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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30, 1998.
OR
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ______________.
Commission File Number: 0-8574
MICROWAVE POWER DEVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3622306
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
49 Wireless Boulevard
Hauppauge, New York 11788-3935
(Address of principal executive offices, including zip code)
(516) 231-1400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X|. No |_|.
As of November 1, 1998, there were 10,380,700 shares outstanding of the
registrant's Common Stock, $.01 par value.
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<PAGE>
MICROWAVE POWER DEVICES, INC.
INDEX
PART I - FINANCIAL INFORMATION Page No.
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets --
September 30, 1998 and December 31, 1997 ..................... 3
Consolidated Statements of Operations -
Three and nine months ended
September 30, 1998 and 1997 .................................. 4
Consolidated Statements of Cash Flows -
Nine months ended September 30,
1998 and 1997 ................................................ 5
Notes to Consolidated Financial Statements ................... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................ 8
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings ............................................ 14
ITEM 6. Exhibits and Reports on Form 8-K ............................. 14
SIGNATURES ............................................................. 14
Page 2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MICROWAVE POWER DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 30,
1998 1997
------------ -----------
(unaudited) (audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 632 $ 687
Accounts receivable, net of allowance for
doubtful accounts of $75 ......................... 7,265 8,329
Inventories, net ................................... 20,968 16,931
Prepaid expenses and other current assets .......... 613 706
Deferred income taxes .............................. 1,597 1,777
-------- --------
Total current assets ............................ 31,075 28,430
PROPERTY, PLANT AND EQUIPMENT, net ..................... 8,946 8,273
INTANGIBLE ASSETS, net ................................. 333 389
OTHER LONG TERM ASSETS ................................. 723 903
DEFERRED INCOME TAXES .................................. 3,857 3,827
-------- --------
$ 44,934 $ 41,822
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................... $ 1,082 $ 650
Accounts payable ................................... 7,324 4,848
Accrued liabilities ................................ 3,090 3,186
Customer advance payments .......................... 1,812 1,563
-------- --------
Total current liabilities ....................... 13,308 10,247
-------- --------
LONG-TERM DEBT ......................................... 11,951 12,626
-------- --------
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;
10,379,450 and 10,378,750 shares issued and
outstanding, respectively ........................ 104 104
Additional paid-in capital ......................... 23,308 23,306
Notes receivable from shareholders ................. (188) (188)
Retained earnings (accumulated deficit) ............ (3,549) (4,273)
-------- --------
Total shareholders' equity ...................... 19,675 18,949
-------- --------
$ 44,934 $ 41,822
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 3
<PAGE>
MICROWAVE POWER DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES ....................... $ 13,098 $ 13,970 $ 38,049 $ 36,204
COST OF SALES ................... 9,164 10,200 26,143 26,620
-------- -------- -------- --------
Gross profit ............. 3,934 3,770 11,906 9,584
-------- -------- -------- --------
OPERATING EXPENSES:
General and administrative .. 921 902 2,999 2,664
Selling ..................... 926 1,187 2,756 2,760
Research and development .... 1,531 1,170 4,365 2,847
-------- -------- -------- --------
3,378 3,259 10,120 8,271
-------- -------- -------- --------
Income from operations ... 556 511 1,786 1,313
INTEREST EXPENSE, net ........... 315 317 879 931
OTHER EXPENSE (INCOME), net ..... 0 1 0 (2)
-------- -------- -------- --------
Income before income taxes 241 193 907 384
PROVISION FOR INCOME TAXES ...... 36 25 183 101
-------- -------- -------- --------
Net income ............... $ 205 $ 168 $ 724 $ 283
======== ======== ======== ========
PER SHARE INFORMATION:
Net income per common share:
Basic..................... $ 0.02 0.02 0.07 $ 0.03
======== ======== ======== ========
Diluted................... $ 0.02 0.02 0.07 $ 0.03
======== ======== ======== ========
Common shares used in
computing per share amounts:
Basic..................... 10,379 10,377 10,379 10,376
======== ======== ======== ========
Diluted................... 10,433 10,496 10,474 10,454
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 4
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MICROWAVE POWER DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
-------------------------
September 30, September 30,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ........................................... $ 724 $ 283
