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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter
Ended June 29, 2003 Commission File Number 0-13433
- -------------------
MILTOPE GROUP INC.
- -----------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2693062
- ------------------------------------- --------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3800 Richardson Road South
Hope Hull, AL 36043
- ----------------------------------- --------------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (334) 284-8665
------------------
Not Applicable
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Former name, former address and former fiscal year, if changed since
last report
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
-------
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes No X
----- ------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of the period covered by this
report. Outstanding at August 7, 2003: 5,908,909 shares of Common
Stock, $.01 par value.
PART I - FINANCIAL INFORMATION
MILTOPE GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
June 29, December 31,
ASSETS 2003 2002
- ------ ------------ ------------
CURRENT ASSETS: $ 48,000 $ 589,000
Cash
Accounts receivable, net of allowance of 120,000 7,043,000 7,799,000
(2003) and $344,000 (2002)
Inventories 13,948,000 11,527,000
Deferred income taxes 1,686,000 1,816,000
Other current assets 343,000 371,000
------------ ------------
Total current assets 23,068,000 22,102,000
------------ ------------
PROPERTY AND EQUIPMENT - at cost:
Machinery and equipment 7,925,000 7,625,000
Furniture and fixtures 1,511,000 1,526,000
Land, building and improvements 6,060,000 6,246,000
------------ ------------
Total property and equipment 15,496,000 15,397,000
Less accumulated depreciation 9,878,000 9,659,000
------------ ------------
Property and equipment - net 5,618,000 5,738,000
------------ ------------
DEFERRED INCOME TAXES 4,355,000 5,126,000
OTHER ASSETS 402,000 437,000
------------ ------------
TOTAL $ 33,443,000 $ 33,403,000
============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Accounts payable $ 9,405,000 $ 7,573,000
Accrued expenses 1,879,000 2,061,000
Short-term debt 440,000 515,000
Current maturities of long-term debt 1,376,000 1,781,000
------------ ------------
Total current liabilities 13,100,000 11,930,000
LONG-TERM DEBT 4,656,000 7,216,000
OTHER LIABILITIES 845,000 945,000
------------ ------------
Total liabilities 18,601,000 20,091,000
------------ ------------
CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value;
20,000,000 shares 68,000 68,000
authorized; 6,811,112 shares outstanding
Capital in excess of par value 24,519,000 24,519,000
Retained earnings 4,297,000 2,858,000
------------ ------------
28,884,000 27,445,000
Less treasury stock at cost 14,042,000 14,133,000
------------ ------------
Total stockholders' equity 14,842,000 13,312,000
------------ ------------
TOTAL $ 33,443,000 $ 33,403,000
============ ============
See Notes To Condensed Consolidated Financial Statements
-2-
MILTOPE GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Thirteen Weeks Ended
----------------------------
June 29, June 30,
2003 2002
------------ ------------
NET SALES $ 17,790,000 $ 11,053,000
------------ ------------
COSTS AND EXPENSES:
Cost of sales 13,822,000 8,907,000
Selling, general and administrative 2,138,000 1,264,000
Engineering, research and development 120,000 266,000
------------ ------------
Total 16,080,000 10,437,000
------------ ------------
INCOME FROM OPERATIONS 1,710,000 616,000
OTHER INCOME (EXPENSE):
Interest expense (95,000) (145,000)
Interest income 1,000 6,000
------------ ------------
Total (94,000) (139,000)
------------ ------------
INCOME BEFORE INCOME TAXES 1,616,000 477,000
INCOME TAXES 600,000 -
------------ ------------
NET INCOME $ 1,016,000 $ 477,000
=========== ============
NET INCOME PER SHARE
BASIC $ 0.17 $ 0.08
============ ============
DILUTED $ 0.17 $ 0.08
============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
BASIC 5,894,667 5,875,077
============ ============
DILUTED 6,130,066 6,027,084
=========== ============
See Notes To Condensed Consolidated Financial Statements
-3-
