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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 1-4371
TECH-SYM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 74-1509818
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
10500 WESTOFFICE DRIVE, SUITE 200
HOUSTON, TEXAS 77042
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 785-7790
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
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New York Stock Exchange
Common Stock (Par Value $.10 per
share)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT
None
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 (Sec. 229.405 of this chapter) is not contained herein,
and will not be contained, to be 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. [ ]
As of March 12, 1999, 6,072,931 shares of the registrant's Common Stock
were issued and outstanding. The aggregate market value of the voting stock held
by non-affiliates of the registrant (assuming only for purposes of this
computation that directors and officers may be affiliates) was $134,131,792
(based on the March 12, 1999, closing sales price of $22.625 published in THE
WALL STREET JOURNAL reports of New York Exchange Composite Transactions).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
Part III of this Annual Report on Form 10-K; the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held May 11, 1999.
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TABLE OF CONTENTS
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PART I
Item 1. Business............................. 1
General.............................. 1
Description of Business Segments..... 1
Measurement of Segment Profit or Loss
and Segment Assets................. 2
Factors Management used to Identify
Reportable Segments................ 2
Discontinued Operations.............. 2
Business Strategy.................... 3
Products and Services................ 3
Product Development.................. 5
Marketing and Customers.............. 6
Government Contracts................. 6
Manufacturing and Raw Materials...... 7
Competition and Business
Conditions......................... 7
Backlog.............................. 7
Intellectual Property................ 8
Regulatory Matters................... 8
Employees............................ 8
Geographical Information............. 8
Year 2000 Compliance................. 8
Item 2. Properties........................... 9
Item 3. Legal Proceedings.................... 10
Item 4. Submission of Matters to a Vote of
Security Holders................... 10
Item Executive Officers of the
4.a. Registrant......................... 10
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PART II
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Item 5. Market for the Registrant's Common
Equity and Related Stockholder
Matters............................ 12
Item 6. Selected Financial Data.............. 13
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 14
Item Quantitative and Qualitative
7.a. Disclosures about Market Risk...... 18
Item 8. Financial Statements and
Supplementary Data................. 18
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure............... 18
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PART III
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Item 10. Directors and Executive Officers of
the Registrant..................... 19
Item 11. Executive Compensation............... 19
Item 12. Security Ownership of Certain
Beneficial Owners and Management... 19
Item 13. Certain Relationships and Related
Transactions....................... 19
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PART IV
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Item 14. Exhibits, Reports on Form 8-K and
Financial Statement Schedules...... 19
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PART I
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain "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. All
statements other than statements of historical facts included in this Form 10-K,
including without limitation the statements under "Item 1. Business," "Item
3. Legal Proceedings" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations," are forward-looking statements.
Although Tech-Sym Corporation believes that the expectations reflected in such
forward-looking statements are reasonable as of the date hereof, no assurance
can be given that such expectations will prove to be correct. Readers are
cautioned not to place undue reliance on these forward-looking statements.
Important factors that could cause actual results to differ materially from
expectations ("Cautionary Statements") include without limitation (i) the risk
of technological change relating to the Company's products and the risk of the
Company's inability to develop new competitive products in a timely manner, (ii)
the risk of decreased demand for the Company's products due to fluctuations in
the communications industry and levels of government expenditures on defense
equipment and services, (iii) the Company's reliance on certain significant
customers, (iv) risk associated with a significant amount of foreign sales, (v)
the credit risk to the Company from certain sales arrangements, (vi) the risk of
fluctuations in future operating results, (vii) the risks of excess or
inadequate inventory levels, (viii) the risks of changing government regulations
or statutes, (ix) the risks of general market conditions, competition and
pricing, (x) the risk of continued access to capital markets and commercial bank
financing on favorable terms and (xi) the risk that planned dispositions of
operating units may not be completed in accordance with expectations or under
acceptable terms. The Company undertakes no obligation to revise or publicly
release the results of any revision to these forward-looking statements. All
subsequent written and oral forward-looking statements attributable to Tech-Sym
Corporation or persons acting on its behalf are expressly qualified in their
entirety by Cautionary Statements.
ITEM 1. BUSINESS
GENERAL
Tech-Sym Corporation (the "Company" or "Registrant" or "Tech-Sym") is
a diversified electronics engineering and manufacturing company primarily
involved in the design, development and manufacture of products used for
communications, defense and weather information.
The Company, incorporated in Nevada in 1944, is headquartered in Houston,
Texas. The Company has three reportable segments: communications, defense
systems and weather information systems.
DESCRIPTION OF BUSINESS SEGMENTS
The Company's communications segment designs, develops and manufactures
microwave components and antennas for wireless terrestrial and satellite voice
and data communications, precision timing and positioning equipment and
electronics defense products. Its worldwide customers include manufacturers of
communication systems, defense electronics systems and aerospace navigation and
communications systems.
The Company's defense systems segment designs, develops and manufactures a
variety of electronic systems that includes electronic controls, monitoring and
power distribution systems for naval applications, systems for training and
evaluating military pilots and crews and cargo handling and aerial delivery
systems. Its primary customers are United States and foreign government
agencies, government contractors and aerospace companies.
The Company's weather information systems segment designs, develops and
manufactures meteorological information systems that detect, analyze and display
information on weather patterns and severe weather events through the use of
sophisticated Doppler radars and computer processing. Its worldwide
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customers include meteorology and hydrology departments of universities and
government agencies, military organizations, television stations and commercial
organizations which sell weather data.
MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS
The Company evaluates the performance of its segments and allocates
resources based on profit or loss from operations before income taxes. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies in Note 1 of Notes to
Consolidated Financial Statements. There are currently no intersegment sales or
transfers, however, any future intersegment sales or transfers will be recorded
at cost or at cost plus an agreed upon intercompany profit.
FACTORS MANAGEMENT USED TO IDENTIFY REPORTABLE SEGMENTS
The Company's reportable segments are business units that design,
manufacture and distribute distinct products, with distinct customer bases and
are each managed separately.
DISCONTINUED OPERATIONS
During June 1998, the Company adopted a plan to sell its businesses
involved in real estate development, manufacture of air monitoring products and
manufacture of radio and television broadcast equipment, and during December
1998, the Company adopted a plan to sell its majority owned (79.12%) subsidiary,
GeoScience Corporation ("GeoScience"). The effective dates of June 30, 1998
and December 31, 1998 are the respective "measurement dates" referred to when
discussing the results of operations of these businesses elsewhere in this
report. The discontinued businesses are reported as discontinued operations for
all periods presented.
The presentation of the discontinued operations includes segregation of the
operating results and the results of disposition of the discontinued businesses
in the Consolidated Statement of Income for the years ended December 31, 1998,
1997 and 1996. The net assets of the discontinued operations are segregated at
December 31, 1998 and 1997 in the Consolidated Balance Sheet and in the
Consolidated Statement of Cash Flows at December 31, 1998, 1997 and 1996.
See (i) "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and (ii) Note 2 of Notes to Consolidated Financial
Statements.
GEOSCIENCE. GeoScience Corporation, headquartered in Houston, Texas,
designs, develops and manufactures seismic data acquisition systems and provides
services for the oil and gas exploration and production industry. Its products
are used world-wide to identify and define subsurface geologic structures,
primarily to predict the existence, location and size of oil and gas deposits.
GeoScience's principal customers include seismic acquisition contractors,
independent and foreign national oil and gas companies and government agencies
around the world. GeoScience's subsidiaries operate manufacturing facilities and
service centers in the United Kingdom, the People's Republic of China and
Singapore, as well as in Houston and Fort Worth, Texas.
GeoScience was formed in March 1996 as a wholly-owned subsidiary of the
Company. All the outstanding stock of Syntron, Inc., CogniSeis Development, Inc.
and Symtronix Corporation was contributed by the Company to GeoScience. In May
1996, 2,597,600 shares of GeoScience Common Stock (24.7% of the outstanding
shares on that date) were sold in a public offering. GeoScience's Common Stock
began trading on the Nasdaq National Market on May 17, 1996. On October 14, 1997
("the disposal date") CogniSeis was sold to Paradigm Geophysical Corporation
(see Note 2 of Notes to Consolidated Financial Statements).
GeoScience's business strategy focuses on the development of
technologically advanced products to facilitate the process of and to decrease
the time involved in acquiring seismic data needed by the oil and gas
exploration and production industry. Additionally, GeoScience seeks to acquire
product lines, technology and businesses that complement internal product
development.
GeoScience maintains operations for the design, manufacture and repair of
marine seismic cables in England, Singapore and Houston. A subsidiary of
GeoScience and The China Oil Offshore Geophysical
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Corporation operate a joint venture to manufacture and repair marine seismic
cables in the People's Republic of China. Seismic cables, for use on land, as
well as ocean bottom cables, are produced by GeoScience in Houston.
GeoScience operates from owned facilities comprising 192,000 square feet
located on a 17.4 acre tract and 63,000 square feet of leased facilities located
in Houston, Texas, 5,500 square feet of leased facilities located in Fort Worth,
Texas, and owned facilities of approximately 54,500 square feet in Derbyshire,
England, and 33,300 square feet in Singapore. At December 31, 1998, GeoScience
employed approximately 626 persons world wide, of which 438 were employed in the
United States.
CONTINENTAL. Continental Electronics Corporation, headquartered in Dallas,
Texas, with subsidiaries in Germany and Chile, designs and manufactures radio
frequency transmitters and other energy sources used for radio and television
broadcasts, communications, radar systems, and special applications.
Continental's customers include the commercial radio and television broadcast
industry, private and government agencies that operate radio stations,
government agencies that engage in scientific research, industrial organizations
whose applications include radio frequency heating and government defense
agencies. Continental's business strategy focuses on the development of
technologically advanced products primarily for the radio and television
broadcast industry.
Continental's products include (i) high power radio transmitters for use in
"short" and "medium" wave frequency bands, (ii) lower power transmitters
that operate at the radio broadcast frequencies commonly referred to as "AM"
and "FM", (iii) high power energy sources and amplifiers for use in science
projects, (iv) low frequency/very low frequency transmitters for communications
from shore to ship and/or submarines, (v) over-the-horizon radar transmitters
for the U.S. Air Force and high frequency communications transmitters for
various branches of the military, (vi) television broadcast transmitters and
antennas and (vii) digital audio broadcast (DAB) equipment.
Continental conducts its manufacturing operations from owned facilities
comprising 158,000 square feet on a 14 acre tract and 84,000 square feet of
leased facilities located in Dallas, Texas, owned facilities of 15,000 square
feet in Santiago, Chile, and leased facilities of approximately 14,000 square
feet in Berlin, Germany. At December 31, 1998, Continental employed
approximately 349 persons worldwide, of whom 156 were employed in the United
States.
BUSINESS STRATEGY
The Company's business strategy focuses on the development of
technologically advanced products within each business segment. The Company
attempts to develop business through growth of its internal product lines and by
acquiring product lines, technology and businesses that complement internal
product development.
PRODUCTS AND SERVICES
COMMUNICATIONS
The Company's communications products include microwave components and
subsystems, timing and positioning equipment, antennas and electronic defense
products which are designed and manufactured by its subsidiary, TRAK
Communications Inc. ("TRAK"). TRAK conducts its operations through five
principal facilities located in: (i) Tampa, Florida; (ii) Dundee, Scotland;
(iii) Chatsworth, California; (iv) San Clemente, California; and (v) Hagerstown,
Maryland.
The microwave components and subsystems are used by customers to make
communications and radar products. Microwave components include energy sources
(oscillators and amplifiers), frequency multipliers, ferrite isolators and
circulators, filters and a broad range of passive components for modulation and
control of microwave energy. Microwave subsystems consist of synthesizers,
frequency converters and microwave receiver assemblies. These microwave
components and subsystems are used in such areas as wireless communications,
satellite communications, aircraft instruments, radars, electronic warfare
systems and industrial microwave heating and cooking. Original equipment
manufacturers purchase these products to
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integrate into their systems. The Company also produces high performance and
compact Global Positioning System ("GPS") filter amplifiers for use in
airborne and terrestrial navigation guidance systems.
The Company's products include extremely accurate timing systems for use by
government and commercial organizations such as NASA, telephone companies and
electric power utilities to synchronize communication carrier signals, initiate
or time events and extract timing information from the GPS satellites.
The Company designs and produces antennas for wireless voice and data
communication, satellite communication, surveillance and range instrumentation.
