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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 June 30, 2002 Commission File No. 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 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 4,443,294 shares of common stock outstanding at August 2,
2002.
1
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
M~WAVE, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
DECEMBER 31 JUNE 30
2001 2002
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 2,102,784 $ 2,110,741
Accounts receivable, net of allowance for doubtful accounts,
2001- $100,000: 2002- $100,000 ............................... 8,829,686 6,626,762
Inventories ................................................... 1,564,008 2,824,078
Refundable income taxes ....................................... 0 853,707
Deferred income taxes ......................................... 1,313,644 1,313,644
Prepaid expenses and other .................................... 105,613 60,192
Restricted cash ............................................... 604,489 1,336,469
------------ ------------
Total current assets ...................................... 14,520,224 15,125,593
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements .............................. 7,219,799 7,662,591
Machinery and equipment ....................................... 13,062,860 14,632,716
------------ ------------
Total property, plant and equipment ....................... 20,282,659 22,295,307
Less accumulated depreciation ................................. (7,836,882) (8,592,880)
------------ ------------
Property, plant and equipment-net ......................... 12,445,777 13,702,427
OTHER ASSETS ...................................................... 331,731 286,209
------------ ------------
TOTAL ............................................................. $ 27,297,732 $ 29,114,229
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .............................................. $ 3,112,370 $ 3,861,359
Accrued expenses .............................................. 1,491,547 995,085
Accrued income taxes .......................................... 152,931 0
Current portion of long-term debt ............................. 1,378,767 1,378,767
------------ ------------
Total current liabilities ................................. 6,135,615 6,235,211
DEFERRED INCOME TAXES ............................................. 663,830 663,830
LONG-TERM DEBT .................................................... 2,743,527 4,166,273
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
6,179,112 shares issued and 4,456,294 shares outstanding
at December 31, 2001, 6,179,112 shares issued and 4,443,294
shares outstanding at June 30, 2002 ......................... 30,895 30,895
Additional paid-in capital .................................... 8,439,072 8,439,072
Retained earnings ............................................. 11,512,072 11,864,118
Treasury stock, at cost, 1,722,815 shares, at December 31, 2001
and 1,735,815 shares at June 30, 2002 ........................ (2,227,279) (2,285,170)
------------ ------------
Total stockholders' equity ................................ 17,754,760 18,048,915
------------ ------------
TOTAL ............................................................. $ 27,297,732 $ 29,114,229
============ ============
See notes to consolidated financial statements.
2
M~WAVE, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended June 30,
------------------------------
2001 2002
------------ ------------
Net sales ......................... $ 15,448,962 $ 7,296,369
Cost of goods sold ................ 13,103,481 6,376,368
------------ ------------
Gross profit .................... 2,345,481 920,001
Operating expenses:
General and administrative ...... 580,087 539,545
Selling and marketing ........... 457,304 351,245
------------ ------------
Total operating expenses ...... 1,037,391 890,790
------------ ------------
Operating income ................ 1,308,090 29,211
Other income (expense):
Interest income ................. 8,000 43,880
Interest expense ................ (89,354) (58,759)
Rental income ................... 51,000 0
------------ ------------
Total other (expense) ......... (30,354) (14,879)
------------ ------------
Income before income taxes .... 1,277,736 14,332
Provision for income taxes ........ 505,113 5,563
------------ ------------
Net income ........................ $ 772,623 $ 8,769
============ ============
Weighted average shares outstanding 4,572,184 4,448,746
Basic earnings per share .......... $ 0.17 $ 0.00
Diluted shares outstanding ........ 4,600,895 4,467,731
Diluted earnings per share ........ $ 0.17 $ 0.00
See notes to consolidated financial statements.
