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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
For the fiscal year ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ______ to _____
Commission file number 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 office) (Zip Code)
Registrant's telephone number, including area code (630) 562-5550
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.005 par value)
------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Indicate by check mark whether the Registrant is an accelerated filer Yes No
(as defined by rule 12b-6 of the Act) [ ] [X]
1
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of June 30, 2002 was approximately $10,694,000, computed on the
basis of the last reported sale price per share ($3.65) of such stock on the
NASDAQ National Market.
The Registrant has 4,443,294 common shares outstanding at March 13, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Applicable portions of the Proxy Statement for the Annual Meeting are
incorporated by reference in Part III of this Form.
Index to Exhibits listed on page 57.
2
M~WAVE, INC.
FORM 10-K
TABLE OF CONTENTS
PART I PAGE
----
Item 1. Business...................................................... 5
Item 2. Properties.................................................... 11
Item 3. Legal Proceedings............................................. 12
Item 4. Submission of Matters to a Vote of Security Holders........... 12
PART II
Item 5. Market for the Registrants Common Equity and Related
Stockholder Matters........................................... 13
Item 6. Selected Financial Data....................................... 15
Item 7. Managements Discussion and Analysis of Financial Condition
and Results Of Operations..................................... 16
Item 8. Financial Statements and Supplementary Data................... 29
Item 9. Changes in the Disagreements with Accounts on Accounting
and Financial Disclosure...................................... 29
PART III
Item 10. Directors and Executive Officers of the Registrant............ 30
Item 11. Executive Compensation........................................ 30
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................ 30
Item 13. Certain Relationships and Related Transactions................ 30
Item 14. Controls and Procedures....................................... 31
PART IV
Item 15. Exhibits, Financial Statement Schedules and
Reports of Form 8-K........................................... 32
Signatures.................................................................. 54
3
This Annual Report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. This Act provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves so long as they identify these
statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements, other than statements of historical fact,
including statements regarding industry prospects and future results of
operations or financial position, made in this Annual Report are forward
looking. We use words such as "anticipates," "believes," "expects," "future,"
and "intends" and similar expressions to identify forward-looking statements.
Forward-looking statements reflect management's current expectations, plans or
projections and are inherently uncertain. Actual results could differ materially
from management's expectations, plans or projections. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date of this report. Certain risks and uncertainties that could cause our
actual results to differ significantly from management's expectations are
described in the section entitled "Risk Factors Affecting Business and Results
of Operations." This section, along with other sections of this Annual Report,
describes some, but not all, of the factors that could cause actual results to
differ significantly from management's expectations. We undertake no obligation
to publicly release any revisions to these forward-looking statements that may
be made to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events. Readers are urged, however, to review
the factors set forth in reports that we file from time to time with the
Securities and Exchange Commission.
4
PART I
In this report, the terms "M~Wave," "Company," "we," "us," and "our" refer to
M~Wave, Inc. and its subsidiary Poly Circuits, Inc.
Item 1. Business
The Company
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 telecommunications and
industrial electronics applications. M~Wave satisfies its customers requirements
for telecommunications and industrial electronics application 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 customers' printed circuit board requirements without
incurring substantial capital expenditures for property, plant 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 applications. These process capabilities are an essential part
of the Virtual Manufacturing process and the Company's ability to attract new
customers.
The Company closed its Bensenville facilities in the third quarter of 2002 and
consolidated operations at its West Chicago facility. The Company recorded a one
time pre-tax charge of $1,752,000 in the third quarter of 2002 relating to
closing and consolidation of the Bensenville facilities into West Chicago.
The Company produces customer specified bonded assemblies consisting of a
printed circuit board also 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
5
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.
M~Wave, Inc. 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.
Recent Developments
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. The
outstanding balance of the debt is approximately $4,907,000 as of March 14,
2003. 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. A copy of the Forbearance
Agreement is filed as Exhibit 10.11 to this Annual Report on Form 10-K and is
hereby incorporated by the reference.
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 expects to satisfy the terms of the Forbearance Agreement by
depositing in the Sinking Fund account $1.5 million out of an anticipated
Federal tax refund in April of approximately $3.0 million and $500,000 of
anticipated state tax refunds during 2003 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 Forebearance Agreements will depend upon
the amount and timing of the aforementioned tax refunds 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 Forebearance Agreement, the lender may
declare the entire amount of the bond immediately due and payable.
6
Even if the Company complies with the terms of the Forebearance 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. See also "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations-Risk Factors affecting
Business and Results of Operations-Default under Industrial Bond Debt and
- -Liquidity."
The report of independent auditors accompanying the consolidated financial
statements in this Annual Report on Form 10-K states that the foregoing matters
raise substantial doubt about the Company's ability to continue as a going
concern. See Note 3 in the Notes to the Consolidated Financial Statements. There
can be no assurance that the forgoing matters will not adversely impact the
Company's relationship with its suppliers and customers.
Industry and Market
There are Commercial and Military-related types of customers within the market
for microwave related printed circuit boards and bonded assemblies. Within both
customer types there has been an "outsourcing" trend whereby many end users have
reduced their internal production of printed circuit boards and bonded
assemblies and moved to buying these products from "contract manufacturing"
board shops.
One of the most widely recognized high frequency telecommunication systems in
commercial use is the cellular telephone. Cellular systems operate at the lower
end of the microwave spectrum and use Teflon(TM) based printed circuit boards
and bonded assemblies in power amplifier base stations. Approximately 47%, 90%
and 94% of the Company's revenues in 2002, 2001, and 2000, respectively, were
related to the cellular telephone industry.
The Company also services broadband access suppliers. Broadband access solution
companies provide broadband products, service solutions and conferencing
solutions for carriers, service providers and business enterprises around the
world. Approximately 29% of the Company's 2002 revenue was related to broadband
access suppliers.
Customers and Marketing
The Company's customers include microwave system manufacturers with
sophisticated technologies and industrial electronic manufacturers. The Company
markets its products through regional sales managers supported by independent
sales organizations. The Company currently services a customer base of
approximately 150.
The sale of microwave printed circuit boards is technical in nature. The Company
works with customer personnel who are frequently experts in microwave design and
theory with added expertise in fabrication and design techniques for printed
circuit boards. Typically, microwave system manufacturers provide the Company
fabrication details and guidelines. The Company fabricates the products to
customer specifications.
The Company has adopted a program of early supplier involvement as part of its
sales strategy. The Company has the opportunity to design-in its manufacturing
processes as a
7
means of reducing the cost of microwave systems. The emphasis
upon a partnership underlies the Company's relationship with its customers.
The Company markets its products through regional sales managers supported by
approximately 20 independent sales organizations, which are paid a commission to
represent the Company. International sales of the Company's products have
accounted for less than 5% of revenues in each of 2002, 2001 and 2000.
In 2002, Celestica International, Westell, Inc. and Lucent Technologies
accounted for 31%, 29% and 11%, respectively, of the Company's revenues. In
2001, Lucent Technologies accounted for 90% of the Company's revenues. In 2000,
Lucent Technologies accounted for 91% of the Company's revenues. On September 1,
2001, Lucent transitioned a segment of their manufacturing operations at
Columbus, Ohio to Celestica. Celestica is based in Toronto, Canada. On September
1, 2001 Lucent also transferred most of their open purchase orders with the
Company to Celestica. In 2001, Lucent's revenue also includes revenue shipments
to Celestica. The loss of, or a substantial reduction in or change in the mix of
orders from, Celestica International or Westell, Inc. would have a material
adverse effect on the Company's results of operations and financial condition.