The Company also supplies antennas, fiber optic controllers and positioners for
information gathering by the U.S. surveillance community and high power antennas
used by the military for jamming enemy radars. Telemetry tracking systems and
microprocessor-based antenna controllers are sold to the U.S. and foreign
governments for use on military test and training ranges. The Company also has
designed and produces antennas for air and land mobile satellite communications
systems. In the wireless local loop market, the Company provides high
performance base station and home subscriber antennas for telephony systems. Its
antennas are also embedded in spread spectrum wireless systems used by
merchandisers to read bar codes and transfer information to and between computer
information systems.
DEFENSE SYSTEMS
The principal defense systems products include airborne training and
instrumentation systems, maritime surveillance radars, shipboard electronics and
mechanical systems which are designed and manufactured by the Company's
subsidiary, Metric Systems Corporation ("Metric"), located in Fort Walton
Beach, Florida. The Company also provides support personnel and services to
military training ranges.
The airborne training systems consist of instrumentation pods which are
attached to aircraft to collect data on the position, altitude, flight
characteristics and weapons systems of the aircraft during simulated combat. The
most current version of the pod contains a high-performance GPS receiver
integrated with other state-of-the-art electronics to collect precise time and
position information, along with weapons data from the aircraft during simulated
combat. The data inputs are recorded in the pods and can be transmitted to
identical pods on other aircraft, allowing training exercises to be conducted
without being "tethered" to a fixed range location. The data can be downloaded
or sent via telemetry to ground instrumentation equipment for display,
debriefing and subsequent analysis by the participants. This equipment reduces
the cost of operating Air Combat Maneuvering Instrumentation (ACMI) ranges since
manned radar tracking sites and other equipment are unnecessary. The Company
also produces a family of advanced threat radar emitters and simulators that
operate with the instrumentation pods to simulate a realistic combat environment
for pilot training.
The Company's shipboard electronic products are used on a variety of
platforms. Electronic control, monitoring and power distribution equipment
designed and produced by the Company has been used since the late 1970s on the
U.S. Navy's Vertical Launching Systems (VLS) deployed on the Ticonderoga
(CG-47), Spruance (DD-963) and Arleigh Burke (DDG-51) classes of cruisers and
destroyers. Similar systems have also been sold to the governments of Canada,
Japan, Australia, New Zealand, Germany, Spain, Korea and the Netherlands. The
Company also supplies shipboard product subsystems for the AN/SQQ-89 Surface
Anti-Submarine Warfare Combat System, firing mechanisms for the Tomahawk and
Trident missiles and cable assemblies for the AEGIS weapon system. The Company's
shipboard electrical switchgear, generator control, weapons control and internal
communications equipment also have been installed on several classes of U.S.
Navy and foreign government ships.
The mechanical systems designed and manufactured by the Company include
antenna support structures for large communications antennas, custom containers
with environmental controls for sensitive electronics equipment such as
satellites, torpedoes and missiles, aircraft launcher rail assemblies for the
AMRAAM missile and mobile ground equipment used to clean and lubricate aircraft
engines. The Company also has developed and manufactures air cargo systems for
airborne supply operations including
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on-board cargo roller/restraint systems, air-drop platforms and cargo handling
equipment for many types of aircraft.
The Company manufactures a variety of other systems including custom
automated test equipment such as the Common Rail and Launcher Test Set used to
test many types of airborne weapons launching systems. The Company's maritime
surveillance radars are used for tracking low altitude aircraft and surface
vessels to provide coastal defense and safety at sea data. The Company also is
providing integration support for the U.S. Army Joint Surveillance and Target
Attack Radar System (JSTARS) Common Ground Station (CGS).
WEATHER INFORMATION SYSTEMS
The primary products of the Company's weather information systems segment
are high performance Doppler radars coupled with sophisticated data processing
systems. Both the hardware and software products are designed and produced by
the Company's subsidiary, Enterprise Electronics Corporation ("EEC"), located
in Enterprise, Alabama.
The Doppler radar measures both reflectivity and velocity of rain droplets
and is used to detect, quantify and display precipitation intensity, velocity
and turbulence. The radar is extremely helpful in analyzing severe weather
conditions such as hurricanes, tornadoes, thunderstorms and wind shear. The
addition of EEC's dual polarization feature provides information on the size and
shape of echo producing droplets, resulting in more accurate calculations of
precipitation levels and in the identification of hail.
The processing systems known as RADSYS 3000 [TM], Weather Windows [TM] and
EDGE [TM] (Enterprise Doppler Graphics Environment) provide meteorologists with
automated radar control as well as enhanced meteorological displays and image
processing capabilities. Both Weather Windows [TM] and EDGE [TM] processing
systems can be utilized with WARN [TM] (Wide Area Radar Network) to generate a
countrywide or large geographic area weather composite. WARN [TM] is capable of
accepting data from a large number of radars for inclusion into the composite
picture thereby providing very accurate weather information for an entire
region.
A unique software utility program developed by EEC for meteorologists,
known as IMAGE [TM] (Integrated Meteorological Analysis and Graphics
Environment), provides displays of weather features such as wind field vectors
and the growth and decay of storm cells. The various processing systems can be
run on a range of computer platforms from low-cost PC-based display and control
systems through UNIX platform mid-range systems to larger scientific systems
utilizing Hewlett Packard, IBM, Silicon Graphics and the Compaq Alpha station
computers.
Meteorological and hydrological agencies (international and domestic),
television broadcasters and the U.S. military use the Company's Doppler weather
radars to forecast weather and provide severe weather warnings. EEC's weather
radars with dual polarization and precision Doppler processing, coupled with
IMAGE [TM] and a full featured computer based control and display subsystem,
provide meteorologists and forecasters with a large amount of critical weather
information. Historically, the majority of the Company's sales of weather
information systems have been in foreign countries. More than 700 of the
Company's weather radars have been installed in more than 60 countries.
PRODUCT DEVELOPMENT
Each of the Company's business segments is actively engaged in the design
and development of additional products and enhancements to their existing
products. Information concerning the amount spent during each of the last three
years on company-sponsored product development activities is set forth in the
Company's "Consolidated Statement of Income" on page F-3. Certain of the
Company's product development activities are undertaken pursuant to government
contracts and subcontracts. The costs incurred under these contracts for product
research and development are charged to cost of sales rather than to product
development costs.
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MARKETING AND CUSTOMERS
The Company's products primarily are marketed directly by the sales forces
of each of its business segments, with the assistance of domestic and
international independent technical sales representatives who receive
commissions on their sales. The principal customers for the communications
products include the United States Government (primarily the armed services),
communication and satellite equipment manufacturers, foreign government
agencies, research organizations and government contractors. The defense systems
products are sold to the armed forces of the United States and foreign
governments, government contractors and aircraft manufacturers. The principal
customers of the weather information systems segment include meteorology and
hydrology departments of universities and government agencies, military
organizations, and television stations.
The following table set forth the percentage for each of the last three
years of total sales contributed by each of the Company's business segments:
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YEAR ENDED DECEMBER 31,
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SEGMENT 1998 1997 1996
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Communications....................... 48% 47% 42%
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Defense Systems...................... 41% 42% 50%
Weather Information Systems.......... 11% 11% 8%
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The Company's largest customer is the United States Government, its
agencies and contractors, whose purchases accounted for approximately 53% of the
Company's consolidated sales in 1998. Of that amount, approximately 93% was
attributable to purchases by the Department of Defense and its contractors. The
loss of these Government contracts would have a material adverse effect on the
Company. Contracts with or for the United States Government and most prime
contractors may be terminated by the Government at will. See "Government
Contracts" below. The Company has not historically experienced any significant
problems with contract cancellations.
During fiscal 1998, 1997 and 1996, approximately 31%, 25% and 22%,
respectively, of the Company's revenue was derived from sales to customers
outside the United States. See Note 13 of Notes to Consolidated Financial
Statements for geographic distribution of revenue.
GOVERNMENT CONTRACTS
Sales under contracts with or for the United States Government accounted
for approximately $74,000,000 or 53% of the Company's revenue in 1998. Most of
the Company's Government contracts are fixed-price contracts. Under a
fixed-price contract, the price paid to the Company is not subject to adjustment
by reason of the costs incurred by the Company in the performance of the
contract, except that adjustments are made for costs incurred due to contract
changes ordered by the Government. Cost overruns incurred in connection with
fixed-price contracts, particularly those involving engineering and development,
could substantially reduce the Company's profitability or cause losses.
Government contracts may be terminated for the convenience of the
Government at any time the Government believes that such termination would be in
its best interest. Under contracts terminated for the convenience of the
Government, the Company is entitled to receive payments for its allowable costs
and, in general, a proportionate share of its fee or profit for the work
actually performed. Under the Truth in Negotiations Act, the Government has a
right for three years after final payment on substantially all negotiated
Government contracts to examine all the Company's cost records with respect to
such contracts to determine whether the Company used and made available to the
Government, or to the prime contractor in the case of a subcontract, accurate,
complete and current cost or pricing information in preparing bids and
conducting negotiations on the contracts or any amendments thereto.
The Company recognizes revenue under most of its Government contracts on
the percentage of completion method which generally is measured by comparing
total costs incurred to date to estimated total costs for each contract.
Estimated losses on contracts are recorded in full when they become apparent.
Provided the job is on schedule, the Company normally recovers most of its costs
on large contracts under a
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progress payment system whereby 75% to 80% of its allowable costs incurred in
performing the contract, including applicable indirect costs such as selling,
general and administrative expenses, may be collected from the Government on a
current basis, while related profit, if any, is billable only upon completion of
the contract, or in certain instances, as delivery of units is made. The Company
and Government representatives closely monitor the Company's performance against
the overall budget as work on the contract progresses. Revisions of a budget may
occur during the course of the work for many reasons including increases or
decreases in the scope of the work, change orders and funding adjustments, and
the Company's performance against such budget. Budget revisions forecasting
profit reductions are recorded by the Company on a current basis, whereas
forecasted profit increases are recorded over the remaining period of
performance.
The Company believes that business done under Government contracts differs
from ordinary commercial contracts in certain other ways. Capital requirements
tend to be smaller because of the progress payment system, there is no
significant bad debt risk and, in general, receivables are paid promptly. The
Company also has found that, in the case of Department of Defense contracts, the
contract dispute procedures are well defined and generally permit expeditious
and inexpensive resolutions of contract problems.
MANUFACTURING AND RAW MATERIALS
The Company manufactures or assembles its products, produces spare parts
and repairs equipment previously sold. The Company maintains inventory,
including work-in-process at different levels of completion, to enable the
Company to satisfy customer delivery schedule requirements.
The Company's operations require a wide variety of electronic and
mechanical components and raw materials. Most of these items are available from
several commercial sources. Dependence on any one supplier is kept to a minimum.
On occasion, the failure of a supplier to deliver key parts can jeopardize the
on-time shipment of Company products.
COMPETITION AND BUSINESS CONDITIONS
The Company faces significant competition in most aspects of its business.
Its principal competitors to both the communications and defense systems
segments include corporations with substantially greater assets and access to
larger financial resources than the Company. The Company believes it is a
principal supplier of meteorological radars to foreign government agencies. 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 contracts awarded on the basis of competitive proposals. 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 depends upon the level
and nature of the nation's defense expenditures. The defense related electronic
systems and components manufactured by the Company are sold primarily to the
United States armed forces, defense contractors and foreign countries for
military and training use. General increases or decreases in the level of
defense appropriations tend to affect demand for defense related products, but
do not necessarily have a corresponding effect on demand for the specialized
products manufactured by the Company. Due to the process by which appropriations
and contracts are approved for defense projects, the Company commonly
experiences delays in the receipt of anticipated orders, which can adversely
impact operating results by shifting operating revenue from one period to
another. Because most of the Company's defense related contracts are awarded on
a fixed-price basis, cost overruns can affect the Company's profitability.
BACKLOG
The backlog was approximately $110,000,000 and $73,000,000 as of December
31, 1998 and 1997, respectively. The backlog as of such dates which was
reasonably expected to be filled within twelve months of such dates was
$89,000,000 and $70,000,000, respectively.
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The backlog figures include only the sales value of the equipment or
products for which the Company has received orders it believes to be firm.
Contracts with or for the United States Government and most prime contractors
may be terminated by the Government at will. See "Government Contracts." The
Company has not experienced any significant problems with contract
cancellations.
INTELLECTUAL PROPERTY
Although the Company holds a number of patents, the Company believes that
its business is not materially dependent upon the protection afforded by
patents, but primarily upon the experience and continued creative skills of its
personnel. Because of rapidly changing technology and the need for
confidentiality, the Company does not seek to obtain patents in many cases.
