<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1998 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 August 6,
1998.
1
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
M~WAVE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, JUNE 30
1997 1998
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................ $ 3,534,315 $ 3,023,784
Accounts receivable, net of allowance for doubtful accounts,
1997- $10,023: 1998 $10,023 ............................................. 1,734,959 1,984,106
Inventories .............................................................. 894,665 1,334,736
Refundable income taxes .................................................. 1,289,027 1,561,095
Deferred income taxes .................................................... 371,026 178,748
Prepaid expenses and other ............................................... 30,591 68,513
------------ ------------
Total current assets ................................................. 7,854,583 8,150,982
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements ......................................... 2,360,152 2,360,152
Machinery and equipment .................................................. 7,249,005 7,109,576
------------ ------------
Total property, plant and equipment .................................. 9,609,157 9,469,728
Less accumulated depreciation ............................................ (4,014,265) (4,372,743)
------------ ------------
Property, plant and equipment-net .................................... 5,594,892 5,096,985
ASSETS TO BE DISPOSED OF, NET ................................................ 3,235,000 3,233,405
OTHER ASSETS ................................................................. 7,862 5,652
------------ ------------
TOTAL ........................................................................ $16,692,337 $ 16,487,024
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 838,610 $ 1,265,094
Accrued expenses ......................................................... 1,029,038 654,653
Current portion of long-term debt ........................................ 307,605 307,605
------------ ------------
Total current liabilities ............................................ 2,175,253 2,227,352
DEFERRED INCOME TAXES ........................................................ 317,947 317,947
LONG-TERM DEBT ............................................................... 2,268,028 2,116,502
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
3,069,806 shares issued and 3,049,806 shares outstanding at December 31,
1997, 3,069,806 shares issued and 3,049,806
shares outstanding at June 30, 1998 .................................... 30,698 30,698
Additional paid-in capital ............................................... 7,574,688 7,574,688
Retained earnings ........................................................ 4,445,723 4,339,837
Treasury stock: 20,000 shares, at cost .................................. (120,000) (120,000)
------------ ------------
Total stockholders' equity ........................................... 11,931,109 11,825,223
------------ ------------
TOTAL ........................................................................ $ 16,692,337 $ 16,487,024
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 3
M~WAVE, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30,
------------------------------
1997 1998
------------- -------------
<S> <C> <C>
Net sales ........................................ $ 4,524,052 $ 3,359,187
Cost of goods sold ............................... 3,433,884 2,697,651
------------- -------------
Gross profit ................................... 1,090,168 661,536
Operating expenses:
General and administrative ..................... 648,269 437,029
Selling and marketing .......................... 293,365 147,695
------------- -------------
Total operating expenses ..................... 941,634 584,724
------------- -------------
Operating income ............................... 148,534 76,812
Other income (expense):
Interest income ................................ 42,200 30,428
Interest expense ............................... (63,815) (56,251)
Gain (loss) on disposal of assets .............. (8,485) 60,206
------------- -------------
Total other income (expense) ................. (30,100) 34,383
------------- -------------
Income before income taxes .................. 118,434 111,195
Provision for income taxes ....................... 65,367 42,016
------------- -------------
Net income ....................................... $ 53,067 $ 69,179
============= =============
Net income per share basic and diluted $ 0.02 $ 0.02
Weighted average shares 3,049,806 3,049,806
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
M~WAVE, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
----------------------------------
1997 1998
--------------- ---------------
<S> <C> <C>
Net sales ............................................. $ 8,795,056 $ 6,075,280
Cost of goods sold .................................... 7,295,917 5,087,145
--------------- ---------------
Gross profit ........................................ 1,499,139 988,135
Operating expenses:
