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FORM 10-K
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, 1998 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.)
500 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
---- ----
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. [ ]
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 $2,823,382 as of February 19,
1999.
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: 5,871,523 as of February 19, 1999.
Documents Incorporated by Reference:
The definitive Proxy Statement for the Annual Meeting of Stockholders
to be held June 10, 1999, 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.
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"), 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 which, 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,
Innova International Corporation, a Delaware corporation ("IIC"),
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. IIC provides, through its operating subsidiaries,
integrated network products and services. IIC is a subsidiary of Great
Universal Incorporated, a Delaware corporation which is engaged in
integrated network services, teleservices and television and media.
Miltope is engaged in the design, development, manufacture and
testing of computers and computer peripheral equipment for military,
rugged and other specialized applications requiring reliable operations
in severe land, sea and airborne environments for both military and
commercial customers. Miltope's product lines include a broad range of
computer printers, disk memory products, transportable microcomputers
and electronically erasable programmable read only memory ("EEPROM")
together with subsystems incorporating these products. Miltope also
delivers components for cabin management and in flight entertainment
systems, public access Internet terminals, and a complete line of
rugged SUN and Hewlett-Packard RISC workstations and related
peripherals.
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 which was used in part in the
acquisition of such facility.
On January 1, 1996, the Company consolidated the operations of
MBP and Miltope Corporation. The Company's two industry segments are
maintained through product line accountability.
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, and the manufacture and distribution of commercial products
conducted by the "Commercial" segment (formerly MBP). 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
- -----------------------
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 computer printers, disk memory products, hand held and
transportable microcomputers, and EEPROM solid state memories, together
with subsystems incorporating these products. In 1988, the Company
introduced a complete line of rugged Hewlett Packard Company computers
and related peripherals. The equipment is being used for the United
States Army's Tactical Command and Control System/Common Hardware
Software Program ("ATCCS/CHS") under a contract awarded to the Company
in August 1988, as well as to other customers for related applications.
During 1995, the Company introduced a new family of rugged
computer products consisting of hand held Intel based computers and
portable SUN and Hewlett-Packard RISC workstations and related
peripherals. These new products are reconfigurable and scaleable for
specific applications and employ commercial "off the shelf" technology.
The hand held Intel based computers are being used for the United
States Army's Soldiers' Portable On-system Repair Tools ("SPORT") under
a contract awarded to the Company in June 1996, as well as by other
customers for related applications. The portable SUN and Hewlett-
Packard RISC workstations comprise the Transportable RISC Computer
("TRC") 2000 product line and are being used for a variety of military
and commercial applications.
Substantially all of the military/rugged segment sales consist of
militarized and rugged products. "Militarized" equipment is designed
and built, with respect to each component and the whole, to conform to
stringent United States Department of Defense ("DOD") specifications
developed for severe land, sea and airborne operating environments.
These specifications define equipment operating parameters including
atmosphere, temperature and humidity conditions, permitted levels of
shock and vibration, susceptibility to electro-magnetic interference
("EMI"), EMI emission levels, and detection and hardening for nuclear
survivability. "Rugged" equipment is designed and manufactured to less
demanding specifications and may include commercially available devices
which are suitably modified for these applications.
Production of equipment conforming to these DOD specifications has
required the development over the years by the Company of proprietary
electronic and electro-mechanical designs and engineering techniques
and specialized manufacturing and testing methods. By these means, the
Company has developed a broad range of proprietary components which
meet these specifications and are otherwise unavailable in the
commercial market. To support its engineering, manufacturing and
testing activities, the Company has extensive manufacturing equipment,
clean rooms and reliability and environmental testing facilities as
well as a multi-function computer aided design ("CAD") system and an
EMI test lab.
Military/rugged products are sold for use in a broad range of
military programs for the United States Air Force, Army, Navy and
Marine Corps, for NATO, for the Australian, British, Canadian, French,
German, Israeli, Italian, Spanish and Norwegian armed forces and for
the armed forces of other 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 Amtech Corporation, Bath Iron
Works, Boeing Aerospace, EDS, Raytheon E-Systems Inc., Northrop Grumman
Corporation, GTE Corp., Government Technology Services, Inc. (GTSI),
General Dynamics, Hughes Defense Communications, Lockheed Martin,
ManTech Test Systems, Inc., Marconi Radar Control Systems Limited,
McDonnell Douglas Corp., Motorola Inc., Loral Federal Systems, Teledyne
Controls, CAE Inc., and ITT Defense Systems.
Miltope believes that it has captured a major portion of the
market for militarized printers and disk memory products. In addition,
Miltope is recognized as a leading supplier of rugged computers and
related equipment. A key element of Miltope's strategy has been to
develop and deliver a broad range of high reliability peripheral
components and systems on a cost effective and timely basis. The
breadth of Miltope's product offerings enables system integrators to
avoid the risks normally encountered when procuring peripherals from
multiple suppliers and to achieve significant price advantages.
Miltope's ability to meet the diverse requirements of its customers has
resulted in substantial recurring business. Also, as defense budgets
have been reduced, an emphasis on commercially adaptable electronics
and the requirement for smaller, less expensive and more portable
systems has occurred. Miltope believes its new product family of
rugged, reconfigurable portable and handheld computing devices will
serve this growing market niche well as evidenced by the DOD's award to
Miltope of the SPORT Program in June 1996 and the award of the TETS
(Third Echelon Test Set) program in October 1997.
Miltope has been performing under a nine year DOD contract which
ran until August 1998 in connection with the ATCCS/CHS Program. The
purpose of the ATCCS/CHS Program is to integrate most of the aspects of
land combat through the common automation of mission command and
control areas. As of February 19, 1999, Miltope has been issued
cumulative firm orders valued at approximately $290,000,000 since the
inception of this contract. In addition, the Company has received
orders for ATCCS/CHS equipment for other defense contractors and
foreign governments.
In June 1996, Miltope was awarded a five year DOD contract for
Soldiers' Portable On-system Repair Tools (SPORT). SPORT will enhance
the U.S. Army's capability to diagnose and repair weapon systems and
electronically display technical manuals. Production deliveries under
this contract began in September, 1997. The contract has an estimated
value of approximately $81,000,000 over a five year period. There can be
no assurances this estimate of purchase requirements will be achieved. As
of February 19, 1999, Miltope has been issued firm orders valued at
approximately $23,000,000 under this contract. In addition, the
Company has received orders for SPORT equipment for other defense
contractors.
In July 1997, Miltope was awarded additional orders of
approximately $3,300,000 from the U.S. Navy for the manufacture and
delivery of SuperBobcat computers. These computers are rugged,
powerful workstations designed and used to support naval aircraft in
gathering signal intelligence for threat identification. As of
February 19, 1999, Miltope has received firm orders of approximately
$7,900,000 from this customer since the inception of the program in
June of 1996.
In October 1997, the Company was selected to supply its Prowler
computer to fulfill a contract awarded by ManTech Test Systems, Inc.
The Prowler is a rugged, portable, Intel based computer developed and
manufactured by Miltope. The unit will serve as the instrument
controller for the U.S. Marines' Third Echelon Test Set ("TETS")
program. TETS will provide the Marines with a portable test capability
to screen, test and diagnose electronic and electromechanical equipment
in the field. The estimated contract value is $9,500,000 over a five
year period. There can be no assurances this estimate of purchase
requirements will be achieved. As of February 19, 1999, Miltope has received
firm orders of approximately $1,000,000 since 1997.
In November 1998, the Company was selected to deliver its TIC-2000
computer and other peripherals to the Electronic Systems Center at
Hanscom Air Force Base. The TIC-2000 is a newly developed rugged,
portable Intel based workstation which will be integrated into the
United States Air Force's Military Satellite Communication. The
estimated value of the contract is $2,000,000 over a two year period.
There can be no assurances this estimate of purchase requirements will be
achieved. As of February 19, 1999, Miltope has received firm orders of
approximately $1,400,000.
