-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VfPhwoX/YF9d9B4EKch90wXL1L7U6wcatOAiNl/8CLeIdXdFutOdJw517Ayx/RY7 epVw8Xu/+I0RRQ/SejZ1gw== 0000950137-97-003679.txt : 19971114 0000950137-97-003679.hdr.sgml : 19971114 ACCESSION NUMBER: 0000950137-97-003679 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: M WAVE INC CENTRAL INDEX KEY: 0000883842 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 363809819 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19944 FILM NUMBER: 97713606 BUSINESS ADDRESS: STREET 1: 216 EVERGREEN ST CITY: BENSENVILLE ILLINOIS STATE: IL ZIP: 60106 BUSINESS PHONE: 6308609542 MAIL ADDRESS: STREET 1: 216 EVERGREEN STREET CITY: BENSENVILLE STATE: IL ZIP: 60106 10-Q 1 FORM 10-Q DATED SEPTEMBER 30, 1997 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 1997 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 3,049,806 shares of common stock outstanding at November 6, 1997. 1 2 PART I - FINANCIAL INFORMATION Item 1: Financial Statements M-WAVE, Inc. CONSOLIDATED BALANCE SHEETS
(Unaudited) DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents............................................ $1,216,859 $2,457,355 Accounts receivable.................................................. 1,725,340 2,360,067 Inventories.......................................................... 1,349,645 1,295,852 Refundable income taxes.............................................. 2,426,081 936,334 Deferred income taxes................................................ 804,088 476,051 Prepaid expenses and other........................................... 191,729 57,323 ------------ ------------- Total current assets............................................. 7,713,742 7,582,982 PROPERTY, PLANT AND EQUIPMENT: Land, buildings and improvements..................................... 6,224,247 6,239,189 Machinery and equipment.............................................. 9,885,170 10,202,183 ------------ ------------- Total property, plant and equipment.............................. 16,109,417 16,441,372 Less accumulated depreciation........................................ (3,646,209) (4,746,954) ------------ ------------- Property, plant and equipment-net................................ 12,463,208 11,694,418 NOTE RECEIVABLE, net of valuation allowance of $250,000.............................................. 871,718 871,718 GOODWILL................................................................. 771,853 695,516 OTHER ASSETS............................................................. 15,030 7,428 ------------ ------------- TOTAL.................................................................... $21,835,551 $20,852,062 ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable..................................................... $1,549,997 $1,184,556 Accrued expenses..................................................... 1,254,436 1,029,192 Current portion of long-term debt.................................... 307,606 307,605 ------------ ------------- Total current liabilities........................................ 3,112,039 2,521,353 DEFERRED INCOME TAXES.................................................... 1,106,786 1,106,786 LONG-TERM DEBT........................................................... 2,604,464 2,345,992 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; authorized, 1,000,000 shares; no shares issued........................................... Common stock, $.01 par value; authorized, 10,000,000 shares 3,041,625 shares issued and 3,021,625 shares outstanding at December 31, 1996, 3,069,806 shares issued and 3,049,806 shares outstanding at September 30, 1997........................... 30,416 30,698 Additional paid-in capital........................................... 7,492,472 7,574,688 Retained earnings ................................................... 7,609,374 7,392,545 Treasury stock: 20,000 shares, at cost.............................. (120,000) (120,000) ------------ ------------- Total stockholders' equity ...................................... 15,012,262 14,877,931 ------------ ------------- TOTAL.................................................................... $21,835,551 $20,852,062 ============ =============
