<PAGE>
FILED: July 14, 2000
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, 2000
Commission file number: 0-19381
WESTWOOD CORPORATION
(Exact name of Registrant as specified in its charter)
Nevada 87-0430944
------ ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
12402 East 60th Street, Tulsa, Oklahoma 74146
---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 918/250-4411
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.003
-----------------------------
(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 July 7, 2000, closing bid price of the common stock as reported by
NASDAQ Bulletin Board) held by non-affiliates was approximately $2,369,112.
The number of outstanding shares of the Registrant's common stock as of July 7,
2000, was 6,891,647 shares.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Item Number and Caption Number
----------------------- ------
<S> <C>
PART I
------
1. Business 1
2. Properties 6
3. Legal Proceedings 6
4. Submission of Matters to a Vote of Security Holders 6
PART II
-------
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
7A. Market Risk Disclosures 12
8. Financial Statements and Supplementary Data 12
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 12
PART III
--------
10. Directors and Executive Officers of the Registrant 12
11. Executive Compensation 14
12. Security Ownership of Certain Beneficial Owners
and Management 23
13. Certain Relationships and Related Transactions 26
PART IV
-------
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 27
</TABLE>
(i)
<PAGE>
PART I
Item 1. Business
General
-------
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; TANO Corp. ("TANO"), a
Louisiana corporation formed in May of 1997; and MC II Electric Company, Inc.
("MC II"), a Texas corporation formed in 1989.
Mobile Power Systems
--------------------
MC II is in the business of designing and manufacturing a broad family of
diesel, gasoline, natural gas and turbine mobile electrical generator sets for
both military and commercial applications. MC II employs approximately 46
employees.
MC II's backlog consists primarily of the final development and production of
the next generation of 30-60 kilowatt technical quiet generator ("TQG") sets for
the U.S. Army. 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 of the generator sets utilized by the Department of Defense.
MC II's manufacturing facilities were relocated from Dallas, Texas to Tulsa,
Oklahoma, in April 2000. Assembly of TQG generator sets is performed in
facilities shared with NMP in Tulsa, Oklahoma, which helps to reduce fixed costs
for both companies. MC II has also designed computer software and flat panel
control screens for monitoring and controlling all generator mechanical and
operational functions. Assembly of control panels for the TQG sets is currently
sub-contracted to NMP.
Automation and Control Systems
------------------------------
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.
TANO's backlog presently includes automation and control systems for a fleet of
new USCG WLM (Coastal) and WLB (seagoing) Buoy Tenders. These two new ship
programs are expected to result in 30 ships being built; at present, twenty-five
ships have been ordered, with additional ships budgeted and funded by Congress.
<PAGE>
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 consists of the 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, controllable
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 supplies spare parts and service for all current systems, as well as parts
and service for systems previously provided to customers over the past twenty
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 13,000 square feet of leased space in an
office park located in New Orleans. In addition, TANO has field offices in San
Diego and Singapore to support field service commitments on the West Coast and
the Pacific Rim. TANO has 44 employees.
Engineered Products - Marine Electrical Switchgear
--------------------------------------------------
NMP's marine engineered products line includes marine switchboards designed for
the distribution of electrical power, interior communication, weapons systems,
electrical plant control and power and lighting control on naval combat vessels.
NMP's primary customers for switchboard products are the major shipbuilders 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 has 84 employees.
Major contracts in NMP's backlog include switchboards for LPD 17 and 18, the
first two of twelve new class amphibious assault ships the U.S. Navy is building
over a five year period, and switchboards for DDG 91 and 92, the Aegis destroyer
program. The total number of DDG ships to
2
<PAGE>
be built is dependent on the progress of the new DD21-class destroyer; however,
best estimates place the number at 17.
Peter Gray Corporation Asset Sale
---------------------------------
In April 1999, the Company, through its wholly owned subsidiary, Roflan
Associates, Inc., a Massachusetts corporation ("Roflan"), closed a sale of the
assets of Roflan's wholly owned subsidiary, Peter Gray Corporation, a
Massachusetts corporation ("Peter Gray"). Belmet Products, Inc. ("Belmet"),
purchased certain specified equipment, inventory, customer lists and marine
symbol line tooling from Peter Gray. Asset sales and liquidation proceeds
totaled $696,000 for the fiscal year ended March 31, 2000.
Pursuant to a Lease Termination Agreement with the owner of its manufacturing
facilities in Andover, Massachusetts, Peter Gray terminated its lease on April
30, 1999. With the sale of its manufacturing equipment and assets to Belmet, and
the termination of its lease, Peter Gray effectively ceased operations.
Remaining assets were sold at auction or transferred to the Company's
subsidiary, NMP, in Tulsa, Oklahoma. Neither the Company, nor any of its
subsidiaries, will continue with the business of manufacturing brass and metal
utility boxes for marine use.
Marine Electrical Hardware Asset Sale
-------------------------------------
On July 26, 1999, NMP closed an asset sale agreement with U.S. Pioneer, L.L.C.,
an Oklahoma limited liability company, for the sale of its hardware products
business, including equipment, inventory and rights to hardware product lines.
The purchase price for the hardware products assets was $2,000,000, consisting
of $1,100,000 paid at closing, a $150,000 promissory note, which was paid within
ninety (90) days of closing, and a $750,000 promissory note to be paid in three
equal installments on or before September 1, 2000, 2001, and 2002. Neither the
Company, nor any of its subsidiaries, will continue with the business of
manufacturing electrical hardware items. NMP will continue with the manufacture
and development of engineered products including marine electrical switchgear.
Marketing
---------
The Company's marketing efforts are carried out by employees with extensive
experience in the required technical disciplines as well as experience in
overall government contracting. Efforts are concentrated on maintaining active
contact with customers and industry organizations and staying abreast of
developments concerning defense-related procurements. The technical ability to
respond in a relatively condensed time frame is of primary importance in the
declining Department of Defense requirements.
The majority of the Company's contracts are the result of Requests for
Quotations ("RFQ"), which is a contracting process where the customer requires
detailed management and technical proposals, including detailed pricing data,
and thereafter establishes a firm fixed price contract with the selected
3
<PAGE>
bidder. These contracts generally constitute a development contract for
equipment design with an ensuing manufacturing contract for the delivery of
equipment and related support services.
Competition
-----------
The Company faces competition in most aspects of its business. The Company's
products are 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
subcontracts awarded on the basis of competitive bidding. In addition to price,
the factors involved in the award of such contracts include the quality of the
proposal and reputation of the bidder. Demand for many of the products sold by
the Company is dependent on the level and nature of the U.S. government's
defense expenditures.
The Company's primary competitor in the military mobile power generation
business is Fermont, a division of Engineered Air Systems, Inc. In the
automation and control systems market, the Company's primary competitors are
C.A.E. Link and Lockheed Martin. The Company's two primary competitors in the
U.S. Navy combatant marine power and switchboard equipment market are SPD
Technologies, Inc., and Metric Systems.
Major and Foreign Customers
---------------------------
Sales under contracts with the U.S. government or subcontracts with major
shipbuilders under contract with the U.S. government accounted for approximately
$15,664,000, or 86.8%, of the Company's sales for the fiscal year ended March
31, 2000, and $24,066,000, or 79%, of the Company's sales for the fiscal year
ended March 31, 1999. Sales to foreign customers totaled $605,165 for the fiscal
year ended March 31, 2000, and $43,000 for the fiscal year ended March 31, 1999.
For a further discussion of sales to major customers and concentration of credit
risk, refer to Note 10 of the Consolidated Financial Statements.
Backlog
-------
The approximate backlog of third-party, fully-funded purchase orders issued to
the Company from customers for the fiscal years ending March 31, 2000, 1999, and
1998, is as follows:
2000 1999 1998
---- ---- ----
$52,000,000 $26,000,000 $24,000,000
Subsequent to the close of fiscal year 2000 on March 31, the Company received
two additional major orders for mobile power systems and marine electrical
switchgear which totaled over $18,000,000, and are expected to be completed over
the next two fiscal years.
4
<PAGE>
During fiscal year 2001, the Company should recognize $45,000,000 in revenues
from the existing backlog of outstanding purchase orders to be filled for its
customers.
Employees
---------
As of March 31, 2000, the Company had 174 employees, none of whom are
represented by unions. Management considers its relations with its employees to
be satisfactory.
Patents and Trademarks
----------------------
The Company owns and has applied for various patents in connection with its
equipment and control systems supplied to the U.S. government and commercial
purchasers with varying expiration dates. Additionally, through its engineering
and development efforts, the Company generates proprietary information and trade
secrets regarding the design and manufacture of various products and systems.
While the Company considers its proprietary information and patents to be
valuable assets, the Company's business is not materially dependent upon patent
protection. Because of rapidly changing technology and the need for
confidentiality, the Company does not seek to obtain patents in many areas.
Materials and Supplies
----------------------
The Company's operations require a wide variety of electrical and mechanical
components and raw materials. Except for certain limited sole-source items which
the U.S. government requires the Company to purchase, most items are available
from several commercial sources.
Environmental Protection
------------------------
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.
Year 2000 Compliance
--------------------
A company-wide project to address Year 2000 compliance issues was completed for
all technology hardware and software. The Company has either purchased or
produced external interfaces with customers and suppliers, operations process
controls, account and other information systems and facility items. The
implementation phase of this project as it related to traditional information
technology areas was completed prior to December 31, 1999.
The Company utilized both internal and external resources to complete this
process. Costs incurred for new software and hardware purchases were capitalized
and other costs were expensed as incurred. The total cost of this project for
external costs of hardware and software, excluding
5
<PAGE>
planned system replacements, was approximately $225,000. The Company encountered
only minor problems associated with the date change from 1999 to 2000, and
experienced no business disruptions. The Company believes that limited and
insignificant continued exposure to Year 2000 complications remain.
Statements included in this Form 10-K constitute "year 2000 readiness
disclosures" subject to the Year 2000 Information and Readiness Disclosure Act
of 1998.
Item 2. Properties
The Company, through its subsidiaries, leases all of its manufacturing,
engineering, warehousing and office facilities comprising a total of
approximately 128,000 square feet. The Company's subsidiaries lease office and
manufacturing facilities as follows: NMP, Tulsa, Oklahoma, 88,725 square feet;
TANO, New Orleans, Louisiana, 13,000 square feet; and MC II, Dallas, Texas,
26,500 square feet. Facility leases for the Company's operations in Tulsa,
Oklahoma, and New Orleans, Louisiana, expire in 2003. Pursuant to agreements
with its landlord, the lease on MC II's manufacturing facilities in Dallas,
Texas, was renegotiated to allow MC II's relocation to Tulsa, Oklahoma, where it
shares manufacturing space with NMP. MC II's remaining lease obligation in
Dallas is on a month-to-month basis pending its relocation, which is expected to
be finalized in the second quarter of fiscal year 2001, ending September 30,
2000. The Company owns all of its manufacturing, assembly and testing equipment.
Item 3. Legal Proceedings
In the ordinary course of its business the Company has various claims and suits
pending. Based on an evaluation which included consultation with counsel
concerning the legal and factual issues involved, the Company is of the opinion
that such pending claims and suits will not have a material adverse effect on
the financial position of the Company.
