<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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)
DELAWARE 04-2758268
(State Or Other Jurisdiction Of (I.R.S. Employer Identification No.)
Incorporation Or Organization)
222 ROSEWOOD DRIVE, DANVERS, MA 01923-4502
(Address of principal executive offices) (Zip Code)
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 NOVEMBER 10, 2000
$.01 PAR VALUE 9,922,498
<PAGE> 2
INDEX
PAGE
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
and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 18
Item 6 Exhibits and Reports on Form 8-K 18
SIGNATURE 18
Page 2 of 18
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
September 30, December 31,
2000 1999
------------- ------------
Assets:
Cash $ 27,729 $ 3,571
Accounts receivable, net 19,357 13,299
Inventories 16,721 10,446
Deferred taxes 4,134 4,134
Refundable income taxes 638 638
Other current assets 562 346
-------- --------
Total current assets 69,141 32,434
-------- --------
Property, plant and equipment, net 15,966 14,954
Intangible assets, net 8,363 9,365
Other assets 851 848
-------- --------
Total assets $ 94,321 $ 57,601
======== ========
Liabilities and stockholders' equity:
Current maturities of long-term debt $ 856 $ 3,605
Accounts payable 4,871 3,292
Accrued expenses 9,658 10,318
Customer advances 1,984 1,603
-------- --------
Total current liabilities 17,369 18,818
-------- --------
Deferred income taxes 1,524 1,524
Long-term debt, net of current maturities 5,848 5,573
Stockholders' equity:
Common stock 100 78
Additional paid-in capital 50,096 13,667
Retained earnings 20,355 18,841
-------- --------
70,551 32,586
Less treasury stock (971) (900)
-------- --------
Total stockholders' equity 69,580 31,686
-------- --------
Total liabilities and stockholders' equity $ 94,321 $ 57,601
======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Page 3 of 18
<PAGE> 4
SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Quarter ended Nine Months ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 27,165 $ 20,819 $ 70,516 $ 62,189
Cost of sales 19,279 14,010 47,881 43,349
-------- -------- -------- --------
Gross profit 7,886 6,809 22,635 18,840
Selling, general and administrative expense 5,403 4,770 16,406 14,228
Research and development expense 1,474 559 2,764 1,384
-------- -------- -------- --------
Operating income 1,009 1,480 3,465 3,228
Other expense (income) (74) 1,250 202 1,250
Interest income (177) (27) (212) (64)
Interest expense 290 121 842 410
-------- -------- -------- --------
Income before income taxes 970 136 2,633 1,632
Income tax expense (benefit) 415 (1,292) 1,119 (1,260)
-------- -------- -------- --------
Net income $ 555 $ 1,428 $ 1,514 $ 2,892
======== ======== ======== ========
Basic earnings per share $ 0.06 $ 0.19 $ 0.18 $ 0.38
Diluted earnings per share $ 0.06 $ 0.18 $ 0.16 $ 0.36
Basic weighted average shares outstanding 8,615 7,652 8,184 7,580
Diluted weighted average shares outstanding 9,578 8,106 9,201 7,981
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Page 4 of 18
<PAGE> 5
SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
September 30,
2000 1999
---- ----
Net cash provided (used) by operating activities $ (6,369) $ 8,263
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (2,232) (1,361)
Other assets (3) 7
-------- --------
Net cash used by investing activities (2,235) (1,354)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 35,068 --
Proceeds from exercise of stock options 670 373
Proceeds from Employee Stock Purchase Plan 413 217
Borrowings on bank revolving credit facility 14,500 4,600
Payments on bank revolving credit facility (17,500) (8,600)
Payments of long-term debt (389) (200)
-------- --------
Net cash provided (used) by financing activities 32,762 (3,610)
-------- --------
Net increase in cash 24,158 3,299
Cash, beginning of period 3,571 2,366
-------- --------
Cash, end of period $ 27,729 $ 5,665
======== ========
Supplemental Disclosure of Non-Cash Financing Activity:
Capital lease - equipment $ 915 --
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Page 5 of 18
<PAGE> 6
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
September 30, 2000, and for the three and nine months ended September 30,
2000 and 1999 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 nine months ended September 30, 2000 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, 1999,
included in our 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.
