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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
--------------------
[X] Annual Report Pursuant to Section 13 or 15(d) of the Exchange Act of
1934 For the fiscal year ended December 31, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _________ to ________
Commission file number 000-21770
SIGNAL TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2758268
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
975 Benecia Avenue, Sunnyvale, CA 94086-2805
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 730 6318
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------
(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 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.
On March 18, 1998, the aggregate fair value of the Registrant's Common Stock
held by non-affiliates was $30,589,400. On March 18, 1998, there were 7,380,007
shares of the Registrant's Common Stock issued and outstanding.
Documents Incorporated By Reference
Part III incorporates information by reference from the definitive Proxy
Statement in connection with the Registrant's Annual Meeting of Shareholders to
be held on May 5, 1998. Certain exhibits are incorporated by reference from the
Registrant's Registration Statement on Form S-1, as amended (File No. 33-61124)
and Form 8-K dated November 24, 1993.
Signal Technology Corporation and Subsidiaries
INDEX TO ANNUAL REPORT ON FORM 10-K
PART I
Page
Item 1: Business 3
item 2: Properties 8
Item 3: Legal Proceedings 9
Item 4: Submission of Matters to a Vote of Security Holders 9
PART II
Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters 10
Item 6: Selected Consolidated Financial Data 11
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 8: Financial Statements and Supplementary Data 14
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 29
PART III
Item 10: Directors and Executive Officers of the Registrant 30
Item 11: Executive Compensation 30
Item 12: Security Ownership of Certain Beneficial Owners and Management 30
Item 13: Certain Relationships and Related Transactions 30
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K 31
Signatures 33
2
PART I
Item I Business
General
The Company designs, develops, manufactures and markets sophisticated electronic
components and subsystems that are utilized in a broad range of advanced
defense, space and communication applications. The Company's principal strategy
for growth is to acquire complementary businesses and product lines while
aggressively marketing growth areas in defense, space and communications. While
consolidation continues in the defense industry, the budget down cycle appears
to have ended and we expect to take advantage of being one of the remaining
companies in defense electronics.
In 1996 the Company acquired certain products lines and associated assets and
backlog of Military Power Systems, a division of Transistor Devices Inc. The
Company acquired certain assets and backlog of four companies in 1995: Western
Microwave, Inc., Tecnetics Incorporated, Adaptive Power Solutions L.L.C., and
Benecia Communications Corporation (Benecia Communications was sold in 1996).
The Company integrates acquired businesses and product lines where possible with
existing operations, reducing redundancies in administration, operations,
facilities and other areas. In addition, the Company is diversifying its
customer base by directing marketing and product development resources to
commercial and non-military applications of its technologies in domestic and
international markets.
The Company's core technology involves precision control, management and
generation of radio and microwave frequencies and electrical currents. Principal
uses for the Company's products include communication networks, satellite
communications, electronic countermeasures, intelligence and guidance systems.
The Company's major customers are prime government contractors which integrate
the Company's products into complex systems sold to agencies of the United
States government and to foreign countries. In recent years, changes in the
global political situation have resulted in reductions in defense budgets and an
apparent increase in United States military reliance upon sophisticated
electronic equipment. However, it appears the defense downturn has ceased with
budget forecasts flat to slightly increasing in the coming years. In addition,
military agencies are seeking to maximize resources by enhancing and upgrading
existing systems and platforms. The Company believes that its products are well
positioned to take advantage of current defense trends due to its substantial
incumbency on key existing programs and platforms. The Company's operating
strategy of enhancing its manufacturing and engineering capabilities to improve
product quality and reduce cost will also enable it to compete effectively in
the future.
The Company reports its operations within one principal industry segment:
electronic components and equipment.
Products and Customers
The Company's products are integrated into complex electronic systems and
subsystems that require precision generation, control and management of radio
and microwave frequencies. The Company is dedicated to supplying high quality
products that meet rigid customer requirements for performance and on-time
delivery, while at the same time being competitively priced. The Company is
continually investing in product design and engineering capability and in
state-of-the-art manufacturing and testing systems and processes.
3
The following table sets forth information concerning net sales of the Company's
principal classes of applications for the periods indicated:
Year Ended December 31
------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------------
(dollars in thousands) $ % $ % $ %
- -------------------------------------------------------------------------------------------------------
Defense $67,985 61% $74,443 65% $57,691 64%
Space 10,602 13 7,115 6 3,675 4
Communication 23,692 26 32,683 29 28,362 32
- -------------------------------------------------------------------------------------------------------
Total $102,279 100% $114,241 100% $89,728 100%
=======================================================================================================
Defense
Signal Technology is a leading supplier of sophisticated, state-of-the-art
electronic components and systems for missile guidance, airborne and ground
based radars, electronic countermeasures (ECM), and electronic intelligence. The
Company supplies products on key missiles programs such as the AMRAAM, Tomahawk,
Sparrow, and PAC3/Patriot missile system. Key programs in ECM include the
ALQ-135, ALQ-156, ALQ-184 and ATRJ. The Company provides microwave and radio
frequency components and subsystems that primarily generate, manage and control
frequencies in the range of 1 Khz to 40Ghz. A typical example is a radar jamming
system which incorporates a microwave oscillator that generates a signal to
render enemy radar ineffective.
Power supply products are typically used for direct electric current (DC) to DC
conversion or alternating electric current (AC) to DC conversion, and high or
low voltage power at varied currents. For example, power management products
would be used to convert 400 Hz AC current generated by an aircraft's generators
into the high voltage high current required for the aircraft's radar.
Space
Signal Technology provides products for manned and unmanned spacecraft.
Principal space applications include satellite communications, intelligence,
surveillance and sensing. The Company designs, develops and manufactures
components such as isolators, circulators and DC to DC power converters for use
on satellite-based digital communication systems such as Globalstar(TM) and
Iridium(TM). Such systems are designed to offer voice, data, paging, and
facsimile to telephones and data terminals in areas underserved or not served by
existing systems. The Company also provides power converters currently being
used in the U.S. Air Force MILSTAR II Program. Substantially all space products
are sold to prime contractors or subcontractors.
Communication
The Company offers a wide selection of communication products including digital
switching equipment, transceivers, power supplies, and microwave components. The
Company's communication products cover a diverse range of applications such as
cellular phone systems, modems, air traffic control, local area and wide area
networks, digital radios, and intelligence gathering. Unlike space and defense
electronics applications, sales of communication products are primarily to
commercial entities, government agencies and foreign companies rather than to
prime contractors on specific programs.
The Company's principal customers are prime contractors and military agencies of
the United States government and certain foreign countries. With the exception
of Raytheon Company, which accounted for 20%, 22%, and 14% of the Company's net
sales in 1997, 1996, and 1995, respectively the loss of any customer would not
have a material adverse effect on the Company.
4
The following table sets forth information concerning net sales of the Company's
products to categories of customers and geographic markets. The sales
information includes direct sales by the Company to the customer or market and
indirect sales to prime contractors selling to the customer or market.
Year Ended December 31
------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------
(dollars in thousands) $ % $ % $ %
- ----------------------------------------------------------------------------------------------------
U.S. government
Military $77,157 65% $75,558 66% $62,682 70%
Non-Military 792 1 2,988 3 3,100 3
U.S. Commercial 7,510 16 17,441 15 9,211 10
International
Military 14,420 16 11,425 10 9,742 11
Commercial 2,400 2 6,829 6 4,993 6
- ----------------------------------------------------------------------------------------------------
Total $102,279 100% $114,241 100% $89,728 100%
====================================================================================================
Government Contracts
A substantial portion of the Company's business is conducted under United States
government contracts and subcontracts. These contracts are either competitively
bid or sole source contracts. Competitively bid contracts are awarded after a
formal bid and proposal competition among suppliers. Sole source contracts are
awarded when a single contractor is deemed to have an expertise or technology
that is superior to that of competing contractors.
