================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 30, 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 July 31, 2000, there were 10,699,888 shares outstanding of the
registrant's Common Stock, $.01 par value.
================================================================================
<PAGE>
MICROWAVE POWER DEVICES, INC.
INDEX
PART I -- FINANCIAL INFORMATION Page No.
------------------------------- --------
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets --
June 30, 2000 and December 31, 1999 ............................... 3
Consolidated Statements of Operations --
Three and six months ended June 30, 2000 and 1999 ................. 4
Consolidated Statements of Cash Flows --
Six months ended June 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 4. Submission of Matters to a Vote of Security Holders ............... 15
ITEM 6. Exhibits and Reports on Form 8-K .................................. 15
SIGNATURES................................................................. 16
Page 2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
MICROWAVE POWER DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 521 $ 618
Accounts receivable, net of allowance for doubtful accounts of
$98 and $160, respectively ................................ 10,876 12,167
Inventories, net ............................................. 13,659 16,062
Prepaid expenses and other current assets .................... 627 529
Deferred income taxes ........................................ 2,251 789
-------- --------
Total current assets .................................... 27,934 30,165
PROPERTY, PLANT AND EQUIPMENT, net ................................ 9,234 9,614
INTANGIBLE ASSETS, net ............................................ 283 247
OTHER LONG-TERM ASSETS ............................................ 427 442
DEFERRED INCOME TAXES ............................................. 6,852 7,062
-------- --------
$ 44,730 $ 47,530
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ............................ $ 1,555 $ 1,418
Accounts payable ............................................. 6,483 7,528
Accrued liabilities .......................................... 4,112 3,796
Customer advance payments .................................... 285 --
-------- --------
Total current liabilities ............................... 12,435 12,742
-------- --------
LONG-TERM DEBT .................................................... 13,410 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; 10,699,718 and 10,638,664 shares issued
and outstanding, respectively ............................. 107 106
Additional paid-in capital ................................... 26,015 25,498
Notes receivable from shareholders ........................... (123) (123)
Retained earnings (accumulated deficit) ...................... (7,114) (5,454)
-------- --------
Total shareholders' equity .............................. 18,885 20,027
-------- --------
$ 44,730 $ 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 Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES ............................................. $ 14,548 $ 19,148 $ 26,971 $ 36,396
COST OF SALES ......................................... 12,313 12,915 22,653 24,903
-------- -------- -------- --------
Gross profit ................................ 2,235 6,233 4,318 11,493
-------- -------- -------- --------
OPERATING EXPENSES:
General and administrative ....................... 891 1,008 1,822 2,014
Selling .......................................... 694 1,151 1,593 2,188
Research and development ......................... 1,381 1,698 2,970 3,308
-------- -------- -------- --------
2,966 3,857 6,385 7,510
-------- -------- -------- --------
Income (loss) from operations ............... (731) 2,376 (2,067) 3,983
INTEREST EXPENSE, net ................................. 363 303 700 597
OTHER INCOME, net ..................................... -- (2) -- (3)
-------- -------- -------- --------
Income (loss) before income taxes ........... (1,094) 2,075 (2,767) 3,389
PROVISION (BENEFIT) FOR INCOME TAXES .................. (438) 787 (1,107) 1,269
-------- -------- -------- --------
Net income (loss) ........................... $ (656) $ 1,288 $ (1,660) $ 2,120
======== ======== ======== ========
PER SHARE INFORMATION:
Net income (loss) per common share:
Basic ....................................... $ (0.06) $ 0.12 $ (0.16) $ 0.20
======== ======== ======== ========
Diluted ..................................... $ (0.06) $ 0.12 $ (0.16) $ 0.20
======== ======== ======== ========
Common shares used in computing per share amounts:
Basic ....................................... 10,697 10,497 10,676 10,472
======== ======== ======== ========
Diluted ..................................... 10,697 10,904 10,676 10,784
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
Page 4
<PAGE>
MICROWAVE POWER DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
------------------------
June 30, June 30,
2000 1999
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ............................................... $(1,660) $ 2,120
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization .............................. 790 758
Deferred income taxes ...................................... (1,122) 1,247
Gain on sale of property, plant and equipment .............. -- (3)
Changes in operating assets and liabilities:
Accounts receivable, net ................................... 1,291 587
Inventories, net ........................................... 2,403 (3,137)
Prepaid expenses and other assets .......................... (153) (69)
Accounts payable and accrued liabilities ................... (729) 131
Customer advance payments .................................. 285 (921)