In November 1998, the Company was selected by Phoenix Group Inc.
to manufacture the Condor APPLIQUE' rugged computer for TRW. This
computer will be used in the United States Army's Force XXI Battle
Command, Brigade and Below Program. This program will be the principal
digital command and control system for the Army at the brigade level
and below and will provide enhanced situational awareness across the
battle space. The estimated value of the contract is $2,800,000 over a
two year period. There can be no assurances this estimate of purchase
requirements will be achieved. As of February 19, 1999, Miltope has
received firm orders of approximately $2,800,000.
Commercial - General
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The commercial segment develops, manufactures and markets
commercial products primarily for transportation, telecommunications
and in-field maintenance markets. Its products are airborne printers,
airline ticket and boarding pass printers, rugged public access
Internet terminals, mass storage devices, and derivatives of rugged
hand held Intel based computers and portable RISC workstations
originally developed for military applications. This segment's
business represented approximately 45% of the Company's 1998 revenues,
approximately 48% of the Company's 1997 revenues and approximately 33%
of the Company's 1996 revenues.
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
1998, customers for the airborne printer line of products included
Boeing, B/E Aerospace, Continental Airlines, Delta Airlines, KLM,
Matsushita Avionics Systems, Teledyne Controls, SAAB, American
Airlines, Itochu Embraer, United Airlines, EL AL and AMR Eagle, Inc..
Miltope has received firm orders during 1998 of approximately
$8,300,000 for airborne printer products.
During 1997, Miltope received firm orders from an affiliate, 3C
Communications International, S.A., a Luxembourg based
telecommunications company, amounting to approximately $8,100,000, for
the manufacture and delivery of rugged Internet terminals for
commercial use in Europe. These terminals are designated for
installation in hotels, transportation centers, restaurants, etc. to
provide Internet access for the traveling public. As of February 19,
1999, Miltope has received cumulative firm orders of approximately
$11,800,000 from this customer since July 1996.
In December 1996, Miltope was awarded a contract for the
manufacture of rugged hard drives for use in Sony Trans Com Inc.'s
Audio Video on Demand In-Flight Entertainment System ("P@ssport TM")
to be sold to airline customers around the world. The estimated
contract value is $10,200,000 over a five year period. The 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. As of February 19, 1999,
Miltope has received firm orders of approximately $200,000 from this
customer for this product.
In October 1997, Miltope was awarded an additional contract from
Sony Trans Com, Inc., for an estimated value of $6,000,000 over a five
year period to develop and manufacture computer units for the P@VEST
Family of Programmable In Flight Entertainment Systems. The Miltope
developed computer unit will provide an interactive capability to Sony
Trans Com, Inc.'s in-flight audio/video, passenger entertainment and
information systems. The 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. As of February 19, 1999, Miltope has received firm orders of
approximately $200,000 from this customer for this product.
In December 1997, Miltope entered into a strategic agreement with
Honeywell, Inc. Business and Commuter Aviation Systems, to provide
Maintenance Access Terminals ("MAT") for use in business jets and
commuter aircraft around the world as an option on Honeywell's
integrated avionics systems. As of February 19, 1999, Miltope has
received firm orders of approximately $1,500,000 for this product from
this customer.
Sales and Significant Customers
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Sales in 1998 attributable to the military industry segment were
approximately as follows: 74% from large DOD programs (each accounting
for 5% or more of annual sales), 6% from smaller programs and sales of
standard items in Miltope's catalogue, 9% from sales to foreign
governments and defense contractors and 11% 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 1998, sales to the DOD accounted for 50% of net sales of the
Company. No other customer accounted for more than 10% of net sales.
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 1998 attributable to the commercial industry segment
amounted to approximately 45% of the Company's total net sales.
During 1997 and 1998, the Company recorded sales of $10,640,000
and $261,000, respectively, to 3C Communications International, S.A.,
an entity affiliated through certain common ownership.
Government Contracts
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Miltope'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. Miltope'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, 1998 was $21,991,000, a 54% increase from the $14,302,000
backlog at December 31, 1997.
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 will be recognized as
revenue by December 31, 1999. The Company also believes that a
substantial part of new delivery orders and contract fundings received
in 1999 will be recognized as revenue in the same year due to shorter
lead times.
Backlog for the commercial industry segment was approximately
31% of the total backlog at December 31, 1998 and approximately 28% of
the total backlog at December 1997.
Backlog does not include unfunded portions of multi-year
contracts. Unfunded portions of multi-year contracts totaled
$86,995,000 and $100,000,000 at December 31, 1998 and 1997,
respectively.
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.
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
which 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 militarization
and ruggedization. Management believes approximately 3% to 5% of net
sales for engineering, research and development expenditures should
adequately support the Company's business.
Engineering, research and development expenditures in 1996, 1997
and 1998 were approximately $1,600,000, $1,700,000 and $1,900,000,
respectively.
Miltope'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. Miltope's funded research efforts for its commercial
segment include projects to enhance its airline in-flight cabin
management and entertainment products, airborne printers, mass storage
devices and public access Internet terminals for commercial markets.
Employees
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At December 31, 1998, the Company employed 185 full-time
personnel. 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 $4,532,000, $1,111,000 and $221,000 in 1996,
1997 and 1998, respectively. The Company recorded foreign sales in its
commercial industry segment of approximately $1,350,000, $11,657,000
and $847,000 in 1996, 1997 and 1998, 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
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Neither of the Company's two industry segments is subject to
seasonal business fluctuations.
ITEM 2. PROPERTIES
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The Company owns a 90,000 square foot building located on 25 acres
in Hope Hull (Montgomery), Alabama.
In addition, the Company owns a 60,000 square foot assembly and
test facility in Troy, Alabama and a 25,000 square foot clean room,
assembly and test facility in Springfield, Vermont.
The Company leases a 9,175 square foot facility in Boulder,
Colorado.
The Company also leases various sales offices in the United
States.
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
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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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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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.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
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Market Information
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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, 1997 have been:
Calendar Year 1997 High Low
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First Quarter $3-7/8 $2-3/4
Second Quarter 4 2-3/4
Third Quarter 4-3/4 3-1/8
Fourth Quarter 4-1/4 3
Calendar Year 1998
First Quarter $3-4/9 $3
Second Quarter 3-1/2 2-3/8
Third Quarter 2-5/8 1-1/3
Fourth Quarter 1-7/8 7/8
Holders of Common Stock
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As of February 19, 1999, there were approximately 1,379
shareholders of record and beneficial owners of the Company's Common
Stock.
Dividend Policy
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No dividends were paid in 1997 or 1998. 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.
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, 1998 which 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,
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1994 1995 1996 1997 1998
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Income Statement Data:
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Net sales $ 75,569 $ 65,708 $ 45,513 $ 40,372 $ 26,444
Gross profit 5,680 13,372 11,077 9,803 4,921
Income (loss) before income taxes (18,885) (984) 1,770 1,211 (4,297)
Net income (loss) (15,460) (984) 2,170 3,271 (3,021)
Basic and diluted net income
(loss) per share (2.65) (.17) .37 .56 (.51)
Cash dividends per share - - - - -
Weighted average shares
outstanding 5,834 5,853 5,867 5,870 5,872
Balance Sheet Data:
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Working capital $ 19,398 $ 18,896 $ 17,999 $ 19,652 $ 20,039
Total assets 53,162 41,440 36,332 38,449 38,938
Long-term debt 17,551 16,953 11,340 11,251 15,035
Stockholders' equity 17,230 15,913 17,858 21,140 18,119
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Business Environment
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The following discussion includes certain forward looking
statements which are affected by important factors including, but not
limited to, actions of competitors, termination of contracts at the
convenience of the United States government, customer funding variations
in connection with multi-year contracts and follow-on options that could
cause actual results to differ materially from forward looking statements.
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 entire segment has been impacted in recent years by reduced
government spending and defense appropriations. The militarized
product area has been especially subject to defense budget cuts. The
military continues to reduce funding for the development and limited
production quantities of highly customized systems and products. 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. Even in the rugged product area, however, defense cuts have
taken a toll. Competition in this area has become more keen in recent
years, as many government contractors pursue fewer military programs.