REGULATORY MATTERS
The Company's operations are subject to numerous local, state, federal and
foreign government laws and regulations governing the discharge of materials
into the environment as well as relating to the protections of public health and
the environment. Noncompliance with such laws and regulations could result in
the imposition of significant fines, penalties and other liabilities on the
Company. The Company believes that it is currently in substantial compliance
with the requirements of environmental and occupational health and safety laws
and regulations. Compliance with such laws and regulations has not represented a
significant expense for the Company in the past and the Company does not foresee
the need for material expenditures to ensure continued compliance with such laws
and regulations as they exist currently. Regulations in these areas are subject
to change, however, and there can be no assurance that future laws or
regulations will not have a material adverse effect on the Company.
The Company from time to time is required to obtain export licenses from
the United States Government. There can be no assurance that the Company will
not experience difficulty in obtaining such licenses as may be required in
connection with export sales.
EMPLOYEES
As of December 31, 1998, the Company employed a total of 1,368 persons
worldwide in the Company's continuing operations, of whom 1,201 were employed in
the United States. None of the Company's employees are represented by a labor
union.
GEOGRAPHICAL INFORMATION
Certain geographical information concerning the Company's business is set
forth in Note 13 of Notes to Consolidated Financial Statements which is
incorporated herein by reference.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are not
capable of distinguishing twenty-first century ("Y2K") dates. As a result,
computer systems and/or software used by many companies in a wide variety of
applications will experience operating difficulties concurrent with the century
change. Significant uncertainty exists concerning the scope and magnitude of
problems associated with the century change.
The Company recognizes the need to ensure its operations will not be
adversely impacted by Y2K software failures, internally or externally, and has
established cross-functional project teams at each of its subsidiaries to
address Y2K issues. The project teams are coordinating the identification and
implementation of changes to computer hardware and software applications that
will attempt to ensure availability and integrity of each company's information
systems and the reliability of its operational systems and manufacturing
processes. The project teams are also coordinating the identification of
potential Y2K risks associated with the products and services each company sells
or has sold, and risks that could affect the business due to suppliers and
others they transact business with should these companies fail to comply with
Y2K requirements. Each subsidiary is also assessing the potential overall impact
of the impending century change on its business, results of operations and
financial position. The findings and resulting actions are being reviewed and
monitored by the Company to insure overall compliance.
8
<PAGE>
Each subsidiary has reviewed its information technology ("IT"),
operational systems and manufacturing processes in order to evaluate those
products, services or systems for Y2K compliance. As a result, the Company has
determined that each subsidiary will be required to modify or replace certain
information and operational systems to be Y2K compliant. These modifications and
replacements are being, and will continue to be, made in conjunction with each
subsidiary's overall systems initiatives. Each subsidiary has reviewed or is
reviewing products previously sold, currently being sold or in design for future
sales for Y2K compliance. Products with Y2K non-compliance issues are being
identified and fixes/modifications, if any, are being developed. Identified Y2K
product issues will be resolved by year end 1999. By the end of the second
quarter of 1999, each subsidiary should complete their communications with
suppliers, financial institutions and others with whom they do business to
address conversion-related issues. The subsidiaries, and therefore the Company,
cannot determine the complete status of Y2K compliance of its suppliers and
financial institutions or what additional costs, if any, might be required by
the Company until it completes the review of the responses received. Each
subsidiary's management believes that non-compliance by their suppliers will be
insignificant. However, failure of their financial institutions to be Y2K
compliant could have a material effect on the Company's financial position or
results of operations.
The Company has not incurred any material expenditures in connection with
identifying, evaluating or remediating Y2K compliance issues. The Company
estimates that the total cost of Y2K compliance activities for both continuing
and discontinued operations will be less than $1,000,000 and the amount spent to
date is less than $500,000. The costs consist mainly of employee and consultant
labor expended evaluating the Company's IT systems, non-IT systems, products and
vendor Y2K issues. Total Y2K compliance expenses are not anticipated to be
material to the Company's financial position or its results of operations. The
Company expects to complete its Y2K project during 1999. Based on available
information, the Company does not believe any material exposure to significant
business interruption exists as a result of Y2K compliance issues. Accordingly,
the Company has not adopted any formal contingency plan in the event its Y2K
project is not completed in a timely manner. These costs and the schedule in
which the Company plans to complete its Y2K modification and testing processes
are based on management's best estimates. However, there can be no assurance
that the Company will identify and remediate all significant Y2K problems on a
timely basis, that remedial efforts will not involve significant time and
expense or that such problems will not have a material adverse effect on the
Company's business, results of operations or financial position.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Houston, Texas. The
Company, through its Tech-Sym Management Corporation subsidiary, occupies
approximately 10,000 square feet of the 20,000 square foot building owned by the
Company. The remaining portion of the building is leased to a third party.
The communications segment conducts manufacturing operations through the
subsidiaries of TRAK Communications which include (i) 124,000 square feet of
office and plant facilities on ten acres owned in Tampa, Florida, (ii) 45,000
square feet of office and plant facilities owned in Dundee, Scotland, (iii)
14,500 square feet of offices and plant facilities leased in San Clemente,
California, (iv) 78,500 square feet of offices, plant facilities and warehouse
space leased in Chatsworth, California, and (v) 32,000 square feet of office and
plant facilities leased in Hagerstown, Maryland.
The defense systems segment conducts manufacturing operations from office
and plant facilities comprising a total of 224,000 square feet located on three
tracts totaling 38 acres owned by the Company's subsidiary, Metric Systems
Corporation, in Fort Walton Beach, Florida. Metric also leases 10,000 square
feet of office and storage space in several nearby facilities.
The weather information systems segment conducts manufacturing operations
from office and plant facilities comprising 43,000 square feet located on an 11
acre tract owned by the Company's subsidiary, Enterprise Electronics
Corporation, in Enterprise, Alabama.
9
<PAGE>
Certain of the facilities of the Company and its subsidiaries are subject
to mortgage debt as set forth in Note 7 of Notes to Consolidated Financial
Statements. The Company believes that it has, or can obtain, adequate and
suitable facilities for the business expected over the next several years. The
Company maintains customary compensation, liability and property insurance for
all of its operations.
ITEM 3. LEGAL PROCEEDINGS
There are various lawsuits and claims pending against the Company's
subsidiaries. In the opinion of Tech-Sym's management, based in part on advice
of counsel, none of these actions is expected to have a material adverse effect
on the consolidated financial position, results of operations or cash flows of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1998 to a vote of the
Company's shareholders through the solicitation of proxies or otherwise.
ITEM 4.A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the current
executive officers (as defined by the Securities and Exchange Commission rules)
of the Company. These officers serve at the discretion of the Board of Directors
of the Company and of various subsidiaries of the Company, as the case may be.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ -----------------------------------------
<S> <C> <C>
Wendell W. Gamel.......................... 69 Chairman of the Board
J. Michael Camp........................... 49 President, Chief Executive Officer
and Director of the Company and
officer and director of various
subsidiaries of the Company
Ray F. Thompson........................... 62 Vice President, Treasurer and Chief
Financial Officer of the Company and
officer and director of various
subsidiaries of the Company
J. Rankin Tippins......................... 46 General Counsel and Secretary of the
Company and officer and director of
various subsidiaries of the Company
Paul L. Harp.............................. 50 Controller and Chief Accounting
Officer of the Company
Kenneth R. Allstaff....................... 54 President of TRAK Communications Inc.
Charles B. Johnson........................ 60 President of Metric Systems
Corporation
Richard F. Miles.......................... 50 President and Director of GeoScience
Corporation and Chairman of the Board
and President of Syntron, Inc.
</TABLE>
There are no family relationships between any of the above persons.
Executive officers are elected annually by the Board of Directors of the Company
or a wholly-owned subsidiary of the Company, as the case may be, at their
respective meetings of directors held immediately following the annual meeting
of shareholders for such Company, to serve for the ensuing year or until their
successors have been elected. The annual meetings of shareholders of the Company
and GeoScience normally are held in April of each year and the annual meeting of
each of the Company's principal subsidiaries, including Metric, TRAK
Communications and EEC are held in June of each year. There are no arrangements
or understandings between any officer and any other person pursuant to which the
officer was elected.
Mr. Gamel was first elected Chairman of the Board in 1980 and has served
continuously in that capacity ever since. He also served as President and Chief
Executive Officer of the Company from April of 1975 through April of 1998.
Mr. Camp has served as President and Chief Executive Officer of the Company
since May of 1998. Prior to joining the Company, he served as President and
Chief Executive Officer of Olicom, Inc., a
10
<PAGE>
company that develops and markets computer network software and hardware
products (from 1996 to 1998). Prior thereto, he served in various capacities at
Northern Telecom Ltd., including Vice President and General Manager of the
Multimedia Business Applications Division (from 1993 to 1996), Vice President
and General Manager of the Data Network Division (from 1992 to 1993) and General
Manager of the Network Integration Division (from 1991 to 1992).
Mr. Thompson has been Treasurer and Chief Financial Officer of the Company
for more than the past five years. In February of 1993, he was elected to the
additional office of Vice President of the Company.
Mr. Tippins has been General Counsel and Secretary of the Company for more
than the past five years. He is a member of the State Bar of Texas and The
Florida Bar.
Mr. Harp was elected Controller of the Corporation effective July 1, 1996,
and is the Chief Accounting Officer for the Company. He previously had served as
Secretary, Treasurer and Controller of Metric since 1982. He is a Certified
Public Accountant in Texas and Florida.
Mr. Allstaff was elected President of TRAK Communications Inc. on October
20, 1998, and continues to serve in that capacity. He served as President of
TRAK Microwave Corporation, a subsidiary of TRAK Communications Inc., from April
1998 until October 1998, as Marketing Director for TRAK Communications Inc.,
from October 1997 to April 1998, and as Managing Director of TRAK Microwave
Limited, a subsidiary of TRAK Communications, from November 1992 until October
of 1997.
Mr. Johnson was elected President of Metric Systems Corporation effective
May 1, 1998. He had previously served as Executive Vice President and General
Manager of Metric since 1982.
Mr. Miles was elected President of Syntron, Inc., on January 29, 1990. In
December of 1995, he was elected Chairman of the Board of Syntron and resigned
as President of Syntron. In March of 1996 and January of 1998, respectively, he
was elected President of GeoScience Corporation and re-elected President of
Syntron and continues to serve in those capacities.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the New York Stock Exchange under the
symbol "TSY". At March 12, 1999, the Company had 1,772 stockholders of record.
The following table sets forth the high and low sales prices for the
Company's Common Stock for the quarters indicated.
PRICE RANGE OF COMMON STOCK
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
QUARTER HIGH LOW HIGH LOW
- ------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
First................................ $29 1/16 $ 25 1/8 $ 32 1/2 $ 29
Second............................... 31 7/8 25 3/8 34 27 3/8
Third................................ 30 11/16 22 3/16 34 3/4 31
Fourth............................... 25 1/8 20 1/2 35 23 3/4
</TABLE>
The Company has not paid any dividends on its Common Stock and does not
expect to pay dividends on its Common Stock in the foreseeable future.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data as of and for the five
years ended December 31, 1998, have been derived from audited consolidated
financial statements. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements as of December 31, 1998
and 1997 and for each of the three years in the period ended December 31, 1998,
and the related notes thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994 (4)
--------- --------- --------- --------- ---------
STATEMENT OF INCOME DATA
<S> <C> <C> <C> <C> <C>
Revenue.......................... $ 140,479 $ 140,562 $ 142,083 $ 120,533 $ 110,800
Cost and expenses of revenue..... 134,832 136,428 112,808 111,249 106,411
--------- --------- --------- --------- ---------
Income from continuing operations
before income taxes and
extraordinary item............. 5,647 4,134 29,275 9,284 4,389
Provision for income taxes....... 1,861 1,063 8,580 2,887 1,550
--------- --------- --------- --------- ---------
Income from continuing
operations..................... 3,786 3,071 20,695* 6,397 2,839
Discontinued operations:
(Loss) income from
operations(1).................. (2,062) 2,593 (1,274) 1,781 3,043
Loss on disposal(1).............. (4,597)
Income from operations(2)........ 4,348 1,785 3,954 4,857 6,233
Gain on disposal(3).............. 3,620
--------- --------- --------- --------- ---------
Income before extraordinary
item........................... 5,095 7,449 23,375 13,035 12,115
Extraordinary item, less
applicable income taxes........ (1,035)
--------- --------- --------- --------- ---------
Net income....................... $ 5,095 $ 7,449 $ 22,340 $ 13,035 $ 12,115
========= ========= ========= ========= =========
Earnings (loss) per common share
Continuing operations
Basic....................... $ .63 $ .51 $ 3.26 $ .98 $ .44
Diluted..................... .61 .50 3.19 .96 .43
Discontinued operations
Basic....................... .22 .72 .42 1.02 1.43
Diluted..................... .21 .71 .41 .99 1.40
Extraordinary item
Basic and diluted........... (.16)
Net income
Basic....................... .84 1.23 3.52 2.00 1.86
Diluted..................... .83 1.21 3.44 1.95 1.83
Weighted average common shares
outstanding
Basic....................... 6,049 6,038 6,350 6,521 6,498
Diluted..................... 6,175 6,168 6,501 6,673 6,611
BALANCE SHEET DATA
Current assets(5)................ $ 186,025 $ 193,371 $ 170,689 $ 171,375 $ 152,067
Current liabilities.............. 36,573 45,441 29,806 29,677 56,284
Working capital.................. 149,452 147,930 140,883 141,698 95,783
Property, plant and
equipment -- net............... 18,817 17,837 18,037 16,111 39,993
Long-term debt................... 2,335 3,273 2,714 17,056 21,587
Total assets..................... 224,101 228,604 206,404 203,478 225,803
Total liabilities................ 56,370 65,421 48,332 53,460 90,016
Shareholders' investment......... 167,731 163,183 158,072 150,018 135,787
</TABLE>
- ------------
(1) Relates to Continental Electronics Corporation, Anarad, Inc. and Lake
Investment Company, net of applicable income tax benefits and expenses. See
Note 2 of Notes to Consolidated Financial Statements.
