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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File 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, 1998: $29,006,065.
Number of shares of Common Stock outstanding as of March 6, 1998: 10,378,890
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.
1997 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Item No. Page
- -------- ----
Part I
1. Business ......................................................3
2. Properties....................................................15
3. Legal Proceedings.............................................15
4. Submission of Matters to a Vote of Security Holders...........15
Part II
5. Market for Registrant's Common Equity
and Related Stockholder Matters.............................16
6. Selected Consolidated Financial Data..........................17
7. Management's Discussion and Analysis
of Financial Condition and Results of Operations............18
8. Financial Statements and Supplementary Data...................23
9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure.......................................23
Part III
10. Directors and Executive Officers of the Registrant............24
11. Executive Compensation........................................24
12. Security Ownership of Certain
Beneficial Owners and Management.............................24
13. Certain Relationships and Related Transactions................24
Part IV
14. Exhibits, Financial Statements and Reports on Form 8-K........24
Signatures....................................................................25
Exhibit Index.................................................................26
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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 wireless 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
("WLL") 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 30 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"), LG Information and Communications, Ltd. ("LGIC"
or "Goldstar") and QUALCOMM Incorporated ("Qualcomm") 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 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.
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Wireless service has been one of the fastest growing segments of the
wireless telecommunications market. According to consensus estimates from
infrastructure OEMs, there were approximately 140 million wireless subscribers
worldwide at year-end 1996, as compared to U.S. Department of Commerce estimates
of approximately 87 million, 52 million and 33 million at year-end 1995, 1994
and 1993, respectively. The growth in wireless communications has required, and
will continue to require, substantial investment by wireless service providers
in wireless infrastructure equipment. Moreover, intensified competition among
wireless 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,
wireless 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
wireless 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 wireless
network are 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 WLL 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 WLL 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
wireless 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:
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 wireless systems by enabling a more efficient use
of digital transmission technologies, microcellular architectures and
adaptive channel allocation. In current wireless 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.
Analog to Digital Transition. Traditional wireless 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.
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.
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.
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 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
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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 30 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. The
Company believes that its long standing technological capability will allow for
wireless market share growth with a continued nurturing of its satellite,
medical and military product lines.
Increase Penetration of Leading Integrated Wireless Infrastructure
Equipment Manufacturers. The Company has developed relationships with certain
large integrated wireless telecommunications OEMs, principally with Lucent, LGIC
and Qualcomm. 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 WLL 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,
CDPD and NMT-450 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. In this way, the Company hopes
to develop additional relationships with worldwide wireless telecommunications
OEMs.
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.
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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 wireless 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
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 wireless 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.
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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 450-3400 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:
- --------------------------------------------------------------------------------
Single Channel Amplifiers Multi-Channel Amplifiers
Wireless System Protocol Protocol
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Analog Cellular: AMPS AMPS
CDPD N-AMPS
TACS
SETACS
ETACS
NMT-450
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Digital Cellular: CDMA CDMA
TDMA TDMA
GSM-900 GSM-900
- --------------------------------------------------------------------------------
PCS: CDMA CDMA *
W-CDMA * TDMA *
TDMA DCS-1800 *
DCS-1800 PCS-1900 *
PCS-1900
- --------------------------------------------------------------------------------
* Products in the prototype phase.
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
NMT, 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 digital signal processing to enhance
linearity. The Company's products are
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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 and
continental 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 human
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, 1997 and December 31,
1996 was $83.9 million and $65.0 million, respectively, of which, as of December
31, 1997, approximately $33.4 million is currently scheduled to be shipped
during fiscal 1998. The $83.9 million backlog as of December 31, 1997 included
$8.2 million to wireless telecommunications customers, $25.0 million to
satellite communications customers, $6.5 million to medical and other commercial
customers and $44.2 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, 1997 include
product specifications not yet achieved by the Company.
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 with Qualcomm emerging as a leader in the global WLL arena.
In addition, a number of South Korean infrastructure OEMs are participating in
the wireless infrastructure build-out in that country and are emerging as
providers of 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 wireless 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.
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The Company sells wireless power amplification products throughout the
world to a limited number of OEM customers, including Lucent, LGIC and Qualcomm,
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 address
the high-power amplification needs of its OEM customers. Sales to integrated
wireless telecommunications OEMs require close account management by the
Company. As such, relationships are established 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 base stations. 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, 1997, 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 24%, 43% and 32%
of net sales in fiscal 1997, 1996 and 1995 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.
Manufacturing
The Company assembles, tests, packages and ships amplifier products at its
manufacturing facility located in Hauppauge, Long Island, 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. During the fourth quarter of 1997
a second stencil printer and oven for the surface-mount center was put into
service. It is currently anticipated that a second automated surface-mount
pick-n-place machine will be added in fiscal 1998. 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 second half of 1996. Essentially all wireless production
amplifiers are now tuned and tested in an automated fashion.
The Company's movement during the past few years into high volume automated
production was the result of time to market and pricing demands of the wireless
telecommunications industry. The Company believes that it must continue to
maintain direct control over this process if it wants to continue to satisfy the
timely needs of wireless telecommunications OEMs. Furthermore, the Company has
introduced these same automated manufacturing processes into its other product
segments much to the benefit of the satellite, medical and military customers
and their associated equipment. As a result, the Company has begun to leverage
its high volume design and production capabilities into its low and medium
volume product lines.
10
<PAGE>
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 1997, 1996 and 1995 were $4.4 million, $7.4 million, and $4.3
million, respectively, and represented 8.4%, 15.5% and 15.8% 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 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 as well as enabling
them to more aggressively pursue various pre-production opportunities.
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 and its thirty
year military industry stature.
11
<PAGE>
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 two
U.S. trademarks and has one European and one U.S. patent 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 "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, 1997
included $9.1 million of orders from Republic Electronics' customers. In 1997,
sales attributable to Republic Electronics' business were $6.9 million,
comprising 13.2% of the Company's net sales.
The Company has a U.S. patent (which expires in January 2012), and a
European patent pending, relating to a windshear radar warning system tester.
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" and "MRES 2000"
are U.S. registered trademarks of the Company. The Company also has a U.S.
patent pending for a flightline test of satellite-based airborne navigation
systems.
Employees
As of December 31, 1997, the Company had a total of 379 regular, temporary
and contract employees, including 235 in operations and quality, 102 in
engineering, 11 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.
12
<PAGE>
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,
1997 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.
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 and to develop new products that can be sold at higher average sales
prices, 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.
13
<PAGE>
Sales of power amplifiers to wireless telecommunications OEMs are expected
to account for a 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, PCS and other wireless telecommunications
services 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.
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.
The recent financial market turmoil and economic slowdown in South Korea
may have a material adverse effect on the Company's sales. The Company's primary
customer in this region is LGIC which is one of a number of South Korean OEMs
that are participating in the wireless infrastructure build-out in that country.
In addition, since worldwide pricing of the Company's products are in U.S.
dollars, the current instability in South Korea and other Asian financial
markets may have the effect of making the Company's products more expensive to
LGIC as compared to those of other manufacturers whose products are priced in
one of the affected Asian currencies. As a result, LGIC may reduce or eliminate
future purchases of the Company's products.
14
<PAGE>
ITEM 2. PROPERTIES.
The Company's operations are located in an 86,000 square foot facility on
7.4 acres of land in Hauppauge, Long Island, New York. The building was
constructed in 1986 and purchased by the Company in June 1992 with the proceeds
from Industrial Development Revenue Bonds ("IDRBs") 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 engineering, manufacturing,
quality assurance, sales and marketing and administrative personnel. The plant
has been customized to suit the Company's operations, which includes electrical
power upgrades and 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 1999, the Company has zoning
approvals 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.
On January 30, 1998, a complaint was filed against the Company in the
United States Bankruptcy Court for the Northern District of Texas, Dallas
Division, alleging the Company's failure to turn over property to the estate of
Pinpoint Communications, Inc. ("Pinpoint") which, as of August 13, 1996, is in
Chapter 7 liquidation. The suit alleges that the Company has failed to return
advance monies of approximately $0.5 million paid by Pinpoint pursuant to an
equipment purchase agreement dated March 31, 1995 between the parties. The
Company believes that the allegations are without merit. The Company expects to
incur legal expenses in its defense of this suit and this suit will likely
result in the diversion of management's attention from daily operations of the
Company's business. There can be no assurances that this litigation will be
resolved in the Company's favor and an unfavorable result could have a material
adverse effect on the Company's business, financial condition and results of
operation.
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 other 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 1997.
15
<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 Nasdaq Stock Market(SM)
under the symbol MPDI. On March 6, 1998 there were approximately 2,300
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
--------------- ---- ---
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
1997:
First Quarter.................... 4-1/4 2-13/32
Second Quarter................... 5-1/2 2-7/16
Third Quarter.................... 12-3/8 4-17/64
Fourth Quarter................... 11 4-3/4
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.
16
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data as of and for the years
ended December 31, 1997 and 1996, and for the year ended December 31, 1995 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, 1995 and as of and for the year ended 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 year ended
December 25, 1993 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 31, December 25,
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
Consolidated Statements of Operations Data: (in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales ...................................... $ 52,037 $ 47,362 $ 27,302 $ 25,134 $ 23,763
Cost of sales .................................. 38,142 41,501 20,122 17,371 16,266
-------- -------- -------- -------- --------
Gross profit ................................... 13,895 5,861 7,180 7,763 7,497
Operating expenses:
General and administrative .................. 3,575 3,221 3,091 2,585 2,316
Selling ..................................... 3,963 3,720 3,346 2,749 1,627
Research and development .................... 4,367 7,364 4,306 1,150 781
-------- -------- -------- -------- --------
Total operating expenses .................. 11,905 14,305 10,743 6,484 4,724
-------- -------- -------- -------- --------
Income (loss) from operations .................. 1,990 (8,444) (3,563) 1,279 2,773
Interest expense, net .......................... 1,237 948 1,310 832 632
Other (income) expense, net .................... (16) 6 55 67 (11)
-------- -------- -------- -------- --------
Income (loss) before income taxes .............. 769 (9,398) (4,928) 380 2,152
Provision (benefit) for income taxes ........... 189 (3,759) (1,976) 33 475
-------- -------- -------- -------- --------
Net income (loss) .............................. $ 580 $ (5,639) $ (2,952) $ 347 $ 1,677
======== ======== ======== ======== ========
Net income (loss) per common share:
Basic ....................................... $ 0.06 $ (0.54) $ (0.36) $ 0.05 $ 0.22
======== ======== ======== ======== ========
Diluted ..................................... $ 0.06 $ (0.54) $ (0.36) $ 0.05 $ 0.22
======== ======== ======== ======== ========
Common shares used in computing
per share amounts:
Basic ....................................... 10,376 10,375 8,172 7,500 7,500
======== ======== ======== ======== ========
Diluted ..................................... 10,465 10,375 8,172 7,500 7,500
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, December 31, December 31, December 25,
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
Consolidated Balance Sheet Data: .................. (in thousands)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ......................... $ 687 $ 1,149 $ 388 $ 410 $ 1,533
Working capital ................................... 18,183 16,151 24,529 8,614 5,706
Total assets ...................................... 41,822 38,890 41,227 21,834 19,224
Total debt ........................................ 13,276 12,789 9,718 11,903 9,495
Total stockholders' equity ........................ 18,949 18,302 23,941 6,416 6,128
</TABLE>
17
<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 30 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 following table summarizes certain key financial information:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Change Change
1997 from 1996 from 1995
($000s) prior year ($000s) prior year ($000s)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 52,037 10% $ 47,362 73% $ 27,302
- ---------------------------------------------------------------------------------------------------------------------------
Gross Profit $ 13,895 137% $ 5,861 (18)% $ 7,180
Gross Profit Margin 26.7% 12.4% 26.3%
- ---------------------------------------------------------------------------------------------------------------------------
General and Administrative Expenses $ 3,575 11% $ 3,221 4% $ 3,091
Percentage of Net Sales 6.9% 6.8% 11.3%
- ---------------------------------------------------------------------------------------------------------------------------
Selling Expenses $ 3,963 7% $ 3,720 11% $ 3,346
Percentage of Net Sales 7.6% 7.9% 12.2%
- ---------------------------------------------------------------------------------------------------------------------------
Research and Development Expenses $ 4,367 (41)% $ 7,364 71% $ 4,306
Percentage of Net Sales 8.4% 15.5% 15.8%
- ---------------------------------------------------------------------------------------------------------------------------
Interest Expense $ 1,237 30% $ 948 (28)% $ 1,310
Percentage of Net Sales 2.3% 2.0% 4.8%
- ---------------------------------------------------------------------------------------------------------------------------
Provision (Benefit) for Income Taxes $ 189 N/A $ (3,759) (90)% $ (1,976)
Effective Tax Rate 24.6% 40.0% 40.1%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
Results of Operations
Fiscal Years Ended December 31, 1997 and December 31, 1996
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 10% to
$52.0 million in 1997 from $47.4 million in 1996. This sales increase was
primarily due to higher shipments of the Company's commercial products,
partially offset by slightly lower shipments of the Company's military products.
