<PAGE> 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, 1996 Commission File No. 0-19944
- ----------------------------------- -----------------------------
M~WAVE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3809819
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
216 Evergreen Street, Bensenville, Illinois 60106
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (630) 860-9542
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 and 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
The registrant has 3,021,625 shares of common stock outstanding at August 6,
1996.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
M~WAVE, Inc.
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...................................... $2,403,747 $374,026
Marketable securities.......................................... 1,321,358 1,072,791
Accounts receivable,net of allowance
for doubtful accounts of $10,000............................. 4,106,494 4,016,950
Inventories.................................................... 3,462,200 2,902,814
Refundable income taxes........................................ 639,112 1,170,528
Deferred income taxes.......................................... 154,682 604,790
Prepaid expenses and other..................................... 331,010 185,434
------------ ------------
Total current assets....................................... 12,418,603 10,327,333
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements............................... 2,680,882 5,997,670
Machinery and equipment........................................ 10,043,357 11,076,371
------------ ------------
Total property, plant and equipment........................ 12,724,239 17,074,041
Less accumulated depreciation.................................. (2,629,466) (3,331,572)
------------ ------------
Property, plant and equipment-net.......................... 10,094,773 13,742,469
GOODWILL........................................................... 873,636 822,744
OTHER ASSETS....................................................... 20,811 24,010
------------ ------------
TOTAL.............................................................. $23,407,823 $24,916,556
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit borrowings...................................... $ 0 $ 500,000
Accounts payable............................................... 1,734,831 2,394,827
Accrued expenses............................................... 1,163,692 1,538,557
Current portion of long-term debt.............................. 409,338 601,742
------------ ------------
Total current liabilities.................................. 3,307,861 5,035,126
DEFERRED INCOME TAXES.............................................. 723,130 723,130
LONG-TERM DEBT..................................................... 11,239 2,249,797
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized, 1,000,000
shares; no shares issued.....................................
Common stock, $.01 par value; authorized, 10,000,000 shares
3,041,625 shares issued and 3,020,375 shares outstanding
at December 31, 1995 and 3,021,625 shares outstanding
at June 30, 1996.......................................... 30,404 30,416
Additional paid-in capital..................................... 7,488,422 7,492,472
Retained earnings ............................................. 11,966,767 9,505,615
Treasury stock: 20,000 shares, at cost........................ (120,000) (120,000)
------------ ------------
Total stockholders' equity ................................ 19,365,593 16,908,503
------------ ------------
TOTAL.............................................................. $23,407,823 $24,916,556
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 3
M~WAVE, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30,
--------------------------------
1995 1996
---------- -----------
<S> <C> <C>
Net sales................................... $8,676,978 $6,340,968
Cost of goods sold.......................... 6,484,036 5,554,127
---------- -----------
Gross profit.............................. 2,192,942 786,841
Operating expenses:
General and administrative................ 569,429 632,324
Selling and marketing..................... 438,167 439,782
Research and development.................. 136,374 184,572
---------- -----------
Total operating expenses................ 1,143,970 1,256,678
Operating income (loss) .................. 1,048,972 (469,837)
Other income (expense):
Interest income........................... 174,190 17,957
Interest expense.......................... (15,999) (55,130)
---------- -----------
Total other income (expense) 158,191 (37,173)
Income (loss) before income taxes...... 1,207,163 (507,010)
Provision (credit) for income taxes......... 478,314 (172,201)
---------- -----------
Net income (loss)........................... $728,849 ($334,809)
========== ===========
Net income (loss) per share $0.24 ($0.11)
Weighted average shares 3,080,176 3,020,526
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
M~WAVE, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 3
--------------------------------
1995 1996
----------- ------------
<S> <C> <C>
Net sales................................... $16,711,156 $12,597,526
Cost of goods sold.......................... 11,982,413 13,644,906
----------- ------------
Gross profit (loss)....................... 4,728,743 (1,047,380)
