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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] 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)
222 ROSEWOOD DRIVE, DANVERS, MA 01923-4502
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 774-2281
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 5, 1999, the aggregate fair value of the Registrant's Common Stock held
by non-affiliates was $20,806,665. On March 5, 1999, there were 7,583,661 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 Stockholders to
be held on May 4, 1999. 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 4
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 11
Item 6. Selected Consolidated Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 17
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 38
PART III
Item 10. Directors and Executive Officers of the Registrant 38
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners and
Management 38
Item 13. Certain Relationships and Related Transactions 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 39
Signatures 42
3
PART I
ITEM I. BUSINESS
Signal Technology Corporation (the "Company") has restated its consolidated
financial statements for fiscal years 1996 and 1997 and the first quarter of
1998. The adjustments were a result of an investigation by the Company's
management with the aid of its independent accountants and outside counsel. The
restatements were primarily required to record contract revenue and inventory
adjustments in the correct periods. The restated results for the years ended
1996 and 1997 have been reflected in Form 10-K/A filed by the Company on October
30, 1998 and for the quarter ended March 31, 1998 in Form 10-Q/A filed by the
Company on October 30, 1998. The consolidated financial statements and related
notes to consolidated financial statements set forth in this Form 10-K reflect
all such restatements.
GENERAL
Signal Technology Corporation (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 pursue existing business
opportunities at its current operations in the defense, space and communication
markets and acquire complementary businesses and product lines. While
consolidation continues in the defense industry, the budget down cycle appears
to have ended and the Company expects to take advantage of being one of the
remaining independent companies in defense electronics.
In 1996, the Company acquired certain product lines and associated assets and
backlog of Military Power Systems, a division of Transistor Devices Inc. and
sold Benecia Communications Corporation.
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
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 electronic
systems on existing 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 should also enable it to compete effectively in
the future.
STRUCTURE AND ORGANIZATION
The Company was incorporated in 1982 and became a public company in 1993. The
Company has five operating divisions; referred to as Arizona, California,
Systems, Keltec and Olektron and reports its operations within three segments:
Microwave Components and Subsystems (Arizona, California and
4
Systems), Power Management Products (Keltec) and Radio Frequency (RF) Components
and Subsystems (Olektron).
PRODUCTS AND CUSTOMERS
The Company's products are integrated into complex electronic systems and
subsystems that require precision control, management and generation of radio
and microwave frequencies. The Company is dedicated to supplying high quality
and highly reliable products that meet rigid customer requirements for
performance and on-time delivery, while at the same time being competitively
priced.
The following table sets forth information concerning net sales by business
segment for years ending December 31:
----------------------------------
(amounts in thousands) 1998 1997 1996
- ---------------------- ----------------------------------
Microwave Components & Subsystems $ 51,858 $ 59,362 $ 65,757
Power Management Products 24,262 25,298 29,788
RF Components & Subsystems 15,963 17,579 17,519
- --------------------------------------------------------------------------------
TOTAL $ 92,083 $102,239 $113,064
================================================================================
For selected financial data by business segment see ("Segment Information") note
15 to consolidated financial statements. Each of the Company's business segments
market products to one or more of the following industries:
DEFENSE
The Company 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 (ELINT). The
Company supplies products on key missile programs such as the AMRAAM, Tomahawk,
Sparrow, Standard Missile (SM), BAT and PAC3/Patriot missile system. Key
programs in ECM include the ALQ-99, ALQ-131, ALQ-135, ALQ-156, ALQ-165 (ASPJ),
ALQ-172, ALQ-184, ALQ-211 (SIRFC), IDECM, APR-48A (RFIS), APR-39, ALR-66/67 and
Salamandre. Radar programs include MILSTAR, ARINE, GRIFO and a number of active
electronically scanned array (AESA) programs. The Company provides microwave and
radio frequency (RF) 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
The Company provides products for spacecraft and launch vehicles. Principal
space applications include satellite communications, intelligence, surveillance
and sensing. The Company designs, develops and manufactures frequency components
such as isolators, circulators, oscillators and power components such as DC to
DC converters. The Company's products are used on satellite-based communication
systems such as Globalstar (TM), Iridium (TM), Tempo (TM), GPS (Global
Positioning System), SBIRS (Space Based Infared Sensor), HESSI (High Energy
Solar Spectroscopic Imager), N.E.A.R. (Near Earth Asteriod Rendezvous), Milstar
II and others. Such systems are designed to offer various combinations of voice,
data, video, paging and facsimile to telephones and data terminals,
environmental astrological experiment results and phenomena data, positioning
and locating data and threat detection and warning.
5
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, wireless local loop (WLL), digital radios, terrestrial
satellite communications (SATCOM)/(VSAT), modems, air traffic control, local
area and wide area networks and intelligence gathering. Unlike space and defense
electronic 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 23%, 20%, and 22% of the Company's net
sales in 1998, 1997, and 1996, respectively, the Company believes that the loss
of any single customer would not have a material adverse effect on the Company.
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
------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------
(dollars in thousands) $ % $ % $ %
- --------------------------------------------------------------------------------------------
U.S. government
Military $ 64,599 70% $ 77,117 75% $ 74,463 66%
Non-Military 1,262 1 792 1 2,988 3
U.S. Commercial 7,639 9 7,510 7 17,441 15
International
Military 16,689 18 14,420 15 11,343 10
Commercial 1,894 2 2,400 2 6,829 6
- --------------------------------------------------------------------------------------------
Total $ 92,083 100% $102,239 100% $113,064 100%
============================================================================================
GOVERNMENT CONTRACTS
A substantial portion of the Company's business is conducted under United States
government contracts primarily through subcontracts to prime contractors. 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. The majority of the Company's business is competitively bid.
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. The Company does participate in fixed
price development contracts.
SALES AND MARKETING
The Company markets its products through its own sales force and a network of
knowledgeable independent sales representatives and distributors. The Company's
sales force is comprised of divisional Vice Presidents, Marketing, regional
sales managers, sales personnel and support staff. The Company has independent
sales representatives in the U.S. and numerous foreign countries.
6
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 for
providing insight into strategies and for gathering information for product line
expansion and acquisitions.
PRODUCT ENGINEERING, MANUFACTURING AND DEVELOPMENT
The Company believes that its success is dependent upon 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 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 costs 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 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) 1998 1997 1996
- --------------------------------------------------------------------------------
Company-funded $ 274 $ 777 $ 522
Customer-sponsored 1,794 1,787 4,820
- --------------------------------------------------------------------------------
Total $2,068 $2,564 $5,342
================================================================================
SOURCES OF RAW MATERIALS
The raw materials and sub-components that 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
believes it could purchase similar or comparable raw materials from alternative
sources of supply on comparable terms. From time to time, the Company
experiences minor delays in obtaining raw materials and components; however,
such delays have not materially affected its operations.
BACKLOG
At December 31, 1998 and 1997, the Company had a backlog of unshipped firm
orders of $64,803 and $88,699, respectively. The Company expects to ship all of
the December 31, 1998 backlog within 1999, except for approximately $13,322
which will be shipped in later periods.
7
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.
EMPLOYEES
As of December 31, 1998, the Company had 754 full-time employees at its various
divisions. No employees are represented by unions. The Company believes its
relations with its employees are good.
INTELLECTUAL PROPERTY
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,
the Company believes that its technological position depends primarily on the
technical competence and the 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. The Company also relies on
a combination of copyright and trademark protection with respect to certain of
its intellectual property.
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 security
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.
8
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Danvers, Massachusetts.
