623 790,623 103,917 Accrued expenses and other 154,477 210,619 68,364 Tax credits and loss carryforwards 0 0 974,064 ----------- ----------- ----------- Deferred tax assets 1,313,644 1,118,242 1,656,391 Valuation Allowance 0 0 (90,000) Deferred tax liabilities Depreciation (543,961) (522,593) (1,161,724) Prepaid bond costs (119,869) 0 0 ----------- ----------- ----------- Deferred tax (663,830) (522,893) (1,161,724) ----------- ----------- ----------- Net deferred tax asset $ 649,814 $ 595,649 $ 404,667 =========== =========== ===========
The effective tax rate differs from the Federal statutory tax rate for the following reasons:
2001 2000 1999 ---- ---- ---- Federal statutory rate 34.0% 34.0% 34.0% State income taxes, net of Federal benefit 2.5 2.5 2.5 Other adjustments 2.9 (2.8) 0.1 ---- ---- ---- Effective rate 39.4% 33.7% 36.6% ==== ==== =====
7. SIGNIFICANT CUSTOMERS AND SUPPLIERS The percentages of net sales attributable to major customers by year were as follows:
2001 2000 1999 ---- ---- ---- Customer A 90% 91% 36% Customer B 2 0 0 Customer C 2 2 13
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 90%, 94% and 64% of the Company's revenues in 2001, 2000 and 1999 respectively, were related to the cellular telephone industry. During 2001, 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 and one manufacturer accounted for approximately 60% of the purchased printed circuit boards. In 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 and one manufacturer accounted for approximately 67% of the purchased printed circuit boards. 33 During 2001, 2000 and 1999, one manufacturer accounted for approximately 54%, 41% and 41%, 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 3.6%, 4.3%, and 18.0% of net sales during 2001, 2000 and 1999, 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 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. 34 Stock option activity under the Plan was as follows:
Number of Shares Weighted Average Under Option Exercise Price ------------ -------------- Balance, January 1, 1999 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 Granted 235,000 7.50 Forfeited (69,375) 7.44 Exercised 0 0 -------- --------- Balance, December 31, 2001 401,625 $ 7.17
Exercisable at year-end: 1999 255,500 $ 5.66 2000 216,000 4.40 2001 221,000 6.45
The weighted average exercise price of the options granted in 2001 were $7.50. The weighted average exercise price of the options granted in 2000 were $13.78. The weighted average exercise prices of the options granted in 1999 were $0.66. The range of exercise prices of the 401,625 options outstanding at December 31, 2001 is $1.63 to $13.78 and the weighted average remaining contractual life is 6 years. At December 31, 2001, 1,098,375 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 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:
2001 2000 1999 ---- ---- ---- Net income(loss) As reported $ 3,796,789 $ 3,939,962 $ (688,905) Pro forma 3,567,112 3,895,958 (958,875)
35 Basic net income (loss) per share As reported Basic $ 0.84 $ 0.86 $ (0.16) Diluted 0.78 0.85 (0.16) Pro forma Basic 0.84 0.85 (0.22) Diluted 0.78 0.84 (0.22)
Options outstanding and exercisable at December 31, 2001, by price range:
Outstanding --------------------------------------- Range of Weighted average Exercisable ----------------------------- exercise Remaining Weighted average Weighted average prices Shares contractual life exercise price shares exercise price ------ ------ ---------------- -------------- ------ -------------- $ 1.62 to 3.50 46,000 1.0 $ 2.44 46,000 $ 2.44 3.51 to 7.35 130,000 4.2 7.04 120,000 7.05 7.36 to 7.97 185,625 7.7 7.58 50,000 7.97 7.98 to 14.00 40,000 8.5 11.08 5,000 13.78 ------- ------- 401,625 221,000
The weighted average fair value of options granted in 2001, and 2000 was $7.50 and $13.78, respectively, and was estimated at the grant date using the Black-Scholes options pricing model with the following weighted average assumptions: expected volatility of 136% and 128%, respectively: risk free interest rate of 4.92% and 5.98%, respectively; expected life of 10 and 10 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 $17,967, $15,711 and $11,655 for 2001, 2000 and 1999. Additionally, the Company may contribute discretionary amounts. The Company discretionary contribution for 2001 was $104,531. There were no discretionary contributions for 2000 and 1999. 11. LEASE COMMITMENTS The Company rents manufacturing and administrative space under operating leases. Rent expense under these leases for the years ended December 31, 2001, 2000 and 1999 was $100,200, $96,000, and $82,090, respectively. Future minimum annual lease commitments at December 31, 2001 are as follows:
Year ---- 2002 $ 98,800
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. 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 36 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. * * * * * * 37 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 2001 and 2000. 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, 2001 2001 2001 2001 ---- ---- ---- ---- Net sales $22,526,120 $15,448,962 $8,611,111 $8,238,239 Gross profit 4,937,066 2,345,481 1,676,584 1,412,463 Net income 2,075,975 772,623 478,865 469,326 Weighted average shares 4,572,184 4,572,184 4,544,689 4,456,932 Basic earnings per share 0.45 0.17 0.11 0.11 Diluted shares 4,651,423 4,600,895 4,570,031 4,456,932 Diluted earnings per share 0.45 0.17 0.10 0.11
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 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 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 per share 0.04 0.17 0.26 0.40
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 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
Balance at Charged to Balance at Year Beginning of costs and end of ---- period expenses Deductions period ------ ---------- ---------- ---------- 2001 $2,027,000 $ 758,290 $758,290 $2,027,000 2000 137,000 1,890,000 0 2,027,000 1999 246,000 0 109,000 137,000
M~Wave, Inc. and Subsidiaries Schedule II - Allowance for Doubtful Accounts For the years ended December 31, 2000, 1999 and 1998
Balance at Charged to Balance at Year Beginning of costs and end of ---- period expenses Deductions period ------ ---------- ---------- ---------- 2001 $100,000 $ 0 $0 $100,000 2000 10,000 90,000 0 $100,000 1999 10,000 0 0 10,000
(a) Accounts charged off as uncollectable, less recovery 39 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, 2002 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, 2002 March 15, 2002 /s/ Lavern D. Kramer /s/ Gary Castagna ---------------------------------- ------------------- Lavern D. Kramer Gary Costagna Director Director March 15, 2002 March 15, 2002 /s/ Paul H. Schmitt /s/ Don Lepore ---------------------------------- --------------- Paul H. Schmitt Don Lepore Treasurer and Secretary Director (Principal Accounting and March 15, 2002 Financial Officer) March 15, 2002
40 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 ******* 10.14 Employment Agreement dated January 29, 2001 between the Company and Joseph A. Turek ******** 10.15 Employment Agreement dated January 29, 2001 between the Company and Paul H. Schmitt ******** 10.16 Employment Agreement dated January 29, 2001 between the Company and Mark Anderson ******** 10.17 Employment Agreement dated January 29, 2001 between the Company and Dan Gosselin ********
41 10.18 Employment Agreement dated January 29, 2001 between the Company and Richard Golden ******** 10.19 Employment Agreement dated June 2, 2001 between the Company and Robert Duke ********* 10.20 Loan Agreement dated July 1, 2001 between the Illinois Development Finance Authority and the Company ********* 21 Subsidiaries 43 24.1 Consent of Grant Thornton LLP 44
*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 to the Registrants quarterly report on form 10-Q for the quarter ended March 31, 2001. ********* Incorporated herein by reference to the applicable exhibit report to the Registrants quarterly report on form 10-Q for the quarter ended June 30, 2001 42