Operating expenses:
General and administrative................ 1,128,465 1,369,016
Selling and marketing..................... 845,107 923,185
Research and development.................. 248,638 305,927
----------- ------------
Total operating expenses................ 2,222,210 2,598,128
Operating income (loss) .................. 2,506,533 (3,645,508)
Other income (expense):
Interest income........................... 254,467 47,508
Interest expense.......................... (31,998) (113,134)
Loss on disposal of assets................ 0 (149,751)
----------- ------------
Total other income (expense) 222,469 (215,377)
Income (loss) before income taxes...... 2,729,002 (3,860,885)
Provision (credit) for income taxes......... 1,083,102 (1,399,732)
----------- ------------
Net income (loss)........................... $1,645,900 ($2,461,153)
=========== ============
Net income (loss) per share $0.54 ($0.81)
Weighted average shares 3,069,102 3,020,451
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
M~WAVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------
1995 1996
---------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).............................................. $1,645,900 ($2,461,153)
Adjustments to reconcile net income (loss) to net cash flows
from operating activities:
Depreciation and amortization.............................. 528,201 752,998
Deferred income taxes...................................... 130,717 (450,108)
Changes in assets and liabilities:
Accounts receivable-trade.................................. (1,039,389) 89,544
Insurance proceeds receivable.............................. 1,065,021 0
Inventories................................................ (577,084) 559,386
Income taxes............................................... (123,374) (531,416)
Prepaid expenses and other assets.......................... (89,348) 142,378
Accounts payable........................................... (273,252) 659,996
Accrued expenses........................................... (472,270) 374,865
---------- ------------
Net cash flows from operating activities................ 795,122 (863,510)
---------- ------------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment...................... (2,673,142) (4,349,802)
Redemption of marketable securities, net....................... 0 248,567
Collection of notes receivable................................. 9,430 0
---------- ------------
Net cash flows from investing activities................ (2,663,712) (4,101,235)
---------- ------------
FINANCING ACTIVITIES:
Common stock issued upon exercise of stock options............. 122,275 4,062
Line of credit borrowings...................................... 500,000
Mortgage debt incurred......................................... 2,439,323
Payments on capital leases..................................... (16,123) (8,361)
---------- ------------
Net cash flows from financing activities................ 106,152 2,935,024
---------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS........................ (1,762,438) (2,029,721)
CASH AND CASH EQUIVALENTS - Beginning of period.................. 6,868,823 2,403,747
---------- ------------
CASH AND CASH EQUIVALENTS - End of period........................ $5,106,385 $ 374,026
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest..................... $ 113,134
Cash paid during the period for income taxes................. $ 983,500
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 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, 1995 filed
March 29, 1996.
2. BUSINESS
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. In 1995, the
Company established a division that does contract assembly work
for customers.
4. INVENTORIES
Substantially all the Company's inventories are in work in
process.
5. DEBT
The Company has borrowed $2,439,000 at June 30, 1996 against
a total financing commitment of $2,954,000 for the construction of
the new P C Dynamics Corporation facility in Frisco, Texas.
Interest on this mortgage debt is at the prime rate. The loan is
payable in monthly installments of principal and interest
beginning September 1996 and ending in August 2001.
The Company has borrowed $500,000 at June 30, 1996 against a
secured promissory note of $2,000,000 to fund the working capital
needs of the Company. The note is due May 31, 1997.
6. LITIGATION
The Company is a party to various actions and proceedings
related to its normal business operations. The Company believes
that the outcome of this litigation will not have a material
adverse effect on the financial position or results of operations
of the Company.
6
<PAGE> 7
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.
The Company believes that this action is without merit. On
January 5, 1996, the Company filed a motion to dismiss the
complaint. On April 26, 1996, this motion to dismiss was denied.
In June 1996, the Plaintiff moved for class certification.
7
<PAGE> 8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS FOR THE QUARTER ENDED JUNE 30, 1996 COMPARED TO THE QUARTER
ENDED JUNE 30, 1995
NET SALES
Net sales were $6,341,000 for the second quarter ended June 30,
1996, a decrease of $2,336,000 or 27% below the second quarter of
1995. The decrease primarily reflects a slowdown in orders from the
Company's largest customers. The reduction in orders from key
accounts began in 1995 and is continuing in 1996.
