10-Q 1 c69336e10-q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 2002 Commission File No. 0-19944 ------------------------------------ --------------------------- M~WAVE, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 36-3809819 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) identification No.) 216 Evergreen Street, Bensenville, Illinois 60106 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (630) 860-9542 --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The registrant has 4,476,297 shares of common stock outstanding at May 2, 2002. 1 M~WAVE, INC. CONSOLIDATED BALANCE SHEETS (unaudited)
DECEMBER 31 MARCH 31 2001 2002 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents ..................................... $ 2,102,784 $ 3,044,595 Accounts receivable, net of allowance for doubtful accounts, 2001- $100,000: 2002- $100,000 ............................... 8,829,686 6,633,669 Inventories ................................................... 1,564,008 2,928,758 Refundable income taxes ....................................... 0 139,271 Deferred income taxes ......................................... 1,313,644 1,150,390 Prepaid expenses and other .................................... 105,613 95,507 Restricted cash ............................................... 604,489 969,638 ------------ ------------ Total current assets ...................................... 14,520,224 14,961,828 PROPERTY, PLANT AND EQUIPMENT: Land, buildings and improvements .............................. 7,219,799 7,594,397 Machinery and equipment ....................................... 13,062,860 13,890,213 ------------ ------------ Total property, plant and equipment ....................... 20,282,659 21,484,610 Less accumulated depreciation and amortization ................ (7,836,882) (8,214,882) ------------ ------------ Property, plant and equipment-net ......................... 12,445,777 13,269,728 OTHER ASSETS ...................................................... 331,731 308,979 ------------ ------------ TOTAL ............................................................. $ 27,297,732 $ 28,540,535 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable .............................................. $ 3,112,370 $ 3,935,340 Accrued expenses .............................................. 1,491,547 1,181,889 Accrued income taxes .......................................... 152,931 0 Current portion of long-term debt ............................. 1,378,767 1,378,767 ------------ ------------ Total current liabilities ................................. 6,135,615 6,495,996 DEFERRED INCOME TAXES ............................................. 663,830 500,576 LONG-TERM DEBT .................................................... 2,743,527 3,445,926 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; authorized, 1,000,000 shares; no shares issued .................................... 0 0 Common stock, $.01 par value; authorized, 10,000,000 shares 6,179,112 shares issued and 4,456,294 shares outstanding at December 31, 2001 and March 31, 2002 ..................... 30,895 30,895 Additional paid-in capital .................................... 8,439,072 8,439,072 Retained earnings ............................................. 11,512,072 11,855,349 Treasury stock, at cost, 1,606,928 shares, at December 31, 2001 and March 31, 2002 ........................................... (2,227,279) (2,227,279) ------------ ------------ Total stockholders' equity ................................ 17,754,760 18,067,142 ------------ ------------ TOTAL ............................................................. $ 27,297,732 $ 28,509,640 ============ ============
2 See notes to consolidated financial statements. M~WAVE, Inc. CONSOLIDATED STATEMENTS OF INCOME (unaudited) Three months ended March 31, -------------------------------- 2001 2002 ------------ ------------ Net sales .............................. $ 22,526,120 $ 8,313,754 Cost of goods sold ..................... 17,589,054 6,697,973 ------------ ------------ Gross profit ......................... 4,937,066 1,615,781 Operating expenses: General and administrative ........... 885,247 593,276 Selling and marketing ................ 471,029 482,058 ------------ ------------ Total operating expenses ........... 1,356,276 1,075,334 ------------ ------------ Operating income ..................... 3,580,790 540,447 Other income (expense): Interest income ...................... 19,335 62,893 Interest expense ..................... (217,958) (42,265) Rental income ........................ 51,000 0 ------------ ------------ Total other income (expense) ....... (147,623) 20,628 ------------ ------------ Income before income taxes ........ 3,433,167 561,075 Provision for income taxes ............. 1,357,192 217,798 ------------ ------------ Net income ............................. $ 2,075,975 $ 343,277 ============ ============ Weighted average shares outstanding .... 4,572,184 4,456,294 Basic earnings per share ............... $ 0.45 $ 0.08 See notes to consolidated financial statements. 3 M~WAVE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three months ended March 31, ----------------------------- 2001 2002 ----------- ----------- OPERATING ACTIVITIES: Net income ............................................................... $ 2,075,975 $ 343,277 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization ........................................ $ 398,490 $ 378,000 Changes in assets and liabilities: Accounts receivable-trade ............................................ $ 1,948,279 $ 2,196,017 Inventories .......................................................... $ 2,030,895 $(1,364,750) Income taxes ......................................................... $ 1,297,192 $ (292,202) Prepaid expenses and other assets .................................... $ (60,686) $ 32,858 Restricted cash ...................................................... $ 0 $ (365,149) Accounts payable ..................................................... $ (976,107) $ 822,970 Accrued expenses ..................................................... $ 81,410 $ (309,658) ----------- ----------- Net cash flows provided by operating activities ................... $ 6,795,448 $ 1,441,363 ----------- ----------- INVESTING ACTIVITIES: Purchase of property, plant and equipment ................................ $(1,557,974) $(1,201,951) ----------- ----------- Net cash flows used in investing activities ....................... $(1,557,974) $(1,201,951) ----------- ----------- FINANCING ACTIVITIES: Long term debt ........................................................... $ 0 $ 717,090 Payments on short and long term debt ..................................... $(2,884,710) $ (14,691) ----------- ----------- Net cash flows used in (provided by) financing activities.......... $(2,884,710) $ 702,399 ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS .................................. $ 2,352,764 $ 941,811 CASH AND CASH EQUIVALENTS - Beginning of period ............................ $ 1,230,999 $ 2,102,784 ----------- ----------- CASH AND CASH EQUIVALENTS - End of period .................................. $ 3,583,763 $ 3,044,595 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest ............................... $ 217,958 $ 42,226 Income tax refunds/ (payments) ......................................... $ 0 $ 510,000
4 See notes to consolidated financial statements. M~WAVE,Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation, consisting only of normal recurring adjustments, have been included. For further information, refer to the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2001 filed March 28, 2002. 2. BUSINESS M~Wave, Inc. through its wholly owned subsidiary Poly Circuits, Inc., is a value-added service provider of high performance printed circuit boards used in a variety of 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 5 customers' printed circuit board requirements without incurring substantial capital expenditures for plant, property 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 application. 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. 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 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. 6 INVENTORIES Inventories are carried at the lower of first-in, first-out (FIFO) cost or market. Substantially all the Company's inventories are in work in process. 4. DEBT The Company has an installment loan of $152,000 collateralized by certain fixed assets of the Company. Interest on this loan is at the prime rate. The loan is payable in monthly installments of principal and interest and is due in October 2004. 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 March 31, 2002 was 1.65%. The term of the bond is 20 years with the first payment of $1,320,000 due in July 2002. Through March 31, 2002 the Company has financed $4,673,000. 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 covenants were waived at March 31, 2002. The Company has a $10,000,000 line of credit available based on 80% of the eligible accounts receivable and 50% of eligible inventory to fund the working capital needs of the Company. Interest is at the prime rate (4.75% at March 31, 2002) plus 1/2%. The agreement expires May 15, 2002 and is renewable annually at the mutual consent of the Company and the lender. The outstanding balance under the line of credit at March 31, 2002 was $0. The Company believes the agreement will be renewed. 5. LITIGATION The Company is a party to various actions and proceedings related to its normal business operations. The Company believes that the outcome of this litigation will not have a material adverse effect on the financial position or results of operations of the Company. 7 Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS FOR THE QUARTER ENDED MARCH 31, 2002 COMPARED TO THE QUARTER ENDED MARCH 31, 2001 NET SALES Net sales were $8,314,000 for the first quarter ended March 31, 2002, a decrease of $14,212,000 or 63% below the first quarter of 2001. The decrease in net sales is directly related to a drop in demand. Virtual Manufacturing accounted for approximately $6,450,000 of net sales in the first quarter of 2002 compared to $21,080,000 of net sales in the first quarter of 2001. Net sales to Lucent were $19,598,000 in the first quarter of 2001 compared to $0 in the first quarter of 2002. Net sales to Celestica were $5,588,000 in the first quarter of 2002 compared to $917,000 in the first quarter of 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. Celestica accounted for 67% of the