Virtually all of the Company's United States government contracts and
subcontracts are fixed price contracts, pursuant to which the Company agrees to
develop a product or to manufacture a product for a fixed price and assumes the
risk of cost overruns. Substantially all of the Company's net sales are derived
from fixed price manufacturing contracts. The Company believes that the risk of
cost overruns is lower on fixed price manufacturing contracts than it is on
fixed price product development contracts.
Sales and Marketing
The Company markets its products through its own sales force and a network of
knowledgeable and active independent sales representatives and distributors. The
Company's sales force is comprised of its Vice President-Marketing, regional
sales managers, sales personnel and support staff. The Company has independent
sales representatives in the U.S. and numerous foreign countries.
The Company's sales managers are responsible for coordinating the independent
sales representatives and for having extensive knowledge of government and
commercial programs in their respective regions. They also keep the Company's
engineering, manufacturing and management personnel advised of possible future
trends and requirements of customers.
The key to the Company's sales and marketing strategy is the development of
long-term relationships with its customers. This is achieved by regular
communications and meetings between Company personnel at all levels and their
counterparts in the customer's organization. The Company is active in forming
strategic alliances and buying agreements. These activities are critical as the
Company intends to acquire other businesses and product lines.
Product Engineering, Manufacturing and Development
The Company believes that a principal reason for its success is the quality of
its product design, engineering, manufacturing and testing capabilities. These
capabilities enable the Company to design and engineer products that meet or
exceed its customers' demanding specifications for performance and reliability
and to manufacture the products at competitive prices. The Company has acquired
manufacturing, engineering and testing know-how and technology in connection
with its acquisitions at
5
costs that it believes are considerably lower than would have been incurred had
the Company developed the know-how and technologies itself.
The Company maintains engineering, product design and manufacturing operations
and related support systems at all of its operating facilities. In addition, all
operations utilize computer systems for product design and product documentation
and to control product performance testing. A key to the Company's ability to
reduce manufacturing cost has been the reduction of direct labor through the
introduction of automated or semi-automated manufacturing and product testing
systems and processes.
The Company invests in product development, principally engineering, to meet and
anticipate customer requirements for new products or enhancements of existing
products. In addition, the Company undertakes customer-sponsored product
development contracts. Accordingly, the Company's development activities,
whether Company-funded or customer-sponsored, are generally product or program
specific. The Company retains all rights from customer-sponsored development
work. The amounts of Company-funded and customer-sponsored development work
performed in each of the last three years are as follows:
Year Ended December 31
----------------------------------------------------
(dollars in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
Company-funded $777 $522 $1,610
Customer-sponsored 1,787 4,820 3,602
- -------------------------------------------------------------------------------
Total $2,564 $5,342 $5,212
===============================================================================
Sources of Raw Materials
The raw materials and sub-components which the Company requires for the
manufacture of its products are generally available from several sources. The
Company purchases some raw materials and components from single sources, but has
no reason to believe it could not purchase from alternative sources of supply on
comparable terms. From time to time, the Company experiences minor delays in
obtaining raw materials and components; however, delays have not materially
affected its operations.
Backlog
At December 31, 1997 and 1996, the Company had a backlog of unshipped firm
orders of $87,483 and $87,887, respectively. The Company expects to ship all of
the December 31, 1997 backlog within 1998, except for approximately $10,563
which will be shipped in later periods.
Competition
As a result of reduced defense spending by the United States government and many
of its allies, competition has become more intense in all markets for the
Company's products. Competition is based primarily on price, product
performance, reliability and customer support. The Company believes that it
competes effectively in all of these areas. The Company's continued success will
depend in part on its ability to develop and introduce low cost, quality
products that meet or exceed customers' specifications.
There is no single competitor that competes with the Company in all of its
product lines. However, there are a number of competitors in each of the
Company's product lines. Some of the Company's competitors have greater
financial and operating resources than the Company. In addition, certain of the
Company's customers have technological capabilities in the Company's product
areas and could choose to manufacture certain products themselves rather than
purchase from suppliers such as the Company.
6
Employees
As of December 31, 1997, the Company had 817 full-time employees at its various
divisions and subsidiaries. No employees are represented by unions. The Company
believes its relations with its employees are satisfactory.
Patents
The Company holds a number of patents issued in the United States and certain
European countries. While the Company considers its patents to be of some value,
its technological position depends primarily on the technical competence and
creative ability of its engineering staff in the areas of product design and
manufacturing processes. All of the Company's key personnel are subject to
confidentiality agreements.
Government Regulation
All of the Company's operations are subject to compliance with regulatory
requirements of federal, state and municipal authorities, including regulations
concerning employment obligations and affirmative action, workplace safety and
protection of the environment. While compliance with applicable regulations has
not adversely affected the Company's operations in the past, there can be no
assurance that the Company will continue to be in compliance in the future or
that these regulations will not change.
In particular, the Company must comply with detailed government procurement and
contracting regulations and with United States government security regulations,
certain of which carry substantial penalty provisions for nonperformance or
misrepresentation in the course of negotiations. Failure of the Company to
comply with its government procurement, contracting or security obligations
could result in penalties or suspension of the Company from government
contracting, which would have a material adverse effect on the Company's results
of operations.
The Company is required to maintain a United States government facility
clearance at each of its locations. This clearance could be suspended or revoked
if the Company is found not to be in compliance with applicable security
regulations. Any such revocation or suspension would delay the Company's
delivery of its products to customers. Although the Company has adopted policies
directed at assuring its compliance with applicable regulations and there have
been no suspensions or revocations of any of its facilities, there can be no
assurance that the approved status of the Company's facilities will continue
without interruption. United States government regulations require a license for
the export of advanced weapons systems. Changes in United States government
policies towards the export of these systems may impact the Company's
international business.
7
Item 2 Properties
The Company's principal executive offices are located in Sunnyvale, California.
The Company's principal operating facilities, containing light manufacturing and
associated engineering and support services are located in four states:
Arizona: The Company owns a modern 84,260 square foot building in
Chandler.
California: The Company leases a modern 54,280 square foot building in
Sunnyvale. The lease is triple net and expires in November
2003. The current annual rent is $623,000 with an average
annual escalation of approximately 6.6% through the term
of the lease.
Florida: The Company owns a modern 68,000 square foot building in
Fort Walton Beach.
Massachusetts: The Company owns a modern 25,000 square foot building in
Webster and a modern 40,350 square foot building in
Beverly.
The Company believes that its properties are in good operating condition and
repair and considers its facilities to be suitable and adequate for the
Company's current and reasonably foreseeable future activities. There is
capacity at the Company's facilities to absorb acquired businesses and product
lines. The properties owned by the Company, are subject to either mortgages or
industrial revenue bond financing.
8
Item 3 Legal Proceedings
The Company is involved from time to time in litigation incidental to its
business.
Weymouth Environmental Contamination:
In April 1996, the Company sold its facility in Weymouth, Massachusetts but
retained the environmental liability and responsibility associated with
groundwater contaminants present at the site. This facility has been classified
as a tier 1A disposal site by the Massachusetts Department of Environmental
Protection ("DEP"), as a result of past releases of petroleum based solvents.
Environmental assessment reports prepared by independent consultants indicate
that contaminants present in the Town of Weymouth well field across the street
from the facility are similar to those reportedly released at the facility and
still present in the groundwater at the facility; however, these reports also
indicate that the contaminants do not exceed safe drinking water levels in the
finished water after normal treatment. Other contaminants which did not
originate at the facility have also been detected in the well field.
The Company is continuing to conduct investigations of the facility for soil and
groundwater contamination and operates a pilot remediation system in cooperation
with the DEP. It is not possible at this stage of the proceedings to predict
what additional remediation and the costs thereof, if any, will be required. The
Company has been informed by its insurers that no recovery of costs incurred in
the treatment of the ground water at the facility is possible under existing
insurance arrangements.
During the year, the Company received funds from a third party in return for a
complete release from liability for any responsibility for the contamination.
