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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, 2003 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.)
475 Industrial Drive, West Chicago, Illinois 60185
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (630) 562-5550
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 | |
Indicate by check mark whether the Registrant is an Yes No
accelerated filer(as defined by rule 12b-6 of the Act) | | |X|
The registrant has 4,443,294 shares of common stock outstanding at May 12, 2003.
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
M~WAVE, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
DECEMBER 31 MARCH 31
2002 2003
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 1,514,509 $ 3,371,848
Accounts receivable, net of allowance for doubtful accounts,
2002- $100,000: 2003- $100,000 ...................................... 1,901,999 1,781,474
Inventories .......................................................... 1,756,641 1,733,185
Refundable income taxes .............................................. 4,446,010 1,746,243
Deferred income taxes ................................................ 748,457 748,457
Prepaid expenses and other ........................................... 31,582 52,130
Restricted cash ...................................................... 348,731 676,075
------------ ------------
Total current assets ............................................. 10,747,929 10,109,412
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements ..................................... 5,522,765 4,177,238
Machinery and equipment .............................................. 9,248,688 4,014,000
------------ ------------
Total property, plant and equipment .............................. 14,771,453 8,191,238
Less accumulated depreciation ........................................ (2,760,441) 0
------------ ------------
Property, plant and equipment-net ................................ 12,011,012 8,191,238
ASSETS TO BE DISPOSED OF, NET ............................................ 568,701 568,701
------------ ------------
TOTAL .................................................................... $ 23,327,642 $ 18,869,351
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ..................................................... $ 3,707,327 $ 4,751,224
Accrued expenses ..................................................... 1,316,579 1,204,420
Current portion of long-term debt .................................... 5,017,629 4,998,401
------------ ------------
Total current liabilities ........................................ 10,041,535 10,954,045
DEFERRED INCOME TAXES .................................................... 616,785 616,785
LONG-TERM DEBT ........................................................... 0 0
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized, 1,000,000
shares; no shares issued ........................................... 0 0
Common stock, $.005 par value; authorized, 10,000,000 shares
6,179,112 shares issued and 4,443,294 shares outstanding
at December 31, 2002, 6,179,112 shares issued and 4,443,294
shares outstanding at March 31, 2003 ............................... 30,895 30,895
Additional paid-in capital ........................................... 8,439,072 8,439,072
Retained earnings .................................................... 6,484,525 1,113,724
Treasury stock, at cost, 1,735,815 shares, at December 31, 2002
and 1,735,815 shares at March 31, 2003 ............................. (2,285,170) (2,285,170)
------------ ------------
Total stockholders' equity ....................................... 12,669,322 7,298,521
------------ ------------
TOTAL .................................................................... $ 23,327,642 $ 18,869,351
============ ============
See notes to consolidated financial statements.
2
M~WAVE, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended March 31,
--------------------------------
2002 2003
----------- -----------
Net sales ............................................. $ 8,313,754 $ 3,205,045
Cost of goods sold .................................... 6,697,973 4,932,871
----------- -----------
Gross profit (loss) ................................. 1,615,781 (1,727,826)
----------- -----------
Operating expenses:
General and administrative .......................... 593,276 577,147
Selling and marketing ............................... 482,058 366,949
Impairment of building and equipment ................ 0 3,577,735
----------- -----------
Total operating expenses .......................... 1,075,334 4,521,831
----------- -----------
Operating income (loss) ............................. 540,447 (6,249,657)
Other income (expense):
Interest income ..................................... 62,893 40,647
Interest expense .................................... (42,265) (50,124)
----------- -----------
Total other income (expense) ...................... 20,628 (9,477)
----------- -----------
Income (loss) before income taxes ................ 561,075 (6,259,134)
Provision (credit) for income taxes ................... 217,798 (888,333)
----------- -----------
Net income (loss) ..................................... $ 343,277 ($5,370,801)
=========== ===========
Weighted average shares outstanding 4,456,294 4,443,294
Basic earnings (loss) per share $ 0.08 ($1.21)
Diluted shares outstanding 4,486,499 4,443,294
Diluted earnings (loss) per share $ 0.08 ($1.21)
See notes to consolidated financial statements.
