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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30, 2000.
OR
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________________
to ____________________.
Commission File Number: 0-8574
MICROWAVE POWER DEVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3622306
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
49 Wireless Boulevard
Hauppauge, New York 11788-3935
(Address of principal executive offices, including zip code)
(631) 231-1400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of October 31, 2000, there were 10,723,564 shares outstanding of the
registrant's Common Stock, $.01 par value.
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<PAGE>
MICROWAVE POWER DEVICES, INC.
INDEX
PART I -- FINANCIAL INFORMATION Page No.
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets --
September 30, 2000 and December 31, 1999 .......................... 3
Consolidated Statements of Operations --
Three and nine months ended September 30, 2000 and 1999 ........... 4
Consolidated Statements of Cash Flows --
Nine months ended September 30, 2000 and 1999 ..................... 5
Notes to Consolidated Financial Statements ........................ 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk...... 14
PART II -- OTHER INFORMATION
ITEM 5. Other Information .............................................. 15
ITEM 6. Exhibits and Reports on Form 8-K ............................... 16
SIGNATURES................................................................. 17
Page 2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MICROWAVE POWER DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- ---------
(unaudited) (audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 574 $ 618
Accounts receivable, net of allowance for doubtful accounts of
$98 and $160, respectively.............................................. 10,609 12,167
Inventories, net........................................................... 13,191 16,062
Prepaid expenses and other current assets.................................. 540 529
Deferred income taxes...................................................... 2,097 789
------- -------
Total current assets.................................................. 27,011 30,165
PROPERTY, PLANT AND EQUIPMENT, net.............................................. 9,055 9,614
INTANGIBLE ASSETS, net.......................................................... 263 247
OTHER LONG-TERM ASSETS.......................................................... 435 442
DEFERRED INCOME TAXES........................................................... 7,211 7,062
------- -------
$43,975 $47,530
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.......................................... $ 1,555 $ 1,418
Accounts payable........................................................... 6,606 7,528
Accrued liabilities........................................................ 3,938 3,796
Customer advance payments.................................................. 80 --
------- -------
Total current liabilities............................................. 12,179 12,742
------- -------
LONG-TERM DEBT.................................................................. 13,148 14,761
------- -------
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; 10,709,064 and 10,638,664 shares issued
and outstanding, respectively.......................................... 107 106
Additional paid-in capital................................................. 26,055 25,498
Notes receivable from shareholders......................................... (123) (123)
Retained earnings (accumulated deficit).................................... (7,391) (5,454)
------- -------
Total shareholders' equity............................................ 18,648 20,027
------- -------
$43,975 $47,530
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
Page 3
<PAGE>
MICROWAVE POWER DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES ............................................. $13,008 $16,417 $39,979 $52,813
COST OF SALES.......................................... 10,311 11,794 32,964 36,697
------- ------- ------- -------
Gross profit................................. 2,697 4,623 7,015 16,116
------- ------- ------- -------
OPERATING EXPENSES:
General and administrative........................ 806 957 2,628 2,971
Selling .......................................... 618 1,031 2,211 3,219
Research and development.......................... 1,384 1,802 4,354 5,110
------- ------- ------- -------
2,808 3,790 9,193 11,300
------- ------- ------- -------
Income (loss) from operations................ (111) 833 (2,178) 4,816
INTEREST EXPENSE, net.................................. 352 331 1,052 928
OTHER INCOME, net...................................... (1) 0 (1) (3)
------- ------- ------- -------
Income (loss) before income taxes............ (462) 502 (3,229) 3,891
PROVISION (BENEFIT) FOR INCOME TAXES................... (185) 157 (1,292) 1,426
------- ------- ------- -------
Net income (loss)............................ $ (277) $ 345 $ (1,937) $ 2,465
======= ======= ======== =======
PER SHARE INFORMATION:
Net income (loss) per common share:
Basic........................................ $ (0.03) $ 0.03 $ (0.18) $ 0.23
======= ======= ======== =======
Diluted...................................... $ (0.03) $ 0.03 $ (0.18) $ 0.23
======= ======= ======== =======
Common shares used in computing per share amounts:
Basic........................................ 10,703 10,565 10,685 10,503
