FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1996
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 No. 0-8574
MICROWAVE POWER DEVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3622306
(State or other jurisdiction of (I.R.S. Employer Identification)
incorporation or organization)
49 Wireless Boulevard
Hauppauge, New York 11788-3935
(Address of principal executive offices) (Zip Code)
(516) 231-1400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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
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 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. [ ]
Aggregate market value of voting stock held by non-affiliates of registrant as
of March 6, 1997: $14,206,503.
Number of shares of Common Stock outstanding as of March 6, 1997: 10,375,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement pursuant to Regulation
14A, which statement will be filed not later than 120 days after the end of the
fiscal year covered by this Report, are incorporated by reference in Part III
hereof.
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MICROWAVE POWER DEVICES, INC.
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
-----------------
Item No. Page
- -------- ----
Part I
1. Business ...................................................... 3
2. Properties .................................................... 16
3. Legal Proceedings ............................................. 16
4. Submission of Matters to a Vote of Security Holders ........... 16
Part II
5. Market for Registrant's Common Equity
and Related Stockholder Matters ............................... 17
6. Selected Consolidated Financial Data .......................... 18
7. Management's Discussion and Analysis
of Financial Condition and Results of Operations ............. 19
8. Financial Statements and Supplementary Data ................... 24
9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure ........... 24
Part III
10.Directors and Executive Officers of the Registrant ............ 25
11.Executive Compensation ........................................ 25
12.Security Ownership of Certain Beneficial Owners and Management 25
13.Certain Relationships and Related Transactions ................ 25
Part IV
14.Exhibits, Financial Statements and Reports on Form 8-K ........ 25
Signatures ................................................................ 26
Exhibit Index ............................................................. 27
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PART I
ITEM 1. BUSINESS
General
Microwave Power Devices, Inc. (the "Company") designs, manufactures and
sells highly linear power amplifiers and related subsystems to the worldwide
wireless telecommunications market. These amplifiers, which are a key component
in cellular base stations and other wireless telecommunications networks
(including personal communications services ("PCS")), increase the power of
radio frequency ("RF") and microwave signals with low distortion. The Company's
wireless telecommunications products consist of solid-state, RF and microwave,
single and multi-channel power amplifiers that support a broad range of analog
and digital transmission protocols including AMPS, CDMA, TDMA, TACS and GSM.
These products are marketed to the cellular, PCS, paging and wireless local loop
segments of the wireless telecommunications industry. The Company's largest
wireless telecommunications customers are integrated wireless telecommunications
original equipment manufacturers ("OEMs"). The Company is also pursuing
opportunities with emerging wireless telecommunications infrastructure equipment
manufacturers and service providers.
In addition to its presence in the wireless telecommunications industry,
the Company designs and manufactures high-power, solid-state amplifiers for
satellite communications and medical applications. The Company also designs and
manufactures amplifiers and other products for the military market.
The Company is capitalizing on its 29 years of experience developing power
amplifiers for the military market by transitioning that technology to
commercial applications. The Company began devoting substantial resources to the
wireless telecommunications market at the end of 1994, and has already achieved
significant market penetration. The Company has received purchase orders from
Lucent Technologies ("Lucent") and LG Information and Communications, Ltd.
("LGIC" or "Goldstar") and, as part of its business strategy, is actively
seeking to expand its business with these and other integrated wireless
telecommunications OEMs, as well as with emerging industry participants.
The Company was incorporated in Delaware in July 1991 to acquire the stock
of MPD Technologies, Inc., the Company's operating subsidiary. MPD Technologies,
Inc. was incorporated in New York in 1967.
Forward-Looking Statements
Certain information contained in this Annual Report on Form 10-K,
including, without limitation, information appearing under Part I, Item 1,
"Business," and Part II, Item 7, "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 under Part I, 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 Annual
Report on Form 10-K.
Wireless Telecommunications Industry Background
Wireless service providers compete in dynamic markets characterized by
evolving industry standards, technologies and applications. In recent years,
there has been a significant increase in the demand for wireless
telecommunications services from business and consumer users worldwide. This
trend has been driven by lower
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overall subscriber costs made possible by changes in the regulatory environment
that encourage competition and the emergence of new enabling technologies.
Wireless service providers are seeking to increase system capacity in order to
accommodate the growing number of subscribers. To increase capacity, these
service providers are investing in infrastructure equipment that provides
greater efficiency in the management of the limited spectrum licensed to them.
Cellular service has been one of the fastest growing segments of the
wireless telecommunications market. The U.S. Department of Commerce estimates
that there were approximately 87 million cellular subscribers worldwide at
year-end 1995, as compared to approximately 52 million and 33 million at
year-end 1994 and 1993, respectively. The growth in cellular communications has
required, and will continue to require, substantial investment by cellular
service providers in wireless infrastructure equipment. Moreover, intensified
competition among cellular service providers is resulting in declining costs to
end-users as well as new types of service offerings. In response to the increase
in subscribers, cellular service providers are taking steps to expand the
capacity of their existing systems, such as incorporating microcellular
networks, converting from analog to digital protocols and implementing adaptive
channel allocation.
Partially in response to concerns about the limited capacity of existing
cellular networks, the Federal Communications Commission ("FCC") began to
allocate spectrum for new wireless services in 1989. This has led to the
auctioning of spectrum for PCS, a new licensed wireless telecommunications
service. PCS proponents believe that increased competition, brought about by the
availability of additional spectrum, will significantly lower rates, leading to
an increase in demand for wireless services. PCS applications may include mobile
telephone services, personal digital services and long distance carrier bypass
of local exchange carriers.
In many developing countries, where access to the public switch telephone
network ("PSTN") by the general population is significantly less than in
developed countries, the Company believes that wireless telecommunications
systems are the most economic means to provide basic telephone service. The
expense, difficulty and time requirements of building and maintaining a cellular
network is generally less than the cost of building and maintaining a comparable
wireline network. Thus, in many less developed countries, wireless service may
provide the primary service platform for both mobile and fixed
telecommunications applications. In a wireless local loop system, channels use
radio systems instead of wireline networks to connect telephone subscribers to
the PSTN. The Company believes that the potential opportunities for wireless
telecommunications in countries without reliable or extensive wireline systems
may be even greater than in countries with developed telecommunications systems.
The Company also believes that in developed countries, market trends such as
deregulation and increased competition for subscribers are leading to the
increased use of wireless local loop systems as an alternative to the existing
wireline network.
The same factors which are driving the growth of wireless
telecommunications services and equipment sales are also creating new market
dynamics for industry participants. The Company believes that competition among
service providers for subscribers will intensify and that future market growth
will be realized primarily through the penetration of the consumer market. The
shift of the customer base from relatively high-usage, price-insensitive
business subscribers to price-sensitive consumer subscribers is expected to lead
to reduced revenue per subscriber. The Company also expects that increasing
competition for subscribers and decreasing revenue per subscriber will cause
wireless service providers to seek the most cost-effective infrastructure
available without sacrificing quality. In addition, the uncertainty surrounding
analog and emerging digital protocols provides an incentive for service
providers to minimize platform and protocol selection risk. These changing
market conditions, the emergence of open hardware standards and protocols, and
new market entrants in the form of PCS providers create an opportunity for new
equipment suppliers to emerge.
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Power Amplification
Given the large expenditures associated with wireless telecommunications
infrastructure equipment, those wireless service providers that are able to
increase the efficiency and lower the cost of new and existing systems, while
improving reliability, will be positioned to compete most effectively. The
Company believes that the following five factors must be addressed by amplifier
manufacturers in order to compete effectively in this evolving market:
o Linearity. Wireless service providers' ability to manage scarce
spectrum resources more effectively and accommodate a larger number of
subscribers is largely dependent on their ability to broadcast signals
with high linearity, which pertains to the ability of a component to
amplify a wave form without altering its characteristics in
undesirable ways. Linear amplifiers allow signals to be amplified
without introducing spurious emissions that might interfere with
adjacent channels. Higher linearity increases the capacity of cellular
systems by enabling a more efficient use of digital transmission
technologies, microcellular architectures and adaptive channel
allocation. In current cellular systems, the power amplifier is
generally the source of the greatest amount of signal distortion.
Consequently, obtaining power amplifiers with high linearity is
critical to wireless service providers' ability to improve spectrum
efficiency.
o Analog to Digital Transition. Traditional cellular systems, which are
based on analog technology, are capable of carrying only one call per
channel. Such systems are being supplanted by digital systems, which
allow a given channel to carry multiple calls simultaneously thereby
increasing system capacity. In addition, in order to maintain
compatibility with existing analog subscriber equipment while
converting their systems to a digital platform, many wireless service
providers in the United States are installing dual mode systems that
support both digital and analog technologies simultaneously.
o Multiple Protocols. Current and emerging wireless networks throughout
the world utilize different protocols. In order to address the needs
of OEMs and service providers, design and development efforts must
result in amplifiers that can be used for each specific protocol.
Current analog protocols include AMPS, TACS and NMT, and current
digital protocols include CDMA, TDMA and GSM. Digital protocols that
are being utilized in emerging PCS systems include CDMA, TDMA and GSM.
o Multi-Channel Functionality. Single channel amplifiers require a
separate power amplifier and cavity filter for each channel.
Multi-channel power amplifiers allow for the simultaneous
amplification of all channels within a base station. Multi-channel
power amplifiers require significantly higher linearity compared to
single channel designs, but do not require separate, high-maintenance,
tunable cavity filters. This architecture allows less space to be
allocated to the amplifier in the base station, while also reducing
deployment and maintenance costs. In addition, multi-channel
amplification functionality enables adaptive channel allocation which
instantaneously allocates unused channels between cell sites in order
to increase system capacity.
o Reliability and Low Maintenance. The Company believes that the power
amplifier in cell sites historically has been the single most common
point of equipment failure in wireless telecommunications networks.
Increasingly reliable power amplifiers, therefore, will improve the
level of service offered by wireless service providers, while reducing
their operating costs. In addition, multi-channel amplifiers eliminate
the need for high-maintenance, tunable cavity filters, which should
further reduce costs.
By drawing on its experience in producing high-quality, custom amplifiers
for the military market, the Company has developed the technical capabilities to
achieve high linearity in its amplification products. The Company has developed
products that support a number of existing analog and digital protocols, and is
continuing to develop new products for other protocols. Certain of the Company's
products support both analog and digital protocols in a dual mode format. The
Company has also developed and is supplying multi-channel amplification
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products that integrate the functions of multiple power amplifiers and cavity
filters into a single smaller unit. The Company has consistently manufactured
highly reliable amplifiers that conform to stringent military specifications and
effective March 25, 1996, the Company obtained ISO 9001 certification, which the
Company believes will ensure even greater process and quality control.
The Company uses CAE/CAD and computer-aided modeling, solid-state device
physics, advanced signal processing techniques and digital control systems in
the development of its products. The Company designs amplifiers to be
manufactured in high volumes at low cost. The integration of the Company's
design and production processes is a key element in the Company's ability to
address wireless telecommunications OEMs' quantity and time to market
requirements for power amplification products.
Strategy
The Company's objective is to be one of the leading independent suppliers
of highly linear power amplification products to wireless telecommunications
OEMs. The Company's strategy incorporates the following key elements:
Leverage Existing Technological Expertise to Commercial Markets. The
Company has 29 years of engineering experience in the design and production of
power amplifiers for the military market. The Company believes that it has
compiled one of the most extensive design libraries in the solid-state, high
power amplifier industry. The Company intends to continue to adapt its expertise
to various commercial market applications and new product requirements.
Increase Penetration of Leading Integrated Wireless Infrastructure
Equipment Manufacturers. The Company has developed relationships with certain
large integrated wireless telecommunications OEMs, principally with Lucent and
LGIC. The Company seeks to capitalize on its existing customer relationships and
become a more significant source of its customers' amplifiers. The Company
believes it can achieve this objective by working closely with OEM customers to
develop insight into their amplification product requirements and to design
products that meet their specific needs.
Develop Relationships with Emerging Wireless Infrastructure Equipment
Manufacturers. The Company anticipates that emerging wireless infrastructure
equipment manufacturers will make contributions to the growth of the wireless
telecommunications industry, especially in the wireless local loop sector. The
Company believes that its multi-channel power amplifiers will assist these
equipment manufacturers in providing high capacity, low cost per channel
products and continues to sell amplifiers to several emerging wireless
infrastructure equipment manufacturers.