------- -------
Net cash provided by operating activities ............. 1,105 713
------- -------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ................. (376) (1,628)
Proceeds from sale of property, plant and equipment ........ -- 5
------- -------
Net cash used in investing activities ................. (376) (1,623)
------- -------
FINANCING ACTIVITIES:
Proceeds from long-term debt ............................... 660 1,659
Principal payments of long-term debt ....................... (779) (633)
Net repayments on revolving credit loans ................... (1,095) (711)
Net proceeds from exercise of common stock options ......... 388 613
------- -------
Net cash provided by (used in) financing activities ... (826) 928
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................... (97) 18
CASH AND CASH EQUIVALENTS, beginning of year ......................... 618 667
------- -------
CASH AND CASH EQUIVALENTS, end of period ............................. $ 521 $ 685
======= =======
SUPPLEMENTAL DATA:
Cash paid for interest .......................................... $ 725 $ 625
======= =======
Cash paid for income taxes ...................................... $ 10 $ 50
======= =======
Non-cash tax benefits from exercise of common stock options ..... $ 130 $ --
======= =======
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
Page 5
<PAGE>
MICROWAVE POWER DEVICES, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 (loss) per common share ("Basic EPS") is computed by dividing net income
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 June 30, 1999
Basic EPS
Net income attributable to common stock $1,288 10,497 $0.12
Effect of dilutive securities: stock options -- 407 --
------ ------ -----
Diluted EPS
Net income attributable to common stock and $1,288 10,904 $0.12
assumed option exercises ====== ====== =====
For the six months ended June 30, 1999
Basic EPS
Net income attributable to common stock $2,120 10,472 $0.20
Effect of dilutive securities: stock options -- 312 --
------ ------ -----
Diluted EPS
Net income attributable to common stock and $2,120 10,784 $0.20
assumed option exercises ====== ====== =====
</TABLE>
Diluted EPS is the same as Basic EPS, for the three months and six months
ended June 30, 2000, since the Company is in a loss postion and, as such, the
impact of the inclusion of stock options then outstanding would be
anti-dilutive. Diluted EPS, for the three months and six months ended June 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.
Page 6
<PAGE>
3. The following stock options were granted, cancelled or exercised during
the second quarter of 2000 under either the 1995, 1996 or 1999 Stock Option
Plans:
Granted Cancelled Exercised
------- --------- ---------
387 @ $6.9375 - $7.00 31 @ $6.375 - $11.125 7 @ $2.875 - $6.375
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 six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Satellite, Medical
Wireless Products and Military Products Total
----------------- --------------------- -----
<S> <C> <C> <C>
Three Months Ended June 30, 2000
Net sales.......................... $5,350 $9,198 $14,548
Gross profit....................... 1,160 1,075 2,235
Net loss........................... (584) (72) (656)
Total assets....................... 14,394 30,336 44,730
Three Months Ended June 30, 1999
Net sales.......................... $9,347 $9,801 $19,148
Gross profit....................... 2,757 3,476 6,233
Net income (loss).................. (95) 1,383 1,288
Total assets....................... 18,652 30,831 49,483
Six Months Ended June 30, 2000
Net sales.......................... $13,032 $13,939 $26,971
Gross profit....................... 2,613 1,705 4,318
Net loss........................... (1,410) (250) (1,660)
Total assets....................... 14,394 30,336 44,730
Six Months Ended June 30, 1999
Net sales.......................... $17,479 $18,917 $36,396
Gross profit....................... 4,927 6,566 11,493
Net income (loss).................. (356) 2,476 2,120
Total assets....................... 18,652 30,831 49,483
</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 includible in comprehensive income which were not
already included in net income for the three and six months ended June 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.
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.
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 --
Second Quarters Ended June 30, 2000 and June 30, 1999
Net Sales. Net sales decreased by 24% to $14.5 million in the second
quarter of 2000 from $19.1 million in the second quarter of 1999. This sales
decrease was primarily due to lower shipments of the Company's commercial
products. Sales of commercial products decreased by 36% to $7.1 million in the
second quarter of 2000 from $11.1 million in the second quarter of 1999,
representing 49% and 58%, respectively, of net sales in such periods. The
commercial sales decrease was predominantly due to lower shipments to one
domestic and, to a lesser extent, one foreign wireless telecommunications
original equipment manufacturer ("OEM"). These decreases were the result of two
programs that were ongoing during this period in 1999 and did not repeat in
2000. One program was a large cellular CDMA amplifier project with our largest
wireless customer and the other was a smaller order to supply wireless repeaters
into Asia. Sales of military products decreased by 7% to $7.4 million in the
second quarter of 2000 from $8.0 million in the second quarter of 1999,
representing 51% and 42%, respectively, of net sales in such periods. The
military sales decrease was predominantly due to lower shipments of Republic
products.