General and administrative .......................... 1,386,271 862,568
Selling and marketing ............................... 593,106 308,350
--------------- ---------------
Total operating expenses .......................... 1,979,377 1,170,918
--------------- ---------------
Operating loss ...................................... (480,238) (182,783)
Other income (expense):
Interest income ..................................... 65,060 71,993
Interest expense .................................... (126,893) (113,692)
Gain on disposal of assets .......................... 34,089 38,806
--------------- ---------------
Total other (expense) ............................ (27,744) (2,893)
--------------- ---------------
Loss before income taxes .......................... (507,982) (185,676)
Credit for income taxes ............................... (164,880) (79,790)
--------------- ---------------
Net loss .............................................. $ (343,102) $ (105,886)
=============== ===============
Net loss per share $ (0.11) $ (0.03)
Weighted average shares 3,038,681 3,049,806
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
M~WAVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
----------------------------------
1997 1998
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) .................................................... $ (343,102) $ (105,886)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Gain on disposal of property, plant and equipment ......... (34,089) (38,806)
Depreciation and amortization ............................. 799,996 502,633
Deferred income taxes ..................................... 218,693 192,278
Changes in assets and liabilities:
Accounts receivable-trade ................................. (735,220) (249,147)
Inventories ............................................... 83,777 (440,071)
Income taxes .............................................. 1,502,791 (272,068)
Prepaid expenses and other assets ......................... 88,995 (35,711)
Accounts payable .......................................... (750) 426,484
Accrued expenses .......................................... (127,948) (374,385)
--------------- ---------------
Net cash flows from operating activities ............... 1,453,143 (394,679)
--------------- ---------------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment ..................... (281,529) (141,126)
Proceeds from sale of property, plant and equipment ........... 52,100 176,800
--------------- ---------------
Net cash flows from investing activities ............... (229,429) 35,674
FINANCING ACTIVITIES:
Common stock issued upon exercise of stock options ............ 32,500 0
Common stock issued for cash .................................. 49,998 0
Payments on long term debt .................................... (180,621) (151,526)
--------------- ---------------
Net cash flows from financing activities ............... (98,123) (151,526)
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............ 1,125,591 (510,531)
CASH AND CASH EQUIVALENTS - Beginning of period ................. 1,216,859 3,534,315
--------------- ---------------
CASH AND CASH EQUIVALENTS - End of period ....................... $ 2,342,450 $ 3,023,784
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest .................... $ 126,893 $ 113,692
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
M~WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments necessary for a fair presentation have been
included. For further information, refer to the consolidated financial
statements contained in the Annual Report on Form 10-K for the year ended
December 31, 1997 filed March 30, 1998 and Form 10-K/A filed April 29, 1998.
2. BUSINESS
M~Wave, through its wholly-owned subsidiaries, Poly Circuits Inc. and P C
Dynamics Corporation (collectively, the "Company"), manufactures printed circuit
boards using Teflon-based laminates to customers' specifications. In addition,
the Company produces customer specified bonded assemblies consisting of a
printed circuit board bonded in some manner to a metal carrier of pallet. One
bonding technique used by the Company is Flexlink(TM), a patented process
granted to the Company in 1993.
3. RECLASSIFICATIONS
Certain reclassifications of 1997 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 $2,424,000 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, 1999 and is renewable annually at the mutual
consent of the Company and the lender. No balance was outstanding under the line
at June 30, 1998.
6
<PAGE> 7
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.
7
<PAGE> 8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS FOR THE QUARTER ENDED JUNE 30, 1998 COMPARED TO THE QUARTER ENDED
JUNE 30, 1997
NET SALES
Net sales were $3,359,000 for the second quarter ended June 30, 1998, a
decrease of $1,165,000 or 26% below the second quarter of 1997. The decline was
the result of a combination of factors including a Company decision to exit the
low margin commodity business; shifts by customers to alternate materials and
suppliers; and lower volumes associated with certain customers products entering
later stages in their life cycles. Net sales to Motorola decreased by $774,000.