Develop Products for Multiple Protocols. The Company intends to continue to
invest resources in the research and development of new products for various
protocols. For cellular systems, the Company currently supports the AMPS, TACS
and CDPD analog protocols, and the CDMA, TDMA and GSM-900 digital protocols. For
PCS systems, the Company currently supports CDMA, TDMA, DCS-1800 and PCS-1900
digital protocols. In addition, the Company is continuing to develop products
that incorporate protocols which the Company believes will address the needs of
established and emerging wireless systems. The Company believes the development
of products for multiple protocols will enable the Company to benefit from the
continuing growth of existing wireless systems and other emerging wireless
telecommunications markets while reducing the risks associated with relying on
the success of one or a limited number of existing or emerging industry
protocols.
Target Development to Meet Customer Requirements. The Company focuses its
development efforts on markets where it anticipates there to be emerging demand.
The Company coordinates its marketing and development functions by producing
prototypes for these targeted markets toward the goal of being one of the early
suppliers to meet emerging customer requirements.
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Provide Support from Product Design through Installation and Operation. The
Company works with its customers throughout the design process to assist them in
refining and developing their amplifier specifications. Once the specifications
have been met and the product delivered, the Company continues to provide
technical support to facilitate system integration, start-up and continued
operation. By providing customer support services from the product design phase
through installation and operation, the Company believes it fosters increased
levels of customer loyalty and satisfaction.
Maintain Control of the Manufacturing Process. As part of the transition to
becoming an amplifier supplier to the wireless telecommunications market, the
Company has implemented, and continues to implement, in-house automated
manufacturing processes in order to control its production schedule. The Company
believes that this strategy will help prevent delays in product shipments as it
would maintain control over all major stages of the manufacturing process. The
Company has made the strategic decision in certain instances to select single or
limited source suppliers in order to obtain lower pricing, receive more timely
delivery and maintain quality control.
Wireless Technology
A typical cellular communications system comprises a geographic region
containing a number of cells, each with a base station, which are networked to
form a wireless service provider's coverage area. Each base station or cell site
houses the equipment that transmits and receives telephone calls to and from the
wireless subscriber within the cell and the switching office of the local
wireline telephone system. Currently, such equipment includes a series of
transceivers, power amplifiers, tunable cavity filters and an antenna. In a
single channel system, each channel requires a separate transceiver, power
amplifier and tunable cavity filter. The power amplifier within the base station
receives a relatively weak signal from the transceiver and significantly boosts
the power of the outgoing wireless signal so that it can be broadcast throughout
the cell. The radio power levels necessary to transmit the signal over the
required range must be achieved without distorting the modulation
characteristics of the signal. The signal must also be amplified with linearity
in order to remain in the assigned channel with low distortion or interference
with adjacent channels.
Conventional cell sites today are macrocells containing high power
amplifiers of 45 watts per channel which are designed to cover a geographic area
typically up to three miles in radius. With 48 channels in a typical base
station and one power amplifier per channel, a conventional analog macrocell's
capacity is typically 1,000 subscribers per cell, or approximately 20
subscribers per analog channel and power amplifier. When the number of
subscribers within the cell exceeds the capacity of the macrocell's equipment,
the cell may be split into several smaller radius microcells in order to add
capacity to a service provider's network. These microcells require less power
and less expensive equipment, but necessitate adding more base stations in the
same geographic area.
Because the radio frequencies assigned to wireless transmissions are
finite, wireless service providers continuously seek new methods of more
efficiently using frequencies in order to increase the capacity of their
networks. One such method, adaptive channel allocation, instantaneously
allocates unused channels between cell sites across a wireless network to follow
user loading patterns. Commuter density changes during rush hours and traffic
jams are examples of the dynamic nature of user loading patterns. Adaptive
channel allocation allows the wireless service provider to re-allocate unused
channels automatically from less active cell sites to busier adjacent cell sites
as the load moves. A key enabling technology for adaptive channel allocation is
multi-channel amplification, in which all channels are amplified together by a
multi-channel power amplifier rather than each channel using a separate power
amplifier. The multi-channel power amplifier allows instantaneous electronic
channel allocation. Functionally, it provides the same capability as numerous
single channel amplifiers and cavity filters but its technology permits the
amplification of 2 to 96 channels without adding hardware. Multi-channel power
amplifiers require significantly higher linearity compared to single channel
designs.
In addition to adaptive channel allocation and multi-channel amplification,
wireless service providers are transitioning from traditional analog
technologies to various digital technologies in order to increase system
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capacity and reduce the cost of wireless service. Conversion to digital
transmission is expected to allow up to 10 times as many voice conversations to
occupy the same frequency bands. Significant improvements in power amplifier
linearity permit multiple conversations on a single channel without unacceptable
channel interference.
A further trend in the development of base stations involves the transition
from narrowband to broadband capabilities. This transition is leading to the
reduction in the size of base station equipment. Size constraints are an
important consideration in urban areas, which typically represent the most
capacity constrained regions of existing cellular networks. A multi-channel
power amplifier requires less space than multiple single channel power
amplifiers, facilitating the size reduction of base stations and potentially
lowering the real estate costs associated with establishing base stations.
Products
Wireless Telecommunications. The Company designs customized products to
address the specific requirements and protocols of its OEM customers. The
Company produces single channel and multi-channel amplifiers for the wireless
telecommunications market in the 463-2000 MHz frequency bands, with peak power
ranging from 10 watts to 2000 watts. The Company's amplifiers meet linearity
requirements of applicable governmental agencies, industry standards and
customer specifications, as appropriate. The Company increases the efficiency of
its product development efforts by employing modular architectures and
configurable core technologies.
The product development cycle begins with the prototype phase, with product
typically designed for a particular customer using core technologies. The
Company usually manufactures such prototypes in the engineering lab in order to
help market its products in a timely manner. Low volume production (or the
pre-production phase) of such prototypes has not contributed a significant
amount to the Company's backlog. If customer demand for such pre-production
units is sufficient, the Company designs additional customized features and
implements high volume production methodologies. The Company believes that the
evolution to the high volume production phase from the prototype phase can be
implemented in most cases within three to six months following the decision to
proceed with high volume production methods. The following tables list the
Company's single channel and multi-channel amplifiers, within the product
development cycle, ranging from the prototype phase to pre-production units to
high-volume production products:
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<TABLE>
<CAPTION>
Single Channel Amplifiers
------------------------------------------------------------------------------------------------------------
Frequency Average Power
Protocol (MHz) (Watts)
------------------------------------------------------------------------------------------------------------
Analog Cellular:
<S> <C> <C>
AMPS 869-894 45
CDPD 869-894 45
------------------------------------------------------------------------------------------------------------
Digital Cellular:
CDMA 869-894 40/60
TDMA 869-894 20
GSM-900 935-960 45
------------------------------------------------------------------------------------------------------------
PCS:
CDMA 1930-1990 16/25/36
TDMA 1930-1990 45
DCS-1800 1805-1880 100
PCS-1900 1930-1990 100
------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Multi-Channel Amplifiers
------------------------------------------------------------------------------------------------------------
Frequency Average Power IMD** Performance
Protocol (MHz) (Watts) (Typical)
------------------------------------------------------------------------------------------------------------
Analog Cellular:
<S> <C> <C> <C>
AMPS 869-894 35/50/75/100 -60dBc
AMPS 869-894 60/100/150/200 -70dBc
N-AMPS 869-894 60/100/150/200 -70dBc
TACS 925-960/940-950 35/60/100/150/200 -60dBc
SETACS 851-866 60/100/150/200 -70dBc
ETACS 917-950 60/100/150/200 -70dBc
TACS 925-960 60/100/150/200 -70dBc
------------------------------------------------------------------------------------------------------------
Digital Cellular:
CDMA 869-894 35/50/75/100 -60dBc
CDMA 869-894 60/100/150/200 -70dBc
TDMA 869-894 35/50/75/100 -60dBc
TDMA 869-894 60/100/150/200 -70dBc
GSM 925-960 25 -65dBc
------------------------------------------------------------------------------------------------------------
PCS*:
DCS-1800 1805-1880 25/50/75/100 -60dBc
PCS-1900 1930-1990 25/50/75/100 -60dBc
CDMA 1805-1880 25/50/75/100 -60dBc
CDMA 1930-1990 15/25/50/75/100 -60dBc
TDMA 1805-1880 25/50/75/100 -60dBc
TDMA 1930-1990 25/50/75/100 -60dBc
------------------------------------------------------------------------------------------------------------
</TABLE>
* Products in the prototype phase.
** Intermodulation distortion ("IMD").
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The Company has used its technological expertise to improve the linearity
of its amplifiers by introducing various compensation techniques. Several of the
Company's single channel amplifiers include linearity correction and
compensation networks. These techniques are combined with digital automatic
error correction circuits to enhance the linearity and performance of the
Company's feed-forward amplifiers. The Company's digital processing techniques
implemented in its feed-forward products allow for simultaneous amplification of
AMPS, TDMA and CDMA channels.
The Company's wireless telecommunications amplifiers can be configured as
modules, separate plug-in amplifier units or integrated subsystems, and range in
price from approximately $500 to $30,000. A power amplifier subsystem consists
of multiple cast housings and adds signal processing to enhance linearity. The
Company's products are integrated into systems by OEM customers, and therefore
must be engineered to be compatible with industry standards and with certain
customer specifications, such as frequency, power, linearity and built-in test
(BIT) for automatic fault diagnostics.
Satellite Communications. The Company's solid-state amplifiers are
critical components in the International Maritime Satellite Organization
("INMARSAT") communications system used by commercial and military aircraft. The
INMARSAT communication link is a vast improvement over high frequency oceanic
communications and is becoming the primary communication link between ground
control and in-flight aircraft. INMARSAT allows commercial aircraft flying over
any region in the world to communicate instantaneously. In addition,
weather-related variations in communication transmissions are all but
eliminated. For passengers, INMARSAT means better and more comprehensive
in-flight voice and data service.
Medical. The Company's primary focus in the medical equipment market is the
production of microwave driver amplifiers for cancer treatment systems. The
Company's amplifiers provide the input signals at 3 GHz to a 10 megawatt, tube
driven klystron amplifier, which controls the intensity of an electron beam and
directs it to an x-ray target. The resultant radiation is then focused to
provide precisely calibrated dosages to exact cancerous locations in the body.
Military. The Company's extensive experience in military amplifiers
includes high-power jammers, communication, radar and other defense oriented
equipment. An example of a military system that incorporated one of the
Company's products was the "Worldwide Color Television" used in the Persian Gulf
War. The Company's amplifier was a primary component of that system, which
injected television and radio signals into the Iraqi communications system. The
Company continues to capitalize on this experience, both by maintaining its
military activities and by developing and producing amplifiers for commercial
applications. The Company also makes air-defense radar environment simulators,
navigational simulators and test equipment, and electronic warfare simulators.
Backlog
The Company's backlog of orders as of December 31, 1996 and December 31,
1995 was $65.0 million and $60.9 million, respectively, of which, as of December
31, 1996, approximately $25.7 million is scheduled to be shipped during the
remainder of fiscal 1997. The $65.0 million backlog as of December 31, 1996
included $8.4 million to wireless telecommunications customers, $19.6 million to
satellite communications customers, $4.1 million to medical and other commercial
customers and $32.9 million to military customers. In general, the Company
includes in its backlog only those orders for which it has accepted purchase
orders. Backlog is not necessarily indicative of future sales. Moreover, nearly
all of the Company's backlog can be cancelled at any time without penalty,
except, in some cases, for the recovery of the Company's actual costs up to the
date of cancellation. Certain of the purchase orders comprising backlog set
forth product specifications that would require the Company to complete
additional product development. A failure to develop products meeting such
specifications could lead to a cancellation of the related purchase order.
Certain of the purchase orders comprising backlog at December 31, 1996 include
product specifications not yet achieved by the Company.
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Customers, Sales and Marketing
The market for wireless infrastructure equipment is primarily concentrated
among a few companies that supply equipment to wireless service providers in
North America and overseas. The Company believes that Lucent, Ericsson,
Motorola, Nokia and Nortel supply the majority of the wireless infrastructure
equipment worldwide. These equipment manufacturers compete in high-growth,
highly competitive market segments in which technology changes rapidly and
numerous industry standards currently exist and are continuing to evolve. In
response to these market dynamics and as the performance requirements of certain
components of cellular base stations increase, many of these equipment
manufacturers are focusing on their core technologies and competencies and are
relying on independent sources for certain system components, such as power
amplifiers.