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,
airline ticket and boarding pass printers, rugged public access Internet
terminals, mass storage devices, and derivatives of rugged hand held Intel
based computers and portable RISC workstations originally developed for
military applications. Sales in the commercial segment decreased by 39%
in 1998 primarily due to decreased sales of rugged public access Internet
terminals.
Results of Operations
- ---------------------
The Company reported a net loss of approximately $3,000,000 in 1998
compared to net income of approximately $3,300,000 in 1997 and approximately
$2,200,000 in 1996. The basic and diluted net loss per share was $.51 in
1998 compared to basic and diluted net income per share of $.56 in 1997 and
$.37 in 1996.
Sales for 1998 totaled approximately $26,400,000, a decrease of
approximately $14,000,000, or 34.7%, from 1997. This change was attributable
to a reduction in military sales of approximately $6,200,000 and a decrease
in commercial sales of approximately $7,700,000. Sales in 1997 totaled
approximately $40,400,000, a decrease of approximately $5,100,000, or 11.3%
from 1996. This change was attributable to a reduction in military sales of
approximately $9,700,000 partially offset by an increase in commercial sales
of approximately $4,600,000.
Gross profit, as a percent of sales, was 18.6% in 1998, 24.3% in 1997
and 24.3% in 1996. The decrease in 1998 from 1997 was primarily attributable
to lower sales volume and a less favorable product mix.
Selling, general and administrative expenses, as a percentage of sales,
was 24.7% in 1998, 15.2% in 1997 and 14.5% in 1996. The increase in 1998 as
a percentage of sales was attributable to lower sales volume and increased
expenses related to employee severance and restructure costs incurred as a
result of streamlining actions taken to improve the Company's long term
competitiveness. The increases in 1996 and 1997 were principally due to a
continued emphasis on increased marketing and business development efforts.
Engineering, research and development expenses, as a percentage of
sales, was 7.1% in 1998, 4.2% in 1997 and 3.6% in 1996. The increase in 1998
as a percent of sales was primarily attributable to lower sales volume,
increased expenses related to employee severance and restructure costs and
increased amounts of research and development for in-flight entertainment
and cabin workstation products. The increase in 1997 was attributable to an
increased amount of research and development related to new products.
Liquidity and Capital Resources
- -------------------------------
Working capital at December 31, 1998 totaled approximately $20,000,000,
an increase of approximately $400,000 from December 31, 1997. Accounts
receivable decreased approximately $3,200,000 as a result of decreased
sales. Inventories increased approximately $3,200,000 primarily as a
result of the SPORT contract and increases in airborne cabin management
systems inventory. Deferred income taxes increased approximately $500,000
as a result of the current year tax benefit accrual. Accounts payable
increased approximately $30,000 reflecting increased payment terms.
Accrued expenses decreased approximately $300,000 as a result of decreased
employee related accrued liabilities.
The Company entered into a revolving credit facility in July 1994
for an amount not to exceed $15,000,000 and is subject to extension for
additional one year periods. In September 1997, it was extended for an
additional one year period expiring May 31, 1999. The Company may
borrow against this credit facility based on eligible collateral. As of
December 31, 1998, the Company had approximately $850,000 of additional
borrowing capacity under this facility.
Cash provided by (used in) operating activities was approximately
$(3,600,000) in 1998, approximately $1,300,000 in 1997 and approximately
$5,400,000 in 1996. The decrease in cash used in operating activities in
1998 as compared to 1997 is primarily the result of the net loss and
increases in inventories and other assets and decreases in accounts
payable and accrued expenses partially offset by a decrease in accounts
receivable. The decrease in cash provided by operating activities in 1997
compared to 1996 is primarily the result of increases in inventories and
other assets and decreases in accounts payable and accrued expenses
partially offset by an increase in net income and a decrease in accounts
receivable. Other assets increased due to the reduction in the deferred
tax asset valuation allowance.
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 and the proceeds of the
offering of taxable revenue bonds (the "Bonds") by the Alabama State
Industrial Development Authority which was completed 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 which in turn is secured by a mortgage on the Montgomery and
Troy, Alabama facilities and a security interest in the equipment
located at such facilities.
The Company has net operating loss carryforwards for Federal
income tax purposes of approximately $5,900,000, $1,200,000 and
$2,600,000 which will expire in 2009, 2010 and 2018, respectively, if
not utilized. In prior years, the Company recorded a deferred tax
asset valuation allowance for net operating loss carryforwards of which
realization was uncertain. During 1996 and 1997, the Company reduced
the valuation allowance by $1,057,000 and $2,524,000, respectively.
The reductions in the valuation allowance were attributable to the
award of significant multi-year government and commercial contracts
during 1996 and 1997, and the result of improved cost controls. During
1998, the Company implemented additional cost improvements related to
its manufacturing processes. Based on these initiatives, the
significant increase in backlog over 1997 and the extended carryforward
period allowed under current tax law, management of the Company is of
the opinion that a valuation allowance is not needed as of December 31,
1998 and the net deferred tax assets as of each year end reflects the
net amount that is more likely than not to be realized. The valuation
allowance can be adjusted in future periods as the probability of
realization of the net deferred income tax asset changes.
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 existing
bank loan arrangements.
Effects of Inflation
- --------------------
Inflation has not had a significant impact on the Company's results
of operations.
Year 2000 Compliance
- --------------------
As has been widely publicized, many computer and digital storage
systems express dates using only the last two digits of the year and will
thus require remediation or replacement to accommodate the year 2000 and
beyond in order to avoid malfunction and resulting widespread business
disruption.
The Company has underway a Year 2000 project that identifies the
programs and infrastructure that could be affected by Year 2000 issues
and has implemented a plan to resolve those problems identified, on a
timely basis. The plan requires a considerable amount of internal
resources devoted by the Company to resolve the pertinent issues.
Additionally, the Company may have to recruit and retain external resources
to assist with the actual implementation, testing and monitoring of the plan.
As of December 31, 1998, the Company does not expect the ongoing resource
cost of the Year 2000 project to have a material adverse effect on the
Company's financial condition and results of operations for fiscal years
beginning after December 31, 1998. The Company currently estimates the total
cost of its Year 2000 project will not exceed $250,000 over the life of the
project. Costs associated with employees working on the Year 2000 project
will be expensed as incurred. Hardware and software purchases related to
this project will be capitalized where appropriate. The Company does not
anticipate additional significant costs as a result of the Year 2000 issue.
The Year 2000 project includes all management information systems
which support ongoing business functions, other systems with computer based
controls such as telecommunications, building environmental and security
management and all suppliers and customers with which the Company maintains
a material business relationship.
Management of the Company believes it has an effective program in
place that will resolve the Year 2000 issues affecting it and that this
program is progressing normally and will be completed on a timely basis.
Despite management's beliefs and the Company's progress made on the Year
2000 issues as of December 31, 1998, it is not possible to anticipate all
possible future outcomes, especially when third parties are involved. In
the event certain third parties are not able to resolve their own Year
2000 issues, there could be circumstances in which the Company would be
unable to receive customer orders, manufacture, test and ship products,
invoice customers or collect payments from those customers. As part of
its Year 2000 project, the Company will solicit written assurances from
its customers and suppliers that each will be prepared for the Year 2000
issue. The Company will perform periodic audits and tests of third party
systems throughout the life of the project for Year 2000 compliance.
However, there can be no certainty of total compliance from any or all of
the third parties the Company deals with on a daily basis.
The Company has not yet seen the need for any widespread contingency
plans to be developed for the Year 2000 issue, but this will be monitored
continuously as the Company gains more information about the compliance
programs of its suppliers and customers. Additionally, some risks of the
Year 2000 issues are beyond the control of the Company and its suppliers
and customers. The Company does not believe it can develop a contingency
plan that will totally shield the Company from an economic ripple effect
throughout the entire economy should others fail to resolve their own Year
2000 problems.
The costs of the Company's Year 2000 project and the timeliness of
the completion of the project are based on management's best estimates,
and reflect assumptions regarding the availability and cost of personnel
trained in this area, the compliance plans of third parties and other
uncertainties. However, due to the complexity and pervasiveness of the
Year 2000 issue and in particular the uncertainty of third party compliance
programs, there can be no assurances given that these estimates will be
achieved, and actual results could differ materially from those anticipated.
