<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
SECURITIES ACT OF 1934.
For the quarterly period ended September 30, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
ACT.
For the transition period from to
------------------- --------------------
Commission file number: 0-16919
WAVEMAT INC.
- ----------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 38-2512387
- ----------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
44191 PLYMOUTH OAKS BLVD, STE. 100, PLYMOUTH, MICHIGAN 48170
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(313) 454-0020
- ----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
--- ---
As of September 29, 1997, the registrant had 10,182,125 shares of its
Common Stock, $.01 par value outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WAVEMAT INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
OPERATING REVENUE: ------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
Microwave processing system sales $22,013 $146,391 $135,607 $227,180
Microwave processing system sales
- affiliate - - - 17,306
Contract research and development
- affiliate 50,000 - 100,000 -
------------- ------------- --------------- --------------
Total operating revenue 72,013 146,391 235,607 244,486
------------- ------------- --------------- --------------
OPERATING COSTS AND EXPENSES:
Cost of sales 42,884 84,014 136,826 169,185
Research and development 16,307 18,935 57,780 67,369
Selling, general and administrative 143,308 182,544 440,971 525,676
Royalty expense - affiliate - - 5,583 12,992
------------- ------------- --------------- --------------
Total operating costs and expenses 202,499 285,493 641,160 775,222
------------- ------------- --------------- --------------
Operating loss (130,486) (139,102) (405,553) (530,736)
OTHER INCOME (EXPENSE):
Miscellneous income 1,688 - 5,085 -
Interest income 37 31 76 110
Interest expense (6,408) 1,720 (5,802) (1,331)
Interest expense - affiliate (50,397) (40,942) (144,962) (112,750)
------------- ------------- --------------- --------------
Other expense, net (55,080) (39,191) (145,603) (113,971)
------------- ------------- --------------- --------------
NET LOSS ($185,566) ($178,293) ($551,156) ($644,707)
------------- ------------- --------------- --------------
NET LOSS PER SHARE OF
COMMON STOCK ($0.02) ($0.02) ($0.05) ($0.06)
------------- ------------- --------------- --------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 10,182,125 10,182,125 10,182,125 10,182,125
============= ============= =============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 3
WAVEMAT INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------------
1997 1996
---------- ------------
<S> <C> <C>
CASH, BEGINNING OF PERIOD $ --- $ ---
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (551,156) (644,707)
Adjustments to reconcile net loss
to net cash provided by (used in) operating
activities:
Depreciation and amortization 41,138 41,595
Changes in current assets and liabilities:
Accounts receivable 7,163 7,906
Inventory (153,323) 43,296
Prepaid expenses (540) 2,469
Bank overdraft (61,783) (1,512)
Short-term borrowings 125,000 ---
Short-term borrowings - affiliate 245,600 369,200
Accounts payable 178,837 (47,052)
Accounts payable - affiliate 7,207 14,267
Accrued liabilities 217,760 297,475
Customer deposits (4,149) (9,665)
Customer deposits - affiliate (25,600) ---
--------- ---------
Net cash provided by operating activities 26,154 73,272
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold
improvements (12,862) (42,630)
Increase in deferred patent costs (13,292) (30,642)
--------- ---------
Net cash used in investing activities (26,154) (73,272)
CASH FLOWS FROM FINANCING ACTIVITIES:
--- ---
--------- ---------
Net cash used in financing activities --- ---
--------- ---------
INCREASE IN CASH --- ---
--------- ---------
CASH, END OF PERIOD $ --- $ ---
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest payments $ 1,139 $ 694
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
WAVEMAT INC.
STATEMENT OF FINANCIAL POSITION
(Unaudited)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30,
1997
--------------
<S> <C>
CURRENT ASSETS:
Accounts receivable $ 12,313
Inventory 214,524
Prepaid expenses 4,938
--------------
Total current assets 231,775
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net of accumulated
depreciation and amortization of $596,355 66,921
LICENSE AGREEMENT, net of accumulated amortization
of $20,625 15,647
PURCHASED TECHNOLOGY, net of accumulated amortization
of $101,562 223,438
DEFERRED PATENT COSTS -affiliate 192,209
OTHER ASSETS 18,504
--------------
Total assets $ 748,494
==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank overdraft $ 33,918
Short-term borrowings 125,000
Short-term borrowings - affiliate 1,928,665
Accounts payable 481,552
Accounts payable - affiliate 65,319
Accrued liabilities 1,003,423
Customer deposits 31,965
Customer deposits - affiliate 102,643
--------------
Total current liabilities 3,772,485
SHAREHOLDERS' DEFICIT:
Preferred stock, $.10 par value, 1,000,000 shares authorized
and 4,000 shares ($399,600 aggregate liquidation preference)
issued and outstanding 400,000
Common stock, $.01 par value, 20,000,000 shares authorized and
10,182,125 shares issued and outstanding 101,821
Additional paid-in capital 4,677,174
Accumulated deficit (8,202,986)
--------------
Shareholders' deficit (3,023,991)
--------------
Total liabilities and shareholders' deficit $ 748,494
==============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
WAVEMAT, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
Except as the context otherwise indicates the term the "Company" refers
to Wavemat Inc.