The Company sells wireless power amplification products throughout the
world to a limited number of OEM customers, including Lucent and LGIC,
principally through its direct sales organizations, as well as through its
exclusive representative network. The Company expects that sales of its products
will continue to be concentrated among a limited number of major OEM customers.
If the Company were to lose a major OEM customer or if orders by such OEM
customer were to otherwise decrease, the Company's business, financial condition
and results of operations would be materially adversely affected.
The Company uses a customer focused, team-based sales approach to satisfy
the high-power amplification needs of its OEM customers. Sales to integrated
wireless telecommunications OEMs require close account management by Company
personnel and relationships at multiple levels of its OEM customers'
organizations, including management, engineering and purchasing personnel. In
addition, the Company's amplifiers require experienced sales and engineering
personnel to match the customer's requirements to the Company's product
capabilities. The Company believes that close technical collaboration with the
OEM customer during the design and qualification phase of new communications
equipment is critical to the integration of its amplification products into the
new equipment. The Company's integrated sales approach involves a team
consisting of a senior executive, a business development specialist, members of
the Company's engineering department and, occasionally, a local technical sales
representative. This sales approach allows the Company's engineering personnel
to work closely with their counterparts at the OEM customer to assure compliance
of the product to the OEM customer's specification. The Company's executive
officers are also involved in certain aspects of the Company's relationships
with its major OEM customers and work closely with their senior managements. At
times, the Company includes a transistor supplier as part of its sales team when
working with a major OEM customer and will consider including key suppliers in
its future sales presentations. As of December 31, 1996, the Company had a
direct sales staff of eight people.
To date, the Company has sold its products overseas with the assistance of
independent sales representatives to OEM customers. The Company's sales staff
provides direction and support to the international independent sales
representatives. Sales outside of the United States represented 43%, 32% and 26%
of net sales in fiscal 1996, 1995 and 1994 respectively. Sales outside of the
United States are denominated in U.S. dollars in order to reduce the risks
associated with the fluctuations of foreign currency exchange rates.
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Manufacturing
The Company assembles, tests, packages and ships amplifier products at its
manufacturing facility located in Hauppauge, New York. Historically, the volume
of the Company's production requirements in the military markets was not
sufficient to justify the implementation of automated manufacturing processes.
The Company anticipated that sales of its products to the wireless
telecommunications industry would require a significant increase in the
Company's manufacturing capacity. Accordingly, the Company began to introduce
automated manufacturing techniques in the second quarter of 1995. In connection
with its transition to automated manufacturing processes, the Company purchased
computerized surface-mount machinery and related process equipment to support
automated assembly, which were delivered, installed and made fully operational
during the third quarter of 1995. The Company intends to continue to maintain a
low level of automated assembly outsourcing in order to ensure a steady and
reliable external source of high-volume production while also providing excess
capacity, if required. In addition, the Company began to introduce automated
tuning and testing into its automated manufacturing processes in the later half
of 1996.
Research and Development
The Company's research and development efforts are focused on the design of
amplifiers for new protocols, the improvement of existing product performance,
cost reductions and improvements in the manufacturability of existing products.
The Company is continuing to focus heavily on designs that support continuous
flow, high volume production for its wireless telecommunications products. The
Company uses an automated design environment employing advanced workstations to
model overall amplifiers and their associated circuits.
The Company has historically devoted a significant portion of its resources
to research and development programs and expects to continue to allocate
significant resources to these efforts. The Company's research and development
expenses in fiscal 1996, 1995 and 1994 were $7.4 million, $4.3 million, and $1.2
million, respectively, and represented 15.5%, 15.8% and 4.6% respectively, of
net sales.
The markets in which the Company and its OEM customers compete are
characterized by rapidly changing technology, evolving industry standards and
continuous improvements in products and services. The Company's future success
depends on its ability to develop in a timely manner new products that compete
effectively on the basis of price and performance and that adequately address
customer requirements. In addition, as is characteristic of the wireless
telecommunications equipment industry, the average sales prices of the Company's
products have historically decreased over the products' lives and are expected
to continue to do so.
Competition
The ability of the Company to compete successfully depends in part upon the
rate at which OEM customers incorporate the Company's products into their
systems. The Company believes that a substantial majority of the present
worldwide production of power amplifiers is captive within the manufacturing
operations of a small number of wireless telecommunications OEMs and offered for
sale as part of their wireless telecommunications systems. The Company's future
success is dependent upon the extent to which these OEMs elect to purchase from
outside sources rather than manufacture their own amplification products. There
can be no assurance that OEM customers will incorporate the Company's products
into their systems or that, in general, OEM customers will continue to rely, or
expand their reliance, on external sources of supply for their power
amplification products. Since each OEM product involves a separate proposal by
the amplifier supplier, there can be no assurance that the Company's current OEM
customers will not rely upon internal production capabilities or a non-captive
competitor for future amplifier product needs. The Company's major OEM customers
continuously evaluate whether to manufacture their own amplification products or
purchase them from outside sources. These OEM customers and other large
manufacturers of wireless telecommunications equipment could also elect to enter
into the non-captive
12
<PAGE>
market and compete directly with the Company. Such increased competition could
materially adversely affect the Company's business, financial condition and
results of operations.
Most of the Company's competitors have, and potential future competitors
could have, substantially greater technical, financial, marketing, distribution
and other resources than the Company and have, or could have, greater name
recognition and market acceptance of their products and technologies. In
addition, certain of these competitors are already established in the wireless
amplification market. No assurance can be given that the Company's competitors
will not develop new technologies or enhancements to existing products or
introduce new products that will offer superior price or performance features.
To the extent that OEMs increase their reliance on external sources for their
power amplification needs, more competitors could be attracted to the market.
The Company expects its competitors to offer new and existing products at
prices necessary to gain or retain market share. The Company expects to
experience significant price competition, which could have a materially adverse
effect on gross margins. Certain of the Company's competitors have substantial
financial resources which may enable them to withstand sustained price
competition or downturns in the power amplification market.
In the military market, the Company competes with certain large OEMs that
design and assemble their own high power amplifiers. However, almost all of
these OEMs are also the Company's customers. The Company believes this is due to
its broad range of solid-state power and frequency capabilities.
Proprietary Technology
The Company believes that the success of its amplifier business depends
more on its specifications, CAE/CAD design and modeling tools, technical
processes and employee expertise than on patent protection. The Company
generally enters into confidentiality and non-disclosure agreements with its
employees and limits access to and distribution of its proprietary technology.
The Company may in the future be notified that it is infringing certain patent
and/or other intellectual property rights of others. Although there are no such
pending lawsuits against the Company or unresolved notices that the Company is
infringing intellectual property rights of others, there can be no assurance
that litigation or infringement claims will not occur in the future. Through
Republic Electronics, the Company has been awarded two U.S. patents, owns one
U.S. trademark and has one U.S. trademark application pending.
Republic Electronics
The Company acquired substantially all the assets of Republic Electronics
in April 1994. Founded in 1951, Republic Electronics is a high-technology
systems engineering and manufacturing firm and is among the world's leading
developers and manufacturers of air defense radar environment simulators,
navigational simulators and test equipment, and electronic warfare simulators. A
radar environmental simulator ("RES") provides a radar system with the signals
that it would normally receive if aircraft, jammers, environmental and clutter
effects were present. An RES injects, into the radar receiver, the coherent and
non-coherent RF and microwave signals based on a computer-generated scenario
that includes parameters such as aircraft, jammers, chaff, weather, sea state
and terrain effects. The Company believes that Republic Electronics is the
world's largest supplier of Tactical Air Navigation ("TACAN") beacon simulators,
and is a major supplier of TACAN flight line test sets and support equipment.
The Company believes it is also the primary supplier of "identification friend
or foe" interrogator flight line test sets for the U.S. Navy and U.S. Air Force.
Republic Electronics' MTS-300A threat signal generator provides for "end-to-end"
system checkout from antennas through cockpit display, of installed electronic
warfare systems on aircraft for verification of installation, cabling, antenna
and overall system performance. The Company's backlog as of December 31, 1996
included $7.4 million of orders by Republic Electronics' customers. In 1996,
sales attributable to Republic Electronics' business were $7.3 million,
comprising 15.4% of the Company's net sales.
13
<PAGE>
The Company has a U.S. patent, relating to a windshear radar warning system
tester, which expires in January 2012. The Company's Weather/Windshear Radar
Tester (WRT-100) simulates microbursts, storms and gust fronts in order to test
a commercial aircraft's radar systems signal processing ability to properly
display hazard warning conditions. The Company holds another U.S. patent, on an
invention that eliminates the need to return a repaired nose-mount type aircraft
radar radome to a radar test range for recertification, which expires in
December 2011. "REPUBLIC" is a U.S. registered trademark of the Company and the
Company has applied to register the trademark "MRES 2000".
Employees
As of February 28, 1997, the Company had a total of 322 regular, temporary
and contract employees, including 191 in operations and quality, 88 in
engineering, 12 in sales and marketing and 31 in administration. The Company
believes its future performance will depend in large part on its ability to
attract and retain highly skilled employees. None of the Company's employees are
represented by a labor union and the Company has not experienced any work
stoppages. The Company considers its employee relations to be good.
Risk Factors
Historically, the Company's revenues have been derived principally from
sales to military markets. The Company only began to focus on the commercial
wireless telecommunications market during the past few years. As a result, the
Company is subject to all of the risks inherent in the operation of a new
business enterprise.
The Company anticipates that sales of its products to relatively few
customers will continue to account for a significant portion of its net sales.
In addition, certain of the purchase orders comprising backlog at December 31,
1996 set forth product specifications not yet achieved by the Company that would
require the Company to complete additional product development. A failure to
develop products meeting such specifications could lead to a cancellation of the
related purchase order. The reduction, delay or cancellation of orders from one
or more significant customers would materially adversely affect the Company's
business, financial condition and results of operations.
The Company has limited experience in producing and manufacturing its
products on a high-volume basis and in contracting for such manufacture.
Manufacture of the Company's products is an extremely complex process, and the
Company may from time to time experience quality problems with products
manufactured on an automated basis internally or by its contract manufacturers.
Furthermore, there can be no assurance that the Company's internal manufacturing
processes will prove sufficient to fulfill the Company's production commitments,
or that contract manufacturers will be able to fulfill any shortfall. If such
problems occur, the Company could experience increased costs, delays,
cancellations or reschedulings of orders or deliveries and product returns and
discounts, any of which could damage relationships with current or prospective
customers and have a material adverse effect on the Company's business,
financial condition and results of operations.
A large portion of the Company's expenses are fixed and difficult to
reduce. If net sales do not meet the Company's expectations, the fixed nature of
the Company's expenses would exacerbate the effect of any net sales shortfall.
Other factors that may cause the Company's net sales, gross margins and results
of operations to vary significantly from period to period include mix of systems
sold; price discounts; market acceptance and the timing and availability of new
products by the Company or its customers; usage of different distribution and
sales channels; product development, warranty and customer support expenses;
customization of systems; and general economic and political conditions. All of
the above factors are difficult for the Company to forecast, and these or other
factors could materially adversely affect the Company's business, financial
condition and results of operations.
14
<PAGE>
Wireless telecommunications OEMs have come under increasing price pressure
from cellular and PCS service providers, and the Company expects to experience
downward pricing pressure on its products. In addition, competition among
non-captive suppliers has increased the downward pricing pressure on the
Company's products. As these wireless manufacturers frequently negotiate supply
arrangements far in advance of delivery dates, the Company often must commit to
price reductions for its products before it is aware of how, or if, cost
reductions can be obtained. To offset declining average sales prices, the
Company will attempt in the near term to achieve manufacturing cost reductions
and, in the longer term, to develop new products that can be sold at higher
average sales prices. If, however, the Company is unable to achieve such cost
reductions, the Company's gross margins will decline, and such decline will have
a material adverse effect on the Company's business, financial condition and
results of operations.
Despite the risks associated with purchasing components from a limited
number of sources, the Company has made the strategic decision to enter into
arrangements with a select group of limited source suppliers in order to obtain
lower pricing, receive more timely delivery and maintain quality control.