International sales increased by 26% to $4.6 million in the second quarter
of 2000 from $3.6 million in the second quarter of 1999, totaling 31% of net
sales in the second quarter of 2000 compared to 19% in the second quarter of
1999. The increase in international sales was predominantly due to shipments
against two foreign military programs during the second quarter of 2000,
partially offset by lower market demand from foreign wireless telecommunications
OEM customers. In the second quarter of 2000, sales
Page 9
<PAGE>
to a domestic commercial OEM (Customer B), a foreign military OEM (Customer D)
and a domestic military OEM (Customer H) accounted for 26%, 24% and 13%,
respectively, of the Company's net sales. In the second quarter of 1999, sales
to a domestic commercial OEM (Customer B) and a domestic military OEM (Customer
F) accounted for 38% 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 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 64% to $2.2 million in the second
quarter of 2000 from $6.2 million in the second quarter of 1999. The Company's
gross profit margin (gross profit as a percentage of net sales) also decreased
to 15.4% in the second quarter of 2000 from 32.6% in the second quarter of 1999.
This gross profit margin decrease was primarily due to the deferments of a major
foreign military program and the 0% gross profit margin which accompanied second
quarter 2000 shipments under that same program. In addition, many of the
Company's current wireless programs are in the pre-production stage as compared
to the same period last year when production programs were in place.
Pre-production programs generally are less profitable than production programs.
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 June 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 $0.9 million in the second quarter of 2000 from $1.0 million
in the second quarter of 1999, representing 6.1% and 5.3%, respectively, of net
sales. The percentage increase is directly related to the reduced revenue level
experienced in the second 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 $0.7 million in the
second quarter of 2000 from $1.2 million in the second quarter of 1999,
representing 4.8% and 6.0%, 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),
decreased advertising costs and reduced bid and proposal expenditures.
Page 10
<PAGE>
Research and Development Expenses. Research and development expenses
decreased by 19% to $1.4 million in the second quarter of 2000 from $1.7 million
in the second quarter of 1999, representing 9.5% and 8.9%, respectively, of net
sales. The percentage increase is directly related to the reduced revenue level
experienced in the second quarter of 2000. 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 20% to $0.4 million in the
second quarter of 2000 from $0.3 million in the second quarter 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% benefit in the second quarter of 2000 from 37.9% in the second quarter of
1999. The effective tax rate for the second 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 second quarter of 1999 would have been 40.0%. There can be no
assurances that the Company will achieve taxable income in the future.
Six Months Ended June 30, 2000 and June 30, 1999
Net Sales. Net sales decreased by 26% to $27.0 million in the first six
months of 2000 from $36.4 million in the first six months of 1999. This sales
decrease was primarily due to lower shipments of the Company's military and
commercial products. Sales of military products decreased by 32% to $10.4
million in the first six months of 2000 from $15.2 million in the first six
months of 1999, representing 39% and 42%, respectively, of net sales in such
periods. The military sales decrease was predominantly due to lower shipments on
one U. S. Government military program, one domestic military program and of
Republic products, partially offset by higher deliveries on one foreign military
program and another domestic military program. Sales of commercial products
decreased by 22% to $16.6 million in the first six months of 2000 from $21.2
million in the first six months of 1999, representing 61% and 58%, respectively,
of net sales in such periods. The commercial sales decrease was predominantly
due to lower shipments to one domestic and one foreign wireless
telecommunications OEM. These decreases were the result of two programs that
were ongoing during this period in 1999 and did not repeat in 2000. One program
was a large cellular CDMA amplifier project with our largest wireless customer
and the other was a smaller order to supply wireless repeaters into Asia.
International sales increased by 28% to $8.0 million in the first six
months of 2000 from $6.2 million in the first six months of 1999, totaling 30%
of net sales in the first six months of 2000 compared to 17% in the first six
months of 1999. The increase in international sales was predominantly due to
higher shipments to a foreign military customer, partially offset by lower
market demand from foreign wireless telecommunications OEM customers. In the
first six months of 2000, sales to one domestic commercial OEM (Customer B), one
foreign military OEM (Customer D), one domestic military OEM (Customer H) and
one foreign commercial OEM (Customer E) accounted for 31%, 15%, 13% and 10%,
respectively, of the Company's net sales. In the first six months of 1999, sales
to one domestic commercial OEM (Customer B) and two domestic military OEMs
(Customer F and Customer G) accounted for 38%, 16% and 11%, 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
Page 11
<PAGE>
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 62% to $4.3 million in the first
six months of 2000 from $11.5 million in the first six months of 1999. The
Company's gross profit margin (gross profit as a percentage of net sales) also
decreased to 16.0% in the first six months of 2000 from 31.6% in the first six
months of 1999. This gross profit margin decrease was primarily due to the
deferments of a major foreign military program and the 0% gross profit margin
which accompanied shipments in the first six months of 2000 under that same
program. In addition, many of the Company's current wireless programs are in the
pre-production stage as compared to the same period last year when production
programs were in place. Pre-production programs generally are less profitable
than production programs.