======= ======= ======== =======
Diluted...................................... 10,703 10,953 10,685 10,860
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
Page 4
<PAGE>
MICROWAVE POWER DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
------------------------------
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ........................................... $(1,937) $ 2,465
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization .......................... 1,195 1,159
Deferred income taxes .................................. (1,313) 1,393
Gain on sale of property, plant and equipment .......... -- (4)
Changes in operating assets and liabilities:
Accounts receivable .................................... 1,558 (2,071)
Inventories ............................................ 2,871 (4,246)
Prepaid expenses and other assets ...................... (74) (135)
Accounts payable and accrued liabilities ............... (780) 155
Customer advance payments .............................. 80 (921)
------- -------
Net cash provided by (used in) operating activities 1,600 (2,205)
------- -------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ............. (582) (1,895)
Proceeds from sale of property, plant and equipment .... -- 5
------- -------
Net cash used in investing activities ............. (582) (1,890)
------- -------
FINANCING ACTIVITIES:
Proceeds from long-term debt ........................... 660 1,659
Principal payments of long-term debt ................... (1,145) (972)
Net proceeds from (repayments on) revolving credit loans (991) 1,944
Repayment of notes receivable from shareholder ......... -- 65
Net proceeds from exercise of common stock options ..... 414 1,377
------- -------
Net cash provided by (used in) financing activities (1,062) 4,073
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS ............................ (44) (22)
CASH AND CASH EQUIVALENTS, beginning of year ..................... 618 667
------- -------
CASH AND CASH EQUIVALENTS, end of period ......................... $ 574 $ 645
======= =======
SUPPLEMENTAL DATA:
Cash paid for interest ...................................... $ 1,093 $ 970
======= =======
Cash paid for income taxes .................................. $ 22 $ 85
======= =======
Non-cash tax benefits from exercise of common stock options . $ 144 $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
Page 5
<PAGE>
MICROWAVE POWER DEVICES, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(in thousands, except per share data)
(unaudited)
1. Reference is made to the Notes to Consolidated Financial Statements
contained in the Company's December 31, 1999 audited consolidated financial
statements included in the Company's 1999 Annual Report and the Company's 1999
Annual Report on Form 10-K filed with the SEC on March 29, 2000. In the opinion
of Management, the interim unaudited financial statements included herein
reflect all adjustments necessary, consisting of normal recurring adjustments,
for a fair presentation of such data on a basis consistent with that of the
audited data presented therein. The consolidated results of operations for
interim periods are not necessarily indicative of the results to be expected for
a full year.
2. The Company accounts for earnings per share pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic net
income per common share ("Basic EPS") is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during the period.
Diluted net income 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 outstanding during the period. A reconciliation between
the numerator and denominator of Basic EPS and Diluted EPS is as follows:
<TABLE>
<CAPTION>
Net Income Per
Net Income Common Shares Common Share
---------- ------------- ------------
<S> <C> <C> <C>
For the quarter ended September 30, 1999
Basic EPS
Net income attributable to common stock $ 345 10,565 $0.03
Effect of dilutive securities: stock options -- 388 --
------ ------ -----
Diluted EPS
Net income attributable to common stock and
assumed option exercises $345 10,953 $0.03
====== ====== =====
For the nine months ended September 30, 1999
Basic EPS
Net income attributable to common stock $2,465 10,503 $0.23
Effect of dilutive securities: stock options -- 357 --
------ ------ -----
Diluted EPS
Net income attributable to common stock and
assumed option exercise $2,465 10,860 $0.23
====== ====== =====
</TABLE>
Diluted EPS is the same as Basic EPS, for the three months and nine months
ended September 30, 2000, since the Company is in a loss position and, as such,
the impact of the inclusion of stock options then outstanding would be
anti-dilutive. Diluted EPS, for the three months and nine months ended September
30, 1999, does not include the impact of other stock options then outstanding
because the exercise price of those options was greater than the average market
price of the Company's common stock during these periods and therefore, their
inclusion would be anti-dilutive.
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<PAGE>
3. The following stock options were granted, cancelled or exercised during
the third quarter of 2000 under either the 1995, 1996 or 1999 Stock Option
Plans:
Granted Cancelled Exercised
------- --------- ---------
23 @ $4.7656 - $6.9375 28 @ $6.375 - $10.00 9 @ $2.875
Note, some of the stock options reported above actually have an effective date
in the second quarter, but those grants were not ratified and approved by the
Compensation Committee until September 12, 2000.