Certain of the Company's limited source suppliers have limited operating
histories and limited financial and other resources and, therefore, they may
prove to be unreliable sources of supply. Further, the Company has only recently
begun to purchase key components in large volume. If the Company were unable to
obtain sufficient quantities of components, particularly power transistors,
delays or reductions in product shipments could occur which would have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, delays in filling orders may have a material
adverse effect on the Company's relationships with its OEM customers, which may
result in the termination of material orders from its OEM customers and/or cause
a permanent loss of future sales.
Sales of power amplifiers to wireless telecommunications OEMs are expected
to account for a substantial majority of the Company's future product sales. The
success of the Company depends to a considerable extent upon the continued
growth and increased availability of cellular and other wireless
telecommunications services, including PCS, in the United States and
internationally. If the wireless telecommunications market fails to grow or
grows more slowly than the Company currently anticipates, the Company's
business, financial condition and results of operations would be materially and
adversely affected.
The Company's major OEM customers continuously evaluate whether to
manufacture their own amplification products. These OEM customers and other
large manufacturers of wireless telecommunications equipment could elect to
enter into the non-captive market and compete directly with the Company. Also,
the Company's competitors could develop new technologies, make enhancements to
existing products, or introduce new products that could offer superior price or
performance features. Such increased competition could materially adversely
affect the Company's business, financial condition and results of operations.
Sales of the Company's products outside of the United States are
denominated in United States dollars. An increase in the value of the U.S.
dollar relative to foreign currencies would make the Company's products more
expensive and, therefore, potentially less competitive outside the United
States. The Company may in the future be notified that it is infringing certain
patent and/or other intellectual property rights of others. Although there are
no such pending lawsuits against the Company or unresolved notices that the
Company is infringing intellectual property rights of others, there can be no
assurance that litigation or infringement claims will not occur in the future.
15
<PAGE>
Regulatory approvals generally must be obtained by the Company in
connection with the manufacture and sale of its products, and by the Company's
customers to operate the Company's products. The United States Federal
Communications Commission ("FCC") recently proposed new regulations that would
impose more stringent RF and microwave emissions standards on the
telecommunications industry. There can be no assurance that if such proposed
regulations are adopted, the Company and its OEM customers will not be required
to alter the manner in which radio signals are transmitted or otherwise alter
the equipment transmitting such signals, which could materially adversely affect
the Company's products and markets. Also, the enactment by federal, state, local
or international governments of new laws or regulations or a change in the
interpretation of existing regulations could affect the market for the Company's
products.
ITEM 2. PROPERTIES.
The Company's operations are located in an 86,000 square foot facility on
7.4 acres of land in Hauppauge, New York. The building was constructed in 1986
and purchased by the Company in June 1992 with the proceeds from Industrial
Development Revenue Bonds ("IRBs") issued through the Suffolk County Industrial
Development Agency ("SCIDA"). In connection with this financing, the Company
transferred ownership of this facility to the SCIDA at closing, and immediately
leased back the facility for a term equal to the term of the bonds. The lease
provides the Company with a $1.00 buyback option exercisable at lease end and
also permits for transfer of ownership of the facility back to the Company if it
prepays the bonds.
This facility houses all of the Company's manufacturing, quality assurance,
engineering, sales and marketing and administrative personnel. The plant has
been customized to suit the Company's operations, which includes electrical
power upgrades and the construction of a Class 100,000 clean room to support
hybrid electronics assembly and test. While the current facility is sufficient
to support the Company's anticipated growth through fiscal year 1997, the
Company has approved zoning and architectural drawings for a 55,000 square foot
expansion of its current facility which the Company believes should be adequate
to meet the Company's presently foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company is
currently not party to any legal proceedings, the adverse outcome of which,
individually or in the aggregate, management believes would have a material
adverse effect on the financial position or results of operations of the
Company.
The Company's operations are subject to environmental laws and regulations
which impose limitations on the discharge of pollutants into the air and water
and establish standards for the treatment, storage and disposal of solid and
hazardous wastes. The Company reviews the effects of any new laws and
regulations on its operations and modifies its operations as appropriate. The
Company believes that it is in substantial compliance with all applicable
environmental laws and regulations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of 1996.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock of the Company is traded on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") National Market System
under the symbol MPDI. On March 10, 1997 there were approximately 1,423
beneficial owners of the Company's Common Stock.
The following table sets forth the high and low closing bid prices for the
Company's Common Stock as reported by NASDAQ. Such quotations reflect
interdealer prices without adjustments for retail markups, markdowns, or
commissions and may not necessarily represent actual transactions.
Calendar Period High Low
--------------- ---- ---
1995:
Fourth Quarter ...................... 15 7-1/4
1996:
First Quarter ....................... 13-5/8 7-1/8
Second Quarter ...................... 9-9/16 4-3/4
Third Quarter ....................... 6-1/2 2-3/8
Fourth Quarter ...................... 3-1/8 1-15/16
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future earnings
for the expansion and operation of its business and does not anticipate paying
cash dividends in the foreseeable future. In addition, the Company's credit
facility contains provisions restricting the payment of dividends.
17
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data as of and for the years
ended December 31, 1996 and 1995, and for the year ended December 31, 1994 have
been derived from, and are qualified by reference to, the Consolidated Financial
Statements of the Company audited by Arthur Andersen LLP, independent public
accountants, included elsewhere in this Annual Report on Form 10-K and should be
read in conjunction with those Consolidated Financial Statements and Notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations. The following selected consolidated financial data as of
December 31, 1994 have been derived from the Consolidated Financial Statements
of the Company audited by Arthur Andersen LLP, independent public accountants,
not included herein. The following selected consolidated financial data as of
and for the years ended December 25, 1993 and December 26, 1992 have been
derived from the Consolidated Financial Statements of the Company audited by
Ernst & Young LLP, independent auditors, not included herein.
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------------------------------
December 31, December 31, December 31, December 25, December 26,
1996 1995 1994 1993 1992
----------- -------- -------- -------- ------------
Consolidated Statements of Operations (in thousands, except per share data)
Data:
<S> <C> <C> <C> <C> <C>
Net sales .......................... $ 47,362 $ 27,302 $ 25,134 $ 23,763 $ 23,446
Cost of sales ...................... 41,501 20,122 17,371 16,266 15,360
-------- -------- -------- -------- --------
Gross profit ....................... 5,861 7,180 7,763 7,497 8,086
Operating expenses:
General and administrative ...... 3,221 3,091 2,585 2,316 2,792
Selling ......................... 3,720 3,346 2,749 1,627 1,944
Research and development ........ 7,364 4,306 1,150 781 822
Total operating expenses ...... 14,305 10,743 6,484 4,724 5,558
-------- -------- -------- -------- --------
Income (loss) from operations ...... (8,444) (3,563) 1,279 2,773 2,528
Interest expense, net .............. 948 1,310 832 632 546
Other (income) expense, net ........ 6 55 67 (11) (229)
-------- -------- -------- -------- --------
Income (loss) before income taxes .. (9,398) (4,928) 380 2,152 2,211
Provision (benefit) for income taxes (3,759) (1,976) 33 475 882
-------- -------- -------- -------- --------
Net income (loss) .................. $ (5,639) $ (2,952) $ 347 $ 1,677 $ 1,329
======== ======== ======== ======== ========
Net income (loss) per common share . $ (0.54) $ (0.36) $ 0.05 $ 0.22 $ 0.18
======== ======== ======== ======== ========
Weighted average common shares ..... 10,375 8,172 7,500 7,500 7,500
======== ======== ======== ======== ========
<CAPTION>
December 31, December 31, December 31, December 25, December 26,
1996 1995 1994 1993 1992
----------- -------- -------- -------- ------------
Consolidated Balance Sheet Data: ... (in thousands)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents .......... $ 1,149 $ 388 $ 410 $ 1,533 $ 1,861
Working capital .................... 16,151 24,529 8,614 5,706 5,861
Total assets ....................... 38,890 41,227 21,834 19,224 17,026
Total debt ......................... 12,789 9,718 11,903 9,495 9,525
Total stockholders' equity ......... 18,302 23,941 6,416 6,128 4,451
</TABLE>
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
The Company commenced operations in 1967. During the past 29 years, the
Company has designed, manufactured and marketed high power, solid-state, 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.
The Company is devoting significant resources to increase its commercial
product offerings, particularly for the wireless telecommunications market. As a
result, the Company's research and development expenses have increased because
customer-funding of product developments costs, which is typical in the military
market, is less prevalent in commercial markets.
The following table summarizes certain key financial information:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Change Change
1996 from 1995 from 1994 *
($000s) prior year ($000s) prior year ($000s)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 47,362 73% $ 27,302 9% $ 25,134
--------------------------------------------------------------------------------------------------------------------
Gross Profit $ 5,861 (18)% $ 7,180 (8)% $ 7,763
Gross Profit Margin 12.4% 26.3% 30.9%
--------------------------------------------------------------------------------------------------------------------
General and Administrative $ 3,221 4% $ 3,091 20% $ 2,585
Expenses
Percentage of Net Sales 6.8% 11.3% 10.3%
--------------------------------------------------------------------------------------------------------------------
Selling Expenses $ 3,720 11% $ 3,346 22% $ 2,749
Percentage of Net Sales 7.9% 12.2% 10.9%
--------------------------------------------------------------------------------------------------------------------
Research and Development Expenses $ 7,364 71% $ 4,306 274% $ 1,150
Percentage of Net Sales 15.5% 15.8% 4.6%
--------------------------------------------------------------------------------------------------------------------
Interest Expense $ 948 (28)% $ 1,310 57% $ 832
Percentage of Net Sales 2.0% 4.8% 3.3%
--------------------------------------------------------------------------------------------------------------------
Provision (Benefit) for Income $ (3,759) (90)% $ (1,976) N/A $ 33
Taxes
Effective Tax Rate 40.0% 40.1% 8.7%
--------------------------------------------------------------------------------------------------------------------
</TABLE>
* Contains fifty-three weeks of activity.
19
<PAGE>
Results of Operations
Fiscal Years Ended December 31, 1996 and December 31, 1995
Net Sales. The Company derives its revenues principally from the sale of
solid-state, RF and microwave, power amplifiers and from the sale of radar
environmental and electronic warfare simulators. Net sales increased by 73% to
$47.4 million in 1996 from $27.3 million in 1995. This sales increase was
primarily due to higher shipments of the Company's commercial products and, to a
lesser extent, higher shipments of the Company's military products. This is in
line with the Company's transition from military dependence to being a dual
supplier of commercial and military products. Sales of commercial products
increased by 80% to $33.6 million in 1996 from $18.7 million in 1995,
representing 71% and 68%, respectively, of net sales in such years. The
commercial sales increase was predominantly due to higher shipments to two
wireless telecommunications OEMs and one satellite communications OEM. Sales of
military products increased by 60% to $13.8 million in 1996 from $8.6 million in
1995, representing 29% and 32%, respectively, of net sales in such years. The
military sales increase was predominantly due to greater market demand for one
Republic product, initial hardware shipments for another Republic product and an
overall modest resurgence of shipments to U.S. prime contractors for various
military products.
International sales increased by 138% to $20.6 million in 1996 from $8.6
million in 1995, totaling 43% of net sales in 1996 compared to 32% in 1995. The
increase in international sales was primarily due to higher foreign wireless
telecommunications OEM business and, to a lesser extent, higher foreign military
business. In 1996, sales to a foreign commercial OEM (Customer A) and a domestic
commercial OEM (Customer B) accounted for 34% and 19%, respectively, of the
Company's net sales. In 1995, sales to one foreign commercial OEM (Customer A)
and two domestic commercial OEMs (Customer B and Customer C) accounted for 26%,
21% and 10%, respectively, of the Company's net sales.
Gross Profit. The Company's cost of sales consists principally of direct
labor, labor overhead, direct material, material overhead, other direct costs
and work-in-process inventory changes from the beginning to the end of a period.
Gross profit decreased by 18% to $5.9 million in 1996 from $7.2 million in 1995.
The Company's gross profit margin (gross profit as a percentage of net sales)
decreased to 12.4% in 1996 from 26.3% in 1995, primarily due to a $4.9 million
write-off of wireless multi-channel work-in-process inventory caused by
diminished demand for these particular products, a $1.0 million write-off of
wireless multi-channel work-in-process inventory related to the cancellation of
the remainder of the AirNet contract (caused by the Company's failure to meet
product specifications within a given time frame) and a $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 the PCS-TDMA program. In addition, the Company's 1996
gross profit margin was adversely affected by the overall low gross profit
margin obtainable on Cellular-CDMA multi-channel amplifiers due to competitive
pricing pressure, low gross profit margins experienced on a number of military
OEM contracts due to various production delays, low gross profit margins
experienced on various other commercial OEM contracts due in part to a number of
engineering and manufacturing difficulties, and higher commercial warranty
expenses (as a percentage of net sales).