The Company continues vigorously to pursue a strategy of being a source to a
broader base of customers and intends to seek to be one of a few key suppliers
rather than the sole supplier. The Company signed eleven Virtual Manufacturing
contracts in 2002, which represented approximately $7,000,000 in 2002 revenues.
As of December 31, 2002, the Company had an order backlog of approximately
$2,540,000 compared to $3,755,000 at December 31, 2001. Nearly all of the
Company's backlog is subject to cancellation or postponement without significant
penalty. The backlog at December 31, 2002 does not include expected revenues
from Virtual Manufacturing contracts. Accordingly, the Company does not believe
that this backlog is necessarily indicative of the Company's future results of
operations or prospects.
Products and Production
The Company manufactures high performance printed circuit boards and also bonds
microwave related printed circuit boards to metal carriers or pallets using a
variety of bonding techniques including a Company patented process called
Flexlink II(TM). The use of Teflon(TM) in the manufacturing of printed circuit
boards is demanding. This is so because Teflon(TM) is a thermo-plastic which, in
a cured state, exhibits a high coefficient of thermal expansion and polymeric
molecular cross-linking which makes plating circuitry difficult. Manufacturing
microwave-related circuit boards requires tolerances measured in ten thousandths
of an inch. Despite these manufacturing complexities, the Company realized a
yield of approximately 89% in 2002 compared to 88% in 2001.
Because the Company manufactures a custom, made-to-order product, there is a
minimal amount of finished goods inventory. The Company maintains raw material
inventory, primarily purchase printed circuits and metal carriers. The Company
seeks to balance its labor, materials and backlog to achieve an average of eight
weeks lead-time from placement of order to shipment of product. Production can
generally be increased rapidly to respond to increases in demand.
The Company is ISO 9002 certified. ISO 9002 is an international standard for
compliance with a manufacturing quality system that is recognized through out
the world.
During 2002, one manufacturer accounted for approximately 24% of the printed
circuit boards supplied to the Company compared to 60% in 2001 and 67% in 2000.
There are
8
numerous manufacturers of printed circuits in the world today.
However, a disruption of printed circuits could have an adverse affect on the
Company's operation. The Company believes that its relationship with principal
suppliers are good.
Product Development
The Company's product development efforts have been an important part of its
ongoing activities. The Company has developed the Flexlink(TM) process, the
bonding of materials with dissimilar coefficients of thermal expansion, and the
fusion bonding of Teflon based laminate for multi-layer circuit fabrication. The
Company was granted a patent in 1993 by the United States Patent Office for its
Flexlink(TM) process. The Company developed an enhanced version called Flexlink
II(TM) in 1996.
The Company relies heavily on its process engineering capabilities to further
its corporate objectives. The Company's future results of operations are
dependent on its ability to continue to initiate or respond to technical changes
and to make the necessary ongoing capital investments. The Company focuses on
improving current manufacturing processes and developing new processes in
pursuit of its goal to increase quality, offer enhanced systems design
flexibility to its customers, and respond to the increasing complexity of its
customers' products.
Virtual Manufacturing
The Company out-sources the manufacture of printed circuit boards as part of its
Virtual Manufacturing process to unaffiliated manufacturers located primarily in
Far East locations. Many of these suppliers are ISO 9000 certified. The Company
believes that it maintains good business relationships with its overseas
manufacturers.
The Company does not maintain long-term purchase contracts with manufacturers
and operates principally on a purchase order basis. The Company believes that it
is not currently dependent on any single manufacturer. However, during 2002, one
manufacturer accounted for approximately 24% of the printed circuit boards
supplied to the Company. In 2001, one manufacturer accounted for approximately
60% of the printed circuit boards supplied to the Company. In 2000, one
manufacturer accounted for approximately 67% of the printed circuit boards
supplied to the Company. The Company believes that the loss of any one single
manufacturer would not have a long-term material adverse effect on the Company
because other manufacturers would be able to increase production to fulfill the
Company's requirements. However, the loss of a supplier could, in the short
term, adversely effect the Company's business until alternative supply
arrangements were secured.
The Company's purchase orders are generally made in United States dollars in
order to maintain continuity in the Company's pricing structure and to limit
exposure to currency fluctuations.
Quality assurance is particularly important to the Company and its product
shipments are required to satisfy quality control tests established by its
internal product design and engineering department. The Company typically
performs quality control inspections prior to shipment of printed circuit boards
to its customers. The Company warrants most printed circuit boards to its
customers with a money-back guarantee for printed circuit boards and components.
9
Competition
The market for the Company's products is highly competitive. The Company
competes for customers primarily on the basis of quality and on time delivery of
its products and the Company's technical support. The Company faces substantial
competition from many companies, including many that have greater financial and
other resources, broader product lines, greater customer service capabilities
and larger and more established customer bases. Alternative methods of
manufacturing microwave-related boards exist, including ceramic and thick film
technologies. Also, new materials are being introduced that are not Teflon(TM)
based and are easier to manufacture. These materials fit within existing
manufacturing capabilities of other board shops. Increased competition could
cause the Company to lose market share and/or accelerate the decline in the
prices of the Company's products. These factors could have a material adverse
effect on the Company's results of operations and financial condition.
Environmental Regulations
The Company and the industry in which it operates are subject to environmental
laws and regulations concerning, among other things, emissions into the air,
discharges into waterways, the generation, handling and disposal of waste
materials and certain record-keeping requirements. The Company periodically
generates and handles materials that are considered hazardous waste under
applicable law and contracts for the off-site disposal of these materials.
During the ordinary course of its operations, the Company has received citations
or notices from regulatory authorities that such operations may not be in
compliance with applicable environmental regulations. Upon such receipt, the
Company works with authorities to resolve the issues raised by such citations or
notices. The Company's past expenditures relating to environmental compliance
have not had a material effect on the financial position or results of
operations of the Company. The Company believes that the overall impact of
compliance with regulations and legislation protecting the environment will not
have a material effect on its future financial position or results of
operations, although no assurance can be given.
Based on information available to the Company, which in most cases includes an
estimate of liability, legal fees and other factors, a reserve for indicated
environmental liabilities has been made in the aggregate amount of approximately
$50,000. The Company spent approximately $147,000 in 2002 and approximately
$382,000 in 2001 complying with EPA regulations.
Patents
Due to rapidly changing technology, the Company believes its success depends
primarily upon the engineering, marketing, manufacturing and support skills of
its personnel, rather than upon patent protection. The Company was granted a
patent in 1993 by the United States Patent Office for its Flexlink(TM) process.
The Company developed an enhanced version called Flexlink II(TM) in 1996.
The Company was granted three patents in 1998. Two patents were granted to the
Company for a printed circuit board process using plasma spraying of conductive
metal. The plasma spraying process eliminates a significant portion of the wet
process currently used to produce printed circuit boards.
Employees
On December 31, 2002, the Company employed approximately 116 persons. The
Company closely monitors the number of employees in response to its periodic
production requirements
10
and believes it is positioned appropriately to change the number of employees as
changes in production warrant.
None of the Company's employees are represented by a labor union and the Company
has never experienced a work stoppage, slowdown or strike. The Company considers
its labor relations to be very good.
Executive Officers of the Registrant
The following is a list of Company's executive officers as of March 15, 2003:
Name Age Position
---- --- --------
Joseph A. Turek 45 Chairman and
Chief Executive Officer
Paul H. Schmitt 56 Secretary and Treasurer
Chief Financial Officer
Robert F. O'Connell 59 Chief Operating Officer
JOSEPH A. TUREK is the founder of the Company and has acted as Chairman and
Chief Executive Officer since June 1993, and has served as director of the
Company since 1988. Mr. Turek served for more than five years in various
positions at West-Tronics, Inc., a manufacturer of low frequency circuit boards
and a contract assembler of electronic products, with his last position as
President in 1987 and 1988.
