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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, 2000 Commission File No. 0-19944
- ------------------------------------ -----------------------------
M-WAVE, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-3809819
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
216 Evergreen Street, Bensenville, Illinois 60106
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (630) 860-9542
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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The registrant has 2,280,842 shares of common stock outstanding at May 4, 2000.
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<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
M-WAVE, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, March 31
1999 2000
------------ -------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 2,586,885 $ 2,783,379
Accounts receivable, net of allowance for doubtful accounts,
1999- $10,000: 2000 $10,000......................................... 2,520,070 2,530,298
Inventories.......................................................... 2,030,417 3,270,740
Deferred income taxes 1,080,940 793,475
Prepaid expenses and other........................................... 71,957 76,883
----------- -----------
Total current assets............................................. 8,290,269 9,454,775
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements..................................... 4,863,247 4,863,247
Machinery and equipment.............................................. 7,934,816 7,966,379
----------- -----------
Total property, plant and equipment.............................. 12,798,063 12,829,626
Less accumulated depreciation (5,855,688) (6,112,188)
----------- -----------
Property, plant and equipment-net................................ 6,942,375 6,717,438
NOTE RECEIVABLE.......................................................... 645,391 645,391
OTHER ASSETS............................................................. 4,700 4,995
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TOTAL.................................................................... $15,882,735 $16,822,599
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................... $ 1,974,067 $ 2,915,420
Accrued expenses..................................................... 508,456 560,662
Accrued income taxes................................................. 0 8,116
Current portion of long-term debt.................................... 361,563 361,563
----------- -----------
Total current liabilities........................................ 2,844,086 3,845,761
DEFERRED INCOME TAXES.................................................... 676,273 490,208
LONG-TERM DEBT........................................................... 1,886,799 1,796,409
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, 1999, 3,084,306 shares issued and 2,280,842
shares outstanding at March 31, 2000............................... 30,698 30,843
Additional paid-in capital........................................... 8,348,832 8,395,812
Retained earnings ................................................... 3,775,321 3,942,840
Treasury stock: 803,464 shares, at cost............................. (1,679,274) (1,679,274)
----------- -----------
Total stockholders' equity ...................................... 10,475,577 10,690,221
----------- -----------
TOTAL.................................................................... $15,882,735 $16,822,599
=========== ===========
See notes to consolidated financial statements
</TABLE>
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<TABLE>
<CAPTION>
M-WAVE, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended March 31,
----------------------------
1999 2000
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<S> <C> <C>
Net sales................................................................ $3,682,818 $5,372,185
Cost of goods sold....................................................... 2,906,236 4,598,236
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Gross profit........................................................... 776,582 773,949
Operating expenses:
General and administrative............................................. 437,159 335,324
Selling and marketing.................................................. 175,284 181,359
---------- ----------
Total operating expenses............................................. 612,443 516,683
---------- ----------
Operating income....................................................... 164,139 257,266
Other income (expense):
Interest income........................................................ 32,280 19,839
Interest expense....................................................... (46,391) (51,068)
Rental income.......................................................... 8,000 51,000
Gain (loss) on disposal of assets...................................... (135,084) 0
---------- ----------
Total other income (expense)......................................... (141,195) 19,771
---------- ----------
Income before income taxes........................................... 22,944 277,037
Provision for income taxes............................................... 13,204 109,518
---------- ----------
Net income............................................................... $ 9,740 $ 167,519
========== ==========
Net income per share basic and diluted................................... $0.00 $0.07
Weighted average shares 2,267,842 2,272,994
See notes to consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
M-WAVE, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
---------------------------------
1999 2000
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income............................................................. $9,740 $167,519
Adjustments to reconcile net income to net cash flows
from operating activities:
Gain on disposal of property, plant and equipment.................. $135,084 $0
Depreciation and amortization...................................... $249,460 $256,500
Deferred income taxes.............................................. $87,168 $101,400
Changes in assets and liabilities:
Accounts receivable-trade.......................................... ($209,705) ($10,228)
Inventories........................................................ $296,091 ($1,240,323)
Income taxes....................................................... ($73,962) $8,116
Prepaid expenses and other assets.................................. ($47,623) ($5,221)
Accounts payable................................................... $155,349 $941,353
Accrued expenses................................................... ($31,495) $52,206
---------- ----------
Net cash flows from operating activities........................ $570,107 $271,322
----------- ----------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment.............................. ($163,921) ($31,563)
Purchase marketable securities......................................... $4,619 $0
Proceeds from sale of PC Dynamics property, plant and equipment ....... $581,965 $0
Proceeds from sale of PC Dynamics net working capital and other ....... $311,354 $0
---------- ----------
Net cash flows used in investing activities..................... $734,017 ($31,563)
FINANCING ACTIVITIES:
Common stock issued upon exercise of stock options..................... $0 $47,125
Payments on long term debt............................................. ($100,932) ($90,390)
---------- ----------
Net cash flows from financing activities........................ ($100,932) ($43,265)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................... $1,203,192 $196,494
CASH AND CASH EQUIVALENTS - Beginning of period.......................... $3,712,537 $2,586,885
---------- ----------
CASH AND CASH EQUIVALENTS - End of period................................ $4,915,729 $2,783,379
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest............................. ($46,391) ($51,068)
See notes to consolidated financial statements.
