<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 0-19944
M-WAVE, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3809819
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
216 Evergreen Street, Bensenville, Illinois 60106
------------------------------------------- ------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (630) 860-9542
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)
- -----------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 24, 1997 was approximately $3,975,000, computed on the
basis of the last reported sale price per share ($2.50) of such stock on the
NASDAQ National Market.
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The Registrant has 3,031,625 common shares outstanding at March 25, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Applicable portions of the Proxy Statement for the Annual Meeting of
Stockholders to be held on Wednesday, June 4, 1997 are incorporated by
reference in Part III of this Form.
Index to Exhibits listed on page 38.
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PART I
Item 1. Business
The Company
- -----------
M-Wave, Inc., through its wholly-owned subsidiaries Poly Circuits, Inc. and P C
Dynamics Corporation (collectively, the "Company"), manufactures microwave
frequency components (MFC) and high frequency circuit boards (HFCB) using
Teflon-based laminates (TBL).
The Company's MFC and HFCB are used in wireless communication systems and other
devices and equipment operating in the microwave frequency spectrum of 800 MHz
and above, such as cellular telephone, direct broadcast satellite television,
global positioning satellite systems, personal communication networks and
military "smart" weapons and antenna systems. MFC and HFCB on TBL are
advantageous for microwave frequency systems because of the extremely low
circuit transmission and power losses and stable, predictable electrical
characteristics associated with TBL.
MFC are devices that become an integral part of a microwave frequency circuit.
MFC are characterized as passive devices requiring no additional manufacturing
to perform their intended function. MFC include, but are not limited to,
filters, couplers, baluns, splitters, combiners and antennas. High frequency
circuit boards are structures that microwave circuits are built upon. HFCB are
composed of special materials designed to enhance the performance of microwave
signals. The combination of MFC and HFCB leads to the creation of a microwave
system.
The production of MFC and HFCB is technologically demanding due to the precise
requirements of their end-use applications and the miniaturization of microwave
frequency components. To meet these technological demands, the Company has
developed manufacturing processes and designs which reduce the cost and
increase the manufacturability and reliability of customer systems.
Additionally, the Company emphasizes quality engineering and design support for
its customers. The Company is subject to stringent technical evaluation and
certification by certain of its customers.
The Company markets its products through Company personnel supported by
approximately 24 independent sales organizations. The Company's base of
approximately 250 customers represents a highly sophisticated group of
purchasers.
Segments within the commercial and military markets have experienced growth in
recent years due to: (i) increased efficiency of microwave systems; (ii) a
commercial market based upon increasing acceptance of microwave frequency
products; (iii) a continuing need to upgrade systems based upon microwave
technology; and (iv) crowding of the available frequency spectrum below 800
MHz. The Company's strategy is to increase sales of MFC and HFCB to support the
growth of its customers in these industry segments.
M-Wave, Inc. was incorporated in Delaware in January 1992 in connection with a
100 for 1 share exchange with the former stockholders of Poly Circuits, Inc.
On April 7, 1992, the Company concluded a 900,000 share initial public offering
with net proceeds of approximately $5.5 million. The Company's executive
offices are located at 216 Evergreen Street, Bensenville, Illinois, 60106, and
its telephone number is (630) 860-9542.
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Industry and Market
- -------------------
In recent years, segments within the commercial and military markets have
experienced growth due to: (i) increased efficiency of microwave systems; (ii)
a commercial market based upon increasing acceptance of microwave frequency
products; (iii) a continuing need to upgrade systems based upon microwave
technology; and (iv) crowding of the available frequency spectrum below 800
MHz. These industry segments include: cellular telephone communications, global
positioning satellite systems, direct broadcast satellite television systems,
personal communication networks, wireless in-building communications networks,
advanced avionic systems and missile electronics. The Company's strategy is to
increase sales of MFC and HFCB to support the growth of its customers in these
industry segments.
One of the most widely recognized high frequency wireless communication systems
in commercial use is cellular telephone. Cellular systems operate at the lower
end of the microwave spectrum and utilize MFC and HFCB products for signal
amplification base stations. As cellular telephone increases market
penetration, additional cellular base stations will be constructed to improve
geographic coverage and system capacity. Approximately 39%, 48% and 64% of the
Company's revenues in 1996, 1995, and 1994, respectively, were related to the
cellular telephone industry. Personal communication services (PCS) systems
will play an important part in the overall market growth for wireless
communications. At this point, the Company does not know what impact the
development of PCS will have on the Company.
Customers and Marketing
- -----------------------
The Company's customers include microwave system manufacturers with
sophisticated technologies. The Company currently services a customer base of
approximately 250.
The sale of MFC and HFCB is technical in nature. The Company works with
customer personnel who are frequently experts in microwave design and theory
with added expertise in MFC and HFCB, as well as fabrication and design
techniques. Typically, microwave system manufacturers provide the Company
fabrication details and guidelines. The Company fabricates MFC and HFCB to
customer specifications. For military microwave system manufacturers, the
Company must meet the demanding military and critical weapon specifications.
The Company has adopted a program of early supplier involvement as part of its
sales strategy. The Company has the opportunity to design-in its manufacturing
processes as a means of reducing the cost of microwave systems. The emphasis
upon a partnership underlies the Company's relationship with its customers.
The Company expanded its domestic sales efforts during the first half of 1996
by adding sales and support staff, but reduced its sales staff somewhat later
in the year as the Company's sales slowed. Approximately 24 independent sales
organizations are paid a commission to represent the Company in geographical
territories. International sales of the Company's products have accounted for
less than 5% of revenues in each of 1996, 1995 and 1994.
In 1996, Motorola, AT&T and Spectrian accounted for 26%, 8% and 10%,
respectively, of the Company's revenues. In 1995, Motorola, AT&T and Spectrian
accounted for 27%, 16% and 12%, respectively, of the Company's revenues. In
1994, Motorola, AT&T and Spectrian accounted for 35%, 27% and 10%,
respectively, of the Company's revenues. The loss of, or a substantial
reduction in or change in the mix of orders from, any one or more of the
Company's major customers could have a material adverse effect on the Company's
results of operations and financial condition. The Company continues to
vigorously pursue a strategy of being a major source to its customers, but
intends to seek to be one of a few key suppliers rather than the sole supplier.
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As of December 31, 1996, the Company had an order backlog of approximately
$4,578,000 compared to $8,000,000 at December 31, 1995. Nearly all of the
Company's backlog is subject to cancellation or postponement without
significant penalty. Accordingly the Company does not believe that this
backlog is necessarily indicative of the Company's future results of
operations or prospects.
Products and Production
- -----------------------
MFC are devices that become an integral part of a microwave frequency circuit.
MFC are characterized as passive devices requiring no additional manufacturing
to perform their intended function. MFC include, but are not limited to
filters, couplers, baluns, splitters, combiners, and antennas. HFCB are
structures that microwave circuits are built upon. HFCB are composed of
special materials designed to enhance the performance of microwave signals.
All HFCB require added value in the form of assembling MFC and other components
to their surface. The combination of MFC and HFCB leads to the creation of a
microwave system.
The use of TBL in the manufacturing of MFC and HFCB is demanding. TBL is a
thermo-plastic which, in a cured state, exhibits a high coefficient of thermal
expansion and polymeric molecular cross-linking which makes plating circuitry
difficult. Manufacturing MFC and HFCB requires tolerances measured in ten
thousandths of an inch. Despite these manufacturing complexities, the Company
realized a yield of about 80% in TBL material utilization in 1996. This
rate has helped the Company reduce its manufacturing costs, which is
particularly important because TBL is substantially more expensive than
laminates used in low frequency circuit fabrications.
