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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 1997.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________________ to ___________________.
Commission File Number: 0-8574
MICROWAVE POWER DEVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3622306
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
49 Wireless Boulevard
Hauppauge, New York 11788-3935
(Address of principal executive offices, including zip code)
(516) 231-1400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
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 _____.
As of November 1, 1997, there were 10,378,750 shares outstanding of the
registrant's Common Stock, $.01 par value.
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<PAGE>
MICROWAVE POWER DEVICES, INC.
INDEX
PART I -- FINANCIAL INFORMATION Page No.
- ------------------------------- --------
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets --
September 30, 1997 and December 31, 1996 ..................... 3
Consolidated Statements of Operations --
Three and nine months ended September 30, 1997 and 1996 ...... 4
Consolidated Statements of Cash Flows --
Nine months ended September 30, 1997 and 1996 ................ 5
Notes to Consolidated Financial Statements.................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 7
PART II -- OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.............................. 12
SIGNATURES.............................................................. 13
Page 2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
MICROWAVE POWER DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(unaudited) (audited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 629 $ 1,149
Accounts receivable, net of allowance for doubtful accounts of
$60 and $76, respectively ............................................... 6,571 7,482
Inventories, net ........................................................... 17,799 14,362
Prepaid expenses and other current assets .................................. 814 657
Deferred income taxes ...................................................... 1,490 345
-------- --------
Total current assets .................................................. 27,303 23,995
PROPERTY, PLANT AND EQUIPMENT, net .............................................. 8,142 8,057
INTANGIBLE ASSETS, net .......................................................... 413 369
INVESTMENT IN MARKETABLE SECURITIES AND OTHER
LONG TERM ASSETS ............................................................. 953 1,015
DEFERRED INCOME TAXES ........................................................... 4,256 5,454
-------- --------
$ 41,067 $ 38,890
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt........................................... $ 650 $ 45
Accounts payable ........................................................... 5,915 5,103
Accrued liabilities ........................................................ 2,820 2,696
-------- --------
Total current liabilities ............................................. 9,385 7,844
-------- --------
LONG-TERM DEBT .................................................................. 13,029 12,744
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares authorized;
no shares issued or outstanding ......................................... -- --
Common stock, $.01 par value; 25,000,000 shares authorized;
10,378,750 and 10,375,000 shares issued and outstanding, respectively ... 104 104
Additional paid-in capital ................................................. 23,306 23,276
Notes receivable from shareholders ......................................... (187) (225)
Retained earnings (accumulated deficit) .................................... (4,570) (4,853)
-------- --------
Total shareholders' equity ............................................ 18,653 18,302
-------- --------
$ 41,067 $ 38,890
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
Page 3
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MICROWAVE POWER DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
--------------------------- ---------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES .................................. $ 13,970 $ 11,449 $ 36,204 $ 33,727
COST OF SALES .............................. 10,200 13,882 26,620 31,251
-------- -------- -------- --------
Gross profit (deficit) ........... 3,770 (2,433) 9,584 2,476
-------- -------- -------- --------
OPERATING EXPENSES:
General and administrative ............ 902 720 2,664 2,488
Selling ............................... 1,187 885 2,760 2,923
Research and development .............. 1,170 1,832 2,847 5,795
-------- -------- -------- --------
3,259 3,437 8,271 11,206
-------- -------- -------- --------
Income (loss) from operations .... 511 (5,870) 1,313 (8,730)
INTEREST EXPENSE, net ...................... 317 291 931 670
OTHER EXPENSE (INCOME), net ................ 1 4 (2) 3
-------- -------- -------- --------
Income (loss) before income taxes 193 (6,165) 384 (9,403)
PROVISION (BENEFIT) FOR INCOME TAXES ....... 25 (2,466) 101 (3,761)
-------- -------- -------- --------
Net income (loss) ................ $ 168 $ (3,699) $ 283 $ (5,642)
======== ======== ======== ========
PER SHARE INFORMATION:
Net income (loss) per common share .... $ 0.02 $ (0.36) $ 0.03 $ (0.54)
======== ======== ======== ========
Weighted average common shares and
common share equivalents outstanding 10,496 10,375 10,454 10,375
