SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission file number 000-21770
SIGNAL TECHNOLOGY CORPORATION
(Exact Name Of Registrant As Specified In Its Charter)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 04-2758268
(State Or Other Jurisdiction Of Incorporation (I.R.S. Employer Identification No.)
Or Organization)
222 ROSEWOOD DRIVE, DANVERS, MA 01923-4502
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (978) 774-2281
--------------------
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 the number of shares outstanding of each of the Registrant's classes of
Common Stock as of the latest practicable date.
Common Stock Outstanding at August 9, 1999
$.01 Par Value 7,651,943 shares
<PAGE>
<TABLE>
INDEX
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
Item 3 Qualitative and Quantitative Disclosures About Market Risk 16
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 6 Exhibits and Reports on Form 8-K 16
SIGNATURE 17
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
June 30, December 31,
1999 1998
-------- --------
Assets:
Cash and cash equivalents $ 1,830 $ 2,366
Accounts receivable, net 13,500 12,894
Inventories 10,365 11,358
Deferred taxes 1,562 1,562
Refundable income taxes 2,295 2,319
Other current assets 303 208
-------- --------
Total current assets 29,855 30,707
-------- --------
Property, plant and equipment, net 14,355 14,935
Intangible assets, net 2,293 2,505
Other assets 832 836
-------- --------
Total assets $ 47,335 $ 48,983
======== ========
Liabilities and stockholders' equity:
Current maturities of long-term debt $ 480 $ 480
Accounts payable 2,315 3,067
Accrued expenses 7,932 7,456
Customer advances 899 3
-------- --------
Total current liabilities 11,626 11,006
-------- --------
Deferred income taxes 1,562 1,562
Long-term debt, net of current maturities 5,728 9,928
Stockholders' equity
Common stock 77 75
Additional paid-in capital 13,413 12,947
Retained earnings 15,829 14,365
-------- --------
29,319 27,387
Less treasury stock (900) (900)
-------- --------
Total stockholders' equity 28,419 26,487
-------- --------
Total liabilities and stockholders' equity $ 47,335 $ 48,983
======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Page 3 of 17
<PAGE>
<TABLE>
SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands except per share amounts)
<CAPTION>
Quarter ended Six Months ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 20,934 $ 22,190 $ 41,370 $ 45,877
Cost of sales 14,792 25,505 29,339 43,689
-------- -------- -------- --------
Gross profit (loss) 6,142 (3,315) 12,031 2,188
Selling, general and administrative expense 4,885 4,652 9,458 9,516
Research and development expense 311 82 825 128
-------- -------- -------- --------
Operating income (loss) 946 (8,049) 1,748 (7,456)
Interest expense 104 242 252 497
-------- -------- -------- --------
Income (loss) before income taxes 842 (8,291) 1,496 (7,953)
Provision (benefit) for income taxes 17 (459) 32 (324)
-------- -------- -------- --------
Net income (loss) $ 825 $ (7,832) $ 1,464 $ (7,629)
======== ======== ======== ========
Net income (loss) per share
Basic $ 0.11 $ (1.07) $ 0.19 $ (1.03)
Diluted $ 0.10 $ (1.07) $ 0.18 $ (1.03)
Shares used in calculating net income (loss) per share
Basic 7,585 7,335 7,544 7,373
Diluted 8,032 7,335 7,922 7,373
<FN>
The accompanying notes are an integral part of the condensed consolidated financial statements.