Our fiscal quarter consists of a thirteen week period ending on the
Saturday closest to September 30. For ease of presentation, interim periods
are designated to have ended on September 30.
2. EARNINGS PER SHARE
We present 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 for all periods using the treasury stock method.
A reconciliation of the numerator and denominator of both basic and diluted
EPS is provided as follows:
Quarter ended Nine Months ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Basic and Diluted EPS
Net income $ 555 $1,428 $1,514 $2,892
====== ====== ====== ======
Basic EPS
Common shares outstanding 8,615 7,652 8,184 7,580
------ ------ ------ ------
Basic earnings per share $ 0.06 $ 0.19 $ 0.18 $ 0.38
====== ====== ====== ======
Diluted EPS
Basic EPS 8,615 7,652 8,184 7,580
Effect of Dilutive Securities -
Common Stock Options 963 454 1,017 401
------ ------ ------ ------
9,578 8,106 9,201 7,981
Diluted EPS
Diluted earnings per share $ 0.06 $ 0.18 $ 0.16 $ 0.36
====== ====== ====== ======
Page 6 of 18
<PAGE> 7
3. COMPREHENSIVE INCOME (LOSS)
There were no differences between net income and comprehensive income for
the quarter and nine months ended September 30, 2000 and September 30,
1999.
4. Details of certain balance sheet accounts are as follows:
September 30, 2000 December 31, 1999
------------------ -----------------
Net inventories:
Raw materials $ 5,747 $ 2,914
Work in progress 14,829 9,739
Finished goods 259 587
-------- --------
20,835 13,240
Less: unliquidated progress payments (4,114) (2,794)
-------- --------
$ 16,721 $ 10,446
======== ========
Property, plant and equipment:
Land $ 992 $ 992
Building and improvements 10,392 10,132
Machinery and equipment 29,598 27,162
Furniture and fixtures 3,888 3,487
-------- --------
44,870 41,773
Less accumulated depreciation (28,904) (26,819)
-------- --------
Net property, plant and equipment $ 15,966 $ 14,954
======== ========
5. INCOME TAXES
In the quarter and nine months ended September 30, 2000, we recorded a
provision for income taxes of $415 and $1,119 respectively. The provision
is at statutory rates after adjustments for non-deductible expenses which
consist principally of goodwill resulting from certain of our acquisitions.
In the quarter and nine months ended September 30, 1999, we recorded a
benefit for income taxes of $1,292 and $1,260 respectively. The benefit for
income taxes relates to the reversal of a valuation allowance on the
deferred tax asset which we believe is more likely than not to be realized,
based on our earnings performance.
6. COMMITMENTS AND CONTINGENCIES
We are involved from time to time in litigation incidental to our business.
Ongoing legal proceedings are as follows:
Weymouth Environmental Contamination:
In April 1996, we sold our manufacturing facility in Weymouth,
Massachusetts but retained the environmental liability and responsibility
associated with groundwater contaminants present at and associated with the
site. This site has been classified as a Tier 1A disposal site by the
Massachusetts Department of Environmental Protection, or 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 site and still
present in the groundwater at the site; 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.
In accordance with the applicable provisions of the Massachusetts
Contingency Plan, we have completed our investigation of the site and have
submitted an evaluation of remedial
Page 7 of 18
<PAGE> 8
alternatives to the DEP. The recommended remedial alternative involves
continued operation of the currently operating groundwater remediation
system with the addition of a supplemental well and well head treatment at
Weymouth Winter Street well number 2 through an agreement with the town of
Weymouth. We have been informed that no recovery of costs incurred in the
treatment of the ground water at the facility is possible under existing
insurance arrangements. We have not reached an agreement with the town of
Weymouth relative to well head treatment and, it is not possible at this
stage of the proceedings to predict whether the DEP will approve the
recommended alternative, and if not, the specific remedial actions, if any,
that it will require.
