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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

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

Registrant’s telephone number, including area code: (978) 774-2281

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:        No:  

Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock as of the latest practicable date.

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SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

The accompanying notes are an integral part of the condensed consolidated financial statements.

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SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

The accompanying notes are an integral part of the condensed consolidated financial statements.

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SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES

The accompanying notes are an integral part of the condensed consolidated financial statements.

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SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
Notes To The Condensed Consolidated Financial Statements
(In thousands, except per share data)

1.		BASIS OF PRESENTATION
		The condensed consolidated financial statements of the Company as of June 30, 2002 and for the three and six months ended June 30, 2002 and 2001 are unaudited. All adjustments (consisting only of normal recurring adjustments) have been made, which in the opinion of management are necessary for a fair presentation. Results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of the results that may be achieved for the full fiscal year or for any future period. These financial statements should be read in conjunction with the audited financial statements for the fiscal year ended December 31, 2001, included in our annual report on Form 10-K. The year-end condensed balance sheet data was derived from the audited financial statements and does not include all the disclosures required by generally accepted accounting principles.
		During the second quarter of 2002, we completed our adoption of Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” and recorded the impact retroactive to the first quarter of 2002, in accordance with the provisions of this standard. See Note 6 for the impact from this adoption.
		Our fiscal quarter consists of a thirteen-week period ending on the Saturday closest to June 30. For ease of presentation, interim periods are designated to have ended on June 30.
2.		RECENT ACCOUNTING PRONOUNCEMENTS
		In May 2002, the Financial Accounting Standards Board, or FASB, issued SFAS No. 145, “Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002.” Adoption of the standard is generally required in the fiscal year beginning after May 15, 2002, with certain provisions becoming effective for financial statements issued on or after May 15, 2002. Under the standard, transactions currently classified by the Company as extraordinary items will no longer be treated as such, but instead will be reported as other non-operating income or expenses. The Company does not expect any impact from the adoption of SFAS No. 145.
		In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which supercedes the FASB’s Emerging Issues Task Force (“EITF”) 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The provisions of this Statement are required to be adopted for exit or disposal activities that are initiated after December 31, 2002. Under this standard, a liability for a cost associated with an exit or disposal activity formerly recognized upon the entity’s commitment to an exit plan are now recognized when the liability is incurred. This standard will impact any future restructuring the Company approves on or after January 1, 2003.
3.		LOSS PER SHARE
		Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share 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 that would be issued upon exercise of stock options and warrants for all periods using the treasury stock method.
		A reconciliation of the numerator and denominator of both basic and diluted loss per share is provided as follows:

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		Options and warrants to purchase a total of 1,189 and 1,095 shares of the Company’s common stock were outstanding during the three and six months ended June 30, 2002, respectively. Options to purchase 675 and 690 shares of common stock were outstanding during the three and six months ended June 30, 2001, respectively. These options and warrants were not included in the above computation of diluted loss per share because they were antidilutive due to the net loss sustained in 2002 and 2001.
4.		COMPREHENSIVE INCOME (LOSS)
		There were no differences between net loss and comprehensive income (loss) for the three and six months ended June 30, 2002 and 2001.
5.		DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS:

6.		GOODWILL AND INTANGIBLE ASSETS
		On August 3, 2001, we entered into technology license and manufacturing agreements with Northrop Grumman Corporation and Vitesse Semiconductor Corporation. The agreements include a 10 year license to use Northrop Grumman’s GaAs heterojunction bipolar transistor (HBT) and pseudomorphic high electron mobility transistor (PHEMT) semiconductor technologies to produce advanced monolithic microwave integrated circuits (MMICs) and radio frequency integrated circuits (RFICs) for the mobile communications market. Northrop Grumman will receive 1,003 shares of our common stock in return for the technology license agreement. At contract signing Northrop Grumman was issued 301 shares of stock. As of June 30, 2002, the remaining 702 shares are expected to be issued based on achievement of certain milestones. The entire value of the 1,003 shares has been recorded as an intangible asset of $9,384 and is being amortized on a straight-line basis over its estimated useful life of five years. The first 301 shares are recorded at a fixed fair value of $2,794, based on our stock price as of August 3, 2001. The remaining 702 shares, valued at $6,590, will remain variable until issued and accordingly, the related asset and liability have been marked to market as of June 30, 2002.
		The manufacturing agreement with Vitesse will provide us with a high-volume supply of GaAs wafers incorporating Northrop Grumman’s GaAs technologies and our MMIC and RFIC designs through the year 2010. The Company paid Vitesse $3,000 in cash for this agreement, all of which has been paid and recorded as a prepaid asset. This prepaid asset is being amortized on a straight-line basis over its estimated useful life of five years and as of June 30, 2002 had a remaining balance of $2,450. Vitesse also received a warrant for 500 shares of our common stock in return for the supply agreement. The warrant was valued at $2,048 using a Black-Scholes option pricing model with the following assumptions: risk-free rate of 3.9%, expected life of two years, volatility of 74% and no dividend yield. The value of the warrant was recorded as an intangible asset and is being amortized on a straight-line basis over its estimated useful life of five years.
		During the second quarter of 2002, we completed our adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” and recorded the impact retroactive to the first quarter of 2002, in accordance with the provisions of this

