UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1997.
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: 0-19381
---------------------------------------
WESTWOOD CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 87-0430944
- ----------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
5314 South Yale Street, Suite 1100, Tulsa, Oklahoma 74135
- ----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 918/524-0002
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 and 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.
(x) Yes ( ) No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.003 par value - 6,264,933 shares as of
November 13, 1997.
<PAGE>
INDEX
Page No.
--------
Part I Financial Information:
Consolidated Balance Sheets as of
September 30, 1997 and March 31, 1997 1
Consolidated Statements of Income for
the Second Quarter and Six Months ended
September 30, 1997 and 1996 3
Consolidated Statement of Cash Flows
for the Six Months ended September 30,
1997 and 1996 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Part II Other Information:
Item 1. Legal Proceedings
(None)
Item 2. Changes in Securities
(None)
Item 3. Defaults Upon Senior Securities
(None)
Item 4. Submission of Matters to a Vote
of Security Holders
(None)
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
<PAGE>
<TABLE>
WESTWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
September 30 March 31
1997 1997
----------------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 306 $ 1,165
Accounts receivable (including
retainage receivable of $197,000
at September 30, 1997 and $767,000
at March 31, 1997) net of allowance
for doubtful accounts 4,155 4,485
Receivable from Roxtec AB 2,547 -
Note receivable - Officer 53 51
Costs and estimated earnings in excess
of billings on uncompleted contracts 1,437 332
Inventories:
Raw materials and purchased parts 3,785 4,605
Work-in-process 4,802 1,210
------- -------
8,587 5,815
Prepaid expenses 289 220
Current deferred income taxes 553 553
------- -------
Total current assets 17,927 12,621
Plant and equipment, at cost:
Leasehold improvements 1,524 768
Machinery and equipment 4,054 3,733
Patterns and tools 425 383
------- -------
6,003 4,884
Accumulated depreciation (2,430) (2,588)
------- -------
3,573 2,296
Other assets:
Drawings, (net) 8 19
Long-term accounts receivable, retainage 1,065 980
Deferred charges & other 117 240
Goodwill 5,993 -
------- -------
7,183 1,239
------- -------
Total assets $28,683 $16,156
======= =======
<FN>
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
WESTWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
September 30 March 31
1997 1997
-----------------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 2,349 $ 886
Income taxes payable 78 612
Accrued liabilities 990 671
Accrued rent 81 81
Billings in excess of costs and estimated
earnings on uncompleted contracts 5,132 1,087
Current portion of long-term debt:
Payable to bank 3,900 -
Note payable 28 47
------- -------
3,928 47
Total current liabilities 12,558 3,384
Accrued rent 283 325
Long-term debt:
Payable to bank 2,000 -
Note payable 596 600
Installments payable 1,269 -
------- -------
3,865 600
Deferred income taxes 372 372
Stockholders' equity:
Preferred stock, 5,000,000 shares
authorized, $.001 par value, no shares
issued and outstanding - -
Common stock, 20,000,000 shares
authorized, $.003 par value, 6,264,933
and 6,139,933 shares issued and
outstanding at September 30, 1997 and
March 31, 1997, respectively 19 18
Capital in excess of par value 4,736 4,627
Retained earnings 6,850 6,830
------- -------
Total stockholders' equity 11,605 11,475
------- -------
Total liabilities and
stockholders' equity $28,683 $16,156
======= =======
<FN>
See accompanying notes.
</TABLE>
2
<PAGE>
<TABLE>
WESTWOOD CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
<CAPTION>
Second Quarter Ended Six Months Ended
September 30 September 30
1997 1996 1997 1996
-------------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $7,920 $8,288 $14,494 $16,077
Cost of sales 6,145 6,350 11,538 12,458
Gross profit 1,775 1,938 2,956 3,619
Operating expenses:
Selling, general & admin. 1,984 1,221 3,124 2,318
Special charge (Note E) - - 210 -
------ ------ ------- -------
1,984 1,221 3,334 2,318
Operating income (loss) (209) 717 (378) 1,301
Other income (expense):
Interest expense (187) (37) (253) (68)
Other income 46 22 66 28
Gain on sale of subsidiary 797 - 797 -
------ ------ ------- -------
656 (15) 610 (40)
------ ------ ------- -------
Income before taxes 447 702 232 1,261
Provision for income taxes 170 265 88 477
Net income $ 277 $ 437 $ 144 $ 784
======= ======= ======= =======
Earnings per share (Note B) $ .044 $ .071 $ .023 $ .128
Cash dividends per share $ .010 $ .010 $ .020 $ .020
<FN>
See accompanying notes.