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 does not include utilities, maintenance
and repairs, insurance and real estate taxes. The lease
expires in 2003. The current annual rent is $670,896 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. The Company
believes that there is capacity at the Company's facilities to absorb acquired
businesses of a certain size and product lines and/or internal growth. The
properties owned by the Company are all subject to either mortgages or
industrial revenue bond financing.
9
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.
SUNNYVALE INDEMNIFICATION CLAIM
Eaton Corporation has filed a suit against the Company in United States District
Court, Northern District of California, alleging that it has a contractual duty
to indemnify Eaton Corporation 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 Eaton Corporation. The indemnification claim was recently dismissed
at the trial level, but may be the subject of an eventual appeal. The Company
also believes that the ultimate disposition will not materially affect its
financial position or results of operations.
DECOURSEY V. SIGNAL TECHNOLOGY CORPORATION
This class action was filed on August 25, 1998 in the United States District
Court for the District of Massachusetts. The Complaint alleges that the Company
and its former chief executive officer, Dale Peterson, violated ss. 10(b) of the
Security Exchange Act of 1934 and Rule 10b-5 and seeks monetary damages. The
Complaint alleges that various public statements by the Company during 1997 and
1998 were false or misleading as a result of alleged accounting irregularities.
The Company intends to defend the matter fully.
L3 COMMUNICATIONS CORPORATION V. SIGNAL TECHNOLOGY CORPORATION, et al
This case was filed on September 3, 1998 in the Superior Court in Fulton County,
Georgia. The Complaint alleges that certain former employees of L-3
Communications now working for the Company unlawfully misappropriated
confidential and trade secret information on behalf of the Company and
unlawfully induced other L-3 Communications employees to join the Company. L-3
Communications has brought claims for civil conspiracy, tortious interference
with prospective and contractual relations, under both the Georgia Deceptive
Trade Practices Act and the Uniform Trade Secrets Act and seeks monetary
damages. The case is in the initial stages. The Company intends to defend the
matter fully.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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. The high and low closing prices for shares of the
Company's Common Stock for the past two years were as follows:
1998 1997
---------------------------------------------
High Low High Low
- --------------------------------------------------------------------------------
First Quarter $ 7 $ 4 3/4 $ 8 7/16 $ 6 1/2
Second Quarter 6 1/2 5 1/4 8 1/4 6 1/8
Third Quarter 6 3/8 3 1/2 7 5/8 5 5/8
Fourth Quarter 3 1/2 2 1/2 7 4 5/8
- --------------------------------------------------------------------------------
There were approximately 95 holders of record of the Company's Common Stock on
March 5, 1999. The closing price per share of the Company's Common Stock on
March 5, 1999 as reported on the AMEX was $ 4 1/8. As of August 17, 1998 the
American Stock Exchange halted trading on the Company's stock and trading
resumed on November 9, 1998 upon the Company's filing of Form 10-Q for the
quarter ended June 30, 1998 on October 23, 1998 and an amended Form 10-K/A for
the year ending December 31, 1997 and an amended Form 10-Q/A for the first
quarter of 1998 both filed October 30, 1998.
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.
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands,
except per share amounts) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
OPERATIONS
- ----------
Net sales $ 92,083 $ 102,239 $ 113,064 $ 89,728 $ 93,094
Operating income (loss) (1) (6,600) 76 4,252 1,040 6,685
Income (loss) before taxes (7,497) (994) 2,907 (123) 5,839
Net income (loss) (7,173) (657) 1,698 (269) 3,562
Net income (loss) per share (1):
Basic (0.97) (0.09) 0.24 (0.04) 0.53
Diluted $ (0.97) $ (0.09) $ 0.22 $ (0.04) $ 0.48
- ------------------------------------------------------------------------------------------------------
Shares used in calculating net income
(loss) per share:
Basic 7,365 7,268 7,076 6,880 6,752
Diluted 7,365 7,268 7,676 6,880 7,362
(1) In 1995, includes restructuring expense of $779 or $(0.07) per share
- ------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
- ------------------
Current assets $ 30,707 $ 42,670 $ 47,096 $ 46,421 $ 39,216
Current liabilities 11,006 13,631 16,065 15,682 12,035
Total assets 48,983 62,840 65,644 66,117 58,431
Long-term debt, less current maturities 9,928 13,408 13,408 17,283 12,903
Total debt 10,408 13,888 14,729 17,658 13,278
Stockholders' equity 26,487 34,274 34,362 31,944 31,913
Shares outstanding at year-end 7,349 7,417 7,172 6,949 6,827
Book value per share $ 3.60 $ 4.62 $ 4.79 $ 4.60 $ 4.67
- ------------------------------------------------------------------------------------------------------
SELECTED DATA
- -------------
Orders $ 68,187 $ 101,875 $ 103,829 $ 110,656 $ 90,249
Year-end backlog $ 64,803 $ 88,699 $ 89,063 $ 92,837 $ 65,998
Employees at year-end 754 817 993 894 854
Revenue per employee $ 122 $ 125 $ 114 $ 100 $ 109
- ------------------------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As previously reported, the restated results for the years ended 1996 and 1997
have been reflected in Form 10-K/A filed by the Company on October 30, 1998 and
for the quarter ended March 31, 1998 in Form 10-Q/A filed by the Company on
October 30, 1998. The consolidated financial statements and related notes to
consolidated financial statements set forth in this Form 10-K reflect all such
restatements. The adjustments were a result of an investigation by the Company's
management with the aid of its independent accountants and outside counsel. The
restatements were primarily required to record contract revenue and inventory
adjustments in the correct periods.
CAUTIONARY NOTE
The Annual Report on Form 10-K may contain "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including, but
not limited to, (i) trends in the federal defense budget and military reliance
upon sophisticated electronic equipment, (ii) the impact upon the Company of
loss of customers
12
or sales, (iii) the impact and effects of competition and the Company's
continued ability to compete in its markets, (iv) the suitability and adeqacy of
the Company's properties for its intended uses, (v) the Company's anticipated
policy with respect to dividends, (vi) the incidence, materiality, and frequency
of fluctuations in the Company's operating results, (vii) the Company's optimism
about improvements in its operating deficiencies, (viii) projected costs of
ameliorating risks associated with, and problems caused by, the Year 2000
problem, and (ix) certain other statements identified or qualified by words such
as "likely", "will", "suggests", "may", "would", "could", "should", "expects",
"anticipates", "estimates", "plans", "projects", "believes", "is optimistic
about", or similar expressions (and variants of such words or expressions).
Investors are cautioned that forward-looking statements are inherently
uncertain. These forward-looking statements represent the best judgment of the
Company as on the date of this Annual Report on Form 10-K, and the Company
cautions readers not to place undue reliance on such statements. Actual
performance and results of operations may differ materially from those projected
or suggested in the forward-looking statements due to certain risks and
uncertainities including, without limitation, risks associated with fluctuations
in the Company's operating results, volume and timing of orders received,
changes in the mix of products sold, competitive pricing pressure, the Company's
ability to meet or renegotiate customer demands, the ability to anticipate
changes in the market, the Company's ability to finance its operations on terms
that are acceptable, the Company's ability to attract and retain qualified
personnel including the Company's management, changes in the global economy,
changes in regulatory processes, the dependence on certain key customers
(including the U.S. government), the Company's ability to realize sufficient
margins on sales of its products, the availability and timing of funding for the
Company's current products and the development of future products, and the risks
the Company faces with respect to the Year 2000 problem.
OVERVIEW
The Company's principal business is the design, development, manufacture and
marketing of sophisticated electronic components and subsystems. The Company's
principal strategy for growth is to pursue existing business opportunities at
its current operations in the defense, space and communication markets and
acquire complementary businesses and product lines.
