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FORM 10-K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002 Commission File Number 0-13433
MILTOPE GROUP INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 11-2693062
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3800 Richardson Road South, Hope Hull, Alabama 36043
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (334) 284-8665
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, par value $.01 each
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days . Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes No X
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The aggregate market value of the voting stock of the registrant
held by non-affiliates (which excludes voting shares held by officers
and directors of the registrant) was $8,592,529 as of June 30, 2002
(the last day of our most recently completed second quarter.)
Indicate the number of shares outstanding of each of the
registrant's classes of common stock: Common Shares with a par value
of $.01 each: 5,878,909 as of February 28, 2003.
Documents Incorporated by Reference:
The definitive Proxy Statement for the Annual Meeting of Stockholders
to be held June 12, 2003, to be filed with the Commission not later
than 120 days after the close of the Registrant's fiscal year, has been
incorporated by reference for Part III, Items 10, 11, 12 and 13, to
this annual report on Form 10-K.
1
ITEM 1. BUSINESS
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General
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Miltope Group Inc. (the "Company"), a Delaware corporation
incorporated in March 1984, is the parent company of Miltope
Corporation, an Alabama corporation ("Miltope"), IV Phoenix Group, Inc.
a New York corporation ("PGI") and Miltope Business Products, Inc., a
New York corporation ("MBP"). Miltope was originally incorporated as a
New York corporation in 1975 to acquire the assets and business of the
Military Equipment Division of Potter Instrument Company, Inc. and
until June 1984 was a wholly owned subsidiary of Stonebrook Group Inc.
(formerly Stenbeck Reassurance Co. Inc.) ("SGI"). In June 1984, all of
the outstanding stock of the Company was issued to SGI in exchange for
all of the outstanding stock of Miltope. SGI is a privately held
corporation that, since 1975, has supported the formation and funding
of companies engaged in the development and manufacture of electronic
hardware for defense and communications applications and in
communications services. In January 1985, shareholders of the Company
(including SGI) sold 700,000 shares of the Company's Common Stock in an
initial public offering. In November 1985, the Company sold an
additional 1,000,000 shares of its Common Stock to the public. As of
December 30, 1994, Miltope merged with and into a newly formed Alabama
corporation, which succeeded to all of the New York corporation's
assets and liabilities. On January 1, 1995, Modern Holdings
Incorporated (formerly XSource Corporation), a Delaware corporation
("MHI"), acquired 62.8% of the outstanding shares of Common Stock of
the Company pursuant to certain share exchange transactions with SGI,
which at such time was a holder of 55.6% of the outstanding shares of
common stock of the Company, and Stuvik AB, a Swedish corporation and,
at such time, a holder of approximately 7.2% of the outstanding shares
of Company common stock. Prior to June of 1999, MHI was a subsidiary
of Great Universal Incorporated, a Delaware corporation ("GUI"), and a
wholly-owned subsidiary of MIC-USA Inc., ("MIC-USA"), a Delaware
corporation and a wholly-owned subsidiary of Millicom International
Cellular S.A. ("MIC"). In connection with the reorganization of GUI in
June 1999, the Company became a subsidiary of GUI, which became a
wholly owned subsidiary of Great Universal LLC, a Delaware limited
liability company ("GU-LLC"), whose sole member from the date of
reorganization until December 31, 1999 was MIC-USA. On December 31,
1999 The 1999 Great Universal LLC Trust (the "Trust") was formed and
MIC-USA assigned all ownership interest of GU-LLC to the Trust. GU-LLC
provides, through its operating subsidiaries, integrated network
products and services, consulting engineering, billing systems
applications, television and media and specialized electronics products
and services.
Miltope designs, develops, and manufactures computers and computer
peripheral equipment for military, industrial and commercial
applications where reliable operation of the equipment in challenging
environments is imperative. The systems provided are qualified for use
in airborne, shipboard, and ground based applications. Miltope's
product lines include a broad range of computers, computer
workstations, servers, printers, disk cartridges, and mass storage
systems. Miltope continues to increase its presence in the military
arena including United States Air Force avionics and ground based
systems as well as United States Army system diagnostics. Miltope's
equipment is designed and qualified for use as part of in-flight
entertainment, cabin management, and communication systems and is
certified for use aboard virtually every commercial and business jet
platform.
In September 1994, the Company relocated its headquarters from
Melville, New York to Montgomery, Alabama.
On January 12, 1995, the Company completed a $6,100,000 industrial
revenue bond offering by the Alabama State Industrial Development
Authority ("SIDA"), the proceeds of which were used to improve, equip
and furnish the new Montgomery facility and to pay the $3,375,000
principal amount of bank indebtedness that was used in part in the
acquisition of such facility.
On April 1, 2000, the Company entered into an agreement with GUI,
to acquire GUI's ownership of 90% of the outstanding stock of PGI.
Since GUI, through its controlling interest in the Company, continues
to own a controlling interest in PGI after the acquisition, the
acquisition was recorded on the Company's books at GUI's historical
cost and accounted for on an "as if pooled basis".
PGI was founded in 1994 and until August 17, 2001 was engaged in
engineering design and development of small, rugged hand-held computers
utilizing commercial off the shelf ("COTS") technology to provide
application solutions for environments where extremes in temperature,
shock and vibration are commonplace. On August 17, 2001, the Company
moved the manufacturing operations of PGI from facilities in Hauppauge,
New York, to the Company's manufacturing facilities in Hope Hull,
Alabama.
2
Segment Information
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The Company's business is divided into two industry segments,
consisting of the manufacture of militarized and rugged equipment
primarily for military applications conducted by the "Military/Rugged"
segment, which includes the activities of PGI, and the manufacture and
distribution of commercial products conducted by the "Commercial"
segment. Financial information regarding the Company's industry
segments is included in Note 10 to the Notes to Consolidated Financial
Statements located in Item 8 of this Form 10-K.
Description of Business
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Military/Rugged - General
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The military/rugged segment is engaged in the design, development,
manufacture and testing of computer and computer peripheral equipment
for military, rugged and other specialized applications requiring
reliable operations in severe land, sea and airborne environments for
military customers. Military/rugged product lines include a broad
range of computers, computer workstations, servers, printers, disk
cartridges, and mass storage systems. Miltope's primary focus is to
capitalize on the development of commercial-off-the-shelf (COTS)
technology for computing, peripherals, and mass storage capabilities by
creating rugged systems that provide these capabilities for use in the
most demanding environments. Close relationships with major design
activities such as Intel, Seagate, ATI, IBM, etc, provides Miltope with
important insight into the future of the computing world. The Miltope
focus is to utilize this COTS technology within the computing systems
provided to the Department of Defense ("DoD"). The intent is to take
advantage of the accelerated improvements occurring in the commercial
electronics industry by procuring state-of-the-art commercial
technology and enhancing its capability to operate in the military
environment - specifically where constant exposure to shock, vibration,
and raw elements is commonplace. This is accomplished through the use
of specialized design techniques enabling the less than rugged
commercial products to withstand the military environment assuring that
the DoD's mission - both tactical and non-tactical - is met. Expert
engineering skills and techniques are utilized to augment the use of
COTS modules to meet extended temperature, shock, vibration, altitude,
and humidity conditions that are encountered. Additionally, special
enclosures are designed and implemented so that the equipment provided
also meets the military requirements for Electromagnetic Interference
("EMI") from both a radiated and susceptibility aspect.
In the mid 1990's Miltope introduced a new family of rugged
computer products consisting of hand held Intel based computers and
related peripherals. In 2000, Miltope expanded this product base to
include vehicle mounted and laptop versions of these computer systems.
These new products are re-configurable and scaleable for specific
applications and employ COTS technology. The United States Army ("the
Army") is utilizing these systems for computing and communication
requirements in various military applications and environments. These
computer systems form the basis for applications such as Fire Control,
Training, Maintenance, Logistics, and Mission Planning. The Company's
computer system products have resulted in several long-term DoD
programs.
The Miltope VCU-1600 computer was selected by the Army for use as
the Commander's Interface in the Mortar Fire Control System ("MFCS").
This selection resulted in an award of over 200 systems with delivery
beginning in 2002 and continuing through 2003. It is anticipated that
the procurement of the VCU-1600 will continue as an integral part of
the Army's Consolidated Fire Control ("ConFire") program recently
awarded in January 2003. The computer has been qualified to the most
stringent requirements in support of this Heavy Mortar System. This
includes continuous operation while being exposed to shock pulses of
greater than 120 Grms, 40 mph driving rain, and temperatures as low as
- -35 to 150 degrees Fahrenheit.
During 2002, Miltope also extended a contractual relationship with
Raytheon to supply rugged computers as part of the SMART-T system for
the Army. This relationship further enhances Miltope's position as a
supplier to Raytheon for the duration of their five-year contract for
the Army.
3
Additionally, during 2002 the Miltope Maintenance Support Device
("MSD") contract entered full-scale production. The MSD contract was
awarded to Miltope in 2001 for a variant of the Company's Model TSC-750
computer system. The TSC-750 computer is unique in the industry by
providing all capabilities of a commercial laptop computer in a custom
magnesium enclosure. The TSC-750 introduces a 13.3" sunlight readable
display that has been rated highest in head to head competition with
its competitors' products. The MSD contract is a five-year contract
with the Army that calls for the delivery of over 11,000 computers,
along with computer accessories, and engineering services. The MSD
program is a follow-on contract to the Soldiers' Portable On-system
Repair Tool ("SPORT") wherein Miltope delivered over 7,800 Miltope
model PCU-5100 computers over a five-year period. The cumulative
number of rugged computers delivered by Miltope under the SPORT and MSD
contracts alone (estimated to be over 19,000 systems) makes Miltope the
largest single supplier of qualified military laptop computers in the
industry. The computers and ancillary equipment delivered under the
SPORT and MSD contracts are utilized by the Army on every weapon system
such as the Abrams Main Battle Tank, the Bradley Fighting Vehicle, and
the Apache Longbow attack helicopter.
In addition to the computers delivered to the Army, Miltope rugged
printer and mass storage products have also made inroads in several DoD
applications. The Miltope family of rugged airborne printers (TP-4840
and TP-4429 models) was selected for use on several military aircraft
platforms. These include the Navy's P-3, and the Air Force's KC-135, C-
5, and KC-10 airframes. Miltope's 4-Bay Militarized Mass Storage
system, providing up to 288 gigabytes of memory has enjoyed an expanded
role aboard the Air Force U2 aircraft. The Miltope mass storage unit
is capable of operating at altitudes of up to 70,000 feet by utilizing
environmentally sealed disk cartridges designed and manufactured by
Miltope. This system's interface is based on high throughput fiber
channel technology typically found on the most complex computing
systems. In an environment where ultra-reliability is necessary, both
Goodrich Corporation and the Air Force have selected the Miltope mass
storage systems for their applications.
Military/rugged products are sold for use in a broad range of
military programs for the United States Air Force, Army, Navy, Marine
Corps, NATO, and for multiple foreign countries. Miltope's militarized
and rugged computers and peripheral products are compatible with most
standard military computers and are sold to the DoD and many prime DoD
systems contractors and integrators, including Boeing Aerospace,
General Dynamics, Lockheed Martin, Rockwell-Collins, BAE, Goodrich
Corporation, Raytheon, Stewart & Stevenson, Harris, and ITT Defense
Systems.
Miltope believes that it has captured a major portion of the
market for militarized rugged laptop computers. In addition, Miltope
is recognized as a leading supplier of rugged printers, mass storage
systems and related equipment. A key element of Miltope's strategy has
been to develop and deliver a broad range of highly reliable computers
and computer peripherals and systems on a cost effective and timely
basis. The breadth of Miltope's product offerings enables system
integrators to not only avoid the risks normally encountered when
procuring peripherals from multiple suppliers but also to achieve
significant price advantages. Miltope's ability to meet the diverse
requirements of its customers has resulted in substantial recurring
business. As the nation's defense budget increases, the Company
believes that it is strategically positioned with current products and
long-term contracts that will provide stability and growth. Utilizing
a modular design basis for the systems, Miltope can quickly reconfigure
its products for specific user applications in a timely fashion. This
provides the flexibility necessary to continue to provide state-of-the-
art, compliant systems without the need for lengthy and costly redesign
efforts.
In December 1999, Miltope was selected by Raytheon Optical Systems
(now Goodrich Corp) to supply several 144 Gigabyte Mass Storage Units
with state of the art Fiber Channel interface. These systems are used
in reconnaissance systems aboard aircraft of the United States Air
Force. The estimated value of the contract is in excess of $1,500,000
over a three-year period. As of February 28, 2003 Miltope has exceeded
the initial contract estimate and has received firm orders of
approximately $2,000,000 in support of this reconnaissance mission and
the program will extend through 2003.
In May 2001, Miltope was awarded a five-year DoD contract for the
Army Maintenance Support Device that is the follow on to the SPORT
contract Miltope was awarded in 1996. The MSD is based on the Miltope
Model TSC - 750 militarized laptop computer. The MSD is used in forward
areas under extreme weather and handling conditions by the Army for on-
system diagnostics and maintenance on all Army weapons platforms,
generators and wheeled and tracked vehicles. The contract has an
estimated value of approximately $120,000,000 over a five-year period.
There can be no assurances this estimate of purchase requirements will
be achieved over the five-year period of the contract. As of February
28, 2003, Miltope has received firm orders of approximately $49,700,000
under this program.