PAUL H. SCHMITT joined the Company in September 1992 as Treasurer. From 1990 to
1992, Mr. Schmitt was with Reynolds Products, a Division of Alco Standard
Corporation, where he held the position of Controller. From 1983 to 1990, he
served as Controller for Garden City Envelope Company.
ROBERT F. O'CONNELL joined the Company in January 2003 as Chief Operating
Officer. From 1993 to January, 2002, Mr. O'Connell served as Vice-President
& General Manager of Northrup Grumman Interconnect Technologies, (formerly
Litton Interconnect Technologies). From 1986 to 1993, Mr. O'Connell served as
Vice-President of Operations at Altron Inc., a division of Sanmina Corporation.
Item 2. Properties
Facilities
The following table lists the manufacturing, administrative, marketing
facilities of the Company:
Lease
Location Function Square Feet Expiration Date
-------- -------- ----------- ---------------
Chicago, Illinois Manufacturing 50,000 Owned
Bensenville, Illinois Manufacturing 14,000 Owned
Bensenville, Illinois Administrative 13,000 June 30, 2005
(Subject to option
to renew for three
years)
11
The Company purchased the West Chicago facility in the fourth quarter of 200O
and began manufacturing at that facility in the fourth quarter of 2001. The
Company closed its Bensenville facilities in the third quarter of 2002 and
consolidated operations at its West Chicago facility.
The Company also has its corporate headquarters in West Chicago, Illinois.
Administration occupies approximately 5,000 square feet.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
12
PART II
Item 5. Market Price and Dividends on the Registrant's Common Equity and Related
Stockholder Matters
The Registrant's common stock is traded on the NASDAQ National Market (trading
symbol MWAV). The following table sets forth, for the calendar periods
indicated, the range of the high and low last reported sales prices of the
common stock from January 1, 2001 through December 31, 2002 as reported by the
NASDAQ.
Year Ended December 31
----------------------------------------
2001 2002
----------------- -----------------
Low High Low High
--- ---- --- ----
First Quarter $ 7.19 $14.50 $ 5.35 $ 8.10
Second Quarter 4.62 8.78 3.65 6.84
Third Quarter 3.70 7.05 0.77 3.56
Fourth Quarter 3.82 5.15 0.75 2.62
As of December 31, 2002, there were approximately 700 shareholders of record
owning the common stock of the Company.
The Company did not pay any dividends on its common stock in 2002 and intends
not to pay dividends in the foreseeable future in order to reinvest its future
earnings in the business.
Disclosure Regarding the Company's Equity Compensation Plans
The company maintains the 1992 Stock Option Plan ("1992 Plan") pursuant to which
the Company may grant equity awards to eligible persons. The material terms of
the 1992 Plan are described below.
The following table summarizes information about equity awards under the
Company's 1992 Plan as of December 31, 2002.
Weighted Number of Shares of
Number of shares of Average Common Stock
Common Stock to be Exercise Price Available for Future
Issued upon exercise of of Outstanding Issuances (excluding
Plan Category Outstanding Options* Options shares reflected in*)
- ------------- -------------------- ------- ---------------------
Equity compensation plans
approved by security holders: 412,575 $7.20 1,087,425
Equity compensation plan not
approved by security holders: ------- ----- ---------
412,575 $7.20 1,087,425
======= ===== =========
13
1992 Stock Option Plan
In 1992, the Company's Board of directors adopted the 1992 Stock Option Plan.
The Company's shareholders approved the 1992 Plan in February 1992 and approved
amendments to the 1992 Plan in June 1995 and June 1997. See exhibit 10.1 of Form
10-K for reference to the plan document, as amended.
14
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial information with
respect to the Company for each of the five years in the period ended December
31, 2002.
Year Ended December 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Statement of Operations Data:
Net sales $ 22,467,683 $ 54,824,432 $ 57,559,962 $ 11,305,643 $ 13,120,054
Gross profit (loss) (2,325,855) 10,371,594 9,888,795 1,022,662 2,433440
Operating income (loss) (8,076,667) 6,112,791 5,904,442 (1,106,419) 182,774
Income (loss) before income taxes (8,311,353) 6,268,444 5,945,268 (1,086,391) 173,923
Net income (loss) (5,027,547) 3,796,789 3,939,962 (688,905) 18,503
Weighted average shares 4,447,859 4,536,204 4,561,957 4,535,342 6,039,626
Basic earnings (loss) per share (1.13) 0.84 0.86 (0.15) 0.00
Diluted shares 4,447,859 4,565,021 4,641,805 4,535,342 6,042,422
Diluted earnings (loss) per share (1.13) 0.83 0.85 (0.15) 0.00
Balance Sheet Data:
Working capital $ 706,394 $ 8,384,609 $ 6,642,608 $ 5,446,183 $ 5,274,656
Total assets 23,327,642 28,142,718 32,390,957 15,935,799 15,753,437
Long-term debt 0 2,743,527 166,566 1,886,799 1,990,337
Stockholders' equity 12,669,322 17,754,760 14,505,976 10,475,577 11,167,648
On October 24, 2000 the Board of Directors declared a two-for-one split of its
common stock, effected in the form of a stock dividend paid on November 28, 2000
to shareholders of record on November 13, 2000. All agreements concerning stock
options in shares of the Company's common stock provide for the issuance of
additional shares due to the declaration of the stock split. All references to
the number of shares, except shares authorized, and to per share information in
the consolidated financial statements have been adjusted to reflect the stock
split on a retroactive basis.
15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
M~Wave is a value-added service provider of high performance circuit boards used
in a variety of digital and high frequency application for telecommunications
and industrial electronics applications.
M~Wave's business has been particularly challenging for the past year, due to
the downturn in the telecommunication industry and the resulting decline in
customer demand. 2002 was a year of transition for M~Wave as we have seen most
of our business move from the telecommunications industry to the industrial
electronics industry. Although the industrial electronics industry has also
experienced a downturn, this transition has allowed us to broaden our base of
customers.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that effect: (1) the reported amounts of assets and
liabilities; (2) the disclosure of contingent liabilities; and (3) the reported
amounts of sales and expenses during the reporting period. On an on-going basis,
we evaluate and update our estimates and judgments, including those related to
the collectibility of accounts receivable, realizability of inventories,
impairment of long-lived assets, and amount of warranty obligations. We base our
estimates and judgments on historical experience and on other factors that we
believe to be reasonable under the circumstances, the results of which form the
basis for our judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different conditions. We believe the following critical
accounting policies, among other policies, affect our more significant judgments
and estimates used in the preparation of our financial statements.
Revenue Recognition and Accounts Receivable
The Company recognizes revenue upon the shipment of its products to the customer
provided that the Company has received a signed purchase order, the price is
fixed, title has transferred, product returns are reasonably estimable,
collection of resulting receivable is reasonably assured, there are no customer
acceptance requirements and there are no remaining significant obligations. We
maintain an allowance for estimated product returns based on historical
experience. We also maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
This estimate is based on historical experience, current economic and industry
conditions and the profile or our customer mix. If the financial condition of
our customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required.
Inventories
Inventories are valued at the lower of cost or market value and include
materials, labor and manufacturing overhead. We write down inventory for
estimated obsolescence or unmarketability equal to the difference between the
cost of the inventory and its estimated market value based on assumptions about
future demand and market conditions. If actual future demand or market
conditions were to be less favorable than we projected, additional inventory
write-downs may be required.
