<PAGE> 1
+UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 0-19944
M~WAVE, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3809819
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
216 Evergreen Street, Bensenville, Illinois 60106
- ------------------------------------------- --------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (630) 860-9542
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)
- -----------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 9, 1998 was approximately $4,053,000, computed on the
basis of the last reported sale price per share ($2.875) of such stock on the
NASDAQ National Market.
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The Registrant has 3,049,806 common shares outstanding at March 9, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Applicable portions of the Proxy Statement for the Annual Meeting are
incorporated by reference in Part III of this Form.
Index to Exhibits listed on page 41.
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PART I
Item 1. Business
The Company
M~Wave, Inc., operates through its wholly-owned subsidiaries Poly Circuits, Inc.
and P C Dynamics Corporation (collectively, the "Company"). In December 1997,
the Company announced that the P C Dynamics subsidiary does not have a place in
the Company's strategic plans and is actively marketing the P C Dynamics
subsidiary. 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 (TM), a patented process granted to the Company in
1993.
The Company's printed circuit boards and bonded assemblies are used in wireless
communication systems and in other devices and equipment operating in the
microwave frequency spectrum of 800 MHz and above. These devices and equipment
include cellular telephones, direct broadcast satellite television, global
positioning satellite systems, personal communication networks and military
"smart" weapons. The Teflon(TM) based boards and assemblies are advantageous for
microwave systems because of their extremely low circuit transmission and power
losses; coupled with stable, predictable electrical characteristics.
The production of Teflon(TM) based printed circuit boards and bonded assemblies
is technologically demanding due to the precise requirements of their end-use
applications and the miniaturization of the microwave frequency components. To
meet these technological demands, the Company has developed manufacturing
processes and designs which reduce the cost and increase the manufacturability
and reliability of customer systems. Additionally, the Company emphasizes
quality engineering and design support for its customers. The Company is subject
to stringent technical evaluation and certification by many of its customers.
The Company markets its products through Company personnel supported by
approximately 20 independent sales organizations. The Company's base of
approximately 125 customers represents a highly sophisticated group of
purchasers.
Segments within the commercial and military markets have experienced growth in
recent years due to: (i) increased efficiency of microwave systems; (ii) a
commercial market based upon increasing acceptance of microwave frequency
products; (iii) a continuing need to upgrade systems based upon microwave
technology; and (iv) crowding of the available frequency spectrum below 800 MHz.
The Company's strategy is to increase sales of its products to support the
growth of its customers in these industry segments.
M~Wave, Inc. was incorporated in Delaware in January 1992 in connection with a
100 for 1 share exchange with the former stockholders of Poly Circuits, Inc. The
Company's executive offices are located at 216 Evergreen Street, Bensenville,
Illinois, 60106, and its telephone number is (630) 860-9542.
Industry and Market
There are Commercial and Military-related types of customers within the market
for microwave related printed circuit boards and bonded assemblies. Within both
customer types there has been an "outsourcing" trend whereby end users have
gotten out of internal
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production of printed circuit boards and bonded assemblies and moved to buying
these products from "contract manufacturing" board shops.
The market for microwave related printed circuit boards and bonded assemblies is
expected to grow as wireless communication systems are expanded and improved,
and as additional technologies such as global positioning satellites systems;
direct broadcast television; advanced avionics systems and missile electronics
are brought to market. Although new growth will occur, pricing pressures will
also grow thereby depressing margins for printed circuit board manufacturers.
One of the most widely recognized high frequency wireless communication systems
in commercial use is the cellular telephone. Cellular systems operate at the
lower end of the microwave spectrum and use Teflon(TM) based printed circuit
boards and bonded assemblies in signal amplification base assemblies. As
cellular telephones increase their market penetration, additional cellular base
stations will be constructed to improve geographic coverage and system capacity.
Approximately 49%, 39% and 48% of the Company's revenues in 1997, 1996, and
1995, respectively, were related to the cellular telephone industry.
Customers and Marketing
The Company's customers include microwave system manufacturers with
sophisticated technologies. The Company currently services a customer base of
approximately 125.
The sale of microwave printed circuit boards is technical in nature. The Company
works with customer personnel who are frequently experts in microwave design and
theory with added expertise in fabrication and design techniques for printed
circuit boards. Typically, microwave system manufacturers provide the Company
fabrication details and guidelines. The Company fabricates the products to
customer specifications. For military microwave system manufacturers, the
Company must meet the demanding military and critical weapon specifications.
The Company has adopted a program of early supplier involvement as part of its
sales strategy. The Company has the opportunity to design-in its manufacturing
processes as a means of reducing the cost of microwave systems. The emphasis
upon a partnership underlies the Company's relationship with its customers.
Approximately 20 independent sales organizations are paid a commission to
represent the Company in geographical territories. International sales of the
Company's products have accounted for less than 5% of revenues in each of 1997,
1996 and 1995.
In 1997, Motorola, Lucent and Spectrian accounted for 19%, 7% and 26%,
respectively, of the Company's revenues. In 1996, Motorola, Lucent and Spectrian
accounted for 26%, 8% and 10%, respectively, of the Company's revenues. In 1995,
Motorola, Lucent and Spectrian accounted for 27%, 16% and 12%, respectively, of
the Company's revenues. The loss of, or a substantial reduction in or change in
the mix of orders from, any one or more of the Company's major customers could
have a material adverse effect on the Company's results of operations and
financial condition. The Company continues to vigorously pursue a strategy of
being a major source to its customers, but intends to seek to be one of a few
key suppliers rather than the sole supplier.
As of December 31, 1997, the Company had an order backlog of approximately
$2,626,000 compared to $4,578,000 at December 31, 1996. Nearly all of the
Company's backlog is subject to cancellation or postponement without significant
penalty. Accordingly the Company does not believe that this backlog is
necessarily indicative of the Company's future results of operations or
prospects.
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<PAGE> 5
Products and Production
The Company produces microwave related Teflon(TM) based printed circuit boards.
The Company also bonds microwave related printed circuit boards to metal
carriers or pallets using a variety of bonding techniques including a Company
patented process called Flexlink(TM). The use of Teflon(TM) in the manufacturing
of printed circuit boards is demanding. This is so because Teflon(TM) is a
thermo-plastic which, in a cured state, exhibits a high coefficient of thermal
expansion and polymeric molecular cross-linking which makes plating circuitry
difficult. Manufacturing microwave-related circuit boards requires tolerances
measured in ten thousandths of an inch. Despite these manufacturing
complexities, the Company realized a yield of approximately 90% in 1997,
compared to 80% in 1996. The increase was related to production efficiencies
achieved at the Poly Circuits facility. This rate has helped the Company reduce
its manufacturing costs, which is particularly important because Teflon(TM) is
substantially more expensive than laminates used in low frequency applications.
Because the Company manufactures a custom, made-to-order product, there is a
minimal amount of finished goods inventory. The Company maintains raw material
inventory, primarily Teflon based laminate. A typical manufacturing cycle time
from engineering to shipment is about two weeks. The Company seeks to balance
its labor, materials and backlog to achieve an average of eight weeks lead-time
from placement of order to shipment of product. Production can generally be
increased rapidly to respond to increases in demand.
The Company maintains in-house capabilities to perform substantially all
processes, thereby minimizing the reliance upon outside sources. The Company
devotes significant time and attention to quality control and TQA (Total Quality
Assurance). The Company operates a SP C (Statistical Process Control) system
that is intended to maintain quality at each process stage by reducing the
variability of each process. As the Company's business has evolved towards the
production of relatively smaller quantities of more complex products, the
Company has at times during 1997 and 1996 encountered difficulty in maintaining
its past yield standards.
During 1997, 1996 and 1995, one manufacturer accounted for approximately 56%,
46% and 49%, respectively, of the Teflon based laminate supplied to the Company.
There are only four U. S. manufacturers of Teflon based laminate. Any disruption
or termination of these sources of Teflon based laminate could adversely affect
the Company's operations. Moreover, any prolonged disruption or termination of
the Company's principal supplier of Teflon based laminate could have a material
adverse effect on the Company's business and damage customer relationships. The
Company purchases Teflon based laminate pursuant to an ongoing purchase order
relationship. The Company believes its relationship with its principal supplier
of Teflon based laminate is good.
Product Development
The Company's product development efforts have been a part of its ongoing
activities. The Company has developed the Flexlink TM process; the bonding of
materials with dissimilar coefficients of thermal expansion, and the fusion
bonding of Teflon based laminate for multi-layer circuit fabrication. The
Company was granted a patent in 1993 by the United States Patent Office for its
Flexlink TM process. The Company developed an enhanced version of Flexlink in
1996.