4
During 2001, Miltope worked extensively with PGI in transitioning
the manufacturing of the SMART-T product line from Hauppauge, New York
to Springfield, Vermont. Miltope is currently producing the SMART-T
Remote Operator Unit ("ROU") and Handheld Terminal Unit ("HTU") for
Raytheon Company in its Hope Hull, Alabama facility under license from
PGI. As of February 28, 2003, Miltope has received firm delivery
orders from Raytheon Company for this product in the amount of
approximately $3,400,000. The SMART-T ROU and HTU are part of the
multi-service, MilStar satellite program for extremely high frequency,
worldwide, tactical data and voice communications. The system provides
the security, mobility and anti-jamming capability required to defeat
the electronic threat and satisfy critical communications needs.
Raytheon has an initial five - year indefinite delivery indefinite
quantity ("IDIQ") contract with its customer. The Company is currently
developing the next generation of the SMART T unit in order to meet
these long-term requirements from Raytheon.
On March 11, 2002, Miltope received firm delivery orders from the
United States Army Tank Automotive Command in the amount of
approximately $5,000,000 plus options of another $1,000,000 for the
upgrade, manufacture and test of the Mortar Fire Control System
Commander's Interface computer. After the initial re-design, this
product will be produced under license from PGI at Miltope's ISO 9001
certified Hope Hull, Alabama facility. The Commander's Interface
computer provides field level fully integrated, on board digital
processing and control of all Mortar Fire Control System components to
enhance weapon location/orientation, navigational and ballistic
solutions. This system has completed first article testing and is now
in full-scale production. Deliveries on this contract will be
completed in 2003.
In August 2002 Miltope was selected by Rockwell-Collins to provide
TP-4429 printer for the KC-135 upgrade program. The estimated value of
this contract is $2,000,000 over a three-year period. As of February
28, 2003 Miltope has received firm orders of approximately $600,000 for
delivery in 2003.
In November 2002 Miltope was selected by Lockheed Martin to
design, develop and deliver nuclear hardened hard drive assemblies for
installation in the data storage system as part of the Rapid Execution
And Combat Targeting ("REACT") response platform. This cost plus award
fee subcontract with Lockheed Martin has an estimated value of over
$3,500,000 in the development, production and spares subcontracts. As
of February 28, 2003 the Company has recorded approximately $1,700,000
in revenue under this cost plus contract.
Miltope continues to grow in the DoD arena for rugged computing,
printing and mass storage systems. This has been accomplished through
the development and qualification of new computer systems and the
transition of the Company's traditional commercial airborne equipment
on to many military platforms.
Commercial - General
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The commercial segment develops, manufactures and markets
commercial products primarily for transportation, telecommunications
and in-flight maintenance markets. Miltope products comprising this
segment are airborne printers, airborne data, ethernet, telephony, and
video servers, airborne in-flight workstations and maintenance access
terminals, mass storage devices, and wireless access points for both
airborne and terminal applications. This segment's business represented
approximately 19% of the Company's 2002 revenues, approximately 25% of
the Company's 2001 revenues and approximately 32% of the Company's 2000
revenues.
This segment has been significantly impacted by the events of
September 11, 2001 but has shown encouraging signs of resurgence in
2003. Stability in this sector for the Company was lead by the strong
performance of the airborne printer market. As activity shifted away
from the large Air Transport market, Miltope focused its efforts on the
growing business jet ("bizjet") and commuter jet markets. Already
holding a significant market share in the Air Transport area for
thermal printers, the Company believes that it has secured the lion's
share of the bizjet and commercial jet sector. Furthermore, the
introduction and FAA qualification of the Miltope Wireless Access
Service Point ("WASP") product has been widely accepted and is
anticipated to lead the way in wireless communication on commercial and
private aircraft.
Industry giants such as Rockwell-Collins, Teledyne Controls,
Thales, and Matsushita are currently utilizing Miltope equipment as
integral components in their in-flight systems. Miltope equipment is
highly regarded for its reliability and configurability. The systems
are designed, qualified, and delivered utilizing multiple operating
systems such as Windows(TM)2000, Windows(TM)98, Windows NT, Windows CE, and
Linux. Miltope also continues to develop and improve various products
such as telephony and internet servers, redundant arrayed independent
disks ("RAID") storage systems, controller terminals and workstations,
and sealed disk drives for a variety of applications related to in-
flight entertainment, communication, and avionics systems.
5
Miltope's airborne printer products are sold to a broad base
of airframe manufacturers and commercial airline companies worldwide
for use in flight deck and cabin workstation information systems.
During 2002, customers for the Company's airborne printer included
mainstays such as Boeing, British Airways, Continental Airlines, Delta
Airlines, KLM, Lufthansa, Matsushita Avionics Systems, Teledyne
Controls, American Airlines, United Airlines and American Eagle.
Additionally in 2002, Miltope developed and expanded relationships with
customers such as Embraer, Gulfstream, and Dassault. As of February
28, 2003, Miltope has received firm orders of approximately $2,600,000
for airborne printer production over the remainder of 2003.
In December 1997, Miltope entered into a strategic agreement
with Honeywell, Inc. Business and Commuter Aviation Systems, to provide
Portable Maintenance Access Terminals ("PMAT") for use in business jets
and commuter aircraft around the world as an option on Honeywell's
integrated avionics systems. As of February 28, 2003, Miltope has
received firm orders of approximately $6,015,000 under this agreement.
Deliveries under this contract will continue into 2004.
In April 2000, Miltope entered into a ten year contract with
Empresa Brasileira De Aeronautica (Embraer) to provide flight deck
printers, beginning in 2002, for use on board their ERJ-170, ERJ-190-
100 and ERJ-190-200 regional and commuter jet aircraft. The estimated
contract value is in excess of $15,000,000 over the ten-year period of
performance ending in 2010. The estimated contract value is based on
the customer's best estimate of purchase requirements during the
contract period. There can be no assurances this estimate of purchase
requirements will be achieved. In 2002, Miltope received firm orders
of approximately $368,000 under this agreement.
In the early part of 2002, Miltope entered into discussions
with Gulfstream and Dassault for the incorporation of Miltope printers
on their respective aircraft. As of December 31, 2002, the company has
received approximately $850,000 in firm orders from the combination of
their Gulfstream and Dassault customers.
The Miltope WASP product has been sold to various customers
for integration into their overall onboard wireless communication
systems. The WASP allows users to wirelessly connect to the aircraft's
server system that in turn can communicate to the ground via telephony
or SATCOM. This allows for the execution of true real-time email and
Internet in the sky for the passenger. Customers using the Miltope
WASP product in trials include Teledyne Controls, Lufthansa, and
Connexion by Boeing. The certification of the WASP as part of these in-
flight systems will provide a growth path for deliveries in 2003 and
beyond. The attractiveness of this type of in-flight system and in
particular the Miltope WASP is that any standard commercial personal
computer or hand held system operating a wireless communication system
has the capability of communicating with the WASP. Additionally,
because the WASP is extremely compact and can be installed in aircraft
using a single cable for power and signal, it can be easily retrofitted
into existing aircraft fleets.
In November of 2002, Miltope was awarded a contract from a
major in-flight entertainment company for the design and development of
a next-generation video server. The award is for approximately
$2,000,000 in firm orders to be delivered in 2003 and 2004. The
contract also has provisions for follow-on orders of an additional
$2,000,000 in 2004 and 2005.
Sales and Significant Customers
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Sales in 2002 attributable to the military/rugged industry segment
were approximately as follows: 62% from large DoD programs (each
accounting for 5% or more of annual sales), 20% from smaller programs
and sales of standard items in Miltope's catalogue, 12% from sales to
foreign governments and defense contractors and 6% from spare parts
sales. Sales to any one large DoD program have varied substantially
from year to year due to product cycles and DoD requirements.
In 2002, sales to the DoD accounted for 68% of net sales of the
Company. No other customer accounted for more than 10% of net sales.
6
The Company has experienced large fluctuations from year to year
in the percentage of sales represented by particular customers due to
product cycles and customer requirements. The Company believes its
customers and the industry are moving to shorter lead times due to
compressed technology cycles and changes in procurement strategies.
Sales in 2002 attributable to the commercial industry segment
amounted to approximately 19% of the Company's total net sales.
During 2002, 2001 and 2000, the Company recorded sales of $0, $0
and $14,000, respectively to Get.2.Net Corporation and 3C
Communications International, S.A., that are affiliates of the Company.
Government Contracts
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The Company's business is subject to various statutes, regulations
and provisions governing defense contracts including the Truth in
Negotiations Act, which provides for the examination by the U.S.
government of cost records to determine whether accurate pricing
information was disclosed in connection with government contracts.
Contracts with the U.S. government as well as with U.S. government
prime contractors are typically at a fixed price with a delivery cycle
of 4 to 12 months, with contracts under any particular program being
subject to further funding and negotiation. The Company's defense
contracts contain customary provisions permitting termination at any
time at the convenience of the customer and providing for payment for
work-in-progress should the contract be canceled.
Backlog
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Backlog for both the military and commercial industry segments at
December 31, 2002 was $39,000,000, a 50.0% increase from the
$26,000,000 backlog at December 31, 2001. Backlog includes only
customer signed delivery orders from current contracts and funded
portions of multi-year contracts. The Company believes that
substantially all of the backlog at December 31, 2002 will be
recognized as revenue by December 31, 2003. The Company also believes
that a substantial part of new delivery orders and contract funding
received in 2003 will be recognized as revenue in the same year due to
shorter lead times. Current backlog as of February 28, 2003, is
approximately $35,000,000.
Backlog for the commercial industry segment was approximately 13%
of the total backlog at December 31, 2002 and approximately 25% of the
total backlog at December 31, 2001.
Backlog does not include un-funded portions of multi-year
contracts.
Competition
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Both of the Company's industry segments face intense competition
in markets for certain of their products. Competition comes from
independent producers as well as prime contractors. Some of these
competitors have greater resources than the Company. Competition is
based on such factors as price, technological capability, quality,
reliability and timely delivery.
The Company's competitive position in its industry segments has
been based upon the experience of its technical personnel in their
respective specialized fields of computer and peripheral product
design; its broad range of products; its ability to design and
manufacture its products to meet customers' specifications; its
specialized manufacturing and testing facilities; its long association
with many of its customers and its managerial and marketing expertise
in dealing with commercial customers, prime contractors and the DoD.
The Company believes that once a particular supplier's computer and/or
peripheral products have been selected for incorporation in a military
or commercial program, further competition by other vendors during the
life cycle of that program is limited.
7
Engineering, Research and Development
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The Company believes that success within the industry depends in
large part upon its ability to develop and apply new technology to
modify, enhance and expand its existing line of proprietary products.
The funding of these activities is primarily internal through Company
sponsored research and development. Product development activities are
generally the result of the need to respond to the anticipated
requirements of future programs, the introduction of new technology
that can be used to enhance product performance and direct requests by
customers and the DoD. In certain cases the Company has licensed
technology from commercial manufacturers for subsequent enhancements to
bring the technology up to military and rugged requirements.
Engineering design techniques and expertise are leveraged across
all product lines enabling rapid development and improved time to
market. Management believes approximately 1% to 5% of net sales for
engineering, research and development expenditures should adequately
support the Company's business.
Engineering, research and development expenditures in 2002, 2001,
and 2000 were approximately $1,047,000, $1,159,000 and $659,000,
respectively.
The Company's funded research and development efforts for its
military/rugged segment include projects to enhance its mass storage
devices, printers, computer workstations and portable/hand held
computers. The Company's funded research efforts for its commercial
segment include projects to enhance its airline in-flight cabin
management and entertainment products, airborne printers and mass
storage devices.
Employees
- ---------
At December 31, 2002, the Company employed 158 full-time personnel
at Miltope in all locations. None of the Company's employees are
represented by a labor union and the Company has experienced no work
stoppages. The Company believes that relations with its employees are
excellent.
Export Sales
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The Company recorded foreign sales in its military/rugged industry
segment of approximately $48,000, $450,000 and $2,600,000 in 2002,
2001 and 2000, respectively. The Company recorded foreign sales in its
commercial industry segment of approximately $2,700,000, $2,400,000 and
$1,800,000 in 2002, 2001 and 2000, respectively.
Source of Supply
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The Company utilized multiple suppliers for most materials and
components. In order to minimize the risk of delay in delivering
finished systems, components are sometimes procured according to the
projected need for such components under annual purchasing agreements.
Miscellaneous
- -------------
Neither of the Company's two industry segments is subject to
seasonal business fluctuations.
In August of 2001, the Company was recognized for its quality
initiatives and was awarded ISO 9001:1994 certification for all the
Company's facilities by the Certification Body of TUV MANAGEMENT
SERVICE.
Internet Address
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The Company maintains a website where additional information
concerning its business and various upcoming events can be found. The
address of the Company's website is www.miltope.com.
8
ITEM 2. PROPERTIES
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The Company owns a 90,000 square foot manufacturing and
administrative facility located on 25 leased acres in Hope Hull
(Montgomery), Alabama ("Hope Hull").
In addition, the Company owns a 25,000 square foot clean room,
assembly and test facility in Springfield, Vermont.
The Company leases a 9,175 square foot engineering and
administrative facility in Boulder, Colorado.
The Company also leases various sales offices in the United
States.
During 1999, the Company consolidated its Troy manufacturing
facility with its Hope Hull facility as a planned measure to reduce
cost redundancy and maximize production efficiency. On April 23,
2000, the Company sold its facility in Troy, Alabama to an unrelated
third party for a sales price of $900,000 with a $25,000 gain being
recognized in the quarter ended June 25, 2000. The proceeds of the
sale were used to reduce the Industrial Revenue Authority Bonds.
