<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 1998
----------------------------------------------
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 Identification No.)
of incorporation)
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 Outstanding at November 12, 1998
- - ----------------------------- ------------------------------------
Common Stock, $.003 par value 6,891,647
<PAGE>
INDEX
-----
Page No.
-------
Part I Financial Information:
Consolidated Balance Sheets as of
September 30, 1998 and March 31, 1998 1
Consolidated Statements of Income for
the Second Quarter and Six Months ended
September 30, 1998 and 1997 3
Consolidated Statements of Cash Flows
for the Six Months ended September 30,
1998 and 1997 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 6
Part II Other Information:
Item 1. Legal Proceedings (None)
Item 2. Changes in Securities (None)
Item 3. Defaults Upon Senior Securities (None)
Item 4. Submission of Matters to a Vote
of Security Holders (None)
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
WESTWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30 March 31
1998 1998
------------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 651 $ 574
Accounts receivable (including retainage
receivable of $44,376 at September 30,
1998,and $58,000 at March 31, 1998), net
of allowance for doubtful accounts 3,667 4,390
Note receivable - Officer 57 55
Income tax receivable 161 502
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,269 2,854
Inventories:
Raw materials and purchased parts 3,712 3,849
Work-in-process 2,222 1,786
-------- -------
5,934 5,635
Prepaid expenses 164 130
Current deferred income taxes 343 354
-------- -------
Total current assets 12,246 14,494
Plant and equipment, at cost:
Leasehold improvements 815 820
Machinery and equipment 4,560 4,341
Patterns and tools 430 430
-------- -------
5,805 5,591
Accumulated depreciation ( 3,294) (2,858)
-------- -------
2,511 2,733
Goodwill (net) 6,488 6,725
Long-term accounts receivable, retainage 668 816
Deferred charges & other 43 63
-------- -------
Total Assets $21,956 $24,831
======== =======
</TABLE>
See accompanying notes
1
<PAGE>
WESTWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30 March 31
1998 1998
------------- --------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,952 $ 3,971
Accrued liabilities 1,497 1,518
Accrued rent 81 81
Billings in excess of costs and estimated
earnings on uncompleted contracts 413 855
Current portion of long-term debt:
Payable to bank 5,000 4,500
Note payable 51 51
Acquisition debt 387 387
------- -------
5,438 4,938
------- -------
Total current liabilities 9,381 11,363
Accrued rent 161 215
Long-term debt:
Payable to bank 1,500 1,750
Note payable 486 526
Acquisition debt 876 876
------- -------
2,862 3,152
------- -------
Deferred income taxes 18 18
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized,
$.001 par value, no shares issued and
outstanding - -
Common stock, 20,000,000 shares authorized,
$.003 par value, 6,891,647 shares issued
and outstanding at September 30, 1998
and March 31, 1998, respectively 21 21
Capital in excess of par value 5,978 5,978
Retained earnings 3,535 4,084
------- -------
Total stockholders' equity 9,534 10,083
------- -------
Total liabilities and stockholders' equity $21,956 $24,831
======= =======
</TABLE>
See accompanying notes
2
<PAGE>
WESTWOOD CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
SECOND QUARTER ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
--------------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $8,724 $7,920 $16,223 $14,494
Cost of sales 8,211 6,145 14,623 11,538
------ ------ ------- -------
Gross profit 513 1,775 1,960 2,956
Operating expenses:
Selling, general & admin. 1,238 1,984 2,452 3,124
Special charge - - - 210
------ ------ ------- -------
1,238 1,984 2,452 3,334
------ ------ ------- -------
Operating loss (725) (209) (492) (378)
Other income (expense):
Interest expense (170) (187) (334) (253)
Other income 92 46 96 66
Gain on sale of subsidiary - 797 - 797
------ ------ ------- -------
(78) 656 (238) 610
------ ------ ------- -------
Income (loss) before taxes (803) 447 (730) 232
Provision for income taxes (275) 170 (250) 88
------ ------ ------- -------
Net income (loss) $ (528) $ 277 $ (480) $ 144
====== ====== ======= =======
Basic, and diluted, earnings
(loss) per share $(.077) $ .040 $ (.070) $ .021
Cash dividends per share $ - $ .010 $ .010 $ .020
</TABLE>
See accompanying notes
3
<PAGE>
WESTWOOD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
September 30
1998 1997