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 requirements. As a result of the foregoing or other
factors, there can be no assurance that the Company will not experience material
fluctuations in its 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, 1998, 1997 AND 1996
Net sales for 1998 totaling $92.1 million decreased 10% from 1997 net sales of
$102.2 million. Backlog decreased to $64.8 million at the end of 1998 from $88.7
million at the end of 1997 on new orders of $68.2 million in 1998 compared to
$101.9 million in 1997. A reduction in orders was the primary reason for the
decreased sales in 1998. Orders throughout the Company have been moderately
affected by economic conditions in Asia. Government sanctions placed on certain
shipments to India and Pakistan have also delayed or cancelled shipments and
postponed new orders.
1997 net sales of $102.2 million decreased approximately 10% compared to 1996
net sales of $113.1 million. Backlog decreased to $88.7 million at the end of
1997 from $89.1 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
accounted for 42% of the decrease. Shipments at the Keltec operation were
adversely impacted by production inefficiencies including key material shortages
throughout the year.
13
For the year ended 1998 gross profit as a percentage of sales decreased to 15.1%
from 17.6% in 1997. The decrease in gross profit percentage is attributable to
the Company currently recognizing losses on contracts and inventory write-downs
taken at the Keltec operation and to a lesser extent the Microwave Components
and Subsystems business.
Gross profit as a percentage of net sales decreased to 17.6% in 1997 from 21.3%
in 1996. Gross profit was adversely affected by lower shipment levels at its
Keltec opeation and the costs associated with the inefficienceis previously
discussed. In addition, both Keltec and Arizona operations experienced
additional costs associated with several development contracts which contributed
significantly to the decrease in gross profit.
Selling, general and administrative expenses increased to $20.2 million for the
year ended 1998 from $17.1 million in 1997. The $3.1 million increase was in
part due to the Company taking a charge for environmental remediation cost at
the Weymouth facility due to a settlement with the State of Massachusetts and a
revision to its estimates for future remediation costs. In addition, the Company
recognized increased legal and accounting costs associated with the Company's
restatement of its 1996 and 1997 financial statements as well as expenses
related to the relocation of new executive employees and severance paid to
former executive employees.
Selling, general and administrative expenses decreased to approximately $17.1
million for the year ended December 31, 1997 from $19.3 million for the year
ended December 31, 1996. As a percentage of sales, these expenses were 16.8% in
1997 and 17.0% in 1996. While net sales decreased, as discussed above, the
Company was able to achieve the decrease in selling, general and administrative
expenses primarily due to reductions in personnel.
Company-funded research and development for 1998 was $.3 million compared to $.8
million in 1997 and $.5 million in 1996. The Company was not engaged in any
significant company-funded research and development efforts during the years
1998, 1997 or 1996.
BUSINESS SEGMENTS
The Company has five operating divisions engaged in the engineering,
manufacturing and marketing of electronic components and subsystems. The three
operating divisions aggregated into the Microwave Components and Subsystems
segment have similar products, production processes and types of customers.
MICROWAVE COMPONENTS AND SUBSYSTEMS
Engaged in the design and manufacture of microwave oscillators, frequency
synthesizers and converters, space qualified microwave assemblies, microwave
amplifiers and microwave switch matrices.
POWER MANAGEMENT PRODUCTS
Engaged in the design and manufacture of military high and low voltage power
supplies, DC to DC converters and military high power amplifiers and
transmitters for use in radar systems.
RADIO FREQUENCY (RF) COMPONENTS AND SUBSYSTEMS
Engaged in the design and manufacture of radio frequency and intermediate
frequency signal processing components, integrated multi-function devices, and
switching systems for the Space, Telecommunications and Military markets.
14
The following tables display net sales and operating income by business segment
for each of the three years ending December 31 which correspond to the segment
information presented in Note 15 to the consolidated financial statements.
(amounts in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Net Sales
- --------- --------------------------------------
Microwave Components & Subsystems $ 51,858 $ 59,362 $ 65,757
Power Management Products 24,262 25,298 29,788
RF Components & Subsystems 15,963 17,579 17,519
--------------------------------------
$ 92,083 $ 102,239 $ 113,064
--------------------------------------
Operating Income
- ---------------- --------------------------------------
Microwave Components & Subsystems $ 2,265 $ 2,856 $ 4,891
Power Management Products (7,401) (3,676) (612)
RF Components & Subsystems 2,127 2,300 1,962
Other (1) (3,591) (1,404) (1,989)
--------------------------------------
$ (6,600) $ 76 $ 4,252
--------------------------------------
(1) Other is primarily corporate selling, general and administrative expenses
that have not been allocated to the business segments.
- --------------------------------------------------------------------------------
MICROWAVE COMPONENTS & SUBSYSTEMS - Net sales of Microwave Components and
Subsystems decreased by 13% in 1998 compared to 1997 and decreased 10% in 1997
compared to 1996. The principal reason for the 1998 reduction in sales in this
segment was a $6.5 million reduction in sales at the Arizona operation caused
mainly by the completion of two large contracts in 1997.
Operating income of Microwave components and Subsystems decreased by 21% in 1998
compared to 1997 and 42% in 1997 compared to 1996. The 1998 reduction was caused
by a $1.8 million reduction in income at the California operation due to
contract losses and sales volume reductions offset by increases in income at the
Arizona and Systems operations.
POWER MANAGEMENT PRODUCTS - Net sales of Power Management Products decreased by
4% in 1998 compared to 1997 and by 15% in 1997 compared to 1996. The 1998
reduction was caused by late contract deliveries.
The operating loss of Power Management Products was $7.4 million in 1998
compared to $3.7 million in 1997 and $.6 million in 1996. The loss is
attributable to recognizing losses on contracts and inventory write-downs.
RF COMPONENTS & SUBSYSTEMS - Net Sales of RF Components and Subsystems decreased
by 9% in 1998 compared to 1997 and 1996. This reduction in 1998 was caused by a
reduction in new orders booked in 1998 which was a result of the loss of certain
programs and program slippages.
Operating income of RF Components and Subsystems decrease by 8% in 1998 compared
to 1997 and increased by 17% compared to 1996. The reduction in 1998 income is
mainly attributable to the abovementioned volume reductions.
15
Interest expense in 1998 decreased to $.9 million from $1.1 million in 1997 and
from $1.3 million in 1996. The decreased interest expense reflects slightly
lower interest rates and lower levels of borrowings. Total debt decreased to
$10.4 million at the end of 1998 from $13.9 million at the end of 1997.
The benefit for income taxes in 1998 was $.3 million on a pretax loss of $7.5
million. The effective income tax rate was (4.3%) benefit in 1998 as compared to
(33.9%) benefit in 1997 and 41.6% provision in 1996. At December 31, 1998 the
Company has a valuation allowance of $2.2 million to reserve for the Company's
deferred tax asset because it is more likely than not that the deferred tax
asset may not be realized. At December 31, 1998 the Company had refundable
income taxes of $2.3 million. The Company expects refunds of approximately $2
million to be collected during the second and third quarters of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity during 1998, 1997 and 1996 was cash
flow from operations, totaling $6.9 million, $4.9 million and $6.1 million
respectively.
The Company's 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. At various dates throughout the year the
Company was not in compliance with certain covenants and the Company obtained
waivers with respect to such non-compliance. The Company was in compliance at
year end December 31, 1998. The Company and its bank have amended the loan
agreement as of October 20, 1998. Among other changes, the amendment increases
the interest charged on the revolving credit facility and the real estate term
loans from the bank's base rate to base rate plus 1/2%. The amount available for
current borrowing is calculated on the Company's eligible receivables as defined
in the loan agreement but not to exceed $15 million. This provision is not
anticipated to have a material impact on the Company's cash requirements in the
foreseeable future.