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		standard. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization and the requirement to test goodwill and other intangible assets for impairment at least annually. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. As part of the adoption of SFAS No. 142, we reassessed the useful lives of existing intangible assets and determined an adjustment was not necessary.
		The Company has identified the following reporting units (by operating segment) for the purposes of assessing impairments of goodwill:

		A two-step impairment test is used to first identify potential goodwill impairment and then to measure the amount of goodwill impairment loss. Impairment losses that arise due to the initial application of this standard will be reported as a cumulative effect of change in accounting principle.
		In accordance with SFAS No. 142, goodwill amortization was discontinued as of January 1, 2002. The Company utilized a discounted cash flow method to determine the fair value of all reporting units with recorded goodwill. The Company completed the transitional impairment test and has recorded a goodwill impairment charge of $23 related to the Olektron Operation and $4,093 related to Signal Wireless as a cumulative effect of change in accounting principle in the first quarter of 2002. In addition, the Company reversed into income the excess of acquired net assets over cost in the amount of $750 in connection with the Keltec Operation as a cumulative effect of change in accounting principle in the first quarter of 2002.
		The following is a roll forward of our goodwill balance from December 31, 2001 to June 30, 2002 by reporting unit:

(1)

Goodwill was allocated to the reporting units based on the reporting unit associated with the initial acquisition. Based on this methodology, no goodwill is assigned to the Arizona and Semiconductor reporting units.

The following is a reconciliation of previously reported financial information to show the proforma effect on earnings and earnings per share had SFAS No. 142 been in effect for the following periods:

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		Amortized Intangible Assets
		All the Company’s intangible assets, excluding goodwill, are subject to amortization. The following table sets forth the gross carrying amount and accumulated amortization of the Company’s intangible assets:

		Aggregate amortization expense for the three and six months ended June 30, 2002 was $836 and $1,539, respectively. Aggregate amortization expense for the year ended December 31, 2001 was $1,053. Amortization expense for the next five years is estimated to be $2,839, $2,601, $2,598, $2,501, and $1,544.
7.		COMMITMENTS AND CONTINGENCIES
		We are involved from time to time in litigation incidental to our business. Ongoing legal proceedings include the following:
		Weymouth Environmental Contamination:
		In April 1996, we sold our manufacturing facility in Weymouth, Massachusetts but retained the environmental liability and responsibility associated with groundwater contaminants present at and associated with the site. This site has been classified as a Tier 1A disposal site by the Massachusetts Department of Environmental Protection, or 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 site and still present in the groundwater at the site; 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.
		In accordance with the applicable provisions of the Massachusetts Contingency Plan, we have completed our investigation of the site and have submitted an evaluation of remedial alternatives to the DEP. The recommended remedial alternative involves continued operation of the currently operating groundwater remediation system, with the addition of a supplemental well and wellhead treatment at Weymouth Winter Street Well No. 2 through an agreement with the Town of Weymouth. We have been informed that no recovery of costs incurred in the treatment of the groundwater at the facility is possible under existing insurance arrangements. We have not reached an agreement with the Town of Weymouth relative to wellhead treatment. It is not possible at this stage of the proceedings to predict whether the DEP will approve the recommended alternative and, if not, the specific remedial actions, if any, that it will require.
		We have recorded liabilities of $1,738 calculated on the discounted cash flow method using a 5.76% discount rate for anticipated costs, including legal and consulting fees, site studies and design and implementation of remediation plans, post-remediation monitoring and related activities to be performed during the next 20 years. Cash payments for Weymouth environmental contamination are expected to be $530 in 2002, including $72 paid during the first six months of 2002, $105 per year for 2003-2005 and $1,670 in total for 2006 and beyond.

