-----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, Sm8YUVl95HEgz5OqfSDbHaqzVYBcCfmc07WS0J/D7er02mxEmDE1MEEk5PLU/kZV 6YA8XCnDIZSewcW/0dbp2w== 0000950137-99-000681.txt : 19990331 0000950137-99-000681.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950137-99-000681 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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-K405 SEC ACT: SEC FILE NUMBER: 000-19944 FILM NUMBER: 99578024 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-K405 1 FORM 10-K DATED 12-31-98 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the fiscal year ended December 31, 1998 Commission file number 0-19944 M~WAVE, Inc. (Exact name of registrant as specified in its charter) Delaware 36-3809819 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 216 Evergreen Street, Bensenville, Illinois 60106 - ------------------------------------------- -------------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code (630) 860-9542 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock ($.01 par value) (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of March 22, 1999 was approximately $1,689,000, computed on the basis of the last reported sale price per share ($1.125) of such stock on the NASDAQ SmallCap Market. 1 2 The Registrant has 2,267,842 common shares outstanding at March 22, 1999. 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 42. 2 3 PART I Item 1. Business The Company M~Wave, Inc., operates through its wholly-owned subsidiaries Poly Circuits, Inc. and P C Dynamics Corporation (collectively, the "Company"). In December 1997, the Company announced that the P C Dynamics subsidiary does not have a place in the Company's strategic plans and the Company will eventually exit the Military market and concentrate all efforts in the Commercial market segments. The Company manufactures printed circuit boards using Teflon-based laminates to customers' specifications. 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's printed circuit boards and bonded assemblies are used in wireless communication systems and other devices and equipment operating in the microwave frequency spectrum of 800 MHz and above. These devices and equipment include cellular telephones, direct broadcast satellite television, global positioning satellite systems, personal communication networks and military "smart" weapons. The Teflon(TM) based boards and assemblies are advantageous for microwave systems because of their extremely low circuit transmission and 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 certification by many of its customers. The Company markets its products through Company personnel supported by approximately 20 independent sales organizations. The Company's base of approximately 125 customers represents a highly sophisticated group of purchasers. Segments within the commercial markets have experienced growth in recent years due to: (i) increased efficiency of microwave systems; (ii) a commercial market based upon increasing acceptance of microwave frequency products; (iii) a continuing need to upgrade systems based upon microwave technology; and (iv) crowding of the available frequency spectrum below 800 MHz. The Company's strategy is to increase sales of its commercial products to support the growth of its customers in these industry segments. M~Wave, Inc. was incorporated in Delaware in January 1992 in connection with a 100 for 1 share exchange with the former stockholders of Poly Circuits, Inc. The Company's executive offices are located at 216 Evergreen Street, Bensenville, Illinois, 60106, and its telephone number is (630) 860-9542. Industry and Market There are Commercial and Military-related types of customers within the market for microwave related printed circuit boards and bonded assemblies. Within both customer types there has been an "outsourcing" trend whereby end users have gotten out of internal 3 4 production of printed circuit boards and bonded assemblies and moved to buying these products from "contract manufacturing" board shops. The market for microwave related printed circuit boards and bonded assemblies is expected to grow as wireless communication systems are expanded and improved. Although new growth will occur, pricing pressures will also grow thereby depressing margins for printed circuit board manufacturers. One of the most widely recognized high frequency wireless communication systems in commercial use is the cellular telephone. Cellular systems operate at the lower end of the microwave spectrum and use Teflon(TM) based printed circuit boards and bonded assemblies in signal amplification base assemblies. As cellular telephones increase their market penetration, additional cellular base stations will be constructed to improve geographic coverage and system capacity. Approximately 51%, 49% and 39% of the Company's revenues in 1998, 1997, and 1996, respectively, were related to the cellular telephone industry. Customers and Marketing The Company's customers include microwave system manufacturers with sophisticated technologies. The Company currently services a customer base of approximately 125. 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. For military microwave system manufacturers, the Company must meet the demanding military and critical weapon 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. Approximately 20 independent sales organizations are paid a commission to represent the Company in geographical territories. International sales of the Company's products have accounted for less than 5% of revenues in each of 1998, 1997 and 1996. In 1998, Motorola, Lucent and Spectrian accounted for 7%, 9% and 37%, respectively, of the Company's revenues. In 1997, Motorola, Lucent and Spectrian accounted for 19%, 7% and 26%, respectively, of the Company's revenues. In 1996, Motorola, Lucent and Spectrian accounted for 26%, 8% and 10%, respectively, of the Company's revenues. The loss of, or a substantial reduction in or change in the mix of orders from, any one or more of the Company's major customers could have a material adverse effect on the Company's results of operations and financial condition. The Company continues vigorously to pursue a strategy of being a major source to its customers, but intends to seek to be one of a few key suppliers rather than the sole supplier. As of December 31, 1998, the Company had an order backlog of approximately $3,772,000 compared to $2,626,000 at December 31, 1997. Nearly all of the Company's backlog is subject to cancellation or postponement without significant penalty. Accordingly, the Company does not believe that this backlog is necessarily indicative of the Company's future results of operations or prospects. 4 5 Products and Production The Company produces microwave related Teflon(TM) based printed circuit boards. The Company 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(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 91% in 1998, compared to 90% in 1997. The increase was related to production efficiencies achieved at the Poly Circuits facility. This rate has helped the Company reduce its manufacturing costs, which is particularly important because Teflon(TM) is substantially more expensive than laminates used in low frequency applications. Because the Company manufactures a custom, made-to-order product, there is a minimal amount of finished goods inventory. The Company maintains raw material inventory, primarily Teflon based laminate. A typical manufacturing cycle time from engineering to shipment is about two weeks. 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 maintains in-house capabilities to perform substantially all processes, thereby minimizing the reliance upon outside sources. The Company devotes significant time and attention to quality control and TQA (Total Quality Assurance). The Company operates an SPC (Statistical Process Control) system that is intended to maintain quality at each process stage by reducing the variability of each process. As the Company's business has evolved towards the production of relatively smaller quantities of more complex products, the Company has at times during 1998 and 1997 encountered difficulty in maintaining its past yield standards. During 1998, 1997 and 1996, one manufacturer accounted for approximately 66%, 56% and 46%, respectively, of the Teflon based laminate supplied to the Company. 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. Moreover, any prolonged disruption or termination of the Company's principal supplier of Teflon based laminate could have a material adverse effect on the Company's business and damage customer relationships. The Company purchases Teflon based laminate pursuant to an ongoing purchase order relationship. The Company believes its relationship with its principal supplier of Teflon based laminate is 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 of Flexlink(TM) in 1996. Pro-Cor(TM) is a patented product intended to serve the antennae segment of the microwave telecommunications market. Customers have expressed high interest due to its special electrical and mechanical properties, since they exceed the performance expectations of Teflon substrates. Pro-Cor(TM) is significantly less expensive than Teflon allowing antennae design engineers a cost effective alternative to current materials. A major domestic antennae 5 6 manufacturer recently funded a Research and Development project to qualify Pro-Cor(TM) in space applications. The Company was granted a patent in 1998 for the Pro-Cor(TM) foam circuit board product. 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. Competition The market for the Company's products is highly competitive. The Company competes for customers primarily on the basis of quality, reliability 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. Also, some of the smaller "non-Teflon(TM) board shops" are now entering the market for Teflon(TM) boards. Some of these smaller shops are located nearby key customers. This is an advantage they can use. 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 recordkeeping requirements. The Company periodically generates and handles materials that are considered hazardous waste under applicable law and contracts for the off-site disposal of these materials. During the ordinary course of its operations, the Company has received citations or notices from regulatory authorities that such operations may not be in compliance with applicable environmental regulations. Upon such receipt, the Company works with authorities to resolve the issues raised by such citations or notices. The Company's past expenditures relating to environmental compliance have not had a material effect on the financial position or results of operations of the Company. The Company believes that the overall impact of compliance with regulations and legislation protecting the environment will not have a material effect on its future financial position or results of operations, although no assurance can be given. Based on information available to the Company, which in most cases includes an estimate of liability, legal fees and other factors, a reserve for indicated environmental liabilities has been made in the aggregate amount of approximately $10,000. The Company spent approximately $33,000 in 1998 complying with EPA regulations. 6 7 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 was granted three (3) patents in 1998. Two (2) patents were granted to the Company for a printed circuits 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. It is an environmentally friendly "green process" for producing printed circuit boards. The Company was also granted a patent in 1998 for a Pro-Cor(TM) foam circuit board product. Pro-Cor(TM) was developed to serve the antennae segment of the microwave telecommunications market. Pro-Cor(TM) is significantly less expensive than Teflon allowing antennae design engineers a cost effective alternative to current materials. Employees On December 31, 1998, the Company employed approximately 88 persons. The Company closely monitors the number of employees in response to its periodic production requirements and believes it is positioned appropriately to change the number of employees as changes in production warrant None of the Company's employees are represented by a labor union and the Company has never experienced a work stoppage, slowdown or strike. The Company considers its labor relations to be very good. 7 8 Executive Officers of the Registrant The following is a list of Company's executive officers: Name Age Position ---- --- ----------------------- Joseph A. Turek 41 Chairman and Chief Executive Officer Paul H. Schmitt 52 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, 2000 (Subject to option to renew for five years) Frisco, Texas Administrative; 44,000 Owned Marketing; and Manufacturing The Company began manufacturing at the Company's new 44,000 square foot building in Frisco, Texas during the fourth quarter of 1996. This facility is subject to a mortgage securing the Company's obligation to repay notes totaling $2,298,000 at December 31, 1998. In December 1997, the Company announced that the P C Dynamics facility located in Frisco, Texas does not have a place in the Company's Strategic Plans. The Company sold substantially all the assets of PC Dynamics Corporation on March 25, 1999, but maintained ownership of the building. 8 9 Item 3. Legal Proceedings None Item 4. Submission of Matters to a Vote of Security Holders None. 9 10 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, 1997 through December 31, 1998 as reported by the NASDAQ.