Sales of commercial products increased by 15% to $38.6 million in 1997 from
$33.6 million in 1996, representing 74% and 71%, respectively, of net sales in
such years. The commercial sales increase was predominantly due to higher
shipments to one domestic wireless telecommunications OEM and one satellite
communications OEM, partially offset by lower shipments to one foreign wireless
telecommunications OEM. Sales of military products decreased by 3% to $13.4
million in 1997 from $13.8 million in 1996, representing 26% and 29%,
respectively, of net sales in such years. The military sales decrease was
predominantly due to an overall lower market demand for Republic products.
International sales decreased by 38% to $12.7 million in 1997 from $20.6
million in 1996, totaling 24% of net sales in 1997 compared to 43% in 1996. The
decrease in international sales was primarily due to lower foreign wireless
telecommunications OEM business, partially offset by higher foreign military
business. In 1997, sales to two domestic commercial OEMs (Customer B and
Customer D) and a foreign commercial OEM (Customer A) accounted for 33%, 16% and
13%, respectively, of the Company's net sales. 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.
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 increased by 137% to $13.9 million in 1997 from $5.9 million in
1996. The Company's gross profit margin (gross profit as a percentage of net
sales) increased to 26.7% in 1997 from 12.4% in 1996. The increase in the gross
profit margin was primarily due to the non-recurrence of the 1996 $4.9 million
write-off of wireless multi-channel work-in-process inventory caused by then
diminished demand for those particular products, the 1996 $1.0 million write-off
of wireless multi-channel work-in-process inventory related to the cancellation
of the remainder of the AirNet contract and the 1996 $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. The increase in gross profit was
primarily due to the non-recurrence of the above mentioned items plus the
recognition of a more favorable gross profit associated with the net sales
increase in 1997. In addition, the following factors adversely affected the
Company's 1997 gross profit margin: (i) low gross profits the Company is
experiencing on three military OEM contracts (the result of production delays,
technical problems and software integration difficulties), (ii) the overall low
gross profit margin obtainable on the Company's multi-channel product line (the
result of competitive pricing pressures), (iii) engineering and manufacturing
difficulties experienced on the pre-production phase of two newer wireless
products and (iv) a high level of warranty expense (as a percentage of net
sales) specifically related to those warranty costs associated with the
Company's more recent introduction of wireless telecommunications products.
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 December
31, 1997 set forth product specifications not yet achieved by the Company that
would require the Company to complete additional product development. Failure to
develop products meeting such specifications could lead to the cancellation of
the related purchase orders or contracts. The reduction, delay or cancellation
of orders or contracts from one or more significant customers could materially
adversely affect the Company's business, financial condition and results of
operations.
19
<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 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 11% to
$3.6 million in 1997 from $3.2 million in 1996, representing 6.9% and 6.8%,
respectively, of net sales. The increase in general and administrative expenses
was primarily due to the Company-wide upgrade of computer hardware, software and
data processing equipment (that portion of which did not meet the Company's
capitalization criteria) as well as higher accounting and legal expenses.
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 7% to $4.0
million in 1997 from $3.7 million in 1996, representing 7.6% and 7.9%,
respectively, of net sales. The increase in selling expenses resulted primarily
from higher bid and proposal expenses (incurred in connection with a $12.0
million foreign military order awarded in the third quarter of 1997 and a
generally higher level of proposal activity across all product lines).
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 decreased by 41% to $4.4 million in 1997 from $7.4
million in 1996, representing 8.4% and 15.5%, respectively, of net sales. The
decrease in research and development expenses resulted primarily from reduced
military and, to a lesser extent, wireless telecommunications product
development efforts. Military research and development expenses decreased
predominantly as a result of the Company completing the majority of the product
development efforts, in 1996, for a Republic MRES 2000 simulator product. In the
military environment, customer funding of product development costs is typical.
The Republic MRES 2000 program was an exception, however, as the Company funded
a large majority of this product development effort throughout 1996. The Company
believes that the continued introduction of new products is essential to its
competitiveness, especially in the wireless telecommunications market, and is
committed to continued investment in research and development. The Company views
the decrease in wireless telecommunications research and development expenses
(the majority of which occurred in the first quarter of 1997) as a short term
solution used to assist in reducing costs to match corresponding reduced
wireless revenue (which also occurred in the first quarter of 1997). Fundamental
to this effort was a temporary reallocation of some of the Company's engineering
and technology resources to either revenue producing or customer-funded product
development during the first quarter of 1997. This action enabled the Company to
leverage its other commercial and military product lines while insuring a
continued and focused emphasis on critical wireless telecommunications
development projects.
Interest Expense. Interest expense consists principally of interest
expended on the Company's credit facility, IDRBs and promissory notes, partially
offset by interest earned on the Company's cash balances. Interest expense
increased by 30% to $1.2 million in 1997 from $0.9 million in 1996, primarily
reflecting increased average borrowings under the Company's credit facility.
Provision for Income Taxes. The Company accounts for income taxes under
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." The Company has recorded deferred tax assets of $3.8 million in
1996 and $2.0 million in 1995 for the benefit of federal income tax net
operating loss carryforwards ("NOLs") and timing differences generated in those
years. The Company has reserved a portion of the deferred tax asset with respect
to its NOLs. Realization is dependent on generating sufficient taxable income
prior to expiration of the NOLs. Although realization is not assured, management
believes it is more likely than not that all of the net 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. The Company's effective tax rate
decreased to 24.6% in 1997 from 40.0% in 1996. The 1997 rate was favorably
impacted by the partial recovery of the previously reserved deferred tax asset
resulting from the Company's improved profitability position as compared to
1996. Without the benefit of this change in the reserve, the effective tax rate
for 1997 would have been 40.2%. The Company will continue to assess the reserved
deferred tax asset each reporting quarter. The 1996 rate was due to the net
20
<PAGE>
loss incurred by the Company in 1996, the benefit of which the Company expects
to utilize to offset future taxable income, as prescribed by SFAS No. 109. There
can be no assurances that the Company will continue to achieve taxable income in
the future.
Fiscal Years Ended December 31, 1996 and December 31, 1995
Net Sales. 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. 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. 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 then diminished demand for those 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
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).
General and Administrative Expenses. 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 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
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.
21
<PAGE>
Interest Expense. 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'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.
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 and/or (ii) cash provided by operating
activities.
The Company has 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 itself 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. 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 $0.5 million and used net cash of
$1.4 million in 1997 and 1996, respectively. From December 31, 1996 to December
31, 1997, accounts receivable, inventory, and accounts payable, accrued
liabilities and customer advance payments increased by $0.8 million, $2.6
million and $1.8 million, respectively. The increase in accounts receivable was
primarily due to the higher revenue level in the fourth quarter of 1997 compared
with the fourth quarter of 1996. The increase in inventory was predominantly due
to an increase in work-in-process inventory associated with three long-term
military programs and a build-to-forecast wireless telecommunication product
and, to a lesser extent, an increase in component inventory associated with one
of the long-term military programs. The increase in accounts payable, accrued
liabilities and customer advance payments was primarily due to the receipt of an
advance payment in the fourth quarter of 1997 from a foreign military OEM and,
to a lesser extent, a greater year end 1997 payroll and related benefits
accrual, partially offset by more current vendor payments when compared to year
end 1996. Investing activities, which consisted primarily of equipment
acquisitions, used net cash of $1.3 million and $0.9 million in 1997 and 1996,
respectively. Financing activities, which consisted predominantly of net
proceeds from the credit facility, provided net cash of $0.4 million and $3.0
million in 1997 and 1996, respectively.
Capital expenditures were $1.3 million and $0.9 million in 1997 and 1996,
respectively. These expenditures were funded primarily through cash provided by
beginning of year cash balances, operating activities and the Company's credit
facility. Principal expenditures for 1997 included upgrades to the Company's
information systems' hardware and software, purchases of engineering and
manufacturing test equipment, upgrades to the Company's CAD systems and expanded
surface mount capabilities. The Company expects that 1998 capital expenditures,
anticipated to minimally include a second automated surface-mount pick-n-place
machine and additional engineering and manufacturing test
22
<PAGE>
equipment, will be financed by cash provided by operating activities, the
Company's credit facility and/or third party financing sources.
As of December 31, 1997, the Company had working capital of approximately
$18.2 million, compared to approximately $16.2 million as of December 31, 1996.
Working capital as of December 31, 1997 included approximately $8.3 million and
$16.9 million in accounts receivable and inventory, respectively, compared to
December 31, 1996 working capital which included approximately $7.5 million and
$14.4 million in accounts receivable and inventory, respectively. The Company's
current ratio (ratio of current assets to current liabilities) as of December
31, 1997 was 2.8:1, compared with a current ratio of 3.1:1 as of December 31,
1996. As of both December 31, 1997 and December 31, 1996, the Company's debt to
equity ratio was 0.7:1.
The Company believes that cash generated from operations, amounts available
under its credit facility, and/or 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.
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 "friendly". The remaining efforts for the Company, all of which
are scheduled for 1998, include a few personal computer applications and Windows
95 upgrades. These efforts are not expected to cause a financial burden for the
Company.
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.