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 the fiscal year ended March 31, 2000.
6
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded on the NASDAQ Bulletin Board Market under
the symbol WNMP. On March 31, 2000 there were 131 stockholders of record, and
approximately 600 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
------------- -------- ------- --------------
Mar. 31, 2000 $ 1.00 $ 0.6875 $ 0.00
Dec. 31, 1999 1.125 0.625 0.00
Sept. 30, 1999 1.125 0.5625 0.00
June 30, 1999 1.125 0.5938 0.00
Mar. 31, 1999 $ 1.00 $ 0.5625 $ 0.00
Dec. 31. 1998 1.25 0.6875 0.00
Sept. 30, 1998 1.875 0.6875 0.00
June 30, 1998 1.50 0.9375 .01
The payment of cash dividends on the Company's common stock, which commenced in
1992, was suspended by the Board of Directors for the second quarter of fiscal
year 1999 and thereafter. This action allowed the Company to concentrate funding
efforts and operating capital for MC II in order to enhance production and
compliance with government contracts calling for the manufacture of mobile
electric generators. Because of the continued need for operating capital for the
Company and MC II, it is not anticipated that any cash dividends will be paid
during fiscal year 2001. However, future decisions regarding dividend payments
will be made by the Board Directors, in advance of each quarter, based on the
Company's then existing current capital needs.
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:
7
<PAGE>
<TABLE>
<CAPTION>
Fiscal Years Ended March 31
-------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Sales $ 18,052 $ 30,390 $ 29,435 $ 33,408 $ 29,480
Net Income (Loss) (1,715) (2,844) (1,317) 1,631 1,237
Total Assets 16,077 19,683 24,831 16,156 15,724
Long-Term Debt 2,686 557 3,152 600 67
Per Basic and Diluted
Common Share*:
Net Income (Loss) (.25) (.41) (.19) .24 .18
Cash Dividends -- .01 .04 .03 .03
</TABLE>
*Per share amounts have been adjusted to reflect annual 10% stock dividends
declared in fiscal 1996, 1997 and 1998.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 herein. The
analysis includes the Company's wholly-owned subsidiaries NMP Corp., TANO Corp.
and MC II Electric Company, Inc. Roflan and Peter Gray were completely wound
down in fiscal year 2000.
Twelve Months Ended March 31, 2000 and 1999
-------------------------------------------
For the fiscal year ended March 31, 2000, the Company incurred a net loss of
$1,715,000, compared to a net loss of $2,844,000 for the fiscal year ended March
31, 1999. The loss per share was $.25, compared to a loss of $.41 per share last
year. Consolidated revenues for the fiscal year ended March 31, 2000, decreased
40.6% to $18,052,000, compared to $30,390,000 for last year. This decrease
resulted primarily from the cessation of operations of Peter Gray and the
reduced sales of MEP-12 and TQG First Article Test units by MC II in fiscal year
2000.
Mobile power system revenues at MC II were $3,228,000, a 74.6% decrease from
last year's revenues of $12,729,000. The lower sales volume was due to the
shipment of the TQG First Article Test units in the second quarter of fiscal
year 1999, while delivery of the initial TQG production units will occur during
the second quarter of fiscal year 2001. Also the MEP-12 Contract was completed
primarily in fiscal year 1999.
8
<PAGE>
Sales of marine electrical hardware products by NMP were $1,916,000 for the
first quarter of fiscal year 2000, the only period with hardware product sales.
The sale of the hardware products line was effected July 1, 1999. Peter Gray
recorded final sales totaling $327,000 prior to the sale of all of its assets
during the first quarter of fiscal year 2000. Marine electrical switchgear sales
by NMP were $5,545,000 for fiscal year 2000, compared to $4,229,000 for last
year, an increase of $1,316,000, or 31.1%. The sales increase was primarily due
to progress on the DDG contract, which was awarded in fiscal year 2000.
Automation and control systems sales by TANO were $7,036,000 for fiscal year
2000, compared to last year's sales of $ 5,798,000, an increase of 21.4%. Delays
in receiving the production turn-on for the major WLB seagoing tug contract
hampered the previous year's sales, but were not an issue in fiscal year 2000.
Gross profit as a percentage of sales improved to 18.6%, compared to 8.4% in
fiscal year 1999. Last year's gross profit margins were impacted by substantial
cost overruns incurred to meet shipping dates for the TQG test units. The
improvement in gross profit for fiscal year 2000 also resulted from increased
backlogs, enabling the Company to better absorb fixed plant overheads. The
substantial reduction of write-downs for obsolete or slow-moving inventories
also contributed to the higher gross profit.
Operating Expenses were $5,065,000 for fiscal year 2000, compared to $5,354,000
for last year, a 5.4% decrease. The sale of the hardware products line at the
end of the first quarter accounted for most of the reduction in operating
expenses. Interest expense decreased from $746,000 to $430,000 due to reduced
borrowings. The Company realized a net gain of $190,000 on the sale of
subsidiary product lines.
The income tax benefit effective rate is 5% compared to 17% for the previous
year. The decrease is due to an additional $333,000 valuation allowance on net
deferred tax assets resulting from the uncertainty of their realization, as well
as revisions to prior year's estimated taxes.
Twelve Months Ended March 31, 1999 and 1998
-------------------------------------------
For the fiscal year ended March 31, 1999, the Company incurred a net loss of
$2,844,000, compared to a net loss of $1,317,000 for the fiscal year ended March
31, 1998. The loss per share was $.41 in fiscal year 1999, compared to a loss of
$.19 per share for the prior year. Consolidated revenues for fiscal year 1999
increased 3.2%, to $30,390,000, compared to $29,435,000 for the previous year.
Mobile power system revenues at MC II were $12,729,000 in fiscal year 1999,
compared to $3,209,000 for the previous year. The previous year's figures
included only sales from May 28, 1997, the date of the MC II acquisition. The
sales increase was primarily due to high levels of shipments under the MEP-12
contract throughout the year, as well as the shipment of the TQG First Article
Test units in the second quarter.
9
<PAGE>
Sales of marine electrical hardware products by NMP and Peter Gray were
$7,634,000 in fiscal year 1999, a 20.4% decrease compared to the previous year.
The winding down of Peter Gray operations during the fourth quarter was a
significant factor in the sales decline.
Marine electrical switchgear sales by NMP were $4,229,000 in fiscal year 1999, a
30.5% decrease compared to the previous year. The lower backlog of major
switchgear contracts was the primary factor of the lower sales performance.
Automation and control systems sales by TANO were $5,798,000 in fiscal year
1999, a 24.0% decrease compared to the previous year, and was mainly a result of
a delay in receiving the production turn-on for the major WLB seagoing tug
contract.
Gross profit as a percentage of sales declined to 8.4% in fiscal year 1999,
compared to 16.3% for the previous year. The substantial decline in gross profit
was primarily due to continued costs incurred in connection with the first
article testing phase of the TQG development contract, lower backlog of
electrical switchgear contracts to absorb fixed plant costs, and $960,000 in
inventory write-downs for obsolete and slow-moving materials.
Operating expenses were $5,354,000 in fiscal year 1999, a 23.8% decrease
compared to the previous year, which included RoxCorp expenses of $782,000 and
an impairment loss of $440,000. Interest expense increased 42.4% over the prior
year as a result of increased borrowings. The Company recorded an extraordinary
gain of $371,000, less taxes of $162,000, in connection with the extinguishment
of debt at Peter Gray in 1999.
The income tax benefit effective rate is 17% compared to 35% for the previous
year. The decrease is due to a $785,000 valuation allowance on net deferred tax
assets being recorded as the realization of the assets is uncertain given the
operating results of the Company in fiscal 1999 and 1998.
Liquidity and Capital Resources
-------------------------------
Late in the fourth quarter of fiscal year 2000, MC II was formally given
approval by the U.S. Army to begin production of the TQG set. In the first
quarter of fiscal year 2001, the Company began to produce the generator sets on
a commercial basis and anticipates that revenues for outstanding purchase orders
for the TQG sets will be recognized in the second quarter, ending September 30,
of fiscal year 2001.
On August 13, 1999, the Company entered into a new Loan Agreement with the
Stillwater National Bank and Trust Company of Stillwater, Oklahoma. The Loan
Agreement established a $2.0 million revolving credit facility for a period of
one year, which expires on August 13, 2000, at which time all of the outstanding
principal of the revolving credit facility is to be paid in full by either
renewal or repayment. The proceeds under the revolving credit facility are used
from time to time to finance working capital needs. Interest on the revolving
credit facility is paid monthly.
10
<PAGE>
In addition, the Loan Agreement also established a $2.0 million term loan for a
period of five years, which matures on August 13, 2004. The proceeds of the term
loan were used to repay in full a previously existing loan with NationsBank,
N.A. The term loan has a monthly amortization schedule for the payment of
interest and the repayment of principal.
On December 23, 1999, the Company issued 10% Subordinated Convertible Notes (the
"Notes") in the face amount of $1.0 million. The Notes bear a fixed 10% rate of
interest and are convertible into common stock of the Company at the option of
the Note holders or at the option of the Company under certain conditions. The
net proceeds of the Notes were used for general cash requirements of the
Company.
Throughout the fourth quarter of fiscal year 2000, the Company was allowed,
under contract agreement, to invoice the U.S. Army for the receipt of major
materials received under the TQG Contract. At the end of the fiscal year, the
proceeds of these progress billings and subsequent payments totaled $2.1
million, which was used to finance receipt of major materials under the contract
in full.
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 related
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; U.S. 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.
11
<PAGE>
Item 7A. Market Risk Disclosures
The Company is exposed to the impact of interest rate fluctuations as a result
of current borrowings under a line of credit and a term loan with interest rates
at prime plus 1% and .5%, respectively. (See Notes 5 and 15 to the Consolidated
Financial Statements included elsewhere herein.) The Company has no exposure
with foreign currency contracts.
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.
PART III
Item 10. Directors and Executive Officers of the Registrant
As of March 31, 2000, the Board of Directors consisted of Ernest H. McKee,
Richard E. Minshall, Anthony Pantaleoni, John H. Williams, Sr., and William J.
Preston. John P. Gigas serves as Executive Vice President.
Executive Officers and Directors
Name Age Position
---- --- --------
Ernest H. McKee 62 President, Chief Executive
Officer, and Chairman
of the Board
John P. Gigas 55 Executive Vice President, Chief
Operating Officer,
Chief Financial Officer
and Secretary-Treasurer
Richard E. Minshall 62 Director
Anthony Pantaleoni 61 Director
12
<PAGE>
John H. Williams, Sr. 82 Director
William J. Preston 65 Director
Ernest H. McKee has served as President, Chief Executive Officer, and Chairman
of the Board of Directors of Westwood Corporation since 1988.