During 2002, the Company consolidated its Springfield, Vermont
assembly and test facility with its Hope Hull facility as part of its
continuing plan to streamline the cost structure of the Company. This
consolidation was completed in August of 2002 and costs of this move in
the amount of approximately $303,000 have been included in the
financial results of the Company.
The Company owns substantially all of the machinery and equipment
used in these facilities. The Company believes that these facilities
are well maintained and are adequate to meet its needs in the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is a claimant in a lawsuit in the U.S. District Court,
Eastern District of New York against former officers, directors, and
employees of PGI and against two competitors of Miltope and PGI. The
complaint alleges damages based on breach of fiduciary duties by the
former officers and directors, theft of trade secrets, violations of
the Lanham Act, conspiracy to commit these violations and other claims.
The corporate defendants answered the complaint, denied the claims
against them but have not filed any counterclaims. The individual
defendants who were former officers and directors of Miltope and PGI
have filed counterclaims. The Company believes that such litigation
and claims will be resolved without a material effect on the Company's
financial position or results of operations.
In addition, the Company, from time to time, is a party to pending
or threatened legal proceedings and arbitration in the ordinary course
of business. Based upon information currently available, and in light
of legal and other defenses available to the Company, management does
not consider liability from any threatened or pending litigation to be
material to the financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
During the fourth quarter of the fiscal year covered by this
Report, no matters were submitted to a vote of security holders through
the solicitation of proxies or otherwise.
9
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
--------------------------------------------------------------------
Market Information
- ------------------
The Company's Common Stock has been traded in the over-the-counter
market under the NASDAQ symbol "MILT" since its initial public offering
on January 23, 1985 and has been trading on the NASDAQ National Market
since June 4, 1985. On March 24, 1999, the Company began trading on
the NASDAQ Small Cap Market. The high and low closing sale prices for
the Common Stock in the over-the-counter market reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions. The quarterly high and low
selling prices (the last daily sale price) of the Common Stock since
January 1, 2001 have been:
Calendar Year 2002 Low High
------------------ --------- ---------
First Quarter $ 1-13/32 $ 2-11/64
Second Quarter 1-37/64 5-45/64
Third Quarter 2-33/64 3-3/4
Fourth Quarter 2-35/64 4-1/2
Calendar Year 2001 Low High
------------------ --------- ---------
First Quarter $ 5/8 $ 1-1/4
Second Quarter 51/64 2-3/16
Third Quarter 1-13/32 2-13/64
Fourth Quarter 1-13/64 2-7/8
Holders of Common Stock
- -----------------------
As of February 28, 2003, there were approximately 1,989 holders of
record and beneficial owners of the Company's Common Stock.
Dividend Policy
- ---------------
No dividends were declared or paid in 2002, 2001 or 2000. The
Company does not presently anticipate paying cash dividends on its
Common Stock. However, the Board of Directors of the Company will
review this policy from time to time in light of its earnings, capital
requirements and financial condition and other relevant factors,
including applicable debt agreement limitations. The Company's bank
loan agreement permits the Company to pay annual dividends of up to 50%
of the prior year's net income.
10
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following is a summary of selected consolidated financial data
of the Company for the five years ended December 31, 2002 that should
be read in conjunction with the consolidated financial statements of
the Company and the notes thereto:
(All amounts in thousands, except per share data)
Year ended December 31,
----------------------------------------------------------
2002 2001 2000 1999 1998
--------- -------- -------- -------- --------
Income statement data:
Net sales $ 48,470 $ 45,249 $ 40,730 $ 36,238 $ 35,509
Gross profit 10,613 5,841 8,023 4,744 6,962
Income(Loss)before income taxes 2,201 (2,277) (1,431) (7,804) (4,284)
Net income (loss) 4,663 (2,277) (1,431) (7,804) (3,008)
Basic net income (loss) per share .79 (.39) (.24) (1.33) (.51)
Diluted net income (loss) per share .77 (.39) (.24) (1.33) (.51)
Cash dividends declared per share - - - - -
Weighted average shares
outstanding
Basic 5,876 5,872 5,872 5,872 5,872
Diluted 6,060 5,872 5,872 5,872 5,872
Balance sheet data:
- -------------------
Working capital $ 10,172 $ 7,212 $ 9,859 $ 10,386 $ 18,828
Total assets 33,403 30,594 35,615 36,869 43,359
Long-term debt 7,216 6,650 9,654 13,986 15,123
Stockholders' equity 13,312 8,639 10,916 10,006 17,810
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-----------------------------------------------------------
The financial and business analysis below provides information
that the Company believes is relevant to an assessment and
understanding of the Company's consolidated financial condition,
changes in financial condition, and results of operations. This
financial and business analysis should be read in conjunction with the
consolidated financial statements and related notes.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995
- --------------------------------------------------------------------------
Certain matters and statements made in this Annual Report on Form
10-K constitute forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. All such
statements are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Wherever possible,
the Company has identified these forward-looking statements by words
such as "anticipates," "may," "believes," "estimates," "projects,"
"expects" "intends," and words of similar import. In addition to the
statements included in this Annual Report on Form 10-K, the Company and
its representatives may from time to time make other oral or written
forward-looking statements. All forward-looking statements involve
certain assumptions, risks and uncertainties that could cause actual
results to differ materially from those included in or contemplated by
the statements. These assumptions, risks, and uncertainties include,
but are not limited to, general business conditions, including the
timing or extent of any recovery of the economy, the highly competitive
nature of the industry in which the Company operates, the continued
involvement of military forces in the war on terrorism, the speed with
which consumers regain confidence in the safety of air transportation
and other risks and uncertainties. All such forward-looking statements
may be affected by inaccurate assumptions or by known or unknown risks
and uncertainties, and therefore those statements may turn out to be
wrong. Consequently, no forward-looking statement can be guaranteed.
Actual future results may vary materially.
All forward-looking statements are made as of the date of filing
or publication. We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information,
future events or otherwise. Investors are advised, however, to consult
any further disclosures the Company makes in future filings with the
Securities and Exchange Commission or in any of its press releases.
Overview
- --------
The Company's military/rugged business segment provides
specialized computers and related peripheral equipment to the United
States and foreign military defense departments. Equipment in this
segment takes two primary forms. The first of these is fully
militarized products, usually designed especially for a particular
mission area with demanding environmental and quality requirements.
The second of these is rugged products, usually based on a commercial
baseline product, but adapted by the Company to meet environmental and
quality specifications that exceed the requirements for commercial
products. This segment can be further differentiated between the
activities of Miltope Corporation and those of its 90% owned
subsidiary, IV Phoenix Group, Inc.
Prior to September 11, 2001, this entire segment had been impacted
in recent years by reduced government spending and defense
appropriations. The militarized product area had been especially
subject to defense budget cuts. The long design cycle for these
programs creates an intangible cost in the form of rapid technological
obsolescence. Some military programs that would have sought
militarized equipment some years ago have modified the requirements to
reflect a need for rugged or commercial products. This trend has
tended to benefit sales of the Company's rugged product line. As the
Army has pushed for further digitization of the battlefield, the
Company has pressed forward its initiatives in the tactical and
tactical supports areas. Budget constraints have forced the various
services to upgrade rather than replace. This has meant incremental
sales in the Company's mass memory and disk product lines.
Through its commercial segment, the Company develops, manufactures
and markets commercial products primarily for transportation,
telecommunications and in-field maintenance markets. Its products are
airborne printers, in-flight cabin management and entertainment
products, wireless access service points, mass storage devices, and
derivatives of rugged hand-held Intel based computers originally
developed for military applications.
12
Results of Operations
- ---------------------
The Company reported consolidated net income of approximately
$4,663,000 in 2002 compared to net losses of approximately $2,277,000
in 2001 and $1,431,000 in 2000. The basic net income per share was
$.79 in 2002 while diluted net income per share was $.77. This
compares to basic and diluted net losses per share of $.39 in 2001 and
$.24 in 2000.
Sales in 2002 totaled approximately $48,470,000, an increase of
approximately $3,221,000, or 7.1%, from 2001. Military sales increased
17.9% in 2002 to $40,466,000 as compared to $34,314,000 in 2001. At
the same time, Commercial sales decreased 20.3% to $8,886,000 from
$11,156,000. The increase in military sales is primarily made up of a
$2,300,000 increase from accelerated deliveries of the Maintenance
Support Device, the replacement contract for the SPORT contract, along
with the addition of $1,700,000 in sales of the Mortar Fire Control
System Commander's Interface computer. The decrease in commercial
sales is primarily attributable to decreased orders from the commercial
airline industry. Sales in 2000 totaled approximately $40,730,000, an
increase of approximately $4,492,000, or 12.4% from 1999. This change
was attributable to increases in SPORT units shipped and increases in
other airborne products that were partially offset by decreases in
PGI's total sales.
Gross profit, as a percent of sales, was 21.9% in 2002, 12.9% in
2001, and 19.7% in 2000. The increase in 2002 from 2001 is largely due
to the elimination of $3,000,000 in negative gross margin related to
PGI as well as improved product mix versus the same period of 2001.
The decrease in 2001 from 2000 is largely due to unforeseen
expenditures required to complete several PGI initial-award contracts.
Selling, general and administrative expenses, as a percentage of
sales, were fairly constant in 2002 and 2001 at 13.7%. These expenses,
as a percentage of sales, were 18.6% in 2000. The decrease in 2001 as
a percentage of sales was attributable to the effect of planned
reductions in administrative and marketing costs at both Miltope and
PGI.
Engineering, research and development expenses, as a percentage of
sales, was 2.2% in 2002, 2.6% in 2001, and 1.6% in 2000. This
fluctuation in cost levels represents efforts expended in 2001 in
relation to the new five-year rugged laptop computer contract awarded
to Miltope in May of 2001.
Interest expense decreased 25.6% in 2002 compared to 2001 due to a
$1,498,000 reduction in total debt and a decrease in interest rates.
The 39.6% decrease in 2001 compared to 2000 was attributable to a
$3,288,000 reduction in total debt and a decrease in interest rates
from the prior year.
Interest income decreased to $33,000 in 2002 from $113,000 in 2001
and $150,000 in 2000 due to lower cash balances on hand and the
continued downward trend in interest rates.
Income tax benefit was $2,462,000 in 2002 and $0 in both 2001 and
2000. During 2002, the Company reversed $3,310,000 of the valuation
allowance against deferred tax assets.
Liquidity and Capital Resources
- -------------------------------
Consolidated working capital at December 31, 2002 totaled
approximately $10,172,000, an increase of approximately $2,960,000 from
December 31, 2001. Accounts receivable increased approximately
$611,000 as a result of increased sales in the last quarter of 2002 as
compared to the last quarter of 2001. Inventories increased by
$111,000 as a result of continued management focus on increasing
inventory turns by closely monitoring sales levels and the associative
inventory levels required to meet those sales levels. Accounts payable
increased by $601,000 reflecting extended payment terms for certain
vendors. Current maturities of long-term debt decreased by
approximately $2,064,000 reflecting the more favorable debt structuring
of the Company's new credit agreement as mentioned below.
13
The Company entered into a revolving credit facility in July
1994 for an amount not to exceed $15,000,000. The Company's
$15,000,000 revolving credit agreement with its primary lender matured
on May 31, 1999 with an outstanding balance of approximately
$12,000,000. This balance was converted into a term loan payable in
twelve equal quarterly installments beginning August 31, 1999.
In January of 2003, the Company entered into a new credit
agreement with Citizen's Business Credit ("Citizen's") that will
provide up to $8,000,000 of financing under a revolving line of credit
over an initial three-year period. The initial proceeds of this line
of credit were used to pay down $4,700,000 of the $5,700,000 balance
due under the existing credit facility provided by its primary lender.
The Company entered into an agreement with its primary lender to
amortize the $1,000,000 balance of the existing line of credit over the
next twelve months. As of February 28, 2003 the Company had a loan
balance under the Citizen's credit line of approximately $4,800,000.
The Company anticipates that this new line of credit and cash generated
internally will provide adequate funding to meet its cash flow needs
for the year ended December 31, 2003. The agreement includes various
provisions requiring the maintenance of certain financial ratios and
certain other limitations. The Company's accounts receivable, contract
rights and inventories are pledged as collateral to the agreement.
Cash provided by operating activities was approximately
$2,079,000 in 2002, $2,079,000 in 2001, and $3,101,000 in 2000. The
decrease in cash provided by operating activities in 2002 and 2001
compared to 1999 is primarily the result of cash expended due to the
shutdown of PGI operations during 2001 and the increase in cost over
revenue associated with the completion of certain PGI sub-contracts.
In April 1994, the Company purchased a new headquarters
facility and related capital equipment located in Montgomery, Alabama.
The purchase was financed through a bank term loan coupled with the
proceeds from the offering of taxable revenue bonds (the "Bonds") by
the Alabama State Industrial Development Authority that was completed
on January 12, 1995 (the "SIDA Offering"). Repayment of the Bonds is
secured by an irrevocable letter of credit issued by Regions Bank in an
amount up to $5,700,000 that in turn is secured by a mortgage on the
Montgomery, Alabama facility and a security interest in the equipment
located at such facility.
The Company has net operating loss carryforwards for federal
income tax purposes of approximately $13,779,000 that expire as
follows: $4,066,000 in 2009, $1,251,000 in 2010, $2,422,000 in 2018,
$3,537,000 in 2019, $1,356,000 in 2020, and $1,147,000 in 2021. At
December 31, 2002, the Company has a valuation allowance of $349,000
against the deferred tax assets. Although realization is not assured,
management believes it is more likely than not that the recorded
deferred tax asset, net of valuation allowance provided, will be
realized. The valuation allowance can be adjusted in future periods as
the probability of realization of the deferred tax asset changes.