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 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 approximates 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 would
affect the Company's variable debt obligations and could potentially reduce
future earnings by a maximum of approximately $115,000.
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
any matter of accounting principles or practices or financial statement
disclosure.
PART III
--------
The information called for by Part III (Items 10, 11, 12 and 13)
of this Report is hereby incorporated by reference from the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A under
the Securities Exchange Act of 1934 in connection with the election of
directors at the 1999 Annual Meeting of Stockholders of the Company,
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, 1998.
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
Consolidated Balance Sheets as of December 31,
1997 and 1998 F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1996, 1997 and 1998 F-4
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1997 and 1998 F-6
Notes to Consolidated Financial Statements F-7
Independent Auditors' Consent F-20
2. All schedules are omitted because they are not applicable
or the required information is shown in the consolidated
financial statements or notes thereto.
3. Exhibits 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)].
3(c) Specimen share certificate for the Common Stock of
the Registrant [Incorporated by reference to Exhibit
4(b) to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 filed with the
Commission on January 8, 1985 (Registration No.
2-93134)].
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)].
Exhibit Page
Number Description of Exhibit Number
- ------- ---------------------- ------
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)].
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)].
Exhibit Page
Number Description of Exhibit Number
- ------- ---------------------- ------
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)].
10(g)(A) Real Estate Sales Contract, dated July 18, 1984,
between the City of Troy, Alabama and Miltope
Corporation [Incorporated by reference to Exhibit
10(o) to the Registrant's Registration Statement on
Form S-1 filed with the Commission on September 6,
1984 (Registration No. 2-93134)].
10(g)(B) Lease Agreement, dated November 1, 1985, between
the Industrial Development Board of the City of
Troy, Alabama and Miltope Corporation
[Incorporated by reference to Exhibit 10(s)(B) to the
Registrant's Form 10-K filed with the Commission
on March 31, 1986 (File No. 0-13433)].
10(h) Agreement of Sale, dated July 15, 1994, between
Miltope Corporation and Marc Beige, with respect
to the sale of 1770 Walt Whitman Road, Melville,
New York [Incorporated by reference to Exhibit 10(l)
to the Registrant's Form 10-K filed with the
Commission on March 31, 1995 (File No. 0-13433)].
10(i) Agreement of Lease, dated as of August 10, 1994,
between Melville Associates, L.P. and Miltope
Corporation [Incorporated by reference to Exhibit 10(m)
to the Registrant's Form 10-K filed with the
Commission on March 31, 1995 (File No. 0-13433)].
Exhibit Page
Number Description of Exhibit Number
- ------- ---------------------- ------
10(j) Purchase and Sale Agreement, dated April 19, 1994,
between Collier Management Group, Inc. and
Miltope Corporation, with respect to 500 Richardson
Road South, Hope Hull, Alabama [Incorporated by
reference to Exhibit 10(n) to the Registrant's Form 10-K
filed with the Commission on March 31, 1995
(File No. 0-13433)].
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)].
Exhibit Page
Number Description of Exhibit Number
- ------- ---------------------- ------
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)].
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)].
Exhibit Page
Number Description of Exhibit Number
- ------- ---------------------- ------
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)].
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(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)].
Exhibit Page
Number Description of Exhibit Number
- ------- ---------------------- ------
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)].
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. 0-13411)]
*10(q)(F) Stock Option Agreement, dated September 17, 1998,
between the Registrant and William L.Dickinson.
10(r)(A) Stock Option Agreement, dated as of September 7,
1988, between the Registrant and Alvin E. Nashman
[Incorporated by reference to Exhibit 10(t)(D) to the
Registrant's Form 10-K filed with the Commission
on March 31, 1989 (File No. 0-13433)].
10(r)(B) Stock Option Agreement, dated as of March 30,
1990, between the Registrant and Alvin E.
Nashman [Incorporated by reference to Exhibit
10(t)(B) to the Registrant's Form 10-K filed
with the Commission on March 27, 1991 (File No.
0-13433)].
- -----------------
* Filed herewith
Exhibit Page
Number Description of Exhibit Number
- ------- ---------------------- ------
10(r)(C) Stock Option Agreement, dated as of June 14, 1990,
between the Registrant and Alvin E. Nashman
[Incorporated by reference to Exhibit 10(t)(B) to the
Registrant's Form 10-K filed with the Commission
on March 27, 1991 (File No. 0-13433)].
10(r)(D) Stock Option Agreement, dated as of June 13, 1991,
between the Registrant and Alvin E. Nashman
[Incorporated by reference to Exhibit 10(r)(D) to the
Registrant's Form 10-K filed with the Commission
on March 27, 1992 (File No. 0-13433)].
10(r)(E) Stock Option Agreement, dated as of June 8, 1992,
between the Registrant and Alvin E. Nashman
[Incorporated by reference to Exhibit 10(r)(E) to the
Registrant's Form 10-K filed with the Commission
on March 25, 1993 (File No. 0-13433)].
10(r)(F) Stock Option Agreement, dated as of June 25, 1993,
between the Registrant and Alvin E. Nashman.
[Incorporated by reference to Exhibit 10(r)(F) to the
Registrant's Form 10-K filed with the Commission
on March 31, 1994 (File No. 0-13443)].
10(r)(G) Stock Option Agreement, dated as of June 3, 1994,
between the Registrant and Alvin E. Nashman
[Incorporated by reference to Exhibit 10(w)(G) to
the Registrant's Form 10-K filed with the Commission
on March 31, 1995 (File No. 0-13433)].
10(r)(H) Stock Option Agreement, dated as of June 5, 1995,
between the Registrant and Alvin E. Nashman.
[Incorporated by reference to Exhibit 10(s)(H) to the
Registrant's Form 10-K filed with the Commission
on March 29, 1996 (File No. 0-13433)].
10(r)(I) Stock Option Agreement, dated as of June 11, 1996,
between the Registrant and Alvin E. Nashman.
[Incorporated by reference to Exhibit 10(r)(I) to the
Registrant's Form 10-K filed with the Commission
on March 26, 1997 (File No. 0-13433)].
Exhibit Page
Number Description of Exhibit Number
- ------- ---------------------- ------
10(r)(J) Stock Option Agreement, dated as of September 11,
1997, between the Registrant and Alvin E. Nashman.
[Incorporated by reference to Exhibit 10(r)(J) to the
Registrant's Form 10-K filed with the Commission on
March 23, 1998 (File No. 0-13433)].
10(s) Stock Option Agreement, dated as of August 7, 1995,
between the Registrant and George K. Webster.
[Incorporated by reference to Exhibit 10(t) to the
Registrant's Form 10-K filed with the Commission
on March 29, 1996 (File No. 0-13433)].
10(t)(A) Stock Option Agreement, dated as of November 8, 1995,
between the Registrant and James E. Matthews.
[Incorporated by reference to Exhibit 10(u) to the
Registrant's Form 10-K filed with the Commission
on March 29, 1996 (File No. 0-13433)].
*10(t)(B) Stock Option Agreement, dated February 4, 1998,
between the Registrant and James E. Matthews.
*10(t)(C) Stock Option Agreement, dated August 19, 1998,
between the Registrant and James E. Matthews.
*10(u) Stock Option Agreement, dated September 17, 1998,
between the Registrant and Jerry Tuttle.
10(w)(A) Asset Purchase Agreement, dated as of December
23, 1992, between Miltope Business Products, Inc.
and Mag-Tek, Inc. [Incorporated by reference to
Exhibit 10(x)(A) to the Registrant's Form 10-K filed
with the Commission on March 25, 1993 (File No. 0-13433)].
10(w)(B) Guaranty of the Registrant, dated as of December 23,
1992, pursuant to Asset Purchase Agreement, dated
as of December 23, 1992, between Miltope Business
Products, Inc. and Mag-Tek, Inc. [Incorporated by
reference to Exhibit 10(x)(B) to the Registrant's
Form 10-K filed with the Commission on March 25,
1993 (File No. 0-13433)].