John P. Gigas has served as Executive Vice President and Chief Operating Officer
of Westwood Corporation since October 27, 1999. On March 31, 2000, Mr. Gigas
also assumed the duties of Secretary-Treasurer and Chief Financial Officer. Mr.
Gigas co-founded Reatta Textile Company and prior to that was the Senior Vice
President and Chief Financial Officer of the John Zink Company, now owned by
Koch Industries, Inc., of Wichita, Kansas. Mr. Gigas received his MBA with
emphasis in international finance/economics from the University of Tulsa in
1982.
Richard E. Minshall has served as a Director of Westwood Corporation since 1988.
Mr. Minshall is President and Chairman of the Board of Directors of Capital
Advisors, Inc., of Tulsa, Oklahoma. Mr. Minshall is a Director of American
Gilsonite and First National Bank & Trust Company of Broken Arrow. Mr. Minshall
is a member of the Oklahoma Society of Financial Analysts and the Oklahoma Bar
Association.
Anthony Pantaleoni has served as a Director of Westwood Corporation since 1988.
Mr. Pantaleoni is a member of the law firm of Fulbright & Jaworski L.L.P., New
York, New York. Mr. Pantaleoni is a Director of Universal Health Services, Inc.,
and AAON, Inc.
John H. Williams, Sr. has served as a Director of Westwood Corporation since
1997. Mr. Williams is an honorary Director of The Williams Companies, Inc.
(NYSE: WMB), of Tulsa, Oklahoma, having resigned as Chairman of the Board and
Chief Executive Officer in late 1978. Mr. Williams joined the Williams Brothers
Company in 1946, and was elected President and Chief Executive Officer in 1950.
In 1971, the name of the company was changed to The Williams Companies, Inc. Mr.
Williams received his civil engineering degree from Yale University in 1940. Mr.
Williams presently serves on the Board of Directors of Apco Argentina Inc., Unit
Corporation (NYSE: UNT) and Willbros Group, Inc. (NYSE: WG).
William J. Preston has served on the Board of Directors since October 1999.
Since 1978, Mr. Preston has been a principal and one of the founding partners of
Preston Exploration, L.L.C., a privately owned oil and gas exploration and
production company located in The Woodlands, Texas. In 1978, Mr. Preston retired
from the active practice of medicine after twelve years of practice in Tulsa,
Oklahoma, in the field of otolaryngology. Mr. Preston received an undergraduate
degree in engineering from the University of Tulsa, and subsequently graduated
from the University of Oklahoma Medical School.
During the fiscal year ended March 31, 2000, the Board of Directors held four
meetings. Each Director attended all meetings in person or by teleconference. In
March, 1998, the Board of
13
<PAGE>
Directors created an Audit Committee composed of Richard E. Minshall, Anthony
Pantaleoni and John H. Williams, Sr. Other than the Audit Committee, the Board
of Directors presently has no other standing committees.
Item 11. Executive Compensation
The following Tables I through III present information concerning the cash
compensation and stock options provided to Messrs. McKee and Gigas. The notes to
these tables provide more specific information regarding compensation as of
March 31, 2000, except for Paul R. Carolus the former Secretary-Treasurer and
Chief Financial Officer who retired on March 31, 2000. Ernest H. McKee and John
P. Gigas are the only Executive Officers of the Company. No other persons are
considered to be Executive Officers or received compensation in excess of
$100,000 for the fiscal year ended March 31, 2000.
Table I
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation(a) Compensation
---------------------------------------- --------------------------
Other
Annual Securities All Other
Name and Fiscal Compen- Underlying Compen-
Principal Position Year Salary Bonus sation(b) Options sation(c)
--------------------- ------------ -------------- -------------- --------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Ernest H. McKee 2000 $225,000 $ -- -- -- $ 6,750
Chief Executive 1999 225,000 -- -- -- 5,606
Officer 1998 150,000 75,000 -- -- 4,500
John P. Gigas 2000 $ 86,000 $ -- -- -- $ 860
Chief Operating
Officer(d)
</TABLE>
(a) Amounts shown include cash compensation earned by Executive
Officers.
(b) The value of other benefits to any Officer during fiscal year
2000 did not exceed the lesser of $50,000 or 10% of the Executive Officer's
total annual salary and bonus or fall within any other category requiring
inclusion.
(c) Amounts contributed to the Company's 401K Plan on behalf of the
named Executive Officer.
14
<PAGE>
(d) Represents compensation commencing October, 1999. Mr. Gigas'
employment contract commenced October 27, 1999, for a two year term. Salary
compensation for Mr. Gigas is $172,000 per annum, payable in equal monthly
installments. Prior to his employment as Executive Vice President and Chief
Operating Officer, Mr. Gigas provided certain consulting services and received
$8,333 during September, 1999, pursuant to the terms of his consulting agreement
with the Company.
Table II
Option Grants in Last Fiscal Year
The only option grant to an Executive Officer was made on October 27, 1999, as
part of the initial employment contract of Mr. John P. Gigas, the Company's
Executive Vice President. Mr. Gigas' stock option provides him with the
opportunity to purchase up to 120,000 shares of the common stock of the Company
at an exercise price of $1.00 per share. The stock Option granted to Mr. Gigas
vests at the rate of 30,000 shares at the end of each calendar quarter
commencing December 31, 1999, and is exercisable through October 27, 2004.
Accordingly, Mr. Gigas now has exercisable Options for 60,000 shares of the
Company's common stock.
Table III
Aggregated Option Exercises
in Last Fiscal Year and
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-the-Money Options
at March 31, 2000 at March 31, 2000
------------------------ -----------------------
Acquired on Value Exer- Unexer- Exer- Unexer-
Name Exercise Realized cisable cisable cisable cisable
---- ----------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Ernest H. McKee 0 $0 116,830(a) 24,200(a) $0 $0
John P. Gigas 0 $0 60,000(b) 60,000(b) $0 $0
</TABLE>
(a) Represents grants of options to acquire 16,105 shares of the
Company's common stock annually on March 20, 1992, through 1996, pursuant to the
1992 Directors' Stock Option Plan, as amended on October 27, 1999 (the
"Directors' Plan"). The shares issued under these Options have been
automatically adjusted for the 10% stock dividends occurring annually from
calendar 1993 through 1997. The exercise prices of the 1992, 1993, 1994, 1995
and 1996 option grants were $3.00, $3.125, $3.50, $2.25 and $1.75, per share,
respectively, which were the NASDAQ closing prices on the date of the grants
($1.86, $1.95, $2.39, $1.69, and $1.45 per share, respectively, after automatic
adjustment for the 10% stock dividends occurring annually from calendar 1993
through 1997).
15
<PAGE>
The Options became exercisable six (6) months after the date of the grants, and
expire ten (10) years from the date of grant.
On September 3, 1996, an additional one-time grant of an option to acquire
60,500 shares (as adjusted for the 10% stock dividends occurring on December 22,
1996, and 1997) was made pursuant to the Directors' Plan. The exercise price of
this option grant was $2.125 per share ($1.75 after automatic adjustment for the
10% stock dividends in calendar 1996 and 1997), which was the NASDAQ closing
price on September 3, 1996. This option vests at the rate of 20% (12,100 shares)
per year on September 3, 1997, through 2001, and each 20% increment is
exercisable for a period of ten (10) years commencing on the vesting date.
(b) Mr. Gigas' option was granted pursuant to his employment contract,
and was not issued through any of the Company's option plans. Mr. Gigas was
issued an option to purchase up to 120,000 shares of the common stock of the
Company at an exercise price of $1.00 per share. The option granted to Mr. Gigas
vests at the rate of 30,000 shares at the end of each calendar quarter
commencing December 31, 1999, and is exercisable through October 27, 2004.
Accordingly, Mr. Gigas now holds exercisable options for 60,000 shares as of
March 31, 2000, with the remaining 60,000 shares exercisable after September 30,
2000.
The Company maintains 401K Plans which were effective January 1, 1989, and are
available for participation by all employees without minimum age or service
requirements. Each participating employee can defer up to 17% of his annual
compensation to a specified limit. The Company matches 100% of the employee's
deferrals, with such matching contributions not to exceed 3% of the employee's
annual compensation. The Company's total contributions to the Plan for fiscal
year 2000 were $138,292.
Directors' fees are payable to each outside Director for attendance at all
regular and special board meetings for the Company. Richard E. Minshall, Anthony
Pantaleoni and John H. Williams, Sr., the Company's outside Directors, have each
been paid the sum of $6,000 for attendance at board meetings during fiscal year
2000, and Mr. Preston received $1,500 for the one meeting he attended after his
appointment. Mr. McKee, although a Director, was not paid a Director's fee.
Compensation of $1,500 per meeting to the outside Directors was originally
initiated as part of the Company's acquisition of NMP in March of 1988, and has
continued thereafter to provide some compensation for the efforts and time
expended by the Directors. While there are only four to six scheduled meetings
of the Board of Directors in Tulsa, Oklahoma, on a yearly basis, there is
substantial communications by and between the Directors throughout the course of
the year which are not compensated in any way.
16
<PAGE>
Stock Performance Graph
The following graph compares the Company's five-year cumulative total return to
the NASDAQ U.S. Stock Index and the S&P Electronic Defense Index over a period
beginning on March 31, 1995, and ending on March 31, 2000. The total stockholder
return assumes $100 invested on March 31, 1995, in the Company and each of the
Indexes shown. It also assumes reinvestment of all dividends.
The Company is in a unique industry and has few competitors manufacturing
electrical generation and control equipment, primarily for military application,
switching panel boards, switchboards, and electronic components. The Company's
primary competitors are not publicly traded on any U.S. Stock Market and
therefore, no financial data is obtainable for comparative purposes.
With the acquisition of E. Systems, Inc., in mid-1995 and Loral Corp. in January
of 1996, the S&P Electronic Defense Index is now composed solely of one company,
PerkinElmer, Inc. The public acquisitions of E. Systems, Inc. and Loral Corp.,
at substantial premiums over the then trading prices of these companies has, in
the Company's opinion, resulted in a substantial inflation of the performance of
the S&P Electronic Defense Index for the period March 31, 1995, through March
31, 2000. Moreover, since the Defense Index contains only one company, it is not
actually representative of an industry group or segment. The Company has
explored other possible indexes for purposes of future reporting, but does not
believe that any existing industry segment index provides meaningful comparisons
as of this date.
Price performance of the Company's common stock may be affected by many factors
other than earnings, including the small capitalization of the Company, limited
availability of public float, and the relatively small number of market makers
in the Company stock. Past financial performance should not be considered to be
a reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods.