At December 31, 1998, the Company had working capital of $19.7 million,
including cash of $2.4 million, as compared to working capital and cash of $29.0
million and $1.1 million, respectively at December 31, 1997. In 1998, the
Company paid back borrowings under the Company's revolving credit facility of
$3.0 million and purchased $.9 million of treasury stock. 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, formerly under lease. The
Company had no expenditures for acquisitions and related costs in 1998 or 1997
and used cash in 1996 of $1 million for such purposes.
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 pursue
acquisition opportunities.
IMPACT OF YEAR 2000
Management is aware of the potential software and hardware anomalies associated
with the upcoming date change commonly known as the Year 2000 problem (Y2K). A
comprehensive review of the Company's computer systems, software and internal
embedded systems has been undertaken and the Company is not aware at this time
of any significant year 2000 issues that will not be resolved prior to the year
2000. The Company is on schedule in its corporate-wide plan to achieve
compliance by the third quarter of 1999.
16
The Company is presently in the third phase of a five-phase plan to bring about
complete compliance in all of its products, internal systems, and suppliers and
thus mitigate against disruption of the Company's business at the turn of the
century. The five phases of the Company's plan are Awareness, Assessment,
Remediation, Testing, and Implementation. Awareness and Assessment have been
completed at this time. Remediation, the phase that the Company is presently in,
is scheduled to be completed by the end of April 1999. Testing, the fourth
phase, is scheduled to be completed by the end of June 1999. The last phase,
Implementation, is scheduled to be completed in September 1999. All of these
different phases overlap each other. The areas of focus are; Products, Computer
Software, Computer Hardware, Embedded Systems, and Supplier Compliance. Each of
the Company's five operating divisions is separately implementing these phases
and because of the varied complexity of the areas of focus at each division,
some of the divisions are ahead of the overall schedule.
The Company has evaluated all of its product lines and has found no product with
embedded date functions that the company believes would cause any Y2K exposure.
As part of its overall plan, the Company has surveyed its suppliers to determine
their Y2K readiness. The Company's understands that its suppliers are an
integral part of the Company's success. To the extent the Company believes
certain suppliers will not be Y2K compliant, it will seek alternate suppliers.
The projected costs of $475 thousand associated with the Company's overall plan
are not expected to have a material effect on the Company's results of
operations or financial position. Costs include internal labor, outside
consultants and, to a lesser extent, new computer hardware and software required
for Y2K compliance. To date, the Company has expended approximately $165
thousand.
At this time, the Company has not developed a "worst case" scenario or an
overall year 2000 contingency plan and does not intend to do so unless, as a
result of its ongoing year 2000 review, management believes such plans are
warranted. The only contingency planning that is currently set to be implemented
will come as a result of a comprehensive survey of the Company's suppliers in
order to learn which will be impacted by the Y2K problem.
Risks associated with the Y2K problem include, among other things, (i) failure
of systems and software used by the Company's customers which will impact their
financial ability to purchase products from the Company, (ii) failure of systems
and software used by vendors and third-party service providers upon which the
Company relies for outsourced services and products, (iii) Y2K problems with the
Company's suppliers which could negatively impact the Company's ability to full
fill its own orders promptly, and (iv) errors or failures of systems in which
the Company's devices are implemented which could result in improper interfacing
or operation of such devices.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not engage in trading market risk sensitive instruments or
purchasing hedging instruments or "other than trading" instruments that are
likely to expose the Company to market risk, whether interest rate, foreign
currency exchange, commodity price or equity price risk. The Company has not
purchased options or entered into swaps or forward or futures contracts. The
Company's primary market risk exposure is that of interest rate risk on
borrowings under its revolving credit facility, which are subject to interest
rates based on the banks base rate plus 1/2%. The Company also has a
collateralized real estate loan at the bank's base rate and a change in the
applicable interest rate on these loans would affect the rate at which the
Company could borrow funds.
17
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) 1998 1997 1996
- ----------------------------------------------------------------------------------
Net sales $ 92,083 $ 102,239 $ 113,064
Cost of sales 78,203 84,247 89,020
- ----------------------------------------------------------------------------------
Gross profit 13,880 17,992 24,044
Selling, general and administrative expenses 20,206 17,139 19,270
Research and development expenses 274 777 522
- ----------------------------------------------------------------------------------
Operating income (loss) (6,600) 76 4,252
Interest expense 897 1,070 1,345
- ----------------------------------------------------------------------------------
Income (loss) before income taxes (7,497) (994) 2,907
- ----------------------------------------------------------------------------------
Provision (benefit) for income taxes (324) (337) 1,209
- ----------------------------------------------------------------------------------
Net income (loss) $ (7,173) $ (657) $ 1,698
==================================================================================
Net income (loss) per share
Basic $ (0.97) $ (0.09) $ 0.24
Diluted $ (0.97) $ (0.09) $ 0.22
==================================================================================
Shares used in calculating net income
(loss) per share
Basic 7,365 7,268 7,076
Diluted 7,365 7,268 7,676
==================================================================================
The accompanying notes are an integral part of the consolidated financial
statements
18
SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------
(dollar amounts in thousands
except per share data) 1998 1997
- -----------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 2,366 $ 1,127
Accounts receivable, net of allowance for doubtful
accounts of $332 in 1998 and $159 in 1997 12,894 15,901
Inventories, net of progress payments 11,358 20,205
Deferred income taxes 1,562 2,327
Refundable income taxes 2,319 2,624
Prepaid expenses and other current assets 208 486
- -----------------------------------------------------------------------------------
Total current assets 30,707 42,670
- -----------------------------------------------------------------------------------
Property, plant and equipment, net 14,935 16,400
Intangibles assets, net 2,505 2,924
Other assets 836 846
- -----------------------------------------------------------------------------------
Total assets $ 48,983 $ 62,840
===================================================================================
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 480 $ 480
Accounts payable 3,067 5,354
Accrued expenses 7,456 6,620
Customer advances 3 1,177
- -----------------------------------------------------------------------------------
Total current liabilities 11,006 13,631
- -----------------------------------------------------------------------------------
Deferred income taxes 1,562 1,527
Long-term debt, net of current maturities 9,928 13,408
Commitments and contingencies (Note 10)
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; none issued and outstanding
Common stock, $0.01 par value; 30,000,000 authorized;
7,501,323 shares in 1998 and 7,423,040 shares
in 1997 issued and 7,349,223 shares in 1998
and 7,417,040 shares in 1997 outstanding 75 74
Additional paid-in-capital 12,947 12,693
Retained earnings 14,365 21,538
- -----------------------------------------------------------------------------------
27,387 34,305
Less treasury stock: 152,100 shares in 1998 and
6,000 shares in 1997, at cost (900) (31)
- -----------------------------------------------------------------------------------
Total stockholders' equity 26,487 34,274
- -----------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 48,983 $ 62,840
===================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
19
SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
-----------------------------------------------------------------------------------------------------
Common Stock Treasury Stock
----------------------- Additional ---------------------- Total
(dollar amounts Shares Paid-in Unearned Retained Amount Stockholders'
in thousands) Issued Amount Capital Compensation Earnings Shares at Cost Equity
- --------------------------------------------------------------------------------------------------------------------------------
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 1,698 1,698
- --------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 7,171,506 72 12,095 22,195 -- -- 34,362
