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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 September 30, 2003 Commission File No. 0-19944
M~WAVE, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-3809819
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) identification No.)
475 Industrial Drive, West Chicago, Illinois 60185
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (630) 562-5550
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X0 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 November 12,
2003.
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
M~WAVE, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
DECEMBER 31 SEPTEMBER 30
2002 2003
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 1,514,509 $ 790,719
Accounts receivable, net of allowance for doubtful accounts,
2002- $100,000: 2003- $100,000............................................. 1,901,999 2,527,191
Inventories................................................................. 1,756,641 834,956
Refundable income taxes..................................................... 4,446,010 822,619
Deferred income taxes....................................................... 748,457 616,785
Prepaid expenses and other.................................................. 31,582 17,311
Restricted cash............................................................. 348,731 0
------------ ------------
Total current assets.................................................... 10,747,929 5,609,581
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements............................................ 5,522,765 2,177,238
Machinery and equipment..................................................... 9,248,688 1,928,600
------------ ------------
Total property, plant and equipment..................................... 14,771,453 4,105,838
Less accumulated depreciation............................................... (2,760,441) 0
------------ ------------
Property, plant and equipment-net....................................... 12,011,012 4,105,838
ASSETS TO BE DISPOSED OF, NET................................................... 568,701 568,701
------------ ------------
TOTAL........................................................................... $ 23,327,642 $ 10,284,120
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................ $ 3,707,327 $ 4,578,653
Accrued expenses............................................................ 1,316,579 1,012,861
Current portion of long-term debt........................................... 5,017,629 2,782,198
------------ ------------
Total current liabilities............................................... 10,041,535 8,373,712
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, $.01 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 September 30, 2003.................................. 30,895 30,895
Additional paid-in capital.................................................. 8,439,072 8,439,072
Retained earnings .......................................................... 6,484,525 (4,891,174)
Treasury stock, at cost, 1,735,815 shares, at December 31, 2002.............
and 1,735,815 shares at September 30, 2003................................ (2,285,170) (2,285,170)
------------ ------------
Total stockholders' equity ............................................. 12,669,322 1,293,623
------------ ------------
TOTAL........................................................................... $ 23,327,642 $ 10,284,120
============ ============
See notes to consolidated financial statements.
2
M~WAVE, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended September 30,
-----------------------------------
2002 2003
------------ ------------
Net sales....................................................................... $ 3,787,531 $ 3,518,178
Cost of goods sold.............................................................. 6,537,287 3,614,003
------------ ------------
Gross loss.................................................................... (2,749,756) (95,825)
Operating expenses:
General and administrative.................................................... 545,830 513,975
Selling and marketing......................................................... 394,618 283,730
Impairment of building and equipment.......................................... 0 2,274,500
Restructuring expense......................................................... 1,752,108 0
------------ ------------
Total operating expenses.................................................... 2,692,556 3,072,205
------------ ------------
Operating loss................................................................ (5,442,312) (3,168,030)
Other income (expense):
Interest income............................................................... 45,817 48,396
Interest expense.............................................................. (50,518) (52,840)
Other income.................................................................. 0 206,089
Gain (loss) on disposal of assets............................................. 0 16,682
------------ ------------
Total other income (expense) (4,701) 218,327
------------ ------------
Loss before income taxes.................................................... (5,447,013) (2,949,703)
Provision (credit) for income taxes............................................. (2,114,422) 131,672
------------ ------------
Net loss........................................................................ ($ 3,332,591) ($ 3,081,375)
============ ============
Weighted average shares outstanding 4,443,294 4,443,294
Basic loss per share ($ 0.75) ($ 0.69)
Diluted shares outstanding 4,443,294 4,443,294
Diluted loss per share ($ 0.75) ($ 0.69)
See notes to consolidated financial statements.