See notes to consolidated financial statements. 2 3 M-WAVE, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended September 30, ----------------------------------- 1996 1997 ------------ ------------- Net sales..................................... $6,284,338 $4,579,624 Cost of goods sold............................ 5,174,233 3,558,755 ------------ ------------- Gross profit ............................... 1,110,105 1,020,869 Operating expenses: General and administrative.................. 781,494 535,256 Selling and marketing....................... 394,900 257,788 Research and development.................... 143,422 0 ------------ ------------- Total operating expenses.................. 1,319,816 793,044 ------------ ------------- Operating income (loss) .................... (209,711) 227,825 Other income (expense): Interest income............................. 0 52,477 Interest expense............................ (69,368) (62,730) Gain on disposal of assets.................. 0 5,000 ------------ ------------- Total other income (expense) (69,368) (5,253) ------------ ------------- Income (loss) before income taxes........ (279,079) 222,572 Provision (credit) for income taxes........... (73,784) 96,300 ------------ ------------- Net income (loss)............................ ($205,295) $126,272 Net income (loss) per share ($0.07) $0.04 ============ ============= Weighted average shares 3,021,625 3,049,806
See notes to consolidated financial statements. 3 4 M-WAVE, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine months ended September 30, ------------------------------------ 1996 1997 ------------ ------------- Net sales.................................... $18,881,864 $13,374,680 Cost of goods sold........................... 18,834,798 10,854,672 ------------ ------------- Gross profit............................... 47,066 2,520,008 Operating expenses: General and administrative................. 2,237,585 1,921,527 Selling and marketing...................... 1,318,085 850,894 Research and development................... 346,615 0 ------------ ------------- Total operating expenses................. 3,902,285 2,772,421 ------------ ------------- Operating loss ............................ (3,855,219) (252,413) Other income (expense): Interest income............................ 25,193 117,537 Interest expense........................... (160,187) (189,623) Gain (loss) on disposal of assets.......... (149,751) 39,089 ------------ ------------- Total other income (expense) (284,745) (32,997) ------------ ------------- Loss before income taxes................ (4,139,964) (285,410) Credit for income taxes...................... (1,473,516) (68,580) ------------ ------------- Net loss.................................... ($2,666,448) ($216,830) ============ ============= Net loss per share ($0.88) ($0.07) Weighted average shares 3,021,261 3,042,430
See notes to consolidated financial statements. 4 5 M-WAVE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended September 30, -------------------------------------- 1996 1997 ----------- ----------- OPERATING ACTIVITIES: Net income (loss)................................................... ($2,666,448) ($216,830) Adjustments to reconcile net loss to net cash flows from operating activities: Gain on disposal of property, plant and equipment............... 0 (39,089) Depreciation and amortization................................... 1,135,874 1,201,963 Deferred income taxes........................................... (351,639) 328,037 Changes in assets and liabilities: Accounts receivable-trade....................................... 1,178,564 (634,727) Inventories..................................................... 801,248 53,793 Income taxes.................................................... (703,669) 1,489,747 Prepaid expenses and other assets............................... 228,040 142,006 Accounts payable................................................ 367,656 (365,441) Accrued expenses................................................ (17,878) (225,244) ----------- ----------- Net cash flows from operating activities..................... (28,252) 1,734,215 ----------- ----------- INVESTING ACTIVITIES: Purchase of property, plant and equipment........................... (4,566,409) (384,844) Proceeds from sale of property, plant and equipment................. 0 67,100 Redemption of marketable securities................................. 1,321,358 0 ----------- ----------- Net cash flows from investing activities..................... (3,245,051) (317,744) FINANCING ACTIVITIES: Common stock issued upon exercise of stock options.................. 4,062 32,500 Common stock issued for cash........................................ 0 49,998 Payments on capital leases.......................................... (10,194) Payments on long term debt.......................................... (400,000) (258,473) Mortgage debt incurred.............................................. 2,571,345 0 ----------- ----------- Net cash flows from financing activities..................... 2,165,213 (175,975) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. (1,108,090) 1,240,496 CASH AND CASH EQUIVALENTS - Beginning of period....................... 2,403,747 1,216,859 ----------- ----------- CASH AND CASH EQUIVALENTS - End of period............................. $1,295,657 $2,457,355 ----------- ----------- Supplemental Disclosures of Cash Flow Information: Cash paid during the period for interest.......................... $160,187 $189,623