4. Segment Information
The Company follows the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Reportable operating
segments are determined based on the Company's management approach. The
management approach, as defined by SFAS No. 131, is based on the way that the
chief operating decision maker organizes the segments within an enterprise for
making operating decisions and assessing performance. While the Company's
results of operations are primarily reviewed on a consolidated basis, the chief
operating decision maker also manages the enterprise in two segments: (i)
wireless products and (ii) satellite, medical and military products. The
following represents selected consolidated financial information for the
Company's segments for the three and nine months ended September 30, 2000 and
1999:
<TABLE>
<CAPTION>
Satellite, Medical
Wireless Products and Military Products Total
----------------- --------------------- -----
<S> <C> <C> <C>
Three Months Ended September 30, 2000
Net sales .................. $ 4,916 $ 8,092 $ 13,008
Gross profit ............... 1,005 1,692 2,697
Net income (loss) .......... (606) 329 (277)
Total assets ............... 15,615 28,360 43,975
Three Months Ended September 30, 1999
Net sales .................. $ 7,837 $ 8,580 $ 16,417
Gross profit ............... 2,072 2,551 4,623
Net income (loss) .......... (475) 820 345
Total assets ............... 21,761 31,236 52,997
Nine Months Ended September 30, 2000
Net sales .................. $ 17,948 $ 22,031 $ 39,979
Gross profit ............... 3,618 3,397 7,015
Net income (loss) .......... (2,016) 79 (1,937)
Total assets ............... 15,615 28,360 43,975
Nine Months Ended September 30, 1999
Net sales .................. $ 25,316 $ 27,497 $ 52,813
Gross profit ............... 6,999 9,117 16,116
Net income (loss) .......... (831) 3,296 2,465
Total assets ............... 21,761 31,236 52,997
</TABLE>
Page 7
<PAGE>
5. Comprehensive Income
The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which requires companies to report all changes in equity
during a period, except those resulting from investment by owners and
distribution to owners, for the period in which they are recognized.
Comprehensive income is the total of net income and all other nonowner changes
in equity (or other comprehensive income) such as unrealized gains/losses on
securities classified as available-for-sale, foreign currency translation
adjustments and minimum pension liability adjustments. The Company's operations
did not give rise to items includable in comprehensive income which were not
already included in net income for the three and nine months ended September 30,
2000 and 1999. Accordingly, the Company's comprehensive income is the same as
its net income for all periods presented.
6. Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes accounting and reporting standards for derivative
instruments (including certain derivative instruments embedded in other
contracts) and for hedging activities. SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000 (as amended by SFAS No. 137 and SFAS No.
138) and will not require retroactive restatement of prior-period financial
statements. The Company currently does not use derivative instruments or engage
in hedging activities and, accordingly, does not expect that this statement will
have an impact on its consolidated statements when adopted.
7. Subsequent Events
See Part II, Item 5 for a discussion regarding the pending transaction
between the Company and Ericsson Inc.
Page 8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Microwave Power Devices, Inc. ("Microwave Power Devices" or the "Company")
commenced operations in 1967. During the past 33 years, the Company has
designed, manufactured and marketed high power, solid-state, radio frequency
("RF") and microwave power amplifiers and related subsystems for military,
medical, satellite and wireless telecommunications applications.
The Company historically has been dependent upon the military market as
its principal source of revenue. In 1992, as the military market was declining,
the Company leveraged its military technological leadership position and
increased the scope of its business by entering the commercial markets serving
medical applications and, following that, satellite applications, thereby
broadening its product offerings. In 1994, the Company started producing power
amplifiers for the wireless telecommunications market. The Company now develops
precision high-power amplifiers for a variety of commercial uses.
See Part II, Item 5 for a discussion regarding the pending transaction
between the Company and Ericsson Inc.
Forward-Looking Statements
Certain information contained in this Quarterly Report on Form 10-Q,
including, without limitation, information appearing under Part I, Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements (within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934). Factors set forth in the Company's 1999 Annual Report on Form 10-K, filed
March 29, 2000, under Item 1, "Business - Risk Factors," together with other
factors that appear with the forward-looking statements, or in the Company's
other Securities and Exchange Commission filings, including its Registration
Statement on Form S-1 dated September 29, 1995, could affect the Company's
actual results and could cause the Company's actual results to differ materially
from those expressed in any forward-looking statements made by, or on behalf of,
the Company in this Quarterly Report on Form 10-Q.