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, further 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.
20
<PAGE>
Certain of the purchase orders or contracts comprising backlog at December
31, 1996 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 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
consist principally of salaries and other expenses for management, finance,
accounting, contracts and human resources as well as legal and other
professional services. General and administrative expenses increased by 4% to
$3.2 million in 1996 from $3.1 million in 1995, representing 6.8% and 11.3%,
respectively, of net sales. The increase in general and administrative expenses
was primarily the result of greater costs associated with being a public
company, for a full year. The decrease in general and administrative expenses as
a percentage of net sales was attributable to the overall sales volume growth in
1996 as compared to 1995.
Selling Expenses. Selling expenses consist principally of salaries and
other expenses for sales and marketing personnel, sales commissions, travel
expenses, advertising and trade shows. Selling expenses increased by 11% to $3.7
million in 1996 from $3.3 million in 1995, representing 7.9% and 12.2%,
respectively, of net sales. The increase in selling expenses resulted primarily
from higher sales representative commissions and higher accrued warranty
expenses partially offset by lower bid and proposal expenses and lower sales
incentive expenses. The decrease in selling expenses as a percentage of net
sales was attributable to the overall sales volume growth in 1996 as compared to
1995.
Research and Development Expenses. Research and development expenses
consist principally of direct labor, labor overhead, direct material, material
overhead and other direct costs associated with product development. Research
and development expenses increased by 71% to $7.4 million in 1996 from $4.3
million in 1995, representing 15.5% and 15.8%, respectively, of net sales. This
increase resulted primarily from higher wireless telecommunications product
development and, to a lesser extent, higher military product development. The
Company believes that the continued introduction of new products is essential to
its competitiveness and is committed to continued investment in research and
development.
Interest Expense. Interest expense consists principally of interest
expended on the Company's credit facility, IRBs and promissory notes, partially
offset by interest earned on the Company's cash balances. Interest expense
decreased by 28% to $0.9 million in 1996 from $1.3 million in 1995, primarily
reflecting a loan repayment, in the latter part of 1995, to the Company's
largest stockholder (through the utilization of a portion of the proceeds from
the Company's initial public offering ("IPO")). In addition, 1995 interest
expense included a one time charge of $0.1 million for deferred financing costs
as a result of the repayment of the debt outstanding at the time of the IPO and
also included a $0.1 million amendment fee expense, charged by Fleet Capital
Corporation, related to a restructuring of the Company's credit facility to
provide additional financing pending the completion of the IPO.
Provision for Income Taxes. The Company accounts for income taxes under
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes". SFAS No. 109 requires the Company
21
<PAGE>
to record an asset with respect to the expected future value of its net
operating loss carryforwards ("NOLs"). The Company has recorded 100% of its
deferred tax asset in relation to its 1996 and 1995 NOLs. At December 31, 1996,
the Company had other remaining federal NOLs of approximately $1.3 million which
may be utilized to reduce future taxable income through the year 2004, subject
to certain limitations. The Company has not recorded a deferred tax asset with
respect to this loss carryforward as the utilization may be required to offset
potential adjustments to previously filed income tax returns currently under
examination by the Internal Revenue Service. The change in control which
occurred when the Company's operating subsidiary was acquired by its principal
stockholder has limited the available NOL carryforward in any given year. Under
the Tax Reform Act of 1986, the amounts of and benefit from NOLs may be impaired
or limited in certain circumstances, including, but not limited to, a cumulative
stock ownership change of more than 50% over a three-year period. The Company's
effective tax rate remained relatively unchanged at 40.0% in 1996 from 40.1% in
1995. These rates are due to the net losses incurred by the Company in both 1996
and 1995, 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 achieve taxable income in the future.
Fiscal Years Ended December 31, 1995 and December 31, 1994
Net Sales. Net sales increased by 9% to $27.3 million in 1995 from $25.1
million in 1994. This sales increase was predominantly due to shipments to two
wireless telecommunications OEMs, which more than offset reduced military
shipments. This was in line with the Company's transition from a highly
dependent military supplier to a commercial manufacturer. Sales of commercial
products increased by 295% to $18.7 million in 1995 from $4.7 million in 1994,
representing 68% and 19%, respectively, of net sales in such years. Sales of
military products decreased by 58% to $8.6 million in 1995 from $20.4 million in
1994, representing 32% and 81%, respectively, of net sales in such years.
International sales increased by 33% to $8.6 million in 1995 from $6.5
million in 1994, totaling 32% of net sales in 1995 compared to 26% in 1994. This
increase in international sales was predominantly due to higher foreign wireless
telecommunications OEM business. In 1995, sales to one foreign commercial OEM
(Customer A) and two domestic commercial OEMs (Customer B and Customer C)
accounted for 26%, 21% and 10%, respectively, of the Company's net sales. In
1994, sales to a military branch of the U.S. Government (Customer D), a domestic
military OEM (Customer E) and a foreign military OEM (Customer F), accounted for
24%, 8% and 6%, respectively, of the Company's net sales.
Gross Profit. Gross profit decreased by 8% to $7.2 million in 1995 from
$7.8 million in 1994. The Company's gross profit margin (gross profit as a
percentage of net sales) decreased to 26.3% in 1995 from 30.9% in 1994,
primarily due to low gross profits experienced on four military OEM contracts
and two wireless telecommunications OEM contracts. These results were caused by:
the inability of one of the Company's suppliers, which was replaced, to produce
a key component on a military OEM contract; the highly price-competitive market
in which the Company won another military OEM contract; production delays on two
military OEM contracts; and production delays on two wireless telecommunications
OEM contracts.
General and Administrative Expenses. General and administrative expenses
increased by 20% to $3.1 million in 1995 from $2.6 million in 1994, representing
11.3% and 10.3%, respectively, of net sales. This increase was primarily the
result of higher employee benefit costs, administrative staffing to support the
Republic Electronics acquisition (full versus partial year) and higher
accounting, legal and miscellaneous office supplies expenses.
Selling Expenses. Selling expenses increased by 22% to $3.3 million in 1995
from $2.7 million in 1994, representing 12.2% and 10.9%, respectively, of net
sales. This increase resulted primarily from sales and marketing personnel to
support the Republic Electronics acquisition (full versus partial year), as well
as higher sales and marketing activity directed toward the wireless
telecommunications market.
22
<PAGE>
Research and Development Expenses. Research and development expenses
increased by 274% to $4.3 million in 1995 from $1.2 million in 1994,
representing 15.8% and 4.6%, respectively, of net sales. This increase resulted
primarily from increased wireless telecommunications product development and, to
a lesser extent, increased military product development.
Interest Expense. Interest expense increased by 57% to $1.3 million in 1995
from $0.8 million in 1994, predominantly reflecting increased borrowings under
the Company's credit facility. These borrowings financed the Company's net
inventory increase which resulted from the Company's initial penetration into
the wireless telecommunications market. With a portion of the net proceeds
received from its IPO, the Company repaid approximately $15.9 million of its
approximately $20.7 million of debt then outstanding. The repayment of this debt
resulted in an aggregate of $0.1 million of deferred financing costs being
charged as interest expense during the fourth quarter of 1995. In addition, the
fourth quarter of 1995 included a $0.1 million amendment fee expense, charged by
Fleet Capital Corporation, related to a restructuring of the Company's credit
facility to provide additional financing pending the completion of the IPO.
Provision for Income Taxes. The Company's effective tax rate increased to
40.1% in 1995 from 8.7% in 1994. The lower rate in 1994 is due to the Company's
recognition of previously generated NOLs to offset full year 1994 taxable
income. The higher rate in 1995 is due to the net loss incurred by the Company,
the benefit of which the Company expects to utilize to offset future taxable
income, as prescribed by SFAS No. 109.
Liquidity and Capital Resources
In the fourth quarter of 1995, the Company successfully completed its 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 exercise of
the underwriters' over-allotment option. Since the IPO, the Company had financed
its operations and met its capital requirements through the following two
sources: (i) a credit facility with Fleet Capital Corporation which was replaced
in February 1997 with a new credit facility and (ii) cash provided by operating
activities.
On February 13, 1997, the Company and IBJ Schroder Bank and Trust Company
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 itself for one-year periods thereafter, unless terminated by either the
Company or IBJ Schroder. 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 raw materials and work-in-process
inventories (with borrowings based on aggregate eligible inventory limited to
$6.0 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 $1.4 million and $17.3 million in
1996 and 1995, respectively. From December 31, 1995 to December 31, 1996,
accounts receivable and inventory decreased by $1.9 million and $4.6 million,
respectively, while accounts payable and accrued liabilities increased by $0.7
million. The decrease in accounts receivable was primarily due to a more linear
level of monthly shipments in the fourth quarter of 1996 as compared to the
significant increase in shipments that occurred late in the fourth quarter of
1995, as well as the normal collection of receivables. The decrease in inventory
was predominantly due to a reduction in wireless work-in-process inventory
related to the above referenced wireless multi-channel write-offs partially
offset by an increase in military work-in-process inventory. The increase in
accounts payable and accrued liabilities was primarily due to a temporary
slowing of vendor payments as the Company balanced cash disbursements against
its credit facility availability. Investing
23
<PAGE>
activities, which consisted primarily of equipment acquisitions, used net cash
of $0.9 million and $2.3 million in 1996 and 1995, respectively. Financing
activities, which consisted predominantly of net proceeds from the revolving
line of credit in 1996 and the Company's IPO in 1995, provided net cash of $3.0
million and $19.6 million in 1996 and 1995, respectively.
Capital expenditures were $0.9 million and $2.3 million in 1996 and 1995,
respectively. These expenditures were funded primarily through cash provided by
the Company's credit facility. Principal expenditures for 1996 included
engineering and manufacturing test equipment, the expansion of the Company's
parking area, personal computer upgrades, upgrades of the Company's Computer
Aided Engineering systems, construction work-in-progress for the proposed
facility expansion (currently on hold), sales demonstration equipment and a new
wireless telecommunications trade show booth. The Company anticipates that 1997
capital expenditures will be financed by cash provided by operating activities,
the Company's credit facility and/or third party financing sources.
As of December 31, 1996, the Company had working capital of approximately
$16.2 million, compared to approximately $24.5 million as of December 31, 1995.
Working capital as of December 31, 1996 included approximately $7.5 million and
$14.4 million in accounts receivable and inventory, respectively, compared to
December 31, 1995 working capital which included approximately $9.4 million and
$18.9 million in accounts receivable and inventory, respectively. The Company's
current ratio (ratio of current assets to current liabilities) as of December
31, 1996 was 3.1:1, compared with a current ratio of 4.4:1 as of December 31,
1995. As of December 31, 1996, the Company's debt to equity ratio was 0.7:1,
compared with a debt to equity ratio of 0.4:1 as of December 31, 1995.
The Company believes that cash generated from operations, amounts available
under its credit facility, and/or other 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 of Part IV of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
24
<PAGE>
PART III
The information required by Part III (Items 10 through 13) is incorporated
by reference to the captions "Principal Stockholders," "Election of Directors,"
"Management" and "Certain Transactions" in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A within 120 days after the end
of the Company's fiscal year covered by this Report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K.
(a) See Index to Financial Statements immediately following Exhibit Index.
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
(c) Exhibits
See Exhibit Index immediately following signature pages.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
By /s/ Edward J. Shubel
------------------------
Edward J. Shubel
Chief Executive Officer
Date: March 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Edward J. Shubel Chief Executive Officer March 24, 1997
- ----------------------
Edward J. Shubel (Principal Executive Officer)
/s/ Paul E. Donofrio Chief Financial Officer March 24, 1997
- ----------------------
Paul E. Donofrio (Principal Financial Officer and
Principal Accounting Officer)
/s/ George J. Sbordone Director March 24, 1997
- ----------------------
George J. Sbordone
Director March 24, 1997
- ---------------------
Merril M. Halpern
/s/ A. Lawrence Fagan Director March 24, 1997
- ---------------------
A. Lawrence Fagan
/s/ Alfred Weber Director March 24, 1997
- -----------------------
Alfred Weber
/s/ David J. Aldrich Director March 24, 1997
- -----------------------
David J. Aldrich
/s/ Warren A. Law Director March 24, 1997
- ----------------------
Warren A. Law
/s/ James S. Silver Director March 24, 1997
- ------------------------
James S. Silver
26
<PAGE>
EXHIBIT INDEX
3.1- Certificate of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1 dated
September 29, 1995 (Registration No. 33-94142)).