See notes to consolidated financial statements. 5 6 M-WAVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation 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, 1996 filed March 31, 1997. 2. BUSINESS M-Wave, through its wholly-owned subsidiaries, Poly Circuits Inc. and P C Dynamics Corporation (collectively, the "Company"), manufactures Teflon-based printed circuit boards used by makers of wireless and microwave related communication equipment. 3. RECLASSIFICATIONS Certain reclassifications of 1996 amounts have been made to conform to the presentation in the current year. 4. INVENTORIES Substantially all the Company's inventories are in work in process. 5. DEBT The Company has a mortgage loan of $2,651,000 for the facility at P C Dynamics Corporation in Frisco, Texas. Interest on this mortgage loan is at 1/2 % over the prime rate. The loan is payable in monthly installments of principal and interest and is due in October 2001. The Company has a $2,000,000 line of credit available based on 80% of the eligible accounts receivable to fund the working capital needs of the Company. The agreement expires May 31, 1998 and is renewable annually at the mutual consent of the Company and the lender. No balance was outstanding under the line at September 30, 1997. 6 7 6. LITIGATION The Company is a party to various actions and proceedings related to its normal business operations. The Company believes that the outcome of this litigation will not have a material adverse effect on the financial position or results of operations of the Company. The Company and Joseph Turek have been named as defendants in Lionheart Partners, Inc., as general partner of Lionheart USA Micro Cap Value, L.P. v. M-Wave, Inc. and Joseph Turek, which was filed on or about November 17, 1995 in the United States District Court for the Northern District of Illinois. The case was filed as a purported class action on behalf of all persons who purchased common stock of the Company between August 8, 1995 and October 18, 1995. The complaint alleges that the defendants made materially false and misleading statements and failed to correct public representations which had become materially false and misleading regarding the Company's revenues and earnings. The complaint asserts claims under Sections 10(b) and 20 of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seeks compensatory damages in an unspecified amount. On April 25, 1997, the plaintiffs and the defendants entered into a settlement agreement which resolves all of the claims arising out of this action, except as to claims of class members who opt out of the settlement. This settlement received court approval on July 8, 1997. The settlement provides for a $150,000 payment to the plaintiff class plus administrative fees not to exceed $20,000. The Company's contribution to the settlement would be approximately $85,000. 7 8 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS FOR THE QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 1996 NET SALES Net sales were $4,580,000 for the third quarter ended September 30, 1997, a decrease of $1,705,000 or 27% below the third quarter of 1996. A decrease in sales of ($1,338,000) occurred when the Company's third largest customer, as reported in the third quarter of 1996, shifted to an alternate material. The third quarter of 1996 included $230,000 of sales relating to the Assembly Division and the Asian based distribution entity (Vortex). These divisions were sold in December 1996. Net sales to the Company's largest customer, in the third quarter of 1997, increased $868,000 or 187% to $1,333,000; net sales to the Company's next largest customer decreased ($305,000) or (26%) to $875,000 and net sales to the Company's third largest customer decreased ($418,000) or (59%) to $295,000. The Company's three largest customers accounted for 55% of the Company's net sales for the third quarter ended September 30, 1997 compared to 51% in the third quarter of 1996. GROSS PROFIT AND COST OF GOODS SOLD Gross profit was $1,021,000 in the third quarter of 1997 compared to $1,110,000 in the third quarter of 1996. The slight decrease in gross profit was the result of a decrease in net sales of 27%, which was almost offset by an increase in gross profit margins of 26%. The Bensenville facility has made significant changes that resulted in an increase of 35% in gross profit margins. The Texas facility has not to date achieved the same magnitude of manufacturing improvements and is hindered by the type of business (small lot sizes) it produces and their gross profits slipped (42%). The third quarter of 1997 included $32,000 favorable adjustments primarily relating to insurance