Long-lived Assets
We review long-lived assets for impairment when circumstances indicate that the
carrying amount may not be recoverable. Factors which could trigger an
impairment review include significant decline in operating results relative to
historical or projected future operating results, significant changes in
16
the manner of our use of assets, changes in technology or significant negative
or economic trends. If this review indicates that the value of an asset may be
impaired, an evaluation of the recoverability of the net carrying value of the
asset over its remaining useful life is made. If this evaluation indicates that
the value of the asset is not recoverable, the net carrying value of the asset
will be reduced to the fair value and the remaining depreciation period may be
adjusted. Any such impairment charge could be significant and could have a
material adverse effect on our financial statements if and when an impairment
charge is recorded.
Warranty
We provide for the estimated cost of the product warranties at the time revenue
is recognized. The warranty obligation includes a provision based on historical
experience, as well as reserves for specific issues we identify. To the extent
actual warranty charges vary from our historical experience, revisions to the
estimated warranty liability may be required.
Other
Other significant accounting policies, not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the financial statements. Policies relating to fair value
of financial instruments, depreciation, and income taxes require judgments on
complex matters that are often subject to multiple external sources of
authoritative guidance such as the Financial Accounting Standards Board,
Securities and Exchange Commission, etc. Although no specific conclusions
reached by these authorities appear likely to cause a material change in the
Company's accounting policies, outcomes cannot be predicted with confidence.
Also see Note 2 to the Company's Consolidated Financial Statements, which
provide a summary of the Company's significant accounting policies.
Results of Operations
Listed below are the related expenses for 2002, 2001 and 2000, as a percent of
sales.
2002 2001 2000
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 110.4 81.1 82.8
------- ------- -------
Gross profit (10.4) 18.9 17.2
------- ------- -------
Operating expenses:
General and administrative 11.0 5.0 4.3
Selling and marketing 6.8 2.8 2.7
Restructuring expense 7.8 0.0 0.0
------- ------- -------
Total operating expenses 25.6 7.8 7.0
------- ------- -------
Operating income (loss) (36.0) 11.1 10.2
Interest income (expense) - net (0.6) (0.5) (0.4)
Rental income 0.0 0.3 0.4
Insurance settlement 0.0 0.0 0.1
Gain (loss) on disposal of equipment (0.4) 0.5 0.0
------- ------- -------
Total other income (expense) (1.0) 0.3 0.1
------- ------- -------
Income (loss) before income taxes (37.0) 11.4 10.3
Income tax expense (benefit) (14.6) 4.5 3.5
------- ------- -------
Net income (loss) (22.4)% 6.9% 6.8%
======= ======= =======
17
COMPARISON OF 2002 AND 2001
Net Sales
Net sales for 2002 decreased 59% to $22.5 million from $54.8 million in 2001.
The decrease in net sales is related to the telecommunication industry, which
saw demands reduced by approximately $39,700,000 from 2001 requirements. The
Company was able to offset some of the decrease in demand for telecommunication
related products by promoting its "Virtual Manufacturing business model" and
entering into the industrial electronics market. Virtual Manufacturing allows
the Company to increase its manufacturing capabilities without the brick and
mortar by using global suppliers to manufacture all types of high quality
printed circuits at much lower costs than domestic suppliers like M~Wave, Inc.
The Company developed sub-contracting relationships in 2002 and 2001 with global
suppliers to create a "Virtual Manufacturing" business. The Company begins the
process by manufacturing prototype and pre-production printed circuits at our
wholly-owned subsidiary, Poly Circuits. Then as our customer requirements
develop into higher volumes we broaden our capability by sub-contracting printed
circuits to our global partners while adding value to our customers for this
service. Added value can be in the form of supply chain management, bonding,
plating or inventory control. Virtual Manufacturing allows the Company to build
a product pipeline for our customers to handle more of their printed circuit
requirements without the brick and mortar. The Company signed contracts with
eleven new virtual manufacturing customers in 2002. Virtual Manufacturing
accounted for approximately 76% of the Company's net sales for 2002 and 90% of
the Company's net sales in 2001.
The Company's three largest customers, Celestica, Westell and Lucent, accounted
for 72% of the Company's net sales in 2002 compared to 90% in 2001. Net sales to
Celestica decreased $4,218,000 to $7,055,000 in 2002. Westell was a new customer
in 2002 with sales of $6,580,000. Net sales to Lucent decreased by $35,493,000
to $2,506,000 in 2002, of which most of the sales to Lucent related to an end of
life sale. On September 1, 2001, Lucent transitioned a segment of their
manufacturing operations at Columbus, Ohio to Celestica. Celestica is based in
Toronto, Canada. On September 1, 2001 Lucent also transferred most of their open
purchase orders with the Company to Celestica.
Gross Profit (Loss) and Cost of Goods Sold
Gross profit decreased $12,697,000 in 2002 from $10,372,000 in 2001 to
$(2,326,000) in 2002. Gross margin decreased to approximately (10%) in 2002 from
approximately 19% in 2001. The decrease in gross profit is a result of the
decrease in net sales, under utilization of the manufacturing facility, the
write-down in inventory, a drop in demand in the telecommunications industry.
The closing and consolidation of the Bensenville facility into the West Chicago
facility also allowed the Company to reduce personnel from approximately 180
employees during the second quarter of 2002 to approximately 116 employees at
year ended December 31, 2002. The reduction included both hourly and salary
employees.
During 2002, one manufacturer accounted for approximately 24% of the printed
circuit boards supplied to the Company compared to 60% in 2001. The Company has
a total reserve for inventory obsolescence of $874,000 at December 31, 2002 and
$2,027,000 at December 31, 2001. Substantially all of the reserve for inventory
obsolescence is related to specific inventory. The inventory obsolescence
reserve requires the use of estimates. The Company believes the techniques and
assumptions used in establishing the reserve is appropriate. See Financial
Statement Schedules on page 39.
Operating Expenses
General and administrative expenses were $2,471,000 or 11.0% of net sales in
2002, compared to $2,722,000 or 5.0% of net sales in 2001. General and
administrative expenses consist primarily of salaries and benefits, professional
services, depreciation of office equipment, computer systems and occupancy
expenses. Payroll related expenses were down $399,000 due to a reduction in
staff and
18
bonus paid to administrative personnel. Professional services were up
approximately $129,000. The Company also expensed $289,000 in 2002 of initial
costs related to the Industrial Revenue Bond.
Selling and marketing expenses were $1,528,000 or 6.8% of net sales in 2002,
compared to $1,536,000 or 2.8% of net sales in 2001. Selling and marketing
expenses include the cost of salaries, advertising and promoting the Company's
products and the commissions paid to independent sales organizations. Payroll
related expenses were up $352,000 with the addition of two regional sales
managers and support staff. Commissions paid to independent sales organizations
were down $436,000.
Restructuring expenses were $1,752,000 or 7.8% of net sales in 2002.
Restructuring expenses include costs associated with the closing, cleanup and
the future disposition of the Bensenville facilities.
Operating Loss
Operating loss was $8,077,000 or 35.9% of net sales in 2002, compared to an
operating income of $6,113,000 or 11.1% of net sales in 2001. The change in
operating income can be summarized as follows:
Decrease in net sales ($6,122,000)
Decrease in gross margin (6,576,000)
Decrease in operating expenses (1,492,000)
-------------
Decrease in operating income ($14,190,000)
=============
Interest Income
Interest income from short-term investments was $195,000 in 2002 compared to
$112,000 in 2001.