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
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MICROWAVE POWER DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
----------------------------
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ............................................. $ 283 $(5,642)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization ............................ 893 893
Deferred income taxes .................................... 53 (3,788)
Loss (gain) on sale of property, plant and equipment ..... (1) 3
Changes in operating assets and liabilities:
Accounts receivable ...................................... 911 2,849
Inventories .............................................. (3,437) 1,439
Prepaid expenses and other assets ........................ (61) (271)
Accounts payable and accrued liabilities ................. 936 2,110
------- -------
Net cash used in operating activities ............... (423) (2,407)
------- -------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ............... (913) (702)
Proceeds from sale of property, plant and equipment ...... 6 15
Investment in marketable securities ...................... 4 5
------- -------
Net cash used in investing activities ............... (903) (682)
------- -------
FINANCING ACTIVITIES:
Proceeds from long-term debt ............................. 2,700 0
Principal payments of long-term debt ..................... (345) (40)
Net proceeds from (repayments on) revolving line of credit (1,465) 3,126
Proceeds from exercise of stock options .................. 30 0
Deferred financing costs ................................. (114) 0
------- -------
Net cash provided by financing activities ........... 806 3,086
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS .............................. (520) (3)
CASH AND CASH EQUIVALENTS, beginning of year ....................... 1,149 388
------- -------
CASH AND CASH EQUIVALENTS, end of period ........................... $ 629 $ 385
======= =======
SUPPLEMENTAL DATA:
Cash paid for interest ........................................ $ 982 $ 748
======= =======
Cash paid for income taxes .................................... $ 96 $ 17
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
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MICROWAVE POWER DEVICES, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(in thousands, except share and per share data)
(unaudited)
1. Reference is made to the Notes to Consolidated Financial Statements
contained in the Company's December 31, 1996 audited consolidated financial
statements included in the Company's 1996 Annual Report and the Company's 1996
Annual Report on Form 10-K filed with the SEC on March 28, 1997. In the opinion
of Management, the interim unaudited financial statements included herein
reflect all adjustments necessary, consisting of normal recurring adjustments,
for a fair presentation of such data on a basis consistent with that of the
audited data presented therein. The consolidated results of operations for
interim periods are not necessarily indicative of the results to be expected for
a full year.
2. Earnings per share for the three and nine months ended September 30,
1997 includes the dilutive effect of 119,685 and 78,782 weighted average
outstanding options, respectively; they do not include the impact of other
outstanding options as the effect of their inclusion would be anti-dilutive.
Earnings per share for the three and nine months ended September 30, 1996
do not include the impact of outstanding options as the effect of their
inclusion would be anti-dilutive.
3. The following stock options were granted, cancelled or exercised during
the third quarter of 1997 under either the 1995 or 1996 Stock Option Plans:
Granted Cancelled Exercised
------- --------- ---------
16,500 @ $ 9.50 2,715 @ $ 2.875 3,750 @ $ 8.00
4,125 @ $ 8.00
5,000 @ $ 9.50
375 @ $10.75
4. Recently Issued Accounting Standards
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". This
statement establishes standards for computing and presenting earnings per share
("EPS"), replacing the presentation of currently required primary EPS with a
presentation of Basic EPS. For entities with complex capital structures, the
statement requires the dual presentation of both Basic EPS and Diluted EPS on
the face of the statement of operations. Under this new standard, Basic EPS is
computed based on weighted average shares outstanding and excludes any potential
dilution; Diluted EPS reflects potential dilution from the exercise or
conversion of securities into common stock or from other contracts to issue
common stock and is similar to the currently required fully diluted EPS. SFAS
No. 128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods, and earlier application is not
permitted. When adopted, the Company will be required to restate its EPS data
for all prior periods presented. The Company does not expect the impact of the
adoption of this statement to be material to previously reported EPS amounts.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Overview
Microwave Power Devices, Inc. ("Microwave Power Devices" or the "Company")
commenced operations in 1967. During the past 30 years, the Company has
designed, manufactured and marketed high power, solid-state, radio frequency
("RF") and microwave power amplifiers and related subsystems for military,
medical, satellite and, most recently, wireless telecommunications applications.