3
M~WAVE, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six months ended June 30,
--------------------------------
2001 2002
------------ ------------
Net sales .............................. $ 37,975,082 $ 15,610,123
Cost of goods sold ..................... 30,692,535 13,074,341
------------ ------------
Gross profit ......................... 7,282,547 2,535,782
Operating expenses:
General and administrative ........... 1,465,334 1,132,821
Selling and marketing ................ 928,333 833,303
------------ ------------
Total operating expenses ........... 2,393,667 1,966,124
------------ ------------
Operating income ..................... 4,888,880 569,658
Other income (expense):
Interest income ...................... 27,335 106,774
Interest expense ..................... (307,312) (101,024)
Rental income ........................ 102,000 0
------------ ------------
Total other income (expense) ....... (177,977) 5,750
------------ ------------
Income before income taxes ........ 4,710,903 575,408
Provision for income taxes ............. 1,862,305 223,362
------------ ------------
Net income ............................. $ 2,848,598 $ 352,046
============ ============
Weighted average shares outstanding .... 4,572,184 4,452,499
Basic earnings per share ............... $ 0.62 $ 0.08
Diluted shares outstanding ............. 4,622,937 4,477,879
Diluted earnings per share ............. $ 0.62 $ 0.08
See notes to consolidated financial statements.
4
M~WAVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
----------------------------
2001 2002
----------- -----------
OPERATING ACTIVITIES:
Net income ........................................... $ 2,848,598 $ 352,046
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization .................... 796,980 756,000
Deferred income taxes ............................ 315,061 0
Changes in assets and liabilities:
Accounts receivable-trade ........................ (3,728,218) 2,202,924
Inventories ...................................... 6,356,501 (1,260,070)
Income taxes ..................................... (759,732) (1,006,638)
Prepaid expenses and other assets ................ (19,328) 90,941
Restricted cash .................................. 0 (731,980)
Accounts payable ................................. (1,430,656) 748,989
Accrued expenses ................................. 77,810 (496,462)
----------- -----------
Net cash flows provided by operating activities 4,457,016 655,750
----------- -----------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment ............ (3,562,609) (2,012,648)
----------- -----------
Net cash flows used in investing activities ... (3,562,609) (2,012,648)
FINANCING ACTIVITIES:
Long term debt ....................................... 132,224 1,465,262
Payments on short and long term debt ................. (1,408,024) (42,516)
Purchase treasury stock .............................. 0 (57,891)
----------- -----------
Net cash flows used in financing activities ... (1,275,800) 1,364,855
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ... (381,393) 7,957
CASH AND CASH EQUIVALENTS - Beginning of period ........ $ 1,230,999 $ 2,102,784
----------- -----------
CASH AND CASH EQUIVALENTS - End of period .............. $ 849,606 $ 2,110,741
=========== ===========
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 in the
United States of America 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, 2001 filed March 28,
2002.
2. BUSINESS
M~Wave, Inc. through its wholly owned subsidiary Poly Circuits, Inc.,
is a value-added service provider of high performance printed circuit
boards used in a variety of digital and high frequency applications for
wireless and industrial electronics applications. M~Wave satisfies its
customers requirements for wireless and industrial electronics applications
by using its 50,000 square foot state-of-the-art prototype and small volume
facility located in West Chicago, Illinois and by outsourcing and
coordinating the manufacture of such boards by a global base of suppliers
located primarily in the Far East ("Virtual Manufacturing"). Virtual
Manufacturing contractually supplies all the printed circuit needs of our
customers by managing the complete procurement process. We deliver products
when the customer needs them through either consignment inventory control
or just-in-time programs.
The Company began Virtual Manufacturing during 2000 by developing
subcontracting relationships with Global manufacturers. The Company
typically begins the Virtual Manufacturing process by manufacturing
prototypes and pre-production printed circuits at its manufacturing
facility. The Company often works closely with customer personnel during
this stage to finalize fabrication details and guidelines for circuit
boards. As customers' requirements for circuit boards develop into higher
volumes, the Company subcontracts the manufacture of the circuit boards to
Global manufacturers. The Company continues to monitor the production and
quality control of the circuit boards and works with its customers and
Global manufacturers throughout the Virtual Manufacturing process. The
Company believes that
6
Virtual Manufacturing allows the Company to satisfy a broader range of its
customers' printed circuit board requirements without incurring substantial
capital expenditures for plant, property and equipment.
The Company added new levels of capacity in 2001 with the addition of
its new facility in West Chicago, Illinois. The new state-of-the-art 50,000
square foot facility in West Chicago enables the Company to provide
quick-turn prototypes to customers and to manufacture pre-production
printed circuit boards for specific customer application. These process
capabilities are an essential part of the Virtual Manufacturing process and
the Company's ability to attract new customers.
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 called Flexlink II(TM) in 1996.