MILTOPE GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Twenty-Six Weeks Ended
----------------------------
June 29, June 30,
2003 2002
------------ ------------
NET SALES $ 33,601,000 $ 20,407,000
------------ ------------
COSTS AND EXPENSES:
Cost of sales 26,499,000 15,486,000
Selling, general and administrative 4,243,000 2,450,000
Engineering, research and development 228,000 579,000
------------ ------------
Total 30,970,000 18,515,000
------------ ------------
INCOME FROM OPERATIONS 2,631,000 1,892,000
OTHER INCOME (EXPENSE):
Interest expense (211,000) (259,000)
Interest income 1,000 16,000
------------ ------------
Total (210,000) (243,000)
------------ ------------
INCOME BEFORE INCOME TAXES 2,421,000 1,649,000
INCOME TAXES 900,000 -
------------ ------------
NET INCOME $ 1,521,000 $ 1,649,000
============ ============
NET INCOME PER SHARE:
BASIC $ .26 $ .28
============ ============
DILUTED $ .25 $ .28
============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
BASIC 5,887,009 5,874,149
============ ============
DILUTED 6,119,445 5,989,674
============ ============
See Notes To Condensed Consolidated Financial Statements
-4-
MILTOPE GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED JUNE 29, 2003 AND JUNE 30, 2002
(unaudited)
June 29, June 30,
2003 2002
------------ ------------
OPERATING ACTIVITIES: $ 1,521,000 $ 1,649,000
Net income
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 445,000 459,000
Provision for slow-moving and obsolete inventories 335,000 600,000
Provision for (recovery of) doubtful accounts receivable (130,000) 345,000
Deferred income taxes 901,000 -
Loss on sale of property and equipment 9,000 -
Change in operating assets and liabilities:
Accounts receivable 886,000 (1,586,000)
Inventories (2,755,000) (874,000)
Other current assets 28,000 76,000
Other assets (2,000) 219,000
Accounts payable and accrued expenses 1,572,000 (28,000)
------------ ------------
Net cash provided by operating activities 2,810,000 860,000
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (319,000) (827,000)
------------ ------------
Net cash used in investing activities (319,000) (827,000)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 8,000 9,000
Net proceeds from line of credit 5,656,000 -
Payments of long-term debt (8,696,000) (926,000)
------------ ------------
Net cash used in financing activities (3,032,000) (917,000)
------------ ------------
NET DECREASE IN CASH (541,000) (884,000)
CASH, BEGINNING OF PERIOD 589,000 1,120,000
------------ ------------
CASH, END OF PERIOD $ 48,000 $ 236,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW
INFORMATION:
Cash payments made for: $ 137,000 $ 173,000
============ ============
Income taxes $ 264,000 $ 294,000
Interest ============ ============
See Notes To Condensed Consolidated Financial Statements
-5-
MILTOPE GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Financial Statements - In the opinion of management, the
accompanying unaudited condensed consolidated financial statements
contain all adjustments necessary (consisting of only normal and
recurring accruals) to present fairly the financial position of the
Company and its subsidiaries as of June 29, 2003 and December 31, 2002
and the results of operations and cash flows for the twenty-six weeks
ended June 29, 2003 and June 30, 2002. All amounts presented have been
rounded to the nearest thousand.
The results for the thirteen and twenty-six weeks ended June 29, 2003
are not necessarily indicative of the results for an entire year. It
is suggested that these consolidated financial statements be read in
conjunction with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2002.
Accounting Estimates - The Company's consolidated financial
statements are prepared in conformity with accounting principles
generally accepted in the United States of America which requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Long-Lived Assets - In accordance with Statement of Financial
Accounting Standards ("SFAS") 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company reviews its long-lived
assets and identifiable intangibles 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 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.