The Company historically has been dependent upon the military market as its
principal source of revenue. In 1992, as the military market was declining, the
Company increased the scope of its business and entered commercial markets,
thereby broadening its product offerings. The Company now develops precision
high-power amplifiers for a variety of commercial uses.
Forward-Looking Statements
Certain information contained in this Quarterly Report on Form 10-Q,
including, without limitation, information appearing under Part I, Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements (within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934). Factors set forth in the Company's Annual Report on Form 10-K, filed
March 28, 1997, under Item 1, "Business - Risk Factors," together with other
factors that appear with the forward-looking statements, or in the Company's
other Securities and Exchange Commission filings, including its Registration
Statement on Form S-1 dated September 29, 1995, could affect the Company's
actual results and could cause the Company's actual results to differ materially
from those expressed in any forward-looking statements made by, or on behalf of,
the Company in this Quarterly Report on Form 10-Q.
Results of Operations --
Third Quarters Ended September 30, 1997 and September 30, 1996
Net Sales. Net sales increased by 22% to $14.0 million in the third quarter
of 1997 from $11.4 million in the third quarter of 1996. This sales increase was
primarily due to higher shipments of the Company's commercial products partially
offset by lower shipments of the Company's military products. Sales of
commercial products increased by 41% to $11.3 million in the third quarter of
1997 from $8.0 million in the third quarter of 1996, representing 81% and 70%,
respectively, of net sales in such periods. The commercial sales increase was
predominantly due to higher shipments to a domestic wireless telecommunications
OEM and a satellite communications OEM, partially offset by lower shipments to a
foreign wireless telecommunications OEM. Sales of military products decreased by
23% to $2.7 million in the third quarter of 1997 from $3.4 million in the third
quarter of 1996, representing 19% and 30%, respectively, of net sales in such
periods. The military sales decrease was predominantly due to lower market
demand for various Republic products.
International sales decreased by 31% to $4.8 million in the third quarter
of 1997 from $6.9 million in the third quarter of 1996, totaling 34% of net
sales in the third quarter of 1997 compared to 61% in the third quarter of 1996.
The decrease in international sales was predominantly due to lower foreign
wireless telecommunications OEM business and lower foreign shipments of Republic
products. In the third quarter of 1997, sales to two domestic commercial OEMs
(Customer B and Customer D) and a foreign commercial OEM (Customer A) accounted
for 32%, 15% and 26%, respectively, of the Company's net sales. In the third
quarter of 1996, sales to a foreign commercial OEM (Customer A) and a domestic
commercial OEM (Customer B) accounted for 40% and 16%, respectively, of the
Company's net sales.
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Gross Profit. Gross profit improved by 255% to $3.8 million in the third
quarter of 1997 from $(2.4) million in the third quarter of 1996. The Company's
gross profit margin (gross profit as a percentage of net sales) also improved to
27.0% in the third quarter of 1997 from (21.3)% in the third quarter of 1996.
The increase in gross profit and gross profit margin was primarily due to the
non-recurrence of the third quarter 1996 $4.9 million write-off of wireless
multi-channel work-in-process inventory caused by the then diminished demand for
those particular products and $0.7 million write-off of wireless single channel
work-in-process inventory caused by a domestic commercial OEM's decision to
internally manufacture amplifiers for the production portion of their PCS-TDMA
program. In addition, the following factors adversely affected the Company's
gross profit margin for the third quarter of 1997: (i) the overall low gross
profit margin obtainable on the Company's wireless multi-channel product line
(the result of competitive pricing pressures), (ii) engineering and
manufacturing difficulties experienced on the pre-production phase of a new
wireless product and (iii) a lower than anticipated gross profit on a Republic
military program (due to technical difficulties encountered).
Certain of the Company's inventory costing techniques involve developing a
standard cost which estimates the average, or standard, cost per unit over the
extended life cycle of a product. Such costs include labor, material, other
direct costs and related overheads. If the extended life cycle of a product does
not materialize or if there is no reasonable certainty that product maturation
will take place within the near future, write-offs of work-in-process inventory
would be required. Such write-offs could materially adversely affect the
Company's gross profit and results of operations.
