Runup, consolidation, breakout, consolidation. From 10Q amended Dec. 10. Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations
The following discussion should be read in conjunction with the company's consolidated financial statements and related disclosures included elsewhere in this quarterly report. Except for historic actual results reported, the following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties. See "Caution Regarding Forward-looking Statements" included above for a discussion of certain factors that could cause future actual results to differ from those described in the following discussion.
Financial Condition and Liquidity
On September 24, 1999, cash and equivalents and short-term investments totaled $110.9 million, an increase of $46.3 million from the year-end balance of $64.6 million. The increase is attributable mostly to the following transactions: Net proceeds of $19.9 million from sale of a discontinued operation--SEG business, and $16.9 million from sale of the remaining San Jose, California facility. See a more detailed discussion of these completed transactions under "Divestiture Activities" below. In addition, the company's cash position was improved by an income tax refund of $12.0 million received in 1999 as a result of the 1998 net operating loss.
At the end of the third quarter, the company's principal source of liquidity consisted of $66.2 million in cash and equivalents plus short-term investments valued at $44.7 million. The company invests its excess cash and equivalents in securities with maturity periods exceeding 90 days to take advantage of the higher yields. These short-term investments, which consist primarily of high grade debt securities, are subject to interest rate risk and rise and fall in value as market interest rates change.
At the end of the third quarter, there were no material commitments for capital expenditures. Based on current plans and business conditions, the company believes that its existing cash and equivalents, short-term investments and cash generated from operations will satisfy anticipated cash and working capital requirements for the next twelve months.
Divestiture Activities
On March 31, 1999, the company sold the high-density plasma chemical vapor deposition (HDPCVD) intellectual property assets and related hardware of SEG. In July 1999, the company sold the remainder of its SEG business, consisting of atmospheric pressure chemical vapor disposition products (APCVD). These transactions completed the divestiture of SEG resulting in a net gain of $7.3 million included in the company's second quarter financial results as a disposition of a discontinued operation.
On August 18, 1999, the company announced a definitive agreement to sell substantially all of TG's assets to a unit of Marconi North America, Inc., a subsidiary of the General Electric Company p.l.c. of the United Kingdom. The sale is not yet complete and is subject to certain conditions in addition to approval by the company's shareowners and government approvals.
On September 16, 1999, the company completed the sale of its remaining San Jose, California facility including a 190,000 square foot building resulting in a pre-tax gain of $9.7 million. This transaction was included in the company's third quarter financial results.
On October 1, 1999, the company completed the sale of one of its long-term lease interests in Palo Alto to Stanford University resulting in net proceeds of about $54.0 million. This transaction and any resulting gain will be reported in the company's fourth quarter financial results.
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Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations (continued)
On October 26, 1999, the company announced it has entered into a definitive merger agreement with FP-WJ Acquisition Corp. ("FP-WJ"), a new company formed by certain investment funds managed by Fox Paine & Company, LLC. Under the terms of the merger agreement, the company's outstanding common shares would be converted into the right to receive $41.125 per share in cash. This transaction is not yet complete and is subject to certain conditions in addition to the receipt of funding under financing commitments, approval by the company's shareowners and customary government approvals, and the completion of the sale of TG to Marconi North America, Inc.
There can be no assurance that the pending sale of TG or the merger with FP-WJ will be completed nor can there be any assurance that the company will be able to complete its strategy for the sale of the entire company.
Current Operations and Business Outlook
During the third quarter 1999, WPG received $23.5 million of new orders, an increase of 49% from the $15.8 million received in the second quarter and an increase of 3.5% from the $22.7 million during the same quarter one year ago. New orders received by WPG included key orders from communication equipment leaders such as Lucent Technologies, Inc. and Nortel Networks. Approximately 20% of the orders were received for WPG's components and repeater products.
During the third quarter 1999, TG received $14.5 million of new orders, an increase of 2.8% from the second quarter of $14.1 million and 59% more than the $9.1 million during the same quarter one year ago. Larger than expected orders were received from U.S. government agencies.
At the end of the third quarter, the company's total backlog was $77.9 million. This was about 13% higher than the $68.7 at the end of the second quarter, and about 18% higher than the $66.0 million of a year ago. Of the total $77.9 million backlog, WPG's was $43.4 million while TG's was $34.5 million. Since the company's backlog can be canceled or rescheduled, backlog is not necessarily a meaningful indicator for future revenue.
With the divestiture of the SEG business completed in the second quarter, the company has been focusing on the WPG and TG businesses. Based on current quarter and year-to-date results, both businesses are on track to exceed their targeted profit plans for the year. Although long-term prospects for both businesses appeared positive, it should be noted that short-term demand variations by key customers may affect short-term quarterly results. In addition, the wireless and telecommunications industries are subject to various regulatory agencies of federal, foreign, state and local governments which can affect market dynamics, causing unforeseen ebb and flow of orders and delivery requirements. Domestic and international competition from a number of firms, some of whom are larger than the company, is intense. Other risks and factors discussed in the company's 1998 Form 10-K/A could significantly affect the company's future operating results.
Third Quarter 1999 Compared to Third Quarter 1998
Sales for WPG increased to $16.5 million in 1999 from $11.6 million in 1998, or 42%. Sales continued to grow compared to 1998, but grew at a slower rate when compared to the first half of 1999. The increase in sales was from various product areas including radio frequency (RF) devices and subassemblies, repeaters and PCS converters.
Sales for TG increased to $12.3 million in 1999 compared to $7.5 million in 1998, or 64%. The 1998 third quarter was a low period for TG as a key product line, Base2(TM), was discontinued and TG refocused on its core products and customers.