We have recorded liabilities of $1,500 calculated on the discounted cash
flow method using an 8% discount rate for anticipated costs including legal
and consulting fees, site studies and design and implementation of
remediation plans, post-remediation monitoring and related activities to be
performed during the next 20 years.
Sunnyvale Indemnification Claim:
Eaton Corporation has filed a suit against us in U.S. District Court,
Northern District of California, alleging that we have 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 we assumed certain liabilities when we acquired one
of the divisions of Eaton Corporation. The indemnification claim was
dismissed at the trial level, but the Ninth Circuit of the U.S. Court of
Appeals has reversed this decision and found that we do owe Eaton a duty of
indemnification. We have filed a counterclaim against Eaton Corporation
alleging fraud and misrepresentation. A trial date for Eaton Corporation's
claim and our counterclaim has been scheduled for December 11, 2000. Eaton
Corporation has informed us that if it prevails on all of its claims and we
are unsuccessful in our counterclaim, they believe they could be entitled
to damages in the range of $8 million to $10 million. While the likely
outcome of the case is uncertain, we believe that we have meritorious
defenses to Eaton Corporation's claim and that we have a valid
counterclaim.
Transistor Devices, Inc. v. Signal Technology Corporation:
On October 29, 1999, Transistor Devices, Inc. filed suit in the Superior
Court in Morris County, New Jersey, against our Keltec division. We removed
the case to the U.S. District Court for the District of New Jersey, where
it is currently pending. The complaint alleges that Keltec is liable for
defamation and intentional interference with the contractual relations
based on alleged statements made by Keltec's President to representatives
of Lockheed Martin Corporation in connection with Lockheed Martin's
solicitation of bids for the design and manufacture of a certain power
supply unit in August 1999. Transistor Devices claims that the alleged
statements were intended to injure its reputation and interfere with its
bid and prospective economic advantage with Lockheed Martin.
In December 1999, Keltec denied the allegations set forth in the complaint
and filed counterclaims against Transistor Devices for breach of contract
and breach of the implied covenant of good faith and fair dealing. Keltec
claims that Transistor Devices' bid to Lockheed Martin directly contravenes
the non-compete provisions in an asset purchase agreement executed by
Transistor Devices and Keltec on December 6, 1996. Our insurer is defending
this case. We are uncertain of the likely outcome of the case.
SEC Investigation:
The Boston District Office of the Securities and Exchange Commission has
advised us on September 27, 2000 that the Commission has entered a formal
order of private investigation. We understand that the investigation
relates to our restatement in 1998 of our financial statements for 1996,
1997 and the first quarter of 1998. We intend to continue to cooperate
with the Commission.
Page 8 of 18
<PAGE> 9
T-3 Contract:
We are currently committed to a long term contract at our Keltec division
(the T-3 contract) for amplifiers for Raytheon. The current contract value
is $764. If Raytheon exercises all of its options within this contract, the
total value could be in excess of $19,000. Based on an assessment by
management in 1998, if all options are exercised at current estimated costs
and prices, our loss could total up to $4,000. In 1999 we negotiated new
prices and specifications for the same amplifiers under a new contract and
we believe prices are at Keltec's manufacturing cost. We believe that other
future orders and options for T-3 amplifiers will be renegotiated.
8. SEGMENT INFORMATION
We have six operating divisions engaged in the development, manufacturing
and marketing of electronic components and subsystems. The divisions;
referred to as Arizona, California, Systems, Advanced Frequency Products,
Keltec and Olektron report their operations within four segments: Signal
Wireless Group (Established in January 2000 includes Advanced Frequency
Products and products from Arizona, California, Olektron and Systems which
are produced for the world-wide wireless telecommunication markets.),
Microwave Components and Subsystems (products from Arizona, California and
Systems that primarily serve the defense and space markets), Power
Management Products (Keltec) and Radio Frequency (RF) Components and
Subsystems (Olektron products that primarily serve the defense market). The
products from the operating divisions aggregated into the Signal Wireless
Group and Microwave Components and Subsystems segments have similar types
of production processes and types of customers.