17
<PAGE>
Table IV
Comparison of Five-Year Cumulative Total Return*
Among Westwood Corporation, NASDAQ U.S. Stock Index
and S&P Electronic Defense Index**
[CHART]
------------------------------------
---- Westwood Corporation
___ _ NASDAQ U.S. Stock Index
..... S&P Electronic Defense Index
------------------------------------
Tabular Description of Performance Graph
<TABLE>
<CAPTION>
Measurement Period Westwood NASDAQ S&P Electronic
(Fiscal Year Covered) Corporation U.S. Stock Index Defense Index
--------------------- ----------- ---------------- -------------
<S> <C> <C> <C>
March 31, 1995 $ 100 $ 100 $ 100
FYE 03/31/96 104.88 134.77 235.25
FYE 03/31/97 94.42 149.12 233.11
FYE 03/31/98 97.45 225.15 333.32
FYE 03/31/99 37.86 303.05 308.76
FYE 03/31/00 41.30 564.40 790.14
</TABLE>
_____________
Assumes $100 invested on March 31, 1995, in Westwood common stock, NASDAQ U.S.
Stock Index and S&P Electronic Defense Index.
* Total Returns assumes reinvestment of dividends.
** Fiscal Year ended March 31, 2000.
18
<PAGE>
Compensation Report
The Board of Directors is responsible for setting the policies that govern the
Company's compensation programs, administering the Company's stock option plans
and establishing the cash compensation of Executive Officers. Due to its small
size, the Board has determined that a Compensation Committee is not needed and
all matters of compensation for Executive Officers is determined by the Board as
a whole. Generally, compensation matters are considered by the Board in March of
each year when sufficient financial information is available for the Board to
review projected year-end results.
While the Board reviews the financial performance of the Company on an annual
basis in connection with its compensation review, such policies of the Board are
informal and are, to a large part, subjective.
The Board's determination of executive compensation is centered on six factors,
including:
1. Earnings per share;
2. Enhancement of net worth;
3. Backlog/development of defense contracts;
4. Reputation for quality;
5. Expansion of product base and services, including development
of new electrical generation and control devices, within the defense industry;
and,
6. Diversification into commercial, non-defense related, products.
The Board has no quantifiable compensation formulas or policies based on the six
factors set forth above. For example, the annual salaries of Mr. McKee and the
former Chief Financial Officer were increased only once during the period from
fiscal year 1988 through fiscal year 1994, even though the Company's net worth
and earnings per share continued to grow annually during that period. The salary
of Mr. McKee has remained the same for four of the last five fiscal years of the
Company. The bonus compensation to Mr. McKee for fiscal 1998 was reduced from
fiscal year 1997 in recognition of decreased net earnings and in recognition of
the tightening economic conditions in the defense industry. No bonus was paid
for fiscal years 1999 and 2000. The amount of the reduction in bonus
compensation was not based on a formula, nor was it based on an equivalent
percentage determined by the losses in fiscal years 2000 and 1999 as compared to
prior fiscal years.
The decrease in bonus is not intended to reflect negatively on the performance
of the Company's Executive Officers. Since approximately 1992, general economic
conditions of corporations in the Tulsa, Oklahoma, area as well as other
corporations in the defense industry generally, indicated that
19
<PAGE>
the salary structures of the Company's Executive Officers were low. The level of
bonus compensation was based in part on an effort to maintain the overall
compensation packages of its Executive Officers in a competitive position with
equivalent companies. However, rather than continue this practice, the Board of
Directors determined in 1998 to raise the base salary compensation of Mr. McKee
and accordingly reduce bonus compensation.
Mr. McKee's employment contract, as amended effective March 31, 1997, increased
his annual salary from $150,000 to $225,000. The Board of Directors believes the
current salary structure is competitive with equivalent corporations in the same
or similar business sectors as the Company and is particularly appropriate given
the efforts of Mr. McKee in the transition of the Company from a primarily
engineered switchgear company to electrical generation and control products.
Mr. McKee, as a Director of the Company, also participates in options granted
pursuant to the Directors' Plan, along with each of the other four Directors.
However, as set forth in Tables II and III hereof, participation in the
Directors' Plan cannot be said to provide an adequate incentive or award for the
services of the Company's Executive Officers.
The salary of Mr. Gigas will be determined for a two year period by the
employment agreement entered into between Mr. Gigas and the Company on October
27, 1999 at the rate of $172,000 per annum, payable in equal monthly
installments. The Company believes that Mr. Gigas' salary is commensurate with
his experience and duties assumed with the Company.
The Directors' Plan, as adopted by the Stockholders of the Company in 1992, and
as amended in 1993, provided for the annual issuance of options to acquire
16,105 shares (as adjusted for the annual dividends occurring from calendar
1993, through 1997) of the Company's common stock to Directors of the Company
for a five-year period at an exercise price equal to the reported closing price
of NASDAQ on the date of each grant. In 1996, the Directors' Plan was amended to
provide for the one-time grant of an option to acquire 60,500 shares (as
adjusted for the 10% stock dividend occurring in calendar 1996, and 1997) of the
Company's common stock at an exercise price equal to the reported closing price
of NASDAQ on September 3, 1996. The Option vests 20% of the 60,500 shares
annually on September 3, 1997, through 2001. The Directors' Plan is automatic in
that the amount of the grants and the computation of the exercise price are
fixed by the Directors' Plan, as previously adopted by the Stockholders, and no
action by the Board of Directors is required to perfect the award. It was
originally designed as an incentive to maintain appropriate members on the
Board, and to induce others to become members of the Board, should that be in
the best interest of the Company's Stockholders.
20
<PAGE>
Stock Option Plans
Incentive and Non-Qualified Stock Option Plan of Westwood Corporation
On March 20, 1992, the Board of Directors of the Company adopted the Incentive
and Non-Qualified Stock Option Plan (the "Incentive Stock Option Plan"), which
was approved by the Stockholders of the Company at the Annual Meeting held
September 24, 1992. The Incentive Stock Option Plan is intended to assist the
Company in securing and retaining key employees by allowing them to participate
in the ownership and growth of the Company through the grant of incentive and
non-qualified options to full-time employees of the Company and its
subsidiaries. Incentive stock options granted under the Incentive Stock Option
Plan are intended to be "Incentive Stock Options" as defined by Section 422 of
the Internal Revenue Code.
The Incentive Stock Option Plan originally provided that 300,000 shares of
common stock were reserved for issuance upon exercise of options to be granted
under the Incentive Stock Option Plan. The Incentive Stock Option Plan was
automatically adjusted as a result of the 10% stock dividends occurring annually
from calendar 1993 through 1997. A total of 483,153 shares are now reserved for
issuance under its terms. The Incentive Stock Option Plan is administered by the
Board of Directors, which determines who shall receive options, the number of
shares of common stock that may be purchased under options, the time and manner
of exercise of options and option prices. The term of options granted under the
Incentive Stock Option Plan may not exceed ten years (five years in the case of
an incentive stock option granted to an optionee owning more than 10% of the
voting stock of the Company (a "10% Holder")). The price for incentive stock
options shall not be less than 100% of the "fair market value" of the shares of
common stock at the time the option is granted; provided, however, that with
respect to an incentive stock option, in the case of a 10% Holder, the purchase
price per share shall be at least 110% of such fair market value. The price for
non-qualified options shall not be less than 75% of the "fair market value" of
the shares of common stock at the time the option is granted. The aggregate fair
market value of the shares of common stock as to which an optionee may exercise
incentive stock options may not exceed $100,000 in any calendar year. Payment
for shares of common stock purchased upon exercise of options is to be made in
cash, check or other instrument, but in the discretion of the Board of
Directors, may be made by delivery of other shares of common stock of the
Company.
Under certain circumstances involving a change in the number of outstanding
shares of common stock without the receipt by the Company of any consideration
therefor, such as a stock split, stock consolidation or payment of a stock
dividend, the class and aggregate number of shares of common stock in respect of
which options may be granted under the Incentive Stock Option Plan, the class
and number of shares subject to each outstanding option and the option price per
share will be proportionately adjusted. In addition, if the Company is involved
in a merger or consolidation, the options granted under the 1992 Stock Option
Plan will be adjusted proportionately.
21
<PAGE>
An option may not be transferred other than by will or by the laws of descent
and distribution or pursuant to a qualified domestic relations order and, during
the lifetime of the option holder, may be exercised only by such holder.
The Incentive Stock Option Plan will terminate on September 24, 2002, and may be
terminated at any time prior to that date by the Board of Directors.
Options granted to employees on November 17, 1994, were exercisable for a period
of five (5) years and have now expired without exercise. There have been no
additional issuances of options under the Incentive Stock Option Plan since
November 17, 1994.
Directors' Stock Option Plan
On March 20, 1992, the Board of Directors of the Company adopted the Directors'
Stock Option Plan (the "Directors' Plan") which was approved by Stockholders of
the Company at the Annual Meeting held September 24, 1992. The Directors' Plan
originally provided for the issuance of up to 100,000 shares of common stock. An
additional 100,000 shares were authorized for issuance under the Directors' Plan
by the Stockholders on October 28, 1993. On March 20, 1996, grants of options to
acquire 16,105 shares of the Company's common stock were issued to each of the
Directors of the Company pursuant to the terms of the Directors' Plan, which
represented the final options reserved under the October 28, 1993,
authorization.
In 1996, the Directors' Plan was amended (the "1996 Amendment"), as approved by
the Stockholders of the Company at the Annual Meeting, to provide each Director
who had served for five (5) years the one-time grant of an option to acquire
60,500 shares (as adjusted for the annual 10% stock dividend occurring in
calendar 1996 and 1997) of the Company's common stock at $2.125 per share ($1.75
per share as adjusted for the annual 10% stock dividend occurring in calendar
1996 and 1997). The 1996 Amendment imposed a vesting schedule which vests 20% of
the 60,500 shares on each of September 3, 1997, through 2001. Additionally, the
1996 Amendment increased the term of the Options granted pursuant to the
Directors' Plan to ten (10) years from the grant date of each Option and
increased the number of shares available under the Directors' Plan by an
additional 200,000 shares, from 266,200 to 466,200.
The Directors' Plan has been automatically adjusted for the annual 10% stock
dividends occurring from calendar 1993 through 1997. The Directors' Plan was
also increased as a result of amendments approved by the Stockholders at the
1997 and 1999 Annual Meetings of Stockholders ("Amendments") for the additional
authorization of options representing 55,000 shares of the Company's common
stock to John H. Williams, Sr., and 50,000 shares to William J. Preston, upon
their appointment to the Board of Directors. As a result of the Amendments and
the 10% stock dividend occurring in calendar 1997 a total of 669,120 shares are
now reserved for issuance under its terms.
22
<PAGE>
The options granted under the Directors' Plan from calendar 1992 through 1996,
are exercisable six months after the grant date, and expire ten years after the
grant date. The options granted on September 3, 1996, vest at the rate of 20%
(12,100 shares) per year, and each vested 20% increment is exercisable for a
period of ten years, commencing on the vesting date. In the case of a Director's
death or permanent disability, the options immediately vest and are exercisable
for a period of one year thereafter and then terminate. If a Director's
membership on the Board of Directors terminates for any reason, any option held
on such date may be exercised for a period of one year after the date of
termination, unless the option terminates sooner by its terms.