23
<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 fourth quarter of
1997.
(c) Exhibits
See Exhibit Index immediately following signature pages.
24
<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 16, 1998
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.
<TABLE>
<S> <C> <C>
/s/ Edward J. Shubel Chief Executive Officer March 16, 1998
- ------------------------ (Principal Executive Officer)
Edward J. Shubel
/s/ Paul E. Donofrio Chief Financial Officer March 16, 1998
- ------------------------ (Principal Financial Officer and
Paul E. Donofrio Principal Accounting Officer)
/s/ George J. Sbordone Director March 16, 1998
- ------------------------
George J. Sbordone
/s/ Merril M. Halpern Director March 16, 1998
- ------------------------
Merril M. Halpern
/s/ A. Lawrence Fagan Director March 16, 1998
- ------------------------
A. Lawrence Fagan
/s/ Alfred Weber Director March 13, 1998
- ------------------------
Alfred Weber
/s/ David J. Aldrich Director March 16, 1998
- ------------------------
David J. Aldrich
/s/ Warren A. Law Director March 11, 1998
- ------------------------
Warren A. Law
/s/ James S. Silver Director March 16, 1998
- ------------------------
James S. Silver
</TABLE>
25
<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)).
10.12- Security Control Agreement dated September 5, 1997 between MPD
Technologies, Inc. and the United States Department of Defense.
10.13- Amendment No. 1 dated as of February 27, 1998 to a Loan and Security
Agreement dated as of February 13, 1997 among IBJ Schroder Business
Credit Corporation, as Lender and Agent, and MPD Technologies, Inc.
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)).
23.1- Consent of Independent Public Accounts.
27.1- Financial Data Schedule.
26
<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, 1997 and 1996..................................................F-3
Consolidated Statements of Operations for the
three years ended December 31, 1997.........................................F-4
Consolidated Statements of Shareholders' Equity
for the three years ended December 31, 1997.................................F-5
Consolidated Statements of Cash Flows
for the three years ended December 31, 1997.................................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, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Melville, New York
March 2, 1998
F-2
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands,
except share data)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 687 $ 1,149
Accounts receivable, net of allowance for doubtful accounts of
$75 and $76, respectively .............................................. 8,329 7,482
Inventories, net .......................................................... 16,931 14,362
Prepaid expenses and other current assets ................................. 706 657
Deferred income taxes ..................................................... 1,777 345
------ ------
Total current assets ................................................ 28,430 23,995
PROPERTY, PLANT AND EQUIPMENT, net ........................................... 8,273 8,057
INTANGIBLE ASSETS, net ....................................................... 389 369
OTHER LONG-TERM ASSETS ....................................................... 903 1,015
DEFERRED INCOME TAXES ........................................................ 3,827 5,454
------ ------
$ 41,822 $ 38,890
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ......................................... $ 650 $ 45
Accounts payable .......................................................... 4,848 5,103
Accrued liabilities ....................................................... 3,186 2,696
Customer advance payments ................................................. 1,563 --
------ ------
Total current liabilities ........................................... 10,247 7,844
------ -----
LONG-TERM DEBT ............................................................... 12,626 12,744
------ ------
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares authorized;
no shares issued or outstanding .................................... -- --
Common stock, $.01 par value; 25,000,000 shares authorized;
10,378,750 and 10,375,000 shares issued and outstanding, respectively 104 104
Additional paid-in capital ................................................ 23,306 23,276
Notes receivable from shareholders ........................................ (188) (225)
Retained earnings (accumulated deficit) ................................... (4,273) (4,853)
------- -------
Total shareholders' equity .......................................... 18,949 18,302
------- ------
$41,822 $38,890
======= =======
</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,
1997 1996 1995
------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C>
NET SALES .................................................... $ 52,037 $ 47,362 $ 27,302
COST OF SALES ................................................ 38,142 41,501 20,122
-------- -------- --------
Gross profit ........................................... 13,895 5,861 7,180
-------- -------- --------
OPERATING EXPENSES:
General and administrative ................................ 3,575 3,221 3,091
Selling ................................................... 3,963 3,720 3,346
Research and development (Note 2) ......................... 4,367 7,364 4,306
-------- -------- --------
11,905 14,305 10,743
-------- -------- --------
Income (loss) from operations .......................... 1,990 (8,444) (3,563)
INTEREST EXPENSE, net ........................................ 1,237 948 1,310
OTHER (INCOME) EXPENSE, net .................................. (16) 6 55
-------- -------- --------
Income (loss) before income taxes ...................... 769 (9,398) (4,928)
PROVISION (BENEFIT) FOR INCOME TAXES ......................... 189 (3,759) (1,976)
-------- -------- --------
Net income (loss) ...................................... $ 580 $ (5,639) $ (2,952)
======== ======== ========
PER SHARE INFORMATION (Note 2):
Net income (loss) per common share:
Basic .................................................. $ 0.06 $ (0.54) $ (0.36)
======== ======== ========
Diluted ................................................ $ 0.06 $ (0.54) $ (0.36)
======== ======== ========
Common shares used in computing per share amounts:
Basic .................................................. 10,376 10,375 8,172
======== ======== ========
Diluted ................................................ 10,465 10,375 8,172
======== ======== ========
</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>
Unrealized
Gain (Loss)
Notes on Investment Retained
Additional Receivable in Earnings
Paid-in from Marketable (Accumulated
Preferred Stock Common Stock Capital Shareholders Securities Deficit) Total
--------------- ------------ ------- ------------ ---------- -------- -----
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 ............ -- $ -- 7,500 $ 75 $ 2,925 $ (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
marketable securities ........... -- -- -- -- -- -- 28 -- 28
Initial public offering ............ -- -- 2,875 29 20,351 -- -- -- 20,380
Reclassification of
notes receivable
from shareholders
(Note 8) ........................ -- -- -- -- -- 38 -- -- 38
---- ---- ------ -------- -------- -------- -------- -------- --------
BALANCE, December 31, 1995 ............ -- -- 10,375 104 23,276 (225) -- 786 23,941
Net loss ........................... -- -- -- -- -- -- -- (5,639) (5,639)
---- ---- ------ -------- -------- -------- -------- -------- --------
BALANCE, December 31, 1996 ............ -- -- 10,375 104 23,276 (225) -- (4,853) 18,302
Net income ......................... -- -- -- -- -- -- -- 580 580
Exercise of stock
options ......................... -- -- 4 -- 30 -- -- -- 30
Repayment of notes
receivable from
shareholders (Note 8) ........... -- -- -- -- -- 37 -- -- 37
---- ---- ------ -------- -------- -------- -------- -------- --------
BALANCE, December 31, 1997 ............ -- $ -- 10,379 $ 104 $ 23,306 $ (188) $ -- $ (4,273) $ 18,949
==== ==== ====== ======== ======== ======== ======== ======== ========
</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,
1997 1996 1995
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .......................................................... $ 580 $ (5,639) $ (2,952)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................................. 1,211 1,189 958
Deferred income taxes ..................................................... 194 (3,699) (1,981)
(Gain) loss on sale of property, plant and equipment ...................... (19) 3 23
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 ...................................................... (847) 1,944 (5,351)
Inventories .............................................................. (2,569) 4,551 (11,621)
Prepaid expenses and other assets ........................................ 104 (433) (431)
Accounts payable and accrued liabilities ................................. 235 707 3,908
Customer advance payments ................................................ 1,563 -- --
-------- -------- --------
Net cash provided by (used in) operating activities .............. 452 (1,377) (17,293)
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ................................. (1,337) (912) (2,315)
Proceeds from sale of property, plant and equipment ........................ 23 15 8
Investment in marketable securities ........................................ (4) -- --
-------- -------- --------
Net cash used in investing activities ............................ (1,318) (897) (2,307)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from long-term debt ............................................... 2,700 -- 800
Principal payments of long-term debt ....................................... (495) (40) (2,992)
Net proceeds from (repayments on) revolving credit loans ................... (1,717) 3,110 2,859
Advances to affiliates, net ................................................ -- -- (1,443)
Deferred financing costs ................................................... (114) (35) (26)
Net proceeds from issuance of common stock ................................. 30 -- 20,380
-------- -------- --------
Net cash provided by financing activities ........................ 404 3,035 19,578
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................. (462) 761 (22)
CASH AND CASH EQUIVALENTS, beginning of year ................................. 1,149 388 410
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year ....................................... $ 687 $ 1,149 $ 388
======== ======== ========
SUPPLEMENTAL DATA:
Cash paid for interest ..................................................... $ 1,302 $ 1,049 $ 1,311
======== ======== ========
Cash paid for income taxes ................................................. $ 104 $ 23 $ 27
======== ======== ========
</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, 1997 and 1996
(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, Long Island, 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
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, 1997, sales to U.S. commercial original
equipment manufacturers ("OEMs") and U.S. prime contractors, the U.S. government
and foreign entities accounted for 72%, 4%, and 24% (14% and 10% to Asia and
Europe, respectively), respectively, of net sales. Accounts receivable from such
customers represent 62%, 7% and 31% of total accounts receivable, respectively,
at December 31, 1997. For the year ended December 31, 1997, sales to two
domestic commercial OEMs (Customer B and Customer D) and one foreign commercial
OEM (Customer A) accounted for 33%, 16% and 13%, respectively, of net sales. At
December 31, 1997 two domestic commercial OEMs (Customer B and Customer D) and
one foreign military OEM (Customer E) represent 26%, 11% and 12% 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, 1996, sales to U.S. commercial 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 F) represent 24% and 13% of
accounts receivable, respectively.
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.
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 4).
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.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation and amortization (Note 5). 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
F-8
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible Assets
Intangible assets, net of accumulated amortization of approximately $328
and $235 at December 31, 1997 and December 31, 1996, 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 to pay down the related debt, these
deferred financing costs were charged to interest expense. During 1997 and 1996,
the Company incurred $114 and $35, respectively, in deferred financing costs
associated with the New Loan Agreement (Note 7), which will be amortized over 3
years.
Long-Lived Assets
Effective January 1, 1996, the Company adopted the 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. The effect of the adoption of this
standard and its current application have not been 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). 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 1996 or 1997.
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 $4,367, $7,364, and $4,306
in the years ended December 31, 1997, December 31, 1996 and December 31, 1995,
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.
F-9
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings
Per Share." Basic net income (loss) per common share ("Basic EPS") is computed
by dividing net income (loss) by the weighted average number of common shares
outstanding. Diluted net income (loss) per common share ("Diluted EPS") is
computed by dividing net income (loss) 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:
<TABLE>
<CAPTION>
Net Income
Net Income Common (Loss) Per
(Loss) Shares Common Share
------ ------ ------------
For the year ended December 31, 1995
------------------------------------
<S> <C> <C> <C>
Basic EPS
Net loss attributable to common stock $(2,952) 8,172 $ (0.36)
Effect of dilutive securities: stock options -- -- --
------- ------- --------
Diluted EPS
Net loss attributable to common stock and
assumed option exercises $(2,952) 8,172 $ (0.36)
======= ======= ========
For the year ended December 31, 1996
------------------------------------
Basic EPS
Net loss attributable to common stock $(5,639) 10,375 $ (0.54)
Effect of dilutive securities: stock options -- -- --
------- ------- --------
Diluted EPS
Net loss attributable to common stock and
assumed option exercises $(5,639) 10,375 $ (0.54)
======= ======= ========
For the year ended December 31, 1997
------------------------------------
Basic EPS
Net income attributable to common stock $ 580 10,376 $ 0.06
Effect of dilutive securities: stock options -- 89 --
------ ------ -------
Diluted EPS
Net income attributable to common stock and
assumed option exercises $ 580 10,465 $ 0.06
======= ======= ========
</TABLE>
Diluted EPS for 1995 and 1996 does not include the impact of stock options
then outstanding as their inclusion would be anti-dilutive.
