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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 June 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 August 1, 1998, there were 10,379,200 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 --
June 30, 1998 and December 31, 1997 ......................... 3
Consolidated Statements of Operations --
Three and six months ended June 30, 1998 and 1997 ........... 4
Consolidated Statements of Cash Flows --
Six months ended June 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 ........................................... 13
ITEM 4. Submission of Matters to a Vote of Security Holders ......... 13
ITEM 6. Exhibits and Reports on Form 8-K ............................ 13
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>
June 30, December 31,
1998 1997
----------- ------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................... $ 558 $ 687
Accounts receivable, net of allowance for
doubtful accounts of $75 .................................. 7,290 8,329
Inventories, net............................................. 19,678 16,931
Prepaid expenses and other current assets.................... 826 706
Deferred income taxes........................................ 2,452 1,777
-------- --------
Total current assets..................................... 30,804 28,430
PROPERTY, PLANT AND EQUIPMENT, net............................... 9,128 8,273
INTANGIBLE ASSETS, net........................................... 359 389
OTHER LONG-TERM ASSETS........................................... 774 903
DEFERRED INCOME TAXES............................................ 3,030 3,827
-------- --------
$ 44,095 $ 41,822
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt............................ $ 989 $ 650
Accounts payable............................................. 5,888 4,848
Accrued liabilities.......................................... 3,048 3,186
Customer advance payments.................................... 2,435 1,563
-------- --------
Total current liabilities................................ 12,360 10,247
-------- --------
LONG-TERM DEBT................................................... 12,265 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;
10,379,200 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)...................... (3,754) (4,273)
-------- --------
Total shareholders' equity............................... 19,470 18,949
-------- --------
$ 44,095 $ 41,822
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
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 Six Months Ended
-------------------------- ------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES ......................... $ 13,512 $ 12,230 $ 24,951 $ 22,234
COST OF SALES ..................... 9,299 8,913 16,979 16,420
-------- -------- -------- --------
Gross profit ............... 4,213 3,317 7,972 5,814
-------- -------- -------- --------
OPERATING EXPENSES:
General and administrative .... 1,104 905 2,078 1,762
Selling ....................... 934 863 1,830 1,573
Research and development ...... 1,426 1,030 2,834 1,677
-------- -------- -------- --------
3,464 2,798 6,742 5,012
-------- -------- -------- --------
Income from operations ..... 749 519 1,230 802
INTEREST EXPENSE, net ............. 288 335 564 614
OTHER INCOME, net ................. -- (3) -- (3)
-------- -------- -------- --------
Income before income taxes . 461 187 666 191
PROVISION FOR INCOME TAXES ........ 125 75 147 76
-------- -------- -------- --------
Net income ................. $ 336 $ 112 $ 519 $ 115
======== ======== ======== ========
PER SHARE INFORMATION:
Net income per common share:
Basic ...................... $ 0.03 $ 0.01 $ 0.05 $ 0.01
======== ======== ======== ========
Diluted .................... $ 0.03 $ 0.01 $ 0.05 $ 0.01
======== ======== ======== ========
Common shares used in computing
per share amounts:
Basic ...................... 10,379 10,375 10,379 10,375
======== ======== ======== ========
Diluted .................... 10,516 10,423 10,491 10,400
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 4
<PAGE>
MICROWAVE POWER DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
------------------------
June 30, June 30,
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ........................................... $ 519 $ 115
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ..................... 690 584
Deferred income taxes ............................. 122 42
Gain on sale of property, plant and equipment ..... -- (3)
Changes in operating assets and liabilities:
Accounts receivable ............................... 1,039 (386)
Inventories ....................................... (2,747) (2,443)
Prepaid expenses and other assets ................. (4) (200)
Accounts payable and accrued liabilities .......... 902 855
Customer advance payments ......................... 872 --
------- -------
Net cash provided by (used in) operating
activities ................................... 1,393 (1,436)
------- -------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ........ (1,503) (325)
Proceeds from sale of property, plant and
equipment ....................................... 10 3
Investment in marketable securities ............... 13 10
------- -------
Net cash used in investing activities .......... (1,480) (312)
------- -------
FINANCING ACTIVITIES:
Proceeds from long-term debt ...................... 1,719 2,700
Principal payments of long-term debt .............. (397) (195)
Net repayments on revolving credit loans .......... (1,344) (1,249)
Deferred financing costs .......................... (22) (114)
Net proceeds from issuance of common stock ........ 2 --
------- -------
Net cash provided by (used in) financing
activities ................................. (42) 1,142
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS .................... (129) (606)