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ..................... 1,074 893
Deferred income taxes ............................. 150 53
Gain on sale of property, plant and equipment ..... -- (1)
Changes in operating assets and liabilities:
Accounts receivable ............................... 1,064 911
Inventories ....................................... (4,037) (3,437)
Prepaid expenses and other assets ................. 267 (61)
Accounts payable and accrued liabilities .......... 2,380 936
Customer advance payments ......................... 249 --
------- -------
Net cash provided by (used in) operating
activities ................................... 1,871 (423)
------- -------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ........ (1,679) (913)
Proceeds from sale of property, plant and
equipment ....................................... 10 6
Investment in marketable securities ............... 6 4
------- -------
Net cash used in investing activities .......... (1,663) (903)
------- -------
FINANCING ACTIVITIES:
Proceeds from long-term debt ...................... 2,133 2,700
Principal payments of long-term debt .............. (640) (345)
Net repayments on revolving credit loans .......... (1,736) (1,465)
Deferred financing costs .......................... (22) (114)
Net proceeds from issuance of common stock ........ 2 30
------- -------
Net cash provided by (used in) financing
activities ................................... (263) 806
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS .................... (55) (520)
CASH AND CASH EQUIVALENTS, beginning of year ............. 687 1,149
------- -------
CASH AND CASH EQUIVALENTS, end of period.................. $ 632 $ 629
======= =======
SUPPLEMENTAL DATA:
Cash paid for interest................................ $ 921 $ 982
======= =======
Cash paid for income taxes............................ $ 136 $ 96
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 5
<PAGE>
MICROWAVE POWER DEVICES, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(in thousands, except share and per share data)
(unaudited)
1. Reference is made to the Notes to Consolidated Financial Statements
contained in the Company's December 31, 1997 audited consolidated financial
statements included in the Company's 1997 Annual Report and the Company's 1997
Annual Report on Form 10-K filed with the SEC on March 20, 1998. In the opinion
of Management, the interim unaudited financial statements included herein
reflect all adjustments necessary, consisting of normal recurring adjustments,
for a fair presentation of such data on a basis consistent with that of the
audited data presented therein. The consolidated results of operations for
interim periods are not necessarily indicative of the results to be expected for
a full year.
2. Effective December 31, 1997, the Company adopted SFAS No. 128,
"Earnings Per Share". Basic net income per common share ("Basic EPS") is
computed by dividing net income by the weighted average number of common shares
outstanding. Diluted net income per common share ("Diluted EPS") is computed by
dividing net income by the weighted average number of common shares and dilutive
common share equivalents then outstanding. SFAS No. 128 requires the
presentation of both Basic EPS and Diluted EPS on the face of the consolidated
statement of operations. The impact of the adoption of this statement was not
material to all previously reported EPS amounts. A reconciliation between the
numerator and denominator of Basic EPS and Diluted EPS is as follows:
Net Income Per
Net Income Common Shares Common Share
---------- ------------- ------------
For the quarter ended September 30, 1998
----------------------------------------
Basic EPS
Net income attributable to
common stock $ 205 10,379 $ 0.02
Effect of dilutive securities:
stock options -- 54 --
----- ------ ------
Diluted EPS
Net income attributable to
common stock and assumed
option exercises $ 205 10,433 $ 0.02
===== ====== ======
For the quarter ended September 30, 1997
----------------------------------------
Basic EPS
Net income attributable to
common stock $ 168 10,377 $ 0.02
Effect of dilutive securities:
stock options -- 119 --
----- ------ ------
Diluted EPS
Net income attributable to
common stock and assumed
option exercises $ 168 10,496 $ 0.02
===== ====== ======
For the nine months ended September 30, 1998
--------------------------------------------
Basic EPS
Net income attributable to
common stock $ 724 10,379 $ 0.07
Effect of dilutive securities:
stock options -- 95 --
----- ------ ------
Diluted EPS
Net income attributable to
common stock and assumed
option exercises $ 724 10,474 $ 0.07
===== ====== ======
For the nine months ended September 30, 1997
--------------------------------------------
Basic EPS
Net income attributable to
common stock $ 283 10,376 $ 0.03
Effect of dilutive securities:
stock options -- 78 --
----- ------ ------
Diluted EPS
Net income attributable to
common stock and assumed
option exercises $ 283 10,454 $ 0.03
===== ====== ======
Page 6
<PAGE>
Diluted EPS, for the three months and nine months ended September 30, 1998
and September 30, 1997, does not include the impact of other stock options then
outstanding as their inclusion would be anti-dilutive.