The Directors' Plan was originally adopted to provide additional incentive to
Directors of the Company, the benefits of which would be tied directly to stock
performance of the Company. Moreover, it was hoped that the Directors' Plan
could partially compensate the four outside Directors, Messrs. Minshall,
Pantaleoni, Williams and Preston, for the considerable amount of consulting and
communication time spent by them outside of Board meetings. While compensated at
the rate of $1,500 per Board meeting, this compensation only applies when they
actually participate in a Board meeting. They are not otherwise compensated for
their additional efforts during the year.
When the Directors' Plan was originally instituted in 1992, the average trading
price for common stock of the Company was approximately $3.00 per share and it
was hoped that the price per share of the common stock would grow by
approximately 10% per year, which would result in a potential gain to each
Director of approximately $3,000 on an annual basis. However, as of the date
hereof, none of the Options issued to Directors over the last nine years have
resulted in any gain and none have been exercised.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding the ownership of the
Company's common stock by (i) each beneficial owner of more than 5% of the
outstanding common stock, (ii) each Director, (iii) the Chief Executive Officer
and the Chief Operating Officer, and (iv) the Executive Officers and Directors
as a group. The information is given as of March 31, 2000, except as noted.
Unless otherwise indicated, each of the Stockholders has sole voting and
investment power with respect to the shares beneficially owned.
23
<PAGE>
Number of Shares
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
Name of Owner or 10% Con- Common Percent
Identity of Group Options vertible Subor- Warrants(a) Stock(b) of Out-
dinated Notes(a) standing(b)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ernest H. McKee
2902 E. 74th Street 141,030(c) 190,000 95,000 1,377,040 20%
Tulsa, Oklahoma 74136
------------------------------------------------------------------------------------------------------------------------
John P. Gigas
5423 East 106th Street 120,000(d) ---- ---- ---- ----
Tulsa, Oklahoma 74137
------------------------------------------------------------------------------------------------------------------------
William J. Preston
1717 Woodstead Court 50,000(e) 190,000 95,000 770,558 11.2%
The Woodlands, Texas 77380
------------------------------------------------------------------------------------------------------------------------
Richard E. Minshall
320 South Boston Avenue 141,030(c) 190,000(f) 95,000(f) 318,356(g) 4.6%
Suite 1300
Tulsa, Oklahoma 74103
------------------------------------------------------------------------------------------------------------------------
Anthony Pantaleoni
666 Fifth Avenue 141,030(c) 165,000(h) 82,500(h) 196,938(i) 2.9%
New York, New York 10103
------------------------------------------------------------------------------------------------------------------------
John H. Williams, Sr.
1800 South Baltimore Ave. 55,000(j) 90,000 45,000 17,000 .3%
Tenth Floor
Tulsa, Oklahoma 74119
------------------------------------------------------------------------------------------------------------------------
Paul R. Carolus
8511 South Canton Avenue 116,830(k) ---- ---- 380,621 5.5%
Tulsa, Oklahoma 74137
------------------------------------------------------------------------------------------------------------------------
Robert E. Lorton
1440 South Owasso Avenue ---- ---- ---- 348,491 5.1%
Tulsa, Oklahoma 74120-5609
------------------------------------------------------------------------------------------------------------------------
All Executive Officers
and Directors as a Group 648,080 825,000 412,500 2,679,892 38.9%
(6 persons)
------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) On December 23, 1999, the Company issued 10% Subordinated Convertible
Notes in the face amount of $1,000,000. The shares set forth in this column are
included within Units of the Company purchased for $10,000 per Unit. Each Unit
consists of a 10% Convertible
24
<PAGE>
Subordinated Note in the amount of $10,000, convertible into 10,000 shares of
common stock, and one warrant to purchase 5,000 shares of common stock at an
exercise price of $1.00 per share. The maturity date for each 10% Convertible
Subordinated Note, and the expiration date of each warrant, is December 23,
2004. The 10% Subordinated Convertible Notes are callable by the Company, under
certain conditions, at the Company's option after December 15, 2001, upon thirty
(30) days' notice, in the event the Company's common stock closing price is in
excess of $2.50 per share for thirty (30) consecutive days within sixty (60)
days of notice of redemption.
(b) Does not include shares under the 10% Convertible Subordinated Notes,
warrants or unexercised Options.
(c) Under the Directors' Plan, Messrs. McKee, Minshall and Pantaleoni have
received Options to acquire a total of 141,030 shares of the Company's common
stock. As of March 31, 2000, each of these Directors are vested in, and hold
exercisable Options to acquire 116,830 shares. Options to acquire the balance of
24,200 shares will vest and become exercisable for 12,100 shares on each of
September 3, 2000 and 2001.
(d) Pursuant to his employment agreement, Mr. Gigas received an Option to
acquire a total of 120,000 shares of the Company's common stock. As of March 31,
2000, Mr. Gigas is vested in, and holds exercisable Options to acquire 60,000
shares. Options to acquire the balance of 60,000 shares will vest and become
exercisable for 30,000 shares on each of June 30, 2000, and September 30, 2000.
(e) Pursuant to the Directors' Plan, Mr. Preston received an Option to
acquire a total of 50,000 shares of the Company's common stock. This Option
vests in 20% increments (10,000 shares) on each October 27, 2000 through 2004.
(f) The shares represented include 19 Units held by Capital Advisors,
Inc., of which Mr. Minshall is the Chief Executive Officer and controlling
shareholder. (See note (a) above.)
(g) Includes 129,967 shares of common stock owned beneficially by Mr.
Minshall individually; 5,371 shares owned beneficially by Mr. Minshall's wife;
181,934 shares held beneficially by Capital Advisors, Inc., and 1,084 shares
owned by Minshall & Company, Inc. Mr. Minshall is the Chief Executive Officer
and controlling shareholder of Capital Advisors, Inc., and Minshall & Company,
Inc. The shares represented do not include 74,855 shares owned by a revocable
trust for the benefit of Mr. Minshall's mother, of which Mr. Minshall is
Trustee. Mr. Minshall does not claim any beneficial ownership in the shares held
by the trust.
(h) The shares represented include 5 Units owned beneficially by Mr.
Pantaleoni; 4 Units owned by the Anthony Pantaleoni Trust, of which he is a
trustee and a beneficiary; 2.5 Units which are owned by a trust of which Mr.
Pantaleoni is trustee; and 5 Units which are owned by Mr. Pantaleoni's wife as
to which he disclaims beneficial ownership. (See note (a) above.)
25
<PAGE>
(i) Includes 56,705 shares of common stock owned beneficially by Mr.
Pantaleoni; 60,000 shares held by a trust of which Mr. Pantaleoni is a trustee
and a beneficiary; 40,233 shares owned by Mr. Pantaleoni's wife, as to which he
disclaims beneficial ownership; and 40,000 shares held by trusts of which Mr.
Pantaleoni is a trustee, and as to which he disclaims beneficial ownership.
(j) Pursuant to the Directors' Plan, Mr. Williams received an Option to
acquire a total of 55,000 shares (as adjusted for the 10% stock dividend
occurring on December 22, 1997) of the Company's common stock. As of March 31,
2000, Mr. Williams is vested in, and holds exercisable Options to acquire 22,000
shares. Options to acquire the balance of 33,000 shares will vest and become
exercisable for 11,000 shares on each of June 6, 2000, through 2002.
(k) Pursuant to the Directors' Plan, Mr. Carolus received Options to
acquire a total of 141,030 shares of the Company's common stock. As of his
retirement from the Company on March 31, 2000, Mr. Carolus is vested in, and
holds exercisable Options to acquire 116,830 shares. These Options will expire
on March 31, 2001, in accordance with their terms. Options to acquire the
balance of 24,200 shares automatically terminated on March 31, 2000, pursuant to
the Directors' Plan.
Item 13. Certain Relationships and Related Transactions
Mr. McKee was employed pursuant to a written employment contract with the
Company through March 2000. This contract, as amended effective March 31, 1997,
provided for a base salary of $225,000 and bonus provisions subject to the
discretion of the Board of Directors. The contract provided for other benefits,
including a Company-owned automobile, club memberships, and reimbursement of
business expenses. Mr. McKee is continuing his employment as President on the
same terms as contained in the former written agreement. There are currently no
plans by the Company or Mr. McKee to formalize Mr. McKee's current employment
terms into a written agreement.
Mr. Paul R. Carolus, the Company's former Chief Financial Officer, Secretary,
Treasurer and a Director from March 1988, retired on March 31, 2000, and
resigned all positions with the Company on that date. Through the fiscal year
ending March 31, 2000, Mr. Carolus received a salary of $130,000 as set forth in
his written employment agreement, which expired on March 31, 2000.
Minshall & Company, Inc., provides services to the Company in regard to public
news releases and public relations matters. A fee of $1,500 per month is paid to
Minshall & Company, Inc., for these services. For the fiscal year ended March
31, 2000, the total sum of $18,000 was paid to Minshall & Company, Inc., in
connection with these services.
In conjunction with the sale of RoxCorp. to Roxtec in September 1997, NMP
entered into an Administrative Services Agreement with RoxCorp. to provide
certain administrative services and facilities on a month-to-month basis,
including office and warehouse space and telephone service.
26
<PAGE>
The services provided, and the consideration to be received, were essentially
identical to those previously provided based on the then inter-corporate expense
allocation determined by NMP and RoxCorp. During the fiscal year ended March 31,
2000, NMP received the sum of $39,785 from RoxCorp. pursuant to the
Administrative Services Agreement. During the fiscal year ended March 31, 2000,
NMP also sold spare parts, supplies, and fabrication services to RoxCorp. for
which NMP received the sum of $256,495.
Matthew E. McKee, a son of Ernest H. McKee, serves as a Production Manager of
NMP. For the Company's fiscal year ending March 31, 2000, Matthew E. McKee
received salary of $61,363 and bonus compensation of $8,000. Matthew E. McKee's
current salary is $68,096 per year. Mr. McKee obtained a B.B.A. degree from the
University of Texas, College of Business in 1992 and has been employed in
various management capacities at NMP Corp. since 1992.
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
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
27
<PAGE>
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.
----------------------------
* Exhibits listed above filed with prior reports by the Company.
27. Financial Data Schedule
(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, 2000.