Year Ended December 31 -------------------------------------------------------- 1998 1997 ------------------------ --------------------------- Low High Low High First Quarter $ 1-7/8 $ 4 $ 2-1/8 $ 4-5/8 Second Quarter 1-3/4 4-5/8 2 3-1/2 Third Quarter 11/16 2-1/4 2-7/16 3-15/16 Fourth Quarter 3/8 1-7/8 3 6-3/8
As of December 31, 1998, there were approximately 700 shareholders of record owning the common stock of the Company. The Registrant did not pay any dividends on its common stock in 1998 and intends not to pay dividends in the foreseeable future in order to reinvest its future earnings in the business. 10 11 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, 1998.
Year Ended December 31 -------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ Statement of Operations Data: Net sales $ 13,120,054 $ 16,697,311 $ 22,643,968 $ 29,512,380 $ 28,009,390 Gross profit (loss) 2,433,440 2,703,768 (701,051) 6,971,272 9,623,653 Operating income (loss) 182,774 (4,360,400) (6,219,548) 2,222,939 5,624,471 Income (loss) before income taxes 173,923 (4,523,648) (6,820,869) 1,868,426 6,201,013 Net income (loss) 18,503 (3,163,652) (4,357,393) 1,262,955 3,745,935 Weighted average shares 3,019,813 3,044,289 3,021,041 2,992,985 2,905,054 Basic earnings (loss) per share 0.01 (1.04) (1.44) 0.42 1.29 Diluted shares 3,021,211 3,044,289 3,021,041 3,072,920 3,006,599 Diluted earnings (loss) per share 0.01 (1.04) (1.44) 0.41 1.25 Balance Sheet Data: Working capital $ 5,342,657 $ 5,679,330 $ 4,601,703 $ 9,110,742 $ 11,046,010 Total assets 15,768,374 16,692,337 21,835,551 23,407,823 23,258,012 Long-term debt 1,990,337 2,268,028 2,604,464 11,239 423,732 Stockholders' equity 11,167,648 11,931,109 15,012,262 19,365,593 17,643,119
11 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Listed below are the related expenses for 1998, 1997 and 1996 as a percent of sales.
1998 1997 1996 --------- --------- --------- Net sales 100.0% 100.0% 100.0% Cost of goods sold 81.5 83.8 103.1 --------- --------- --------- Gross profit (loss) 18.5 16.2 (3.1) --------- --------- --------- Operating expenses: General and administrative 12.5 13.8 14.3 Selling and marketing 4.6 6.1 7.4 Research and development 0.0 0.0 1.6 Impairment of building and equipment 0.0 15.6 0.0 Goodwill impairment charge 0.0 4.0 0.0 Writeoff of note receivable 0.0 2.8 1.1 --------- --------- --------- Total operating expenses 17.1 42.3 24.4 Operating income (loss) 1.4 (26.1) (27.5) Interest income (expense) - net (0.3) (0.4) (0.9) Gain (loss) on disposal of equipment 0.2 (0.6) (1.8) --------- --------- --------- Total other income (expense) (0.1) (1.0) (2.7) --------- --------- --------- Income (loss) before income taxes 1.3 (27.1) (30.2) Income tax expense (benefit) 1.2 (8.2) (10.9) --------- --------- --------- Net income (loss) 0.1% (18.9)% (19.3)% ========= ========= =========
COMPARISON OF 1998 AND 1997 Net Sales Net sales for 1998 decreased 21% to $13.1 million from $16.7 million in 1997. The decrease in sales was due to several factors including a Company decision to exit 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. Net sales to Motorola decreased by $2,194,000 or 70% to $927,000. The products produced for Motorola are maturing and their requirements have been reduced. Net sales to Lucent increased by $102,000 or 9% to $1,181,000. Net sales to LK Products decreased by $909,000 or 98% to $17,000. LK Products has shifted their product to an alternative material. The decline in net sales was partially offset by an increase in net sales to Spectrian, the Company's largest customer, of $414,000 or 9% to $4,789,000 and Rockwell of $640,000 or 52% to $1,872,000. The Company's three largest customers accounted for 60% of the Company's net sales in 1998 compared to 52% in 1997. 12 13 The Company is taking steps to increase its sales by visiting key customers to inform them of the positive changes at the Company. Gross Profit and Cost of Goods Sold Gross profit decreased $0.3 million in 1998 from $2.7 million in 1997 to $2.4 million in 1998. Gross margin increased to approximately 18% in 1998 from approximately 16% in 1997. The improvement is due to many factors. Indirect labor costs were down approximately $550,000 mainly due to a reduction in staff in 1997. Depreciation and amortization costs were down approximately $445,000 mainly due to the decision to write-down the assets of the P C Dynamics facility in 1997. Process improvements and controls reduced scrap by $125,000. However, future production problems would adversely impact the Company's gross margins and profitability, which would also result in decreased liquidity and adversely affect the Company's financial position. Teflon based laminate is the largest single component of the Company's cost of goods sold, representing 18.8% and 15.4% of net sales during 1998 and 1997, respectively. The Company did not experience significant changes in the cost of Teflon based laminate during 1998 and 1997. During 1998 and 1997, one manufacturer accounted for approximately 66% and 56%, respectively, of the Teflon based laminate supplied to the Company. Operating Expenses General and administrative expenses were $1,635,000 or 12.5% of net sales in 1998, compared to $2,297,000 or 13.8% of net sales in 1997. General and administrative expenses consist primarily of salaries and benefits, professional services, depreciation of office equipment, computer systems and occupancy expenses. On April 15, 1996, the Company engaged a consulting firm to provide consulting services with respect to the Company's operations, which services resulted in additional expenses of $100,000 in 1997. The consultants completed their work with the Company in February 1997. Payroll related expenses were down $300,000 due to staff reductions and the resignation of the Company's former president. Depreciation and Amortization mainly relating to PC Dynamics was down $85,000. Selling and marketing expenses were $616,000 or 4.7% of net sales in 1998, compared to $1,021,000 or 6.1% of net sales in 1997. Selling and marketing expenses include the cost of salaries, advertising and promoting the Company's products and the commissions paid to independent sales organizations. Commissions and expenses relating to independent sales organizations were down $313,000 as a result of lower sales. Payroll related expenses were down $79,000 due to staff reductions. During the fourth quarter of 1997, the Company decided to reposition the P C Dynamics subsidiary located in Frisco, Texas. Management decided the P C Dynamics subsidiary did not have a future place in the Company's strategic plans. As such, management is actively marketing P C Dynamics for sale. In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company recorded a goodwill impairment charge of $670,000 in December, 1997. In December, 1997, the Company also recorded a $2,604,448 impairment of building and equipment for the write down the P C Dynamics building and equipment to an estimate of market value. The building and equipment are recorded in the December 31, 1998 balance sheet as assets to be disposed of and are recorded at market value less an estimate of selling costs. The market value was determined based on appraisals. For the year ended December 31, 1998 P C Dynamics' financial results included $4,485,684 of net sales and operating profits of $378,366. For the years ended December 31, 1997 and 1996, P C 13 14 Dynamics' financial results included $4,192,303 and $4,786,726 of net sales and operating losses of $4,422,128 and $1,377,584, respectively. In May 1995, the Company established a division which performed contract assembly work for the Company's customers. Effective December 13, 1996, the Company sold substantially all of the assets, subject to certain liabilities, of this division to Marquis Microwave Products for a promissory note of $1,122,000, which approximated the net book value of the assets sold to Marquis Microwave Products. In 1996, the Company recorded a valuation allowance of $250,000 on the note. Effective December 19, 1997, the Company consented to the transfer of assets of Marquis Microwave Products to TRL Technologies, Inc. provided Marquis Microwave Products pays the Company $400,000. As further consideration, the Company entered into a Royalty agreement that entitles the Company to receive royalties of 3% of net sales of products developed by Marquis Microwave Products, subject to a maximum of $700,000. The Company also agreed that the Promissory Note and the prior royalty agreements dated December 13, 1996 issued by Marquis Microwave Products are null and void. In connection with this transaction the Company recorded a write-off of Note Receivable of $472,000 in December, 1997. The Company had sustained operating losses on the Assembly Division of $1.1 million in 1996 on revenues of $463,000. Operating income Operating income was $183,000 or 1.4% of net sales in 1998, compared to a negative $4,360,000 or negative 26.1% of net sales in 1997. The change in operating income can be summarized as follows: Decrease in net sales $ (579,000) Increase in gross margin 309,000 1997 Impairment of building and equipment 2,604,000 1997 Goodwill impairment charge 670,000 1997 Write off of note receivable 472,000 Decrease in operating expenses 1,067,000 --------- Increase in operating income $4,543,000 =========