</TABLE>
3
<PAGE>
<TABLE>
WESTWOOD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Six Months Ended
September 30
1997 1996
-------------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 144 $ 784
Adjustments to reconcile net income to
cash provided by (used) in operations:
Depreciation and amortization 279 293
Amortization of goodwill 141 -
Deferred income taxes - (98)
Cash flows impacted by changes in:
Accounts receivable 1,061 613
Costs and estimated earnings in excess
of billings on uncompleted contracts (844) 1,211
Inventories (1,808) (249)
Prepaid expenses (74) (114)
Long-term accounts receivable, retainage (85) 190
Deferred charges 148 (65)
Accounts payable 890 (660)
Accrued liabilities (522) (564)
Billings in excess of costs and estimated
earnings on uncompleted contracts 408 56
Income taxes payable (585) (310)
Other (177) (4)
------- -------
Net cash provided by (used in)
operating activities (1,024) 1,083
INVESTING ACTIVITIES
Purchase of plant and equipment (206) (187)
Acquisition of Roflan - (990)
Acquisition of TANO (2,000) -
Acquisition of MCII (500) -
------- -------
Net cash used in investing activities (2,706) (1,177)
FINANCING ACTIVITIES
Principal payments on debt (2,905) (4,533)
Borrowings on debt 5,900 4,400
Dividends paid (124) (112)
------- -------
Net cash provided by (used in)
financing activities 2,871 (245)
Net (decrease) in cash (859) (339)
Cash at beginning of period 1,165 598
Cash at end of period $ 306 $ 259
<FN>
See accompanying notes.
</TABLE>
4
<PAGE>
WESTWOOD CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited consolidated financial statements
include Westwood wholly-owned subsidiaries NMP Corp., Roflan
Associates, Inc. (and its wholly-owned subsidiary Peter Gray
Corporation), TANO Corp., and MCII Electric Company, Inc. (See
Note C). Operations of RoxCorp have been included through
September 30, 1997 (see Note D). These statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. Management believes all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the fiscal second quarter and six months ended
September 30, 1997 may not necessarily be indicative of the
results that may be expected for the year ended March 31, 1998.
For further information, refer to the consolidated financial
statements and footnotes included in Westwood Corporation's
annual report on Form 10-K for the year ended March 31, 1997, and
Forms 8-K dated May 13, 1997, May 28, 1997, and October 14, 1997.
Note B - Common Stock
- ---------------------
The financial statements, including earnings per share
calculation, reflect the impact of 10% stock dividends approved
by the Board of Directors on November 7, 1996, October 19, 1995,
November 17, 1994, and November 3, 1993 respectively, as well as
the issuance of 125,000 shares in connection with the acquisition
of MCII Electric Company, Inc. on May 28, 1997.
As of September 30, 1997, stock options issued under directors
and employees plans were for 644,900 shares, and no options have
been exercised or cancelled.
Note C - Acquisitions
- ---------------------
On May 13, 1997, the Company purchased the assets and liabilities
of TANO Automation, Inc.'s Marine Automation Control Division
("TANO") for a total purchase price of $2,500,000. TANO designs,
manufactures, sells and services electrical automation and
control systems for both military and commercial ships and
machinery plant automation and control systems. The transaction
involved the payment of $2,000,000 in cash plus the signing of a
60-day noninterest bearing note of $500,000. The transaction is
5
<PAGE>
subject to certain purchase price adjustments which could
potentially reduce the final purchase price. A $1,800,000 draw
on NMP's revolving credit facility plus $654,000 in existing cash
was advanced to the Company for the purchase of TANO and for the
payment of certain of the liabilities assumed. The transaction
was accounted for as a purchase and the purchase price and
related direct expenses associated with the acquisition were
allocated on a preliminary basis to the fair value of the assets
purchased and liabilities assumed. These costs exceeded the fair
value of the net assets acquired by $1,500,000, and are being
amortized over a fifteen-year period. The results of operations
have been included from the date of acquisition.