Results of Operations -- Third Quarters Ended September 30, 2000 and September
30, 1999
Net Sales. Net sales decreased by 21% to $13.0 million in the third
quarter of 2000 from $16.4 million in the third quarter of 1999. This sales
decrease was primarily due to lower shipments of the Company's commercial
products. Sales of commercial products decreased by 26% to $7.6 million in the
third quarter of 2000 from $10.2 million in the third quarter of 1999,
representing 58% and 62%, respectively, of net sales in such periods. The
commercial sales decrease was predominantly due to lower shipments to one
domestic wireless telecommunications original equipment manufacturer ("OEM"),
partially offset by higher shipments to one foreign wireless telecommunications
customer. Sales of military products decreased by 12% to $5.4 million in the
third quarter of 2000 from $6.2 million in the third quarter of 1999,
representing 42% and 38%, respectively, of net sales in such periods. The
military sales decrease was predominantly due to lower shipments of Republic
products.
International sales decreased by 2% to $4.2 million in the third quarter of
2000 from $4.3 million in the third quarter of 1999, totaling 32% of net sales
in the third quarter of 2000 compared to 26% in the
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<PAGE>
third quarter of 1999. The decrease in international sales was predominantly due
to lower shipments of military products (primarily Republic products), partially
offset by higher shipments of wireless products to foreign customers. In the
third quarter of 2000, sales to two domestic commercial OEMs (Customer B and
Customer C), a foreign commercial OEM (customer I), a domestic military OEM
(Customer H) and a foreign military OEM (Customer D) accounted for 12%, 14%,
16%, 13% and 11%, respectively, of the Company's net sales. In the third quarter
of 1999, sales to a domestic commercial OEM (Customer B) and a foreign military
OEM (Customer D) accounted for 44% and 14%, respectively, of the Company's net
sales.
The Company has entered into arrangements with its major wireless OEM
customer whereby the customer stocks the Company's amplifiers on a consignment
basis until they are consumed by the customer in production, at which time
revenue is recognized. Under these arrangements, the Company receives a forecast
each week from the customer reflecting the customer's estimated future product
requirements. These forecasts provide the Company with a one year forward-look
which details the weekly requirements for the first 26 weeks and the monthly
requirements for the remaining six months.
Gross Profit. Gross profit decreased by 42% to $2.7 million in the third
quarter of 2000 from $4.6 million in the third quarter of 1999. The Company's
gross profit margin (gross profit as a percentage of net sales) also decreased
to 20.7% in the third quarter of 2000 from 28.2% in the third quarter of 1999.
The decrease in gross profit margin was primarily due to the underabsorption of
overhead expenses as compared to the same period last year, which is the result
of the lower sales volume. In addition, revenues in the third quarter of 2000 on
a major foreign military program were recognized at 0% gross profit margin as
the Company has previously recognized the loss on this contract.
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.
Certain of the purchase orders or contracts comprising backlog at
September 30, 2000 set forth product specifications not yet achieved by the
Company that would require the Company to complete additional product
development. Failure to develop products meeting such specifications could lead
to the cancellation of the related purchase orders or contracts. The reduction,
delay or cancellation of orders or contracts from one or more significant
customers could materially adversely affect the Company's business, financial
condition and results of operations.
There can be no assurances that gross profit will improve. If the Company
is not able to reduce its production costs to the extent anticipated, or to
introduce new products with greater gross profit margins, and if average selling
prices decline beyond current expectations, the Company's gross profit and
results of operations could be materially adversely affected. The Company's
gross profit may also be affected by a variety of other factors, including the
mix of systems and equipment sold; production, reliability or quality problems;
and price competition.
General and Administrative Expenses. General and administrative expenses
decreased by 16% to $0.8 million in the third quarter of 2000 from $1.0 million
in the third quarter of 1999, representing 6.2% and 5.8%, respectively, of net
sales. The percentage increase is directly related to the reduced revenue level
experienced in the third quarter of 2000. The decrease in general and
administrative expenses resulted primarily from the termination of consulting
agreements with two directors on January 31, 2000.