Interest Income Interest income from short-term investments was $172,000 in 1998 compared to $180,000 in 1997. Interest Expense Interest expense, primarily related to the Company's mortgage obligation on its P C Dynamics facility, was $219,000 in 1998 compared to $250,000 in 1997. Gain (loss) on disposal of fixed assets The Company recorded a gain of $39,000 in 1998 compared to a loss of $93,000 in 1997 relating to the disposal of fixed assets which are no longer usable in the Company's business. 14 15 Income Taxes The Company had an effective tax credit rate of 89.4% in 1998, and an effective tax credit rate of 30.1% in 1997. The rate of 89.4% in 1998 reflects changes in estimated tax refunds. Earnings per share In 1997, the Company adopted Statement of Financial Accounting Standards No. 128 - - "Earnings per Share" ("SFAS 128"). As required by SFAS 128, all current and prior year earnings (loss) per share data have been restated to conform to the provisions of SFAS 128. COMPARISON OF 1997 AND 1996 Net Sales Net sales for 1997 decreased 26% to $16.7 million from $22.6 million in 1996. The decrease in sales was due to several factors including a Company decision to exit 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. 1996 net sales also included $741,000 of sales relating to the Assembly Division and the Asian based distribution entity (Vortex). These divisions were sold in December 1996. Net sales to Motorola decreased by $2,776,000 or 47% to $3,120,000. The products produced for Motorola are maturing and their requirements have been reduced. Net sales to Lucent decreased by $708,000 or 40% to $1,080,000. The products produced for Lucent are maturing and their requirements have been reduced. Net sales to LK Products decreased by $2,233,000 or 71% to $926,000. LK Products has shifted their product to an alternative material. The foregoing decreases in net sales were partially offset by an increase in net sales to Spectrian, the Company's largest customer, of $2,158,000 or 97% to $4,375,000. The Company's three largest customers accounted for 52% of the Company's net sales in 1997 compared to 45% in 1996. The Company is taking steps to increase its sales by visiting key customers to inform them of the positive changes at the Company; however, the Company expects its sales to decline in the first quarter of 1998. Gross Profit and Cost of Goods Sold Gross profit increased $3.4 million in 1997 from a negative $0.7 million in 1996 to $2.7 million in 1997. Gross margin increased to approximately 16% in 1997 from approximately negative 3% in 1996. The improvement is due to many factors. In 1996, the Company incurred sales adjustments for pricing and returns of $1,201,000 and inventory writedowns of $2,719,000 and $747,000 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 in 1997. This includes moving to one shift from two while improving on time delivery. The Texas facility has not 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 would continue to adversely impact the Company's gross margins and profitability, which would also result in decreased liquidity and adversely affect the Company's financial position. 15 16 The adjusted gross profit was $3,966,000 or 17.5% in 1996 compared to $2,704,000 or 16.2% in 1997. The adjusted gross profit for 1996 is calculated by adding back the sales adjustments and inventory write-downs of $4,667,000 to the reported gross loss. The adjusted gross profit declined due to a decrease in sales and manufacturing inefficiencies related to the P C Dynamics facility. Teflon based laminate is the largest single component of the Company's cost of goods sold, representing 15.4% and 27.5% of net sales during 1997 and 1996, respectively. The Company did not experience significant changes in the cost of Teflon based laminate during 1997 and 1996. During 1997 and 1996, one manufacturer accounted for approximately 56% and 46%, respectively, of the Teflon based laminate supplied to the Company. Operating Expenses General and administrative expenses were $2,297,000 or 13.8% of net sales in 1997, compared to $3,233,000 or 14.3% of net sales in 1996. General and administrative expenses consist primarily of salaries and benefits, professional services, depreciation of office equipment, computer systems and occupancy expenses. The net decrease was due to a reduction in professional and legal fees of $748,000 and the final settlement of the Comptek litigation of $170,000. 1996 expenses also included $93,000 of administrative expenses relating to the Assembly Division and the Asian based distribution entity (Vortex). On April 15, 1996, the Company engaged a consulting firm to provide consulting services with respect to the Company's operations, which services resulted in additional expenses of $696,000. The consultants completed their work with the Company in February 1997. Selling and marketing expenses were $1,021,000 or 6.1% of net sales in 1997, compared to $1,678,000 or 7.4% of net sales in 1996. Selling and marketing expenses include the cost of salaries, advertising and promoting the Company's products and the commissions paid to independent sales organizations. The decrease in selling and marketing expenses was primarily attributable to a reduction in staff and reduced commissions paid as a result of a decease in sales. 1996 expenses also included $223,000 of selling and marketing expenses relating to the Assembly Division and the Asian based distribution entity (Vortex). Research and development expenses related to the Assembly Division were $357,000 or 1.6% of net sales for 1996. The Company sold the Assembly Division in December 1996. During the fourth quarter of 1997, the Company decided to reposition the P C Dynamics subsidiary located in Frisco, Texas. Management decided the P C Dynamics subsidiary did not have a future place in the Company's strategic plans. As such, management is actively marketing P C Dynamics for sale. In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company recorded a goodwill impairment charge of $670,000. The Company also recorded a $2,604,448 impairment of building and equipment for the write down the P C Dynamics building and equipment to an estimate of market value. The building and equipment are recorded in the December 31, 1998 balance sheet as building and equipment to be disposed of at market value less an estimate of selling costs. The market value was determined based on appraisals. For the years ended December 31, 1997, 1996 and 1995 P C Dynamics' financial results included $4,192,303, $4,786,726 and $4,172,403 of net sales and operating losses of $4,422,128, $1,377,584 and $353,474, respectively. Until the P C Dynamics business is sold, the Company estimates incurring monthly pre-tax losses in the range of $75,000 to $100,000 per month. In May 1995, the Company established a division which performed contract assembly work for the Company's customers. Effective December 13, 1996, the Company sold substantially all of the assets, subject to certain liabilities, of this division to Marquis Microwave Products for a promissory 16 17 note of $1,122,000, which approximated the net book value of the assets sold to Marquis Microwave Products. In 1996, the Company recorded a valuation allowance of $250,000 on the note. Effective December 19, 1997, the Company consented to the transfer