<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 September 30, 1997 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 3,049,806 shares of common stock outstanding at November 6,
1997.
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PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
M-WAVE, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................ $1,216,859 $2,457,355
Accounts receivable.................................................. 1,725,340 2,360,067
Inventories.......................................................... 1,349,645 1,295,852
Refundable income taxes.............................................. 2,426,081 936,334
Deferred income taxes................................................ 804,088 476,051
Prepaid expenses and other........................................... 191,729 57,323
------------ -------------
Total current assets............................................. 7,713,742 7,582,982
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements..................................... 6,224,247 6,239,189
Machinery and equipment.............................................. 9,885,170 10,202,183
------------ -------------
Total property, plant and equipment.............................. 16,109,417 16,441,372
Less accumulated depreciation........................................ (3,646,209) (4,746,954)
------------ -------------
Property, plant and equipment-net................................ 12,463,208 11,694,418
NOTE RECEIVABLE, net of valuation
allowance of $250,000.............................................. 871,718 871,718
GOODWILL................................................................. 771,853 695,516
OTHER ASSETS............................................................. 15,030 7,428
------------ -------------
TOTAL.................................................................... $21,835,551 $20,852,062
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................... $1,549,997 $1,184,556
Accrued expenses..................................................... 1,254,436 1,029,192
Current portion of long-term debt.................................... 307,606 307,605
------------ -------------
Total current liabilities........................................ 3,112,039 2,521,353
DEFERRED INCOME TAXES.................................................... 1,106,786 1,106,786
LONG-TERM DEBT........................................................... 2,604,464 2,345,992
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, 3,069,806 shares issued and 3,049,806
shares outstanding at September 30, 1997........................... 30,416 30,698
Additional paid-in capital........................................... 7,492,472 7,574,688
Retained earnings ................................................... 7,609,374 7,392,545
Treasury stock: 20,000 shares, at cost.............................. (120,000) (120,000)
------------ -------------
Total stockholders' equity ...................................... 15,012,262 14,877,931
------------ -------------
TOTAL.................................................................... $21,835,551 $20,852,062
============ =============
</TABLE>
See notes to consolidated financial statements.
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M-WAVE, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30,
-----------------------------------
1996 1997
------------ -------------
<S> <C> <C>
Net sales..................................... $6,284,338 $4,579,624
Cost of goods sold............................ 5,174,233 3,558,755
------------ -------------
Gross profit ............................... 1,110,105 1,020,869
Operating expenses:
General and administrative.................. 781,494 535,256
Selling and marketing....................... 394,900 257,788
Research and development.................... 143,422 0
------------ -------------
Total operating expenses.................. 1,319,816 793,044
------------ -------------
Operating income (loss) .................... (209,711) 227,825
Other income (expense):
Interest income............................. 0 52,477
Interest expense............................ (69,368) (62,730)
Gain on disposal of assets.................. 0 5,000
------------ -------------
Total other income (expense) (69,368) (5,253)
------------ -------------
Income (loss) before income taxes........ (279,079) 222,572
Provision (credit) for income taxes........... (73,784) 96,300
------------ -------------
Net income (loss)............................ ($205,295) $126,272
Net income (loss) per share ($0.07) $0.04
============ =============
Weighted average shares 3,021,625 3,049,806
</TABLE>
See notes to consolidated financial statements.
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M-WAVE, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
------------------------------------
1996 1997
------------ -------------
<S> <C> <C>
Net sales.................................... $18,881,864 $13,374,680
Cost of goods sold........................... 18,834,798 10,854,672
------------ -------------
Gross profit............................... 47,066 2,520,008
Operating expenses:
General and administrative................. 2,237,585 1,921,527
Selling and marketing...................... 1,318,085 850,894
Research and development................... 346,615 0
------------ -------------
Total operating expenses................. 3,902,285 2,772,421
------------ -------------
Operating loss ............................ (3,855,219) (252,413)
Other income (expense):
Interest income............................ 25,193 117,537
Interest expense........................... (160,187) (189,623)
Gain (loss) on disposal of assets.......... (149,751) 39,089
------------ -------------
Total other income (expense) (284,745) (32,997)
------------ -------------
Loss before income taxes................ (4,139,964) (285,410)
Credit for income taxes...................... (1,473,516) (68,580)
------------ -------------
Net loss.................................... ($2,666,448) ($216,830)
============ =============
Net loss per share ($0.88) ($0.07)
Weighted average shares 3,021,261 3,042,430
</TABLE>
See notes to consolidated financial statements.
