-----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, BN9LZrUu8O8b1oUJCGdMybn6+UKW9XWfkxboZjpFIL8lSh38Jl2drHexVsRtXz+d 7IyIk9FaDXFEA3doPEsaTA== 0000950137-99-001403.txt : 19990507 0000950137-99-001403.hdr.sgml : 19990507 ACCESSION NUMBER: 0000950137-99-001403 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990506 FILER: COMPANY DATA: COMPANY CONFORMED NAME: M WAVE INC CENTRAL INDEX KEY: 0000883842 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 363809819 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19944 FILM NUMBER: 99611963 BUSINESS ADDRESS: STREET 1: 216 EVERGREEN ST CITY: BENSENVILLE ILLINOIS STATE: IL ZIP: 60106 BUSINESS PHONE: 6308609542 MAIL ADDRESS: STREET 1: 216 EVERGREEN STREET CITY: BENSENVILLE STATE: IL ZIP: 60106 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 1999 Commission File No. 0-19944 - ------------------------------------ ----------------------------- M-WAVE, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 36-3809819 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 216 Evergreen Street, Bensenville, Illinois 60106 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (630) 860-9542 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The registrant has 2,267,842 shares of common stock outstanding at May 4, 1999. 1 2 PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS M-WAVE, INC. CONSOLIDATED BALANCE SHEETS
(UNAUDITED) DECEMBER 31, MARCH 31, 1998 1999 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents............................................... $ 3,712,537 $ 4,915,729 Accounts receivable, net of allowance for doubtful accounts, 1998- $10,000: 1999 $10,000............................................ 1,772,637 1,367,312 Inventories............................................................. 1,583,421 513,851 Refundable income taxes................................................. 0 73,962 Deferred income taxes................................................... 395,987 308,819 Prepaid expenses and other.............................................. 99,656 133,734 ----------- ----------- Total current assets................................................ 7,564,238 7,313,407 PROPERTY, PLANT AND EQUIPMENT: Land, buildings and improvements........................................ 2,360,152 4,987,979 Machinery and equipment................................................. 7,355,774 7,500,202 ----------- ----------- Total property, plant and equipment................................. 9,715,926 12,488,181 Less accumulated depreciation........................................... (4,750,872) (5,096,929) ----------- ----------- Property, plant and equipment-net................................... 4,965,054 7,391,252 NOTE RECEIVABLE............................................................. 0 1,066,504 ASSETS TO BE DISPOSED OF, NET............................................... 3,233,405 0 OTHER ASSETS................................................................ 5,677 655 ----------- ----------- TOTAL....................................................................... $15,768,374 $15,771,818 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................................................ $ 1,306,348 $ 1,472,894 Accrued expenses........................................................ 607,628 535,718 Current portion of long-term debt....................................... 307,605 307,605 ----------- ----------- Total current liabilities........................................... 2,221,581 2,316,217 DEFERRED INCOME TAXES....................................................... 388,808 388,808 LONG-TERM DEBT.............................................................. 1,990,337 1,889,405 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 2,267,842 shares outstanding at December 31, 1998, 3,069,806 shares issued and 2,267,842 shares outstanding at March 31, 1999.................................. 30,698 30,698 Additional paid-in capital.............................................. 8,348,832 8,348,832 Retained earnings ...................................................... 4,464,226 4,473,966 Treasury stock: 801,964 shares, at cost................................ (1,676,108) (1,676,108) ----------- ----------- Total stockholders' equity ......................................... 11,167,648 11,177,388 ----------- ----------- TOTAL....................................................................... $15,768,374 $15,771,818 =========== ===========
See notes to consolidated financial statements. 2 3 M~WAVE, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended March 31, ---------------------------- 1998 1999 ---------- ---------- Net sales......................................................... $2,716,093 $3,682,818 Cost of goods sold................................................ 2,389,494 2,906,236 ---------- ---------- Gross profit.................................................... 326,599 776,582 Operating expenses: General and administrative...................................... 425,539 437,159 Selling and marketing........................................... 160,655 175,284 ---------- ---------- Total operating expenses...................................... 586,194 612,443 ---------- ---------- Operating income (loss)......................................... (259,595) 164,139 Other income (expense): Interest income................................................. 41,565 32,280 Interest expense................................................ (57,441) (46,391) Rental income................................................... 0 8,000 Loss on disposal of assets...................................... (21,400) (135,084) ---------- ---------- Total other income (expense) (37,276) (141,195) ---------- ---------- Income (loss) before income taxes........................... (296,871) 22,944 Provision (credit) for income taxes............................... (121,806) 13,204 ---------- ---------- Net income (loss)................................................. ($175,065) $9,740 ========== ========== Net income (loss) per share basic and diluted ($0.06) $0.00 Weighted average shares 3,049,806 2,267,842