CASH AND CASH EQUIVALENTS, beginning of year ............. 687 1,149
------- -------
CASH AND CASH EQUIVALENTS, end of period.................. $ 558 $ 543
======= =======
SUPPLEMENTAL DATA:
Cash paid for interest................................ $ 591 $ 652
======= =======
Cash paid for income taxes............................ $ 131 $ 34
======= =======
</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
June 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 Common
Net Income Common Shares Share
---------- ------------- ----------
For the quarter ended June 30, 1998
-----------------------------------
Basic EPS
Net income attributable to
common stock $ 336 10,379 $ 0.03
Effect of dilutive securities:
stock options -- 137 --
------ ------ --------
Diluted EPS
Net income attributable to
common stock and assumed
option exercises $ 336 10,516 $ 0.03
====== ====== ========
For the quarter ended June 30, 1997
-----------------------------------
Basic EPS
Net income attributable to
common stock $ 112 10,375 $ 0.01
Effect of dilutive securities:
stock options -- 48 --
------ ------ --------
Diluted EPS
Net income attributable to
common stock and assumed
option exercises $ 112 10,423 $ 0.01
====== ====== ========
For the six months ended June 30, 1998
--------------------------------------
Basic EPS
Net income attributable to
common stock $ 519 10,379 $ 0.05
Effect of dilutive securities:
stock options -- 112 --
------ ------ --------
Diluted EPS
Net income attributable to
common stock and assumed
option exercises .......................... $ 519 10,491 $ 0.05
====== ====== ========
For the six months ended June 30, 1997
--------------------------------------
Basic EPS
Net income attributable to
common stock $ 115 10,375 $ 0.01
Effect of dilutive securities:
stock options -- 25 --
------ ------ --------
Diluted EPS
Net income attributable to
common stock and assumed
option exercises $ 115 10,400 $ 0.01
====== ====== ========
Page 6
<PAGE>
Diluted EPS, for the three months and six months ended June 30, 1998 and
June 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 second quarter of 1998 under either the 1995 or 1996 Stock Option Plans:
Granted Cancelled Exercised
------- --------- ---------
5,340 @ $7.0625 5,860 @ $2.875 - $9.50 310 @ $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 June 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 operated 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 --
Second Quarters Ended June 30, 1998 and June 30, 1997
Net Sales. Net sales increased by 10% to $13.5 million in the second
quarter of 1998 from $12.2 million in the second quarter 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 171% to $7.1 million in the
second quarter of 1998 from $2.6 million in the second quarter of 1997,
representing 53% and 21%, respectively, of net sales in such periods. The
military sales increase was predominantly due to higher shipments on a U. S.
Government military program. Sales of commercial products decreased by 33% to
$6.4 million in the second quarter of 1998 from $9.6 million in the second
quarter of 1997, representing 47% and 79%, 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 another domestic wireless
telecommunications OEM.
International sales decreased by 29% to $1.8 million in the second quarter
of 1998 from $2.6 million in the second quarter of 1997, totaling 14% of net
sales in the second quarter of 1998 compared to 21% in the second quarter of
1997. The decrease in international sales was predominantly due to lower market
demand for foreign wireless telecommunications OEM business, partially offset by
increased Republic foreign military business. In the second quarter of 1998,
sales to a domestic commercial OEM (Customer B) and a domestic military OEM
(Customer G) accounted for 22% and 30%, respectively, of the Company's net
sales. In the second quarter of 1997, sales to two domestic commercial OEMs
(Customer B and Customer D) and a foreign commercial OEM (Customer A) accounted
for 34%, 16% and 17%, respectively, of the Company's net sales.
Page 8
<PAGE>
Gross Profit. Gross profit increased by 27% to $4.2 million in the second
quarter of 1998 from $3.3 million in the second quarter of 1997. The Company's
gross profit margin (gross profit as a percentage of net sales) increased to
31.2% in the second quarter of 1998 from 27.1% in the second quarter of 1997.
This gross profit margin increase was primarily due to a more favorable revenue
mix of higher net gross profit margin business in the MPD military product line,
a more favorable fixed overhead absorption in the second quarter of 1998 versus
the second quarter of 1997 and a lower commercial warranty expense (specifically
for the Company's multi-channel, cellular-CDMA product). Despite the above, the
following factors adversely affected the gross profit margin for the second
quarter of 1998: (i) low gross profit margins the Company is experiencing on two
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
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 June 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
increased by 22% to $1.1 million in the second quarter of 1998 from $0.9 million
in the second quarter of 1997, representing 8.2% 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.
Selling Expenses. Selling expenses increased by 8% to $0.9 million in the
second quarter of 1998 from $0.9 million in the second quarter of 1997,
representing 6.9% and 7.1%, respectively, of net sales. The increase in selling
expenses resulted primarily from higher travel expenses for the Company's sales
and marketing personnel.
Research and Development Expenses. Research and development expenses
increased by 38% to $1.4 million in the second quarter of 1998 from $1.0 million
in the second quarter of 1997, representing 10.6% and 8.4%, respectively, of net
sales. This increase 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.