3
M~WAVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three month ended March 31,
----------------------------------
2002 2003
----------- -----------
OPERATING ACTIVITIES:
Net income (loss) ................................................... $ 343,277 ($5,370,801)
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization ................................... $ 378,000 $ 294,600
Impairment of building and equipment ............................ $ 0 $ 3,577,735
Changes in assets and liabilities:
Accounts receivable-trade ....................................... $ 2,196,017 $ 120,525
Inventories ..................................................... ($1,364,750) $ 23,456
Income taxes .................................................... ($292,202) $ 2,699,767
Prepaid expenses and other assets ............................... $ 32,858 ($20,548)
Restricted cash ................................................. ($365,149) ($327,344)
Accounts payable ................................................ $ 822,970 $ 1,043,897
Accrued expenses ................................................ ($309,658) ($112,159)
----------- -----------
Net cash flows provided by operating activities .............. $ 1,441,363 $ 1,929,128
----------- -----------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment ........................... ($1,201,951) ($52,561)
----------- -----------
Net cash flows used in investing activities .................. ($1,201,951) ($52,561)
----------- -----------
FINANCING ACTIVITIES:
Long term debt ...................................................... $ 717,090 $ 0
Payments on short and long term debt ............................... ($14,691) ($19,228)
----------- -----------
Net cash flows provided by (used in) financing activities .... $ 702,399 ($19,228)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................. $ 941,811 $ 1,857,339
CASH AND CASH EQUIVALENTS - Beginning of period ....................... $ 2,102,784 $ 1,514,509
----------- -----------
CASH AND CASH EQUIVALENTS - End of period ............................. $ 3,044,595 $ 3,371,848
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest .......................... $ 42,226 $ 50,124
Income tax payments(refunds) ...................................... $ 510,000 ($3,588,099)
See notes to consolidated financial statements.
4
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, 2002 filed March 31, 2003.
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 Virtual Manufacturing allows the Company to
satisfy a broader range of its
5
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 475 Industrial Drive, West Chicago,
Illinois 60185, and its telephone number is (630) 562-5550.
6
3. REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate continuation of the company as a going concern. However, the
Company has sustained substantial losses from operations in 2002, and such
losses have continued through the unaudited quarter ended March 31, 2003. As of
December 31, 2002, the Company was in default of certain debt covenants under
its Industrial Revenue Bond Agreement. On March 26, 2003, the Company entered
into a Forbearance Agreement where the Company agreed to comply with all the
terms and conditions and the Bank agreed to forbear on its rights to call the
debt from the date of the agreement through August 31, 2003.
Under the terms of the Forbearance Agreement, the Company has agreed to
deposit in the Sinking Fund Account for the Industrial Bond Debt:
(i) $1,500,000 on the earlier of (x) receipt by the Borrower of any
federal tax refund or (y) April 30, 2003; and
(ii) $500,000 on the earlier of (x) receipt by the Borrower of any state
tax refund or (y) June 30, 2003; and
(iii) $300,000 on the earlier of (x) receipt by Borrower of the proceeds
of the sale of its real estate located at 215 Park Street, Bensenville, Illinois
or (y) August 15, 2003.
The Company received its federal tax refund on March 31, 2003 and
deposited $1,500,000 in the sinking fund in April 2003 as required.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown in the
accompanying balance sheet is dependent upon continued operations of the
company, which in turn is dependent upon the company's ability to obtaining
additional working capital, and the refinancing its long-term debt and to
succeed in its future operations.
Management has taken and/or plans to take the following action to revise
its operating and financial requirements, which it believes are sufficient to
provide the Company with the ability to continue in existence:
- - Refinance its long-term debt
- - Obtain working capital financing
- - Sign additional supply chain agreements with new customers in 2003
- - Hired an RF sales manager to focus on the RF business of the Company which
the Company believes will add approximately $5 to $10 million of annual
revenue
- - Froze the wages of all employees effective January 1, 2003
7
- - Reduce the purchase cost of raw materials, supplies and repairs.
However, there can be no assurances that the Company will be able to
complete the aforementioned steps.