Company's net sales for the first quarter ended March 31, 2002 compared to 1% in the first quarter of 2001. Lucent accounted for 87% of the Company's net sales for the first quarter ended March 31, 2001. Spectrian accounted for 9% of the Company's net sales for the first quarter ended March 31, 2002 compared to 1% in the first quarter of 2001. Westell, a new Virtual Manufacturing customer, accounted for 8% of the Company's net sales for the first quarter ended March 31, 2002. GROSS PROFIT AND COST OF GOODS SOLD The Company's gross profit for the first quarter of 2002 was $1,616,000 compared to $4,937,000 for the first quarter of 2001. The decrease in gross profit is a result of the reduction in net sales. Gross Margin decreased to approximately 19% in the first quarter of 2002 from approximately 21% in the first quarter of 2001. The Company enjoys improved efficiencies at higher sales levels. OPERATING EXPENSES General and administrative expenses were $593,000 or 7.1% of net sales in the first quarter of 2002 compared to $885,000 or 3.9% of net sales in the first quarter of 2001. 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 $240,000 8 due to a reduction in the bonus award. Professional services, which include legal and auditing fees, were down $49,000. Selling and marketing expenses were $482,000 or 5.8% of net sales in the first quarter of 2002 compared to $471,000 or 2.1% of net sales in the first quarter of 2001. Selling and marketing expenses include the cost of salaries, advertising and promoting the Company's products, and commissions paid to independent sales organizations. Commissions paid to independent sales organizations were down $145,000. Payroll related expenses were up $131,000 with the addition of four regional sales managers and support staff. OPERATING INCOME Operating income was $540,000 or 6.5% of net sales in the first quarter of 2002 compared to an operating income of $3,581,000 or 15.9% of net sales in the first quarter of 2001, a decrease of $3,040,000. The changes in operating income reflect primarily the changes in net sales, gross profit and cost of goods sold and operating expenses as discussed above. The change in operating income can be summarized as follows: Decrease in net sales ($3,114,000) Decrease in gross margin (206,000) Increase in operating expenses 280,000 ----------- Decrease in operating income ($3,040,000) INTEREST INCOME Interest income from short-term investments was $63,000 in the first quarter of 2002 compared to $19,000 in the first quarter of 2001. Rental income from the P C Dynamics facility was $51,000 in the first quarter of 2001. The Company sold the P C Dynamics facility in the fourth quarter of 2001. INTEREST EXPENSE Interest expense, primarily related to the Industrial Revenue Bond was $42,000 in the first quarter of 2002 compared to $218,000 in the first quarter of 2001. The Company had a mortgage obligation on the P C Dynamics facility in the first quarter of 2001. INCOME TAXES In the first quarter of 2002, the Company had an effective tax rate of 38.8% compared to 39.5% in the first quarter of 2001. 9 LIQUIDITY AND CAPITAL RESOURCES Net cash flows provided by operations was $1,441,000 for the three months ended March 31, 2002 compared to providing $6,795,000 for the first three months of 2001. Accounts receivables decreased $2,196,000. Inventories increased $1,365,000. Accounts payable increased $823,000. Depreciation and amortization was $378,000. Capital expenditures mainly relating to the new West Chicago facility were $1,202,000 for the three months ended March 31, 2002. The Company plans to spend approximately $3,000,000 in 2002 on capital expenditures mainly relating to the West Chicago facility. The capital expenditures will be financed partially through the Industrial Revenue Bond. The Company has an installment loan of $152,000 collateralized by certain fixed assets of the Company. Interest on this loan is at the prime rate. The loan is payable in monthly installments of principal and interest and is due in October 2004. The Company 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 March 31, 2002 was approximately 1.65%. The outstanding balance as March 31, 2002 was $4,673,000. 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 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. The Company has a $10,000,000 line of credit available based on 80% of the eligible accounts receivable and 50% of eligible inventory to fund the working capital needs of the Company. Interest is at the prime rate (4.75% at March 31, 2002) plus 1/2%. The agreement expires May 15, 2002 and is renewable annually at the mutual consent of the Company and the lender. The outstanding balance under the line of credit at March 31, 2002 was $0. The Company believes the agreement will be renewed. 10 As of March 31, 2002, the Company has $4,825,000 of debt and $3,045,000 of cash and cash equivalents. Management believes that funds generated from operations, coupled with the Company's cash and investment balances and its capacity for debt will be sufficient to fund current business operations. INFLATION Management believes inflation has not had a material effect on the Company's operation or on its financial position. FOREIGN CURRENCY TRANSACTIONS All of the Company's foreign transactions are negotiated, invoiced and paid in United States dollars. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS As a supplier to microwave manufacturers, the Company is dependent upon the success of its customers in developing and successfully marketing end-user microwave systems. The Company is currently working on several development programs for its customers. The development of commercial applications for microwave systems and the timing and size of production schedules for these programs is uncertain and beyond the control of the Company. There can be no assurance that these development programs will have a favorable impact on the Company's operating results. Although management believes some of these products and programs may ultimately develop into successful commercial applications, such developments could result in periodic fluctuations in the Company's operating results. As a result of these considerations, the Company has historically found it difficult to project operating results. The Company expects that a small number of customers will continue to account for a substantial majority of its sales and that the relative dollar amount and mix of products sold to any of these customers can change significantly from year to year. There can be no assurance that the Company's major customers will continue to purchase products from the Company at current levels, or that the mix of products purchased will be in the same ratio. The loss of the Company's largest customer or a change in the mix of product sales would have a material adverse effect on the Company. In addition, future results may be impacted by a number of other factors, including the Company's dependence on suppliers and subcontractors for components; the Company's ability to respond to technical advances; successful award of contracts under bid; design and production delays; cancellation or reduction of contract orders; the Company's effective utilization 11 of existing and new manufacturing resources and the "Virtual Manufacturing" process; and pricing pressures by key customers. The Company's future success is highly dependent upon its ability to manufacture products that incorporate new technology and are priced competitively. The market for the Company's products is characterized by rapid technology advances and industry-wide competition. This competitive environment has resulted in downward pressure on gross margins. In addition, the Company's business has evolved towards the production of relatively smaller quantities of more complex products, the Company expects that it will at times encounter difficulty in maintaining its past yield standards. There can be no assurance that the Company will be able to develop technologically advanced products or that future-pricing actions by the Company and its competitors will not have a material adverse effect on the Company's results of operations. The Company is dependent upon unaffiliated foreign companies for the manufacture of printed circuit boards as part of its Virtual Manufacturing process. The Company's arrangements with manufacturers are subject to the risks of doing business abroad, such as import duties, trade restrictions, production delays due to unavailability of parts or components, transportation delays, work stoppages, foreign currency fluctuations, political instability and other factors which could have an adverse effect on the Company's business, financial condition and results of operations. The Company believes that the loss of any one or more of its suppliers would not have a long term material adverse effect on its business, financial condition and results of operations because other manufacturers would be able to increase production to fulfill its requirements. However, the loss of certain suppliers, could, in the short term adversely affect its business until alternative supply arrangements were secured. Although the Company intends to continue to grow its revenues, there can be no assurance that the growth experienced by the Company will continue or that the Company will be able to achieve the growth contemplated by its business strategy. The Company's ability to continue to grow may be affected by various factors, many of which are not within the Company's control, including competition in the telecommunications industry. This growth has placed, and is expected to continue to place, significant demands on all aspects of the Company's business. Including its administrative, technical and financial personnel and systems. The company's future operating results will substantially depend on the ability of its officers and key employees to manage such anticipated growth, to attract and retain additional highly qualified management, technical and financial personnel, and to implement and/or improve its technical, administrative, financial control and reporting systems. 12 PART II - OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS None 13 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K None 14 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. M~WAVE,INC. Date: May 2, 2002 /s/ PAUL H. SCHMITT ------------------------- Paul H. Schmitt Chief Financial Officer 15 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ------- ------------------------------------------------------------- None 16