Our reportable segments are as follows:
Signal Wireless Group
Designs and manufactures commercial wireless products for the
telecommunications industry.
Microwave Components and Subsystems
Designs and manufactures microwave oscillators, frequency synthesizers and
converters, space qualified microwave assemblies, microwave amplifiers and
microwave switch matrices.
Power Management Products
Designs and manufactures military high and low voltage power suppliers, DC
to DC converters and military high power amplifiers and transmitters for
use in radar systems.
Radio Frequency Components and Subsystems
Designs and manufactures RF and intermediate frequency signal processing
components, integrated multi-function devices, and switching systems.
Page 9 of 18
<PAGE> 10
The following tables display net sales and operating income by business
segment for the quarter and nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Quarter ended Nine Months ended
September 30, September 30,
NET SALES 2000 1999 2000 1999
--------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Signal Wireless Group $ 6,125 $ 368 $ 12,541 $ 2,255
Microwave Components & Subsystems 11,336 11,519 29,887 31,465
Power Management Products 7,252 5,918 20,846 19,923
RF Components & Subsystems 2,452 3,014 7,242 8,546
-------- -------- -------- --------
$ 27,165 $ 20,819 $ 70,516 $ 62,189
OPERATING INCOME(1)
-------------------
Signal Wireless Group $ (1,438) $ (63) $ (3,015) $ (376)
Microwave Components & Subsystems 1,916 938 3,570 1,775
Power Management Products 693 662 3,326 1,578
RF Components & Subsystems (162) (57) (416) 251
-------- -------- -------- --------
$ 1,009 $ 1,480 $ 3,465 $ 3,228
</TABLE>
(1) Corporate selling, general and administrative expenses have been
allocated to business segments using net sales as an allocation base.
The following table displays total assets by business segment as of
September 30, 2000 and December 31, 1999;
September 30, December 31,
2000 1999
------------- ------------
TOTAL ASSETS
------------
Signal Wireless Group $18,832 $10,497
Microwave Components Subsystems 18,549 18,094
Power Management Products 15,101 12,134
RF Components & Subsystems 8,001 7,227
Corporate 33,838 9,649
------- -------
Total $94,321 $57,601
Page 10 of 18
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND
SEPTEMBER 30,1999
The following table sets forth the percentage of net sales of certain items in
our consolidated financial statements for the periods indicated:
Three Months Ended
September 30,
------------------
2000 1999
---- ----
Net sales 100.0% 100.0%
Cost of sales 71.0% 67.3%
----- -----
Gross profit 29.0% 32.7%
Selling, general and administrative expenses 19.9% 22.9%
Research and development expenses 5.4% 2.7%
----- -----
Operating income 3.7% 7.1%
Other expense (0.3)% 6.0%
Interest expense, net 0.4% 0.4%
----- -----
Income before income taxes 3.6% 0.7%
Provision (benefit) for income taxes 1.5% (6.2)%
----- -----
Net income 2.1% 6.9%
===== =====
Net sales. Net sales increased 30.5% from $20.8 million during the third quarter
of 1999 to $27.2 million during the similar period in 2000. The primary reason
for the increase was the $5.8 million increase in sales of the Signal Wireless
Group which includes Advanced Frequency Products acquired in December 1999.
Gross profit. Gross profit increased 15.8% from $6.8 million for third quarter
of 1999 to $7.9 million during the similar period in 2000. The primary reason
for the $1.1 million increase was increased sales volume offset by a loss
incurred on a terminated contract and lower gross margins associated with
changes in contract mix.