- ---------------
*Filed herewith
Exhibit Page
Number Description of Exhibit Number
- ------- ---------------------- ------
10(w)(C) Supply Agreement, dated as of January 5, 1993,
between Miltope Business Products, Inc. and
Mag-Tek, Inc. [Incorporated by reference to Exhibit
10(x)(C) to the Registrant's Form 10-K filed with the
Commission on March 25, 1993 (File No. 0-13433)].
10(w)(D) Escrow Agreement, dated as of January 5, 1993,
among Miltope Business Products, Inc., Mag-Tek,
Inc. and First Interstate Bank of California, as
Escrow Agent [Incorporated by reference to Exhibit
10(x)(D) to the Registrant's Form 10-K filed with the
Commission on March 25, 1993 (File No. 0-13433)].
10(w)(E) Marketing Agreement, dated as of January 5, 1993,
between Miltope Business Products, Inc. and
Mag-Tek, Inc. [Incorporated by reference to Exhibit
10(x)(E) to the Registrant's Form 10-K filed with the
Commission on March 25, 1993 (File No. 0-13433)].
10(w)(F) Noncompetition Agreement, dated as of January 5,
1993, between Miltope Business Products, Inc. and
Mag-Tek, Inc. [Incorporated by reference to Exhibit
10(x)(F) to the Registrant's Form 10-K filed with the
Commission on March 25, 1993 (File No. 0-13433)].
10(y) Renegotiation Agreement, dated August 23, 1996,
between the Registrant and Mag-Tek, Inc.
[Incorporated by reference to Exhibit 10(y) to the
Registrant's Form 10-K filed with the Commission
on March 26, 1997 (File No. 0-13433)].
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.
- ---------------
*Filed herewith
Exhibit Page
Number Description of Exhibit Number
- ------- ---------------------- ------
*23 Independent Auditors' Consent, dated March 30, 1999,
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 and
No. 33-33752 on Form S-3 of their report dated
February 19, 1999 (March 9, 1999 as to the waiver
letter described in Note 5) appearing in this Annual
Report on Form 10-K for the year ended
December 31, 1998.
*27 Financial Data Schedule
- ---------------
*Filed herewith
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, 1997
and 1998 F-3
Consolidated Statements of Operations for the
Years Ended December 31, 1996, 1997 and 1998 F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1997 and 1998 F-6
Notes to Consolidated Financial Statements F-7
All supplemental schedules are omitted because they are not applicable
or the required information is shown in the consolidated financial
statements or notes thereto.
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 its subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, such consolidated financial statements present fairly,
in all material respects, the financial position of Miltope Group Inc.
and subsidiaries at December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
- ------------------------------------
Birmingham, Alabama
February 19, 1999 (March 9, 1999 as
to the waiver letter described in
Note 5)
F-2
MILTOPE GROUP INC. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
- ---------------------------------------------------------------------------
ASSETS 1997 1998
- ------ ----------- -----------
CURRENT ASSETS:
Cash $ 443,000 $ 57,000
Accounts receivable 9,977,000 6,792,000
Inventories 14,703,000 17,867,000
Deferred income taxes 345,000 829,000
Other current assets 242,000 278,000
----------- -----------
Total current assets 25,710,000 25,823,000
PROPERTY AND EQUIPMENT - at cost: ----------- -----------
Machinery and equipment 7,177,000 7,689,000
Furniture and fixtures 1,561,000 1,594,000
Land, buildings and improvements 8,021,000 8,101,000
----------- -----------
Total property and equipment 16,759,000 17,384,000
Less accumulated depreciation 7,101,000 8,549,000
----------- -----------
Property and equipment - net 9,658,000 8,835,000
----------- -----------
DEFERRED INCOME TAXES 2,240,000 3,335,000
OTHER ASSETS 841,000 945,000
----------- -----------
TOTAL $38,449,000 $38,938,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,437,000 $ 4,462,000
Accrued expenses 1,351,000 1,012,000
Current maturities of long-term debt 270,000 310,000
----------- -----------
Total current liabilities 6,058,000 5,784,000
LONG-TERM DEBT 11,251,000 15,035,000
----------- -----------
Total liabilities 17,309,000 20,819,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value; 20,000,000 shares
authorized; 6,811,112 shares outstanding
at December 31, 1997 and 1998 68,000 68,000
Capital-in-excess of par value 20,264,000 20,264,000
Retained earnings 15,054,000 12,033,000
----------- -----------
35,386,000 32,365,000
Less treasury stock 14,246,000 14,246,000
----------- -----------
Total stockholders' equity 21,140,000 18,119,000
----------- -----------
TOTAL $38,449,000 $38,938,000
=========== ===========
See notes to consolidated financial statements.
F-3
MILTOPE GROUP INC. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
- ---------------------------------------------------------------------------------
1996 1997 1998
----------- ----------- -----------
NET SALES $45,513,000 $40,372,000 $26,444,000
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 34,436,000 30,569,000 21,523,000
Selling, general and administrative 6,601,000 6,137,000 6,532,000
Engineering, research and development 1,630,000 1,705,000 1,884,000
----------- ----------- -----------
Total 42,667,000 38,411,000 29,939,000
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 2,846,000 1,961,000 (3,495,000)
INTEREST EXPENSE - net 1,076,000 750,000 802,000
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 1,770,000 1,211,000 (4,297,000)
INCOME TAX BENEFIT (400,000) (2,060,000) (1,276,000)
----------- ----------- -----------
NET INCOME (LOSS) $ 2,170,000 $ 3,271,000 $(3,021,000)
=========== =========== ===========
BASIC AND DILUTED NET
INCOME (LOSS) PER SHARE $.37 $.56 $(.51)
==== ==== =====
WEIGHTED AVERAGE SHARES
OUTSTANDING 5,867,148 5,870,083 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, 1996, 1997 AND 1998
- ---------------------------------------------------------------------------------
Unrealized
Common Stock Appreciation Treasury Stock
------------ Capital-in- on Investment --------------
Par Excess of Retained Available
Shares Value Par Value Earnings for Sale Shares Cost
--------- ------- ----------- ----------- ------------- ------- -----------
Balance, January 1, 1996 6,806,737 $68,000 $20,253,000 $ 9,613,000 $ 225,000 939,589 $14,246,000
Change in unrealized appreciation
on investment available for sale - - - - (225,000) - -
Net income - - - 2,170,000 - - -
--------- ------- ----------- ----------- ---------- ------- -----------
Balance, December 31, 1996 6,806,737 68,000 20,253,000 11,783,000 - 939,589 14,246,000
Exercise of Stock Options 4,375 - 11,000 - - - -
Net income - - - 3,271,000 - - -
--------- ------ ---------- ---------- ---------- ------- -----------
Balance, December 31, 1997 6,811,112 68,000 20,264,000 15,054,000 - 939,589 14,246,000
Net loss - - - (3,021,000) - - -
Balance, December 31, 1998 6,811,112 $68,000 20,264,000 $ 12,033,000 $ - 939,589 $14,246,000
========= ======= ========== ============ ========= ======= ===========
See notes to consolidated financial statements.