Stock Based Compensation - At June 29, 2003, the Company has two
stock based compensation plans which are described more fully in Note 8
to the Company's Financial Statements presented in the Annual Report on
Form 10-K for the year ended December 31, 2002. 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 income, as this amount
is insignificant. The following table illustrates the effect on net
income and net income 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:
-6-
Thirteen Weeks Ending
---------------------------
June 29, June 30,
2003 2002
------------ -----------
Net income, as reported: $ 1,016,000 $ 477,000
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (30,000) (19,000)
------------ -----------
Pro forma net income $ 986,000 $ 458,000
============ ===========
Basic net income per share:
As reported $ 0.17 $ 0.08
Pro forma $ 0.17 $ 0.08
Diluted net income per share:
As reported $ 0.17 $ 0.08
Pro forma $ 0.16 $ 0.08
Twenty-Six Weeks Ending
----------------------------
June 29, June 30,
2003 2002
------------ ------------
Net income, as reported: $ 1,521,000 $ 1,649,000
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (61,000) (38,000)
------------ ------------
Pro forma net income $ 1,460,000 $ 1,611,000
============ ============
Basic net income per share:
As reported $ 0.26 $ 0.28
Pro forma $ 0.25 $ 0.27
Diluted net income per share:
As reported $ 0.25 $ 0.28
Pro forma $ 0.24 $ 0.27
For purposes of SFAS 123, the weighted average fair value of the
options granted during 2003 and 2002 is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
June 29, June 30,
2003 2002
--------- --------
Expected life (years) 10.0 10.0
Risk-free interest rate 5.51% 5.00%
Dividend rate 0% 0%
Expected volatility 99.16% 111.42%
-7-
Net Income Per Share - Basic and diluted earnings per share are
computed by dividing the net income 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
thirteen and twenty-six weeks ending June 29, 2003 and June 30, 2002,
as detailed below:
Thirteen Weeks Twenty-six Weeks
Ended Ended
---------------------- ----------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
---------- ---------- --------- ----------
Weighted average common
shares outstanding - basic 5,894,667 5,875,077 5,887,009 5,874,149
Dilutive effect of stock options 235,399 152,007 232,436 115,525
---------- ---------- --------- ----------
Weighted average common
shares outstanding - diluted 6,130,066 6,027,084 6,119,445 5,989,674
========== ========== ========== ==========
All options that would have an anti-dilutive effect on net income
per share if exercised were excluded from the computation of diluted
net income per share. Anti-dilutive options for the thirteen week
periods ended June 29, 2003 and June 30, 2002 were 31,393. Anti-
dilutive options for the twenty-six weeks ended June 29, 2003 and June
30, 2002 were 31,393 and 80,952, respectively.
2. Inventories - Net - Inventories consist of the following:
June 29, 2003 December 31, 2002
------------- -----------------
Purchased parts and
Subassemblies $ 11,326,000 $ 8,578,000
Work-in-process 2,622,000 2,949,000
------------ ------------
Total $ 13,948,000 $ 11,527,000
============ ============
Inventories include a reserve for slow-moving and obsolete items of
$1,246,000 and $1,971,000 at June 29, 2003 and December 31, 2002,
respectively.
3. Income Taxes - The Company recognized tax expense at the estimated
effective statutory rate for the thirteen and twenty-six week period
ended June 29, 2003. However, the Company does not have a tax payment
liability due to the use of a portion of the net operating loss carry-
forward the Company has available to it. No income tax expense was
recorded for the thirteen and twenty-six weeks ended June 30, 2002
since the Company's income was offset by the utilization of its net
operating loss carryforward. A valuation allowance which had fully
reserved the deferred tax assets was reversed during the fourth quarter
of 2002.
4. Contingencies:
Litigation - As noted in the Company's Form 10K for the year ended
December 31, 2002, 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, results of operations, or cash flows.
-8-
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 any
potential 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 that may be 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 June 29,
2003, the Company believes that any additional costs evolving from
these negotiations would not be material to the consolidated financial
statements.
5. 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. 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 sales people 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 in the Company's Annual Report on
Form 10-K. The Company's determination of segment operating profit
(loss) does not reflect other income (expense) or income taxes.