--------------------------
OPERATING ACTIVITIES (Unaudited)
<S> <C> <C>
Net income (loss) $ (480) $ 144
Adjustments to reconcile net income (loss)
to cash provided by (used in) operations:
Depreciation and amortization 436 279
Amortization of goodwill 237 141
Deferred income taxes 11 -
Cash flows impacted by changes in:
Accounts receivable 723 1,061
Costs and estimated earnings in excess
of billings on uncompleted contracts 1,585 (844)
Inventories (299) (1,808)
Prepaid expenses (34) (74)
Long-term accounts receivable, retainage 148 (85)
Deferred charges 20 148
Accounts payable (2,019) 890
Accrued liabilities and rent (75) (522)
Billings in excess of costs and estimated
earnings on uncompleted contracts (442) 408
Income taxes payable/receivable 341 (585)
Other (2) (177)
------- -------
Net cash provided by (used in) operating activities 150 (1,024)
INVESTING ACTIVITIES
Purchase of plant and equipment (214) (206)
Acquisition of TANO - (2,000)
Acquisition of MCII - (500)
------- -------
Net cash used in investing activities (214) (2,706)
FINANCING ACTIVITIES
Principal payments on debt (540) (2,905)
Borrowings on debt 750 5,900
Dividends paid (69) (124)
------- -------
Net cash provided by financing activities 141 2,871
------- -------
Net increase (decrease) in cash 77 (859)
Cash at beginning of period 574 1,165
------- -------
Cash at end of period $ 651 $ 306
======= =======
</TABLE>
See accompanying notes
4
<PAGE>
WESTWOOD CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
Note 1 - 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. Operations of TANO Corp and MCII Electric are included beginning June
1997, and operations of RoxCorp are included through September 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 second quarter ended September 30, 1998 may not
necessarily be indicative of the results that may be expected for the year ended
March 31, 1999. 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, 1998.
Note 2 - Common Stock
- - ---------------------
The financial statements, including earnings per share calculation, reflect a
10% stock dividend declared in November 1997.
5
<PAGE>
WESTWOOD CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
GENERAL
- - -------
Results of Operations - Second Quarter Ended September 30, 1998 and 1997
- - ------------------------------------------------------------------------
For the second quarter ended September 30, 1998, the Company had a net loss of
$528,000 compared to net income of $277,000 for the same quarter last year,
which included a pretax gain of $797,000 from the sale of a subsidiary. Net
loss per share was $.077 compared to net earnings of $.040 per share for the
prior year.
Consolidated sales for the second quarter ended September 30, 1998 increased
10.2% to $8,724,000 compared to $7,920,000 for the previous year. A major
factor in this increase was substantially higher sales revenues from shipments
of mobile power systems by MCII. Offsetting this increase, however, were lower
sales of marine electrical hardware products, marine electrical switchgear, and
engineered automation and control systems.
Gross profit, as a percentage of sales, decreased to 5.9% compared to 22.4% for
the prior year. During the second quarter the Company incurred significant
completion costs to meet the critical delivery date of the first article test
units of the pre-production phase in the TQG development contract. The Company
recorded contract revenues of $1,598,000 on delivery of the test units. However,
as a result of the additional costs incurred in meeting the delivery dates the
Company recorded additional contract losses of $478,000. Also, in comparison
with the same quarter last year, that period's gross profit included Rox Corp.
sales which had high gross margins.
For the second quarter, the Company incurred an operating loss of $725,000
compared to an operating loss of $209,000 for the same quarter last year.
Operating expenses decreased by 37.6% compared to last year, which included
RoxCorp. operations.
A breakdown of sales by the Company's major product groups follows:
Mobile power systems sales for the second quarter were $4,840,000, compared to
$207,000 for last year. The sales increase was mainly a result of shipments
under the Air Force MEP-12 contract, as well as shipment of the TQG first
article test units.
Sales of marine electrical hardware products for the second quarter were
$1,864,000, a 32.1% decrease compared to the same quarter last year. Lower
shipments of symbol items and titanium products accounted for most of the
comparative decrease in sales.
