-----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, TlkoPz+KT2ruMDTuKlOiz9F7zdaiJZ2IJeubhbA2bu7kqpkuaE2kXFF0EX88gndp P8QdbM3T8NeqsGMV0053XA== 0000950137-99-002851.txt : 19990810 0000950137-99-002851.hdr.sgml : 19990810 ACCESSION NUMBER: 0000950137-99-002851 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990809 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: 99680805 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 QUARTERLY REPORT 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 June 30, 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 August 5, 1999. 1 2 PART I - FINANCIAL INFORMATION Item 1: Financial Statements M~WAVE, Inc. CONSOLIDATED BALANCE SHEETS (Unaudited)
DECEMBER 31, JUNE 30 1998 1999 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents......................................... $3,712,537 $4,504,432 Accounts receivable, net of allowance for doubtful accounts, 1998- $10,000: 1999 $10,000...................................... 1,772,637 1,062,304 Inventories....................................................... 1,583,421 563,697 Refundable income taxes........................................... 0 319,707 Deferred income taxes............................................. 395,987 210,545 Prepaid expenses and other........................................ 99,656 100,858 ----------- ----------- Total current assets.......................................... 7,564,238 6,761,543 PROPERTY, PLANT AND EQUIPMENT: Land, buildings and improvements.................................. 2,360,152 4,967,977 Machinery and equipment........................................... 7,355,774 7,515,763 ----------- ----------- Total property, plant and equipment........................... 9,715,926 12,483,740 Less accumulated depreciation..................................... (4,750,872) (5,345,524) ----------- ----------- Property, plant and equipment-net............................. 4,965,054 7,138,216 NOTE RECEIVABLE....................................................... 0 988,215 ASSETS TO BE DISPOSED OF, NET......................................... 3,233,405 0 OTHER ASSETS.......................................................... 5,677 970 ----------- ----------- TOTAL................................................................. $15,768,374 $14,888,944 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.................................................. $1,306,348 $1,010,794 Accrued expenses.................................................. 607,628 416,612 Current portion of long-term debt................................. 307,605 307,605 ----------- ----------- Total current liabilities..................................... 2,221,581 1,735,011 DEFERRED INCOME TAXES................................................. 388,808 388,808 LONG-TERM DEBT........................................................ 1,990,337 1,813,706 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 June 30, 1999............................. 30,698 30,698 Additional paid-in capital........................................ 8,348,832 8,348,832 Retained earnings ................................................ 4,464,226 4,247,997 Treasury stock: 801,964 shares, at cost.......................... (1,676,108) (1,676,108) ----------- ----------- Total stockholders' equity ................................... 11,167,648 10,951,419 ----------- ----------- TOTAL................................................................. $15,768,374 $14,888,944 =========== ===========
See notes to consolidated financial statements. 2 3 M~WAVE, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three months ended June 30, --------------------------- 1998 1999 ------------ ------------ Net sales........................................... $3,359,187 $1,896,866 Cost of goods sold.................................. 2,697,651 1,896,882 ------------ ------------ Gross profit (loss)............................... 661,536 (16) Operating expenses: General and administrative........................ 437,029 311,051 Selling and marketing............................. 147,695 122,844 ------------ ------------ Total operating expenses........................ 584,724 433,895 ------------ ------------ Operating income (loss)........................... 76,812 (433,911) Other income (expense): Interest income................................... 30,428 69,314 Interest expense.................................. (56,251) (59,843) Rental income..................................... 0 51,000 Gain (loss) on disposal of assets................. 60,206 0 ------------ ------------ Total other income (expense) 34,383 60,471 ------------ ------------ Income (loss) before income taxes.............. 111,195 (373,440) Provision (credit) for income taxes................. 42,016 (147,472) ------------ ------------ Net income (loss)................................... $69,179 ($225,968) ============ ============ Net income (loss) per share basic and diluted $0.02 ($0.10) Weighted average shares 3,049,806 2,267,842 See notes to consolidated financial statements. 3 4 M~WAVE, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Six months ended June 30, ---------------------------- 1998 1999 ---------- ---------- Net sales...................................... $6,075,280 $5,579,684 Cost of goods sold............................. 5,087,145 4,803,118 ---------- ---------- Gross profit................................. 