Thirteen Weeks Ended June 29, 2003 and June 30, 2002
- ----------------------------------------------------
General
June 29, 2003 Military/Rugged Commercial Eliminations Corporate Consolidated
-------------------------------- --------------- ----------- ------------ ---------- ------------
Net sales from external customers $ 15,981,000 $ 1,809,000 $ 17,790,000
============ =========== ============
Segment operating income $ 1,388,000 $ 322,000 $ 1,710,000
============ =========== ============
Other income (expense) $ - $ - $ - $ (94,000) $ (94,000)
============ =========== =========== =========== ============
Income (loss) before income taxes $ 1,388,000 $ 322,000 $ - $ (94,000) $ 1,616,000
============ =========== =========== =========== ============
Identifiable assets $ 20,554,000 $ 6,054,000 $ 6,835,000 $ 33,443,000
============ =========== =========== ============
Capital expenditures $ 82,000 $ 9,000 $ 91,000
============ =========== ============
Depreciation and amortization $ 207,000 $ 12,000 $ 219,000
============ =========== ============
General
June 30, 2002 Military/Rugged Commercial Eliminations Corporate Consolidated
-------------------------------- --------------- ----------- ------------ ---------- ------------
Net sales from external customers $ 8,104,000 $ 2,949,000 $ 11,053,000
============ =========== ============
Segment operating income $ (1,041,000) $ 1,657,000 $ 616,000
============ =========== ============
Other income (expense) $ - $ - $ - $ (139,000) $ (139,000)
============ =========== ============ =========== ============
Income (loss) before income taxes $ (1,041,000) $ 1,657,000 $ - $ (139,000) $ 477,000
============ =========== ============ =========== ============
Identifiable assets $ 18,139,000 $ 8,183,000 $4,976,000 $ 31,298,000
============ =========== =========== ============
Capital expenditures $ 477,000 $ 169,000 $ 646,000
============ =========== ============
Depreciation and amortization $ 226,000 $ 10,000 $ 236,000
============ =========== ============
-9-
Twenty-Six Weeks Ended June 29, 2003 and June 30, 2002
- ------------------------------------------------------
General
June 29, 2003 Military/Rugged Commercial Eliminations Corporate Consolidated
-------------------------------- --------------- ----------- ------------ ---------- ------------
Net sales from external customers $ 29,886,000 $ 3,715,000 $ - $ 33,601,000
============ =========== ============ ============
Segment operating income $ 1,919,000 $ 712,000 $ - $ 2,631,000
============ =========== ============ ============
Other income (expense) $ - $ - $ - $ (210,000) $ (210,000)
============ =========== ============ ========== ============
Income (loss) before income taxes $ 1,919,000 $ 712,000 $ - $ (210,000) $ 2,421,000
============ =========== ============ ========== ============
Identifiable assets $ 20,554,000 $ 6,054,000 $ - $6,835,000 $ 33,443,000
============ =========== ============ ========== ============
Capital expenditures $ 282,000 $ 37,000 $ - $ 319,000
============ =========== ============ ============
Depreciation and amortization $ 421,000 $ 24,000 $ - $ 445,000
============ =========== ============ ============
General
June 30, 2002 Military/Rugged Commercial Eliminations Corporate Consolidated
-------------------------------- --------------- ----------- ------------ ---------- ------------
Net sales from external customers $ 14,192,000 $ 6,215,000 $ - $ 20,407,000
============ =========== ============ ============
Segment operating income (loss) $ (370,000) $ 2,262,000 $ - $ 1,892,000
============ =========== ============ ============
Other income (expense) $ - $ - $ - $ (243,000) $ (243,000)
============ =========== ============ ========== ============
Income (loss) before income taxes $ (370,000) $ 2,262,000 $ - $ (243,000) $ 1,649,000
============ =========== ============ ========== ============
Identifiable assets $ 18,139,000 $ 8,183,000 $ - $4,976,000 $ 31,298,000
============ =========== ============ ========== ============
Capital expenditures $ 591,000 $ 236,000 $ - $ 827,000
============ =========== ============ ============
Depreciation and amortization $ 445,000 $ 14,000 $ - $ 459,000
============ =========== ============ ============
General
December 31, 2002 Military/Rugged Commercial Eliminations Corporate Consolidated
-------------------------------- --------------- ----------- ------------ ---------- ------------
Identifiable assets $ 20,240,000 $ 4,824,000 $ - $8,339,000 $ 33,403,000
-10-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- -----------------------------------------------------------------------
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
- -----------------------------------------------------------------------
The matters and statements made in this Quarterly Report on Form
10-Q 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 Quarterly Report on Form 10-Q, 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 actions of competitors, termination
convenience of the United States government, customer funding
variations in connection with multi-year contracts of contracts at
the 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.
GENERAL
- -------
The following discussion and analysis presents certain factors
affecting the Company's results of operations for the thirteen and
twenty-six weeks ended June 29, 2003, as compared to the thirteen and
twenty-six weeks ended June 30, 2002.