GROSS PROFIT AND COST OF GOODS SOLD
Gross profit decreased to $787,000 in the second quarter of
1996 from $2,193,000 in the second quarter of 1995. This decrease is
primarily attributable to reduced shipments to the Company's largest
customers, a shift in product mix, and production problems. The
decrease in gross profit includes sales adjustments for pricing and
returns of $228,000 and manufacturing scrap and rework of $127,000.
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.
OPERATING EXPENSES
General and administrative expenses were $632,000 or 10.0% of
net sales in the second quarter of 1996 compared to $569,000 or 6.6%
of net sales in the second quarter of 1995. 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 $214,000 in the second quarter of 1996.
General and administrative expenses consist primarily of salaries
and benefits, professional services, depreciation of office
equipment, computer systems and occupancy expenses.
Selling and marketing expenses were $440,000 or 6.9% of net
sales in the second quarter of 1996 compared to $438,000 or 5.0% of
net sales in the second quarter of 1995. Sales commission expense
was 3.5% of net sales in the second quarter of 1996 compared to 1.7%
of net sales in the second quarter of 1995 due to a change in sales
mix to more commissionable sales. Selling and marketing expenses
include the cost of salaries, advertising and promoting the
Company's products, and commissions paid to independent sales
organizations.
8
<PAGE> 9
Research and development expenses which relate primarily to the
assembly operations were $185,000 or 2.9% of net sales in the second
quarter of 1996 compared to $136,000 or 1.6% of net sales in the
second quarter of 1995. Research and development costs are expensed
as they are incurred.
OPERATING INCOME(LOSS)
Operating loss was ($470,000) in the second quarter of 1996
compared to operating income of $1,049,000 or 12.1% of net sales in
the second quarter of 1995, a decrease of $1,519,000. 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:
<TABLE>
<S> <C>
Decrease in net sales $(591,000)
Decrease in gross margin (815,000)
Increase in operating expenses (113,000)
------------
Decrease in operating income $(1,519,000)
</TABLE>
OTHER INCOME (EXPENSE)
Interest income declined to $18,000 in the second quarter of
1996 from $174,000 in the second quarter of 1995 because a
substantial portion of the Company's investments have been
liquidated over the past year. Interest expense increased to
$55,000 in the second quarter of 1996 from $16,000 in the second
quarter of 1995 because of the mortgage debt and the line of credit
borrowings during 1996.
INCOME TAXES
In the second quarter of 1995 the Company had an effective tax
rate of 39.6%. In the second quarter of 1996, the Company had an
effective tax credit of 34.0%.
9
<PAGE> 10
RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1995
NET SALES
Net sales were $12,598,000 for the six months ended June 30,
1996, a decrease of $4,114,000 or 25% below the first six months of
1995. The decrease primarily reflects a slowdown in orders from the
Company's largest customers as well as production problems which
resulted in higher than expected sales returns. The reduction in
orders from key accounts began in 1995 and is continuing in 1996.
GROSS PROFIT(LOSS) AND COST OF GOODS SOLD
Gross profit decreased to a loss of ($1,047,000) in the first six
months of 1996 from $2,193,000 in the first six months of 1995. This
decrease is primarily attributable to reduced shipments to the Company's
largest customers, a shift in product mix, and production problems. The
decrease in gross profit includes sales adjustments for pricing and
returns of $949,000 and inventory writedowns of $1,295,000 and $792,000
relating to manufacturing scrap and rework and inventory obsolescence,
respectively. 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.
OPERATING EXPENSES
General and administrative expenses were $1,369,000 or 10.9% of
net sales for the first six months of 1996 compared to $1,128,000 or
6.8% of net sales for the first six months of 1995. 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 $214,000 for the first six months
of 1996. General and administrative expenses consist primarily of
salaries and benefits, professional services, depreciation of office
equipment, computer systems and occupancy expenses.
Selling and marketing expenses were $923,000 or 7.3% of net
sales for the first six months of 1996 compared to $845,000 or 5.1%
of net sales for the first six months of 1995. Sales commission
expense was 3.2% of net sales for the first six months of 1996
compared to 2.0% of net sales for the first six months of 1995 due
to a change in sales mix to more commissionable sales. Selling and
marketing expenses include the cost of salaries, advertising and
promoting the Company's products, and commissions paid to
independent sales organizations.