Interest Expense
Interest expense, primarily related to new borrowings for the West Chicago
facility, was $334,000 in 2002 compared to $425,000 in 2001.
Rental income
Rental income, primarily relating to the P C Dynamics facility, was $176,000 in
2001. The Company sold the P C Dynamics facility in the fourth quarter of 2001.
Gain on disposal of fixed assets
The Company recorded a loss of $96,000 in 2002 relating to the sale of assets in
the Bensenville facility. The Company recorded a gain of $291,000 relating to
the sale of the P C Dynamics facility in the fourth quarter of 2001.
Income Taxes
The Company had an effective tax credit of 39.5% in 2002 compared to an
effective tax rate of 39.4% in 2001.
19
COMPARISON OF 2001 AND 2000
Net Sales
Net sales for 2001 decreased 5% to $54.8 million from $57.6 million in 2000. The
small decrease in net sales is related to the telecommunication industry as a
whole, which saw demands reduced by up to 50% from 2000 requirements. The
Company was able to offset the decrease in demand for telecommunication related
products by promoting its "Virtual Manufacturing business model" and entering
into the industrial electronics market. Virtual Manufacturing allows the Company
to increase its manufacturing capabilities without the brick and mortar by using
global suppliers to manufacture all types of high quality printed circuits at
much lower costs than domestic suppliers like M~Wave, Inc. The Company developed
sub-contracting relationships in 2000 and 2001 with global suppliers to create a
"Virtual Manufacturing" business. The Company begins the process by
manufacturing prototype and pre-production printed circuits at our wholly-owned
subsidiary, Poly Circuits. Then as our customer requirements develop into higher
volumes we broaden our capability by sub-contracting printed circuits to our
global partners while adding value to our customers for this service. Added
value can be in the form of supply chain management, bonding, plating or
inventory control. Virtual Manufacturing allows the Company to build a product
pipeline for our customers to handle more of their printed circuit requirements
without the brick and mortar. The Company has signed contracts with five new
virtual manufacturing customers. Virtual Manufacturing accounted for
approximately 90% of the Company's net sales for 2001 and 76% of the Company's
net sales in 2000.
The Company's three largest customers, Lucent, Honeywell and Spectrian,
accounted for 94% of the Company's net sales in 2001 compared to 95% in 2000.
Net sales to Lucent related business decreased by $2,836,000 to $49,374,000 in
2001. On September 1, 2001, Lucent transitioned a segment of their manufacturing
operations at Columbus, Ohio to Celestica. Celestica is based in Toronto,
Canada. On September 1, 2001 Lucent also transferred most of their open purchase
orders with the Company to Celestica. In 2001, Lucent's revenue also includes
revenue shipments to Celestica. Beginning in 2002, the Company reported these
revenues separately.
Gross Profit and Cost of Goods Sold
Gross profit increased $482,000 in 2001 from $9.9 million in 2000 to $10.4
million in 2001. Gross margin increased to approximately 19% in 2001 from
approximately 17% in 2000. The increase in gross profit is a result of improved
margins and the Company's decision to enter into the industrial electronics
market.
During 2001, one manufacturer accounted for approximately 60% of the printed
circuit boards supplied to the Company compared to 67% in 2000. The Company has
a total reserve for inventory obsolescence of $2,027,000 at December 31, 2001
and December 31, 2000; substantially related to specific inventory. The
inventory obsolescence reserve requires the use of estimates. The Company
believes the techniques and assumptions used in establishing the reserve is
appropriate. Please see Financial Statement Schedules on page 39.
Operating Expenses
General and administrative expenses were $2,722,000 or 5.0% of net sales in
2001, compared to $2,458,000 or 4.3% of net sales in 2000. General and
administrative expenses consist primarily of salaries and benefits, professional
services, depreciation of office equipment, computer systems and occupancy
expenses. Payroll related expenses were down $285,000 due to a reduction in
bonus paid to administrative personnel. Depreciation expense was up $142,000
principally relating to the acquisition of the new facility in West Chicago,
Illinois. The Company also recorded a reserve of $195,000 relating to the Note
Receivable from Performance Interconnect as outlined in Liquidity and Capital
Resources.
20
Selling and marketing expenses were $1,536,000 or 2.8% of net sales in 2001,
compared to $1,527,000 or 2.7% of net sales in 2000. Selling and marketing
expenses include the cost of salaries, advertising and promoting the Company's
products and the commissions paid to independent sales organizations. There was
very little change in selling and marketing expenses.
Operating Income
Operating income was $6,112,000 or 11.1% of net sales in 2001, compared to
$5,904,000 or 10.3% of net sales in 2000. The change in operating income can be
summarized as follows:
Decrease in net sales ($470,000)
Increase in gross margin 953,000
Increase in operating expenses (275,000)
----------
Increase in operating income $ 208,000
==========
Interest Income
Interest income from short-term investments was $112,000 in 2001 compared to
$114,000 in 2000.
Interest Expense
Interest expense, primarily related to new borrowings for the West Chicago
facility, was $425,000 in 2001 compared to $339,000 in 2000.
Rental income
Rental income, primarily relating to the P C Dynamics facility, was $176,000 in
2001 compared to $204,000 in 2000. The Company sold the P C Dynamics facility in
the fourth quarter of 2001.
Insurance Settlement
The Company recorded a one-time gain of $62,000 in 2000 relating to the fire at
the PC Dynamics facility in 1994.
Gain on disposal of fixed assets
The Company recorded a gain of $291,000 in 2001 relating to the sale of the P C
Dynamics facility in the fourth quarter of 2001.
Income Taxes
The Company had an effective tax rate of 39.4% in 2001 compared to 33.7% in
2000. The increase relates to the usage of tax credits and net operating loss
carry forward in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided (used) by operations was $1,566,000, $11,410,000 and
$(5,673,000) in 2002, 2001 and 2000, respectively. Inventories increased
$193,000 at year ended December 31, 2002, due to an increase in Virtual
Manufacturing sales. Accounts receivable was down $7,773,000 due to decreased
sales in the fourth quarter of 2002 compared to the fourth quarter of 2001. Days
of sales outstanding is at 51 days, 58 days and 45 days at December 31, 2002,
2001 and 2000, respectively. Depreciation and amortization in 2002 was
$1,446,000, up $79,000 due to the capital equipment purchased for the new
facility in West Chicago, Illinois. Accounts Payable was up $595,000 due mainly
to increased purchases in the fourth quarter of 2002 compared to the fourth
quarter of 2001.
21
Purchases of property, plant and equipment were $2,997,000, $7,558,000, and
$2,421,000 in 2002, 2001 and 2000, respectively. The Company purchased a new
facility in 2000 at a cost of approximately $1,600,000. Capital expenditures
relating to the new West Chicago Facility were $2,856,000 in 2002 and $6,374,000
in 2001. The Company plans to spend approximately $300,000 in 2003 on capital
expenditures mainly relating to the new facility in West Chicago. The
expenditures were partially financed through borrowings of approximately
$2,320,000 and cash provided by operations.
On November 13, 2001, the Company sold its facility located in Frisco, Texas.
The Company received $2,388,000 from the sale of the facility. $1,445,000 was
used to satisfy the debt associated with the facility and $943,000 was used to
reduce credit line debt at the time of the sale.
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 February 28, 2003 was approximately 1.39%. The term of the
loan is 20 years. The outstanding balance as of December 31, 2002 was
$4,910,000. 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 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
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. The
outstanding balance of the debt is approximately $4,907,000 as of March 14,
2003. 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. A copy of the Forbearance
Agreement is filed as Exhibit 10.11 to this Annual Report on Form 10-K and is
hereby incorporated by reference.