</FN>
</TABLE>
Page 4 of 17
<PAGE>
SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
June 30,
1999 1998
-------- --------
Net cash provided by operating activities $ 3,998 $ 1,872
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (752) (758)
Proceeds from disposal of property, plant and
equipment -- 14
Other assets 4 5
-------- --------
Net cash used by investing activities (748) (739)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 338 67
Proceeds from Employee Stock Purchase Plan 76 183
Borrowings on bank revolving credit facility 4,600 15,000
Payments on bank revolving credit facility (8,600) (14,700)
Repurchase of treasury stock -- (836)
Payments of long-term debt (200) (300)
-------- --------
Net cash used by financing activities (3,786) (586)
-------- --------
Net (decrease) increase in cash (536) 547
Cash and cash equivalents, beginning of period 2,366 1,127
-------- --------
Cash and cash equivalents, end of period $ 1,830 $ 1,674
======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Page 5 of 17
<PAGE>
SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
Notes To The Condensed Consolidated Financial Statements
(in thousands, except per share data)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of the Company as of June
30, 1999, and for the three and six months ended June 30, 1999 and 1998
are unaudited. All adjustments (consisting only of normal recurring
adjustments) have been made, which in the opinion of management are
necessary for a fair presentation. Results of operations for the three
and six months ended June 30, 1999 are not necessarily indicative of the
results that may be achieved for the full fiscal year or for any future
period. These financial statements should be read in conjunction with the
audited financial statements for the fiscal year ended December 31, 1998,
included in the Company's annual report on Form 10-K. The year end
condensed balance sheet data was derived from the audited financial
statements and does not include all the disclosures required by generally
accepted accounting principles.
The Company's fiscal quarter consists of a thirteen week period ending on
the Saturday closest to June 30. For ease of presentation, interim
periods are designated to have ended on June 30.
2. EARNINGS PER SHARE
The Company presents basic and diluted earnings per share ("EPS"). Basic
EPS is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period.
Diluted EPS is computed giving effect to all dilutive potential common
shares that were outstanding during the period. Dilutive potential common
shares consist of the incremental common shares issuable upon the
exercise of stock options using the treasury stock method.
<TABLE>
A reconciliation of the numerator and denominator of both basic and
diluted EPS is provided as follows:
<CAPTION>
Quarter ended June 30, Six Months ended June 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic and Diluted EPS
Net income (loss) $ 825 $(7,832) $ 1,464 $(7,629)
======= ======= ======= =======
Basic EPS
Common shares outstanding 7,585 7,335 7,544 7,373
------- ------- ------- -------
Basic earnings (loss) per share $ 0.11 $ (1.07) $ 0.19 $ (1.03)
======= ======= ======= =======
Diluted EPS
Common shares outstanding 7,585 7,335 7,544 7,373
Effect of Dilutive Securities -
Common Stock Options 447 -- 378 --
------- ------- ------- -------
8,032 7,335 7,922 7,373
Diluted EPS
Diluted earnings (loss) per share $ 0.10 $ (1.07) $ 0.18 $ (1.03)
======= ======= ======= =======
</TABLE>
Page 6 of 17
<PAGE>
3. COMPREHENSIVE INCOME (LOSS)
There were no differences between net income and comprehensive income for
the quarter and six months ended June 30, 1999 and June 30, 1998.
4. Details of certain balance sheet accounts are as follows:
June 30, December 31,
1999 1998
-------- --------
Net inventories:
Raw materials $ 2,062 $ 3,595
Work in progress 11,316 10,936
Finished goods 296 279
-------- --------
13,674 14,810
Less: unliquidated progress payments (3,309) (3,452)
-------- --------
$ 10,365 $ 11,358
======== ========
Property, plant and equipment:
Land $ 992 $ 992
Building and improvements 10,024 9,986
Machinery and equipment 26,041 25,570
Furniture and fixtures 3,139 3,025
-------- --------
40,196 39,573
Less accumulated depreciation (25,841) (24,638)
-------- --------
Net property, plant and equipment $ 14,355 $ 14,935
======== ========
5. INCOME TAXES
In the quarter and six months ended June 30, 1999, the Company recorded a
provision for income taxes of $17 and $32 respectively for alternative
minimum tax. In the quarter and six months ended June 30, 1998, the Company
recorded a benefit for income taxes of $459 and $324 respectively which
reflects loss carrybacks to the extent available. The Company has provided
a valuation allowance for the full amount of its net deferred tax assets at
June 30, 1999 because it is more likely than not that the deferred tax
asset may not be realized.
6. COMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in litigation incidental to its
business including the following:
Weymouth Environmental Contamination:
In April 1996, the Company sold its facility in Weymouth, Massachusetts but
retained the environmental liability and responsibility associated with
groundwater contaminants present at the site. This facility has been
classified as a tier 1A disposal site by the Massachusetts Department of
Environmental Protection ("DEP"), as a result of past releases of petroleum
based solvents. Environmental assessment reports prepared by independent
consultants indicate that contaminants present in the Town of Weymouth well
field across the street from the facility are similar to those reportedly
released at the facility and still present in the groundwater at the
facility; however, these reports also indicate that the contaminants do not
exceed safe drinking water levels in the finished water after normal
treatment. Other contaminants which did not originate at the facility have
also been detected in the well field.
The Company is continuing to conduct investigations of the facility for
soil and groundwater contamination and operate a pilot remediation system
in cooperation with the DEP. It is not
Page 7 of 17
<PAGE>
possible at this stage of the proceedings to predict exactly what
additional remediation and the costs thereby, if any, will be required. The
Company has been informed by its insurers that no recovery of costs
incurred in the treatment of the ground water at the facility is possible
under existing insurance arrangements. During the fourth quarter 1998 the
Company took a charge for environmental remediation costs due to a
settlement with the State of Massachusetts and a revision to its estimates
for future remediation costs at the site.
Sunnyvale Indemnification Claim:
Eaton Corporation has filed a suit against the Company in United States
District Court, Northern District of California, alleging that it has a
contractual duty to indemnify Eaton Corporation for costs incurred as a
result of environmental contamination and subsequent remediation. The claim
is based upon allegations that the Company assumed certain liabilities when
it acquired one of the divisions of Eaton Corporation. The indemnification
claim was recently dismissed at the trial level, but may be the subject of
an eventual appeal. The Company believes that the ultimate disposition will
not materially affect its financial position or results of operations.
DeCoursey v. Signal Technology Corporation:
The case was filed on August 25, 1998 in the United States District Court
for the District of Massachusetts. Plaintiffs allege that they purchased
Common Stock of the Company between April 28, 1997 and August 17, 1998 and
seek to represent the class of all persons purchasing during that period.
The Complaint, which was amended on March 29, 1999, alleges that the
Company and its former Chief Executive Officer, Dale Peterson, violated
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 and
seeks monetary damages. The Amended Complaint alleges that various public
statements by the Company during 1997 and 1998 were false or misleading as
a result of alleged accounting irregularities. On June 11, 1999, the
Company filed a motion to dismiss the Amended Complaint. Subsequently, the
parties have requested that the court temporarily hold the motion to
dismiss in abeyance pending voluntary mediation of the dispute. The Company
cannot predict the outcome at this time.
L-3 Communications Corporation v. Signal Technology Corporation, et al:
This case was filed on September 3, 1998 in the Superior Court in Fulton
County, Georgia. The Complaint alleges that certain former employees of L-3
Communications now working for the Company unlawfully misappropriated
confidential and trade secret information on behalf of the Company and
unlawfully induced other L-3 Communications employees to join the Company.
L-3 Communications has brought claims for civil conspiracy, tortuous
interference with prospective and contractual relations, under both the
Georgia Deceptive Trade Practices Act and the Uniform Trade Secrets Act and
seeks monetary damages. The case is in the initial stages.
T-3 Contract:
The Company is currently committed to a long term contract at its Keltec
division (the T-3 contract) for amplifiers for Raytheon Company. The
current contract value is $764. If Raytheon Company exercises all of its
options within this contract, the total value could be in excess of
$19,000. Based on an assessment by management if all options are exercised
at current estimated costs and prices, the Company's loss could total up to
$4,000. In March 1999 the Company negotiated new prices and specifications
for the same amplifiers under a new contract and the Company believes
prices are at Keltec's manufacturing cost. The Company believes that other
future orders and options for T-3 amplifiers will be renegotiated.