This amount has been included in the Company accrued for remediation.
Sunnyvale Indemnification Claim:
A third party has filed a breach of contract suit against the Company alleging
that it has a contractual duty to indemnify the third party for costs incurred
as a result of environmental contamination and subsequent remediation. The claim
is based upon allegations that the Company assumed certain liabilities when it
acquired one of the divisions of the third party. The Company believes it has
meritorious defenses with respect to this claim and intends to vigorously defend
its position in the suit. The Company also believes that the ultimate
disposition will not materially affect its financial position or results of
operations.
Item 4 Submission of Matters to a Vote of Security Holders
None.
9
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is listed on the American Stock Exchange ("AMEX"),
under the symbol STZ. Prior to its listing on the AMEX in August, 1994, the
Company's Common Stock was traded in the over-the-counter market and was
included in the NASDAQ National Market System under the trading symbol STCX. The
high and low sales prices for shares of the Company's Common Stock for the past
two years were as follows:
1997 1996
--------------------------------------------------------------
High Low High Low
- --------------------------------------------------------------------------------
First Quarter $ 8 7/16 $ 6 1/2 $ 7 7/8 $ 5 1/4
Second Quarter 8 1/4 6 1/8 9 3/4 6 7/8
Third Quarter 7 5/8 5 5/8 7 7/8 5
Fourth Quarter 7 4 5/8 8 5/8 7 1/4
================================================================================
There were approximately 90 holders of record of the Company's Common Stock on
March 18, 1998. The closing price per share of the Company's Common Stock on
March 18, 1998 as reported on the AMEX was $6.00.
The Company has never paid cash dividends on its Common Stock. The Company
currently anticipates that it will retain all available funds for use in
operations and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future.
10
Item 6 Selected Consolidated Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
-----------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
OPERATIONS
Net sales $ 102,279 $ 114,241 $ 89,728 $ 93,094 $ 97,054
===========================================================================================================
Operating income(1) 1,788 5,042 1,040 6,685 8,337
Income (loss) before taxes 718 3,697 (123) 5,839 7,890
Net income (loss) 338 2,245 (269) 3,562 4,930
Net income (loss) per share (1):
Basic 0.05 0.32 (0.04) 0.53 0.80
Diluted $ 0.04 $ 0.29 $ (0.04) $ 0.48 $ 0.70
- -----------------------------------------------------------------------------------------------------------
Shares used in calculating net income (loss)
per share:
Basic 7,268 7,076 6,880 6,752 6,162
Diluted 7,691 7,676 6,880 7,362 6,997
(1) In 1995, includes restructuring expense of $779 or $(0.07) per share
===========================================================================================================
FINANCIAL POSITION
Current assets $ 44,212 $ 48,043 $ 46,421 $ 39,216 $ 33,756
Current liabilities 13,631 16,465 15,682 12,035 15,459
Total assets 64,382 66,591 66,117 58,431 55,124
Long-term debt, less current maturities 13,408 13,408 17,283 12,903 10,032
Total debt 13,888 14,729 17,658 13,278 10,407
Stockholders' equity 35,816 34,909 31,944 31,913 28,086
Shares outstanding at year-end 7,417 7,172 6,949 6,827 6,711
Book value per share $ 4.83 $ 4.87 $ 4.60 $ 4.67 $ 4.19
- -----------------------------------------------------------------------------------------------------------
SELECTED DATA
New orders $ 101,875 $ 103,829 $ 110,656 $ 90,249 $ 78,109
Year-end backlog $ 87,483 $ 87,887 $ 92,837 $ 65,998 $ 64,489
Employees at year-end 817 993 894 854 996
Revenue per employee $ 125 $ 115 $ 100 $ 109 $ 97
- -----------------------------------------------------------------------------------------------------------
11
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company's principal business is the design, development, manufacture and
marketing of sophisticated electronic components and subsystems that are
utilized in a broad range of advanced space, communication and defense
applications. The Company's principal strategy for growth is to acquire
complementary businesses and product lines while aggressively marketing growth
areas in space, communication and defense.
The Company has experienced and expects to continue to experience significant
fluctuations in its results of operations. Factors that affect the Company's
results of operations include the volume and timing of orders received, changes
in the mix of products sold, competitive pricing pressures and the Company's
ability to meet customer demands. As a result of the foregoing or other factors,
there can be no assurance that the Company will not experience material
fluctuations in the future operating results on a quarterly or annual basis,
which would materially and adversely affect the Company's business, financial
condition and results of operations.
Results of Operations for the Years Ended December 31, 1997, 1996 and 1995
Net sales decreased approximately 10% in 1997 compared to 1996. Backlog
decreased to $87.9 million from $92.8 million at the end of 1996 on new orders
of $101.9 million in 1997 compared to $103.8 million in 1996. The Company's
Keltec Operation, also its largest operation, accounted for 47% of the decrease.
Shipments at the Keltec Operation were adversely impacted by production
inefficiencies including key material shortages throughout the year as well as
management turnover. The Company has taken steps to correct the problems, but
does not expect significantly improved results until the second half of 1998.
Net sales in 1996 compared to 1995 increased approximately 27% overall. Net
sales in defense electronic applications increased 29% while net sales in Space
and Communications grew 94% and 15% respectively. High levels of bookings in
1995 and 1996 contributed to the sales growth.
Gross profit as a percentage of net sales decreased to 19.3% in 1997 from 21.7%
in 1996. Gross profit was adversely affected by lower shipment levels at its
Keltec Operation and the costs associated with the inefficiency mentioned above.
Both the Keltec Operation and Arizona Operation experienced additional costs
associated with several development contracts and contributed significantly to
the decrease in gross profit.
From 1995 to 1996, gross profit as a percentage of net sales dropped from 21.9%
to 21.7%. The slight decrease in the gross profit percentage can be attributed
to higher than expected costs on development contracts. Higher net sales
accounted for the increase in the amount of gross profit for 1996.
Selling, general and administrative expenses decreased on a dollar basis to
approximately $17.1 million for the year ended December 31, 1997 from $19.3
million for 1996 and $16.2 million for 1995. As a percentage of sales, these
expenses were 16.8% in 1997, 16.9% in 1996 and 18.8% in 1995. While net sales
decreased 10% the Company was able to obtain a slight decrease in SG&A as a
percentage of sales from 1996 to 1997 as a result of administrative cost
reductions, primarily in reduced personnel. The Company has a total of 817
employees at the end of 1997 versus 993 at the end of 1996.
12
Company-funded research and development expenses increased $255 thousand (49%)
from 1996 levels, while customer-sponsored R&D decreased $3,033 thousand. This
compares with a decrease in company-funded R&D of $1,088 thousand (68%) in 1996
from 1995. Customer-sponsored R&D increased $1,218 thousand (34%) during this
same period.
In 1995 the Company recorded a restructuring expense pursuant to the shut down
of its ST Systron Donner facility in Sylmar, California. The $779 thousand
restructuring expense included employee severance costs, write-down of inventory
and costs related to the consolidation of the business into the Company's
Chandler, Arizona and Sunnyvale, California facilities.
Interest expense in 1997 decreased to $1,070 thousand from $1,345 thousand in
1996 and $1,163 thousand in 1995. The decreased interest expense reflects
slightly lower interest rates and much lower levels of borrowings throughout the
year, although long-term debt remained at $13,408 at the end of both 1997 and
1996.
The provision for income taxes in 1997 was $380 thousand on pretax income of
$718 thousand. The effective tax rate was 52.8% in 1997 compared to 39.3% in
1996 and 118.7% in 1995. In both 1997 and 1995, the effective tax rate was
adversely effected by the non-deductibility of goodwill and in 1995 the
restriction on carry forward of state tax loses.