refunds as a result of lower net sales and payroll expenses. The Company also recorded approximately $20,000 of non-recurring expenses primarily relating to severance costs. The Company has made operational changes designed to enhance its quality control and ability to manufacture highly complex products; however, there can be no assurance as to when, or if, these changes will result in improved manufacturing processes. Future production problems would adversely impact the Company's gross margins and profitability, which would also result in decreased liquidity and adversely affect the Company's financial position. OPERATING EXPENSES General and administrative expenses were $535,000 or 11.7% of net sales in the third quarter of 1997 compared to $781,000 or 8 9 12.4% of net sales in the third quarter of 1996. The net decrease of ($246,000) was due to a reduction in professional fees partially offset by an increase in payroll expenses associated with the hiring of a new president. General and administrative expenses consist primarily of salaries and benefits, professional services, depreciation of office equipment, computer systems and occupancy expenses. Selling and marketing expenses were $258,000 or 5.6% of net sales in the third quarter of 1997 compared to $395,000 or 6.3% of net sales in the third quarter of 1996. The net decrease of ($137,000) was due to a reduction in payroll related expenses partially offset by an increase in Sales Commissions. The third quarter of 1996 included $55,000 of selling expenses relating to the Assembly Division and the Asian based distribution entity (Vortex). Selling and marketing expenses include the cost of salaries, advertising and promoting the Company's products, and commissions paid to independent sales organizations. Research and development expenses related to the assembly division were $143,000 or 2.3% of net sales in the third quarter of 1996. The Company sold the Assembly Division in December 1996. OPERATING INCOME (LOSS) Operating income was $228,000 or 5.0% in the third quarter of 1997 compared to operating loss of ($210,000) or (3.3%) of net sales in the third quarter of 1996, an increase of $438,000. The increase of $438,000 of operating income from the third quarter of 1996 to the third quarter of 1997 was due to many factors; however, the major factor was strong productivity gains and aggressive cost reductions leading to increased operating margins. The change in operating income can be summarized as follows: Decrease in net sales $ (301,000) Increase in gross margin 212,000 Decrease in operating expenses 527,000 ----------- Increase in operating income $ 438,000 INTEREST INCOME Interest income in the third quarter of 1997 includes $22,000 from the notes receivable; obtained in the sale of the Assembly Division in 1996. Other interest income is on short-term investments. INTEREST EXPENSE Interest expense, primarily related to the Company's mortgage obligation on its P C Dynamics facility, was $63,000 in the third quarter of 1997 compared to $69,000 in the third quarter of 1996. 9 10 GAIN ON DISPOSAL OF FIXED ASSETS The Company recorded a gain of $5,000 on the disposal of fixed assets in the third quarter of 1997. INCOME TAXES In the third quarter of 1997 the Company had an effective tax rate of 43.3% due to the effects of state income taxes. In the third quarter of 1996, the Company had an effective tax credit rate of 26.4%. 10 11 RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 NET SALES Net sales were $13,375,000 for the nine months ended September 30, 1997, a decrease of $5,507,000 or 29% below the first nine months of 1996. A decrease in sales of ($2,212,000) occurred when the Company's third largest customer shifted to an alternate material. The decrease in sales was also due to several other factors including a Company decision to exit the low margin commodity business; shifts by customers to alternate materials and suppliers; and the tapering off of specific customer program business as it enters the later stages in its life cycle. There has also been some lessening of the rate of growth for microwave/wireless communications infrastructure equipment. The first nine months of 1996 included $483,000 of sales relating to the Assembly Division and the Asian based distribution entity (Vortex). These divisions were sold in December 1996. Net sales to the Company's largest customer, for nine months ended September 30, 1997, increased $1,646,000 or 99% to 3,299,000; net sales to the Company's next largest customer decreased ($2,660,000) or (50%) to $2,650,000 and net sales to the Company's third largest customer decreased ($2,212,000) or (71%) to $896,000. The Company's three largest customers accounted for 51% of the Company's net sales for the nine months ended September 30, 1997 