3. The following stock options were granted, cancelled or exercised during
the third quarter of 1998 under either the 1995 or 1996 Stock Option Plans:
Granted Cancelled Exercised
------- --------- ---------
none 15,810 @ $2.875 - $9.50 250 @ $2.875
4. Recently Issued Accounting Standards
(a) In the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income," which requires companies to report all changes
in equity during a period, except those resulting from investment by owners and
distribution to owners, for the period in which they are recognized.
Comprehensive income is the total of net income and all other nonowner changes
in equity (or other comprehensive income) such as unrealized gains/losses on
securities classified as available-for-sale, foreign currency translation
adjustments and minimum pension liability adjustments. Comprehensive and other
comprehensive income must be reported on the face of annual financial statements
or in the case of interim reporting, the footnote approach may be utilized. For
fiscal years 1997 and 1996, and for the quarters ended September 30, 1998 and
1997, the Company's operations did not give rise to items includible in
comprehensive income which were not already included in net income. Accordingly,
the Company's comprehensive income is the same as its net income for all periods
presented.
(b) In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
A company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998).
While the Company operates in international markets, it does so presently
without the use of derivatives and therefore this new pronouncement is not
applicable.
Page 7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Microwave Power Devices, Inc. ("Microwave Power Devices" or the "Company")
commenced operations in 1967. During the past 31 years, the Company has
designed, manufactured and marketed high power, solid-state, radio frequency
("RF") and microwave power amplifiers and related subsystems for military,
medical, satellite and wireless telecommunications applications.
The Company historically has been dependent upon the military market as
its principal source of revenue. In 1992, as the military market was declining,
the Company increased the scope of its business and entered commercial markets,
thereby broadening its product offerings. The Company now develops precision
high-power amplifiers for a variety of commercial uses.
Forward-Looking Statements
Certain information contained in this Quarterly Report on Form 10-Q,
including, without limitation, information appearing under Part I, Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements (within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934). Factors set forth in the Company's 1997 Annual Report on Form 10-K, filed
March 20, 1998, under Item 1, "Business - Risk Factors," together with other
factors that appear with the forward-looking statements, or in the Company's
other Securities and Exchange Commission filings, including its Registration
Statement on Form S-1 dated September 29, 1995, could affect the Company's
actual results and could cause the Company's actual results to differ materially
from those expressed in any forward-looking statements made by, or on behalf of,
the Company in this Quarterly Report on Form 10-Q.
Results of Operations --
Third Quarters Ended September 30, 1998 and September 30, 1997
Net Sales. Net sales decreased by 6% to $13.1 million in the third quarter
of 1998 from $14.0 million in the third quarter of 1997. This sales decrease was
primarily due to lower shipments of the Company's commercial products, partially
offset by higher shipments of the Company's military products. Sales of
commercial products decreased by 54% to $5.2 million in the third quarter of
1998 from $11.3 million in the third quarter of 1997, representing 40% and 81%,
respectively, of net sales in such periods. The commercial sales decrease was
predominantly due to lower shipments to one foreign and one domestic wireless
telecommunications original equipment manufacturer ("OEM") and lower shipments
to one satellite communications OEM, partially offset by higher shipments to
other commercial customers. Sales of military products increased by 198% to $7.9
million in the third quarter of 1998 from $2.7 million in the third quarter of
1997, representing 60% and 19%, respectively, of net sales in such periods. The
military sales increase was predominantly due to higher shipments on a U.S.
Government military program and higher shipments to a domestic military OEM.