Certain of the purchase orders or contracts comprising backlog at September
30, 1997 set forth product specifications not yet achieved by the Company that
would require the Company to complete additional product development. Failure to
develop products meeting such specifications could lead to the cancellation of
the related purchase orders or contracts. The reduction, delay or cancellation
of orders or contracts from one or more significant customers could materially
adversely affect the Company's business, financial condition and results of
operations.
There can be no assurances that gross profit will continue to improve. If
the Company is not able to reduce its production costs to the extent
anticipated, or to introduce new products with higher margins, and if average
selling prices decline beyond current expectations, the Company's gross profit
and results of operations could be materially adversely affected. The Company's
gross profit may also be affected by a variety of other factors, including the
mix of systems and equipment sold; production, reliability or quality problems;
and price competition.
General and Administrative Expenses. General and administrative expenses
increased by 25% to $0.9 million in the third quarter of 1997 from $0.7 million
in the third quarter of 1996, representing 6.4% and 6.3%, respectively, of net
sales. This increase was primarily due to the Company-wide upgrade of computer
hardware and software and data processing equipment.
Selling Expenses. Selling expenses increased by 34% to $1.2 million in the
third quarter of 1997 from $0.9 million in the third quarter of 1996,
representing 8.5% and 7.7%, respectively, of net sales. This increase resulted
primarily from higher bid and proposal expenses (incurred in connection with a
$12.0 million foreign military order awarded in the third quarter of 1997),
higher sales representative commissions (the result of higher overall sales
volume), higher advertising, trade show and travel expenses (incurred in
connection with the first time attendance at a second major wireless trade show)
and a higher accrued warranty expense.
Research and Development Expenses. Research and development expenses
decreased by 36% to $1.2 million in the third quarter of 1997 from $1.8 million
in the third quarter of 1996, representing 8.4% and 16.0%, respectively, of net
sales. The decrease in research and development expenses resulted primarily from
reduced military product development efforts and, to a lesser extent, reduced
wireless telecommunications product development efforts. Military research and
development expenses decreased predominantly as a result of the Company shipping
initial hardware to a foreign military OEM, late in 1996, for a Republic MRES
2000 simulator product. In the military environment, customer funding of product
development costs is typical. The Republic MRES 2000 program was an exception,
however, as the Company funded a large majority of this product development
effort throughout 1996. The Company believes that the continued introduction of
new products is
Page 8
<PAGE>
essential to its competitiveness, especially in the wireless telecommunications
market, and is committed to continued investment in research and development.
Interest Expense. Interest expense remained relatively stable at $0.3
million in both the third quarters of 1997 and 1996.
Provision for Income Taxes. The Company's effective tax rate decreased to
13.0% in the third quarter of 1997 from 40.0% in the third quarter of 1996. The
1997 rate was favorably impacted by the partial recovery of a previously
reserved deferred tax asset. Without the benefit of this change in the reserve,
the effective tax rate for the third quarter of 1997 would have been 40.0%. The
Company will continue to assess its reserved deferred tax assets each reporting
quarter. The 1996 rate was due to the then anticipated full year 1996 net loss,
the benefit of which the Company expects to utilize to offset future taxable
income, as prescribed by FAS 109. There can be no assurances, however, that the
Company will continue to experience taxable income in the future.
Nine Months Ended September 30, 1997 and September 30, 1996
Net Sales. Net sales increased by 7% to $36.2 million in the first nine
months of 1997 from $33.7 million in the first nine months of 1996. This sales
increase was primarily due to higher shipments of the Company's commercial
products. Sales of commercial products increased by 9% to $27.2 million in the
first nine months of 1997 from $24.9 million in the first nine months of 1996,
representing 75% and 74%, respectively, of net sales in such periods. The
commercial sales increase was predominantly due to higher shipments to a
domestic wireless telecommunications OEM and a satellite communications OEM,
partially offset by lower shipments to a foreign wireless telecommunications
OEM. Sales of military products increased by 2% to $9.0 million in the first
nine months of 1997 from $8.8 million in the first nine months of 1996,
representing 25% and 26%, respectively, of net sales in such periods. The
military sales increase was predominantly due to greater market demand for
various MPD amplifier products.