Selling, general and administrative expenses. Selling general and administrative
expenses increased 13.3% from $4.8 million during the third quarter of 1999 to
$5.4 million during the similar period in 2000. The primary reason for the
increase in selling, general and administrative expenses is additional selling,
general and administrative expenses associated with the Advanced Frequency
Products operation including the amortization of intangible assets associated
with the acquisition of Advanced Frequency Products. Additionally, there was a
$.4 million expense associated with remediation plans for groundwater
contaminants at a previously owned manufacturing facility in Weymouth,
Massachusetts partially offset by reductions in other general and administrative
expenses.
Research and development expenses. Research and development expenses increased
163.7% from $.6 million during the third quarter of 1999 to $1.5 million during
the similar period in 2000. We continue to increase research and development
expenditures as part of our new focus on the commercial wireless industry and to
produce technology upgrades to existing equipment.
Page 11 of 18
<PAGE> 12
Other income. Other income was $74 thousand during the third quarter of 2000 and
was related to the proposed acquisition of LogiMetrics Inc.'s high-power
amplifier business. During the third quarter of 2000 we continued to manage the
business and were in discussions with LogiMetrics concerning terms and
conditions under which we may retain the Bohemia, New York business. Other
expenses of $1,250 thousand during the third quarter of 1999 was in connection
with reaching an agreement-in-principle to settle a pending securities class
action.
Interest expense, net. Interest expense increased 20.2% from $94 thousand during
the third quarter of 1999 to $113 thousand during the similar period in 2000.
The increase is due to a higher level of borrowing at higher interest rates
during the first two months of the third quarter offset by repayment of our
revolving credit line in late August, and interest income generated from
investing cash received from the sale of an additional 2 million shares of
common stock.
Provision for income taxes. Provision for income taxes was $0.4 million in the
third quarter of 2000. In the third quarter of 1999 we recorded a benefit for
income taxes of $1,292 thousand resulting from the reversal of a valuation
allowance on the deferred tax asset which we believe is more likely than not to
be realized, based on our earnings performance.
Business Segments
We have six operating divisions referred to as Arizona, California, Systems,
Advanced Frequency Products, Keltec and Olektron and report our operations
within four segments: Signal Wireless Group (commercial wireless products for
the telecommunications industry from Arizona, California, Systems, Advanced
Frequency Products and Olektron divisions); Microwave Components and Subsystems
(products from Arizona, California and Systems that primarily serve defense and
space markets), Power Management Products (Keltec) and Radio Frequency (RF)
Components and Subsystems (Olektron products that primarily serve the defense
markets).
The following tables display net sales and operating income by business segment
for each of the quarters ended September 30:
(amounts in thousands) 2000 1999
---- ----
NET SALES
Signal Wireless Group $ 6,125 $ 368
Microwave Components and Subsystems 11,336 11,519
Power Management Products 7,252 5,918
RF Components & Subsystems 2,452 3,014
------- -------
$27,165 $20,819
OPERATING INCOME(1)
Signal Wireless Group $(1,438) $ (63)
Microwave Components & Subsystems 1,916 938
Power Management Products 693 662
RF Components & Subsystems (162) (57)
------- -------
$ 1,009 $ 1,480
(1) Corporate selling, general and administrative expenses have been allocated
to business segments using net sales as an allocation base.
Page 12 of 18
<PAGE> 13
Signal Wireless Group
Net sales. Net sales increased from $.4 million during the third quarter of 1999
to $6.1 million during the similar period in 2000. The increase was due to $4.7
million in sales from Advanced Frequency Products and $1.0 million in increased
sales from other operations due to a strong demand for wireless products.
Operating loss. Operating loss increased from a $63 thousand loss during the
third quarter of 1999 to a $1,438 thousand loss during the similar period in
2000. The decrease is primarily due to increased spending on research and
development, increased selling, general and administrative costs including the
amortization of intangible assets associated with the Advanced Frequency
Products acquisition and a loss incurred on a terminated contract.