10
<PAGE> 11
Research and development expenses relating primarily to the
assembly operations were $306,000 or 2.4% of net sales for the first
six months of 1996 compared to $249,000 or 1.5% of net sales for the
first six months of 1995. Research and development costs are
expensed as they are incurred.
OPERATING INCOME(LOSS)
Operating loss was ($3,645,000) for the first six months of
1996 compared to operating income of $2,507,000 or 15.0% of net
sales for the first six months of 1995, a decrease of $6,152,000.
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:
<TABLE>
<S> <C>
Decrease in net sales $(1,164,000)
Decrease in gross margin (4,612,000)
Increase in operating expenses (376,000)
------------
Decrease in operating income $(6,152,000)
</TABLE>
OTHER INCOME (EXPENSE)
Interest income declined to $48,000 for the first six months of
1996 from $254,000 for the first six months of 1995 because a
substantial portion of the Company's investments have been
liquidated over the past year. Interest expense increased to
$113,000 for the first six months of 1996 from $32,000 for the first
six months of 1995 because of the mortgage debt and the line of
credit borrowings during 1996.
LOSS ON DISPOSAL OF ASSETS
The loss of $149,751 relates to unusable equipment disposed of
at the P C Dynamics location.
INCOME TAXES
For the first six months of 1995 the Company had an effective
tax rate of 39.6%. For the first six months of 1996, the Company had
an effective tax credit of 36.3%.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided/(used) from operations was ($864,000) for the
first six months of 1996 compared to $795,000 for the first six
months of 1995. A reduction of inventories and increases in accounts
payable and accrued expenses partially offset the first six months
of 1996 loss from operations.
Capital expenditures of $4.3 million in the first six months of
1996, compared with $2.7 million in the first six months of 1995,
include $3.3 million for the new P C Dynamics facility in
11
<PAGE> 12
Texas. The estimated cost to complete this facility is $0.5 million.
The construction expenditures were partially financed through
mortgage borrowings of $2.4 million against a total financing
commitment of $2.95 million. Except for completion of the P C
Dynamics facility and expenditures required to improve its
manufacturing processes, the Company presently has no plans for
additional capital expenditures.
On January 10, 1996, the Company obtained a construction loan
from American National Bank and Trust Company of Chicago in the
amount of $2,160,000 to finance the rebuilding of the facility in
Frisco, Texas. The loan is payable in monthly installments of
principal and interest beginning September 1996 and ending in August
2001.
On March 31, 1996, the Company obtained a construction loan
from American National Bank and Trust Company that permits
borrowings up to $794,000 to finance the rebuilding of the facility
in Frisco, Texas. As of June 30, 1996, $279,000 was outstanding. The
loan is payable in monthly installments of principal and interest
beginning September 1996 and ending in August 2001.
As of June 30, 1996, the Company has $3,352,000 of debt and
$1,447,000 of cash and investments.
The Company has a $2,000,000 line of credit and has borrowed
$500,000 as of June 30, 1996. Management believes that funds
generated from operations, coupled with the Company's cash and
investment balances and its capacity for debt will be sufficient to
fund current business operations. The Company's ability to fund its
activities is directly dependent upon its sales, its ability to
improve its manufacturing processes, the effective utilization of
the Company's manufacturing resources and the Company's ability to
access external sources of financing. The Company anticipates
additional debt financing during 1996. There can be no assurances
that such additional debt financing can be obtained and, if
obtained, at reasonable terms.
INFLATION
Management believes Company's operation or on its financial position.
inflation has not had a material effect on the Company's operation or on
its financial position.
FOREIGN CURRENCY TRANSACTIONS
All of the Company's foreign transactions are negotiated, invoiced
and paid in United States dollars.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
As a supplier to microwave manufacturers, the Company is dependent
upon the success of its customers in developing and
12
<PAGE> 13
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.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company and Joseph Turek have been named as defendants in
Lionheart Partners, Inc., as general partner of Lionheart USA
Micro Cap Value, L.P. v. M-Wave, Inc. and Joseph Turek, which was
filed on or about November 17, 1995 in the United States District
Court for the Northern District of Illinois. The case was filed
as a purported class action on behalf of all persons who purchased
common stock of the Company between August 8, 1995 and October 18,
1995. The complaint alleges that the defendants made materially
false and misleading statements and failed to correct public
representations which had become materially false and misleading
regarding the Company's revenues and earnings. The complaint
asserts claims under Sections 10(b) and 20 of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and
seeks compensatory damages in an unspecified amount.