6
<PAGE>
Engineered automation and control system sales were $985,000, a 50.4% decrease
compared to $1,986,000 for last year's second quarter.
Marine electrical switchgear sales revenue for the second quarter decreased
39.3% to $1,035,000, compared to $1,705,000 for the same quarter last year, and
reflects the lower backlog for this product group.
Six Months Ended September 30, 1998 and 1997
- - --------------------------------------------
For the six months ended September 30, 1998, the Company had a net loss of
$480,000 compared to net income of $144,000 for the same period last year, which
included a pretax gain of $797,000 from the sale of a subsidiary. Net loss per
share was $.070 compared to net earnings of $.021 per share for the prior year.
Sales for the six months ended September 30, 1997 were $16,223,000, a 11.9%
increase compared to the previous year. Sales of mobile power systems by MCII
accounted for all of the increase for the period, while sales of marine
electrical hardware and switchgear, as well as engineered automation and control
systems, were lower than the same period last year.
Gross profit, as a percentage of sales, decreased to 12.1% compared to 20.4% for
last year. As discussed in the second quarter, the most significant event
impacting the lower gross profit for the period was the loss recorded in the
second quarter in connection with the additional costs incurred to meet critical
delivery dates of the TQG first article test units. Also in comparison with
last year, that period's gross profit included RoxCorp sales which had high
gross margins.
The Company incurred an operating loss of $492,000 for the six months ended
September 30, 1998 compared to an operating loss of $378,000 for the same six
month period last year. Operating expenses for the current period decreased
26.5% compared to last year, which included a $210,000 special charge and
RoxCorp. expenses.
Liquidity and Capital Resources
- - -------------------------------
Operating activities for the six months ended September 30, 1998 resulted in net
cash provided of $150,000. During this period, the net loss used cash of
$480,000, with major operating adjustments and sources being depreciation of
$436,000 and amortization of goodwill of $237,000. Additional sources of cash
were decreases in accounts receivable of $723,000, costs and estimated earnings
in excess of billings of $1,585,000, and decreases in long-term accounts
receivable, retainage of $148,000 and income taxes receivable of $341,000.
Major uses of cash in operating activities were increases in inventories of
$299,000, decreases in accounts payable of $2,019,000, and decreases in billings
in excess of costs and estimated earnings on uncompleted contracts of $442,000.
7
<PAGE>
A major factor in the substantial decrease in costs and estimated earnings in
excess of billings on uncompleted contracts was the completion of the first
article test units under the TQG development contract, which provided cash to
pay down accounts payable.
The Company is currently in discussions with NationsBank concerning modification
and renewal of the credit facility maturing November 5, 1998 and the Company
anticipates renewal of this facility along similar lines. The Company is also
reviewing with the Bank potential increases in financing requirements connected
with the initial production buildup of the TQG Contract expected early in fiscal
2000.
At September 30, 1998, the Company was not in compliance with covenants of the
loan agreement concerning net worth and cash flow, and the Company has received
waivers of these covenant violations.
Year 2000 Compliance
- - --------------------
As a result of both internal and external review processes, the Company has
implemented new accounting, engineering, and information system software which
has been represented by the manufacturer to be Year 2000 compliant. The Company
has also acquired hardware items including additional workstations and periphery
equipment to facilitate the implementation of the new software processing
systems. The new information software system has been installed and the Company
is involved in employee training as of this date. Implementation of the system
is expected to be complete by April 30, 1999. The Company's new software
processing system has thus far been installed at the Company, and its
subsidiaries, NMP Corp. and MC II in Dallas. TANO Corp. utilizes its own
information, accounting and processing software which is already believed to be
Year 2000 compliant.
The Company and its subsidiaries have conducted Year 2000 Compliance surveys and
inquiries with substantially all of their vendors, suppliers, and professional
and service organizations. The results of the surveys are being reviewed by
Company personnel and an analysis of the data received by the Company is
expected to be complete by December 31, 1998.