F-5
MILTOPE GROUP INC. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
- ---------------------------------------------------------------------------------
1996 1997 1998
OPERATING ACTIVITIES: ---------- ---------- ------------
Net income (loss) $2,170,000 $3,271,000 $(3,021,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,737,000 1,670,000 1,506,000
Provision for slow-moving and obsolete inventories 879,000 485,000 1,050,000
Provision for doubtful accounts receivable 201,000 95,000 5,000
Provision for asset impairment - 432,000 -
Gain on sale of investment available for sale (522,000) (566,000) -
(Gain) loss on sale of fixed assets 33,000 - (4,000)
Deferred income taxes (465,000) (2,120,000) (1,579,000)
Change in operating assets and liabilities provided (used) cash:
Accounts receivable (674,000) 819,000 3,180,000
Inventories 1,717,000 (1,497,000) (4,214,000)
Other current assets 59,000 (45,000) (36,000)
Other assets 1,287,000 (146,000) (127,000)
Accounts payable and accrued expenses (1,022,000) (1,106,000) (314,000)
----------- ----------- -----------
Net cash provided by (used in) operating activities 5,400,000 1,292,000 (3,554,000)
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (625,000) (1,725,000) (704,000)
Proceeds from sale of property and equipment 4,000 - 48,000
Proceeds from sale of investment available for sale 524,000 798,000 -
----------- ----------- -----------
Net cash used in investing activities (97,000) (927,000) (656,000)
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from (payments of) revolving credit loan - net (4,305,000) 179,000 4,090,000
Payments of other long-term debt (1,171,000) (240,000) (266,000)
Exercise of stock options - 11,000 -
----------- ---------- -----------
Net cash provided by (used in) financing activities (5,476,000) (50,000) 3,824,000
----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH (173,000) 315,000 (386,000)
CASH, BEGINNING OF YEAR 301,000 128,000 443,000
----------- ---------- -----------
CASH, END OF YEAR $ 128,000 $ 443,000 $ 57,000
=========== ========== ===========
SUPPLEMENTAL DISCLOSURE:
Payments made for:
Income taxes $ - $ 76,000 $ 67,000
=========== ========== ===========
Interest $ 1,279,000 $ 821,000 $ 789,000
=========== ========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Reduction of liability associated with acquisition $ 425,000 $ - $ -
=========== ========== ===========
Change in unrealized appreciation on investment available for sale $ (225,000) $ - $ -
=========== ========== ===========
See notes to consolidated financial statements.
F-6
MILTOPE GROUP INC. AND SUBSIDIARIES
- -----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING
AND FINANCIAL REPORTING POLICIES
----------------------------------
Principles of Consolidation - The consolidated financial statements
include the accounts of Miltope Group Inc. and its wholly-owned
subsidiaries, Miltope Corporation ("Miltope"), Miltope Business
Products, Inc. ("MBP") and Miltope's wholly-owned subsidiary,
International Miltope, Ltd., a Foreign Sales Corporation ("FSC").
These companies are collectively referred to as the "Company". All
material inter-company transactions have been eliminated.
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 generally accepted
accounting principles 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.
Fair Value of Financial Instruments - The carrying value of the
Company's accounts receivable, accounts payable and accrued
expenses 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.
Investment Available for Sale - Gains and losses on the disposition
of the investment available for sale are computed under the
specific identification method. Unrealized gains and losses, net
of tax, related to the investment available for sale are reported
as a separate component of stockholders' equity.
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.
Intangible Assets - Intangible assets include a noncompete
agreement and purchased technology with an aggregate carrying value
of $301,000 and $0 at December 31, 1996 and 1997, respectively,
which were being amortized over a six to seven-year period on a
straight-line basis. In 1997, the Company recognized an impairment
in the recoverability of these intangible assets as described in
Note 4.
F-7
Revenue Recognition - Sales and related cost of sales are generally
recognized as deliveries are made. All significant multi-year
contracts are accounted for under the percentage-of-completion
method of accounting. The amount of revenue recognized is the
portion of total contract price that the cost expended to date
bears to the anticipated total cost, based on current estimates of
costs at completion. The contract price includes all amounts
currently under contract, including approved contract changes and
claims that can be reasonably estimated and realization is
probable. Estimated losses on contracts are recorded in the period
they are identified. Revisions in profit estimates are reflected
in the period in which the facts that require revision are known.
Engineering, Research and Development - Engineering, research and
development expenditures not made in connection with sales
contracts are charged to expense as incurred.
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 (see Note 6).
Net Income (Loss) Per Share - Basic and diluted earnings per share
are computed by dividing net income (loss) by the weighted average
common shares outstanding (basic EPS) or weighted average common
shares outstanding assuming dilution (diluted EPS). Based on this
computation, there is no difference between basic and diluted net
income (loss) per share.
Recent Accounting Pronouncements - In June 1997, the Financial
Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) 130, Reporting Comprehensive Income.
This statement is now effective, but currently has no impact on the
Company. In June 1998, FASB issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 is required to be
adopted for years beginning after June 15, 1999. The Company is
currently evaluating SFAS 133 and has not yet determined its impact
on the Company's consolidated financial statements.
Reclassifications - Certain prior years amounts have been
reclassified to conform with the 1998 presentation.
2. ACCOUNTS RECEIVABLE
-------------------
Accounts receivable consist of the following:
1997 1998
----------- -----------
Amounts receivable from the
United States Government
$ 3,856,000 $ 2,849,000
Amounts receivable from other customers 6,188,000 3,974,000
Allowance for doubtful accounts (67,000) (31,000)
----------- -----------
Total $ 9,977,000 $ 6,792,000
=========== ===========
F-8
3. INVENTORIES
-----------
Inventories consist of the following:
1997 1998
----------- -----------
Purchased parts and subassemblies $10,019,000 $12,874,000
Work-in-process 4,684,000 4,993,000
----------- -----------
Total $14,703,000 $17,867,000
=========== ===========
Inventories, other than inventoried costs related to long-term
contracts, are stated at the lower of cost (principally first-in,
first-out) or market. Inventoried costs related to long-term
contracts (included in purchased parts and subassemblies and work-
in-progress) are stated at actual costs, including engineering and
manufacturing overheads, contract specific tooling, and other
related non-recurring costs incurred to date, reduced by amounts
identified with revenue recognized on units delivered or progress
completed. Inventoried costs related to long-term contracts are
reduced by charging any amounts in excess of estimated realizable
value to cost of sales. Inventories include amounts relating to
contracts and programs having production cycles longer than one
year and a portion thereof will not be realized within one year.
Inventories include an allowance for slow-moving and obsolete items
of $3,599,000, $1,242,000 and $1,383,000 at December 31, 1996, 1997
and 1998, respectively.
4. OTHER ASSETS
------------
The Company owned an investment in M-Systems Flash Disk Pioneers,
Ltd. ("M-Systems"), a company based in Israel. During 1996 and
1997, the Company sold 92,014 and 153,242 shares of M-Systems stock
at a gain of $522,000 and $566,000, respectively.
Interest income recognized on certain loans to an affiliated
company was $37,000 during 1996 and is reflected as a reduction of
interest expense in the accompanying consolidated statements of
operations. During 1996, all loans to the related entity were
repaid to the Company.
In 1993, the Company acquired certain assets of Mag-Tek, Inc., a
manufacturer of magnetic stripe products. The consideration
included aggregate discounted minimum royalty payments of
approximately $1,100,000. In August 1996, the Company and Mag-Tek,
Inc. entered into an agreement to terminate the minimum royalty
payment provisions of the related asset purchase contract. In
connection with this agreement, the remaining long-term debt of
$425,000 was written off and intangible assets were reduced by the
same amount. In 1997, the Company recognized a $432,000 impairment
in the value of all remaining Mag-Tek, Inc. assets including
inventory, equipment and intangible assets.
F-9
5. LONG-TERM DEBT
--------------
Long-term debt consists of the following:
1997 1998
----------- -----------
Revolving credit loan $ 6,181,000 $10,271,000
Industrial Development Authority
Revenue Bonds 5,340,000 5,074,000
----------- -----------
Total 11,521,000 15,345,000
Less current maturities 270,000 310,000
----------- -----------
Total $11,251,000 $15,035,000
=========== ===========
A $15,000,000 revolving credit agreement, at the Company's option,
bears interest at the bank's reference rate (8.5% and 7.75% at
December 31, 1997 and 1998, respectively), or at a rate equaling
the London Inter Bank Offered Rate (5.81% and 5.31% at December 31,
1997 and 1998, respectively) plus 2.0%. If for any day the total
amount advanced, regardless of the interest rate option, exceeds
$10 million, an additional .25% is added to the interest rate. The
revolving credit facility is scheduled to mature on May 31, 1999,
at which time, if not renewed, the outstanding amount would be
converted into a term loan payable in twelve equal quarterly
installments beginning August 31, 2000. The bank may extend the
revolving credit agreement for successive one year periods. The
Company's accounts receivable, contract rights and inventories are
pledged as collateral to the agreement.