F-10
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
Effective January 1, 1995, the Company adopted 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 10).
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. 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.
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.
4. INVENTORIES, NET:
At December 31, 1997 and 1996, inventories, net consist of the following:
1997 1996
-------- --------
Raw materials .......................................... $ 7,504 $ 6,333
Work-in-process ........................................ 12,349 8,918
Unliquidated progress payments ......................... (1,789) (231)
-------- --------
18,064 15,020
Less: Reserves ......................................... (1,133) (658)
-------- --------
$ 16,931 $ 14,362
======== ========
F-11
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
5. PROPERTY, PLANT AND EQUIPMENT, NET:
At December 31, 1997 and 1996, property, plant and equipment, net consists
of the following:
1997 1996
-------- --------
Land ............................................... $ 937 $ 937
Building and improvements .......................... 4,384 4,361
Machinery and equipment ............................ 7,448 6,606
Furniture and fixtures ............................. 201 131
-------- --------
12,970 12,035
Less: Accumulated depreciation and amortization .... (4,697) (3,978)
-------- --------
$ 8,273 $ 8,057
======== ========
6. ACCRUED LIABILITIES:
At December 31, 1997 and 1996, accrued liabilities consist of the
following:
1997 1996
------ ------
Accrued payroll and benefits ................... $1,868 $1,450
Accrued commissions ............................ 474 422
Accrued warranty ............................... 715 400
Other .......................................... 129 424
------ ------
$3,186 $2,696
====== ======
7. LONG-TERM DEBT:
At December 31, 1997 and 1996, long-term debt consists of the following:
1997 1996
-------- --------
Industrial Development Revenue Bonds (a) ......... $ 4,620 $ 4,665
Loan and security agreement (b) .................. 8,656 8,124
-------- --------
13,276 12,789
Less: Current portion ............................ (650) (45)
-------- --------
$ 12,626 $ 12,744
======== ========
(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
F-12
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Series B Bonds include a $425 Debt Service Reserve Fund due and payable on
June 30, 2022. Approximately $441 and $437 was in an escrow account in
accordance with the terms of the IDRBs and is included in long-term assets
in the accompanying consolidated balance sheets as of December 31, 1997 and
December 31, 1996, respectively. 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.
(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 relate
strictly to revolving credit loans, which bore interest at the bank's base
rate (8.25% at December 31, 1996) plus 1.0%, and totaled $8,124.
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 provided for borrowings up to $13,000 in the form of a
revolving line of credit in the amount of $10,300 and a term loan in the
amount of $2,700. At December 31, 1997 the line of credit and term loan had
outstanding borrowings of $6,406 and $2,250, respectively. 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. Effective February 1, 1998, in accordance with the
terms of the loan document, the above rates have been reduced by 0.5% each.
The aggregate annual maturities of long-term debt, at December 31, 1997,
are as follows:
1998........................................................ $ 650
1999........................................................ 655
2000........................................................ 7,516
2001........................................................ 65
2002........................................................ 70
Thereafter.................................................. 4,320
-------
Total..................................... $13,276
=======
On February 27, 1998, Amendment No. 1 to the New Loan Agreement was
executed which provided for (a) an overall increase in the value of the credit
facility to $15,450 by adding a $3,000 capital equipment loan facility, (b) the
establishment of a method by which the revolving line of credit will be
increased from $10,300 to a maximum of $12,000 with each monthly $50 repayment
of the term loan beginning with the March 1, 1998 payment and (c) the extension
of the Amended New Loan Agreement to February 12, 2001.
F-13
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. 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%. On March
2, 1998, the notes were approved to be extended to September 3, 2001 and to bear
interest at 8.0%. In 1996, $38 of the outstanding notes receivable from
shareholders was repaid. An additional $37 of the outstanding notes receivable
from shareholders was repaid in 1997.
9. INCOME TAXES:
For the years ended December 31, 1997, December 31, 1996 and December 31,
1995, the provision (benefit) for income taxes consists of the following:
1997 1996 1995
------- ------- -------
Current:
Federal ............... $ -- $ -- $ --
State ................. -- -- --
------- ------- -------
Deferred:
Federal ............... 170 (3,384) (1,779)
State ................. 19 (375) (197)
------- ------- -------
189 (3,759) (1,976)
------- ------- -------
$ 189 $(3,759) $(1,976)
======= ======= =======
The following table reconciles the Federal statutory rate to the Company's
effective income tax rate for the years ended December 31, 1997, December 31,
1996 and December 31, 1995:
1997 1996 1995
---- ---- ----
Statutory rate ........................................... 34% 34% 34%
State taxes, net of federal benefit ...................... 6 6 6
Change in valuation allowance on deferred tax asset ...... (15) -- --
--- --- ---
Effective Rate ........................................... 25% 40% 40%
=== === ===
F-14
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, December 31, 1996 and December
31, 1995, the deferred income tax provision (benefit) is related to differences
between the financial and tax bases of assets and liabilities resulting from the
following:
1997 1996 1995
------- ------- -------
Depreciation ............................ $ 46 $ (137) $ (96)
Inventories ............................. (218) (56) 41
Accrued vacation expense ................ (23) (34) 77
Accrued warranty costs .................. (126) (126) (10)
Prepaid real estate taxes ............... (7) 3 (30)
Accounts receivable ..................... -- (3) 7
Contract research and development ....... (46) 231 --
Net operating loss carryforwards ........ 563 (3,637) (1,965)
------- ------- -------
$ 189 $(3,759) $(1,976)
======= ======= =======
The Company has recorded deferred tax assets of $3,759 in 1996 and $1,976
in 1995 for the benefit of federal income tax loss carryforwards and timing
differences generated in those years. The Company has reserved a portion of the
deferred tax asset with respect to its loss carryforwards. 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 net 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.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset, net, at December 31, 1997 and December 31,
1996, are as follows:
1997 1996
------- -------
Depreciation ................................... $ (268) $ (222)
Inventories .................................... 528 311
Accrued vacation expense ....................... 276 253
Accrued warranty costs ......................... 286 160
Prepaid real estate taxes ...................... (53) (60)
Accounts receivable ............................ 30 30
Contract research and development .............. (185) (231)
Net operating loss carryforwards ............... 5,406 6,094
------- -------
6,020 6,335
Less: valuation allowance ...................... 416 536
------- -------
Deferred tax asset, net ........................ $ 5,604 $ 5,799
======= =======
F-15
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. 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.
In March 1998, the Company amended the 1996 Stock Option Plan (the "Amended
1996 Plan"), subject to stockholder approval at the Annual Meeting of
Stockholders to be held on May 7, 1998, 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 an additional 500
shares of the Company's common stock. The Amended 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, the
1996 Plan and the Amended 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, the 1996 Plan and
the Amended 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, 1997, 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> <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
=== =============== == =======
Year Ended December 31, 1997
Granted................................ 25 $2.875 - $9.50 187 $2.875 - $9.50
Exercised.............................. (4) $8.00 -- --
Cancelled.............................. (18) $8.00 - $10.75 (8) $2.875
---- -------------- --- ------
Outstanding at December 31, 1997....... 516 $2.875 - $11.375 228 $2.875 - $11.125
=== ================ === ================
</TABLE>
At December 31, 1997, 450 shares were exercisable and 5 shares were
available for grant under the 1995 Plan and 16 shares were exercisable and 247
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 income (loss) and net
income (loss) per common share would have been the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss): As reported $580 $(5,639) $(2,952)
Pro forma 78 (6,202) (3,174)
Basic net income (loss)
per common share: As reported $0.06 $(0.54) $(0.36)
Pro forma 0.01 (0.60) (0.39)
Diluted net income (loss)
per common share: As reported $0.06 $(0.54) $(0.36)
Pro forma 0.01 (0.60) (0.39)
</TABLE>
F-17
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:
1997 1996 1995
---- ---- ----
Fair value $1.94 $5.26 $3.53
Expected life (years) 4.0 4.0 3.5
Risk-free interest rate 6.1% 5.5% 5.8%
Volatility 70% 54% 52%
Dividend yield 0% 0% 0%
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.
11. DEFINED CONTRIBUTION PENSION PLAN:
MPD maintains a defined contribution pension 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 $500, $493, and $464, in 1997, 1996 and 1995, respectively.
12. TRANSACTIONS WITH RELATED PARTIES:
Prior to the Company's initial public offering in 1995, corporate charges
were assessed by a related party for management services provided to the
Company. These charges were $0, $0, and $342 in 1997, 1996 and 1995,
respectively, and are included in general and administrative expenses in the
accompanying consolidated statements of operations.
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.
13. 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 $1,487, $1,434, and $571 in 1997, 1996 and 1995,
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.
F-18
<PAGE>
MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
(formerly MPD Holdings, Inc. and subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employment and Consulting Agreements
The Company has an employment agreement with its President and Chief
Executive Officer which expires on August 30, 1998 and provides for an annual
base salary of $264. 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, 1997 and December 31, 1996, the Company had outstanding
letters of credit aggregating $1,799 and $260, respectively.
F-19
EXHIBIT 10.12
September 5, 1997
Security Control Agreement
<PAGE>
SECURITY CONTROL AGREEMENT
This Agreement ("this Agreement") is made this 5th day of September, 1997,
by and between MPD Technologies, Inc., a New York corporation (the
"Corporation") and the United States Department of Defense ("DoD"), both of the
above collectively, the "Parties".
RECITALS:
WHEREAS, the Corporation is duly organized and existing under the laws of
the State of New York, and is wholly-owned by Microwave Power Devices, Inc., a
Delaware corporation ("MPD"); and
WHEREAS, Charterhouse Group International, Inc. (the ("Foreign
Corporation"), is the beneficial owner of 49.54% of the common stock of MPD;
WHEREAS, the Corporation's Board of Directors currently consists of six
directors, two of whom were also officers of the Corporation, three of whom are
independent third parties, and none of whom the Foreign Corporation is entitled
to nominate;
WHEREAS, the Corporation's business consists, in part, of the research,
design, development and manufacture of defense and defense-related items for
various User Agencies1 of the United States Government, including, without
limitation, the DoD; and
- --------
1 The Office of the Secretary of Defense (including all boards, councils,
staffs, and commands), DoD agencies, and the Departments of Army, Navy, and
Air Force (including all of their activities); the Departments of State,
Commerce, Treasury, Transportation, Interior, Agriculture, Labor, and
Justice; National Aeronautics and Space Administration; General Services
Administration; Small Business Administration; National Science Foundation;
Environmental Protection Agency; United States Arms Control and Disarmament
Agency; Federal Emergency Management Agency; Federal Reserve System; United
States Information Agency; International Trade Commission; United States
Trade Representative; and General Accounting Office (the "User Agencies").
