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FILED: June 29, 1998
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
Commission file number: 0-19381
WESTWOOD CORPORATION
(Exact name of Registrant as specified in its charter)
Nevada 87-0430944
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
5314 South Yale, Suite 1100, Tulsa, Oklahoma 74146
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 918/524-0002
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.003
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The approximate aggregate market value of the Registrant's common stock (based
upon the June 24, 1998, closing sale price of the common stock as reported by
NASDAQ) held by non-affiliates was approximately $4,484,824.
The number of outstanding shares of the Registrant's common stock as of June 24,
1998, was 6,891,647 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12 and 13 of Part III are incorporated by reference from the
definitive Proxy Statement relating to the Registrant's Annual Meeting of
Stockholders for fiscal 1998, which definitive Proxy Statement will be filed
within 120 days of the end of the Registrant's fiscal year.
This filing consists of 45 pages.
Exhibit List found on Pages 12 through 14.
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TABLE OF CONTENTS
Page
Item Number and Caption Number
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PART I 1
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1. Business 1
2. Properties 6
3. Legal Proceedings 6
4. Submission of Matters to a Vote of Security Holders 7
PART II 7
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5. Market for Registrant's Common Equity and Related
Stockholder Matters 7
6. Selected Financial Data 7
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
8. Financial Statements and Supplementary Data 11
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 11
PART III 12
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10. Directors and Executive Officers of the Registrant 12
11. Executive Compensation 12
12. Security Ownership of Certain Beneficial Owners
and Management 12
13. Certain Relationships and Related Transactions 12
PART IV 12
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14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 12
(i)
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PART I
ITEM 1. BUSINESS
General
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Westwood Corporation (the "Company"), a Nevada corporation formed in 1986, is
engaged in the design, manufacture, and sale of electrical generation,
distribution, and automated control equipment and related products. The
Company's business is conducted through its wholly-owned subsidiaries, NMP Corp.
("NMP"), an Oklahoma corporation formed in 1988; Roflan Associates, Inc.
("Roflan"), and its wholly-owned subsidiary, Peter Gray Corporation ("PGC"),
both Massachusetts corporations acquired in 1996; TANO Corp. ("TANO"), a
Louisiana corporation formed in May of 1997; and MC II Electrical Company ("MC
II"), a Texas corporation formed in 1989.
Products and Markets
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Mobile Power Systems
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MC II is in the business of design and manufacturing of a broad family of
diesel, gas, natural gas and turbine mobile electrical generator sets for both
military and commercial applications. MC II employs approximately 82 employees.
Major contracts included within backlog at MC II include development of the next
generation of 30-60 KW TQG generator sets for the U.S. Army, and contractor on
the MEP-012A generator set for the U.S. Air Force. MC II is also an important
supplier of generator replacement spare parts, and is one of just a few
manufacturers capable of supporting substantially all the generator sets
utilized by the Department of Defense.
MC II's manufacturing facilities in Dallas, Texas, perform most aspects of the
generator manufacturing process, including CNC sheetmetal fabrication, CNC
machining, welding, structural fabrication, specialty treating and coating of
parts, wire generator and wire harness assembly. MC II has also designed and
assembles computer software and flat panel touch control screens for monitoring
and controlling all generator mechanical and operations functions.
Automation and Control Systems
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TANO, located in New Orleans, Louisiana, designs, manufactures, installs and
services high-quality, automation and control systems for major military and
commercial ships. TANO is a leading and long-standing provider of automated
machinery plant control systems for the U.S. Coast Guard, the U.S. Navy and the
Military Sealift Command ("MSC").
TANO is the leading supplier of machinery plan automation and control systems
for the U.S. Coast Guard, having been awarded an estimated 97% of its systems
automation contracts for which the Company bid in the last 25 years. TANO's
projected bookings and billings have been substantially increased by contract to
provide, on an exclusive basis, automation and control systems for a fleet
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of new USCG WL and WLB buoy Tenders. These two new ship programs are expected to
result in 30 ships being built; at present, fifteen ships have been ordered,
with additional ships budgeted and funded by Congress.
TANO's product lines are divided into two segments: Systems, and Parts and
Service. Systems consists of the design and manufacture of automation and
control systems for new ships, as well as complex retrofits for existing ships.
Parts and Services refers to TANO's aftermarket business whereby TANO provides
parts and maintenance to a large, worldwide installed base of TANO systems.
A typical TANO system consists of a ship control console located on the bridge,
a central console located in the ship's engine room, and a number of remote
terminal units (RTUs), distributed throughout the ship, which gather data from
the ship's machinery and execute commands communicated by the consoles. TANO's
systems fall into two broad categories: Propulsion Control Systems and Machinery
Monitoring and Control Systems.
Propulsion Control Systems monitor and control the different propulsion
functions of a ship including: the ship's engine speed, clutches, convertible
propeller pitch, z-drive, thrusters, and reduction gears. Machinery Monitoring
and Control Systems automatically control and monitor a wide variety of
functions including the hydraulic systems, cargo monitoring, ballast
distribution, electric power management and water and waste water management.
Alarm functions are linked with the monitoring systems to provide audible or
visual alarms to alert the ship's operator or crew to problems detected by the
monitoring systems.
TANO provides spare parts and service on all current and former systems
previously provided by TANO typically for over 20 years. Spare parts and service
orders from TANO's installed base of approximately 600 ships provides a stable
and ongoing source of revenue that typically offers much higher gross profit
margins, due to its captive nature, than initial system orders. Management
believes a significant growth opportunity exists in this segment since the
current level of business has been attained with minimal sales effort.
TANO's offices and operations occupy 10,000 square feet of leased space in an
office park located in New Orleans. In addition, a small office is leased in
Singapore to support TANO's field service commitments in the Pacific Rim. TANO
has approximately 34 employees.
Engineered Products - Electrical Switchgear
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The Company's marine engineered products line includes marine switchboards
designed for the distribution of electrical power, interior communication,
weapon systems, electrical plant control and power and lighting control on naval
combat vessels. In addition to the actual manufacture of the switchboard and
related products, the Company also supplies electrical and electronic
components, panelboards, spare repair parts, support computer software,
engineering and field services. The Company's primary customers for switchboard
products are the major shipbuilders
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that serve as prime defense contractors to the U.S. Government. Equipment is
also sold to Allied Foreign Governments with State Department approval, under
the War Munitions Act. NMP employs 103 persons at its plant facilities in Tulsa,
Oklahoma.
Marine Electrical Hardware
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The Company also manufactures and distributes marine electrical hardware
utilized on military and commercial vessels including switches, lights, and
relays contained in specially manufactured brass housings, and fiber optic
lighting systems. NMP and PGC manufacture and market a diversified line of
marine electrical hardware products, primarily for the U. S. Navy. PGC also
specializes in deep drawing, metal stamping, and pressing of speciality metal
products from various metals, including brass, aluminum, and steel. PGC employs
55 persons at its plant facilities in Andover, Massachusetts.
Marketing
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The Company's marketing efforts are carried out by employees with extensive
experience in technical disciplines as well as in the military/government
contracting process. These individuals concentrate their efforts on maintaining
active contact with the Company's customers and industry organizations and
keeping abreast of developments in defense programs. The Company's marketing
staff has a long-term professional relationship with Defense Department
personnel and are familiar with the operating and procurement procedures of
these organizations. The marketing of the Company's products and services
requires an in-depth knowledge of the near and long-term plans and equipment
requirements of these customers. Demonstrated technical capabilities are of
primary importance to successful contract awards.
The majority of the Company's defense contracts are the result of negotiated
Request for Quotations ("RFQ"). RFQs involve a contracting process whereby the
customer requires detailed management and technical proposals as well as
detailed pricing data and, thereafter, negotiates a firm fixed price contract
with the selected bidder. These contracts generally constitute a development
contract for equipment design with an ensuing manufacturing contract for the
delivery of equipment and related services. A substantial portion of the
Company's business involves contracts for design and ensuing manufacturing while
the remainder of the Company's contracts are usually manufacturing or service
related only and involve no associated design work.
