<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, 1998
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 22, 1999 was approximately $1,689,000, computed on the
basis of the last reported sale price per share ($1.125) of such stock on the
NASDAQ SmallCap Market.
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The Registrant has 2,267,842 common shares outstanding at March 22, 1999.
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 42.
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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 the Company will eventually exit the Military
market and concentrate all efforts in the Commercial market segments. 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 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 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 commercial 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. 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 51%, 49% and 39% of the Company's revenues in 1998, 1997, and
1996, 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 1998,
1997 and 1996.
In 1998, Motorola, Lucent and Spectrian accounted for 7%, 9% and 37%,
respectively, of the Company's revenues. 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. 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 vigorously to 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, 1998, the Company had an order backlog of approximately
$3,772,000 compared to $2,626,000 at December 31, 1997. 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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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 91% in 1998,
compared to 90% in 1997. 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 an SPC (Statistical Process Control) system
that is intended to maintain quality at each process stage by reducing the
variability of each process. As the Company's business has evolved towards the
production of relatively smaller quantities of more complex products, the
Company has at times during 1998 and 1997 encountered difficulty in maintaining
its past yield standards.
During 1998, 1997 and 1996, one manufacturer accounted for approximately 66%,
56% and 46%, 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(TM)
in 1996.
Pro-Cor(TM) is a patented product intended to serve the antennae segment of the
microwave telecommunications market. Customers have expressed high interest due
to its special electrical and mechanical properties, since they exceed the
performance expectations of Teflon substrates. Pro-Cor(TM) is significantly less
expensive than Teflon allowing antennae design engineers a cost effective
alternative to current materials. A major domestic antennae
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manufacturer recently funded a Research and Development project to qualify
Pro-Cor(TM) in space applications. The Company was granted a patent in 1998 for
the Pro-Cor(TM) foam circuit board product.
The Company relies heavily on its process engineering capabilities to further
its corporate objectives. The Company's future results of operations are
dependent on its ability to continue to initiate or respond to technical changes
and to make the necessary ongoing capital investments. The Company focuses on
improving current manufacturing processes and developing new processes in
pursuit of its goal to increase quality, offer enhanced systems design
flexibility to its customers, and respond to the increasing complexity of its
customers' products.
Competition
The market for the Company's products is highly competitive. The Company
competes for customers primarily on the basis of quality, reliability and on
time delivery of its products and the Company's technical support. The Company
faces substantial competition from many companies, including many that have
greater financial and other resources, broader product lines, greater customer
service capabilities and larger and more established customer bases. 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
$10,000. The Company spent approximately $33,000 in 1998 complying with EPA
regulations.
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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.
The Company was granted three (3) patents in 1998. Two (2) patents were granted
to the Company for a printed circuits board process using plasma spraying of
conductive metal. The plasma spraying process eliminates a significant portion
of the wet process currently used to produce printed circuit boards. It is an
environmentally friendly "green process" for producing printed circuit boards.
The Company was also granted a patent in 1998 for a Pro-Cor(TM) foam circuit
board product. Pro-Cor(TM) was developed to serve the antennae segment of the
microwave telecommunications market. Pro-Cor(TM) is significantly less
expensive than Teflon allowing antennae design engineers a cost effective
alternative to current materials.
Employees
On December 31, 1998, the Company employed approximately 88 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
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:
Name Age Position
---- --- -----------------------
Joseph A. Turek 41 Chairman and
Chief Executive Officer
Paul H. Schmitt 52 Secretary and Treasurer
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.
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:
Lease
Location Function Square Feet Expiration Date
-------- -------- ----------- ---------------
Bensenville, Illinois Manufacturing 14,000 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
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
$2,298,000 at December 31, 1998. In December 1997, the Company announced that
the P C Dynamics facility located in Frisco, Texas does not have a place in the
Company's Strategic Plans. The Company sold substantially all the assets of PC
Dynamics Corporation on March 25, 1999, but maintained ownership of the
building.
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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 Small Cap 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, 1997 through December 31, 1998 as reported by the
NASDAQ.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------
1998 1997
------------------------ ---------------------------
Low High Low High
<S> <C> <C> <C> <C>
First Quarter $ 1-7/8 $ 4 $ 2-1/8 $ 4-5/8
Second Quarter 1-3/4 4-5/8 2 3-1/2
Third Quarter 11/16 2-1/4 2-7/16 3-15/16
Fourth Quarter 3/8 1-7/8 3 6-3/8
</TABLE>
As of December 31, 1998, there were approximately 700 shareholders of record
owning the common stock of the Company.