22
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 expects to satisfy the terms of the Forbearance Agreement by
depositing in the Sinking Fund account $1.5 million out of an anticipated
Federal tax refund in April of approximately $3.0 million and $500,000 of
anticipated state tax refunds during 2003 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 refunds 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.
The report of the independent auditors accompanying the consolidated financial
statements of this Annual Report on Form 10-K states that the foregoing matters
raise substantial doubt about the Company's ability to continue as a going
concern. See Note 3 to Consolidated Financial Statements. 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 is currently negotiating to replace short and long-term debt.
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 approximately $3.0
million in Federal tax refunds in April and $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. Based upon the current level of
operations and anticipated growth, management believes that future cash flow
from operations, the anticipated receipt of the aforementioned tax refunds,
proceeds from
23
the sale of certain fixed assets and funds from external sources of debt
financing will be adequate to meet its anticipated liquidity requirements over
the next 12 months. The Company is currently negotiating additional debt
financing. There can be no assurances that such debt financing will be available
on commercially reasonable terms, if at all. Any such debt financing 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 Company's operations and access to external sources of
financing will continue to provide resources sufficient to service the Company's
indebtedness after satisfying liabilities arising in the ordinary course of
business.
The Company has an installment loan of $108,000 collateralized by certain fixed
assets of the Company. Interest on this loan is at the prime rate (4.25% at
December 31, 2002). The loan is payable in monthly installments of principal and
interest and is due October 2004.
On December 18, 1998, the Company repurchased 1,563,928 shares of its common
stock owned by First Chicago Equity Corporation (""FCEC") and its affiliates.
The aggregate consideration paid by the Company consisted of $781,964 plus
warrants to purchase up to 1,563,928 shares of the Company's common stock with
an exercise price of $0.50 per share (increasing by $0.025 per share each
anniversary date of the warrants). The warrants are exercisable only if the
Company engages in an extraordinary transaction (e.g., a merger, a
consolidation, combination or dissolution) within five years of the issue date
of the warrants.
On March 25, 1999, PC Dynamics Corporation, a wholly owned subsidiary of the
Company, sold substantially all of its machinery and equipment, inventory and
accounts receivable and assigned substantially all of its outstanding contracts
and orders to Performance Interconnect Corp., a Texas Corporation ("PIC"). The
purchase price paid by PIC consisted of:
(i) $893,319 Cash
(ii) a promissory note in the principal amount of $773,479, which is
payable in nine (9) equal monthly installments commencing on July
1, 1999.
(iii) a promissory note in the principal amount of $293,025, which is
payable in monthly installments of $50,000 commencing on May
1,1999 until paid. The Company has collected the full amount of
this note.
PC Dynamics and PIC also entered into a royalty agreement which provides for PIC
to pay PC Dynamics a royalty equal to 8.5% of the net invoice value of certain
microwave frequency components and circuit boards sold by PIC for eighteen
months following the closing. PIC shall not be required to pay P C Dynamics in
excess of $500,000 in aggregate royalty payments.
In addition, PC Dynamics has leased its facility in Texas to PIC for $17,000 per
month for three years. PIC has the right under the lease to purchase the
facility from PC Dynamics for $2,000,000 at anytime during the term of the
lease. If PIC exercises its right to purchase the facility, the remaining
balance due on the royalty agreement is payable in monthly installments of
$25,000 until a minimum of $500,000 is paid.
This agreement was amended in the third quarter of 1999 whereas the Company
agreed to revise the payment schedule for Promissory Note I from 9 equal monthly
installments to 30 equal monthly installments in return for not pursuing the
purchase of the facility in Texas. The Company has collected $133,000 through
December 31, 2000. The royalty agreement was also revised to $500,000 payable in
equal monthly installments of $25,000 until paid. The Company collected $145,000
through December 31, 2000.
On November 8, 2001, Performance Interconnect (PIC) exercised its right and
purchased the facility located in Frisco, Texas per the terms of the agreement
dated March 25, 1999. The Company also amended the Promissory Note with
Performance Interconnect whereas PIC agreed to pay the
24
Company $711,649 in 29 equal monthly installments of principal and interest
(prime plus 1%) of $10,140.69 commencing December 15, 2001 with the entire
unpaid balance of principal and interest due May 15, 2004. As of December 31,
2002, the Company collected approximately $142,000 per the terms of the new
agreement.
Inflation
Management believes inflation has not had a material effect on the Company's
operation or on its financial position.
NEW ACCOUNTING STANDARDS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 addresses a variety of accounting practices. Its provisions related
to the rescission of SFAS No. 4 (Reporting Gains and Losses from Extinguishment
of Debt) are effective for fiscal years beginning after May 15, 2002. Its
provisions related to SFAS No. 13 (Accounting for Leases) are effective for
transactions occurring after May 15, 2002. All other provisions are effective
for financial statements issued on or after May 15, 2002. SFAS No. 44 was titled
"Accounting for Intangible Assets of Motor Carriers." SFAS No. 64 was titled
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements."
The Company adopted the provisions of SFAS No. 145 that were effective as of May
15, 2002. This adoption did not have a material effect on the Company's results
of operations or financial position. The Company does not expect adoption of the
provisions that are effective for fiscal years beginning after May 15, 2002, to
have a material effect on its results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." It requires recognition of costs associated
with exit or disposal activities at the time they are incurred rather than at
the date of a commitment to an exit or disposal plan. The statement is effective
for exit or disposal activities initiated after December 31, 2002. The Company
does not expect adoption of this statement to have a material effect on its
results of operations or financial position.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." It is an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. FIN
45 elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize at
the inception of a guarantee a liability for the fair value of the obligation
undertaken in issuing the guarantee. Initial recognition and measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. Disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
Company does not expect adoption of this interpretation to have a material
effect on its results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure." It amends SFAS No. 123, "Accounting
for Stock-Based Compensation," to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure requirements of SFAS No.
123 to require more prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method on reported amounts. The amendments to SFAS No. 123
in paragraphs 2(a)-2(e) were effective for financial statements for fiscal years
ending after December 15, 2002, and were adopted by the Company in 2002. This
adoption did not have a material effect on the Company's results of operations
or financial position. The amendment to SFAS No. 123 in paragraph 2(f) and the
amendment to Opinion 28 in paragraph 3 are effective for financial reports
containing condensed
25
financial statements for interim periods beginning after December 15, 2002. The
Company does not expect adoption of these portions of the statement to have a
material effect on its results of operations or financial position.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities." It is an interpretation of Accounting Research
Bulletin No. 51 and revises the requirements for consolidation by business
enterprises of variable interest entities. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest acquired before February 1, 2003. FIN 46 applies to public enterprises
as of the beginning of the applicable interim or annual period and to nonpublic
enterprises as of the end of the applicable annual period. It may be applied
prospectively with a cumulative-effect adjustment as of the date on which it is
first applied or by restating previously issued financial statements for one or
more years with a cumulative-effect adjustment as of the beginning of the first
year restated. The Company is not party to any variable interest entity. It does
not expect adoption of this interpretation to have a material effect on its
results of operations or 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. The
outstanding balance of the debt is approximately $4,907,000 as of March 14,
2003. 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. A copy of the Forbearance
Agreement is filed as Exhibit 10.11 to this Annual Report on From 10-K and is
hereby incorporated by reference.