International sales decreased by 38% to $10.1 million in the first nine
months of 1997 from $16.2 million in the first nine months of 1996, totaling 28%
of net sales in the first nine months of 1997 compared to 48% in the first nine
months of 1996. The decrease in international sales was predominantly due to
lower foreign wireless telecommunications OEM business, partially offset by
higher Republic foreign military business. In the first six months of 1997,
sales to two domestic commercial OEMs (Customer B and Customer D) and a foreign
commercial OEM (Customer A) accounted for 31%, 16% and 18%, respectively, of the
Company's net sales. In the first nine months of 1996, sales to a foreign
commercial OEM (Customer A) and a domestic commercial OEM (Customer B) accounted
for 39% and 17%, respectively, of the Company's net sales.
Gross Profit. Gross profit increased by 287% to $9.6 million in the first
nine months of 1997 from $2.5 million in the first nine months of 1996. The
Company's gross profit margin (gross profit as a percentage of net sales) also
increased to 26.5% in the first nine months of 1997 from 7.3% in the first nine
months of 1996. The increase in gross profit and gross profit margin was
primarily due to the non-recurrence of the first nine months 1996 $4.9 million
write-off of wireless multi-channel work-in-process inventory caused by then
diminished demand for those particular products, $1.0 million write-off of
wireless multi-channel work-in-process inventory related to the cancellation of
the remainder of the AirNet contract and $0.7 million write-off of wireless
single channel work-in-process inventory caused by a domestic commercial OEM's
decision to internally manufacture amplifiers for the production portion of
their PCS-TDMA program. In addition, the following factors adversely affected
the gross profit margin for the first nine months of 1997: (i) the overall low
gross profit margin obtainable on the Company's multi-channel product line (the
result of competitive pricing pressures), (ii) low gross profits the Company is
experiencing on three military OEM contracts (the result of production delays,
technical problems and software integration difficulties), (iii) engineering and
manufacturing difficulties experienced on the pre-production phase of a new
wireless product, (iv) a higher commercial warranty expense (specifically for
the Company's multi-channel, Cellular-CDMA product) and (v) a lower than
anticipated absorption of overhead
Page 9
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expenses. It should be noted, however, that by the end of the first quarter of
1997, the majority of the technical problems encountered with the Company's
multi-channel, Cellular-CDMA product had been addressed, product returns seem to
be diminishing, product reliability appears to be improving and, accordingly,
commercial warranty expense seems to be leveling.
Certain of the Company's inventory costing techniques involve developing a
standard cost which estimates the average, or standard, cost per unit over the
extended life cycle of a product. Such costs include labor, material, other
direct costs and related overheads. If the extended life cycle of a product does
not materialize or if there is no reasonable certainty that product maturation
will take place within the near future, write-offs of work-in-process inventory
would be required. Such write-offs could materially adversely affect the
Company's gross profit and results of operations.
Certain of the purchase orders or contracts comprising backlog at September
30, 1997 set forth product specifications not yet achieved by the Company that
would require the Company to complete additional product development. Failure to
develop products meeting such specifications could lead to the cancellation of
the related purchase orders or contracts. The reduction, delay or cancellation
of orders or contracts from one or more significant customers could materially
adversely affect the Company's business, financial condition and results of
operations.
There can be no assurances that gross profit will continue to improve. If
the Company is not able to reduce its production costs to the extent
anticipated, or to introduce new products with greater margins, and if average
selling prices decline beyond current expectations, the Company's gross profit
and results of operations could be materially adversely affected. The Company's
gross profit may also be affected by a variety of other factors, including the
mix of systems and equipment sold; production, reliability or quality problems;
and price competition.
General and Administrative Expenses. General and administrative expenses
increased by 7% to $2.7 million in the first nine months of 1997 from $2.5
million in the first nine months of 1996, both representing 7.4% of net sales.
This increase was primarily due to the Company-wide upgrade of computer hardware
and software and data processing equipment.