See notes to consolidated financial statements. 3 4 M~WAVE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended March 31, 1998 1999 ---------- ---------- OPERATING ACTIVITIES: Net income (loss)........................................................ ($175,065) $ 9,740 Adjustments to reconcile net loss to net cash flows from operating activities: Loss on disposal of property, plant and equipment.................... $ 21,400 $ 135,084 Depreciation and amortization........................................ $ 243,425 $ 249,460 Deferred income taxes................................................ $96,139 $ 87,168 Changes in assets and liabilities: Accounts receivable-trade............................................ $ 115,423 ($209,705) Inventories.......................................................... ($329,861) $ 296,091 Income taxes......................................................... ($217,946) ($73,962) Prepaid expenses and other assets.................................... ($51,419) ($47,623) Accounts payable..................................................... $ 194,685 $ 155,349 Accrued expenses..................................................... ($455,293) ($31,495) ---------- ---------- Net cash flows from operating activities.......................... ($558,512) $ 570,107 ---------- ---------- INVESTING ACTIVITIES: Purchase of property, plant and equipment................................ ($65,544) ($163,921) Proceeds from sale of property, plant and equipment...................... $ 115,000 $ 4,619 Proceeds from sale of PC Dynamics property, plant and equipment ......... $ 0 $ 581,965 Proceeds from sale of PC Dynamics net working capital and other ......... $ 0 $ 311,354 ---------- ---------- Net cash flows from investing activities.......................... $ 49,456 $ 734,017 FINANCING ACTIVITIES: Payments on long term debt............................................... ($75,827) ($100,932) ---------- ---------- Net cash flows from financing activities.......................... ($75,827) ($100,932) ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... ($584,883) $1,203,192 CASH AND CASH EQUIVALENTS - Beginning of period............................ $3,534,315 $3,712,537 ---------- ---------- CASH AND CASH EQUIVALENTS - End of period.................................. $2,949,432 $4,915,729 ========== ========== Supplemental Disclosures of Cash Flow Information: Cash paid during the period for interest............................... $ 57,441 $ 46,391
See notes to consolidated financial statements. 5 M-WAVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 1998 filed March 30, 1999. 2. BUSINESS M-Wave, through its wholly-owned subsidiaries, Poly Circuits Inc. and PC Dynamics Corporation (collectively, 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 developed an enhanced version of Flexlink(TM) in 1996. On March 25, 1999, PC Dynamics Corporation, sold substantially all of its machinery and equipment, inventory and accounts receivable and assigned all of its outstanding contracts and orders to Performance Interconnect Corporation, a Texas Corporation.(PIC) The purchase price paid by PIC consisted of: (i) $893,319 in 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; and (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. PIC shall not be required to pay PC Dynamics in excess of $500,000 in aggregate royalty payments. 5 6 In addition, PC Dynamics has leased its facility in Texas to PIC for $17,000 per month for three years. PIC has the right under the lease to purchase the facility from PC Dynamics for $2,000,000 at anytime during the term of the lease. If PIC exercises its right to purchase the facility, the remaining balance due on the royalty agreement is payable in monthly installments of $25,000 until a minimum of $500,000 is paid. 3. INVENTORIES Substantially all the Company's inventories consist of work in process. 4. DEBT The Company has a mortgage loan of $2,197,010 for the facility at PC Dynamics Corporation in Frisco, Texas. Interest on this mortgage loan is at 1/2 % over prime rate. The loan is payable in monthly installments of principal and interest and is due in October 2001. The Company has a $2,000,000 line of credit available based on 80% of eligible accounts receivable to fund the working capital needs of the Company. Interest is at the prime rate (7.75% at March 31, 1999) 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 March 31, 1999. 5. LITIGATION The Company is a party to various actions and proceedings related to its normal business operations. The Company believes that the outcome of these proceedings will not have a material adverse effect on the financial position or results of operations of the Company. 6 7 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS FOR THE QUARTER ENDED MARCH 31, 1999 COMPARED TO THE QUARTER ENDED MARCH 31, 1998 NET SALES Net sales were $3,683,000 for the first quarter ended March 31, 1999 a increase of $967,000 or 36% above the first quarter of 1998. The increase was a result of a final shipment of a matured product line of $1,300,000 to Motorola. Net sales of all other products sold to Motorola decreased by $154,000. Net sales to Rockwell decreased by $56,000. Net sales to Spectrian decreased by $430,000. Spectrian reduced their requirements in the first quarter of 1999. Net sales to Lucent increased by $62,000. Net sales in general were reduced due to low customer requirements. The Company's three largest customers accounted for 55% of the Company's net sales for the first quarter ended March 31, 1999 compared to 54% in the first quarter of 1998. GROSS PROFIT AND COST OF GOODS SOLD Gross profit increased by $450,000 to $777,000 in the first quarter of 1999 from $327,000 in 1998. The increase in gross profit was a result of an increase in net sales of 36%. Gross margin increased to approximately 21% in 1999 from approximately 12% in 1998. Scrap was down approximately 22% due to increased controls and process improvements. During the fourth quarter of 1997, the Company decided to reposition the PC Dynamics subsidiary located in Frisco, Texas. Management decided the PC Dynamics subsidiary did not have a future place in the Company's strategic plans. On March 25, 1999, PC Dynamics sold substantially all of its machinery and equipment, inventory and accounts receivable and assigned all of its outstanding contracts and orders to Performance Interconnect Corporation, a Texas Corporation. The Company also leased its Texas facility to Performance Interconnect Corporation. The building and equipment of PC Dynamics Corporation 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. The building value of PC Dynamics Corporation is recorded in the March 31, 1999 balance sheet as land, buildings and improvements. 