Liquidity and Capital Resources
The Company's primary source of liquidity in both 1997 and 1996 was cash flow
from the operations, $4.9 million and $6.1 million respectively. Primary sources
of liquidity in 1995 arose from cash flow from the operations, $813 thousand,
and additional bank borrowings of $4.8 million. The bank borrowing arrangement
requires the Company to maintain certain minimum balances and ratios, the most
significant of which requires the maintenance of a minimum net worth of $32
million. At December 31, 1997 and at various dates throughout the year the
Company was not in compliance with certain covenants as a result of its losses
in the second and third quarters. The Company has obtained waivers with respect
to the non-compliance as of December 31, 1997.
At December 31, 1997, the Company had working capital of $30.6 million,
including cash of $1.1 million, as compared to working capital and cash of $31.6
million and $1.9 million, respectively at December 31, 1996. In 1997, additions
to property, plant and equipment accounted for most of the cash used by
investing activities, $5.4 million and includes approximately $2.4 million for
the purchase of its Beverly Massachusetts facility, formally under lease. The
Company had no expenditures for acquisitions and related costs in 1997 and used
cash in 1996 and 1995 of $1 million and $4.1 million respectively.
The Company continues to investigate acquisition opportunities in complementary
businesses, product lines and markets, but has no agreements, understandings or
commitments for additional acquisitions at this time. The Company believes that
it has adequate cash, working capital and available financing facilities to meet
its operating and capital requirements in the foreseeable future and to continue
its acquisition program.
13
Item 8 Financial Statements and Supplementary Data
Signal Technology Corporation and Subsidiaries
Consolidated Statements of Operations
Year ended December 31,
------------------------------
(amounts in thousands, except per share data) 1997 1996 1995
- ---------------------------------------------------------------------------------------
Net sales $102,279 $114,241 $ 89,728
Cost of sales 82,575 89,407 70,051
- ---------------------------------------------------------------------------------------
Gross profit 19,704 24,834 19,677
Selling, general and administrative expenses 17,139 19,270 16,248
Research and development expenses 777 522 1,610
Restructuring expense -- -- 779
- ---------------------------------------------------------------------------------------
Operating income 1,788 5,042 1,040
Interest expense 1,070 1,345 1,163
- ---------------------------------------------------------------------------------------
Income (loss) before income taxes 718 3,697 (123)
- ---------------------------------------------------------------------------------------
Provision for income taxes 380 1,452 146
- ---------------------------------------------------------------------------------------
Net income (loss) $ 338 $ 2,245 $ (269)
=======================================================================================
Net income (loss) per share
Basic $ 0.05 $ 0.32 $ (0.04)
Diluted $ 0.04 $ 0.29 $ (0.04)
=======================================================================================
Shares used in calculating net income (loss) per share
Basic 7,268 7,076 6,880
Diluted 7,691 7,676 6,880
=======================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
14
Signal Technology Corporation and Subsidiaries
Consolidated Balance Sheets
December 31,
--------------------
(dollar amounts in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 1,127 $ 1,870
Accounts receivable, net of allowance for doubtful
accounts of $159 in 1997 and $170 in 1996 15,901 18,383
Inventories 22,707 24,293
Deferred income taxes 2,327 2,989
Other current assets 2,150 508
- ---------------------------------------------------------------------------------------------------
Total current assets 44,212 48,043
- ---------------------------------------------------------------------------------------------------
Property, plant and equipment, net 16,400 14,310
Intangibles assets, net 2,924 3,374
Other assets 846 864
- ---------------------------------------------------------------------------------------------------
Total assets 64,382 66,591
===================================================================================================
LIABILITIES
Current liabilities:
Current maturities of long-term debt 480 1,321
Accounts payable 5,354 5,289
Accrued expenses 6,620 8,512
Income taxes payable -- 295
Customer advances 1,177 1,048
- ---------------------------------------------------------------------------------------------------
Total current liabilities 13,631 16,465
- ---------------------------------------------------------------------------------------------------
Deferred income taxes 1,527 1,809
Long-term debt, net of current maturities 13,408 13,408
- ---------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 10 )
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 5,000,000 shares authorized; none issued -- --
Common stock, $0.01 par value; 30,000,000 authorized;
7,423,040 shares in 1997 and 7,171,506 shares in 1996 issued and 7,417,040
shares in 1997 and 7,171,506 shares in 1996 outstanding 74 72
Additional paid-in-capital 12,693 12,095
Retained earnings 23,080 22,742
- ---------------------------------------------------------------------------------------------------
35,847 34,909
Less treasury stock; 6,000 shares in 1997, at cost (31) --
- ---------------------------------------------------------------------------------------------------
Total stockholders' equity 35,816 34,909
- ---------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 64,382 $ 66,591
===================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
15
Signal Technology Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
-------------------------------------------------------------------------------------------------
Common Stock Treasury Stock
-------------------- Additional --------------------- Total
Shares Paid-in Unearned Retained Amount Stockholders'
(dollar amounts in thousands) Issued Amount Capital Compensation Earnings Shares at Cost Equity
- --------------------------------------------------------------------------------------------------------------------------------
December 31, 1994 6,826,592 $ 68 $ 11,187 $ (108) $ 20,766 -- $ -- $ 31,913
Exercise of stock options 122,091 1 245 246
Unearned compensation 54 54
Net income (269) (269)
- --------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 6,948,683 69 11,432 (54) 20,497 -- -- 31,944
Exercise of stock options 222,823 3 663 666
Unearned compensation 54 54
Net income 2,245 2,245
- --------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 7,171,506 72 12,095 -- 22,742 -- -- 34,909
Exercise of stock options 246,534 2 566 568
Issuance of common stock 5,000 -- 32 32
Stock repurchase program (6,000) (31) (31)
Net income 338 338
- --------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 7,423,040 $ 74 $ 12,693 $ -- $ 23,080 (6,000) $ (31) $ 35,816
===============================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
16
Signal Technology Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(dollar amounts in thousands)
Years ended December 31,
---------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 338 $ 2,245 $ (269)
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation 3,292 3,368 3,527
Amortization 422 390 186
(Gain) or Loss on disposal of property, plant and equipment 10 (95) (18)
Unearned compensation -- 54 54
Deferred taxes 380 (186) (58)
Changes in operating assets and liabilities:
Accounts receivable 2,482 (2,400) 638
Inventory 1,586 2,751 (5,777)
Other current assets (1,642) 546 (95)
Accounts payable 65 (1,266) 1,997
Accrued expenses (1,892) 3,220 (212)
Income taxes payable (295) 295 (40)
Customer advances 129 (2,808) 880
- --------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,875 6,114 813
- --------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisitions and associated costs -- (1,000) (4,070)
Additions to property, plant and equipment (5,404) (1,960) (1,584)
Proceeds from disposal of property, plant and equipment 12 356 175
Other 46 (15) (45)
- --------------------------------------------------------------------------------------------------
Net cash used by investing activities (5,346) (2,619) (5,524)
- --------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 568 666 246
Proceeds from issuance of stock 32 --
Purchase of treasury stock (31) -- --
Borrowings on bank term note 2,980 -- --
Borrowings under bank revolving credit facilities 33,700 24,029 26,955
Repayment of borrowings under bank revolving credit facilities (36,200) (27,529) (22,200)
Payments of long-term debt (1,321) (375) (375)
- --------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (272) (3,209) 4,626
- --------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (743) 286 (85)
Cash, beginning of year 1,870 1,584 1,669
- --------------------------------------------------------------------------------------------------
Cash, end of year $ 1,127 $ 1,870 $ 1,584
==================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
1. NATURE OF OPERATIONS
The Company designs, develops, manufactures and markets sophisticated electronic
components and subsystems that are utilized in a broad range of advanced
defense, space and communication applications. The Company's principal strategy
for growth is to acquire complementary businesses and product lines while
aggressively marketing growth areas in defense, space and communication.
The Company's core technology involves precision control, management and
generation of radio and microwave frequencies and electrical currents. Principal
uses for the Company's products include communication networks, satellite
communications, electronic countermeasures, intelligence and guidance systems.