4. 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.
5. DEBT
The Company has an installment loan of $93,000 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 March 31, 2003
was 1.45%. The term of the bond is 20 years with the first payment of $1,320,000
due and made in July 2002 and payments are due annually thereafter.
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 mortgage notes are cross-defaulted and cross-collateralized. The credit
agreement, as amended May 15, 2001 requires the Company to maintain a stipulated
amount of tangible net worth and cash flow coverage ratio, as defined. The
Company was in default with the covenants at September 30, 2002, December 31,
2002 and March 31, 2003. On March 31, 2003, the Company entered into a
Forbearance Agreement with Bank One, N. A., formerly known as American National
Bank and Trust Company of Chicago, pursuant to which the Company agreed to
comply with all the terms and conditions contained in the Forbearance Agreement
and the Bank agreed to forbear from the date of the agreement to August 31, 2003
from pursuing its rights under the Reimbursement Agreement (including the right
to declare the bond immediately due and payable) provided the Company complies
with all the terms and conditions contained in the Forbearance Agreement. As the
Forbearance Agreement terminates on August 31, 2003, the balance of the
8
debt outstanding is presented as current. As of May 6, 2003 the Company believes
that it is in compliance of the Forbearance Agreement dated March 31, 2003.
The Company had a line of credit agreement, which expired on May 15, 2002.
6. 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.
7. SIGNIFICANT EVENTS
The Company announced on May 8, 2003 the following steps it is immediately
taking in an effort to reposition the Company and improve its liquidity:
- the layoff of approximately 44 of the Company's 126 employees.
Mainly in the production segment of the Company's business;
- pursuing the sale of certain fixed assets no longer being used
at the Company's Bensenville facility;
- pursuing hardship requests for accelerated payment of
anticipated state tax refunds of approximately $900.000.
- engaged Jim Mayer, the managing member of Credit Support
International, LLC of Texas to assist the Company's
management.
The Company announced that Robert O'Connell, the chief operating officer,
has resigned by mutual agreement from the Company to pursue other interests. In
the interim, Mr. Turek, the Chief Executive Officer, will assume Mr. O'Connell's
daily responsibilities.
8. IMPAIRMENT OF LONG-LIVED ASSETS TO BE HELD AND USED
The Company recorded impairment of building, plant and equipment charges
in the first quarter of 2003 of $3,578,000. The charge was recorded to comply
with FASB statement No. 144, which states (a) recognize an impairment loss when
the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows and (b) measure the impairment losses the difference
between the carrying amount and the fair value of the asset. The Company
estimated the fair value of the real estate at $4,000,000 and the machinery and
equipment at $4,014,000. This resulted in a write-down of the assets of
$3,578,000. This amount could change pending a final appraisal, which is
expected to be completed on May 23, 2003.
9
9. STOCK-BASED COMPENSATION
Effective for fiscal 2003, the Company adopted the disclosure requirements under
SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure," as an amendment to SFAS No. 123.
Stock-based employee compensation, including stock options, for the three months
ended March 31, 2003 and 2002 was accounted for under the intrinsic value-based
method as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Therefore, no compensation expense was recognized for those stock
options that had no intrinsic value on the date of grant.
If the Company were to recognize compensation expense over the relevant
service period under the fair-value method of SFAS No. 123 net earnings would
have decreased, resulting in pro forma net earnings (loss) and EPS as presented
below:
THREE MONTHS
ENDED MARCH 31,
---------------------------------
2003 2002
------------- -------------
Net earnings (loss), as reported $ (5,370,801) $ 343,277
Deduct: Stock-based employee
compensation expense, net
of related tax effects,
determined under fair-value
method for all awards (74,653) (63,856)
------------- -------------
Pro forma net earnings (loss) $ (5,445,454) $ 279,421
============= =============
EPS, as reported
Basic $ (1.21) $ 0.08
Diluted (1.21) 0.08
Pro forma EPS
Basic $ (1.23) $ 0.06
Diluted (1.23) 0.06
10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS FOR THE QUARTER ENDED MARCH 31, 2003 COMPARED TO THE QUARTER ENDED MARCH
31, 2002
NET SALES
Net sales were $3,205,000 for the quarter ended March 31, 2003, a decrease
of $5,109,000 or 159% below the first quarter of 2002. The decrease in net sales
is directly related to a drop in demand in the telecom industry. Virtual
Manufacturing accounted for approximately $2,514,000 of net sales or 78% in the
first quarter of 2003 compared to $6,424,000 of net sales or 77% in the first
quarter of 2002.