The Company relies heavily on its process engineering capabilities to further
its corporate objectives. The Company's future results of operations are
dependent on its ability to
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continue to initiate or respond to technical changes and to make the necessary
ongoing capital investments. The Company focuses on improving current
manufacturing processes and developing new processes in pursuit of its goal to
increase quality, offer enhanced systems design flexibility to its customers,
and respond to the increasing complexity of its customers' products.
Competition
The market for the Company's products is highly competitive. The Company
competes for customers primarily on the basis of quality, reliability and on
time delivery of its products and the Company's technical support. The Company
faces substantial competition from many companies, including many that have
greater financial and other resources, broader product lines, greater customer
service capabilities and larger and more established customer bases. Also, some
of the smaller "non-Teflon(TM) board shops" are now entering the market for
Teflon(TM) boards. Some of these smaller shops are located nearby key customers.
This is an advantage they can use.
Alternative methods of manufacturing microwave-related boards exist, including
ceramic and thick film technologies. Also, new materials are being introduced
that are not Teflon(TM) based and are easier to manufacture. These materials fit
within existing manufacturing capabilities of other board shops. Increased
competition could cause the Company to lose market share and/or accelerate the
decline in the prices of the Company's products. These factors could have a
material adverse effect on the Company's results of operations and financial
condition.
Environmental Regulations
The Company and the industry in which it operates are subject to environmental
laws and regulations concerning, among other things, emissions into the air,
discharges into waterways, the generation, handling and disposal of waste
materials and certain recordkeeping requirements. The Company periodically
generates and handles materials that are considered hazardous waste under
applicable law and contracts for the off-site disposal of these materials.
During the ordinary course of its operations, the Company has received citations
or notices from regulatory authorities that such operations may not be in
compliance with applicable environmental regulations. Upon such receipt, the
Company works with authorities to resolve the issues raised by such citations or
notices. The Company's past expenditures relating to environmental compliance
have not had a material effect on the financial position or results of
operations of the Company. The Company believes that the overall impact of
compliance with regulations and legislation protecting the environment will not
have a material effect on its future financial position or results of
operations, although no assurance can be given.
Based on information available to the Company, which in most cases includes an
estimate of liability, legal fees and other factors, a reserve for indicated
environmental liabilities has been made in the aggregate amount of approximately
$13,000. The Company spent approximately $21,000 in 1997 complying with EPA
regulations.
Patents
Due to rapidly changing technology, the Company believes its success depends
primarily upon the engineering, marketing, manufacturing and support skills of
its personnel, rather than upon patent protection. The Company was granted a
patent in 1993 by the United States Patent Office for its Flexlink(TM) process.
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Employees
On December 31, 1997, the Company employed approximately 100 persons. The
Company closely monitors the number of employees in response to its periodic
production requirements and believes it is positioned appropriately to change
the number of employees as changes in production warrant. In February and March
1997, the Company significantly reduced the number of employees in response to
lower than anticipated shipments.
None of the Company's employees are represented by a labor union and the Company
has never experienced a work stoppage, slowdown or strike. The Company considers
its labor relations to be very good.
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Executive Officers of the Registrant
The following is a list of Company's executive officers:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Joseph A. Turek 40 Chairman and
Chief Executive Officer
Michael Bayles 46 President and
Chief Operating Officer
Paul H. Schmitt 51 Secretary and Treasurer
</TABLE>
JOSEPH A. TUREK is the founder of the Company and has acted as Chairman and
Chief Executive Officer since June 1993, and has served as director of the
Company since 1988. Mr. Turek served for more than five years in various
positions at West-Tronics, Inc., a manufacturer of low frequency circuit boards
and a contract assembler of electronic products, with his last position as
President in 1987 and 1988.
MICHAEL BAYLES joined the Company in February 1997 as President and Chief
Operating Officer. From April, 1991 to February, 1997, Mr. Bayles was with
Varlen Instruments, a division of Varlen Corporation, where he held the position
of President.
PAUL H. SCHMITT joined the Company in September 1992 as Treasurer. From 1990 to
1992, Mr. Schmitt was with Reynolds Products, a Division of Alco Standard
Corporation, where he held the position of Controller. From 1983 to 1990, he
served as Controller for Garden City Envelope Company.
Item 2. Properties
Facilities
The following table lists the manufacturing, administrative, marketing
facilities of the Company:
<TABLE>
<CAPTION>
Lease
Location Function Square Feet Expiration Date
-------- -------- ----------- ---------------
<S> <C> <C> <C>
Bensenville, Illinois Manufacturing 14,000 Not Applicable
(owned)
Bensenville, Illinois Administrative 13,000 June 30, 2000
(Subject to option
to renew for five
years)
Frisco, Texas Administrative; 44,000 Owned
Marketing; and
Manufacturing
</TABLE>
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The Company began manufacturing at the Company's new 44,000 square foot building
in Frisco, Texas during the fourth quarter of 1996. This facility is subject to
a mortgage securing the Company's obligation to repay notes totaling $2,576,000
at December 31, 1997. In December 1997, the Company announced that the P C
Dynamics facility located in Frisco, Texas does not have a place in the Company"
Strategic Plans. As such, the Company is actively marketing P C Dynamics for
sale.
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Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Registrant's common stock is traded on the NASDAQ National Market (trading
symbol MWAV). The following table sets forth, for the calendar periods
indicated, the range of the high and low last reported sales prices of the
common stock from January 1, 1996 through December 31, 1997 as reported by the
NASDAQ. The Company announced that it has been notified by the Nasdaq Stock
Market, Inc., that, based on the trading price of M~Wave's common stock for the
previous 30 consecutive trading dates, the common stock is not in compliance
with the new public float requirement for continued listing on the NASDAQ
National Market. Unless M~Wave's common stock trades at a price which causes
M~Wave to satisfy the minimum requirement for at least 10-consecutive days on or
prior to May 28, 1998, Nasdaq will issue a delisting letter to the Company.
Year Ended December 31
--------------------------------------------
1997 1996
-------------------- --------------------
Low High Low High
First Quarter $ 2-1/8 $ 4-5/8 $ 5-3/4 $ 8-3/4
Second Quarter 2 3-1/2 4-1/4 6-3/4
Third Quarter 2-7/16 3-15/16 2-1/2 5
Fourth Quarter 3 6-3/8 1-3/4 4-1/4
As of December 31, 1997, there were approximately 1,500 shareholders of record
owning the common stock of the Company.
The Registrant did not pay any dividends on its common stock in 1997 and intends
not to pay dividends in the foreseeable future in order to reinvest its future
earnings in the business.
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Item 6. Selected Financial Data
The following table sets forth selected consolidated financial information with
respect to the Company for each of the five years in the period ended December
31, 1997.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 16,697,311 $ 22,643,968 $ 29,512,380 $ 28,009,390 $ 19,605,899
Gross profit (loss) 2,703,768 (701,051) 6,971,272 9,623,653 7,535,670
Operating income (loss) (4,360,400) (6,219,548) 2,222,939 5,624,471 5,731,411
Income (loss) before income taxes (4,523,648) (6,820,869) 1,868,426 6,201,013 5,786,285
Net income (loss) (3,163,652) (4,357,393) 1,262,955 3,745,935 3,534,426
Weighted average shares 3,044,289 3,021,041 2,992,985 2,905,054 2,949,860
Basic earnings (loss) per share (1.04) (1.44) 0.42 1.29 1.20
Diluted shares 3,044,289 3,021,041 3,072,920 3,006,599 3,039,045
Diluted earnings (loss) per share (1.04) (1.44) 0.41 1.25 1.16
Balance Sheet Data:
Working capital $ 5,679,330 $ 4,601,703 $ 9,110,742 $ 11,046,010 $ 8,799,481
Total assets 16,692,337 21,835,551 23,407,823 23,258,012 15,255,251
Long-term debt 2,268,028 2,604,464 11,239 423,732 0
Stockholders' equity 11,931,109 15,012,262 19,365,593 17,643,119 12,340,953
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Listed below are the related expenses for 1997, 1996 and 1995 as a percent of
sales.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 83.8 103.1 76.4
----- ----- -----
Gross profit (loss) 16.2 (3.1) 23.6
----- ----- -----
Operating expenses:
General and administrative 13.8 14.3 7.9
Selling and marketing 6.1 7.4 6.8
Research and development 0.0 1.6 1.4
Impairment of building and equipment 15.6 0.0 0.0
Goodwill impairment charge 4.0 0.0 0.0
Writeoff of note receivable 2.8 1.1 0.0
----- ----- -----
Total operating expenses 42.3 24.4 16.1
Operating income (loss) (26.1) (27.5) 7.5
Interest income (expense) - net (0.4) (0.9) 0.7
Litigation settlement 0 0 (1.9)
Loss on disposal of equipment (0.6) (1.8) 0
----- ----- -----
Total other income (expense) (1.0) (2.7) (1.2)
----- ----- -----
Income (loss) before income taxes (27.1) (30.2) 6.3
Provision (credit) for income taxes (8.2) (10.9) 2.0
----- ----- -----
Net income (loss) (18.9)% (19.3)% 4.3%
===== ===== =====
</TABLE>
COMPARISON OF 1997 AND 1996
Net Sales
Net sales for 1997 decreased 26% to $16.7 million from $22.6 million in 1996.