The Company's printed circuit boards and bonded assemblies are used in
a variety of telecommunications and industrial electronic applications.
Many of the Company's printed circuit boards are Teflon(TM) based and are
advantageous for microwave systems because of their extremely low 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 ISO certification by many of its customers.
The Company markets its products through regional sales managers
supported by independent sales organizations. The Company's base of
approximately 100 customers represents a highly sophisticated group of
purchasers.
M~Wave 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
7
Street, Bensenville, Illinois, 60106, and its telephone number is (630)
860-9542.
3. INVENTORIES
Inventories are carried at the lower of first-in, first-out (FIFO)
cost or market. Substantially all the Company's inventories are in work in
process. The Company provides a reserve for slow moving and obsolete
inventory. During the second quarter, the Company negotiated a settlement
for previously reserved inventory not expected to be recovered.
4. DEBT
The Company has an installment loan of $137,000 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.
On July 26, 2001, the Company signed an agreement with the Illinois
Development Finance Authority to borrow up to a maximum $8,100,000 to
finance its facility in West Chicago, Illinois. Borrowings can be
disbursed, in accordance with the agreement, to the Company for up to three
years. Interest is set on a weekly basis, based upon the interest rates of
comparable tax-exempt bonds under prevailing market conditions. The
interest rate at June 30, 2002 was 1.55%. The term of the bond is 20 years
with the first payment of $1,320,000 due in July 2002. Through June 30,
2002 the Company borrowed $5,408,000. The first payment, by the Company was
made in July 2002. The Company also borrowed an additional $688,000 in July
2002. The total amount now borrowed is $4,776,000.
The Company had a line of credit agreement, which expired on May 15,
2002. The Company is currently negotiating to renew or replace the line of
credit.
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.
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS FOR THE QUARTER ENDED JUNE 30, 2002 COMPARED TO THE QUARTER ENDED JUNE
30, 2001
NET SALES
Net sales were $7,296,000 for the quarter ended June 30, 2002, a decrease
of $8,153,000 or 53% below the second quarter of 2001. The decrease in net sales
is directly related to a drop in demand in the telecom industry. Virtual
Manufacturing accounted for approximately $2,907,000 of net sales in the second
quarter of 2002 compared to $13,890,000 of net sales in the second quarter of
2001. The second quarter of 2002 also included two non-recurring events that
boosted sales by $3,600,000. These events were the result of the end of life of
several products we produced for Lucent and the shipment of inventory we were
holding for Westell. Had these events not occurred, the net sales for the second
quarter of 2002 would have been approximately $3,696,000.
Net sales to Lucent were $13,321,000 in the second quarter of 2001 compared
to $2,502,000 in the second quarter of 2002. Net sales to Celestica were
$526,000 in the second quarter of 2002 compared to $529,000 in the second
quarter of 2001. On September 1, 2001, Lucent transitioned a segment of their
manufacturing operations at Columbus, Ohio to Celestica. Celestica is based in
Toronto, Canada. On September 1, 2001, Lucent also transferred most of their
open purchase orders with the Company to Celestica.
Lucent accounted for 34% of the Company's net sales in the second quarter
ended June 30, 2002 compared to 86% in the second quarter of 2001. Celestica
accounted for 7% of the Company's net sales for the second quarter ended June
30, 2002 compared to 3% in the second quarter of 2001. Westell, a new Virtual
Manufacturing customer, accounted for 42% of the Company's net sales for the
second quarter ended June 30, 2002.
GROSS PROFIT AND COST OF GOODS SOLD
The Company's gross profit for the second quarter of 2002 was $920,000
compared to $2,345,000 for the second quarter of 2001. The decrease in gross
profit is a result of the decrease in net sales and a drop in demand in the
telecom industry. Gross Margin decreased to approximately 13% in the second
quarter of 2002 from approximately 15% in the second quarter of 2001. The second
quarter 2002 results included two non-recurring events that boosted revenue by
$3,600,000 and gross margin by $2,500,000. These events were a result of the end
of life of several products we produced for Lucent and shipment of inventory
9
we were holding for Westell. Had these events not occurred, the gross profit for
the second quarter would have been a loss of approximately $1,500,000.