Page 8 of 17
<PAGE>
7. SEGMENT INFORMATION
The Company is engaged in the engineering, manufacturing and marketing of
electronic components and subsystems. The Company has five operating
divisions referred to as Arizona, California, Systems, Keltec and Olektron
and reports its operations within three segments: Microwave Components and
Subsystems (Arizona, California and Systems), Power Management Products
(Keltec) and Radio Frequency (RF) Components and Subsystems (Olektron). The
operations aggregated into the microwave components and subsystems segment
have similar products, production processes and types of customers.
The Company's reportable segments are as follows:
Microwave Components and Subsystems
Engaged in the design and manufacture of microwave oscillators, frequency
synthesizers and converters, space qualified microwave assemblies,
microwave amplifiers and microwave switch matrices.
Power Management Products
Engaged in the design and manufacture of military high and low voltage
power supplies, DC to DC converters and military high power amplifiers and
transmitters for use in radar systems.
Radio Frequency (RF) Components and Subsystems
Engaged in the design and manufacture of radio frequency and intermediate
frequency signal processing components, integrated multi-function devices,
and switching systems for the Space, Telecommunications and Military
markets.
<TABLE>
The following tables display net sales and operating income by business
segment for the quarter and six months ended June 30, 1999 and 1998:
<CAPTION>
Quarter ended Six Months ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- ------ --------
<S> <C> <C> <C> <C>
Net Sales
- ---------
Microwave Components & Subsystems $ 11,277 $ 13,213 $ 21,702 $ 25,692
Power Management Products 6,696 4,421 14,005 11,609
RF Components & Subsystems 2,961 4,556 5,663 8,576
-------- -------- ------ --------
$ 20,934 $ 22,190 41,370 $ 45,877
======== ======== ======== ========
Operating Income
- ----------------
Microwave Components & Subsystems $ 834 $ (810) $ 1,611 $ 135
Power Management Products 777 (7,459) 1,539 (7,943)
RF Components & Subsystems 169 683 255 1,259
Other(1) (834) (463) (1,657) (907)
-------- -------- ------ --------
$ 946 $ (8,049) $ 1,748 $ (7,456)
======== ======== ======== ========
<FN>
(1) Other is primarily corporate selling, general and administrative expenses that have not been allocated to the business segments.
</FN>
</TABLE>
Page 9 of 17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Results of Operations for the Three Months Ended June 30, 1999 and 1998
Net sales in the second quarter of 1999 decreased $1.3 million, or 5.7% as
compared to the second quarter of 1998. Backlog increased from $71.4 million at
March 31, 1999 to $76.8 million at June 30, 1999 on new orders of $26.5 million.
A reduction in third and fourth quarter 1998 new orders at the Microwave and RF
Components and Subsystems businesses was the primary reason for the decreased
sales in the second quarter 1999 compared to the second quarter 1998.
Gross profit during the second quarter of 1999 increased $9.5 million as
compared to the second quarter of 1998. Gross profit was adversely effected
during the second quarter of 1998 by contract adjustments and inventory
write-downs at the Company's Keltec Operation and to a lesser extent at its
Microwave Components and Subsystems businesses. The impact of these adjustments
in the second quarter 1998 was approximately $7.9 million and were a result of
an investigation by Corporate management with the aid of its independent
accountants and outside counsel into contract and inventory accounting practices
at its Keltec Operation. For the second quarter of 1999 gross profit as a
percentage of sales increased to 29.3% from 28.8% in the first quarter of 1999.
The improved performance from both second quarter 1998 and first quarter 1999 is
attributable to the Company's corrective actions taken including a new
management team at Keltec, strengthening performance assessment, tightening
financial controls and streamlining operations.
Selling, general and administrative expenses increased $233 thousand or 5.0% as
compared to the second quarter of 1998. As a percentage of sales, these expenses
were 23.3% for the second quarter of 1999 and 21.0% for the second quarter of
1998. The increase in selling, general and administrative expense is primarily
due to increased payroll and professional fees at the corporate office.