</TABLE>
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M-WAVE,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
necessary for a fair presentation, consisting only of normal recurring
adjustments, 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, 1999 filed March 24, 2000.
2. BUSINESS
M-Wave, through its wholly-owned subsidiary Poly Circuits Inc. (the
"Company"), manufactures high performance 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. The Company has collected $293,025
through March 31, 2000.
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
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the closing. PIC shall not be required to pay PC Dynamics in excess of
$500,000 in aggregate royalty payments.
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.
This agreement was amended in the third quarter of 1999 whereas the Company
agreed to revise the payment schedule for Promissory Note I from 9 equal
monthly installments to 30 equal monthly installments in return for not
pursuing the purchase of the facility in Texas. The Company has collected
$128,915 through March 31,2000. The royalty agreement was also revised to
$500,000 payable in equal monthly installments of $25,000 until paid. The
Company has collected $145,000 through March 31,2000.
No payments were received in the first quarter of 2000 as scheduled above.
The payments were abated for 90 days per a verbal agreement between the
parties. The Company has received $10,000 in April 2000. The Company is
again reviewing the possibility of selling the facility in Texas to
Performance Interconnect.
3. INVENTORIES
Substantially all the Company's inventories are in work in process.
4. DEBT
The Company has a mortgage loan of $1,889,000 for the facility at P C
Dynamics Corporation in Frisco, Texas. Interest on this mortgage loan is at
1/2 % over the prime rate. The loan is payable in monthly installments of
principal and interest and is due in October 2001.
The Company has an installment loan of $269,000 collateralized by certain
fixed assets of the Company. Interest on this loan is at the prime rate.
The loan is payable in monthly installments of principal and interest and
is due in October 2004.
The Company has a $2,000,000 line of credit available based on 80% of the
eligible accounts receivable to fund the working capital needs of the
Company. Interest is at the prime rate (9.00% at March 31, 2000) plus 1/2%.
The agreement expires May 31, 2000 and is renewable annually at the mutual
consent of the Company and the lender. No balance was outstanding under the
line at March 31, 2000.
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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 this
litigation 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, 2000 COMPARED TO THE QUARTER
ENDED MARCH 31, 1999
NET SALES
Net sales were $5,372,000 for the first quarter ended March 31, 2000, an
increase of $1,689,000 or 46% above the first quarter of 1999. The first quarter
of 1999 included a final shipment of a matured product line of $1,300,000. The
first quarter of 1999 also included the results of PC Dynamics Corporation. The
assets of PC Dynamics Corporation were disposed of in the first quarter of 1999.
PC Dynamics reported sales of approximately $988,000 in the first quarter of
1999. Thus the adjusted net sales of the Company for the first quarter of 1999
were $1,394,000. Net sales increased approximately $3,978,000 in the first
quarter of 2000 when compared to the adjusted first quarter net sales of 1999
for the Company to the reported net sales of the Company for the first quarter
of 2000.
Net sales to Lucent were $4,412,000 in the first quarter of 2000 compared
to $307,000 in the first quarter of 1999. Net sales to Motorola were $42,000 in
the first quarter of 2000 compared to $1,359,000 in the first quarter of 1999.
The sales to Motorola in the first quarter of 1999 included a final shipment of
a matured product line of $1,300,000. Net sales to Spectrian were $322,000 in
the first quarter of 2000 compared to $312,000 in the first quarter of 1999.
The Company's three largest customers accounted for 91% of the Company's
net sales for the first quarter ended March 31, 2000 compared to 55% in the
first quarter of 1999.
GROSS PROFIT (LOSS) AND COST OF GOODS SOLD
The Company's gross profit for the first quarter of 2000 was $774,000
compared to $777,000 for the first quarter of 1999. The first quarter of 1999
included a final shipment of a maturing product line to Motorola generating
approximately $480,000 in gross profit. The first quarter of 1999 also included
the results of PC Dynamics Corporation. The assets of PC Dynamics Corporation
were disposed of in the first quarter of 1999. PC Dynamics reported a gross
profit of approximately $222,000 in the first quarter of 1999. Thus the adjusted
gross profit of the Company for the first quarter of 1999 was $75,000. Gross
profit increased approximately $700,000 in the first quarter of 2000 when
compared to the adjusted first quarter results of 1999 for the Company to the
reported gross profit of the Company for the first quarter of 2000. The increase
is a result of increased sales and improved efficiencies.
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OPERATING EXPENSES
General and administrative expenses were $335,000 or 6.2% of net sales in
the first quarter of 2000 compared to $437,000 or 11.9% of net sales in the
first quarter of 1999. The first quarter of 1999 also included the results of PC
Dynamics Corporation. The assets of PC Dynamics Corporation were disposed of in
the first quarter of 1999. PC Dynamics reported general and administrative
expenses of approximately $103,000 in the first quarter of 1999. General and
administrative expenses consist primarily of salaries and benefits, professional
services, depreciation of office equipment, computer systems and occupancy
expenses.