3
M~WAVE, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine months ended September 30,
-----------------------------------
2002 2003
------------ ------------
Net sales....................................................................... $ 19,397,654 $10,864,273
Cost of goods sold.............................................................. 19,611,629 12,885,354
------------- ------------
Gross loss.................................................................... (213,975) (2,021,081)
Operating expenses:
General and administrative.................................................... 1,678,651 1,856,848
Selling and marketing......................................................... 1,227,920 1,027,542
Impairment of building and equipment.......................................... 0 7,452,235
Restructuring expense......................................................... 1,752,108 0
------------ ------------
Total operating expenses.................................................... 4,658,679 10,336,625
------------ ------------
Operating loss................................................................ (4,872,654) (12,357,706)
Other income (expense):
Interest income............................................................... 152,591 134,053
Interest expense.............................................................. (151,542) (148,478)
Other income.................................................................. 0 206,089
Gain (loss) on disposal of assets............................................. 0 33,682
------------ ------------
Total other income.......................................................... 1,049 225,346
------------ ------------
Loss before income taxes.................................................... (4,871,605) ( 12,132,360)
Credit for income taxes......................................................... 1,891,060 756,661
------------ ------------
Net loss........................................................................ ($ 2,980,545) ($11,375,699)
============ ============
Weighted average shares outstanding 4,449,397 4,443,294
Basic loss per share ($ 0.67) ($2.56)
Diluted shares outstanding 4,449,397 4,443,294
Diluted loss per share ($ 0.67) ($ 2.56)
See notes to consolidated financial statements.
4
M~WAVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
-----------------------------------
2002 2003
------------ ------------
OPERATING ACTIVITIES:
Net loss...................................................................... ($ 2,980,545) ($11,375,699)
Adjustments to reconcile net loss to net cash flows
from operating activities:
(Gain) loss on disposal of property, plant and equipment.................. 986,108 (33,682)
Depreciation and amortization............................................. 1,134,000 506,600
Impairment of buildings and equipment..................................... 0 7,452,235
Deferred income taxes..................................................... 0 131,672
Changes in assets and liabilities:
Accounts receivable-trade................................................. 6,040,942 (625,192)
Inventories............................................................... (609,241) 921,685
Income taxes.............................................................. (3,121,060) 3,623,391
Prepaid expenses and other assets......................................... 44,720 14,271
Restricted cash........................................................... 257,610 348,731
Accounts payable.......................................................... 685,964 871,326
Accrued expenses.......................................................... (562,610) (303,718)
------------ ------------
Net cash flows provided by operating activities........................ 1,875,888 1,531,620
------------ ------------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment..................................... (2,902,083) (53,661)
Proceeds from sale of property, plant and equipment........................... 0 33,682
------------ ------------
Net cash flows used in investing activities............................ (2,902,083) (19,979)
------------ ------------
FINANCING ACTIVITIES:
Long term debt................................................................ 2,302,623 0
Payments on short and long term debt......................................... (1,381,314) (2,235,431)
Purchase treasury stock....................................................... (57,891) 0
------------ ------------
Net cash flows provided by (used in) financing activities.............. 863,418 (2,235,431)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS....................................... (162,777) (723,790)
CASH AND CASH EQUIVALENTS - Beginning of period................................. 2,102,784 1,514,509
------------ ------------
CASH AND CASH EQUIVALENTS - End of period....................................... $ 1,940,007 $ 790,719
============ ============
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, 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 the printed circuit needs of our customers by managing the complete
procurement process. We deliver products when the customer needs them through
consignment, inventory control or just-in-time programs.
The Company began Virtual Manufacturing during 2000 by developing
subcontracting relationships with local and 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 customer
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
6
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.
In September 2003 the Company exited direct domestic manufacturing by
using operating and strategic partnerships with domestic and Asian Printed
Circuit Board manufacturers. Our domestic and Asian partners manufacture to our
specifications and under our review from management based in Chicago and
Singapore.