Capital expenditures totaled $996,000 in 2002, $247,000 in
2001, and $175,000 in 2000. The increase in 2002 and 2001 over 2000
was due primarily to purchases of various tooling and set-up
expenditures for the production of the new MSD contract awarded in
2001. The Company expects capital expenditures for 2003 to be less
than the 2002 level. Depreciation and amortization expense for 2002
totaled $934,000 compared to $1,035,000 in 2001 and $1,360,000 for
2000. For 2003, depreciation and amortization expense is expected to
be approximately $875,000.
The Company believes that its working capital and capital
requirement needs for its current lines of business and new product
development will be met by its cash flow from operations and proceeds
from its current revolving line of credit provided by Citizen's
Business Credit to the Company.
14
Contractual Obligations - (dollars in thousands)
- ------------------------------------------------
The Company's obligations to make future payments under
contracts as of December 31, 2002 are summarized in the following
table:
Contractual Obligations Total Less than 1 year 1-3 years 4-5 years Over 5 years
--------- ---------------- --------- --------- ------------
Long-term debt $ 8,915 $ 1,738 $ 6,492 $ 600 $ 85
Capital lease obligations 82 43 39 - -
Operating leases 3,082 182 206 118 2,576
-------- ------- ------- ------- -------
Total contractual obligations $ 12,079 $ 1,963 $ 6,737 $ 718 $ 2,661
========= ======= ======= ======= =======
Recent Accounting Pronouncements
- --------------------------------
In April 2002 , the Financial Accounting Standards Board
("FASB") issued SFAS 145, Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS 145 amends existing guidance on reporting gains and losses on the
extinguishments of debt to prohibit the classification of the gain or
loss as extraordinary, as the use of such extinguishments have become
part of the risk management strategy of many companies. SFAS 145 also
amends SFAS 13 to require sale-leaseback accounting for certain lease
modifications that have economic effects similar to sale-leaseback
transactions. The provisions of SFAS 145 related to the rescission of
SFAS 4 are applied in fiscal years beginning after May 15, 2002.
Earlier application of these provisions is encouraged. The provisions
of SFAS 145 related to SFAS 13 were effective for transactions
occurring after May 15, 2002, with early application encouraged. The
adoption of SFAS 145 is not expected to have a material effect on the
Company's consolidated financial statements.
In June 2001, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities", which is effective
for any exit or disposal activities initiated after December 31, 2002.
SFAS 146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred
rather than at the time a company commits to an exit plan. SFAS 146
also establishes that the liability should initially be measured and
recorded at fair value. The Company is currently evaluating the impact
of this statement.
The FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45), which addresses the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees. FIN 45
also clarifies the requirements related to the recognition of a
liability by a guarantor at the inception of a guarantee for the
guarantor's non-contingent obligations associated with such guarantee.
The disclosure requirements of this Interpretation are effective for
financial statements of periods ending after December 15, 2002. The
initial recognition and measurement provisions are applicable on a
prospective basis for guarantees issued or modified after December 31,
2002.
Critical Accounting Policies
- ----------------------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires the appropriate
application of certain accounting policies, many of which require us to
make estimates and assumptions about future events and their impact on
amounts reported in our financial statements and related notes. Since
future events and their impact cannot be determined with certainty, the
actual results will inevitably differ from our estimates. Such
differences could be material to the financial statements.
We believe application of accounting policies and the estimates
inherently required therein, are reasonable. These accounting policies
and estimates are constantly reevaluated, and adjustments are made when
facts and circumstances dictate a change. Our accounting policies are
more fully described in Note 1 to the financial statements, presented
elsewhere in this report on Form 10-K. We have identified certain
critical accounting policies that are described below.
Inventories-Provision for Slow Moving and Obsolescence - The Company
has various components in its inventory that relate to discontinued
products and warranty replacement parts and repairs. The Company
identifies slow moving or obsolete inventories and estimates
15
appropriate loss provisions related thereto. On an on-going basis the
Company evaluates its estimates of loss provisions by using various
reports and analysis to focus on inventory throughput trends, inventory
composition and inventory utilization over discrete periods of time.
Additionally, the Company tracks projected parts usage to parts on hand
inventory to minimize risk of overstocks.
Deferred Taxes - The Company records a valuation allowance to reduce
its deferred tax assets to the amount that it believes is more likely
than not to be realized. While the Company has considered future
taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event the
Company was to determine that it would not be able to realize all or
part of its net deferred tax assets in the future, an adjustment to the
deferred tax assets would be charged to income in the period such
determination was made. Likewise, should the Company determine that it
would be able to realize its deferred tax assets in the future in
excess of its net recorded amount, an adjustment to the deferred tax
assets would increase income in the period such determination was made.
Impairment of Long-lived Assets - The Company, using its best estimates
based on reasonable and supportable assumptions and projections,
reviews for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, and goodwill and certain
intangible assets in accordance with Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. The financial
statements referred to above reflect all adjustments required by
Statements 144 and 142 as of December 31, 2002.
Effects of Inflation
- --------------------
Inflation has not had a significant impact on the Company's
results of operations.
Outlook for the Company
- -----------------------
The Company believes that the events of September 11, 2001,
have, and will continue to have, a profound effect on how every company
in the United States does business. As the war on terrorism has
unfolded and expanded, overall military spending has increased
dramatically and will likely continue to increase in the areas of
computing and electronics over the next several years. As this
military spending expansion continues, the Company believes that
Miltope will benefit from its continued efforts to meet military
environmental requirements with modified commercial equipment and
components. The Company believes the level of growth in revenue in the
Company's commercial airborne products market will remain low over the
next twelve to eighteen month period. Despite this belief, the Company
continues to focus appropriate resources in the development of products
for the airborne market as potential applications arise. The Company
believes that its results will be favorably affected in the future with
continued growth in the military coupled with the expected longer-term
recovery in its commercial airborne products markets.
16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Market risk is the risk of loss arising from adverse changes in
market prices and interest rates. The Company is exposed to interest
risk inherent in its financial instruments. The Company is not
currently subject to foreign currency or commodity price risk. The
Company manages its exposure to these market risks through its regular
operating and financing activities.
The Company has a term loan and an Industrial Development
Authority Bond Issue that are exposed to changes in interest rates
during the course of their maturity. Both debt instruments bear
interest at current market rates and thus approximate fair market
value. The Company manages its interest rate risk by (a) periodically
retiring and issuing debt and (b) periodically fixing the interest rate
on the London Inter Bank Offered Rate (LIBOR) portion of its revolving
credit loan for 30 to 60 days in order to minimize interest rate
swings. A 10% increase in interest rates (from 3.38% to 3.72.%) would
affect the Company's variable debt obligations and could potentially
reduce future earnings by approximately $30,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
See Table of Contents to Consolidated Financial Statements on Page
F-1.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
----------------------------------------------------
During the twenty-four months prior to the date of the financial
statements contained herein, no Form 8-K reporting a change of
accountants has been filed which included a reported disagreement on
any matter of accounting principles or practices or financial statement
disclosure.
17
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The information called for by this item is incorporated by
reference from the Company's definitive Proxy Statement for its 2003
annual meeting under the captions "Proposal No.1 - Election of
Directors", "Board of Directors and Committees" and "Section 16(a)
Beneficial Ownership Reporting Compliance" which definitive Proxy
Statement will be filed with the Securities and Exchange Commission not
later than 120 days after the end of the Company's fiscal year ended
December 31, 2002.
Item 11. Executive Compensation
----------------------
The information called for by this item is incorporated by
reference from the Company's definitive Proxy Statement for its 2003
annual meeting under the captions "Compensation of Executive Officers
and Directors" and "Compensation of Directors" which definitive Proxy
Statement will be filed with the Securities and Exchange Commission not
later than 120 days after the end of the Company's fiscal year ended
December 31, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The information called for by this item is incorporated by
reference from the Company's definitive Proxy Statement for its 2003
annual meeting under the captions "Security Ownership of Certain
Beneficial Owners", "Ownership of Common Stock by Directors,
Nominees and Officers" and "Securities Authorized for Issuance Under
Equity Compensation Plans" which definitive Proxy Statement will be filed
with the Securities and Exchange Commission not later than 120 days
after the end of the Company's fiscal year ended December 31, 2002.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The information called for by this item is incorporated by
reference from the Company's definitive Proxy Statement for its 2003
annual meeting under the captions "Certain Relationships and Related
Transactions" which definitive Proxy Statement will be filed with the
Securities and Exchange Commission not later than 120 days after the
end of the Company's fiscal year ended December 31, 2002.
Item 14. Controls and Procedures
-----------------------
The Chief Executive Officer and Chief Financial Officer of the
Company have concluded, based on their evaluation as of a date within
90 days prior to the date of the filing of this Annual Report on Form
10-K, that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by the
Company in the reports filed or submitted by it under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission, and include controls and
procedures designed to ensure that information required to be disclosed
by the Company in such reports is accumulated and communicated to the
Company's management, including the Company's Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. The design of any system of controls is
based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions,
regardless of how remote.
There were no significant changes in the Company's internal
controls or in other factors that significantly affect these controls
subsequent to the date of such evaluation.
18
PART IV
- -------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) The following documents are filed as part of this Report Page
1. Consolidated Financial Statements:
Table of Contents to Consolidated Financial Statements F-1
Independent Auditors' Report F-2
Independent Auditors' Report of Other Auditors F-3
Consolidated Balance Sheets as of December 31,
2002 and 2001 F-4
Consolidated Statements of Operations for the Years
Ended December 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 2002, 2001 and 2000 F-6
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2002, 2001 and 2000 F-7
Notes to Consolidated Financial Statements F-8
2. Financial Statement Schedule
The following financial statement schedule for the
years ended December 31, 2002, 2001, and 2000 is
included in Part IV of this report on the indicated
page:
Schedule II Valuation and Qualifying Accounts and Reserves F-20
All other Schedules are omitted because of the
absence of conditions under which they are
required.
Independent Auditors' Consent F-21
3. Exhibits 20
(b) There have been no reports on Form 8-K filed during the last
quarter of the period ended December 31, 2002.
19
Exhibit Page
Number Description of Exhibit Number
- ------- ---------------------- ------
3(a) Certificate of Incorporation of the Registrant, as
amended to date [Incorporated by reference to
Exhibit 3(a) to the Registrant's Registration
Statement on Form S-1 filed with the Commission on
September 6, 1984 (Registration No. 2-93134)]
3(b) By-laws of the Registrant, as currently in effect
[Incorporated by reference to Exhibit 3(b) to the
Registrant's Form 10-K filed with the Commission
on March 31, 1987 (File No. 0-13433)].
10(a)(A) 1985 Key Employee Stock Option Plan adopted by
the Board of Directors of the Registrant on July 1,
1985 [Incorporated by reference to Exhibit 10(a) to
the Registrant's Registration Statement on Form S-1
filed with the Commission on October 22, 1985
(Registration No. 33-1042)].
10(a)(B) Form of 1985 Key Employee Stock Option
Agreement, dated as of July 1, 1985, between the
Registrant and certain key employees of the
Registrant [Incorporated by reference to Exhibit
10(b) to the Registrant's Registration Statement on
Form S-1 filed with the Commission on October 22,
1985 (Registration No. 33-1042)].
10(b)(A) Incentive Stock Option Plan adopted by the Board of
Directors of the Registrant on June 1, 1984 and
approved by Stonebrook Group Inc. (formerly
Stenbeck Reassurance Co. Inc.) on June 1, 1984, as
amended by the Board of Directors of the Registrant
on May 6, 1985 [Incorporated by reference to
Exhibit 10(c) to the Registrant's Registration
Statement on form S-1 filed with the Commission on
October 22, 1985 (Registration No. 33-1042)].
10(b)(B) Form of Incentive Stock Option Agreement, dated as
of June 1, 1984, between the Registrant and certain
key employees of the Registrant [Incorporated by
reference to Exhibit 10(e) to the Registrant's
Registration Statement on Form S-1 filed with the
Commission on October 22, 1985 (Registration No.
33-1042)].
20
Exhibit Page
Number Description of Exhibit Number
- ------- ---------------------- ------
10(c)(A) Management Stock Option Plan adopted by the Board
of Directors of the Registrant on June 1, 1984 and
approved by Stonebrook Group Inc. on June 1, 1984,
as amended by the Board of Directors of the
Registrant on May 6, 1985 [Incorporated by reference
to Exhibit 10(f) to the Registrant's Registration
Statement on Form S-1 filed with the Commission on
October 22, 1985 (Registration No. 33-1042)].
10(c)(B) Form of Management Stock Option Agreement, dated
as of June 1, 1984, between the Registrant and
certain management employees of the Registrant
[Incorporated by reference to Exhibit 10(d) to the
Registrant's Registration Statement on Form S-1 filed
with the Commission on September 6, 1984
(Registration No. 2-93134)].
10(d) Miltope Corporation Cash Bonus Plan, as amended,
effective January 1, 1984 [Incorporated by reference
to Exhibit 10(e) to the Registrant's Registration
Statement on Form S-1 filed with the Commission on
September 6 , 1984 (Registration No. 2-93134)].
10(f)(A) 1995 Stock Option and Performance Award Plan
adopted by the Board of Directors of the Registrant
on April 11, 1995 and approved by the stockholders
of the Registrant on June 5, 1995 [Incorporated
by reference to Exhibit 4(a)(1) to the Registrant's
Registration Statement on Form S-8 filed with the
Commission on December 21, 1995 (File No. 33-65233)].