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. 1996 net sales also included $741,000
of sales relating to the Assembly Division and the Asian based distribution
entity (Vortex). These divisions were sold in December 1996. Net sales to
Motorola decreased by $2,776,000 or 47% to $3,120,000. The products produced for
Motorola are maturing and their requirements have been reduced. Net sales to
Lucent decreased by $708,000 or 40% to $1,080,000. The products produced for
Lucent are maturing and their requirements have been reduced. Net sales to LK
Products decreased by $2,233,000 or 71% to $926,000. LK Products has shifted
their product to an alternative material.
The foregoing decreases in net sales were partially offset by an increase in net
sales to Spectrian, the Company's largest customer, of $2,158,000 or 97% to
$4,375,000.
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The Company's three largest customers accounted for 52% of the Company's net
sales in 1997 compared to 45% in 1996.
The Company is taking steps to increase its sales by visiting key customers to
inform them of the positive changes at the Company; however, the Company expects
its sales to decline in the first quarter of 1998.
Gross Profit and Cost of Goods Sold
Gross profit increased $3.4 million in 1997 from a negative $0.7 million in 1996
to $2.7 million in 1997. Gross margin increased to approximately 16% in 1997
from approximately negative 3% in 1996. The improvement is due to many factors.
In 1996, the Company incurred sales adjustments for pricing and returns of
$1,201,000 and inventory writedowns of $2,719,000 and $747,000 relating to
manufacturing scrap and rework and inventory obsolescence, respectively. 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 in 1997.This includes moving to one shift from two while improving on time
delivery. The Texas facility has not 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 would continue to
adversely impact the Company's gross margins and profitability, which would also
result in decreased liquidity and adversely affect the Company's financial
position.
The adjusted gross profit was $3,966,000 or 17.5% in 1996 compared to $2,704,000
or 16.2% in 1997. The adjusted gross profit for 1996 is calculated by adding
back the sales adjustments and inventory write-downs of $4,667,000 to the
reported gross loss. The adjusted gross profit declined due to a decrease in
sales and manufacturing inefficiencies related to the P C Dynamics facility.
Teflon based laminate is the largest single component of the Company's cost of
goods sold, representing 15.4% and 27.5% of net sales during 1997 and 1996,
respectively. The Company did not experience significant changes in the cost of
Teflon based laminate during 1997 and 1996. During 1997 and 1996, one
manufacturer accounted for approximately 56% and 46%, respectively, of the
Teflon based laminate supplied to the Company.
Operating Expenses
General and administrative expenses were $2,297,000 or 13.8% of net sales in
1997, compared to $3,233,000 or 14.3% of net sales in 1996. General and
administrative expenses consist primarily of salaries and benefits, professional
services, depreciation of office equipment, computer systems and occupancy
expenses. The net decrease was due to a reduction in professional and legal fees
of $748,000 and the final settlement of the Comptek litigation of $170,000. 1996
expenses also included $93,000 of administrative expenses relating to the
Assembly Division and the Asian based distribution entity (Vortex). 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 $696,000. The consultants completed their work with the Company in
February 1997.
Selling and marketing expenses were $1,021,000 or 6.1% of net sales in 1997,
compared to $1,678,000 or 7.4% of net sales in 1996. Selling and marketing
expenses include the cost of salaries, advertising and promoting the Company's
products and the commissions paid to independent sales organizations. The
decrease in selling and marketing expenses was primarily attributable to a
reduction in staff and reduced commissions paid as a result of a decease in
sales.
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<PAGE> 15
1996 expenses also included $223,000 of selling and marketing expenses relating
to the Assembly Division and the Asian based distribution entity (Vortex).
Research and development expenses related to the Assembly Division were $357,000
or 1.6% of net sales for 1996. The Company sold the Assembly Division in
December 1996.
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 did not have a future place in the Company's strategic
plans. As such, management is actively marketing P C Dynamics for 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. 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 December 31, 1997 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.
For the year ended December 31, 1997, 1996 and 1995 P C Dynamics' financial
results included $4,192,303, $4,786,726 and $4,172,403 of net sales and
operating losses of $4,422,128, $1,377,584 and $353,474, respectively. Until the
P C Dynamics business is sold, the Company estimates incurring monthly pre-tax
losses in the range of $75,000 to $100,000 per month. If the decision was made
to cease P C Dynamic's business, the Company estimates incurring approximately
$200,000 in severance and shutdown costs. If P C Dynamics' business were to
cease, the Company estimates incurring expenses of approximately $84,000 each
month for real estate taxes, utilities and security until the building and
equipment can be disposed of.
In May 1995, the Company established a division which performed contract
assembly work for the Company's customers. Effective December 13, 1996, the
Company sold substantially all of the assets, subject to certain liabilities, of
this division to Marquis Microwave Products for a promissory note of $1,122,000,
which approximated the net book value of the assets sold to Marquis Microwave
Products. In 1996, the Company recorded a valuation allowance of $250,000 on the
note.
Effective December 19, 1997, the Company consented to the transfer of assets of
Marquis Microwave Products to TRL Technologies, Inc. provided Marquis Microwave
Products pay the Company $400,000. As further consideration, the Company entered
into a Royalty agreement that entitles the Company to receive royalties of 3% of
net sales of products developed by Marquis Microwave Products, subject to a
maximum of $700,000. The Company also agreed that the Promissory Note and the
prior royalty agreements dated December 13, 1996 issued by Marquis Microwave
Products are null and void. In connection with this transaction the Company
recorded a write-off of Note Receivable of $472,000.
The Company had sustained operating losses on the Assembly Division of $1.1
million in 1996 and $400,000 in 1995 on revenues of $463,000 and $91,000,
respectively.
Operating loss
Operating income was negative $4.4 million or negative 26.1% of net sales in
1997, compared to a negative $6.2 million or negative 27.5% of net sales in
1996. The change in operating income can be summarized as follows:
Decrease in net sales $184,000
Increase in gross margin 3,221,000
Impairment of building and equipment (2,604,000)
Goodwill impairment charge (670,000)
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<PAGE> 16
Write off of note receivable (222,000)
Decrease in operating expenses 1,950,000
----------
Decrease in operating loss $1,859,000
==========
Interest Income
Interest income from short-term investments was $180,000 in 1997 compared to
$39,000 in 1996.
Interest Expense
Interest expense, primarily related to the Company's mortgage obligation on its
P C Dynamics facility, was $250,000 in 1997 compared to $224,000 in 1996.
Loss on disposal of fixed assets
The Company recorded a loss of $93,000 in 1997 and $417,000 in 1996 relating to
the disposal of fixed assets which are no longer usable in the Company's
business.
Income Taxes
The Company had an effective tax credit rate of 30.1% in 1997,and an effective
tax credit rate of 36.1% in 1996.
Earnings per share
In 1997, the Company adopted Statement of Financial Accounting Standards No. 128
- - "Earnings per Share" ("SFAS 128"). As required by SFAS 128, all current and
prior year earnings (loss) per share data have been restated to conform to the
provisions of SFAS 128.
COMPARISON OF 1996 AND 1995
Net Sales
Net sales for 1996 decreased 23% to $22.6 million from $29.5 million in 1995.
This decrease was primarily attributable to production problems. Net sales to
Motorola decreased by $1,826,000 or 24% to $5,896,000. Net sales to Spectrian
decreased by $1,280,000 or 37% to $2,218,000. Net sales to AT&T decreased by
$2,759,000 or 61% to $1,788,000. Net sales to Glenayre decreased by $1,873,000
or 95% to $90,000.
The foregoing decreases in net sales were partially offset by an increase in net
sales to L K Products and Rockwell, two of the Company's larger customers, of
$3,069,000 or 26%.
The Company's three largest customers accounted for 50% of the Company's net
sales in 1996 compared to 55% in 1995.
Gross Profit and Cost of Goods Sold
Gross profit decreased $7.7 million in 1996 from $7.0 million in 1995 to
negative $0.7 million in 1996. Gross margin decreased to approximately negative
3% in 1996 from approximately 24% in 1995. This reduction is attributable to
reduced shipments to certain of the Company's largest customers, a shift in
product mix, and production problems. The decrease in gross profit includes
sales adjustments for pricing and returns of $1,201,000 and inventory writedowns
of $2,719,000 and $747,000 relating to manufacturing scrap and rework and
inventory obsolescence, respectively.