28
<PAGE>
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/ John P. Gigas By: /s/ Anthony Pantaleoni
---------------------------------- --------------------------------
John P. Gigas Anthony Pantaleoni
Secretary/Treasurer and Director
Chief Financial Officer
By: /s/ John H. Williams By: /s/ William J. Preston
--------------------------------- --------------------------------
John H. Williams William J. Preston
Director Director
DATE: July 7, 2000
29
<PAGE>
Westwood Corporation
Index to Consolidated Financial Statements and Schedule
<TABLE>
<CAPTION>
Page
----
<S> <C>
Covered by Report of Independent Auditors
Report of Independent Auditors.....................................................................F-2
Consolidated Balance Sheets as of March 31,
2000 and 1999...................................................................................F-3
Consolidated Statements of Operations for the
years ended March 31, 2000, 1999 and
1998............................................................................................F-5
Consolidated Statements of Stockholders' Equity
for the years ended March 31, 2000, 1999 and
1998............................................................................................F-6
Consolidated Statements of Cash Flows for the
years ended March 31, 2000, 1999 and 1998.......................................................F-7
Notes to Consolidated Financial Statements for the
years ended March 31, 2000, 1999 and 1998.......................................................F-9
Schedule for the years ended March 31, 2000, 1999 and 1998:
II - Valuation and Qualifying Accounts.......................................................F-28
Not Covered by Report of Independent Auditors:
Selected Quarterly Financial Information (unaudited)..............................................F-29
</TABLE>
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>
[LETTERHEAD OF ERNST & YOUNG]
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, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 2000. 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 auditing standards generally accepted
in the United States. 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, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 2000, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Tulsa, Oklahoma
June 2, 2000
F-2
<PAGE>
Westwood Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31
2000 1999
------------------------------------
(In Thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 293 $ 1,283
Accounts receivable (including retainage receivable
of $69 in 2000 and $16 in 1999),
net of allowance for doubtful accounts of
$35 in 2000 and $126 in 1999 2,522 3,696
Income tax receivable - 789
Costs and estimated earnings in excess of
billings on uncompleted contracts 2,156 2,198
Inventories, primarily raw materials
and purchased parts 3,470 2,648
Prepaid expenses 67 40
Note receivable 227 -
Assets held for sale - 402
------------------------------------
Total current assets 8,735 11,056
Plant and equipment, at cost:
Leasehold improvements 251 310
Machinery and equipment 4,557 4,275
Patterns and tools 100 195
------------------------------------
4,908 4,780
Accumulated depreciation (3,069) (2,937)
------------------------------------
1,839 1,843
Note receivable 441 -
Loan origination costs (net of accumulated
amortization costs of $3 in 2000) 57 -
Goodwill (net of accumulated amortization of
$1,242 in 2000 and $858 in 1999) 4,735 6,250
Long-term accounts receivable, retainage 270 534
------------------------------------
Total assets $16,077 $19,683
====================================
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
March 31
2000 1999
------------------------------------
(In Thousands,
except for share amounts)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 4,301 $ 2,397
Accrued liabilities 1,371 1,489
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,201 501
Current portion of long-term debt 1,158 7,569
------------------------------------
Total current liabilities 8,031 11,956
Long-term debt 2,686 557
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 shares issued
and outstanding 21 21
Capital in excess of par value 5,978 5,978
Retained earnings (accumulated deficit) (544) 1,171
Treasury stock, 127,000 shares at cost (95) -
------------------------------------
Total stockholders' equity 5,360 7,170
------------------------------------
Total liabilities and stockholders' equity $16,077 $19,683
====================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Westwood Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended March 31
2000 1999 1998
------------------------------------------------------
(In Thousands, except earnings per share)
<S> <C> <C> <C>
Sales $18,052 $ 30,390 $29,435
Cost of sales 14,699 27,838 24,640
------------------------------------------------------
Gross profit 3,353 2,552 4,795
Operating expenses:
Marketing and selling expenses 804 1,233 2,269
General and administrative expenses 4,261 4,121 4,318
Impairment loss - - 440
------------------------------------------------------
5,065 5,354 7,027
------------------------------------------------------
Operating loss (1,712) (2,802) (2,232)
Other income (expense):
Interest expense (430) (746) (524)
Gain on sale of subsidiary/product lines 190 - 797
Other 147 (135) (73)
------------------------------------------------------
(93) (881) 200
------------------------------------------------------
Loss before extraordinary
gain and income taxes (1,805) (3,683) (2,032)
Benefit for income taxes (90) (630) (715)
------------------------------------------------------
Loss before extraordinary gain (1,715) (3,053) $(1,317)
Extraordinary gain - 209 -
------------------------------------------------------
Net loss $(1,715) $ (2,844) $(1,317)
======================================================
Basic and diluted loss per share:
Loss before extraordinary gain $ (.25) $ (.44) $ (.19)
Extraordinary gain - .03 -
------------------------------------------------------
Net loss $ (.25) $ (.41) $ (.19)
======================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Westwood Corporation
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Retained
Capital in Earnings
Preferred Common Excess of (Accumulated Treasury
Stock Stock Par Value Deficit) Stock Total
--------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
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
Net loss - - - (2,844) - (2,844)
Cash dividends paid
($.01 per share) - - - (69) - (69)
--------------------------------------------------------------------------------------
Balance at March 31, 1999 - 21 5,978 1,171 - 7,170
Net loss - - - (1,715) - (1,715)
Purchase of 127,000
shares of common
stock - - - - (95) (95)
--------------------------------------------------------------------------------------
Balance at March 31, 2000 $ - $21 $5,978 $ (544) $ (95) $ 5,360
======================================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Westwood Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended March 31
2000 1999 1998
-------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Operating activities
Net loss $(1,715) $(2,844) $(1,317)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 933 1,372 1,448
Extraordinary gain - (209) -
Non-cash interest expense 30 113 -
Non-cash interest income (37) - -
Impairment loss - - 440
Gain on sale of subsidiary/product lines (190) - (797)
Loss on asset disposals 61 372 32
Deferred income taxes - 336 (133)
Cash flows impacted by changes in:
Accounts receivable 1,174 694 356
Costs and estimated earnings
in excess of billings on
uncompleted contracts 42 2,442 (2,837)
Inventories (2,737) 979 818
Prepaid expenses (27) 90 102
Long-term accounts receivable,
retainage 264 283 171
Accounts payable 1,904 (1,573) 2,491
Accrued liabilities and rent (148) (231) 192
Billings in excess of costs and
estimated earnings on
uncompleted contracts 700 (354) (3,156)
Income taxes receivable 789 (449) (1,057)
-------------------------------------------------
Net cash provided by (used in)
operating activities 1,043 1,021 (3,247)
</TABLE>
F-7
<PAGE>
Westwood Corporation
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended March 31
2000 1999 1998
------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Investing activities
Purchases of plant and equipment $ (637) $ (353) $ (450)
Proceeds from sales of plant and equipment - 3 71
Proceeds from sale of subsidiary/
product lines 1,946 - 2,389
Purchase of certain assets - - (2,080)
Acquisition of company, less
cash acquired - (498)
Collections (advances) on officer loan - 55 (4)
------------------------------------------------------
Net cash provided by (used in)
investing activities 1,309 (295) (572)
Financing activities
Principal payments on debt (9,187) (1,702) (3,017)
Borrowings on debt 6,000 1,754 6,500
Dividends paid - (69) (255)
Acquisition of 127,000 shares
of common stock (95) - -
Loan origination cost payments (60) - -
------------------------------------------------------
Net cash provided by (used in)
financing activities (3,342) (17) 3,228
------------------------------------------------------
Net increase (decrease) in cash (990) 709 (591)
Cash and cash equivalents at
beginning of year 1,283 574 1,165
------------------------------------------------------
Cash and cash equivalents at end of year $ 293 $ 1,283 $ 574
======================================================
</TABLE>
See accompanying notes.
F-8
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
1. Description of Business Activities and Significant Accounting Policies
Business Activities
The wholly owned operating subsidiaries included in the consolidated financial
statements of Westwood Corporation ("Company"), a holding company, are:
Subsidiary Nature of Business
--------------------------------------------------------------------------------
NMP Corp. ("NMP") NMP designs and manufactures electrical
distribution and signal switching equipment
in accordance with specifications of the U.
S. Navy for use in combat ships. NMP also
manufactured and marketed a diversified
line of marine electrical hardware
products, primarily for the U.S. Navy,
until July 1999.
TANO Corp. ("TANO") Designs, manufactures, sells and services
automation and control systems for both
military and commercial ships and machinery
plant automation and control systems.
MCII Electric Co. ("MCII") Designs, manufactures, sells and supports
mobile generator sets for both military and
commercial applications.
Peter Gray Corporation, Commercial cold forger, serving mostly
("Peter Gray") wholly owned commercial markets within the U.S. until
subsidiary of Roflan and 1999.
Associates, Inc., a holding
company
In the third quarter of 1999, the Company decided to cease its Peter Gray
operations and completed the sale of certain assets in the first quarter of 2000
for $696,000. Peter Gray's assets were classified as assets held for sale at
March 31, 1999 and the gain on disposal of these assets was $294,000 in 2000.
F-9
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
1. Description of Business Activities and Significant Accounting Policies
(continued)
In July 1999, the Company sold certain marine hardware-related assets of NMP for
a total sales price of $2,000,000. Of the total sales price, $1,250,000 was
received by March 31, 2000. The remaining balance of $750,000 is to be received
in three annual installments of $250,000 beginning September 1, 2000 and is
represented by a non-interest-bearing note receivable. The Company recorded a
$104,000 loss in connection with the sale, primarily due to the Company
recording the note receivable at a discount rate of 8.75%.
Estimates and Assumptions
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States 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.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid mutual funds invested in U.S.
government securities with maturities of three months or less when acquired.
Contracts
Revenues and estimated earnings under long-term fixed-price production contracts
are recorded on a percentage of completion basis, generally using units of
delivery as the measurement basis for effort accomplished. Estimated earnings
are recognized in proportion to recorded revenues. For long-term contracts
which, among other things, provide for the delivery of minimal quantities or
require a significant amount of development effort in relation to total contract
value, the Company generally recognizes revenues and costs on the percentage-of-
completion method, measured by the percentage
F-10
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
1. Description of Business Activities and Significant Accounting Policies
(continued)
of total labor costs or total costs incurred to date to estimated total labor
costs or total costs for each contract. On all other contracts revenues are
recognized when contract performance is complete. 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.
The effect of changes in estimates of contract profits was to increase 2000,
increase 1999 and decrease 1998 net operating loss by approximately $437,000,
$221,000 and $509,000, 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 $540,000, $836,000 and $682,000
is included in the 2000, 1999 and 1998 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.
Loan Origination Costs
Loan origination costs are being amortized on a straight-line basis over the
scheduled five-year maturity period of the convertible subordinate debentures
(see Note 5).
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.
F-11
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
1. Description of Business Activities and Significant Accounting Policies
(continued)
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.
Incentive Stock Options
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 Statement of Financial
Accounting Standard ("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 equals or is more than the market price of
the underlying stock on the date of the grant, no compensation expense is
recognized.
Earnings Per Share
Basic earnings per share are based upon 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 2000, 1999 and 1998, resulting in no difference
between basic and dilutive earnings per share for each of the years presented.