Our manufacturing partners maintain most certifications for quality,
environmental and safety including ISO, QS, UL CE and others. We have a solid
reputation for timely delivery of products that are competitively priced, from
plants operating at high levels for worker and environmental safety both within
and outside the U.S.
7
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.
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 nine-months ended September 30,
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 agreed to
deposit in the Sinking Fund Account for the Industrial Bond Debt:
(ii) $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. As of
September 30, 2003, the Company had received the expected refund from the state
but the Company has not sold the real estate located at 215 Park Street,
Bensenville, Illinois.
8
The Company defaulted under the Forbearance Agreement dated March 26,
2003 due to its failure to make certain required payments.
On October 1, 2003, M-Wave entered into a new $2,413,533 loan with Bank
One, NA that will mature on December 31, 2003, and will require monthly
payments of interest at the bank's prime rate. This loan replaces the unpaid
portion of the Industrial Revenue Bonds (IRB) that were used to fund the
acquisition of the land and construction of the company's manufacturing plant
located in West Chicago, Illinois, and a related forbearance agreement with
the bank. Upon signing the new loan, the Company is no longer in default of
its obligations to the bank arising pursuant to the IRB. However, the Company
will need to repay or negotiate the loan, or seek alternative financing,
prior to the loans' maturity on December 31, 2003.Concurrent with the new
loan, M-Wave paid $350,000 toward then-outstanding principal obligations, and
Bank One released liens covering the Company's accounts receivable and
inventory. Additional terms of the loan include assigning Bank One a lien on
the Company's real estate and improvements located in Bensenville, IL, site
of its former operations. Bank One is to receive a payment of $650,000 upon
sale of the Bensenville assets, to be applied to the loan's principal. As of
November 12, the Company has not sold the Bensenville assets.
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 obtain
additional working capital, refinance its long-term debt and succeed in its
future operations.
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 finished goods.
5. DEBT
The Company had an installment loan of $64,000 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.
9
Interest is set on a weekly basis, based upon the interest rates of
comparable tax-exempt bonds under prevailing market conditions.
See Footnote Number 7, Debt, in the Company's Annual Report Form 10-K,
for fiscal year ended December 31, 2002, filed March 31, 2003.
On October 1, 2003, M-Wave entered into a new $2,413,533 loan with Bank
One, NA that will mature on December 31, 2003, and will require monthly
payments of interest at the bank's prime rate. This loan replaces the unpaid
portion of the Industrial Revenue Bonds (IRB) that was used to fund the
acquisition of the land and construction of the company's manufacturing plant
located in West Chicago, Illinois, and a related forbearance agreement with
the bank. Upon signing the new loan, the Company is no longer in default of
its obligations to the bank arising pursuant to the IRB. However, the Company
will need to repay or negotiate the loan, or seek alternative financing,
prior to the loans' maturity on December 31, 2003. Concurrent with the new
loan, M-Wave paid $350,000 toward then-outstanding principal obligations, and
Bank One released liens covering the Company's accounts receivable and
inventory. Additional terms of the loan include assigning Bank One a lien on
the Company's real estate and improvements located in Bensenville, IL, site
of its former operations. Bank One is to receive a payment of $650,000 upon
sale of the Bensenville assets, to be applied to the loan's principal.
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.
6. RESTRUCTURING ACTIVITIES
The Board of Directors of the Company engaged Credit Support
International, LLC of Texas, and specifically its Managing Member, Jim Mayer,
April 15, 2003 to assist in implementing a corporate restructuring that
includes financial, operating and strategic re-positioning to stem operating
and financial losses. Through the efforts of Mr. Mayer and our management, in
August 2003, we developed, and the Board approved, a revised business plan
and operating model. The plan provides for us to exit direct domestic
manufacturing by using operating and strategic partnerships with domestic and
Asian PCB manufacturers that include possible joint ventures, contract
manufacturing or operating alliances to accomplish the goal to "virtually"
produce PCB's. As a result, we employ 56 people today, down from 152 at the
end of 2001.