OPERATING EXPENSES
General and administrative expenses were $540,000 or 7.4% of net sales in
the second quarter of 2002 compared to $580,000 or 3.8% of net sales in the
second quarter of 2001. General and administrative expenses consist primarily of
salaries and benefits, professional services, depreciation of office equipment,
computer systems and occupancy expenses. Payroll related expenses were down
$62,000 due to a reduction in the bonus award. Professional services, which
include legal and auditing fees, were down $41,000.
Selling and marketing expenses were $351,000 or 4.8% of net sales in the
second quarter of 2002 compared to $457,000 or 3.0% of net sales in the quarter
of 2001. Selling and marketing expenses include the cost of salaries,
advertising and promoting the Company's products, and commissions paid to
independent sales organizations. Commissions paid to independent sales
organizations were down $230,000. Payroll related expenses were up $99,000 with
the addition of four regional sales managers and support staff.
OPERATING INCOME
Operating income was $29,000 or 0.4% of net sales in the second quarter of
2002 compared to an operating income of $1,308,000 or 8.5% of net sales in the
second quarter of 2001, a decrease of $1,279,000. 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:
Decrease in net sales ($1,238,000)
Decrease in gross margin (188,000)
Decrease in operating expenses 147,000
-----------
Decrease in operating income ($1,279,000)
INTEREST INCOME
Interest income from short-term investments was $44,000 in the second
quarter of 2002 compared to $8,000 in the second quarter of 2001. Rental income
from the P C Dynamics facility was $51,000 in the second quarter of 2001. The
Company sold the P C Dynamics facility in the fourth quarter of 2001.
10
INTEREST EXPENSE
Interest expense, primarily related to the Industrial Revenue Bond was
$59,000 in the second quarter of 2002 compared to $89,000 in the second quarter
of 2001. The Company had a mortgage obligation on the P C Dynamics facility in
the second quarter of 2001.
INCOME TAXES
In the second quarter of 2002, the Company had an effective tax rate of
38.8% compared to 39.5% in the second quarter of 2001.
11
RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 2001
NET SALES
Net sales were $15,610,000 for the six months ended June 30, 2002, a
decrease of $22,365,000 or 59% below the first six months of 2001. The decrease
in net sales is directly related to a drop in demand in the telecom industry.
Virtual Manufacturing accounted for approximately $9,357,000 of net sales for
the first six months of 2002 compared to $34,970,000 for the first six months of
2001. The first six months of 2002 also included two non-recurring events that
boosted sales by $3,600,000. These events were the result of the end of life of
several products we produced for Lucent and the shipment of inventory we were
holding for Westell. Had these events not occurred, the net sales for the first
six months of 2002 would have been approximately $12,010,000.
Net sales to Lucent were $33,524,000 for the first six months of 2001
compared to $2,528,000 for the first six months of 2002. Net sales to Celestica
were $6,115,000 for the first six months of 2002 compared to $1,446,000 for the
first six months of 2001. On September 1, 2001, Lucent transitioned a segment of
their manufacturing operations at Columbus, Ohio to Celestica. Celestica is
based in Toronto, Canada. On September 1, 2001, Lucent also transferred most of
their open purchase orders with the Company to Celestica.
Celestica accounted for 39% of the Company's net sales for the first six
months of 2002 compared to 4% for the first six months of 2001. Lucent accounted
for 88% of the Company's net sales for the first six months of 2001. Spectrian
accounted for 4% of the Company's net sales for the first six months of 2002
compared to 1% for the first six months of 2001. Westell, a new Virtual
Manufacturing customer, accounted for 24% of the Company's net sales for the
first six months of 2002.
GROSS PROFIT AND COST OF GOODS SOLD
The Company's gross profit for the first six months of 2002 was $2,536,000
compared to $7,283,000 for the first six months of 2001. The decrease in gross
profit is a result of the decrease in net sales and a drop in demand in the
telecom industry. Gross Margin decreased to approximately 16% for the first six
months of 2002 from approximately 19% for the first six months of 2001. The
first six months of 2002 included two non-recurring events that boosted revenue
by $3,600,000 and gross margin by $2,500,000. These events were a result of the
end of life of several products we produced for Lucent and shipment of inventory
we were holding for Westell. Had these events not
12
occurred, the gross profit for the first six months would have been
approximately $36,000.