The Company believes that this action is without merit. On
January 5, 1996, the Company filed a motion to dismiss the
complaint. On April 26, 1996, this motion to dismiss was denied.
In June 1996, the plaintiff moved for class certification.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(b) The Company filed a report on Form 8-K dated May 7, 1996
announcing expected first quarter 1996 results.
14
<PAGE> 15
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 13, 1996 /s/ PAUL H. SCHMITT
--------------------------------
Paul H. Schmitt
Chief Financial Officer
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No Description
- ------- ----------------------------------------------
<S> <C>
10.9 $2,000,000 Secured Promissory Note dated May
31, 1996 issued to American National Bank and
Trust of Chicago
27 Financial Data Schedule
</TABLE>
16
<PAGE> 1
EXHIBIT 10.9
PROMISSORY NOTE (SECURED)
$2,000,000.00
CHICAGO, ILLINOIS MAY 31, 1996
------------
DUE MAY 31, 1997
------------
FOR VALUE RECEIVED, the undersigned (jointly and severally if more than
one) ("Borrower"), promises to pay to the order of AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO ("Bank"), at its principal place of business in
Chicago, Illinois or such other place as Bank may designate from time to time
hereafter, the principal sum of TWO MILLION AND 00/100 Dollars, or such lesser
principal sum as may then be owed by Borrower to Bank hereunder, which sum
shall be due and payable on MAY 31, 1997.
Borrower's obligations and liabilities to Bank under this Note, and all
other obligations and liabilities of Borrower to Bank (including without
limitation all debts, claims and indebtedness) whether primary, secondary,
direct, contingent, fixed or otherwise, including those evidenced in rate
hedging agreements designed to protect the Borrower from the fluctuation of
interest rates, heretofore, now and/or from time to time hereafter owing, due
or payable, however evidenced, created, incurred, acquired or owing and however
arising, whether under this Note, any agreement, instrument or document
heretofore, now or from time to time hereafter executed and delivered to Bank
by or on behalf of Borrower, or by oral agreement or operation of law or
otherwise shall be defined and referred to herein as "Borrower's Liabilities."
The unpaid principal balance of Borrower's Liabilities due hereunder shall
bear interest from the DATE OF DISBURSEMENT until paid, computed as follows: AT
A DAILY RATE EQUAL TO THE DAILY RATE EQUIVALENT OF 0.0% PER ANNUM (computed on
the basis of a 360-day year and actual days elapsed) IN EXCESS OF the rate of
interest announced or published publicly from time to time by Bank as its prime
or base rate of interest (THE "BASE RATE"); provided, however, that in the
event that any of Borrower's Liabilities are not paid when due, the unpaid
amount of Borrower's Liabilities shall bear interest after the due date until
paid at a rate equal to the sum of the rate that would otherwise be in effect
plus 3%.
The rate of interest to be charged by Bank to Borrower shall fluctuate
hereafter from time to time concurrently with, and in an amount equal to, each
increase or decrease in the Base Rate, whichever is applicable.
Accrued interest shall be payable by Borrower to Bank on the same day of
each month, and at maturity, commencing with the 30TH day of JUNE, 1996, or as
billed by Bank to Borrower, at Bank's principal place of business, or at such
other place as Bank may designate from time to time hereafter. After maturity,
accrued interest on all of Borrower's Liabilities shall be payable on demand.
Borrower warrants and represents to Bank that Borrower shall use the
proceeds represented by this Note solely for proper business purposes and
consistently with all applicable laws and statutes.