10(f)(B) Form of Non-Qualified Stock Option Agreement under
the 1995 Stock Option and Performance Award Plan
[Incorporated by reference to Exhibit 4(a)(2) to the
Registrant's Registration Statement on Form S-8 filed
with the Commission on December 21, 1995
(File No. 33-65233)].
10(f)(C) Form of Incentive Stock Option Agreement under the
1995 Stock Option and Performance Award Plan
[Incorporated by reference to Exhibit 4(a)(3) to the
Registrant's Registration Statement on Form S-8 filed
with the Commission on December 21, 1995
(File No. 33-65233)].
21
Exhibit Page
Number Description of Exhibit Number
- ------- ---------------------- ------
10(k)(A)(1) Loan Agreement, dated July 27, 1994, among First
Alabama Bank, as lender, and Miltope Corporation
and Miltope Business Products, Inc., as borrowers
[Incorporated by reference to Exhibit 10(o)(A)(1)
to the Registrant's Form 10-K filed with the
Commission on March 31, 1995 (File No. 0-13433)].
10(k)(A)(2) Amendment to Loan Agreement, dated as of October
3, 1994, among First Alabama Bank, Miltope
Corporation and Miltope Business Products, Inc.
[Incorporated by reference to Exhibit 10(o)(A)(2)
to the Registrant's Form 10-K filed with the
Commission on March 31, 1995 (File No. 0-13433)].
10(k)(A)(3) Amendment to Loan Agreement and Related
Documents, dated February 3, 1995, among First
Alabama Bank, Miltope Corporation and Miltope
Business Products, Inc. [Incorporated by reference
to Exhibit 10(o)(A)(3) to the Registrant's Form 10-K
filed with the Commission on March 31, 1995
(File No. 0-13433)].
10(k)(A)(4) Amendments to Loan Agreement and Related
Documents, dated February 6, 1997, among Regions
Bank (formerly First Alabama Bank), Miltope
Corporation and Miltope Business Products, Inc.
[Incorporated by reference to Exhibit 10(k)(A)(4) to
the Registrant's Form 10-K filed with the Commission
on March 26, 1997 (File No. 0-13433)].
10(k)(A)(5) Amendments to Loan Agreement and Related
Documents, dated December 1, 1997, among Regions
Bank (formerly First Alabama Bank), Miltope
Corporation and Miltope Business Products, Inc.
[Incorporated by reference to Exhibit 10(K)(A)(5) to
the Registrant's Form 10-K filed with the Commission
on March 23, 1998 (File No. 0-13433)].
22
Exhibit Page
Number Description of Exhibit Number
- ------- ---------------------- ------
10(k)(B) Guaranty Agreement, dated July 27, 1994, by the
Registrant to First Alabama Bank [Incorporated by
reference to Exhibit 10(o)(B) to the Registrant's
Form 10-K filed with the Commission on March 31, 1995
(File No. 0-13433)].
10(k)(C) Security Agreement, dated July 27, 1994, among
Miltope Corporation, Miltope Business Products, Inc.
and First Alabama Bank [Incorporated by
reference to Exhibit 10(o)(C) to the Registrant's
Form 10-K filed with the Commission on March 31, 1995
(File No. 0-13433)].
10(l)(A) Term Loan Agreement, dated October 13, 1994,
between First Alabama Bank, as lender, and Miltope
Corporation, as borrower [Incorporated by
reference to Exhibit 10(p)(A) to the Registrant's
Form 10-K filed with the Commission on March 31, 1995
(File No. 0-13433)].
10(l)(B) Real Estate Mortgage and Security Agreement, dated
October 13, 1994, by Miltope Corporation in favor
of First Alabama Bank [Incorporated by reference to
Exhibit 10(p)(B) to the Registrant's Form 10-K
filed with the Commission on March 31, 1995
(File No. 0-13433)].
10(m)(A) Loan Agreement, dated January 1, 1995, between the
State Industrial Development Authority and Miltope
Corporation [Incorporated by reference to Exhibit 10(q)(A)
to the Registrant's Form 10-K filed with the Commission
on March 31, 1995 (File No. 0-13433)].
10(m)(B) Credit Agreement, dated January 1, 1995, between
Miltope Corporation and First Alabama Bank
[Incorporated by reference to Exhibit 10(q)(B) to the
Registrant's Form 10-K filed with the Commission
on March 31, 1995 (File No. 0-13433)].
10(m)(C) Guaranty Agreement, dated January 1, 1995, by the
Registrant to First Alabama Bank [Incorporated by
reference to Exhibit 10(o)(C) to the Registrant's
Form 10-K filed with the Commission on
March 31, 1995 (File No. 0-13433)].
23
Exhibit Page
Number Description of Exhibit Number
- ------- ---------------------- ------
10(m)(D) Bond Purchase Agreement, dated January 11, 1995,
among Miltope Corporation, the State Industrial
Development Authority and Merchant Capital,
L.L.C. [Incorporated by reference to Exhibit 10(q)(D)
to the Registrant's Form 10-K filed with the Commission
on March 31, 1995 (File No. 0-13433)].
10(m)(E) Re-marketing Agreement, dated January 1, 1995,
among Miltope Corporation, the State Industrial
Development Authority and Merchant Capital,
L.L.C. [Incorporated by reference to Exhibit 10(q)(E)
to the Registrant's Form 10-K filed with the Commission
on March 31, 1995 (File No. 0-13433)].
10(m)(F) Real Estate Mortgage and Security Agreement, dated
as of January 1, 1995, from Miltope Corporation in
favor of First Alabama Bank [Incorporated by
reference to Exhibit 10(q)(F) to the Registrant's
Form 10-K filed with the Commission on
March 31, 1995 (File No. 0-13433)].
*10(m)(G) Loan and Security Agreement, dated January 6, 2003
between Citizens Business Credit and Miltope Corporation
10(q)(A) Stock Option Agreement, dated as of June 25, 1993,
between the Registrant and William L. Dickinson.
[Incorporated by reference to Exhibit 10(q) to the
Registrant's Form 10-K filed with the Commission
on March 31, 1994 (File No. 0-13433)].
10(q)(B) Stock Option Agreement, dated as of June 3, 1994,
between the Registrant and William L. Dickinson
[Incorporated by reference to Exhibit 10(u)(B) to
the Registrant's Form 10-K filed with the Commission
on March 31, 1995 (File No. 0-13433)].
10(q)(C) Stock Option Agreement, dated as of June 5, 1995,
between the Registrant and William L. Dickinson.
[Incorporated by reference to Exhibit 10(r)(C) to the
Registrant's Form 10-K filed with the Commission
on March 29, 1996 (File No. 0-13433)].
10(q)(D) Stock Option Agreement, dated as of June 11, 1996,
between the Registrant and William L. Dickinson.
[Incorporated by reference to Exhibit 10(q)(D) to the
Registrant's Form 10-K filed with the Commission
on March 26,1997 (File No. 0-13433)].
_____________
*Filed herewith
24
Exhibit Page
Number Description of Exhibit Number
- ------- ---------------------- ------
10(q)(E) Stock Option Agreement, dated as of September 11, 1997,
between the Registrant and William L. Dickinson.
[Incorporated by reference to Exhibit 10(q)(E) to the
Registrants Form 10-K filed with the Commission on
March 23, 1998 (File No. 0-13433)].
10(q)(F) Stock Option Agreement, dated September 17, 1998,
between the Registrant and William L. Dickinson.
[Incorporated by reference to Exhibit 10(q)(F) to the
Registrants Form 10-K filed with the Commission on
March 31, 1999 (File No. 0-13433)].
10(q)(G) Stock Option Agreement, dated April 20, 2000,
between the Registrant and William L. Dickinson.
[Incorporated by reference to Exhibit 10(q)(G) to the
Registrants Form 10-K filed with the Commission on
April 4, 2001 (File No. 0-13433)].
10(q)(H) Stock Option Agreement, dated April 19, 2001,
between the Registrant and William L. Dickinson.
[Incorporated by reference to Exhibit 10(q)(H) to the
Registrants Form 10-K filed with the Commission on
April 1, 2002 (File No. 0-13433)].
*10(q)(I) Stock Option Agreement, dated July 19, 2002,
between the Registrant and William L. Dickinson
10(u) Stock Option Agreement, dated September 17, 1998,
between the Registrant and Jerry Tuttle.
[Incorporated by reference to Exhibit 10(u) to the
Registrant's Form 10-K filed with the Commission
on March 31, 1999 (File No. 0-13433)].
10(u)(A) Stock Option Agreement, dated April 20, 2000,
between the Registrant and Jerry Tuttle.
[Incorporated by reference to Exhibit 10(u)(A) to the
Registrants Form 10-K filed with the Commission on
April 4, 2001 (File No. 0-13433)].
10(u)(B) Stock Option Agreement, dated April 19, 2001,
between the Registrant and Jerry Tuttle.
[Incorporated by reference to Exhibit 10(u)(B) to the
Registrants Form 10-K filed with the Commission on
April 1, 2002 (File No. 0-13433)].
_____________
*Filed herewith
25
Exhibit Page
Number Description of Exhibit Number
- ------- ---------------------- ------
*10(u)(C) Stock Option Agreement, dated July 19, 2002,
between the Registrant and Jerry Tuttle.
10(v) Stock Option Agreement dated January 15, 1999
between the Registrant and Thomas R. Dickinson.
[Incorporated by reference to Exhibit 10(v) to the
Registrant's Form 10-K filed with the Commission
on March 31, 2000 (File No. 0-13433)].
10(v)(A) Stock Option Agreement dated May 4, 2000, between
the Registrant and Thomas R. Dickinson.
[Incorporated by reference to Exhibit 10(v)(A) to the
Registrant's Form 10-K filed with the Commission
on April 4, 2001 (File No. 0-13433)].
10(v)(B) Stock Option Agreement dated November 20, 2001, between
the Registrant and Thomas R. Dickinson.
[Incorporated by reference to Exhibit 10(v)(B) to the
Registrant's Form 10-K filed with the Commission
on April 1, 2002 (File No. 0-13433)].
*10(v)(C) Stock Option Agreement dated July 18, 2002, between
the Registrant and Thomas R. Dickinson.
10(w) Stock Option Agreement, dated April 20, 2000,
between the Registrant and Lawrence P. Farrell.
[Incorporated by reference to Exhibit 10(w) to the
Registrants Form 10-K filed with the Commission on
April 4, 2001 (File No. 0-13433)].
10(w)(A) Stock Option Agreement, dated April 19, 2001,
between the Registrant and Lawrence P. Farrell.
[Incorporated by reference to Exhibit 10(w)(A) to the
Registrants Form 10-K filed with the Commission on
April 1, 2002 (File No. 0-13433)].
*10(w)(B) Stock Option Agreement, dated July 19, 2002,
between the Registrant and Lawrence P. Farrell.
10(x) Stock Option Agreement dated June 25, 1999,
between the Registrant and Tom B. Dake.
[Incorporated by reference to Exhibit 10(x) to the
Registrant's Form 10-K filed with the Commission
on March 31, 2000 (File No. 0-13433)].
_____________
*Filed herewith
26
Exhibit Page
Number Description of Exhibit Number
- ------- ---------------------- ------
10(x)(A) Stock Option Agreement dated May 4, 2000,
between the Registrant and Tom B. Dake.
[Incorporated by reference to Exhibit 10(x)(A) to the
Registrant's Form 10-K filed with the Commission
on April 4, 2001 (File No. 0-13433)].
10(x)(B) Stock Option Agreement dated November 20, 2001,
between the Registrant and Tom B. Dake.
[Incorporated by reference to Exhibit 10(x)(B) to the
Registrant's Form 10-K filed with the Commission
on April 1, 2002 (File No. 0-13433)].
*10(x)(C) Stock Option Agreement dated July 18, 2002,
between the Registrant and Tom B. Dake.
18 Letter regarding change in accounting principle, dated May
13, 1994 [Incorporated by reference to Exhibit 18 to
the Registrant's Form 10-Q filed with the
Commission on May 16, 1994 (File No. 0-13433)].
*21 Subsidiaries of the Registrant.
*23 Independent Auditors' Consent, dated March 28, 2003,
to the incorporation by reference in Registration
Statements No. 2-97977, No. 33-8245,
No. 33-78744 and No. 33-65233 on Form S-8 of their
report dated February 28, 2003 appearing in this
Annual Report on Form 10-K for the year ended
December 31, 2002.
*99(a) Certification of Chief Executive Officer
*99(b) Certification of Chief Financial Officer
_________
*Filed herewith
27
MILTOPE GROUP INC. AND SUBSIDIARIES
-----------------------------------
TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 2002
and 2001 F-4
Consolidated Statements of Operations for the
Years Ended December 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2002, 2001 and 2000 F-6
Consolidated Statements of Cash Flows for the
Years Ended December 31, 2002, 2001 and 2000 F-7
Notes to Consolidated Financial Statements F-8
The following financial statement schedule for the years ended
December 31, 2002, 2001, and 2000 is included in Part IV of this report
on the indicated page:
Schedule II Valuation and Qualifying Accounts and Reserves F-20
All other Schedules are omitted because of the absence of
conditions under which they are required.