OPERATING EXPENSES
General and administrative expenses were $1,132,000 or 7.3% of net sales
for the first six months of 2002 compared to $1,465,000 or 3.9% of net sales for
the first six months of 2001. General and administrative expenses consist
primarily of salaries and benefits, professional services, depreciation of
office equipment, computer systems and occupancy expenses. Payroll related
expenses were down $302,000 due to a reduction in the bonus award. Professional
services, which include legal and auditing fees, were down $90,000.
Selling and marketing expenses were $833,000 or 5.3% of net sales for the
first six months of 2002 compared to $928,000 or 2.4% of net sales for the first
six months of 2001. Selling and marketing expenses include the cost of salaries,
advertising and promoting the Company's products, and commissions paid to
independent sales organizations. Commissions paid to independent sales
organizations were down $374,000. Payroll related expenses were up $221,000 with
the addition of four regional sales managers and support staff.
OPERATING INCOME
Operating income was $570,000 or 3.6% of net sales for the first six months
of 2002 compared to an operating income of $4,889,000 or 12.9% of net sales for
the first six months of 2001, a decrease of $4,319,000. 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:
Decrease in net sales ($4,289,000)
Decrease in gross margin (458,000)
Decrease in operating expenses 428,000
-----------
Decrease in operating income ($4,319,000)
INTEREST INCOME
Interest income from short-term investments was $107,000 for the first six
months of 2002 compared to $27,000 for the first six months of 2001. Rental
income from the P C Dynamics facility was $102,000 for the first six months of
2001. The Company sold the P C Dynamics facility in the fourth quarter of 2001.
13
INTEREST EXPENSE
Interest expense, primarily related to the Industrial Revenue Bond was
$101,000 for the first six months of 2002 compared to $307,000 for the first six
months of 2001. The Company had a mortgage obligation on the P C Dynamics
facility in the first quarter of 2001.
INCOME TAXES
For the first six months of 2002, the Company had an effective tax rate of
38.8% compared to 39.5% for the first six months of 2001.
14
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows provided by operations was $656,000 for the first six months
of 2002 compared to providing $4,457,000 for the first six months of 2001.
Accounts receivables decreased $2,203,000. Inventories increased $1,260,000.
Accounts payable increased $749,000. Depreciation and amortization was $756,000.
Capital expenditures mainly relating to the new West Chicago facility were
$2,013,000 for the first six months of 2002. The Company plans to spend an
additional $1,000,000 in the second half of 2002 on capital expenditures mainly
relating to the West Chicago facility. The capital expenditures will be financed
partially through the Industrial Revenue Bond.
The Company has an installment loan of $137,000 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 completed financing of $8,100,000 from the Illinois Development
Finance Authority's 2001 maximum limit on tax-exempt private activity bonds to
finance its facility in West Chicago, Illinois on July 26, 2001. The bond
replaced approximately $2,865,000 of credit line debt, which had an interest
rate of 6% at the time. The interest on the bond is set weekly: the current rate
for the week ending June 30, 2002 was approximately 1.55%. The outstanding
balance, as June 30, 2002 was $5,408,000. The term of the loan is 20 years with
the first payment of $1,320,000 due in July 2002. The Company made the first
payment of $1,320,000 per the terms of the agreement. The Company also borrowed
an additional amount of $688,000 in July 2002. The total amount borrowed as of
July 31, 2002 is $4,776,000. The Company also entered into a five-year agreement
on September 4, 2001 with American National Bank and Trust Company of Chicago
hedging $4,000,000 of the Industrial Bond Debt at a 4.24% rate of interest.
The Company's industrial bond debt documents contain a number of
significant covenants that, among other things, restrict the Company's ability
to dispose of assets, incur additional indebtedness, pay dividends, enter into
certain investments, enter into sale and lease-back transactions, make certain
acquisitions, engage in mergers and consolidations, create liens, or engage in
certain transactions with affiliates, and otherwise restrict corporate and
business activities. In addition, the Company is required to comply with
specified financial ratios and tests, including a minimum tangible net worth
test, a minimum interest coverage ratio and a maximum leverage ratio. The
Company's ability to continue to comply with these covenants and restrictions
may be affected by events beyond the Company's control. A failure by the Company
to comply with these covenants and restrictions would result in an event of
default under the Company's industrial bond debt documents.
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.
The Company had a line of credit agreement, which expired on May 15, 2002.