16
<PAGE> 17
The Company has made operational changes designed to enhance its quality control
and ability to manufacture highly complex products; however, there can be no
assurance as to when, or if, these changes will result in improved manufacturing
processes. Future production problems would continue to adversely impact the
Company's gross margins and profitability, which would also result in decreased
liquidity and adversely affect the Company's financial position.
Teflon based laminate is the largest single component of the Company's cost of
goods sold, representing 27.5% and 18.6% of net sales during 1996 and 1995,
respectively. The Company did not experience significant changes in the cost of
Teflon based laminate during 1996 and 1995. During 1996 and 1995, one
manufacturer accounted for approximately 46% and 49% , respectively, of the
Teflon based laminate supplied to the Company.
Operating Expenses
General and administrative expenses were $3,233,000 or 14.3% of net sales in
1996, compared to $2,327,000 or 7.9% of net sales in 1995. On April 15, 1996,
the Company engaged a consulting firm to provide consulting services with
respect to the Company's operations, which services resulted in additional
expenses of $609,000. The consultants completed their work with the Company in
February 1997. General and administrative expenses for 1996 also include a
valuation provision of $250,000 against a promissory note of $1.1 million
received by the Company in December 1996 in connection with the sale of its
Assembly Division. General and administrative expenses consist primarily of
salaries and benefits, professional services, depreciation of office equipment,
computer systems and occupancy expenses.
Selling and marketing expenses were $1,678,000 or 7.4% of net sales in 1996,
compared to $2,009,000 or 6.8% of net sales in 1995. The decrease in selling and
marketing expenses was primarily attributable to reduced commissions paid as a
result of a decrease in sales. Selling and marketing expenses include the cost
of salaries, advertising and promoting the Company's products and the
commissions paid to independent sales organizations.
Research and development expenses were $357,000 or 1.6% of net sales in 1996,
compared to $412,000 or 1.4% of net sales in 1995. Research and development
expenses were related to the Assembly Division, which was sold in December 1996.
Operating Income
Operating income was negative $6.2 million or negative 27.5% of net sales in
1996, a decrease of $8.4 million from 1995. The change in operating income can
be summarized as follows:
Decrease in net sales ($1,622,000)
Decrease in gross margin (6,033,000)
Write off of note receivable (250,000)
Increase in operating expenses (538,000)
------------
Decrease in operating income ($8,443,000)
===========
Interest Income
Interest income from short-term investments was $39,000 in 1996 compared to
$294,000 in 1995.
Interest Expense
Interest expense, primarily related to the Company's mortgage obligation on its
P C Dynamics facility, was $224,000 in 1996 compared to $88,000 in 1995.
17
<PAGE> 18
Loss on disposal of fixed assets
The Company recorded a loss of $417,000 in 1996 relating to the disposal of
fixed assets which are no longer usable in the Company's business.
Litigation settlement
On May 13, 1994, Comptek Research, Inc., Comptek Telecommunications, Inc. and
Industrial Systems Service, Inc. (together "Comptek") filed a six-count
complaint against M~Wave, Inc. and Poly Circuits, Inc. alleging contractual,
Uniform Commercial Code and tortious violations arising out of Poly Circuits'
sale of printed circuit boards.
On September 29, 1995 the Company reached settlement with Comptek. The
settlement included a cash payment of $300,000, the issuance of 20,000 shares of
the Company's common stock to Comptek and an agreement to supply goods and
services to Comptek on a long-term basis. The settlement resulted in a
non-recurring pre-tax charge in the third quarter of 1995 of $561,000 or $0.11
per share after tax.
Income Taxes
The Company had an effective tax credit rate of 36.1% in 1996,and an effective
tax provision rate of 32.4% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided/(used) by operations was $2,645,000, ($181,000) and ($740,000)
in 1997, 1996 and 1995, respectively. The Company reduced its Accounts Payable
in 1997 by $711,000, which was partially offset by a reduction of inventories in
1997 of $455,000. Cash generated and cash on hand has been primarily used for
the purchase of property, plant and equipment. Purchases of property, plant and
equipment were $544,000, $4,723,000, and $4,528,000 in 1997, 1996 and 1995,
respectively. The capital expenditures for 1996 include $3.6 million for the new
P C Dynamics facility in Texas. The expenditures were partially financed through
mortgage borrowings of $2.9 million. Except for expenditures required to improve
the manufacturing processes, the Company presently has no plans for additional
capital expenditures.
In January and March 1996, the Company obtained construction loans from American
National Bank and Trust Company of Chicago to finance the rebuilding of the P C
Dynamics facility in Frisco, Texas. The loans are payable in monthly
installments of principal and interest which began in October 1996 and end with
a balloon payment of $1,440,000 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 account receivables through May 1998 at an interest rate of prime plus
0.5%. At December 31, 1997, no amounts were outstanding on this line.
As of December 31, 1997, the Company has $2,576,000 of debt and $3.5 million of
cash and cash equivalents. Management believes that funds generated from
operations, coupled with the Company's cash balance and its capacity for debt
will be sufficient to fund current business operations.
18
<PAGE> 19
The sale of the P C Dynamics subsidiary will have no material effect on
liquidity and capital resources because the value of the assets are reflected at
net realizable value.
Inflation
Management believes inflation has not had a material effect on the Company's
operation or on its financial position.
New Accounting Pronouncements
Statement of Financial Standard 125 and 127 - Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This new
Statement will have no material effect on the Company.
Statement of Financial Standard 129 - Disclosures of Information about Capital
Structure. This new Statement should have no material effect on the Company.
Statement of Financial Standard 130 - Reporting Comprehensive income. This new
Statement should have no material effect on the Company.
Statement of Financial Standard 131 - Disclosure about Segments of an Enterprise
and Related Information. This new Statement will be adopted in December 1998.
Year 2000 Compliance
The company is presently updating its operating software at a cost of
approximately $75,000 to be in compliance with year 2000 requirements.
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.
19
<PAGE> 20
In addition, future results may be impacted by a number of other factors,
including the Company's dependence on suppliers and subcontractors for
components; the Company's ability to respond to technical advances; successful
award of contracts under bid; design and production delays; cancellation or
reduction of contract orders; the Company's effective utilization of existing
and new manufacturing resources; and pricing pressures by key customers.
The Company's future success is highly dependent upon its ability to manufacture
products that incorporate new technology and are priced competitively. The
market for the Company's products is characterized by rapid technology advances
and industry-wide competition. This competitive environment has resulted in
downward pressure on gross margins. In addition, the Company's business has
evolved towards the production of relatively smaller quantities of more complex
products, the Company expects that it will at times encounter difficulty in
maintaining its past yield standards. There can be no assurance that the Company
will be able to develop technologically advanced products or that future-pricing
actions by the Company and its competitors will not have a material adverse
effect on the Company's results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
Consolidated financial statements and the related notes for each of the three
years in the period ended December 31, 1997 are filed in response to this Item
pursuant to Item 14.
The supplementary data regarding quarterly results of operations, set forth
under the caption "Selected Quarterly Financial Data (Unaudited)" following the
aforementioned consolidated financial statements, are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Company filed a report on Form 8K dated August 11, 1997 announcing the
Company had engaged Grant Thornton LLP as the Company's accountants replacing
Deloitte & Touche LLP
20
<PAGE> 21
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required by this Item with respect to Executive Officers of the
Company is set forth in Part I, Item 4 and is incorporated herein by this
reference. Information required by this Item with respect to members of the
Board of Directors of the Company will be contained in the Proxy Statement for
the Annual Meeting of Stockholders (the "1998 Proxy Statement"), and is
incorporated herein by this reference.
Item 11. Executive Compensation
Information required by this Item will be contained in the 1998 Proxy Statement
and is incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item will be contained in the 1998 Proxy Statement
and is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
Information required by this Item will be contained in the 1998 Proxy Statement
and is incorporated herein by this reference.
21
<PAGE> 22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
PAGE IN THE
FORM 10-K
---------
Independent Auditors' Report 23
Independent Auditors' Report 24
Consolidated Balance Sheets
December 31, 1997 and 1996 25
Consolidated Statements of Operations
Years Ended December 31, 1997, 1996 and 1995 26
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1997, 1996 and 1995 27
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995 28-29
Notes to Consolidated Financial Statements 30-37
Selected Quarterly Financial Data (Unaudited) 38
Subsidiaries 41
(a) 2. Financial Statement Schedules
None
(a) 3. Exhibits
The exhibits filed herewith are set forth on the Index to Exhibits
filed as part of this report.
(b) The Company filed a report on Form 8-K dated December 22, 1997
announcing fourth quarter 1997 charges for restructuring and asset
writedowns.
22
<PAGE> 23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
M~Wave, Inc.