Because the Company manufactures a custom, made-to-order product, there is a
minimal amount of finished goods inventory. The Company maintains raw
material inventory, primarily TBL. A typical manufacturing cycle time from
engineering to shipment is about two weeks. The Company seeks to balance its
labor, materials and backlog to achieve an average of eight weeks lead time
from placement of order to shipment of product. Production can generally be
increased rapidly to respond to increases in demand.
The Company maintains in-house capabilities to perform substantially all
processes, thereby minimizing the reliance upon outside sources. The Company
devotes significant time and attention to quality control and TQA (Total
Quality Assurance). The Company operates a SPC (Statistical Process Control)
system that is intended to maintain quality at each process stage by reducing
the variability of each process. As the Company's business has evolved towards
the production of relatively smaller quantities of more complex products, the
Company has at times during 1996 and 1995 encountered difficulty in maintaining
its past yield standards.
Many of the made-to-order products manufactured by the Company involve novel
fabrication and design techniques and have specific component requirements. As
a result, the manufacture of products by the Company is subject to delays
resulting from unexpected design or production difficulties and the inability
of the Company to obtain specific components on a timely basis from suppliers.
During 1996, 1995 and 1994, one manufacturer accounted for approximately 46%,
49% and 60%, respectively, of the TBL supplied to the Company. There are only
four U. S. manufacturers of TBL. Any disruption or termination of these
sources of TBL could adversely affect the Company's operations. Moreover, any
prolonged disruption or termination of the Company's principal supplier of TBL
could have a material adverse effect on the Company's business and damage
customer relationships. The Company purchases TBL pursuant to an
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ongoing purchase order relationship. The Company believes its relationship with
its principal supplier of TBL is good.
Product Development
- -------------------
The Company's product development efforts have been a part of its ongoing
activities. The Company has developed the Flexlink TM process, the bonding of
materials with dissimilar coefficients of thermal expansion, and the fusion
bonding of TBL for multi-layer circuit fabrication. The Company was granted
a patent in 1993 by the United States Patent Office for its Flexlink TM process.
The Company relies heavily on its process engineering capabilities to further
its corporate objectives. The Company's future results of operations are
dependent on its ability to continue to initiate or respond to technical
changes and to make the necessary ongoing capital investments. The Company
focuses on improving current manufacturing processes and developing new
processes in pursuit of its goal to increase quality, offer enhanced systems
design flexibility to its customers, and respond to the increasing complexity
of its customers' products.
Competition
- -----------
The market for the Company's products is highly competitive. The Company
competes for customers primarily on the basis of quality, reliability and on
time delivery of its products and the Company's technical support. The Company
faces substantial competition from many companies, including many that have
greater financial and other resources, broader product lines, greater customer
service capabilities and larger and more established customer bases. Other
methods of manufacturing microwave systems exist, including ceramic and thick
film technologies. Increased competition could cause the Company to lose
market share and/or accelerate the decline in the prices of the Company's
products. These factors could have a material adverse effect on the Company's
results of operations and financial condition.
Environmental Regulations
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The Company and the industry in which it operates are subject to environmental
laws and regulations concerning, among other things, emissions into the air,
discharges into waterways, the generation, handling and disposal of waste
materials and certain recordkeeping requirements. The Company periodically
generates and handles materials that are considered hazardous waste under
applicable law and contracts for the off-site disposal of these materials.
During the ordinary course of its operations, the Company has received
citations or notices from regulatory authorities that such operations may not
be in compliance with applicable environmental regulations. Upon such receipt,
the Company works with authorities to resolve the issues raised by such
citations or notices. The Company's past expenditures relating to
environmental compliance have not had a material effect on the financial
position or results of operations of the Company. The Company believes that
the overall impact of compliance with regulations and legislation protecting
the environment will not have a material effect on its future financial
position or results of operations, although no assurance can be given.
Based on information available to the Company, which in most cases includes an
estimate of liability, legal fees and other factors, a reserve for indicated
environmental liabilities has been made in the aggregate amount of
approximately $96,000.
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Patents
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Due to rapidly changing technology, the Company believes its success depends
primarily upon the engineering, marketing, manufacturing and support skills of
its personnel, rather than upon patent protection. The Company was granted a
patent in 1993 by the United States Patent Office for its Flexlink TM process.
Employees
- ---------
On December 31, 1996, the Company employed approximately 145 persons. The
Company closely monitors the number of employees in response to its periodic
production requirements and believes it is positioned appropriately to change
the number of employees as changes in production warrant. In February and March
1997, the Company significantly reduced the number of employees in response to
lower than anticipated shipments.
None of the Company's employees are represented by a labor union and the
Company has never experienced a work stoppage, slowdown or strike. The Company
considers its labor relations to be very good.
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Executive Officers of the Registrant
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The following is a list of Company's executive officers:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Joseph A. Turek 39 Chairman and
Chief Executive Officer
Michael Bayles 45 President and
Chief Operating Officer
Paul H. Schmitt 50 Secretary and Treasurer
</TABLE>
JOSEPH A. TUREK is the founder of the Company and has acted as Chairman and
Chief Executive Officer since June 1993, and has served as director of the
Company since 1988. Mr. Turek served for more than five years in various
positions at West-Tronics, Inc., a manufacturer of low frequency circuit boards
and a contract assembler of electronic products, with his last position as
President in 1987 and 1988.
MICHAEL BAYLES joined the Company in February 1997 as President and Chief
Operating Officer. From April, 1991 to February, 1997, Mr. Bayles was with
Varlen Instruments, a division of Varlen Corporation, where he held the
position of President.
PAUL H. SCHMITT joined the Company in September 1992 as Treasurer. From 1990 to
1992, Mr. Schmitt was with Reynolds Products, a Division of Alco Standard
Corporation, where he held the position of Controller. From 1983 to 1990, he
served as Controller for Garden City Envelope Company.
Item 2. Properties
Facilities
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The following table lists the manufacturing, administrative, marketing and
research and development facilities of the Company:
<TABLE>
<CAPTION>
Lease
Location Function Square Feet Expiration Date
-------- -------- ----------- ---------------
<S> <C> <C> <C>
Bensenville, Illinois Manufacturing 14,000 Not Applicable
(owned)
Bensenville, Illinois Administrative 13,000 June 30, 2000
(Subject to option
to renew for five
years)
Bensenville, Illinois Research and 3,000 September 30, 1997
Development;
Manufacturing
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Frisco, Texas Administrative; 44,000 Owned
Marketing; and
Manufacturing
</TABLE>
The Company began manufacturing at the Company's new 44,000 square foot
building in Frisco, Texas during the fourth quarter of 1996. This facility is
subject to a mortgage securing the Company's obligation to repay notes totaling
$2,904,000 at December 31, 1996.
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Item 3. Legal Proceedings
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The Company is a party to various actions and proceedings related to its normal
business operations. The Company believes that the outcome of this litigation
will not have a material adverse effect on the financial position or results of
operations of the Company.
The Company and Joseph Turek have been named as defendants in Lionheart
Partners, Inc., as general partner of Lionheart USA Micro Cap Value, L.P. v.
M~Wave, Inc. and Joseph Turek, which was filed on or about November 17, 1995 in
the United States District Court for the Northern District of Illinois. The
case was filed as a purported class action on behalf of all persons who
purchased common stock of the Company between August 8, 1995 and October 18,
1995. The complaint alleges that the defendants made materially false and
misleading statements and failed to correct public representations which had
become materially false and misleading regarding the Company's revenues and
earnings. The complaint asserts claims under Sections 10(b) and 20 of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seeks
compensatory damages in an unspecified amount.
