<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 March 31, 1998 Commission File No. 0-19944
- ------------------------------------ -----------------------------
M~WAVE, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3809819
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
216 Evergreen Street, Bensenville, Illinois 60106
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (630) 860-9542
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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
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The registrant has 3,049,806 shares of common stock outstanding at May 4, 1998.
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PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
M~WAVE, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $3,534,315 $2,949,431
Accounts receivable, net of allowance for doubtful accounts,
1997- $10,233: 1998 $10,233......................................... 1,734,959 1,619,536
Inventories.......................................................... 894,665 1,224,526
Refundable income taxes.............................................. 1,289,027 1,506,973
Deferred income taxes................................................ 371,026 274,887
Prepaid expenses and other........................................... 30,591 83,199
----------- -----------
Total current assets............................................. 7,854,583 7,658,552
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements..................................... 2,360,152 2,360,152
Machinery and equipment.............................................. 7,249,005 7,144,052
----------- -----------
Total property, plant and equipment.............................. 9,609,157 9,504,204
Less accumulated depreciation........................................ (4,014,265) (4,223,593)
----------- -----------
Property, plant and equipment-net................................ 5,594,892 5,280,611
ASSETS TO BE DISPOSED OF, NET.......................................... 3,235,000 3,235,000
OTHER ASSETS........................................................... 7,862 6,674
----------- -----------
TOTAL.................................................................. $16,692,337 $16,180,837
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................... $838,610 $1,033,295
Accrued expenses..................................................... 1,029,038 573,745
Current portion of long-term debt.................................... 307,605 307,605
----------- -----------
Total current liabilities........................................ 2,175,253 1,914,645
DEFERRED INCOME TAXES.................................................. 317,947 317,947
LONG-TERM DEBT......................................................... 2,268,028 2,192,201
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized, 1,000,000
shares; no shares issued........................................... 0 0
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 March 31, 1998............................... 30,698 30,698
Additional paid-in capital........................................... 7,574,688 7,574,688
Retained earnings ................................................... 4,445,723 4,270,658
Treasury stock: 20,000 shares, at cost.............................. (120,000) (120,000)
----------- -----------
Total stockholders' equity ...................................... 11,931,109 11,756,044
----------- -----------
TOTAL.................................................................. $16,692,337 $16,180,837
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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M~WAVE, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1997 1998
---------- ----------
<S> <C> <C>
Net sales....................................................... $4,271,004 $2,716,093
Cost of goods sold.............................................. 3,862,033 2,389,494
---------- ----------
Gross profit.................................................. 408,971 326,599
Operating expenses:
General and administrative.................................... 738,002 425,539
Selling and marketing......................................... 299,741 160,655
---------- ----------
Total operating expenses.................................... 1,037,743 586,194
---------- ----------
Operating loss ............................................... (628,772) (259,595)
Other income (expense):
Interest income............................................... 22,860 41,565
Interest expense.............................................. (63,078) (57,441)
Gain (loss) on disposal of assets............................. 42,574 (21,400)
---------- ----------
Total other income (expense) 2,356 (37,276)
---------- ----------
Loss before income taxes.................................. (626,416) (296,871)
Income tax benefit.............................................. (230,246) (121,806)
---------- ----------
Net loss....................................................... ($396,170) ($175,065)
========== ==========
Net loss per share ($0.13) ($0.06)
Weighted average shares 3,027,433 3,049,806
</TABLE>
See notes to consolidated financial statements.