Interest Expense. Interest expense decreased by 14% to $0.3 million in the
second quarter of 1998 from $0.3 million in the second quarter of 1997,
primarily reflecting decreased average net borrowings under the Company's credit
facility.
Provision for Income Taxes. The Company's effective tax rate decreased to
27.0% in the second quarter of 1998 from 40.0% in the second quarter of 1997.
The effective tax rate for the second quarter of 1998 was favorably
Page 9
<PAGE>
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.
Without the benefit of this change in the reserve, the effective tax rate for
the second quarter of 1998 would have been 40.0%. The Company will continue to
assess its reserved deferred tax asset each reporting quarter.
Six Months Ended June 30, 1998 and June 30, 1997
Net Sales. Net sales increased by 12% to $25.0 million in the first six
months of 1998 from $22.2 million in the first six 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 86% to $11.8 million in the
first six months of 1998 from $6.3 million in the first six months of 1997,
representing 47% and 28%, respectively, of net sales in such periods. The
military sales increase was predominantly due to higher shipments on a U. S.
Government military program. Sales of commercial products decreased by 17% to
$13.2 million in the first six months of 1998 from $15.9 million in the first
six months of 1997, representing 53% and 72%, 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.
International sales decreased by 33% to $3.6 million in the first six
months of 1998 from $5.3 million in the first six months of 1997, totaling 14%
of net sales in the first six months of 1998 compared to 24% in the first six
months of 1997. The decrease in international sales was predominantly due to
lower market demand for foreign wireless telecommunications OEM business,
partially offset by higher Republic foreign military business. In the first six
months of 1998, sales to one domestic military OEM and two domestic commercial
OEMs (Customer G, Customer B and Customer D) accounted for 24%, 22% and 11%,
respectively, of the Company's net sales. In the first six months of 1997, sales
to two domestic commercial OEMs (Customer B and Customer D) and a foreign
commercial OEM (Customer A) accounted for 31%, 17% and 13%, respectively, of the
Company's net sales.
Gross Profit. Gross profit increased by 37% to $8.0 million in the first
six months of 1998 from $5.8 million in the first six months of 1997. The
Company's gross profit margin (gross profit as a percentage of net sales)
increased to 31.9% in the first six months of 1998 from 26.1% in the first six
months of 1997. This gross profit margin increase was primarily due to a more
favorable revenue mix of higher net gross profit margin business in the MPD
military product line, a lower commercial warranty expense (specifically for the
Company's multi-channel, cellular-CDMA product) and a more favorable fixed
overhead absorption in the first six months of 1998 versus the first six months
of 1997. Despite the above, the following factors adversely affected the gross
profit margin for the first six 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 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 June 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.
Page 10
<PAGE>
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 18% to $2.1 million in the first six months of 1998 from $1.8
million in the first six months of 1997, representing 8.3% and 7.9%,
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 personal computer and data processing supplies and
higher professional fees.
Selling Expenses. Selling expenses increased by 16% to $1.8 million in the
first six months of 1998 from $1.6 million in the first six months of 1997,
representing 7.3% and 7.1%, respectively, of net sales. The increase in selling
expenses resulted primarily from higher advertising and trade show expenses,
higher travel expenses for the Company's sales and marketing personnel and
higher sales representative commissions (the result of product sales mix
variations and the higher overall sales volume).
Research and Development Expenses. Research and development expenses
increased by 69% to $2.8 million in the first six months of 1998 from $1.7
million in the first six months of 1997, representing 11.4% and 7.5%,
respectively, of net sales. This increase 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 six 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 and second
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 level throughout the balance of 1998.
Interest Expense. Interest expense decreased by 8% to $0.6 million in the
first six months of 1998 from $0.6 million in the first six months of 1997,
primarily reflecting decreased average net borrowings under the Company's credit
facility.
Provision for Income Taxes. The Company's effective tax rate decreased to
22.0% for the first six months of 1998 from 40.0% for the first six months of
1997. The effective tax rate for the first six months of 1998 was 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.
Without the benefit of this change in the reserve, the effective tax rate for
the first six months of 1998 would have been 40.0%. The Company will continue to
assess its reserved deferred tax asset each reporting quarter.
Liquidity and Capital Resources
In the fourth quarter of 1995, the Company successfully completed its
initial public offering ("IPO") raising net proceeds to the Company of
approximately $20.4 million from the Company's sale of 2,875,000 shares of
Common Stock, including the underwriters' over-allotment option. Since the IPO,
the Company has financed its operations and met its capital requirements through
the following two sources: (i) a credit facility and/or (ii) cash provided by
operating activities.