The products produced for Motorola are maturing and their requirements have been
shrinking. Net sales to LK Products decreased by $488,000. LK Products has
shifted its product to an alternate material. Net sales to Spectrian increased
by $424,000. Net sales in general were reduced due to low demands in the second
quarter.
The Company's three largest customers accounted for 65% of the Company's
net sales for the second quarter ended June 30, 1998 compared to 54% in the
second quarter of 1997.
GROSS PROFIT AND COST OF GOODS SOLD
Gross profit decreased to $662,000 in the second quarter of 1998 from
$1,090,000 in the second quarter of 1997. The decrease in gross profit was the
result of a decrease in Net sales of 26%. Gross Margin decreased to
approximately 20% in the second quarter of 1998 from 24% in the second quarter
of 1997. Direct and Indirect labor was down $148,000 due mainly to lower volume
in the second quarter of 1998.
During the fourth quarter of 1997, the Company decided to reposition the
P C Dynamics subsidiary located in Frisco, Texas. Management decided the P C
Dynamics subsidiary may not have a future place in the Company's strategic
plans. As such, management is considering strategic options for P C Dynamics
including its sale. 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, the Company recorded a goodwill impairment
charge of $670,000 in 1997. In 1997, the Company also recorded a $2,604,448
impairment of building and equipment for the write down the P C Dynamics
building and equipment to an estimate of market value. The building and
equipment are recorded in the June 30, 1998 balance sheet as building and
equipment to be disposed of at market value less an estimate of selling costs.
The market value was determined based on appraisals. As a result of this
decision,
8
<PAGE> 9
Depreciation and Amortization expense was $52,000 less than the first quarter of
1997.
OPERATING EXPENSES
General and administrative expenses were $437,000 or 13.0% of net sales in
the second quarter of 1998 compared to $648,000 or 14.3% of net sales in the
second quarter of 1997. General and administrative expenses consist primarily of
salaries and benefits, professional services, depreciation of office equipment,
computer systems and occupancy expenses. Payroll related expenses were down
$62,000 due mainly to the resignation of Michael Bayles, the Company's former
President. Depreciation and Amortization relating to P C Dynamics was $33,000
less than the second quarter of 1997.
Selling and marketing expenses were $148,000 or 4.4% of net sales in the
second quarter of 1998 compared to $293,000 or 6.5% of net sales in the second
quarter of 1997. Selling and marketing expenses include the cost of salaries,
advertising and promoting the Company's products, and commissions paid to
independent sales organizations. Commissions and expenses relating to
independent sales organizations were down $114,000 as a result of lower sales.
Payroll related expenses were down $31,000 due to staff reductions.
OPERATING INCOME
Operating income was $77,000 or 2.3% in the second quarter of 1998 compared
to $149,000 or 3.3% of net sales in the second quarter of 1997, an decrease of
$72,000. The changes in operating income reflect primarily the changes in net
sales, gross profit and cost of goods sold and operating expenses as discussed
above. The change in operating income can be summarized as follows:
<TABLE>
<S> <C>
Decrease in net sales $ (281,000)
Decrease in gross margin (148,000)
Decrease in operating expenses 357,000
-----------
Decrease in operating income $ (72,000)
</TABLE>
INTEREST INCOME
Interest income from short-term investments was $30,000 in the second
quarter of 1998 compared to $30,000 in the second quarter of 1997. Royalty
income was $12,000 in the second quarter of 1997.
INTEREST EXPENSE
Interest expense, primarily related to the Company's mortgage obligation on
its P C Dynamics facility, was $56,000 in the second quarter of 1998 compared to
$64,000 in the second quarter of 1997.
9
<PAGE> 10
GAIN (LOSS) ON DISPOSAL OF FIXED ASSETS
The Company recorded a gain of $60,000 on the disposal of fixed assets in
the second quarter of 1998 compared to a loss of $8,000 in the second quarter of
1997.