Selling Expenses. Selling expenses decreased by 6% to $2.8 million in the
first nine months of 1997 from $2.9 million in the first nine months of 1996,
representing 7.6% and 8.6%, respectively, of net sales. This decrease resulted
primarily from lower sales representative commissions (the result of domestic
versus foreign sales mix variations) and, to a lesser extent, lower travel,
freight, advertising and trade show expenses, all of which were partially offset
by higher bid and proposal expenses (incurred in connection with a $12.0 million
foreign military order awarded in the third quarter of 1997, as well as a
generally higher level of proposal activity across all product lines).
Research and Development Expenses. Research and development expenses
decreased by 51% to $2.8 million in the first nine months of 1997 from $5.8
million in the first nine months of 1996, representing 7.9% and 17.2%,
respectively, of net sales. The decrease in research and development expenses
resulted primarily from reduced military product development efforts and, to a
lesser extent, reduced wireless telecommunications product development efforts.
Military research and development expenses decreased predominantly as a result
of the Company shipping initial hardware to a foreign military OEM, late in
1996, for a Republic MRES 2000 simulator product. In the military environment,
customer funding of product development costs is typical. The Republic MRES 2000
program was an exception, however, as the Company funded a large majority of
this product development effort throughout 1996. The Company believes that the
continued introduction of new products is essential to its competitiveness,
especially in the wireless telecommunications market, and is committed to
continued investment in research and development. The Company views the decrease
in wireless telecommunications research and development expenses (the majority
of which occurred in the first quarter of 1997) as a short term solution used to
assist in reducing costs to match corresponding reduced wireless revenue.
Fundamental to this effort was a temporary reallocation of some of the Company's
engineering and technology resources to either revenue producing or
customer-funded product development during the first quarter of 1997.
Page 10
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This action enabled the Company to leverage its other commercial and military
product lines while insuring a continued and focused emphasis on critical
wireless telecommunications development projects.
Interest Expense. Interest expense increased by 39% to $0.9 million in the
first nine months of 1997 from $0.7 million in the first nine months of 1996,
primarily reflecting increased average borrowings under the Company's credit
facility.
Provision for Income Taxes. The Company's effective tax rate decreased to
26.3% for the first nine months of 1997 from 40% in the first nine months of
1996. The 1997 rate was favorably impacted by the partial recovery of a
previously reserved deferred tax asset. Without the benefit of this change in
the reserve, the effective tax rate for the third quarter of 1997 would have
been 40.0%. The Company will continue to assess its reserved deferred tax assets
each reporting quarter. The 1996 rate was due to the then anticipated full year
1996 net loss, the benefit of which the Company expects to utilize to offset
future taxable income, as prescribed by SFAS No. 109. There can be no assurances
that the Company will continue to achieve taxable income in the future.
Liquidity and Capital Resources
In the fourth quarter of 1995, the Company successfully completed its
initial public offering ("IPO") raising net proceeds to the Company of
approximately $20.4 million from the Company's sale of 2,875,000 shares of
Common Stock, including the underwriters' over-allotment option. Since the IPO,
the Company has financed its operations and met its capital requirements through
the following two sources: (i) a credit facility and (ii) cash provided by
operating activities.
On February 13, 1997, the Company and IBJ Schroder Bank and Trust Company
("IBJ") entered into a $13.0 million credit facility consisting of a revolving
line of credit in the amount of $10.3 million and a term loan in the amount of
$2.7 million. The revolving line of credit and term loan bear interest at annual
rates equal to the prime rate plus 1.0% and the prime rate plus 1.25%,
respectively. The credit facility matures in February 2000 and automatically
renews for one-year periods thereafter, unless terminated by either the Company
or IBJ. Aggregate borrowings under the revolving line of credit are limited by a
borrowing base, which is calculated as the sum of 85% of eligible accounts
receivable and 40% of eligible raw materials and work-in-process inventories
(with borrowings based on aggregate eligible inventory limited to $6.0 million).
The term loan requires a monthly paydown of $0.05 million. Therefore, at
September 30, 1997 the term loan balance was $2.4 million. The credit facility
is subject to customary covenants, including, among other things, limitations
with respect to incurring indebtedness, payment of dividends and affiliate
advances, and a provision for maintaining a certain fixed charge coverage ratio.