10
7. 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. IMPAIRMENT OF LONG-LIVED ASSETS TO BE HELD AND USED
The Company recorded impairment of building, plant and equipment
charges in the first nine months of 2003 of $7,452,000. The charges were
recorded to comply with FASB statement No. 144, which requires the Company to
(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 as the difference between the carrying amount and the fair
value of the asset. On September 30, 2003, the fair value of the real estate
was estimated at $2,000,000 and the machinery and equipment at $1,929,000.
This resulted in a write-down of the assets of $2,274,500 in the third
quarter of 2003, and resulting in total write-down of such assets in the
first nine months of 2003 of $7,452,000.
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 six
months ended September 30, 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:
11
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------------
2003 2002
------------------------------
Net loss, as reported $(11,375,699) $(2,980,545)
Deduct: Stock-based employee
compensation expense, net
of related tax effects,
determined under fair-value
method for all awards (191,568) (191,568)
------------ ------------
Pro forma net loss $(11,567,267) $(3,172,113)
============ ============
EPS, as reported
Basic $ (2.56) $ (0.67)
Diluted (2.56) (0.67)
Pro forma EPS
Basic $ (2.60) $ (0.71)
Diluted (2.60) (0.71)
10. SUBSEQUENT EVENTS
On October 1, 2003, M-Wave entered into a new $2,413,533 loan with Bank
One, NA that will mature on December 31, 2003, and will require monthly
payments of interest at the bank's prime rate. This loan replaces the unpaid
portion of the Industrial Revenue Bonds (IRB) that was used to fund the
acquisition of the land and construction of the company's manufacturing
plant located in West Chicago, Illinois, and a related forbearance agreement
with the bank. Upon signing the new loan, the Company is no longer in
default of its obligations to the bank arising pursuant to the IRB. However,
the Company will need to repay or negotiate the loan, or seek alternative
financing, prior to the loans' maturity on December 31, 2003. Concurrent
with the new loan, M-Wave paid $350,000 toward then-outstanding principal
obligations, and Bank One released liens covering the Company's accounts
receivable and inventory. Additional terms of the loan include assigning
Bank One a lien on the Company's real estate and improvements located in
Bensenville, IL, site of its former operations. Bank One is to receive a
payment of $650,000 upon sale of the Bensenville assets, to be applied to
the loan's principal.
12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS FOR THE QUARTER ENDED SEPTEMBER 30, 2003 COMPARED TO THE QUARTER ENDED
SEPTEMBER 30, 2002
NET SALES
Net sales were $3,518,000 for the quarter ended September 30, 2003, a
decrease of $269,000 or 7% below the third quarter of 2002. The decrease in net
sales is related to a drop in demand in the industrial electronic applications
offset partially by increased demand in high-frequency applications.
Net sales to Westell were $654,000 in the third quarter of 2003
compared to $1,403,000 in the third quarter of 2002. Westell has reduced their
requirements from the Company and has begun procuring their requirements
directly from Asian suppliers. Net sales to Remec were $597,000 in the third
quarter of 2003, compared to $0 in the third quarter of 2002. Net sales to
Celestica were $394,000 compared to $784,000 in the third quarter of 2002.
GROSS LOSS AND COST OF GOODS SOLD
The Company's gross loss for the third quarter of 2003 was $96,000
compared to a gross loss of $2,750,000 for the third quarter of 2002. The third
quarter of 2002 included costs relating to the closing of the Bensenville
facility, a reduction in workforce and end of life costs relating to several
products. The gross loss for the third quarter of 2003 is a result of under
utilization of the manufacturing facility. On September 2, 2003 the Company
began to use a third party to coordinate and supervise the manufacturing process
at its West Chicago facility. The Company now out-sources and coordinates the
manufacture of all its customers' requirements needs through a global base of
suppliers.