To date, the Company has incurred software implementation costs of approximately
$110,000. Costs of labor, and personnel time for purposes of the Year 2000
Compliance reviews, training, and implementation have not been determined as of
this date. However, the Company believes that its original estimates contained
in prior reports of approximately $250,000 will not be exceeded. The Company
will update this estimate as additional information becomes available. The cost
of the Company's Year 2000 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.
8
<PAGE>
Once this analysis is complete, the Company will endeavor to implement a plan
for identifying and minimizing the risk that systems and processes critical to
the Company's operations will be vulnerable to failures or disruptions due to a
lack of Year 2000 compliance within the Company, within a vendor, supplier, or
customer of the Company, or within some third party unrelated to the Company or
any of its suppliers, vendors, or customers. Due to the unprecedented nature of
the Year 2000 problem, and due to the potential for unforseen consequences from
and manifestations of the Year 2000 problem, it may not be possible for the
Company to identify or minimize all such risks and the Company may be adversely
affected by disruptions caused directly or indirectly by the Year 2000 problem.
However, as the risks to the Company's critical systems and processes are
identified, the Company will design and implement such contingency plans as the
Company deems appropriate to reasonably minimize the foreseeable disruption to
such systems and processes.
Statements included in this Form 10-Q constitute "year 2000 readiness
disclosures" subject to the Year 2000 Information and Readiness Disclosure Act
of 1998.
Forward Looking Information
- - ---------------------------
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 it 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 business, business conditions in the military and commercial
industries served by the Company; Federal Government defense budgeting process;
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.
9
<PAGE>
PART II - Other Information
ITEM 5. OTHER INFORMATION
On October 28, 1998 TANO Corp., a wholly owned subsidiary of the Company, filed
an Administrative Claim (the "Claim") with the Navy Surface Warfare Center in
Philadelphia (the "Navy"). The Claim asserts that the Navy has infringed TANO's
United States Patent entitled "Computer Monitoring and Testing of Automatic
Control System" (the "Patent") by utilizing the Patent's technology on several
surface fleet shipbuilding programs without consent or payment to TANO.
The immediate purpose of the Claim is to require the Navy's Engineering and
Legal divisions to determine the existence and extent of infringement. The Navy
is expected to report its findings after the first of the year. The Claim is
not at this time before any court or administrative tribunal which could award
damages. The Navy, by regulation, is required to take all necessary steps to
investigate, and to settle administratively, deny, or otherwise dispose of such
claim prior to suit against the United States for Patent infringement. The
claim can be considered to be a prelude to patent litigation depending on the
outcome of the Navy's review. Because TANO does not know the full extent of the
Navy's usage of the Patent's technology, it is impossible to predict any outcome
at this date. TANO will continue to diligently pursue its administrative and
legal remedies. In the event that TANO's Administrative Claim is not resolved
within the Navy, more formal claims against the United States may be required at
the Federal Court of Claims. The ultimate resolution of such claims are lengthy
to conclude.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following document is filed as an exhibit to this Form 10-Q:
Exhibit 27 - Financial Data Schedule.
(b) A Form 8-K was filed on August 28, 1998 to report that the Company's
quarterly dividend payments of $.01 per share were suspended by the
Company's Board of Directors to provide additional operating capital for
MCII and for enhancement of MCII's production facilities.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
DATE: November 16, 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
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME
AND STOCKHOLDERS' EQUITY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 651
<SECURITIES> 0
<RECEIVABLES> 3,711
<ALLOWANCES> 44
<INVENTORY> 5,934
<CURRENT-ASSETS> 12,246
<PP&E> 5,805
<DEPRECIATION> 3,294
<TOTAL-ASSETS> 21,956
<CURRENT-LIABILITIES> 9,381
<BONDS> 0
0
0
<COMMON> 21
<OTHER-SE> 9,513
<TOTAL-LIABILITY-AND-EQUITY> 21,956
<SALES> 16,223
<TOTAL-REVENUES> 16,223
<CGS> 14,623
<TOTAL-COSTS> 17,075
<OTHER-EXPENSES> (238)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (334)
<INCOME-PRETAX> (730)
<INCOME-TAX> (250)
<INCOME-CONTINUING> (480)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (480)
<EPS-PRIMARY> (.070)
<EPS-DILUTED> (.070)
</TABLE>