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 June 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 10% to $1.8 million in the first six months of 2000 from $2.0
million in the first six months of 1999, representing 6.8% and 5.5%,
respectively, of net sales. The percentage increase is directly related to the
reduced revenue level experienced in the first six 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.
Selling Expenses. Selling expenses decreased by 27% to $1.6 million in the
first six months of 2000 from $2.2 million in the first six months of 1999,
representing 5.9% and 6.0%, 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),
decreased advertising costs and reduced bid and proposal expenditures.
Research and Development Expenses. Research and development expenses
decreased by 10% to $3.0 million in the first six months of 2000 from $3.3
million in the first six months of 1999, representing 11.0% and 9.1%,
respectively, of net sales. The decrease in research and development expenses
resulted primarily from decreased military and, to a lesser extent, 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.
Page 12
<PAGE>
Interest Expense. Interest expense increased by 17% to $0.7 million in the
first six months of 2000 from $0.6 million in the first six 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 six months of 2000 from 37.4% for the first six months of
1999. The effective tax rate for the first six 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 six 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 June 30, 2000, credit facility
borrowings totaled $10.5 million which consisted of a term loan balance of $0.8
million, a Capex #1 loan balance of $1.9 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 $6.6 million. In addition, $2.4 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).
Operating activities provided net cash of $1.1 million and $0.7 million in
the first six months of 2000 and 1999, respectively. From December 31, 1999 to
June 30, 2000, inventory decreased by $2.4 million, accounts receivable
decreased by $1.3 million, accounts payable and accrued liabilities decreased by
$0.7 million and customer advance payments increased by $0.3 million. The
decrease in inventory was primarily due to a decrease in work-in-process for
military and wireless telecommunications products, as well as a decrease in
finished goods inventories for wireless telecommunications products. The
decrease in accounts receivable was primarily due to the $3.5 million
Page 13
<PAGE>
drop in revenue experienced in the second quarter of 2000 versus the fourth
quarter of 1999. Investing activities, which consisted primarily of equipment
acquisitions, used net cash of $0.4 million and $1.6 million in the first six
months of 2000 and 1999, respectively. Financing activities, which consisted
primarily of proceeds from long-term debt, principal payments of long-term debt,
net repayments made on the revolving line of credit and net proceeds from the
exercise of common stock options, used net cash of $0.9 million and provided net
cash of $0.9 million in the first six months of 2000 and 1999, respectively.
Capital expenditures were $0.4 million and $1.6 million in the first six
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 six 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 $0.8 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 June 30, 2000, the Company had working capital of approximately
$15.5 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 June 30, 2000 was 2.2:1, compared with a current ratio of 2.4:1 as of
December 31, 1999. As of both June 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.
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 June 30, 2000, an aggregate principal amount of $10.5 million was
outstanding under the Company's credit facility and represented a weighted
average annual interest rate of 10.0%. 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 0.9%, 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,
Page 14
<PAGE>
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.
PART II -- OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
At the Company's Annual Meeting of Stockholders held Thursday, May 4,
2000, at 11:00 A.M., local time, at the offices of Proskauer Rose LLP, 1585
Broadway, 26th Floor, New York, New York 10036, the following items were voted
upon:
For Against Abstain
--- ------- -------
1. Election of Directors:
Alfred Weber 9,093,274 0 546,855
Merril M. Halpern 9,092,924 0 547,205
A. Lawrence Fagan 9,092,924 0 547,205
David J. Aldrich 9,093,639 0 546,490
Warren A. Law 9,094,324 0 545,805
James Silver 9,093,324 0 546,805
James Morice 9,094,774 0 545,355
2. Adopt the Company's 1999
Stock Option Plan 7,336,524 2,286,262 17,343
3. Ratify the appointment of
Arthur Andersen LLP 9,628,686 7,743 3,700
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 10.17 Change in Control Agreement dated as of May 15,
2000 between Microwave Power Devices, Inc. and
Thomas V. Gilboy.
Exhibit 10.18 Amendment No. 4 dated as of August 8, 2000 to a
Loan and Security Agreement dated as of February
13, 1997 among IBJ Whitehall Business Credit
Corporation, as Lender and Agent, and MPD
Technologies, Inc.
Exhibit 10.19 Change in Control Agreement dated as of July 31,
2000 between Microwave Power Devices, Inc. and
Stephen A. Scover.
Exhibit 27.1 Financial Data Schedule.
(b) No reports on Form 8-K have been filed during the quarter ending June
30, 2000.
Page 15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROWAVE POWER DEVICES, INC.
(Registrant)
Dated: August 10, 2000 /s/ Alfred Weber
----------------- ----------------------------------------
By: Alfred Weber
Chairman, President and CEO
Dated: August 10, 2000 /s/ Thomas V. Gilboy
----------------- ----------------------------------------
By: Thomas V. Gilboy
Vice President and CFO
(Principal Financial and Accounting Officer)
Page 16