Selling Expenses. Selling expenses decreased by 40% to $0.6 million in the
third quarter of 2000 from $1.0 million in the third quarter of 1999,
representing 4.8% and 6.3%, respectively, of net sales. The decrease in selling
expenses resulted primarily from lower sales representative commissions (the
result of the lower overall sales volume and product sales mix variations),
reduced bid and proposal expenditures, and decreased advertising and trade show
costs.
Page 10
<PAGE>
Research and Development Expenses. Research and development expenses
decreased by 23% to $1.4 million in the third quarter of 2000 from $1.8 million
in the third quarter of 1999, representing 10.6% and 11.0%, respectively, of net
sales. The decrease in research and development expenses resulted primarily from
decreased wireless telecommunications product development. The Company believes,
however, that the continued introduction of new products is essential to its
competitiveness, especially in the wireless telecommunications market, and is
committed to continued investment in research and development.
Interest Expense. Interest expense increased by 6% to at $0.4 million in
the third quarter of 2000 from $0.3 million in the third quarter of 1999. The
increase in interest expense resulted from a higher interest rate as compared to
the same period last year.
Provision for Income Taxes. The Company's effective tax rate increased to
40.0% in the third quarter of 2000 from 31.3% in the third quarter of 1999. The
effective tax rate for the third quarter of 1999 was favorably impacted by the
partial recovery of previously reserved deferred tax assets. Without the benefit
of this change in the valuation allowance, the effective tax rate for the third
quarter of 1999 would have been 40.0%. There can be no assurances that the
Company will achieve taxable income in the future.
Nine Months Ended September 30, 2000 and September 30, 1999
Net Sales. Net sales decreased by 24% to $40.0 million in the first nine
months of 2000 from $52.8 million in the first nine months of 1999. This sales
decrease was primarily due to lower shipments of the Company's commercial and
military products. Sales of commercial products decreased by 23% to $24.1
million in the first nine months of 2000 from $31.4 million in the first nine
months of 1999, representing 60% and 59%, respectively, of net sales in such
periods. The commercial sales decrease was predominantly due to lower shipments
to a domestic wireless telecommunications OEM. Sales of military products
decreased by 26% to $15.9 million in the first nine months of 2000 from $21.4
million in the first nine months of 1999, representing 40% and 41%,
respectively, of net sales in such periods. The military sales decrease was
predominantly due to lower shipments of both military amplifiers and Republic
products.
International sales increased by 15% to $12.1 million in the first nine
months of 2000 from $10.5 million in the first nine months of 1999, totaling 30%
of net sales in the first nine months of 2000 compared to 20% in the first nine
months of 1999. The increase in international sales was predominantly due to
higher shipments of both military and wireless products. In the first nine
months of 2000, sales to one domestic commercial OEM (Customer B), one domestic
military OEM (Customer H) and one foreign military OEM (Customer D) accounted
for 25%, 13% and 14%, respectively, of the Company's net sales. In the first
nine months of 1999, sales to one domestic commercial OEM (Customer B) and one
domestic military OEM (Customer F) accounted for 40% and 12%, respectively, of
the Company's net sales.
The Company has entered into arrangements with its major wireless OEM
customer whereby the customer stocks the Company's amplifiers on a consignment
basis until they are consumed in production, at which time revenue is
recognized. Under these arrangements, the Company receives a forecast each week
from the customer reflecting the customer's estimated future product
requirements. These forecasts provide the Company with a one year forward-look
which details the weekly requirements for the first 26 weeks and the monthly
requirements for the remaining six months.
Gross Profit. Gross profit decreased by 56% to $7.0 million in the first
nine months of 2000 from $16.1 million in the first nine months of 1999. The
Company's gross profit margin (gross profit as a percentage of net sales) also
decreased to 17.5% in the first nine months of 2000 from 30.5% in the first nine
months of 1999. This gross profit margin decrease was primarily due to the
deferments of a major
Page 11
<PAGE>
foreign military program and the 0% gross profit margin which accompanied
shipments in the first nine months of 2000 under that same program, which was
previously recognized as a loss contract. In addition, the Company is
experiencing an underabsorption of overhead expenses as compared to the same
period last year, which is the result of the lower sales volume.
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.