International sales decreased by 76% to $1.2 million in the third quarter
of 1998 from $4.8 million in the third quarter of 1997, totaling 9% of net sales
in the third quarter of 1998 compared to 34% in the third quarter of 1997. The
decrease in international sales was predominantly due to lower market demand for
foreign wireless telecommunications OEM business. In the third quarter of 1998,
sales to two domestic military OEMs (Customer G and Customer H) and one domestic
commercial OEM (Customer B) accounted for 29%, 18% and 11%, respectively, of the
Company's net sales. In the third quarter of 1997, sales to two domestic
commercial OEMs (Customer B and Customer D) and a foreign commercial OEM
(Customer A) accounted for 32%, 15% and 26%, respectively, of the Company's net
sales.
Page 8
<PAGE>
Gross Profit. Gross profit improved by 4% to $3.9 million in the third
quarter of 1998 from $3.8 million in the third quarter of 1997. The Company's
gross profit margin (gross profit as a percentage of net sales) also improved to
30.0% in the third quarter of 1998 from 27.0% in the third quarter of 1997. The
increase in gross profit margin was primarily due to a more favorable revenue
mix of higher net gross profit margin business in the MPD military versus
commercial product lines. Despite the above, the following factors adversely
affected the gross profit margin for the third quarter of 1998: (i) low gross
profit margins the Company is experiencing on three foreign military OEM
contracts (the result of technical problems and competitive pricing pressures)
and (ii) the overall low gross profit margin obtainable on the Company's
wireless multi-channel product line (the result of competitive pricing
pressures).
Certain of the Company's inventory costing techniques involve developing a
standard cost which estimates the average, or standard, cost per unit over the
extended life cycle of a product. Such costs include labor, material, other
direct costs and related overheads. If the extended life cycle of a product does
not materialize or if there is no reasonable certainty that product maturation
will take place within the near future, write-offs of work-in-process inventory
would be required. Such write-offs could materially adversely affect the
Company's gross profit and results of operations.
Certain of the purchase orders or contracts comprising backlog at
September 30, 1998 set forth product specifications not yet achieved by the
Company that would require the Company to complete additional product
development. Failure to develop products meeting such specifications could lead
to the cancellation of the related purchase orders or contracts. The reduction,
delay or cancellation of orders or contracts from one or more significant
customers could materially adversely affect the Company's business, financial
condition and results of operations.
There can be no assurances that gross profit will continue to improve. If
the Company is not able to reduce its production costs to the extent
anticipated, or to introduce new products with greater gross profit 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
remained relatively stable at $0.9 million in both the third quarters of 1998
and 1997, representing 7.0% and 6.4%, respectively, of net sales.
Selling Expenses. Selling expenses decreased by 22% to $0.9 million in the
third quarter of 1998 from $1.2 million in the third quarter of 1997,
representing 7.1% and 8.5%, respectively, of net sales. The decrease in selling
expenses resulted primarily from lower accrued warranty costs (as wireless
warranty requirements appear to be decreasing from the higher levels experienced
in early 1997), lower sales representative commissions (as a result of foreign
versus domestic sales mix variations and the overall lower sales volume) and
lower bid and proposal activity (predominantly on military programs).
Research and Development Expenses. Research and development expenses
increased by 31% to $1.5 million in the third quarter of 1998 from $1.2 million
in the third quarter of 1997, representing 11.7% and 8.4%, respectively, of net
sales. The increase in research and development expenses resulted primarily from
increased military and wireless telecommunications product development. The
Company believes that the continued introduction of new products is essential to
its competitiveness, especially in the wireless telecommunications market, and
is committed to continued investment in research and development.
Interest Expense. Interest expense remained relatively stable at $0.3
million in both the third quarters of 1998 and 1997.
Provision for Income Taxes. The Company's effective tax rate increased to
14.9% in the third quarter of 1998 from 13.0% in the third quarter of 1997. Both
the 1998 and 1997 rates were favorably impacted by the partial recovery of a
previously reserved deferred tax asset as a result of the Company's improved
profitability position compared to 1997. Without the benefit of this change in
the reserve, the effective tax rate for both the third quarter
Page 9
<PAGE>
of 1998 and 1997 would have been 40.0%. The Company will continue to assess its
reserved deferred tax asset each reporting quarter. There can be no assurances,
however, that the Company will continue to experience taxable income in the
future.