We have audited the accompanying consolidated balance sheets of M~Wave, Inc.
and Subsidiaries as of December 31, 1997 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
then ended. These financial statements are the responsibility of the
management of M~Wave, Inc. Our responsibility is to express an opinion on
these financial statements based on our audit. The consolidated financial
statements of M-Wave, Inc. and subsidiaries for the years ended December 31,
1996 and December 31, 1995 were audited by other auditors whose report dated
February 17, 1997 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of M~Wave, Inc. and
Subsidiaries as of December 31, 1997, and the consolidated results of their
operations and their consolidated cash flows for the year then ended, in
conformity with generally accepted accounting principles.
We also audited the adjustments that were applied to restate the 1996 and
1995 earnings per share information to give retroactive effect to the
adoption of Statement of Financial Accounting Standards No. 128, as
described in Note 2. In our opinion, such adjustments are appropriate and
have been properly applied.
GRANT THORNTON LLP
Chicago, Illinois
January 30, 1998
23
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
M~Wave, Inc.
Bensenville, Illinois
We have audited the accompanying consolidated balance sheet of M~Wave, Inc.
and subsidiaries as of December 31, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of M~Wave, Inc. and subsidiaries as
of December 31, 1996, and the results of their operations and their cash
flows for the years ended December 31, 1996 and 1995 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
February 17, 1997
24
<PAGE> 25
M~WAVE, Inc. and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- -----------------------------------------------------------------------------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,534,315 $ 1,216,859
Accounts receivable, net of allowance
for doubtful accounts:
1997 - $10,023; 1996 - $50,000 1,734,959 1,725,340
Inventories 894,665 1,349,645
Refundable income taxes 1,289,027 2,426,081
Deferred income taxes 371,026 804,088
Prepaid expenses and other 30,591 191,729
------------ ------------
Total current assets 7,854,583 7,713,742
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements 2,360,152 6,224,247
Machinery and equipment 7,249,005 9,885,170
Less accumulated depreciation (4,014,265) (3,646,209)
------------ ------------
Property, plant and equipment - net 5,594,892 12,463,208
NOTE RECEIVABLE, net of valuation
allowance of $250,000 in 1996 0 871,718
ASSETS TO BE DISPOSED OF, NET 3,235,000 0
GOODWILL 0 771,853
OTHER ASSETS 7,862 15,030
------------ ------------
TOTAL $ 16,692,337 $ 21,835,551
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 838,610 $ 1,549,997
Accrued expenses 1,029,038 1,254,436
Current portion of long-term debt 307,605 307,606
------------ ------------
Total current liabilities 2,175,253 3,112,039
DEFERRED INCOME TAXES 317,947 1,106,786
LONG-TERM DEBT 2,268,028 2,604,464
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; 3,041,625 shares issued and 3,021,625
shares outstanding at December 31, 1996, 3,069,806
shares issued and 3,049,806 shares outstanding at
December 31, 1997 30,698 30,416
Additional paid-in capital 7,574,688 7,492,472
Retained earnings 4,445,723 7,609,374
Treasury stock, 20,000 shares at cost (120,000) (120,000)
------------ ------------
Total stockholders' equity 11,931,109 15,012,262
------------ ------------
TOTAL $ 16,692,337 $ 21,835,551
============ ============
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 26
M~WAVE, Inc. and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ----------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NET SALES $ 16,697,311 $ 22,643,968 $ 29,512,380
COST OF GOODS SOLD 13,993,543 23,345,019 22,541,108
------------ ------------ ------------
Gross profit (loss) 2,703,768 (701,051) 6,971,272
OPERATING EXPENSES:
General and administrative 2,297,309 3,233,423 2,326,806
Selling and marketing 1,020,623 1,678,078 2,009,058
Research and development 0 356,996 412,469
Impairment of building and equipment 2,604,448 0 0
Goodwill impairment charge 670,070 0 0
Writeoff of note receivable 471,718 250,000 0
------------ ------------ ------------
Total operating expenses 7,064,168 5,518,497 4,748,333
------------ ------------ ------------
Operating income (loss) (4,360,400) (6,219,548) 2,222,939
OTHER INCOME (EXPENSE):
Interest income 179,828 39,459 294,010
Interest expense (250,232) (224,110) (87,570)
Litigation settlement 0 0 (560,953)
Loss on disposal of equipment (92,844) (416,670)
------------ ------------ ------------
Total other income (expense), net (163,248) (601,321) (354,513)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (4,523,648) (6,820,869) 1,868,426
Income tax expense (benefit) (1,359,996) (2,463,476) 605,471
------------ ------------ ------------
NET INCOME (LOSS) $ (3,163,652) $ (4,357,393) $ 1,262,955
============ ============ ============
Weighted average shares outstanding 3,044,289 3,021,041 2,992,985
============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE $ (1.04) $ (1.44) $ 0.42
============ ============ ============
Diluted shares outstanding 3,044,289 3,021,041 3,072,920
============ ============ ============
DILUTED EARNINGS (LOSS) PER SHARE $ (1.04) $ (1.44) $ 0.41
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 27
M~WAVE, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE
JANUARY 1, 1995 $ 30,094 $ 7,149,213 $ 10,703,812 $ (240,000) $ 17,643,119
Common stock issued:
Stock options (31,000 shares) 310 339,209 0 0 339,519
Reissuance of treasury
stock (20,000 shares) 0 0 0 120,000 120,000
Net income 0 0 1,262,955 0 1,262,955
------------ ------------ ------------ ------------ ------------
BALANCE
DECEMBER 31,1995 30,404 7,488,422 11,966,767 (120,000) 19,365,593
Common stock issued:
Stock options (1,200 shares) 12 4,050 0 0 4,062
Net loss 0 0 (4,357,393) 0 (4,357,393)
------------ ------------ ------------ ------------ ------------
BALANCE
DECEMBER 31,1996 30,416 7,492,472 7,609,374 (120,000) 15,012,262
Common stock issued:
Stock options (10,000 shares) 100 32,400 0 0 32,500
Sale of 18,200 shares of
Common Stock 182 49,816 49,998
Net loss 0 0 (3,163,651) 0 (3,163,651)
------------ ------------ ------------ ------------ ------------
BALANCE
DECEMBER 31,1997 $ 30,698 $ 7,574,688 $ 4,445,723 $ (120,000) $ 11,931,109
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 28
M~WAVE, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from:
OPERATING ACTIVITIES:
Net income (loss) $(3,163,652) $(4,357,393) $ 1,262,955
Adjustments to reconcile net income to
net cash flows from operating activities:
Provision for doubtful accounts 0 40,000 0
Valuation provision on note receivable 471,718 250,000 0
Loss on disposal of equipment 92,844 416,670 0
Depreciation and amortization 1,511,640 1,339,591 987,542
Impairment of buildings and equipment 2,604,448 0 0
Goodwill impairment charge 670,070 0 0
Deferred income taxes (355,777) (265,750) 48,993
Treasury stock issued in litigation settlement 0 0 120,000
Changes in assets and liabilities:
Accounts receivable (9,619) 1,913,215 (510,457)
Inventories 454,980 2,029,938 (1,086,770)
Income taxes 1,137,054 (1,786,969) (521,156)
Prepaid expenses and other assets 168,307 133,753 (88,722)
Accounts payable (711,387) 15,166 (541,160)
Accrued expenses (225,398) 90,744 (410,828)
----------- ----------- -----------
Net cash flows from operating activities 2,645,228 (181,045) (739,603)
----------- ----------- -----------
Cash flows from:
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (543,934) (4,722,756) (4,528,061)
Purchase of marketable securities 0 0 (1,321,358)
Redemption of marketable securities 0 1,321,358 0
Proceeds on sale of fixed assets 70,100 0 0
Insurance proceeds received, net of fire
related payments 0 0 1,756,328
Collection of notes receivable 400,000 0 451,533
Cash paid in conjunction with sale of
assembly division 0 (100,000) 0
----------- ----------- -----------
Net cash flows from investing activities (73,834) (3,501,398) (3,641,558)
----------- ----------- -----------
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Common stock issued upon exercise of stock options 32,500 4,062 339,519
Common stock issued for cash 49,998 0 0
Proceeds from long-term debt 0 2,954,000 0
Repayment of long-term debt (336,436) (462,507) (423,434)
----------- ----------- -----------
Net cash flows from financing activities (253,938) 2,495,555 (83,915)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 2,317,456 (1,186,888) (4,465,076)
CASH AND CASH EQUIVALENTS:
Beginning of year 1,216,859 2,403,747 6,868,823
----------- ----------- -----------
End of year $ 3,534,315 $ 1,216,859 $ 2,403,747
=========== =========== ===========
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash paid during the year for:
Income taxes $ 0 $ 0 $ 1,079,500
Interest 250,232 224,110 64,000
Income tax refunds received 2,141,268 0 0
</TABLE>
See notes to consolidated financial statements.