(2) Relates to GeoScience Corporation (including its previously discontinued
businesses), net of applicable income tax expense and minority interest.
(3) Relates to the discontinued geoscientific software subsidiary, CogniSeis
Development, Inc., of GeoScience Corporation, net of applicable income taxes
and minority interest.
(4) Balance sheet data as of December 31, 1994 was not restated for discontinued
operations.
(5) Including net assets of discontinued operations for all years presented
except for 1994.
* INCLUDES GAIN ON SALE OF SUBSIDIARY STOCK OF $13,758, NET OF TAXES.
No dividends were paid on common stock for any of the above years.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
During June 1998, the Company adopted a plan to sell its businesses
involved in real estate development, manufacture of air monitoring products and
manufacture of radio and television broadcast equipment, and during December
1998, the Company adopted a plan to sell its majority owned (79.12%) subsidiary,
GeoScience Corporation ("GeoScience"). The effective dates of June 30, 1998
and December 31, 1998 are the respective measurement dates referred to when
discussing the results of operations of these businesses elsewhere in this
report. The discontinued businesses are reported as discontinued operations for
all periods presented.
On November 18, 1998, the Company completed the sale of the real estate
development business, Lake Investment Company ("Lake"), to Consumer Loan
Portfolios Inc., for cash of $1,300,000 plus a note receivable of $3,600,000.
The Company received $500,000 on the note receivable on February 5, 1999, and is
due to receive $800,000 in the first half of 1999. The remaining amount,
$2,300,000, is payable in quarterly installments beginning March 31, 1999. A
balloon payment for the outstanding balance is payable on December 31, 2002.
On March 15, 1999, the Company completed the sale of substantially all of
the assets of the air monitoring products business, Anarad, Inc. ("Anarad"),
for cash of $550,000 plus 90% of the cash collected after March 15, 1999 on
outstanding trade accounts receivable on that date. All remaining uncollected
trade accounts receivable after 90 days will be returned to the Company for
appropriate action.
The Company is actively marketing its radio and television broadcast
equipment business, Continental Electronics Corporation ("Continental").
Several potential purchasers have conducted initial due diligence
investigations. Management anticipates Continental will incur operating losses
approximating $12,000,000 from the measurement date through the expected
disposal date, including certain fourth quarter reorganization and restructuring
activities of Continental and its subsidiaries. Management expects such losses
to be offset by the proceeds from the sale.
In December 1998, the Boards of Directors of the Company and GeoScience
committed to a plan to seek a strategic merger partner for GeoScience. On
January 18, 1999, the Company and GeoScience signed an agreement to merge
GeoScience with a third party, subject to shareholder and regulatory approval.
The Company, GeoScience and the third party have subsequently terminated the
proposed merger. The third party has paid GeoScience $3,000,000 in connection
with such termination. The Company and GeoScience will continue to pursue
opportunities to combine GeoScience's operations with a strategic partner.
Previously, in June 1997, GeoScience adopted a plan to sell its
geoscientific software subsidiary, CogniSeis. CogniSeis has been included in the
Company's presentation of discontinued operations in the Consolidated Statement
of Income for the years ended December 31, 1998, 1997 and 1996 and in the
Consolidated Balance Sheet at December 31, 1997 and 1996. On October 14, 1997
(the "disposal date"), CogniSeis was sold to Paradigm Geophysical Corporation
for cash of $8,929,000, net of certain liabilities assumed pursuant to the terms
of the sale agreement, plus a note receivable. During 1998, the uncertainties
surrounding certain provisions of the sales agreement were resolved and
GeoScience received payment in full of the note receivable, resulting in the
recognition of a gain on the sale of $3,620,000, net of taxes and minority
interest.
As a result of depressed oil prices, several oil companies have announced
reduced budgets for oil and gas exploration. In response, several GeoScience
customers announced plans to reduce capital expenditures, which could cause
cancellation or restructuring of orders, postponement of delivery or payment and
a decrease in future orders of GeoScience's products. Continued depressed oil
prices could result in lower sales for GeoScience in the future and may effect
the amount the Company will receive on the disposition of GeoScience.
Management's discussion and analysis of the results of operations reflects
the reclassification of the discontinued operations. Note 2 of Notes to
Consolidated Financial Statements sets forth the financial results of the
discontinued operations and is included by reference.
14
<PAGE>
1998 IN COMPARISON WITH 1997
REVENUE. Sales for the year ended December 31, 1998 were $140,479,000
compared to $140,562,000 in 1997. Sales by the communications segment increased
$1,146,000 or 2% to $67,906,000 from $66,760,000 in 1997 primarily due to
increased demand for wireless antennas, which offset decreases in the demand for
microwave components resulting from the Asian economic crisis during 1998. Sales
by the defense systems segment decreased $1,888,000 or 3% to $56,520,000 from
$58,408,000. The decrease occurred during the first quarter of the year
primarily due to the delay in receiving a follow-on Vertical Launching System
("VLS") contract. The delayed contract was awarded in March 1998 for
approximately $28,000,000 with options, when exercised, totaling an additional
$23,500,000. Sales by the weather information systems segment increased $659,000
or 4% to $16,053,000 from $15,394,000 in 1997 primarily as a result of increased
sales under a U.S. Navy contract placed with the Company in January 1997 for
various weather radar systems.
GROSS MARGIN. The Company's gross margin increased $1,997,000 or 5% to
$39,873,000 from $37,876,000 in 1997 on slightly lower sales as discussed above.
As a percentage of sales, the gross margin increased to 28% from 27% in 1997.
The gross margin percent remained constant at 25% in both 1998 and 1997 for the
communications and defense systems segments. The gross margin percent for the
weather information systems segment improved 9% to 53% in 1998 from 44% in 1997
primarily as a result of manufacturing and operational efficiencies, although
continued increases cannot be reasonably expected in future periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Consolidated selling, general
and administrative expenses for 1998 were $31,663,000 as compared to $31,648,000
in the prior year. These expenses as a percentage of sales were constant at 22%
for both 1998 and 1997. The communications segment's general and administrative
expenses increased as a result of reorganization costs incurred in the later
half of the year. These costs included the expenses associated with the
appointment of a new president, the search for and hiring of several other key
managers, expenditures for severance payments and other expenditures typical for
such organizational changes. General and administrative expenses of the defense
systems segment decreased as a result of cost reduction efforts taken in
response to the lower sales volume of the current year versus the prior year.
The selling expenses of the communications segment decreased significantly
reflecting the business downturn due to the Asian economic crisis, while the
selling expenses of the defense systems segment increased as a result of the
increased marketing activity for its instrumentation pods and radar products.
COMPANY-SPONSORED PRODUCT DEVELOPMENT. Company-sponsored product
development costs increased $1,103,000 or 46% to $3,505,000 for 1998 from
$2,402,000 in 1997. Expenditures increased in the defense systems segment as a
result of efforts to upgrade and improve the instrumentation pods product line
and to develop a new digital temperature control unit for the "advanced
tactical forward looking, infrared targeting system". The increased
expenditures by the weather information systems segment was primarily to upgrade
the EDGE [TM] and Weather Windows [TM] processing systems.
INTEREST EXPENSE. The Company's interest expense for 1998 decreased to
$1,305,000 from $1,429,000 in 1997. The decrease was due to the lower interest
rate on borrowings under the Company's line of credit facilities during the
year.
INTEREST AND OTHER INCOME. The Company's 1998 net interest and other
income was $2,247,000 as compared to $1,737,000 in 1997. The $510,000 increase
was primarily due to a payment received by the weather information systems
segment regarding the settlement of a dispute.
PROVISION FOR INCOME TAXES. The effective tax rates for continuing
operations was 33% in 1998 as compared to 25.7% in 1997. The increase is
primarily due to lower benefits derived from the Company's Foreign Sales
Corporation and for expenditures for research and experimentation in the current
year versus the prior year. The Company's overall effective tax rate for the
year was 46.9% as compared to 29.5% in 1997. The main reason for the difference
between this effective rate and the U.S. statutory rate of 35% was the lack of
any tax benefit to the Company for the operational losses incurred by a foreign
subsidiary
15
<PAGE>
(TELEFUNKEN Sendertechnik GmbH) that is part of the discontinued broadcast
equipment business, Continental Electronics Corporation.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations for
1998 was $3,786,000 or $0.61 per share as compared to $3,071,000 or $0.50 per
share in 1997. The improved 1998 results were primarily a result of the
improvement in gross margin compared to the prior year.
DISCONTINUED OPERATIONS. The 1998 net results of operations and disposals
relating to discontinued businesses were $1,309,000 or $0.21 per share as
compared to $4,378,000 or $0.71 per share in 1997. The primary reasons for the
decrease were the losses of the broadcast equipment business in 1998 versus
profit in 1997 and the continued worsening results through 1998 of the air
monitoring products business, together with the anticipated loss on its sale.
These negative results more than offset the gain recognized on the sale of
GeoScience's previously discontinued subsidiary, CogniSeis Development, Inc. See
Note 2 of Notes to Consolidated Financial Statements.
NET INCOME. The Company's net income of $5,095,000 or $0.83 per share for
1998 as compared to $7,449,000 or $1.21 per share in 1997, reflects the net
effect of the items discussed above.
1997 IN COMPARISON WITH 1996
REVENUE. Sales for the year ended December 31, 1997 decreased $1,521,000
or 1% to $140,562,000 as compared to $142,083,000 in 1996. Sales by the
communications segment increased $7,455,000 or 13% to $66,760,000 from
$59,305,000 in 1996. The increase was primarily due to increased sales of
microwave components associated with the general growth of the communication
market. Sales by the defense systems segment decreased $12,633,000 or 18% to
$58,408,000 from $71,041,000 in 1996. The decrease reflected the lower level of
government contract awards to the Company, including the delay in the award of a
follow-on Vertical Launching Systems ("VLS") contract, and the nearing
completion of several major programs that had been in process over several
years. Sales by the weather information systems segment increased $3,657,000 or
31% to $15,394,000 from $11,737,000 in 1996. The primary reason for the increase
was the unusually large orders for various weather radar systems by the U.S.
Navy.
GROSS MARGIN. The Company's gross margin decreased $1,115,000 or 3% to
$37,876,000 from $38,991,000 in 1996 on lower sales as discussed above. As a
percentage of sales, gross margin was 27% for both 1997 and 1996. The gross
margin percentage of the communications segment decreased to 25% of sales in
1997 as compared to 32% of sales in 1996 due to increased manufacturing costs
related to late product shipments and problems related to overstaffing. The
gross margin percent of the defense systems segment increased to 25% of sales in
1997 as compared to 21% of sales in 1996 primarily as a result of cost control
efforts undertaken in response to the lower sales volume from the prior year.