of assets of Marquis Microwave Products to TRL Technologies, Inc. provided Marquis Microwave Products pay the Company $400,000. As further consideration, the Company entered into a Royalty agreement that entitles the Company to receive royalties of 3% of net sales of products developed by Marquis Microwave Products, subject to a maximum of $700,000. The Company also agreed that the Promissory Note and the prior royalty agreements dated December 13, 1996 issued by Marquis Microwave Products are null and void. In connection with this transaction the Company recorded a write-off of Note Receivable of $472,000. The Company had sustained operating losses on the Assembly Division of $1.1 million in 1996 and $400,000 in 1995 on revenues of $463,000 and $91,000, respectively. Operating loss Operating income was negative $4.4 million or negative 26.1% of net sales in 1997, compared to a negative $6.2 million or negative 27.5% of net sales in 1996. The change in operating income can be summarized as follows: Decrease in net sales $ 184,000 Increase in gross margin 3,221,000 Impairment of building and equipment (2,604,000) Goodwill impairment charge (670,000) Write off of note receivable (222,000) Decrease in operating expenses 1,950,000 ---------- Decrease in operating loss $ 1,859,000 ==========
Interest Income Interest income from short-term investments was $180,000 in 1997 compared to $39,000 in 1996. Interest Expense Interest expense, primarily related to the Company's mortgage obligation on its P C Dynamics facility, was $250,000 in 1997 compared to $224,000 in 1996. Loss on disposal of fixed assets The Company recorded a loss of $93,000 in 1997 and $417,000 in 1996 relating to the disposal of fixed assets which are no longer usable in the Company's business. Income Taxes The Company had an effective tax credit rate of 30.1% in 1997, and an effective tax credit rate of 36.1% in 1996. 17 18 Earnings per share In 1997, the Company adopted Statement of Financial Accounting Standards No. 128 - - "Earnings per Share" ("SFAS 128"). As required by SFAS 128, all current and prior year earnings (loss) per share data have been restated to conform to the provisions of SFAS 128. LIQUIDITY AND CAPITAL RESOURCES Net cash provided/(used) by operations was $1,338,000, $2,645,000 and ($181,000) in 1998, 1997 and 1996, respectively. In 1998, inventories increased $689,000 due mainly to increased investment in work in process ($217,000) and the Bonding Process ($191,000). Depreciation and amortization was $771,000, down $741,000 in 1998 due to the write-down of the PC Dynamics assets in December 1997. Accrued expenses were down $421,000 due mainly to the payments made for litigation settlements. The Company collected income tax refunds of $1,179,000. Cash generated and cash on hand was used to repurchase 781,964 shares of its common stock owned by First Chicago Equity Corporation. Cash generated and cash on hand was also used for the purchase of property, plant and equipment. Purchases of property, plant and equipment were $277,000, $544,000, and $4,723,000 in 1998, 1997 and 1996, respectively. The capital expenditures for 1996 include $3.6 million for the new P C Dynamics facility in Texas. The expenditures were partially financed through mortgage borrowings of $2.9 million. Except for expenditures required to improve the manufacturing processes, the Company presently has no plans for additional capital expenditures. In January and March 1996, the Company obtained construction loans from American National Bank and Trust Company of Chicago to finance the rebuilding of the P C Dynamics facility in Frisco, Texas. The loans are payable in monthly installments of principal and interest which began in October 1996 and end with a balloon payment of $1,440,000 in October 2001. The Company has a line of credit from American National Bank and Trust Company of Chicago which provides for a maximum borrowings of $2,000,000 based on 80% of eligible account receivables through May 1998 at an interest rate of prime plus 0.5%. At December 31, 1998, no amounts were outstanding on this line. On December 18, 1998, the Company repurchased 781,964 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 781,964 shares of the Company's common stock with an exercise price of $1.00 per share (increasing by $0.05 per share each anniversary date of the warrants). The warrants are exercisable only if the Company engages in an extraordinary transaction (e.g., a merger, a consolidation, combination or dissolution) within five years of the issue date of the warrants. The future value of the warrants at year-end was $744,144. As of December 31, 1998, the Company has $2,298,000 of debt and $3.7 million of cash and cash equivalents. Management believes that funds generated from operations, coupled with the Company's cash balance and its capacity for debt will be sufficient to fund current business operations. The sale of the P C Dynamics subsidiary will have no material effect on liquidity and capital resources because the value of the assets are reflected at net realizable value. 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: 18 19 (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. 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. 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. The Company does not expect this transaction to have a material effect on the financial position of the Company. The sale of the assets will have an effect on net income of up to $100,000. Inflation Management believes inflation has not had a material effect on the Company's operation or on its financial position. New Accounting Pronouncements Statement of Financial Standard 132 - "Disclosures of Pension information." This new Statement should have no material effect on the Company. Statement of Financial Standard 133 - "Reporting on Derivatives and Hedging Transactions." This new Statement should have no material effect on the Company. Statement of Financial Standard 134 - "Accounting for Mortgage backed Securities." This new Statement should have no material effect on the Company. Year 2000 Compliance Many computer and other software and hardware systems currently are not, or will or may not be, able to read, calculate or output correctly using dates after 1999 and such systems will require significant modifications in order to be "Year 2000 compliant." This issue may have a material adverse affect on the Company's business, financial condition and results of operations because its computer and other systems are integral parts of the Company's distribution activities as well as its accounting and other information systems and because the Company will have to divert financial resources and personnel to address this issue. The Company has reviewed its computer and other hardware and software systems and has recently begun upgrading those systems that it has identified as not being year 2000 compliant. The existing systems will be upgraded either through modification or replacement. The Company currently anticipates that it will complete testing of these upgrades by the end of fiscal 1999. Although the Company is not aware of any material operational impediments associated with upgrading its computer and other hardware and software systems to be year 2000 compliant, the Company cannot make any assurances that the upgrade or the Company's computer systems will be completed on schedule, or that the upgraded systems will be free of defects. If any such risks materialize, the Company could experience material adverse consequences to its business, financial condition and results of operations. 19 20 Year 2000 compliance may also adversely affect the Company's business financial conditions and results of operations indirectly by causing complications to, or otherwise affecting, the operations of any one or more of its suppliers and customers. The Company is contacting its significant suppliers and customers in an attempt to identify any potential year 2000 compliance issues with them. The Company is currently unable to anticipate the magnitude of the operational or financial impact of year 2000 compliance issues with its suppliers or customers. The Company incurred approximately $55,000 through fiscal 1998 and expects to incur approximately $100,000 through fiscal 1999 to resolve and test the Company's year 2000 compliance issues. All expenses incurred in connection with year 2000 compliance will be expensed as incurred, other than acquisitions of new software or hardware, which will be capitalized. 