The Company's major customers are prime government contractors which integrate
the Company's products into complex systems sold to agencies of the United
States government and foreign countries. The Company believes that its products
are well positioned to take advantage of current defense trends due to its
substantial incumbency on key existing programs and platforms. The Company's
operating strategy of enhancing its manufacturing and engineering capabilities
to improve product quality and reduce cost will also enable it to compete
effectively in the future.
The Company reports its operations within one principal industry segment:
electronic components and equipment.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of Signal Technology
Corporation and its wholly-owned subsidiaries, (collectively, the "Company").
Intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
The Company records revenue upon shipment or customer acceptance, in accordance
with the terms of individual contracts. Revenue is determined based on sales
value per unit and costs are based on estimated average cost per unit over the
entire contract. Estimated losses on contracts are recognized in full in the
period they become known. Provision is made currently for estimated returns and
warranty costs.
Research and Development
Research and development expenditures are charged to operations as incurred.
Research and development expenses include approximately $534 in 1995 of funding
provided to Benecia Communications, Inc., a company which became an operating
division of the Company. Benecia Communications was sold in May 1996. (See Note
3)
18
Income Taxes
Deferred tax assets and liabilities consist of differences between the tax basis
of assets and liabilities and their basis for financial reporting purposes and
are measured based on the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. Deferred tax assets are stated at their
estimated realizable value. The provision for income taxes consists of estimated
federal and state income taxes currently payable adjusted for changes between
periods in the measurement of deferred tax assets and liabilities. Tax credits
are recognized as a reduction of income tax expense in the years in which the
credits are utilized for tax purposes.
Earnings per Share
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("SFAS 128") effective December 31, 1997.
SFAS 128 requires the presentation of basic and diluted earnings per share
("EPS"). Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed giving effect to all dilutive potential common
shares that were outstanding during the period. Dilutive potential common shares
consist of the incremental common shares issuable upon the exercise of stock
options and warrants for all periods using the treasury stock method. All prior
period earnings per share amounts have been restated to comply with the
provisions of SFAS 128.
Inventories
Inventories are valued at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market, and are presented net of progress payments
and foreseeable losses.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, and depreciation is provided
using the straight-line method over the estimated useful life of the asset, as
follows:
Buildings 33 years
Building improvements 15 years
Machinery and equipment 7 years
Furniture and fixtures 5-7 years
Leasehold improvements are amortized over the lesser of their useful lives or
the life of the lease. Maintenance and repairs are charged to expense as
incurred; improvements are capitalized. Upon retirement or sale, the cost of the
assets disposed of and the related accumulated depreciation are removed from the
accounts; any resulting gain or loss is credited or charged to income.
Intangible Assets
Intangible assets consist principally of goodwill which is being amortized on
the straight line basis over periods of five to twenty years. At December 31,
1997 and 1996 accumulated amortization was $1,311 and $888 respectively.
Concentrations of Risk
The market for the Company's products is largely dependent on the availability
of new contracts from U.S. Government authorities to prime contractors to which
the Company provides components. Any decline in expenditure by U.S. government
authorities may have an adverse effect on the Company's financial performance.
The Company generally extends credit to these customers and, therefore,
collection of receivables is affected by the defense industry economy. The
Company closely monitors extensions of credit, maintaining reserves for
potential credit losses, and such losses have been within management's
expectations. Substantially all of the Company's cash is deposited with a single
bank.
19
Also, the Company's international sales are totally denominated in U.S.
currency. Consequently, changes in exchange rates that strengthen the U.S.
dollar could increase the price in local currencies of the Company's products in
foreign markets and make the Company's products relatively more expensive than
competitors' products that are denominated in local currencies, leading to a
reduction in sales or profitability in those foreign markets. The Company has
not taken any protective measures against exchange rate fluctuations, such as
purchasing hedging instruments with respect to such fluctuations.
The amounts reported for cash equivalents, receivables and other financial
instruments are considered to approximate fair values based upon comparable
market information available at the respective balance sheet dates. Financial
instruments that potentially subject the Company to concentrations of credit
risks consist principally of cash and note and trade receivables.
The Company must comply with detailed government procurement and contracting
regulations and with United States government security regulations, certain of
which carry substantial penalty provisions for nonperformance or
misrepresentation in the course of negotiations. Failure of the Company to
comply with its government procurement, contracting or security obligations
could result in penalties or suspension of the Company from government
contracting, which would have a material adverse effect on the Company's results
of operations.
The Company's inventories include high-technology parts and components that may
be specialized in nature or subject to rapid technology obsolescence. While the
Company has programs to minimize the required inventories on hand and considers
technology obsolescence in estimating reserves to reduce recorded amounts to
market values, such estimates could change in the future.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive
Income". SFAS 130 establishes standards for reporting and display of financial
statements. The impact of adopting SFAS 130, which is effective in fiscal 1998,
has not been determined.
In June 1997, the Financial Accounting Standards Boards issued Statement of
Financial Accounting Standards No. 131 (SFAS 131) "Disclosures about Segments of
an Enterprise and Related Information." SFAS 131 requires publicly held
companies to report financial and other information about key revenue producing
segments of the entity for which such information is available and is utilized
by the chief operation decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and expense items
and total assets. A reconciliation of segment information to amounts reported in
the financial statements would be provided. SFAS 131 is effective in fiscal
1998. The Company operates within one segment: electronic components and
equipment.
Reclassifications
Certain amounts in the financial statements have been reclassified to conform
with the current year's presentation. The reclassification had no impact on
previously reported net income.
3. ACQUISITIONS AND DISPOSALS
In December, 1996, the Company paid $2,342 for certain assets and the assumption
of certain liabilities of Military Power Systems a division of Transistor
Devices Inc.
20
In July, 1995, the Company paid $1,292 for certain assets and the assumption of
certain liabilities of Western Microwave, Inc. In September, 1995, the Company
paid $2,528 for certain assets and the assumption of certain liabilities of
Tecnetics, Incorporated. In October, 1995, the Company paid $250 for certain
assets relating to a power supply contract of Adaptive Power Solutions, L.L.C.
The acquisition included assets and the assumption of certain liabilities
relating to the contract.
Each of these transactions was financed with cash with the exception of the
Military Power Systems transaction, which the seller financed in the amount of
$946 paid in 1997. These transactions have been accounted for as purchases. The
purchase prices, including costs of $20 in 1996 and $95 in 1995 associated with
the acquisitions, have been allocated to the acquired assets and liabilities
assumed based upon their fair value at the respective dates of the acquisitions.
The results of operations of the acquired businesses since the acquisition dates
are included in the consolidated statements of income.
Assuming the acquisitions described above had been made on January 1, 1996, the
Company's unaudited proforma condensed results of operations would have been as
follows:
1996 1995
---------------------------------------------------------------
Net sales $120,241 $100,258
Net income $2,853 $(81)
Earnings per share
Diluted (Basic) $.37 $(0.01)
The proforma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisitions been
made on January 1, 1996, or of results which may occur in the future.
In April 1995, the company exercised its option to acquire the assets of Benecia
Communications Corporation (BCC). BCC was a development stage company performing
research and development activities on technologies and products used in
commercial satellite communications. The Company had funded BCC since September
1993. Consideration for the acquisition was the forgiveness of a promissory note
in the principal amount of $1,800. In May 1996, the Company sold the Benecia
product lines and associated assets to Communications & Power Industries, Inc.
for $800.
4. RESTRUCTURING
In 1995 the Company recorded a restructuring expense pursuant to the shutdown of
its Systron Donner facility in Sylmar, California. The $779 restructuring
expense includes severance costs of $225, write-down of assets of $275, removal
and transportation costs of $185 and other costs of $94 related to the
restructuring of the business. As of December 31, 1996, all cash expenditures as
a result of the restructuring have been incurred. Employees terminated as a
result of the restructuring totaled 46.