F-1
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Stockholders and Board of Directors
of Miltope Group Inc.:
We have audited the accompanying consolidated balance sheets of Miltope
Group Inc. and subsidiaries (a majority-owned subsidiary of Great
Universal Incorporated) as of December 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity,
and cash flows for each of the three years in the period ended December
31, 2002. Our audits also included the consolidated financial
statement schedule listed in the index at Item 8. These financial
statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Miltope Group Inc. and subsidiaries at December 31, 2002 and 2001, and
the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------
Birmingham, Alabama
February 18, 2003
F-2
MILTOPE GROUP INC. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
- ------------------------------------------------------------------------------------
ASSETS 2002 2001
CURRENT ASSETS: ----------- -----------
Cash and cash equivalents $ 589,000 $ 1,120,000
Accounts receivable 7,799,000 7,188,000
Inventories 11,527,000 11,416,000
Deferred income taxes 1,816,000 1,339,000
Other current assets 371,000 389,000
----------- -----------
Total current assets 22,102,000 21,452,000
PROPERTY AND EQUIPMENT - at cost: ----------- -----------
Machinery and equipment 7,625,000 7,588,000
Furniture and fixtures 1,526,000 1,588,000
Land, buildings and improvements 6,246,000 6,702,000
----------- -----------
Total property and equipment 15,397,000 15,878,000
Less accumulated depreciation and amortization 9,659,000 10,058,000
----------- -----------
Property and equipment - net 5,738,000 5,820,000
----------- -----------
DEFERRED INCOME TAXES 5,126,000 2,825,000
OTHER ASSETS 437,000 497,000
----------- -----------
TOTAL $33,403,000 $30,594,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,573,000 $ 6,972,000
Accrued expenses 2,061,000 2,783,000
Short-term debt 515,000 640,000
Current maturities of long-term debt 1,781,000 3,845,000
----------- -----------
Total current liabilities 11,930,000 14,240,000
LONG-TERM DEBT 7,216,000 6,650,000
OTHER LIABILITIES 945,000 1,065,000
----------- -----------
Total liabilities 20,091,000 21,955,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value; 20,000,000 shares
authorized; 6,811,112 shares outstanding 68,000 68,000
Capital-in-excess of par value 24,519,000 24,519,000
Retained earnings (deficit) 2,858,000 (1,702,000)
----------- -----------
27,445,000 22,885,000
Less treasury stock, at cost 14,133,000 14,246,000
----------- -----------
Total stockholders' equity 13,312,000 8,639,000
----------- -----------
TOTAL $33,403,000 $30,594,000
=========== ===========
See notes to consolidated financial statements.
F-3
MILTOPE GROUP INC. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- ----------------------------------------------------------------------------------
2002 2001 2000
----------- ----------- -----------
NET SALES $48,470,000 $45,249,000 $40,730,000
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 37,857,000 39,408,000 32,707,000
Selling, general and administrative 6,617,000 6,224,000 7,578,000
Engineering, research and
development 1,047,000 1,159,000 659,000
Asset impairment 150,000 - -
----------- ----------- -----------
Total 45,671,000 46,791,000 40,944,000
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 2,799,000 (1,542,000) (214,000)
OTHER INCOME (EXPENSES):
Interest expense (631,000) (848,000) (1,367,000)
Interest income 33,000 113,000 150,000
----------- ----------- -----------
Total (598,000) (735,000) (1,217,000)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME
TAXES 2,201,000 (2,277,000) (1,431,000)
INCOME TAX BENEFIT 2,462,000 - -
----------- ----------- -----------
NET INCOME (LOSS) $ 4,663,000 $(2,277,000) $(1,431,000)
=========== =========== ===========
NET INCOME (LOSS) PER SHARE
BASIC $ .79 $ (.39) $ (.24)
=========== =========== ===========
DILUTED $ .77 $ (.39) $ (.24)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
BASIC 5,875,754 5,871,523 5,871,523
=========== =========== ===========
DILUTED 6,059,916 5,871,523 5,871,523
=========== =========== ===========
See notes to consolidated financial statements.
F-4
MILTOPE GROUP INC. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- -----------------------------------------------------------------------------------
Common Stock Capital-in- Retained
Par Excess of Earnings Treasury Stock
Shares Value Par Value (Deficit) Shares Cost
--------- ---------- ------------ ---------- ------- -----------
Balance January 1, 2000 6,811,112 $ 68,000 $ 22,178,000 $ 2,006,000 939,589 $14,246,000
Pre-acquisition conversion of
PGI related-party debt to equity 2,341,000
Net loss - - - (1,431,000) - -
--------- ---------- ------------ ----------- ------- -----------
Balance, December 31, 2000 6,811,112 68,000 24,519,000 575,000 939,589 14,246,000
Net loss - - - (2,277,000) - -
--------- ---------- ------------ ----------- ------- -----------
Balance, December 31, 2001 6,811,112 68,000 24,519,000 (1,702,000) 939,589 14,246,000
Exercise of stock options (103,000) (7,386) (113,000)
Net income 4,663,000
--------- ---------- ------------ ----------- ------- -----------
Balance December 31, 2002 6,811,112 $ 68,000 $ 24,519,000 $ 2,858,000 932,203 $14,133,000
========= ========== ============ =========== ======= ===========
See notes to consolidated financial statements.
F-5
MILTOPE GROUP INC. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- ------------------------------------------------------------------------------------
2002 2001 2000
OPERATING ACTIVITIES: ----------- ------------ ------------
Net income (loss) $ 4,663,000 $ (2,277,000) $ (1,431,000)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 934,000 1,035,000 1,360,000
Provision for slow-moving and obsolete inventories 1,213,000 1,583,000 1,319,000
Provision for doubtful accounts receivable 351,000 345,000 182,000
(Gain) loss on sale of fixed assets 23,000 36,000 (22,000)
Asset impairment 150,000 - -
Deferred income taxes (2,778,000) - -
Change in assets and liabilities provided (used) cash:
Accounts receivable (962,000) 400,000 (3,638,000)
Inventories (1,324,000) (123,000) 1,164,000
Other current assets 18,000 (7,000) 30,000
Other assets 35,000 398,000 409,000
Accounts payable and accrued expenses (244,000) 689,000 3,728,000
----------- ------------ ------------
Net cash provided by operating activities 2,079,000 2,079,000 3,101,000
----------- ------------ ------------
INVESTING ACTIVITIES:
Capital expenditures (996,000) (247,000) (175,000)
Proceeds from sale of property and equipment - 166,000 900,000
----------- ------------ ------------
Net cash provided by (used in) investing activities (996,000) (81,000) 725,000
----------- ------------ ------------
FINANCING ACTIVITIES:
Exercise of stock options 10,000 - -
Payments on long-term debt (1,624,000) (3,589,000) (3,552,000)
----------- ------------ ------------
Net cash used in financing activities (1,614,000) (3,589,000) (3,552,000)
----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (531,000) (1,591,000) 274,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,120,000 2,711,000 2,437,000
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 589,000 $ 1,120,000 $ 2,711,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: ============ ============ ============
Cash payments made for:
Income taxes $ 286,000 $ 12,000 $ -
=========== ============ ============
Interest $ 587,000 $ 836,000 $ 1,364,000
=========== ============ ============
Equipment acquired under capital lease obligations $ - $ 141,000 $ -
=========== ============ ============
Pre-acquisition conversion of PGI related-party debt to equity $ - $ - $ 2,341,000
=========== ============ ============
See notes to consolidated financial statements.
F-6
MILTOPE GROUP INC. AND SUBSIDIARIES
- -----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING
AND FINANCIAL REPORTING POLICIES
---------------------------------
Principles of Consolidation - The consolidated financial statements
include the accounts of Miltope Group Inc., its wholly-owned
subsidiaries, Miltope Corporation ("Miltope"), and Miltope Business
Products, Inc. ("MBP"), and its 90% owned subsidiary, IV Phoenix
Group, Inc. ("PGI"). These companies are collectively referred to
as the "Company". All material intercompany transactions have been
eliminated. The Company is a majority-owned subsidiary of Great
Universal Incorporated ("GUI"). All amounts presented have been
rounded to the nearest thousand.
Nature of Operations - The Company through its two industry
segments, military/rugged and commercial, is engaged in the
development of computers and peripheral equipment for rugged and
other specialized applications for military and commercial
customers, domestic and international.
Accounting Estimates - The Company's consolidated financial
statements are prepared in conformity with accounting principles
generally accepted in the United States of America which require
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Fair Value of Financial Instruments - The carrying value of the
Company's cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses and short-term debt approximates fair
value because of the short-term maturity of those instruments.
Additional information regarding the fair value of other financial
instruments is disclosed in Note 5.
Cash Equivalents -The Company considers all highly-liquid
investments with original maturities of three months or less to be
cash equivalents.
Depreciation and Amortization - Depreciation of machinery,
equipment, furniture and fixtures is computed on the straight-line
method over the estimated useful lives of the related assets
ranging from 3 to 10 years. Depreciation of buildings and
improvements is computed on the straight-line method over an
estimated useful life of 30 years. Amortization of leasehold
improvements is computed on the straight-line method over the
lesser of the estimated useful life of the improvement or the
remaining term of the lease.
Inventories - Inventories are stated at the lower of cost (first-
in, first-out) or market. Inventoried costs include direct
materials, direct labor, engineering and manufacturing overhead,
contract specific tooling, and other related costs.
Long-Lived Assets - In accordance with SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company reviews
its long-lived assets and identifiable intangibles, excluding
goodwill, for impairment when events or changes in circumstances
indicate that the carrying amount of these assets may not be
recoverable based on estimates of future undiscounted cash flows
without interest charges. An impairment loss is recognized only if
the carrying amount of the asset is not recoverable and is measured
as the difference between the carrying amount and the fair value of
the asset. Assets held for disposal, if any, are carried at the
lower of carrying amount or fair value, less estimated cost to sell
such assets.
Revenue Recognition - The Company generates revenue from its
operating segments, commercial and military/rugged. All commercial
products are generally priced to the customer on a price per unit
basis. The Company recognizes revenue based on the price per unit
at the time delivery of the product is made and title, ownership
and risk of loss passes to the customer. In the military/rugged
F-7
segment the Company recognizes revenue from fixed price contracts
for products when deliveries are made or work performed and title,
ownership and risk of loss passes to the customer. The Company
recognizes revenue from cost-plus-fee contracts when work is
performed and reimbursable and allowable costs are incurred and
estimated fees are earned. Revenue for certain pre-production
services pursuant to sales contracts is recognized when the service
is performed.
Engineering, Research and Development - Engineering, research and
development expenditures not made in connection with sales
contracts are charged to expense as incurred.
Product Warranties - The Company provides limited warranties of
anywhere from 90 days to 5 years based on the product sold. A
liability is provided for estimated future warranty costs based
upon management's assessment of historical experience and current
trends.
Stock Based Compensation - At December 31, 2002, the Company has
two stock based compensation plans which are described more fully
in Note 8. The Company accounts for those plans under the
recognition and measurement principles of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and Related Interpretations. No stock-based employee
compensation cost is reflected in net (loss) income, as this amount
is insignificant. The following table illustrates the effect on
net income (loss) and net income (loss) per share if the Company
had applied the fair value recognition provisions of SFAS Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation. See Note 8 for the assumptions used in the
following table:
2002 2001 2000
----------- ------------- -------------
Net income (loss), as $ 4,663,000 $ (2,277,000) $ (1,431,000)
reported:
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (101,000) (126,000) (125,000)
----------- ------------ ------------
Pro forma net income $ 4,562,000 $ (2,403,000) $ (1,556,000)
=========== ============ ============
Basic net income (loss) per share:
As reported $ 0.79 $ 0.39) $ (0.24)
Pro forma $ 0.78 $ (0.41) $ (0.26)
Diluted net income (loss) per share:
As reported $ 0.77 $ (0.39) $ (0.24)
Pro forma $ 0.75 $ (0.41) $ (0.26)
Income Taxes - The Company recognizes deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the Company's consolidated financial
statements or tax returns. Deferred tax assets and liabilities are
determined based on the differences between the financial
accounting and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are
expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to
be realized (Note 6).
Net Income (Loss) Per Share - Basic and diluted earnings per share
are computed by dividing the net income (loss) by the weighted
average common shares outstanding (basic EPS) or weighted average
common shares outstanding assuming dilution (diluted EPS). Options
that could potentially dilute basic net income per share in the
future were included in the computation of diluted net income per
share for the year ended December 31, 2002, as detailed below:
2002 2001 2000
---------- --------- ---------
Weighted average common shares
outstanding - basic 5,875,754 5,871,523 5,871,523
Dilutive effect of stock options 184,162 - -
--------- --------- ---------
Weighted average common shares
outstanding - diluted 6,059,916 5,871,523 5,871,523
========= ========= =========
Options that could potentially dilute basic net income per share in
the future were not included in the computation of diluted net loss
per share because to do so would have been anti-dilutive. Anti-
dilutive options were 63,952, 447,795, and 333,512 for 2002, 2001,
and 2000, respectively.
F-8
Recent Accounting Pronouncements -
In April 2002 , the Financial Accounting Standards Board("FASB")
issued SFAS 145, Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS 145 amends existing guidance on reporting gains and losses
on the extinguishments of debt to prohibit the classification of
the gain or loss as extraordinary, as the use of such extinguishments
have become part of the risk management strategy of many companies.
SFAS 145 also amends SFAS 13 to require sale-leaseback accounting
for certain lease modifications that have economic effects similar
to sale-leaseback transactions. The provisions of SFAS 145 related
to the rescission of SFAS 4 are applied in fiscal years beginning
after May 15, 2002. Earlier application of these provisions is
encouraged. The provisions of SFAS 145 related to SFAS 13 were
effective for transactions occurring after May 15, 2002, with early
application encouraged. The adoption of SFAS 145 is not expected
to have a material effect on the Company's consolidated financial
statements.