Page 1
<PAGE>
WHEREAS, the offices and plants of the Corporation require facility
security clearances issued under the DoD Industrial Security Program ("DISP") to
conduct the Corporation's business, and the DISP requires that a corporation
maintaining a facility security clearance be effectively insulated from foreign
ownership, control or influence ("FOCI");
WHEREAS, the purpose of this Agreement is to reasonably and effectively
insulate the Foreign Corporation (and all entities that control, are under
common control with or are controlled by the Foreign Corporation, collectively,
the "Affiliates") from unauthorized access to classified2 and controlled
unclassified information3 and from influence over the Corporation's business or
management in a manner that could result in the compromise of classified
information or could adversely affect the performance of classified contracts;
and
WHEREAS, to comply fully with the policies of DoD that require a
corporation maintaining a facility security clearance to be insulated
effectively from undue FOCI, all parties hereto have agreed that management
control of the defense and technology security affairs and classified contracts
of the Corporation should be vested in resident citizens of the United States
who have DoD personnel security clearances;(4) and
- ----------
2 For the purposes of this Agreement, the term "classified information" shall
mean any information that has been determined pursuant to Executive Order
12356 or any predecessor or successor order to require protection against
classifications TOP SECRET, SECRET, and CONFIDENTIAL are used to designate
such information.
3 For purposes of this Agreement, the term "controlled unclassified
information" shall mean information, the export of which is controlled by
the International Traffic in Arms Regulations ("ITAR") and/or the Export
Administration Regulations ("EAR").
4 For purposes of this Agreement, the term "security clearance" shall mean an
administrative determination that an individual is eligible for access to
classified information of a certain category.
Page 2
<PAGE>
WHEREAS, in order to meet DoD's national security objectives in the matter
of the Corporation's facility security clearance and to further the
Corporation's business objectives, the Parties intent to be bound by the
provisions of this Agreement;
NOW THEREFORE, it is hereby agreed as follows:
ARTICLE I - ORGANIZATION
1.1 Composition of the Corporation's Board.
The Board of Directors of the Corporation (the "Corporation Board") shall
include at least one individual who is not and has never been employed by the
Corporation, or the Affiliates, and approved by DoD (the "Outside Director").
Except as specifically provided herein, each member of the Corporation Board,
however characterized by this Section 1.1, shall have all of the rights, powers,
and responsibilities conferred or imposed upon directors of the Corporation by
applicable statutes and regulations, and by the Corporation's Certificate of
Incorporation and by-laws. The Chairman of the Corporation Board shall be a
resident citizen of the United States and shall have had no prior involvement
through either contract or employment with the Affiliates.
1.2 Qualifications, Appointment, and Removal of Directors
1.2.1 During the period that this Agreement is in force, the
Corporation Board shall be composed as provided in Section 1.1 hereof, and
its members shall meet the following additional requirements:
a. The Outside Director shall be a resident citizen of the United
States, shall have a DoD personnel security clearance for at least the
level of the Corporation's
Page 3
<PAGE>
facility security clearance, and shall have been approved by the
Defense Investigative Service ("DIS") as satisfying the appropriate
DoD personnel security requirements and the applicable provisions of
this Agreement.
b. In the event that the Foreign Corporation becomes entitled to
nominate a Director pursuant to the applicable provisions of an
agreement between the Corporation and the Foreign Corporation (the
"Foreign Director"), the Foreign Director shall not have a DoD
personnel security clearance for the Corporation, regardless of
citizenship, and shall be formally excluded from access to classified
information by resolution of the Corporation Board.
1.2.2 The Shareholders may remove any member of the Corporation Board
for any reason permitted by the provisions of applicable state law or the
Corporation's Certificate of Incorporation or by-laws, provided that to the
extent feasible, the Corporation shall notify DIS in advance of the removal
of the Outside Director, and provided further that any replacement for the
Outside Director shall meet the qualifications set forth in the Agreement.
1.2.3 Except as provided by this section, the obligation of a director
to abide by and enforce this Agreement shall terminate when the director
leaves office, but nothing herein shall relieve the departing director of
any responsibility that the director may have, pursuant to the laws and
regulations of the United States, not to disclose classified information or
controlled unclassified information obtained during the course of the
director's service on the Corporation Board, and such responsibility shall
not terminate by virtue of the director leaving office. The Corporation
shall advise the departing director of such responsibility when the
director leaves
Page 4
<PAGE>
office, but the failure of the Corporation to so advise the director shall
not relieve the director of any such responsibility.
1.3 Indemnification of Outside Director
1.3.1 The Outside Director in his or her capacity as director of the
Corporation shall fulfill his or her duties in accordance with applicable
law including the New York Business Corporation Law.
1.3.2 The Corporation shall indemnify and hold harmless the Outside
Director in accordance with the terms and conditions specified in its
Certificate of Incorporation, By-laws and any indemnification agreement
that may be executed between the Corporation and the Outside Director.
ARTICLE II - OPERATION
2.1 Operation of this Agreement
The Corporation shall at all times maintain policies and practices to
ensure the safeguarding of classified information and controlled unclassified
information entrusted to it and the performance of classified contracts and
participation in classified programs for the User Agencies in accordance with
the DoD Agreement (DoD Form 441), this Agreement, appropriate contract
provisions regarding security, United States export control laws, and the DISP.
Such policies and practices shall provide that the Corporation shall exclude the
Affiliates and all members of their Boards of Directors and all officers,
employees, agents and other representatives of each of the Affiliates, as such,
from access to classified information and controlled unclassified information
entrusted to the Corporation. Such policies and practices
Page 5
<PAGE>
with respect to the Affiliate shall be established and approved by the
Corporation Board, and shall not be repealed or amended without prior written
notice to DIS.
2.2 Defense Security Committee Compliance Programs
2.2.1 There shall be established a permanent committee of the
Corporation Board, the Defense Security Committee ("DSC"), consisting of
the Outside Director and no less than two other directors who are officers
of the Corporation and have personal security clearances. The member of the
DSC shall endeavor to ensure that the Corporation complies with the terms
and conditions of the policies and practices with respect to the Affiliates
established pursuant to Section 2.1 and shall establish such policies and
procedures, including appropriate oversight and monitoring of the
Corporation's operations, towards such end.
2.2.2 The Chairman of the DSC who shall be the Outside Director shall
designate a director to serve as Secretary of the DSC. The Secretary's
responsibility shall include ensuring that all records, journals and
minutes of DSC meetings and other documents sent to or received by the DSC
are prepared and retained for inspection by DIS.
2.2.3 A Facility Security Officer ("FSO") shall be appointed by the
Corporation and shall be the principal advisor to the DSC concerning the
safeguarding of classified information. The FSO's responsibility shall
include the operational oversight of the Corporation's compliance with the
requirements of the DISP.
2.2.4 The Corporation shall develop and implement a Technology Control
Plan ("TCP"), which shall be subject to review by DIS, and shall prescribe
measures to prevent unauthorized disclosure or export of controlled
unclassified information consistent with applicable United States laws.
Page 6
<PAGE>
2.2.5 Upon taking office, the DSC members and the FSO shall be briefed
by a DIS representative on their responsibilities under the DISP, United
States Government export control laws, and the Agreement.
2.2.6 Each member of the DSC shall exercise all reasonable efforts to
advise as soon as possible if a member of the DSC reasonably believes a
violation of, or an attempt to violate, any provision of this Agreement,
appropriate contract provisions regarding security, United States
Government export control laws, or the DISP has occurred.
2.2.7 Each member of the DSC shall execute, for delivery to DIS, upon
accepting his or her appointment and thereafter at each annual meeting of
the Corporation with DIS as established by Section 2.4.1 of this Agreement,
a certificate acknowledging the protective measures and obligations imposed
on the Corporation by this Agreement and his or her obligations set forth
herein to enforce such measures and obligations.
2.3 Obligations and Certifications of Foreign Officers and Directors
2.3.1 The Foreign Director shall:
(a) not have access to classified information or controlled
unclassified information entrusted to the Corporation except as
permissible under the DISP and applicable United States Government
laws and regulations;
(b) neither seek nor accept classified information or controlled
unclassified information entrusted to the Corporation, except as
permissible under the DISP and applicable United States Government
laws and regulations; and
Page 7
<PAGE>
(c) advise the DSC promptly if he or she reasonably believes (i)
any violations or attempted violations of this Agreement, appropriate
contract provisions regarding security, or United States export
control laws, or (ii) actions inconsistent with the DISP or applicable
United States Government laws or regulations, have occurred.
2.3.2 Upon accepting appointment and annually thereafter, the Foreign
Director shall execute, for delivery to DIS, a certificate affirming his or
her agreement to be bound by, and acceptance of the responsibilities
imposed by, this Agreement, and further acknowledging and affirming the
obligations set forth in 2.3.1.
2.4 Annual Review and Certification
2.4.1 Representatives of DIS, the DSC, and the FSO shall meet annually
to review the effectiveness of this Agreement and to establish a common
understanding of the operating requirements and how they will be
implemented. These meetings shall include a discussion of the following:
a. whether the Agreement is working in a manner satisfactory to
the Parties;
b. compliance or acts of noncompliance with the Agreement, DISP
rules, or other applicable laws and regulations;
c. necessary guidance or assistance regarding problems or
impediments associated with the practical application or utility of
this Agreement.
Page 8
<PAGE>
2.4.2 The Chairman of the DSC shall submit to DIS one year from the
effective date of this Agreement and annually thereafter an implementation
and compliance report. Such reports shall include the following
information:
a. a detailed description of the manner in which the Corporation
is carrying out its obligation under the Agreement;
b. a detailed description of changes to security procedures,
implemented or proposed, relating to the Affiliates and the reasons
for those changes;
c. a detailed description of any acts of noncompliance with the
terms of this Agreement, whether inadvertent or intentional, with a
discussion of steps taken by the Corporation to prevent such acts from
occurring in the future;
d. a detailed chronological summary of all transfers of
classified or controlled unclassified information, if any, from the
Corporation to the Affiliates, complete with an explanation of the
United States Governmental authorization relied upon to effect such
transfers. Copies of approved export licenses covering the reporting
period shall be appended to the report; and
e. a discussion of any other issues that could have a bearing on
the effectiveness or implementation of this Agreement.
2.5 Visitation Policy
2.5.1 All visits to the Corporation or its U.S. subsidiaries by any
director or executive officer of the Affiliates, except the Foreign
Director, shall be reported to the FSO.
Page 9
<PAGE>
2.5.2 A chronological record of all visit notifications made pursuant
to Section 2.5.1, including information concerning completed visits, such
as the date, place, and personnel involved, shall be maintained by the FSO
for inspection by DIS and periodically reviewed by the DSC.