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. This motion has been briefed and a decision is pending. The
parties are currently discussing a settlement under which the Company and
Joseph Turek deny all wrongdoing.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Registrant's common stock is traded on the NASDAQ National Market (trading
symbol MWAV). The following table sets forth, for the calendar periods
indicated, the range of the high and low last reported sales prices of the
common stock from January 1, 1995 through December 31, 1996 as reported by the
NASDAQ.
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
1996 1995
---------------- ------------------
Low High Low High
--- ---- --- ----
<S> <C> <C> <C> <C>
First Quarter $5-3/4 $8-3/4 $11-1/2 $15-3/4
Second Quarter 4-1/4 6-3/4 11-3/4 18-1/4
Third Quarter 2-1/2 5 12-3/4 18-3/4
Fourth Quarter 1-3/4 4-1/4 5-3/4 15-1/2
</TABLE>
As of December 31, 1996, there were approximately 2,200 shareholders of record
owning the common stock of the Company.
The Registrant did not pay any dividends on its common stock in 1996 and
intends not to pay dividends in the foreseeable future in order to reinvest its
future earnings in the business.
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Item 6. Selected Financial Data
The following table sets forth selected consolidated financial information with
respect to the Company for each of the five years in the period ended December
31, 1996.
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $22,643,968 $29,512,380 $28,009,390 $19,605,899 $10,657,931
Gross profit (loss) (683,020) 6,971,272 9,623,653 7,535,670 2,615,049
Operating income (loss) (6,219,548) 2,222,939 5,624,471 5,731,411 1,667,921
Income (loss) before income
taxes (6,820,869) 1,868,426 6,201,013 5,786,285 1,716,778
Net income (loss) (4,357,393) 1,262,955 3,745,935 3,534,426 1,050,359
Weighted average shares 3,021,041 3,072,920 3,006,599 2,949,860 2,658,907
Net income (loss) per share (1.44) 0.41 1.25 1.20 .40
Balance Sheet Data:
Working capital $4,601,703 $9,110,742 $11,046,010 $8,799,481 $5,931,090
Total assets 21,835,551 23,407,823 23,258,012 15,255,251 10,598,038
Long-term debt 2,604,464 11,239 423,732 0 0
Stockholders' equity 15,012,262 19,365,593 17,643,119 12,340,953 8,806,527
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
- ---------------------
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ -------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 103.0 76.4 65.6
------- ------ -------
Gross profit (loss) (3.0) 23.6 34.4
------- ------ -------
Operating expenses:
General and administrative 14.6 7.9 6.4
Selling and marketing 7.4 6.8 6.4
Research and development 2.4 1.4 1.5
------- ------ -------
Total operating expenses 24.4 16.1 14.3
------- ------ -------
Operating income (loss) (27.4) 7.5 20.1
Interest income (expense) - net (0.9) 0.7 0.5
Litigation settlement (1.9)
Non-recurring gain (loss) (1.8) 1.5
------- ------ -------
Total other income (expense) (2.7) (1.2) 2.0
------- ------ -------
Income (loss) before income taxes (30.1) 6.3 22.1
Provision (credit) for income taxes (10.9) 2.0 8.7
------- ------ -------
Net income (loss) (19.2)% 4.3% 13.4%
======= ====== =======
</TABLE>
COMPARISON OF 1996 AND 1995
Net Sales
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Net sales for 1996 decreased 23% to $22.6 million from $29.5 million in 1995.
This decrease was primarily attributable to production problems. Net sales to
Motorola decreased by $1,826,000 or 24% to $5,896,000. Net sales to Spectrian
decreased by $1,280,000 or 37% to $2,218,000. Net sales to AT&T decreased by
$2,759,000 or 61% to $1,788,000. Net sales to Glenayre decreased by
$1,873,000 or 95% to $90,000.
The foregoing decreases in net sales were partially offset by an increase in
net sales to L K Products and Rockwell, two of the Company's larger customers,
of $3,069,000 or 26%.
The Company's three largest customers accounted for 44% of the
Company's net sales in 1996 compared to 55% in 1995.
Gross Profit and Cost of Goods Sold
- -----------------------------------
Gross profit decreased $7.7 million in 1996 from $7.0 million in 1995 to
negative $0.7 million in 1996. Gross margin decreased to negative 3% in 1996
from 24% in 1995. This reduction is attributable to reduced shipments to
certain of 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 $1,201,000 and inventory writedowns of $2,719,000
and $747,000 relating to manufacturing scrap and rework and inventory
obsolescence, respectively. The Company has made operational changes
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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.
TBL is the largest single component of the Company's cost of goods sold,
representing 27.5% and 18.6% of net sales during 1996 and 1995, respectively.
The Company did not experience significant changes in the cost of TBL during
1996 and 1995. During 1996 and 1995, one manufacturer accounted for
approximately 46% and 49% , respectively, of the TBL supplied to the Company.
Operating Expenses
- ------------------
General and administrative expenses were $3,314,000 or 14.6% of net sales in
1996, compared to $2,327,000 or 7.9% of net sales in 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 $609,000. The consultants completed their work with the Company in
February 1997. General and administrative expenses for 1996 also include a
valuation provision of $250,000 against a promissory note of $1.1 million
received by the Company in December 1996 in connection with the sale of its
Assembly Division. 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 $1,678,000 or 7.4% of net sales in 1996,
compared to $2,009,000 or 6.8% of net sales in 1995. The decrease in selling
and marketing expenses was primarily attributable to reduced commissions paid
as a result of a decease in sales. Selling and marketing expenses include the
cost of salaries, advertising and promoting the Company's products and the
commissions paid to independent sales organizations.
Research and development expenses were $545,000 or 2.4% of net sales in 1996,
compared to $412,000 or 1.4% of net sales in 1995. The Company is currently
developing Flexlink II, its second generation high frequency bonding process
that is designed to provide improved performance and increased efficiencies.
In February 1997 and March 1997, the Company significantly reduced the number
of employees in response to lower than anticipated shipments.
Operating Income
- ----------------
Operating income was negative $6.2 million or negative 27.5% of net sales in
1996, a decrease of $8.4 million from 1995. The change in operating income can
be summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Decrease in net sales ($1,622,000)
Decrease in gross margin (6,033,000)
Increase in operating expenses (788,000)
------------
Decrease in operating income ($8,443,000)
============
</TABLE>
Interest Income
- ---------------
Interest income from short-term investments was $39,000 in 1996 compared to
$294,000 in 1995.
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Interest Expense
- ----------------
Interest expense, primarily related to the Company's mortgage obligation on
its P C Dynamics facility, was $224,000 in 1996 compared to $88,000 in 1995.
Loss on disposal of fixed assets
- --------------------------------
The Company recorded a loss of $417,000 in 1996 relating to the disposal of
fixed assets which are no longer usable in the Company's business.
Litigation settlement
- ---------------------
On May 13, 1994, Comptek Research, Inc., Comptek Telecommunications, Inc. and
Industrial Systems Service, Inc. (together "Comptek") filed a six-count
complaint against M~Wave, Inc. and Poly Circuits, Inc. alleging contractual,
Uniform Commercial Code and tortious violations arising out of Poly Circuits'
sale of printed circuit boards.
On September 29, 1995 the Company reached settlement with Comptek. The
settlement included a cash payment of $300,000, the issuance of 20,000 shares
of the Company's common stock to Comptek and an agreement to supply goods and
services to Comptek on a long-term basis. The settlement resulted in a
non-recurring pre-tax charge in the third quarter of 1995 of $561,000 or $0.11
per share after tax.