21
5. STATEMENTS OF CASH FLOWS
Years ended December 31
------------------------------
1997 1996 1995
------------------------------------------------------------------------------------------
Cash paid during period for:
Interest $1,063 $1,392 $1,135
Taxes $1,227 $736 $802
------------------------------------------------------------------------------------------
Non cash activity:
TDI note payable $946
Forgiveness of Benecia Promising Note $1,800
Building sold in exchange for note receivable $858
==========================================================================================
6. INVENTORIES
December 31
-----------------------
1997 1996
---------------------------------------------------------------------
Raw materials $6,339 $8,225
Work in progress 18,250 18,912
Finished goods 484 307
-----------------------
25,073 27,444
Less: unliquidated progress payments (2,366) (3,151)
-----------------------
$22,707 $24,293
=====================================================================
7. PROPERTY, PLANT AND EQUIPMENT
December 31
------------------------
1997 1996
----------------------------------------------------------------------
Land $992 $592
Building and improvements 9,793 7,285
Machinery and equipment 25,636 24,217
Furniture and fixtures 2,753 2,285
----------------------------------------------------------------------
39,174 $34,379
Less accumulated depreciation (22,774) (20,069)
----------------------------------------------------------------------
Net property, plant and equipment $16,400 $14,310
======================================================================
8. ACCRUED EXPENSES
December 31
----------------------
1997 1996
---------------------------------------------------------------------
Accrued payroll & employee benefits $1,939 $2,151
Accrued vacation 1,164 1,293
Accrued warranty 772 833
Accrued commissions 993 1,275
Other accrued expenses 1,752 2,960
---------------------------------------------------------------------
$6,620 $8,512
=====================================================================
22
9. LONG-TERM DEBT AND NOTES PAYABLE
December 31
-----------------------
1997 1996
-----------------------------------------------------------------------------------------------
Massachusetts Industrial Revenue Bond,
maturing in 2009, interest at 62% of the prime rate plus 1/2%
effective interest rate of 4.7% and 4.6%, payable in annual
principal payments of $80 $888 $968
Bank revolving credit facility 7,000 9,500
Bank real estate term loan facility 6,000 3,315
Note payable in connection with acquisition - 946
----------------------------------------------------------------------------------------------
13,888 14,729
Less: current maturities (480) (1,321)
----------------------------------------------------------------------------------------------
$13,408 $13,408
==============================================================================================
The Massachusetts Industrial Revenue Bond is collateralized by real estate with
a net book value of $1,347 at December 31, 1997.
The Company has a $15,000 unsecured bank revolving credit facility, (the
"Revolver"). The Revolver expires in June 2000, and amounts may be borrowed,
paid and reborrowed at the election of the Company through the expiration date.
Amounts available under the Revolver are reduced by actual borrowings and
outstanding letters of credit. The Company has the option of borrowing under one
or more differing interest rate formulas and at December 31, 1997, the weighted
average interest rate was 7.57% and 7.81% at December 31, 1996. The Company also
pays a quarterly commitment fee at annual rates ranging from 1/8% to 3/8%
depending upon the amount of the unused facility. After reduction for
outstanding letters of credit under the Revolver the company has approprimately
$7,600 available.
The Real Estate Loan is collateralized by real estate with a net book value of
$5,253 at December 31, 1997. Maturing in January, 2003, the Real Estate Loan is
payable in quarterly principal payments of $100, plus interest at the bank's
base rate (8.50% at December 31, 1997), with the last installment equal to the
remaining unpaid loan balance.
The Agreement in respect of the Real Estate Loan and the Revolver contains
certain covenants related to tangible net worth and interest coverage, as
defined. Default on any covenant may affect the commitment by the bank to
continue to lend under the Agreement and, if not corrected, could accelerate the
maturity of any borrowings outstanding under the Agreement. At December 31, 1997
and at various dates throughout the year the Company was not in compliance with
certain covenants. The Company has obtained waivers in respect of non-compliance
as of December 31, 1997.
23
10. COMMITMENTS AND CONTINGENCIES
The Company leases real estate and equipment under operating leases expiring at
various dates through 2003. The leases include provisions for rent escalation,
renewals and purchase options and the Company is generally responsible for
taxes, maintenance and repairs. Aggregate rental expense included in operations
amounted to $1,256 in 1997, $915 in 1996 and $1,384 in 1995. Future minimum
lease payments under noncancellable operating leases with an initial term
exceeding one year are as follows:
1998 $ 764
1999 $ 805
2000 $ 798
2001 $ 778
2002 $ 819
The Company is involved from time to time in litigation incidental to its
business.
Weymouth Environmental Contamination:
In April 1996, the Company sold its facility in Weymouth, Massachusetts but
retained the environmental liability and responsibility associated with
groundwater contaminants present at the site. This facility has been classified
as a tier 1A disposal site by the Massachusetts Department of Environmental
Protection ("DEP"), as a result of past releases of petroleum based solvents.
Environmental assessment reports prepared by independent consultants indicate
that contaminants present in the Town of Weymouth well field across the street
from the facility are similar to those reportedly released at the facility and
still present in the groundwater at the facility; however, these reports also
indicate that the contaminants do not exceed safe drinking water levels in the
finished water after normal treatment. Other contaminants which did not
originate at the facility have also been detected in the well field.
The Company is continuing to conduct investigations of the facility for soil and
groundwater contamination and operate a pilot remediation system in cooperation
with the DEP. It is not possible at this stage of the proceedings to predict
what additional remediation and the costs thereby, if any, will be required. The
Company has been informed by its insurers that no recovery of costs incurred in
the treatment of the ground water at the facility is possible under existing
insurance arrangements.
During the year, the Company received funds from a third party in return for a
complete release from liability for any responsibility for the contamination.
This amount has been included in the Company accrued for remediation.
Sunnyvale Indemnification Claim:
A third party has filed a breach of contract suit against the Company alleging
that it has a contractual duty to indemnify the third party for costs incurred
as a result of environmental contamination and subsequent remediation. The claim
is based upon allegations that the Company assumed certain liabilities when it
acquired one of the divisions of the third party. The Company believes it has
meritorious defenses with respect to this claim and intends to vigorously defend
its position in the suit. The Company also believes that the ultimate
disposition will not materially affect its financial position or results of
operations.
24
11. INCOME TAXES
Years ended December 31
---------------------------------------
1997 1996 1995
- -------------------------------------------------------------------
Currently payable:
Federal $0 $1,512 --
State 0 174 $204
- -------------------------------------------------------------------
Deferred:
Federal 317 (430) (50)
State 63 196 (8)
===================================================================
Provision for income taxes $380 $1,452 $146
===================================================================
The Company's effective tax rate differs from the statutory federal income tax
rate as follows:
Years ended December 31
-----------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------
Statutory federal income tax rate 34.0% 34.0% (34.0)%
State income taxes, net of federal benefit 7.8 5.8 86.3
Benefit from foreign sales corporation --- (1.9) ---
Non-deductible expenses and other 11.0 1.4 66.4
=============================================================================
Effective tax rate 52.8% 39.3% 118.7%
=============================================================================
Non-deductible expense consists principally of goodwill, depreciation expense
resulting from certain of the Company's acquisitions and other amounts not
deductible for tax purposes. The tax effect of temporary differences that give
rise to the net deferred tax asset and liability are as follows:
December 31
--------------------------------------
1997 1996
- ---------------------------------------------------------------------------
Net tax asset:
Net operating losses $317
Vacation accrual 417 $455
Inventories 776 1,646
Warranty 306 331
Deferred compensation 243 197
Other 268 360
- ---------------------------------------------------------------------------
Total $2,327 $2,989
============================================================================
Net tax liability:
Depreciation $1,527 $1,809
- ---------------------------------------------------------------------------
Total $1,527 $1,809
============================================================================
25
12. STOCKHOLDERS' EQUITY
The Company has stock option plans under which a maximum of 3,167 options may be
granted generally at prices not less than 100 percent of the fair market value
of the Company's common stock at the date of option grant. Options vest ratably
over a four to five year period and expire not more than ten years from date of
grant. At December 31, 1997, 1,271 shares of common stock were reserved for
future issuance under the plans and 565 were available for future grant.
