Dang, what's going on here?
Must be the MWAV report card last week...
Looks like they are trimming fat and concentrating on meat.
I really liked this part:
Net sales to Lucent increased by $2,932,000 or 248% to $4,113,000. Net sales to Motorola
increased by $672,000 or 72% to $1,599,000. Net sales to R F Power increased by $871,000 or 657% to $1,004,000.
Doubled this morning in 7s.
Hope Tom has cleaned up the garage. <ggg>
****************
March 24, 2000
M WAVE INC (MWAV)
Annual Report (SEC form 10-K)
Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Listed below are the related expenses for 1999, 1998 and 1997 as a percent of sales.
1999 1998 1997
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 91.0 81.5 83.8
------ ------ ------
Gross profit 9.0 18.5 16.2
------ ------ ------
Operating expenses:
General and administrative 13.4 12.5 13.8
Selling and marketing 5.4 4.6 6.1
Impairment of building and equipment 0.0 0.0 15.6
Goodwill impairment charge 0.0 0.0 4.0
Write-off of note receivable 0.0 0.0 2.8
------ ------ ------
Total operating expenses 18.8 17.1 42.3
------ ------ ------
Operating income (loss) (9.8) 1.4 (26.1)
Interest income (expense) - net 0.0 (0.3) (0.4)
Rental income 1.4 0.0 0.0
Gain (loss) on disposal of equipment (1.2) 0.2 (0.6)
------ ------ ------
Total other income (expense) 0.2 (0.1) (1.0)
------ ------ ------
Income (loss) before income taxes (9.6) 1.3 (27.1)
Income tax expense (benefit) (3.5) 1.2 (8.2)
------ ------ ------
Net income (loss) (6.1)% 0.1% (18.9)%
====== ====== =======
COMPARISON OF 1999 AND 1998
Net Sales -
Net sales for 1999 decreased 13% to $11.3 million from $13.1 million in 1998. The decrease in sales was due to Company
selling off substantially all of the assets of P C Dynamics Corporation. Net sales of P C Dynamics declined $3,713,000. Net
sales to Spectrian decreased by $3,318,000 or 69% to $1,471,000. Many of products produced for Spectrian are now
manufactured off-shore. Net sales to Lucent increased by $2,932,000 or 248% to $4,113,000. Net sales to Motorola
increased by $672,000 or 72% to $1,599,000. Net sales to R F Power increased by $871,000 or 657% to $1,004,000.
The Company's three largest customers accounted for 64% of the Company's net sales in 1999 compared to 60% in 1998.
Gross Profit and Cost of Goods Sold -
Gross profit decreased $1.4 million in 1999 from $2.4 million in 1998 to $1.0 million in 1999. Gross margin decreased to
approximately 9% in 1999 from approximately 19% in 1998. Part of the difference ($718,000) was the result of the Company
selling off substantially all of the assets of P C Dynamics Corporation. Gross margin for the remainder of the Company
decreased approximately
$621,000 due to manufacturing inefficiencies caused by start-up orders with a major customer and rework of products
scrapped in the manufacturing process. The Company experienced excessive scrap and rework costs of $230,000 in the
second quarter of 1999 relating to Lucent start-up orders. Future production problems would adversely impact the Company's
gross margins and profitability, which would also result in decreased liquidity and adversely affect the Company's financial
position.
Teflon based laminate is the largest single component of the Company's cost of goods sold, representing 18.0% and 18.8% of
net sales during 1999 and 1998, respectively. The Company did not experience significant changes in the cost of Teflon based
laminate during 1999 and 1998. During 1999 and 1998, one manufacturer accounted for approximately 41% and 66%,
respectively, of the Teflon based laminate supplied to the Company.
Operating Expenses
General and administrative expenses were $1,519,000 or 13.4% of net sales in 1999, compared to $1,635,000 or 12.5% of
net sales in 1998. 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 $267,000
due to the Company selling off substantially all of the assets of P C Dynamics Corporation. Depreciation and Amortization was
up $62,000.
Selling and marketing expenses were $610,000 or 5.4% of net sales in 1999, compared to $616,000 or 4.7% of net sales in
1998. Selling and marketing expenses include the cost of salaries, advertising and promoting the Company's products and the
commissions paid to independent sales organizations. Commissions and expenses relating to independent sales organizations
were down $54,000 as a result of lower sales.