The Registrant did not pay any dividends on its common stock in 1998 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, 1998.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net sales $ 13,120,054 $ 16,697,311 $ 22,643,968 $ 29,512,380 $ 28,009,390
Gross profit (loss) 2,433,440 2,703,768 (701,051) 6,971,272 9,623,653
Operating income (loss) 182,774 (4,360,400) (6,219,548) 2,222,939 5,624,471
Income (loss) before income taxes 173,923 (4,523,648) (6,820,869) 1,868,426 6,201,013
Net income (loss) 18,503 (3,163,652) (4,357,393) 1,262,955 3,745,935
Weighted average shares 3,019,813 3,044,289 3,021,041 2,992,985 2,905,054
Basic earnings (loss) per share 0.01 (1.04) (1.44) 0.42 1.29
Diluted shares 3,021,211 3,044,289 3,021,041 3,072,920 3,006,599
Diluted earnings (loss) per share 0.01 (1.04) (1.44) 0.41 1.25
Balance Sheet Data:
Working capital $ 5,342,657 $ 5,679,330 $ 4,601,703 $ 9,110,742 $ 11,046,010
Total assets 15,768,374 16,692,337 21,835,551 23,407,823 23,258,012
Long-term debt 1,990,337 2,268,028 2,604,464 11,239 423,732
Stockholders' equity 11,167,648 11,931,109 15,012,262 19,365,593 17,643,119
</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 1998, 1997 and 1996 as a percent of
sales.
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 81.5 83.8 103.1
--------- --------- ---------
Gross profit (loss) 18.5 16.2 (3.1)
--------- --------- ---------
Operating expenses:
General and administrative 12.5 13.8 14.3
Selling and marketing 4.6 6.1 7.4
Research and development 0.0 0.0 1.6
Impairment of building and
equipment 0.0 15.6 0.0
Goodwill impairment charge 0.0 4.0 0.0
Writeoff of note receivable 0.0 2.8 1.1
--------- --------- ---------
Total operating expenses 17.1 42.3 24.4
Operating income (loss) 1.4 (26.1) (27.5)
Interest income (expense) - net (0.3) (0.4) (0.9)
Gain (loss) on disposal of equipment 0.2 (0.6) (1.8)
--------- --------- ---------
Total other income (expense) (0.1) (1.0) (2.7)
--------- --------- ---------
Income (loss) before income taxes 1.3 (27.1) (30.2)
Income tax expense (benefit) 1.2 (8.2) (10.9)
--------- --------- ---------
Net income (loss) 0.1% (18.9)% (19.3)%
========= ========= =========
</TABLE>
COMPARISON OF 1998 AND 1997
Net Sales
Net sales for 1998 decreased 21% to $13.1 million from $16.7 million in 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
$2,194,000 or 70% to $927,000. The products produced for Motorola are maturing
and their requirements have been reduced. Net sales to Lucent increased by
$102,000 or 9% to $1,181,000. Net sales to LK Products decreased by $909,000 or
98% to $17,000. LK Products has shifted their product to an alternative
material.
The decline in net sales was partially offset by an increase in net sales to
Spectrian, the Company's largest customer, of $414,000 or 9% to $4,789,000 and
Rockwell of $640,000 or 52% to $1,872,000.
The Company's three largest customers accounted for 60% of the Company's net
sales in 1998 compared to 52% in 1997.
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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 $0.3 million in 1998 from $2.7 million in 1997 to $2.4
million in 1998. Gross margin increased to approximately 18% in 1998 from
approximately 16% in 1997. The improvement is due to many factors. Indirect
labor costs were down approximately $550,000 mainly due to a reduction in staff
in 1997. Depreciation and amortization costs were down approximately $445,000
mainly due to the decision to write-down the assets of the P C Dynamics facility
in 1997. Process improvements and controls reduced scrap by $125,000. However,
future production problems would adversely impact the Company's gross margins
and profitability, which would also result in decreased liquidity and adversely
affect the Company's financial position.
Teflon based laminate is the largest single component of the Company's cost of
goods sold, representing 18.8% and 15.4% of net sales during 1998 and 1997,
respectively. The Company did not experience significant changes in the cost of
Teflon based laminate during 1998 and 1997. During 1998 and 1997, one
manufacturer accounted for approximately 66% and 56%, respectively, of the
Teflon based laminate supplied to the Company.
Operating Expenses
General and administrative expenses were $1,635,000 or 12.5% of net sales in
1998, compared to $2,297,000 or 13.8% of net sales in 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 $100,000 in 1997. The consultants completed
their work with the Company in February 1997. Payroll related expenses were down
$300,000 due to staff reductions and the resignation of the Company's former
president. Depreciation and Amortization mainly relating to PC Dynamics was down
$85,000.
Selling and marketing expenses were $616,000 or 4.7% of net sales in 1998,
compared to $1,021,000 or 6.1% of net sales in 1997. Selling and marketing
expenses include the cost of salaries, advertising and promoting the Company's
products and the commissions paid to independent sales organizations.
Commissions and expenses relating to independent sales organizations were down
$313,000 as a result of lower sales. Payroll related expenses were down $79,000
due to staff reductions.
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 in December,
1997. In December, 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 December 31, 1998 balance sheet as assets to be disposed of and
are recorded at market value less an estimate of selling costs.
The market value was determined based on appraisals.
For the year ended December 31, 1998 P C Dynamics' financial results included
$4,485,684 of net sales and operating profits of $378,366. For the years ended
December 31, 1997 and 1996, P C
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Dynamics' financial results included $4,192,303 and $4,786,726 of net sales and
operating losses of $4,422,128 and $1,377,584, respectively.
