<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1999 Commission File No. 0-19944
- ------------------------------------ -----------------------------
M-WAVE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3809819
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
216 Evergreen Street, Bensenville, Illinois 60106
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (630) 860-9542
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The registrant has 2,267,842 shares of common stock outstanding at May 4, 1999.
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
M-WAVE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, MARCH 31,
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 3,712,537 $ 4,915,729
Accounts receivable, net of allowance for doubtful accounts,
1998- $10,000: 1999 $10,000............................................ 1,772,637 1,367,312
Inventories............................................................. 1,583,421 513,851
Refundable income taxes................................................. 0 73,962
Deferred income taxes................................................... 395,987 308,819
Prepaid expenses and other.............................................. 99,656 133,734
----------- -----------
Total current assets................................................ 7,564,238 7,313,407
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements........................................ 2,360,152 4,987,979
Machinery and equipment................................................. 7,355,774 7,500,202
----------- -----------
Total property, plant and equipment................................. 9,715,926 12,488,181
Less accumulated depreciation........................................... (4,750,872) (5,096,929)
----------- -----------
Property, plant and equipment-net................................... 4,965,054 7,391,252
NOTE RECEIVABLE............................................................. 0 1,066,504
ASSETS TO BE DISPOSED OF, NET............................................... 3,233,405 0
OTHER ASSETS................................................................ 5,677 655
----------- -----------
TOTAL....................................................................... $15,768,374 $15,771,818
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................ $ 1,306,348 $ 1,472,894
Accrued expenses........................................................ 607,628 535,718
Current portion of long-term debt....................................... 307,605 307,605
----------- -----------
Total current liabilities........................................... 2,221,581 2,316,217
DEFERRED INCOME TAXES....................................................... 388,808 388,808
LONG-TERM DEBT.............................................................. 1,990,337 1,889,405
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 2,267,842 shares outstanding
at December 31, 1998, 3,069,806 shares issued and 2,267,842
shares outstanding at March 31, 1999.................................. 30,698 30,698
Additional paid-in capital.............................................. 8,348,832 8,348,832
Retained earnings ...................................................... 4,464,226 4,473,966
Treasury stock: 801,964 shares, at cost................................ (1,676,108) (1,676,108)
----------- -----------
Total stockholders' equity ......................................... 11,167,648 11,177,388
----------- -----------
TOTAL....................................................................... $15,768,374 $15,771,818
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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M~WAVE, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1999
---------- ----------
<S> <C> <C>
Net sales......................................................... $2,716,093 $3,682,818
Cost of goods sold................................................ 2,389,494 2,906,236
---------- ----------
Gross profit.................................................... 326,599 776,582
Operating expenses:
General and administrative...................................... 425,539 437,159
Selling and marketing........................................... 160,655 175,284
---------- ----------
Total operating expenses...................................... 586,194 612,443
---------- ----------
Operating income (loss)......................................... (259,595) 164,139
Other income (expense):
Interest income................................................. 41,565 32,280
Interest expense................................................ (57,441) (46,391)
Rental income................................................... 0 8,000
Loss on disposal of assets...................................... (21,400) (135,084)
---------- ----------
Total other income (expense) (37,276) (141,195)
---------- ----------
Income (loss) before income taxes........................... (296,871) 22,944
Provision (credit) for income taxes............................... (121,806) 13,204
---------- ----------
Net income (loss)................................................. ($175,065) $9,740
========== ==========
Net income (loss) per share basic and diluted ($0.06) $0.00
Weighted average shares 3,049,806 2,267,842
</TABLE>
See notes to consolidated financial statements.