Company-funded research and development increased to $311 thousand for the
second quarter of 1999 from $82 thousand in the second quarter of 1998. The
Company has instituted an enhanced research and development program for 1999.
Interest expense was $138 thousand lower for the second quarter 1999 as compared
to the second quarter 1998 primarily due to lower levels of borrowings. Total
debt decreased to $6.2 million at June 30, 1999 from $13.9 million at June 30,
1998.
In the second quarter of 1999 the Company recorded a provision for income taxes
of $17 thousand for alternative minimum tax compared to an income tax benefit of
$459 thousand in the second quarter of 1998. The second quarter 1999 tax is less
than the statutory rate principally due to the use of net operating loss
carryforwards. The second quarter 1998 benefit reflects loss carry backs to the
extent available. The Company has provided a valuation allowance for the full
amount of its net deferred tax asset at June 30, 1999 because it is more likely
than not that the deferred tax asset may not be realized.
Business Segments
The Company has five operating divisions referred to as Arizona, California,
Systems, Keltec and Olektron and reports its operations within three segments:
Microwave Components and
Page 10 of 17
<PAGE>
Subsystems (Arizona, California and Systems), Power Management Products (Keltec)
and Radio Frequency (RF) Components and Subsystems (Olektron).
The following tables display net sales and operating income by business segment
for each of the quarters ending June 30:
(amounts in thousands) 1999 1998
-------- --------
Net Sales
- ---------
Microwave Components & Subsystems $ 11,277 $ 13,213
Power Management Products 6,696 4,421
RF Components & Subsystems 2,961 4,556
-------- --------
$ 20,934 $ 22,190
======== ========
Operating Income
- ----------------
Microwave Components & Subsystems $ 834 $ (810)
Power Management Products 777 (7,459)
RF Components & Subsystems 169 683
Other(1) (834) (463)
-------- --------
$ 946 $ (8,049)
======== ========
(1) Other is primarily corporate selling, general and administrative expenses
that have not been allocated to the business segments.
Microwave Components & Subsystems
Net sales of Microwave Components and Subsystems decreased by 14.7% in the
second quarter of 1999 compared to the second quarter of 1998. The primary
reason for the decrease was a reduction in third and fourth quarter 1998 orders.
Operating income of Microwave Components and Subsystems was $834 thousand for
the second quarter 1999 compared to an operating loss of $810 thousand for the
second quarter 1998. Gross profit was adversely effected during the second
quarter of 1998 by contract adjustments and inventory write-downs of
approximately $1.9 million.
Power Management Products
Net sales of Power Management Products increased by 51.4% in the second quarter
of 1999 compared to the second quarter of 1998. The primary reason for the
increase was a focused effort by the new management team to increase
efficiencies in manufacturing and ship delinquent orders.
Operating income of Power Management Products was $777 thousand for the second
quarter 1999 compared to an operating loss of $7,459 thousand for the second
quarter of 1998. Gross profit was adversely effected during the second quarter
1998 by contract adjustments and inventory write-downs of approximately $6.0
million. Contributing to the increase in operating income during the second
quarter 1999 was increased sales volume, greater efficiencies in manufacturing
and changes in contract mix.
RF Components and Subsystems
Net sales of RF Components and Subsystems decreased by 35.0% in the second
quarter of 1999 compared to the second quarter of 1998. The primary reason for
the decreased sales was a reduction in new orders during the last half of 1998
and first quarter 1999.
Page 11 of 17
<PAGE>
Operating income of RF Components and Subsystems was $169 thousand for the
second quarter of 1999 compared to $683 thousand for the second quarter of 1998.
The $514 thousand decrease in operating income is mainly attributable to the
above mentioned decrease in sales volume.