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 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 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. 20 21 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, 1998 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. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 21 22 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 "1999 Proxy Statement"), and is incorporated herein by this reference. Item 11. Executive Compensation Information required by this Item will be contained in the 1999 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 1999 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 1999 Proxy Statement and is incorporated herein by this reference. 22 23 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 Auditors' Report 24 Independent Auditors' Report 25 Consolidated Balance Sheets December 31, 1998 and 1997 26 Consolidated Statements of Operations Years Ended December 31, 1998, 1997 and 1996 27 Consolidated Statements of Stockholders' Equity Years Ended December 31, 1998, 1997 and 1996 28 Consolidated Statements of Cash Flows Years Ended December 31, 1998, 1997 and 1996 29-30 Notes to Consolidated Financial Statements 31-39 Selected Quarterly Financial Data (Unaudited) 40 Subsidiaries 44 (a) 2. Financial Statement Schedules None (a) 3. Exhibits The exhibits filed herewith are set forth on the Index to Exhibits filed as part of this report. (b) The Company filed a reports on Form 8-K as follows: (1) Dated November 25, 1998 announced it was notified by First Chicago Equity Capital that they intended to nominate Lawrence Fox and Christopher Saenger to stand for election as directors at the Company's annual meeting of stockholders. (2) Dated December 21, 1998 announced the Company had repurchased 781,964 shares of its common stock owned by First Chicago Equity Corporation. 23 24 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors M~Wave, Inc. We have audited the accompanying consolidated balance sheets of M~Wave, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. 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. The consolidated financial statements of M~Wave, Inc. and Subsidiaries for the year ended December 31, 1996 was audited by other auditors whose report dated February 17, 1997 expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted auditing standards. 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, 1998 and 1997, and the consolidated results of their operations and their consolidated cash flows for the year then ended, in conformity with generally accepted accounting principles. We also audited the adjustments that were applied to restate the 1996 earnings per share information to give retroactive effect to the adoption of Statement of Financial Accounting Standards No. 128, as described in Note 2. In our opinion, such adjustments are appropriate and have been properly applied. GRANT THORNTON LLP Chicago, Illinois January 29, 1999 (except for Note 3 as to which the date is March 25, 1999) 24 25 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders M~Wave, Inc. Bensenville, Illinois We have audited the accompanying consolidated statements of operations, stockholders' equity and cash flows of M~Wave, Inc. and subsidiaries for the year ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of M~Wave, Inc. and subsidiaries for the year ended December 31, 1996 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Chicago, Illinois February 17, 1997 25 26 M~WAVE, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997
ASSETS 1998 1997 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 3,712,537 $ 3,534,315 Accounts receivable, net of allowance for doubtful accounts: 1997 - $10,023; 1998 - $10,000 1,772,637 1,734,959 Inventories 1,583,421 894,665 Refundable income taxes 0 1,289,027 Deferred income taxes 395,987 371,026 Prepaid expenses and other assets 99,656 30,591 ------------ ------------ Total current assets 7,564,238 7,854,583 PROPERTY, PLANT AND EQUIPMENT: Land, buildings and improvements 2,360,152 2,360,152 Machinery and equipment 7,355,774 7,249,005 ------------ ------------ Total property, plant and equipment 9,715,926 9,609,157 Less accumulated depreciation (4,750,872) (4,014,265) ------------ ------------ Property, plant and equipment - net 4,965,054 5,594,892 ASSETS TO BE DISPOSED OF, NET 3,233,405 3,235,000 OTHER ASSETS 5,677 7,862 ------------ ------------ TOTAL $ 15,768,374 $ 16,692,337 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,306,348 $ 838,610 Accrued expenses 607,628 1,029,038 Current portion of long-term debt 307,605 307,605 ------------ Total current liabilities 2,221,581 2,175,253 DEFERRED INCOME TAXES 388,808 317,947 LONG-TERM DEBT 1,990,337 2,268,028 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;3,069,806 shares issued and 3,049,806 shares outstanding at December 31, 1997, 3,069,806 shares issued and 2,267,842 shares outstanding at December 31, 1998 30,698 30,698 Additional paid-in capital 8,348,832 7,574,688 Retained earnings 4,464,226 4,445,723 Treasury stock, 20,000 shares at December 31, 1997 and 801,964 shares at December 31, 1998, at cost (1,676,108) (120,000) ------------ ------------ Total stockholders' equity 11,167,648 11,931,109 ------------ ------------ TOTAL $ 15,768,374 $ 16,692,337 ============ ============
See notes to consolidated financial statements. 26 27 M~WAVE, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------ ------------ ------------ NET SALES $ 13,120,054 $ 16,697,311 $ 22,643,968 COST OF GOODS SOLD 10,686,614 13,993,543 23,345,019 ------------ ------------ ------------ Gross profit (loss) 2,433,440 2,703,768 (701,051) OPERATING EXPENSES: General and administrative 1,635,001 2,297,309 3,233,423 Selling and marketing 615,665 1,020,623 1,678,078 Research and development 0 0 356,996 Impairment of building and equipment 0 2,604,448 0 Goodwill impairment charge 0 670,070 0 Writeoff of note receivable 0 471,718 250,000 ------------ ------------ ------------ Total operating expenses 2,250,666 7,064,168 5,518,497 ------------ ------------ ------------ Operating income (loss) 182,774 (4,360,400) (6,219,548) OTHER INCOME (EXPENSE): Interest income 171,597 179,828 39,459 Interest expense (219,254) (250,232) (224,110) Gain (loss) on disposal of equipment 38,806 (92,844) (416,670) ------------ ------------ ------------ Total other income (expense), net (8,851) (163,248) (601,321) ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES 173,923 (4,523,648) (6,820,869) Income tax expense (benefit) 155,420 (1,359,996) (2,463,476) ------------ ------------ ------------ NET INCOME (LOSS) $ 18,503 $ (3,163,652) $ (4,357,393) ============ ============ ============ Weighted average shares outstanding 3,019,813 3,044,289 3,021,041 ============ ============ ============ BASIC EARNINGS (LOSS) PER SHARE $ 0.01 $ (1.04) $ (1.44) ============ ============ ============ Diluted shares outstanding 3,021,211 3,044,289 3,021,041 ============ ============ ============ DILUTED EARNINGS (LOSS) PER SHARE $ 0.01 $ (1.04) $ (1.44) ============ ============ ============
See notes to consolidated financial statements. 27 28 M~WAVE, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Additional Total Common Paid-in Retained Treasury Stockholders' Stock Capital Earnings Stock Equity ------------ ------------ ------------ ------------ -------------- BALANCE JANUARY 1, 1996 $ 30,404 $ 7,488,422 $ 11,966,767 $ (120,000) $ 19,365,593 Common stock issued: Stock options (1,200 shares) 12 4,050 0 0 4,062 Net loss 0 0 (4,357,393) 0 (4,357,393) ------------ ------------ ------------ ------------ ------------ BALANCE DECEMBER 31, 1996 30,416 7,492,472 7,609,374 (120,000) 15,012,262 Common stock issued: Stock options (10,000 shares) 100 32,400 0 0 32,500 Sale of 18,200 shares of Common Stock 182 49,816 0 0 49,998 Net loss 0 0 (3,163,651) 0 (3,163,651) ------------ ------------ ------------ ------------ ------------ BALANCE DECEMBER 31, 1997 $ 30,698 $ 7,574,688 $ 4,445,723 $ (120,000) $ 11,931,109 ============ ============ ============ ============ ============ Treasury stock purchased: 781,964 shares and issuance of stock warrants 0 774,144 0 (1,556,108) (781,964) Net income 0 0 18,503 0 18,503 ------------ ------------ ------------ ------------ ------------ BALANCE DECEMBER 31, 1998 $ 30,698 $ 8,348,832 $ 4,464,226 $ (1,676,108) $ 11,167,648 ============ ============ ============ ============ ============