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M~WAVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1999
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................................ ($175,065) $ 9,740
Adjustments to reconcile net loss to net cash flows
from operating activities:
Loss on disposal of property, plant and equipment.................... $ 21,400 $ 135,084
Depreciation and amortization........................................ $ 243,425 $ 249,460
Deferred income taxes................................................ $96,139 $ 87,168
Changes in assets and liabilities:
Accounts receivable-trade............................................ $ 115,423 ($209,705)
Inventories.......................................................... ($329,861) $ 296,091
Income taxes......................................................... ($217,946) ($73,962)
Prepaid expenses and other assets.................................... ($51,419) ($47,623)
Accounts payable..................................................... $ 194,685 $ 155,349
Accrued expenses..................................................... ($455,293) ($31,495)
---------- ----------
Net cash flows from operating activities.......................... ($558,512) $ 570,107
---------- ----------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment................................ ($65,544) ($163,921)
Proceeds from sale of property, plant and equipment...................... $ 115,000 $ 4,619
Proceeds from sale of PC Dynamics property, plant and equipment ......... $ 0 $ 581,965
Proceeds from sale of PC Dynamics net working capital and other ......... $ 0 $ 311,354
---------- ----------
Net cash flows from investing activities.......................... $ 49,456 $ 734,017
FINANCING ACTIVITIES:
Payments on long term debt............................................... ($75,827) ($100,932)
---------- ----------
Net cash flows from financing activities.......................... ($75,827) ($100,932)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... ($584,883) $1,203,192
CASH AND CASH EQUIVALENTS - Beginning of period............................ $3,534,315 $3,712,537
---------- ----------
CASH AND CASH EQUIVALENTS - End of period.................................. $2,949,432 $4,915,729
========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest............................... $ 57,441 $ 46,391
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
M-WAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments necessary for a fair
presentation have been included. For further information, refer to
the consolidated financial statements contained in the Annual
Report on Form 10-K for the year ended December 31, 1998 filed
March 30, 1999.
2. BUSINESS
M-Wave, through its wholly-owned subsidiaries, Poly Circuits
Inc. and PC Dynamics Corporation (collectively, the "Company"),
manufactures printed circuit boards using Teflon-based laminates to
customers' specifications. In addition, the Company produces
customer specified bonded assemblies consisting of a printed
circuit board bonded in some manner to a metal carrier or pallet.
One bonding technique used by the Company is Flexlink(TM), a
patented process granted to the Company in 1993. The Company
developed an enhanced version of Flexlink(TM) in 1996.
On March 25, 1999, PC Dynamics Corporation, sold substantially
all of its machinery and equipment, inventory and accounts
receivable and assigned all of its outstanding contracts and orders
to Performance Interconnect Corporation, a Texas Corporation.(PIC)
The purchase price paid by PIC consisted of:
(i) $893,319 in 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;
and
(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. PIC shall not be required to pay PC Dynamics in excess of
$500,000 in aggregate royalty payments.
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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. If PIC exercises its right
to purchase the facility, the remaining balance due on the royalty
agreement is payable in monthly installments of $25,000 until a
minimum of $500,000 is paid.
3. INVENTORIES
Substantially all the Company's inventories consist of work in
process.
4. DEBT
The Company has a mortgage loan of $2,197,010 for the facility
at PC Dynamics Corporation in Frisco, Texas. Interest on this
mortgage loan is at 1/2 % over prime rate. The loan is payable in
monthly installments of principal and interest and is due in
October 2001.
The Company has a $2,000,000 line of credit available based on
80% of eligible accounts receivable to fund the working capital
needs of the Company. Interest is at the prime rate (7.75% at March
31, 1999) 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 March 31,
1999.
5. LITIGATION
The Company is a party to various actions and proceedings
related to its normal business operations. The Company believes
that the outcome of these proceedings will not have a material
adverse effect on the financial position or results of operations
of the Company.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS FOR THE QUARTER ENDED MARCH 31, 1999 COMPARED TO THE QUARTER
ENDED MARCH 31, 1998
NET SALES
Net sales were $3,683,000 for the first quarter ended March
31, 1999 a increase of $967,000 or 36% above the first quarter of 1998.
The increase was a result of a final shipment of a matured product line
of $1,300,000 to Motorola. Net sales of all other products sold to
Motorola decreased by $154,000. Net sales to Rockwell decreased by
$56,000. Net sales to Spectrian decreased by $430,000. Spectrian
reduced their requirements in the first quarter of 1999. Net sales to
Lucent increased by $62,000. Net sales in general were reduced due to
low customer requirements.