Results of Operations for the Six Months Ended June 30, 1999 and 1998
Net sales in the first six months of 1999 decreased $4.5 million, or 9.8% as
compared to the first six months of 1998. Backlog increased from $64.8 million
at December 31, 1998 to $76.8 million at June 30, 1999 on new orders of $53.4
million. This compares to a decrease in backlog from $88.7 million at December
31, 1997 to $85.7 million at June 30, 1998 on new orders of $42.9 million in the
first six months of 1998. A reduction in third and fourth quarter 1998 new
orders at the Microwave and RF Components and Subsystems businesses was the
primary reason for the decreased sales in the first six months of 1999 compared
to the first six months of 1998.
Gross Profit during the first six months of 1999 increased $9.8 million as
compared to the first six months of 1998. Gross profit was adversely effected
during the first six months of 1998 by contract adjustments and inventory
write-downs at the Company's Keltec Operation and to a lesser extent at its
Microwave Components and Subsystems businesses. The impact of these adjustments
in the first six months of 1998 was approximately $8.2 million and were a result
of an investigation by Corporate management with the aid of its independent
accountants and outside counsel into contract and inventory accounting practices
at its Keltec Operation. For the first six months of 1999 gross profit as a
percentage of sales was 29.1%. The improved performance over the first six
months of 1998 is attributable to the Company's corrective actions taken
including a new management team at Keltec, strengthening performance assessment,
tightening financial controls and streamlining operations.
Selling, general and administrative expenses decreased $58 thousand or 0.6% as
compared to the first six months of 1998.
Company funded research and development increased to $825 thousand for the first
six months of 1999 from $128 thousand in the first six months of 1998. The
Company has instituted an enhanced research and development program for 1999.
Interest expense was $245 thousand lower for the first six months of 1999 as
compared to the first six months of 1998 primarily due to lower levels of
borrowings. Total debt decreased to $6.2 million at June 30, 1999 from $13.9
million at June 30, 1998.
During the first six months of 1999 the Company recorded a provision for income
taxes of $32 thousand for alternative minimum tax compared to an income tax
benefit of $324 thousand for the first six months of 1998. The year to date 1999
tax is less than the statutory rate principally due to the use of net operating
loss carryforwards. The year to date 1998 benefit reflects loss carry backs to
the extent available. The Company has provided a valuation allowance for the
full amount of its net deferred tax asset at June 30, 1999 because it is more
likely than not that the deferred tax asset may not be realized.
Business Segments
The following tables display net sales and operating income by business segment
for the six months ending June 30:
Page 12 of 17
<PAGE>
(amounts in thousands) 1999 1998
-------- ---------
Net Sales
- ---------
Microwave Components & Subsystems $ 21,702 $ 25,692
Power Management Products 14,005 11,609
RF Components & Subsystems 5,663 8,576
-------- --------
$ 41,370 $ 45,877
======== ========
Operating Income
- ----------------
Microwave Components & Subsystems $ 1,611 $ 135
Power Management Products 1,539 (7,943)
RF Components & Subsystems 255 1,259
Other (1) (1,657) (907)
-------- --------
$ 1,748 $ (7,456)
======== ========
(1) Other is primarily corporate selling, general and administrative expenses
that have not been allocated to the business segments.
Microwave Components & Subsystems
Net sales of Microwave Components and Subsystems decreased by 15.5% in the first
six months of 1999 compared to the first six months of 1998. The primary reason
for the decrease was a reduction in third and fourth quarter 1998 orders.
Operating income of Microwave components and Subsystems was $1,611 thousand for
the first six months of 1999 compared to $135 thousand for the first six months
of 1998. Gross profit was adversely effected during the first six months of 1998
by contract adjustments and inventory write-downs of approximately $1.9 million.
Power Management Products
Net sales of Power Management Products increased by 20.6% in the first six
months of 1999 compared to the first six months of 1998. The primary reason for
the increase was a focused effort by the new management team to increase
efficiencies in manufacturing and ship delinquent orders.