The gross margin percent of the weather information systems segment improved to
44% of sales in 1997 as compared to 42% in 1996. The improvement was due to
increased manufacturing efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Consolidated selling, general
and administrative expenses for 1997 increased $2,623,000 or 9% to $31,648,000
from $29,025,000 in 1996. These expenses as a percentage of sales increased to
22% in 1997 from 20% in 1996. The increase primarily occurred in the weather
information systems segment due to increased commission costs and expenses
directly associated with the increased sales level. The smaller increases in the
communications and defense systems segments were directly associated with
increased sales efforts.
COMPANY-SPONSORED PRODUCT DEVELOPMENT. Company-sponsored product
development costs decreased $659,000 or 22% to $2,402,000 in 1997 from
$3,061,000 in 1996. The decrease primarily occurred in the communications
segment. The 1996 expenses included a large expenditure on a major antenna
development project completed in that year. There were minor increases of
expenditures in both the defense systems and weather information systems
segments, however, neither had any significant projects in process either year.
INTEREST EXPENSE. The Company's interest expense for 1997 decreased
$371,000 or 21% to $1,429,000 from $1,800,000 in 1996. The decrease reflected
the results of retiring a significant part of the
16
<PAGE>
Company's long term debt in 1996 with proceeds received from the sale of stock
of the GeoScience subsidiary in a public offering in that year.
INTEREST AND OTHER INCOME. The Company's 1997 net interest and other
income was $1,737,000 in 1997 as compared to $3,004,000 in 1996. Interest
earnings were greater in 1996 due to the investment of the proceeds received
from the subsidiary stock sale.
PROVISION FOR INCOME TAXES. The Company's overall effective tax rate
declined in 1997 to 29.5% from 33.5% in 1996. The lower rate for 1997 reflects
the benefits the Company derived from its Foreign Sales Corporation and for
expenditures for research and experimentation. In 1996, the Company provided for
taxes at the statutory rate on the gain related to the sale of subsidiary stock
and incurred a non-deductible charge for the write-off of impaired goodwill.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations for
1997 was $3,071,000 or $0.50 per share as compared to $20,695,000 or $3.19 per
share in 1996. The 1996 results included the unusual items of a $13,758,000
after-tax gain on the sale of stock of a subsidiary.
DISCONTINUED OPERATIONS. The 1997 net results of operations relating to
discontinued businesses were $4,378,000 as compared to $2,680,000 in 1996. The
1996 results included the unusual write-off of impaired goodwill at the air
monitoring products subsidiary. The 1997 results of the broadcast equipment
subsidiary improved as a result of lower expenditures on research and
development than in 1996.
NET INCOME. The Company's net income of $7,449,000 or $1.21 per share for
1997 as compared to $22,340,000 or $3.44 per share in 1996, reflects the net
effect of the items discussed above, plus the extraordinary item in 1996
relating to the early extinguishment of debt.
CURRENT BUSINESS OUTLOOK. During 1998, the Company restructured its
operations to focus on its core businesses in communications, defense and
weather information.
The Company believes that its broadcast unit, Continental Electronics
Corporation, and its seismic unit, GeoScience Corporation, will be sold by June
30, 1999 and December 31, 1999, respectively. The Company intends to utilize the
cash to be received for debt reduction, acquisitions, stock repurchase or all
three. Management expects that acquisitions will be related to the remaining
core businesses.
During the third and fourth quarters of 1998, a major restructuring and
reorganization plan was enacted within the communications segment to produce
improvements in both growth and profitability of this segment. It is currently
anticipated that the Asian markets for the Company's products will improve
during 1999, which should lead to increased sales and less competitive pricing
regarding the Company's products.
The defense systems segment has experienced growth in its foreign sales
recently and the Company believes that there will be growth in the U.S.
government activity in 1999 and 2000 based on recent defense budget reviews.
Stronger economic activity worldwide is currently indicated, which would enable
foreign governments and their agencies to expend funds for weather information
systems that are both desired and needed.
While none of the above future events can be predicted with certainty,
Management believes these are reasonable expectations at the present time.
LIQUIDITY & CAPITAL RESOURCES
During 1998, the Company satisfied its working capital and capital
expenditure requirements through available cash, cash received on sale of a
business and bank borrowings. At December 31, 1998, the Company's working
capital, net of assets of discontinued operations, was $62,646,000 as compared
to $53,615,000 at December 31, 1997. For the year, the Company's cash, cash
equivalents and short-term investments decreased $2,993,000 to $3,645,000 from
$6,638,000 in 1997. During the year the Company invested in capital equipment
and additional inventory to facilitate its ability to meet customer orders in a
timely manner.
The Company's operations provided cash in the amount of $2,294,000,
$6,053,000 and $6,907,000 in 1998, 1997 and 1996, respectively. Concentrations
of credit risk with respect to the receivables, unbilled
17
<PAGE>
revenue and long-term receivables from customers other than the U.S. Government
are generally limited due to the large number of customers in the Company's
customer base and their dispersion across different industries and geographic
areas. The Company's operations outside the United States are subject to usual
risks, including changes in governmental policies, currency transfer
restrictions and currency devaluations. The Company's foreign subsidiaries use
their local currency as their functional currency.
Capital expenditures for land, buildings and improvements and machinery and
equipment were $5,030,000, $3,457,000 and $5,908,000 for 1998, 1997 and 1996,
respectively. Because of the Company's approximate $110,000,000 backlog and
anticipated new business, it is expected that additional investments will be
required in capital equipment and facilities. The Company expects to invest
approximately $7,100,000 in 1999 in capital expenditures.
The Company believes that the funds required for working capital needs and
capital equipment additions will come from available funds, unused lines of
credit, long-term borrowings, capital equipment financing and cash received from
the sale of discontinued business units. At December 31, 1998, the Company had
line of credit facilities aggregating approximately $45,293,000 of which
$27,601,000 was available for additional short-term borrowings
The Company plans to continue efforts to improve the average collection
time on receivables and to reduce inventory, while maintaining levels needed to
support customer requirements. The Company believes these efforts, along with
the available sources of funds, will provide the necessary cash requirements to
meet the Company's growth strategy.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The vast majority of the Company's financial transactions are U.S. dollar
based, however, Tech-Sym is exposed to market risks that include changes in U.S.
and international interest rates as well as changes in currency exchange rates
as measured against the U.S. dollar and each other. To date, the Company has not
experienced any material effects, positively or negatively, to its financial
position or results of operations due to changes in either interest rates or
currency exchange rates. The Company has in the past engaged in hedging
activities, through the use of forward exchange contracts. Such activity has
been limited to transactions involving borrowings between foreign subsidiaries
and their U.S. parent corporation. There were no open positions at December 31,
1998.
The Company's policy regarding investments of cash is to limit its
investments to marketable securities of investment grade rating and to limit the
amount of investment with any single institution. The emphasis is on capital
preservation and immediate access to funds. The Company had $228,000 and
$100,000 of marketable securities at December 31, 1998 and 1997, respectively.
See Note 1 of Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in a separate section of
this Report on Form 10-K. See the accompanying "Index of Financial Statements"
at Page F-1. Such information is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors required by Item 10 is incorporated by
reference from the Company's Proxy Statement for its 1999 Annual Meeting of
Stockholders (the "Proxy Statement"), which is to be filed with the Securities
and Exchange Commission (the "Commission") within 120 days of December 31,
1998 pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended ("the Act"). The information required by Item 10 with respect to
executive officers has been included in Part I above as Item 4.a.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
Company's Proxy Statement which is to be filed with the Commission within 120
days of December 31, 1998, pursuant to Regulation 14A under the Act.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
Company's Proxy Statement which is to be filed with the Commission within 120
days of December 31, 1998, pursuant to Regulation 14A under the Act.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
Company's Proxy Statement which is to be filed with the Commission within 120
days of December 31, 1998, pursuant to Regulation 14A under the Act.
PART IV
ITEM 14. EXHIBITS, REPORTS ON FORM 8-K AND FINANCIAL STATEMENT SCHEDULES
(a) The Following documents are filed as a part of this report:
1. Financial Statements:
See the accompanying "Index of Financial Statements" at Page F-1.
2. Financial Statement Schedule:
See the accompanying "Index of Financial Statements" at Page F-1.
3. Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
*3(a) -- Articles of Incorporation of Registrant, as amended [Registrant's 10-K (1989), SEC File
No. 1-4371, Exhibit 3(a)].
*3(b) -- By-Laws of Registrant, as amended [Registrant's 10-Q (filed 8/13/98), SEC File No. 1-4371,
Exhibit 3(b)].
*10(a)+ -- 1990 Stock Option Plan, as amended effective April 29, 1997. [Registrant's 10-K (1997),
SEC File No. 1-4371, Exhibit 10(a)].
*10(b)+ -- 1998 Equity Incentive Plan, as amended [Registrant's 10-Q (filed 8/13/98), SEC File No.
1-4371, Exhibit 10(a)].
*10(c)+ -- Written description of incentive bonus compensation plan effective January 1, 1997
[Registrant's 10-K (1997), SEC File No. 1-4371, Exhibit 10(b)].
*10(d)+ -- Termination Agreement dated as of May 1, 1998, between the Registrant and J. Michael Camp
[Registrant's 10-Q (filed 8/13/98), SEC File No. 1-4371, Exhibit 10(b)].
*10(e)+ -- Termination Agreement dated May 1, 1991, between the Registrant and Ray F. Thompson
[Registrant's 10-K (1991), SEC File No. 1-4371, Exhibit 10(r)].
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
*10(f)+ -- Termination Agreement dated May 1, 1991, between the Registrant and Richard F. Miles
[Registrant's 10-K (1991), SEC File No. 1-4371, Exhibit 10(s)].
*10(g)+ -- First Amendment to Termination Agreement, dated April 26, 1994, between the Registrant and
Richard F. Miles [Registration No. 33-56533, Exhibit 10(s)].
*10(h)+ -- Termination Agreement dated May 1, 1991, between the Registrant and J. Rankin Tippins
[Registrant's 10-K (1991), SEC File No. 1-4371, Exhibit 10(t)].
*10(i)+ -- Termination Agreement dated August 15, 1996, between the Registrant and Paul L. Harp
[Registrant's 10-K (1996), SEC File No. 1-4371, Exhibit 10(p)].
*10(j) -- Trust Agreement dated June 11, 1991 between the Registrant and Texas Commerce Bank
National Association [Registrant's 10-K (1991), SEC File No. 1-4371, Exhibit 10(w)].
*10(k) -- First Amendment dated June 1, 1992, to Trust Agreement dated June 11, 1991, between the
Registrant and Texas Commerce Bank National Association [Registrant's 10-K (1992), SEC
File No. 1-4371, Exhibit 10(x)].
*10(l)+ -- Nonemployee Director Retirement Plan of the Registrant effective January 1, 1992
[Registrant's 10-K (1991), SEC File No. 1-4371, Exhibit 10(x)].
*10(m)+ -- Executive Retirement Agreement, as amended and restated, dated April 30, 1998, between the
Registrant and Wendell W. Gamel [Registrant's 10-Q (filed 8/13/98), SEC File No. 1-4371,
Exhibit 10(c)].
*10(n)+ -- Executive Retirement Agreement, as amended and restated, dated April 30, 1998, between the
Registrant and Coy J. Scribner [Registrant's 10-Q (filed 8/13/98), SEC File No. 1-4371,
Exhibit 10(d)].
*10(o)+ -- Executive Retirement Agreement, as amended and restated, dated April 30, 1992, between the
Registrant and Ray F. Thompson [Registrant's 10-K (1996), SEC File No. 1-4371, Exhibit
10(v)].
*10(p)+ Executive Retirement Agreement, as amended and restated, dated April 30, 1992, between
Registrant and J. Rankin Tippins [Registrant's 10-K (1996), SEC File No. 1-4371, Exhibit
10(x)].
*10(q)+ -- Executive Retirement Agreement dated April 26, 1994, between the Registrant and Richard F.
Miles [Registration No. 33-56533, Exhibit 10(ee)].
*10(r)+ -- Executive Retirement Agreement dated January 1, 1998, between the Registrant and Paul L.
Harp [Registrant's 10-K (1997), SEC File No. 1-4371, Exhibit 10(r)].
21 -- Subsidiaries of the Registrant.
22 -- Power of Attorney.
23 -- Consent of independent accountants.
27 -- Financial Data Schedule which is deemed not to be filed for purposes of liability under
the federal securities laws.
</TABLE>
- ------------
* Incorporated by reference to prior filing, as indicated.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.
(b) Reports on Form 8-K.