compared to 53% for the nine months ended September 30, 1996. The Company is taking steps to increase its sales; however, the Company expects its sales to decline in the fourth quarter of 1997. GROSS PROFIT (LOSS) AND COST OF GOODS SOLD Gross profit increased $2,473,000 in the first nine months of 1997 from $47,000 in the first nine months of 1996. The improvement is due to many factors. In 1996, the Company incurred sales adjustments for pricing and returns of ($1,084,000) and inventory writedowns of ($1,910,000) and ($665,000) relating to manufacturing scrap and rework and inventory obsolescence, respectively. A total of $301,000 of the inventory writedowns related to the Assembly Division that was sold in December 1996. These charges did not reoccur in 1997. Also, the Bensenville facility made good progress in improving productivity and reducing costs during the first nine months of 1997. This includes moving to a one shift operation from two while improving on time delivery. The Texas facility has not to date achieved the same magnitude of manufacturing improvements and is hindered by the type of business (small lot sizes) it produces. The Company has made operational changes designed to enhance its quality control and ability to manufacture highly complex products; however, there can be no assurance as to when, or if, these changes will result in improved manufacturing processes. Future production problems could adversely impact the Company's gross margins and 11 12 profitability, which could also result in decreased liquidity and adversely affect the Company's financial position. OPERATING EXPENSES General and administrative expenses were $1,922,000 or 14.4% of net sales for the first nine months of 1997 compared to $2,238,000 or 11.9% of net sales for the first nine months of 1996. The net decrease was due to a reduction in professional and legal fees partially offset by an increase in payroll expense associated with the hiring of a new president. The first nine months of 1996 included $75,000 of administrative expenses relating to the Assembly Division and the Asian based distribution entity (Vortex). These divisions were sold in December 1996. On April 15, 1996 the Company engaged a consulting firm to provide consulting services with respect to the Company's operations. The consultants completed their work with the Company in February 1997. General and administrative expenses consist primarily of salaries and benefits, professional services, depreciation of office equipment, computer systems and occupancy expenses. Selling and marketing expenses were $851,000 or 6.4% of net sales for the first nine months of 1997 compared to $1,318,000 or 7.0% of net sales for the first nine months of 1996. Sales commission expense was 3.3% of net sales for the first nine months of 1997 compared to 3.1% of net sales for the first nine months of 1996. The dollar spending reductions were partly due to lower commissions earned and payroll related expenses. The first nine months of 1996 included $170,000 of selling expenses relating to the Assembly Division and the Asian based distribution entity (Vortex). These divisions were sold in December 1996. Selling and marketing expenses include the cost of salaries, advertising and promoting the Company's products, and commissions paid to independent sales organizations. Research and development expenses related to the Assembly Division were $347,000 or 1.8% of net sales in the first nine months of 1996. The Company sold the Assembly Division in December 1996. OPERATING INCOME (LOSS) Operating loss was ($252,000) for the first nine months of 1997 compared to ($3,855,000)for the first nine months of 1996, an improvement of $3,603,000. 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 $ (14,000) Increase in gross margin 2,487,000 Decrease in operating expenses 1,130,000 ------------ Decrease in operating loss $ 3,603,000 12 13 INTEREST INCOME Interest income for the nine months ended September 30, 1997 includes $52,000 from the notes receivable; obtained in the sale of the Assembly Division in 1996. Other interest income is on short-term investments. INTEREST EXPENSE Interest expense, primarily related to the Company's mortgage obligation on its P C Dynamics facility, was $189,000 for the first nine months of 1997 compared to $160,000 for the first nine months of 1996. GAIN (LOSS) ON DISPOSAL OF ASSETS The Company recorded a gain of $39,000 on the disposal of fixed assets for the first nine months of 1997 compared to a loss of $150,000 for the first nine months of 1996. INCOME TAXES For the first nine months of 1997 the Company had an effective tax credit rate of 24.0%. For the first nine months of 1996, the Company had an effective tax credit rate of 35.6%. The lower rate in 1997 is due to the effect of state