Long-Lived Assets
The Company evaluates the long-lived assets, including related intangibles, of
identifiable business activities for impairment when events or changes in
circumstances indicate, in management's judgment, that the carrying value of
such assets may not be recoverable. The determination of whether impairment has
occurred is based on management's estimate of undiscounted future cash flows
attributable to the assets
F-12
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
1. Description of Business Activities and Significant Accounting Policies
(continued)
as compared to the carrying value of the assets. If impairment has occurred, the
amount of the impairment recognized is determined by estimating the fair value
for the assets and recording a provision for loss if the carrying value is
greater than fair value.
For assets identified to be disposed of in the future, the carrying value of
these assets is compared to the estimated fair value less the cost to sell to
determine if impairment is required. Until the assets are disposed of, an
estimate of the fair value is redetermined when related events or circumstances
change.
New Accounting Standard
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued which requires that all derivative instruments be
recorded as assets or liabilities on the balance sheet at fair value. SFAS No.
133 is not required to be adopted by the Company until April 1, 2001. The
Company's financial position, results of operations or cash flows are not
expected to be significantly impacted by this SFAS when adopted.
Reclassifications
Certain 1999 and 1998 amounts have been reclassified to be consistent with the
2000 presentation.
2. Acquisitions
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 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 called
for in 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.
F-13
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
2. Acquisitions (continued)
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 net purchase price was subsequently reduced during
2000 to $974,000 as a result of the settlement of acquisition litigation with
the former owner of MCII (see Note 5). The 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 $4,265,000.
3. Related Parties
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., (a previously wholly owned subsidiary), the
Company subleased office and warehouse space as well as provided 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. The Company received $51,000, $88,000 and $66,000 in 2000, 1999 and
1998, respectively, related to the administrative services agreement. The
sublease and administrative services agreement were terminated in 2000.
Additionally, the Company's NMP subsidiary sells materials and parts to Rox
Corp. which resulted in revenues to the Company of $256,000, $174,000 and
$82,000 in 2000, 1999 and 1998, respectively.
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:
2000 1999
-------------------------
(In Thousands)
Costs incurred on uncompleted contracts $ 58,933 $ 42,834
Estimated earnings 18,524 11,452
-------------------------
77,457 54,286
Less contract billings to date 76,502 52,589
-------------------------
$ 955 $ 1,697
=========================
Included in the accompanying balance
sheets under the following captions:
Costs and estimated earnings
in excess of billings on
uncompleted contracts $ 2,156 $ 2,198
Billings in excess of costs and
estimated earnings on
uncompleted contracts (1,201) (501)
-------------------------
$ 955 $ 1,697
=========================
Accounts receivable includes approximately $901,000 and $748,000 of progress
billings at March 31, 2000 and 1999, 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:
2000 1999
------------------------
(In Thousands)
Revolving credit facility $ 662 $ 4,200
Term note 1,814 2,333
MCII acquisition note 274 1,470
Convertible subordinate debenture 1,000 -
Other 94 123
------------------------
3,844 8,126
Less current maturities 1,158 7,569
-------------------------
$ 2,686 $ 557
=========================
Annual maturities on long-term debt are: 2001 - $1,158,000; 2002 - $545,000;
2003 - $421,000; 2004 - $448,000; and 2005 - $1,272,000.
On August 13, 1999, the Company entered into a new bank credit facility for a
$2,000,000 revolving credit line and $2,000,000 5-year term note. Proceeds from
this new credit facility were used to repay all amounts outstanding under the
previous bank facility and term note. The revolving credit line and term note
bear interest at the Wall Street Journal prime rate plus .25% to .75% based on
the debt service coverage ratio of the Company each quarter (total rate of 9.75%
at March 31, 2000). The new revolving credit line expires on August 13, 2000 and
is based on a borrowing base of acceptable receivables and inventories. The term
loan facility requires monthly principal payments of $33,898 plus accrued
interest through August 2004.
The revolving credit line and the term note contain covenants relating to
leverage and liquidity and are secured by accounts receivable, equipment, and
inventories of all the Company's subsidiaries. The Company was not in compliance
with the liquidity and leverage covenants at various times throughout 2000. The
Company has obtained a waiver for the liquidity and leverage covenant violations
as of March 31, 2000. In addition, the bank has waived the leverage and
liquidity covenants through March 31, 2001.
F-16
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
At March 31, 2000, $1,338,000 was available under the revolving credit facility
based on the borrowing base. Borrowings on the revolving credit facilities
averaged $2,222,000, $4,110,000 and $2,592,000 per day during 2000, 1999 and
1998, respectively, with the highest month-end balance being $3,965,000,
$4,500,000 and $3,790,000, respectively. The weighted average interest rate was
8.98%, 8.75% and 8.5% during 2000, 1999 and 1998, respectively.
In December 1999, the Company completed a $1,000,000 convertible subordinated
debenture offering. The private placement was purchased by a small group of
outside investors as well as officers and directors of the Company. The
debentures bear interest of 10% per annum and mature on December 22, 2004. The
debentures are convertible into common stock at one share for each $1.00 of
debentures exercised. In connection with the issuance of the debentures, the
Company issued warrants to purchase up to 500,000 shares of common stock of the
Company at $1.00 per share. The warrants are exercisable within five years from
the date of issuance. The amount of warrants exercisable is dependent upon the
market price of the stock. As of March 31, 2000, none of the warrants were
exercisable.
In connection with the acquisition of MCII in 1997, the Company signed a
$1,500,000 noninterest-bearing note payable to the former owner of MCII. The
note required three annual installments, beginning in May 1998, of $500,000. The
Company recorded the obligation at a discount rate of 8.5%, which was consistent
with the rate obtainable from the lender of the existing revolving credit
facility in May 1997. In December 1999, the Company agreed to settle litigation
related to the acquisition of MCII with the former owner of MCII. The settlement
replaced the 1997 noninterest-bearing note, which had a discounted balance at
settlement of $1,470,000, with a new $300,000 noninterest-bearing note and
$100,000 cash payable to the former owner of MCII. The new note requires eight
quarterly installments, beginning in April 2000, of $37,500. The Company
recorded the new note at a discount rate of 8.25%, which was consistent with the
rate obtainable from the lender of the new revolving credit facility in December
1999. As a result, the $1,135,000 purchase price settlement reduced previously
recorded goodwill. The settlement also required the Company to repurchase
127,000 shares of the Company's common stock from the former owner of MCII for
$95,000.
F-17
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
In connection with the acquisition of Peter Gray, the Company assumed a secured
note payable maturing on November 1, 2001. The note was 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 was computed at 8% per annum. The note was secured by
the accounts receivable and leasehold improvements of Peter Gray. In January
1999, the Company entered into an agreement with the note holder to terminate
the secured note payable for a $167,500 cash payment by the Company as the note
holder sold the building, which Peter Gray occupied, to a third party. As a
result of the extinguishment of this debt, an extraordinary gain of $371,000
less income taxes of $162,000 was recognized in 1999.
6. Income Taxes
The components of the provisions (benefits) for income taxes from loss before
extraordinary gain are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $ (137) $(1,012) $(550)
State 47 46 (32)
-------------------------------------------
(90) (966) (582)
Deferred:
Federal - 301 (120)
State - 35 (13)
-------------------------------------------
- 336 (133)
-------------------------------------------
$ (90) $ (630) $(715)
===========================================
</TABLE>
F-18
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
The difference between the expected tax rate and the effective tax rate for the
benefit for income taxes before extraordinary gain is due to the following:
<TABLE>
<CAPTION>
2000 1999 1998
----------------------------------------
(In Thousands)
<S> <C> <C> <C>
Expected benefit for federal
income taxes at the statutory rate $(614) $(1,252) $(691)
State income taxes - net of
federal benefit 16 (106) (22)
Increase in valuation allowance 333 785 15
Revisions to prior year's
estimated taxes 137 - -
Other 38 (57) (17)
----------------------------------------
Benefit for income taxes
before extraordinary gain $ (90) $ (630) $(715)
========================================
</TABLE>
Significant components of the Company's deferred tax liabilities and assets as
of March 31 are as follows:
<TABLE>
<CAPTION>
2000 1999
-----------------------------
(In Thousands)
<S> <C> <C>
Deferred tax liabilities:
Long-term contracts $ 13 $ 37
Tax over book depreciation and amortization 79 -
-----------------------------
Total deferred tax liabilities 92 37
Deferred tax assets:
Allowance for doubtful accounts 13 48
Book over tax depreciation and amortization - 55
State net operating loss carryforward 96 64
Federal net operating loss carryforward 499 -
Inventory reserves 135 528
Warranty reserve 115 81
Vacation accrual 66 61
Tax inventory overhead capitalization 301 2
Less valuation allowance (1,133) (800)
-----------------------------
Total deferred tax assets 92 37
-----------------------------
Net deferred tax asset $ - $ -
=============================
</TABLE>
F-19
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
Management believes a valuation allowance is required due to sufficient
uncertainty existing regarding the realizability of the Company's net deferred
tax assets. The increase of $470,000 and $785,000 in the valuation allowance
during 2000 and 1999, respectively, was due to an assessment of the Company's
ability to realize its net deferred tax assets in the future as a result of the
operating losses in 2000, 1999 and 1998.
At March 31, 2000 and 1999, the Company had $1,600,000 and $1,067,000,
respectively, of state net operating loss carryforwards which expire beginning
in 2013. At March 31, 2000, the Company also had a federal net operating loss
carryforward of $1,467,000, which expires in 2015.
7. Asset Impairment
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.
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 operating leases are as follows:
2001 $ 574,000
2002 498,000
2003 77,000
-----------------
$1,149,000
=================
F-20
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
8. Leases (continued)
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 contained escalation clauses, which increased
the lease payment after the fifth year of the agreement. Under generally
accepted accounting principles, rent expense was recognized on a straight-line
basis on the lease agreement. In January 1999, this lease agreement was
terminated which resulted in Peter Gray reversing the deferred rent liability of
$235,000 and writing off $370,000 of related leasehold improvements to other
expense.
Rent expense incurred under operating lease agreements was $659,000, $655,000
and $690,000 for 2000, 1999 and 1998, respectively.
9. Employee Benefit Plans
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 2000, 1999 and 1998 were $138,000, $168,000 and $135,000,
respectively. The Company does not provide any post-retirement benefits other
than the 401(k) plans.
10. Major Customers and Concentration of Credit Risk
The Company's customers are primarily the U.S. government and companies engaged
in the defense contractor industry located throughout the U.S. who have
contracted with the U.S. government. During 2000, the Company had $2,574,000,
$3,729,000 and $5,594,000 of sales generated by two general contractors and the
U.S. government, respectively. The first general contractor's sales were
generated by the marine electrical switchgear and the automation and control
systems segments. The second general contractor's sales were generated by the
automation and control systems segment. The U.S. government's sales were
generated by all segments. During 1999, the Company had $15,979,000 of sales
generated by all segments of the Company to the U.S. government. A general
contractor and the U.S. government accounted for approximately $4,151,000 and
$5,723,000, respectively, of sales in 1998. The general contractor sales were
generated by the automation and control systems segment and the U.S. government
sales were generated by all segments.