-11-
RESULTS OF OPERATIONS
- ---------------------
Thirteen weeks ended June 29, 2003 compared to thirteen weeks ended
June 30, 2002
- -----------------------------------------------------------------------
Net sales for the thirteen weeks ended June 29, 2003 (second
quarter of 2003) were $17,790,000 compared to net sales for the
thirteen weeks ended June 30, 2002 (second quarter of 2002) of
$11,053,000. Military sales increased in the second quarter of 2003 to
$15,981,000 as compared to $8,104,000 in the second quarter of 2002.
Commercial sales decreased in the second quarter of 2003 to $1,809,000
from $2,949,000 in the second quarter of 2002. The 97.2% increase in
military sales year to year was primarily the result of $13,280,000 in
revenue attributable to the full ramped up production level of the TSC-
750 under the Maintenance Support Device ("MSD") Indefinite Delivery
Indefinite Quantity ("IDIQ") contract partially offset by the loss of
$5,969,000 in revenue attributable to the SPORT program, a five-year
hand-held computer contract completed in June 2002. The Company also
benefited from increased sales of tactical computers for the SMART T
program with Raytheon and the CONFIRE program with both Honeywell
Corporation and the U.S. Army's Picatinny Arsenal. Both of these
programs utilize computers that were originally designed by one of the
Company's subsidiaries but have been subsequently redesigned by Miltope
Corporation to conform to the environmental requirements of the
respective programs. These sales accounted for $1,471,000 in the
second quarter of 2003 as compared to $1,255,000 for the same period in
2002. The 38.7% decrease in commercial sales was directly attributable
to decreased orders from the commercial airline industry primarily
caused by the continued uncertainty plaguing that industry segment.
The gross margin percentage for the second quarter of 2003 was
22.3% compared to 19.4% for the same period in 2002. This increase is
largely due to increased efficiencies at the higher MSD production
levels.
Selling, general and administrative expenses for the second
quarter of 2003 increased 69.1% from the second quarter of 2002, to
$2,138,000. These expenses as a percent of sales were 12.0% in the
second quarter of 2003 compared to 11.4% for the similar period in
2002. The increase as a percent of sales is primarily attributable to
increased legal expenses related to the litigation described in Note 4
to the condensed consolidated financial statements. These associative
legal expenses were in the amount of $745,000 in the second quarter of
2003 as compared to $207,000 in the second quarter of 2002.
Company funded engineering, research and development expenses for
the second quarter of 2003 decreased to $120,000 from $266,000 in the
second quarter of 2002. These expenses as a percent of sales were 0.7%
in the second quarter of 2003 and 2.4% in 2002. The decrease is
primarily attributable to an increase in customer funded development
projects which utilized engineering resources that would have been used
on Company funded development projects. Most of the customer funded
development projects continue to generate revenue and therefore all
costs associated with these revenues are included in the Cost of Sales
line. Income or loss from these customer funded development programs
is included in the gross margin for each period.
Interest expense was $95,000 in the second quarter of 2003
compared to $145,000 for the similar period in 2002. This decrease is
a result of a decreased level of debt due to lower working capital
requirements in the first quarter of 2003 offset partially by a higher
variable cost of debt under the terms of the Company's new credit
agreement entered into in January 2003.
The Company had virtually no interest income in the second quarter
of 2003 compared to $6,000 for the similar period in 2002, as a result
of the terms of the new credit agreement.
The Company recognized tax expense at the estimated effective
statutory rate for the thirteen week period ended June 29, 2003.
However, the Company does not have a tax payment liability due to the
use of a portion of the net operating loss carry-forward the Company
has available to it. No income tax expense was recorded for the
thirteen weeks ended June 30, 2002 since the Company's income was
offset by the utilization of its net operating loss carryforward. A
valuation allowance which had fully reserved the deferred tax assets
was reversed during the fourth quarter of 2002.
-12-
The consolidated net income for the second quarter of 2003 was
$1,016,000 compared to net income of $477,000 in the second quarter of
2002. The basic net income per share was $0.17 for the second quarter
of 2003 based on the weighted average of 5,894,667 shares outstanding.