Competition
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The Company faces competition in all aspects of its business. The Company's
products are generally of a highly technical nature and involve the use of
techniques and materials similar to those used by its competitors. The
principal competitive factors with respect to the Company's products are
technological innovation, product quality, price, adherence to delivery
schedules and product reliability. A significant portion of the Company's sales
are made under government contracts or subcontracts awarded on the basis of
competitive bidding. In addition to price, the factors involved
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in the award of such contracts include the quality of the proposal and
reputation of the bidder. Also, demand for many of the products sold by the
Company is dependent on the level and nature of the nation's defense
expenditures.
The Company has two primary competitors in the military mobile power generation
business, including Libby International and Fermont, a division of Dynamic
Corporation of America. In the automation and control system market, the
Company's primary competitors are C.A.E. Link and Lockheed Martin of Daytona.
The Company has two primary competitors in the U.S. Navy combatant marine power
and switchboard equipment market. These competitors are SPD Technologies, Inc.
("SPD"), and Metric Systems. Competition with the Company's electrical hardware
products line comes from a number of companies participating in small niches
within the overall market.
Major and Foreign Customers
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Sales under contracts or subcontracts for the United States Government accounted
for approximately $21,664,000 or 74% of the Company's sales in fiscal year ended
March 31, 1998 and $22,552,000 or 68% of the Company's sales in fiscal year
ended March 31, 1997. Sales to foreign customers totaled $562,000 in fiscal
year ended March 31, 1998 and $493,000 in fiscal year ended March 31, 1997. For
a further discussion of sales to major customers and concentration of credit
risk, refer to Note 11 of the Consolidated Financial Statements.
Backlog
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The backlog of sales revenue at fiscal year-end March 31, 1998, 1997, and 1996
was as follows:
1998 1997 1996
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$24,000,000 $12,200,000 $24,698,000
Of the existing backlog, the amount of sales revenue expected to be generated
within the next fiscal year is as follows:
1999 1998 1997
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$22,000,000 $11,000,000 $21,000,000
The above backlog figures include only the sales value of major equipment or
products for which the Company has received firm orders. The backlog also only
includes the reengineering development phase of the MC II TQG contract, and does
not include amounts for production order releases. Upon successful completion
of the development phase, the contract calls for production orders totaling
approximately $30,000,000 to be released over a three year period.
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The balance of the Company's backlog consists of smaller contracts, marine
electrical hardware, and miscellaneous components designed and manufactured by
the Company. These components are used mainly as spare parts and include
relays, sensing devices, and a wide assortment of power and lighting panels.
Employees
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As of March 31, 1998, the Company had 274 employees, none of whom are
represented by unions. Management considers its relations with its employees to
be satisfactory.
Patents and Trademarks
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The Company believes that its business is not materially dependent upon the
protection afforded by patents, but primarily upon the experience and continued
creative skills of its personnel. Because of rapidly changing technology and
the need for confidentiality, the Company does not seek to obtain patents in
this area.
Materials and Supplies
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The Company's operations require a wide variety of electrical and mechanical
components and raw materials. Except in regard to sole-source air circuit
breakers which the Company is required to purchase from SPD, most items are
available from several commercial sources.
Environmental Protection
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The Company believes that it and each of its subsidiaries are currently in
compliance with all federal, state and local provisions regulating the discharge
of materials into the environment, or otherwise relating to the protection of
the environment.
During the due diligence phase of the Company's acquisition of Roflan and PGC in
April, 1996 it was learned that PGC had, along with several thousand other
companies, been listed as a potentially responsible party in two EPA Superfund
sites located in New England as a result of acquiring manufacturing assets from
a New England corporation which had utilized the services of a licensed
commercial disposal company from 1954 to 1960. PGC has disclaimed any
liability. Based on review by environmental counsel, the Company believes that
its exposure, even if ultimately determined as a potentially responsible party,
which it has denied, is de minimis with settlement values ranging from $2,500 to
$5,000.
Year 2000 Compliance
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The Company has initiated a company-wide project to address the year 2000
compliance issue for all technology hardware and software, either purchased or
produced, external interfaces with customers and suppliers, operations process
control, accounting and information systems, and
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facility items. The assessment phase of this project as it relates to
traditional information technology areas should be substantially complete by the
end of September, 1998. Necessary conversion and replacement activities will
begin when needs are determined.
The Company expects to utilize both internal and external resources to complete
this process. Costs incurred for new software and hardware purchases will be
capitalized and other costs will be expensed as incurred.
While the total cost of this project is still being evaluated, the Company
estimates that external costs, excluding previously planned system replacements,
necessary to complete the project within the schedule described will total
approximately $250,000. The Company will update this estimate as additional
information becomes available. The costs of the project and the completion
dates are based on management's best estimates, which were derived utilizing
numerous assumptions of future events, including the continued availability of
certain resources, third party year 2000 compliance modification plans and other
factors. There can be no guarantee that these estimates will be achieved and
actual results could differ materially from these estimates.
ITEM 2. PROPERTIES
The Company leases all of its manufacturing, engineering, warehousing and office
facilities comprising a total of approximately 246,000 square feet. The
Company, and its subsidiaries, lease office and manufacturing facilities as
follows: the Company and NMP, Tulsa, Oklahoma, 92,000 square feet; Roflan and
PGC, Andover, Massachusetts, 74,000 square feet; TANO, New Orleans, Louisiana,
10,000 square feet; and, MC II, Dallas, Texas, 70,000 square feet. These leases
are from one to five years with renewal options. The Company owns all of its
manufacturing, assembly and testing equipment.
ITEM 3. LEGAL PROCEEDINGS
On February 20, 1998, the Company and its subsidiary MC II filed suit against
Herschel P. McCullough ("McCullough"), the former president and owner of MC II
in an action styled Westwood Corporation and MC II Electric Company, Inc. v.
Herschel P. McCullough, District Court of Tulsa County, State of Oklahoma, Case
No. CJ-98-0876. The Company and MC II have alleged causes of action specifying
breach of specific representations under the terms of the Stock Purchase
Agreement under which the Company purchased the stock of MC II on May 28, 1997;
breach of McCullough's Employment Agreement, and a request for a declaratory
judgment relating to McCullough's Employment Agreement. McCullough has counter-
claimed against the Company claiming the Company fraudulently induced McCullough
to enter into the Stock Purchase Agreement and that it systematically froze him
out under the Employment Agreement. The case is in the early stages of
discovery and no trial date is set.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's stockholders for a vote during the
fourth quarter of its fiscal year ending March 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ Small-Cap Market under the
symbol WNMP. On March 31, 1998 there were 131 shareholders of record, and
approximately 700 beneficial owners of the Company's common stock. The range of
sales prices for the Company's common stock for the last two years, as reported
by the National Association of Securities Dealers, Inc., and cash dividends
declared were as follows:
Quarter Ended High Bid Low Bid Cash Dividends
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Mar. 31, 1998 $ 1-13/16 $ 1-1/4 $ .01
Dec. 31, 1997 2-5/16 1-1/2 .01
Sept. 30, 1997 2-3/4 1-9/16 .01
June 30, 1997 2-1/2 1-5/16 .01
Mar. 31, 1997 $ 1-3/4 $ 1-3/16 $ .01
Dec. 31. 1996 2-3/8 1-9/16 .01
Sept. 30, 1996 2-5/16 1-7/8 .01
June 30, 1996 2-3/16 1-5/8 .01
The Company has paid dividends at the rate of $.01 per share per quarter since
December, 1992. In view of the Company's acquisition strategy over the last two
fiscal years, the Company will review its dividend policy to determine whether
or not the small dividend given by the Company actually has a positive effect on
its market price and whether or not the funds utilized in the cash dividends
could be better utilized by the Company as a reduction of borrowings.