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M-WAVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------------
1996 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................................... ($2,666,448) ($216,830)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Gain on disposal of property, plant and equipment............... 0 (39,089)
Depreciation and amortization................................... 1,135,874 1,201,963
Deferred income taxes........................................... (351,639) 328,037
Changes in assets and liabilities:
Accounts receivable-trade....................................... 1,178,564 (634,727)
Inventories..................................................... 801,248 53,793
Income taxes.................................................... (703,669) 1,489,747
Prepaid expenses and other assets............................... 228,040 142,006
Accounts payable................................................ 367,656 (365,441)
Accrued expenses................................................ (17,878) (225,244)
----------- -----------
Net cash flows from operating activities..................... (28,252) 1,734,215
----------- -----------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment........................... (4,566,409) (384,844)
Proceeds from sale of property, plant and equipment................. 0 67,100
Redemption of marketable securities................................. 1,321,358 0
----------- -----------
Net cash flows from investing activities..................... (3,245,051) (317,744)
FINANCING ACTIVITIES:
Common stock issued upon exercise of stock options.................. 4,062 32,500
Common stock issued for cash........................................ 0 49,998
Payments on capital leases.......................................... (10,194)
Payments on long term debt.......................................... (400,000) (258,473)
Mortgage debt incurred.............................................. 2,571,345 0
----------- -----------
Net cash flows from financing activities..................... 2,165,213 (175,975)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. (1,108,090) 1,240,496
CASH AND CASH EQUIVALENTS - Beginning of period....................... 2,403,747 1,216,859
----------- -----------
CASH AND CASH EQUIVALENTS - End of period............................. $1,295,657 $2,457,355
----------- -----------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest.......................... $160,187 $189,623
</TABLE>
See notes to consolidated financial statements.
5
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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, 1996 filed
March 31, 1997.
2. BUSINESS
M-Wave, through its wholly-owned subsidiaries, Poly Circuits Inc.
and P C Dynamics Corporation (collectively, the "Company"),
manufactures Teflon-based printed circuit boards used by makers of
wireless and microwave related communication equipment.
3. RECLASSIFICATIONS
Certain reclassifications of 1996 amounts have been made to
conform to the presentation in the current year.
4. INVENTORIES
Substantially all the Company's inventories are in work in
process.
5. DEBT
The Company has a mortgage loan of $2,651,000 for the facility at
P C Dynamics Corporation in Frisco, Texas. Interest on this
mortgage loan is at 1/2 % over the prime rate. The loan is
payable in monthly installments of principal and interest and is
due in October 2001.
The Company has a $2,000,000 line of credit available based on 80%
of the eligible accounts receivable to fund the working capital
needs of the Company. The agreement expires May 31, 1998 and is
renewable annually at the mutual consent of the Company and the
lender. No balance was outstanding under the line at September
30, 1997.
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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.
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.
On April 25, 1997, the plaintiffs and the defendants entered into
a settlement agreement which resolves all of the claims arising
out of this action, except as to claims of class members who opt
out of the settlement. This settlement received court approval on
July 8, 1997. The settlement provides for a $150,000 payment to
the plaintiff class plus administrative fees not to exceed
$20,000. The Company's contribution to the settlement would be
approximately $85,000.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS FOR THE QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO THE
QUARTER ENDED SEPTEMBER 30, 1996
NET SALES
Net sales were $4,580,000 for the third quarter ended September
30, 1997, a decrease of $1,705,000 or 27% below the third quarter of
1996. A decrease in sales of ($1,338,000) occurred when the
Company's third largest customer, as reported in the third quarter
of 1996, shifted to an alternate material. The third quarter of
1996 included $230,000 of sales relating to the Assembly Division
and the Asian based distribution entity (Vortex). These divisions
were sold in December 1996. Net sales to the Company's largest
customer, in the third quarter of 1997, increased $868,000 or 187%
to $1,333,000; net sales to the Company's next largest customer
decreased ($305,000) or (26%) to $875,000 and net sales to the
Company's third largest customer decreased ($418,000) or (59%) to
$295,000.