Additionally, non-qualified options to purchase a total of 102 shares of the
Company's common stock have been granted to certain non-employee directors and
others. These options were granted at the fair market value of the Company's
common stock at the date of option grant, vest generally over a five year period
and expire between 1999 and 2002.
For financial reporting purpose only, certain options granted in 1992 were
accounted for as if they had been granted at less than market value when
compared with the value of common stock issued in the Company's initial public
offering in 1993. Unearned compensation related to these options is being
recorded ratably over the vesting period. These options, as well as all other
options granted prior to the initial public offering, were granted at prices
determined by the Board of Directors to be not less than the fair market value
at the date of grant.
Information concerning the plans and non-qualified stock options is as follows:
Available Option Option Price Aggregate Weighted Avg.
for Grant Shares per Share Price Exercise Price
- --------------------------------------------------------------------------------------------------------------
December 31, 1994 172 1,269 $1.57 - $7.25 $3,435 $2.71
Options granted (138) 138 3.50 - 5.06 569 4.13
Options canceled 75 (105) 1.57 - 7.25 (427) 4.06
Options exercised --- (122) 1.57 - 2.36 (246) 2.02
- -------------------------------------------------------------------------------------------------------------
December 31, 1995 109 1,180 1.57 - 7.25 3,331 2.82
Options granted (187) 187 5.25 - 8.25 1,325 7.09
Options canceled 80 (102) 1.80 - 8.25 (421) 4.09
Options exercised --- (223) 1.57 - 4.75 (436) 1.96
Increase in available options, 1992 500 --- --- --- --- ---
Plan
- -------------------------------------------------------------------------------------------------------------
December 31, 1996 502 1,042 1.57 - 8.25 $3,799 3.65
Options granted (175) 250 4.94 - 7.63 1,740 6.96
Options canceled 238 (238) 4.25 - 8.25 (1,233) 5.19
Options exercised - (246) 1.57 - 5.75 (568) 2.31
- -------------------------------------------------------------------------------------------------------------
December 31, 1997 565 808 $1.57 - $8.25 $3,738 $4.63
- -------------------------------------------------------------------------------------------------------------
A total of 488 options were exercisable at December 31, 1997
26
The following table summarizes information with respect to stock options
outstanding as of December 31, 1997:
Range of Outstanding Weighted-Average Weighted-Average Exercisable Weighted-Average
Exercise Prices as of Remaining Contractual Exercise Price as of Exercise Price
12/31/97 Life 12/31/97
- ----------------------------------------------------------------------------------------------------------------------
$1.5700 - $1.8000 311,020 2.2 $1.6186 311,020 $1.6186
$2.0000 - $3.9400 34,832 3.9 2.7707 22,332 2.3625
$4.1880 - $5.7500 84,750 2.0 5.1852 50,500 5.2977
$6.0600 - $7.0000 200,000 4.2 6.5078 52,500 6.2708
$7.2500 - $8.2500 177,000 3.2 7.7116 51,750 7.5088
======================================================================================================================
807,602 3.0 $4.5887 488,102 $3.1582
The following information concerning the Company's stock option and employee
stock purchase plans is provided in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation." The Company accounts for such plans in accordance
with APB No. 25 and related Interpretations.
The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions are as follows:
1997 1996 and 1995
------------------- ---------------------
Risk-free Interest Rates 6.2% 6.2%
Expected Life 4.4 years 4.7 years
Volatility 0.65 0.70
Dividend Yield -- --
The weighted average fair value of those options granted in 1997, 1996 and 1995
was $4.03, $4.51 and $2.49 respectively.
The following proforma income information has been prepared following the
provisions of SFAS No. 123:
(amounts in thousands except per share data)
1997 1996
----------------- ---------------
Net income (loss) - proforma $ (107) $ 2,045
Net income (loss) per share - proforma
(Basic) Diluted $ (0.01) $ 0.27
The above proforma effects on income may not be representative of the effects on
net income for future years as option grants typically vest over several years
and additional options are generally granted each year.
27
13. EARNING PER SHARE
In accordance with the disclosure requirements of SFAS 128, a reconcilation of
the numerator and denominator of both basic and diluted EPS is provided as
follows:
1997 1996 1995
---- ---- ----
Numerator - Basic and Diluted EPS
Net income (loss) $338 $2,245 $(269)
Denominator - Basic EPS
Common shares outstanding 7,268 7,076 6,880
----- ----- ------
Basic earnings (loss) per share $0.05 $0.32 $(0.04)
===== ===== ======
Denominator - Diluted EPS
Denominator - Basic EPS 7,268 7,076 6,880
Effect of Diluted Securities
Common Stock Options 423 600 --
----- ----- ------
Denominator - Diluted EPS 7,691 7,676 6,880
----- ----- ------
Diluted earnings (loss) per share $0.04 $0.29 $(0.04)
===== ===== ======
14. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) plan covering substantially all of its employees.
Eligible employees may contribute up to 15% of their annual compensation, as
defined, to this plan. The Company may also make a discretionary contribution.
The Company's contributions to this plan totaled $401 in 1997, $164 in 1996 and
$116 in 1995.
The Company has an Employee Stock Purchase Plan ("the Purchase Plan") under
which 300,000 shares of common stock have been reserved for issuance. Eligible
employees may designate not more than 10% of their cash compensation to be
deducted each pay period for the purchase of common stock under the Purchase
Plan, and participants may purchase not more than $25,000 of common stock in any
one calendar year. On the last business day of each six month offering period
shares of common stock are purchased with the employees' payroll deductions over
the immediately preceding six months at a price per share of 85% of the lesser
of the market price of the common stock on the purchase date or the market price
on the first day of the period. The Purchase Plan will terminate no later than
December 31, 1999. In fiscal 1997 no shares were issued under the Purchase Plan.
15. SEGMENT INFORMATION
The Company is engaged in one industry segment: the engineering, manufacturing
and marketing of electronic components and subsystems. The Company distributes
its products worldwide. Export sales were $16,820 in 1997, $18,254 in 1996 and
$14,785 in 1995. One U.S. customer accounted for 20% of net sales in 1997 and
22% of sales in 1996 and 14% in 1995.
28
16. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following quarterly financial information should be read in conjunction with
Note 2. The first three quarters in each year consist of thirteen week periods
with the fourth quarter ending on December 31.
First Second Third Fourth
1997: Quarter Quarter Quarter Quarter
---------------------------------------------------------------------------------------
Net sales $ 27,082 $ 25,474 $ 25,639 $ 24,084
Gross profit 6,141 4,734 3,875 4,954
Operating income 1,442 102 (219) 463
Net income (loss) 745 (107) (320) 20
Net income (loss) per share:
Basic $ 0.10 $ (0.01) $ (0.04) $ 0.00
Diluted $ 0.10 $ (0.01) $ (0.04) $ 0.00
Shares used in calculating
Net income (loss per share):
Basic 7,187 7.268 7,277 7,333
Diluted 7,714 7.268 7,277 7,663
---------------------------------------------------------------------------------------
1996:
---------------------------------------------------------------------------------------
Net sales $ 22,048 $ 27,371 $ 31,624 $ 33,198
Gross profit 4,475 5,151 7,235 7,973
Operating income 125 648 1,903 2,366
Net income (loss) (155) 170 995 1,235
Net income (loss) per share:
Basic $ (0.02) $ 0.02 $ 0.14 $ 0.17
Diluted $ (0.02) $ 0.02 $ 0.13 $ 0.16
---------------------------------------------------------------------------------------
Shares used in calculating
Net income (loss per share):
Basic 6,977 7,034 7,136 7,158
Diluted 6,977 7,711 7,652 7,720
---------------------------------------------------------------------------------------
Net sales and net income are subject to fluctuations as a result of customer
actions including the timing of mandated delivery schedules, changes in the
timing of program funding, delays in obtaining qualification approvals and the
timing of preshipment inspections.