The Company is currently negotiating to renew or replace the line of credit.
The Company's ability to make scheduled principal and interest payments on,
or to refinance, its indebtedness, or to fund planned capital
15
expenditures will depend upon its future performance, which is subject to
general economic, financial, competitive and other factors that are beyond its
control. The Company's ability to fund operating activities is also dependent
upon its rate of growth, ability to effectively manage its inventory, the terms
under which the Company extends credit to customers and its ability to collect
under such terms and its ability to access external sources of financing. Based
upon the current level of operations and anticipated growth, management believes
that future cash flow from operations, together with other sources of debt
fundings and issuance of additional equity securities, will be adequate to meet
its anticipated requirements for capital expenditures, working capital, interest
payments and scheduled principal payments over the next 12 months. There can be
no assurance, however, that its business will continue to generate sufficient
cash flow from operations in the future to service its debt and make necessary
capital expenditures after satisfying certain liabilities arising in the
ordinary course of business. If unable to do so, the Company may be required to
refinance all or a portion of its existing debt, to sell assets or to obtain
additional financing. There can be no assurance that any such refinancing would
be available or that any such sale of assets or additional financing could be
obtained.
INFLATION
Management believes inflation has not had a material effect on the
Company's operation or on its financial position.
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
16
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 the Company's largest customer or a change in the mix of product sales
would 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 the "Virtual Manufacturing" process; 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.
The Company is dependent upon unaffiliated foreign companies for the
manufacture of printed circuit boards as part of its Virtual Manufacturing
process. The Company's arrangements with manufacturers are subject to the risks
of doing business abroad, such as import duties, trade restrictions, production
delays due to unavailability of parts or components, transportation delays, work
stoppages, foreign currency fluctuations, political instability and other
factors which could have an adverse effect on the Company's business, financial
condition and results of operations. The Company believes that the loss of any
one or more of its suppliers would not have a long term material adverse effect
on its business, financial condition and results of operations
17
because other manufacturers would be able to increase production to fulfill its
requirements. However, the loss of certain suppliers, could, in the short term
adversely affect its business until alternative supply arrangements were
secured.
Although the Company intends to continue to grow its revenues, there can be
no assurance that the growth experienced by the Company will continue or that
the Company will be able to achieve the growth contemplated by its business
strategy. The Company's ability to continue to grow may be affected by various
factors, many of which are not within the Company's control, including
competition in the telecommunications industry. This growth has placed, and is
expected to continue to place, significant demands on all aspects of the
Company's business. Including its administrative, technical and financial
personnel and systems. The company's future operating results will substantially
depend on the ability of its officers and key employees to manage such
anticipated growth, to attract and retain additional highly qualified
management, technical and financial personnel, and to implement and/or improve
its technical, administrative, financial control and reporting systems.
18
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Stockholders was held on June 19, 2002.
(b) At the Company's Annual Meeting of Stockholders, the Stockholders reelected
to the Company's Board of Directors Mr. Gregory E. Meyer. Mr. Meyer is a
class I Directors and will serve a term ending upon the election of Class I
Directors at the 2005 Annual Meeting of Stockholders. The aggregate number
of votes cast for, against or withheld, for the election of Mr. Meyer was
as follows: 4,136,705 for, 0 against and 202,867 withheld.
(c) The Board of Directors is divided into three classes, each of whose members
serve for a staggered three-year term. The Board is comprised of one Class
I Director (Gregory E. Meyer) whose term expires at the 2005 Annual Meeting
of Stockholders, two Class II Director (Joseph A. Turek and Donald A.
Lepore) whose term expires at the 2003 Annual Meeting of Stockholders and
two Class III Directors (Lavern D. Kramer and Gary L. Castagna) whose term
expires at the 2004 Annual Meeting of Stockholders.
At the Company's Annual Meeting of Stockholders, the Stockholders ratified the
appointment of Grant Thornton LLP as auditors of the Company for the 2002
calendar year. The aggregate number of votes cast for, against or withheld, for
the ratification of Grant Thornton LLP as auditors was 4,328,084, 10,020 and
28,785, respectively.
19
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
None
20
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: August 12, 2002 /s/ PAUL H. SCHMITT
----------------------------
Paul H. Schmitt
Chief Financial Officer
21
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------
None
22