Nine Months Ended September 30, 1998 and September 30, 1997
Net Sales. Net sales increased by 5% to $38.0 million in the first nine
months of 1998 from $36.2 million in the first nine months of 1997. This sales
increase was primarily due to higher shipments of the Company's military
products, partially offset by lower shipments of the Company's commercial
products. Sales of military products increased by 119% to $19.6 million in the
first nine months of 1998 from $9.0 million in the first nine months of 1997,
representing 52% and 25%, respectively, of net sales in such periods. The
military sales increase was predominantly due to higher shipments on a U.S.
Government military program, higher shipments to a domestic military OEM and
higher shipments to a foreign military OEM, partially offset by lower shipments
to other military customers. Sales of commercial products decreased by 32% to
$18.4 million in the first nine months of 1998 from $27.2 million in the first
nine months of 1997, representing 48% and 75%, respectively, of net sales in
such periods. The commercial sales decrease was predominantly due to lower
shipments to one foreign and one domestic wireless telecommunications OEM and
lower shipments to one satellite communications OEM, partially offset by higher
shipments to another domestic wireless telecommunications OEM and higher
shipments to other commercial customers.
International sales decreased by 53% to $4.7 million in the first nine
months of 1998 from $10.1 million in the first nine months of 1997, totaling 12%
of net sales in the first nine months of 1998 compared to 28% in the first nine
months of 1997. The decrease in international sales was predominantly due to
lower market demand for foreign wireless telecommunications OEM business. In the
first nine months of 1998, sales to one domestic military OEM (Customer G) and
one domestic commercial OEM (Customer B) accounted for 26% and 18%,
respectively, of the Company's net sales. In the first nine months of 1997,
sales to two domestic commercial OEMs (Customer B and Customer D) and a foreign
commercial OEM (Customer A) accounted for 31%, 16% and 18%, respectively, of the
Company's net sales.
Gross Profit. Gross profit increased by 24% to $11.9 million in the first
nine months of 1998 from $9.6 million in the first nine months of 1997. The
Company's gross profit margin (gross profit as a percentage of net sales) also
increased to 31.3% in the first nine months of 1998 from 26.5% in the first nine
months of 1997. The increase in gross profit margin was primarily due to a more
favorable revenue mix of higher net gross profit margin business in the
Company's single channel versus multi-channel wireless product line, a more
favorable revenue mix of higher net gross profit margin business in the MPD
military versus commercial product lines, a lower commercial warranty expense
(specifically for the Company's multi-channel, cellular-CDMA wireless product)
and a more favorable fixed overhead absorption in the first nine months of 1998
versus the first nine months of 1997. Despite the above, the following factors
adversely affected the gross profit margin for the first nine months of 1998:
(i) low gross profit margins the Company is experiencing on three foreign
military OEM contracts (the result of technical problems and competitive pricing
pressures), (ii) the overall low gross profit margin the Company is experiencing
during the early production phases of its single channel, cellular-CDMA wireless
product line and (iii) the overall low gross profit margin obtainable on the
Company's wireless multi-channel product line (the result of competitive pricing
pressures).
Certain of the Company's inventory costing techniques involve developing a
standard cost which estimates the average, or standard, cost per unit over the
extended life cycle of a product. Such costs include labor, material, other
direct costs and related overheads. If the extended life cycle of a product does
not materialize or if there is no reasonable certainty that product maturation
will take place within the near future, write-offs of work-in-process inventory
would be required. Such write-offs could materially adversely affect the
Company's gross profit and results of operations.
Certain of the purchase orders or contracts comprising backlog at
September 30, 1998 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
Page 10
<PAGE>
purchase orders or contracts. The reduction, delay or cancellation of orders or
contracts from one or more significant customers could materially adversely
affect the Company's business, financial condition and results of operations.
There can be no assurances that gross profit will continue to improve. If
the Company is not able to reduce its production costs to the extent
anticipated, or to introduce new products with greater gross profit margins, and
if average selling prices decline beyond current expectations, the Company's
gross profit and results of operations could be materially adversely affected.