The diluted net income per share was $0.17 based on a diluted weighted
average of 6,130,066 shares outstanding. The basic and diluted net
income per share was $0.08 for the similar period in 2002 based on a
weighted average of 5,875,077 shares of the Company's common stock
outstanding.
Twenty-six weeks ended June 29, 2003 compared to twenty-six weeks ended
June 30, 2002
- -----------------------------------------------------------------------
Net sales for the twenty-six weeks ended June 29, 2003 were
$33,601,000 compared to net sales for the twenty-six weeks ended June
30, 2002 of $20,407,000. Military sales increased in the first half of
2003 to $29,886,000 as compared to $14,192,000 in the first half of
2002. Commercial sales decreased in the first half of 2003 to
$3,715,000 from $6,215,000 in the first half of 2002. The 110.6%
increase in military sales year to year was primarily the result of
$22,851,000 in revenue attributable to the full ramped up production
level of the TSC-750 under the MSD IDIQ contract partially offset by
the loss of $10,836,000 in revenue attributable to the SPORT program, a
five-year hand-held computer contract completed in June 2002. The
Company also benefited from increased sales of tactical computers for
the SMART T program with Raytheon and the CONFIRE program with both
Honeywell Corporation and the U.S Army's Picatinny Arsenal. Both of
these programs utilize computers that were originally designed by one
of the Company's subsidiaries but have been subsequently redesigned by
Miltope Corporation to conform to the environmental requirements of the
respective programs. These sales accounted for $4,138,000 for the
twenty-six week period ended June 29, 2003 as compared to $1,731,000
for the twenty-six week period ended June 30, 2002. The 40.2% decrease
in commercial sales is directly attributable to decreased orders from
the commercial airline industry primarily caused by the current
uncertainty plaguing that industry segment.
The gross margin percentage for the first half of 2003 was 21.1%
compared to 24.1% for the same period in 2002. This decrease is
largely due to a shift in product mix from the higher margin revenue
generated by the commercial airborne products to the lower margin
revenue generated by the MSD contract products.
Selling, general and administrative expenses for the first half of
2003 increased 73.2% from the first half of 2002, to $4,243,000. These
expenses as a percent of sales were 12.6% in the first half of 2003
compared to 12.0% for the similar period in 2002. The increase as a
percent of sales is primarily attributable to increased legal expenses
related to the litigation described in Note 4 to the condensed
consolidated financial statements. These associative legal expenses
were in the amount of $1,362,000 for the twenty-six week period ended
June 29, 2003 as compared to $329,000 for the twenty-six week period
ended June 30, 2002.
Company funded engineering, research and development expenses for
the first half of 2003 decreased to $228,000 from $579,000 in the first
half of 2002. These expenses as a percent of sales were 0.7% in the
first half of 2003 and 2.8% in 2002. The decrease is primarily
attributable to an increase in customer funded development projects
which utilized engineering resources that would have been used on
Company funded development projects. Most of the customer funded
development projects continue to generate revenue and therefore all
costs associated with these revenues are included in the Cost of Sales
line. Income or loss from these customer funded development programs is
included in the gross margin for each period.
Interest expense was $211,000 in the first half of 2003 compared
to $259,000 for the similar period in 2002. This decrease is a result
of a decreased level of debt due to lower working capital requirements
in the first quarter of 2003 offset partially by a higher variable cost
of debt under the terms of the Company's new credit agreement entered
into in January 2003.
The Company had virtually no interest income in the first half of
2003 compared to $16,000 for the similar period in 2002, as a result of
the terms of the new credit agreement.
-13-
The Company recognized tax expense at the estimated effective
statutory rate for the thirteen week period ended June 29, 2003.
However, the Company does not have a tax payment liability due to the
use of a portion of the net operating loss carry-forward the Company
has available to it. No income tax expense was recorded for the twenty-
six weeks ended June 30, 2002 since the Company's income was offset by
the utilization of its net operating loss carryforward. A valuation
allowance which had fully reserved the deferred tax assets was reversed
during the fourth quarter of 2002.
The consolidated net income for the first half of 2003 was
$1,521,000 compared to net income of $1,649,000 in the first half of
2002. The basic net income per share was $0.26 for the first half of
2003 based on the weighted average of 5,887,009 shares outstanding.