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 pays 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 in December, 1997.
The Company had sustained operating losses on the Assembly Division of $1.1
million in 1996 on revenues of $463,000.
Operating income
Operating income was $183,000 or 1.4% of net sales in 1998, compared to a
negative $4,360,000 or negative 26.1% of net sales in 1997. The change in
operating income can be summarized as follows:
<TABLE>
<S> <C>
Decrease in net sales $ (579,000)
Increase in gross margin 309,000
1997 Impairment of building and equipment 2,604,000
1997 Goodwill impairment charge 670,000
1997 Write off of note receivable 472,000
Decrease in operating expenses 1,067,000
---------
Increase in operating income $4,543,000
=========
</TABLE>
Interest Income
Interest income from short-term investments was $172,000 in 1998 compared to
$180,000 in 1997.
Interest Expense
Interest expense, primarily related to the Company's mortgage obligation on its
P C Dynamics facility, was $219,000 in 1998 compared to $250,000 in 1997.
Gain (loss) on disposal of fixed assets
The Company recorded a gain of $39,000 in 1998 compared to a loss of $93,000 in
1997 relating to the disposal of fixed assets which are no longer usable in the
Company's business.
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Income Taxes
The Company had an effective tax credit rate of 89.4% in 1998, and an effective
tax credit rate of 30.1% in 1997. The rate of 89.4% in 1998 reflects changes in
estimated tax refunds.
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 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.
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.
15
<PAGE> 16
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. 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, 1998 balance sheet as
building and equipment to be disposed of at market value less an estimate of
selling costs. The market value was determined based on appraisals.
For the years 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.
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
16
<PAGE> 17
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:
<TABLE>
<S> <C>
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)
Write off of note receivable (222,000)
Decrease in operating expenses 1,950,000
----------
Decrease in operating loss $ 1,859,000
==========
</TABLE>
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.
17
<PAGE> 18
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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided/(used) by operations was $1,338,000, $2,645,000 and ($181,000)
in 1998, 1997 and 1996, respectively. In 1998, inventories increased $689,000
due mainly to increased investment in work in process ($217,000) and the Bonding
Process ($191,000). Depreciation and amortization was $771,000, down $741,000 in
1998 due to the write-down of the PC Dynamics assets in December 1997. Accrued
expenses were down $421,000 due mainly to the payments made for litigation
settlements. The Company collected income tax refunds of $1,179,000. Cash
generated and cash on hand was used to repurchase 781,964 shares of its common
stock owned by First Chicago Equity Corporation. Cash generated and cash on hand
was also used for the purchase of property, plant and equipment. Purchases of
property, plant and equipment were $277,000, $544,000, and $4,723,000 in 1998,
1997 and 1996, 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, 1998, no amounts were outstanding on this line.
On December 18, 1998, the Company repurchased 781,964 shares of its common stock
owned by First Chicago Equity Corporation ("FCEC") and its affiliates. The
aggregate consideration paid by the Company consisted of $781,964 plus warrants
to purchase up to 781,964 shares of the Company's common stock with an exercise
price of $1.00 per share (increasing by $0.05 per share each anniversary date of
the warrants). The warrants are exercisable only if the Company engages in an
extraordinary transaction (e.g., a merger, a consolidation, combination or
dissolution) within five years of the issue date of the warrants. The future
value of the warrants at year-end was $744,144.
As of December 31, 1998, the Company has $2,298,000 of debt and $3.7 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.
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.
On March 25, 1999, PC Dynamics Corporation, a wholly owned subsidiary of the
Company, sold substantially all of its machinery and equipment, inventory and
accounts receivable and assigned substantially all of its outstanding contracts
and orders to Performance Interconnect Corp., a Texas Corporation ("PIC"). The
purchase price paid by PIC consisted of:
18
<PAGE> 19
(i) $893,319 Cash
(ii) a promissory note in the principal amount of $773,479, which is
payable in nine (9) equal monthly installments commencing on July
1, 1999.
(iii) a promissory note in the principal amount of $293,025, which is
payable in monthly installments of $50,000 commencing on May 1,
1999 until paid.
PC Dynamics and PIC also entered into a royalty agreement which provides for PIC
to pay PC Dynamics a royalty equal to 8.5% of the net invoice value of certain
microwave frequency components and circuit boards sold by PIC for eighteen
months following the closing.
In addition, PC Dynamics has leased its facility in Texas to PIC for $17,000 per
month for three years. PIC has the right under the lease to purchase the
facility from PC Dynamics for $2,000,000 at anytime during the term of the
lease.
The Company does not expect this transaction to have a material effect on the
financial position of the Company. The sale of the assets will have an effect
on net income of up to $100,000.
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 132 - "Disclosures of Pension information." This
new Statement should have no material effect on the Company.
Statement of Financial Standard 133 - "Reporting on Derivatives and Hedging
Transactions." This new Statement should have no material effect on the Company.
Statement of Financial Standard 134 - "Accounting for Mortgage backed
Securities." This new Statement should have no material effect on the Company.