In the opinion of management, all adjustments (consisting primarily of
normal recurring accruals) considered necessary for a fair presentation
have been included. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report
on Form 10-KSB for the year ended December 31,1996.
(2) DETAILS TO STATEMENTS OF FINANCIAL POSITION
Inventory consisted of the following:
September 30, 1997
------------------
Raw materials $ 33,886
Consignment 24,400
Work-in-process 156,238
---------
$ 214,524
---------
A summary of Accrued Liabilities follows:
September 30, 1997
------------------
Accrued legal & audit $ 37,088
Royalties - affiliate 55,434
Commissions 60,391
Accrued Payroll 81,141
Deferred compensation 229,279
Accrued interest-affiliate 426,696
Other 113,394
-----------
$ 1,003,423
-----------
(3) LICENSE AGREEMENT
On September 30, 1997, the Company failed to comply with the terms of the
Exclusive License Agreement between Wavemat, Inc. and Michigan State
University ("MSU"), an affiliate of the Company, originally dated January
15, 1998, as amended from time to time and by a payment plan modification
agreement dated December 6, 1996 as amended from time to time. (See Item
5 - Other Information - to the Financial Statements).
4
<PAGE> 6
WAVEMAT, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(4) SHORT TERM BORROWINGS
On June 16, 1997, the Company entered into a $125,000 line of credit
arrangement with a bank with such credit line carrying an interest rate
on outstanding balances of two percent above the prevailing prime rate of
a major bank. The Company paid no commitment fee for the arrangement of
the line of credit. This line of credit is secured pursuant to a
guarantee agreement between Venture Funding, Ltd. ("Venture"), a
significant shareholder of the Company and the lending bank. The Company
has drawn $125,000 against this line of credit and has accrued $3,865 of
interest pertaining to this obligation at an interest rate of 10.50
percent as of September 30, 1997. The amounts borrowed pursuant to this
line of credit were payable by the Company as of October 14, 1997, but
was extended to November 30, 1997.
(5) SHORT TERM BORROWINGS - AFFILIATE
On April 7, 1994, the Company finalized a $350,000 revolving Line of
Credit Promissory Note with Growth Funding, Ltd. ("Growth"), a
wholly-owned subsidiary of Venture, a significant shareholder of the
Company, with such credit line carrying an interest rate on outstanding
balances of 2 percent above the prevailing prime rate of a major bank
with such interest rate ranging from 8.25 percent per annum to 10.75
percent annum for the period of April 7, 1994 through September 30, 1997.
The Company had utilized this entire line of credit during 1994. Amounts
borrowed pursuant to this line of credit are payable by the Company on
demand. The Company made payments of $12,000 in 1995, reducing the line
of credit Promissory Note to $338,000. In addition, this Promissory Note
is to be repaid, pursuant to an Agreement between the Company and Norton
Diamond Film Division ("Norton") of Saint-Gobain/Norton Industrial
Ceramics Corporation, an affiliate of the Company, dated August 9, 1994,
in which Norton agreed to waive their standard 20% discount from the
prevailing list price for its purchases from the Company provided this
20% discount is used to first repay accrued interest and then principal
5
<PAGE> 7
WAVEMAT, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
owing on the outstanding balance to Venture until the balance is repaid
in full.
On August 18, 1994, the Company issued a Convertible Debenture
("Debenture") to Growth, for the principal amount of $724,575 with the
interest accruing on the outstanding balance at a rate of 2 percent above
the prime rate of a major bank with such rate ranging from 9.75 percent
per annum to 11.00 percent per annum for the period from August 12, 1994
through September 30,1997. The Debenture amount of $724,575 represents
amounts owed by the Company to Venture in relation to a promissory
note($125,000), plus related accrued interest ($23,603), deferred
compensation ($261,139), accrued royalties ($212,591), and other
miscellaneous liabilities ($102,242). The Debenture has an exercise
price of $.5630 per share of common stock.