Certain of the purchase orders or contracts comprising backlog at
September 30, 2000 set forth product specifications not yet achieved by the
Company that would require the Company to complete additional product
development. Failure to develop products meeting such specifications could lead
to the cancellation of the related purchase orders or contracts. The reduction,
delay or cancellation of orders or contracts from one or more significant
customers could materially adversely affect the Company's business, financial
condition and results of operations.
There can be no assurances that gross profit will improve. If the Company
is not able to reduce its production costs to the extent anticipated, or to
introduce new products with greater gross profit margins, and if average selling
prices decline beyond current expectations, the Company's gross profit and
results of operations could be materially adversely affected. The Company's
gross profit may also be affected by a variety of other factors, including the
mix of systems and equipment sold; production, reliability or quality problems;
and price competition.
General and Administrative Expenses. General and administrative expenses
decreased by 12% to $2.6 million in the first nine months of 2000 from $3.0
million in the first nine months of 1999, representing 6.6% and 5.6%,
respectively, of net sales. The percentage increase is directly related to the
reduced revenue level experienced in the first nine months of 2000. The decrease
in general and administrative expenses resulted primarily from the termination
of consulting agreements with two directors on January 31, 2000 and other cost
saving measures.
Selling Expenses. Selling expenses decreased by 31% to $2.2 million in the
first nine months of 2000 from $3.2 million in the first nine months of 1999,
representing 5.5% and 6.1%, respectively, of net sales. The decrease in selling
expenses resulted primarily from lower sales representative commissions (the
result of the lower overall sales volume and product sales mix variations),
reduced bid and proposal expenditures, and decreased advertising and trade show
costs.
Research and Development Expenses. Research and development expenses
decreased by 15% to $4.4 million in the first nine months of 2000 from $5.1
million in the first nine months of 1999, representing 10.9% and 9.7%,
respectively, of net sales. The decrease in research and development expenses
resulted primarily from decreased wireless telecommunications and military
product development efforts. The Company believes, however, that the continued
introduction of new products is essential to its competitiveness, especially in
the wireless telecommunications market, and is committed to continued investment
in research and development.
Interest Expense. Interest expense increased by 13% to $1.1 million in the
first nine months of 2000 from $0.9 million in the first nine months of 1999.
The increase in interest expense resulted from greater average borrowings and a
higher interest rate as compared to the same period last year.
Provision for Income Taxes. The Company's effective tax rate increased to
40.0% for the first nine months of 2000 from 36.6% in the first nine months of
1999. The effective tax rate for the first nine months of 1999 was favorably
impacted by the partial recovery of previously reserved deferred tax assets.
Without the benefit of this change in the valuation allowance, the effective tax
rate for the first
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nine months of 1999 would have been 40.0%. There can be no assurances that the
Company will achieve taxable income in the future.
Liquidity and Capital Resources
Since the Company went public in 1995, the Company has financed its
operations and met its capital requirements through the following two sources:
(i) a credit facility and/or (ii) cash provided by operating activities.
In March 2000, the Company amended its loan agreement with IBJ Whitehall
Business Credit Corporation ("IBJ"). The loan agreement now provides for a $18.9
million credit facility consisting of a revolving line of credit in the amount
of $13.7 million, a term loan in the amount of $0.9 million and two capital
equipment ("Capex") loan facilities, Capex #1 and Capex #2, in the amounts of
$2.0 million and $2.3 million, respectively. The revolving line of credit and
both the term loan and Capex loans bear interest at annual rates equal to the
prime rate plus 0.50% and the prime rate plus 0.75%, respectively. The credit
facility matures in February 2002 and automatically renews for one-year periods
thereafter, unless terminated by either the Company or IBJ. Aggregate borrowings
under the revolving line of credit are limited by a borrowing base, which is
calculated as the sum of 85% of eligible accounts receivable and 40% of eligible
raw materials and work-in-process inventories (with borrowings based on
aggregate eligible inventory limited to $7.0 million). The term loan requires a
monthly principal payment of $0.05 million. The Capex loans require monthly
principal payments that are recalculated each month based on the prior month's
Capex borrowings, if any, amortized over 60 months. Capex #2 loan borrowings
must occur prior to December 31, 2000. At September 30, 2000, credit facility
borrowings totaled $10.2 million which consisted of a term loan balance of $0.6
million, a Capex #1 loan balance of $1.7 million, a Capex #2 loan balance of
$1.2 million (with $1.5 million of the $2.3 million utilized) and revolving line
of credit borrowings of $6.7 million. In addition, $1.4 million of the revolving
line of credit is committed to the Company's outstanding letters of credit. In
August 2000, the Company and IBJ completed Amendment No. 4 to the credit
facility, which provided for a change in certain covenants regarding machinery
and equipment valuations, certain financial statement covenants, and certain
other matters pertaining to the calculation of eligible assets in the Company's
borrowing base. 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 or a minimum EBITDA (as
specified in the August 2000 amendment). For the quarter ended September 30,
2000, the Company was granted a waiver from IBJ with regard to this requirement.