Microwave Components and Subsystems
Net sales. Net sales decreased 1.6% from $11.5 million during the third quarter
of 1999 to $11.3 million during the similar period in 2000.
Operating income. Operating income increased 104.3% from $.9 million during the
third quarter of 1999 to $1.9 million during the similar period in 2000. The
increase is primarily due to an increase in gross margins attributable to
changes in contract mix, a reduction in selling, general and administrative
expenses and reduced spending on research and development.
Power Management Products
Net sales. Net sales increased 22.5% from $5.9 million during the third quarter
of 1999 to $7.3 million during the similar period in 2000. The increase is
primarily due to an increase in shipments of production hardware for an
international customer.
Operating income. Operating income increased 4.7% from $662 thousand during the
third quarter of 1999 to $693 thousand during the similar period in 2000. The
increase is primarily due to an increase in gross margin associated with
increased sales volume partially offset by lower gross margins associated with
changes in contract mix.
RF Components and Subsystems
Net sales. Net sales decreased 18.6% from $3.0 million during the third quarter
of 1999 to $2.5 million during the similar period in 2000. The decrease is
primarily due to a reduction in sales of mixers, power dividers and coupler
devices for which orders have been declining.
Operating loss. Operating loss increased 184.2% from a $57 thousand loss during
the third quarter of 1999 to a $162 thousand loss during the similar period in
2000. The increase is primarily due to a decrease in gross margin associated
with contract mix and decreased sales volume partially offset by reductions to
selling, general and administrative costs and research and development expenses.
Page 13 of 18
<PAGE> 14
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999.
The following table set forth the percentage of net sales of certain items in
our consolidated financial statements for the periods indicated:
Nine Months Ended
September 30,
------------------
2000 1999
---- ----
Net sales 100.0% 100.0%
Cost of sales 67.9% 69.7%
----- -----
Gross profit 32.1% 30.3%
Selling, general and administrative expense 23.3% 22.9%
Research and development expense 3.9% 2.2%
----- -----
Operating income 4.9% 5.2%
Other expense 0.3% 2.0%
Interest expense, net 0.9% 0.6%
----- -----
Income before income taxes 3.7% 2.6%
Provision for income taxes 1.6% (2.0)%
----- -----
Net income 2.1% 4.6%
===== =====
Net Sales. Net sales increased 13.4% from $62.2 million during the first nine
months of 1999 to $70.5 million during the similar period in 2000. The primary
reason for the increase was the addition of $10.3 million in commercial wireless
product sales from the Signal Wireless Group. The net sales to the defense
electronics market were down 3.3% generally due to delays in new orders.
Gross profit. Gross profit increased 20.1% from $18.8 million during the first
nine months of 1999 to $22.6 million during the similar period in 2000. The
increase in gross profit is primarily attributable to increase sales volume
along with streamlining of operations, improvements in financial controls and
changes in product mix partially off set by a loss incurred on a terminated
contract.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 15.3% from $14.2 million during the first nine
months of 1999 to $16.4 million during the similar period in 2000. The increase
is partially a result of higher additional selling, general and administrative
expenses associated with the Signal Wireless Group and the acquisition of
Advanced Frequency Products. The expenses associated with Advanced Frequency
Products include the amortization of intangible assets. Additionally, there was
a $.6 million expense associated with remediation plans for groundwater
contaminants at a previously owned manufacturing facility in Weymouth,
Massachusetts and a non-cash stock option compensation expense of $.2 million
related to stock options granted to non-employees.
Research and development expenses. Research and development increased 99.7% from
$1.4 million during the first nine months of 1999 to $2.8 million during the
similar period in 2000. In 2000 our management team has continued to increase
research and development expenditures as part of our new focus on the commercial
wireless industry and to produce technology upgrades to existing equipment.