See notes to consolidated financial statements. 28 29 M~WAVE, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ----------- ----------- ----------- Cash flows from: OPERATING ACTIVITIES: Net income (loss) $ 18,503 $(3,163,652) $(4,357,393) Adjustments to reconcile net income to net cash flows from operating activities: Provision for doubtful accounts 0 0 40,000 Valuation provision on note receivable 0 471,718 250,000 (Gain) loss on disposal of equipment (38,806) 92,844 416,670 Depreciation and amortization 770,760 1,511,640 1,339,581 Impairment of buildings and equipment 0 2,604,448 0 Goodwill impairment charge 0 670,070 0 Deferred income taxes 45,900 (355,777) (265,750) Changes in assets and liabilities: Accounts receivable (37,678) (9,619) 1,913,215 Inventories (688,756) 454,980 2,029,938 Income taxes 1,289,027 1,137,054 (1,786,969) Prepaid expenses and other assets (66,877) 168,307 133,753 Accounts payable 467,738 (711,387) 15,166 Accrued expenses (421,410) (225,398) 90,744 ----------- ----------- ----------- Net cash flows from operating activities 1,338,401 2,645,228 (181,045) ----------- ----------- ----------- Cash flows from: INVESTING ACTIVITIES: Purchase of property, plant and equipment (277,324) (543,934) (4,722,756) Redemption of marketable securities 0 0 1,321,358 Proceeds on sale of fixed assets 176,800 70,100 0 Purchase treasury stock (781,964) Collection of notes receivable 0 400,000 0 Cash paid in conjunction with sale of assembly division 0 0 (100,000) ----------- ----------- ----------- Net cash flows from investing activities (882,488) (73,834) (3,501,398) ----------- ----------- -----------
29 30 Cash flows from: FINANCING ACTIVITIES: Common stock issued upon exercise of stock options 0 32,500 4,062 Common stock issued for cash 0 49,998 0 Proceeds from long-term debt 0 0 2,954,000 Repayment of long-term debt (277,691) (336,436) (462,507) ----------- ----------- ----------- Net cash flows from financing activities (277,691) (253,938) 2,495,555 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 178,222 2,317,456 (1,186,888) CASH AND CASH EQUIVALENTS: Beginning of year 3,534,315 1,216,859 2,403,747 ----------- ----------- ----------- End of year $ 3,712,537 $ 3,534,315 $ 1,216,859 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: 1998 1997 1996 ----------- ----------- ----------- Cash paid during the year for: Interest $ 219,254 $ 250,232 $ 224,110 Income tax refunds received 1,179,506 2,141,268 0
See notes to consolidated financial statements. 30 31 M~WAVE, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 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, through its wholly-owned subsidiaries, Poly Circuits, Inc. and P C Dynamics Corporation (collectively, the "Company"), manufactures microwave frequency components and high frequency circuit boards on Teflon-based laminates for commercial and military wireless communication applications. 2. SIGNIFICANT ACCOUNTING POLICIES Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation - The consolidated financial statements include the accounts of M~Wave and its wholly-owned subsidiaries. Significant intercompany transactions and account balances have been eliminated. Revenue Recognition - The Company recognizes revenue when product is shipped to customers. Cash and Cash Equivalents - Cash and cash equivalents comprise cash in banks and highly liquid investments that are both readily convertible to known amounts of cash and so near maturity that they present insignificant risk of change in value. Inventories - Inventories are carried at the lower of first-in, first-out (FIFO) cost or market. Substantially all the Company's inventories are work-in-process. Property, Plant and Equipment - Property, plant and equipment are recorded at cost. The Company calculates depreciation using the straight-line method at annual rates as follows: Building and improvements 3% to 20% Machinery and equipment 10% to 20% Goodwill - Goodwill arising from the acquisition of P C Dynamics Corporation was being amortized on a straight-line basis over 10 years. In 1997, in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of," the Company wrote off the goodwill in the fourth quarter of 1997 after assessing its recoverability, as well as the book value of the building and equipment of the P C Dynamics facility. The goodwill and building and equipment of the P C Dynamics were determined to be impaired based upon P C Dynamics' estimated net realizable value. 31 32 Assets to be Disposed of, Net - The Company has recorded the building and equipment of the PC Dynamics facility as Assets to be Disposed of, Net and valued these items at market less an estimate of selling costs. 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 - In 1997, the Company adopted Statement of Financial Accounting Standards No. 128 - "Earnings per Share" ("SFAS 128"). As required by SFAS 128, all current and prior year earnings (loss) per share data have been restated to conform to the provisions of SFAS 128. 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 losses. There is no difference in the Company's calculation of basic and fully diluted earnings per share for 1998, 1997 and 1996. 3. SUBSEQUENT EVENT 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. 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. 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. The Company does not expect this transaction to have a material effect on the financial position of the Company. The sale of the assets will have an effect on net income of up to $100,000. 4. SALE OF ASSEMBLY DIVISION In May 1995, the Company established a division which performed contract assembly work for the Company's customers. Effective December 13, 1996, the Company sold substantially all of the assets, subject to certain liabilities, of this division for a promissory note of $1,122,000, 32 33 which approximated the net book value of the assets sold to Marquis Microwave Products. In 1996, the Company recorded a valuation allowance of $250,000 on the note. Effective December 19, 1997, the Company consented to the transfer of assets of Marquis Microwave Products, Inc. to TRL Technologies, Inc. provided Marquis Microwave Products pay the Company $400,000. As further consideration, the Company will be entitled to royalties of 3% of net sales of Marquis Microwave Products, subject to a maximum of $700,000. The Company also agreed that the Promissory Note and the prior royalty agreements dated December 13, 1996 issued by Marquis Microwave Products are null and void. In connection with this transaction the Company recorded a write-off of Note Receivable of $472,000. The Company sustained an operating loss on the Assembly Division of $1.1 million in 1996 on revenues of $463,000. 5. ACCRUED EXPENSES Accrued expenses at December 31, 1998 and 1997 were comprised of:
1998 1997 ---------- ---------- Salaries and wages $ 125,937 $ 284,694 Commissions 105,134 94,094 Professional fees 35,000 250,000 Property and other taxes 111,000 118,756 Other 230,557 281,494 ---------- ---------- Total accrued expenses $ 607,628 $1,029,038 ========== ==========
6. LONG-TERM DEBT The Company has a bank credit agreement which includes a revolving line of credit and the mortgage loan described below. Line of credit availability is based on 80% of eligible accounts receivable, with a borrowing limit of $2,000,000. Interest is at the prime rate (7.75% at December 31, 1998) plus 1/2%. The agreement expires May 31, 1999 and is renewable annually at the mutual consent of the Company and the lender. No balance was outstanding under the line at December 31, 1998. Long-term debt is comprised of the following at December 31, 1998 and 1997:
1998 1997 ---------- ---------- Mortgage notes payable, 1/2% over prime rate, payable in monthly principal installments of approximately $25,000 due October 2001, collateralized by PC Dynamics facility $2,297,942 $2,575,505 Obligations under capital leases, due through 1998 128 ---------- ---------- 2,297,942 2,575,633 Less current portion 307,605 307,605 ---------- ---------- Total long-term debt $1,990,337 $2,268,028 ========== ==========