<PAGE> 2
To secure the prompt payment to Bank of Borrower's Liabilities and the
prompt, full and faithful performance by Borrower of all of the provisions to
be kept, observed or performed by Borrower under this Note and/or any other
agreement, instrument or document heretofore, now and/or from time to time
hereafter delivered by or on behalf of Borrower to Bank, Borrower grants to
Bank a security interest in and to the following property: (a) all of
Borrower's now existing and/or owned and hereafter arising or acquired monies,
reserves, deposits, deposit accounts and interest or dividends thereon,
securities, cash, cash equivalents and other property now or at any time or
times hereafter in the possession or under the control of Bank or its bailee
for any purpose; (b) ALL BUSINESS ASSETS OF BORROWER PURSUANT TO LOAN AND
SECURITY AGREEMENT DATED MAY 31, 1996; and (c) all substitutions, renewals,
improvements, accessions or additions thereto, replacements, offspring, rents,
issues, profits, returns, products and proceeds thereof, including without
limitation proceeds of insurance policies insuring the foregoing collateral
(all of the foregoing property is referred to herein individually and
collectively as "Collateral").
Regardless of the adequacy of the Collateral, any deposits or other sums
at any time credited by or payable or due from Bank to Borrower, or any monies,
cash, cash equivalents, securities, instruments, documents or other assets of
Borrower in the possession or control of Bank or its bailee for any purpose,
may be reduced to cash and applied by Bank to or setoff by Bank against
Borrower's Liabilities.
Borrower agrees to deliver to Bank immediately upon Bank's demand, such
additional collateral as Bank may request from time to time should the value of
the Collateral (in Bank's sole and exclusive opinion) decline, deteriorate,
depreciate or become impaired, or should Bank deem itself insecure for any
reason whatsoever, including without limitation a change in the financial
condition of Borrower or any party liable with respect to Borrower's
Liabilities, and does hereby grant to Bank a continuing security interest in
such other collateral, which shall be deemed to be a part of the Collateral.
Borrower shall execute and deliver to Bank, at any time upon Bank's demand, all
agreements, instruments, documents and other written matter that Bank may
request, in form and substance acceptable to Bank, to perfect and maintain
perfected Bank's security interest in the Collateral or any additional
collateral. Borrower agrees that a carbon, photographic or photostatic copy,
or other reproduction, of this Note or of any financing statement, shall be
sufficient as a financing statement.
Bank may take, and Borrower hereby waives notice of, any action from time
to time that Bank may deem necessary or appropriate to maintain or protect the
Collateral, and Bank's security interest therein, and in particular Bank may at
any time (i) transfer the whole or any part of the Collateral into the name of
the Bank or its nominee, (ii) collect any amounts due on Collateral directly
from persons obligated thereon, (iii) take control of any proceeds and products
of Collateral, and/or (iv) sue or make any compromise or settlement with
respect to any Collateral. Borrower hereby releases Bank from any and all
causes of action or claims which Borrower may now or hereafter have for any
asserted loss or damage to Borrower claimed to be caused by or arising from:
(a) Bank's taking any action permitted by this paragraph; (b) any failure of
Bank to protect, enforce or collect in whole or in part any of the Collateral;
and/or (c) any other act or omission to act on the part of Bank, its officers,
agents or employees, except for willful misconduct.
2
<PAGE> 3
The occurrence of any one of the following events shall constitute a
default by the Borrower ("Event of Default") under this Note: (a) if Borrower
fails to pay any of Borrower's Liabilities when due and payable or declared due
and payable (whether by scheduled maturity, required payment, acceleration,
demand or otherwise); (b) if Borrower or any guarantor of any of Borrower's
Liabilities fails or neglects to perform, keep or observe any term, provision,
condition, covenant, warranty or representation contained in this Note; (c)
occurrence of a default or event of default under any agreement, instrument or
document heretofore, now or at any time hereafter delivered by or on behalf of
Borrower to Bank; (d) occurrence of a default or an event of default under any
agreement, instrument or document heretofore, now or at any time hereafter
delivered to Bank by any guarantor of Borrower's Liabilities or by any person
or entity which has granted to Bank a security interest or lien in and to some
or all of such person's or entity's real or personal property to secure the
payment of Borrower's Liabilities; (e) if the Collateral or any other of
Borrower's assets are attached, seized, subjected to a writ, or are levied upon
or become subject to any lien or come within the possession of any receiver,
trustee, custodian or assignee for the benefit of creditors; (f) if a notice of