Year 2000 Compliance
Many computer and other software and hardware systems currently are not, or will
or may not be, able to read, calculate or output correctly using dates after
1999 and such systems will require significant modifications in order to be
"Year 2000 compliant." This issue may have a material adverse affect on the
Company's business, financial condition and results of operations because its
computer and other systems are integral parts of the Company's distribution
activities as well as its accounting and other information systems and because
the Company will have to divert financial resources and personnel to address
this issue.
The Company has reviewed its computer and other hardware and software systems
and has recently begun upgrading those systems that it has identified as not
being year 2000 compliant. The existing systems will be upgraded either through
modification or replacement. The Company currently anticipates that it will
complete testing of these upgrades by the end of fiscal 1999.
Although the Company is not aware of any material operational impediments
associated with upgrading its computer and other hardware and software systems
to be year 2000 compliant, the Company cannot make any assurances that the
upgrade or the Company's computer systems will be completed on schedule, or that
the upgraded systems will be free of defects. If any such risks materialize, the
Company could experience material adverse consequences to its business,
financial condition and results of operations.
19
<PAGE> 20
Year 2000 compliance may also adversely affect the Company's business financial
conditions and results of operations indirectly by causing complications to, or
otherwise affecting, the operations of any one or more of its suppliers and
customers. The Company is contacting its significant suppliers and customers in
an attempt to identify any potential year 2000 compliance issues with them. The
Company is currently unable to anticipate the magnitude of the operational or
financial impact of year 2000 compliance issues with its suppliers or customers.
The Company incurred approximately $55,000 through fiscal 1998 and expects to
incur approximately $100,000 through fiscal 1999 to resolve and test the
Company's year 2000 compliance issues. All expenses incurred in connection with
year 2000 compliance will be expensed as incurred, other than acquisitions of
new software or hardware, which will be capitalized.
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 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.
20
<PAGE> 21
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, 1998 are filed in response to this Item
pursuant to Item 14.
The supplementary data regarding quarterly results of operations, set forth
under the caption "Selected Quarterly Financial Data (Unaudited)" following the
aforementioned consolidated financial statements, are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
21
<PAGE> 22
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 "1999 Proxy Statement"), and is
incorporated herein by this reference.
Item 11. Executive Compensation
Information required by this Item will be contained in the 1999 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 1999 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 1999 Proxy Statement
and is incorporated herein by this reference.
22
<PAGE> 23
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 24
Independent Auditors' Report 25
Consolidated Balance Sheets
December 31, 1998 and 1997 26
Consolidated Statements of Operations
Years Ended December 31, 1998, 1997 and 1996 27
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996 28
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996 29-30
Notes to Consolidated Financial Statements 31-39
Selected Quarterly Financial Data (Unaudited) 40
Subsidiaries 44
(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 reports on Form 8-K as follows:
(1) Dated November 25, 1998 announced it was notified by First
Chicago Equity Capital that they intended to nominate Lawrence
Fox and Christopher Saenger to stand for election as directors
at the Company's annual meeting of stockholders.
(2) Dated December 21, 1998 announced the Company had repurchased
781,964 shares of its common stock owned by First Chicago
Equity Corporation.
23
<PAGE> 24
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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the years 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 year ended
December 31, 1996 was 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, 1998 and 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
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 29, 1999 (except for Note 3 as to which the date is March 25, 1999)
24
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
M~Wave, Inc.
Bensenville, Illinois
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of M~Wave, Inc. and subsidiaries for the
year ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of M~Wave,
Inc. and subsidiaries for the year ended December 31, 1996 in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
February 17, 1997
25
<PAGE> 26
M~WAVE, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,712,537 $ 3,534,315
Accounts receivable, net of allowance
for doubtful accounts:
1997 - $10,023; 1998 - $10,000 1,772,637 1,734,959
Inventories 1,583,421 894,665
Refundable income taxes 0 1,289,027
Deferred income taxes 395,987 371,026
Prepaid expenses and other assets 99,656 30,591
------------ ------------
Total current assets 7,564,238 7,854,583
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements 2,360,152 2,360,152
Machinery and equipment 7,355,774 7,249,005
------------ ------------
Total property, plant and equipment 9,715,926 9,609,157
Less accumulated depreciation (4,750,872) (4,014,265)
------------ ------------