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 loss (657) (657)
- --------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 7,423,040 74 12,693 21,538 34,274
Exercise of stock options 36,599 1 74 75
Issuance of common stock 41,684 180 180
Stock repurchase program (146,100) (869) (869)
Net loss (7,173) (7,173)
- --------------------------------------------------------------------------------------------------------------------------------
December 31, 1998 7,501,323 $ 75 $ 12,947 $ $ 14,365 (152,100) $ (900) $ 26,487
================================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
20
SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
---------------------------------
(dollar amounts in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (7,173) $ (657) $ 1,698
Adjustments to reconcile net income (loss) to
net cash provided by operations:
Depreciation 3,028 3,292 3,368
Amortization 419 422 390
(Gain) or loss on disposal of property,
plant and equipment (4) 10 (95)
Unearned compensation -- -- 54
Deferred taxes 800 380 (186)
Changes in operating assets and liabilities:
Accounts receivable 3,007 2,482 (2,400)
Inventory 8,847 2,898 3,941
Refundable income taxes 305 (2,205) 104
Prepaid expenses and other current assets 278 (154) 199
Accounts payable (2,287) 65 (1,266)
Accrued expenses 836 (1,492) 2,820
Income taxes payable -- (295) 295
Customer advances (1,174) 129 (2,808)
- ------------------------------------------------------------------------------------
Net cash provided by operating activities 6,882 4,875 6,114
- ------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisitions and associated costs -- -- (1,000)
Additions to property, plant and equipment (1,608) (5,404) (1,960)
Proceeds from disposals of property, plant
and equipment & other 59 58 341
- ------------------------------------------------------------------------------------
Net cash used by investing activities (1,549) (5,346) (2,619)
- ------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 75 568 666
Proceeds from issuance of stock 180 32 --
Purchase of treasury stock (869) (31) --
Borrowings on bank term note -- 2,980 --
Borrowings under bank revolving credit facilities 26,950 33,700 24,029
Repayment of borrowings under bank revolving
credit facilities (29,950) (36,200) (27,529)
Payments of long-term debt (480) (1,321) (375)
- ------------------------------------------------------------------------------------
Net cash used by financing activities (4,094) (272) (3,209)
- ------------------------------------------------------------------------------------
Net increase (decrease) in cash 1,239 (743) 286
Cash, beginning of year 1,127 1,870 1,584
- ------------------------------------------------------------------------------------
Cash, end of year $ 2,366 $ 1,127 $ 1,870
====================================================================================
The accompanying notes are an integral part of the consolidated financial
statements
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. (A) RESTATEMENT ADJUSTMENTS
The Company has restated its consolidated financial statements for fiscal years
1996 and 1997 and for the first fiscal quarter of 1998. As announced in the
Company's August 17, 1998 press release, the adjustments were primarily a result
of an investigation by corporate management with the aid of its independent
accountants and outside counsel. The restatements were required to reverse
contract revenue recorded in advance of shipment, to recognize losses on
contracts when they were estimable and probable and to reduce inventory to its
net realizable value. Certain transactions which were reversed have been
recorded as revenues in later periods when the contract work was completed. The
restated results for the years ended 1996 and 1997 have been reflected in Form
10-K/A filed by the Company on October 30, 1998 and for the quarter ended March
31, 1998 in Form 10-Q/A filed by the Company on October 30, 1998. The
consolidated financial statements and related notes to consolidated financial
statements set forth in this Form 10-K reflect all such restatements. A summary
of the impact of such restatements for the years ended December 31, 1997 and
1996 is as follows:
Consolidated Statements of Operations
- -------------------------------------
(in thousands, except per share data)
Year ended Year ended
December 31, 1997 December 31, 1996
Previously As Previously As
Reported Restated Reported Restated
---------- --------- ---------- ---------
Net sales $ 102,279 $ 102,239 $ 114,241 $ 113,064
Gross profit 19,704 17,992 24,834 24,044
Operating income 1,788 76 5,042 4,252
Income (loss) before income
taxes 718 (994) 3,697 2,907
Net income (loss) 338 (657) 2,245 1,698
Net income (loss) per share
Basic $ 0.05 $ (0.09) $ 0.32 $ 0.24
Diluted $ 0.04 $ (0.09) $ 0.29 $ 0.22
Consolidated Balance Sheets
- ------------------------------------
(in thousands)
Year ended
December 31, 1997
Previously As
Reported Restated
---------- --------
Net inventories $22,707 $20,205
Total current assets 44,212 42,670
Total assets 64,382 62,840
Current liabilities 13,631 13,631
Retained earnings 23,080 21,538
Stockholders' equity 35,816 34,274
1. (B) 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
pursuing existing business opportunities at its current operations in defense,
space
22
and communication. The Company has five operating divisions and reports its
operations within three segments: Microwave Components and Subsystems, Power
Management Products and Radio Frequency (RF) Components and Subsystems.
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.
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 on a percentage of completion basis generally using
units of delivery as the basis to measure the contract work which has been
completed. 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.
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.
EARNINGS PER SHARE
The Company presents 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 for all
periods using the treasury stock method.
23
COMPREHENSIVE INCOME (LOSS)
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS 130"), effective January 1, 1998. SFAS 130
requires that items defined as comprehensive income, such as foreign currency
translation adjustments, be separately classified in the financial statements
and that the accumulated balance of other comprehensive income be reported
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. There were no differences between net income
(loss) and comprehensive income (loss) for the years ended December 31, 1998,
1997 and 1996.
INVENTORIES
Inventories, other than inventoried costs relating to contracts and programs,
are stated at the lower of cost (principally first-in, first-out) or market.
Inventoried costs relating to contracts are stated at the actual production
cost, including overhead, and other related non-recurring costs, incurred to
date reduced by amounts identified with revenue recognized on units delivered or
progress completed. Inventoried costs relating to long-term contracts and
programs are reduced by charging any amounts in excess of estimated realizable
value to cost of sales.
In accordance with industry practice, inventories may 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.
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,
1998 and 1997 accumulated amortization was $1,730 and $1,311 respectively. At
each reporting date, management assesses whether there has been a permanent
impairment in the value of its long-term assets and the amount of such impaiment
by comparing anticipated undiscounted future operating income from acquired
business units with the carrying value of the related goodwill. The factors
considered by management in performing this assessment include current operating
results, trends and prospects, as well as the effects of demand, competition and
other economic factors.
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
24
extensions of credit, maintaining reserves for potential credit losses, and such
losses have been within management's expectations.
Also, the Company's international sales are 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. Substantially
all of the Company's cash is deposited in a single bank.
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.
RECLASSIFICATIONS
Certain amounts in the financial statements have been reclassified to conform
with the current year's presentation.
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. Seller financing in the amount of $946 was paid off in 1997. The
transaction was accounted for as a purchase and results of operations since the
acquisition date are included in the consolidated statements of income.
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. OTHER ASSETS
At December 31, 1998 and 1997 Other Assets includes a mortgage receivable in the
amount of $831 and $842, respectively. In April 1996, the Company issued the
mortgage related to the sale of its former operating facility in Weymouth,
Massachusetts and retained an environment liability present at the site. The
mortgage receivable matures on September 1, 2023, and principal and interest
payments of
25
approximately $6 are due monthly (see note 10 Commitments and Contingencies).
The Company earns interest on the mortgage receivable at a rate of 8.0% per
annum and interest income for the years ended December 31, 1998, 1997 and 1996
amounted to $63, $61, and $41, respectively.