In June 2001, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which is effective
for any exit or disposal activities initiated after December 31,
2002. SFAS 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability
is incurred rather than at the time a company commits to an exit
plan. SFAS 146 also establishes that the liability should
initially be measured and recorded at fair value. The Company is
currently evaluating the impact of this statement.
The FASB issued Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"), which addresses
the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees. FIN
45 also clarifies the requirements related to the recognition of a
liability by a guarantor at the inception of a guarantee for the
guarantor's noncontingent obligations associated with such
guarantee. The disclosure requirements of this Interpretation are
effective for financial statements of periods ending after December
15, 2002. The initial recognition and measurement provisions are
applicable on a prospective basis for guarantees issued or modified
after December 31, 2002 and are not expected to have a significant
impact on the Company's consolidated financial statements.
2. ACQUISITION OF PGI BY MILTOPE GROUP, INC.
-----------------------------------------
On April 1, 2000, the Company entered into an agreement with GUI to
acquire GUI's ownership of 90% of the outstanding stock of IV
Phoenix Group, Inc. ("PGI") by the Company. Since GUI, through its
controlling interest in the Company, continues to own a controlling
interest in PGI after the acquisition, the acquisition has been
recorded on the Company's books at GUI's historical cost and
accounted for on an "as if pooled basis".
Effective August 17, 2001, all manufacturing operations of PGI, an
operating division that is part of the military/rugged segment,
were shut down. The Company contracted with PGI to continue
production of selective PGI products in Miltope's facilities on a
license fee basis. Those contracts were fulfilled during 2002.
All material transactions between the Company and PGI have been
eliminated.
Revenues and net income (loss) for the separate companies and the
combined amounts presented in the consolidated financial statements
for the year of acquisition are as follows:
2000
------------
Revenues (net of eliminations):
Miltope $ 36,811,000
PGI 3,919,000
------------
Combined $ 40,730,000
============
Net income (loss):
Miltope $ 474,000
PGI (1,905,000)
------------
Combined $ (1,431,000)
============
3. ACCOUNTS RECEIVABLE, NET
------------------------
Accounts receivable consist of the following: 2002 2001
----------- -----------
Amounts receivable from the
United States Government $ 5,752,000 $ 3,124,000
Amounts receivable from other customers 2,301,000 4,379,000
Allowance for doubtful accounts (254,000) (315,000)
----------- -----------
Total $ 7,799,000 $ 7,188,000
=========== ===========
F-9
4. INVENTORIES
-----------
Inventories consist of the following: 2002 2001
------------ ------------
Purchased parts and subassemblies $ 8,578,000 $ 9,246,000
Work-in-process 2,949,000 2,170,000
------------ ------------
Total $ 11,527,000 $ 11,416,000
============ ============
Inventories include a reserve for slow-moving and obsolete
items of $1,971,000, and $2,480,000 at December 31, 2002, and 2001,
respectively.
5. LONG-TERM DEBT
--------------
Long-term debt consists of the following: 2002 2001
----------- -----------
Term loan $ 5,700,000 $ 6,350,000
Industrial Development Authority
Revenue Bonds 2,715,000 3,135,000
Capital Leases 82,000 125,000
Other debt 500,000 885,000
----------- -----------
Total 8,997,000 10,495,000
Less current maturities 1,781,000 3,845,000
----------- -----------
Total $ 7,216,000 $ 6,650,000
=========== ===========
In January of 2003, the Company entered into a new credit agreement
with Citizen's Business Credit ("Citizen's") that will provide up
to $8,000,000 of financing under a revolving line of credit over an
initial three-year period. The initial proceeds of this line of
credit were used to pay down $4,700,000 of the $5,700,000 balance
due under the existing credit facility provided by its primary
lender. The Company entered into an agreement with its primary
lender to amortize the $1,000,000 balance of the existing line of
credit over the next twelve months. The table above reflects
maturities of long-term debt as adjusted by the terms of this new
credit agreement. As of February 28, 2003 the Company had a loan
balance under the Citizen's credit line of approximately
$4,800,000. The Company's accounts receivable, contract rights and
inventories are pledged as collateral to the agreement.
As of December 31, 2002, the Company has a balance of $5,700,000
which bears interest at a rate equaling the London Inter Bank
Offered Rate plus 2% (effective rate 3.38%) under a $15,000,000
revolving credit agreement with its primary lender. As of December
31, 2001, the $6,350,000 term loan, at the Company's option, bears
interest at the bank's reference rate (effective rate was 4.75%),
or at a rate equaling the London Inter Bank Offered Rate plus 2.0%
(effective rate 4.14%). The Company's accounts receivable,
contract rights and inventories are pledged as collateral to the
agreement.
The new credit agreement referenced above includes various
provisions requiring the maintenance of certain financial ratios
and limitations on (i) transactions with affiliates, (ii) other
debt and guarantees, (iii) investment in, and advances to, other
entities, and (iv) payment of dividends. The Company's term loan
agreement permits the company to pay annual dividends of up to 50%
of the prior year's net income.
Principal payments for the Industrial Development Authority Revenue
Bonds (the "Bonds") range between $455,000 and $600,000 from
December 2003 through December 2008. Repayment of the Bonds is
secured by an irrevocable letter of credit in an amount up to
$5,700,000 that in turn is secured by a mortgage on the Montgomery,
Alabama facility and a security interest in the equipment located
at such facility. Property and equipment with a carrying value of
$4,140,000 and $4,567,000 at December 31, 2002 and 2001,
respectively, are pledged as collateral. Letter of credit
commitment fees paid during 2002 and 2001 were $34,000 and $40,000,
respectively. The agreement with the Industrial Development
Authority bears interest at a variable market rate that ranged from
1.40% to 2.04% during 2002, and from 1.90% to 6.51% during 2001,
and was 1.42% and 1.93% at December 31, 2002 and 2001,
respectively.
Other notes are due in aggregate monthly installments of $35,000
including variable interest based on the U.S. Treasury Rate (4.25%
and 5.88% at December 31, 2002 and 2001, respectively).
F-10
The aggregate maturities of current and long-term debt subsequent
to December 31, 2002, are presented below.
Year Ending December 31,
---------------------------
2003 $ 1,781,000
2004 746,000
2005 525,000
2006 5,260,000
2007 600,000
Thereafter 85,000
-----------
Total $ 8,997,000
===========
The fair value of long-term debt approximated the carrying value as
of December 31, 2002 and 2001, as all instruments are at variable
interest rates.
6. INCOME TAXES
------------
The provision (benefit) for income taxes consists of the following:
2002 2001 2000
----------- -------- -------
Current:
Federal $ 100,000 $ - $ -
State 216,000 - -
Deferred (2,778,000) - -
---------- -------- -------
Total $(2,462,000) $ - $ -
=========== ======== =======
The Company's benefit for income taxes differs from the amount
computed using the federal statutory tax rate as a result of the
following items:
2002 2001 2000
------------ ------------ ------------
Amount at federal statutory rate $ 770,000 $ (725,000) $ (487,000)
Increases (reductions) due to:
State taxes - net of federal
income taxes (benefit) 144,000 (36,000) (78,000)
Change in valuation allowance (3,310,000) 755,000 490,000
Goodwill - 3,000 50,000
Change in tax rate (50,000) - -
Other (16,000) 3,000 25,000
------------ ------------ ------------
Total $ (2,462,000) $ - $ -
============ ============ ============
The deferred tax assets and liabilities at December 31, 2002 and
2001 are comprised of the following:
F-11
2002
---------------------------------------
Deferred
Deferred Tax
Tax Assets Liabilities Total
Current : ----------- ----------- -----------
Inventories $ 1,243,000 $ - $ 1,243,000
Non-deductible accrual 619,000 - 619,000
Intangible assets 1,000 - 1,000
Prepaid expenses - (43,000) (43,000)
----------- --------- -----------
1,863,000 (43,000) 1,820,000
Total current
Valuation allowance (4,000) - (4,000)
----------- --------- -----------
Net current 1,859,000 (43,000) 1,816,000
----------- --------- -----------
Long-term:
Net operating loss carryforward 5,289,000 - 5,289,000
Alternative minimum tax
credit carryforward 246,000 - 246,000
Accelerated depreciation - (64,000) (64,000)
----------- --------- -----------
Total long-term 5,535,000 (64,000) 5,471,000
Valuation allowance (345,000) - (345,000)
----------- --------- -----------
Net long-term 5,190,000 (64,000) 5,126,000
----------- --------- -----------
Net $ 7,049,000 $(107,000) $ 6,942,000
=========== ========= ===========
2001
----------------------------------------
Deferred
Deferred Tax
Tax Assets Liabilities Total
----------- ----------- -----------
Current :
Inventories $ 1,484,000 $ - $ 1,484,000
Non-deductible accrual 330,000 - 330,000
Prepaid expenses - (42,000) (42,000)
----------- ----------- -----------
Total current 1,814,000 (42,000) 1,772,000
Valuation allowance (433,000) - (433,000)
----------- ----------- -----------
Net current 1,381,000 (42,000) 1,339,000
----------- ----------- -----------
Long-term:
Net operating loss
carryforward 5,818,000 - 5,818,000
Alternative minimum tax
credit carryforward 240,000 - 240,000
Other 1,000 (8,000) (7,000)
----------- ----------- -----------
Total long-term 6,059,000 (8,000) 6,051,000
Valuation allowance (3,226,000) - (3,226,000)
----------- ----------- -----------
Net long-term 2,833,000 (8,000) 2,825,000
----------- ----------- -----------
Net $ 4,214,000 $ (50,000) $ 4,164,000
=========== =========== ===========
The valuation allowance of $349,000 and $3,659,000 at December 31,
2002 and December 31, 2001, respectively, represents a provision
for uncertainty as to the realization of certain deferred tax
assets, including net operating loss carryforwards in certain
jurisdictions. The change during 2002 in the deferred tax
valuation allowance primarily relates to the utilization of net
operating loss carryforwards. The Company has recognized that it
is more likely than not that the future tax benefits for the
realization of U.S. tax credits and net operating loss
carryforwards will be fully utilized as a result of current and
anticipated future income. However, the Company has also
recognized that it is more likely than not that the future tax
benefits for the realization of state net operating loss
carryforwards for PGI will not be realized as a result of future
income. Accordingly, the valuation allowance of $349,000, relating
to subsidiary PGI, reflects the lower than anticipated net deferred
tax asset utilization.
The Company has net operating loss carryforwards for federal income
tax purposes at December 31, 2002 of approximately $13,779,000 that
expire as follows: $4,066,000 in 2009, $1,251,000 in 2010,
$2,422,000 in 2018, $3,537,000 in 2019, $1,356,000 in 2020 and
$1,147,000 in 2021. The Company also has approximately $246,000 of
alternative minimum tax credit carryforwards available to offset
future federal income taxes.
F-12
7. EMPLOYEE BENEFIT PLANS
----------------------
Savings Plan - The Company has a profit-sharing/401(k) retirement
plan (the "Plan") which covers substantially all employees.
Company contributions are discretionary and are determined annually
based on profits. The Plan allows for an employee pay conversion
feature whereby each eligible employee may contribute up to 15% of
their total pay. The Company's provision pursuant to the Plan
amounted to $81,000, $80,000, and $81,000 in 2002, 2001 and 2000,
respectively.
Performance Based Bonus Plan - The Company has a bonus plan that
provides for additional compensation to certain executive officers.
The bonus is payable upon the attainment of certain financial
targets that are approved by the Board of Directors, and is
calculated as a specified percentage of the officer's current base
salary. The Company recorded a bonus provision of $250,000,
$350,000 and $300,000 for 2002, 2001 and 2000, respectively.
8. STOCK OPTIONS
-------------
The Company has a Stock Option and Performance Award Plan ("SOPA")
under which 500,000 shares of common stock are reserved for
issuance under options to be granted for periods not to exceed ten
years at an exercise price not less than the fair market value of
the shares at the date of grant. They are exercisable at a
cumulative rate of 25% in each of the first four years subsequent
to the applicable grant. Options have been granted for 438,489
shares under this plan as of December 31, 2002.
Under separate plans, certain of the Company's outside directors
have been granted options to purchase shares of common stock at
exercise prices of 85% of the fair market value of such shares at
date of grant. Such options are exercisable at any time during the
term of ten years or within one year after termination of service
as a director. The Company has reserved 300,000 shares of common
stock for issuance under these plans.
A summary of the Company's stock options as of December 31, 2002,
2001 and 2000 and changes during the year ended on those dates is
presented below:
F-13
2002 2001 2000
----------------------------- ------------------------------ --------------------------------
Weighted Weighted Weighted
Weighted Average Weighted Average Weighted Average
Options Average Fair Value Options Average Fair Value Options Average Fair Value
for Exercise at Grant for Exercise at Grant for Exercise at Grant
Shares Price Date Shares Price Date Shares Price Date
----------------------------- ------------------------------ --------------------------------
Outstanding at
beginning of year 447,795 $1.91 333,512 $2.17 312,858 $2.20
Granted
Price = fair value 134,000 $2.98 $2.72 60,500 $1.66 $1.56 37,000 $1.53 $1.45
Price < fair value 17,766 $2.53 $3.01 62,283 $0.72 $0.74 19,254 $2.34 $2.77
Exercised (7,386) $1.37 - -
Canceled (7,625) $2.73 (8,500) $1.71 (35,600) $1.89
------- ------- -------
Outstanding at end
of year 584,550 $2.17 447,795 $1.91 333,512 $2.17
======= ======= =======
Options exercisable
at December 31:
Director options 146,061 $1.64 128,295 $1.52 66,012 $2.27
Employee options 209,989 $2.29 156,500 $2.53 107,500 $2.86
------- ------- -------
Total 356,050 $2.02 284,795 $2.07 173,512 $2.64
======= ======= =======
The following table summarizes information about stock options
outstanding at December 31, 2002:
Options Outstanding Options Exercisable
----------------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Life Exercise Price Outstanding Exercise Price
----------------------------------------------------- -----------------------------
Range of Exercise Prices
$0.72 -- $1.75 311,300 7.25 $1.35 216,800 $1.25
$2.34 -- $4.46 256,250 7.43 $2.94 122,250 $2.91
$5.50 -- $5.50 17,000 0.72 $5.50 17,000 $5.50
-------- -------
584,550 7.14 $2.17 356,050 $2.02
======== =======
For purposes of SFAS 123, the weighted average fair value of the
options granted during 2002, 2001 and 2000 is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following assumptions:
2002 2001 2000
-------- ------- -------
Expected life (years) 10.0 10.0 10.0
Risk-free interest rate 5.51% 5.00% 5.71%
Dividend rate 0% 0% 0%
Expected volatility 99.16% 111.42% 106.63%
The pro forma disclosure required by SFAS 123 is presented in
tabular format in Note 1.