Operating activities provided net cash of $1.6 million and used net cash
of $2.2 million in the first nine months of 2000 and 1999, respectively. From
December 31, 1999 to September 30, 2000, inventory decreased by $2.9 million,
accounts receivable decreased by $1.6 million, and accounts payable and accrued
liabilities decreased by $0.8 million. The decrease in inventory was primarily
due to the lower wireless and military revenue levels, as compared to last year,
which corresponds to lower inventory balance requirements. The decrease in
accounts receivable was primarily due to the reduced revenue levels experienced
in the third quarter of 2000 as compared to the fourth quarter of 1999.
Financing activities, which consisted primarily of proceeds from long-term debt,
principal payments of long-term debt, net proceeds from (repayments on) the
revolving line of credit and net proceeds from the exercise of common stock
options, used net cash of $1.1 million and provided net cash of $4.1 million in
the first nine months of 2000 and 1999, respectively.
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Capital expenditures were $0.6 million and $1.9 million in the first nine
months of 2000 and 1999, respectively. These expenditures were funded primarily
through cash provided by the Company's credit facility. Principal expenditures
for the first nine months of 2000 included engineering and manufacturing test
equipment, other equipment used in the production process and computer hardware
upgrades. The Company anticipates making additional capital expenditures of
approximately $0.6 million during the remainder of 2000, including the purchase
of additional engineering and manufacturing test equipment and production
process equipment, computer equipment upgrades and enhancements to its CAE/CAD
systems. It is anticipated that capital expenditures for 2000 will be financed
by the Company's credit facility, cash provided by operating activities and/or
third party financing sources.
As of September 30, 2000, the Company had working capital of approximately
$14.8 million, compared to approximately $17.4 million as of December 31, 1999.
The Company's current ratio (ratio of current assets to current liabilities) as
of September 30, 2000 was 2.2:1, compared with a current ratio of 2.4:1 as of
December 31, 1999. As of both September 30, 2000 and December 31, 1999, the
Company's debt to equity ratio was 0.8:1.
The Company believes that cash generated from operations, amounts
available under its credit facility, and/or third party financing will be
sufficient to fund necessary capital expenditures and to provide adequate
working capital for at least the next 12 months. There can be no assurance,
however, that the Company will not require additional financing prior to such
date to fund its operations, and, if required, that such financing will be
available on commercially reasonable terms. In addition, the Company may require
additional financing after such date to fund its operations. Moreover, see Part
II, Item 5 for a discussion regarding the pending transaction between the
Company and Ericsson Inc.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal financial instrument is long-term debt under a
credit facility (consisting of a revolving line of credit, term loan and two
Capex loan facilities) that provides for interest at the prime rate plus 0.50%
or the prime rate plus 0.75% (depending upon the individual credit facility
component). The Company is affected by market risk exposure primarily through
the effect of changes in interest rates on amounts payable by the Company under
this credit facility. A significant rise in the prime rate could materially
adversely affect the Company's business, financial condition and results of
operations. At September 30, 2000, an aggregate principal amount of $10.2
million was outstanding under the Company's credit facility and represented a
weighted average annual interest rate of 10.2%. If principal amounts outstanding
under the Company's credit facility remained at this level for an entire year
and the prime rate increased or decreased, respectively, by 1.0%, the Company
would pay or save, respectively, an additional $0.1 million in interest in that
year. The Company does not utilize derivative financial instruments to hedge
against changes in interest rates or for any other purpose.