F-21
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
10. Major Customers and Concentration of Credit Risk (continued)
At March 31, 2000, approximately $1,503,000 (60%) of accounts receivable,
including current retainage, are due from the two general contractors and the
U.S. government. 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.
11. Statement of Cash Flows
Cash payments for interest were $439,000, $625,000 and $482,000 for 2000, 1999
and 1998, respectively. Cash payments (refunds) for income taxes were
$(933,000), $(679,000) and $540,000 for 2000, 1999 and 1998 respectively.
12. Common Stock
The financial statements, including the earnings per share calculations, include
the impact of a 10% stock dividend (with fractional shares rounded to the next
highest share) approved by the Board of Directors of the Company on October 30,
1997. This stock dividend resulted in an increase in the number of shares of
common stock issued and outstanding by 626,714 shares in 1998.
The Company has two stock option plans covering directors and employees,
respectively. Options vest and are exercisable as determined by the Board of
Directors on a grant-by-grant basis. In 1998 and 2000, the Board of Directors
increased the number of shares of common stock reserved under the directors'
plan by 55,000 and 50,000 shares, respectively, to a total of 670,000 shares.
The number of shares of common stock reserved under the employees' plan is
483,000 shares. The exercise price per share is specified separately in each
option agreement issued to a director or employee under each plan but cannot be
less than the fair market value per share of common stock on the date of the
grant. At March 31, 2000, zero and 483,000 common shares were reserved by the
Company for future option grants under the directors and employee plans,
respectively. The employee plan expires in 2003.
F-22
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
12. Common Stock (continued)
A summary of the Company's stock option activity and related information for the
years ended March 31 follows:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Vested
--------------------------------- --------------------------------
Weighted Average Weighted Average
Options Exercise Price Options Exercise Price
--------------------------------- --------------------------------
<S> <C> <C> <C> <C>
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
--------------
At March 31, 1999 766,000 $1.77 540,000 $1.78
Granted with exercise
price equal to market
price of Company's
common stock 50,000 .81
Granted with exercise
price in excess of
market price of
Company's common
stock 120,000 1.00
Forfeited (82,000) 1.60
Expired (88,000) 1.54
--------------
At March 31, 2000 765,000 1.63 549,000 $1.74
==============
</TABLE>
No options were exercised or cancelled during any of the three-year periods
ending March 31, 2000. The number of options authorized and granted and the
price per option have been adjusted to reflect the impact of the 10% stock
dividend discussed above. The exercise price for options outstanding as of March
31, 2000 ranged from $.81 to $2.39.
F-23
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
12. Common Stock (continued)
The weighted average remaining contractual life of those options is 6.72 years.
At March 31, 2000, the contractual life of options outstanding ranged from five
to eleven years. The weighted average grant date fair value of options granted
with the exercise price equal to the market price of the Company's common stock
during 2000 and 1998 was $.65 and $1.12, respectively. The weighted average
grant date fair value of options granted with the exercise price in excess of
the market price of the Company's common stock during 2000 was $.47. No options
were granted during 1999.
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 2000, 1999
and 1998:
2000 1999 1998
---------------------------------
Risk free interest rate 6.65% - 6.75%
Weighted-average expected life 5.18 years - 8 years
Expected volatility 78% - 59%
Expected dividends 0.00% - 2%
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:
2000 1999 1998
------------------------------
Net loss:
As reported $(1,715) $(2,844) $(1,317)
Pro forma (1,777) (2,900) $(1,370)
Net loss per basic and diluted share:
As reported $ (.25) $ (.41) $ (.19)
Pro forma $ (.26) $ (.42) $ (.20)
F-24
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
12. Common Stock (continued)
Pro forma amounts include compensation expense for the vested portion of options
granted due to the graded vesting policy of these options. 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.
13. Earnings Per Share
The following sets forth the computation of basic and diluted loss per share for
the years ended March 31:
<TABLE>
<CAPTION>
2000 1999 1998
-----------------------------------------
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share:
Net loss - in thousands $ (1,715) $ (2,844) $ (1,317)
=========================================
Denominator for basic and diluted earnings
per share - weighted average shares * 6,891,647 6,891,647 6,780,814
=========================================
Basic and diluted loss per share $ (.25) $ (.41) $ (.19)
=========================================
</TABLE>
* Adjusted for 10% stock dividends in 1998. See Note 12.
14. Legal Contingencies and Commitments
The Company is involved in various claims and legal actions arising in the
ordinary course of business. Management does not believe that the ultimate
resolution of these matters will have a material impact on the Company's
financial position, results of operations or cash flow.
The Company has an employment contract through October 27, 2001 with one of its
principal officers. The contract provides for a base salary with an aggregate
total annual salary commitment of $172,000. Bonus provisions are subject to the
discretion of the Board of Directors of the Company.
F-25
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
15. Financial Instruments
The following methods and assumptions were used by the Company in estimating its
fair-value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet approximate fair value due to the short-term maturity of these
instruments.
Notes receivable: As the maturity of this receivable is less than
thirty months, fair value is estimated to approximate the historically
recorded amount.
Long-term debt: The fair value of the Company's long-term debt is based
on the prices of similar securities with similar terms and credit
ratings. The carrying amount and fair value of the Company's long-term
debt is $3,844,000 and $3,843,000, respectively, at March 31, 2000.
16. Segment Disclosures
The Company evaluates performance based upon segment income (loss) before
extraordinary gain and income taxes, which includes revenues from external and
internal customers, operating costs and expenses, and depreciation, depletion
and amortization. The accounting policies of the segments are the same as those
described in Note 1. Intersegment sales are generally accounted for as if the
sales were to unaffiliated third parties, that is, at current market prices.
The Company's reportable segments are strategic business units that offer
different products and services. The segments are managed separately because
each segment requires different technology, marketing strategies and industry
knowledge. Other includes corporate operations. Long-lived assets are comprised
of property and equipment, goodwill and deferred charges.
F-26
<PAGE>
Westwood Corporation
Notes to Consolidated Financial Statements (continued)
16. Segment Disclosures (continued)
<TABLE>
<CAPTION>
Income
(Loss) Before
Revenues Extraordinary
--------------------------------- Additions to Depreciation
Revenues Inter- Gain and Total Long-Lived and
External Segment Total Income Taxes Assets Assets Amortization
--------------------------------- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
2000
--------------------------
Marine electrical
switchgear $ 7,788 $ 444 $ 8,232 $ 228 $ 14,326 $ 215 $ 152
Mobile power systems 3,228 - 3,228 (1,984) 6,778 285 542
Automation and
control systems 7,036 418 7,454 702 5,137 137 211
Other - - - (1,851) 11,551 - 28
Eliminations - (862) (862) 1,100 (21,715) - -
--------------------------------- ---------------------------------------------------
Total $18,052 $ - $ 18,052 $ (1,805) $ 16,077 $ 637 $ 933
================================= ===================================================
1999
-------------------------
Marine electrical
switchgear $11,863 $ 946 $ 12,809 $ (1,886) $ 14,579 $ 184 $ 556
Mobile power systems 12,729 - 12,729 (1,650) 8,669 32 621
Automation and
control systems 5,798 215 6,013 453 3,846 69 190
Other - - - (2,312) 17,672 78 5
Eliminations - (1,161) (1,161) 1,712 (25,083) - -
--------------------------------- ---------------------------------------------------
Total $30,390 $ - $ 30,390 $ (3,683) $ 19,683 $ 353 $ 1,372
================================= ===================================================
1998
--------------------------
Marine electrical
switchgear $18,628 $ 272 $ 18,900 $ (1,055) $ 16,763 $ 276 $ 776
Mobile power systems 3,209 - 3,209 (1,487) 10,248 2,103 518
Automation and
control systems 7,598 32 7,630 457 4,143 627 151
Other - - - (1,295) 21,675 22 3
Eliminations - (304) (304) 1,348 (27,998) - -
--------------------------------- ---------------------------------------------------
Total $29,435 $ - $ 29,435 $ (2,032) $ 24,831 $ 3,028 $ 1,448
================================= ===================================================
</TABLE>
Marine hardware revenues were 27%, 52% and 68% and marine switchgear revenues
were 73%, 48% and 32% of 2000, 1999 and 1998 total marine electrical switchgear
segment revenues, respectively.
F-27
<PAGE>
Westwood Corporation
Schedule II - 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, 2000:
Allowance for doubtful
accounts $ 126 $ - $ (91) $ - $ 35
Reserves for inventory 1,391 - (1,037) - 354
Deferred income tax asset
valuation allowance 800 - 333 - 1,133
Year ended March 31, 1999:
Allowance for doubtful
accounts $ 65 $ - $ 61 $ - $ 126
Reserves for inventory 830 - 561 - 1,391
Deferred income tax asset
valuation allowance 15 - 785 - 800
Year ended March 31, 1998:
Allowance for doubtful
accounts 44 - 21 - 65
Reserves for inventory 850 - (20) - 830
Deferred income tax
asset valuation allowance - - 15 - 15
</TABLE>
F-28
<PAGE>
Westwood Corporation
Selected Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
Basic and Diluted
Earnings
Gross Net (Loss) Per
Profit Income Average Share of
Sales (Loss) (Loss) Common Stock*
------------------------------------------------------------------------------
(In Thousands, except earnings per share)
<S> <C> <C> <C> <C>
2000:
First $4,694 $1,029 $ (29) $(.01)
Second 4,246 607 (504) (.07)
Third 4,133 785 (324) (.05)
Fourth 4,979 932 (858) (.12)
1999:
First $7,499 $1,447 $ 48 $ .01
Second 8,724 513 (528) (.08)
Third 7,572 891 (338) (.05)
Fourth 6,595 (299) (2,026) (.29)
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)
</TABLE>
* Restated to reflect the impact of the fiscal year 1998 10% stock dividend.
The first quarter of 2000 includes a $294,000 gain from the sale of certain
assets of Peter Gray. The second quarter of 2000 includes $335,000 in
additional contract losses related to unexpected costs incurred on a
long-term development contract and the completion of a long-term production
contract. During the fourth quarter of 2000, the Company incurred a $119,000
loss from the finalization of the sale of its marine hardware product line.
Fourth quarter of 2000 also includes a $185,000 increase in warranty
reserves.
The second quarter of 1999 includes $478,000 in additional contract losses
related to a long-term development contract which were incurred to meet
second quarter delivery dates on the first article test units. The fourth
quarter of 1999 includes $926,000 in additions to the excess and obsolete
inventory reserves, a $209,000 extraordinary gain from the early
extinguishment of debt, a $135,000 net charge to other expense relating to
the early termination of a long-term building lease and a $785,000 valuation
allowance on the Company's net deferred income tax assets.
F-29
<PAGE>
Westwood Corporation
Selected Quarterly Financial Information (Unaudited) (continued)
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 excess and obsolete inventory
reserve additions.
F-30