3.2- By-laws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 dated September 29, 1995
(Registration No. 33-94142)).
10.1- Loan and Security Agreement dated as of February 13, 1997 among IBJ
Schroder Bank & Trust Company, as Lender and Agent, and MPD Technologies,
Inc. (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K
dated February 13, 1997 (Commission File No. 0-8574)).
10.2- Indenture of Trust, $4,810,000, Suffolk County Industrial Development
Agency, 1992 Industrial Development Revenue Bonds (MPD Wireless, Inc.
Facility - Series A and Series B) dated June 1, 1992 (incorporated by
reference to Exhibit 10.2 to the Company's Registration Statement on Form
S-1 dated September 29, 1995 (Registration No. 33-94142)).
10.3- Lease Agreement dated as of June 1, 1992 between MPD Wireless, Inc. and
the Suffolk County Industrial Development Agency (incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement on Form
S-1 dated September 29, 1995 (Registration No. 33-94142)).
10.4- Registration Rights Agreement dated as of June 29, 1995 among the
Registrant, Charter Technologies Limited Liability Company, George J.
Sbordone, Edward J. Shubel, James S. Silver and Lee Leong (incorporated
by reference to Exhibit 10.4 to the Company's Registration Statement on
Form S-1 dated September 29, 1995 (Registration No. 33-94142)).
10.5- Microwave Power Devices, Inc. 1995 Stock Option Plan (incorporated by
reference to Exhibit 10.5 to the Company's Registration Statement on Form
S-1 dated September 29, 1995 (Registration No. 33-94142)).
10.6- Employment Agreement dated September 3, 1991 between MPD Wireless, Inc.
And Edward J. Shubel (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1 dated September 29, 1995
(Registration No. 33-94142)).
10.7- Deferred Compensation Agreement dated as of April 21, 1992 between MPD
Wireless, Inc. and Edward J. Shubel (incorporated by reference to Exhibit
10.7 to the Company's Registration Statement on Form S-1 dated September
29, 1995 (Registration No. 33-94142)).
10.8- Agreement dated as of April 21, 1992 between MPD Wireless, Inc. and
Edward J. Shubel (incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1 dated September 29, 1995
(Registration No. 33-94142)).
10.9- Consulting Agreement with George J. Sbordone (incorporated by reference
to Exhibit 10.10 to the Company's Annual Report on Form 10-K dated
December 31, 1995 (Commission File No. 0-8574)).
10.10- Consulting Agreement with James S. Silver (incorporated by reference to
Exhibit 10.11 to the Company's Annual Report on Form 10-K dated December
31, 1995 (Commission File No. 0-8574)).
10.11- Microwave Power Devices, Inc. 1996 Stock Option Plan (incorporated by
reference to Exhibit 10.12 to the Company's Annual Report on Form
10-K/A-1 dated December 31, 1995 (Commission File No. 0-8574)).
21.1- Subsidiaries of the Company (incorporated by reference to the Company's
Annual Report on Form 10-K dated December 31, 1995 (Commission File No.
0-8574)).
27.1- Financial Data Schedule.
99.1- Form of Special Security Agreement published by the United States
Department of Defense (incorporated by reference to Exhibit 99.1 to the
Company's Registration Statement on Form S-1 dated September 29, 1995
(Registration No. 33-94142)).
27
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants ............................. F-2
Consolidated Balance Sheets as of
December 31, 1996 and 1995 ......................................... F-3
Consolidated Statements of Operations for
the three years ended December 31, 1996 ............................ F-4
Consolidated Statements of Shareholders'
Equity for the three years ended December 31, 1996 ................. F-5
Consolidated Statements of Cash Flows for
the three years ended December 31, 1996 ............................ F-6
Notes to Consolidated Financial Statements ........................... F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Microwave Power Devices, Inc.:
We have audited the accompanying consolidated balance sheets of Microwave
Power Devices, Inc. (formerly MPD Holdings, Inc.) (a Delaware corporation) and
subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Microwave Power Devices,
Inc. and subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Melville, New York
February 24, 1997
F-2
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------- --------
(in thousands,
except share data)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ............................................ $ 1,149 $ 388
Accounts receivable, net of allowance for doubtful accounts of $76 and
$67, respectively .............................................. 7,482 9,426
Inventories, net ..................................................... 14,362 18,912
Prepaid expenses and other current assets ............................ 657 480
Deferred income taxes ................................................ 345 2,515
-------- --------
Total current assets ........................................... 23,995 31,721
PROPERTY, PLANT AND EQUIPMENT, net ...................................... 8,057 8,364
INTANGIBLE ASSETS, net .................................................. 369 382
INVESTMENT IN MARKETABLE SECURITIES AND OTHER LONG-TERM ASSETS
1,015 760
DEFERRED INCOME TAXES ................................................... 5,454 --
-------- --------
$ 38,890 $ 41,227
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt .................................... $ 45 $ 40
Accounts payable ..................................................... 5,103 4,883
Accrued liabilities .................................................. 2,696 2,269
-------- --------
Total current liabilities ...................................... 7,844 7,192
-------- --------
DEFERRED INCOME TAXES ................................................... -- 416
-------- --------
LONG-TERM DEBT .......................................................... 12,744 9,678
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 16)
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; 10,375,000
shares issued and outstanding .................................. 104 104
Additional paid-in capital ........................................... 23,276 23,276
Notes receivable from shareholders ................................... (225) (225)
Unrealized loss on investment in marketable securities ............... -- --
Retained earnings (accumulated deficit) .............................. (4,853) 786
-------- --------
Total shareholders' equity ..................................... 18,302 23,941
-------- --------
$ 38,890 $ 41,227
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------
December 31, December 31, December 31,
1996 1995 1994
-------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C>
NET SALES ................................... $ 47,362 $ 27,302 $ 25,134
COST OF SALES ............................... 41,501 20,122 17,371
-------- -------- --------
Gross profit .......................... 5,861 7,180 7,763
-------- -------- --------
OPERATING EXPENSES:
General and administrative ............... 3,221 3,091 2,585
Selling .................................. 3,720 3,346 2,749
Research and development (Note 2) ........ 7,364 4,306 1,150
-------- -------- --------
14,305 10,743 6,484
-------- -------- --------
Income (loss) from operations ......... (8,444) (3,563) 1,279
INTEREST EXPENSE, net ....................... 948 1,310 832
OTHER EXPENSE, net .......................... 6 55 67
-------- -------- --------
Income (loss) before income taxes ..... (9,398) (4,928) 380
PROVISION (BENEFIT) FOR INCOME TAXES ........ (3,759) (1,976) 33
-------- -------- --------
Net income (loss) ..................... $ (5,639) $ (2,952) $ 347
======== ======== ========
PER SHARE INFORMATION:
Net income (loss) per common share ....... $ (0.54) $ (0.36) $ 0.05
======== ======== ========
Weighted average common shares outstanding 10,375 8,172 7,500
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
F-4
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Additional
Paid-in
Preferred Stock Common Stock Capital
--------------- ------------ -------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
BALANCE, December 25, 1993 ...... -- $ -- 7,500 $ 75 $ 2,925
Net income ................... -- -- -- -- --
Unrealized loss on investment
in marketable securities .. -- -- -- -- --
-------- -------- -------- -------- --------
BALANCE, December 31, 1994 ...... -- -- 7,500 75 2,925
Net loss .................. -- -- -- -- --
Unrealized gain on investment
in marketable securities... -- -- -- -- --
Realized loss on investment in
investment in marketable
securities................. -- -- -- -- --
Initial public offering
(Note 4) .................. -- -- 2,875 29 20,351
Reclassification of notes
receivable from
shareholders (Note 11) .... -- -- -- -- --
-------- -------- -------- -------- --------
BALANCE, December 31, 1995 ...... -- -- 10,375 104 23,276
Net loss .................. -- -- -- -- --
-------- -------- -------- -------- --------
BALANCE, December 31, 1996 ..... -- $ -- 10,375 $ 104 $ 23,276
======== ======== ======== ======== ========
<CAPTION>
Unrealized
Notes Gain (Loss)on Retained
Receivable Investment in Earnings
from Marketable (Accumulated
Shareholders Securities Deficit) Total
------------ ---------- -------- -----
<S> <C> <C> <C> <C>
BALANCE, December 25, 1993 ...... $ (263) $ -- $ 3,391 $ 6,128
Net income ................... -- -- 347 347
Unrealized loss on investment
in marketable securities .. -- (59) -- (59)
-------- -------- -------- --------
BALANCE, December 31, 1994 ...... (263) (59) 3,738 6,416
Net loss .................. -- -- (2,952) (2,952)
Unrealized gain on investment
in marketable securities... -- 31 -- 31
Realized loss on investment in
investment in marketable
securities................. -- 28 -- 28
Initial public offering
(Note 4) .................. -- -- -- 20,380
Reclassification of notes
receivable from
shareholders (Note 11) .... 38 -- -- 38
-------- -------- -------- --------
BALANCE, December 31, 1995 ...... (225) -- 786 23,941
Net loss .................. -- -- (5,639) (5,639)
-------- -------- -------- --------
BALANCE, December 31, 1996 ..... $ (225) $ -- $ (4,853) $ 18,302
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
F-5
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------
December 31, December 31, December 31,
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ....................................................... $ (5,639) $ (2,952) $ 347
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization .......................................... 1,189 958 904
Deferred income taxes .................................................. (3,699) (1,981) (75)
Loss on sale of property, plant and equipment .......................... 3 23 55
Loss on sale of investment in marketable securities .................... -- 28 --
Amortization of deferred financing costs as interest expense ........... -- 126 --
Changes in operating assets and liabilities:
Accounts receivable ................................................... 1,944 (5,351) 944
Inventories ........................................................... 4,551 (11,621) (1,481)
Prepaid expenses and other assets ..................................... (433) (431) 115
Accounts payable and accrued liabilities .............................. 707 3,908 (117)
-------- -------- --------
Net cash provided by (used in) operating activities ........... (1,377) (17,293) 692
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment .............................. (912) (2,315) (662)
Proceeds from sale of property, plant and equipment ..................... 15 8 22
Acquisition of a business ............................................... -- -- (3,383)
Investment in marketable securities ..................................... -- -- (27)
-------- -------- --------
Net cash used in investing activities ......................... (897) (2,307) (4,050)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from long-term debt ............................................ -- 800 2,534
Principal payments of long-term debt .................................... (40) (2,992) (418)
Net proceeds from revolving credit loans ................................ 3,110 2,859 2,154
Settlement of amounts payable under stock purchase agreement ............ -- -- (1,300)
Advances to affiliates, net ............................................. -- (1,443) (610)
Deferred financing costs ................................................ (35) (26) (125)
Net proceeds from issuance of common stock .............................. -- 20,380 --
-------- -------- --------
Net cash provided by financing activities ..................... 3,035 19,578 2,235
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................... 761 (22) (1,123)
CASH AND CASH EQUIVALENTS, beginning of year .............................. 388 410 1,533
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year .................................... $ 1,149 $ 388 $ 410
======== ======== ========
SUPPLEMENTAL DATA:
Cash paid for interest .................................................. $ 1,049 $ 1,311 $ 1,278
======== ======== ========
Cash paid for income taxes .............................................. $ 23 $ 27 $ 60
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
F-6
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
(in thousands, except per share data)
1. THE COMPANY:
On September 3, 1991, Charter Electronics Group, Inc. acquired from
M/A-Com, Inc. all of the outstanding capital stock of Microwave Power Devices,
Inc. On June 14, 1995, the name of this entity was changed to MPD Wireless, Inc.
and on October 9, 1995 the name of this entity was changed to MPD Technologies,
Inc. ("MPD"). On October 21, 1991, Charter Electronics Group, Inc. changed its
name to MPD Holdings, Inc., which was changed on June 13, 1995 to Microwave
Power Devices, Inc. (the "Parent"). Prior to the acquisition of MPD, Charter
Electronics Group, Inc., which was formed on August 24, 1991, was engaged only
in activities related to its formation, the acquisition and its financing.