ARTICLE III - DoD Remedies
3.1 DoD Rights
Nothing contained in the Agreement shall limit or affect the authority of
the head of a United States Government agency5 to deny, limit or revoke in
accordance with agency procedures and laws the Corporation's access to
classified and controlled unclassified information under its jurisdiction.
3.2 Criminal Sanctions
Nothing in this Agreement limits the right of the United States Government
to pursue criminal sanctions against the Corporation or any Affiliates, or any
director, officer, employee, representative, or agent of any of these companies,
for violations of the criminal laws of the United States in connection with
their performance of any of the obligations imposed by this Agreement, including
but not limited to any violations of the False Statements Act 18 U.S.C. 1001, or
the False Claims Act 18 U.S.C. 287.
- ----------
5 For purposes of this Agreement the term "agency" has the meaning provided
at 5 United States Code 552(f).
Page 10
<PAGE>
ARTICLE IV - TERMINATION
4.1 Automatic Termination. This Agreement shall automatically terminate
when the Affiliates in the aggregate own less than 5% of all issued and
outstanding voting securities, determined on an aggregate basis and not as
separate classes, of the Corporation.
4.2 Other Terminations. Except as specified in Section 13.01, this
Agreement may only be terminated by DIS as follows:
a. in the event of a sale of the business or all of the Shares or a
substantially similar transaction to a company or person not under FOCI;
b. when DIS determines that existence of this Agreement is no longer
necessary to maintain a facility security clearance for the Corporation;
c. when DIS determines that continuation of a facility security
clearance for the Corporation is no longer necessary;
d. when DIS determines that there has been a material breach of this
Agreement that requires it to be terminated;
e. when DIS otherwise determines that termination is in the national
interest;
f. five (5) days from the effective date of this Agreement if, at
least ninety (90) days before that date, the Corporation petitions DIS to
terminate this Agreement; and
g. when the Corporation for any reason and at any time, petitions DIS
to terminate this Agreement. However, DIS has the right to receive
disclosure of the reason or reasons therefor, and has the right to
determine, in its sole discretion based on a determination of the national
security interests of the United States, whether such petition should be
granted.
Page 11
<PAGE>
4.3 Notice of Other Terminations. If DIS determines that this Agreement
should be terminated for any reason, DIS shall provide the Corporation with
thirty (30) days written advance notice of its intent and reasons therefor.
4.4 Standard for Other Terminations. DIS is expressly prohibited from
causing a continuation of this Agreement for any reason other than the national
security of the United States.
ARTICLE V- MISCELLANEOUS
5.1 All notices required or permitted to be given to the Parties to this
Agreement shall be in writing and shall be deemed given three business days
after being mailed in a postpaid envelope, via registered or certified mail,
upon receipt if given by hand delivery or facsimile, (answerback received) or
one business day after being given a reputable overnight courier, addresses
shown below, or to such other addresses as the Parties may designate from time
to time pursuant to this Section:
For the Corporation: MPD Technologies, Inc.
49 Wireless Blvd.
Hauppauge, NY 11788
For Dis: Defense Investigative Service
1340 Braddock Place
Alexandria, Virginia 22314-1651
5.2 Order of Precedence. In the event that any resolution or by-law of any
of the Parties is found to be inconsistent with any provision hereof, the terms
of this Agreement shall control, to the extent the applicable law permits such
substitution by contract.
Page 12
<PAGE>
5.3 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the United States laws, and to the extent not
inconsistent with the laws of the State of New York.
5.4 Location of Agreement. Until the termination of this Agreement, one
original counterpart shall be kept at the principal office of the Corporation.
5.5 Execution in Counterpart. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original, and all of such
counterparts shall together constitute but one and the same instrument.
5.6 Amendment of Agreement. This Agreement may be amended by an agreement
in writing executed by all Parties.
IN WITNESS WHEREOF, the Parties hereto have fully executed this Agreement
as of the date and year first above written.
/s/ Margaret A. Lisowy By /s/ Paul E. Donofrio
- ---------------------------- ----------------------------------
Signature of Witness Name: Paul E. Donofrio
Title: V.P. Finance/CFO
FOR THE CORPORATION
/s/ Arthur M. James By /s/ Donald E. Dwyer
- ---------------------------- ----------------------------------
Signature of Witness Name: Donald E. Dwyer
Title: Field Office Chief, DSS, S11LI
Mid-Atlantic Operating Location
FOR THE DEPARTMENT OF DEFENSE
Page 13
<PAGE>
SECURITY CONTROL AGREEMENT CERTIFICATE
I acknowledge that in my capacity as a representative of Charterhouse Group
International, Inc., I, Merril M. Halpern, have been excluded from access to
classified information and export-controlled technical data in the possession of
MPD Technologies, Inc. in accordance with the terms of a resolution by the Board
of Directors of Microwave Power Devices, Inc. & Subsidiary (MPD Technologies,
Inc.) dated 9/5/97 and the Security Control Agreement entered into between MPD
Technologies, Inc. and the United States Department of Defense, dated 9/5/97 .
I certify that:
1. I have waived any right to have access to classified information and
export-controlled technical data held by MPD Technologies, Inc. except as
permissible under the DoD Industrial Security Manual, DoD 5220.22M, the National
Industrial Security Program Operating Manual ("NISPOM") and any successor
regulation and applicable United States laws and regulations;
2. I will not adversely influence MPD Technologies, Inc. classified contracts or
programs or corporate policies regarding the security of classified information
and export-controlled technical data;
3. I will not seek and have not obtained classified information or
export-controlled technical data in the possession of MPD Technologies, Inc.
except as permissible under the DoD Industrial Security Manual, DoD 5220.22M,
NISPOM and any successor regulation and applicable United States laws and
regulations;
4. If I become aware of any violations of the Security Control Agreement or
contract provisions regarding industrial security or actions inconsistent with
the DoD Industrial Security Manual, NISPOM or applicable United States laws or
regulations, I will promptly notify the MPD Technologies, Inc. Defense Security
Committee established by subsection 2.2 of the Security Control Agreement.
Dated: 9/5/97
/s/ Merril M. Halpern
------------------------------------------
Merril M. Halpern, Chairman
Witness: Charterhouse Group International, Inc.
/s/ Charlotte M. Culver
- ------------------------------
Charlotte M. Culver
(Named Typed or Printed)
Page 14
<PAGE>
SECURITY CONTROL AGREEMENT CERTIFICATE
I acknowledge that in my capacity as a representative of Charterhouse Group
International, Inc., I, A. Lawrence Fagan, have been excluded from access to
classified information and export-controlled technical data in the possession of
MPD Technologies, Inc. in accordance with the terms of a resolution by the Board
of Directors of Microwave Power Devices, Inc. & Subsidiary (MPD Technologies,
Inc.) dated 9/5/97 and the Security Control Agreement entered into between MPD
Technologies, Inc. and the United States Department of Defense, dated 9/5/97 .
I certify that:
1. I have waived any right to have access to classified information and
export-controlled technical data held by MPD Technologies, Inc. except as
permissible under the DoD Industrial Security Manual, DoD 5220.22M, the National
Industrial Security Program Operating Manual ("NISPOM") and any successor
regulation and applicable United States laws and regulations;
2. I will not adversely influence MPD Technologies, Inc. classified contracts or
programs or corporate policies regarding the security of classified information
and export-controlled technical data;
3. I will not seek and have not obtained classified information or
export-controlled technical data in the possession of MPD Technologies, Inc.
except as permissible under the DoD Industrial Security Manual, DoD 5220.22M,
NISPOM and any successor regulation and applicable United States laws and
regulations;
4. If I become aware of any violations of the Security Control Agreement or
contract provisions regarding industrial security or actions inconsistent with
the DoD Industrial Security Manual, NISPOM or applicable United States laws or
regulations, I will promptly notify the MPD Technologies, Inc. Defense Security
Committee established by subsection 2.2 of the Security Control Agreement.
Dated: 9/5/97
/s/ A. Lawrence Fagan
--------------------------------------
A. Lawrence Fagan, President
Witness: Charterhouse Group International, Inc.
/s/ Linda A. Tammaro
- ------------------------------
Linda A. Tammaro
(Named Typed or Printed)
Page 15
<PAGE>
DEFENSE SECURITY COMMITTEE MEMBER CERTIFICATE
By execution of this Certificate, I acknowledge the protective security
measures that have been taken by MPD Technologies, Inc. through resolutions
dated 9/5/97 to implement the Security Control Agreement (the "Agreement"),
copies of which are attached.
I further acknowledge that the United States Government has placed its
reliance on me as a United States citizen and as a holder of a personnel
security clearance to exercise all appropriate aspects of the Agreement; to
assure that members of the MPD Technologies, Inc. Board of Directors, MPD
Technologies, Inc. officers, and MPD Technologies, Inc. employees comply with
the provisions of the Agreement; and to assure that the Defense Investigative
Service is advised of any violation of, or attempt to violate, any undertaking
in the Agreement, appropriate contract provisions regarding security, the DoD
Industrial Security Manual, DoD 5220.22-M, or the National Industrial Security
Program or any successor regulation, of which I am aware.
Dated: 9/5/97
/s/ George J. Sbordone
----------------------------
Signature
George J. Sbordone, Chairman
Name Printed or Typed
MPD Technologies, Inc.
Page 16
<PAGE>
DEFENSE SECURITY COMMITTEE MEMBER CERTIFICATE
By execution of this Certificate, I acknowledge the protective security
measures that have been taken by MPD Technologies, Inc. through resolutions
dated 9/5/97 to implement the Security Control Agreement (the "Agreement"),
copies of which are attached.
I further acknowledge that the United States Government has placed its
reliance on me as a United States citizen and as a holder of a personnel
security clearance to exercise all appropriate aspects of the Agreement; to
assure that members of the MPD Technologies, Inc. Board of Directors, MPD
Technologies, Inc. officers, and MPD Technologies, Inc. employees comply with
the provisions of the Agreement; and to assure that the Defense Investigative
Service is advised of any violation of, or attempt to violate, any undertaking
in the Agreement, appropriate contract provisions regarding security, the DoD
Industrial Security Manual, DoD 5220.22-M, or the National Industrial Security
Program or any successor regulation, of which I am aware.
Dated: 9/5/97
/s/ Edward J. Shubel
-------------------------------
Signature
Edward J. Shubel, President/CEO
Name Printed or Typed
MPD Technologies, Inc.
Page 17
<PAGE>
DEFENSE SECURITY COMMITTEE MEMBER CERTIFICATE
By execution of this Certificate, I acknowledge the protective security
measures that have been taken by MPD Technologies, Inc. through resolutions
dated 9/5/97 to implement the Security Control Agreement (the "Agreement"),
copies of which are attached.
I further acknowledge that the United States Government has placed its
reliance on me as a United States citizen and as a holder of a personnel
security clearance to exercise all appropriate aspects of the Agreement; to
assure that members of the MPD Technologies, Inc. Board of Directors, MPD
Technologies, Inc. officers, and MPD Technologies, Inc. employees comply with
the provisions of the Agreement; and to assure that the Defense Investigative
Service is advised of any violation of, or attempt to violate, any undertaking
in the Agreement, appropriate contract provisions regarding security, the DoD
Industrial Security Manual, DoD 5220.22-M, or the National Industrial Security
Program or any successor regulation, of which I am aware.