The Company's three largest customers accounted for 55% of the
Company's net sales for the first quarter ended March 31, 1999 compared
to 54% in the first quarter of 1998.
GROSS PROFIT AND COST OF GOODS SOLD
Gross profit increased by $450,000 to $777,000 in the first
quarter of 1999 from $327,000 in 1998. The increase in gross profit was
a result of an increase in net sales of 36%. Gross margin increased to
approximately 21% in 1999 from approximately 12% in 1998. Scrap was
down approximately 22% due to increased controls and process
improvements.
During the fourth quarter of 1997, the Company decided to
reposition the PC Dynamics subsidiary located in Frisco, Texas.
Management decided the PC Dynamics subsidiary did not have a future
place in the Company's strategic plans. On March 25, 1999, PC Dynamics
sold substantially all of its machinery and equipment, inventory and
accounts receivable and assigned all of its outstanding contracts and
orders to Performance Interconnect Corporation, a Texas Corporation.
The Company also leased its Texas facility to Performance Interconnect
Corporation.
The building and equipment of PC Dynamics Corporation 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. The
building value of PC Dynamics Corporation is recorded in the March 31,
1999 balance sheet as land, buildings and improvements.
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OPERATING EXPENSES
General and administrative expenses were $437,000 or 11.9% of
net sales in the first quarter of 1999 compared to $426,000 or 15.7% of
net sales in the first quarter of 1998. General and administrative
expenses consist primarily of salaries and benefits, professional
services, depreciation of office equipment, computer systems and
occupancy expenses. The first quarter of 1999 included approximately
$44,000 of expenses relating to the sale of substantially all the
assets of PC Dynamics Corporation.
Selling and marketing expenses were $175,000 or 4.8% of net
sales in the first quarter of 1999 compared to $161,000 or 5.9% of net
sales in the first quarter of 1998. Selling and marketing expenses
include the cost of salaries, advertising and promoting the Company's
products, and commissions paid to independent sales organizations.
Sales commission expense increased $19,000 as a result of higher sales.
OPERATING INCOME
Operating Income was $164,000 in the first quarter of 1999
compared to an operating loss of $260,000 in the first quarter of 1998,
an increase in the operating income of $424,000. The change in
operating income reflects primarily the changes in net sales, gross
profit and cost of goods sold and operating expenses as discussed
above. The change in operating income can be summarized as follows:
Increase in net sales $ 116,000
Increase in gross margin 334,000
Increase in operating expenses (26,000)
------------
Increase in operating income $ 424,000
On March 31, 1999, the Company had 49 employees compared to 91
on March 31, 1998.
INTEREST INCOME
Interest income from short-term investments was $32,000 in the
first quarter of 1999 compared to $35,000 in 1998. Royalty income was
$6,700 in the first quarter of 1998.
INTEREST EXPENSE
Interest expense, primarily related to the Company's mortgage
obligation on its P C Dynamics facility, was $46,000 in the first
quarter of 1999 compared to $57,000 in 1998.
GAIN (LOSS) ON DISPOSAL OF FIXED ASSETS
The Company recorded a loss of $135,000 on the disposal of
fixed assets in the first quarter of 1999 compared to a loss of
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$21,000 in 1998. The loss in the first quarter of 1999 was primarily
related to sale of substantially all the machinery and equipment of PC
Dynamics Corporation to Performance Interconnect Corporation.
INCOME TAXES
The Company had an effective tax credit rate of 57.5% in
the first quarter of 1999 compared to 41.0% in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided/(used) was $570,000 for the first three
months of 1999 compared to ($559,000) for the first three months of
1998. Inventories decreased $296,000. Accounts payable was up $155,000.
Capital expenditures were $164,000 for the first three months
of 1999, Capital expenditures were $66,000 in the first three months of
1998.