Accordingly, no assurance can be given that the Company's current dividend
policy will not be changed in the future based on factors of capital needs,
financing and lending activities and requirements, and other matters. See,
"Note 5, on page F-16".
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and related notes thereto for the periods indicated, which
are included in this report:
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Fiscal Years Ended March 31
1998 1997 1996 1995 1994
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(In thousands, except per share data)
Sales $29,435 $33,408 $29,480 $31,928 $31,419
Net Income (Loss) (1,317) 1,631 1,237 1,625 2,126
Total Assets 24,831 16,156 15,724 18,492 16,138
Long-Term Debt 3,152 600 67 21 662
Per Basic and Diluted
Common Share*:
Net Income (Loss) (.19) .24 .18 .24 .31
Cash Dividends .04 .03 .03 .03 .03
*Per share amounts have been adjusted to reflect 10% stock dividends declared in
October, 1993, November, 1994, October, 1995, November, 1996, and November,
1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following management comments regarding the Company's financial condition
and results of operations should be read in conjunction with the Selected
Financial Data and the Consolidated Financial Statements included elsewhere.
The analysis includes the Company's wholly-owned subsidiaries NMP Corp., Roflan
and Peter Gray Corp. Operations of TANO Corp. and MCII Electric Co. are
included from date of acquisition, May 13, 1997 and May 28, 1997, respectively.
Operations of RoxCorp are included only through September 30, 1997 when RoxCorp.
was sold.
Twelve Months Ended March 31, 1998 and 1997
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For the fiscal year ended March 31, 1998, the Company incurred a net loss of
$1,317,000 compared to net income of $1,631,000 for the previous year. The loss
per share was $.19 compared to earnings per share of $.24 for the previous year.
Total consolidated sales for the fiscal year ended March 31, 1998 declined 11.9%
to $29,435,000 compared to $33,408,000 for the prior year.
Gross profit, as a percentage of sales declined to 16.3% compared to 23.9% for
the previous year. Lower gross profit is due to a fourth quarter $430,000
increase in inventory reserves; the sale of RoxCorp., which had higher margins,
in September, 1997; completion of long-term switchgear contracts in early fiscal
1998 and lower overall margins of the new mobile power system product line.
Also contributing to the overall net loss was a fourth quarter $440,000
impairment write-down of property and equipment at the Company's Peter Gray
subsidiary.
Operating expenses increased 24.8% over the previous year primarily as a result
of the TANO and MC II acquisitions. Interest expense increased 502% over the
previous year as a result of the increased borrowing in connection with the TANO
and MC II acquisitions.
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A breakdown of sales by the Company's major product groups follows:
. Mobile power systems (MCII Electric Co.).
. Engineered automation and control systems (TANO Corp.)
. Marine electrical switchgear (NMP Corp.)
. Marine electrical hardware (NMP Corp./Peter Gray Corp.)
Mobile power systems sales, from May 28, 1997, the date of the MCII Electric
acquisition to March 31, 1998, were $3,209,000. Sales for this product group
were relatively low due to several factors that affected production and normal
sales and margins. One of the company's major contracts, the TQG contract has a
development phase that was only partially complete when the company was
acquired. To complete the required development work, the Company focused
considerable time and resources, and no sales revenues or margins were recorded
during this phase. At year-end, the Company has provided for additional
estimates to complete this development, and expects to begin production and
develop sales revenues on this contract beginning in the fourth quarter of
fiscal 1999. On another major contract, the Air Force MEP-12 program, it was
necessary to fulfill past contract requirements before the Company could begin
recognizing full sales and margins on shipments. This phase of the contract was
completed in March, and the Company began making shipments under this contract
recognizing normal sales and margins beginning in April.
Engineered automation and control systems sales, from May 13, 1997, the date of
the TANO acquisition to March 31, 1998, were $7,630,000. The U.S. Coast Guard
WLB/WLM buoy tender program was a major contract contributing to sales revenues
during the period.
Marine electrical switchgear sales for the fiscal year ended March 31, 1998
declined 68.8% to $6,081,000 compared to $19,460,000 for the prior year. A
declining backlog of major long-term switchgear contracts as a result of the
down-turn in navy shipbuilding was the primary reason for the substantial
decrease in sales revenues for this product line.
Marine electrical hardware sales for the fiscal year were $9,585,000, a 4.3%
decrease compared to the previous year. A factor in the lower sales for the
fiscal year was the negative impact on production output during the first
quarter when certain manufacturing operations were relocated from Massachusetts
to Tulsa.
Twelve Months Ended March 31, 1997 and 1996
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Net income for the fiscal year ended March 31, 1997 was $1,631,000, a 31.9%
increase compared to $1,237,000 for the previous year. Earnings per share were
$.24, compared to $.18 for the previous year.
Total consolidated sales for the fiscal year ended March 31, 1997 were
$33,408,000, a 13.3% increase compared to $29,480,000 for the prior year. A
breakdown of sales by product lines shows marine hardware sales of $10,014,000,
an increase of 191% over the previous year, mainly as a result
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of the Roflan/Peter Gray acquisition in May, 1996. Sales of safety sealing
products by RoxCorp were $3,934,000, an increase of 136% over the prior year,
and primarily due to increased penetration into the telecommunication industry.
Sales of engineered switchgear products by NMP Corp. declined 20% to
$19,460,000, compared to $24,368,000 for the previous fiscal year. Lower
production on the DDG-51 program due to the winding down of that contract was
the major reason for the decline.
Gross profit, as a percentage of sales, improved to 23.9% compared to 18.9% for
the prior year. The increase in sales of higher margin safety sealing systems,
as well as cost reductions in certain switchgear products, accounted for most of
the improvement in gross margin. Operating income increased to $2,718,000, a
34.9% increase over the previous year. Interest expense increased 47.5% to
$87,000 as a result of increased borrowing.
Liquidity and Capital Resources
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Operating activities for the fiscal year ended March 31, 1998 resulted in net
cash used of $3,247,000. During this period, cash was provided by major cash
adjustments and sources of depreciation and amortization of $1,448,000 and
impairment loss of $440,000; reductions in accounts receivable of $356,000 and
inventories of $242,000; and increases in accounts payable of $2,491,000, and
accrued liabilities of $192,000. Major uses of cash were the net loss of
$1,317,000, the gain on sale of subsidiary of $797,000, increases in costs and
estimated earnings in excess of billings on uncompleted contracts of $2,261,000;
and reductions in billings in excess of costs and estimated earnings on
uncompleted contracts of $3,156,000, and income taxes payable/receivable of
$1,057,000.
Lower production activity and progress billings on major switchgear contracts,
as well as heavy expenditures related to uncompleted MCII contracts that were
only partially funded by progress billings, accounted for most of the activity
related to contracts in process.
The acquisitions of TANO and MCII in the first quarter, and the sale of RoxCorp.
in the second quarter were the significant investing activities affecting cash
flow for the fiscal year ending March 31, 1998. 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. In connection with the sale of RoxCorp., the Company received $2,389,000
and utilized $2,000,000 of the amount received to pay down its revolver loan
balance with the balance used as working capital funds.
On September 5, 1997, the Company executed a new $6,500,000 credit agreement
with NationsBank providing a $4,000,000 one year revolving line of credit, and a
$2,500,000 5-year term loan. On February 23, 1998, the credit agreement was
amended to provide an additional $400,000 term loan to mature September 5, 1998.
The revolving line of credit has a borrowing base of acceptable receivables and
inventories.
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The Company's cash flow and working capital was impacted during the latter half
of the fiscal year, both as a result of the loss for the period, but also due to
the completion requirements of certain MCII contracts. Completion of those
contracts required the expenditure of substantial funds which the Company could
only partially recover through progress billings.
The Company anticipates it will request an increase in the current line of
credit, but that as a result of progress on the MCII contracts, and the expected
return to profitability for the fiscal year ending March 31, 1999, future
funding requirements should be substantially lessened.
Forward Looking Information
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Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although the Company believes such forward-
looking statements are based on reasonable assumptions, no assurance can be
given that every objective will be reached. Such statements are made in
reliance on the safe harbor protections provided under the Private Securities
Litigation Reform Act of 1995.
As required by such Act, the Company hereby identifies the following important
factors that could cause actual results to differ materially from any results
projected, forecasted, estimated or budgeted by the Company in forward-looking
statements: (i) risks and uncertainties impacting the Company as a whole relate
to changes in general economic conditions in the United States; the availability
and cost of capital; changes in laws and regulations to which the Company is
subject, including tax, environmental and employment laws and regulations; the
cost and effects of legal and administrative claims and proceedings against the
Company or its subsidiaries or which may be brought against the Company or its
subsidiaries; conditions of the capital markets utilized by the Company to
access capital to finance operations; and, to the extent the Company increases
its investments and activities abroad, such investments and activities will be
subject to foreign economies, laws, and regulations; and (ii) for the Company's
defense related businesses, business conditions in the military and commercial
industries served by the Company; Federal Government defense budgeting
processes; compliance with Government contract and inspection programs; and
other risk factors listed from time to time in the Company's reports with the
Securities and Exchange Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item begins at page F-1, attached.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 1998 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 1998 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 1998 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 1998 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
1. Financial Statements - The Financial Statement Index is found on page F-1,
attached
2. Financial Statement Schedules - The Financial Statement Schedule Index is
found on page F-1, attached
3. List of Exhibits*
2.1 Exchange Agreement between Westwood Corporation and NMP Corp. dated March
29, 1988
2.2 Asset Purchase Agreement between NMP Corp. and General Signal
12
<PAGE>
3.1 Articles of Incorporation of Westwood Corporation
3.2 Bylaws of Westwood Corporation
3.3 Restated and Amended Articles of Incorporation of Westwood Corporation
4.1 Specimen Stock Certificate
4.2 Subordinated NMP Corp. Note
10.1 Employment Agreement, as amended, of Ernest H. McKee
10.2 Employment Agreement, as amended, of Paul R. Carolus
10.3 Credit Agreement Fourth National Bank of Tulsa
10.4 Bath Iron Works Corporation, contract for constructing DDG-51 Class Guided
Missile Destroyer Program
10.5 China Shipbuilding Corporation, contract for construction of PFG-2 Guided
Missile Frigate
10.6 Exclusive Manufacturing and Territory Sales Agreement, dated January 22,
1992, between NMP Corp., and Roxtec AB
10.7 1992 Employees' Stock Option Plan of Westwood Corporation
10.8 1992 Directors' Stock Option Plan of Westwood Corporation
10.9 1992 Directors' Stock Option Plan as amended October 28, 1993
10.10 1992 Directors' Stock Option Plan as amended September 3, 1996
10.11 Roflan Stock Purchase Agreement (Reported on Form 8-K, filed May 14,
1996)
10.12 TANO Corp. Asset Purchase Agreement (Reported on Form 8-K, filed June
5, 1997)
10.13 MC II Stock Purchase Agreement (Reported on Form 8-K, filed June 12,
1997)
10.14 Roxtec Purchase Agreement (Reported on Form 8-K, filed September 30,
1997)
22.1 Articles of Incorporation of NMP Corp.
22.2 Bylaws of NMP Corp.
13
<PAGE>
27. Financial Data Schedule
* Exhibits filed with prior reports by the Company.
(b) REPORTS ON FORM 8-K
No filings on Form 8-K were made during the last quarter of the fiscal year
ending March 31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
WESTWOOD CORPORATION
By: /s/ Ernest H. McKee By: /s/ Richard E. Minshall
------------------------------- -------------------------------
Ernest H. McKee Richard E. Minshall
President and Director Director
By: /s/ Paul R. Carolus By: /s/ Anthony Pantaleoni
------------------------------- -------------------------------
Paul R. Carolus Anthony Pantaleoni
Secretary/Treasurer and Director Director
By: /s/ John H. Williams
-------------------------------
John H. Williams
Director
DATE: June 29, 1998
14
<PAGE>
WESTWOOD CORPORATION
Index to Consolidated Financial Statements and Schedule
Page
----
Covered by Report of Independent Auditors
Report of Independent Auditors F-2
Consolidated Balance Sheets as of March 31,
1998 and 1997.............................................. F-3
Consolidated Statements of Operations for the
Years ended March 31, 1998, 1997 and
1996....................................................... F-5
Consolidated Statements of Stockholders' Equity
for the Years ended March 31, 1998, 1997 and
1996....................................................... F-6
Consolidated Statements of Cash Flows for the
Years ended March 31, 1998, 1997 and 1996.................. F-7
Notes to Consolidated Financial Statements for the
Years ended March 31, 1998, 1997 and 1996.................. F-9
Schedule for the Years ended March 31, 1998, 1997 and 1996:
V - Valuation and Qualifying Accounts.................. F-27
Not Covered by Report of Independent Auditors:
Selected Quarterly Financial Information (unaudited)......... F-26
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the respective
financial statements or notes thereto.
F-1
<PAGE>
[ERNST & YOUNG LLP LOGO]
Report of Independent Auditors
The Board of Directors
Westwood Corporation
We have audited the accompanying consolidated balance sheets of Westwood
Corporation as of March 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1998. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Westwood Corporation at March 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
(Original Manually Signed)
Tulsa, Oklahoma
June 5, 1998
F-2
<PAGE>
Westwood Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
MARCH 31
1998 1997
-----------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 574 $ 1,165
Accounts receivable (including retainage receivable
of $58,000 in 1998 and $767,000 in 1997),
net of allowance for doubtful accounts of
$65,000 in 1998 and $44,000 in 1997 4,390 4,485
Note receivable--officer 55 51
Income tax receivable 502 -
Costs and estimated earnings in excess of
billings on uncompleted contracts 2,854 332
Inventories:
Raw materials and purchased parts 3,849 4,605
Work-in-process 1,786 1,210
-----------------------------------
5,635 5,815
Prepaid expenses 130 220
Current deferred income taxes 354 553
-----------------------------------
Total current assets 14,494 12,621
Plant and equipment, at cost:
Leasehold improvements 820 768
Machinery and equipment 4,341 3,733
Patterns and tools 430 383
-----------------------------------
5,591 4,884
Accumulated depreciation (2,858) (2,588)
-----------------------------------
2,733 2,296
Goodwill (net of accumulated amortization of
$387,000 in 1998) 6,725 -
Long-term accounts receivable, retainage 816 980
Deferred charges (net of accumulated amortization
of $768,000 in 1998 and $572,000 in 1997) 63 259
-----------------------------------
Total assets $24,831 $16,156
===================================
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
MARCH 31
1998 1997
----------------------------------
(In Thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,971 $ 886
Income taxes payable - 612
Accrued liabilities 1,518 671
Accrued rent 81 81
Billings in excess of costs and estimated
earnings on uncompleted contracts 855 1,087
Current portion of long-term debt:
Note payable 51 47
Payable to bank 4,500 -
Acquisition debt 387 -
----------------------------------
4,938 47
----------------------------------
Total current liabilities 11,363 3,384
Accrued rent 215 325
Long-term debt:
Payable to bank 1,750 -
Note payable 526 600
Acquisition debt 876 -
----------------------------------
3,152 600
Deferred income taxes 18 372
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized,
$.001 par value, no shares issued or
outstanding - -
Common stock, 20,000,000 shares authorized,
$.003 par value, 6,891,647 and 6,139,933
shares issued and outstanding at March 31,
1998 and 1997, respectively 21 18
Capital in excess of par value 5,978 4,627
Retained earnings 4,084 6,830
----------------------------------
Total stockholders' equity 10,083 11,475
----------------------------------
Total liabilities and stockholders' equity $24,831 $16,156
==================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Westwood Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1998 1997 1996
--------------------------------------------------
(In Thousands, except earnings per share)
<S> <C> <C> <C>
Sales $29,435 $33,408 $29,480
Cost of sales 24,640 25,410 23,897
--------------------------------------------------
Gross profit 4,795 7,998 5,583
Operating expenses:
Marketing and selling expenses 2,269 1,710 1,426
General and administrative expenses 4,318 3,570 2,142
Impairment loss 440 - -
--------------------------------------------------
7,027 5,280 3,568
--------------------------------------------------
Operating income (loss) (2,232) 2,718 2,015
Other income (expense):
Interest expense (524) (87) (59)
Gain on sale of subsidiary 797 - -
Other (73) 33 58
--------------------------------------------------
200 (54) (1)
--------------------------------------------------
Income (loss) before income taxes (2,032) 2,664 2,014
Provision (benefit) for income taxes (715) 1,033 777
--------------------------------------------------
Net income (loss) $(1,317) $ 1,631 $ 1,237
==================================================
Basic and diluted earnings
(loss) per share $(.19) $.24 $.18
</TABLE>
See accompanying notes.
F-5
<PAGE>
Westwood Corporation
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Capital in
Preferred Common Excess of Retained
Stock Stock Par Value Earnings Total
------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1995 - $15 $2,244 $ 6,785 $ 9,044
Net income - - - 1,237 1,237
Cash dividends paid
($.03 per share) - - - (208) (208)
Stock dividend - 2 1,267 (1,269) -
------------------------------------------------------------------------
Balance at March 31, 1996 17 3,511 6,545 10,073
Net income - - - 1,631 1,631
Cash dividends paid
($.03 per share) - - - (229) (229)
Stock dividend - 1 1,116 (1,117) -
------------------------------------------------------------------------
Balance at March 31, 1997 18 4,627 6,830 11,475
Net loss - - - (1,317) (1,317)
Stock issuance - 1 179 - 180
Cash dividends paid
($.04 per share) - - - (255) (255)
Stock dividend - 2 1,172 (1,174) -
------------------------------------------------------------------------
Balance at March 31, 1998 - $21 $5,978 $ 4,084 $10,083
========================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Westwood Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1998 1997 1996
-------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(1,317) $ 1,631 $ 1,237
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,448 754 521
Impairment loss 440 - -
Gain on sale of subsidiary (797) - -
Loss on asset disposals 32 - 2
Deferred income taxes (133) (346) (106)
Cash flows impacted by changes in:
Accounts receivable 356 754 3,199
Costs and estimated earnings
in excess of billings on
uncompleted contracts (2,261) 2,657 (399)
Inventories 242 327 740
Prepaid expenses 102 (91) (5)
Long-term accounts receivable,
retainage 171 322 (71)
Accounts payable 2,491 (1,817) (701)
Accrued liabilities and rent 192 (830) (70)
Billings in excess of costs and
estimated earnings on
uncompleted contracts (3,156) (1,306) (1,146)
Income taxes payable/receivable (1,057) 260 287
-------------------------------------------------
Net cash provided by (used in) operating
activities (3,247) 2,315 3,488
</TABLE>
F-7
<PAGE>
Westwood Corporation
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1998 1997 1996
-----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
INVESTING ACTIVITIES
Purchases of plant and equipment $ (450) $ (110) $ (257)
Proceeds from sales of plant and equipment 71 12 -
Proceeds from sale of subsidiary 2,389
Purchase of certain assets (2,080) (69) (325)
Acquisition of company, less
cash acquired (498) (815) -
Collections (advances) on officer loan (4) 49 70
Other - (33) (212)
-----------------------------------------------------
Net cash used in investing activities (572) (966) (724)
FINANCING ACTIVITIES
Principal payments on debt (3,017) (5,103) (5,566)
Borrowings on debt 6,500 4,550 3,505
Dividends paid (255) (229) (208)
-----------------------------------------------------
Net cash provided by (used in)
financing activities 3,228 (782) (2,269)
-----------------------------------------------------
Net increase (decrease) in cash (591) 567 495
Cash and cash equivalents at
beginning of year 1,165 598 103
-----------------------------------------------------
Cash and cash equivalents at end of year $ 574 $ 1,165 $ 598
=====================================================
</TABLE>
See accompanying notes.
F-8
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements
March 31, 1998, 1997 and 1996
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
Westwood Corporation ("Company"), a holding company, owns 100% of the
outstanding shares of NMP Corp. ("NMP"), Roflan and Associates, Inc. ("Roflan")
and through Roflan's ownership interest, 100% of the outstanding common stock of
its wholly owned subsidiary, Peter Gray Corporation ("Peter Gray"). In April
1997, NMP spun-off its Rox Tec division and established a separate wholly owned
subsidiary, Rox Corp. In May 1997, Westwood purchased the assets and liabilities
of TANO Automation, Inc.'s Marine Automation Control Division and established a
separate wholly owned subsidiary, Tano Corp.("TANO"). Westwood also purchased
100% of the outstanding shares of MCII Electric Co. ("MCII") in May 1997. In
September 1997, the Company sold the net assets of Rox Corp. in a cash
transaction.
NMP primarily manufactures and markets a diversified line of marine hardware
products, primarily for the U.S. Navy. NMP is also engaged in the business of
designing and manufacturing electrical distribution and signal switching
equipment in accordance with specifications of the U.S. Navy for use on combat
ships. Peter Gray is a commercial cold forger, serving mostly commercial markets
within the United States. TANO designs, manufactures, sells and services
electrical automation and control systems for both military and commercial ships
and machinery plant automation and control systems. MCII designs, manufactures,
sells and supports mobile generator sets for both military and commercial
applications.
ESTIMATES AND ASSUMPTIONS
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions, in particular estimates of anticipated contract costs and
revenues utilized in the earnings recognition process, that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
CONSOLIDATION POLICY
The consolidated financial statements include the account balances of the
Company and its wholly owned subsidiaries. All intercompany balances have been
eliminated.
F-9
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid mutual funds invested in United
States government securities with maturities of three months or less when
acquired.
CONTRACTS
The Company recognizes revenues and costs for major long-term contracts on the
percentage-of-completion method, measured by the percentage of total labor costs
incurred to date to estimated total labor costs for each contract. Estimated
losses on contracts are provided for in full when they become apparent. The
excess of any accumulated costs and estimated earnings over billings is
presented as a current asset in the accompanying balance sheet. When billings
exceed costs incurred and estimated earnings, the excess of such billings is
presented as a current liability. On all other contracts, revenues are
recognized when units are shipped.
The effect of changes in estimates of contract profits was to increase 1998 and
1997 net earnings by approximately $509,000 and $586,000, respectively, from
that which would have been reported had the revised estimates been used as the
basis of recognition of contract profits in the preceding years.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
principally on the average cost method.
DEPRECIATION
Plant and equipment are depreciated using the straight-line method over their
estimated useful lives. Depreciation expense of $682,000, $520,000 and $364,000
is included in the 1998, 1997 and 1996 statements of operations, respectively,
based on the utilization of the particular assets.
Major replacements and improvements are capitalized while minor replacements,
maintenance and repairs which do not extend useful lives are expensed.
F-10
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
AMORTIZATION OF DEFERRED CHARGES
Deferred charges represent amounts related primarily to certain costs of
obtaining and developing new product lines. Deferred charges are being amortized
by the straight-line method over their estimated useful lives.
GOODWILL
Goodwill, which represents the excess of cost over fair value of net assets of
businesses acquired, is amortized on a straight line basis over periods not
exceeding 15 years. On an ongoing basis, management reviews the valuation and
amortization of goodwill, taking into consideration any events and circumstances
which might have impaired the fair value. Goodwill is written down to fair value
when declines in fair value are indicated, based upon expected cash flows
related to the acquired business.
INCOME TAXES
The Company includes the operations of its subsidiaries in its consolidated
federal income tax return. Deferred income taxes are computed using the
liability method and are provided on all temporary differences between the
financial basis and the tax basis of the Company's assets and liabilities.
EARNINGS PER SHARE
During 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share." As such, basic earnings per share are
based upon the sum of the average number of common shares outstanding. Diluted
earnings per share assumes the exercise of stock options outstanding using the
treasury stock method. However, none of the options outstanding were dilutive in
1998, 1997 and 1996, resulting in no difference between basic and dilutive
earnings per share for each of the years presented.
F-11
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," effective for fiscal years beginning after December 15, 1995.
SFAS No. 121 was adopted in the first quarter of fiscal 1997.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
standard, which is effective for fiscal years beginning after December 15, 1997,
is a disclosure oriented standard and will not affect the Company's reported
consolidated financial position, results of operations or cash flows.
In April 1998, the AICPA issued Statement of Position ("SOP") 98-5, "Reporting
the Costs of Start-Up Activities." The SOP is effective for fiscal years
beginning after December 31, 1998, and requires start-up costs capitalized prior
to that date be written off and any future start-up costs to be expensed as
incurred. The unamortized balance of start-up costs at March 31, 1998 (included
as a component of deferred charges) will be fully amortized prior to the
required adoption of this statement. The Company has determined that the impact
of the adoption of SOP will not materially impact future operations.
2. ACQUISITIONS
On March 11, 1996, NMP acquired certain assets of a product line from Tabet
Manufacturing Co., Inc. for $325,000 in cash. The transaction was accounted for
as a purchase. A summary of the assets acquired in the transaction is as follows
(in thousands):
Inventory $ 58
Equipment 267
----------------
$325
================
The results of operations for this purchase have been included from the date of
the acquisition. Results of operations of the product line prior to purchase by
NMP were not significant when compared to the operations of the Company.
F-12
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS (CONTINUED)
On May 1, 1996, the Company acquired 100% of the issued and outstanding common
stock of Roflan and through Roflan's ownership interest, 100% of the outstanding
common stock of its wholly owned subsidiary, Peter Gray, for $990,000 in cash.
The transaction was accounted for as a purchase. The results of operations have
been included from the date of acquisition. The net purchase price was
subsequently reduced during 1997 by 50% of the federal tax refund of $260,000
received as a result of filing Roflan and Peter Gray's consolidated federal tax
return for the period from October 1, 1995 through April 30, 1996 as per the
purchase agreement. The acquired net assets have been recorded based upon an
allocation of the purchase price with substantially all of the purchase price in
excess of Roflan and Peter Gray's historical carrying value being allocated to
property and equipment.
During 1998, a change in the operational structure and decline in product demand
of the Company's Peter Gray subsidiary resulted in the Company performing an
evaluation of the valuation of the subsidiary's plant and equipment. Based upon
the evaluation it was determined that Peter Gray's $1,100,000 in plant and
equipment was impaired by $440,000 resulting in a write down to current fair
value. The write down was included as a charge against 1998 operations. Fair
value was based on estimated future cash flows to be generated by Peter Gray,
discounted at a market rate of interest.
On May 13, 1997, the Company purchased the assets and liabilities of TANO
Automation, Inc.'s Marine Automation Control Division for a total purchase price
of $2,500,000. The transaction was accounted for as a purchase and accordingly,
TANO's results of operations are included in the financial statements since the
date of the acquisition. The net purchase price was subsequently reduced during
1998 to $2,080,000 as a result of a post-closing audit of TANO's balance sheet
as per the purchase agreement. The purchase price was allocated to the
respective net assets acquired based upon their respective fair values. The
excess purchase price over the net assets acquired resulted in goodwill of
approximately $1,712,000.
On May 28, 1997, the Company purchased 100% of the outstanding common stock of
MCII Electric Company, Inc. for $2,000,000, plus 125,000 shares of the Company's
common stock. The transaction was accounted for as a purchase and accordingly,
MCII's results of operations are included in the financial statements since the
date of the acquisition. The transaction involved the payment of $500,000 in
cash plus three noninterest bearing annual installments of $500,000 each through
May 28, 2000. The
F-13
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS (CONTINUED)
purchase price was allocated to the assets and liabilities assumed in the
acquisition based upon their respective fair values. The excess purchase price
over the net assets acquired resulted in goodwill of approximately $5,400,000.
The following selected unaudited pro forma information (in thousands, except per
share amounts) is provided to present a summary of the combined results of the
Company as if the acquisitions discussed above had occurred at the beginning of
fiscal 1997, giving effect to purchase accounting adjustments. The pro forma
data is for informational purposes only and may not necessarily reflect the
results of operations had the acquired businesses operated as of part of the
Company for the years ended March 31, 1998 and 1997.
1998 1997
--------------------------
Sales $29,814 $43,297
Net income (loss) (1,579) 1,905
--------------------------
Basic and diluted earnings (loss) per share $ (.23) $ .28
==========================
3. SALE OF ROX CORP.
On September 30, 1997, the Company sold the net assets of Rox Corp, for $881,000
in cash. In addition to the sales price, $1,666,000 in outstanding loans between
Rox Corp. and the Company and its subsidiaries were paid in full by the
purchaser.
Subsequent to the sale of Rox Corp. and the transfer of employees who have
ownership in the Company to Rox Corp., the Company began subleasing office and
warehouse space as well as providing other administrative services to Rox Corp.
via an administrative services agreement. The agreement, which can be cancelled
by either party with adequate notice, contains various market comparable prices
for the services provided or space occupied. Additionally, the Company's NMP
subsidiary sells materials and parts to Rox Corp. which resulted in revenues to
the Company of $82,000 since the sale of Rox Corp.
F-14
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
4. UNCOMPLETED CONTRACTS
At March 31, costs incurred on uncompleted contracts, estimated earnings and
related contract billings to date are as follows:
1998 1997
--------------------------------
(In Thousands)
Costs incurred on uncompleted
contracts $49,301 $54,867
Estimated earnings 14,888 17,106
--------------------------------
64,189 71,973
Less contract billings to date 62,190 72,728
--------------------------------
$ 1,999 $ (755)
================================
Included in the accompanying
balance sheets under the
following captions:
Costs and estimated earnings
in excess of billings on
uncompleted contracts $ 2,854 $ 332
Billings in excess of costs and
estimated earnings on
uncompleted contracts 855 1,087
--------------------------------
$ 1,999 $ (755)
================================
Accounts receivable include approximately $1,603,000 and $340,000 of progress
billings at March 31, 1998 and 1997, respectively.
F-15
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT
Long-term debt at March 31 consists of the following:
1998 1997
---------------------------------
(In Thousands)
Revolving credit facility $3,600 $ -
Notes payable to bank 2,650 -
Peter Gray note payable 577 647
MCII acquisition note 1,263 -
---------------------------------
8,090 647
---------------------------------
Less current maturities 4,938 47
---------------------------------
$3,152 $ 600
=================================
Annual maturities on long-term debt are: 1999 -- $4,938,000; 2000 -- $989,000;
2001 -- $1,045,000; 2002 -- $868,000; and 2003 -- $250,000.
On May 27, 1997, the Company entered into a $2,500,000 term note and extended
their existing $3,000,000 revolving credit facility. On September 5, 1997, the
Company entered into a new revolving credit facility and term loan facility in
the amount of $4,000,000 and $2,500,000, respectively, each bearing interest at
the lender's prime rate (8.5% at March 31, 1998). The revolving credit facility
expires September 5, 1998 and is based on a borrowing base of acceptable
receivables and inventories. The term loan facility requires monthly principal
payments, plus accrued interest of $41,667 through October, 2002. In February,
1998, the Company amended the credit agreement to allow for an additional term
loan in the amount of $400,000 bearing interest at the lender's prime rate plus
1% (9.5% at March 31, 1998). The $400,000 term loan matures on September 5,
1998.
Each of the credit arrangements contain covenants relating to the maintenance of
a cash flow to current maturity ratio, current ratio, debt to net worth ratio,
net worth ratio, and working capital and is secured by accounts receivable and
inventories of the Company's NMP, MCII, and TANO subsidiaries as well as the
property and equipment of all of the Company's subsidiaries. The credit facility
also restricts the declaration and payment of dividends to 50% of net income of
the preceding fiscal year. At March 31, 1998, the Company was not in compliance
with a covenant requiring the maintenance of the annual cash flow to current
maturity ratio. The Company has obtained a waiver of the covenant violation for
the year ended March 31, 1998.
F-16
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
At March 31, 1998, $400,000 was available under the revolving credit facility.
Borrowings on the revolving credit facility averaged $2,592,000, $306,000 and
$111,000 per day during 1998, 1997 and 1996, respectively, with the highest
month-end balance being $3,790,000, $2,000,000 and $1,500,000, respectively. The
weighted average interest rate was 8.5%, 8.6% and 9.0% during 1998, 1997 and
1996, respectively.
In connection with the acquisition of MCII, the Company signed a $1,500,000
noninterest bearing note payable with the former owner of MCII. The note
requires three annual installments, beginning in May 1998, of $500,000. The
Company has recorded the obligation at a discount consistent with the rate
obtainable from the lender of their existing revolving credit facility.
In connection with the acquisition of Peter Gray, the Company assumed a secured
note payable due on November 1, 2001. The note is payable in monthly principal
and interest installments of $8,000 through September 1999, followed by 24
monthly payments of $11,000, with a final payment of $335,000 due on November 1,
2001. Interest is computed at 8% per annum. The note is secured by the accounts
receivable and leasehold improvements of Peter Gray.
At March 31, 1998, the fair value of the Company's MCII note payable cannot be
determined given the uncertainty of the contingencies with the former owner of
MCII as described in Note 7. At March 31, 1998 and 1997, the fair value of the
rest of the Company's notes payable approximates the carrying value.
F-17
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES
The components of the provisions for income taxes are as follows:
1998 1997 1996
--------------------------------------------------
(In Thousands)
Current:
Federal $(550) $1,158 $ 750
State (32) 221 133
--------------------------------------------------
(582) 1,379 883
Deferred:
Federal (120) (310) (95)
State (13) (36) (11)
--------------------------------------------------
(133) (346) (106)
--------------------------------------------------
$(715) $1,033 $ 777
==================================================
The difference between the expected tax rate and the effective tax rate is
primarily due to state income taxes as shown below:
1998 1997 1996
--------------------------------------------------
(In Thousands)
Expected provision for
federal income taxes
at the statutory rate $(691) $ 906 $ 685
State income taxes--net
of federal benefit (22) 114 76
Other (2) 13 16
--------------------------------------------------
Provision for income
taxes $(715) $1,033 $ 777
==================================================
F-18
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets as
of March 31 are as follows:
1998 1997
--------------------------------
(In Thousands)
Deferred tax liabilities:
Long-term contracts $ 78 $131
Tax over book depreciation
and amortization 91 428
--------------------------------
Total deferred tax liabilities 169 559
Deferred tax assets:
Overhead allocations to inventory 1 90
Inventory reserves 282 346
Warranty reserve 47 57
Accrued rent 101 154
Other--net 74 93
--------------------------------
Total deferred tax assets 505 740
--------------------------------
Net deferred tax asset $336 $181
================================
7. COMMITMENTS AND CONTINGENCIES
Subsequent to the acquisition of MCII, the Company was informed by U.S.
government contract officials of concerns relating to the adequacy and accuracy
of certain MCII contract accounting information. The Company believes it has
fully responded to concerns raised. However, as a result of this notification
and other information learned subsequent to the acquisition, the Company has
filed several indemnification claims against the former owner of MCII, who has
in turn filed counter claims against the Company. While initial settlement
discussions have commenced, it is still uncertain as to the ultimate resolution
of the claims. Any settlement under the indemnification provision would
correspondingly reduce or increase the amount of goodwill associated with MCII
and not materially impact operating results of the Company.
The Company has employment contracts through March 31, 2000 with its principal
officers. These contracts provide for base salaries with an aggregate total
annual salary commitment of $355,000. Bonus provisions are subject to the
discretion of the Board of Directors of the Company.
F-19
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
8. LEASES
The Company leases all of its premises and various equipment under non-
cancelable operating lease agreements. The future minimum lease payments for all
leases are as follows:
1999 $ 705,000
2000 656,000
2001 588,000
2002 345,000
2003 113,000
----------------
$2,407,000
================
In fiscal 1992, Peter Gray entered into a 10-year operating lease which provided
for free rent during the first two years of the agreement. Additionally, the
lease agreement contains escalation clauses which increased the lease payments
after the fifth year of the agreement. Under generally accepted accounting
principles, rent expense should be recognized on a straight-line basis on lease
agreements like Peter Gray's. Of the above commitments, $296,000 and $406,000
has been recorded at March 31, 1998 and 1997, respectively, as accrued rent in
order to recognize rent expense associated with the Peter Gray lease on a
straight-line basis.
Rent expense incurred under operating lease agreements was $690,000, $496,000
and $438,000 for 1998, 1997 and 1996, respectively.
9. NOTE RECEIVABLE -- OFFICER
The note receivable from Ernest McKee, President of the Company, includes
principal and accrued interest at prime plus 1/4%. The note was due on March 31,
1997 but was extended to March 31, 1999 with the final payment plus interest due
at maturity. The note is secured by 366,667 shares of the Company's stock.
10. EMPLOYEE BENEFIT PLAN
The Company maintains 401(k) plans into which participating employees can defer
up to 17% of their annual compensation up to a specified limit. The Company
matches 100% of each participating employee's deferrals, not to exceed 3% of
each participating employee's annual compensation. The Company contributions to
the plans for 1998, 1997 and 1996 were $135,000, $122,000 and $120,000,
respectively. The Company does not provide any post-retirement benefits other
than the 401(k) plans.
F-20
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
11. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company's operations are conducted within one business segment and its
customers are primarily the United States government and companies engaged in
the defense contractor industry located throughout the United States who have
contracted with the United States government. During 1998, the Company had sales
of 10% or more of total sales to a general contractor and the United States
government accounting for approximately $4,151,000 and $4,108,000 of revenues,
respectively. Two different general contractors accounted for approximately
$11,488,000 and $7,244,000 of revenues in 1997 and approximately $11,550,000 and
$7,833,000 of revenues in 1996.
At March 31, 1998, approximately $1,568,000 (36 %) of accounts receivable,
including current retainage, are due from two customers. The Company generally
does not require collateral from its customers as progress billings are rendered
to customers as the work is performed, which results in substantial receipt of
amounts due prior to the time the products are shipped. Credit losses relating
to customers in the defense contractor industry have not been significant.
The Company has been dependent upon long-term switch gear contracts relating to
major new ship building programs for the bulk of its sales revenue. In recent
years, one program has been a significant contributor to revenues. In 1996, the
Company was notified that it was not awarded a new contract related to this ship
building program. During 1998, this program was substantially completed and as a
result, the Company experienced a significant decline in sales revenues.
However, in 1998, as a result of recent acquisitions, the reduction in revenue
was partially offset by revenue from long-term contracts relating to electrical
generation systems and electrical automation and control systems as well as
increased sales from other products.
12. STATEMENT OF CASH FLOWS
Cash payments for interest were $482,000, $87,000 and $78,000 and income taxes
were $540,000, $1,120,000 and $596,000 for 1998, 1997 and 1996, respectively.
13. COMMON STOCK
The financial statements, including the earnings per share calculations, include
the impact of three 10% stock dividends (with fractional shares rounded to the
next highest share) approved by the Board of Directors of the Company on October
30, 1997, November 7, 1996, and October 19, 1995, respectively. These stock
dividends resulted in an increase in the number of shares of common stock issued
and outstanding by 626,714, 558,251
F-21
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
13. COMMON STOCK (CONTINUED)
and 507,519 shares in 1998, 1997 and 1996, respectively. Earnings and dividends
paid per share have been retroactively restated for the years ended March 31,
1997 and 1996 to reflect the impacts of these stock dividends.
The Company has two stock option plans covering directors and employees,
respectively. The plans initially permitted the granting of five-year options
for up to 321,000 shares and 483,000 shares of the Company's common stock at
fair market value for directors and employees, respectively. In September 1996,
the Board of Directors authorized, and the shareholders approved on November 7,
1996, the extension of the directors' options to ten years. Vesting of the
321,000 directors' options occurred six months after the grant date. For the
employee's plan, vesting occurs as follows:
10% after 1 year
15% after 2 years
25% after 3 years
25% after 4 years
25% after 5 years
On September 3, 1996, the Board of Directors of the Company authorized, and the
shareholders approved on November 7, 1996, the issuance of new director options
for 242,000 shares of the Company's common stock with vesting occurring on these
options at a 20% annual rate beginning September 3, 1997. The contractual life
of the vested options extends 10 years beyond the annual vesting date. On
September 3, 1997, the Board of Directors of the Company authorized, and the
shareholders approved on December 4, 1997, the issuance of an additional 55,000
shares of the Company's common stock to a new director of the Company. The
contractual life and vesting structure of the newly granted options are the same
as those granted on September 3, 1996.
F-22
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
13. COMMON STOCK (CONTINUED)
A summary of the Company's stock option activity and related information for the
years ended March 31 follows:
STOCK OPTIONS
OUTSTANDING STOCK OPTIONS VESTED
----------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
----------------- --------------------
At March 31, 1995 404,000 $1.81 193,000 $2.06
Granted 65,000 $1.45
-------
At March 31, 1996 469,000 $1.76 258,000 $1.91
Granted 242,000 $1.75
-------
At March 31, 1997 711,000 $1.76 344,000 $1.80
GRANTED 55,000 $1.93
-------
AT MARCH 31, 1998 766,000 $1.77 444,000 $1.80
=======
No options were exercised, cancelled, or forfeited during any of the three-year
periods ending March 31, 1998. The number of options authorized and granted and
the price per option have been adjusted to reflect the impact of the 10% stock
dividends discussed above. The exercise price for options outstanding as of
March 31, 1998 ranged from $1.45 to $2.39. The weighted average remaining
contractual life of those options is 7.31 years.
The Company has elected to follow Accounting Principals Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided under SFAS No. 123, "Accounting for
Stock-Based Compensation," requires the use of option valuation models that were
not developed for use in valuing stock options. Under APB 25, because the
exercise price of the Company's director and employee stock options equal the
market price of the underlying stock on the date of the grant, no compensation
expense is recognized.
F-23
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
13. COMMON STOCK (CONTINUED)
Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's director
and employee stock options have characteristics significantly different from
traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of fair value of its
director and employee options.
The fair value of the options was estimated at the date of the grant using the
Black-Scholes option pricing model with the following assumptions for 1998, 1997
and 1996; expected life of the stock options of 8, 5.74 and 5 years,
respectively; volatility of the expected market price of the Company's stock of
59% (all years); risk free interest rate of 6.75%, 6.40% and 6.10%;
respectively; and a 2% dividend yield rate (all years).
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's reported
and pro forma information for the year ended March 31 is as follows:
1998 1997 1996
-------------------------------------
Net income (loss):
As reported $(1,317) $1,631 $1,237
Pro forma $(1,370) $1,387 $1,237
Net income (loss) per basic and
diluted share
As reported $ (.19) $ .24 $ .18
Pro forma $ (.20) $ .20 $ .18
Weighted average grant date
fair value $ 1.12 $ .93 $ 1.05
13. COMMON STOCK (CONTINUED)
Pro forma amounts for 1998 include compensation expense for the vested portion
of options granted in 1998 and 1997 due to the graded vesting policy of these
options. Pro forma amounts for 1997 include compensation expense for the vested
director's options which were extended to a ten year life by the Board of
Directors in September, 1996, since such an action required the remeasurement of
the options at the extension date. Pro forma results for 1996 do not differ from
actual results as the options granted during this year did not vest until the
subsequent year. Since compensation expense from stock options is recognized
over the future years' vesting period, pro forma amounts may not be
representative of future years' amounts.
F-24
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
14. EARNINGS PER SHARE
The following sets forth the computation of basic and diluted earnings (loss)
per share for the years ended March 31:
1998 1997 1996
----------------------------------------
Numerator for basic and diluted
earnings per share:
Net income (loss--in thousands $ (1,317) $ 1,631 $ 1,237
========================================
Denominator for basic and diluted
earnings per share--weighted
average shares * 6,780,814 6,766,647 6,766,647
========================================
Basic and diluted earnings (loss)
per share $ (.19) $ .24 $ .18
========================================
* Adjusted for 10% stock dividends in 1998, 1997 and 1996. See Note 13.
F-25
<PAGE>
Westwood Corporation
Selected Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
BASIC AND DILUTED
EARNINGS PER
GROSS NET AVERAGE SHARE OF
SALES PROFIT INCOME (LOSS) COMMON STOCK*
----------------------------------------------------------------------
(In Thousands, except earnings per share)
<S> <C> <C> <C> <C>
1998:
First $6,574 $1,181 $ (133) $(.02)
Second 7,920 1,775 277 .04
Third 7,737 1,660 (70) (.01)
Fourth 7,204 179 (1,391) (.20)
1997:
First 7,789 1,681 347 .05
Second 8,288 1,938 437 .06
Third 8,911 2,097 464 .07
Fourth 8,420 2,282 383 .06
1996:
First $9,448 $1,595 $ 492 $ .07
Second 6,773 1,215 306 .04
Third 5,985 1,163 192 .03
Fourth 7,274 1,610 247 .04
</TABLE>
*Restated to reflect the impact of the fiscal year 1998, 1997 and 1996, 10%
stock dividends.
The first quarter of 1998 includes a special charge of $210,000 to reorganize
and relocate certain manufacturing and engineering facilities. The second
quarter of 1998 includes a $797,000 gain recognized on the sale of the Company's
Rox Corp. subsidiary. The fourth quarter of 1998 includes the impact of a
$440,000 impairment write-down of the Company's Peter Gray property and
equipment combined with approximately $430,000 in inventory reserve additions.
F-26
<PAGE>
Westwood Corporation
Schedule V -- Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
AMOUNTS AMOUNTS
BALANCE AT ASSUMED CHARGED BALANCE AT
BEGINNING IN (CREDITED) END OF
DESCRIPTION OF PERIOD ACQUISITION TO EXPENSES DEDUCTIONS PERIOD
- ------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1998:
Allowance for doubtful
accounts $ 44 $ - $ 21 $ - $ 65
Reserves for inventory 850 - (20) - 830
Year ended March 31, 1997:
Allowance for doubtful
accounts 25 19 - - 44
Reserves for inventory 520 40 290 - 850
Year ended March 31, 1996:
Allowance for doubtful
accounts 25 - - - 25
Reserves for inventory 495 - 25 - 520
</TABLE>
F-27