On October 27, 1995, by resolution of the Board of Directors, the
exercise price of the Debenture issued to Growth on August 18, 1994 was
reduced from $.5630 to $.1563 per share of common stock, the average of
the bid-ask price of the Company's common stock on that date in
consideration for financing and contributions of capital provided to the
Company during 1995. On the same date, $600,000 of the debt owed Growth
under the Debenture was converted to 3,838,772 shares of the Company's
common stock. There remains a balance due of $124,574 under the
Convertible Debenture.
On December 1, 1994, the Company entered into a $100,000 line of credit
arrangement evidenced by a promissory note with Growth. The amounts
borrowed pursuant to this line of credit are payable by the Company on
demand. The Company has utilized $100,000 of the line of credit by
December 31, 1995. The applicable interest rate is at 2 percentage
points above the prime rate of a major bank with such interest rates
ranging from 9.75 percent per annum to 10.5 percent per annum for the
period ending September 30, 1997.
On January 4, 1995, the Company entered into a line of credit arrangement
evidenced by a promissory note with Growth. The amounts borrowed
pursuant to this line of credit are payable on demand. The Company has
drawn $1,334,090 on this line of credit as of September 30, 1997. The
applicable interest rate is 2 percentage points above the prime rate of a
major bank with such interest rates ranging from 10.25 percent per annum
to 11.00 percent per annum for the period from January 4, 1995 through
September 30, 1997.
6
<PAGE> 8
WAVEMAT, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
On December 3, 1996, the Company entered into a $25,000 line of
credit arrangement evidenced by a promissory note with Growth. The
amounts borrowed pursuant to the line of credit are payable by the
Company on demand. The Company had drawn $25,000 on this line of credit
in 1996. The applicable interest rate is at 2 percentage points above
the prime rate rate of a major bank with such interest rate ranging from
10.25 percent per annum to 10.50 percent per annum for the period from
December 3, 1996 through September 30, 1997.
On December 20, 1996, the Company entered into $3,500 line of credit
arrangement evidenced by a promissory note with Growth. The amounts
borrowed pursuant to the line of credit are payable by the Company on
demand. The Company had utilized $3,500 of the line of credit in 1996.
The applicable interest rate is at 2 percentage points above the prime
rate of a major bank with such interest rate ranging from 10.25 percent
per annum to 10.50 percent per annum for the period from December 20,
1996 through September 30, 1997.
On January 9, 1997, the Company entered into a $3,500 line of credit
arrangement evidenced by a promissory note with Growth. The amounts
borrowed pursuant to the line of credit are payable by the Company on
demand. The Company had utilized $3,500 of the line of credit by March
31, 1997. The applicable interest rate is at 2 percentage points above
the prime rate of a major bank with such interest rate ranging from 10.25
percent per annum to 10.50 percent per annum for the period from January
9, 1997 through September 30, 1997.
(6) COMMITMENTS AND CONTINGENCIES
GOING CONCERN
The Company has incurred operating losses and generated cash flow
deficits from operating activities since inception, therefore, the
Company's ability to continue as a going concern is contingent upon its
ability to raise additional funds to support its activities.
The Company is relying on sales of its microwave processing systems to
provide additional working capital. The Company
7
<PAGE> 9
WAVEMAT, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
is also continuously evaluating acquisitions of technologies and/or
entities owning such technologies which are compatible to the Company's
business strategies with the intention of increasing the Company's
revenue generating capabilities. In addition, the Company is continuing
to seek capital from various sources of funding such as additional term
loans, lines of credit, corporate partners and sales of equity
securities. However, there is no assurance that the required amount of
additional funds can be raised.
8
<PAGE> 10
WAVEMAT, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 1996
Operating loss declined slightly during the 1997 quarter and significantly for
the nine-month period as a result of a substantial decline in operating costs
and expenses, more than off-setting the decline in operating revenue.
Operating revenue declined because of significant decrease in microwave
processing system sales for the three month period and to a lesser extent for
the nine-month period. Microwave process system orders have been
negatively impacted by the fact that the Company is in the process of
establishing an international market for its products. Contract research and
development revenue increased as a result of increased sponsored research and
development activity. Operating expenses decreased significantly primarily as a
result of lower cost of sales, research and development activities and selling,
general and administrative expense.
The decline in cost of sales was attributable to lower microwave processing
system sales mentioned above. The increase in gross margin were the result of
under utilized capacity. Research and development expenses declined slightly
due to lower non-sponsored research activities performed by the Company.