Net sales to Westell were $1,507,000 in the first quarter of 2003 compared
to $874,000 in the first quarter of 2002. Net sales to Celestica were $105,000
in the first quarter of 2003 compared to $5,588,000 in the first quarter of
2002. The reduction in net sales with Celestica is related to the completion of
a specific project. Net sales to Federal Signal were $235,000 in the first
quarter of 2003. Federal Signal first signed a contract with the Company in
February 2002.
GROSS PROFIT AND COST OF GOODS SOLD
The Company's gross loss for the first quarter of 2003 was ($1,728,000)
compared to a gross profit of $1,616,000 for the first quarter of 2002. The
decrease in gross profit is a result of the decrease in net sales, under
utilization of the manufacturing facility and a drop in demand in the telecom
industry.
OPERATING EXPENSES
General and administrative expenses were $577,000 or 18.0% of net sales in
the first quarter of 2003 compared to $593,000 or 7.1% of net sales in the first
quarter of 2002. 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 up
$62,000. Professional services, which include legal and auditing fees, were down
$45,000.
Selling and marketing expenses were $367,000 or 11.4% of net sales in the
first quarter of 2003 compared to $482,000 or 5.8% of net sales in the first
quarter of 2002. 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
11
organizations were down $46,000. Payroll related expenses were down $30,000 with
the addition of regional sales managers and support staff.
The Company recorded impairment of building, plant and equipment charges
in the first quarter of 2003 of $3,578,000. The charge was recorded to comply
with FASB statement No. 144, which states (a) recognize an impairment loss when
the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows and (b) measure the impairment losses the difference
between the carrying amount and the fair value of the asset. The Company
estimated the fair value of the real estate at $4,000,000 and the machinery and
equipment at $4,014,000. This resulted in a write-down of the assets of
$3,578,000. This amount could change pending a final appraisal, which is
expected to be completed on May 23, 2003.
OPERATING INCOME
Operating loss was ($6,250,000) in the first quarter of 2003 compared to
an operating income of $540,000 or 6.5% of net sales in the first quarter of
2002, a decrease of $6,790,000. 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 ($993,000)
Decrease in gross margin (2,350,000)
Impairment of building and equipment (3,578,000)
Decrease in operating expenses 131,000
-----------
Decrease in operating income ($6,790,000)
INTEREST INCOME
Interest income from short-term investments was $41,000 in the first
quarter of 2003 compared to $63,000 in the first quarter of 2002.
INTEREST EXPENSE
Interest expense, primarily related to the Industrial Revenue Bond was
$50,000 in the first quarter of 2003 compared to $42,000 in the first quarter of
2002.
12
INCOME TAXES
In the first quarter of 2003, the Company had an effective tax credit of
14.2% compared to an effective tax rate of 38.8% in the first quarter of 2002.
The Company's tax credit is limited to expected tax refunds of approximately
$888,000 for 2003.
13
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $1,929,000 for the first three months
of 2003 compared to $1,441,000 for the first three months of 2002. Inventories
decreased $121,000. The Company received approximately $3,588,000 in Income tax
refunds. Accounts payable increased $1,043,000. Depreciation and amortization
was $295,000.
Capital expenditures were $53,000 in the first quarter of 2003 compared to
$1,202,000 in the first quarter of 2002. The Company has limited plans for
capital expenditures in 2003.