income taxes. LIQUIDITY AND CAPITAL RESOURCES Net cash provided/(used) from operations was $1,734,000 for the first nine months of 1997 compared to ($28,000) for the first nine months of 1996. The Company collected Income tax refunds of $1,886,000 which offset losses of ($217,000) for the first nine months of 1997. Capital expenditures were $385,000 in the first nine months of 1997, $105,000 to upgrade the network system at the Bensenville facility. Capital expenditures were $4,566,000 in the first nine months of 1996, $3.4 million for the new P C Dynamics facility in Texas. The Company has a mortgage loan of $2,651,000 for the facility at P C Dynamics Corporation in Frisco, Texas. Interest on this mortgage loan is at 1/2 % over the prime rate. The loan is payable in monthly installments of principal and interest and is due in October 2001. The Company has a $2,000,000 line of credit available based on 80% of the eligible accounts receivable to fund the working capital needs of the Company. The agreement expires May 31, 1998 and is renewable annually at the mutual consent of the Company and the lender. No balance was outstanding under the line at September 30, 1997. 13 14 As of September 30, 1997, the company has $2,651,000 of mortgage debt and $2,457,000 of cash and cash equivalents. Management believes that funds generated from operations, coupled with the Company's cash and investment balances and its capacity for debt will be sufficient to fund current business operations. The Company's ability to fund its activities is directly dependent upon its sales and its ability to continue to improve its manufacturing processes. 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 related equipment manufacturers, the Company is dependent upon the success of its customers in developing and successfully marketing end-user microwave related 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 one or more of the Company's major customers or a change in the mix of product sales could 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 14 15 of existing and new manufacturing resources; 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 recorded a Notes Receivable of $1.1 million in December 1996 relating to the sale of the Assembly Division. While the Company believes that its realization on the note will equal or exceed the net carrying value of $872,000 at September 30, 1997, it is at least reasonably possible that an increase in the $250,000 valuation allowance will be required in the near term, depending upon the financial stability of the purchaser. 15 16 PART II - OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS The Company and Joseph Turek have been named as defendants in Lionheart Partners, Inc., as general partner of Lionheart USA Micro Cap Value, L.P. v. M-Wave, Inc. and Joseph Turek, which was filed on or about November 17, 1995 in the United States District Court for the Northern District of Illinois. The case was filed as a purported class action on behalf of all persons who purchased common stock of the Company between August 8, 1995 and October 18, 1995. The complaint alleges that the defendants made materially false and misleading statements and failed to correct public representations which had become materially false and misleading regarding the Company's revenues and earnings. The complaint asserts claims under Sections 10(b) and 20 of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seeks compensatory damages in an unspecified amount. On April 25, 1997, the plaintiffs and the defendants entered into a settlement agreement which resolves all of the claims arising out of this action, except as to claims of class members who opt out of the settlement. This settlement received court approval on July 8, 1997. The settlement provides for a $150,000 payment to the plaintiff class plus administrative fees not to exceed $20,000. The Company's contribution to the settlement would be approximately $85,000. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data (b) The Company filed report on Form 8-K dated August 15, 1997 announcing the relationship between M-Wave, Inc. and Deloitte & Touche LLP has ceased. 16 17 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: November 7, 1997 /s/ PAUL H. SCHMITT ---------------------------- Paul H. Schmitt Chief Financial Officer 17 18 EXHIBIT INDEX Exhibit No Description - ------- -------------------------------------------------- 27 Financial Data 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 2,457,355 0 2,360,067 0 1,295,852 7,582,982 16,441,372 (4,746,954) 20,852,062 2,521,353 2,345,992 0 0 30,698 14,847,233 20,852,062 13,374,680 0 10,854,672 2,772,421 (32,997) 0 0 (285,410) (68,580) (216,830) 0 0 0 (216,830) (0.07) 0
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