The Company's three largest customers accounted for 55% of the
Company's net sales for the third quarter ended September 30, 1997
compared to 51% in the third quarter of 1996.
GROSS PROFIT AND COST OF GOODS SOLD
Gross profit was $1,021,000 in the third quarter of 1997
compared to $1,110,000 in the third quarter of 1996. The slight
decrease in gross profit was the result of a decrease in net sales
of 27%, which was almost offset by an increase in gross profit
margins of 26%. The Bensenville facility has made significant
changes that resulted in an increase of 35% in gross profit margins.
The Texas facility has not to date achieved the same magnitude of
manufacturing improvements and is hindered by the type of business
(small lot sizes) it produces and their gross profits slipped (42%).
The third quarter of 1997 included $32,000 favorable adjustments
primarily relating to insurance refunds as a result of lower net
sales and payroll expenses. The Company also recorded approximately
$20,000 of non-recurring expenses primarily relating to severance
costs. 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 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 $535,000 or 11.7% of
net sales in the third quarter of 1997 compared to $781,000 or
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12.4% of net sales in the third quarter of 1996. The net decrease of
($246,000) was due to a reduction in professional fees partially
offset by an increase in payroll expenses associated with the hiring
of a new president. 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 $258,000 or 5.6% of net
sales in the third quarter of 1997 compared to $395,000 or 6.3% of
net sales in the third quarter of 1996. The net decrease of
($137,000) was due to a reduction in payroll related expenses
partially offset by an increase in Sales Commissions. The third
quarter of 1996 included $55,000 of selling expenses relating to the
Assembly Division and the Asian based distribution entity (Vortex).
Selling and marketing expenses include the cost of salaries,
advertising and promoting the Company's products, and commissions
paid to independent sales organizations.
Research and development expenses related to the assembly
division were $143,000 or 2.3% of net sales in the third quarter of
1996. The Company sold the Assembly Division in December 1996.
OPERATING INCOME (LOSS)
Operating income was $228,000 or 5.0% in the third quarter of
1997 compared to operating loss of ($210,000) or (3.3%) of net sales
in the third quarter of 1996, an increase of $438,000. The increase
of $438,000 of operating income from the third quarter of 1996 to
the third quarter of 1997 was due to many factors; however, the
major factor was strong productivity gains and aggressive cost
reductions leading to increased operating margins. The change in
operating income can be summarized as follows:
Decrease in net sales $ (301,000)
Increase in gross margin 212,000
Decrease in operating expenses 527,000
-----------
Increase in operating income $ 438,000
INTEREST INCOME
Interest income in the third quarter of 1997 includes $22,000
from the notes receivable; obtained in the sale of the Assembly
Division in 1996. Other interest income is on short-term
investments.
INTEREST EXPENSE
Interest expense, primarily related to the Company's mortgage
obligation on its P C Dynamics facility, was $63,000 in the third
quarter of 1997 compared to $69,000 in the third quarter of 1996.
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GAIN ON DISPOSAL OF FIXED ASSETS
The Company recorded a gain of $5,000 on the disposal of fixed
assets in the third quarter of 1997.
INCOME TAXES
In the third quarter of 1997 the Company had an effective tax
rate of 43.3% due to the effects of state income taxes. In the third
quarter of 1996, the Company had an effective tax credit rate of
26.4%.
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RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 1996
NET SALES
Net sales were $13,375,000 for the nine months ended September
30, 1997, a decrease of $5,507,000 or 29% below the first nine
months of 1996. A decrease in sales of ($2,212,000) occurred when
the Company's third largest customer shifted to an alternate
material. The decrease in sales was also due to several other
factors including a Company decision to exit the low margin
commodity business; shifts by customers to alternate materials and
suppliers; and the tapering off of specific customer program
business as it enters the later stages in its life cycle. There has
also been some lessening of the rate of growth for
microwave/wireless communications infrastructure equipment. The
first nine months of 1996 included $483,000 of sales relating to the
Assembly Division and the Asian based distribution entity (Vortex).