None.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S> <C>
TECH-SYM CORPORATION
Date: March 30, 1999 By: /s/Ray F. Thompson
Ray F. Thompson, Vice President
and Treasurer (principal financial
officer)
Date: March 30, 1999 By: /s/Paul L. Harp
Paul L. Harp, Controller
(principal accounting officer)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 30, 1999 By: /s/Wendell W. Gamel
Wendell W. Gamel,
Chairman of the Board and
Director
Date: March 30, 1999 By: /s/J. Michael Camp
J. Michael Camp
President, Chief Executive
Officer and Director
Date: March 30, 1999 By: *W. L. Creech
W. L. Creech
Director
Date: March 30, 1999 By: *Michael C. Forrest
Michael C. Forrest
Director
Date: March 30, 1999 By: *A. A. Gallotta, Jr.
A. A. Gallotta, Jr.
Director
Date: March 30, 1999 By: *Christopher C. Kraft, Jr.
Christopher C. Kraft, Jr.
Director
Date: March 30, 1999 By: *Coy J. Scribner
Coy J. Scribner
Director
Date: March 30, 1999 By: *Charles K. Watt
Charles K. Watt
Director
Date: March 30, 1999 By: *Richard S. Friedland
Richard S. Friedland
Director
* Signed by Ray F. Thompson as attorney-in-fact pursuant to Power of Attorney.
21
<PAGE>
TECH-SYM CORPORATION
INDEX OF FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Financial Statements:
Report of Independent
Accountants.................... F-2
Consolidated Statement of Income
for the years ended December
31,
1998, 1997 and 1996........... F-3
Consolidated Balance
Sheet -- December 31, 1998 and
1997........................... F-4
Consolidated Statement of Cash
Flows for the years ended
December 31, 1998, 1997 and
1996........................... F-5
Consolidated Statement of
Changes in Shareholders'
Investment for the years ended
December 31, 1998, 1997 and
1996........................... F-6
Notes to Consolidated Financial
Statements..................... F-7
Financial Statement Schedule:
Schedule II -- Valuation and
Qualifying Accounts and
Reserves....................... F-27
</TABLE>
All other schedules have been omitted because they are not applicable or
the required information is presented in the financial statements or the notes
to the financial statements.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Tech-Sym Corporation
In our opinion, the consolidated financial statements listed in the index
appearing on page F-1, present fairly, in all material respects, the financial
position of Tech-Sym Corporation and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule listed in the index appearing on page F-1, presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and the financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
February 23, 1999, except as to paragraphs 4 and 6 of Note 2,
which are as of March 15 and March 24, 1999, respectively
F-2
<PAGE>
TECH-SYM CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenue.............................. $ 140,479 $ 140,562 $ 142,083
---------- ---------- ----------
Cost and expenses
Cost of revenue................. 100,606 102,686 103,092
Selling, general and
administrative expenses....... 31,663 31,648 29,025
Company-sponsored product
development................... 3,505 2,402 3,061
Interest expense................ 1,305 1,429 1,800
Gain on issuance of subsidiary
stock......................... (21,166)
Interest and other
income -- net................. (2,247) (1,737) (3,004)
---------- ---------- ----------
134,832 136,428 112,808
---------- ---------- ----------
Income from continuing
operations before income
taxes and extraordinary
item....................... 5,647 4,134 29,275
Provision for income taxes........... 1,861 1,063 8,580
---------- ---------- ----------
Income from continuing
operations.................... 3,786 3,071 20,695
Discontinued operations (Note 2)
Income (loss) on operations
(except GeoScience), less
applicable income tax
(benefit) expense............. (2,062) 2,593 (1,274)
Loss on disposal (except
GeoScience), including a
provision for operating losses
through estimated disposal
date, less applicable income
tax benefit................... (4,597)
Income on GeoScience operations,
less applicable income tax
expense and less minority
interest...................... 4,348 1,785 3,954
Gain on sale of GeoScience
subsidiary (CogniSeis), less
applicable income tax expense
and minority interest......... 3,620
---------- ---------- ----------
Income from discontinued
operations................. 1,309 4,378 2,680
---------- ---------- ----------
Income before extraordinary
item....................... 5,095 7,449 23,375
Extraordinary item
Loss on early extinguishment of
debt, less applicable income
tax of $557................... (1,035)
---------- ---------- ----------
Net income.................... $ 5,095 $ 7,449 $ 22,340
========== ========== ==========
Earnings (loss) per common share
Continuing operations
Basic......................... $ .63 $ .51 $ 3.26
Diluted....................... .61 .50 3.19
Discontinued operations
Basic......................... .22 .72 .42
Diluted....................... .21 .71 .41
Extraordinary item
Basic and diluted............. (.16)
Net income
Basic......................... .84 1.23 3.52
Diluted....................... .83 1.21 3.44
Weighted average common shares
outstanding
Basic......................... 6,049 6,038 6,350
Diluted....................... 6,175 6,168 6,501
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
TECH-SYM CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT PAR VALUE AND NUMBER OF SHARES)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents....... $ 3,417 $ 6,538
Short-term investments.......... 228 100
Receivables -- net.............. 25,271 23,708
Unbilled revenue................ 39,315 42,284
Inventories -- net.............. 24,753 21,675
Deferred taxes on income........ 4,697 4,034
Net assets of discontinued
operations (Note 2)............ 86,806 94,315
Other........................... 1,538 717
---------- ----------
Total current assets.......... 186,025 193,371
Property, plant and
equipment -- net................... 18,817 17,837
Long-term receivables................ 2,224
Other assets......................... 17,035 17,396
---------- ----------
Total assets.................. $ 224,101 $ 228,604
========== ==========
LIABILITIES
Current liabilities
Notes payable................... $ 13,911 $ 17,677
Current maturities of long-term
debt........................... 1,178 902
Accounts payable................ 8,152 8,318
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 5,163 6,561
Taxes on income................. 508 2,124
Other accrued liabilities....... 7,661 9,859
---------- ----------
Total current liabilities..... 36,573 45,441
Long-term debt....................... 2,335 3,273
Deferred taxes on income............. 9,452 8,530
Other liabilities.................... 8,010 8,177
---------- ----------
Total liabilities............. 56,370 65,421
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note
12)
SHAREHOLDERS' INVESTMENT
Preferred stock -- authorized
2,000,000 shares, without par
value, none issued
Common stock -- authorized 20,000,000
shares, $.10 par value, issued
8,044,881 and 7,994,881 shares,
respectively....................... 804 799
Additional capital................... 41,361 40,677
Accumulated earnings................. 157,739 152,644
Accumulated other comprehensive
loss -- net........................ (3,489) (3,277)
Common stock held in treasury, at
cost (1,980,400 and 1,936,900
shares, respectively).............. (28,684) (27,660)
---------- ----------
Total shareholders'
investment................... 167,731 163,183
---------- ----------
Total liabilities and
shareholders' investment..... $ 224,101 $ 228,604
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
TECH-SYM CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................... $ 5,095 $ 7,449 $ 22,340
Income on discontinued
operations...................... (2,286) (4,378) (2,680)
Provision for disposal of
discontinued operations......... 4,597
Gain on sale of CogniSeis........ (3,620)
Adjustments to reconcile income
from continuing operations to net
cash provided by (used for)
continuing operations:
Depreciation and amortization.... 5,132 5,053 5,024
Deferred income taxes............ 259 1,043 4,737
Gain on issuance of stock by
subsidiary...................... (21,166)
Change in operating assets and
liabilities, net of impact of
purchase of business:
Receivables...................... (187) (5,795) 1,648
Unbilled revenue................. 2,969 (309) (7,343)
Inventories...................... (3,078) (3,138) (1,909)
Other assets..................... (1,068) 991 (2,294)
Accounts payable................. (166) 1,377 2,518
Other accrued liabilities and
billings in excess.............. (3,596) 3,662 2,453
Taxes on income.................. (1,616) 15 1,127
Other noncurrent liabilities..... (141) 83 2,452
--------- --------- ---------
Net cash provided by operating
activities of continuing
operations.................... 2,294 6,053 6,907
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures............... (5,030) (3,457) (5,908)
Investment in grantor trust........ (616) (516) (519)
Purchase of business, net of cash
acquired......................... (1,854)
Proceeds on sale of discontinued
operations (Note 2).............. 9,556 8,929
Purchases of investment
securities....................... (128)
Other.............................. 151 8 17
--------- --------- ---------
Net cash provided by (used for)
investing activities.......... 3,933 3,110 (6,410)
--------- --------- ---------
Cash flows from financing activities
of continuing operations:
Net (payments) borrowings under
line of credit agreements........ (3,766) 10,227 (3,210)
Proceeds from long-term debt....... 597 1,700 538
Payments on long-term debt......... (1,268) (755) (17,639)
Proceeds from issuance of
subsidiary common stock.......... 40,428
Proceeds from exercise of stock
options.......................... 689 929 1,275
Acquisition of treasury stock...... (1,024) (901) (15,745)
--------- --------- ---------
Net cash (used for) provided by
financing activities of
continuing operations......... (4,772) 11,200 5,647
--------- --------- ---------
Net cash used for discontinued
operations......................... (4,576) (18,091) (13,729)
--------- --------- ---------
Net (decrease) increase in cash and
cash equivalents................... (3,121) 2,272 (7,585)
Cash and cash equivalents at
beginning of year.................. 6,538 4,266 11,851
--------- --------- ---------
Cash and cash equivalents at end of
year............................... $ 3,417 $ 6,538 $ 4,266
========= ========= =========
Cash flows from operating activities
include:
Cash transactions:
Interest paid.................... $ 698 $ 1,267 $ 1,810
Income taxes paid, net........... 1,668 3,264 1,595
Noncash transactions:
Note receivable on sale of
discontinued operations......... 3,600
Investment in joint ventures..... 309 394 309
Settlement of CogniSeis note
receivable...................... 1,244
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
TECH-SYM CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' INVESTMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER TREASURY STOCK
---------------- ADDITIONAL ACCUMULATED COMPREHENSIVE ------------------
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) SHARES AMOUNT
------ ------ ---------- ----------- ------------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995........... 7,860 $786 $ 38,486 $ 122,855 $(1,095) 1,308 $(11,014)
Comprehensive income for 1996
Net income......................... 22,340
Other comprehensive income, net of
tax
Foreign currency translation
adjustments..................... 184
Total comprehensive income.....
Issuance of common stock for stock
options............................. 81 8 1,267
Acquisition of treasury shares....... 597 (15,745)
------ ------ ---------- ----------- ------------- ------ --------
Balance, December 31, 1996........... 7,941 794 39,753 145,195 (911) 1,905 (26,759)
Comprehensive income for 1997
Net income......................... 7,449
Other comprehensive income, net of
tax
Foreign currency translation
adjustments..................... (2,366)
Total comprehensive income.....
Issuance of common stock for stock
options............................. 54 5 768
Acquisition of treasury shares....... 32 (901)
Tax benefit associated with stock
options............................. 156
------ ------ ---------- ----------- ------------- ------ --------
Balance, December 31, 1997........... 7,995 799 40,677 152,644 (3,277) 1,937 (27,660)
Comprehensive income for 1998
Net income......................... 5,095
Other comprehensive income, net of
tax
Foreign currency translation
adjustments..................... 439
Minimum pension liability
adjustment...................... (651)
Total comprehensive income.....
Issuance of common stock for stock
options............................. 50 5 684
Acquisition of treasury shares....... 43 (1,024)
------ ------ ---------- ----------- ------------- ------ --------
Balance, December 31, 1998........... 8,045 $804 $ 41,361 $ 157,739 $(3,489) 1,980 $(28,684)
====== ====== ========== =========== ============= ====== ========
<CAPTION>
SHAREHOLDERS'
INVESTMENT
TOTAL
--------------
<S> <C>
Balance, December 31, 1995........... $150,018
Comprehensive income for 1996
Net income.........................
Other comprehensive income, net of
tax
Foreign currency translation
adjustments.....................
Total comprehensive income..... 22,524
Issuance of common stock for stock
options............................. 1,275
Acquisition of treasury shares....... (15,745)
--------------
Balance, December 31, 1996........... 158,072
Comprehensive income for 1997
Net income.........................
Other comprehensive income, net of
tax
Foreign currency translation
adjustments.....................
Total comprehensive income..... 5,083
Issuance of common stock for stock
options............................. 773
Acquisition of treasury shares....... (901)
Tax benefit associated with stock
options............................. 156
--------------
Balance, December 31, 1997........... 163,183
Comprehensive income for 1998
Net income.........................
Other comprehensive income, net of
tax
Foreign currency translation
adjustments.....................