On May 28, 1997, the Company purchased 100% of the issued and
outstanding common stock of MCII Electric Company, Inc. ("MCII")
for $2,000,000, plus 125,000 shares of the Company's common
stock. MCII designs and manufactures mobile generator sets for
both military and commercial applications. The transaction
involved the payment of $500,000 on May 28, 1997 plus three
noninterest-bearing annual installments of $500,000 each through
May 28, 2000. The transaction was funded by a $2,700,000 draw on
NMP's amended revolving credit facility to purchase MCII and pay
certain of the liabilities assumed.
In accordance with purchase accounting rules, the Company made a
preliminary allocation of the purchase price and related direct
expenses to the fair value of the assets purchased and
liabilities assumed which resulted in recording goodwill of
$1,800,000. As a result of additional information in the second
quarter, the Company has recorded additional liabilities in
connection with progress billings, and under purchase accounting
provisions, has recorded additional goodwill of $2,700,000.
Under the provisions of the MCII acquisition agreement, the
Company has made an initial notification to the seller that there
are major indemnification claims pending under this contract.
(Refer to Item 5 "Other Information".) Any settlement under the
indemnification provision of the contract would correspondingly
reduce the amount of goodwill. The Company is amortizing
goodwill over a fifteen-year period, and it is the Company's
policy to calculate the recoverability of goodwill based upon
future expected cash flows from current and anticipated
contracts. At September 30, 1997, no impairment was indicated.
The Company will continue to periodically review the carrying
value of goodwill.
Note D - Sale of RoxCorp.
- --------------------------
On September 30, 1997, the Company sold its wholly-owned
subsidiary, RoxCorp., to Roxtec Holding AB, a Swedish limited
liability company. Of the purchase price of $850,000, $765,000
was to be paid at closing, with a final purchase price adjustment
to be based on the September 30, 1997 balance sheet compared to
June 30, 1997 balance sheet. In addition, at closing Roxtec was
to pay all outstanding loans due the Company or its
affiliates, totaling $1,666,000. On October 1, 1997, closing
6
<PAGE>
funds of $2,431,000 were paid, and on October 22, 1997, an
additional $116,000 was paid to the Company which represented the
final amounts due under the sale agreement.
Note E - Special Charge
- -----------------------
During the first quarter ended June 30, 1997, the Company
implemented plans to reorganize and relocate certain
manufacturing and engineering operations in Tulsa. A special
charge of $210,000 was recorded for the direct costs relating to
this relocation.
Note F - Income Taxes
- ---------------------
The IRS has recently completed an examination of tax returns for
the fiscal years ended March 31, 1994, 1995, and 1996. The IRS
has proposed a tax increase of $264,000 for 1994, an increase of
$295,000 for 1995, and a tax decrease of $236,000 for 1996. The
tax adjustments relate only to the timing of recognition of
income on long-term contracts, and management plans to appeal the
assessments. It is management's belief that the resolution of
this matter will not materially affect results of operations,
equity or cash flow.
7
<PAGE>
WESTWOOD CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
September 30, 1997
GENERAL
- -------
Results of Operations
- ---------------------
The first six months ended September 30, 1997 saw a number of
major changes for Westwood Corporation. The Company completed
the acquisitions of TANO and MCII, and completed a major
relocation of certain manufacturing operations. The Company also
completed the sale of its RoxCorp subsidiary on September 30,
1997. The Company had been dependent upon long-term switchgear
contracts relating to major new shipbuilding programs for the
bulk of its sales revenues, and the recent acquisitions are major
steps into the electrical generation and control markets. The
Company feels this niche market offers considerable growth
potential. The sale of RoxCorp was designed as another step in
focusing on this market.