29
<PAGE> 30
M~WAVE, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. ORGANIZATION AND OPERATIONS
M~Wave, Inc. ("M~Wave"), a Delaware corporation, was formed on January 31,
1992. On January 31, 1992, Poly Circuits, Inc. ("Poly Circuits") became a
wholly-owned subsidiary of M~Wave through an exchange in which the former
stockholders of Poly Circuits received 100 shares of M~Wave common stock for
each outstanding share of Poly Circuits.
M~Wave, through its wholly-owned subsidiaries, Poly Circuits, Inc. and P C
Dynamics Corporation (collectively, the "Company"), manufactures microwave
frequency components and high frequency circuit boards on Teflon-based
laminates for commercial and military wireless communication applications.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Principles of Consolidation - The consolidated financial statements include
the accounts of M~Wave and its wholly-owned subsidiaries. Significant
intercompany transactions and account balances have been eliminated.
Revenue Recognition - The Company recognizes revenue when product is shipped
to customers.
Cash and Cash Equivalents - Cash and cash equivalents comprise cash in banks
and highly liquid investments that are both readily convertible to known
amounts of cash and so near maturity that they present insignificant risk of
change in value.
Inventories - Inventories are carried at the lower of first-in, first-out
(FIFO) cost or market. Substantially all the Company's inventories are
work-in-process.
Property, Plant and Equipment - Property, plant and equipment are recorded
at cost. The Company calculates depreciation using the straight-line method
at annual rates as follows:
Building and improvements 3% to 20%
Machinery and equipment 10% to 20%
Goodwill - Goodwill arising from the acquisition of P C Dynamics Corporation
was being amortized on a straight-line basis over 10 years. In 1997, 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 wrote down the goodwill in the
fourth quarter of 1997 after assessing its recoverability, as well as the
book value of the building and equipment of the P C Dynamics facility. The
goodwill and building and equipment of the P C Dynamics were determined to
be impaired based upon P C Dynamics' estimated net realizable value.
30
<PAGE> 31
Assets to be Disposed of, Net - The Company has recorded the building and
equipment of the P C Dynamics facility as Assets to be Disposed of, Net and
valued these items at market less an estimate of selling costs.
Fair Value of Financial Instruments - The fair value of financial
instruments are not materially different from their carrying values.
Income Taxes - Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis at enacted tax rates when such amounts are supposed to
be realized or settled.
Net Earnings (Loss) Per Share - In 1997, the Company adopted Statement of
Financial Accounting Standards No. 128 - "Earnings per Share" ("SFAS 128").
As required by SFAS 128, all current and prior year earnings (loss) per
share data have been restated to conform to the provisions of SFAS 128.
The Company's basic net earnings (loss) per share amounts have been computed
by dividing net earnings (loss) by the weighted average number of
outstanding common shares. The Company's diluted net earnings (loss) per
share is computed by dividing net earnings (loss) by the weighted average
number of outstanding common shares and common share equivalents relating to
stock options, when dilutive based on cumulative year-to-date losses. There
is no difference in the Company's calculation of basic and fully diluted
earnings per share for 1997 and 1996. For the year ended December 31, 1995,
79,935 shares of common stock equivalents were included in the computation
of diluted earnings per share. Options to purchase 155,000 shares of common
stock with a weighted average exercise price of $14.69 were outstanding at
December 31, 1995, but were excluded from the computation of common share
equivalents because their exercise prices were greater than the average
market price of common shares.
Reclassifications - Certain reclassifications of 1996 and 1995 amounts have
been made to conform to the presentation in the current year.
3. SALE OF ASSEMBLY DIVISION
In May 1995, The Company established a division which performed contract
assembly work for the Company's customers. Effective December 13, 1996, the
Company sold substantially all of the assets, subject to certain
liabilities, of this division for a promissory note of $1,122,000, which
approximated the net book value of the assets sold to Marquis Microwave
Products. In 1996, the Company recorded a valuation allowance of $250,000 on
the note.
Effective December 19, 1997, the Company consented to the transfer of assets
of Marquis Microwave Products, Inc. to TRL Technologies, Inc. provided
Marquis Microwave Products pay the Company $400,000. As further
consideration, the Company will be entitled to royalties of 3% of net sales
of Marquis Microwave Products, subject to a maximum of $700,000. The Company
also agreed that the Promissory Note and the prior royalty agreements dated
December 13, 1996 issued by Marquis Microwave Products are null and void. In
connection with this transaction the Company recorded a write-off of Note
Receivable of $472,000.
The Company had sustained operating losses on the Assembly Division of $1.1
million in 1996 and $400,000 in 1995 on revenues of $463,000 and $91,000,
respectively.
4. ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and 1996 were comprised of:
31
<PAGE> 32
1997 1996
---- ----
Salaries and wages $284,694 $242,720
Commissions 94,094 109,494
Professional fees 250,000 445,764
Property and other taxes 118,756 109,104
Other 281,494 347,354
-------- --------
Total accrued expenses $1,029,038 $1,254,436
=========== ==========
5. LONG-TERM DEBT
The Company has a bank credit agreement which includes a revolving line of
credit and the mortgage loan described below.
Line of credit availability is based on 80% of eligible accounts receivable,
with a borrowing limit of $2,000,000. Interest is at the prime rate (8.5% at
December 31, 1997) 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 December 31, 1997.
Long-term debt is comprised of the following at December 31, 1997 and 1996:
1997 1996
----- ----
Mortgage notes payable, 1/2% over
prime rate, payable in monthly
installments of $25,233 due
October 2001, collateralized by P C
Dynamics facility $2,575,505 $2,903,534
Obligations under capital leases,
due through 1998 128 8,536
---------- ----------
2,575,633 2,912,070
Less current portion 307,605 307,606
---------- ----------
Total long-term debt $2,268,028 $2,604,464
========== ==========
Scheduled future maturities of long-term debt are as follows at December 31,
1997:
1998 307,605
1999 302,796
2000 302,796
2001 1,662,436
----------
$2,575,633
==========
The terms of the Company's long-term bank debt represent the borrowing rates
currently available to the Company; accordingly, the fair value of this debt
approximates its carrying amount.
Revolving credit borrowings and the mortgage notes are cross-defaulted and
cross-collateralized. The credit agreement, as amended May 31, 1997 requires
the Company to maintain a stipulated amount of tangible net worth, as
defined.
32
<PAGE> 33
6. INCOME TAXES
The provision (benefit) for income taxes consists of:
1997 1996 1995
---- ---- ----
Current $(1,004,219) $(2,197,726) $556,478
Deferred (355,777) (265,750) 48,993
----------- ---------- --------
Total $(1,359,996) $(2,463,476) $605,471
=========== =========== ========
The primary components comprising the net deferred tax assets (liabilities)
are as follows:
1997 1996
---- ----
Deferred tax assets
Impairment of fixed assets to be disposed of $1,015,735 $ 0
Impairment and amortization of goodwill 296,104 0
Accounts receivable reserves 37,540 61,827
Inventory reserves 218,769 411,672
Accrued expenses and other 117,952 330,589
Tax credits 36,154 0
---------- ----------
Deferred tax assets 1,722,254 804,088
Deferred tax liabilities
Depreciation (1,669,175) (1,106,786)
---------- ----------
Net deferred tax assets (liabilities) $ 53,079 $ (302,698)
========== ==========
The Company believes no valuation allowance is required due to the
availability of net operating loss carrybacks and the expectation of future
taxable income.
The effective tax rate differs from the from the Federal statutory tax rate
for the following reasons:
1997 1996 1995
---- ---- ----
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of Federal benefit 2.5 4.8 4.2
Tax exempt interest 0 0 (5.5)
Other, net (6.4) (2.7) (0.3)
----- ------ -----
Effective rate 30.1% 36.1% 32.4%
===== ===== =====
7. SIGNIFICANT CUSTOMERS AND SUPPLIERS
The percentages of net sales attributable to major customers by year were as
follows:
1997 1996 1995
---- ---- ----
Customer A 7% 8% 16%
Customer B 19 26 27
Customer C 26 10 12
Customer D 7 14 6
33
<PAGE> 34
The loss of, or a substantial reduction in or change in the mix of orders
from, any one of the Company's major customers could have a material adverse
effect on the Company's results of operations and financial condition.
Approximately 49%, 39% and 48% of the Company's revenues in 1997,1996 and
1995 respectively, were related to the cellular telephone industry.
During 1997, 1996 and 1995, one manufacturer accounted for approximately 56%,
46% and 49%, respectively, of the Teflon-based laminates ("Teflon based
laminate") supplied to the Company. Teflon based laminate is the largest
single component of the Company's cost of goods sold representing
approximately 15.4%, 27.5%, and 18.6% of net sales during 1997, 1996 and
1995, respectively. There are only four U. S. manufacturers of Teflon based
laminate. Any disruption or termination of these sources of Teflon based
laminate could adversely affect the Company's operations.