Operating activities used net cash of $0.4 million and $2.4 million in the
first nine months of 1997 and 1996, respectively. From December 31, 1996 to
September 30, 1997, accounts receivable decreased by $0.9 million, while
inventory and accounts payable and accrued liabilities increased by $3.4 million
and $0.9 million, respectively. The decrease in accounts receivable was
primarily due to the collection during the first nine months of 1997 of two
foreign receivables which were outstanding at December 31, 1996 and had extended
payment terms. The increase in inventory was predominantly due to a greater
work-in-process inventory on two long-term military contracts. The increase in
accounts payable and accrued liabilities was primarily the result of the second
quarter 1997 implementation of a new cash management system which created a
favorable float situation at September 30, 1997 (i.e.: checks in vendors hands
but not yet cleared). Investing activities, which consisted primarily of
equipment acquisitions, used net cash of $0.9 million and $0.7 million in the
first nine months of 1997 and 1996, respectively. Financing activities, which
consisted primarily of proceeds from long-term debt and net proceeds from the
revolving line of credit, provided net cash of $0.8 million and $3.1 million in
the first nine months of 1997 and 1996, respectively.
Capital expenditures were $0.9 million and $0.7 million in the first nine
months of 1997 and 1996, respectively. These expenditures were funded primarily
through cash provided by beginning of year cash on-hand balances and the
Company's credit facility. Principal expenditures for the first nine months of
1997 included
Page 11
<PAGE>
upgrades to the Company's business systems' hardware and software and CAD
systems. In addition, 1997 expenditures included purchases of engineering and
manufacturing test equipment, computer equipment, manufacturing assembly
equipment and furniture and fixtures. The Company anticipates making additional
capital expenditures of $0.6 million during the remainder of 1997, including
purchases of additional engineering and manufacturing assembly and test
equipment, purchases of office equipment as well as continued upgrades to its
CAD systems and computer equipment.
As of September 30, 1997, the Company had working capital of approximately
$17.9 million, compared to approximately $16.2 million as of December 31, 1996.
Working capital as of September 30, 1997 included approximately $6.6 million and
$17.8 million in accounts receivable and inventory, respectively. The Company's
current ratio (ratio of current assets to current liabilities) as of September
30, 1997 was 2.9:1, compared with a current ratio of 3.1:1 as of December 31,
1996. As of both September 30, 1997 and December 31, 1996, the Company's debt to
equity ratio was 0.7:1.
The Company believes that cash generated from operations, amounts available
under its credit facility, and/or third party financing will be sufficient to
fund necessary capital expenditures and to provide adequate working capital for
at least the next 12 months. There can be no assurance, however, that the
Company will not require additional financing prior to such date to fund its
operations, and, if required, that such financing will be available on
commercially reasonable terms. In addition, the Company may require additional
financing after such date to fund its operations.
PART II -- OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27.1 Financial Data Schedule.
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
Page 12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROWAVE POWER DEVICES, INC.
(Registrant)
Dated: November 3, 1997 /s/ Edward J. Shubel
---------------- --------------------------
By: Edward J. Shubel
President and CEO
Dated: November 3, 1997 /s/ Paul E. Donofrio
---------------- --------------------------
By: Paul E. Donofrio
Vice President Finance/CFO
(Principal Financial and
Accounting Officer)
Page 13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from consolidated
financial statements found on the Quarterly Report on Form 10-Q, September 30,
1997, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 629
<SECURITIES> 0
<RECEIVABLES> 6,631
<ALLOWANCES> 60
<INVENTORY> 17,799
<CURRENT-ASSETS> 27,303
<PP&E> 12,578
<DEPRECIATION> 4,436
<TOTAL-ASSETS> 41,067
<CURRENT-LIABILITIES> 9,385
<BONDS> 13,029
0
0
<COMMON> 104
<OTHER-SE> 18,549
<TOTAL-LIABILITY-AND-EQUITY> 41,067
<SALES> 36,204
<TOTAL-REVENUES> 36,204
<CGS> 26,620
<TOTAL-COSTS> 26,620
<OTHER-EXPENSES> (2)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 931
<INCOME-PRETAX> 384
<INCOME-TAX> 101
<INCOME-CONTINUING> 283
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 283
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