5. STATEMENTS OF CASH FLOWS
Years ended December 31
------------------------
1998 1997 1996
-----------------------------------------------------------------------
CASH PAID DURING PERIOD FOR:
Interest $ 842 $1,063 $1,392
Taxes -- 1,227 736
-----------------------------------------------------------------------
NON CASH ACTIVITY:
TDI note payable -- -- 946
Building sold in exchange
for note receivable -- -- 858
=======================================================================
6. INVENTORIES
December 31
---------------------
1998 1997
-----------------------------------------------------------------------
Raw materials $ 3,595 $ 6,239
Work in progress 10,936 17,065
Finished goods 279 484
---------------------
14,810 23,788
Less: unliquidated progress payments (3,452) (3,583)
---------------------
$ 11,358 $ 20,205
=======================================================================
7. PROPERTY, PLANT AND EQUIPMENT
December 31
---------------------
1998 1997
-----------------------------------------------------------------------
Land $ 992 $ 992
Building and improvements 9,986 9,793
Machinery and equipment 25,570 25,636
Furniture and fixtures 3,025 2,753
---------------------
39,573 39,174
Less accumulated depreciation (24,638) (22,774)
---------------------
Net property, plant and equipment $ 14,935 $ 16,400
=======================================================================
8. ACCRUED EXPENSES
December 31
---------------------
1998 1997
-----------------------------------------------------------------------
Accrued payroll & employee benefits $2,248 $1,939
Accrued vacation 1,129 1,164
Accrued warranty 1,249 772
Accrued commissions 934 993
Other accrued expenses 1,896 1,752
-----------------------------------------------------------------------
$7,456 $6,620
=======================================================================
26
9. LONG-TERM DEBT AND NOTES PAYABLE
December 31
-----------------------
1998 1997
-----------------------------------------------------------------------
Massachusetts Industrial Revenue Bond,
maturing in 2009, interest at 62% of
the prime rate plus 1/2% effective
interest rate of 4.6% and 4.7%, payable
in annual principal payments of $80 $ 808 $ 888
Bank revolving credit facility 4,000 7,000
Bank real estate term loan facility 5,600 6,000
-----------------------------------------------------------------------
10,408 13,888
Less: current maturities (480) (480)
-----------------------------------------------------------------------
$ 9,928 $ 13,408
=======================================================================
The Massachusetts Industrial Revenue Bond is collateralized by real estate with
a net book value of $1,384 at December 31, 1998.
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.
In the event that the facility is not extended or renegotiated, any amounts
borrowed would become due at the expiration date, as a result all amounts have
been classified as long-term. 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, 1998 and 1997, the weighted average interest rate was 7.14% and
7.57% respectively. The Company also pays a quarterly commitment fee at an
annual rate of 3/8% on the amount of the unused facility. After reduction for
outstanding letters of credit under the Revolver, the Company has approximately
$11,000 available as of December 31, 1998.
The Real Estate Loan is collateralized by real estate with a net book value of
$5,127 at December 31, 1998. Maturing in January 2003, the Real Estate Loan is
payable in quarterly principal payments of $100, plus interest at the bank's
base rate (7.75% at December 31, 1998), with the last installment equal to the
remaining unpaid loan balance.
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 and, if not corrected,
could accelerate the maturity of any borrowings outstanding. At various dates
throughout the year the Company was not in compliance with certain covenants and
the Company obtained waivers with respect to such non-compliance. The Company
was in compliance at year end December 31, 1998. The Company and its bank have
amended the loan agreement as of October 22, 1998. Among other changes, the
amendment increases the interest charged on the revolving credit facility and
the real estate term loans from the bank's base rate to base rate plus 1/2%. The
amount available for current borrowing is calculated on the Company's eligible
receivables as defined in the agreement but not to exceed $15 million. This
provision is not anticipated to have a material impact on the Company's cash
requirements in the foreseeable future.
27
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
which are inflationary in nature, renewals and purchase options and the Company
is generally responsible for taxes, maintenance and repairs. Aggregate rental
expense included in operations amounted to $907 in 1998, $1,256 in 1997 and $915
in 1996. Future minimum lease payments under noncancellable operating leases
with an initial term exceeding one year are as follows:
1999 $ 841
2000 845
2001 879
2002 878
2003 721
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 at 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
exactly 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 1998 the Company took a charge for
environmental remediation costs due to a settlement with the State of
Massachusetts and a revision to its estimates for future remediation costs at
the site.
During 1997, the Company received funds from a third party in return for a
complete release from liability for any responsibility for the contamination.
This $350 thousand settlement has been included in the Company's accrual for
remediation.
Sunnyvale Indemnification Claim:
A third party has filed a 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 indemnification claim was recently
dismissed at the trial level, but may be the subject of an eventual appeal. The
Company believes the dismissal will be upheld and also has counterclaims it
continues to assert. The Company also believes that the ultimate disposition
will not materially affect its financial position or results of operations.
DeCoursey v. Signal Technology Corporation:
This purported class action was filed on August 25, 1998 in the United States
District Court for the District of Massachusetts. The Complaint alleges that the
Company and its former chief executive officer, Dale Peterson, violated ss.
10(b) of the Security Exchange Act of 1934 and Rule 10b-5 and seeks
28
monetary damages. The Complaint alleges that various public statements by the
Company during 1997 and 1998 were false or misleading as a result of alleged
accounting irregularities. The Company intends to defend the matter fully.
L3 Communications Corporation v. Signal Technology Corporation, et al:
This case was filed on September 3, 1998 in the Superior Court in Fulton County,
Georgia. The Complaint alleges that certain former employees of L-3
Communications now working for the Company unlawfully misappropriated
confidential and trade secret information on behalf of the Company and
unlawfully induced other L-3 Communications employees to join the Company. L-3
Communications has brought claims for civil conspiracy, tortious interference
with prospective and contractual relations, under both the Georgia Deceptive
Trade Practices Act and the Uniform Trade Secrets Act and seeks monetary
damages. The case is in the initial stages. The Company intends to defend the
matter fully.
T-3 Contract:
The Company is currently committed to a long term contract at its Keltec
division (the T-3 contract) for amplifiers for Raytheon. The current contract
value is $764. If Raytheon exercises all of its options within this contract,
the total value could be in excess of $19,000. Based on an assessment by
management in 1998, if all options are exercised at current estimated costs and
prices, the Company's loss could total up to $4,000. In 1999 the Company
negotiated new prices and specifications for the same amplifiers under a new
contract and the Company believes prices are at Keltec's manufacturing cost. The
Company believes that other future orders and options for T-3 amplifliers will
be renegotiated.
29
11. INCOME TAXES
Years ended December 31
1998 1997 1996
- --------------------------------------------------------------------------------
Current (benefit) provision
Federal $(1,121) $ (717) $ 1,269
State 0 0 174
- --------------------------------------------------------------------------------
Deferred (benefit) provision
Federal (936) 317 (430)
State (480) 63 196
- --------------------------------------------------------------------------------
Less: Valuation allowance
Federal 1,544 0 0
State 669 0 0
- --------------------------------------------------------------------------------
(Benefit) provision for income taxes $ (324) $ (337) $ 1,209
================================================================================
The Company's effective tax rate differs from the statutory federal income tax
rate as follows:
Years ended December 31
1998 1997 1996
- --------------------------------------------------------------------------------
Statutory federal income tax rate (34.0)% (34.0)% 34.0%
State income taxes, net of federal benefit (4.2) (7.8) 7.4
Benefit from foreign sales corporation -- (2.4)
Non-deductible expenses and other 4.4 7.9 2.6
Change in valuation allowance 29.5 -- --
- --------------------------------------------------------------------------------
EFFECTIVE TAX RATE (4.3)% (33.9)% 41.6%
================================================================================
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
--------------------
1998 1997
- --------------------------------------------------------------------------------
Deferred tax asset:
Net operating losses and credits $ 972 $ 317
Vacation accrual 293 417
Inventories 792 776
Warranty 222 306
Deferred compensation 267 243
Environmental reserve 388 --
Contract reserves 419 --
Other 422 268
- --------------------------------------------------------------------------------
Gross deferred tax asset 3,775 2,327
Less: valuation allowance 2,213 --
- --------------------------------------------------------------------------------
Net deferred tax asset $1,562 $2,327
Deferred tax liability:
Depreciation $1,562 $1,527
- -------------------------------------------------------------------------------
Deferred tax liability $1,562 $1,527
================================================================================
The Company has provided a valuation allowance for the full amount of its net
deferred tax assets at December 31, 1998 since realization of these future
benefits is not sufficiently assured.