The Company collected $893,000 relating to the sale of
substantially all of the machinery and equipment, inventory and
accounts receivable of PC Dynamics Corporation to Performance
Interconnect Corporation.
The Company has a mortgage loan of $2,197,010 on the P C
Dynamics facility. Interest on this mortgage loan is at 1/2 % over
prime rate. The loan is payable in monthly installments of principal
and interest and is due in October 2001.
The Company has a line of credit from American National Bank
and Trust Company of Chicago which provides for a maximum borrowings of
$2,000,000 based on 80% of eligible accounts receivables through May
1999 at an interest rate of prime plus 0.5%. No balance was outstanding
under the line at March 31, 1999.
As of March 31, 1999, the Company has $2,197,000 of debt and
$4,916,000 of cash and cash equivalents. Management believes that funds
generated from operations, coupled with the Company's cash balance and
its capacity for debt will be sufficient to fund current business
operations.
INFLATION
Management believes inflation has not had a material effect on
the Company's operation or on its financial position.
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
9
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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.
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 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
10
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microwave systems and the timing and size of production schedules for
these programs is uncertain and beyond the control of the Company.
There can be no assurance that these development programs will have a
favorable impact on the Company's operating results. Although
management believes some of these products and programs may ultimately
develop into successful commercial applications, such developments
could result in periodic fluctuations in the Company's operating
results. As a result of these considerations, the Company has
historically found it difficult to project operating results.
The Company expects that a small number of customers will
continue to account for a substantial majority of its sales and that
the relative dollar amount and mix of products sold to any of these
customers can change significantly from year to year. There can be no
assurance that the Company's major customers will continue to purchase
products from the Company at current levels, or that the mix of
products purchased will be in the same ratio. The loss of one or more
of the Company's major customers or a change in the mix of product
sales could have a material adverse effect on the Company.
In addition, future results may be impacted by a number of
other factors, including the Company's dependence on suppliers and
subcontractors for components; the Company's ability to respond to
technical advances; successful award of contracts under bid; design and
production delays; cancellation or reduction of contract orders; the
Company's effective utilization of existing and new manufacturing
resources; and pricing pressures by key customers.
The Company's future success is highly dependent upon its
ability to manufacture products that incorporate new technology and are
priced competitively. The market for the Company's products is
characterized by rapid technology advances and industry-wide
competition. This competitive environment has resulted in downward
pressure on gross margins. In addition, the Company's business has
evolved towards the production of relatively smaller quantities of more
complex products, the Company expects that it will at times encounter
difficulty in maintaining its yield standards. There can be no
assurance that 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.
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PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data
The Company filed a report on Form 8-K dated March 25, 1999 announcing
that PC Dynamics Corporation, a wholly owned subsidiary of the Company,
sold substantially all of its machinery and equipment, inventory and
accounts receivable and assigned all of its outstanding contracts and
orders to Performance Interconnect Corporation, a Texas Corporation.
12
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
M-WAVE, INC.
Date: May 4, 1999 /s/ PAUL H. SCHMITT
------------------------------
Paul H. Schmitt
Chief Financial Officer
13
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EXHIBIT INDEX
EXHIBIT
NO DESCRIPTION
------- --------------------------------------------------
27 Financial Data
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4915729
<SECURITIES> 0
<RECEIVABLES> 1367312
<ALLOWANCES> 0
<INVENTORY> 513851
<CURRENT-ASSETS> 7313407
<PP&E> 12488181
<DEPRECIATION> (5096929)
<TOTAL-ASSETS> 15771818
<CURRENT-LIABILITIES> 2316217
<BONDS> 1889405
0
0
<COMMON> 30698
<OTHER-SE> 11146690
<TOTAL-LIABILITY-AND-EQUITY> 15771818
<SALES> 3682818
<TOTAL-REVENUES> 0
<CGS> 2906236
<TOTAL-COSTS> 612443
<OTHER-EXPENSES> (141195)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 22944
<INCOME-TAX> 13204
<INCOME-CONTINUING> 9740
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9740
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