Income Taxes
- ------------
The Company had an effective tax credit rate of 36.1% in 1996 and an
effective tax provision rate of 32.4% in 1995.
COMPARISON OF 1995 AND 1994
Net Sales
- ---------
Net sales for 1995 increased 5% to $29.5 million from $28.0 million in 1994.
This increase was primarily attributable to increased sales of P C Dynamics and
an increase in sales to Spectrian, the Company's third largest customer. Net
sales of P C Dynamics, which was acquired by the Company in August 1994,
increased to $4,172,000 in 1995 from $1,055,000 in 1994. Net sales to
Spectrian increased by approximately $687,000 or 24% to $3,498,000.
The foregoing increases in net sales were offset by a reduction in net sales to
AT&T and Motorola, the Company's two largest customers, of approximately
$4,396,000 or 26%. The Company's inability to obtain components on a timely
basis from a Motorola-approved supplier contributed to the reduction in
shipments made by the Company to Motorola during 1995.
The Company's three largest customers accounted for approximately 55% of the
Company's net sales in 1995 compared to approximately 72% of the Company's net
sales in 1994.
Gross Profit and Cost of Goods Sold
- -----------------------------------
Gross profit decreased 28% to $2.7 million in 1995 from $9.6 million in 1994.
Gross margin decreased to approximately 24% in 1995 from approximately 34% in
1994. This reduction is attributable to reduced shipments to certain of the
Company's largest customers, a shift in product mix, certain price reductions
due to competitive pressures and additional costs of approximately $323,000 in
1995 relating to the Company's assembly operations. In particular, a product
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<PAGE> 16
manufactured by P C Dynamics under a military supply contract and a product
manufactured by Poly Circuits for one of its major customers each had higher
than expected manufacturing costs and contributed to the decline in gross
margin in 1995.
TBL is the largest single component of the Company's cost of goods sold,
representing approximately 18.6% and 14.5% of net sales during 1995 and 1994,
respectively. The Company did not experience significant changes in the cost
of TBL during 1995 and 1994. During 1995 and 1994, one manufacturer accounted
for approximately 49% and 60% , respectively, of the TBL supplied to the
Company.
Operating Expenses
- ------------------
General and administrative expenses were approximately $2,327,000 or 7.9% of
net sales in 1995, compared to $1,789,000 or 6.4% of net sales in 1994. The
increase in general and administrative expenses was attributable to an increase
in staff, particularly at P C Dynamics, and costs of approximately $60,000
relating to the Company's assembly operations. 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 approximately $2,009,000 or 6.8% of net
sales in 1995, compared to $1,789,000 or 6.4% of net sales in 1994. The
increase in selling and marketing expenses was primarily attributable to
commissions paid as a result of a shift in sales from non-commissionable sales
to commissionable sales and additional expenses relating to international
sales. Selling and marketing expenses include the cost of salaries,
advertising and promoting the Company's products and the commissions paid to
independent sales organizations.
Research and development expenses were approximately $412,000 or 1.4% of net
sales in 1995, compared to $420,000 or 1.5% of net sales in 1994. The Company
is currently developing Flexlink II, its second generation high frequency
bonding process that is designed to provide improved performance and increased
efficiencies.
By the end of 1995, the Company had reduced the number of employees at P C
Dynamics and Poly Circuits in response to lower than anticipated shipments.
However, the Company expects that the commencement of operations at P C
Dynamics' new facility in Texas and increased production at the Company's
assembly operation will increase depreciation and other fixed manufacturing
costs of the Company.
Operating Income
- ----------------
Operating income was approximately $2.2 million or 7.5% of net sales in 1995, a
decrease of $3.4 million from 1994. The change in operating income can be
summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Increase in net sales $516,000
Decrease in gross margin (3,168,000)
Increase in operating expenses (749,000)
-----------
Decrease in operating income ($3,401,000)
===========
</TABLE>
Interest Income
- ---------------
Interest income from short-term investments was approximately $294,000 in 1995
compared to $177,000 in 1994.
16
<PAGE> 17
Liquidity and Capital Resources
- -------------------------------
Net cash provided/(used) by operations was ($181,000), ($740,000) and $4,378,000
in 1996, 1995 and 1994, respectively. Cash generated and cash on hand has been
primarily used for the purchase of property, plant and equipment. Purchases of
property, plant and equipment were $4,723,000, $4,528,000, and $2,725,000 in
1996, 1995 and 1994, respectively. The capital expenditures for 1996 include
$3.6 million for the new P C Dynamics facility in Texas. The expenditures were
partially financed through mortgage borrowings of $2.9 million. Except for
expenditures required to improve the manufacturing processes, the Company
presently has no plans for additional capital expenditures.
On August 5, 1994, the Company acquired the operating assets and liabilities of
P C Dynamics Corporation for a total consideration of $3,325,000, including
$1,000,000 cash, a note payable of $800,000 bearing interest at 8% and payable
in two installments of $400,000, and 100,000 shares of M~Wave Common Stock with
a fair market value of $15.25 per share. The cash portion of the purchase
price was funded from available cash balances.
On September 8, 1994, a fire at P C Dynamics Corporation substantially
destroyed the 17,000 square foot facility located in Frisco, Texas. The fire
destroyed the administrative portion of the facility. The manufacturing
section's structure was damaged less severely, but corrosive smoke damage
effectively destroyed the highly sensitive equipment needed for production.
The Company used the insurance proceeds together with internally generated
funds and bank borrowings to build a new facility and replace certain plant and
equipment.
In January and March 1996, the Company obtained construction loans from
American National Bank and Trust Company of Chicago to finance the rebuilding
of the P C Dynamics facility in Frisco, Texas. The loans are payable in
monthly installments of principal and interest which began in October 1996 and
end with a balloon payment of $1,462,000 in October 2001.
The Company has a $2,000,000 line of credit from American National Bank and
Trust Company of Chicago which provides for a maximum borrowings of $2,000,000
through May 1997 at an interest rate of prime plus 0.5%. At December 31, 1996,
no amounts were outstanding on this line.
As of December 31, 1996, the Company has $2,912,000 of debt and $1.2 million of
cash and cash equivalents. Management believes that funds generated from
operations, coupled with the Company's cash balance and its capacity for debt
will be sufficient to fund current business operations and reasonably
foreseeable expansion plans. The Company anticipates additional debt financing
during the next twelve months. There can be no assurances that such additional
debt financing can be obtained and, if obtained, at reasonable terms.
Inflation
- ---------
Management believes 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.
17
<PAGE> 18
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.
Item 8. Financial Statements and Supplementary Data
Consolidated financial statements and the related notes for each of the three
years in the period ended December 31, 1996 are filed in response to this Item
pursuant to Item 14.
The supplementary data regarding quarterly results of operations, set forth
under the caption "Selected Quarterly Financial Data (Unaudited)" following the
aforementioned consolidated financial statements, are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
18
<PAGE> 19
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required by this Item with respect to Executive Officers of the
Company is set forth in Part I, Item 4 and is incorporated herein by this
reference. Information required by this Item with respect to members of the
Board of Directors of the Company will be contained in the Proxy Statement for
the Annual Meeting of Stockholders (the "1996 Proxy Statement"), to be held on
Wednesday, June 4, 1997, and is incorporated herein by this reference.
Item 11. Executive Compensation
Information required by this Item will be contained in the 1997 Proxy Statement
and is incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item will be contained in the 1997 Proxy Statement
and is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
Information required by this Item will be contained in the 1997 Proxy Statement
and is incorporated herein by this reference.