Operating Income
Operating loss was $1,106,000 or 9.8% of net sales in 1999, compared to a operating income of $183,000 or 1.4% of net
sales in 1998. The change in operating income can be summarized as follows:
Decrease in net sales $(337,000) Decrease in gross margin (1,074,000) Decrease in operating expenses 122,000
-----------
Decrease in operating income $(1,289,000)
===========
Interest Income -
Interest income from short-term investments was $206,000 in 1999 compared to $172,000 in 1998.
Interest Expense
Interest expense, primarily related to the Company's mortgage obligation on its P C Dynamics facility, was $212,000 in 1999
compared to $219,000 in 1998.
Rental income -
Rental income, primarily relating to the P C Dynamics facility, was $161,000 in 1999.
Gain (loss) on disposal of fixed assets -
The Company recorded a loss of $135,000 in 1999 compared to a gain of $39,000 in 1998 relating to the disposal of fixed
assets which are no longer usable in the Company's business.
Income Taxes
The Company had an effective tax credit rate of 36.6% in 1999, and an effective tax rate of 89.4% in 1998. The rate of 89.4%
in 1998 reflects changes in estimated tax refunds.
Earnings per share
In 1997, the Company adopted Statement of Financial Accounting Standards No. 128 - "Earnings per Share" ("SFAS 128").
As required by SFAS 128, all current and prior year earnings (loss) per share data have been restated to conform to the
provisions of SFAS 128.
COMPARISON OF 1998 AND 1997
Net Sales -
Net sales for 1998 decreased 21% to $13.1 million from $16.7 million in 1997. The decrease in sales was due to several
factors including a Company decision to exit low margin commodity business; shifts by customers to alternate materials and
suppliers; and the tapering off of specific customer program business as it enters the later stages in its life cycle. Net sales to
Motorola decreased by $2,194,000 or 70% to $927,000. The products produced for Motorola are maturing and their
requirements have been reduced. Net sales to Lucent increased by $102,000 or 9% to $1,181,000. Net sales to LK Products
decreased by $909,000 or 98% to $17,000. LK Products has shifted their product to an alternative material.
The decline in net sales was partially offset by an increase in net sales to Spectrian, the Company's largest customer, of
$414,000 or 9% to $4,789,000 and Rockwell of $640,000 or 52% to $1,872,000.
The Company's three largest customers accounted for 60% of the Company's net sales in 1998 compared to 52% in 1997.
Gross Profit and Cost of Goods Sold -
Gross profit decreased $0.3 million in 1998 from $2.7 million in 1997 to $2.4 million in 1998. Gross margin increased to
approximately 18% in 1998 from approximately 16% in 1997. The improvement is due to many factors. Indirect labor costs
were down approximately $550,000 mainly due to a reduction in staff in 1997. Depreciation and amortization costs were down
approximately $445,000 mainly due to the decision to write-down the assets of the P C Dynamics facility in 1997. Process
improvements and controls reduced scrap by $125,000. However, future production problems would adversely impact the
Company's gross margins and profitability, which would also result in decreased liquidity and adversely affect the Company's
financial position.
Teflon based laminate is the largest single component of the Company's cost of goods sold, representing 18.8% and 15.4% of
net sales during 1998 and 1997, respectively. The Company did not experience significant changes in the cost of Teflon based
laminate during 1998 and 1997. During 1998 and 1997, one manufacturer accounted for approximately 66% and 56%,
respectively, of the Teflon based laminate supplied to the Company.
Operating Expenses
General and administrative expenses were $1,635,000 or 12.5% of net sales in 1998, compared to $2,297,000 or 13.8% of
net sales in 1997. General and administrative expenses consist primarily of salaries and benefits, professional services,
depreciation of office equipment, computer systems and occupancy expenses. On April 15, 1996, the Company engaged a
consulting firm to provide consulting services with respect to the Company's operations, which services resulted in additional
expenses of $100,000 in 1997. The consultants completed their work with the Company in February 1997. Payroll related
expenses were down $300,000 due to staff reductions and the resignation of the Company's former president. Depreciation
and Amortization mainly relating to PC Dynamics was down $85,000.
Selling and marketing expenses were $616,000 or 4.7% of net sales in 1998, compared to $1,021,000 or 6.1% of net sales in
1997. Selling and marketing expenses include the cost of salaries, advertising and promoting the Company's products and the
commissions paid to independent sales organizations. Commissions and expenses relating to independent sales organizations
were down $313,000 as a result of lower sales. Payroll related expenses were down $79,000 due to staff reductions.