lien, levy or assessment is filed of record or given to Borrower with respect
to all or any of Borrower's assets by any federal, state or local department or
agency; (g) if Borrower or any guarantor of Borrower's Liabilities becomes
insolvent or generally fails to pay or admits in writing its inability to pay
debts as they become due, if a petition under Title 11 of the United States
Code or any similar law or regulation is filed by or against Borrower or any
such guarantor, if Borrower or any such guarantor shall make an assignment for
the benefit of creditors, if any case or proceeding is filed by or against
Borrower or any such guarantor for its dissolution or liquidation, or if
Borrower or any such guarantor is enjoined, restrained or in any way prevented
by court order from conducting all or any material part of its business
affairs; (h) the death or incompetency of Borrower or any guarantor of
Borrower's Liabilities, or the appointment of a conservator for all or any
portion of Borrower's assets or the Collateral; (i) the revocation,
termination or cancellation of any guaranty of Borrower's Liabilities without
written consent of Bank; (j) if a contribution failure occurs with respect to
any pension plan maintained by Borrower or any corporation, trade or business
that is, along with Borrower, a member of a controlled group of corporations or
a controlled group of trades or businesses (as described in Sections 414(b) and
(c) of the Internal Revenue Code of 1986 or Section 4001 of the Employee
Retirement Income Security Act of 1974, as amended, "ERISA") sufficient to give
rise to a lien under Section 302(f) of ERISA; (k) if Borrower or any guarantor
of Borrower's Liabilities is in default in the payment of any obligations,
indebtedness or other liabilities to any third party and such default is
declared and is not cured within the time, if any, specified therefor in any
agreement governing the same; (l) if any material statement, report or
certificate made or delivered by Borrower, any of Borrower's partners,
officers, employees or agents or any guarantor of Borrower's Liabilities is not
true and correct; or (m) if Bank is reasonably insecure.
Upon the occurrence of an Event of Default, at Bank's option, without
notice by Bank to or demand by Bank of Borrower: (i) all of Borrower's
Liabilities shall be immediately due and payable; (ii) Bank may exercise any
one or more of the rights and remedies accruing to a secured party under the
Uniform Commercial Code of the relevant jurisdiction and any other applicable
law upon default by a debtor; (iii) Bank may enter, with or without process of
law and without breach of the peace, any premises where the Collateral is or
may be located, and may seize or remove the Collateral from said premises
and/or remain upon said premises and use the same for the purpose of
collecting, preparing and disposing of the Collateral; and/or (iv) Bank may
sell or
3
<PAGE> 4
otherwise dispose of the Collateral at public or private sale for cash
or credit, provided, however, that Borrower shall be credited with the net
proceeds of any such sale only when the same are actually received by Bank.
Upon an Event of Default, Borrower, immediately upon demand by Bank, shall
assemble the Collateral and make it available to Bank at a place or places to
be designated by Bank which is reasonably convenient to Bank and Borrower.
All of Bank's rights and remedies under this Note are cumulative and
non-exclusive. The acceptance by Bank of any partial payment made hereunder
after the time when any of Borrower's Liabilities become due and payable will
not establish a custom or waive any rights of Bank to enforce prompt payment
hereof. Bank's failure to require strict performance by Borrower of any
provision of this Note shall not waive, affect or diminish any right of Bank
thereafter to demand strict compliance and performance therewith. Any waiver
of an Event of Default hereunder shall not suspend, waive or affect any other
Event of Default hereunder. Borrower and every endorser waive presentment,
demand and protest and notice of presentment, protest, default, non-payment,
maturity, release, compromise, settlement, extension or renewal of this Note,
and hereby ratify and confirm whatever Bank may do in this regard. Borrower
further waives any and all notice or demand to which Borrower might be entitled
with respect to this Note by virtue of any applicable statute or law (to the
extent permitted by law).
Borrower agrees to pay, immediately upon demand by Bank, any and all
costs, fees and expenses (including reasonable attorneys' fees, costs and
expenses) incurred by Bank (i) in enforcing any of Bank's rights hereunder, and
(ii) in representing Bank in any litigation, contest, suit or dispute, or to
commence, defend or intervene or to take any action with respect to any
litigation, contest, suit or dispute (whether instituted by Bank, Borrower or
any other person) in any way relating to this Note, Borrower's Liabilities or
the Collateral, and to the extent not paid the same shall become part of
Borrower's Liabilities.