988,135 776,566 Operating expenses: General and administrative................... 862,568 748,210 Selling and marketing........................ 308,350 298,128 ---------- ---------- Total operating expenses................... 1,170,918 1,046,338 ---------- ---------- Operating (loss)............................. (182,783) (269,772) Other income (expense): Interest income.............................. 71,993 101,594 Interest expense............................. (113,692) (106,234) Rental income................................ 0 59,000 Gain (loss) on disposal of assets............ 38,806 (135,084) ---------- ---------- Total other income (expense) (2,893) (80,724) ---------- ---------- Loss before income taxes.................. (185,676) (350,496) Credit for income taxes........................ (79,790) (134,268) ---------- ---------- Net loss....................................... ($105,886) ($216,228) ========== ========== Net loss per share basic and diluted ($0.03) ($0.10) Weighted average shares 3,049,806 2,267,842 See notes to consolidated financial statements. 4 5 M~WAVE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended June 30, -------------------------- 1998 1999 ---------- --------- OPERATING ACTIVITIES: Net loss................................................................... ($105,886) ($216,228) Adjustments to reconcile net loss to net cash flows from operating activities: Gain (loss) on disposal of property, plant and equipment............... ($38,806) $135,084 Depreciation and amortization.......................................... $502,633 $498,055 Deferred income taxes.................................................. $192,278 $185,442 Changes in assets and liabilities: Accounts receivable-trade.............................................. ($249,147) $95,303 Inventories............................................................ ($440,071) $246,245 Income taxes........................................................... ($272,068) ($319,707) Prepaid expenses and other assets...................................... ($35,711) ($15,063) Accounts payable....................................................... $426,484 ($306,751) Accrued expenses....................................................... ($374,385) ($150,601) ---------- --------- Net cash flows from operating activities............................ ($394,679) $151,779 ---------- --------- INVESTING ACTIVITIES: Purchase of property, plant and equipment.................................. ($141,126) ($159,480) Proceeds from sale of property, plant and equipment........................ $176,800 $4,619 Proceeds from notes receivable............................................. $0 $78,289 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............................ $35,674 $816,747 FINANCING ACTIVITIES: Payments on long term debt................................................. ($151,526) ($176,631) ---------- --------- Net cash flows from financing activities............................ ($151,526) ($176,631) ---------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... ($510,531) $791,895 CASH AND CASH EQUIVALENTS - Beginning of period.............................. $3,534,315 $3,712,537 ---------- --------- CASH AND CASH EQUIVALENTS - End of period.................................... $3,023,784 $4,504,432 ========== ========== Supplemental Disclosures of Cash Flow Information: Cash paid during the period for interest................................. $113,692 $106,234
See notes to consolidated financial statements. 5 6 M~WAVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 1998 filed March 30, 1999. 2. BUSINESS M~Wave, through its wholly-owned subsidiaries, Poly Circuits Inc. and P C 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. The Company has collected $100,000 through June 30, 1999. 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 6 7 excess of $500,000 in aggregate royalty payments. The Company has collected $20,000 through June 30,1999. 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 are in work in process. 4. DEBT The Company has a mortgage loan of $2,121,000 for the facility at P C Dynamics Corporation in Frisco, Texas. Interest on this mortgage loan is at 1/2 % over the prime rate. The loan is payable in monthly installments of principal and interest and is due in October 2001. The Company has a $2,000,000 line of credit available based on 80% of the eligible accounts receivable to fund the working capital needs of the Company. Interest is at the prime rate (8.00% at June 30, 1999) plus 1/2%. The agreement expires May 31, 2000 and is renewable annually at the mutual consent of the Company and the lender. No balance was outstanding under the line at June 30, 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 this litigation will not have a material adverse effect on the financial position or results of operations of the Company. 