Page 11
<PAGE>
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 loans borrowings must occur prior to
February 27, 1999. At June 30, 1998, the term loan balance was $1.95 million,
borrowings under the $3.0 million Capex facility were $1.7 million and
borrowings under the $10.5 million revolving line of credit were $5.1 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 $1.4 million and used net cash
of $1.4 million in the first six months of 1998 and 1997, respectively. From
December 31, 1997 to June 30, 1998, inventory increased by $2.7 million,
accounts payable and accrued liabilities increased by $0.9 million, customer
advance payments increased by $0.9 million and accounts receivable decreased by
$1.0 million. The increase in inventory was primarily due to an increase in raw
materials and work-in-process inventories for wireless telecommunications
products. The increase in accounts payable and accrued liabilities was primarily
the result of higher accrued accounts payable. The increase in customer advance
payments was primarily due to the receipt (in the second quarter of 1998) of
another advance payment from a foreign military OEM. The decrease in accounts
receivable was primarily due to the lower sales for the second quarter of 1998
as compared to the fourth quarter of 1997. Investing activities, which consisted
primarily of equipment acquisitions, used net cash of $1.5 million and $0.3
million in the first six months of 1998 and 1997, respectively. Financing
activities which consisted primarily of proceeds from long-term debt, principal
payments of long-term debt and net repayments made on the revolving line of
credit, used net cash of $0.04 million and provided net cash of $1.1 million in
the first six months of 1998 and 1997, respectively.
Capital expenditures were $1.5 million and $0.3 million in the first six
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 six months of 1998 included
engineering and manufacturing test equipment, the purchase of a second automated
surface-mount pick-n-place machine and enhancements to the Company's CAE/CAD
systems. The Company anticipates making additional capital expenditures of $0.5
million during the remainder of 1998, including purchases of additional
engineering and manufacturing test equipment as well as continued upgrades to
its CAE/CAD systems and computer equipment.
As of June 30, 1998, the Company had working capital of approximately
$18.4 million, compared to approximately $18.2 million as of December 31, 1997.
Working capital as of June 30, 1998 included approximately $7.3 million and
$19.7 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 June 30,
1998 was 2.5:1, compared with a current ratio of 2.8:1 as of December 31, 1997.
As of both June 30, 1998 and December 31, 1997, the Company's debt to equity
ratio was 0.7:1.
The Company believes that cash generated from operations, amounts
available under its credit facility, and/or third party financing will be
sufficient to fund necessary capital expenditures and to provide adequate
working capital for at least the next 12 months. There can be no assurance,
however, that the Company will not require additional financing prior to such
date to fund its operations, and, if required, that such financing will be
available on commercially reasonable terms. In addition, the Company may require
additional financing after such date to fund its operations.
Page 12
<PAGE>
The majority of any Year 2000 issues have already been addressed by the
Company. 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
remaining efforts for the Company, all of which are scheduled for 1998, include
certain personal computer applications and Windows 95 upgrades. These efforts
are not expected to require a significant financial expense for the Company.
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 4. Submission of Matters to a Vote of Security Holders.
At the Company's Annual Meeting of Stockholders held Thursday, May 7,
1998, at 11:00 A.M., local time, at the offices of Proskauer Rose LLP, 1585
Broadway, 26th Floor, New York, New York 10036, the following items were voted
upon:
For Against Abstain
--- ------- -------
1. Election of Directors:
George J. Sbordone 9,854,715 0 6,700
Edward J. Shubel 9,854,415 0 7,000
Merril M. Halpern 9,854,815 0 6,600
A. Lawrence Fagan 9,854,615 0 6,800
Alfred Weber 9,854,915 0 6,500
David J. Aldrich 9,852,715 0 8,700
Warren A. Law 9,852,815 0 8,600
James Silver 9,854,915 0 6,500
2. Approve the amendment
to the 1996 Stock Option
Plan 9,653,952 183,088 24,375
3. Ratify the
appointment of
Arthur Andersen LLP 9,841,365 8,850 11,200
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 June
30, 1998.
Page 13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROWAVE POWER DEVICES, INC.
(Registrant)
Dated: August 12, 1998 /s/ Edward J. Shubel
----------------------- --------------------
By: Edward J. Shubel
President and CEO
Dated: August 12, 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, June 30, 1998,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 558
<SECURITIES> 0
<RECEIVABLES> 7,365
<ALLOWANCES> 75
<INVENTORY> 19,678
<CURRENT-ASSETS> 30,804
<PP&E> 14,410
<DEPRECIATION> 5,282
<TOTAL-ASSETS> 44,095
<CURRENT-LIABILITIES> 12,360
<BONDS> 12,265
0
0
<COMMON> 104
<OTHER-SE> 19,366
<TOTAL-LIABILITY-AND-EQUITY> 44,095
<SALES> 24,951
<TOTAL-REVENUES> 24,951
<CGS> 16,979
<TOTAL-COSTS> 16,979
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 564
<INCOME-PRETAX> 666
<INCOME-TAX> 147
<INCOME-CONTINUING> 519
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 519
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