7 8 OPERATING EXPENSES General and administrative expenses were $437,000 or 11.9% of net sales in the first quarter of 1999 compared to $426,000 or 15.7% of net sales in the first quarter of 1998. General and administrative expenses consist primarily of salaries and benefits, professional services, depreciation of office equipment, computer systems and occupancy expenses. The first quarter of 1999 included approximately $44,000 of expenses relating to the sale of substantially all the assets of PC Dynamics Corporation. Selling and marketing expenses were $175,000 or 4.8% of net sales in the first quarter of 1999 compared to $161,000 or 5.9% of net sales in the first quarter of 1998. Selling and marketing expenses include the cost of salaries, advertising and promoting the Company's products, and commissions paid to independent sales organizations. Sales commission expense increased $19,000 as a result of higher sales. OPERATING INCOME Operating Income was $164,000 in the first quarter of 1999 compared to an operating loss of $260,000 in the first quarter of 1998, an increase in the operating income of $424,000. The change in operating income reflects primarily the changes in net sales, gross profit and cost of goods sold and operating expenses as discussed above. The change in operating income can be summarized as follows: Increase in net sales $ 116,000 Increase in gross margin 334,000 Increase in operating expenses (26,000) ------------ Increase in operating income $ 424,000 On March 31, 1999, the Company had 49 employees compared to 91 on March 31, 1998. INTEREST INCOME Interest income from short-term investments was $32,000 in the first quarter of 1999 compared to $35,000 in 1998. Royalty income was $6,700 in the first quarter of 1998. INTEREST EXPENSE Interest expense, primarily related to the Company's mortgage obligation on its P C Dynamics facility, was $46,000 in the first quarter of 1999 compared to $57,000 in 1998. GAIN (LOSS) ON DISPOSAL OF FIXED ASSETS The Company recorded a loss of $135,000 on the disposal of fixed assets in the first quarter of 1999 compared to a loss of 8 9 $21,000 in 1998. The loss in the first quarter of 1999 was primarily related to sale of substantially all the machinery and equipment of PC Dynamics Corporation to Performance Interconnect Corporation. INCOME TAXES The Company had an effective tax credit rate of 57.5% in the first quarter of 1999 compared to 41.0% in 1998. LIQUIDITY AND CAPITAL RESOURCES Net cash provided/(used) was $570,000 for the first three months of 1999 compared to ($559,000) for the first three months of 1998. Inventories decreased $296,000. Accounts payable was up $155,000. Capital expenditures were $164,000 for the first three months of 1999, Capital expenditures were $66,000 in the first three months of 1998. The Company collected $893,000 relating to the sale of substantially all of the machinery and equipment, inventory and accounts receivable of PC Dynamics Corporation to Performance Interconnect Corporation. The Company has a mortgage loan of $2,197,010 on the P C Dynamics facility. Interest on this mortgage loan is at 1/2 % over prime rate. The loan is payable in monthly installments of principal and interest and is due 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 accounts receivables through May 1999 at an interest rate of prime plus 0.5%. No balance was outstanding under the line at March 31, 1999. As of March 31, 1999, the Company has $2,197,000 of debt and $4,916,000 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. INFLATION Management believes inflation has not had a material effect on the Company's operation or on its financial position. 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 9 10 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. 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 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 10 11 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 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. 11 12 PART II - OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS None ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data The Company filed a report on Form 8-K dated March 25, 1999 announcing that PC Dynamics Corporation, a wholly owned subsidiary of the Company, sold substantially all of its machinery and equipment, inventory and accounts receivable and assigned all of its outstanding contracts and orders to Performance Interconnect Corporation, a Texas Corporation. 12 13 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. M-WAVE, INC. Date: May 4, 1999 /s/ PAUL H. SCHMITT ------------------------------ Paul H. Schmitt Chief Financial Officer 13 14 EXHIBIT INDEX EXHIBIT NO DESCRIPTION ------- -------------------------------------------------- 27 Financial Data 14 EX-27 2 FINANCIAL DATA SCHEDULE
5 1 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 4915729 0 1367312 0 513851 7313407 12488181 (5096929) 15771818 2316217 1889405 0 0 30698 11146690 15771818 3682818 0 2906236 612443 (141195) 0 0 22944 13204 9740 0 0 0 9740 0.00 0.00
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