The diluted net income per share was $0.25 based on a diluted weighted
average of 6,119,445 shares outstanding. The basic and diluted net
income per share was $0.28 for the similar period in 2002 based on a
weighted average of 5,874,149 shares of the Company's common stock
outstanding.
-14-
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital was $9,968,000 at June 29, 2003 compared to
$10,172,000 at December 31, 2002. Accounts receivable decreased
$756,000 as a result of higher levels of military sales in December
than June. Inventory levels increased $2,421,000 compared to December
31, 2002 balances as the Company prepared for increased production
demands in the 3rd and 4th quarter of 2003. Accounts payable increased
$1,832,000 reflecting an increase in inventory purchases at the end of
the 2nd quarter. Current maturities of long-term debt decreased
$405,000 reflecting the amortization of the remaining $1 million due to
the former lender.
Capital expenditures totaled $319,000 for the first six months of
2003 compared to $827,000 in the first six months of 2002. The
decrease in 2003 from 2002 is due to the capitalization of tooling and
test equipment in 2002 in relation to the start up of the MSD contract.
The Company expects capital expenditures for the full year 2003 to be
approximately $450,000. Depreciation and amortization expense for the
first six months of 2003 totaled $445,000 compared to $459,000 for the
first six months of 2002. Depreciation and amortization expense for
the remainder of 2003 is expected to be approximately $431,000.
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 former primary
lender. The Company entered into an agreement with its former primary
lender to amortize the remaining $1,000,000 balance of the existing
line of credit over the next twelve months. 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.
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-Q. We have identified certain
critical accounting policies that are described below.
-15-
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
appropriate loss provisions related thereto. On an on-going basis the
Company evaluates its estimates of loss provisions by using various
7reports 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.
In 2002, the Company eliminated the valuation allowance against its
deferred tax assets.
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. The financial statements
referred to above reflect all adjustments required by Statement 144 as
of December 31, 2002.
Item 3. 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 revolving credit 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. A 10% increase in interest rates (from 4.8% to
5.3%) would affect the Company's variable debt obligations and could
potentially reduce future net earnings by a maximum of approximately
$33,000 per year.
-16-
Item 4. Controls and Procedures
- --------------------------------
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
As of the end of the period covered by this report on Form 10-Q,
the Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the Chief
Executive Officer, Mr. Thomas R. Dickinson, and the Chief Financial
Officer, Mr. Tom B. Dake, of the effectiveness of the Company's
disclosure controls and procedures as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e). Based upon that evaluation, Mr. Dickinson and Mr.
Dake have conluded that the Company's disclosure controls and
procedures are functioning effectively to provide reasonable assurance
that information the Company is required to disclose in the reports it
files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules
and forms of the Securities and Exchange Commission. These disclosure
controls and procedures include, without limitation, controls and
procedures designed to provide reasonable assurance that information
the Company is required to disclose in such reports is accumulated and
communicated to Company management, including the chief executive
officer and the chief financial officer, as appropriate to allow timely
decisions regarding required disclosure.
Change in Internal Controls
- ---------------------------
There have been no significant changes in the Company's internal
controls over financial reporting or in other factors that have
materially affected or is reasonable likely to materially affect
internal controls since the date of Mr. Dickinson's and Mr. Dake's most
recent reviews of the Company's internal control systems. The design
of any system of internal controls and procedures is based upon certain
assumptions about the likelihood of future events. There can be no
assurance that any design will succeed in achieving its stated goal
under all potential future conditions, regardless of how remote.
-17-
PART II - OTHER INFORMATION
- ---------------------------
Item 1 - Legal Proceedings
As noted in the Company's Form 10K for the year ending December
31, 2002, 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.
The Company, from time to time, is a party to pending or threatened
legal proceedings and arbitrations. Based upon information presently
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.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
--------
31.1 Certification of Chief Executive Officer,
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
99.1 Certification of Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification of Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
------------------
None
-18-
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MILTOPE GROUP INC.
By: /s/ Tom B. Dake
-----------------------------------
Tom B. Dake,
Vice President Finance and Chief
Financial Officer
(Principal Accounting Officer)
Dated: August 13, 2003
-19-