INCOME TAXES
In the second quarter of 1998 the Company had an effective tax rate of
37.8%. In the second quarter of 1997, the Company had an effective tax credit
rate of 55.2% due to the effects of state income taxes.
10
<PAGE> 11
RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1997
NET SALES
Net sales were $6,075,000 for the six months ended June 30, 1998, a
decrease of $2,720,000 or 31% below the first six months of 1997. The decrease
in sales was due to several 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. Net sales to Motorola decreased by
$1,560,000. The products produced for Motorola are maturing and their
requirements have been shrinking. Net sales to LK Products decreased by
$877,000. LK Products has shifted its product to an alternate material. Net
sales to Spectrian increased by $305,000. Net sales in general were reduced due
to low requirements.
The Company's three largest customers accounted for 59% of the Company's
net sales for the six months ended June 30, 1998 compared to 53% for the six
months ended June 30, 1997.
GROSS PROFIT (LOSS) AND COST OF GOODS SOLD
Gross profit decreased to $988,000 in the first six months of 1998 from
$1,499,000 in the first six months of 1997. The decrease in gross profit was a
result of a decrease in net sales of 31%. Gross margin decreased from 17% to 16%
for the first six months of 1998. Direct labor and indirect labor was down
approximately $462,000 due mainly to a reduction in employees as a result of
lower volume for the first six months of 1998.
During the fourth quarter of 1997, the Company decided to reposition the P
C Dynamics subsidiary located in Frisco, Texas. Management decided the P C
Dynamics subsidiary may not have a future place in the Company's strategic
plans. As such, management is considering strategic options for P C Dynamics
including its sale. 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, the Company recorded a goodwill impairment
charge of $670,000 in 1997. In 1997, the Company also recorded a $2,604,448
impairment of building and equipment for the write down the P C Dynamics
building and equipment to an estimate of market value. The building and
equipment are recorded in the June 30, 1998 balance sheet as building and
equipment to be disposed of at market value less an estimate of selling costs.
The market value was determined based on appraisals. As a result of this
decision, Depreciation and Amortization expense was $120,000 less than the
second quarter of 1997.
11
<PAGE> 12
OPERATING EXPENSES
General and administrative expenses were $863,000 or 14.2% of net sales for
the first six months of 1998 compared to $1,386,000 or 15.8% of net sales for
the first six months of 1997. General and administrative expenses consist
primarily of salaries and benefits, professional services, depreciation of
office equipment, computer systems and occupancy expenses. 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
$110,000 for the first six months of 1997. The consultants completed their work
with the Company in February 1997. Payroll related expenses were down $102,000
due to staff reductions and the resignation of Michael Bayles, the Company's
former President. Depreciation and Amortization relating to P C Dynamics was
$65,000 less than the first six months of 1997.
Selling and marketing expenses were $308,000 or 5.1% of net sales for the
first six months of 1998 compared to $593,000 or 6.7% of net sales for the first
six months of 1997. Selling and marketing expenses include the cost of salaries,
advertising and promoting the Company's products, and commissions paid to
independent sales organizations. Commissions and expenses relating to
independent sales organizations were down $197,000 as a result of lower sales.
Payroll related expenses were down $70,000 due to staff reductions.
OPERATING (LOSS)
Operating loss was ($183,000) for the first six months of 1998 compared to
($480,000) for the first six months of 1997, an improvement of $297,000. The
changes in operating income reflect primarily the changes in net sales, gross
profit and cost of goods sold and operating expenses as discussed above. The
change in operating income can be summarized as follows:
<TABLE>
<S> <C>
Decrease in net sales $ (464,000)
Decrease in gross margin (47,000)
Decrease in operating expenses 808,000
-----------
Decrease in operating loss $ 297,000
</TABLE>
INTEREST INCOME
Interest income from short-term investments was $65,000 for the six months
ended June 30, 1998 compared to $52,000 for the six months ended June 30, 1997.