7 8 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS FOR THE QUARTER ENDED JUNE 30, 1999 COMPARED TO THE QUARTER ENDED JUNE 30, 1998 NET SALES Net sales were $1,897,000 for the second quarter ended June 30, 1999, a decrease of $1,462,000 or 44% below the second quarter of 1998. Part of the decline ($1,139,000) was the result of the Company selling off substantially all of the assets of P C Dynamics Corporation. The Company also experienced excessive scrap with recent Lucent start-up orders, which negatively impacted net sales by approximately $220,000. Net sales to Lucent increased by $495,000 from the second quarter of 1998. Net sales to Spectrian decreased by $1,116,000. The Company's three largest customers accounted for 72% of the Company's net sales for the second quarter ended June 30, 1999 compared to 65% in the second quarter of 1998. GROSS PROFIT AND COST OF GOODS SOLD The Company was approximately breakeven at the Gross Profit level for the second quarter of 1999. This was a decrease of $662,000 from the second quarter of 1998. A portion of the decline ($227,000) was the result of the Company selling off substantially all of the assets of P C Dynamics Corporation. Additional decline in gross profit of $65,000 relates to lower sales volume as result of manufacturing inefficiencies relating to the Lucent start-up orders. The Company also experienced excessive scrap costs of $130,000 and rework costs of approximately $100,000 relating to the Lucent start-up production. During the fourth quarter of 1997, the Company decided to reposition the PC 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. 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 June 30, 1999 balance sheet as land, buildings and improvements. 8 9 OPERATING EXPENSES General and administrative expenses were $311,000 or 16.4% of net sales in the second quarter of 1999 compared to $437,000 or 13.3% of net sales in the second quarter of 1998. General and administrative expenses consist primarily of salaries and benefits, professional services, depreciation of office equipment, computer systems and occupancy expenses. Most of the decline was the result of the Company selling off substantially all of the assets of P C Dynamics Corporation. Selling and marketing expenses were $123,000 or 6.5% of net sales in the second quarter of 1999 compared to $148,000 or 4.4% of net sales in the second 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. Selling and marketing expenses declined as a result of the Company selling off substantially all of the assets of P C Dynamics Corporation. OPERATING LOSS Operating loss was $434,000 or 22.9% in the second quarter of 1999 compared to a operating income of $77,000 or 2.3% of net sales in the second quarter of 1998, an decrease of $511,000. The changes in operating income reflect primarily the changes in net sales, gross profit and cost of goods sold and operating expenses as discussed above. The change in operating income can be summarized as follows: Decrease in net sales $ (288,000) Decrease in gross margin (373,000) Decrease in operating expenses 150,000 ----------- Decrease in operating income $ (511,000) INTEREST INCOME Interest income from short-term investments was $43,000 in the second quarter of 1999 compared to $30,000 in the second quarter of 1998. Interest income in the second quarter of 1999 includes $26,000 from notes receivable, generated in the sale of the assets of P C Dynamics. Rental income from the P C Dynamics facility was $51,000 in the second quarter of 1999. INTEREST EXPENSE Interest expense, primarily related to the Company's mortgage obligation on its P C Dynamics facility, was $60,000 in the second quarter of 1999 compared to $30,000 in the second quarter of 1998. 9 10 GAIN (LOSS) ON DISPOSAL OF FIXED ASSETS The Company recorded a gain of $60,000 on the disposal of fixed assets in the second quarter of 1998. INCOME TAXES In the second quarter of 1999 the Company had an effective tax credit rate of 39.4%. In the second quarter of 1998 the Company had an effective tax rate of 37.8%. 10 11 RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998 NET SALES Net sales were $5,580,000 for the six months ended June 30, 1999, a decrease of $496,000 or 8% below the first six months of 1998. Part of the difference ($1,379,000) was the result of the Company selling off substantially all the assets of P C Dynamics Corporation. This was offset by a final shipment to Motorola of a matured product line of $1,300,000 in the first quarter of 1999. Net sales to Lucent increased $558,000. Net sales to Spectrian decreased by $1,546,000. Net sales to Spectrian have been declining from last year's volume since the beginning of the fiscal year. However, net sales to Spectrian have increased by approximately $100,000 from the first quarter of 1999. The Company's three largest customers accounted for 58% of the Company's net sales for the six months ended June 30, 1999 compared to 59% for the six months ended June 30, 1998. GROSS PROFIT (LOSS) AND COST OF GOODS SOLD Gross profit decreased $212,000 in the first six months of 1999 from $988,000 in the first six months of 1998. Part of the difference ($295,000) was the result of the Company selling off substantially all of the assets of P C Dynamics Corporation. Gross margin for the remainder of the Company increased approximately $80,000 due to increased sales. The Company did experience excessive scrap and rework costs of $230,000 in the second quarter of 1999 relating to the Lucent start-up orders. During the fourth quarter of 1997, the Company decided to reposition the PC 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. 