The Company, headquartered in Hauppauge, New York, is primarily engaged in
the engineering and manufacturing of radio frequency and microwave power
amplifiers for commercial and military applications.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Parent
and its wholly-owned operating subsidiary, MPD (together, the "Company"). All
intercompany balances and transactions have been eliminated in consolidation.
Fiscal Year
In 1994, the Company reported on a 52/53 week fiscal year ending on the
last Saturday in December. The consolidated financial statements for 1994
contain 53 weeks. Effective July 1, 1995, the Company elected to report on a
calendar year.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity, at the
purchase date, of three months or less to be cash equivalents.
Concentration of Credit Risk
For the year ended December 31, 1996, sales to U.S. commercial original
equipment manufacturers ("OEMs") and U.S. prime contractors, the U.S. government
and foreign entities accounted for 49%, 8%, and 43% (34% and 9% to Asia and
Europe, respectively), respectively, of net sales. Accounts receivable from such
customers represent 66%, 6% and 28% of total accounts receivable, respectively,
at December 31, 1996. For the year ended December 31, 1996, sales to one foreign
commercial OEM (Customer A) and one domestic commercial OEM (Customer B)
accounted for 34% and 19%, respectively, of net sales. At December 31, 1996, one
domestic commercial OEM (Customer B) and one foreign military OEM (Customer G)
represent 24% and 13% of accounts receivable, respectively.
F-7
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the year ended December 31, 1995, sales to U.S. commercial OEMs and
U.S. prime contractors, the U.S. government and foreign entities accounted for
57%, 11% and 32% (27%, 4% and 1% to Asia, Europe and Canada, respectively),
respectively, of net sales. Accounts receivable from such customers represent
61%, 15% and 24% of total accounts receivable, respectively, at December 31,
1995. For the year ended December 31, 1995, sales to one foreign commercial OEM
(Customer A) and two domestic commercial OEMs (Customer B and Customer C)
accounted for 26%, 21% and 10%, respectively, of net sales. At December 31,
1995, one domestic commercial OEM (Customer B) and one foreign commercial OEM
(Customer A) represent 34% and 16% of accounts receivable, respectively.
For the year ended December 31, 1994, sales to U.S. prime contractors, the
U.S. government and foreign entities accounted for 44%, 30% and 26% (16%, 6% and
4% to Europe, Asia and Canada, respectively), respectively, of net sales.
Accounts receivable from such customers represent 49%, 33% and 18% of total
accounts receivable, respectively, at December 31, 1994. For the year ended
December 31, 1994, sales to one government agency (Customer D), one domestic
military OEM (Customer E) and one foreign military OEM (Customer F) accounted
for 24%, 8% and 6%, respectively, of net sales.
The Company generally performs credit evaluations of its customers'
financial condition prior to the extension of credit. The Company generally does
not require collateral, and, where appropriate, requires that letters of credit
be provided on foreign sales.
Inventories
Inventories are stated at the lower of cost (using the first-in, first-out
cost method) or net realizable value. Work-in-process associated with fixed
price long-term contracts is valued at the sum of the direct labor, direct
material, other direct costs and related overhead costs incurred under each
contract, less amounts charged to cost of sales.
Progress Payments
Progress payments received from customers are offset against inventories
associated with the contracts for which the payments were received (Note 5).
Under contractual arrangements by which progress payments are received from the
U.S. Government, the U.S. Government has a lien title interest in the
inventories identified with related contracts.
Long-term Contracts
In accordance with industry practice, all contract-related assets and
liabilities are classified as current, even though certain of these
contract-related assets and liabilities may not be realized within one year.
This practice is reflective of the Company's operating cycle as a contractor
under long-term contracts.
F-8
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation and amortization (Note 6). Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
assets which are as follows:
Building and improvements.......................... 7 to 40 years
Machinery and equipment............................ 3 to 7 years
Furniture and fixtures............................. 5 to 10 years
Intangible Assets
Intangible assets, net of accumulated amortization of approximately $235
and $187 at December 31, 1996 and December 31, 1995, respectively, consist of
goodwill, bond issuance costs and deferred financing costs. Goodwill represents
costs in excess of net assets acquired related to certain acquisitions made by
the Company and is being amortized over periods of 5 and 10 years. Bond issuance
costs are being amortized over 30 years, which represents the term of the
respective underlying debt agreement. Deferred financing costs were being
amortized over 5 years. However, during 1995, in connection with the use of the
proceeds of the initial public offering (Note 4) to pay down the related debt,
these deferred financing costs were charged to interest expense. During 1996,
the Company incurred $35 in additional deferred financing costs associated with
the New Loan Agreement (Note 10), which will be amortized over 3 years.
Long-Lived Assets
During March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement establishes financial accounting and reporting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used, and for long-lived assets
and certain identifiable intangibles to be disposed of. This statement is
effective for financial statements for fiscal years beginning after December 15,
1995, although earlier application is encouraged. The Company adopted this
standard in 1996, and the effect of adoption was not material.
Investment in Marketable Securities
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." In connection with the
adoption of this pronouncement, the debt securities held by the Company and
included in the accompanying consolidated balance sheets that may be sold in
response to changes in interest rates, prepayments, and other factors have been
classified as available-for-sale. Such securities are reported at fair value,
with unrealized gains and losses excluded from earnings and reported in a
separate component of shareholders' equity (on an after-tax basis) (Note 7).
Gains and losses on the disposition of securities are recognized on the specific
identification method in the period in which they occur. During 1995, the
Company realized gross proceeds of $451 and realized a loss of $28 on a sale of
these securities. There were no sales of these securities in 1994 or 1996. The
cumulative effect of the adoption of this pronouncement at January 1, 1994 was
not material.
F-9
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Revenue and profits on fixed-price long-term and commercial contracts are
recognized using the unit of delivery method. Profits expected to be realized on
contracts are based on total sales value as related to estimated costs at
completion. These estimates are reviewed and revised periodically throughout the
lives of the contracts, and adjustments to profits resulting from such revisions
are made cumulative to the date of the change. Estimated losses on long-term
contracts-in-progress are recorded in the period in which such losses become
known.
Research and Development
Research and development costs incurred by the Company are included in
expenses in the year incurred. Such costs amounted to $7,364, $4,306, and $1,150
in the years ended December 31, 1996, December 31, 1995 and December 31, 1994,
respectively. Certain other development costs are incurred in connection with
long-term contracts pursuant to which these costs are financed under related
contracts. These costs are included in cost of sales and the related revenues
are included in net sales in the accompanying consolidated statements of
operations.
Income Taxes
The Company provides for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under the asset and liability method specified by
SFAS No. 109, the deferred tax amounts included in the balance sheet are
determined based on the difference between the financial statement and tax bases
of assets and liabilities as measured by the enacted tax rates that will be in
effect when these differences reverse. Differences between assets and
liabilities for financial statement and tax return purposes are principally
related to property, plant and equipment, inventories, accrued vacation expense,
accrued warranty costs, real estate taxes, accounts receivable and contract
research and development.
Net Income (Loss) Per Common Share
Net income (loss) per common share was computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
respective years.
Fully diluted net loss per common share for 1996 and 1995 has not been
presented since the inclusion of the impact of stock options outstanding in 1996
and 1995 (Note 13) would be antidilutive as the Company is in a net loss
position in 1996 and 1995. Fully diluted net income per common share has not
been presented for 1994 as there were no stock option plans in existence during
that year.
Stock-Based Compensation
During October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation." This statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans. SFAS No. 123 encourages entities to adopt a fair value based
method of accounting for stock compensation plans. However, SFAS No. 123 also
permits the Company to continue to measure compensation costs under pre-existing
accounting pronouncements. If the fair value based method of accounting is not
adopted, SFAS No. 123 requires pro forma disclosures of net income (loss) and
net income (loss) per common share in the notes to financial statements. The
Company has elected to provide the necessary pro forma disclosures (Note 13),
beginning in 1996.
F-10
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
Reclassifications
Certain prior year financial statement amounts have been reclassified to
conform with the current year's presentation.
3. ACQUISITION OF A BUSINESS:
Pursuant to an asset purchase agreement with Republic Electronics Co.
("REC") dated April 8, 1994, MPD acquired certain assets and assumed certain
liabilities of REC for $3,204 in cash plus costs related to the acquisition of
$179. Costs in excess of net assets acquired of approximately $179 were recorded
as goodwill and are being amortized over a period of 5 years (Note 2). The
business acquired from REC develops and manufactures air defense radar and
navigational simulators, and its operations reside at the Company's Hauppauge,
New York facility.
Pro Forma Results of Operations
Summarized below are the unaudited pro forma results of operations of the
Company as though this acquisition had occurred at the beginning of 1994.
Adjustments have been made for pro forma income taxes related to this
transaction.
For the Year Ended
December 31, 1994
-----------------
Pro forma net sales..................... $ 27,929
Pro forma net income.................... 508
Pro forma net income per share.......... $ 0.07
These pro forma results of operations are not necessarily indicative of
the actual results of operations that would have occurred had the purchase been
made at the beginning 1994, or of results which have occurred since December 31,
1994, or of results which may occur in the future.
4. INITIAL PUBLIC OFFERING:
In October 1995, the Company completed an initial public offering of 2,500
shares of common stock at $8.00 per share. In November 1995, the Company sold an
additional 375 shares of common stock at $8.00 per share pursuant to the
underwriters' overallotment related to the October 1995 initial public offering.
Aggregate net proceeds to the Company from the offering, after deduction of
direct expenses, were $20,380. The Company used a portion of these proceeds to
repay $15,860 of its debt obligations outstanding at the closing date.
F-11
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1995, in connection with the initial public offering of its
securities, the Company effected a recapitalization whereby the previously
outstanding Class A voting and Class B non-voting common stock was converted to
7,500 shares of a single class of common stock. All information contained in the
accompanying financial statements and footnotes has been retroactively restated
to give effect to this transaction.
5. INVENTORIES, NET:
At December 31, 1996 and 1995, inventories, net, consists of the following:
1996 1995
---- ----
Raw materials............................ $ 6,333 $ 5,736
Work-in-process.......................... 8,918 14,382
Unliquidated progress payments........... (231) (816)
-------- --------
15,020 19,302
Less: Reserves........................... (658) (390)
-------- --------
$ 14,362 $ 18,912
======== ========
During 1996, the Company wrote-off $6,550 of wireless work-in-process
inventory due to decreased product demand and the resulting impact on estimated
costs at completion.
6. PROPERTY, PLANT AND EQUIPMENT, NET:
At December 31, 1996 and 1995, property, plant and equipment, net, consists
of the following:
1996 1995
---- ----
Land................................... $ 937 $ 937
Building and improvements.............. 4,361 4,104
Machinery and equipment................ 6,606 6,183
Furniture and fixtures................. 131 75
-------- --------
12,035 11,299
Less: Accumulated depreciation
and amortization............... (3,978) (2,935)
-------- --------
$ 8,057 $ 8,364
======== ========
7. INVESTMENT IN MARKETABLE SECURITIES:
At December 31, 1996 and 1995, investment in marketable securities consists
of the following:
1996 1995
---- ----
Book value....................... $ 437 $ 437
Unrealized loss.................. -- --
------- -------
Market value..................... $ 437 $ 437
======= =======
F-12
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
This investment has a maturity of less than one year at December 31,
1996 and 1995, an is classified as available-for-sale (Note 2). However, this
investment has been classified as a non-current asset as the Company is required
to hold this amount in escrow in accordance with the terms of an Industrial
Development Revenue Bond agreement (Note 10).
8. ACCRUED LIABILITIES:
At December 31, 1996 and 1995, accrued liabilities consists of the
following:
1996 1995
---- ----
Accrued payroll and benefits................ $ 1,450 $ 1,445
Accrued commissions......................... 422 467
Accrued warranty............................ 400 84
Other....................................... 424 273
------- -------
$ 2,696 $ 2,269
======= =======
9. NOTE PAYABLE TO RELATED PARTY:
The acquisition of MPD was partially financed by a $4,773 unsecured
promissory note from the Company's principal shareholder, of which $2,853
remained outstanding at December 31, 1994. Amounts outstanding under this note
bore interest at 6.5% and were due on September 3, 1996. During 1995, the
Company repaid this note with the proceeds from the initial public offering of
its securities (Note 4).