Dated: 9/5/97
/s/ Alfred Weber
----------------------------
Signature
Alfred Weber, Director
Name Printed or Typed
MPD Technologies, Inc.
Page 18
EXHIBIT 10.13
AMENDMENT NO. 1
TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 1 ("Amendment") is entered into as of February 27, 1998,
by and between MPD TECHNOLOGIES, INC., a New York corporation ("Borrower")
having its principal place of business at 49 Wireless Boulevard, Hauppauge, New
York and IBJ SCHRODER BUSINESS CREDIT CORPORATION (as successor to IBJ BANK &
TRUST COMPANY) ("IBJS") having its principal place of business at One State
Street, New York, New York and each of the other financial institutions named in
or which hereafter become a party to the Loan Agreement (as defined below) (IBJS
and such other financial institutions, the "Lenders") and IBJS as agent for the
Lenders (IBJS in such capacity, the "Agent").
BACKGROUND
Borrower, Agent and Lenders are parties to a Loan and Security Agreement
dated as of February 13, 1997 (as amended, supplemented or otherwise modified
from time to time, the "Loan Agreement") pursuant to which Lenders provided
Borrower with certain financial accommodations.
Borrower has requested that Lenders and Agent amend the Loan Agreement
to, among other things, (a) increase the amount of the overall credit facility
by providing for a $3,000,000 equipment loan facility, (b) provide a procedure
to increase the Maximum Revolving Amount upon repayment by Borrower of the Term
Loan and (c) extend the termination date, and Agent and Lenders are willing to
do so on the terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or grant of credit
heretofore or hereafter made to or for the account of Borrower by Agent and
Lenders, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Definitions. All capitalized terms not otherwise defined herein shall
have the meanings given to them in the Loan Agreement.
2. Amendment to Loan Agreement. Subject to satisfaction of the conditions
precedent set forth in Section 3 below, the Loan Agreement is hereby amended as
follows:
2.1. Section 1.2 of the Loan Agreement is hereby amended by inserting the
following defined terms in their appropriate alphabetical order:
<PAGE>
Amendment No. 1 - means Amendment No. 1 to Loan and Security Agreement
dated as of the Amendment No. 1 Effective Date among Borrower, Lenders and
Agent.
Amendment No. 1 Effective Date - means February 27, 1998.
Capex Loans - the loans made by Lenders as provided in Section 2.3(B) of
this Agreement.
Capex Note - the secured promissory note to be executed by Borrower to
evidence the Capex Loans, which shall be in the form of Exhibit 2.3(B)
attached to Amendment No. 1.
Maximum Capex Amount -Three Million Dollars ($3,000,000), less principal
payments of the Capex Loans.
2.2. Section 1.2 of the Loan Agreement is hereby amended by amending the
following defined terms in their entirety to provide as follows:
Loans - all loans and advances made by Lenders pursuant to this Agreement,
including, without limitation, all Revolving Credit Loans, Capex Loans and
the Term Loan.
Maximum Revolving Amount - the lesser of (a) Twelve Million Dollars
($12,000,000) or (b) sum of (i) Ten Million Three Hundred Thousand Dollars
($10,300,000) plus (ii) commencing with the March 1, 1998 payment, the
amount paid by Borrower each month with respect to the principal of the
Term Loan.
Notes - the Term Note, the Capex Note and the Revolving Credit Note.
2.3 The preamble of Section 2 of the Loan Agreement is hereby amended by
deleting the phrase "THIRTEEN MILLION AND XX/100 DOLLARS ($13,000,000)"
appearing in the fourth and fifth lines thereof and replacing it with the phrase
"FIFTEEN MILLION FOUR HUNDRED FIFTY THOUSAND AND XX/100 ($15,450,000)" in its
place and stead.
2.4. Section 2.3 of the Loan Agreement is hereby amended by (a) deleting
the section heading "Term Loan" and replacing it with the section heading "Term
Loan and Capex Loans" in its place and stead, (b) inserting an "(A)" immediately
before the word "Subject" appearing in the first line thereof and (c) inserting
a new subsection "(B)" at the end thereof as follows:
"(B) Capex Loans. (i) Subject to the terms and conditions set forth
herein, each Lender, severally and not jointly, agrees to make Loans to
Borrower to finance Borrower's purchase of Equipment for use in Borrower's
business ("Capex Loans") in the sum equal to such Lender's Commitment
Percentage of an amount not to exceed eighty percent (80%) of the net
invoice cost of such Equipment purchased by Borrower (which shall be
exclusive of shipping, handling, taxes, installation and all other "soft"
costs) provided that the total amount of all outstanding Capex Loans shall
not exceed the Maximum Capex Amount. All Capex Loans must be in original
principal amounts
<PAGE>
of not less than $100,000. Capex Loans may only be borrowed prior to the
first anniversary of the Amendment No. 1 Effective Date. Once repaid, a
Capex Loan may not be reborrowed. The Capex Loan shall be evidenced by and
subject to the terms of a secured promissory note, in substantially the
form attached hereto as Exhibit 2.3(B) (the "Capex Note").
(ii) Loans constituting Capex Loans shall be accumulated during each
of twelve periods (each a "Borrowing Period") during the Term. Each
Borrowing Period shall consist of one month with the first Borrowing Period
commencing on the Amendment No. 1 Effective Date and ending on March 26,
1998. At the end of each Borrowing Period, the sum of the principal amount
of all Capex Loans made during such Borrowing Period will be amortized on
the basis of a sixty (60) month amortization schedule (such amount as
determined with respect to any Borrowing Period, the "Amortization
Amount"). Monthly principal payments will be initially determined for the
Capex Loans made during the initial Borrowing Period and the amount of such
monthly principal payments shall be increased upon the completion of each
subsequent Borrowing Period by the Amortization Amount for each such
subsequent Borrowing Period. Each Capex Loan shall be, with respect to
principal, payable in equal monthly installments based upon the
amortization schedule set forth above, commencing on the first Business Day
of the month following the month in which such Capex Loan was made and on
the first day of each month thereafter, subject to acceleration upon the
occurrence and continuance of an Event of Default under this Agreement or
termination of this Agreement. Each Lender's Commitment Percentage of the
Capex Loans shall be evidenced by and subject to the Capex Note."
2.5. Section 2.6 of the Loan Agreement is hereby amended by deleting the
amount "$500,000" appearing in the fifth line thereof and replacing it with the
amount "$2,650,000" in its place and stead.
2.6. Section 2.16(A) of the Loan Agreement is hereby amended by inserting
the following sentence at the end thereof:
"The Capex Loans shall be advanced according to the Commitment Percentages
of Lenders."
2.7. Section 2.16(B) of the Loan Agreement is hereby amended by adding the
following sentence immediately after the second sentence thereof:
"Each payment (including each prepayment) by Borrower on account of the
principal of and interest on the Capex Note, shall be made from or to, or
applied to that portion of the Capex Loans evidenced by the Capex Note pro
rata according to the Commitment Percentages of Lenders."
2.8. Section 3.1(A) of the Loan Agreement is hereby amended by inserting
the phrase "plus the Capex Loans" immediately after the phrase "the Term Loan"
appearing in the third line thereof.
Page 3
<PAGE>
2.9. Section 3.1(D) of the Loan Agreement is hereby amended by deleting the
first sentence in its entirety and replacing it with the following in its place
and stead:
"Borrower shall pay an unused facility fee at the rate of one-quarter of
one percent (1/4%) per annum on the difference between (a) the Maximum
Revolving Amount plus (i) from February 27, 1998 through February 28, 1999,
the Maximum Capex Amount or (ii) at any time thereafter, the unpaid balance
of the Capex Loans and (b) the average daily unpaid balance of the Loans,
payable to Agent for the ratable benefit of Lenders quarterly in arrears,
commencing on the first day of the calendar quarter following the calendar
quarter in which the Closing Date occurs."
2.10. Section 3.2 of the Loan Agreement is hereby amended by deleting the
phrase "February 12, 2000" appearing in the fourth and fifth lines thereof and
replacing it with the phrase "February 12, 2001" in its place and stead.
2.11. Section 3.3(C) of the Loan Agreement is hereby amended by inserting
the phrase "plus the Maximum Capex Amount" immediately after the phrase "the
Maximum Revolving Amount" appearing in the eighth and twelfth lines thereof.
2.12. Section 3.3(D) of the Loan Agreement is hereby amended by inserting
the phrase "and the Capex Loans" immediately following the phrase "the Term
Loan" appearing in the second sentence thereof.
2.13. Section 3.5 of the Loan Agreement is hereby amended by inserting the
phrase "and/or the Capex Loans" immediately after the phrase "the Term Loan"
appearing in the sixteenth line thereof.
2.14. Section 9.3 of the Loan Agreement is hereby amended by deleting the
phrase "Fixed Charge Ratio" appearing in the fifth line thereof and replacing it
with "Fixed Charge Coverage ratio" in its place and stead.
2.15. Section 10 of the Loan Agreement is hereby amended to include the
following new subsection 10.3 at the end thereof:
"10.3. Conditions to Each Capex Loan. The agreement of Lenders to make
any Capex Loan is subject to satisfaction of the following conditions
precedent: (a) receipt by Agent of (i) a copy of the invoice relating to
the Equipment being purchased, (ii) evidence that such Equipment has been
shipped to Borrower, (iii) evidence that the requested Capex Loan does not
exceed eighty percent (80%) of the net invoice cost of such Equipment
purchased by Borrower (which shall be exclusive of shipping, handling,
taxes, installation and all other "soft" costs), and (iv) such other
documentation and evidence that Agent may request; and (b) after giving
effect thereto, the aggregate outstanding Capex Loans shall not exceed the
Maximum Capex Amount."
Page 4
<PAGE>
2.16. Section 13.12 of the Loan Agreement is hereby amended to by inserting
the phrase "and the Capex Loans" immediately after the phrase "Revolving Credit
Loan" appearing in the last line thereof.
2.17. Exhibit 2.1 to the Loan Agreement is hereby deleted and replaced in
its entirety with Exhibit 2.1 attached to Amendment No. 1.
3. Conditions of Effectiveness. This Amendment shall become effective upon
satisfaction of the following conditions precedent: Agent shall have received
(i) four (4) copies of this Amendment executed by Borrower and consented and
agreed to by Microwave Power Devices, Inc., as guarantor, (ii) an amendment fee
to Agent equal to $15,000, (iii) an executed Amended and Restated Revolving
Credit Note, (iv) an executed Capex Note and (v) evidence in the form of
corporate resolutions demonstrating that Borrower shall have taken all necessary
corporate action for the authorization, execution, delivery and performance of
this amendment and (vi) such other certificates, instruments, documents,
agreements and opinions of counsel as may be required by Agent or its counsel,
each of which shall be in form and substance satisfactory to Agent and its
counsel.
4. Representations and Warranties. Borrower hereby represents and warrants
as follows:
(a) This Amendment and the Loan Agreement, as amended hereby,
constitute legal, valid and binding obligations of Borrower and are
enforceable against Borrower in accordance with their respective terms.