During the fourth quarter of 1997, the Company decided to reposition the P C Dynamics subsidiary located in Frisco, Texas.
Management decided the P C Dynamics subsidiary did not have a future place in the Company's strategic plans. As such,
management was actively marketing P C Dynamics for sale. In accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company
recorded a goodwill impairment charge of $670,000 in December, 1997. In December, 1997, the Company also recorded a
$2,604,448 impairment of building and equipment for the write down of the P C Dynamics building and equipment to an
estimate of market value. The building and equipment were recorded in the December 31, 1998 balance sheet as assets to be
disposed of and were recorded at market value less an estimate of selling costs. The market value was determined based on
appraisals.
For the year ended December 31, 1998 P C Dynamics' financial results included $4,485,684 of net sales and operating profits
of $378,366. For the years ended December 31, 1997 and 1996, P C Dynamics' financial results included $4,192,303 and
$4,786,726 of net sales and operating losses of $4,422,128 and $1,377,584, respectively.
In May 1995, the Company established a division which performed contract assembly work for the Company's customers.
Effective December 13, 1996, the Company sold substantially all of the assets, subject to certain liabilities, of this division to
Marquis Microwave Products for a promissory note of $1,122,000, which approximated the net book value of the assets sold
to Marquis Microwave Products. In 1996, the Company recorded a valuation allowance of $250,000 on the note.
Effective December 19, 1997, the Company consented to the transfer of assets of Marquis Microwave Products to TRL
Technologies, Inc. provided Marquis Microwave Products paid the Company $400,000. As further consideration, the
Company entered into a Royalty agreement that entitles the Company to receive royalties of 3% of net sales of products
developed by Marquis Microwave Products, subject to a maximum of $700,000. The Company also agreed that the
Promissory Note and the prior royalty agreements dated December 13, 1996 issued by Marquis Microwave Products are null
and void. In connection with this transaction the Company recorded a write-off of Note Receivable of $472,000 in December,
1997.
The Company had sustained operating losses on the Assembly Division of $1.1 million in 1996 on revenues of $463,000.
Operating income
Operating income was $183,000 or 1.4% of net sales in 1998, compared to a negative $4,360,000 or negative 26.1% of net
sales in 1997. The change in operating income can be summarized as follows:
Decrease in net sales $(579,000) Increase in gross margin 309,000 1997 Impairment of building and equipment 2,604,000
1997 Goodwill impairment charge 670,000 1997 Write off of note receivable 472,000 Decrease in operating expenses
1,067,000
--------------
Increase in operating income $4,543,000
==============
Interest Income -
Interest income from short-term investments was $172,000 in 1998 compared to $180,000 in 1997.
Interest Expense
Interest expense, primarily related to the Company's mortgage obligation on its P C Dynamics facility, was $219,000 in 1998
compared to $250,000 in 1997.
Gain (loss) on disposal of fixed assets
The Company recorded a gain of $39,000 in 1998 compared to a loss of $93,000 in 1997 relating to the disposal of fixed
assets which are no longer usable in the Company's business.
Income Taxes
The Company had an effective tax credit rate of 89.4% in 1998, and an effective tax credit rate of 30.1% in 1997. The rate of
89.4% in 1998 reflects changes in estimated tax refunds.
Earnings per share
In 1997, the Company adopted Statement of Financial Accounting Standards No. 128 - "Earnings per Share" ("SFAS 128").
As required by SFAS 128, all current and prior year earnings (loss) per share data have been restated to conform to the
provisions of SFAS 128.
LIQUIDITY AND CAPITAL RESOURCES
-
Net cash provided/(used) by operations was $(1,918,000), $1,338,000 and $2,645,000 in 1999, 1998 and 1997,
respectively. In 1999, inventories increased $1,220,000 due mainly to the sale of the P C Dynamics inventory of $773,000 and
an increased investment in work in process of $246,000. Depreciation and amortization was $1,008,000, up $237,000 in
1999 due mainly to depreciating the P C Dynamics Facility in 1999. Accounts receivable was up $1,362,000 due to increased
sales in the fourth quarter of 1999. Cash generated and cash on hand was also used for the purchase of property, plant and
equipment. Purchases of property, plant and equipment were $474,000, $277,000, and $544,000 in 1999, 1998 and 1997,
respectively. The expenditures were partially financed through borrowings of $294,000.