19
<PAGE> 20
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
<TABLE>
<S> <C> <C> <C>
(a) 1. Financial Statements
Page in the
Form 10-K
-----------
Independent Auditors' Report 21
Consolidated Balance Sheets
December 31, 1996 and 1995 22
Consolidated Statements of Operations
Years Ended December 31, 1996, 1995 and 1994 23
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1996, 1995 and 1994 24
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994 25-26
Notes to Consolidated Financial Statements 27-34
Selected Quarterly Financial Data (Unaudited) 35
Subsidiaries 38
</TABLE>
(a) 2. Financial Statement Schedules
All schedules are omitted because they are not applicable, or not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
(a) 3. Exhibits
The exhibits filed herewith are set forth on the Index to Exhibits
filed as part of this report.
(b) The Company filed a report on Form 8-K dated December 19, 1996
announcing the sale of the Assembly Division.
20
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Directors and Stockholders
M-Wave, Inc.
Bensenville, Illinois
We have audited the accompanying consolidated balance sheets of M-Wave,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of M~Wave, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 17, 1997
(March 25, 1997 as to the last paragraph of Note 6)
21
<PAGE> 22
M-WAVE, Inc. and Subsidiaries
- -----------------------------
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------
ASSETS 1996 1995
- ------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,216,859 $2,403,747
Marketable securities 1,321,358
Accounts receivable, net of allowance
for doubtful accounts:
1996 - $50,000; 1995 - $10,000 1,725,340 4,106,494
Inventories 1,349,645 3,462,200
Refundable income taxes 2,426,081 639,112
Deferred income taxes 804,088 154,682
Prepaid expenses and other 191,729 331,010
----------- ----------
Total current assets 7,713,742 12,418,603
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements 6,224,247 2,680,882
Machinery and equipment 9,885,170 10,043,357
Less accumulated depreciation (3,646,209) (2,629,466)
----------- -----------
Property, plant and equipment - net 12,463,208 10,094,773
NOTE RECEIVABLE, net of valuation
allowance of $250,000 871,718
GOODWILL 771,853 873,636
OTHER ASSETS 15,030 20,811
----------- -----------
TOTAL $21,835,551 $23,407,823
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $1,549,997 $1,734,831
Accrued expenses 1,254,436 1,163,692
Current portion of long-term debt 307,606 409,338
----------- -----------
Total current liabilities 3,112,039 3,307,861
DEFERRED INCOME TAXES 1,106,786 723,130
LONG-TERM DEBT 2,604,464 11,239
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 3,021,625 shares outstanding
at December 31, 1996 30,416 30,404
Additional paid-in capital 7,492,472 7,488,422
Retained earnings 7,609,374 11,966,767
Treasury stock, 20,000 shares at cost (120,000) (120,000)
----------- -----------
Total stockholders' equity 15,012,262 19,365,593
----------- -----------
TOTAL $21,835,551 $23,407,823
=========== ===========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 23
M-WAVE, Inc. and Subsidiaries
- -----------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
NET SALES $22,643,968 $29,512,380 $28,009,390
COST OF GOODS SOLD 23,326,988 22,541,108 18,385,737
----------- ----------- -----------
Gross profit (loss) (683,020) 6,971,272 9,623,653
OPERATING EXPENSES:
General and administrative 3,313,512 2,326,806 1,789,489
Selling and marketing 1,678,078 2,009,058 1,789,245
Research and development 544,938 412,469 420,448
----------- ----------- -----------
Total operating expenses 5,536,528 4,748,333 3,999,182
----------- ----------- -----------
Operating income (loss) (6,219,548) 2,222,939 5,624,471
OTHER INCOME (EXPENSE):
Interest income 39,459 294,010 176,816
Interest expense (224,110) (87,570) (24,916)
Non-recurring gain 424,642
Litigation settlement (560,953)
Loss on disposal of equipment (416,670)
----------- ----------- -----------
Total other income (expense), net (601,321) (354,513) 576,542
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (6,820,869) 1,868,426 6,201,013
Provision (credit) for income taxes (2,463,476) 605,471 2,455,078
=========== =========== ===========
NET INCOME (LOSS) $(4,357,393) $ 1,262,955 $ 3,745,935
=========== =========== ===========
NET INCOME (LOSS) PER SHARE $ (1.44) $ 0.41 $ 1.25
=========== =========== ===========
Weighted average shares outstanding 3,021,041 3,072,920 3,006,599
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 24
M-WAVE, Inc. and Subsidiaries
- -----------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------------------------
Additional Total
Common Paid-in Retained Treasury Stockholders'
Stock Capital Earnings Stock Equity
------- ---------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE
JANUARY 1,1994 $29,000 $5,594,076 $ 6,957,877 $(240,000) $12,340,953
Common stock issued:
Acquisition 1,000 1,524,000 1,525,000
Stock options 94 31,137 31,231
Net income 3,745,935 3,745,935
------- ---------- ---------- --------- -----------
BALANCE
DECEMBER 31, 1994 30,094 7,149,213 10,703,812 (240,000) 17,643,119
Common stock issued:
Stock options 310 339,209 339,519
Reissuance of treasury
stock (20,000 shares) 120,000 120,000
Net income 1,262,955 1,262,955
------- ---------- ----------- --------- -----------
BALANCE
DECEMBER 31,1995 $30,404 $7,488,422 $11,966,767 $(120,000) $19,365,593
Common stock issued:
Stock options 12 4,050 4,062
Net loss (4,357,393) (4,357,393)
BALANCE ------- ---------- ----------- --------- -----------
DECEMBER 31,1996 $30,416 $7,492,472 $ 7,609,374 $(120,000) $15,012,262
======= ========== =========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 25
M-WAVE, Inc. and Subsidiaries
- -----------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(4,357,393) $1,262,955 $3,745,935
Adjustments to reconcile net income
to net cash flows from
operating activities:
Provision for doubtful accounts 40,000
Valuation provision on note receivable 250,000
Loss on disposal of equipment 416,670
Depreciation and amortization 1,339,581 987,542 816,634
Deferred income taxes (265,750) 48,993 295,479
Treasury stock issued in
litigation settlement 120,000
Non-recurring gain (424,642)
Changes in assets and liabilities:
Accounts receivable 1,913,215 (510,457) (335,500)
Inventories 2,029,938 (1,086,770) (392,789)
Income taxes (1,786,969) (521,156) (790,025)
Prepaid expenses and other assets 133,753 (88,722) (24,160)
Accounts payable 15,166 (541,160) 603,833
Accrued expenses 90,744 (410,828) 883,026
----------- ---------- ----------
Net cash flows from
operating activities (181,045) (739,603) 4,377,791
----------- ---------- ----------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (4,722,756) (4,528,061) (2,725,056)
Purchase of marketable securities (1,321,358)
Redemption of marketable securities 1,321,358
Insurance proceeds received, net of fire
related payments 1,756,328 (324,360)
Acquisition of P C Dynamics Corporation,
net of cash acquired (1,200,000)
Collection of notes receivable 451,533 7,053
Cash paid in conjunction with sale
of Assembly Division (100,000)
----------- ---------- ----------
Net cash flows from
investing activities (3,501,398) (3,641,558) (4,242,363)
----------- ---------- ----------
FINANCING ACTIVITIES:
Common stock issued upon exercise of
stock options 4,062 339,519 31,231
Proceeds from long-term debt 2,954,000
Repayment of long-term debt (462,507) (423,434) (34,030)
---------- ---------- ----------
Net cash flows from
financing activities 2,495,555 (83,915) (2,799)
---------- ---------- ----------
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,186,888) (4,465,076) 132,629
CASH AND CASH EQUIVALENTS:
Beginning of year 2,403,747 6,868,823 6,736,194
---------- ---------- ----------
End of year $1,216,859 $2,403,747 $6,868,823
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
1996 1995 1994
---------- --------- ----------
Cash paid during the year for:
Income taxes $1,079,500 $2,950,000
Interest $ 145,794 64,000 7,025
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
In 1994, the Company purchased substantially all of the operating assets and
assumed certain liabilities of P C Dynamics Corporation in a transaction
summarized as follows:
<S> <C>
Fair value of assets acquired $4,238,100
Consideration paid:
Cash (includes $200,000 of related fees
and costs) 1,200,000
Notes payable 800,000
M-Wave, Inc. common stock 1,525,000
----------
3,525,000
----------
Liabilities assumed $713,100
==========
</TABLE>
In 1996, the Company sold substantially all of the operating assets, subject to
certain liabilities, of the Assembly Division for a promissory note in the
amount of $1,122,000, the net book value of the net assets sold. The Company
has recorded a valuation allowance of $250,000 on the note receivable at
December 31, 1996. Prior to the sale, the Company advanced $100,000 to the
purchaser.