Principal payments for the Industrial Development Authority Revenue
Bonds (the "Bonds") range between $310,000 and $670,000 from
December, 1999 through December, 2009. Repayment of the Bonds is
secured by an irrevocable letter of credit issued by Regions Bank
in an amount up to $5,700,000 which in turn is secured by a
mortgage on the Montgomery and Troy, Alabama facilities and a
security interest in the equipment located at such facilities.
Letter of credit commitment fees paid during 1997 and 1998 were
$71,000 and $64,000, respectively. Property and equipment with a
carrying value of $7,888,000 and $7,281,000 at December 31, 1997
and 1998, respectively, are pledged as collateral. The agreement
with the Industrial Development Authority bears interest at a
variable market rate which ranged from 5.22% to 5.81% during 1998,
and was 6.00% and 5.62% at December 31, 1997 and 1998,
respectively.
The credit agreements referenced above include 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. On December 31, 1997,
there were no violations of credit agreement provisions. The
Company's bank loan agreement permits the Company to pay annual
dividends of up to 50% of the prior year's net income. At December
31, 1998, the Company was in default of certain financial ratio
requirements related to minimum net worth and cash flows that are
measured annually. A letter dated March 9, 1999 was obtained from
the bank waiving the violations.
F-10
The aggregate maturities of current and long-term debt subsequent to
December 31, 1998, are as follows:
Year Ending December 31,
------------------------
1999 $ 310,000
2000 2,057,000
2001 3,804,000
2002 3,844,000
2003 2,166,000
Thereafter 3,164,000
-----------
Total $15,345,000
===========
The fair value of long-term debt approximated the carrying value as
of December 31, 1997 and 1998, as all instruments are at variable
interest rates.
6. INCOME TAXES
------------
The provision (benefit) for income taxes consists of the following:
1996 1997 1998
Current: --------- ----------- -----------
Federal $ 65,000 $ 9,000 $ 303,000
State - 51,000 -
Deferred (465,000) (2,120,000) (1,579,000)
--------- ----------- -----------
Total $(400,000) $(2,060,000) $(1,276,000)
========= =========== ===========
F-11
The deferred tax assets and liabilities at December 31, 1997 and
1998 are comprised of the following:
1997
------------------------------------------
Deferred
Deferred Tax
Current: Tax Assets Liabilities Total
---------- ----------- ----------
Inventories $ 243,000 $ - $ 243,000
Non-deductible accruals 102,000 - 102,000
---------- ----------- ----------
Total current 345,000 - 345,000
---------- ----------- ----------
Long-term:
Intangible assets 3,000 - 3,000
Net operating loss
carryforward 2,415,000 - 2,415,000
Alternative minimum tax
credit carryforward 235,000 - 235,000
Accelerated depreciation - (413,000) (413,000)
---------- ----------- ----------
Total long-term 2,653,000 (413,000) 2,240,000
---------- ----------- ----------
Net $2,998,000 $ (413,000) $2,585,000
========== =========== ==========
1998
-------------------------------------------
Deferred
Deferred Tax
Current: Tax Assets Liabilities Total
---------- ----------- ----------
Inventories $ 722,000 $ - $ 722,000
Non-deductible accruals 107,000 - 107,000
---------- ----------- ----------
Total current 829,000 - 829,000
---------- ----------- ----------
Long-term:
Intangible assets 3,000 - 3,000
Net operating loss
carryforward 3,422,000 - 3,422,000
Alternative minimum tax
credit carryforward 240,000 - 240,000
Accelerated depreciation - (330,000) (330,000)
---------- ----------- ----------
Total long-term 3,665,000 (330,000) 3,335,000
---------- ----------- ----------
Net $4,494,000 $ (330,000) $4,164,000
========== =========== ==========
F-12
At December 31, 1996, a valuation allowance of $2,524,000 had been
established against the net deferred income tax assets. During 1996
and 1997, the Company reduced the valuation allowance by $1,057,000
and $2,524,000, respectively. The reduction in the valuation
allowance was attributable to the award of significant multi-year
government and commercial contracts during 1996 and 1997 and the
result of improved cost controls. During 1998, the Company
implemented additional cost improvements related to its
manufacturing processes. Based on these initiatives, the
significant increase in backlog over 1997 and the extended
carryforward period allowed under current tax law, management of
the Company is of the opinion that a valuation allowance is not
needed as of December 31, 1998 and the net deferred tax assets as
of each year end reflects the net amount that is more likely than
not to be realized.
During 1997, the Company utilized approximately $1,127,000 of net
operating loss carryforwards to offset income tax expense. The
Company has net operating loss carryforwards for federal income tax
purposes at December 31, 1998 of approximately $5,900,000,
$1,200,000 and $2,600,000, which will expire in 2009, 2010 and
2018, respectively, if not utilized. The Company also has
approximately $240,000 of alternative minimum tax credit
carryforwards available to offset future federal income taxes.
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:
1996 1997 1998
----------- ----------- -----------
Amount at federal statutory rate $ 602,000 $ 412,000 $(1,461,000)
Increases (reductions) due to:
State taxes - net of federal
income tax benefit 47,000 38,000 (119,000)
Change in valuation allowance (1,057,000) (2,524,000) -
Adjustment to estimated income
tax accruals - - 207,000
Other 8,000 14,000 97,000
----------- ----------- -----------
Total $ (400,000) $(2,060,000) $(1,276,000)
=========== =========== ===========
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 $35,000 and $91,000 in 1996 and 1997, respectively. The
Company made no contributions for 1998.
F-13
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's bonus provision for 1996 and 1997 was
$261,000 and $132,000, respectively. No bonus provision was made
for 1998.
8. STOCK OPTIONS
-------------
The Company has an Incentive Stock Option Plan ("ISO"), a
Management Stock Option Plan ("MSO") and a Key Employee Stock
Option Plan ("KSO"). The ISO, MSO and KSO Plans expired in 1994
and 1995. In addition, on April 11, 1995, the Company adopted the
1995 Stock Option and Performance Award Plan ("SOPA") which was
approved by the Company's stockholders on June 5, 1995. Under the
ISO, MSO, KSO and SOPA plans, 376,780, 187,700, 150,000 and 500,000
shares of common stock, respectively, were 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, then are exercisable at a cumulative rate of
25% in each of the first four years subsequent to the applicable
grant.
Under a separate plan, 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 as long as the recipient is a director or within
one year after termination of service.
A summary of the Company's stock options as of December 31, 1996,
1997 and 1998 and changes during the year ended on those dates is
presented below:
1996 1997 1998
------------------------------ ------------------------------ ------------------------------
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 280,085 $3.87 283,479 $3.57 285,717 $3.57
Granted
Price = fair value 42,500 $2.86 $1.99 18,600 $3.71 $2.60 83,000 $2.93 $1.99
Price < fair value 6,722 $4.46 $4.09 9,118 $3.29 $2.82 23,528 $1.28 $1.05
Exercised - (4,375) $2.48 -
Canceled (45,828) $4.88 (21,105) $3.94 (95,000) $3.73
------- ------- -------
Outstanding at end
of year 283,479 $3.57 285,717 $3.56 297,245 $3.14
======= ===== ======= ===== ======= ======
Options exercisable
at December 31:
-------------------
Director options 65,979 $3.64 74,117 $3.44 97,645 $2.92
Employee options 62,250 $4.33 105,500 $3.93 77,150 $3.61
------- ------- -------
Total 128,229 $3.97 179,617 $3.73 174,795 $3.22
======= ===== ======= ===== ======= =====
F-14
The following table summarizes information about stock options
outstanding at December 31, 1998:
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
------------------------
$2.38 - $4.46 275,845 7.45 $3.12 153,395 $2.87
$5.50 - $6.80 21,400 3.69 $5.82 21,400 $5.77
------- -------
297,245 7.18 $3.56 174,795 $3.22
======= ==== ===== ======= =====
The Company applied Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations in accounting for its employee and director plans.
Compensation expense related to these plans under this methodology
is insignificant. Had compensation cost been determined based on
the fair value at the grant date for awards under these plans
consistent with the methodology prescribed under SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123), the Company's
net income (loss) and basic and diluted net income (loss) per share
would approximate the pro forma amounts below.