(b) Upon the effectiveness of this Amendment, Borrower hereby
reaffirms all covenants, representations and warranties made in the Loan
Agreement to the extent the same are not amended hereby and agree that all
such covenants, representations and warranties shall be deemed to have been
remade as of the effective date of this Amendment.
(c) No Event of Default or Default has occurred and is continuing or
would exist after giving effect to this Amendment.
(d) Borrower has no defense, counterclaim or offset with respect to
the Loan Agreement.
5. Effect on the Loan Agreement.
(a) Upon the effectiveness of this Amendment, each reference in the Loan
Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like
import shall mean and be a reference to the Loan Agreement as amended hereby.
(b) Except as specifically amended herein, the Loan Agreement, and all
other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
Page 5
<PAGE>
(c) The execution, delivery and effectiveness of this Amendment shall not
operate as a waiver of any right, power or remedy of Agent, nor constitute a
waiver of any provision of the Loan Agreement, or any other documents,
instruments or agreements executed and/or delivered under or in connection
therewith.
6. Governing Law. This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns and
shall be governed by and construed in accordance with the laws of the State of
New York.
7. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
8. Counterparts; Telecopied Signatures. This Amendment may be executed in
any number of and by different parties hereto on separate counterparts, all of
which, when so executed, shall be deemed an original, but all such counterparts
shall constitute one and the same agreement. Any signature delivered by a party
by facsimile transmission shall be deemed to be an original signature hereto.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and
year first written above.
MPD TECHNOLOGIES, INC.
By: /s/ Paul E. Donofrio
-----------------------------
Name: Paul E. Donofrio
Title: V.P. Finance/CFO
IBJ SCHRODER BUSINESS CREDIT CORPORATION,
as Agent and a Lender
By: /s/ Alfred J. Scoyni
-------------------------------
Name: Alfred J. Scoyni
Title: Vice President
CONSENTED AND AGREED TO:
MICROWAVE POWER DEVICES, INC.
By: /s/ Paul E. Donofrio
-----------------------------
Name: Paul E. Donofrio
Title: V.P. Finance/CFO
Page 6
<PAGE>
EXHIBIT 2.1
AMENDED AND RESTATED
REVOLVING CREDIT NOTE
$12,000,000.00 New York, New York
as of February 27, 1998
This Revolving Credit Note is executed and delivered under and pursuant to
the terms of that certain Loan and Security Agreement dated as of February 13,
1997 (as the same has been and may be further amended, supplemented or modified
from time to time, the "Loan Agreement") by and among MPD TECHNOLOGIES, INC., a
New York corporation having its chief executive office at 49 Wireless Boulevard,
Hauppauge, New York 11788 ("Borrower"), IBJ SCHRODER BANK & TRUST COMPANY
("IBJS"), each of the other financial institutions named in or which hereafter
become parties to the Loan Agreement (IBJS and such other financial
institutions, the "Lenders") and IBJS as agent for the Lenders (IBJS in such
capacity, "Agent"). Capitalized terms not otherwise defined herein shall have
the meanings as provided in the Loan Agreement.
FOR VALUE RECEIVED, Borrower hereby promises to pay to the order of Agent
for the ratable benefit of Lenders at Agent's offices located at One State
Street, New York, New York 10004 or at such other place as Agent may from time
to time designate in writing to Borrower:
(i) the principal sum of TWELVE MILLION AND 00/100 DOLLARS ($12,000,000.00)
or, if different from such amount, such amount of Revolving Advances as may be
due and owing under the Loan Agreement, payable in accordance with the
provisions of the Loan Agreement and subject to acceleration upon the occurrence
of an Event of Default under the Loan Agreement, earlier termination of the Loan
Agreement or earlier prepayment as required pursuant to the terms thereof; and
(ii) interest on the principal amount of this Note from time to time
outstanding until such principal amount is paid in full, at such interest rates
and at such times as are provided in the Loan Agreement. Upon and after the
occurrence of an Event of Default, and during the continuation thereof, interest
shall be payable at the Default Rate. In no event, however, shall interest
hereunder exceed the maximum interest rate permitted by law.
This Amended and Restated Revolving Credit Note amends and restates in its
entirety and is given in substitution for, but not in satisfaction of, that
certain Revolving Credit Note dated February 13, 1997 issued by Borrower in
favor of Agent for the ratable benefit of Lenders in the original principal
amount of $10,300,000.
This Note is the Revolving Credit Note referred to in the Loan Agreement
and is secured, inter alia, by the liens granted pursuant to the Loan Agreement
and the Other
<PAGE>
Agreements, is entitled to the benefits of the Loan Agreement and the Other
Agreements and is subject to all of the agreements, terms and conditions therein
contained.
This Note is subject to mandatory prepayment and may be voluntarily
prepaid, in whole or in part, on the terms and conditions set forth in the Loan
Agreement.
If an Event of Default under Sections 11.1(J) or 11.1(K) of the Loan
Agreement shall occur, then this Note shall immediately become due and payable,
without notice, together with reasonable attorneys' fees if the collection
hereof is placed in the hands of an attorney to obtain or enforce payment
hereof. If any other Event of Default shall occur under the Loan Agreement or
any of the Other Agreements which is not cured within any applicable grace
period, then this Note may, as provided in the Loan Agreement, be declared to be
immediately due and payable, without notice, together with reasonable attorneys'
fees, if the collection hereof is placed in the hands of an attorney to obtain
or enforce payment hereof.
This Note is being delivered in the State of New York, and shall be
construed and enforced in accordance with the laws of such State.
Borrower expressly waives any presentment, demand, protest, notice of
protest, or notice of any kind except as expressly provided in the Loan
Agreement.
MPD TECHNOLOGIES, INC.
By: /s/ Paul E. Donofrio
---------------------------
Name: Paul E. Donofrio
Title: Vice President
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the 2nd day of March, 1998, before me personally came Paul Donofrio, to
me known, who being by me duly sworn, did depose and say that he is the Vice
President of MPD Technologies, Inc., the corporation described in and which
executed the foregoing instrument; and that he was authorized to sign his name
thereto.
/s/ Lisa M. Vaccaro
-------------------------------
Notary Public
Lisa M. Vaccaro
Notary Public, State of New York
No. 02VA5049635
Qualified in Nassau County
Commission Expires 9/18/99
Page 8
<PAGE>
EXHIBIT 2.3(B)
CAPEX NOTE
$3,000,000.00 New York, New York
as of February 27, 1998
This Capex Note is executed and delivered under and pursuant to the terms
of that certain Loan and Security Agreement dated as of February 13, 1997 (as
the same has been and may be further amended, supplemented or modified from time
to time, the "Loan Agreement") by and among MPD TECHNOLOGIES, INC., a New York
corporation having its chief executive office at 49 Wireless Boulevard,
Hauppauge, New York 11788 ("Borrower"), IBJ SCHRODER BANK & TRUST COMPANY
("IBJS"), each of the other financial institutions named in or which hereafter
become parties to the Loan Agreement (IBJS and such other financial
institutions, the "Lenders") and IBJS as agent for the Lenders (IBJS in such
capacity, "Agent"). Capitalized terms not otherwise defined herein shall have
the meanings as provided in the Loan Agreement.
FOR VALUE RECEIVED, Borrower hereby promises to pay to the order of Agent
for the ratable benefit of Lender at Agent's offices located at One State
Street, New York, New York 10004 or at such other place as Agent may from time
to time designate to Borrower in writing:
(i) the principal sum of THREE MILLION AND 00/100 DOLLARS ($3,000,000.00)
or such lesser amount as shall be advanced by Lender on or before February 28,
1999, payable in consecutive monthly installments each in an amount equal to
Lender's Commitment Percentage of the applicable monthly payment on Capex Loans
as set forth in the Loan Agreement, subject to acceleration upon the occurrence
of an Event of Default under the Loan Agreement, earlier termination of the Loan
Agreement or earlier prepayment as required pursuant to the terms of the Loan
Agreement; and
(ii) interest on the principal amount of this Note from time to time
outstanding until such principal amount is paid in full, at such interest rates
and at such times as are provided in the Loan Agreement. Upon and after the
occurrence of an Event of Default, and during the continuation thereof, interest
shall be payable at the Default Rate. In no event, however, shall interest
hereunder exceed the maximum interest rate permitted by law.
This Note is the Capex Note referred to in the Loan Agreement and is
secured, inter alia, by the liens granted pursuant to the Loan Agreement and the
Other Agreements, is entitled to the benefits of the Loan Agreement and the
Other Agreements and is subject to all of the agreements, terms and conditions
therein contained.
This Note is subject to mandatory prepayment and may be voluntarily
prepaid, in whole or in part, on the terms and conditions set forth in the Loan
Agreement.
Page 9
<PAGE>
If an Event of Default under Sections 11.1(J) or 11.1(K) of the Loan
Agreement shall occur, then this Note shall immediately become due and payable,
without notice, together with reasonable attorneys' fees if the collection
hereof is placed in the hands of an attorney to obtain or enforce payment
hereof. If any other Event of Default shall occur under the Loan Agreement or
any of the Other Agreements, which is not cured within any applicable grace
period, then this Note may, as provided in the Loan Agreement, be declared to be
immediately due and payable, without notice, together with reasonable attorneys'
fees, if the collection hereof is placed in the hands of an attorney to obtain
or enforce payment hereof.
This Note is being delivered in the State of New York, and shall be
construed and enforced in accordance with the laws of such State.
Borrower expressly waives any presentment, demand, protest, notice of
protest, or notice of any kind except as expressly provided in the Loan
Agreement.
MPD TECHNOLOGIES, INC.
By By: /s/ Paul E. Donofrio
-----------------------
Name: Paul E. Donofrio
Title: Vice President
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the 2nd day of March, 1998, before me personally came Paul Donofrio, to
me known, who being by me duly sworn, did depose and say that he is the Vice
President of MPD Technologies, Inc., the corporation described in and which
executed the foregoing instrument; and that he signed his name thereto by order
of the board of directors of said corporation.
/s/ Lisa M. Vaccaro
--------------------------------
Notary Public
Lisa M. Vaccaro
Notary Public, State of New York
No. 02VA5049635
Qualified in Nassau County
Commission Expires 9/18/99
Page 10
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-34107.
ARTHUR ANDERSEN LLP
Melville, New York
March 16, 1998
<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, 1997,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 687
<SECURITIES> 0
<RECEIVABLES> 8,404
<ALLOWANCES> 75
<INVENTORY> 16,931
<CURRENT-ASSETS> 28,430
<PP&E> 12,970
<DEPRECIATION> 4,697
<TOTAL-ASSETS> 41,822
<CURRENT-LIABILITIES> 10,247
<BONDS> 12,626
0
0
<COMMON> 104
<OTHER-SE> 18,845
<TOTAL-LIABILITY-AND-EQUITY> 41,822
<SALES> 52,037
<TOTAL-REVENUES> 52,037
<CGS> 38,142
<TOTAL-COSTS> 38,142
<OTHER-EXPENSES> (16)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,237
<INCOME-PRETAX> 769
<INCOME-TAX> 189
<INCOME-CONTINUING> 580
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 580
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