The Company has a line of credit from American National Bank and Trust Company of Chicago which provides for a
maximum borrowings of $2,000,000 based on 80% of eligible account receivables through May 2000 at an interest rate of
prime plus 0.5%. At December 31, 1999, no amounts were outstanding on this line.
On December 18, 1998, the Company repurchased 781,964 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 781,964 shares of the Company's common stock with an exercise price of $1.00 per share
(increasing by $0.05 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.
As of December 31, 1999, the Company has $2,248,000 of debt and $2,587,000 of cash and cash equivalents. Management
believes that funds generated from operations, coupled with the Company's cash balance and its capacity for debt will be
sufficient to fund current business operations.
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 $293,000
through December 1999.
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 $128,915 through December 31,1999. The royalty agreement was also
revised to $500,000 payable in equal monthly installments of $25,000 until paid. The Company has collected $145,000
through December 31, 1999.
Inflation -
Management believes inflation has not had a material effect on the Company's operation or on its financial position.
New Accounting Pronouncements -
Statement of Financial Standard 132 - "Disclosures of Pension information." This new Statement should have no material effect
on the Company.
Statement of Financial Standard 133 - "Reporting on Derivatives and Hedging Transactions." This new Statement should have
no material effect on the Company.
Statement of Financial Standard 134 - "Accounting for Mortgage backed Securities." This new Statement should have no
material effect on the Company.
Year 2000 Compliance
The Company has reviewed its computer and other hardware and software systems and has upgraded those systems that it has
identified as not being year 2000 compliant. These systems were upgraded either through modification or replacement.
Although the Company is not aware of any material operational impediments associated with upgrading its computer and other
hardware and software systems to be year 2000 compliant, the Company cannot make any assurances that the upgrade will be
free of defects. If any operational impediments materialize, the Company could experience material adverse consequences to its
business, financial condition and results of operations.
Year 2000 compliance may also adversely affect the Company's business financial conditions and results of operations
indirectly by causing complications to, or otherwise affecting, the operations of any one or more of its suppliers and customers.
The Company has contacted its significant suppliers and customers in an attempt to identify any potential year 2000 compliance
issues with them. The Company did not find any compliance issues.
The Company incurred approximately $86,000 through fiscal 1999 to resolve and test the Company's year 2000 compliance
issues. All expenses incurred in connection with year 2000 compliance were expensed as incurred, other than acquisitions of
new software or hardware, which was capitalized.
Foreign Currency Transactions -
All of the Company's foreign transactions are negotiated, invoiced and paid in United States dollars.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
As a supplier to microwave manufacturers, the Company is dependent upon the success of its customers in developing and
successfully marketing end-user microwave systems. The Company is currently working on several development programs for
its customers. The development of commercial applications for microwave systems and the timing and size of production
schedules for these programs is uncertain and beyond the control of the Company. There can be no assurance that these
development programs will have a favorable impact on the Company's operating results. Although management believes some
of these products and programs may ultimately develop into successful commercial applications, such developments could
result in periodic fluctuations in the Company's operating results. As a result of these considerations, the Company has
historically found it difficult to project operating results.
The Company expects that a small number of customers will continue to account for a substantial majority of its sales and that
the relative dollar amount and mix of products sold to any of these
customers can change significantly from year to year. There can be no assurance that the Company's major customers will
continue to purchase products from the Company at current levels, or that the mix of products purchased will be in the same
ratio. The loss of one or more of the Company's major customers or a change in the mix of product sales could have a material
adverse effect on the Company.
In addition, future results may be impacted by a number of other factors, including the Company's dependence on suppliers and
subcontractors for components; the Company's ability to respond to technical advances; successful award of contracts under
bid; design and production delays; cancellation or reduction of contract orders; the Company's effective utilization of existing
and new manufacturing resources; and pricing pressures by key customers.
The Company's future success is highly dependent upon its ability to manufacture products that incorporate new technology and
are priced competitively. The market for the Company's products is characterized by rapid technology advances and
industry-wide competition. This competitive environment has resulted in downward pressure on gross margins. In addition, the
Company's business has evolved towards the production of relatively smaller quantities of more complex products, the
Company expects that it will at times encounter difficulty in maintaining its past yield standards. There can be no assurance that
the Company will be able to develop technologically advanced products or that future-pricing actions by the Company and its
competitors will not have a material adverse effect on the Company's results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
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, 1999 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.
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