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 May 7, 2003 was approximately 1.65%. The term of the loan is
20 years. The outstanding balance as of March 31, 2003 was $4,905,000. The
Company is required to pay $1,320,000 each year through quarterly sinking fund
payments of $325,000. The next payment of $1,320,000 is due in the third quarter
of 2003. The Company has been making quarterly sinking fund payments of
$325,000, except that the December quarterly payment was not made until February
2003. The Company deposited $325,000 in the first quarter of 2003 and an
additional $1,500,000 in April 2003 into the sinking fund for the Company's
outstanding industrial bond debt account per the terms of its Forbearance
Agreement with Bank One. The outstanding balance of the industrial bond debt
dropped to approximately $2,750,000 net of the sinking fund. The Company's cash
balance was approximately $456,000 as of May 7, 2003
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 comply with these covenants and restrictions may be
14
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 Company was in default on September 30, 2002 because of its failure to
comply with the financial ratios as set forth in the Reimbursement Agreement
relating to the bond. On November 8, 2002, the Company entered into a
Forbearance Agreement with Bank One, N. A., formerly known as American Bank and
Trust Company of Chicago, pursuant to which the Company agreed to comply with
all of the terms and conditions contained in the Forbearance Agreement and the
Bank agreed to forbear from the date of the agreement to December 31, 2002 from
pursuing its rights under the Reimbursement Agreement (including the right to
declare the bond immediately due and payable) provided the Company complies with
all of the terms and conditions contained in the Forbearance Agreement.
The Company was not in compliance with certain financial covenants for the year
ended December 31, 2002 relating to the Company's industrial bond debt. On March
31, 2003, the Company entered into a Forbearance Agreement with Bank One, N. A.,
formerly known as American Bank and Trust Company of Chicago, pursuant to which
the Company agreed to comply with all of the terms and conditions contained in
the Forbearance Agreement and the Bank agreed to forbear from the date of the
agreement to August 31, 2003 from pursuing its rights under the Reimbursement
Agreement (including the right to declare the bond immediately due and payable)
provided the Company complies with all of the terms and conditions contained in
the Forbearance Agreement
Under the terms of the Forbearance Agreement, the Company has agreed to deposit
in the Sinking Fund Account for the Industrial Bond debt:
(i) $1,500,000 on the earlier of (x) receipt by the Borrower of any federal
tax refund or (y) April 30, 2003; and
(ii) $500,000 on the earlier of (x) receipt by the Borrower of any state tax
refund or (y) June 30, 2003; and
(iii) $300,000 on the earlier of (x) receipt by Borrower of the proceeds of the
sale of its real estate located at 215 Park Street, Bensenville, Illinois
or (y) August 15, 2003.
The Company received its federal tax refund on March 31, 2003 and deposited
$1,500,000 in the sinking fund in April 2003 as required. The Company must
satisfy the remaining terms of the Forbearance Agreement by depositing in the
Sinking Fund account $500,000 by June 30, 2003 and an additional $300,000 by
August 15, 2003. The Company must also make the regularly scheduled quarterly
sinking fund payments of $325,000. The Company is pursuing
15
hardship requests for accelerated payments of anticipated state tax refunds of
approximately $900,000. The Company is also in discussions with third parties
concerning the sale of certain fixed assets no longer being used at the
Company's Bensenville facility. The Company's ability to comply with the terms
of the Forbearance Agreements will depend upon the amount and timing of the
aforementioned tax refund and asset sales, which are subject to factors that are
beyond the Company's control. If the Company does not comply with the terms of
the Forbearance Agreement, the lender may declare the entire amount of the bond
immediately due and payable.
Even if the Company complies with the terms of the Forbearance Agreement, there
can be no assurances that the lender and the Company will continue to enter into
forbearance agreements beyond August 31, 2003, if necessary, or that the terms
of such agreements will not have a material adverse effect on the Company's
ability to fund working capital or give the Company sufficient time and
flexibility to avoid future defaults under the industrial bond debt. The Company
may be required to refinance the industrial bond debt. There can be no assurance
that any such refinancing would be available on commercially reasonable terms,
if at all. Any such refinancing may require the Company to issue warrants for
the Company's common stock, which may result in significant dilution of existing
stockholders' ownership interest.
There can be no assurances that the forgoing matters will not adversely impact
the Company's relationship with its suppliers and customers.