OPERATING EXPENSES
General and administrative expenses were $514,000 or 14.6% of net sales
in the third quarter of 2003 compared to $546,000 or 14.4% of net sales in the
third quarter of 2002, a decrease of $32,000. General and administrative
expenses consist primarily of salaries and benefits, professional services,
depreciation of office, equipment and computer systems and occupancy expenses.
Payroll related expenses were down $60,000. Professional services, which include
legal, auditing , and consulting fees were up $104,000.
Selling and marketing expenses were $284,000 or 8.1% of net sales in
the third quarter of 2003 compared to $395,000 or 10.4% of net sales in the
third quarter of 2002. Selling and marketing expenses include the cost of
salaries,
13
advertising and promotion of the Company's products, and commissions paid to
independent sales organizations. Commissions paid to independent sales
organizations were down $60,000. Payroll-related expenses were down $38,000 with
the reduction of regional sales managers in the third quarter of 2003. Travel
expenses were down $11,000.
The Company recorded impairment of Property, Plant and Equipment
charges in the third quarter of 2003 of $2,275,000. The Company had the property
and plant located in West Chicago, Illinois appraised in the second quarter of
2003 for $2,400,000 however the Company now believes the fair value of the
property to be approximately $2,000,000. The Company also contracted to have the
Equipment appraised again in the third quarter of 2003. The equipment was
appraised for approximately $1,929,000 compared to a book value of $3,877,000.
The impairment was recorded to comply with FASB statement No. 144, which
requires the Company to (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 as the difference between the carrying
amount and the fair value of the asset. Since the fair value of the Property,
Plant and Equipment was $3,929,000, this resulted in a write-down of the assets
of $2,275,000 in the third quarter of 2003.
Restructuring expenses were $1,752,000 or 46.3% of sales in the third
quarter of 2002. Restructuring expenses include costs associated with the
closing, cleanup and disposition of the Bensenville facilities. These expenses
include (1) the net write-down and disposal of approximately $986,000 of
specific assets that were not required at the West Chicago facility, (2)
cleanup, sale and related expenses of $680,000 for the Bensenville facilities
and (3) severance payments of $86,000.
OPERATING LOSS
Operating loss was ($3,168,000) in the third quarter of 2003 compared
to an operating loss of ($5,442,000) in the third quarter of 2002, a decrease in
loss of $2,274,000. The changes in operating loss reflect primarily the changes
in net sales, gross profit and cost of goods sold, impairment charges and
operating expenses as discussed above, which can be summarized as follows:
Decrease in net sales $ 196,000
Increase in gross margin 2,458,000
Impairment of building and equipment (2,275,000)
Restructuring expense 1,752,000
Decrease in operating expenses 143,000
-------------
Decrease in operating loss $ 2,274,000
14
INTEREST INCOME
Interest income from short-term investments was $48,000 in the third
quarter of 2003 compared to $46,000 in the third quarter of 2002.
INTEREST EXPENSE
Interest expense, primarily related to the Industrial Revenue Bond was
$53,000 in the third quarter of 2003 compared to $51,000 in the third quarter of
2002.
OTHER INCOME
Other income of $206,000, primarily relates to forgiveness of debt as
the Company entered into settlement agreements with its Vendors. Under terms of
the vendor settlement agreements, the Company will pay, immediately following
the signing of each agreement, 50% of the vendor balances that are under
$10,000. It will pay trade balances in excess of $10,000 to vendors at 60% of
the principal balance, payable in two payments staggered 60 days apart. The
vendors will then forgive the balance of such trade debt. Through September 30,
2003, the Company has entered into vendor settlement agreements with vendors
holding approximately $1.2 million of trade debt. Of the remaining trade debt,
the Company is negotiating with one vendor to whom the Company's obligations are
approximately $1.3 million, and the Company has yet to commence negotiations
with certain vendors in Asia to whom the balance of approximately $600,000 is
owed.