8. STOCK OPTION PLAN
In February 1992, the Board of Directors and stockholders of the Company
approved a non-qualified Stock Option Plan (the "Stock Option Plan") under
which 300,000 shares of common stock are reserved for issuance upon exercise
of stock options. The Stock Option Plan is designed as an incentive for
retaining key employees and directors.
In June 1995, the Board of Directors and stockholders of the Company
approved an amendment and restatement of the Company's 1992 Stock Option
Plan. The principal changes that resulted from the amendment are (1) an
increase in the aggregate number of shares of Common Stock of the Company
available for the exercise of options granted under the plan from 300,000 to
500,000; (2) a limit on the number of shares as to which options may be
granted to any grantee in any calendar year to 75,000; (3) a grant of
discretion to the Compensation Committee to extend the exercisability of
options after a grantee's termination of employment (other than for Cause,
as defined in the Plan) from 30 days to any longer period up to the full
remaining term of the option; and (4) a provision for the acceleration of
the exercisability of all outstanding options (regardless of when granted)
in the event of a Change of Control of the Company.
In June 1997 the Board of Directors and stockholders of the Company approved
an amendment and restatement of the Company's 1992 Stock Option Plan. The
principal changes that resulted from the amendment are (1) to increase the
aggregate number of shares of Common Stock of the Company available for the
exercise of options granted under the plan from 500,000 to 750,000 and (2)
to increase the limit on the number of shares as to which options may be
granted to any grantee in any calendar year from 75,000 to 215,000.
The exercise price of each non-qualified stock option granted to employees
of the Company under the Stock Option Plan must equal at least 80% of the
fair market value of the underlying shares of common stock on the date of
the grant, and the maximum term of such an option may not exceed 10 years.
For all options granted to date, except for 75,000 options granted in 1995
and 210,000 shares granted in 1997, exercise price has equaled fair market
value at the date of grant, the term of the option has been 10 years, and
the options vest as to 25% on each of the first four anniversary dates of
the grant. Exercise prices, as a percentage of fair market value at date of
grant, on 75,000 options granted in 1995 are 110% as to 25,000 options, 120%
as to 25,000 options and 130% as to 25,000 options. These options vest as to
33 1/3% on December 31, 1995, December 31, 1996, December 31, 1997 and the
term is ten years. Exercise prices for the 210,000 shares granted in 1997
are 50,000 shares at $2.75 (fair market value), 70,000 at $7.50 and 90,000
shares at $10.00. These options vest at 40% on February 3, 1998, 35% on
February 3, 1999 and 25% on February 3, 2000, and the term is ten years.
34
<PAGE> 35
Stock option activity under the Plan was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Number of Shares Weighted Average
Under Option Exercise Price
- -------------------------------------------------------------------
<S> <C> <C>
Balance, January 1, 1995 255,650 8.46
Granted 105,000 14.50
Forfeited (31,250) 12.06
Exercised (31,025) 5.38
- -------------------------------------------------------------------
Balance, December 31, 1995 298,375 10.53
Forfeited (61,250) 10.37
Exercised (1,250) 3.25
- -------------------------------------------------------------------
Balance, December 31, 1996 235,875 $ 10.61
Granted 220,000 7.27
Forfeited (85,000) 10.21
Exercised (10,000) 3.25
- -------------------------------------------------------------------
Balance, December 31, 1997 360,875 $ 8.73
- -------------------------------------------------------------------
</TABLE>
Exercisable at year-end:
1995 127,125 $ 8.39
1996 175,875 9.30
1997 137,125 10.97
The weighted average exercise price of the options granted in 1997 were
$7.27. The weighted average exercise price of the options granted in 1995
were $ 14.50. The range of exercise prices of the 360,875 options
outstanding at December 31, 1997 is $2.75 to $15.93 and the weighted
average remaining contractual life is 7 years. At December 31, 1997,
337,500 shares were available for grant.
The Company applies Accounting Principles Board Opinion No. 25 in accounting
for stock options. Accordingly, no compensation cost has been recognized for
options granted. Had compensation cost for options granted in 1997 and 1995
been determined based on the fair value at the grant date, consistent with
the method prescribed by Financial Accounting Standards Board Statement No.
123, the Company's net income (loss) and related per share amounts would
have been adjusted to the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income(loss)
As reported $(3,163,652) $(4,357,393) $1,262,955
Pro forma (3,676,145) (4,583,145) 1,103,047
Basic net income (loss) per share
As reported
Basic $ (1.04) $ (1.44) $ 0.42
</TABLE>
35
<PAGE> 36
Diluted (1.04) (1.44) 0.41
Pro forma
Basic (1.21) (1.51) 0.37
Diluted (1.21) (1.51) 0.36
Options outstanding and exercisable at December 31, 1997, by price range:
<TABLE>
<CAPTION>
Outstanding
------------------------------------ Exercisable
Range of Weighted average ---------------------------
exercise Remaining Weighted average Weighted average
prices Shares contractual life exercise price shares exercise price
------ ------ ---------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$ 2.75 to 3.99 97,125 7.6 $ 3.04 37,125 $ 3.25
4.00 to 7.99 80,000 8.7 7.44 10,000 7.00
8.00 to 11.99 93,750 9.1 10.01 2,500 10.25
12.00 to 13.99 30,000 7.3 13.54 28,750 13.51
14.00 to 16.00 60,000 7.3 15.28 58,750 15.30
------ ------
360,875 137,175
</TABLE>
The weighted average fair value of options granted in 1997, and 1995 was
$4.70 and $10.50, respectively, and was estimated at the grant date using
the Black-Scholes options pricing model with the following weighted average
assumptions: expected volatility of 178% and 81%, respectively: risk free
interest rate of 6.6% and 7.2 %, respectively; expected life of 9 years; and
no dividend yield.
9. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution retirement plan covering
substantially all full-time employees. The plan allows for employees to
defer up to 10% of their pretax annual compensation, as defined in the plan.
The Company will match up to 25% of the first 4% of base compensation that a
participant contributes. Additionally, discretionary amounts may be
contributed by the Company. There were no Company's contributions for 1997,
1996 and 1995.
10. LEASE COMMITMENTS
The Company rents manufacturing and administrative space under operating
leases. Rent expense under these leases for the years ended December 31,
1997, 1996 and 1995 was $93,600, $236,401, and $142,534, respectively.
Future minimum annual lease commitments at December 31, 1997 are as follows:
Year
1998 $109,060
1999 57,600
2000 28,800
---------
Total $195,460
========
11. LITIGATION
The Company is a party to various actions and proceedings related to its
normal business operations. The Company believes that the outcome of this
litigation will not have a material adverse effect on the financial position
or results of operations of the Company.
On May 13, 1994, Comptek Research, Inc., Comptek Telecommunications, Inc.
and Industrial Systems Service, Inc. (together "Comptek") filed a suit
against M~Wave, Inc. and Poly Circuits,
36
<PAGE> 37
Inc. alleging contractual, Uniform Code and tortious violations arising out
of Poly Circuits' sale of printed circuits boards. On September 29, 1995,
the Company reached settlement with Comptek. The settlement included a cash
payment of $300,000, the issuance of 20,000 shares of the Company's common
stock to Comptek and an agreement to supply goods and services to Comptek on
a long-term basis. The settlement resulted in a non-recurring pre-tax charge
in the third quarter of 1995 of approximately $561,000, or $0.11 per share
after tax.
The Company and Joseph Turek have been named as defendants in Lionheart
Partners, Inc., as general partner of Lionheart USA Micro Cap Value, L.P. v.
M~Wave, Inc. and Joseph Turek, which was filed on or about November 17, 1995
in the United States District Court for the Northern District of Illinois.
The case was filed as a purported class action on behalf of all persons who
purchased common stock of the Company between August 8, 1995 and October 18,
1995. The complaint alleges that the defendants made materially false and
misleading statements and failed to correct public representations which had
become materially false and misleading regarding the Company's revenues and
earnings. The complaint asserts claims under Sections 10(b) and 20 of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and
seeks compensatory damages in an unspecified amount.
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 and is recorded in accrued liabilities on the
December 31, 1997 balance sheet.
12. ENVIRONMENTAL MATTERS
The Company periodically generates and handles materials that are considered
hazardous waste under applicable law and contracts for the off-site disposal
of these materials. During the ordinary course of its operations, the
Company has on occasion received citations or notices from regulatory
authorities that such operations may not be in compliance with applicable
environmental regulations. Upon such receipt, the Company works with such
authorities to resolve the issues raised by such citations or notices. The
Company's past expenditures relating to environmental compliance have not
had a material effect on the financial position of the Company. The Company
believes the overall impact of compliance with regulations and legislation
protecting the environment will not have a material effect on its future
financial position or results of operations, although no assurance can be
given.