33 34 Scheduled future maturities of long-term debt are as follows at December 31, 1998: 1999 307,605 2000 307,605 2001 1,682,732 --------- $2,297,942 =========
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 31, 1998 requires the Company to maintain a stipulated amount of tangible net worth, as defined. 7. INCOME TAXES The provision (benefit) for income taxes consists of:
1998 1997 1996 ----------- ----------- ----------- Current $ (146,657) $(1,004,219) $(2,197,726) Deferred 302,077 (355,777) (265,750) ----------- ----------- ----------- Total $ 155,420 $(1,359,996) $(2,463,476 =========== =========== ===========
The primary components comprising the net deferred tax assets (liabilities) are as follows:
1998 1997 ----------- ----------- Deferred tax assets Impairment of fixed assets to be disposed of $ 1,015,735 $ 1,015,735 Impairment and amortization of goodwill 294,766 296,104 Accounts receivable reserves 24,595 37,540 Inventory reserves 204,823 218,769 Accrued expenses and other 3,818 117,952 Tax credits and loss carryforwards 166,177 36,154 ----------- ----------- Deferred tax assets 1,709,914 1,722,254 Deferred tax liabilities Depreciation (1,702,735) (1,669,175) ----------- ----------- Net deferred tax assets (liabilities) $ 7,179 $ 53,709 =========== ===========
The effective tax rate differs from the Federal statutory tax rate for the following reasons:
1998 1997 1996 --------- --------- --------- Federal statutory rate 34.0% 34.0% 34.0% State income taxes, net of Federal benefit 2.5 2.5 4.8 Other adjustments 52.9 (6.4) (2.7) --------- --------- --------- Effective rate 89.4% 30.1% 36.1% ========= ========= =========
34 35 8. SIGNIFICANT CUSTOMERS AND SUPPLIERS The percentages of net sales attributable to major customers by year were as follows:
1998 1997 1996 ---- ---- ---- Customer A 37% 26% 10% Customer B 14 7 9 Customer C 9 7 8 Customer D 7 19 26
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 51%, 49% and 39% of the Company's revenues in 1998,1997 and 1996 respectively, were related to the cellular telephone industry. During 1998, 1997 and 1996, one manufacturer accounted for approximately 66%, 56% and 46%, respectively, of the Teflon-based laminates ("Teflon based laminate") supplied to the Company. Teflon based laminate is the largest single component of the Company's cost of goods sold representing approximately 18.8%, 15.4%, and 27.5% of net sales during 1998, 1997 and 1996, 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. 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 300,000 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 300,000 to 500,000; (2) a limit on the number of shares as to which options may be granted to any grantee in any calendar year to 75,000; (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 500,000 to 750,000 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 75,000 to 215,000. 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 35 36 not exceed 10 years. For all options granted to date, except for 75,000 options granted in 1995 and 210,000 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 75,000 options granted in 1995 are 110% as to 25,000 options, 120% as to 25,000 options and 130% as to 25,000 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 210,000 shares granted in 1998 are 50,000 shares at $2.75 , 70,000 at $6.10 and 90,000 shares at $8.80. These options vest at 40% on May 1, 1998, 35% on May 1, 1999 and 25% on May 1, 2000, and the term is ten years. Stock option activity under the Plan was as follows:
Number of Shares Weighted Average Under Option Exercise Price --------------------------------------------------------------- Balance, January 1, 1996 298,375 $10.53 Forfeited (61,250) 10.37 Exercised (1,250) 3.25 --------------------------------------------------------------- Balance, December 31, 1996 235,875 $10.61 Granted 220,000 7.27 Forfeited (85,000) 10.21 Exercised (10,000) 3.25 --------------------------------------------------------------- Balance, December 31, 1997 360,875 $ 8.73 --------------------------------------------------------------- Granted 220,000 6.22 Forfeited (218,125) 7.28 Exercised 0 0 --------------------------------------------------------------- Balance, December 31, 1998 362,750 $ 8.08 --------------------------------------------------------------- Exercisable at year-end: 1996 175,875 $ 9.30 1997 137,125 10.97 1998 219,250 9.48
The weighted average exercise price of the options granted in 1998 were $6.22. The weighted average exercise price of the options granted in 1997 were $7.27. The range of exercise prices of the 362,750 options outstanding at December 31, 1998 is $1.25 to $15.93 and the weighted average remaining contractual life is 8 years. At December 31, 1998, 387,250 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: 36 37
1998 1997 1996 ------------- ------------- ------------- Net income(loss) As reported $ 18,503 $ (3,163,652) $ (4,357,393) Pro forma (353,005) (3,676,145) (4,583,145) Basic net income (loss) per share As reported Basic $ 0.01 $ (1.04) $ (1.44) Diluted 0.01 (1.04) (1.44) Pro forma Basic (0.12) (1.21) (1.51) Diluted (0.12) (1.21) (1.51)
Options outstanding and exercisable at December 31, 1998, by price range:
Outstanding --------------------------------------- Exercisable Range of Weighted average ---------------------------- exercise remaining Weighted average Weighted average prices Shares contractual life exercise price Shares exercise price ------ ------ ---------------- ---------------- ------ ----------------- $ 1.25 to 3.99 99,000 7.7 $ 2.85 51,500 $ 3.08 4.00 to 7.99 80,000 8.6 6.21 38,000 6.34 8.00 to 12.99 93,750 9.1 8.86 39,750 8.94 13.00 to 13.99 30,000 6.2 13.53 30,000 13.53 14.00 to 16.00 60,000 6.2 15.28 60,000 15.28 ------- ------- 362,750 219,250
The weighted average fair value of options granted in 1998, and 1997 was $6.22 and $4.70, respectively, and was estimated at the grant date using the Black-Scholes options pricing model with the following weighted average assumptions: expected volatility of 143% and 178%, respectively: risk free interest rate of 4.93% and 6.6%, respectively; expected life of 9 and 8 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 10% 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. Additionally, discretionary amounts may be contributed by the Company. There were no Company's contributions for 1998, 1997 and 1996. 11. LEASE COMMITMENTS The Company rents manufacturing and administrative space under operating leases. Rent expense under these leases for the years ended December 31, 1998, 1997 and 1996 was $77,100, $93,600, and $236,401, respectively. Future minimum annual lease commitments at December 31, 1998 are as follows:
Year ---- 1999 57,600 2000 28,800 ------- Total $86,400 =======
37 38 12. LITIGATION The Company is a party to various actions and proceedings related to its normal business operations. The Company believes that the outcome of this litigation will not have a material adverse effect on the financial position or results of operations of the Company. The Company and Joseph Turek have been named as defendants in Lionheart Partners, Inc., as general partner of Lionheart USA Micro Cap Value, L.P. v. M~Wave, Inc. and Joseph Turek, which was filed on or about November 17, 1995 in the United States District Court for the Northern District of Illinois. The case was filed as a purported class action on behalf of all persons who purchased common stock of the Company between August 8, 1995 and October 18, 1995. The complaint alleges that the defendants made materially false and misleading statements and failed to correct public representations which had become materially false and misleading regarding the Company's revenues and earnings. The complaint asserts claims under Sections 10(b) and 20 of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seeks compensatory damages in an unspecified amount. On April 25, 1997, the plaintiffs and the defendants entered into a settlement agreement which resolves all of the claims arising out of this action, except as to claims of class members who opt out of the settlement. This settlement received court approval on July 8, 1997. The settlement provided for a $150,000 payment to the plaintiff class plus administrative fees not to exceed $20,000. The Company paid $85,000 in 1998 in settlement of the class action suit. The remainder was paid by the Company's insurance carrier. 