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 expects to satisfy the terms of the Forbearance Agreement by
depositing in the sinking fund account $1.5 million out of an anticipated
Federal tax refund in April of approximately $3.0 million and $500,000 of
anticipated state tax refunds during 2003 of approximately $900,000. The
26
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 refunds and asset
sales, which are subject to factors that are beyond its 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. See also "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations-Risk Factors affecting
Business and Results of Operations-Default under Industrial Bond Debt and
- -Liquidity."
The report of independent auditors accompanying the consolidated financial
statements in this Annual Report on Form 10-K states that the foregoing matters
raise substantial doubt about the Company's ability to continue as a going
concern. See Note 3 in the Notes to the Consolidated Financial Statements. 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 approximately $3.0
million in Federal tax refunds in April and $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 revenue shortfalls and (e) the
Company's ability to access external sources of financing. Based upon the
current level of operations and anticipated growth, management believes that
future cash flow from operations, the anticipated receipt of the aforementioned
tax refunds, proceeds from the sale of certain fixed assets and funds from
external sources of debt financing will be adequate to meet its anticipated
liquidity requirements over the next 12 months. The Company is currently
negotiating additional debt financing. There can be no assurances that such debt
financing will be available on commercially reasonable terms, if at all. Any
such debt financing may require the Company to issue warrants for the Company's
common stock, which may result in significant dilution of existing stockholders'
ownership interest. In addition, the Company's ability to incur additional
indebtedness is limited by covenants in the Company's industrial bond debt.
There can be no assurances that the Company's operations and access to external
sources of financing will continue to provide resources sufficient to service
the Company's indebtedness after satisfying liabilities arising in the ordinary
course of business.
Dependence on Major Customers
The Company's three largest customers accounted for 72% of the Company's net
sales in 2002. 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,
27
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.
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;
o Price and product competition;
o Changes in mix of products we sell;
o The levels at which we utilize our manufacturing capacity;
o Our level of experience in manufacturing a particular product;
o Manufacturing process yields; and
o Raw material availability.
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 operatng 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
28
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 revocatin 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. If the minimum market value of our publicly
held shares remains below $5.0 million, the Company may be delisted from the
Nasdaq National Market which could reduce the liquidity of our common stock,
further decrease the market price of our common stock and negatively impact our
ability to obtain additional capital. The Company has until April 28, 2003 to
comply with the Nasdaq National Market listing requirements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company 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
Company's industrial bond debt at a 4.24% rate of interest.
Item 8. Financial Statements and Supplementary Data
Consolidated financial statements and the related notes for each of the three
years in the period ended December 31, 2002 are filed in response to this Item
pursuant to Item 14.
The supplementary data regarding quarterly results of operations, set forth
under the caption "Selected Quarterly Financial Data (Unaudited)" following the
aforementioned consolidated financial statements, are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
29
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required by this Item with respect to Executive Officers of the
Company is set forth in Part I, Item 4 and is incorporated herein by this
reference. Information required by this Item with respect to members of the
Board of Directors of the Company will be contained in the Proxy Statement for
the Annual Meeting of Stockholders (the "2003 Proxy Statement"), and is
incorporated herein by this reference.
Item 11. Executive Compensation
Information required by this Item will be contained in the 2003 Proxy Statement
and is incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item will be contained in the 2003 Proxy Statement
and is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
Information required by this Item will be contained in the 2003 Proxy Statement
and is incorporated herein by this reference.
30
PART IV
ITEM 14. CONTROLS AND PROCEDURES.
- ----------------------------------
(a) Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and its Chief Financial Officer, have
reviewed and evaluated the effectiveness of the Company's disclosure controls
and procedures (as defined in the Securities Exchange Act of 1934 Rules
13a-14(c) and 15d-14(c)) as of a date within 90 days of the filing date of this
annual report on Form 10-K (the "Evaluation Date"). Based on their review and
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of the Evaluation Date, the Company's disclosure controls and
procedures were adequate and effective to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known to
them by others within those entities in a timely manner, particularly during the
period in which this annual report on Form 10-K was being prepared, and that no
changes are required at this time.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the Company's internal controls
subsequent to the Evaluation Date, or any significant deficiencies or material
weaknesses in such internal controls requiring corrective actions. As a result,
no corrective actions were taken.
31
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
Page in the
Form 10-K
---------
Independent Certified Public Accountants Report 33
Consolidated Balance Sheets
December 31, 2002 and 2001 35
Consolidated Statements of Operations
Years Ended December 31, 2002, 2001 and 2000 36
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2002, 2001 and 2000 37
Consolidated Statements of Cash Flows
Years Ended December 31, 2002, 2001 and 2000 38-39
Notes to Consolidated Financial Statements 40-51
Selected Quarterly Financial Data (Unaudited) 52
Subsidiaries 61
(a) 2. Financial Statement Schedules
Allowance for Doubtful Accounts 53
Inventory Obsolescence 53
(a) 3. Exhibits
The exhibits filed herewith are set forth on the Index to Exhibits
filed as part of this report.
(b) Reports on Form 8-K
o A current report on Form 8-K was filed on October 4, 2002, disclosing
under item 5, expected third quarter 2002 revenues and other matters
o A current report on Form 8-K was filed on October 31, 2002, disclosing
under item 5, third quarter 2002 results and other matters
o A current report on Form 8-K was filed on January 10, 2003, disclosing
under item 5, expected fourth quarter 2002 revenues and other matters
32
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACOUNTANTS
Board of Directors
M~Wave, Inc.
We have audited the accompanying consolidated balance sheets of M~Wave, Inc. and
Subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2002. These financial statements
are the responsibility of the management of M~Wave, Inc. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of M~Wave, Inc. and Subsidiaries
as of December 31, 2002 and 2001, and the consolidated results of their
operations and their consolidated cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited Schedule II of M~Wave, Inc.,and Subsidiaries for the years
ended December 31, 2002, 2001 and 2000. In our opinion, this schedule presents
fairly, in all material respects, the information required to be set forth
therin.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, 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. The Company's business plan for 2003, which is also described in Note 3,
contemplates reduced operating losses, obtaining additional working capital, and
the refinancing its long-term debt. The Company's ability to achieve the
foregoing elements of its business, which may be necessary to permit the
realization of assets and satisfaction of liabilities in the ordinary course of
business, is uncertain and raises substantial doubt about its ability to
continue as a going concern. The financial
33
statements do not include any adjustments that might result from the outcome of
this uncertainty.
GRANT THORNTON LLP
Chicago, Illinois
January 30, 2003 (except for footnote No. 3 and 7, as of March 31, 2003)
34
M~WAVE, Inc. and Subsidiaries
- -----------------------------
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
- ----------------------------------------------------------------------------------------------
ASSETS 2002 2001
- ------ ---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 1,514,509 $ 2,102,784
Accounts receivable, net of allowance
for doubtful accounts:
2002 - $100,000; 2001 - $100,000 1,901,999 9,674,672
Inventories 1,756,641 1,564,008
Refundable income taxes 4,446,010 0
Deferred income taxes 748,457 1,313,644
Prepaid expenses and other assets 31,582 105,613
Restricted cash 348,731 604,489
------------ ------------
Total current assets 10,747,929 14,365,210
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements 5,522,765 7,219,799
Machinery and equipment 9,248,688 13,062,860
------------ ------------
Total property, plant and equipment 14,771,453 20,282,659
Less accumulated depreciation 2,760,441 7,836,882
------------ ------------
Property, plant and equipment - net 12,011,012 12,445,777
ASSETS TO BE DISPOSED OF 568,701 0
OTHER ASSETS 0 331,731
------------ ------------
TOTAL $ 23,327,642 $ 28,142,718
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,707,327 $ 3,112,370
Accrued expenses 1,316,579 2,336,533
Accrued income taxes 0 152,931
Current portion of long-term debt 5,017,629 1,378,767
------------ ------------
Total current liabilities 10,041,535 6,980,601
DEFERRED INCOME TAXES 616,785 663,830
LONG-TERM DEBT 0 2,743,527
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 4,456,294 shares outstanding at
December 31, 2001 30,895 30,895
Additional paid-in capital 8,439,072 8,349,072
Retained earnings 6,484,525 11,512,072
Treasury stock, at cost, 1,735,815 shares at December 31,
2002 and 1,722,815 at December 31,2001 (2,285,170) (2,227,279)
------------ ------------
Total stockholders' equity 12,669,322 17,754,760
------------ ------------
TOTAL $ 23,327,642 $ 28,142,718
============ ============
See notes to consolidated financial statements.