See notes to consolidated financial statements.
26
<PAGE> 27
M-WAVE, Inc. and Subsidiaries
- -----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATIONS
M-Wave, Inc. ("M-Wave"), a Delaware corporation, was formed on January 31,
1992. On January 31, 1992, Poly Circuits, Inc. ("Poly Circuits") became a
wholly-owned subsidiary of M~Wave through an exchange in which the former
stockholders of Poly Circuits received 100 shares of M~Wave common stock for
each outstanding share of Poly Circuits.
M-Wave, through its wholly-owned subsidiaries, Poly Circuits, Inc. and P C
Dynamics Corporation (collectively, the "Company"), manufactures microwave
frequency components and high frequency circuit boards on Teflon-based
laminates for commercial and military wireless communication applications.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Principles of Consolidation - The consolidated financial statements include
the accounts of M-Wave and its wholly-owned subsidiaries. Significant
intercompany transactions and account balances have been eliminated.
Revenue Recognition - The Company recognizes revenue when product is shipped
to customers.
Cash and Cash Equivalents - Cash and cash equivalents comprise cash in banks
and highly liquid investments that are both readily convertible to known
amounts of cash and so near maturity that they present insignificant risk of
change in value.
Marketable securities, - Marketable securities, consisting primarily of
municipal notes, are classified as available-for-sale securities as defined
by Statement of Financial Accounting Standards No. 115. Unrealized gains
and losses are immaterial at December 31, 1995, as are realized gains and
losses for 1996 and 1995.
Inventories - Inventories are carried at the lower of first-in, first-out
(FIFO) cost or market. Substantially all the Company's inventories are
work-in-process.
Property, Plant and Equipment - Property, plant and equipment are recorded
at cost. The Company calculates depreciation using the straight-line method
at annual rates as follows:
<TABLE>
<CAPTION>
<S> <C>
Building and improvements 3% to 20%
Machinery and equipment 10% to 20%
</TABLE>
27
<PAGE> 28
Goodwill - Goodwill arising from the acquisition of P C Dynamics Corporation
is being amortized on a straight-line basis over 10 years. The Company
assesses the recoverability of goodwill, as well as other long-lived assets,
based upon expectations of future undiscounted cash flows in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Earnings (Loss) Per Share - Earnings (loss) per share is determined by
dividing net income (loss) by the weighted average number of common shares
and common share equivalents (dilutive stock options) outstanding during
the period.
Reclassifications - Certain reclassifications of 1995 and 1994 amounts have
been made to conform to the presentation in the current year.
3. ACQUISITION
Effective August 5, 1994, M-Wave acquired substantially all of the assets
and assumed certain liabilities of P C Dynamics Corporation ("PCD") for
total consideration of $3,325,000, including $1,000,000 cash, an $800,000
note and 100,000 shares of M-Wave common stock valued at $1,525,000.
The acquisition was accounted for using the purchase method of accounting.
Results of operations of PCD have been included in the consolidated
statements of income from the date of acquisition.
Had the acquisition occurred at January 1, 1994, proforma results of
operations for the year ended December 31, 1994 would have been as follows:
<TABLE>
<CAPTION>
<S> <C>
Sales $30,561,854
Net income 3,319,819
Net income per share 1.08
</TABLE>
On September 8, 1994, the PCD facilities in Frisco, Texas, were severely
damaged by a fire. As a result of the fire, the Company recorded a 1994
non-recurring gain of $424,642, representing the excess of estimated
insurance proceeds over the carrying value of assets lost and fire-related
expenses incurred, as detailed below:
<TABLE>
<CAPTION>
<S> <C>
Total insurance proceeds $2,656,328
Carrying value of assets destroyed (1,007,326)
Fire-related expenses (1,224,360)
----------
Non-recurring gain $ 424,642
==========
</TABLE>
Until October 1995, the Company leased the PCD facility from the former
general manager of PCD, at a monthly rental of approximately $9,300. In
October 1995, the Company purchased the land on which the PCD plant and
office facilities were built for $240,000, the appraised value of the land.
In addition, the Company exchanged a note receivable of $451,533 due from
the owner of the PCD facility and paid cash of approximately $866,000 for
the rights to approximately $1,300,000 of insurance proceeds
28
<PAGE> 29
receivable on the fire-damaged facility. Such proceeds have been applied
to construction of the new PCD facility.
4. SALE OF ASSEMBLY DIVISION
In May 1995, the Company established a division which performed contract
assembly work for the Company's customers. Effective December 13, 1996, the
Company sold substantially all of the assets, subject to certain
liabilities, of this division for a promissory note of $1,122,000, the net
book value of the assets sold (including $700,000 of machinery and
equipment). The Company has recorded a valuation allowance of $250,000 on
the note.
The note is due on December 13, 2001, but may be prepaid in full or in part.
It bears interest at 8% through December 13, 1997, and at rates increasing
from prime plus 1.5% to prime plus 3.5% over the remaining term, and is
collateralized by the machinery and equipment sold.
As further consideration, the Company will be entitled to royalties equal to
3% of the purchaser's net sales, subject to a maximum amount ranging from
$300,000 to $2.0 million, depending on the length of time the promissory note
is outstanding; the $2.0 million maximum results if the note is not prepaid.
The Company sustained operating losses on the Assembly Division of $1.1
million in 1996 and $400,000 in 1995 on revenues of $463,000 and $91,000,
respectively. While the Company believes that its realization on the note
will equal or exceed the net carrying value of $872,000 at December 31,
1996, it is at least reasonably possible that an increase in the $250,000
valuation allowance will be required in the near term, depending on the
purchaser's operating results.
5. ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1995 were comprised of:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Salaries and wages $242,720 $233,432
Commissions 109,494 301,252
Legal 445,764 365,000
Property and other taxes 109,104 10,000
Other 347,354 254,008
---------- ----------
Total accrued expenses $1,254,436 $1,163,692
========== ==========
</TABLE>
6. LONG-TERM DEBT
The Company has a bank credit agreement which includes a
revolving line of credit and the mortgage loans described below.
Line of credit availability is based on 80% of eligible accounts
receivable, with a borrowing limit of $2,000,000. Interest is at the
prime rate plus 1/2%. The agreement expires May 31, 1997 and is
renewable semi-annually at the mutual consent of the Company and the
lender. No balance was outstanding under the line at December 31, 1996.