Property, plant and equipment - net 4,965,054 5,594,892
ASSETS TO BE DISPOSED OF, NET 3,233,405 3,235,000
OTHER ASSETS 5,677 7,862
------------ ------------
TOTAL $ 15,768,374 $ 16,692,337
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,306,348 $ 838,610
Accrued expenses 607,628 1,029,038
Current portion of long-term debt 307,605 307,605
------------
Total current liabilities 2,221,581 2,175,253
DEFERRED INCOME TAXES 388,808 317,947
LONG-TERM DEBT 1,990,337 2,268,028
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 2,267,842 shares outstanding at
December 31, 1998 30,698 30,698
Additional paid-in capital 8,348,832 7,574,688
Retained earnings 4,464,226 4,445,723
Treasury stock, 20,000 shares at December 31, 1997
and 801,964 shares at December 31, 1998, at cost (1,676,108) (120,000)
------------ ------------
Total stockholders' equity 11,167,648 11,931,109
------------ ------------
TOTAL $ 15,768,374 $ 16,692,337
============ ============
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 27
M~WAVE, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 13,120,054 $ 16,697,311 $ 22,643,968
COST OF GOODS SOLD 10,686,614 13,993,543 23,345,019
------------ ------------ ------------
Gross profit (loss) 2,433,440 2,703,768 (701,051)
OPERATING EXPENSES:
General and administrative 1,635,001 2,297,309 3,233,423
Selling and marketing 615,665 1,020,623 1,678,078
Research and development 0 0 356,996
Impairment of building and equipment 0 2,604,448 0
Goodwill impairment charge 0 670,070 0
Writeoff of note receivable 0 471,718 250,000
------------ ------------ ------------
Total operating expenses 2,250,666 7,064,168 5,518,497
------------ ------------ ------------
Operating income (loss) 182,774 (4,360,400) (6,219,548)
OTHER INCOME (EXPENSE):
Interest income 171,597 179,828 39,459
Interest expense (219,254) (250,232) (224,110)
Gain (loss) on disposal of equipment 38,806 (92,844) (416,670)
------------ ------------ ------------
Total other income (expense), net (8,851) (163,248) (601,321)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 173,923 (4,523,648) (6,820,869)
Income tax expense (benefit) 155,420 (1,359,996) (2,463,476)
------------ ------------ ------------
NET INCOME (LOSS) $ 18,503 $ (3,163,652) $ (4,357,393)
============ ============ ============
Weighted average shares outstanding 3,019,813 3,044,289 3,021,041
============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE $ 0.01 $ (1.04) $ (1.44)
============ ============ ============
Diluted shares outstanding 3,021,211 3,044,289 3,021,041
============ ============ ============
DILUTED EARNINGS (LOSS) PER SHARE $ 0.01 $ (1.04) $ (1.44)
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 28
M~WAVE, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Retained Treasury Stockholders'
Stock Capital Earnings Stock Equity
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE
JANUARY 1, 1996 $ 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 0 0 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
============ ============ ============ ============ ============
Treasury stock purchased:
781,964 shares and issuance of
stock warrants 0 774,144 0 (1,556,108) (781,964)
Net income 0 0 18,503 0 18,503
------------ ------------ ------------ ------------ ------------
BALANCE
DECEMBER 31, 1998 $ 30,698 $ 8,348,832 $ 4,464,226 $ (1,676,108) $ 11,167,648
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 29
M~WAVE, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from:
OPERATING ACTIVITIES:
Net income (loss) $ 18,503 $(3,163,652) $(4,357,393)
Adjustments to reconcile net income to
net cash flows from operating activities:
Provision for doubtful accounts 0 0 40,000
Valuation provision on note receivable 0 471,718 250,000
(Gain) loss on disposal of equipment (38,806) 92,844 416,670
Depreciation and amortization 770,760 1,511,640 1,339,581
Impairment of buildings and equipment 0 2,604,448 0
Goodwill impairment charge 0 670,070 0
Deferred income taxes 45,900 (355,777) (265,750)
Changes in assets and liabilities:
Accounts receivable (37,678) (9,619) 1,913,215
Inventories (688,756) 454,980 2,029,938
Income taxes 1,289,027 1,137,054 (1,786,969)
Prepaid expenses and other assets (66,877) 168,307 133,753
Accounts payable 467,738 (711,387) 15,166
Accrued expenses (421,410) (225,398) 90,744
----------- ----------- -----------
Net cash flows from operating activities 1,338,401 2,645,228 (181,045)
----------- ----------- -----------
Cash flows from:
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (277,324) (543,934) (4,722,756)
Redemption of marketable securities 0 0 1,321,358
Proceeds on sale of fixed assets 176,800 70,100 0
Purchase treasury stock (781,964)
Collection of notes receivable 0 400,000 0
Cash paid in conjunction with sale of
assembly division 0 0 (100,000)
----------- ----------- -----------
Net cash flows from investing activities (882,488) (73,834) (3,501,398)
----------- ----------- -----------
</TABLE>
29
<PAGE> 30
<TABLE>
<S> <C> <C> <C>
Cash flows from:
FINANCING ACTIVITIES:
Common stock issued upon exercise of stock options 0 32,500 4,062
Common stock issued for cash 0 49,998 0
Proceeds from long-term debt 0 0 2,954,000
Repayment of long-term debt (277,691) (336,436) (462,507)
----------- ----------- -----------
Net cash flows from financing activities (277,691) (253,938) 2,495,555
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 178,222 2,317,456 (1,186,888)
CASH AND CASH EQUIVALENTS:
Beginning of year 3,534,315 1,216,859 2,403,747
----------- ----------- -----------
End of year $ 3,712,537 $ 3,534,315 $ 1,216,859
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
1998 1997 1996
----------- ----------- -----------
Cash paid during the year for:
Interest $ 219,254 $ 250,232 $ 224,110
Income tax refunds received 1,179,506 2,141,268 0
</TABLE>
See notes to consolidated financial statements.