These divisions were sold in December 1996. Net sales to the
Company's largest customer, for nine months ended September 30,
1997, increased $1,646,000 or 99% to 3,299,000; net sales to the
Company's next largest customer decreased ($2,660,000) or (50%) to
$2,650,000 and net sales to the Company's third largest customer
decreased ($2,212,000) or (71%) to $896,000.
The Company's three largest customers accounted for 51% of the
Company's net sales for the nine months ended September 30, 1997
compared to 53% for the nine months ended September 30, 1996.
The Company is taking steps to increase its sales; however, the
Company expects its sales to decline in the fourth quarter of 1997.
GROSS PROFIT (LOSS) AND COST OF GOODS SOLD
Gross profit increased $2,473,000 in the first nine months of
1997 from $47,000 in the first nine months of 1996. The improvement
is due to many factors. In 1996, the Company incurred sales
adjustments for pricing and returns of ($1,084,000) and inventory
writedowns of ($1,910,000) and ($665,000) relating to manufacturing
scrap and rework and inventory obsolescence, respectively. A total
of $301,000 of the inventory writedowns related to the Assembly
Division that was sold in December 1996. These charges did not
reoccur in 1997. Also, the Bensenville facility made good progress
in improving productivity and reducing costs during the first nine
months of 1997. This includes moving to a one shift operation from
two while improving on time delivery. The Texas facility has not to
date achieved the same magnitude of manufacturing improvements and
is hindered by the type of business (small lot sizes) it produces.
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 could adversely impact the Company's gross margins and
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profitability, which could also result in decreased liquidity and
adversely affect the Company's financial position.
OPERATING EXPENSES
General and administrative expenses were $1,922,000 or 14.4% of
net sales for the first nine months of 1997 compared to $2,238,000
or 11.9% of net sales for the first nine months of 1996. The net
decrease was due to a reduction in professional and legal fees
partially offset by an increase in payroll expense associated with
the hiring of a new president. The first nine months of 1996
included $75,000 of administrative expenses relating to the Assembly
Division and the Asian based distribution entity (Vortex). These
divisions were sold in December 1996. On April 15, 1996 the Company
engaged a consulting firm to provide consulting services with
respect to the Company's operations. The consultants completed their
work with the Company in February 1997. 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 $851,000 or 6.4% of net
sales for the first nine months of 1997 compared to $1,318,000 or
7.0% of net sales for the first nine months of 1996. Sales
commission expense was 3.3% of net sales for the first nine months
of 1997 compared to 3.1% of net sales for the first nine months of
1996. The dollar spending reductions were partly due to lower
commissions earned and payroll related expenses. The first nine
months of 1996 included $170,000 of selling expenses relating to the
Assembly Division and the Asian based distribution entity (Vortex).
These divisions were sold in December 1996. Selling and marketing
expenses include the cost of salaries, advertising and promoting the
Company's products, and commissions paid to independent sales
organizations.
Research and development expenses related to the Assembly
Division were $347,000 or 1.8% of net sales in the first nine months
of 1996. The Company sold the Assembly Division in December 1996.
OPERATING INCOME (LOSS)
Operating loss was ($252,000) for the first nine months of 1997
compared to ($3,855,000)for the first nine months of 1996, an
improvement of $3,603,000. The changes in operating income reflect
primarily the changes in net sales, gross profit and cost of goods
sold and operating expenses as discussed above. The change in
operating income can be summarized as follows:
Decrease in net sales $ (14,000)
Increase in gross margin 2,487,000
Decrease in operating expenses 1,130,000
------------
Decrease in operating loss $ 3,603,000
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INTEREST INCOME
Interest income for the nine months ended September 30, 1997
includes $52,000 from the notes receivable; obtained in the sale of
the Assembly Division in 1996. Other interest income is on
short-term investments.
INTEREST EXPENSE
Interest expense, primarily related to the Company's mortgage
obligation on its P C Dynamics facility, was $189,000 for the first
nine months of 1997 compared to $160,000 for the first nine months
of 1996.