The Company's gross profit may also be affected by a variety of other factors,
including the mix of systems and equipment sold; production, reliability or
quality problems; and price competition.
General and Administrative Expenses. General and administrative expenses
increased by 13% to $3.0 million in the first nine months of 1998 from $2.7
million in the first nine months of 1997, representing 7.9% and 7.4%,
respectively, of net sales. The increase in general and administrative expenses
resulted primarily from the costs associated with the settlement of an
employee-related lawsuit, increased year end compensation accruals based, in
part, on the Company achieving certain fiscal year performance goals and higher
professional fees.
Selling Expenses. Selling expenses remained relatively stable at $2.8
million in both the first nine months of 1998 and 1997, representing 7.2% and
7.6%, respectively, of net sales. Within selling expenses, however, advertising,
trade show and bad debt expenses were higher while accrued warranty costs and
bid and proposal expenses were lower. The bad debt expense relates specifically
to the reversal of a previously recorded customer overpayment. The accrued
warranty reduction relates to the apparent decrease of wireless warranty
requirements from the higher levels experienced in early 1997, and bid and
proposal activity is lower predominantly on military programs.
Research and Development Expenses. Research and development expenses
increased by 53% to $4.4 million in the first nine months of 1998 from $2.8
million in the first nine months of 1997, representing 11.5% and 7.9%,
respectively, of net sales. The increase in research and development expenses
resulted primarily from increased wireless telecommunications product
development and, to a lesser extent, increased military research and
development. The Company believes that the continued introduction of new
products is essential to its competitiveness, especially in the wireless
telecommunications market, and is committed to continued investment in research
and development. The Company viewed the low level of wireless telecommunications
product development in the first nine months of 1997 as a short term solution to
assist in reducing costs to match reduced wireless revenue. Fundamental to this
effort was a planned temporary reallocation (in the first quarter of 1997) of
some of the Company's engineering and technology resources to either revenue
producing or customer-funded product development. This action enabled the
Company to leverage its other commercial and military product lines while
insuring a continued and focused emphasis on critical wireless
telecommunications development projects. The Company views the level of research
and development expenses incurred in the first, second and third quarters of
1998 to be more indicative of a typical quarterly research and development
expense for the Company. As such, the Company anticipates experiencing this more
typical quarterly expense level for the next few quarters.
Interest Expense. Interest expense remained relatively stable at $0.9
million in both the first nine months of 1998 and 1997.
Provision for Income Taxes. The Company's effective tax rate decreased to
20.2% for the first nine months of 1998 from 26.3% in the first nine months of
1997. The 1998 and 1997 rates were favorably impacted by the partial recovery of
a previously reserved deferred tax asset as a result of the Company's improved
profitability position as compared to 1997. The partial recovery is reflected in
all nine months of 1998 but only for three months of 1997 (recovery began in
July 1997). Without the benefit of this change in the reserve, the effective tax
rate for both the first nine months of 1998 and 1997 would have been 40.0%. The
Company will continue to assess its reserved deferred tax asset each reporting
quarter. There can be no assurances that the Company will continue to achieve
taxable income in the future.
Page 11
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Liquidity and Capital Resources
Since the Company successfully completed its initial public offering in
1995, the Company has financed its operations and met its capital requirements
through the following two sources: (i) a credit facility and/or (ii) cash
provided by operating activities.