INCOME TAXES
In the third quarter of 2003, the Company had an effective tax rate of
4.5% compared to an effective tax credit of 38.8% in the third quarter of 2002.
The Company expensed the net deferred tax asset of $131,672 in the third quarter
of 2003 to provide a valuation allowance.
15
RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 2002
NET SALES
Net sales were $10,864,000 for the nine months ended September 30,
2003, a decrease of $8,533,000 or 44% below the first nine months of 2002. The
decrease in net sales is related to a drop in demand in the high-frequency
applications offset partially by increased demand in industrial electronic
applications. The first nine months of 2002 also included two non-recurring
events that boosted sales net sales by $3,600,000. These events were the result
of (1) a cancellation charge of approximately $2.5 million paid by Lucent
related to the discontinuation of several products and (2) a one-time shipment
of inventory for approximately $1.0 million that the Company was holding for
Westell. Had these events not occurred the net sales for the first nine months
of 2002 would have been approximately $15,798,000.
Net sales to Westell were $3,923,000 for the first nine months of 2003
compared to $5,093,000 for the first nine months of 2002. The net sales in 2002
to Westell included a shipment of inventory of approximately $1,000,000. Net
sales to Celestica were $752,000 for the first nine months of 2003 compared to
$6,898,000 for the first nine months of 2002. The reduction in net sales with
Celestica is related to the completion of a specific project. Net sales to
Federal Signal were $816,000 for the first nine months of 2003 compared to
$125,000 for the first nine months of 2002. Federal Signal first signed a
contract with the Company in February 2002. Net sales to Lucent were $2,528,000
for the first nine months of 2002, which was a cancellation charge paid by
Lucent related to the discontinuation of several products.
GROSS LOSS AND COST OF GOODS SOLD
The Company's gross loss for the first nine months of 2003 was
$2,021,000 compared to a gross loss of $214,000 for the first nine months of
2002. The first nine months of 2002 include 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
occurred, the gross loss for the first nine months of 2002 would have been
approximately $2,714,000. The gross loss for the first nine months of 2003 is a
result of under-utilization of the manufacturing facility and a drop in demand
in the telecom industry.
16
OPERATING EXPENSES
General and administrative expenses were $1,857,000 or 17.1% of net
sales for the first nine months of 2003 compared to $1,679,000 or 8.7% of net
sales for the first nine months of 2002. General and administrative expenses
consist primarily of salaries and benefits, professional services, depreciation
of office, equipment and computer systems and occupancy expenses.
Payroll-related expenses were up $60,000. Professional services, which include
legal, auditing and consulting fees were up $229,000.
Selling and marketing expenses were $1,028,000 or 9.5% of net sales for
the first nine months of 2003 compared to $1,228,000 or 6.3% of net sales for
the first nine months of 2002. Selling and marketing expenses include the cost
of salaries, advertising and promotion of the Company's products, and
commissions paid to independent sales organizations. Commissions paid to
independent sales organizations were down $28,000. Payroll-related expenses were
down $56,000 and advertising expenses were down $60,000.
The Company recorded impairment of building, plant and equipment
charges in the first nine months of 2003 of $7,452,000. The charge was recorded
to comply with FASB statement No. 144, which requires the Company to (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 as the difference between the carrying amount and the fair value of the
asset. On September 30, 2003, the fair value of the real estate was estimated at
$2,000,000 and the machinery and equipment at $1,929,000. This resulted in a
write-down of the assets of $7,452,000.
Restructuring expenses were $1,752,000 or 9.0% of sales in the first
nine months of 2002. Restructuring expenses include costs associated with the
closing, cleanup and disposition of the Bensenville facilities. These expenses
include (1) the net write-down and disposal of approximately $986,000 of
specific assets that were not required at the West Chicago facility, (2)
cleanup, sale and related expenses of $680,000 for the Bensenville facilities
and (3) severance payments of $86,000.