Minimum pension liability
adjustment......................
Total comprehensive income..... 4,883
Issuance of common stock for stock
options............................. 689
Acquisition of treasury shares....... (1,024)
--------------
Balance, December 31, 1998........... $167,731
==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
THE BUSINESS
Tech-Sym Corporation (the "Company" or "Tech-Sym") is a diversified
electronics engineering and manufacturing company primarily involved in the
design, development and manufacture of products used for communications, defense
and weather information. The Company operates in three business segments;
communications, defense systems and weather information systems.
The Company's communications products include microwave components and
subsystems, timing and positioning equipment, antennas and electronic defense
products. The principal defense systems products include airborne training and
instrumentation systems, maritime surveillance radars, shipboard electronics and
mechanical systems. The primary products of the Company's weather information
systems segment are high performance Doppler radars coupled with sophisticated
data processing systems.
On May 17, 1996, GeoScience Corporation ("GeoScience"), a subsidiary of
the Company, completed a sale of its common stock in an initial public offering.
The sale generated net proceeds to the Company of $40,428,000 and a gain of
$21,166,000. At December 31, 1998, the Company's ownership percentage in
GeoScience was 79.12%.
As discussed in Note 2, the Company adopted a plan, effective June 30, 1998
(the "measurement date"), to sell its broadcast, air monitoring products and
real estate investment subsidiaries. Effective December 31, 1998 (the
"measurement date"), the Company adopted a plan to sell its majority owned
subsidiary, GeoScience. These businesses, including minority interest
attributable to GeoScience, are presented as discontinued operations in these
financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Tech-Sym
Corporation and its subsidiaries after the elimination of intercompany
transactions. Investments in companies and joint ventures over which the Company
has significant influence, but not a controlling interest, are recorded using
the equity method of accounting.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the reported amounts of certain assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the related reported amounts of revenues and
expenses during the reporting period. It is possible that actual results could
differ significantly from those estimates and that significant changes to
estimates could occur. The Company's management believes that the estimates used
in these financial statements are reasonable.
SHORT-TERM INVESTMENTS AND OTHER CASH EQUIVALENTS
Short-term investments are carried at market value and have maturities of
less than one year. The Company classifies short-term investments with original
maturities of three months or less as cash equivalents.
REVENUE RECOGNITION
The Company recognizes revenue on long-term contracts utilizing the
percentage of completion method, measured by comparing total costs incurred to
date to estimated total costs for each contract. Estimated losses on contracts
are recorded in full when they become apparent. Substantially all unbilled
F-7
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
revenue amounts are expected to be billed and collected within one year in
accordance with the terms of the related contracts.
Revenue from the sale of products manufactured in standard manufacturing
operations is recognized at the time of shipment unless significant future
obligations remain. Where significant future obligations exist, revenue is not
recognized until such obligations have been satisfied or are no longer
significant.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
principally using the first-in, first-out or weighted average cost method.
DEPRECIATION AND AMORTIZATION
Depreciation of plant and equipment is provided using the straight-line
method over the estimated useful lives of the related assets. Major renewals and
betterments are capitalized while minor replacements, maintenance and repairs
which do not extend useful lives are expensed. The cost and accumulated
depreciation applicable to assets retired or sold are removed from the
respective accounts and the resultant gain or loss is recognized at that time.
Intangible assets are amortized using the straight-line method over 5 to 15
years. Amortization expense was $1,224,000, $940,000 and $1,059,000 in 1998,
1997 and 1996, respectively. Intangible assets of $5,229,000 and $4,674,000 at
December 31, 1998 and 1997, respectively, are included in other long-term assets
and are net of accumulated amortization of $6,238,000 and $4,652,000 at December
31, 1998 and 1997, respectively.
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The carrying amount
of a long-lived asset is considered impaired when anticipated undiscounted cash
flows expected to result from the use of the asset and its eventual disposition
is less than its carrying amount. At December 31, 1996, the Company wrote-off
the unamortized goodwill of $3,627,000 associated with the acquisition of
Anarad, Inc., in 1994. The Company believes that no material impairment exists
at December 31, 1998.
RESEARCH AND DEVELOPMENT
The Company performs research and development under both company-sponsored
programs and contracts with others, primarily the U.S. Government. Costs related
to company-sponsored research and development for new products and major product
improvements are expensed as incurred.
INCOME TAXES
The provision for income taxes is computed based on the pretax income
included in the consolidated statement of income. The asset and liability
approach is used to recognize deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax basis of assets and liabilities.
The Company has not recorded a deferred income tax liability for additional
U.S. Federal income taxes that would result from the distribution of earnings of
its foreign subsidiaries, if they were actually repatriated. The Company intends
to indefinitely reinvest the undistributed earnings of its foreign subsidiaries.
F-8
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The Company's foreign subsidiaries use their local currency as their
functional currency. Accordingly, assets and liabilities of the Company's
foreign subsidiaries are translated using the exchange rates in effect at the
balance sheet date, while income and expenses are translated using average
rates. Translation adjustments are reported as a separate component of
comprehensive income within shareholders' investment.
STOCK-BASED COMPENSATION
In 1996, the Company adopted Statement of Financial Accounting Standard No.
123 ("FAS 123") ACCOUNTING FOR STOCK-BASED COMPENSATION. Upon adoption of FAS
123, the Company continued to measure compensation expense for its stock-based
employee compensation plan using the intrinsic value method prescribed in APB
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and has provided in Note 9 pro
forma disclosures of the effect on net income and earnings per share as if the
fair value-based method prescribed in FAS 123 has been applied in measuring
compensation expense.
EARNINGS PER SHARE
The Company has applied Financial Accounting Standard No. 128 ("FAS 128")
EARNINGS PER SHARE for each of the years presented. FAS 128 requires the Company
to report both basic earnings per share, which is based on the weighted average
number of common shares outstanding, and diluted earnings per share, which is
based on the weighted average number of common shares outstanding and all
dilutive potential common shares outstanding. Stock options are the only
dilutive potential shares the Company has outstanding for all periods presented.
At December 31, 1998, 1997 and 1996 options to acquire 166,400, 232,700 and
246,000 shares of common stock at weighted average exercise prices of $31.23,
$34.46 and $34.47, respectively, were not included in the computations of
dilutive EPS because the options' exercise price was greater than the average
market price of the common shares.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Financial Accounting
Standards No. 130 ("FAS 130") REPORTING COMPREHENSIVE INCOME. This statement
establishes standards for reporting and display of comprehensive income and its
components. The Company's comprehensive income is comprised of net income,
minimum pension liability adjustments and foreign currency translation
adjustments from those subsidiaries not using the U.S. dollar as their
functional currency. Accumulated other comprehensive income by component is
summarized in the Consolidated Statement of Changes in Shareholders' Investment
for all years presented. The tax benefit or expense related to the components of
other comprehensive income was not significant.
SEGMENT REPORTING
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131 ("FAS 131") DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. FAS 131 supersedes FAS 14 FINANCIAL REPORTING FOR SEGMENTS OF A
BUSINESS ENTERPRISE replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. FAS
131 also requires disclosures about products and services, geographic areas and
major customers. The adoption of FAS 131 did not affect results of operations or
financial position, but did affect the disclosure of segment information and has
been used for all years presented in these statements (Note 13).
F-9
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
POSTRETIREMENT BENEFIT PLANS
During 1998, the Company adopted Financial Accounting Standards No. 132
("FAS 132") EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT
BENEFITS. FAS 132 amends Statements of Financial Accounting Standards No. 87, 88
and 106. The Statement revises employers' disclosures about pension and other
postretirement benefit plans but does not change the measurement or recognition
of those plans (Note 11).
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("FAS 133") ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. FAS 133 is effective for fiscal years
beginning after June 15, 1999 and established accounting and reporting standards
for derivative instruments. The Company has historically not engaged in
significant derivative instrument activity. Adoption of FAS 133 is not expected
to have a material effect on the Company's financial position or operational
results.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
NOTE 2 -- DISCONTINUED OPERATIONS
Effective June 30, 1998, the Company adopted a plan to sell its businesses
involved in real estate development (Lake Investment Company or "Lake"),
manufacture of air monitoring products (Anarad, Inc., or "Anarad") and
manufacture of radio and television broadcast equipment (Continental Electronics
Corporation or "Continental"), and effective December 31, 1998, the Company
adopted a plan to sell its majority owned (79.12%) subsidiary, GeoScience
Corporation ("GeoScience"). The effective dates of June 30, 1998 and December
31, 1998 are the respective measurement dates referred to when discussing the
results of operations of these businesses elsewhere in this report.
The presentation of the discontinued operations includes segregation of the
operating results and the results of disposition of the businesses in the
Consolidated Statement of Income for the years ended December 31, 1998, 1997 and
1996. The net assets of the discontinued operations are segregated at December
31, 1998 and 1997 in the Consolidated Balance Sheet and in the Consolidated
Statement of Cash Flows at December 31, 1998, 1997 and 1996. Accordingly, the
revenue, costs and expenses, assets and liabilities and cash flows of these
discontinued operations have been excluded from the respective captions in the
Consolidated Statement of Income, Consolidated Balance Sheet and Consolidated
Statement of Cash Flows and have been reported as "Income (loss) from
discontinued operations, net of applicable income taxes (benefits)", as "Net
assets of discontinued operations" and as "Net cash used in discontinued
operations" for all periods presented. The results of discontinued operations
do not reflect any interest expense or management fees allocated by the Company.
Data presented for earnings per share reflect the reclassification of the
discontinued operations.
On November 18, 1998, the Company sold Lake to Consumer Loan Portfolios
Inc., for cash of $1,300,000 plus a note receivable of $3,600,000. The Company
received $500,000 on the note receivable on February 5, 1999, and is due to
receive $800,000 in the first half of 1999. The remaining amount, $2,300,000 is
payable in quarterly installments beginning March 31, 1999. A balloon payment
for the outstanding balance is payable on December 31, 2002.
On March 15, 1999, the Company sold substantially all of the assets of
Anarad for cash of $550,000 plus 90% of the cash collected after March 15, 1999
on outstanding trade accounts receivable on that date. All remaining uncollected
trade accounts receivable after 90 days will be returned to the Company for
appropriate action.
F-10
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is actively marketing its radio and television broadcast
equipment business, Continental. Several potential purchasers have conducted
initial due diligence investigations. The loss on disposition of Continental of
$3,534,000 in the table below includes operating losses of $9,000,000 from the
measurement date to December 31, 1998 (including certain fourth quarter
reorganization and restructuring activities of Continental and its subsidiaries)
and operating losses of $3,000,000 through the expected disposal date, offset by
the estimated proceeds on sale.
In December 1998, the Boards of Directors of the Company and GeoScience
committed to a plan to seek a strategic merger partner for GeoScience. On
January 18, 1999, the Company and GeoScience signed an agreement to merge
GeoScience with a third party, subject to shareholder and regulatory approval.
The Company, GeoScience and the third party have subsequently terminated the
proposed merger. The third party has paid GeoScience $3,000,000 in connection
with such termination. The Company and GeoScience will continue to pursue
opportunities to combine GeoScience's operations with a strategic partner.
Previously, in June 1997, GeoScience adopted a plan to sell its
geoscientific software subsidiary, CogniSeis. CogniSeis has been included in the
Company's presentation of discontinued operations in the Consolidated Statement
of Income for the years ended December 31, 1998, 1997 and 1996 and in the
Consolidated Balance Sheet at December 31, 1997 and 1996. On October 14, 1997
(the "disposal date"), CogniSeis was sold to Paradigm Geophysical Corporation
for cash of $8,929,000, net of certain liabilities assumed pursuant to the terms
of the sale agreement, plus a note receivable. During 1998, the uncertainties
surrounding certain provisions of the sales agreement were resolved and
GeoScience received payment in full of the note receivable, resulting in the
recognition of a gain on the sale of $3,620,000, net of taxes and minority
interest.