In February 1998, the Company entered into a loan agreement with IBJ
Schroder Business Credit Corporation ("IBJ") which provides for a $15.45 million
credit facility consisting of a revolving line of credit in the amount of $10.3
million, a term loan in the amount of $2.15 million and a $3.0 million capital
equipment ("Capex") loan facility. The revolving line of credit and both the
term loan and Capex loan bear interest at annual rates equal to the prime rate
plus 0.5% and the prime rate plus 0.75%, respectively. The credit facility
matures in February 2001 and automatically renews for one-year periods
thereafter, unless terminated by either the Company or IBJ. Aggregate borrowings
under the revolving line of credit are limited by a borrowing base, which is
calculated as the sum of 85% of eligible accounts receivable and 40% of eligible
raw materials and work-in-process inventories (with borrowings based on
aggregate eligible inventory limited to $6.0 million). The term loan requires a
monthly principal payment of $0.05 million. The revolver increases each month
commensurate with term loan repayments until a maximum revolving line of credit
of $12.0 million is reached. The Capex loan requires monthly principal payments
that are recalculated each month based on the prior month's Capex borrowings, if
any, amortized over 60 months. Capex loan borrowings must occur prior to
February 27, 1999. At September 30, 1998, the term loan balance was $1.8
million, borrowings under the $3.0 million Capex facility were $2.0 million and
borrowings under the $10.65 million revolving line of credit were $4.7 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 provided net cash of $1.9 million and used net cash
of $0.4 million in the first nine months of 1998 and 1997, respectively. From
December 31, 1997 to September 30, 1998, inventory increased by $4.0 million,
accounts payable and accrued liabilities increased by $2.4 million and accounts
receivable decreased by $1.1 million. The increase in inventory was primarily
due to a net work-in-process increase on a long-term U.S. Government military
program (that is expected to ship complete in 1999) and a delay in the initial
production ramp-up of a particular wireless program by a major customer which
has caused a temporary build-up of work-in-process and raw materials
inventories. The increase in accounts payable and accrued liabilities was
primarily the result of higher accrued accounts payable and a more favorable
float situation (i.e., checks in vendors hands but not yet cleared). The
decrease in accounts receivable was primarily due to the lower sales for the
third quarter of 1998 as compared to the fourth quarter of 1997. Investing
activities, which consisted primarily of equipment acquisitions, used net cash
of $1.7 million and $0.9 million in the first nine months of 1998 and 1997,
respectively. Financing activities, which consisted primarily of proceeds from
long-term debt, net repayments on the revolving line of credit and principal
payments of long-term debt, used net cash of $0.3 million and provided net cash
of $0.8 million in the first nine months of 1998 and 1997, respectively.
Capital expenditures were $1.7 million and $0.9 million in the first nine
months of 1998 and 1997, respectively. These expenditures were funded primarily
through cash provided by the Company's credit facility and beginning of year
cash balances. Principal expenditures for the first nine months of 1998 included
the procurement of engineering and manufacturing test equipment and the purchase
of a second automated surface-mount pick-n-place machine. The Company
anticipates making additional capital expenditures of $0.3 million during the
remainder of 1998, including purchases of additional engineering and
manufacturing test equipment as well as continued upgrades to its computer
equipment and facility.
As of September 30, 1998, the Company had working capital of approximately
$17.8 million, compared to approximately $18.2 million as of December 31, 1997.
Working capital as of September 30, 1998 included approximately $7.3 million and
$21.0 million in accounts receivable and inventory, respectively, compared to
December 31, 1997 working capital which included approximately $8.3 million and
$16.9 million in accounts receivable and inventory, respectively. The Company's
current ratio (ratio of current assets to current liabilities) as of September
30, 1998 was 2.3:1, compared with a current ratio of 2.8:1 as of December 31,
1997. As of both September 30, 1998 and December 31, 1997, the Company's debt to
equity ratio was 0.7:1.
Page 12
<PAGE>
The Company believes that cash generated from operations, amounts
available under its credit facility, and/or third party financing will be
sufficient to fund necessary capital expenditures and to provide adequate
working capital for at least the next 12 months. There can be no assurance,
however, that the Company will not require additional financing prior to such
date to fund its operations, and, if required, that such financing will be
available on commercially reasonable terms. In addition, the Company may require
additional financing after such date to fund its operations.
YEAR 2000 - The Company has developed a Year 2000 Readiness Plan. This
plan addresses three main areas: (a) information technology systems (including
the Company's business systems, engineering and test equipment, both hardware
and software related), (b) non-information technology systems (including
embedded technology such as microcontrollers, typically found in such equipment
as telephone systems, fax systems, elevators, security systems, HVAC, etc.) and
(c) supply chain readiness or third party issues (including customers as well as
inventory and non-inventory suppliers). The Company's Chief Financial Officer
has been tasked with overseeing this process and reports periodically to the
Audit Committee of the Company's Board of Directors.