F-14
9. COMMITMENTS AND CONTINGENCIES
-----------------------------
Leasing Arrangements - The Company is obligated under several non-
cancelable operating leases covering land, office facilities and
equipment. The corporate headquarters resides upon land under a
lease which provides for minimum rentals through 2086. Minimum
rentals are subject to increases based on the annual consumer price
index. Future minimum lease payments under all operating leases
with an initial or remaining non-cancelable lease term of more than
one year at December 31, 2002 are as follows:
Year Ending December 31,
-----------------------
2003 $ 182,000
2004 103,000
2005 103,000
2006 85,000
2007 33,000
Thereafter 2,576,000
-----------
Total $ 3,082,000
===========
Aggregate rental expense under operating leases amounted to
$317,000, $413,000, and $428,000 in 2002, 2001 and 2000,
respectively.
The Company leases excess office space at its Hope Hull facility
to a non-related tenant on a month-to-month basis. In 2001 and
2000, additional space was leased to a party related through certain
common ownership resulting in rental income of $32,000 (2001) and
$96,000 (2000). Aggregate rental income for excess office space
amounted to $106,000, $126,000, and $187,000 in 2002, 2001 and 2000,
respectively
Litigation - The Company is a claimant in a lawsuit in the
U.S. District Court, Eastern District of New York against former
officers, directors, and employees of PGI and against two
competitors of Miltope and PGI. The complaint alleges damages
based on breach of fiduciary duties by the former officers and
directors, theft of trade secrets, violations of the Lanham Act,
conspiracy to commit these violations and other claims. The
corporate defendants answered the complaint, denied the claims
against them but have not filed any counterclaims. The individual
defendants who were former officers and directors of Miltope and
PGI have filed counterclaims. The Company believes that such
litigation and claims will be resolved without a material effect on
the Company's financial position or results of operations.
In addition, the Company, from time to time, is a party to pending
or threatened legal proceedings and arbitration in the ordinary
course of business. Based upon information currently available,
and in light of legal and other defenses available to the Company,
management does not consider liability from any threatened or
pending litigation to be material to the consolidated financial
statements.
Claims - From time to time the Company may have certain of its
contracts subject to final negotiation or modification with the
customer in the ordinary course of business. Although the ultimate
outcome of these negotiations or modifications is unknown at
December 31, 2002, the Company believes that any additional costs
evolving from these negotiations would not be material to the
consolidated financial statements.
F-15
Product Warranties - In accordance with FIN 45, the Company's
warranty reserve activity is reflected in the table below:
-----------------------------------------------------------------
Additions
Balance at Charged to
Year Beginning Costs and Balance at
of Period Expenses Deductions End of Period
-----------------------------------------------------------------
2002 $ 541,000 $ 1,438,000 $ 1,228,000 $ 751,000
2001 230,000 883,000 572,000 541,000
2000 125,000 697,000 592,000 230,000
10. SEGMENT INFORMATION
-------------------
The Company's reportable segments are organized around its two main
products and services segments, Military/Rugged and Commercial.
Through its military/rugged segment, the Company is engaged in the
design, manufacture and testing of computer and computer peripheral
equipment for military and other specialized applications requiring
reliable operations in severe land, sea and airborne environments.
These products are generally sold by the Company's business
development group through the federal government bid process. IV
Phoenix Group ("PGI") is an operating segment of the Company which
has been aggregated within the Military/Rugged segment for
financial reporting purposes. The Company's commercial segment
designs, develops, manufactures and markets commercial computer
related products primarily for transportation, telecommunications
and in-field maintenance markets. These products are sold through
an established network of marketing representatives and Company
employed salespeople to a broad base of customers both
international and domestic. The accounting policies of the
segments are the same as those described in the summary of
significant accounting policies. The Company's determination of
segment operating profit (loss) does not reflect other income
(expense) or income taxes.
General
2002 Military/Rugged Commercial Eliminations Corporate Consolidated
----- --------------- ----------- ------------ ----------- ------------
Net sales from external customers $ 40,466,000 $ 8,886,000 $ (882,000) $ 48,470,000
============ =========== ============ ============
Segment operating income $ 766,000 $ 2,033,000 $ - $ 2,799,000
============ =========== ============ ============
Other income (expense) $ - $ - $ - $ (598,000) $ (598,000)
=========== =========== ============ =========== ============
Income (loss) before income taxes $ 766,000 $ 2,033,000 $ - $ (598,000) $ 2,201,000
============ ========== ============ =========== ============
Identifiable assets $ 20,240,000 $ 4,824,000 $ - $ 7,920,000 $ 32,984,000
============ ========== ============ =========== ============
Capital expenditures $ 743,000 $ 253,000 $ 996,000
============ =========== ============
Depreciation and amortization $ 900,000 $ 34,000 $ - $ 934,000
============ =========== ============ ============
General
2001 Military/Rugged Commercial Eliminations Corporate Consolidated
----- --------------- ----------- ------------ ----------- ------------
Net sales from external customers $ 34,314,000 $11,156,000 $ (221,000) $ 45,249,000
============ =========== ============ ============
Segment operating income (loss) $(2,927,000) $ 1,392,000 $ (7,000) $ (1,542,000)
============ =========== ============ ============
Other income (expense) $ - $ - $ - $ (735,000) $ (735,000)
============ =========== ============ =========== ============
Income (loss) before income taxes $(2,927,000) $ 1,392,000 $ (7,000) $ (735,000) $ (2,277,000)
============ =========== ============ =========== ============
Identifiable assets $17,330,000 $ 7,094,000 $ 7,000 $ 6,163,000 $ 30,594,000
============ =========== ============ =========== ============
Capital expenditures $ 178,000 $ 69,000 $ 247,000
============ =========== ============
Depreciation and amortization $ 943,000 $ 85,000 $ 7,000 $ 1,035,000
============ =========== ============ ============
F-16
General
2000 Military/Rugged Commercial Eliminations Corporate Consolidated
----- --------------- ----------- ------------ ----------- ------------
Net Sales from external customers $28,011,000 $12,972 000 $ (253,000) $ 40,730 000
============ =========== ============ ============
Segment operating income (loss) $ (1,379,000) $ 1,311,000 $ (146,000) $ (214,000)
============ =========== ============ ============
Other income (expense) $ - $ - $ - $(1,217,000) $ (1,217,000)
============ =========== ============ =========== ============
Income (loss) before income taxes $ (1,379,000) $ 1,311,000 $ (146,000) $(1,217,000) $ (1,431,000)
============ =========== ============ =========== ============
Identifiable assets $ 18,675,000 $ 8,727,000 $ 7,000 $ 8,206,000 $ 35,615,000
============ =========== ============ =========== ============
Capital expenditures $ 112,000 $ 63,000 $ 175,000
============ =========== ============
Depreciation and amortization $ 883,000 $ 330,000 $ 147,000 $ 1,360,000
============ =========== ============ ============
In 2002, 2001 and 2000, foreign sales accounted for 0.1%,1%, and
9%, respectively, of the military/rugged segment net sales and 28%,
21%, and 14%, respectively, of the commercial segment net sales.
During 2002, 2001 and 2000, the United States Government accounted
for 68%, 63%, and 52% of consolidated net sales of the Company,
respectively.
11.UNAUDITED QUARTERLY FINANCIAL DATA
----------------------------------
Summarized unaudited quarterly financial data for the years ended
December 31, 2002 and 2001 is as follows:
Thirteen Weeks Ended
------------------------------------------------------------
March 31, June 30, September 29, December 31,
2002 2002 2002 2002
----------- ------------ ------------ ------------
Net sales $ 9,354,000 $ 11,053,000 $ 12,784,000 $ 15,279,000
=========== ============ ============ ============
Gross profit $ 2,775,000 $ 2,146,000 $ 2,299,000 $ 3,393,000
=========== ============ ============ ============
Net income $ 1,172,000 $ 477,000 $ 326,000 $ 2,688,000*
=========== ============ ============ ============
Basic net income per share $.20 $.08 $.06 $.46*
=== === === ====
Diluted net income per share $.20 $.08 $.05 $.44*
==== === ==== ====
Thirteen Weeks Ended
---------------------------------------------------------------
April 1, July 1, September 30, December 31,
2001 2001 2001 2001
----------- ------------ ----------- ------------
Net sales $ 9,993,000 $ 11,387,000 $12,551,000 $ 11,318,000
=========== ============ =========== ============
Gross profit $ 1,615,000 $ 1,589,000 $ 1,440,000 $ 1,197,000
=========== ============ =========== ============
Net loss $ (311,000) $ (433,000) $ (443,000) $ (1,090,000)
=========== ============ =========== ============
Basic and diluted net loss
per share $(.05) $(.08) $(.08) $(.18)
==== === ===== ====
* - During the 4th quarter of 2002, as discussed in Note 6, the Company
reversed $3,310,000 of the valuation allowance against deferred tax
assets.
F-17
12.RELATED PARTY TRANSACTIONS
During 2002 and 2001, the Company recorded no sales to entities
that are affiliated through certain common ownership. Sales to
those entities in 2000 were $14,000. There were no receivables on
those sales at December 31, 2002 or 2001. During 2002, 2001 and
2000, the Company received consulting and management services from
a company affiliated through common ownership. Fees for such
services in the amount of $100,000, $91,000 and $72,000,
respectively, are included in selling, general and administrative
expenses. Accrued expenses for such fees were $944,000 and
$1,040,000 as of December 31, 2002 and December 31, 2001,
respectively.
F-18
Schedule II
Miltope Group, Inc. and Subsidiaries
Valuation and Qualifying Accounts and Reserves
For the Years Ended December 31, 2002, 2001, and 2000
- ---------------------------------------------------------------------------------
Additions
Balance at Charged to
Beginning Costs and Balance at
Description of Period Expenses Deductions End of Period
- ---------------------------------------------------------------------------------
2002
----
Accrued Warranty Costs $ 541,000 $ 1,438,000 $ 1,228,000 $ 751,000
Accrued Obsolescence 2,480,000 1,213,000 1,722,000 1,971,000
Doubtful Receivables 315,000 351,000 412,000 254,000
2001
----
Accrued Warranty Costs $ 230,000 $ 883,000 $ 572,000 $ $541,000
Accrued Obsolescence 1,913,000 1,583,000 1,016,000 2,480,000
Doubtful Receivables 570,000 345,000 600,000 315,000
2000
----
Accrued Warranty Costs $ 125,000 $ 697,000 592,000 $ 230,000
Accrued Obsolescence 710,000 1,319,000 116,000 1,913,000
Doubtful Receivables 546,000 182,000 158,000 570,000
F-19
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
No. 2-97977, No. 33-8245, No. 33-78744 and No. 33-65233 of Miltope
Group Inc. on Forms S-8 of our report dated February 28, 2003,
appearing in this Annual Report on Form 10-K of Miltope Group Inc. for
the year ended December 31, 2002.
/s/Deloitte & Touche LLP
--------------------
Birmingham, Alabama
March 28, 2003
F-20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned thereunto duly
authorized.
MILTOPE GROUP INC.
March 18, 2003 -----------------------------
Thomas R. Dickinson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
March 18, 2003 -----------------------------------
Thomas R. Dickinson
President and Chief Executive
Officer (Principal Executive Officer)
March 18, 2003 ------------------------------------
Tom B. Dake
Vice President and Chief
Financial Officer
(Principal Accounting Officer)
March 18, 2003 ------------------------------------
William L. Dickinson
Director
March 18, 2003 ------------------------------------
William Mustard
Director
March 18, 2003 ------------------------------------
Henry Guy
Director
March 18, 2003 ------------------------------------
Jerry O. Tuttle
Director
CERTIFICATIONS
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
I, Thomas R. Dickinson, certify that:
1. I have reviewed this annual report on Form 10-K of Miltope
Group, Inc. (the "registrant");
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements and other
financial information included in the annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for the
periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of the date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) Presented in the annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in the annual report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: March 18, 2003 /s/ Thomas R. Dickinson
------------------------------------
President and Chief Executive Officer
CERTIFICATIONS
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
I, Tom B. Dake, certify that:
1. I have reviewed this annual report on Form 10-K of Miltope
Group, Inc. (the "registrant");
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements and other
financial information included in the annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for the
periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of the date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) Presented in the annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in the annual report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: March 18, 2003 /s/ Tom B. Dake
------------------------------------------
Vice-President and Chief Financial Officer