Other expenses. Other expenses were $202 thousand during the first nine months
of 2000 and were related to the proposed acquisition of LogiMetrics Inc.'s
high-power amplifier business. During the third quarter of 2000 we continued to
manage the business and were in discussions
Page 14 of 18
<PAGE> 15
with LogiMetrics concerning terms and conditions under which we may retain the
Bohemia, New York business. Other expense of $1,250 thousand during the third
quarter of 1999 was in connection with reaching an agreement-in-principle to
settle a pending security class action.
Interest expense, net. Interest expense increased by 82.1% from $346 thousand
during the first nine months of 1999 compared to $630 thousand during the
similar period in 2000. The increase is due to an increased level of borrowings
at higher interest rates.
Provision for income taxes. Income taxes were a $1,260 thousand benefit during
the first nine months of 1999 compared to an income tax expense of $1,119
thousand during the similar period in 2000. The benefit for income taxes in 1999
results from the reversal of a valuation allowance on deferred tax assets, which
we believe is more likely than not to be realized, based on our earnings
performance.
Business Segments
The following tables display net sales and operating income by business segment
for the nine months ending September 30:
(amounts in thousands)
NET SALES 2000 1999
---- ----
Signal Wireless Group $ 12,541 $ 2,255
Microwave Components and Subsystems 29,887 31,465
Power Management Products 20,846 19,923
RF Components & Subsystems 7,242 8,546
-------- --------
$ 70,516 $ 62,189
OPERATING INCOME(1)
Signal Wireless Group $ (3,015) $ (376)
Microwave Components & Subsystems 3,570 1,775
Power Management Products 3,326 1,578
RF Components & Subsystems (416) 251
-------- --------
$ 3,465 $ 3,228
(1) Corporate selling, general and administrative expenses have been allocated
to business segments using net sales as an allocation base.
Signal Wireless Group
Net sales. Net sales of Signal Wireless Group increased 456.1% from $2.3 million
for the first nine months of 1999 to $12.5 million for the similar period in
2000. The primary reason for the increase was $7.5 million in sales from
Advanced Frequency Products along with an increase in sales from other
operations due to a strong demand for wireless products.
Operating loss. Operating loss of Signal Wireless Group increased by 701.9%
from a $.4 million loss for the first nine months of 1999 to a $3.0 million loss
for a similar period in 2000. The increase is primarily a result of increased
selling, general and administrative costs including the amortization of
intangible assets associated with the Advanced Frequency Products acquisition,
increased spending on research and development and a loss incurred on a
terminated contract.
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<PAGE> 16
Microwave Components and Subsystems
Net sales. Net sales of Microwave Components and Subsystems decreased 5.0% from
$31.5 million for the first nine months of 1999 to $29.9 million for the similar
period in 2000. The primary reason for the decrease was lower A/V switch
shipments at our Systems Operation.
Operating income. Operating income of Microwave Components and Subsystems
increased by 101.1%, from $1.8 million for the first nine months of 1999 to $3.6
million for a similar period in 2000. The increase is primarily due to an
increase in gross margins attributable to streamlining of operations and changes
in contract mix partially offset by a decrease in gross margin associated with
decreased sales volume.
Power Management Products
Net sales. Net sales of Power Management Products increased 4.6% from $19.9
million for the first nine months of 1999 to $20.8 million for the similar
period in 2000. The primary reason was an increase in shipments of production
hardware and delivery of several preproduction units which experienced delays
during the development stage of the program during 1999.
Operating income. Operating income of Power Management Products increased by
110.8% from $1.6 million for the first nine months of 1999 to $3.3 million for a
similar period in 2000. The increase is primarily due to an increase in gross
margins associated with changes in contract mix and lower manufacturing costs.
RF Components and Subsystems
Net sales. Net sales of RF Components & Subsystems decreased 15.3% from $8.5
million for the first nine months of 1999 to $7.2 million for the similar period
in 2000. The decrease was primarily due to a reduction in sales across most
product areas for which orders have been declining.