OPERATING LOSS
Operating loss was $12,358,000 for the first nine months of 2003
compared to an operating loss of $4,873,000 for the first nine months of 2002,
an increase in loss of $7,485,000. The changes in operating loss reflect
primarily the changes in net sales, gross profit and cost of goods sold,
impairment charges and operating expenses as discussed above which could be
summarized as follows:
17
Decrease in net sales $ 94,000
Decrease in gross margin (1,901,000)
Impairment of building and equipment (7,452,000)
Restructuring expense 1,752,000
Decrease in operating expenses 22,000
-------------
Increase in operating loss ($ 7,485,000)
INTEREST INCOME
Interest income from short-term investments was $134,000 for the first
nine months of 2003 compared to $153,000 for the first nine months of 2002.
INTEREST EXPENSE
Interest expense, primarily related to the Industrial Revenue Bond was
$148,000 for the first nine months of 2003 compared to $152,000 for the first
nine months of 2002.
OTHER INCOME
Other income of $206,000, primarily relates to forgiveness of debt as
the Company entered into settlement agreements with its Vendors. Under terms of
the vendor settlement agreements, the Company will pay, immediately following
the signing of each agreement, 50% of the vendor balances that are under
$10,000. It will pay trade balances in excess of $10,000 to vendors at 60% of
the principal balance, payable in two payments staggered 60 days apart. The
vendors will then forgive the balance of such trade debt. To date, the Company
has entered into vendor settlement agreements with vendors holding approximately
$1.2 million of trade debt. Of the remaining trade debt, the Company is
negotiating with one vendor to whom the Company's obligations are approximately
$1.3 million, and the Company has yet to commence negotiations with certain
vendors in Asia to whom the balance of approximately $600,000 is owed.
INCOME TAX CREDIT
In the first nine months of 2003, the Company had an effective tax
credit of 6.2% compared to an effective tax credit of 38.8% in the first nine
months of 2002. The Company's tax credit is limited to expected tax refunds of
approximately $888,000 for 2003. The Company also expensed it net deferred tax
asset of $131,672 in the third quarter of 2003 to provide a valuation allowance.
18
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $1,532,000 for the first nine
months of 2003 compared to $1,876,000 for the first nine months of 2002.
Accounts receivable increased $625,000. Inventories decreased $922,000. The
Company received approximately $4,510,000 in income tax refunds. Accounts
payable increased $871,000. Depreciation and amortization was $507,000.
Capital expenditures were $54,000 in the first nine months of 2003
compared to $2,902,000 in the first nine months 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 term of the loan is 20 years. The
Company has been making quarterly sinking fund payments of $325,000, except that
the December 2002 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.
On October 1, 2003, M-Wave entered into a new $2,413,533 loan with Bank
One, NA that will mature on December 31, 2003, and will require monthly payments
of interest at the bank's prime rate. This loan replaces the unpaid portion of
the Industrial Revenue Bonds (IRB) that were used to fund the acquisition of the
land and construction of the Company's manufacturing plant located in West
Chicago, Illinois, and a related forbearance agreement with the bank. Upon
signing the new loan, the Company is no longer in default of its obligations to
the bank arising pursuant to the IRB. However, the Company will need to repay or
negotiate the loan, or seek alternative financing, prior to the loans' maturity
on December 31, 2003.Concurrent with the new loan, M-Wave paid $350,000 toward
then-outstanding principal obligations, and Bank One released liens covering the
Company's accounts receivable and inventory. Additional terms of the loan
include assigning Bank One a lien on the Company's real estate and improvements
located in Bensenville, IL, site of its former operations. Bank One is to
receive a payment of $650,000 upon sale of the Bensenville assets, to be applied
to the loan's principal. The Company's cash balance was approximately $791,000
as of September 30, 2003.