30
<PAGE> 31
M~WAVE, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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 off 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.
31
<PAGE> 32
Assets to be Disposed of, Net - The Company has recorded the building and
equipment of the PC 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 1998, 1997 and 1996.
3. SUBSEQUENT EVENT
On March 25, 1999, PC Dynamics Corporation, a wholly owned subsidiary of
the Company, sold substantially all of its machinery and equipment,
inventory and accounts receivable and assigned substantially all of its
outstanding contracts and orders to Performance Interconnect Corp., a
Texas Corporation ("PIC"). The purchase price paid by PIC consisted of:
(i) $893,319 Cash
(ii) a promissory note in the principal amount of $773,479, which
is payable in nine (9) equal monthly installments commencing
on July 1, 1999.
(iii) a promissory note in the principal amount of $293,025, which
is payable in monthly installments of $50,000 commencing on
May 1, 1999 until paid.
PC Dynamics and PIC also entered into a royalty agreement which provides
for PIC to pay PC Dynamics a royalty equal to 8.5% of the net invoice
value of certain microwave frequency components and circuit boards sold by
PIC for eighteen months following the closing.
In addition, PC Dynamics has leased its facility in Texas to PIC for
$17,000 per month for three years. PIC has the right under the lease to
purchase the facility from PC Dynamics for $2,000,000 at anytime during
the term of the lease.
The Company does not expect this transaction to have a material effect on
the financial position of the Company. The sale of the assets will have an
effect on net income of up to $100,000.
4. SALE OF ASSEMBLY DIVISION
In May 1995, the Company established a division which performed contract
assembly work for the Company's customers. Effective December 13, 1996,
the Company sold substantially all of the assets, subject to certain
liabilities, of this division for a promissory note of $1,122,000,
32
<PAGE> 33
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 sustained an operating loss on the Assembly Division of $1.1
million in 1996 on revenues of $463,000.
5. ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and 1997 were comprised of:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Salaries and wages $ 125,937 $ 284,694
Commissions 105,134 94,094
Professional fees 35,000 250,000
Property and other taxes 111,000 118,756
Other 230,557 281,494
---------- ----------
Total accrued expenses $ 607,628 $1,029,038
========== ==========
</TABLE>
6. 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 (7.75% at December 31, 1998) plus 1/2%. The agreement expires May 31,
1999 and is renewable annually at the mutual consent of the Company and the
lender. No balance was outstanding under the line at December 31, 1998.
Long-term debt is comprised of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Mortgage notes payable, 1/2% over prime rate,
payable in monthly principal installments of
approximately $25,000 due October 2001,
collateralized by PC Dynamics facility $2,297,942 $2,575,505
Obligations under capital leases,
due through 1998 128
---------- ----------
2,297,942 2,575,633
Less current portion 307,605 307,605
---------- ----------
Total long-term debt $1,990,337 $2,268,028
========== ==========
</TABLE>
33
<PAGE> 34
Scheduled future maturities of long-term debt are as follows at December
31, 1998:
<TABLE>
<S> <C>
1999 307,605
2000 307,605
2001 1,682,732
---------
$2,297,942
=========
</TABLE>
The terms of the Company's long-term bank debt represent the borrowing
rates currently available to the Company; accordingly, the fair value of
this debt approximates its carrying amount.
Revolving credit borrowings and the mortgage notes are cross-defaulted and
cross-collateralized. The credit agreement, as amended May 31, 1998
requires the Company to maintain a stipulated amount of tangible net
worth, as defined.
7. INCOME TAXES
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current $ (146,657) $(1,004,219) $(2,197,726)
Deferred 302,077 (355,777) (265,750)
----------- ----------- -----------
Total $ 155,420 $(1,359,996) $(2,463,476
=========== =========== ===========
</TABLE>
The primary components comprising the net deferred tax assets
(liabilities) are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets
Impairment of fixed assets to be disposed of $ 1,015,735 $ 1,015,735
Impairment and amortization of goodwill 294,766 296,104
Accounts receivable reserves 24,595 37,540
Inventory reserves 204,823 218,769
Accrued expenses and other 3,818 117,952
Tax credits and loss carryforwards 166,177 36,154
----------- -----------
Deferred tax assets 1,709,914 1,722,254
Deferred tax liabilities
Depreciation (1,702,735) (1,669,175)
----------- -----------
Net deferred tax assets (liabilities) $ 7,179 $ 53,709
=========== ===========
</TABLE>
The effective tax rate differs from the Federal statutory tax rate for the
following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of Federal benefit 2.5 2.5 4.8
Other adjustments 52.9 (6.4) (2.7)
--------- --------- ---------
Effective rate 89.4% 30.1% 36.1%
========= ========= =========
</TABLE>
34
<PAGE> 35
8. SIGNIFICANT CUSTOMERS AND SUPPLIERS
The percentages of net sales attributable to major customers by year were
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Customer A 37% 26% 10%
Customer B 14 7 9
Customer C 9 7 8
Customer D 7 19 26
</TABLE>
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 51%, 49% and 39% of the Company's revenues in 1998,1997 and
1996 respectively, were related to the cellular telephone industry.