Operating income. Operating income of RF Components & Subsystems decreased by
265.7%, from $.3 million for the first nine months of 1999 to a $.4 million loss
for a similar period in 2000. The decrease is primarily due to a decrease in
gross margin associated with contract mix, production problems on the Sparrow
missile program and decreased sales partially offset by reductions to research
and development expenditures.
Liquidity and Capital Resources
At September 30, 2000 we had working capital of $51.8 million, including cash
and cash equivalents of $27.7 million, as compared to working capital of $13.6
million and cash and cash equivalents of $3.6 million, respectively at December
31, 1999. Net cash flow used by operations was $6.4 million for the first nine
months of 2000 compared to $8.3 million net cash flow provided by operations for
the first nine months of 1999. A $6.3 million increase in inventory and a $6.1
million increase in accounts receivable along with a $1.3 million payment
associated with the shareholder lawsuit are the primary reasons for negative
cash flow from operations during the first nine months of 2000. In the first
nine months of 2000, we repaid borrowings under our revolving credit facility of
$3.0 million reducing to zero the amount borrowed under the facility. Proceeds
from the issuance of 2 million shares of common stock were $35 million in the
third quarter of 2000.
Our borrowing arrangement requires us to maintain certain minimum balances and
ratios, including the requirement to maintain a minimum tangible net worth. We
were in compliance with the net worth covenant at September 30, 2000. Our
borrowing arrangement also requires that we maintain an interest coverage ratio.
At September 30, 2000 we were not in compliance with the interest coverage
covenant and we obtained a waiver with respect to such non-
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<PAGE> 17
compliance for the quarter ending September 30, 2000. The revolving credit
facility will expire December 31, 2000 and we expect to have a new credit
facility in place by that date.
We continue to investigate acquisition opportunities in complementary
businesses, product lines and markets. We believe that we have adequate cash,
working capital and available financing to meet our operating and capital
requirements in the foreseeable future and to pursue acquisition opportunities.
Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues. The application of
the guidance in SAB 101 as amended by SAB 101A and SAB 101B, will be required in
our fourth quarter of the fiscal year 2000. The effects of applying this
guidance, if any, will be reported as a cumulative effect adjustment resulting
from a change in accounting principle. Our evaluation of SAB 101 is not yet
complete.
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 we are involved, (ii) the
impact of an amendment to our credit facility on its liquidity, (iii) our
ability to meet operating and capital requirement and to pursue acquisition
opportunities, (iv) 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 of
expressions). Investors are cautioned that forward-looking statements are
inherently uncertain. These forward-looking statements represent our best
judgement on the date of this Form 10-Q, and we caution 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 our operating results, volume and timing
of orders received, changes in the mix of products sold, competitive pricing
pressure, our ability to meet or renegotiate customer demands, the ability to
anticipate changes in the market, our ability to finance operations on terms
that are acceptable, our ability to attract and retain qualified personnel
including our management, changes in the global economy, changes in regulatory
processes, the dependence on certain key customers (including the U.S.
Government), our ability to realize sufficient margins on sales of its products,
the availability and timing of funding for our current products and the
development of future products.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do 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. We have not purchased options or
entered into swaps or forward or futures contracts. Our primary market risk
exposure is that of interest rate risk on borrowings under our revolving credit
facility, which are subject to interest rates based on the bank's base rate plus
1/2%. We also have 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 we could borrow funds.
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<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 6 - Commitments and Contingencies to our Condensed Consolidated Financial
Statements contained elsewhere in this Quarterly Report is incorporated herein
by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
EXHIBITS DESCRIPTION
-------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
We made the following filings on Form 8-K since the second quarter 2000:
Signal Technology Corporation Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 21, 2000 relating to the announcement
that we terminated discussions relative to our proposed acquisition of
LogiMetrics.
Signal Technology Corporation Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 13, 2000 stating we
consummated our sale of 2 million newly issued shares of common stock and an
additional 200 thousand shares on behalf of certain selling shareholders.
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: November 13, 2000
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