Item 1. Business 4 Item 2.
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.
ITEM 3.
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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
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.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 7.
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
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.
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.
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.
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.
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.
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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the consolidated financial statements
SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of the consolidated financial statements.
SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements
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
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.
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
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
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 =======================================================================
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.
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
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.
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:
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.
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.
The following table summarizes information with respect to stock options outstanding as of December 31, 1998:
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.
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.
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
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.
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.
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.
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
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None - --------------------------------------------------------------------------------
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.
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.
PART IV
ITEM 14.
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. *****
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.
******* 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
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
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Notes (1) Write-off of bad debts (2) Charged to inventory accounts from previously established reserve amounts.