Interest income for the six months ended June 30, 1997 includes $37,000 from the
notes receivable, obtained in the sale of the Assembly Division in 1996. Royalty
income was $7,000 for the six months ended June 30, 1998 compared to $12,000 for
the six months ended June 30, 1997.
12
<PAGE> 13
INTEREST EXPENSE
Interest expense, primarily related to the Company's mortgage obligation on
its P C Dynamics facility, was $114,000 for the first six months of 1998
compared to $127,000 for the first six months of 1997.
GAIN ON DISPOSAL OF ASSETS
The Company recorded a gain of $39,000 on the disposal of fixed assets for
the first six months of 1998 compared to $34,000 for the first six months of
1997.
INCOME TAXES
For the first six months of 1998 the Company had an effective tax credit
rate of 43.0% due to the effects of state income taxes. For the first six months
of 1997 the Company had an effective tax credit rate of 32.5%.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided/(used) from operations was $(395,000) for the first six
months of 1998 compared to 1,453,000 for the first six months of 1997.
Inventories increased $440,000 due mainly to Lucent ($163,000) and the
additional investment in the Bonding Process ($204,000). Depreciation and
amortization was down $297,000 due to the write-down of the P C Dynamics assets
in December 1997. Accrued expenses were down $374,000 due mainly to payments
made for Property taxes and Litigation settlements. The Company collected Income
tax refunds of $1,886,000 that offset losses of ($343,000) for the first six
months of 1997. The Company also collected $1,027,000 of Income tax refunds in
the third quarter of 1998.
Capital expenditures to improve manufacturing processes were $141,000 in
the first six months of 1998. Capital expenditures were $282,000 in the first
six months of 1997, $105,000 to upgrade the network system at the Bensenville
facility.
The Company has a mortgage loan of $2,424,000 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, 1999 and is renewable annually at the mutual
consent of the Company and the lender. No balance was outstanding under the line
at June 30, 1998.
13
<PAGE> 14
As of June 30, 1998, the company has $2,424,000 of debt and $3,024,000 of
cash and cash equivalents. Management believes that funds generated from
operations, coupled with the Company's cash and investment balances and its
capacity for debt will be sufficient to fund current business operations.
INFLATION
Management believes inflation has not had a material effect on the
Company's operation or on its financial position.
FOREIGN CURRENCY TRANSACTIONS
All of the Company's foreign transactions are negotiated, invoiced and paid
in United States dollars.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
As a supplier to microwave manufacturers, the Company is dependent upon the
success of its customers in developing and 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.
14
<PAGE> 15
The Company's future success is highly dependent upon its ability to
manufacture products that incorporate new technology and are priced
competitively. The market for the Company's products is characterized by rapid
technology advances and industry-wide competition. This competitive environment
has resulted in downward pressure on gross margins. In addition, the Company's
business has evolved towards the production of relatively smaller quantities of
more complex products, the Company expects that it will at times encounter
difficulty in maintaining its past yield standards. There can be no assurance
that the Company will be able to develop technologically advanced products or
that future pricing actions by the Company and its competitors will not have a
material adverse effect on the Company's results of operations.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.11 Michael Bayles Consulting Agreement
27 Financial Data
(b) The Company filed a report on Form 8-K dated May 1, 1998 announcing
Michael Bayles will be stepping down as President and Chief Operating
Officer, but will remain on as a Consultant to the Management Team.
Joseph Turek, Chairman and Chief Executive Officer will assume his day
to day responsibilities.
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: August 7, 1998 /s/ PAUL H. SCHMITT
-------------------------------------
Paul H. Schmitt
Chief Financial Officer
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No Description
------- -----------
<S> <C>
10.11 Michael Bayles Consulting Agreement
27 Financial Data
</TABLE>
<PAGE> 1
CONSULTING AGREEMENT
CONSULTING AGREEMENT ("Agreement") made in Bensenville, Illinois this 1st
day of May, 1998, between M-WAVE, INC., a Delaware corporation (the "Company"),
and MICHAEL BAYLES ("Bayles").
WHEREAS, the Company desires to secure the services of Bayles as a business
consultant to the Company; and
WHEREAS, Bayles is willing to make his services available to the Company on
the terms and conditions set forth below,
NOW, THEREFORE, the parties hereto agree as follows:
1. Relationship. The Company hereby retains Bayles and Bayles hereby
agrees to be retained, on the following terms, as a business consultant to the
Company.
2. Term. The term of this Agreement shall commence on the date hereof
and terminate in accordance with the provisions of Section 8 hereof.
3. Duties. During the term of this Agreement, Bayles shall consult with
and render advice to the Company regarding all aspects of the Company's
business. Bayles shall provide such consulting services during reasonable
business hours upon request by one or more of the directors or officers of the
Company; provided, however, that Bayles shall have no obligation to devote more
than 20% of his business time to such consulting services. Bayles shall have no
obligation at any time to go to any office or place of business of the Company,
but shall make himself available for consultation by phone during reasonable
business hours. Notwithstanding the foregoing, during the term of this
Agreement, Bayles agrees that he shall use his best efforts to make himself
available in person a minimum of five times each calendar month at the Company's
executive offices at such times as may be reasonably requested by an
<PAGE> 2
executive officer of the Company upon reasonable notice to Bayles for meetings
and/or discussions relating to the Company and its business.
4. Compensation. As compensation for services rendered hereunder, the
Company shall pay Bayles the following: (i) Forty-Seven Thousand Five Hundred
Dollars ($47,500) per year as consulting fees to Bayles, payable in equal
monthly installments on the last business day of each calendar month (or on such
other basis as the parties hereto shall agree); (ii) Thirty Five Thousand
Dollars ($35,000) on September 1, 1998 provided that Bayles shall have provided
consulting services to the Company in accordance with this Agreement through
such date; and (iii) Fifteen Thousand Dollars ($15,000) on March 31, 2000
provided that Bayles shall have provided consulting services to the Company in
accordance with this Agreement through such date. Notwithstanding the foregoing
in the event of a Change of Control (as defined in the Company's 1992 Stock
Option Plan, as amended and restated (the "Option Plan"), the bonuses set forth
in clauses (ii) and (iii) shall become immediately due and payable provided that
Bayles has not terminated this Agreement prior to the closing of such Change of
Control.
5. Employee Benefits. Bayles acknowledges that he shall not be entitled
by reason of his services under this Agreement to participate in any of the
Company's incentive, savings or retirement plans, practices, policies and
programs. Bayles hereby expressly waives his right (if any) to participate in
any such incentive, savings or retirement plans, practices, policies and
programs, irrespective of his status during the term of this Agreement or any
change therein; provided, however, that nothing in this Agreement shall waive or
limit Bayles' right to post-employment benefits under any incentive, savings or
retirement plan, practice, policy or program of the Company attributable to his
service with the Company as an employee.
-2-
<PAGE> 3
6. Taxes. Bayles acknowledges that he is retained under this Agreement
as an independent contractor and that the Company will not withhold federal or
state income taxes from the compensation due under this Agreement, will not
contribute on his behalf under the Federal Insurance Contributions Act or the
Federal Unemployment Tax Act or any comparable state program, and will not
withhold Bayles' share of contributions to such programs from his compensation.
Bayles agrees that he is exclusively liable for the payment of federal and state
income taxes, including estimated taxes, and the payment of any self-employment
tax; and will indemnify the Company and hold it harmless from and against any
liability imposed on the Company for taxes, interest and penalties attributable
to any failure by Bayles to pay income and self-employment taxes applicable to
Bayles as an independent contractor.
7. Options. Bayles acknowledges that the employee stock options set
forth below originally granted to him under the Option Plan are cancelled
pursuant to Section 14 of the Option Plan and have been replaced by substituted
awards under Section 14 of the Option Plan as set forth in the Stock Option
Agreement attached hereto as an Exhibit.
<TABLE>
<CAPTION>
Shares Strike Price
------ ------------
<S> <C>
50,000 $2.75
70,000 7.50
90,000 10.00
</TABLE>
8. Termination. This Agreement may be terminated on or after September
1, 1998 upon 30 days prior written notice to the other party. Notwithstanding
the foregoing, this Agreement may be immediately terminated by the Company at
any time for Cause. For purposes of this Agreement, "Cause" shall mean (i) the
commission by Bayles of any felony or other crime involving dishonesty, fraud or
moral turpitude, or (ii) wilful or habitual neglect of Bayles' duties as
specified in this Agreement.
-3-
<PAGE> 4
9. Notice. Any notice or other communication required, permitted or
desirable hereunder shall be sufficiently given if hand-delivered or sent by
registered or certified mail, return receipt requested, postage prepaid, and
addressed:
If to the Company, to:
M-Wave, Inc.
215 Park Street
Bensenville, IL 60106
Attention: Chairman
If to Bayles, to:
Michael Bayles
4130 Grand Avenue
Western Springs, IL 60558
10. Waiver; Remedies. No failure by either party hereto to exercise, and
no delay in exercising, any right, power or remedy hereunder shall operate as a
waiver thereof, and no single or partial exercise by either party of any such
right, power or remedy shall preclude other or future exercise thereof or the
exercise of any other right, power or remedy. The rights and remedies herein
provided are cumulative and are not exclusive of any rights or remedies which
the parties hereto may otherwise have at law or in equity.
11. Modification. This Agreement may be amended only by a written
instrument or multiple counterparts thereof executed by the parties hereto.
12. Binding Effect. This Agreement may not be assigned by either party
hereto. This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and the heirs and legal representatives of Bayles.
13. Savings Clause. The provisions of this Agreement shall be considered
to be separable and independent of each other, and if any provision of this
Agreement or the
-4-
<PAGE> 5
application thereof in any circumstances shall be held invalid or unenforceable,
the remaining provisions of this Agreement and the application of such provision
in other circumstances shall not be affected thereby.
14. Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
15. Governing Law. This Agreement is made in, and shall be governed by
and construed in accordance with, the laws of Illinois.
16. Counterparts. This Agreement may be executed in two or more
counterparts, both or all of which, in the aggregate, shall be construed to be
one agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
on the date and at the place first written above.
M-WAVE, INC.
By:
---------------------------------
------------------------------------
MICHAEL BAYLES
-5-
<PAGE> 6
M-WAVE, INC.
STOCK OPTION AGREEMENT
THIS AGREEMENT is made as of the 1st day of May, 1998 by and between
M-Wave, Inc. a Delaware corporation (the "Company"), and Michael Bayles
("Grantee").
Grantee is employed by the Company. By granting this option, Company
desires to carry out the purposes of the M-Wave, Inc. 1992 Stock Option Plan, as
amended and restated, a copy of which has been furnished Grantee.
Company and Grantee agree as follows:
1. Effective May 1, 1998 (the "Grant Date"), Company grants to Grantee a
stock option (the "Option") to purchase 210,000 shares (the "Shares") of the
Company's Common Stock. The Option shall be subject to all of the terms and
conditions of the Plan and this Agreement.
2. Subject to the provisions of paragraph 4, 5 and 6 hereof, the Option
becomes exercisable at the times and at the exercise prices shown below:
<TABLE>
<CAPTION>
# OF SHARES EXERCISE DATE
SUBJECT PRICE NUMBER OF FIRST
TO OPTION PER SHARE SHARES EXERCISABLE EXERCISABLE
----------- --------- ------------------ -----------
<S> <C> <C> <C>
50,000 $2.75 20,000 5/1/98
17,500 5/1/99
12,500 5/1/00
70,000 $6.10 28,000 5/1/98
24,500 5/1/99
17,500 5/1/00
90,000 $8.80 36,000 5/1/98
31,500 5/1/99
22,500 5/1/00
</TABLE>
provided, however, that each exercise shall be for not less than the lesser of
100 Shares or all Shares then subject to this Option.
3. If any applicable taxes are required to be withheld at the time of
exercise or issuance, Grantee agrees to pay to the Company the amount of any
such taxes, including Federal and state, thereafter required to be withheld or
collected in respect to the issuance of exercise of these Shares as is
determined by the Company's legal or tax counsel.
4. This Option shall terminate ten (10) years from the Grant Date,
subject to earlier termination as provided herein or in the Plan.
5. If Grantee is terminated for Cause (as defined in that certain
Consulting Agreement
<PAGE> 7
dated May 1, 1998 between Grantee and the Company (the "Agreement") or as
defined in the Plan), any unexercised portion of the Option shall terminate
immediately upon the termination. If the Consulting Agreement is terminated for
any reason other than Cause (as defined in the Agreement), the Option shall
terminate thirty (30) days after termination of such Agreement. Any of the
provisions of this paragraph 5 to the contrary notwithstanding, in no event
shall any portion of the Option be exercised after the end of the maximum term
of the Option provided for in paragraph 4 hereof.
6. Notwithstanding any of the provisions herein to the contrary, (a) the
Option shall not be exercisable during the first six months after the Grant Date
and (b) subject to the provisions of (a), in the event of a Change of Control
(as defined in the Plan), all unvested options shall automatically become
immediately vested and exercisable.
7. The number of Shares covered by this Agreement and the exercise price
for the Shares shall be appropriately adjusted as determined by the Plan
Committee to reflect any stock dividend, stock split, reverse stock split, share
combination, re-capitalization, merger, consolidation, asset spin-off,
reorganization, or similar event, of or by the Company.
8. This Option is non-transferable other than by will or the laws of
descent and distribution or pursuant to a qualified domestic relations order (as
defined by the Internal Revenue Code ("Code")), and is exercisable, during the
Grantee's lifetime, only by him.
9. The Option granted herein is intended to be a non-qualified option
and will not be treated as an option meeting the requirements of Section 422(b)
of the Code.
10. The Stock Option Agreement supersedes all prior oral or written
proposals, negations, representations, communications, writings and agreements
between you and the Company.
11. This Stock Option Agreement cancels with the consent of the Grantee
all other stock options hitherto granted to the Grantee and not exercised prior
to the date hereof, and substitutes the foregoing new Options therefor, pursuant
to Section 14 of the Plan.
-2-
<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Agreement of the date
first above written.
M-WAVE, INC.:
By:
-------------------------------------------
Title:
----------------------------------------
GRANTEE:
- ----------------------------------------------
Michael Bayles
ATTEST:
- ----------------------------------------------
Secretary
-3-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,023,784
<SECURITIES> 0
<RECEIVABLES> 1,984,106
<ALLOWANCES> 0
<INVENTORY> 1,334,736
<CURRENT-ASSETS> 8,150,982
<PP&E> 9,469,728
<DEPRECIATION> (4,372,743)
<TOTAL-ASSETS> 16,487,024
<CURRENT-LIABILITIES> 2,227,352
<BONDS> 2,116,502
0
0
<COMMON> 30,698
<OTHER-SE> 11,794,525
<TOTAL-LIABILITY-AND-EQUITY> 16,487,024
<SALES> 6,075,280
<TOTAL-REVENUES> 0
<CGS> 5,087,145
<TOTAL-COSTS> 1,170,918
<OTHER-EXPENSES> (2,893)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (185,676)
<INCOME-TAX> (79,790)
<INCOME-CONTINUING> (105,886)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (105,886)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> 0
</TABLE>