During 1998, 1997 and 1996, one manufacturer accounted for approximately
66%, 56% and 46%, 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 18.8%, 15.4%, and 27.5% of net sales during 1998, 1997 and
1996, 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.
9. STOCK OPTION PLAN
In February 1992, the Board of Directors and stockholders of the Company
approved a non-qualified Stock Option Plan (the "Stock Option Plan") under
which 300,000 shares of common stock are reserved for issuance upon
exercise of stock options. The Stock Option Plan is designed as an
incentive for retaining key employees and directors.
In June 1995, the Board of Directors and stockholders of the Company
approved an amendment and restatement of the Company's 1992 Stock Option
Plan. The principal changes that resulted from the amendment are (1) an
increase in the aggregate number of shares of Common Stock of the Company
available for the exercise of options granted under the plan from 300,000
to 500,000; (2) a limit on the number of shares as to which options may be
granted to any grantee in any calendar year to 75,000; (3) a grant of
discretion to the Compensation Committee to extend the exercisability of
options after a grantee's termination of employment (other than for Cause,
as defined in the Plan) from 30 days to any longer period up to the full
remaining term of the option; and (4) a 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
35
<PAGE> 36
not exceed 10 years. For all options granted to date, except for 75,000
options granted in 1995 and 210,000 shares granted in 1998, 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 1998 are 50,000 shares at $2.75 , 70,000 at
$6.10 and 90,000 shares at $8.80. These options vest at 40% on May 1, 1998,
35% on May 1, 1999 and 25% on May 1, 2000, and the term is ten years.
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, 1996 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
---------------------------------------------------------------
Granted 220,000 6.22
Forfeited (218,125) 7.28
Exercised 0 0
---------------------------------------------------------------
Balance, December 31, 1998 362,750 $ 8.08
---------------------------------------------------------------
Exercisable at year-end:
1996 175,875 $ 9.30
1997 137,125 10.97
1998 219,250 9.48
</TABLE>
The weighted average exercise price of the options granted in 1998 were
$6.22. The weighted average exercise price of the options granted in 1997
were $7.27. The range of exercise prices of the 362,750 options
outstanding at December 31, 1998 is $1.25 to $15.93 and the weighted
average remaining contractual life is 8 years. At December 31, 1998,
387,250 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
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:
36
<PAGE> 37
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net income(loss)
As reported $ 18,503 $ (3,163,652) $ (4,357,393)
Pro forma (353,005) (3,676,145) (4,583,145)
Basic net income (loss) per share
As reported
Basic $ 0.01 $ (1.04) $ (1.44)
Diluted 0.01 (1.04) (1.44)
Pro forma
Basic (0.12) (1.21) (1.51)
Diluted (0.12) (1.21) (1.51)
</TABLE>
Options outstanding and exercisable at December 31, 1998, 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>
$ 1.25 to 3.99 99,000 7.7 $ 2.85 51,500 $ 3.08
4.00 to 7.99 80,000 8.6 6.21 38,000 6.34
8.00 to 12.99 93,750 9.1 8.86 39,750 8.94
13.00 to 13.99 30,000 6.2 13.53 30,000 13.53
14.00 to 16.00 60,000 6.2 15.28 60,000 15.28
------- -------
362,750 219,250
</TABLE>
The weighted average fair value of options granted in 1998, and 1997 was
$6.22 and $4.70, respectively, and was estimated at the grant date using
the Black-Scholes options pricing model with the following weighted
average assumptions: expected volatility of 143% and 178%, respectively:
risk free interest rate of 4.93% and 6.6%, respectively; expected life of
9 and 8 years respectively; and no dividend yield.
10. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution retirement plan covering
substantially all full-time employees. The plan allows for employees to
defer up to 10% of their pretax annual compensation, as defined in the
plan. The Company will match up to 25% of the first 4% of base
compensation that a participant contributes. Additionally, discretionary
amounts may be contributed by the Company. There were no Company's
contributions for 1998, 1997 and 1996.
11. LEASE COMMITMENTS
The Company rents manufacturing and administrative space under operating
leases. Rent expense under these leases for the years ended December 31,
1998, 1997 and 1996 was $77,100, $93,600, and $236,401, respectively.
Future minimum annual lease commitments at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Year
----
<S> <C>
1999 57,600
2000 28,800
-------
Total $86,400
=======
</TABLE>
37
<PAGE> 38
12. LITIGATION
The Company is a party to various actions and proceedings related to its
normal business operations. The Company believes that the outcome of this
litigation will not have a material adverse effect on the financial
position or results of operations of the Company.
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 provided for a $150,000 payment to the plaintiff class plus
administrative fees not to exceed $20,000. The Company paid $85,000 in
1998 in settlement of the class action suit. The remainder was paid by the
Company's insurance carrier.