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M~WAVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three month ended March 31,
----------------------------
1997 1998
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss..................................................................................... ($396,170) ($175,065)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Gain(loss) on disposal of property, plant and equipment.................................. (42,574) 21,400
Depreciation and amortization............................................................ 399,827 243,425
Deferred income taxes.................................................................... 36,452 96,139
Changes in assets and liabilities:
Accounts receivable-trade................................................................ (189,227) 115,423
Inventories.............................................................................. 319,161 (329,861)
Income taxes............................................................................. 154,725 (217,946)
Prepaid expenses and other assets........................................................ (20,796) (51,419)
Accounts payable......................................................................... (83,232) 194,685
Accrued expenses......................................................................... (215,586) (455,293)
---------- ----------
Net cash flows from operating activities.............................................. (37,420) (558,512)
---------- ----------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment.................................................... (128,585) (65,544)
Proceeds from sale of property, plant and equipment.......................................... 22,100 115,000
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Net cash flows from investing activities.............................................. (106,485) 49,456
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................................................................... (102,877) (75,827)
---------- ----------
Net cash flows from financing activities.............................................. (20,379) (75,827)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS...................................................... (164,284) (584,883)
CASH AND CASH EQUIVALENTS - Beginning of period................................................ 1,216,859 3,534,315
---------- ----------
CASH AND CASH EQUIVALENTS - End of period...................................................... $1,052,575 $2,949,432
========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest................................................... $63,078 $57,441
</TABLE>
See notes to consolidated financial statements.
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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, 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 or pallet.
One bonding technique used by the Company is Flexlink, a patented process
granted to the Company in 1993.
4. INVENTORIES
Substantially all the Company's inventories are in work in process.
5. DEBT
The Company has a mortgage loan of $2,500,000 for the facility at P C
Dynamics Corporation in Frisco, Texas. Interest on this mortgage loan is at
1/2 % over 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
eligible accounts receivable to fund the working capital needs of the Company.
Interest is at the prime rate (8.5% at March 31, 1998) plus 1/2%. 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
March 31, 1998.
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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 these
proceedings will not have a material adverse effect on the financial position
or results of operations of the Company.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS FOR THE QUARTER ENDED MARCH 31, 1998 COMPARED TO THE QUARTER ENDED MARCH
31, 1997
NET SALES
Net sales were $2,716,000 for the first quarter ended March 31, 1998 a
decrease of $1,555,000 or 36% below the first quarter of 1997. The decrease in
sales was due to several factors including a Company decision to exit 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 $787,000.
The products produced for Motorola are maturing and their requirements have been
shrinking. Net sales to LK Products decreased by $390,000. LK Products have
shifted their product to an alternate material. Net sales to Spectrian
decreased by $119,000. Spectrian reduced their requirements in the first quarter
of 1998. Net sales in general were reduced due to low requirements.
The Company's three largest customers accounted for 54% of the Company's
net sales for the first quarter ended March 31, 1998 compared to 52% in the
first quarter of 1997
The Company is taking steps to increase its sales by visiting key customers
to inform them of the positive changes at the Company.
GROSS PROFIT AND COST OF GOODS SOLD
Gross profit decreased by $82,000 to $327,000 in the first quarter of 1998
from $409,000 in 1997. The decrease in gross profit was a result of a decrease
in net sales of 36%. Gross margin increased to approximately 12% in 1998 from
approximately 10% in 1997. Direct and Indirect labor was down approximately
$314,000 or 32% due mainly to a reduction in employees due to lower volume.
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 March 31, 1998 balance
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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 $67,000
less than the first quarter of 1997.
OPERATING EXPENSES
General and administrative expenses were $426,000 or 15.7% of net sales in
the first quarter of 1998 compared to $738,000 or 17.3% of net sales in the
first quarter 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 in the
first quarter of 1997. The consultants completed their work with the Company in
February 1997. Payroll related expenses were down $42,000 due to staff
reductions. Depreciation and Amortization relating to P C Dynamics was $33,000
less than the first quarter of 1997.
Selling and marketing expenses were $161,000 or 5.9% of net sales in the
first quarter of 1998 compared to $300,000 or 7.0% of net sales in the first
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. Sales commission expense was down $84,000 as a
result of lower sales. Payroll related expenses were down $39,000 due to staff
reductions.