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		Sunnyvale (Eaton) Indemnification Claim:
		Eaton Corporation filed a suit against us in U.S. District Court, Northern District of California, alleging that we have 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 we assumed certain liabilities when we acquired one of the divisions of Eaton Corporation in 1989. The indemnification claim was dismissed at the trial level, but the Ninth Circuit of the U.S. Court of Appeals reversed this decision and found that we do owe Eaton a duty of indemnification. In December 2000, the decision by a jury was in favor of an indemnification claim by Eaton and Eaton was awarded a judgment of $4,229, related to environmental liabilities assumed by us when we purchased Eaton’s Microwave Products division in 1989. On March 7, 2001, the U.S. District Court ruled on various motions pending before it, including denying our motion for a new trial and denying certain of Eaton’s motions. The U.S. District Court amended the judgment to increase it to an aggregate of $6,969 and clarified that we are responsible for fifty percent of the reasonable costs and expenses of remediation. At December 31, 2000, we recorded liabilities of $9,000 for anticipated costs including the judgment, legal and consulting fees, site studies, implementation of remediation plans, post-remediation monitoring and related activities to be performed during the next 20 years. Cash deposits of $6,969 were made during the first nine months of 2001 with the Clerk, United States District Court by order of the United States District Court for the Northern District of California. Recorded liabilities have been reduced by the cash deposits described above and are $2,031 at June 30, 2002. On April 26, 2001, the U.S. District Court denied our motion to reopen the amended judgment and to amend our answer and counterclaim. We appealed the amended judgment on May 24, 2001 and are awaiting the result.
		SEC Investigation:
		On March 27, 2002, the Securities and Exchange Commission completed its investigation of the Company. As previously reported in the Company’s Form 10-K as of December 31, 2001, the Company agreed to the entry of an order requiring that we cease and desist from committing or causing any violations and any future violations of the periodic reporting, record keeping, and internal control provisions of the federal securities laws set forth in Section 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13. However, enforcement proceedings have been initiated against several former officers, directors, and employees and, as a result, they are seeking indemnification and defense costs and penalties. We are considering payment of certain of these costs at the request of these individuals. In 2001, we therefore accrued $450 for anticipated costs related to these proceedings. During the second quarter of 2002, we accrued an additional $75 and made payments totaling $35. As of June 30, 2002, the accrual balance was $490.
8.		DEBT
		Our Revolving Credit Agreement, which includes a line of credit and real estate term loan on which $0 and $4,300, respectively, were outstanding as of June 30, 2002, has financial covenants including a leverage ratio, fixed charge coverage ratio and minimum EBITDA. At June 30, 2002, we were not in compliance with the financial covenants and have received a waiver for the quarter ended June 30, 2002. The waiver does not permit us to borrow money under our revolving credit facility due to the non-compliance with the financial covenants. Our credit agreement also includes a $4,300 real estate term loan that expires in January 2003, but is shown as a current liability due to the non-compliance with the financial covenants as described above. We are currently pursuing a new revolving credit facility. If we are unsuccessful in obtaining a new revolving credit facility, we may be required to collateralize our letter of credit that backs our Industrial Revenue Bond.
9.		SEGMENT INFORMATION
		We have five operating divisions engaged in the development, manufacturing and marketing of electronic components and subsystems. The operating divisions, referred to as Arizona, California, Keltec, Olektron and Signal Wireless Group (SWG), report their operations within two groups (Signal Wireless and Defense) comprised of four reporting segments: Signal Wireless Group, Microwave Components & Subsystems (Arizona and California), Power Management Products (Keltec) and Radio Frequency (RF) Components & Subsystems (Olektron). In reporting business segment operating income (loss), corporate headquarters expenses have been allocated to the business segments based on a percentage of net sales.
		Our reportable segments are engaged in the following activities:
		Signal Wireless Group
		Designs and manufactures commercial wireless products for the telecommunications and mobile appliance industries.
		Defense Group:
		The Defense Group is comprised of the following three segments:

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		Microwave Components & Subsystems
		Designs and manufactures microwave oscillators, frequency synthesizers and converters, space qualified microwave assemblies, microwave amplifiers and microwave switch matrices.
		Power Management Products
		Designs and manufactures 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 Components & Subsystems
		Designs and manufactures RF and intermediate frequency signal processing components, integrated multi-function devices and switching systems.

The following tables display net sales and operating income (loss) by business segment for the three and six months ended June 30, 2002 and 2001: