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 December 31, 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, 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 - 6,891,647 shares as of
February 5, 1998.
<PAGE>
INDEX
Page No.
Part I Financial Information:
Consolidated Balance Sheets as of
December 31, 1997 and March 31, 1997 1
Consolidated Statements of Income for
the Third Quarter and Nine Months ended
December 31, 1997 and 1996 3
Consolidated Statement of Cash Flows
for the Nine Months ended December 31,
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 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
<PAGE>
Part I. Financial Information
WESTWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
December 31 March 31
1997 1997
----------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 488 $ 1,165
Accounts receivable (including retainage
receivable of $92,770 at December 31,
1997 and $767,000 at March 31, 1997)
net of allowance for doubtful accounts 3,819 4,485
Note receivable - Officer 54 51
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,579 32
Inventories:
Raw materials and purchased parts 4,144 4,605
Work-in-process 6,226 1,210
------- -------
10,370 5,815
Prepaid expenses 256 220
Current deferred income taxes 553 553
------- -------
Total current assets 17,119 12,621
Plant and equipment, at cost:
Leasehold improvements 1,524 768
Machinery and equipment 4,079 3,733
Patterns and tools 429 383
------- -------
6,032 4,884
Accumulated depreciation (2,654) (2,588)
------- -------
3,378 2,296
Other assets:
Drawings (net) 3 19
Long-term accounts receivable, retainage 950 980
Deferred charges & other 98 240
Goodwill 5,885 -
------- -------
6,936 1,239
------- -------
Total assets $27,433 $16,156
======= =======
See accompanying notes
</TABLE>
1
<PAGE>
WESTWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
December 31 March 31
1997 1997
----------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,072 $ 886
Income taxes payable 90 612
Accrued liabilities 1,084 671
Accrued rent 81 81
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,646 1,087
Current portion of long-term debt:
Revolving debt agreement 3,150 -
Payable to bank 500 -
Note payable 5 47
------- -------
3,655 47
------- -------
Total current liabilities 11,628 3,384
Accrued rent 235 325
Long-term debt:
Payable to bank 1,875 -
Note payable 585 600
Installments payable 1,266 -
------- ------
3,726 600
------- ------
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 author-
rized, $.003 par value, 6,891,647
and 6,139,933 shares issued and
outstanding at December 31, 1997
and March 31, 1997, respectively 21 18
Capital in excess of par value 5,989 4,627
Retained earnings 5,462 6,830
------- -------
Total stockholders' equity 11,472 11,475
------- -------
Total liabilities and stockholders' equity $27,433 $16,156
</TABLE>
See accompanying notes
2
<PAGE>
WESTWOOD CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
December 31 December 31
1997 1996 1997 1996
------------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $7,737 $8,911 $22,231 $24,988
Cost of sales 6,077 6,814 17,615 19,272
------ ------ ------- -------
Gross profit 1,660 2,097 4,616 5,716
Operating expenses:
Selling, general & admin. 1,642 1,315 4,766 3,633
Special charge (Note E) - - 210 -
------ ------ ------- -------
1,642 1,315 4,976 3,633
------ ------ ------- -------
Operating income (loss) 18 782 (360) 2,083
Other income (expense):
Interest expense (116) (41) (318) (109)
Other income (expense) (14) 8 1 36
Gain on sale of subsidiary - - 797 -
------ ------ ------- -------
(130) (33) 480 (73)
------ ------ ------- -------
Income (loss) before taxes (112) 749 120 2,010
Provision for income taxes (42) 285 46 762
------ ------ ------- -------
Net income (loss) $ (70) $ 464 $ 74 $ 1,248
====== ====== ======= =======
Basic, and diluted, earnings
(loss) per share (Note B) $(.010) $ .069 $ .011 $ .185
Cash dividends per share $ .009 $ .009 $ .027 $ .027
</TABLE>
See accompanying notes
3
<PAGE>
WESTWOOD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
December 31
1997 1996
------------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 74 $ 1,248
Adjustments to reconcile net income to
cash provided by (used) in operations:
Depreciation and amortization 684 404
Amortization of goodwill 247 -
Deferred income taxes - (348)
Cash flows impacted by changes in:
Accounts receivable 1,397 151
Costs and estimated earnings in excess
of billings on uncompleted contracts (986) 1,539
Inventories (3,591) (38)
Prepaid expenses (24) (165)
Long-term accounts receivable, retainage 30 263
Deferred charges 142 98
Accounts payable 1,613 118
Accrued liabilities (428) (407)
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,078) (441)
Income taxes payable (471) 42
Other (405) (6)
----- ------
Net cash provided by (used in)
operating activities (2,886) 2,458
INVESTING ACTIVITIES
Purchase of plant and equipment (236) (189)
Acquisition of Roflan - (990)
Acquisition of TANO (2,000) -
Acquisition of MCII (500) -
Sale of RoxCorp 2,547 -
------ ------
Net cash used in investing activities (189) (1,179)
FINANCING ACTIVITIES
Principal payments on debt (5,065) (5,043)
Borrowings on debt 7,650 4,550
Dividends paid (187) (167)
------ ------
Net cash provided by (used in)
financing activities 2,398 (660)
Net increase (decrease) in cash (677) 619
Cash at beginning of period 1,165 598
------ ------
Cash at end of period $ 488 $ 1,217
======= =======
</TABLE>
See accompanying notes
4
<PAGE>
WESTWOOD CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 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 TANO Corp and MCII Electric are included
beginning June 1, 1997, and operations of RoxCorp are included
through September 30, 1997, when this company was sold. 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 third
quarter and nine months ended December 31, 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 October 30, 1997, 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.
The Company has adopted Statement of Financial Accounting
Standards No. 128 "Earnings per Share", and all earnings per
share amounts for all periods have been presented to conform to
Statement No. 128 requirements.
5
<PAGE>
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
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
6
<PAGE>
policy to calculate the recoverability of goodwill based upon
future expected cash flows from current and anticipated
contracts. At December 31, 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 paid at closing, and a final purchase price adjustment was
based on the September 30, 1997 balance sheet as compared to the
June 30, 1997 balance sheet. In addition, at closing Roxtec paid
all outstanding loans due the Company or its affiliates, totaling
$1,666,000. On October 1, 1997, closing 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
December 31, 1997
GENERAL
Results of Operations
- ---------------------
The fiscal nine months ending December 31, 1997 was a period of
major transition for Westwood Corporation. Through its
wholly-owned NMP Corp. subsidiary, the Company had been heavily
dependent upon long-term switchgear contracts relating to major
navy shipbuilding programs. With the downturn in the market, the
Company began extensive diversification efforts, and in May
completed the acquisitions of TANO Corp. and MCII Electric.
These acquisitions are major steps into new electrical generation
and control markets which the Company feels offers considerable
growth opportunity. In September, the Company completed the sale
of its RoxCorp subsidiary which was designed as another step in
focusing on these new markets.
The Company is now in the process of assimilating these
acquisitions. The TANO acquisition has already begun to have a
positive effect on the Company's operations. However, the MCII
acquisition is not expected to make a substantial contribution
until the 1999 fiscal year, beginning in April, 1998. 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, and considerable progress is now being made.
See Note C-Acquisition.
Third Quarter Ended December 31, 1997 and 1996
- ----------------------------------------------
The recent acquisitions of TANO and MCII, the sale of RoxCorp,
and the significant downturn in NMP's engineered contracts were
all major factors impacting the current quarter compared to the
same period last year.
Consolidated sales for the third quarter ended December 31, 1997
were $7,737,000, a 13.2% reduction compared to the same quarter
last year. TANO contributed significantly to consolidated sales
in the current quarter, with MCII also beginning to make some
sales contribution during the period. However, there was a
substantial reduction in sales revenues from NMP's engineered
contracts as a result of the completion of the DDG-51 contract.
Also, the comparable quarter last year included RoxCorp sales.
8
<PAGE>
Gross profit, as a percentage of sales, decreased to 21.5%,
compared to 23.5% for the same quarter last year. The prior
period included RoxCorp sales which carried a higher gross
margin.
Operating expenses for the third quarter increased 24.9% over the
same period last year due to the inclusion of TANO and MCII
expenses. In addition, operating expenses for the current
quarter included substantial nonrecurring professional fees
connected with MCII operations. Interest expense increased
significantly due to higher borrowings primarily in connection
with the recent acquisitions.
As a result of lower sales, lower gross profit, and increased
operating expenses, the Company had a net loss of $70,000 for the
current quarter, compared to net income of $464,000 for the same
quarter last year.
Nine Months Ended December 31, 1997 and 1996
- --------------------------------------------
As discussed under the third quarter, major factors affecting the
current nine month period ending December 31, 1997, as compared
to the same period last year, were the acquisitions of TANO and
MCII, the sale of RoxCorp, and the downturn in NMP's engineered
contracts.
Sales for the nine months ended December 31, 1997 were
$22,231,000, an 11% reduction when compared to the same period
last year. The most significant factor in this comparative
reduction in consolidated sales was lower sales revenues from
NMP's engineered contracts due to completion of the DDG-51
contract.
Gross profit, as a percentage of sales, decreased to 20.8%,
compared to 22.9% for the same period last year. The prior
period included RoxCorp sales which carried a higher gross
margin.