OPERATING LOSS
Operating loss was $260,000 in the first quarter of 1998 compared to an
operating loss of $629,000 in the first quarter of 1997, a decrease in the
operating loss of $369,000. The change in operating loss reflects primarily the
changes in net sales, gross profit and cost of goods sold and operating expenses
as discussed above. The change in operating loss can be summarized as follows:
<TABLE>
<S> <C>
Decrease in net sales $(149,000)
Increase in gross margin 66,000
Decrease in operating expenses 452,000
---------
Decrease in operating loss $ 369,000
</TABLE>
On March 31, 1998, the Company had 91 employees compared to 115 on March
31, 1997.
INTEREST INCOME
Interest income from short-term investments was $35,000 in the first
quarter of 1997 compared to $23,000 in 1997. Royalty income was $6,700 in the
first quarter of 1998.
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INTEREST EXPENSE
Interest expense, primarily related to the Company's mortgage obligation on
its P C Dynamics facility, was $57,000 in the first quarter of 1998 compared to
$63,000 in 1997.
GAIN (LOSS) ON DISPOSAL OF FIXED ASSETS
The Company recorded a loss of $21,000 on the disposal of fixed assets in
the first quarter of 1998 compared to a gain of $43,000 in 1997.
INCOME TAXES
The Company had an effective tax credit rate of 41.0% in the first quarter
of 1998 compared to 36.8% in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operations was $559,000 for the first three months of
1998 compared to $37,000 for the first three months of 1997. Inventories
increased $330,000. Depreciation and amortization were down $157,000 to due the
write-down of the P C Dynamics assets in December, 1997. Accrued expenses were
down $455,000 due mainly to payments made in the first quarter of 1998 for
Property taxes and Litigation settlements.
Capital expenditures were $65,000 for the first three months of 1998,
Capital expenditures were $129,000 in the first three months of 1997.
The Company has a mortgage loan of $2,500,000 on the P C Dynamics facility.
Interest on this mortgage loan is at 1/2 % over prime rate. The loan is
payable in monthly installments of principal and interest and is due in October
2001.
The Company has a line of credit from American National Bank and Trust
Company of Chicago which provides for a maximum borrowings of $2,000,000 based
on 80% of eligible accounts receivables through May 1998 at an interest rate of
prime plus 0.5%. No balance was outstanding under the line at March 31, 1998.
As of March 31, 1998, the Company has $2,500,000 of debt and $2,949,000 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.
INFLATION
Management believes inflation has not had a material effect on the
Company's operation or on its financial position.
FOREIGN CURRENCY TRANSACTIONS
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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.
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 yield standards. There can be no assurance that
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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.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data
(b) The Company filed a report on Form 8-K dated March 3, 1998 announcing the
Company will be delisted from NASDAQ if the Company does not meet the new
listing requirements.
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.
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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: May 4, 1998 /s/ PAUL H. SCHMITT
------------------------------
Paul H. Schmitt
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT
NO DESCRIPTION
- ------- -------------------------------------------------
27 Financial Data
13
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000883842
<NAME> M-WAVE INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2949431
<SECURITIES> 0
<RECEIVABLES> 1619536
<ALLOWANCES> 0
<INVENTORY> 1224526
<CURRENT-ASSETS> 7658552
<PP&E> 9504204
<DEPRECIATION> (4223593)
<TOTAL-ASSETS> 16180837
<CURRENT-LIABILITIES> 1914645
<BONDS> 2192201
0
0
<COMMON> 30698
<OTHER-SE> 11725346
<TOTAL-LIABILITY-AND-EQUITY> 16180837
<SALES> 2716093
<TOTAL-REVENUES> 0
<CGS> 2389494
<TOTAL-COSTS> 586194
<OTHER-EXPENSES> (37276)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (296871)
<INCOME-TAX> (121806)
<INCOME-CONTINUING> (175065)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (175065)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> 0
</TABLE>