29
<PAGE> 30
Long-term debt is comprised of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Note payable to seller of P C Dynamics, $400,000
8% interest, due in August 1996
Mortgage notes payable, 1/2% over prime rate,
monthly installments, due October 2001,
collateralized by P C Dynamics facility $2,903,534
Obligations under capital leases,
due through 1997 8,536 20,577
---------- --------
2,912,070 420,577
Less current portion 307,606 409,338
---------- --------
Total long-term debt $2,604,464 $11,239
========== ========
</TABLE>
<TABLE>
<CAPTION>
Scheduled maturities of long-term debt are as follows at December 31, 1996:
<S> <C>
1997 $307,606
1998 306,522
1999 302,796
2000 302,796
2001 1,692,350
----------
$2,912,070
==========
</TABLE>
The terms of the Company's long-term bank debt represent the borrowing rates
currently available to the Company; accordingly, the fair value of this
debt approximates its carrying amount.
Revolving credit borrowings and the mortgage notes are cross-defaulted and
cross-collateralized. The credit agreement, as amended March 25, 1997,
effective January 1, 1997, requires the Company to maintain a stipulated
amount of tangible net worth, as defined.
7. INCOME TAXES
<TABLE>
<CAPTION>
The provision (credit) for income taxes consists of:
1996 1995 1994
---------- -------- ----------
<S> <C> <C> <C>
Current (2,197,726) 556,478 2,159,599
Deferred (265,750) 48,993 295,479
---------- -------- ----------
Total ($2,463,476) $605,471 $2,455,078
=========== ======== ==========
</TABLE>
The primary components comprising the net deferred tax liabilities are
as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
Depreciation and amortization $(1,106,786) $(909,532)
Accounts receivable reserves 61,827
Inventory reserves 411,672
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
<S> <C> <C>
Accrued expenses and other 330,589 154,682
Tax credits 186,402
----------- ---------
Net deferred tax liabilities $ (302,698) $(568,448)
=========== =========
</TABLE>
The effective tax rate differs from the from the Federal statutory tax
rate for the following reasons:
<TABLE>
<CAPTION>
1996 1995 1994
------ ----- -----
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of Federal benefit 4.8 4.2 4.8
Tax exempt interest (5.5) (1.1)
Other, net (2.7) (0.3) 1.9
----- ----- -----
Effective rate 36.1% 32.4% 39.6%
===== ===== =====
</TABLE>
8. SIGNIFICANT CUSTOMERS AND SUPPLIERS
The percentages of net sales attributable to major customers by year
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Customer A 8% 16% 27%
Customer B 26 27 35
Customer C 10 12 10
Customer D 14 6 0
</TABLE>
During 1996, 1995 and 1994, one manufacturer accounted for approximately
46%, 49% and 60%, respectively, of the Teflon-based laminates ("TBL")
supplied to the Company. TBL is the largest single component of the
Company's cost of goods sold representing approximately 27.5%, 18.6%, and
14.5% of net sales during 1996, 1995 and 1994, respectively. There are only
four U. S. manufacturers of TBL. Any disruption or termination of these
sources of TBL could adversely affect the Company's operations.
9. STOCK OPTION PLAN
In February 1992, the Board of Directors and stockholders of the Company
approved a non-qualified Stock Option Plan (the "Stock Option Plan") under
which 300,000 shares of common stock are reserved for issuance upon exercise
of stock options. The Stock Option Plan is designed as an incentive for
retaining key employees and directors.
In June 1995, the Board of Directors and stockholders of the Company
approved an amendment and restatement of the Company's 1992 Stock Option
Plan. The principal changes that resulted from the amendment are (1) an
increase in the aggregate number of shares of Common Stock of the Company
available for the exercise of options granted under the plan from 300,000 to
500,000; (2) a limit on the number of shares as to which options may be
granted to any grantee in any calendar year to 75,000; (3) a grant of
discretion to the Compensation Committee to extend the exercisability of
options after a grantee's termination of employment (other than for Cause,
as defined in the Plan) from 30 days to any longer period up to the full
remaining term of the option; and (4) a
31
<PAGE> 32
provision for the acceleration of the exercisability of all outstanding
options (regardless of when granted) in the event of a Change of Control
of the Company.
The exercise price of each non-qualified stock option granted to
employees of the Company under the Stock Option Plan must equal at least 80%
of the fair market value of the underlying shares of common stock on the
date of the grant, and the maximum term of such an option may not exceed 10
years. For all options granted to date, except for 75,000 options granted
in 1995, exercise price has equaled fair market value at the date of grant,
the term of the options has been 10 years, and the options vest as to 25% on
each of the first four anniversary dates of the grant. Exercise prices, as a
percentage of fair market value at date of grant, on 75,000 options granted
in 1995 are 110% as to 25,000 options, 120% as to 25,000 options and 130%
as to 25,000 options. These options vest as to 33-1/3% on December 31, 1995,
December 31, 1996 and December 31, 1997.
<TABLE>
<CAPTION>
Stock option activity under the Plan was as follows:
---------------------------------------------------------------------
Number of Shares Weighted Average
Under Option Exercise Price
---------------------------------------------------------------------
<S> <C> <C>
Balance, January 1, 1994 190,000 $ 6.43
Granted 75,000 12.97
Exercised (9,350) 3.34
---------------------------------------------------------------------
Balance, December 31, 1994 255,650 8.46
---------------------------------------------------------------------
Granted 105,000 14.50
Forfeited (31,250) 12.06
Exercised (31,025) 5.38
---------------------------------------------------------------------
Balance, December 31, 1995 298,375 10.53
---------------------------------------------------------------------
Forfeited (61,250) 10.37
Exercised (1,250) 3.25
---------------------------------------------------------------------
Balance, December 31, 1996 235,875 $10.61
---------------------------------------------------------------------
Exercisable at year-end:
1994 69,400
1995 127,125
1996 175,875
</TABLE>
The weighted average fair value of the options granted in 1995 is
$10.50 per share. The range of exercise prices of the 235,875 options
outstanding at December 31, 1996 is $3.25 to $15.93 and the weighted average
remaining contractual life is 8 years. At December 31, 1996, 222,500 shares
were available for grant.
The Company applies Accounting Principles Board Opinion No. 25 in
accounting for stock options. Accordingly, no compensation cost has been
recognized for options granted.
32
<PAGE> 33
Had compensation cost for options granted in 1995 been determined based on
the fair value at the grant date, consistent with the method prescribed by
Financial Accounting Standards Board Statement No. 123, the Company's net
income (loss) and related per share amounts would have been adjusted to
the following pro forma amounts:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
---- ----
Net income (loss)
As reported $(4,357,393) $1,262,955
Pro forma (4,583,145) 1,103,047
Net Income (loss) per share
As reported $ (1.44) $ 0.41
Pro forma (1.51) 0.36
</TABLE>
The fair value of each option granted in 1995 was estimated at the grant
date using the Black-Scholes options pricing model with the following
weighted average assumptions: expected volatility of 81%: risk free
interest rate of 7.2%; expected life of 9 years; and, no dividend yield.
10. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution retirement plan covering
substantially all full-time employees. The plan allows for employees to
defer up to 10% of their pretax annual compensation, as defined in the plan.
The Company will match up to 25% of the first 4% of base compensation that
a participant contributes. Additionally, discretionary amounts may be
contributed by the Company. The Company's contributions for 1996, 1995 and
1994 were zero, zero and $50,000, respectively.
11. LEASE COMMITMENTS
The Company rents manufacturing and administrative space under operating
leases. Rent expense under these leases for the years ended December 31,
1996, 1995 and 1994 was $236,401, $142,534, and $90,715, respectively.