This Note shall be deemed to have been submitted by Borrower to Bank and
to have been made at Bank's principal place of business. This Note shall be
governed and controlled by the internal laws of the State of Illinois and not
the law of conflicts.
Advances under this Note may be made by Bank upon oral or written request
of any person authorized to make such requests on behalf of Borrower
("Authorized Person"). Borrower agrees that Bank may act on requests which
Bank in good faith believes to be made by an Authorized Person, regardless of
whether such requests are in fact made by an Authorized Person. Any such
advance shall be conclusively presumed to have been made by Bank to or for the
benefit of Borrower. Borrower does hereby irrevocably confirm, ratify and
approve all such advances by Bank and agrees to indemnify Bank against any and
all losses and expenses (including reasonable attorneys' fees) and shall hold
Bank harmless with respect thereto.
TO INDUCE BANK TO ACCEPT THIS NOTE, BORROWER IRREVOCABLY AGREES THAT,
SUBJECT TO BANK'S SOLE AND ABSOLUTE ELECTION, ALL ACTIONS OR PROCEEDINGS IN ANY
WAY, MANNER OR RESPECT, ARISING OUT OF OR FROM OR RELATED TO THIS NOTE SHALL BE
LITIGATED IN COURTS HAVING SITUS WITHIN THE CITY OF CHICAGO, STATE OF ILLINOIS.
BORROWER HEREBY
4
<PAGE> 5
CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL
COURT LOCATED WITHIN SAID CITY AND STATE. BORROWER HEREBY WAIVES ANY RIGHT IT
MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST
BORROWER BY BANK IN ACCORDANCE WITH THIS PARAGRAPH.
BORROWER IRREVOCABLY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY ACTION,
SUIT, COUNTERCLAIM OR PROCEEDING (I) TO ENFORCE OR DEFEND ANY RIGHTS UNDER OR
IN CONNECTION WITH THIS NOTE OR ANY AMENDMENT, INSTRUMENT, DOCUMENT OR
AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION
HEREWITH, OR (II) ARISING FROM ANY DISPUTE OR CONTROVERSY IN CONNECTION WITH OR
RELATED TO THIS NOTE OR ANY SUCH AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT,
AND AGREES THAT ANY SUCH ACTION, SUIT, COUNTERCLAIM OR PROCEEDING SHALL BE
TRIED BEFORE A COURT AND NOT BEFORE A JURY.
PC DYNAMICS CORPORATION
-----------------------
"BORROWER"
Address:
216 Evergreen Street By: /S/ Joseph A. Turek
- --------------------- --------------------------------
Bensenville, IL 60106 Joseph A. Turek, President
- ----------------------
Address: M~WAVE, INC.
-----------------------------------
216 Evergreen Street "BORROWER"
- ----------------------
Bensenville, IL 60106
- ---------------------- By: /S/ Joseph A. Turek
--------------------------------
Joseph A. Turek, President
POLY CIRCUITS, INC.
-----------------------------------
"BORROWER"
Address:
216 Evergreen Street By: /S/ Joseph A. Turek
- ---------------------- --------------------------------
Bensenville, IL 60106 Joseph A. Turek, President
- ----------------------
5
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 374,026
<SECURITIES> 1,072,791
<RECEIVABLES> 4,016,950
<ALLOWANCES> 0
<INVENTORY> 2,902,814
<CURRENT-ASSETS> 10,327,333
<PP&E> 17,074,041
<DEPRECIATION> (3,331,572)
<TOTAL-ASSETS> 24,916,556
<CURRENT-LIABILITIES> 5,035,126
<BONDS> 2,249,797
<COMMON> 30,416
0
0
<OTHER-SE> 16,878,087
<TOTAL-LIABILITY-AND-EQUITY> 24,916,556
<SALES> 12,597,526
<TOTAL-REVENUES> 0
<CGS> 13,664,906
<TOTAL-COSTS> 2,598,128
<OTHER-EXPENSES> (215,377)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,860,885)
<INCOME-TAX> (1,399,732)
<INCOME-CONTINUING> (2,461,153)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,461,153)
<EPS-PRIMARY> (0.81)
<EPS-DILUTED> 0
</TABLE>