The Company anticipates the full effects of the recent
acquisitions to be reflected in the latter half of fiscal 1998
and the early part of fiscal 1999.
The TANO acquisition has already begun to have a positive impact
on the Company's operation. However, the MCII acquisition is not
expected to reflect positively until early in fiscal 1999. This
is partly due to the development nature of its major TQG
contract, but mainly due to manufacturing, systems and other
problems that existed prior to acquisition. These problems are
requiring considerable efforts and resources to bring operations
up to acceptable levels. See Note C - Acquisitions.
Second Quarter Ended September 30, 1997 and 1996
- ------------------------------------------------
Consolidated sales for the second quarter ended September 30,
1997 were $7,920,000, a 4.4% reduction compared to the same
quarter last year. Lower sales revenues for engineered products,
primarily as a result of the winding down of the DDG-51 contract,
accounted for most of the sales decline. Sales of other
products, including a substantial contribution from the recently
acquired TANO Corp., helped offset the decline in sales of
engineered products. In the current quarter ended September 30,
1997, sales of all products, other than engineered products,
accounted for 79% of total sales, compared to 49% for the same
period last year.
8
<PAGE>
Operating expenses for the current quarter were $1,984,000,
compared to $1,221,000 for the same quarter last year. This
increase was mainly a result of the inclusion of the recent
acquisitions.
As a result of the lower sales and increased operating expenses,
the Company had a $209,000 operating loss for the current
quarter, compared to operating income of $717,000 for the same
quarter last year.
Interest expense was $187,000 for the current quarter, compared
to $37,000 for the same period last year. The increase was a
result of higher borrowings in connection with the recent
acquisitions.
The Company recognized a $797,000 gain on the sale of its RoxCorp
subsidiary on September 30, 1997 (see Note D).
Earnings per share were $.044 for the quarter ended September 30,
1997, compared to $.071 for the same period last year.
Six Months Ended September 30, 1997 and 1996
- --------------------------------------------
Sales for the six months ended September 30, 1997 were
$14,494,000, a 9.8% reduction compared to the same period last
year. Lower sales revenues from engineered products, primarily
the major DDG-51 contract, accounted for most of the sales
decline. As discussed under the second quarter, sales from other
products made a substantial contribution. For the six month
period ended September 30, 1997, sales of other than engineered
products were 73% of total sales, compared to 30% for the same
period last year.
Operating expenses for the six months ended September 30, 1997
were $3,334,000, compared to $2,318,000 for the same period last
year. Included in this increase was a special charge of $210,000
for the direct costs relating to the relocation and
reorganization of certain engineering and manufacturing
operations. Most of the increase in operating expenses was a
result of the inclusion of the recent acquisitions.
As a result of the lower sales and increased operating expenses,
the Company had a $378,000 operating loss for the six months
ended September 30, 1997, compared to operating income of
$1,301,000 for the same period last year.
Interest expenses for the current period was $253,000, compared
to $68,000 for the same period last year. The increase was a
result of higher borrowings in connection with the recent
acquisitions.
The Company recognized a $797,000 gain on the sale of its RoxCorp
subsidiary on September 30, 1997 (see Note D).
Earnings per share were $.023 for the six months ended September
30, 1997, compared to $.128 for the same period last year.
9
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Operating activities for the six months ended September 30, 1997
resulted in net cash used of $1,024,000. During this period, net
income provided cash of $144,000, with major operating
adjustments and sources being depreciation and amortization of
$279,000, amortization of goodwill of $141,000, decreases in
accounts receivable of $1,061,000, increases in accounts payable
of $890,000, and billings in excess of costs and estimated
earnings of $408,000. Major uses of cash in operating activities
were increases in costs and estimated earnings in excess of
billings of $844,000, increases in inventories of $1,808,000,
reductions in accrued liabilities of $522,000, and income taxes
payable of $585,000. Lower sales volume was a factor in the
decrease in accounts receivable. A build-up in inventories, net
costs in excess of billings and related accounts payable at MCII
were factors in those changes.