Selling and marketing expenses were $181,000 or 3.4% of net sales in the
first quarter of 2000 compared to $175,000 or 4.8% of net sales in the first
quarter of 1999. Selling and marketing expenses include the cost of salaries,
advertising and promoting the Company's products, and commissions paid to
independent sales organizations.
OPERATING INCOME (LOSS)
Operating income was $257,000 or 4.8% in the first quarter of 2000 compared
to an operating income of $164,000 or 4.5% of net sales in the first quarter of
1999, an increase of $93,000. The changes in operating income reflect primarily
the changes in net sales, gross profit and cost of goods sold and operating
expenses as discussed above. The change in operating income can be summarized as
follows:
Increase in net sales $ 356,000
Decrease in gross margin (359,000)
Decrease in operating expenses (96,000)
---------
Increase in operating income $ 93,000
INTEREST INCOME
Interest income from short-term investments was $20,000 in the first
quarter of 2000 compared to $32,000 in the first quarter of 1999. Rental income
from the P C Dynamics facility was $51,000 in the first quarter of 2000 compared
to $8,000 in the first quarter of 1999.
INTEREST EXPENSE
Interest expense, primarily related to the Company's mortgage
obligation on its P C Dynamics facility, was $51,000 in the first
quarter of 2000 compared to $46,000 in the first quarter of 1999.
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INCOME TAXES
In the first quarter of 2000 the Company had an effective tax credit rate
of 39.5%. In the first quarter of 1999 the Company had an effective tax rate of
57.5%.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operations was $271,000 for the first three months
of 2000 compared to $570,000 for the first three months of 1999. Inventories
increased ($1,240,000). The increase in inventory relates to increased sales and
the inventory consignment agreement with Lucent. Accounts payable increased
$941,000. Depreciation and amortization was $257,000.
Capital expenditures to improve manufacturing processes were $32,000 in the
first three months of 2000. Capital expenditures to improve manufacturing
processes were $164,000 in the first three months of 1999.
The Company has a mortgage loan of $1,889,000 for the facility at P C
Dynamics Corporation in Frisco, Texas. Interest on this mortgage loan is at 1/2
% over the prime rate. The loan is payable in monthly installments of principal
and interest and is due in October 2001.
The Company has an installment loan of $269,000 collateralized by certain
fixed assets of the Company. Interest on this loan is at the prime rate. The
loan is payable in monthly installments of principal and interest and is due in
October 2004.
The Company has a $2,000,000 line of credit available based on 80% of the
eligible accounts receivable to fund the working capital needs of the Company.
Interest is at the prime rate (9.00% at March 31, 2000) plus 1/2%. The agreement
expires May 31, 2000 and is renewable annually at the mutual consent of the
Company and the lender. No balance was outstanding under the line at March 31,
2000.
As of March 31, 2000, the Company has $2,158,000 of debt and $2,783,000 of
cash and cash equivalents. Management believes that funds generated from
operations, coupled with the Company's cash and investment balances and its
capacity for debt will be sufficient to fund current business operations.
INFLATION
Management believes inflation has not had a material effect on the
Company's operation or on its financial position.
YEAR 2000 COMPLIANCE
The Company has reviewed its computer and other hardware and software
systems and has upgraded those systems that it has
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identified as not being year 2000 compliant. These systems were upgraded either
through modification or replacement.
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 will be free of defects. If any operational impediments 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 has contacted its significant suppliers
and customers in an attempt to identify any potential year 2000 compliance
issues with them. The Company did not find any compliance issues.
The Company incurred approximately $86,000 through fiscal 1999 to resolve
and test the Company's year 2000 compliance issues. All expenses incurred in
connection with year 2000 compliance were expensed as incurred, other than
acquisitions of new software or hardware, which was 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
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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.
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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 Schedule
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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, 2000 /s/ PAUL H. SCHMITT
----------------------
Paul H. Schmitt
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------
27 Financial Data
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,783,379
<SECURITIES> 0
<RECEIVABLES> 2,530,298
<ALLOWANCES> 0
<INVENTORY> 3,270,740
<CURRENT-ASSETS> 9,454,775
<PP&E> 12,829,626
<DEPRECIATION> (6,112,188)
<TOTAL-ASSETS> 16,822,599
<CURRENT-LIABILITIES> 3,845,761
<BONDS> 1,796,409
0
0
<COMMON> 30,843
<OTHER-SE> 10,690,221
<TOTAL-LIABILITY-AND-EQUITY> 16,822,599
<SALES> 5,372,185
<TOTAL-REVENUES> 0
<CGS> 4,598,236
<TOTAL-COSTS> 516,683
<OTHER-EXPENSES> 19,771
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 277,097
<INCOME-TAX> 109,518
<INCOME-CONTINUING> 167,519
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 167,519
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