13. ENVIRONMENTAL MATTERS The Company periodically generates and handles materials that are considered hazardous waste under applicable law and contracts for the off-site disposal of these materials. During the ordinary course of its operations, the Company has on occasion received citations or notices from regulatory authorities that such operations may not be in compliance with applicable environmental regulations. Upon such receipt, the Company works with such authorities to resolve the issues raised by such citations or notices. The Company's past expenditures relating to environmental compliance have not had a material effect on the financial position of the Company. The Company believes the overall impact of compliance with regulations and legislation protecting the environment will not have a material effect on its future financial position or results of operations, although no assurance can be given. 14. IMPAIRMENT OF GOODWILL AND LONG-LIVED ASSETS TO BE DISPOSED OF During the fourth quarter of 1997, the Company decided to reposition the P C Dynamics subsidiary located in Frisco, Texas. Management decided the P C Dynamics division did not have a future place in the Company's strategic plans. As such, management is actively marketing P C Dynamics for sale. In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of," the Company recorded a goodwill impairment charge of $670,000. The Company also recorded a $2,604,448 impairment of building and equipment for the write down of the P C Dynamics building and equipment to an estimate of market value. The building and equipment are recorded in the December 31, 1998 balance sheet as assets to be disposed of and are recorded at market value less an estimate of selling costs. The market value was determined based on appraisals. 38 39 For the year ended December 31, 1998 P C Dynamics' financial results included $4,485,684 of net sales and operating profits of $378,366. For the years ended December 31, 1997 and 1996, P C Dynamics' financial results included $4,192,303 and $4,786,726 of net sales and operating losses of $4,422,128 and $1,377,584, respectively. 15. STOCK WARRANTS On December 18, 1998, the Company repurchased 781,964 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 781,964 shares of the Company's common stock with an exercise price of $1.00 per share (increasing by $0.05 per share each anniversary date of the warrants). The warrants are exercisable only if the Company engages in an extraordinary transaction (e.g., a merger, a consolidation, combination or dissolution) within five years of the issue date of the warrants. The future value of the warrants at year-end was $744,144. 39 40 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 1998 and 1997. 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, 1998 1998 1998 1998 -------------------------------------------------------------------- Net sales $ 2,716,093 $ 3,359,187 $ 3,550,212 $ 3,494,562 Gross profit 326,599 661,536 623,913 821,392 Net income (loss) (175,065) 69,179 37,436 86,953 Weighted average shares 3,049,806 3,049,806 3,049,806 2,930,811 Basic earnings (loss) per share (0.06) 0.02 0.01 0.03 Diluted shares 3,049,806 3,052,065 3,049,806 2,934,144 Diluted earnings (loss) per share (0.06) 0.02 0.01 0.03
Three Months Ended -------------------------------------------------------------------- March 31, June 30, September 30, December 31, 1997 1997 1997 1997 -------------------------------------------------------------------- Net sales $ 4,271,004 $ 4,524,052 $ 4,579,624 $ 3,322,631 Gross profit 408,971 1,090,168 1,020,869 183,760 Net income (loss) (396,170) 53,067 126,272 (2,946,822) Weighted average shares 3,027,433 3,049,806 3,049,806 3,049,806 Basic earnings (loss) per share (0.13) 0.02 0.04 (0.97) Diluted shares 3,027,433 3,049,806 3,051,324 3,049,806 Diluted earnings (loss) per share (0.13) 0.02 0.04 (0.97)
During the three months ended December 31, 1997, the Company recorded expenses of $2,604,448 for impairment of building and equipment, $670,000 for goodwill impairment and $471,718 for a writeoff of a note receivable. 40 41 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 22, 1999 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/ Michael Bayles - --------------------------- --------------------- Joseph A. Turek Michael Bayles Director Director March 22, 1999 March 22, 1999 /s/ Lavern D. Kramer /s/ Rick Mathes - --------------------------- --------------------- Lavern D. Kramer Rick Mathes Director Director March 22, 1999 March 22, 1999 /s/ Paul H. Schmitt - ---------------------------- Paul H. Schmitt Treasurer and Secretary (Principal Accounting and Financial Officer) March 22, 1999 41 42 EXHIBIT INDEX
Exhibit No. Description Page - ------- -------------------------------------------------------------- ------ 2.1 Exchange Agreement, dated as of January 31, 1992, among Poly * Circuits, Inc., Joel S. Dryer, Joseph A. Turek and the Company 3.1 Certificate of Incorporation of the Company * 3.2 Bylaws of the Company * 10.1 Amended and restated M~Wave, Inc. 1992 Stock Option Plan **** 10.2 Lease, dated June 22, 1989, by and between Louis R. and Ruth DeMichele and the Company * 10.3 Amended Form of Sales Representative Agreement generally used by and between the Company and its sales representatives * 10.4 Employment Agreement between the Company and Joseph A. Turek **** 10.5 Registration Rights Agreement dated July 21, 1993, between the Company and certain holders of Company common stock ** 10.6 Shareholders Agreement, dated July 21, 1993, by and among First Capital Corporation of Chicago, Cross Creek Partners II, and Joseph A. Turek ** 10.7 Asset Purchase Agreement, dated as of August 5, 1994, by and among the Company, P C Dynamics acquisition, P CD Holdings, Inc. and P C Dynamics Corporation. *** 10.8 Construction Loan Note, dated January 10, 1996, by and among the Company, P C Dynamics and American National Bank and Trust Company. ***** 10.9 Employment Agreement between the Company and Michael Bayles ****** 10.10 Stock Purchase Agreement dated December 18, 1998 by and between the Company and First Chicago Equity Corporation. ****** 10.11 Stock Purchase Agreement dated December 18, 1998 by and between the Company and Cross Creek Partners II. ****** 10.12 Warrant dated December 18, 1998 issued to First Chicago Equity ****** 10.13 Warrant dated December 18, 1998 issued to Cross Creek Partners II ****** 21 Subsidiaries 44 24.1 Consent of Grant Thornton LLP 45 24.2 Consent of Deloitte & Touche LLP 46 27 Financial Data Schedule 47-50
42 43 * 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. 43 EX-21 2 SUBSIDIARIES 1 Exhibit 21 Item 21. Subsidiaries Name State of Incorporation - ---- ---------------------- Poly Circuits, Inc. Illinois P C Dynamics Corporation Texas 44 EX-24.1 3 CONSENT OF GRANT THORNTON LLP 1 Exhibit 24.1 INDEPENDENT AUDITORS' CONSENT Board of Directors M~Wave, Inc We have issued our report dated January 29, 1999, accompanying the consolidated financial statements and schedule included in the Annual Report of M~Wave, Inc. and Subsidiaries on Form 10-K for the year ended December 31, 1998. We hereby consent to the incorporation by reference of said report in the Registration Statements of M~Wave, Inc. and Subsidiaries on Form S-8 (File No. 33-72650), effective December 8, 1993 and on Form S-3 (File No. 33-98712), effective November 3, 1995. GRANT THORNTON LLP Chicago, Illinois March 28, 1999 45 EX-24.2 4 CONSENT OF DELOITTE & TOUCHE LLP 1 Exhibit 24.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-72650 on Form S-8 and Registration Statement No. 33-98712 on Form S-3 of M~Wave, Inc. of our report dated February 17, 1997, appearing in the Annual Report on Form 10-K of M~Wave, Inc. for the year ended December 31, 1998. DELOITTE & TOUCHE LLP Chicago, Illinois March 25, 1999 46 EX-27 5 FDS
5 0000883842 M-WAVE, INC. 1 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 3712537 0 1772637 0 1583421 7564238 9715926 (4750872) 15768374 2221581 1990337 0 0 30698 11136950 15768374 13120054 0 10686614 2250666 (8851) 0 0 173923 155420 18503 0 0 0 18503 0.01 0.01
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