Based on information available to the Company, which in most cases includes
an estimate of liability, legal fees and other factors, a reserve for
indicated environmental liabilities has been recorded in accrued liabilities
section of the December 31, 1997 Balance Sheet, the aggregate amount is
approximately $13,000.
13. IMPAIRMENT OF GOODWILL AND LONG-LIVED ASSETS TO BE DISPOSED OF
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 division did not have a future place in the Company's strategic
plans. As such, management is actively marketing P C Dynamics for 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. The Company also recorded a $2,604,448 impairment of building
and equipment for the write down of the P C Dynamics building and equipment
to an estimate of market value. The building and equipment are recorded in
the December 31, 1997 balance sheet as building and
37
<PAGE> 38
equipment to be disposed of at market value less an estimate of selling
costs. The market value was determined based on appraisals.
For the year ended December 31, 1997, 1996 and 1995 P C Dynamics' financial
results included $4,192,303, $4,786,726 and $4,172,403 of net sales and
operating losses of $4,422,128, $1,377,584 and $353,474, respectively. Until
the P C Dynamics business is sold, the Company estimates incurring monthly
pre-tax losses in the range of $75,000 to $100,000 per month. If the decision
was made to cease P C Dynamic's business, the Company estimates incurring
approximately $200,000 in severance and shutdown costs. If P C Dynamics'
business were to cease, the Company estimates incurring expenses of
approximately $84,000 each month for real estate taxes, utilities and
security until the building and equipment can be disposed of.
* * * * * *
38
<PAGE> 39
M~WAVE, Inc. and Subsidiaries
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Set forth below is a summary of the Company's unaudited quarterly results for
each quarter during 1997 and 1996. In management's opinion, these results have
been prepared on the same basis as the audited financial statements contained
elsewhere herein and include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the information for the
periods when read in conjunction with the financial statements and notes
thereto.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 4,271,004 $ 4,524,052 $ 4,579,624 $ 3,322,631
Gross profit 408,971 1,090,168 1,020,869 183,760
Net income (loss) (396,170) 53,067 126,272 (2,946,822)
Weighted average shares 3,027,433 3,049,806 3,049,806 3,049,806
Basic earnings (loss) per share (0.13) 0.02 0.04 (0.97)
Diluted shares 3,027,433 3,049,806 3,051,324 3,049,806
Diluted earnings (loss) per share (0.13) 0.02 0.04 (0.97)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 6,256,558 $ 6,340,968 $ 6,284,338 $ 3,762,104
Gross profit (loss) (1,834,221) 784,689 1,110,105 (761,624)
Net income (loss) (2,126,344) (334,809) (205,295) (1,690,945)
Weighted average shares 3,020,375 3,020,526 3,021,625 3,021,625
Basic earnings (loss) per share (0.70) (0.11) (0.07) (0.56)
Diluted shares 3,020,375 3,020,526 3,021,625 3,021,625
Diluted earnings (loss) per share (0.70) (0.11) (0.07) (0.56)
</TABLE>
During the three months ended December 31, 1997, the Company recorded expenses
of $2,604,448 for impairment of building and equipment, $670,000 for goodwill
impairment and $471,718 for a writeoff of a note receivable.
39
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
M~WAVE, Inc.
By: /s/ Joseph A. Turek
-----------------------
Joseph A. Turek
Chairman of the Board,
Chief Executive Officer
March 15, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Joseph A. Turek /s/ Michael Bayles
- --------------------- -----------------------
Joseph A. Turek Michael Bayles
Director President and Chief
March 15, 1998 Operating Officer
March 15, 1998
/s/ Lavern D. Kramer /s/ Timothy A. Dugan
- --------------------- -----------------------
Lavern D. Kramer Timothy A. Dugan
Director Director
March 15, 1998 March 15, 1998
/s/ Eric Larson /s/ Rick Mathes
- --------------------- -----------------------
Eric Larson Rick Mathes
Director Director
March 15, 1998 March 15, 1998
/s/ Paul H. Schmitt
- ------------------------
Paul H. Schmitt
Treasurer and Secretary
(Principal Accounting and
Financial Officer)
March 15, 1998
40
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page
--- ----------- ----
<S> <C> <C>
2.1 Exchange Agreement, dated as of January 31, 1992, among Poly *
Circuits, Inc., Joel S. Dryer, Joseph A. Turek and the Company
3.1 Certificate of Incorporation of the Company *
3.2 Bylaws of the Company *
10.1 Amended and restated M~Wave, Inc. 1992 Stock Option Plan ****
10.2 Lease, dated June 22, 1989, by and between Louis R. and Ruth
DeMichele and the Company *
10.3 Amended Form of Sales Representative Agreement generally used
by and between the Company and its sales representatives *
10.4 Employment Agreement between the Company and
Joseph A. Turek ****
10.5 Registration Rights Agreement dated July 21, 1993, between
the Company and certain holders of Company common stock **
10.6 Shareholders Agreement, dated July 21, 1993, by and among
First Capital Corporation of Chicago, Cross Creek Partners II,
and Joseph A. Turek **
10.7 Asset Purchase Agreement, dated as of August 5, 1994, by and
among the Company, P C Dynamics acquisition, P CD Holdings,
Inc. and P C Dynamics Corporation. ***
10.8 Construction Loan Note, dated January 10, 1996, by and among the
Company, P C Dynamics and American National Bank and Trust
Company. *****
10.9 Employment Agreement between the Company and Michael Bayles ******
21 Subsidiaries 43
24.1 Consent of Grant Thornton LLP 44
24.2 Consent of Deloitte & Touche LLP 46
27 Financial Data Schedule 46-49
</TABLE>
*Incorporated herein by reference to the applicable exhibit to the
Registrant's Registration Statement on Form S-1
(Registration No. 33-45499).
**Incorporated herein by reference to the applicable exhibit to the
Registrant's Annual Report on Form 10-K for year ended December 31, 1993
(Registration No. 0-19944).
***Incorporated herein by reference to the applicable Report on Form 8-K
dated August 5, 1994.
41
<PAGE> 42
****Incorporated herein by reference to the applicable exhibit to the
Registrants quarterly report on form 10-Q for the quarter ended June
30, 1995.
*****Incorporated herein by reference to the applicable exhibit to the
Registrant's Annual Report on Form 10-K for year ended December 31,
1995.
******Incorporated herein by reference to the applicable exhibit to the
Registrants quarterly report on form 10-Q for the quarter ended March
31, 1997.
42
<PAGE> 1
Exhibit 21
Subsidiaries
Name State of Incorporation
- ---- ----------------------
Poly Circuits, Inc. Illinois
P C Dynamics Corporation Texas
43
<PAGE> 1
Exhibit 24.1
INDEPENDENT AUDITORS' CONSENT
Board of Directors
M~Wave, Inc
We have issued our report dated January 30, 1998, accompanying the consolidated
financial statements and schedule included in the Annual Report of M~Wave, Inc.
and Subsidiaries on Form 10-K for the year ended December 31, 1997. We hereby
consent to the incorporation by reference of said report in the Registration
Statements of M~Wave, Inc. and Subsidiaries on Form S-8 (File No. 33-72650),
effective December 8, 1993 and on Form S-3 (File No. 33-98712), effective
November 3, 1995.
GRANT THORNTON LLP
Chicago, Illinois
March 25, 1998
44
<PAGE> 1
Exhibit 24.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-72650 on Form S-8 and Registration Statement No. 33-98712 on Form S-3 of
M~Wave, Inc. of our report dated February 17, 1997, appearing in the Annual
Report on Form 10-K of M~Wave, Inc. for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 25, 1997
46
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000883842
<NAME> M-WAVE INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,534,315
<SECURITIES> 0
<RECEIVABLES> 1,734,959
<ALLOWANCES> 0
<INVENTORY> 894,665
<CURRENT-ASSETS> 7,854,583
<PP&E> 9,609,157
<DEPRECIATION> 4,014,265
<TOTAL-ASSETS> 16,692,337
<CURRENT-LIABILITIES> 2,175,253
<BONDS> 2,268,028
0
0
<COMMON> 30,698
<OTHER-SE> 12,020,411
<TOTAL-LIABILITY-AND-EQUITY> 16,692,337
<SALES> 16,697,311
<TOTAL-REVENUES> 0
<CGS> 13,993,543
<TOTAL-COSTS> 7,064,168
<OTHER-EXPENSES> (163,248)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,523,648)
<INCOME-TAX> (1,359,996)
<INCOME-CONTINUING> (3,163,652)
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</TABLE>