1996 1997 1998
---------- ----------- -----------
Net income (loss):
As reported $2,170,000 $(3,021,000) $ 3,271,000
Pro forma $2,058,000 $ 3,173,000 $(3,102,000)
Basic and diluted net income (loss) per share:
As reported $ 0.37 $ 0.56 $ (0.51)
Pro forma $ 0.35 $ 0.54 $ (0.53)
Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected
in future years.
For purposes of SFAS 123, the weighted average fair value of the
options granted during 1996, 1997 and 1998 is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following assumptions:
1996 1997 1998
------ ------ ------
Expected life (years) 10.0 10.0 10.0
Risk-free interest rate 6.31% 5.74% 5.87%
Dividend rate 0% 0% 0%
Expected volatility 60.00% 52.30% 49.96%
F-15
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, 1998 are as follows:
Year Ending December 31,
------------------------
1999 $ 320,000
2000 239,000
2001 171,000
2002 152,000
2003 116,000
Thereafter 2,706,000
----------
Total $3,704,000
==========
Aggregate rental expense under operating leases amounted to
$376,000, $237,000 and $282,000 in 1996, 1997 and 1998,
respectively.
The Company leases office space at its Hope Hull facility to
tenants on a year-to-year basis, as well as under a multi-year
lease with entities affiliated through certain common ownership,
where future minimum lease receipts at December 31, 1998 are as
follows:
Year Ending December 31,
------------------------
1999 $ 158,000
2000 114,000
2001 32,000
----------
Total $ 304,000
==========
Aggregate rental income under operating leases amounted to $219,000
and $162,000 in 1997 and 1998, respectively.
Litigation - 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.
Claims - From time to time the Company has 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 December
31, 1998, the Company believes that additional costs evolving from
these negotiations will not be material.
F-16
10. SEGMENT INFORMATION
-------------------
On December 31, 1998, the Company adopted SFAS 131, Disclosure
about Segments of an Enterprise and Related Information. SFAS 131
established standards for reporting information about segments in
annual financial statements and requires selected information about
segments in interim financial reports issued to stockholders. It
also established standards for related disclosures about products
and services, and geographic areas. Segments are defined as
components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief
operating decision-maker in deciding how to allocate resources and
in assessing performance.
Under this standard, 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. The Company's
determination of segment operating profit (loss) does not reflect
other income (expense) or income taxes.
General
1996 Military/Rugged Commercial Eliminations Corporate Consolidated
---- --------------- ------------ ------------ --------- ------------
Net sales from external customer $ 30,618,000 $ 14,895,000 $ - $ 45,513,000
============ ============ ============ ============
Segment operating profit (loss) $ 1,088,000 $ 1,643,000 $ 115,000 $ 2,846,000
============ ============ ============ ============
Identifiable assets $ 25,126,000 $ 9,169,000 $ - $ 2,037,000 $ 36,332,000
============ ============ =========== =========== ============
Capital expenditures $ 420,000 $ 205,000 $ 625,000
============ ============ ============
Depreciation and amortization $ 1 ,086,000 $ 651,000 $ 1,737,000
============ ============ ============
General
1997 Military/Rugged Commercial Eliminations Corporate Consolidated
---- --------------- ------------- ------------ ----------- ------------
Net sales from external customers $ 20,853,000 $ 19,519,000 $ - $ 40,372,000
============ ============ ============ ============
Segment operating profit (loss) $ 412,000 $ 1,549,000 $ - $ 1,961,000
============ ============ ============ ============
Identifiable assets $ 22,037,000 $ 12,301,000 $ - $ 4,111,000 $ 38,449,000
============ ============ ============ =========== ============
Capital expenditures $ 891,000 $ 834,000 $ 1,725,000
============ ============ ============
Depreciation and amortization $ 1,052,000 $ 618,000 $ 1,670,000
============ ============ ============
F-17
General
1998 Military/Rugged Commercial Eliminations Corporate Consolidated
---- --------------- ------------ ------------ ----------- ------------
Net sales from external customers $ 14,605,000 $ 11,839,000 $ - $ 26,444,000
============ ============ ============ ============
Segment operating profit (loss) $ (3,435,000) $ (60,000) $ - $ (3,495,000)
============ ============ ============ ============
Identifiable assets $ 25,178,000 $ 8,317,000 $ - $ 5,443,000 $ 38,938,000
============ ============ ============ =========== ============
Capital expenditures $ 389,000 $ 315,000 $ 704,000
============ ============ ============
Depreciation and amortization $ 958,000 $ 548,000 $ 1,506,000
============ ============ ============
In 1996, 1997 and 1998, foreign sales accounted for 15%, 5% and 2%
respectively, of the military/rugged segment net sales and 9%, 60%
and 7%, respectively, of the commercial segment net sales.
During 1996, 1997 and 1998, the United States Government accounted
for 54%, 39% and 51% of consolidated net sales of the Company,
respectively.
11. UNAUDITED QUARTERLY FINANCIAL DATA
----------------------------------
Summarized unaudited quarterly financial data for the years ended
December 31, 1997 and 1998 is as follows:
Thirteen Weeks Ended
------------------------------------------------------------
March 30, June 29, September 28, December 31,
1997 1997 1997 1997
----------- ------------ ------------- ------------
Net Sales $ 9,042,000 $ 11,992,000 $ 8,326,000 $ 11,012,000
=========== ============ =========== ============
Gross Profit $ 2,182,000 $ 2,658,000 $ 2,165,000 $ 2,798,000
=========== ============ =========== ============
Net Income $ 174,000 $ 642,000 $ 705,000 $ 1,750,000
Basic and diluted net income =========== ============ =========== ============
per share $.03 $.11 $.12 $.30
==== ==== ==== ====
Thirteen Weeks Ended
March 29, June 28, September 27, December 31,
1998 1998 1998 1998
----------- ----------- ------------ ------------
Net Sales $ 7,444,000 $ 5,939,000 $ 5,409,000 $ 7,652,000
=========== =========== =========== ===========
Gross Profit $ 1,938,000 $ 1,056,000 $ 725,000 $ 1,202,000
=========== =========== =========== ===========
Net Loss $ (45,000) $(1,251,000) $ (903,000) $ (822,000)
=========== =========== =========== ===========
Basic and diluted net loss
per share $(.01) $(.21) $ (.15) $(.14)
===== ===== ==== =====
F-18
12. RELATED PARTY TRANSACTIONS
--------------------------
During 1996, 1997, and 1998, the Company recorded sales of
$1,140,000, $10,640,000 and $2,186,000, respectively, to entities
which are affiliated through certain common ownership. At December
31, 1997 and 1998, accounts receivable on such sales were
$2,910,000 and $1,079,000, respectively.
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 and No. 33-33752 of Miltope Group Inc. on Form
S-3 of our report dated February 19, 1999 (March 9, 1999 as to the waiver
letter described in Note 5) appearing in this Annual Report on Form 10-K
of Miltope Group Inc. for the year ended December 31, 1998.
/s/ Deloitte & Touche LLP
- -------------------------------
Birmingham, Alabama
March 30, 1999
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 31, 1999 /s/ Thomas R. Dickinson
-------------------------------------
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 31, 1999 /s/ Thomas R. Dickinson
-------------------------------------
Thomas R. Dickinson
President and Chief Executive
Officer (Principal Executive Officer)
March 31, 1999 /s/ Teddy G. Allen
-------------------------------------
Teddy G. Allen
Chairman of the Board of
Directors
March 31, 1999 -------------------------------------
Jan H. Stenbeck
Director
March 31, 1999 /s/ William Mustard
-------------------------------------
William Mustard
Director
March 31, 1999 /s/ Teri Spencer
-------------------------------------
Teri Spencer
Director
March 31, 1999 /s/ Franklin Miller
-------------------------------------
Franklin Miller
Director
March 31, 1999 /s/ William L. Dickinson
-------------------------------------
William L. Dickinson
Director
March 31, 1999 /s/ Jerry O. Tuttle
-------------------------------------
Jerry O. Tuttle
Director