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's ability to make scheduled principal and interest payments on, or
to refinance, its indebtedness, or to fund working capital and anticipated
capital expenditures will depend on the Company's 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 (a) the Company's anticipated receipt of $900,000 in state tax
refunds during 2003, (b) proceeds of anticipated sales of fixed assets no longer
required at the Company's Bensenville facility, (c) the Company's ability to
refinance the industrial bond debt and/or continue to enter into forbearance
agreements beyond August 31, 2003, if necessary relating to such debt, (d) the
Company's ability to effectively manage its expenses in relation to revenues and
(e) the Company's ability to access external sources of financing. The Company
has been unable to date to secure additional financing and/or refinancing of the
industrial bond debt. The Company announced on May 8, 2003 that it had
16
a layoff of approximately 44 of the Company's 126 employees, mainly in the
production segment of the Company's business.
There can be no assurances that the steps being taken by the Company, even if
successfully completed, will enable the Company to comply with the terms of the
Forbearance Agreement and/or fund the Company's working capital requirements.
Moreover, even if the Company is able to comply with the terms of the
Forbearance Agreement, There can be no assurance that Bank One and the Company
will continue to enter into forbearance agreements beyond August 31, 2003 or
that the Company will be able to fund its working capital needs.
The Company has an installment loan of $93,000 collateralized by certain fixed
assets of the Company. Interest on this loan is at the prime rate (4.25% at
March 31, 2003). The loan is payable in monthly installments of principal and
interest and is due October 2004.
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.
RISK FACTORS AFFECTING BUSINESS AND RESULTS OF OPERATIONS
You should carefully consider the following factors that may affect our
business, future operating results and financial condition, as well as other
information included in this Annual Report. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial
also may impair our business operations. If any of the following risks actually
occur, our business, financial condition and operating results could be
materially adversely affected.
Default Under Industrial Bond Debt
The Company was not in compliance with certain financial covenants for the year
ended December 31, 2002 relating to the Company's industrial bond debt. On March
31, 2003, the Company entered into a Forbearance Agreement with Bank One, N. A.,
formerly known as American Bank and Trust Company of Chicago, pursuant to which
the Company agreed to comply with all of the terms
17
and conditions contained in the Forbearance Agreement and the Bank agreed to
forbear from the date of the agreement to August 31, 2003 from pursuing its
rights under the Reimbursement Agreement (including the right to declare the
bond immediately due and payable) provided the Company complies with all of the
terms and conditions contained in the Forbearance Agreement
Under the terms of the Forbearance Agreement, the Company has agreed to deposit
in the Sinking Fund Account for the Industrial Bond debt:
(i) $1,500,000 on the earlier of (x) receipt by the Borrower of any federal
tax refund or (y) April 30, 2003; and
(ii) $500,000 on the earlier of (x) receipt by the Borrower of any state tax
refund or (y) June 30, 2003; and
(iii) $300,000 on the earlier of (x) receipt by Borrower of the proceeds of the
sale of its real estate located at 215 Park Street, Bensenville, Illinois
or (y) August 15, 2003.
The Company received its federal tax refund on March 31, 2003 and deposited
$1,500,000 in the sinking fund in April 2003 as required. The Company must
satisfy the remaining terms of the Forbearance Agreement by depositing in the
Sinking Fund account $500,000 by June 30, 2003 and an additional $300,000 by
August 15, 2003. The Company must also make the regularly scheduled quarterly
sinking fund payments of $325,000. The Company is pursuing hardship requests for
accelerated payments of anticipated state tax refunds of approximately $900,000.
The Company is also in discussions with third parties concerning the sale of
certain fixed assets no longer being used at the Company's Bensenville facility.
The Company's ability to comply with the terms of the Forbearance Agreements
will depend upon the amount and timing of the aforementioned tax refund and
asset sales, which are subject to factors that are beyond the Company's control.
If the Company does not comply with the terms of the Forbearance Agreement, the
lender may declare the entire amount of the bond immediately due and payable.
Even if the Company complies with the terms of the Forbearance Agreement, there
can be no assurances that the lender and the Company will continue to enter into
forbearance agreements beyond August 31, 2003, if necessary, or that the terms
of such agreements will not have a material adverse effect on the Company's
ability to fund working capital or give the Company sufficient time and
flexibility to avoid future defaults under the industrial bond debt. The Company
may be required to refinance the industrial bond debt. There can be no assurance
that any such refinancing would be available on commercially reasonable terms,
if at all. Any such refinancing may require the Company to issue warrants for
the Company's common stock, which may result in significant dilution of existing
stockholders' ownership interest.
18
There can be no assurances that the forgoing matters will not adversely impact
the Company's relationship with its suppliers and customers.
Liquidity
The Company's ability to make scheduled principal and interest payments on, or
to refinance, its indebtedness, or to fund working capital and anticipated
capital expenditures will depend on the Company's 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 (a) the Company's anticipated receipt of $900,000 in state tax
refunds during 2003, (b) proceeds of anticipated sales of fixed assets no longer
required at the Company's Bensenville facility, (c) the Company's ability to
refinance the industrial bond debt and/or continue to enter into forbearance
agreements beyond August 31, 2003, if necessary relating to such debt, (d) the
Company's ability to effectively manage its expenses in relation to revenues and
(e) the Company's ability to access external sources of financing. The Company
has been unable to date to secure additional financing and/or refinancing of the
industrial bond debt. The Company announced on May 8, 2003 that it had a layoff
of approximately 44 of the Company's 126 employees, mainly in the production
segment of the Company's business.
There can be no assurances that the steps being taken by the Company, even if
successfully completed, will enable the Company to comply with the terms of the
Forbearance Agreement and/or fund the Company's working capital requirements.
Moreover, even if the Company is able to comply with the terms of the
Forbearance Agreement, There can be no assurance that Bank One and the Company
will continue to enter into forbearance agreements beyond August 31, 2003 or
that the Company will be able to fund its working capital needs.
Dependence on Major Customers
The Company's three largest customers accounted for 58% of the Company's net
sales in the first quarter of 2003. 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.
19
Competition: Ability to Respond to Technical Advances
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.
Dependence on Overseas Manufactures
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 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.
Fluctuations in Quarterly Operating Results
Our quarterly results of operations are subject to significant variation for a
variety of reasons, including the following:
The timing and volume of our customers' orders;
Price and product competition;
Changes in mix of products we sell;
The levels at which we utilize our manufacturing capacity;
Our level of experience in manufacturing a particular product;
Manufacturing process yields; and
Raw material availability.
20
Each of these factors has had in the past, and may have in the future, an
adverse effect on our quarterly operating results. In addition, a significant
portion of our operating expenses are relatively fixed in nature and planned
expenditures are based in part on anticipated orders. Any inability to adjust
spending quickly enough to compensate for any revenue shortfalls may magnify the
adverse impact of such revenue shortfalls of our results of operations. As a
result, our operating results may vary significantly from one quarter to the
next.
Environmental Laws
We are required to comply with all federal, state, county and municipal
regulations regarding protection of the environment. Printed circuit board
manufacturing requires the use of a variety of materials, including metals and
chemicals. Water used in the printed circuit board manufacturing process must be
treated to remove metal particle and other contaminants before it can be
discharged into the municipal sanitary sewer system. As a result, we are subject
to various federal, state, local and foreign environmental laws and regulations,
including those governing storage, use, discharge and disposal of hazardous
substances in the ordinary course of our manufacturing processes. Although we
believe our current manufacturing operations comply in all material respects
with applicable environmental laws and regulations, environmental legislation
has been enacted and may in the future be enacted or interpreted to create
environmental liability with respect to our facilities or operations. We may be
responsible for the cleanup of any contamination discovered at our current and
former manufacturing facilities and could be subject to revocation of permits
necessary to conduct business. Further, we cannot guaranty that additional
environmental matters will not arise in the future at sites where no problem is
currently known or at sites that we may acquire in the future.
Common Stock: Possible De-listing
The market value of our publicly held shares has fallen below the minimum market
value of $5.0 million as required by the Nasdaq National Market on which our
common stock is currently listed. On May 8, 2003 the Company was approved for
inclusion in the Nasdaq SmallCap Market. The Company will to be trading on the
Nasdaq SmallCap market under the symbol "MWAV."