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Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations (continued)
Gross margin for WPG increased to 41% in 1999 from 27% in 1998 mostly due to higher volume. Also in 1998, quantifiable costs totaling about $0.6 million were incurred related to the start-up of the Milpitas, California plant. The start-up phase was completed on schedule in the first half of 1999. See additional information about the Milpitas, California plant operations in Part I, Item 1 of the company's 1998 Form 10-K/A.
Gross margin for TG increased to 37% in 1999 compared to a loss in 1998. TG's 1999 third quarter results continued to indicate that the 1998 restructuring and realignment were positive relative to current business conditions. Included in the 1998 third quarter was a $3.4 million inventory write down associated with the discontinued Base2 product line, and $6.7 million of charges for problem contracts and slow-moving inventory.
WPG research and development expenses were $4.4 million in 1999 or 27% of sales, compared to $3.9 million in 1998, or 34% of sales. Research and development activities are expected to remain at the current level for the rest of 1999. WPG has been focused on bringing new products to market efficiently to take advantage of the growing market.
TG research and development expenses decreased from 20% of sales in 1998 to 5% in 1999 as the group halted its spending on the discontinued Base2 product in September 1998. Actual expenses decreased from $1.5 million in 1998 to $0.6 million in 1999. TG believes the current level of research and development activity is sufficient in sustaining its refocused core business.
WPG's selling and administrative expenses increased to $2.3 million or 14% of sales in 1999, from $1.3 million or 11% of sales in 1998. Due to the increase in volume, WPG required additional corporate administrative support and was charged $0.8 million more in the third quarter of 1999 than in the same quarter of 1998 for such support. The remainder of the increase was attributable to sales commission expense due to higher sales volume. For the full year 1999, WPG's selling and administrative expenses are expected to be within planned levels at about 11% of sales.
Excluding the 1998 restructuring charges of $2.7 million, TG's selling and administrative expenses were $2.9 million in 1999 compared to $3.4 million in 1998, or a 15% decline. The decline was attributable to the restructuring actions taken in 1998.
The company incurred additional expenses totaling $1.6 million related to the pending transactions as discussed in this Part I, Item 2, under "Divestiture Activities". Although the transactions are pending, the related expenses must be charged against earnings as they are incurred.
Interest income decreased to $1.1 million in 1999 compared to $1.4 million in 1998 mostly due to higher funds available for investment in the third quarter of 1998. In 1999, the sale of the company's remaining San Jose, California facility was completed in the third quarter resulting in $9.7 million of pre-tax gain.
Due to the combined effect of the above, net income from continuing operations in 1999 was $6.9 million, or $1.00 per diluted share, compared to a net loss of $8.9 million in 1998, or $1.13 loss per diluted share.
Year-to-date 1999 Compared to Year-to-date 1998
WPG sales increased 84% to $63.7 million in 1999 from $34.6 million in 1998. WPG continued to grow in all product areas particularly with strong shipments of wireless-local-loop products in the first half of 1999.
Although TG sales decreased from $41.3 million in 1998 to $34.6 million in 1999, or 16%, it was in line with TG's expectations after restructuring in 1998. TG's efforts in refocusing on its core products
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Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations (continued)
and customers have been positive as its orders and sales have been stabilized for the first three quarters of 1999.
Gross margin for WPG improved to 38% in 1999 from 32% in 1998 as the group continued to benefit from higher volume and economies of scale.
Gross margin for TG was 38% in 1999 compared to 21% in 1998. Included in 1998 was a $3.4 million inventory write down associated with the discontinued Base2 product line, and $6.7 million of charges for problem contracts and slow-moving inventory.
WPG research and development expenses increased from $9.1 million in 1998 to $13.0 million in 1999. The expenditures were within WPG's plans. WPG's product development activities are expected to continue at its current pace as it is committed to introduce new quality products to its rapidly growing market in a timely manner.
TG research and development expenses decreased substantially from $7.6 million in 1998 to $2.1 million in 1999. The drop was mostly due to spending being curbed on the discontinued Base2 product line since third quarter 1998.
WPG selling and administrative expenses decreased from 12% of sales in 1998 to 11% of sales in 1999 as expected due to higher business volume. Actual expenses increased from $4.2 million to $6.8 million and were within WPG's plans. Due to the increase in volume, WPG required additional corporate administrative support and was charged $1.7 million more in 1999 than in 1998 for such support. The remainder of the increase was mostly attributable to sales commission expense due to higher sales volume.
Excluding 1998 restructuring charges of $2.7 million, TG selling and administrative expenses decreased from $11.5 million in 1998 to $8.1 million in 1999. Based on the results of the first three quarters of 1999, the decrease was mostly due to the resizing of the TG business in 1998.
The company incurred additional expenses totaling $1.6 million related to a number of pending transactions as discussed in Part I, Item 2, under "Divestiture Activities". Although some of the transactions are still pending, the related expenses have to be charged against earnings as they are incurred.
Interest income decreased to $2.7 million in 1999 compared to $4.7 million in 1998 mostly due to higher funds available for investment in 1998 than in 1999. In 1999, the sale of the company's remaining San Jose, California facility was completed in the third quarter resulting in $9.7 million of pre-tax gain. In 1998, the sale of about 15 acres of undeveloped land adjacent to the San Jose, California facility resulted in about $15.0 million of pre-tax gain.
Due to the combined effect of the above, net income from continuing operations in 1999 was $12.1 million, or $1.80 per diluted share, compared to $3.2 million in 1998, or $0.39 per diluted share.
Looks good on first scan. Jack |