13. ENVIRONMENTAL MATTERS
The Company periodically generates and handles materials that are
considered hazardous waste under applicable law and contracts for the
off-site disposal of these materials. During the ordinary course of its
operations, the Company has on occasion received citations or notices from
regulatory authorities that such operations may not be in compliance with
applicable environmental regulations. Upon such receipt, the Company works
with such authorities to resolve the issues raised by such citations or
notices. The Company's past expenditures relating to environmental
compliance have not had a material effect on the financial position of the
Company. The Company believes the overall impact of compliance with
regulations and legislation protecting the environment will not have a
material effect on its future financial position or results of operations,
although no assurance can be given.
14. 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, 1998 balance sheet as assets to be disposed
of and are recorded at market value less an estimate of selling costs. The
market value was determined based on appraisals.
38
<PAGE> 39
For the year ended December 31, 1998 P C Dynamics' financial results
included $4,485,684 of net sales and operating profits of $378,366. For
the years ended December 31, 1997 and 1996, P C Dynamics' financial
results included $4,192,303 and $4,786,726 of net sales and operating
losses of $4,422,128 and $1,377,584, respectively.
15. STOCK WARRANTS
On December 18, 1998, the Company repurchased 781,964 shares of its common
stock owned by First Chicago Equity Corporation ("FCEC") and its
affiliates. The aggregate consideration paid by the Company consisted of
$781,964 plus warrants to purchase up to 781,964 shares of the Company's
common stock with an exercise price of $1.00 per share (increasing by
$0.05 per share each anniversary date of the warrants). The warrants are
exercisable only if the Company engages in an extraordinary transaction
(e.g., a merger, a consolidation, combination or dissolution) within five
years of the issue date of the warrants. The future value of the warrants
at year-end was $744,144.
39
<PAGE> 40
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 1998 and 1997. 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,
1998 1998 1998 1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 2,716,093 $ 3,359,187 $ 3,550,212 $ 3,494,562
Gross profit 326,599 661,536 623,913 821,392
Net income (loss) (175,065) 69,179 37,436 86,953
Weighted average shares 3,049,806 3,049,806 3,049,806 2,930,811
Basic earnings (loss) per share (0.06) 0.02 0.01 0.03
Diluted shares 3,049,806 3,052,065 3,049,806 2,934,144
Diluted earnings (loss) per share (0.06) 0.02 0.01 0.03
</TABLE>
<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>
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.
40
<PAGE> 41
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 22, 1999
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 Director
March 22, 1999 March 22, 1999
/s/ Lavern D. Kramer /s/ Rick Mathes
- --------------------------- ---------------------
Lavern D. Kramer Rick Mathes
Director Director
March 22, 1999 March 22, 1999
/s/ Paul H. Schmitt
- ----------------------------
Paul H. Schmitt
Treasurer and Secretary
(Principal Accounting and
Financial Officer)
March 22, 1999
41
<PAGE> 42
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page
- ------- -------------------------------------------------------------- ------
<S> <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 ******
10.10 Stock Purchase Agreement dated December 18, 1998 by and between the
Company and First Chicago Equity Corporation. ******
10.11 Stock Purchase Agreement dated December 18, 1998 by and between
the Company and Cross Creek Partners II. ******
10.12 Warrant dated December 18, 1998 issued to First Chicago Equity ******
10.13 Warrant dated December 18, 1998 issued to Cross Creek Partners II ******
21 Subsidiaries 44
24.1 Consent of Grant Thornton LLP 45
24.2 Consent of Deloitte & Touche LLP 46
27 Financial Data Schedule 47-50
</TABLE>
42
<PAGE> 43
* Incorporated herein by reference to the applicable exhibit to the
Registrant's Registration Statement on Form S-1 (Registration No.
33-45499).
** Incorporated herein by reference to the applicable exhibit to the
Registrant's Annual Report on Form 10-K for year ended December 31,
1993 (Registration No. 0-19944).
*** Incorporated herein by reference to the applicable Report on Form 8-K
dated August 5, 1994.
**** Incorporated herein by reference to the applicable exhibit to the
Registrants quarterly report on form 10-Q for the quarter ended June
30, 1995.
***** Incorporated herein by reference to the applicable exhibit to the
Registrant's Annual Report on Form 10-K for year ended December 31,
1995.
****** Incorporated herein by reference to the applicable exhibit to the
Registrants quarterly report on form 10-Q for the quarter ended March
31, 1997.
******* Incorporated herein by reference to the applicable exhibit report on
Form 8-K dated December 18, 1998.
43
<PAGE> 1
Exhibit 21
Item 21. Subsidiaries
Name State of Incorporation
- ---- ----------------------
Poly Circuits, Inc. Illinois
P C Dynamics Corporation Texas
44
<PAGE> 1
Exhibit 24.1
INDEPENDENT AUDITORS' CONSENT
Board of Directors
M~Wave, Inc
We have issued our report dated January 29, 1999, 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, 1998. 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 28, 1999
45
<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, 1998.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 25, 1999
46
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<NAME> M-WAVE, INC.
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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