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None
29
- --------------------------------------------------------------------------------
PART III
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management
Item 13 Certain Relationships and Related Transactions
All information required by Items 10, 11, 12 and 13 is incorporated herein by
reference to the Company's definitive proxy statement for its annual meeting of
stockholders to be held on May 5, 1998, which will be filed with the Securities
and Exchange Commission pursuant to Regulation 14A.
30
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Index to Financial Statements and Financial Statement Schedules Page
Consolidated Balance Sheet as of December 31, 1997 and 1996 15
Financial Statements for the Years Ended December 31, 1997, 1996 and 1995:
Consolidated Statements of Operations 14
Consolidated Statements of Stockholders' Equity 16
Consolidated Statements of Cash Flows 17
Notes to Consolidated Financial Statements 18
Report of Independent Accountants 34
Schedule II Valuation and Qualifying Accounts 35
All other schedules are omitted because they are not applicable, not
required under the instructions, or all the information required is set
forth in the consolidated financial statements or notes thereto.
(2) The following described exhibits are filed herewith or incorporated
herein by reference indicated:
Exhibit
Number Description
- --------------------------------------------------------------------------------
3.1 Certificate of Incorporation of Registrant, as amended to date.*
3.2 By-Laws of Registrant, as amended to date.***
10.1 Amended and Restated Credit Agreement among The First National
Bank of Boston, the Registrant and its subsidiaries, dated as of
April 14, 1992.*
10.0.1 Second Amendment and Restatement of Credit Agreement with First
National Bank of Boston, dated as of September 30, 1993.***
10.4 Employee Incentive Stock Option Plan-1982 of the Registrant.*
10.5 1992 Equity Incentive Plan of the Registrant.*
10.6 Signal Technology Corporation 401(k) Plan.*
10.8 Lease dated as of October 18, 1990 by and between Benecia
Associates and ST Microwave Corp.*
10.18 Asset Purchase and Sale Agreement by and between Adaptive Power
Solutions, L.L.C. and ST Keltec Corporation, a wholly owned
subsidiary of Signal Technology Corporation, dated October 12,
1995. *****
10.19 Trade Licence and Purchase and Sale Agreement by and between
Western Microwave, Inc. and ST Microwave Corporation, a wholly
owned subsidiary of Signal Technology Corporation, dated July 21,
1995. *****
10.20 Purchase and Sale Agreement by and between Tecnetics,
Incorporated. and ST Keltec Corporation, a wholly owned subsidiary
of Signal Technology Corporation, dated September 7, 1995. *****
10.22 Amendment agreement No.1 to the Second Amendment and Restated
Credit Agreement, dated as of September 30, 1993, with the First
National Bank of Boston, dated as of July 20, 1995. *****
10.23 Amendment agreement No.2 to the Second Amendment and Restated
Credit Agreement dated as of September 30,1993, with the First
National Bank of Boston, dated as of September 30, 1995. *****
31
Exhibit
Number Description
- --------------------------------------------------------------------------------
10.24 Amendment agreement No. 3 to the Second Amendment and Restated
Credit Agreement, dated as of September 30, 1993, with the First
National Bank of Boston, dated as of March 29, 1996. *******
10.25 Amendment agreement No. 4 to the Second Amendment and Restated
Credit Agreement, dated as of September 30, 1993, with the First
National Bank of Boston, dated as of March 10, 1997. *******
10.26 Asset Purchase Agreement by and between Transistor Devices Inc.
and ST Keltec Corporation, a wholly owned subsidiary of Signal
Technology Corporation, dated as December 6, 1996. *******
10.27 Asset Purchase Agreement by and between Pulau Electronics
Corporation and ST Microwave (Arizona) Corporation, a wholly owned
subsidiary of ST Microwave Corporation, dated as of June 14, 1996.
*******
10.28 Agreement and instrument of purchase and sale by and between
Communications & Power Industries, Inc. and ST Microwave
Corporation, a wholly owned subsidiary of Signal Technology
Corporation, dated as of May 24,1996. *******
10.29 First Amendment to lease, dated as of September 9, 1996, by and
between Benicia Associates and Signal Technology Corporation.
*******
10.30 Employee Stock Purchase Plan. ******
10.31 Amendment No. 5 to the second and restated credit agreement, dated
as of September 30, 1993, with the First National Bank of Boston,
dated as of December 15, 1997.
10.32 Purchase and sale agreement by and between Communications and
Power Industries, Inc. (Seller) and Signal Technology Corporation
(Buyer), dated July 25, 1997 for all real estate at 26-28 Tozer
Road, Beverly Massachusetts.
21.1 Schedule of Registrant's subsidiaries.
23.1 Consent of Independent Accountants
* Incorporated by reference to the corresponding exhibit filed as
part of the Registrant's registration statement on Form S-1, as
amended (File No. 33-61124).
*** Incorporated by reference to the corresponding exhibit filed as
part of the Registrant's 1993 Annual Report on Form 10-K.
**** Incorporated by reference to the corresponding exhibit filed as
part of the Registrant's 1994 Annual Report on Form 10-K.
***** Incorporated by reference to the corresponding exhibit filed as
part of the Registrant's 1995 Annual Report on Form 10-K.
****** Incorporated by reference to the definitive Proxy Statement to be
filed with the SEC in connection with Company's Annual Meeting of
Shareholders to held on May 6, 1997.
******* Incorporated by reference to the correspondence exhibit filed as
part of the registrant's 1996 Annual Report on Form 10-K.
(b) Reports on Form 8-K
None
32
SIGNATURES
Pursuant to the requirements of Section 13 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.
SIGNAL TECHNOLOGY CORPORATION
By: \s\ Dale L. Peterson
------------------------------------------------
Chairman, Chief Executive Officer & President
Date: March 27, 1998
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 date indicated.
\s\ Dale L. Peterson March 27, 1998
--------------------------------------------------
Dale L. Peterson
Chairman, Chief Executive Officer & President
\s\ Bernard P. O'Sullivan March 27, 1998
--------------------------------------------------
Bernard P. O'Sullivan
Director
\s\ Harvey C. Krentzman March 27, 1998
--------------------------------------------------
Harvey C. Krentzman
Director
\s\ Joseph S. Schneider March 27, 1998
--------------------------------------------------
Joseph S. Schneider
Director
\s\ Larry L. Hansen March 27, 1998
--------------------------------------------------
Larry L. Hansen
Director
33
Report of Independent Accountants
To the Board of Directors and Stockholders
Signal Technology Corporation
We have audited the consolidated financial statements and financial
statement schedule of Signal Technology Corporation listed in Item 14 (a) (1) of
this form 10-K. These financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule 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, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Signal
Technology Corporation and Subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
San Jose, California COOPERS & LYBRAND L.L.P.
January 26, 1998
34
Schedule II Valuation and Qualifying Accounts
Years ended December 31, 1997, 1996 and 1995
- -------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
Description of Period Expenses Accounts of Period
- -------------------------------------------------------------------------------------------------------------------------
1995
Inventory reserve 5,065,000 934,000 (1,502,000)(2) 4,497,000
Allowance for doubtful
accounts 166,000 52,000 (52,000)(1) 166,000
- -------------------------------------------------------------------------------------------------------------------------
1996
Inventory reserve 4,497,000 1,308,000 (3,421,000)(2) 2,384,000
Allowance for doubtful
accounts 166,000 164,000 (160,000)(1) 170,000
- -------------------------------------------------------------------------------------------------------------------------
1997
Inventory reserve 2,384,000 1,833,000 (2,588,000)(2) 1,629,000
Allowance for doubtful
accounts 170,000 (8,000) (3,000)(1) 159,000
- -------------------------------------------------------------------------------------------------------------------------
Notes
(1) Write-off of bad debts
(2) Credit to inventory accounts for previously reserved amounts
35