Selling, general and administrative expenses declined due to lower promotional
and sales administrative expenses. Royalty expense decreased for the
nine-month period because of lower sales activity.
Net loss increased for the 1997 quarter as a result of the increased other
expense, net due to higher borrowing and related interest cost. Net loss
declined for the 1997 nine-month period as the result of the decrease in
operating loss mentioned above.
FINANCIAL CONDITION
SEPTEMBER 30, 1997 COMPARED TO DECEMBER 31, 1996
9
<PAGE> 11
WAVEMAT, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The Company continued to have difficulty meeting its cash requirements
and obligations during the nine months of 1997. For the nine months ended
September 30, 1997, the Company continued to defer payment of all or a portion
of compensation of certain management personnel to conserve cash for operating
purposes. Deferred compensation costs of the Company amounted to $229,279 as
of September 30, 1997. The Company was also in arrears pertaining to other
obligations in the amount of $257,536 as of September 30, 1997.
Obligations which the Company met during the three months of 1997 were
satisfied through sales of the Company's microwave processing systems and
contracted research and development activities, customer deposits, lines of
credit and short-term borrowings.
As indicated in Note 6 to the Financial Statements, the Company has incurred
operating losses and generated cash flow deficits from operating activities
since its inception, therefore, the Company's ability to continue as a going
concern is contingent upon its ability to raise additional funds to support its
activities. At September 30, 1997, the Company had a negative working capital
position of $3,540,710 compared to a negative working capital position of
$3,004,700 at December 31, 1996.
The Company is attempting to generate working capital through the sale of its
microwave processing systems and through its contract research and development
activities. As of September 30, 1997, the Company had a backlog of open sales
orders, net, of customer deposits, amounting to $201,678. Subject to various
qualifications and assuming no change in delivery dates or in the shipment of
orders in the normal course of business, management expects, although there can
be no assurance, to ship all of the above mentioned backlog and collect the
applicable cash proceeds during 1997.
The Company must increase its backlog of open sales orders substantially and
obtain additional product development assistance to adequately support its
activities. The Company is continuously evaluating acquisitions of
technologies and/or entities owning such technologies which are compatible to
the Company's business strategies with the intention of increasing the
Company's revenue generating capabilities. In addition, the Company is
continuing to seek funding from various other sources such as additional term
loans, lines of credit, corporate
10
<PAGE> 12
WAVEMAT, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
partners and equity financing. However, there is no assurance that the
required amount of additional funds can be raised.
ITEM 5. OTHER INFORMATION
On October 30, 1997, the Company was notified by MSU of being in failure to
comply with the terms of the License Agreement originally dated January 15,
1988, as amended from time to time and the payment plan letter agreement
between the Company and MSU, dated December 6, 1996, as amended from time to
time.
On November 7, 1997, Venture Funding Ltd., an affiliate of the Company, which
had unconditionally guaranteed the December 6, 1996 letter agreement, made a
payment of $136,080 relating to patent and royalty obligations owed by
the Company in order to be in compliance with the above mentioned agreements
with MSU.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - Ex. 27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the Quarter ended
September 30,1997.
11
<PAGE> 13
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WAVEMAT INC.
REGISTRANT
Date: November 19, 1997 BY: /s/ Monis Schuster
----------------------------------------
Monis Schuster, Chairman of the
Board and Chief Executive Officer
(Principal Operating Officer)
Date: November 19, 1997 BY: /s/ Sharon K. Zitnik
----------------------------------------
Sharon K. Zitnik, Vice President
Treasurer, Secretary and Chief Financial
Officer (Principal Financial Officer)
12
<PAGE> 14
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
EX-27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> (33,918)
<SECURITIES> 0
<RECEIVABLES> 12,313
<ALLOWANCES> 0
<INVENTORY> 214,524
<CURRENT-ASSETS> 231,775
<PP&E> 663,276
<DEPRECIATION> 596,355
<TOTAL-ASSETS> 748,494
<CURRENT-LIABILITIES> 3,772,485
<BONDS> 0
0
400,000
<COMMON> 101,822
<OTHER-SE> (3,525,812)
<TOTAL-LIABILITY-AND-EQUITY> 748,494
<SALES> 235,607
<TOTAL-REVENUES> 235,607
<CGS> 136,826
<TOTAL-COSTS> 641,160
<OTHER-EXPENSES> 145,603
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 150,764
<INCOME-PRETAX> (551,156)
<INCOME-TAX> 0
<INCOME-CONTINUING> (551,156)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (551,156)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> 0
</TABLE>