30
As of December 31, 1998, the Company has federal and state net operating loss
carry forwards of $7,140 which expire at various dates through 2019.
12. STOCKHOLDERS' EQUITY
The Company has stock option plans (the "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 in increments and over periods determined by the Company's Compensation
Committee and expire not more than ten years from date of grant. At December 31,
1998, 1,254 shares of common stock were reserved for future issuance under the
plans and 126 were available for future grant. Additionally, non-qualified
options to purchase a total of 50 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 2003.
Information concerning the Plans and non-qualified stock options is as follows:
Available Option Option Price Weighted Avg.
for Grant Shares per Share Exercise Price
- --------------------------------------------------------------------------------
December 31, 1995 109 1,180 $1.57 - $7.25 $2.82
Options granted (187) 187 5.25 - 8.25 7.09
Options canceled 80 (102) 1.80 - 8.25 4.09
Options exercised -- (223) 1.57 - 4.75 1.96
Increase in available
options, 1992 Plan 500 -- -- -- --
- --------------------------------------------------------------------------------
December 31, 1996 502 1,042 1.57 - 8.25 3.65
Options granted (175) 250 4.94 - 7.63 6.96
Options canceled 238 (238) 4.25 - 8.25 5.19
Options exercised -- (246) 1.57 - 5.75 2.31
- --------------------------------------------------------------------------------
December 31, 1997 565 808 1.57 - 8.25 4.63
- --------------------------------------------------------------------------------
Options granted (656) 656 2.50 - 6.25 2.82
Options canceled 217 (249) 2.36 - 8.25 6.65
Options exercised -- (37) 1.58 - 5.75 2.00
- --------------------------------------------------------------------------------
December 31, 1998 126 1,178 $1.58 - $8.25 $3.27
- --------------------------------------------------------------------------------
A total of 544 options were exercisable at December 31, 1998.
A total of 488 options were exercisable at December 31, 1997.
A total of 683 options were exercisable at December 31, 1996.
31
The following table summarizes information with respect to stock options
outstanding as of December 31, 1998:
Range of Outstanding Weighted-Average Weighted-Average Exercisable Weighted-Average
Exercise Prices as of Remaining Exercise Price as of Exercise Price
12/31/98 Contractual Life 12/31/98
- ------------------------------------------------------------------------------------------------------
$1.5700 - $1.8000 283 1.1 $1.6221 283 $1.6221
$2.0000 - $3.9400 611 4.9 2.5130 139 2.4908
$4.1880 - $5.7500 47 2.5 4.9485 21 4.7728
$6.0600 - $7.0000 170 3.5 6.2960 74 6.2797
$7.2500 - $8.2500 67 2.8 7.8163 27 7.8602
- ------------------------------------------------------------------------------------------------------
Total 1,178 3.6 544 $2.9076
======================================================================================================
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:
1998 1997 1996
--------- --------- ---------
Risk-free Interest Rates 5.3% 6.2% 6.2%
Expected Life 4.5 years 4.4 years 4.7 years
Volatility 0.65 0.65 0.70
Dividend Yield -- -- -
The weighted average fair value of those options granted in 1998, 1997 and 1996
was $1.60, $4.03 and $4.51 respectively.
The following proforma income information has been prepared following the
provisions of SFAS No. 123:
(amounts in thousands except per share data)
- --------------------------------------------
1998 1997 1996
------------------------------------
Net income (loss) - proforma $ (7,821) $ (1,102) $ 1,498
Net income (loss) per share - proforma
Diluted $ (1.06) $ (0.15) $ 0.20
- --------------------------------------------------------------------------------
The above proforma effects on income (loss) may not be representative of the
effects on net income (loss) for future years as option grants typically vest
over several years and additional options are generally granted each year.
32
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:
1998 1997 1996
---------------------------------
Numerator - Basic and Diluted EPS
Net income (loss) $(7,173) $ (657) $ 1,698
Denominator - Basic EPS
Common shares outstanding 7,365 7,268 7,076
------- ------- -------
Basic earnings (loss) per share $ (0.97) $ (0.09) $ 0.24
======= ======= =======
Denominator - Diluted EPS
Denominator - Basic EPS 7,365 7,268 7,076
Effect of Diluted Securities
Common Stock Options -- -- 600
Denominator - Diluted EPS 7,365 7,268 7,676
------- ------- -------
Diluted earnings (loss) per share $ (0.97) $ (0.09) $ 0.22
======= ======= =======
As of December 31, 1998 and 1997 the number of dilutive shares was 238 and 423,
respectively and such shares have not been included in above calculations as the
effect would be anti-dilutive.
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 $378 in 1998, $401 in 1997 and
$164 in 1996.
The Company has an Employee Stock Purchase Plan ("the Purchase Plan") under
which 300 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 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 on June 30, 1999
unless its term is extended. In fiscal 1998, 42 shares were issued under the
Purchase Plan.
15. SEGMENT INFORMATION
The Company is engaged in the engineering, manufacturing and marketing of
electronic components and subsystems. The company has five operating divisions;
referred to as Arizona, California, Systems, Keltec and Olektron and reports its
operations within three segments: Microwave Components and Subsystems (Arizona,
California and Systems), Power Management Products (Keltec) and Radio Frequency
(RF) Components and Subsystems (Olektron). The operations aggregated into the
Microwave Components and Subsystems segment have similar products, production
processes and types of customers.
33
The Company's reportable segments are as follows:
MICROWAVE COMPONENTS AND SUBSYSTEMS
Engaged in the design and manufacture of microwave oscillators, frequency
synthesizers and converters, space qualified microwave assemblies, microwave
amplifiers and microwave switch matrices.
POWER MANAGEMENT PRODUCTS
Engaged in the design and manufacture of military high and low voltage power
supplies, DC to DC converters and military high power amplifiers and
transmitters for use in radar systems.
RADIO FREQUENCY (RF) COMPONENTS AND SUBSYSTEMS
Engaged in the design and manufacture of radio frequency and intermediate
frequency signal processing components, integrated multi-function devices, and
switching systems for the Space, Telecommunications and Military markets.