Operating income of Power Management Products was $1,539 thousand for the first
six months of 1999 compared to an operating loss of $7,943 thousand for the
first six months of 1998. Gross profit was adversely effected during the first
six months of 1998 by contract adjustments and inventory write-downs of
approximately $6.3 million. Contributing to the increase in operating income
during the first six months of 1999 was increased sales volume, greater
efficiencies in manufacturing and changes in contract mix.
RF Components and Subsystems
Net sales of RF Components and Subsystems decreased by 34.0% in the first six
months of 1999 compared to the first six months of 1998. The primary reason for
the decreased sales was a reduction in new orders during the last six months of
1998 and first quarter 1999.
Operating income of RF Components and Subsystems was $255 thousand for the first
six months 1999 compared to $1,259 thousand for the first six months of 1998.
The $1,004 thousand decrease in operating income is mainly attributable to the
above mentioned decrease in sales volume.
Page 13 of 17
<PAGE>
Liquidity and Capital Resources
At June 30, 1999, the Company had working capital of $18.2 million, including
cash and cash equivalents of $1.8 million, as compared to working capital of
$19.7 million and cash and cash equivalents of $2.4 million, respectively at
December 31, 1998. In the first six months of 1999, the Company repaid
borrowings under the Company's revolving credit facility of $4.0 million
reducing to zero the amount borrowed under the facility. Net cash flow from
operations was $4.0 million for the first six months of 1999 compared to $1.9
million for the first six months of 1998. A $1.0 million reduction in
inventories and a $0.9 million increase in customer advances contributed to the
increased cash flow from operations.
The Company's borrowing arrangement requires the Company to maintain certain
minimum balances and ratios, the most significant of which requires the
maintenance of a minimum net worth. The Company was in compliance with all debt
convenants at June 30, 1999.
The Company continues to investigate acquisition opportunities in complementary
businesses, product lines and markets, but has no commitments for additional
acquisitions at this time. The Company believes that it has adequate cash,
working capital and available financing to meet its operating and capital
requirements in the foreseeable future and to pursue acquisition opportunities.
Impact of Year 2000
Management is aware of the potential software and hardware anomalies associated
with the upcoming date change commonly known as the Year 2000 problem (Y2K). A
comprehensive review of the Company's computer systems, software and internal
embedded systems has been undertaken and management is not aware at this time of
any significant year 2000 issues that will not be resolved prior to the year
2000. The Company is on schedule in its corporate-wide plan to achieve
compliance by the third quarter of 1999.
The Company is presently in the final phase of a five-phase plan to ensure
compliance in all of its products, internal systems, and suppliers and thus
mitigate against disruption of the Company's business at the turn of the
century. The five phases of the Company's plan are Awareness, Assessment,
Remediation, Testing, and Implementation. The last phase, Implementation, is
scheduled to be completed in September 1999. The first four phases have been
completed. The areas of focus are: Products, Computer Software, Computer
Hardware, Embedded Systems, and Supplier Compliance. Each of the Company's five
operating divisions is separately implementing the plan.
The Company has evaluated all of its product lines and has found no product with
embedded date functions that the Company believes would cause any Y2K exposure.
As part of its overall plan, the Company has surveyed its suppliers to determine
their Y2K readiness. The Company understands that its suppliers are an integral
part of the Company's success. To the extent the Company believes certain
suppliers will not be Y2K compliant, it will seek alternate suppliers.
The projected costs of approximately $475 thousand associated with the Company's
overall plan to achieve Y2K compliance are not expected to have a material
effect on the Company's results of operations or financial position. Costs
include internal labor, outside consultants and, to a lesser extent, new
computer hardware and software required to achieve Y2K compliance. To date, the
Company has expended approximately $248 thousand.
Page 14 of 17
<PAGE>
At this time, the Company has not developed a "worst case" scenario or an
overall year 2000 contingency plan and does not intend to do so unless, as a
result of its ongoing year 2000 review, management believes such plans are
warranted. The only contingency planning that is currently set to be implemented
results from a comprehensive survey of the Company's suppliers in order to learn
which will be impacted by the Y2K problem.