The Company has identified potential deficiencies related to Year 2000 in
its information technology systems and is in the process of addressing them
through upgrades or other remediation. For example, in 1997 the Company's
business and computing system was upgraded and is now Year 2000 compliant
(according to the Company's software providers). The Company expects to complete
remediation and testing of its internal systems in the first quarter of 1999. In
terms of non-information technology systems, the Company has identified those
items which may require remediation or replacement. The Company is in the
process of addressing those items and expects to complete remediation or
replacement and testing in the first quarter of 1999. As for third parties, the
Company is in the process of identifying and contacting suppliers, both
inventory and non-inventory, as well as customers. This process includes the
solicitation of written responses to questionnaires and/or meetings with certain
of such third parties. The Company expects to have a better understanding of the
Year 2000 readiness of these third parties over the next several months.
Based upon the Company's current estimates, additional out-of-pocket costs
associated with its Year 2000 compliance are not expected to be material. These
costs are anticipated to be incurred primarily in 1999 and include third party
consultants, remediation of existing computer software and replacement or
remediation of embedded chips. Such costs do not include internal management
time and the deferral of other projects, the effects of which are not expected
to be material to the Company's results of operations or financial condition. At
this point in time, the Company believes that it is difficult to specifically
identify the cause of the most reasonable worst case Year 2000 scenario. As with
all engineering and manufacturing companies, a reasonable worst case scenario
would be the result of failures of third parties (including, without limitation,
governmental entities and entities with which the Company has no direct
involvement) that continue for more than several days in various geographic
areas from which the Company's raw materials and components are sourced or to
which the Company's products are sold. In connection with the production of
products and the procurement of raw materials and components, the Company is
considering various contingency plans. Continuing failures in key geographic
areas in the United States and in certain European and Asian countries that
limit procurement or delivery of product, would most likely have a material
adverse effect on the Company's results of operations. The extent of such lost
revenue cannot be estimated at this time; however, the Company is considering
contingency plans to limit, to the extent possible, the effect of such lost
revenue on the Company's result of operations. Any such plans would necessarily
be limited to matters over which the Company can reasonably control.
The Company's Year 2000 efforts are ongoing and its overall plan, as well
as the consideration of contingency plans, will continue to evolve as new
information becomes available. While the Company anticipates continuity of its
business activities, that continuity will be dependent upon its ability, and the
ability of third parties with whom the Company relies on directly, or
indirectly, to be Year 2000 compliant.
Page 13
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. Legal Proceedings
Reference is made to Part II, Item I of the Company's Form 10-Q for the
quarter ended March 31, 1998.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27.1 Financial Data Schedule.
(b) No reports on Form 8-K have been filed during the quarter ending
September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROWAVE POWER DEVICES, INC.
(Registrant)
Dated: November 11, 1998 /s/ Edward J. Shubel
----------------------- --------------------------
By: Edward J. Shubel
President and CEO
Dated: November 11, 1998 /s/ Paul E. Donofrio
----------------------- --------------------------
By: Paul E. Donofrio
Vice President Finance/CFO
(Principal Financial and
Accounting Officer)
Page 14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from consolidated
financial statements found on the Quarterly Report on form 10-Q, September 30,
1998, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 632
<SECURITIES> 0
<RECEIVABLES> 7,340
<ALLOWANCES> 75
<INVENTORY> 20,968
<CURRENT-ASSETS> 31,075
<PP&E> 14,585
<DEPRECIATION> 5,639
<TOTAL-ASSETS> 44,934
<CURRENT-LIABILITIES> 13,308
<BONDS> 11,951
0
0
<COMMON> 104
<OTHER-SE> 19,571
<TOTAL-LIABILITY-AND-EQUITY> 44,934
<SALES> 38,049
<TOTAL-REVENUES> 38,049
<CGS> 26,143
<TOTAL-COSTS> 26,143
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 879
<INCOME-PRETAX> 907
<INCOME-TAX> 183
<INCOME-CONTINUING> 724
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 724
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