Where appropriate, the Company requires that letters of credit be provided
on foreign sales. In addition, all transactions by the Company are denominated
in U.S. dollars. As such, the Company has shifted foreign currency exposure onto
its foreign customers. As a result, if exchange rates move against foreign
customers, the Company could experience difficulty collecting unsecured accounts
receivable, the cancellation of existing orders or the loss of future orders.
The foregoing could materially adversely affect the Company's business,
financial condition and results of operations.
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PART II -- OTHER INFORMATION
ITEM 5. Other Information
On October 12, 2000, Microwave Power Devices, Inc. (the "Company"),
Ericsson MPD Acquisition Corp., a Delaware corporation ("Purchaser"), and
Ericsson Inc., a Delaware corporation ("Parent") entered into an Agreement and
Plan of Merger (the "Merger Agreement"). The Merger Agreement provides, among
other things, for the commencement of a cash tender offer (the "Offer") to
acquire all outstanding shares of the Company's common stock, par value $.01 per
share (the "Shares") for $8.70 per share (such award, or any greater amount per
Share paid pursuant to the Offer, being the "Per Share Amount") by Purchaser and
further provides that, as promptly as practicable after the satisfaction or, if
permissible, waiver of the conditions set forth in the Merger Agreement, and in
accordance with the relevant provisions of the General Corporation Law of the
State of Delaware ("DGCL"), Purchaser will be merged with the Company (the
"Merger"), with the Company continuing as the surviving corporation and as a
direct wholly owned subsidiary of Parent. At the effective time of the Merger,
all Shares not tendered in the Offer (other than, Shares held in the treasury of
the Company and Shares held by Parent, Purchaser or any direct or indirect
wholly owned subsidiary of Parent or of the Company or shares held by
stockholders, if any, who have properly exercised appraisal rights for such
Shares in accordance with Section 262 of the DGCL) will be converted into the
right to receive the Per Share Amount (subject to applicable withholding taxes),
without interest.
Parent and Purchaser have entered into a Stockholders' Agreement, dated as
of October 12, 2000 (the "Stockholders' Agreement") with certain stockholders of
the Company, namely George Sbordone, James Silver, Lee Leong, Alfred Weber and
Charter Technologies Limited Liability Company, the Company's largest
stockholder (collectively, the "Principal Stockholders"), pursuant to which,
among other things, the Principal Stockholders have agreed to (i) tender their
Shares after commencement of the Offer (which Shares currently represent in the
aggregate approximately 50.6% of the outstanding Shares on a fully diluted basis
(after taking into account all Shares issuable upon conversion of shares of
Company preferred stock or any other convertible securities or upon the exercise
of any vested options, warrants or rights)), (ii) vote such Shares in favor of
the Merger and (iii) grant Purchaser an option to purchase such Shares at the
Per Share Amount upon terms and subject to the conditions set forth in the
Stockholders' Agreement.
On October 20, 2000, Purchaser, Parent and Telefonaktiebolaget LM Ericsson
(Publ) filed, among other items, its Tender Offer Statement on Schedule TO and
the related Letter of Transmittal with the Securities and Exchange Commission
relating to the Offer. On October 20, 2000, the Company filed its
Solicitation/Recommendation Statement on Schedule 14D-9 with the Securities and
Exchange Commission relating to the Offer ("Schedule 14D-9").
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ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 2.1 Agreement and Plan of Merger, dated as of October 12,
2000, among Parent, Purchaser and the Company. (incorporated herein by reference
to Exhibit 3. to the Schedule 14D-9 filed by the Company on October 20, 2000
with the Securities and Exchange Commission).
Exhibit 27.1 Financial Data Schedule.
Exhibit 99.1 Stockholders' Agreement, dated as of October 12, 2000, among
the several stockholders of the Company who are parties thereto, Parent and
Purchaser. (incorporated herein by reference to Exhibit 4. to the Schedule 14D-9
filed by the Company on October 20, 2000 with the Securities and Exchange
Commission).
(b) No reports on Form 8-K have been filed during the quarter ending
September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROWAVE POWER DEVICES, INC.
(Registrant)
Dated: November 13, 2000 /s/ Alfred Weber
----------------------------------------
By: Alfred Weber
Chairman, President and CEO
Dated: November 13, 2000 /s/ Thomas V. Gilboy
----------------------------------------
By: Thomas V. Gilboy
Vice President and CFO
(Principal Financial and Accounting
Officer)
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