Risks associated with the Y2K problem include, among other things, (i) failure
of systems and software used by the Company's customers which will impact their
financial ability to purchase products from the Company, (ii) failure of systems
and software used by vendors and third-party service providers upon which the
Company relies for outsourced services and products, (iii) Y2K problems with the
Company's suppliers which could negatively impact the Company's ability to
fulfill its own orders promptly, and (iv) errors or failures of systems in which
the Company's devices are implemented which could result in improper interfacing
or operation of such devices.
Cautionary Note
This Form 10-Q may contain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended including without limitation (i) the
anticipated outcome and impact of proceedings in which the Company is involved,
(ii) the impact of an amendment to the Company's credit facility on its
liquidity, (iii) the Company's ability to meet its operating and capital
requirement and to pursue acquisition opportunities, (iv) projected costs of
ameliorating risks associated with, and problems caused by, the Year 2000
problem, and (v) certain other statements identified or qualified by words such
as "likely", "will", "suggests", "may", "would", "could", "should", "expects",
"anticipates", "estimates", "plans", "projects", "believes", "is optimistic
about", or similar expressions (and variants of such words or expressions).
Investors are cautioned that forward-looking statements are inherently
uncertain. These forward-looking statements represent the best judgement of the
Company as on the date of this Form 10-Q, and the Company cautions readers not
to place undue reliance on such statements. Actual performance and results of
operations may differ materially from those projected or suggested in the
forward-looking statements due to certain risks and uncertainties including,
without limitation, risks associated with fluctuations in the Company's
operating results, volume and timing of orders received, changes in the mix of
products sold, competitive pricing pressure, the Company's ability to meet or
renegotiate customer demands, the ability to anticipate changes in the market,
the Company's ability to finance its operations on terms that are acceptable,
the Company's ability to attract and retain qualified personnel including the
Company's management, changes in the global economy, changes in regulatory
processes, the Company's dependence on certain key customers (including the U.S.
Government), the Company's ability to realize sufficient margins on sales of its
products, the availability and timing of funding for the Company's current
products and the development of future products.
Page 15 of 17
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in trading market risk sensitive instruments or
purchasing hedging instruments or "other than trading" instruments that are
likely to expose the Company to market risk, whether interest rate, foreign
currency exchange, commodity price or equity price risk. The Company has not
purchased options or entered into swaps or forward or futures contracts. The
Company's primary market risk exposure is that of interest rate risk on
borrowings under its revolving credit facility, which are subject to interest
rates based on the bank's base rate plus 1/2%. The Company also has a
collateralized real estate loan at the bank's base rate and a change in the
applicable interest rate on these loans would affect the rate at which the
Company could borrow funds.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 6 - Commitments and Contingencies to the Company's Condensed Consolidated
Financial Statements contained elsewhere in this Quarterly Report is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECUTIRY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 4, 1999, to
consider and vote upon proposals to (i) elect three directors, (ii) ratify the
action of the directors in amending the Company's 1992 Equity Incentive Plan,
and (iii) ratify the action of the directors in extending the term of the
Company's Employee Stock Purchase Plan. Larry L. Hansen, Harvey C. Krentzman,
and Thomas F. Skelly were elected as directors of the Company by a vote of
6,417,167, 6,417,067, and 6,495,114 for, respectively, and 518,700, 518,800, and
440,753 withheld, respectively. The second proposal was approved by a vote of
2,976,113 for, 1,429,963 against, 20,138 abstaining, and 2,509,653 broker
non-votes. The third proposal was approved by a vote of 4,273,582 for, 234,871
against, 16,525 abstaining, and 2,410,889 broker non-votes.
The following directors continued in office after the meeting: George E.
Lombard, Thomas G. McInerney, Bernard P. O'Sullivan, and Joseph Schneider.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Exhibits Description
-------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
Page 16 of 17
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNAL TECHNOLOGY CORPORATION
By: /s/ Robert Nelsen
Robert Nelsen
Chief Financial Officer and
Principal Accounting Officer
DATE: August 12, 1999
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