The acquisitions of TANO and MCII in the first quarter were
significant investing activities affecting cash flow for the six
months ended September 30, 1997. To facilitate these
acquisitions, the Company utilized available cash funds of
$654,000, and borrowed a total of $4,500,000 of which $2,500,000
was under an amendment to the existing revolving credit
agreement, and $2,000,000 under a short-term bank loan.
On September 5, 1997, the Company executed a new $6,500,000
credit agreement with NationsBank providing a $4,000,000
revolving line of credit, and a $2,500,000 5-year term loan.
Upon the closing of this agreement, the $2,000,000 short-term
loan was paid and replaced by a new $2,500,000 5-year term loan.
The revolving line of credit has a borrowing base of acceptable
receivables and inventories, and the Company borrows periodically
under this revolving line.
The Company believes that the increased borrowing capacity
provided under the new banking agreement, along with operating
cash flows, will be adequate for future operations.
Subsequent to the RoxCorp closing on September 30, 1997, the
Company received $2,431,000 on October 1, 1997, and an additional
$116,000 on October 22, 1997, which represented the full amount
due under the final purchase price adjustment provision of the
sale agreement. The Company utilized $2,000,000 of the amount
received to pay down its revolver loan balance, and utilized the
balance as working capital funds.
The discussions in this section contain forward looking
statements that involve a number of risks and uncertainties.
Among factors that would cause actual results to differ
materially are the following: business conditions in the
military and commercial industries served by the Company;
conditions in the general economy; changes in customer order
patterns including timing of delivery; risk of nonpayment
customer receivables; competitive factors; and other risk factors
listed from time to time in the Company's reports with the
Securities and Exchange Commission.
10
<PAGE>
Item No.5
- ---------
Other Information
- -----------------
Subsequent to the Company's acquisition of MC II on May 28, 1997,
the Company was informed by Government contract officials of
concerns relating to the adequacy of MC II contract accounting
information. It is considered a normal part of the Government's
oversight function to raise questions regarding contractor
operations. The impact of the questions tat have been raised is
not considered to result in material consequences to the
financial condition of the Company. The Company is aggressively
taking action to respond to the issues raised by the Government
in a timely and effective manner.
Regular Quarterly Dividend
- --------------------------
On October 30, 1997, the regular quarterly dividend of $.01 per
common share was declared to stockholders of record on
December 1, 1997, payable on December 22, 1997.
Issuance of Stock Dividend
- --------------------------
On October 30, 1997, the Board of Directors approved a ten
percent stock dividend (one new share of common stock, par value
$.003, for each ten shares now held) to stockholders of record on
December 1, 1997. The new shares will be issued on December 22,
1997.
Item No. 6
- ----------
(a) The following document is filed as an exhibit to this
Form 10-Q:
Exhibit 27 - Financial Data Schedule
(b) On October 15, 1997, the Company filed its Form 8-K to
disclose the disposition of Rox Corp., a subsidiary,
occurring on September 30, 1997.
11
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
DATE: November 13, 1997 WESTWOOD CORPORATION
By: /s/ Ernest H. McKee
------------------------------
Ernest H. McKee, Director
President and
Chief Executive Officer
By: /s/ Paul R. Carolus
------------------------------
Paul R. Carolus, Director
Secretary/Treasurer and
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1997
<CASH> 306
<SECURITIES> 0
<RECEIVABLES> 6,702
<ALLOWANCES> 0
<INVENTORY> 8,587
<CURRENT-ASSETS> 17,927
<PP&E> 6,003
<DEPRECIATION> (2,430)
<TOTAL-ASSETS> 28,683
<CURRENT-LIABILITIES> 12,558
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 11,586
<TOTAL-LIABILITY-AND-EQUITY> 28,683
<SALES> 7,920
<TOTAL-REVENUES> 7,920
<CGS> 6,145
<TOTAL-COSTS> 1,984
<OTHER-EXPENSES> 656
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 187
<INCOME-PRETAX> 447
<INCOME-TAX> 170
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 277
<EPS-PRIMARY> .044
<EPS-DILUTED> 0
</TABLE>