10. LONG-TERM DEBT:
At December 31, 1996 and 1995, long-term debt consists of the following:
1996 1995
---- ----
Industrial Development Revenue Bonds (a).... $4,665 $4,705
Loan and security agreement (b)............. 8,124 5,013
------- ------
12,789 9,718
Less: Current portion....................... (45) (40)
------- ------
$12,744 $9,678
======= ======
(a) On June 30, 1992, MPD purchased a 7.4 acre parcel of land and an 86,000
square foot building for use as a corporate headquarters and
manufacturing operation for $4,295. MPD financed the acquisition with
Industrial Development Revenue Bonds ("IDRBs") totaling $4,810 issued
through the Suffolk County Industrial Development Agency ("SCIDA"). The
issuance was comprised of $490 Series A Bonds at 7.75% and $4,320 Series
B Bonds at 8.5% with interest payable quarterly. The Series A Bonds and
the Series B Bonds mature on June 30, 2002 and June 30, 2022,
respectively, and are subject to annual mandatory sinking fund
redemptions on June 30 of each year beginning with June 30, 1993 and June
30, 2003, respectively. The Series B Bonds include a $425 Debt Service
Reserve Fund due and payable on June 30, 2022. Under IDRB terms, MPD
transferred ownership of this facility to the SCIDA at closing and
immediately leased back the facility with a lease term equal to the IDRB
terms and provided for a one dollar buy-back option at lease end.
F-13
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(b) At December 31, 1996, the Company had an amended and restated loan and
security agreement with a lender (the "Loan Agreement"), which provided
for borrowings up to $8,400 in the form of revolving credit. Aggregate
borrowings under the Loan Agreement were limited by a borrowing base
calculation to the sum of 85% of accounts receivable, as defined, 35% of
raw materials, 35% of "non-wireless" work-in-process, as defined, 50% of
"wireless" work-in-process, as defined (reduced by 1% per week until 35%
was reached on February 21, 1997), and 65% of finished goods inventory,
as defined (borrowings based on eligible inventory were limited to $6,000
(reduced by $40 per week until $5,680 was reached on January 3, 1997)).
Borrowings under the Loan Agreement were collateralized by accounts
receivable, inventory, equipment and certain other assets. The Loan
Agreement was to expire on April 5, 1999 and was renewable for one-year
terms. Borrowings under the Loan Agreement at December 31, 1996 and 1995,
relate strictly to revolving credit loans which bear interest at the
bank's base rate (8.25% and 8.5% at December 31, 1996 and 1995) plus
1.0%, in the amount of $8,124 and $5,013, respectively.
The aggregate annual maturities of long-term debt, at December 31, 1996,
are as follows:
1997................................ $ 45
1998................................ 50
1999................................ 8,179
2000................................ 60
2001................................ 65
Thereafter.......................... 4,390
-------
Total............. $12,789
=======
On February 13, 1997, the Company replaced the Loan Agreement with a credit
facility from another lender (the "New Loan Agreement"). The New Loan Agreement
provides for borrowings up to $13,000 in the form of a revolving line of credit
and a term loan. Aggregate borrowings under the New Loan Agreement are limited
by a borrowing base calculation to the sum of 85% of accounts receivable, as
defined and 40% of raw materials and work-in-process inventories, as defined
(borrowings based on eligible inventory are limited to $6,000). Borrowings under
the New Loan Agreement are collateralized by accounts receivable, inventory,
equipment and certain other assets. The New Loan Agreement expires on February
12, 2000 and is renewable thereafter for one-year terms. The New Loan Agreement
contains a covenant to maintain a certain fixed charge coverage ratio.
Borrowings under the New Loan Agreement for the revolving line of credit and the
term loan will bear interest at the bank's base rate plus 1.0% and 1.25%,
respectively.
11. SHAREHOLDERS' EQUITY:
Notes receivable from shareholders resulted from the issuance of the
Company's common stock and are secured by the pledge of such stock. The notes
bore interest at 8.0% and were due on September 3, 1996. On February 24, 1997,
the notes were extended to September 3, 1998 and bear interest at 8.0%.
Subsequent to December 31, 1995, $38 of the outstanding notes receivable from
shareholders were repaid.
F-14
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. INCOME TAXES:
For the years ended December 31, 1996, December 31, 1995 and December 31,
1994, the provision (benefit) for income taxes consists of the following:
1996 1995 1994
------- ------- -------
Current:
Federal ......... $ -- $ -- $ 95
State ........... -- -- 39
------- ------- -------
-- -- 134
------- ------- -------
Deferred:
Federal ......... (3,384) (1,779) (91)
State ........... (375) (197) (10)
------- ------- -------
(3,759) (1,976) (101)
------- ------- -------
$(3,759) $(1,976) $ 33
======= ======= =======
The following table reconciles the Federal statutory rate to the Company's
effective income tax rate for the years ended December 31, 1996, December 31,
1995 and December 31, 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory rate ............................ 34% 34% 34%
State taxes, net of federal benefit ....... 6 6 7
Utilization of NOL carryforwards .......... -- -- (34)
Other ..................................... -- -- 2
---- ---- ----
Effective Rate ............................ 40% 40% 9%
==== ==== ====
</TABLE>
For the years ended December 31, 1996, December 31, 1995 and December 31,
1994, the deferred income tax provision (benefit) is related to differences
between the financial and tax bases of assets and liabilities resulting from the
following:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Depreciation ...................... $ (137) $ (96) $ 38
Inventories ....................... (56) 41 (74)
Accrued vacation expense .......... (34) 77 (36)
Accrued warranty costs ............ (126) (10) (4)
Prepaid real estate taxes ......... 3 (30) (25)
Accounts receivable ............... (3) 7 --
Contract research and development . 231 -- --
Net operating loss carryforwards .. (3,637) (1,965) --
------- ------- -------
$(3,759) $(1,976) $ (101)
======= ======= =======
</TABLE>
F-15
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company acquired a net operating loss carryforward of approximately
$2,600 for federal income tax purposes, the utilization of which is subject to
Internal Revenue Code limitations and expiration in 2004. At December 31, 1996,
approximately $1,340 of the loss carryforward was available for future use. The
Company has not recorded a deferred tax asset with respect to this loss
carryforward as the utilization may be required to offset potential adjustments
to previously filed income tax returns currently under examination by the
Internal Revenue Service.
The Company has recorded deferred tax assets of $3,759 and $1,976 for the
benefit of federal income tax loss carryforwards and timing differences
generated in 1996 and 1995. Realization is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards. Although
realization is not assured, management believes it is more likely than not that
all of the deferred tax asset will be realized. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
13. STOCK OPTION PLANS:
In June 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan") pursuant to which key employees of the Company and eligible consultants
to the Company are eligible to receive incentive and/or non-qualified stock
options to purchase up to 525 shares of the Company's common stock. The 1995
Plan, which expires on June 26, 2005, is administered by the Compensation
Committee of the Board of Directors. The selection of participants, grant of
options, determination of price and other conditions relating to the exercise of
options is determined by the Compensation Committee of the Board of Directors.
In March 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan"), which was approved by the Stockholders in May 1996, pursuant to which
key employees of the Company and eligible consultants to the Company are
eligible to receive incentive and/or non-qualified stock options to purchase up
to 475 shares of the Company's common stock. The 1996 Plan, which expires on
March 5, 2006, is administered by the Compensation Committee of the Board of
Directors. The selection of participants, grant of options, determination of
price and other conditions relating to the exercise of options is determined by
the Compensation Committee of the Board of Directors.
Incentive and non-qualified stock options granted under the 1995 Plan and
the 1996 Plan are exercisable for a period of up to 10 years from the date of
grant at an exercise price which is not less than the fair market value of the
common shares on the date of the grant, except that the term of an incentive
stock option granted under the 1995 Plan and the 1996 Plan to a shareholder
owning more than 10% of the outstanding common shares may not exceed 5 years and
its exercise price may not be less than 110% of the fair market value of the
common shares on the date of the grant.
F-16
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Transactions involving the 1995 Plan and the 1996 Plan for the years ended
December 31, 1996 and December 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
1995 Plan 1996 Plan
--------- ---------
Shares Option Price Shares Option Price
------ ------------ ------ ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1995
Granted .......................... 459 $ 8.00 - $10.75 -- $--
Exercised ........................ -- -- -- --
Cancelled ........................ (4) $8.00 -- --
--- --------------- --- ----
Outstanding at December 31, 1995 . 455 $ 8.00 - $10.75 -- $--
--- --------------- --- ----
Year Ended December 31, 1996
Granted .......................... 70 $11.125 - $11.375 49 $11.125
Exercised ........................ -- -- -- --
Cancelled ........................ (12) $ 8.00 - $10.75 -- --
--- --------------- --- -------
Outstanding at December 31, 1996 . 513 $ 8.00 - $11.375 49 $11.125
=== ================ === =======
</TABLE>
At December 31, 1996, 223 shares were exercisable and 12 shares were
available for grant under the 1995 Plan and no shares were exercisable and 426
shares were available for grant under the 1996 Plan.
The Company accounts for these plans under APB No. 25, under which no
compensation cost is recognized for stock options granted with an exercise price
at or above the prevailing market price on the date of the grant. Had
compensation cost for these plans been determined consistent with the fair value
approach required by SFAS No. 123, the Company's net loss and net loss per
common share would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Net loss: As reported $(5,639) $(2,952)
Pro forma (6,202) (3,174)
Net loss per common share: As reported $(0.54) $(0.36)
Pro forma (0.60) (0.39)
</TABLE>
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions used
for the grants made in June 1995, November 1995, February 1996 and March 1996,
respectively: risk-free interest rates of 5.8%, 5.63%, 5.41% and 5.49%; expected
dividend yields of 0% for each grant; expected lives of 3.5 years, 3.0 years,
3.0 years and 4.0 years; expected stock price volatility of 52%, 54%, 54% and
54%.
The effects of applying SFAS No. 123 in this pro forma disclosure may not
be indicative of future amounts because SFAS No. 123 does not apply to stock
options granted prior to January 1, 1995 and additional stock option grants are
anticipated in future years.
F-17
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. DEFINED CONTRIBUTION PENSION PLAN:
MPD maintains a defined contribution plan which covers substantially all
employees, and provides for employee contributions of up to 14% of their salary,
a portion of which is matched by MPD. Contributions by MPD were $493, $464, and
$364, in 1996, 1995 and 1994, respectively.
15. TRANSACTIONS WITH RELATED PARTIES:
Prior to the Company's initial public offering in 1995 (Note 4), corporate
charges were assessed by a related party for management services provided to the
Company. These charges were $0, $342, and $456 in 1996, 1995 and 1994,
respectively, and are included in general and administrative expenses in the
accompanying consolidated statements of operations.
16. COMMITMENTS AND CONTINGENCIES:
Operating Leases
Rent expense, including amounts charged to inventory as part of overhead
allocations and the rental of machinery and equipment (on a month-to-month
basis) in all three years was $1,434, $571, and $165 in 1996, 1995 and 1994,
respectively.
Litigation
In the normal course of business, the Company is a party to various claims
and/or litigation. Management believes that the settlement of all such claims
and/or litigation, considered in the aggregate, will not have a material adverse
effect on the Company's financial position and results of operations.
Employment and Consulting Agreements
The Company has an employment agreement with its President and Chief
Executive Officer which expires on August 30, 1997 and provides for an annual
base salary of $250. The terms of the agreement are automatically renewed for
successive one year terms. Additionally, the Company has consulting agreements
with two director/shareholders which provide for aggregate annual compensation
of $225.
Letters of Credit
As of December 31, 1996, the Company has outstanding letters of credit
aggregating $260.
F-18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
consolidated financial statements found on the Annual Report on Form 10-K,
December 31, 1996, and is qualified in its entirety by reference to such
financial statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,149
<SECURITIES> 0
<RECEIVABLES> 7,558
<ALLOWANCES> 76
<INVENTORY> 14,362
<CURRENT-ASSETS> 23,995
<PP&E> 12,035
<DEPRECIATION> 3,978
<TOTAL-ASSETS> 38,890
<CURRENT-LIABILITIES> 7,844
<BONDS> 12,744
0
0
<COMMON> 104
<OTHER-SE> 18,198
<TOTAL-LIABILITY-AND-EQUITY> 38,890
<SALES> 47,362
<TOTAL-REVENUES> 47,362
<CGS> 41,501
<TOTAL-COSTS> 41,501
<OTHER-EXPENSES> 6
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 948
<INCOME-PRETAX> (9,398)
<INCOME-TAX> (3,759)
<INCOME-CONTINUING> (5,639)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,639)
<EPS-PRIMARY> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