35
M~WAVE, Inc. and Subsidiaries
- -----------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- -------------------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
NET SALES $ 22,467,683 $ 54,824,432 $ 57,559,962
COST OF GOODS SOLD 24,793,538 44,452,838 47,671,167
------------ ------------ ------------
Gross profit (loss) (2,325,855) 10,371,594 9,888,795
OPERATING EXPENSES:
General and administrative 2,471,153 2,722,392 2,457,677
Selling and marketing 1,527,551 1,536,411 1,526,676
Restructuring expense 1,752,108 0 0
------------ ------------ ------------
Total operating expenses 5,750,812 4,258,803 3,984,353
------------ ------------ ------------
Operating income (loss) (8,076,667) 6,112,791 5,904,442
OTHER INCOME (EXPENSE):
Interest income 194,624 112,392 114,173
Interest expense (333,678) (424,661) (339,312)
Rental income 0 176,800 204,000
Insurance settlement 0 0 61,965
Gain (loss) on disposal of equipment (95,632) 291,122 0
------------ ------------ ------------
Total other income (expense), net (234,686) 155,653 40,826
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (8,311,353) 6,268,444 5,945,268
Income tax expense (benefit) (3,283,806) 2,471,655 2,005,306
------------ ------------ ------------
NET INCOME (LOSS) $ (5,027,547) $ 3,796,789 $ 3,939,962
============ ============ ============
Weighted average shares outstanding 4,447,859 4,536,204 4,561,957
============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE $ (1.13) $ 0.84 $ 0.86
============ ============ ============
Diluted shares outstanding 4,447,859 4,565,021 4,641,805
============ ============ ============
DILUTED EARNINGS (LOSS) PER SHARE $ (1.13) $ 0.83 $ 0.85
============ ============ ============
See notes to consolidated financial statements.
36
M~WAVE, Inc. and Subsidiaries
- -----------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- ----------------------------------------------------------------------------------------------------------------------
Additional Total
Common Paid-in Retained Treasury Stockholders'
Stock Capital Earnings Stock Equity
----- ------- -------- ----- ------
BALANCE
JANUARY 1, 2000 $ 30,698 $ 8,348,832 $ 3,775,321 $ (1,679,274) $ 10,475,577
============ ============ ============ ============ ============
Common stock issued:
Stock options (39,500 shares) 197 90,240 0 0 90,437
Net income 0 0 3,939,962 0 3,939,962
------------ ------------ ------------ ------------ ------------
BALANCE
DECEMBER 31, 2000 $ 30,895 $ 8,439,072 $ 7,715,283 $ (1,679,274) $ 14,505,976
============ ============ ============ ============ ============
Treasury stock purchased:
115,887 shares 0 0 0 (548,005) (548,005)
Net income 0 0 3,796,789 0 3,796,789
------------ ------------ ------------ ------------ ------------
BALANCE
DECEMBER 31,2001 $ 30,895 $ 8,439,072 $ 11,512,072 $ (2,227,279) $ 17,754,760
============ ============ ============ ============ ============
Treasury stock purchased:
13,000 shares 0 0 0 (57,891) (57,891)
Net loss 0 0 (5,027,547) 0 (5,027,547)
------------ ------------ ------------ ------------ ------------
BALANCE
DECEMBER 31,2002 $ 30,895 $ 8,439,072 $ 6,484,525 $ (2,285,170) $ 12,669,322
============ ============ ============ ============ ============
See notes to consolidated financial statements.
37
M~WAVE, Inc. and Subsidiaries
- -----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- ----------------------------------------------------------------------------------------------------------
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,027,547) $ 3,796,789 $ 3,939,962
(Gain) loss on disposal of equipment 1,361,740 (291,122) 0
Depreciation and amortization 1,446,348 1,367,276 1,058,657
Reserve for notes receivable 0 195,391 450,000
Deferred income taxes 518,142 (54,165) (190,982)
Changes in assets and liabilities:
Accounts receivable 7,772,673 2,904,094 (10,005,632)
Inventories (192,633) 7,295,787 (6,829,378)
Prepaid expenses and other assets 405,762 (334,741) (25,946)
Restricted cash 255,758 (604,489) 0
Accounts payable 594,957 (3,404,171) 4,542,474
Accrued expenses (1,019,954) 533,059 1,241,954
Income taxes (4,598,941) 6,664 146,287
------------ ------------ ------------
Net cash flows provided by (used in)
operating activities 1,516,304 11,410,352 (5,672,604)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (2,997,023) (7,558,146) (2,421,443)
Proceeds on sale of fixed assets 55,000 0 0
Proceeds from sale of PC Dynamics net property,
plant and equipment 0 2,341,376 0
------------ ------------ ------------
Net cash flows (used in) provided by
investing activities (2,942,023) (5,216,770) (2,421,443)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued upon exercise of stock options 0 0 90,437
Credit line debt 0 (5,500,000) 5,500,000
Proceeds from long-term debt 2,302,623 3,955,859 1,509,286
Purchase of treasury stock (57,891) (548,005) 0
Repayment of long-term debt (1,407,288) (3,229,651) (361,562)
------------ ------------ ------------
Net cash flows (used in) provided by
financing activities 837,444 (5,321,797) 6,738,161
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (588,275) 871,785 (1,355,886)
38
CASH AND CASH EQUIVALENTS:
Beginning of year 2,102,784 1,230,999 2,586,885
------------ ------------ ------------
End of year $ 1,514,509 $ 2,102,784 $ 1,230,999
============ ============ ============
2002 2001 2000
---- ---- ----
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 333,678 $ 424,661 $ 339,312
Income tax payments (720,000) (2,520,133) (2,050,000)
See notes to consolidated financial statements.
39
M~WAVE, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATIONS
M~Wave, Inc. ("M~Wave"), a Delaware corporation, was formed on January 31,
1992. On January 31, 1992, Poly Circuits, Inc. ("Poly Circuits") became a
wholly owned subsidiary of M~Wave through an exchange in which the former
stockholders of Poly Circuits received 100 shares of M~Wave common stock
for each outstanding share of Poly Circuits.
M~Wave, Inc., currently operating through its wholly-owned subsidiary Poly
Circuits, Inc. (the "Company"), is a value-added service provider of high
performance printed circuit boards used in a variety of telecommunications
applications for wireless and internet communications and digital
applications. M~Wave satisfies its customers needs for high performance
printed circuit boards by using its 50,000 square foot state-of-the-art
facility located in West Chicago, Illinois and by outsourcing and
coordinating the manufacture of such boards by unaffiliated manufacturers
located primarily in the Far East ("Virtual Manufacturing")
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Principles of Consolidation - The