Operating expenses for the current nine month period increased
37% due mainly to the inclusion of TANO and MCII expenses, as
well as a special charge of $210,000 relating to the relocation
and reorganization of certain engineering and manufacturing
operations. Interest expense increased significantly due to
higher borrowings primarily in connection with the recent
acquisitions.
The Company recognized a $797,000 gain on the sale of its RoxCorp
subsidiary on September 30, 1997.
Net income for the nine months ended December 31, 1997 was
$74,000, compared to $1,248,000 for the same period last year.
9
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Operating activities for the nine months ended December 31, 1997
resulted in net cash used of $2,886,000. During this period, net
income provided cash of $74,000, with major operating adjustments
and sources being depreciation and amortization of $684,000,
amortization of goodwill of $247,000, decreases in accounts
receivable of $1,397,000 and increases in accounts payable of
$1,613,000. Major uses of cash in operating activities were
increases in costs and estimated earnings in excess of billings
of $986,000, increases in inventories of $3,591,000, reduction in
billings in excess of costs and estimated earnings on uncompleted
contracts of $1,078,000, reduction in accrued liabilities of
$428,000 and income taxes payable of $471,000. The substantial
build up in inventories and costs in excess of billings, as well
as the decrease in billings in excess of costs, relate to MCII
operations.
The acquisitions of TANO and MCII, as well as the sale of
RoxCorp, were the most significant investing activities affecting
cash flow during the nine months ended December 31, 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.
In connection with the sale of RoxCorp, the Company received
$2,547,000 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.
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.
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 future operating cash flows, will be
adequate for future operations.
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
10
<PAGE>
customer receivables; competitive factors; and other risk factors
listed from time to time in the Company's reports with the
Securities and Exchange Commission.
Part II. Other Information
Item 4.
- -------
Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------
The Annual Meeting of Stockholders of the Company was held on
December 4, 1997. At the Annual Meeting, five individuals were
elected as directors of the Company. In addition, the amendment
to the 1992 Directors' Stock Option Plan, as mended on
September 3, 1996, was approved.
A tabulation of the voting at the Annual Meeting with respect to
the matters indicated is as follows:
Election of Directors:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
Ernest H. McKee 5,250,173 56,209 11,631
Paul R. Carolus 5,250,173 56,209 11,631
Richard E. Minshall 5,250,173 56,209 11,631
Anthony Pantaleoni 5,250,173 56,209 11,631
John H. Williams 5,230,157 76,225 11,631
</TABLE>
Approval of Amendment to 1992 Directors' Stock Option Plan, as
amended on September 3, 1996:
For Against Abstain
--- ------- -------
5,034,052 264,971 4,713
Item No.5
- ---------
Other Information
- -----------------
Subsequent to the Company's acquisition of MCII on May 28, 1997,
the Company was informed by U.S. Government contract officials of
concerns relating to the adequacy and accuracy of MCII contract
11
<PAGE>
accounting information. The Company believes it has fully
responded to concerns raised by the Government and believes that
it is in substantial compliance with government contracting
requirements.
As a result of information learned in the second quarter, which
resulted in the Company recording an additional $2,700,000 of
Goodwill to the balance sheet of MCII, the Company has notified
the Seller of MCII of potential indemnification claims under the
Purchase Agreement dated May 28, 1997. While settlement
discussions have commenced, it is not yet known whether such
claims can be settled without resort to litigation.
Regular Quarterly Dividend
- --------------------------
On February 5, 1998, the regular quarterly dividend of $.01 per
common share was declared to stockholders of record on March 2,
1998, and payable on March 23, 1998.
Item No. 6
- ----------
(a) The following document is filed as an exhibit to this
Form 10-Q:
Exhibit 27 - Financial Data Schedule.
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: February 6, 1998 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> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 488
<SECURITIES> 0
<RECEIVABLES> 3,819
<ALLOWANCES> 0
<INVENTORY> 10,370
<CURRENT-ASSETS> 17,119
<PP&E> 6,032
<DEPRECIATION> (2,654)
<TOTAL-ASSETS> 27,433
<CURRENT-LIABILITIES> 11,628
<BONDS> 0
0
0
<COMMON> 21
<OTHER-SE> 11,451
<TOTAL-LIABILITY-AND-EQUITY> 27,433
<SALES> 7,737
<TOTAL-REVENUES> 7,737
<CGS> 6,077
<TOTAL-COSTS> 1,642
<OTHER-EXPENSES> (130)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 116
<INCOME-PRETAX> (112)
<INCOME-TAX> (42)
<INCOME-CONTINUING> (70)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (70)
<EPS-PRIMARY> (.010)
<EPS-DILUTED> (.010)
</TABLE>