Future minimum annual lease commitments at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year
-----
<S> <C>
1997 $84,600
1998 57,600
1999 57,600
2000 28,800
--------
Total $228,600
========
</TABLE>
12. LITIGATION
The Company is a party to various actions and proceedings related to its
normal business operations. The Company believes that the outcome of this
litigation will not have a material adverse effect on the financial position
or results of operations of the Company.
On May 13, 1994, Comptek Research, Inc., Comptek Telecommunications, Inc.
and Industrial Systems Service, Inc. (together "Comptek") filed a suit
against M-Wave, Inc. and Poly Circuits, Inc. alleging contractual, Uniform
Code and tortious violations arising out of Poly Circuits' sale of printed
circuits boards. On September 29, 1995, the Company reached settlement
with Comptek. The settlement included a cash payment of
33
<PAGE> 34
$300,000, the issuance of 20,000 shares of the Company's common stock to
Comptek and an agreement to supply goods and services to Comptek on a
long-term basis. The settlement resulted in a non-recurring pre-tax
charge in the third quarter of 1995 of approximately $561,000, or $0.11
per share after tax.
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. This motion has been briefed and a decision is
pending. The parties are currently discussing a settlement under which the
Company and Joseph Turek deny all wrongdoing.
13. ENVIRONMENTAL MATTERS
The Company periodically generates and handles materials that are considered
hazardous waste under applicable law and contracts for the off-site disposal
of these materials. During the ordinary course of its operations, the
Company has on occasion received citations or notices from regulatory
authorities that such operations may not be in compliance with applicable
environmental regulations. Upon such receipt, the Company works with such
authorities to resolve the issues raised by such citations or notices. The
Company's past expenditures relating to environmental compliance have not
had a material effect on the financial position of the Company. The Company
believes the overall impact of compliance with regulations and legislation
protecting the environment will not have a material effect on its future
financial position or results of operations, although no assurance can be
given.
Based on information available to the Company, which in most cases includes
an estimate of liability, legal fees and other factors, a reserve for
indicated environmental liabilities has been recorded in the aggregate
amount of approximately $96,000.
* * * * * *
34
<PAGE> 35
M-WAVE, Inc. and Subsidiaries
- -----------------------------
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- -------------------------------------------------------------------------------
Set forth below is a summary of the Company's unaudited quarterly results for
each quarter during 1996 and 1995. In management's opinion, these results have
been prepared on the same basis as the audited financial statements contained
elsewhere herein and include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the information for the
periods when read in conjunction with the financial statements and notes
thereto.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales $6,256,558 $6,340,968 $6,284,338 $3,762,104
Gross profit (loss) (1,834,221) 786,841 1,111,075 (746,715)
Net income (loss) (2,126,344) (334,809) (205,295) (1,690,945)
Net income (loss) per share (0.70) (0.11) (0.07) (0.56)
Three Months Ended
---------------------------------------------------
March 31, June 30, September 30, December 31,
1995 1995 1995 1995
----------- ---------- ------------- ------------
Net sales $8,034,178 $8,676,978 $5,868,340 $6,932,884
Gross profit 2,535,801 2,192,942 991,896 1,250,633
Net income (loss) 917,051 728,849 (496,969) 114,024
Net income (loss) per share 0.30 0.24 (0.16) 0.04
</TABLE>
35
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
M-WAVE, Inc.
By:
------------------------------
Joseph A. Turek
Chairman of the Board,
Chief Executive Officer
March 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
- ----------------------------- ------------------------------
Joseph A. Turek Eric C. Larson
Director Director
March 26, 1997 March 26, 1997
- ----------------------------- ------------------------------
Lavern D. Kramer Timothy A. Dugan
Director Director
March 26, 1997 March 26, 1997
- -----------------------------
Paul H. Schmitt
Treasurer and Secretary
(Principal Accounting and
Financial Officer)
March 26, 1997
36
<PAGE> 37
EXHIBIT INDEX
- -------------
<TABLE>
<CAPTION>
Exhibit
No. Description Page
- ------- -------------------------------------------------------------- -----
<S> <C> <C>
2.1 Exchange Agreement, dated as of January 31, 1992, among Poly *
Circuits, Inc., Joel S. Dryer, Joseph A. Turek and the Company
3.1 Certificate of Incorporation of the Company *
3.2 Bylaws of the Company *
10.1 Amended and restated M~Wave, Inc. 1992 Stock Option Plan ****
10.2 Lease, dated June 22, 1989, by and between Louis R. and Ruth
DeMichele and the Company *
10.3 Amended Form of Sales Representative Agreement generally used
by and between the Company and its sales representatives *
10.4 Employment Agreement between the Company and
Joseph A. Turek ****
10.5 Registration Rights Agreement dated July 21, 1993, between
the Company and certain holders of Company common stock **
10.6 Shareholders Agreement, dated July 21, 1993, by and among
First Capital Corporation of Chicago, Cross Creek Partners II,
and Joseph A. Turek **
10.7 Asset Purchase Agreement, dated as of August 5, 1994, by and
among the Company, P C Dynamics acquisition, P CD Holdings,
Inc. and P C Dynamics Corporation. ***
10.8 Construction Loan Note, dated January 10, 1996, by and among
the Company, P C Dynamics and American National Bank and
Trust Company. *****
21 Subsidiaries 38
24.1 Consent of Deloitte & Touche LLP 39
27 Financial Data Schedule 40-43
</TABLE>
* Incorporated herein by reference to the applicable exhibit to
the Registrant's
Registration Statement on Form S-1 (Registration No. 33-45499).
** Incorporated herein by reference to the applicable exhibit to
the Registrant's
Annual Report on Form 10-K for year ended December 31, 1993
(Registration No. 0-19944).
*** Incorporated herein by reference to the applicable Report on
Form 8-K dated August 5, 1994.
**** Incorporated herein by reference to the applicable exhibit to the
Registrants quarterly report on form 10-Q for the quarter ended
June 30, 1995.
*****Incorporated herein by reference to the applicable exhibit to the
Registrant's
Annual Report on Form 10-K for year ended December 31, 1995.
37
<PAGE> 1
Exhibit 21
Subsidiaries
<TABLE>
<CAPTION>
Name State of Incorporation
- ---- ----------------------
<S> <C>
Poly Circuits, Inc. Illinois
P C Dynamics Corporation Texas
</TABLE>
<PAGE> 1
Exhibit 24.1
INDEPENDENT AUDITORS' REPORT
We consent to the incorporation by reference in Registration Statement No.
33-72650 on Form S-8 and Registration Statement No. 33-98712 on Form S-3 of
M~Wave, Inc. of our report dated February 17, 1997 (March 25, 1997 as to the
last paragraph of Note 6) appearing in the Annual Report on Form 10-K of
M~Wave, Inc. for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,216,859
<SECURITIES> 0
<RECEIVABLES> 1,725,340
<ALLOWANCES> 0
<INVENTORY> 2,426,081
<CURRENT-ASSETS> 7,713,742
<PP&E> 16,109,417
<DEPRECIATION> (3,646,209)
<TOTAL-ASSETS> 21,835,551
<CURRENT-LIABILITIES> 3,112,039
<BONDS> 2,604,464
0
0
<COMMON> 30,416
<OTHER-SE> 14,981,846
<TOTAL-LIABILITY-AND-EQUITY> 21,835,551
<SALES> 22,643,968
<TOTAL-REVENUES> 0
<CGS> 23,326,988
<TOTAL-COSTS> 5,536,528
<OTHER-EXPENSES> (601,321)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,820,869)
<INCOME-TAX> (2,463,476)
<INCOME-CONTINUING> (4,357,393)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,357,393)
<EPS-PRIMARY> (1.44)
<EPS-DILUTED> 0
</TABLE>