The accounting policies of the segments are the same as those described in the
"Summary of Significant Accounting Policies". Segment data includes a charge for
allocating a portion of corporate-headquarters costs. The table below presents
selected financial data by business segment for the years ending December 31:
Selected Financial Data by Business Segment
(amounts in thousands)
1998 1997 1996
- -------------------------------------------------------------------------------
NET SALES
Microwave Components & Subsystems $ 51,858 $ 59,362 $ 65,757
Power Management Products 24,262 25,298 29,788
RF Components & Subsystems 15,963 17,579 17,519
--------- --------- ---------
$ 92,083 $ 102,239 $ 113,064
OPERATING INCOME
Microwave Components & Subsystems $ 2,265 $ 2,856 $ 4,891
Power Management Products (7,401) (3,676) (612)
RF Components & Subsystems 2,127 2,300 1,962
Other (3,591) (1,404) (1,989)
--------- --------- ---------
$ (6,600) $ 76 $ 4,252
TOTAL ASSETS
Microwave Components & Subsystems $ 22,890 $ 29,799 $ 32,583
Power Management Products 12,173 20,129 16,834
RF Components & Subsystems 7,110 7,170 5,248
Other 6,810 5,742 10,979
--------- --------- ---------
$ 48,983 $ 62,840 $ 65,644
LONG-LIVED ASSETS
Microwave Components & Subsystems $ 1,103 $ 1,316 $ 1,530
Power Management Products 1,272 1,443 1,644
RF Components & Subsystems 130 165 200
--------- --------- ---------
$ 2,505 $ 2,924 $ 3,374
34
DEPRECIATION EXPENSE
Microwave Components & Subsystems $ 1,709 $ 2,000 $ 2,037
Power Management Products 865 835 656
RF Components & Subsystems 405 432 508
Other 49 25 167
--------- --------- ---------
$ 3,028 $ 3,292 $ 3,368
Net Sales by Customer Category
(amounts in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
U.S. GOVERNMENT MILITARY
Microwave Components & Subsystems $ 33,819 $ 43,258 $ 40,543
Power Management Products 17,709 18,739 18,715
RF Components & Subsystems 13,071 15,120 15,205
--------- --------- ---------
$ 64,599 $ 77,117 $ 74,463
U.S. GOVERNMENT NON-MILITARY
Microwave Components & Subsystems $ 949 $ 348 $ 2,620
Power Management Products -- -- 22
RF Components & Subsystems 313 444 346
--------- --------- ---------
$ 1,262 $ 792 $ 2,988
U.S. COMMERCIAL
Microwave Components & Subsystems $ 6,485 $ 6,107 $ 12,674
Power Management Products 179 515 3,607
RF Components & Subsystems 975 888 1,160
--------- --------- ---------
$ 7,639 $ 7,510 $ 17,441
INTERNATIONAL MILITARY
Microwave Components & Subsystems $ 9,389 $ 8,340 $ 7,352
Power Management Products 5,926 5,109 3,542
RF Components & Subsystems 1,374 971 449
--------- --------- ---------
$ 16,689 $ 14,420 $ 11,343
INTERNATIONAL COMMERCIAL
Microwave Components & Subsystems $ 1,216 $ 1,376 $ 3,219
Power Management Products 448 807 3,294
RF Components & Subsystems 230 217 316
--------- --------- ---------
$ 1,894 $ 2,400 $ 6,829
--------- --------- ---------
Total $ 92,083 $ 102,239 $ 113,064
SIGNIFICANT CUSTOMER
Revenue of approximately $21,474 (23%), $20,456 (20%) and $25,133 (22%) was
attributable to Raytheon Company for the years ended December 31, 1998, 1997 and
1996, respectively. At December 31, 1998 and 1997, accounts receivable from
Raytheon Company accounted for approximately $2,447 (19%) and $2,927 (18%),
respectively, of the total amount of accounts receivable due to the Company.
35
16. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following quarterly financial information should be read in conjunction with
Note 1a and 1b. The first three quarters in each year consist of thirteen week
periods with the fourth quarter ending on December 31.
First Second Third Fourth
1998: Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------
Net sales $ 23,687 $ 22,190 $ 22,766 $ 23,440
Gross profit 5,503 (3,315) 5,903 5,789
Operating income 593 (8,049) 286 570
Net income (loss) 203 (7,832) 85 371
Net income (loss) per share:
Basic $ 0.03 $ (1.07) $ 0.01 $ 0.05
Diluted $ 0.03 $ (1.07) $ 0.01 $ 0.05
Shares used in calculating Net income
(loss) per share:
Basic 7,411 7,335 7,349 7,349
Diluted 7,663 7,335 7,618 7,480
- -----------------------------------------------------------------------------------
1997:
- -----------------------------------------------------------------------------------
Net sales $ 26,881 $ 25,713 $ 25,312 $ 24,333
Gross profit 5,222 4,197 2,734 5,839
Operating income (loss) 523 (435) (1,360) 1,348
Net income (loss) 211 (419) (983) 534
Net income (loss) per share:
Basic $ 0.03 $ (0.06) $ (0.14) $ 0.07
Diluted $ 0.03 $ (0.06) $ (0.14) $ 0.07
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
- -----------------------------------------------------------------------------------
Net sales and net income (loss) 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.
36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Signal Technology Corporation
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a) present fairly, in all material respects, the
financial position of Signal Technology Corporation and its subsidiaries at
December 31, 1998 and 1997, 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. In addition, in our
opinion, the financial statement schedule listed in the index appearing under
Item 14(a) presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Boston, Massachusetts PricewaterhouseCoopers LLP
February 16, 1999
37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
- --------------------------------------------------------------------------------
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 4, 1999, which will be filed with the Securities
and Exchange Commission pursuant to Regulation 14A.
38
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
Financial Statements for the Years Ended December 31, 1998,
1997 and 1996:
Consolidated Statements of Operations 18
Consolidated Balance Sheets 19
Consolidated Statements of Stockholders' Equity 20
Consolidated Statements of Cash Flows 21
Notes to Consolidated Financial Statements 22
Report of Independent Accountants 37
Schedule II Valuation and Qualifying Accounts 43
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. *****
39
Exhibit
Number Description
- --------------------------------------------------------------------------------
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. *****
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.
10.33 Sublease Agreement as of October 1, 1998 by and between Copyright
Clearance Center, Inc. and Signal Technology Corporation.
10.34 Amendment Agreement No. 6 to Second Amended and Restated Credit
Agreement, dated as of September 30, 1993, with BankBoston, N.A.,
formerly know as the First National Bank of Boston, dated as of October
20, 1998.
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.
40
******* 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
41
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/ Robert Nelsen
--------------------------------------------------------
Chief Financial Officer and Principle Accounting Officer
Date: March 30, 1999
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/ George E. Lombard March 30, 1999
- ------------------------------------------------
Chairman, Chief Executive Officer and Principle
Executive Officer
/s/ Robert Nelsen March 30, 1999
- ------------------------------------------------
Chief Financial Officer and Principle Accounting
Officer
/s/ Bernard P. O'Sullivan March 30, 1999
- ------------------------------------------------
Bernard P. O'Sullivan
Director
/s/ Harvey C. Krentzman March 30, 1999
- ------------------------------------------------
Harvey C. Krentzman
Director
/s/ Joseph S. Schneider March 30, 1999
- ------------------------------------------------
Joseph S. Schneider
Director
/s/ Larry L. Hansen March 30, 1999
- ------------------------------------------------
Larry L. Hansen
Director
42
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------------------
Balance at Charges to Charged to Balance at
Beginning Costs and Other End
Description of Period Expenses Accounts of Period
- --------------------------------------------------------------------------------------------
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 1,933,000 (2,588,000)(2) 1,729,000
Allowance for
doubtful accounts 170,000 (8,000) (3,000)(1) 159,000
- --------------------------------------------------------------------------------------------
1998
Inventory reserve 1,729,000 5,823,000 (1,624,000)(2) 5,928,000
Allowance for
doubtful accounts 159,000 196,000 (23,000)(1) 332,000
- --------------------------------------------------------------------------------------------
Notes
(1) Write-off of bad debts
(2) Charged to inventory accounts from previously established reserve amounts.
43