GAIN (LOSS) ON DISPOSAL OF ASSETS
The Company recorded a gain of $39,000 on the disposal of fixed
assets for the first nine months of 1997 compared to a loss of
$150,000 for the first nine months of 1996.
INCOME TAXES
For the first nine months of 1997 the Company had an effective
tax credit rate of 24.0%. For the first nine months of 1996, the
Company had an effective tax credit rate of 35.6%. The lower rate in
1997 is due to the effect of state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided/(used) from operations was $1,734,000 for the
first nine months of 1997 compared to ($28,000) for the first nine
months of 1996. The Company collected Income tax refunds of
$1,886,000 which offset losses of ($217,000) for the first nine
months of 1997.
Capital expenditures were $385,000 in the first nine months of
1997, $105,000 to upgrade the network system at the Bensenville
facility. Capital expenditures were $4,566,000 in the first nine
months of 1996, $3.4 million for the new P C Dynamics facility in
Texas.
The Company has a mortgage loan of $2,651,000 for the facility
at P C Dynamics Corporation in Frisco, Texas. Interest on this
mortgage loan is at 1/2 % over the prime rate. The loan is payable
in monthly installments of principal and interest and is due in
October 2001.
The Company has a $2,000,000 line of credit available based on
80% of the eligible accounts receivable to fund the working capital
needs of the Company. The agreement expires May 31, 1998 and is
renewable annually at the mutual consent of the Company and the
lender. No balance was outstanding under the line at September 30,
1997.
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<PAGE> 14
As of September 30, 1997, the company has $2,651,000 of
mortgage debt and $2,457,000 of cash and cash equivalents.
Management believes that funds generated from operations, coupled
with the Company's cash and investment balances and its capacity for
debt will be sufficient to fund current business operations. The
Company's ability to fund its activities is directly dependent upon
its sales and its ability to continue to improve its manufacturing
processes.
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.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
As a supplier to microwave related equipment manufacturers, the
Company is dependent upon the success of its customers in developing
and successfully marketing end-user microwave related 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
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<PAGE> 15
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.
The Company recorded a Notes Receivable of $1.1 million in
December 1996 relating to the sale of the Assembly Division. While
the Company believes that its realization on the note will equal or
exceed the net carrying value of $872,000 at September 30, 1997, it
is at least reasonably possible that an increase in the $250,000
valuation allowance will be required in the near term, depending
upon the financial stability of the purchaser.
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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.
On April 25, 1997, the plaintiffs and the defendants entered into
a settlement agreement which resolves all of the claims arising
out of this action, except as to claims of class members who opt
out of the settlement. This settlement received court approval on
July 8, 1997. The settlement provides for a $150,000 payment to
the plaintiff class plus administrative fees not to exceed
$20,000. The Company's contribution to the settlement would be
approximately $85,000.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data
(b) The Company filed report on Form 8-K dated August 15,
1997 announcing the relationship between M-Wave, Inc. and
Deloitte & Touche LLP has ceased.
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
M-WAVE, INC.
Date: November 7, 1997 /s/ PAUL H. SCHMITT
----------------------------
Paul H. Schmitt
Chief Financial Officer
17
<PAGE> 18
EXHIBIT INDEX
Exhibit
No Description
- ------- --------------------------------------------------
27 Financial Data
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,457,355
<SECURITIES> 0
<RECEIVABLES> 2,360,067
<ALLOWANCES> 0
<INVENTORY> 1,295,852
<CURRENT-ASSETS> 7,582,982
<PP&E> 16,441,372
<DEPRECIATION> (4,746,954)
<TOTAL-ASSETS> 20,852,062
<CURRENT-LIABILITIES> 2,521,353
<BONDS> 2,345,992
0
0
<COMMON> 30,698
<OTHER-SE> 14,847,233
<TOTAL-LIABILITY-AND-EQUITY> 20,852,062
<SALES> 13,374,680
<TOTAL-REVENUES> 0
<CGS> 10,854,672
<TOTAL-COSTS> 2,772,421
<OTHER-EXPENSES> (32,997)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (285,410)
<INCOME-TAX> (68,580)
<INCOME-CONTINUING> (216,830)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (216,830)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> 0
</TABLE>