19
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 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)
proceeds of anticipated sales of fixed assets no longer required at the
Company's Bensenville facility, (b) the Company's ability to effectively manage
its expenses in relation to revenues and (c) the Company's ability to access
external sources of financing. The Company has been unable to date to secure
additional financing.
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 Promissory Note and/or fund the Company's working capital requirements.
Moreover, even if the Company is able to comply with the terms of the Promissory
Note, there can be no assurance that the Company will be able to fund its
working capital needs.
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.
SIGNIFICANT EVENTS
The Company continues to take the following steps to reposition the
Company and improve its liquidity:
- reducing staff 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;
20
- engaging Jim Mayer, the managing member of Credit Support
International, LLC of Texas to assist the Company's
management;
- Negotiating and entering into vendor settlement agreements with
vendors for the partial forgiveness of our trade debt;
- Exploring options for the Company's owned property in West
Chicago, Illinois.
RISK FACTORS AFFECTING BUSINESS AND RESULTS OF OPERATIONS
This report, as well as our other reports filed with the SEC and our
press releases and other communications, contain forward-looking statements made
pursuant to the safe harbor provisions of the Securities Litigation Reform Act
of 1995. Forward-looking statements include all statements regarding our
expected financial position, results of operations, cash flows, dividends,
financing plans, strategy, budgets, capital and other expenditures, competitive
positions, growth opportunities, benefits from new technology, plans and
objectives of management, and markets for stock. These forward-looking
statements are based largely on our expectations and, like any other business,
are subject to a number of risks and uncertainties, many of which are beyond our
control. The risks include those stated in the section entitled "Risk Factors
Affecting Business and Results of Operations" in Item 7 of our Annual Report on
Form 10-K and economic, competitive and other factors affecting our operations,
markets, products and services, expansion strategies and other factors discussed
elsewhere in this report, our Annual Report on Form 10-K and the other documents
we have filed with the Securities and Exchange Commission. In light of these
risks and uncertainties, there can be no assurance that the forward-looking
information contained in this report will in fact prove accurate, and our actual
results may differ materially from the forward-looking statements.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their
evaluation as of September 30, 2003, the Company's principal executive
officer and principal financial officer have concluded that the
Company's disclosure controls and procedures (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 was no change in the Company's
internal control over financial reporting during the quarter ended
September 30, 2003 that has materially affected, or is reasonably
likely to materially affect, its internal control over financial
reporting.
21
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
22
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.14 Credit Agreement, dated as of October 1, 2003, among
Bank One, NA, M~Wave, Inc., and Poly Circuits, Inc.
10.15 Consulting Agreement, dated September 1, 2003, by and
between the Company and Credit Support International,
LLC.
31.1 Certification of the CEO pursuant to Section 302 of
the Sarbanes-Oxley Act.
31.2 Certification of the CFO pursuant to Section 302 of
the Sarbanes-Oxley Act.
32.1 Certification pursuant to 18 U.S.C. Section 135O, as
adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 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 October 14,
2003 under item 5 relating to progress made in our
restructuring, including a new secured loan, the
renewal of our engagement of a turnaround adviser,
and our renegotiation of delinquent trade debt.
23
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: November 12, 2003 /s/ PAUL H. SCHMITT
-------------------------
Paul H. Schmitt
Chief Financial Officer
24
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 ********
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 *********
25
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 *********
10.14 Credit Agreement dated October 1, 2003 between Bank One, NA, the
Company and Poly Circuits, Inc. 27-52
10.15 Consulting Agreement, dated September 1, 2003, by and between the
Company and Credit Support International, LLC. 53-61
21 Subsidiaries *********
24.1 Consent of Grant Thornton LLP *********
31.1 Certification of the CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act. 62
31.2 Certification of the CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act. 63
32.1 Certification pursuant to 18 U.S.C. Section 135O, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 64
32.2 Certification pursuant to 18 U.S.C. Section 135O, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 65
* 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
26