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-Q, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls and
procedures
21
(as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act
of 1934 (the "Exchange Act")) are effective to ensure that information required
to be disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
22
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
23
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 135O, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 135O, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
(1) A current report on Form 8-K was filed on May 9, 2003 under
item 5 reduction in workforce and the resignation of the
Company's COO, Robert O'Connell
24
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 12, 2003 /s/ PAUL H. SCHMITT
----------------------------
Paul H. Schmitt
Chief Financial Officer
25
CERTIFICATIONS
I, Joseph A. Turek, Chairman and Chief Executive Officer of M-Wave, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of M-Wave, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
26
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 12, 2003
By: /s/ Joseph A. Turek
------------------------------------
JOSEPH A. TUREK
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
27
CERTIFICATIONS
I, Paul H. Schmitt, Chief Financial Officer of M-Wave, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of M-Wave Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
28
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 12, 2003
By: /s/ Paul H. Schmitt
-------------------------------
PAUL H. SCHMITT
CHIEF FINANCIAL OFFICER
29
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION PAGE
------- -------------------------------------------------------- ----
2.1 Exchange Agreement, dated as of January 31, 1992, among
Poly Circuits, Inc., Joel S. Dryer, Joseph A. Turek and
the Company *
3.1 Certificate of Incorporation of the Company *
3.2 Bylaws of the Company
10.1 Amended and restated M~Wave, Inc. 1992 Stock Option Plan ***
10.2 Construction Loan Note, dated January 10, 1996, by and
among the Company, P C Dynamics and American National
Bank and Trust Company. ***
10.3 Stock Purchase Agreement dated December 18, 1998 by and
between the Company and First Chicago Equity Corporation. *****
10.4 Stock Purchase Agreement dated December 18, 1998 by and
between the Company and Cross Creek Partners II. *****
10.5 Warrant dated December 18, 1998 issued to First Chicago
Equity *****
10.6 Warrant dated December 18, 1998 issued to Cross Creek
Partners II *****
10.7 Employment Agreement dated January 29, 2001 between the
Company and Joseph A. Turek ******
10.8 Employment Agreement dated January 29, 2001 between the
Company and Paul H. Schmitt ******
10.9 Loan Agreement dated July 1, 2001 between the Illinois
Development Finance Authority and the Company *******
10.10 Forbearance Agreement dated November 8, 2002 between the
Company and Bank One, N.A., formerly known as American
National Bank & Trust Company of Chicago ********
30
10.11 Forbearance Agreement dated March 31, 2003 between the
Company and Bank One, N.A., formerly known as American
National Bank & Trust Company of Chicago *********
10.12 Employment Agreement dated January 7, 2003 between the
Company and Robert O'Connell *********
10.13 Employment Agreement dated January 29, 2003 between the
Company and Paul H. Schmitt *********
21 Subsidiaries *********
24.1 Consent of Grant Thornton LLP *********
99.1 Certification pursuant to 18 U.S.C. Section 135O, as
adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002. 30
99.2 Certification pursuant to 18 U.S.C. Section 135O, as
adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002. 31
* Incorporated herein by reference to the applicable exhibit to
Registrants Registration Statement on Form S-1 (Registration
No. 33-45499)
*** Incorporated herein by reference to the applicable exhibit to
the Registrant's Annual Report on Form 10-K for year ended
December 31, 1995.
***** Incorporated herein by reference to the applicable exhibit
report on Form 8-K dated December 18, 1998.
****** Incorporated herein by reference to the applicable exhibit
report to the Registrant's quarterly report on form 10-Q for
the quarter ended March 31, 2001.
******* Incorporated herein by reference to the applicable exhibit
report to the Registrant's quarterly report on form 10-Q for
the quarter ended June 30, 2001
******** Incorporated herein by reference to the applicable exhibit
report to the Registrant's quarterly report on form 10-Q for
the quarter ended September 30, 2002
******** Incorporated herein by reference to the applicable exhibit
report to the Registrant's annual report on form 10-K for the
year ended December 31, 2002
31