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 June 30, 1999 balance sheet as land, buildings and improvements. OPERATING EXPENSES General and administrative expenses were $748,000 or 13.4% of net sales for the first six months of 1999 compared to $863,000 or 11 12 14.2% of net sales for the first six months of 1998. General and administrative expenses consist primarily of salaries and benefits, professional services, depreciation of office equipment, computer systems and occupancy expenses. Most of the decline was the result of the Company selling off substantially all of the assets of P C Dynamics Corporation. Selling and marketing expenses were $298,000 or 5.3% of net sales for the first six months of 1999 compared to $308,000 or 5.1% of net sales for the first six months 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. Selling and marketing expenses declined as a result of the Company selling off substantially all of the assets of P C Dynamics Corporation. OPERATING (LOSS) Operating loss was ($270,000) for the first six months of 1999 compared to ($183,000) for the first six months of 1998, a increase of $87,000. The changes in operating loss reflect primarily the changes in net sales, gross profit and cost of goods sold and operating expenses as discussed above. The change in operating loss can be summarized as follows: Decrease in net sales $ (81,000) Decrease in gross margin (131,000) Decrease in operating expenses 125,000 ----------- Increase in operating loss $ (87,000) INTEREST INCOME Interest income from short-term investments was $76,000 for the six months ended June 30, 1999 compared to $72,000 for the six months ended June 30, 1998. Interest income for the six months ended June 30, 1999 includes $26,000 from notes receivable, generated in the sale of substantially all of the assets of P C Dynamics Corporation. Rental income from the P C Dynamics facility was $59,000 for the six months ended June 30, 1999. INTEREST EXPENSE Interest expense, primarily related to the Company's mortgage obligation on its P C Dynamics facility, was $106,000 for the first six months of 1999 compared to $114,000 for the first six months of 1998. GAIN ON DISPOSAL OF ASSETS The Company recorded a loss of $135,000 on the disposal of fixed assets in the first six months of 1999 compared to a gain of $39,000 for the first six months of 1998. The loss in the first six months of 1999 was primarily related to the sale of 12 13 substantially all the machinery and equipment of P C Dynamics to Performance Interconnect Corporation. INCOME TAXES For the first six months of 1999 the Company had an effective tax credit rate of 38.3%. For the first six months of 1998 the Company had an effective tax credit rate of 43.0% due to the effects of state income taxes. LIQUIDITY AND CAPITAL RESOURCES Net cash provided/(used) from operations was $152,000 for the first six months of 1999 compared to ($537,000) for the first six months of 1998. Inventories decreased $246,000. Accounts receivable decreased $95,000. Accounts payable decreased $307,000. Capital expenditures to improve manufacturing processes were $159,000 in the first six months of 1999. Capital expenditures to improve manufacturing processes were $95,000 in the first six months of 1998. The Company collected $972,000 relating to the sale of substantially all the machinery and equipment, inventory and accounts receivable of P C Dynamics to Performance Interconnect Corporation. The Company has a mortgage loan of $2,121,000 for the facility at P C Dynamics Corporation in Frisco, Texas. Interest on this mortgage loan is at 1/2 % over the prime rate. The loan is payable in monthly installments of principal and interest and is due in October 2001. The Company has a $2,000,000 line of credit available based on 80% of the eligible accounts receivable to fund the working capital needs of the Company. Interest is at the prime rate (8.00% at June 30, 1999) plus 1/2%. The agreement expires May 31, 2000 and is renewable annually at the mutual consent of the Company and the lender. No balance was outstanding under the line at June 30, 1999. As of June 30, 1999, the company has $2,121,000 of debt and $4,504,000 of cash and cash equivalents. Management believes that funds generated from operations, coupled with the Company's cash and investment balances and its capacity for debt will be sufficient to fund current business operations. INFLATION Management believes inflation has not had a material effect on the Company's operation or on its financial position. 13 14 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 the third quarter of 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 incurred approximately $62,000 to date and expects to incur approximately $35,000 in the third quarter of 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. 14 15 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. 15 16 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. 16 17 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. M~WAVE, INC. Date: August 6, 1999 /s/ PAUL H. SCHMITT ------------------------------ Paul H. Schmitt Chief Financial Officer 17 18 EXHIBIT INDEX Exhibit No Description ------- -------------------------------------------- 27 Financial Data 18 EX-27 2 FDS
5 0000883842 M-WAVE INC. 1 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 4,504,432 0 1,062,304 0 563,697 6,761,543 12,483,740 (5,345,524) 14,888,944 1,735,011 1,813,706 0 0 30,698 10,920,721 14,888,944 5,579,684 0 4,803,118 1,046,338 (80,724) 0 0 (350,496) (134,268) (216,228) 0 0 0 (216,228) (0.10) (0.10)
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