The results of the discontinued operations through the appropriate
measurement dates are summarized as follows, as well as the expected results
from disposition (in thousands except per share data):
<TABLE>
<CAPTION>
GEOSCIENCE CONTINENTAL ANARAD LAKE TOTAL
---------- ----------- ------- ------ --------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Revenue......................... $ 122,933 $17,640 $ 1,761 $ 776 $143,110
Income (loss) before provision
for income taxes.............. 5,068 (2,640) (277) (160) (1,991)
Income tax expense (benefit).... 111 (871) (91) (53) (904)
Income (loss) from operations,
net of income taxes and
minority interest............. 4,348 (1,769) (186) (107) 2,286
Gain on sale of CogniSeis, net
of taxes and minority
interest...................... 3,620 3,620
Income (loss) on dispositions,
net of income taxes........... (3,534) (1,063) (4,597)
Net income (loss)............... 7,968 (5,303) (1,249) (107) 1,309
Earnings (loss) per common share
Basic...................... $ 1.32 $ (.88) $ (.20) $ (.02) $ .22
Diluted.................... 1.29 (.86) (.20) (.02) .21
</TABLE>
F-11
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total revenue for the period January 1 through December 31, 1998 for
Continental and Anarad was $39,991,000 and $2,605,000, respectively. The total
revenue for Lake during 1998 through the disposition date, November 18, 1998,
was $1,482,000.
<TABLE>
<CAPTION>
GEOSCIENCE CONTINENTAL ANARAD LAKE TOTAL
---------- ----------- ------- ------ --------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Revenue......................... $ 94,451 $54,094 $ 3,151 $1,842 $153,538
Income (loss) before provision
for income taxes.............. 5,283 4,822 (644) (489) 8,972
Income tax expense (benefit).... 1,743 1,432 (191) (145) 2,839
Income (loss) from operations,
net of income taxes and
minority interest............. 3,021 3,390 (453) (344) 5,614
Loss on operation of CogniSeis,
net of income taxes and
minority interest............. (1,236) (1,236)
Net income (loss)............... 1,785 3,390 (453) (344) 4,378
Earnings (loss) per common share
Basic...................... $ .29 $ .56 $ (.08) $ (.05) $ .72
Diluted.................... .29 .55 (.07) (.06) .71
Year ended December 31, 1996
Revenue......................... $ 90,896 $60,300 $ 3,813 $1,960 $156,969
Income (loss) before provisions
for income taxes.............. 10,479 4,113 (4,076) (153) 10,363
Income tax expense (benefit).... 3,458 1,357 (149) (50) (4,616)
Income (loss) from operations,
net of income taxes and
minority interest............. 5,933 2,756 (3,927) (103) 4,659
Loss on operation of CogniSeis,
net of income taxes and
minority interest............. (1,979) (1,979)
Net income (loss)............... 3,954 2,756 (3,927) (103) 2,680
Earnings (loss) per common share
Basic...................... $ .62 $ .43 $ (.61) $ (.02) .42
Diluted.................... .61 .42 (.60) (.02) .41
</TABLE>
For financial reporting purposes, the assets and liabilities attributable
to discontinued operations have been classified in the consolidated balance
sheet as net assets of discontinued operations and consists of the following (in
thousands):
<TABLE>
<CAPTION>
GEOSCIENCE CONTINENTAL ANARAD LAKE TOTAL
---------- ----------- ------ ------ --------
<S> <C> <C> <C> <C> <C>
As of the year ended December 31,
1998
Current assets.................. $ 107,199 $38,052 $ 750 $146,001
Total assets.................... 152,171 46,211 1,063 199,445
Current liabilities............. 54,644 29,083 587 84,314
Total liabilities............... 77,459 34,593 587 112,639
Net assets of discontinued
operations.................... 74,712 11,618 476 86,806
As of the year ended December 31,
1997
Current assets.................. $ 102,586 $45,426 $ 778 $ 886 $149,676
Total assets.................... 149,821 55,706 1,112 8,181 214,820
Current liabilities............. 56,045 21,720 260 78,025
Total liabilities............... 81,557 35,985 260 2,703 120,505
Net assets of discontinued
operations.................... 68,264 19,721 852 5,478 94,315
</TABLE>
F-12
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMENTS REGARDING CERTAIN ITEMS OF THE DISCONTINUED GEOSCIENCE OPERATION
GeoScience receivables include notes receivable on seismic equipment sales
in the amount of $8,760,000 and $7,653,000 at December 31, 1998 and 1997,
respectively, generally secured by equipment sold. A significant amount,
approximately 23%, of GeoScience's trade and notes receivable are with foreign
oil and gas exploration companies located in Russia and in China.
At December 31, 1998 and 1997, GeoScience gross inventories included
$13,591,000 and $12,026,000, respectively, of electronic components related to
the land seismic data acquisition system product line, PolySeis ATS. GeoScience,
together with members of a consortium, first developed this product line in late
1995. Modifications to enhance the product's reliability and market acceptance
were made during 1998 and 1997. GeoScience has recently experienced sales to
third parties and limited leasing activity, but believes that certain risks of
market acceptance exist. GeoScience continues to actively issue quotations to
prospective customers and expects to continue its PolySeis marketing and sales
activities. In January 1999, GeoScience shipped $1,100,000 of PolySeis inventory
to a Chinese customer. GeoScience expects to generate additional revenue from
the sale of the product in the latter half of 1999, but the timing of such
transactions may be substantially delayed and such expected transactions may not
materialize at all. GeoScience recognized leasing revenues related to the
PolySeis product of approximately $800,000 for each of the years ended December
31, 1998 and 1997.
As a result of the limited market acceptance of the product to date and the
competitive factors it currently faces, GeoScience determined that a writedown
to reduce the carrying value of the PolySeis inventory to an estimate of its net
realizable value was appropriate at December 31, 1998. A charge of $6,000,000 to
cost of goods sold was recognized in GeoScience's income statement for the year
ended December 31, 1998 to recognize the effect of certain inventory for which
no revenue is expected to be generated, certain expected promotional activities,
the slower than expected market maturation and the obsolescence of certain
components due to modifications in configurations and design.
NOTE 3 -- RECEIVABLES AND UNBILLED REVENUE
Receivables and unbilled revenue are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Current receivables
Commercial, less allowance for
doubtful accounts of $339 and
$167.......................... $ 15,630 $ 14,524
U.S. Government................. 8,144 9,184
Other receivables............... 1,497
--------- ---------
$ 25,271 $ 23,708
========= =========
Unbilled revenues
Commercial...................... $ 9,218 $ 11,652
U.S. Government................. 30,097 30,632
--------- ---------
$ 39,315 $ 42,284
========= =========
Long-term receivables
Commercial...................... $ 2,224
=========
</TABLE>
Government receivables and unbilled revenue include amounts from prime
contractors with the U.S. Government where the Company is the subcontractor.
Current receivables at December 31, 1998 include trade accounts and the current
portion of long-term notes receivable of $1,394,000.
F-13
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unbilled revenues represents revenue recognized on contracts for which
billings had not been presented to the customers because the amounts were not
contractually billable at the balance sheet date. Substantially all unbilled
amounts receivable will be billed and collected within one year in accordance
with the terms of the related contracts.
NOTE 4 -- INVENTORIES
Inventories, which consist principally of electronic components, are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
Raw materials........................ $ 16,686 $ 16,424
Work in process...................... 7,514 4,402
Finished goods....................... 2,430 2,810
---------- ---------
26,630 23,636
Less reserve......................... (1,877) (1,961)
---------- ---------
$ 24,753 $ 21,675
========== =========
</TABLE>
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ----------------------
LIVES 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
At cost:
Land, buildings and
improvements.................. 10 - 35 $ 18,514 $ 18,035
Machinery and equipment......... 3 - 12 52,041 48,424
---------- ----------
70,555 66,459
Less accumulated depreciation........ (51,738) (48,622)
---------- ----------
$ 18,817 $ 17,837
========== ==========
</TABLE>
NOTE 6 -- NOTES PAYABLE
At December 31, 1998, the Company had short-term line of credit facilities
aggregating approximately $45,293,000. Borrowings under these lines may be made
in such amounts and at such maturities and interest rates as are offered by the
banks and accepted by the Company at the time of each borrowing. The lines of
credit contain certain restrictive covenants including limitations on asset
sales, limitations on indebtedness, limitations on payments for dividends and
acquisition of treasury shares, limitations on investments and certain financial
covenants and ratios. At December 31, 1998 and 1997, borrowings under these
lines totaled $13,911,000 and $17,677,000, respectively. Weighted average
interest rates on such borrowings outstanding at December 31, 1998 and 1997 were
7.22% and 8.25%, respectively.
F-14
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- LONG-TERM DEBT
The components of long-term debt are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Real estate mortgage notes, due in
monthly installments with interest
at 7.44% to 9.06%, maturity at
various dates through 2003......... $ 3,458 $ 4,052
Notes secured by equipment, due in
monthly installments with interest
at 13.0%, maturity at various dates
through 1999....................... 55 123
--------- ---------
3,513 4,175
Less current maturities.............. (1,178) (902)
--------- ---------
$ 2,335 $ 3,273
========= =========
</TABLE>
Future maturities of long-term debt are $1,178,000 in 1999, $834,000 in
2000, $551,000 in 2001, $419,000 in 2002, $291,000 in 2003 and $240,000
thereafter.
At December 31, 1998, $4,246,000 of land, buildings and improvements were
pledged as collateral to secure various long-term debt obligations.
NOTE 8 -- INCOME TAXES
The components of income (loss) before income taxes are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Continuing operations
Domestic........................ $ 4,877 $ 2,982 $ 28,805
Foreign......................... 770 1,152 470
--------- --------- ---------
Total continuing
operations.............. 5,647 4,134 29,275
--------- --------- ---------
Discontinued operations
Domestic........................ 11,982 2,381 5,193
Foreign......................... (3,879) 4,289 1,818
--------- --------- ---------
Total discontinued
operations.............. 8,103 6,670 7,011
--------- --------- ---------
Total income before
income taxes....... $ 13,750 $ 10,804 $ 36,286
========= ========= =========
</TABLE>
F-15
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Continuing operations
Current tax expense
U.S. Federal.................... $ 1,123 $ (341) $ 3,269
State........................... 250 330 296
Foreign......................... 229 31 278
--------- --------- ---------
Total current continuing
operations.............. 1,602 20 3,843
Deferred tax expense
U.S. Federal.................... 134 269 5,831
Foreign......................... 125 774 (1,094)
--------- --------- ---------
Total deferred continuing
operations.............. 259 1,043 4,737
--------- --------- ---------
Total continuing
operations............ 1,861 1,063 8,580
--------- --------- ---------
Discontinued operations.............. 4,582 2,125 3,577
--------- --------- ---------
Total provision............ $ 6,443 $ 3,188 $ 12,157
========= ========= =========
</TABLE>
The overall income tax expense for 1998, 1997 and 1996 resulted in
effective tax rates of 46.9%, 29.5% and 33.5%, respectively. The primary reason
for the 1998 increase in the effective tax rate, is the valuation allowance
required for the net operating loss on discontinued foreign operations. The
income tax expense for 1998, 1997 and 1996 related to continuing operations
resulted in effective tax rates of 33%, 25.7% and 29.3%, respectively. The
reasons for the difference between this effective tax rate and the U.S.
statutory rate of 35% are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Continuing Operations
Federal taxes on income at
statutory rates............... $ 1,976 $ 1,447 $ 10,246
State income taxes, net......... 162 214 193
Foreign Tax (rate
differential)................. 87
Foreign Sales Corporation
("FSC") benefit............. (468) (602) (591)
Research and experimentation tax
credit........................ (100)
Nondeductible intangible
amortization.................. 204 169 262
Other, net...................... (100) (65) (1,530)
--------- --------- ---------
Total continuing operations... 1,861 1,063 8,580
--------- --------- ---------
Discontinued Operations
Federal taxes on income at
statutory rates............... 2,836 2,334 2,190
State income taxes, net......... 91 24 67
Foreign Tax (rate
differential)................. 197
Change in valuation allowance... 2,475
Foreign Sales Corporation
benefit....................... (1,067) (273) (355)
Research and experimentation tax
credit........................ (114)
Nondeductible intangible
amortization.................. 104 26 1,565
Other, net...................... (54) 128 110
--------- --------- ---------
Total discontinued
operations................. 4,582 2,125 3,577
--------- --------- ---------
Total provision............ $ 6,443 $ 3,188 $ 12,157
========= ========= =========
</TABLE>
F-16
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax liabilities (assets) of continuing operations at December 31,
1998 and 1997 are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax liabilities
Depreciation.................... $ 154 $ (62)
Installment sales............... (864) (765)
Equity in earnings of
affiliate..................... 1,386 1,276
Basis difference in affiliate
stock......................... 7,632 7,632
Other........................... 1,144 449
--------- ---------
Deferred tax liabilities...... 9,452 8,530
--------- ---------
Deferred tax assets
Deferred compensation........... (2,639) (2,263)
Compensatory absences
accruals...................... (659) (646)
Inventory accounting and
valuation allowance........... (1,107) (764)
Product warranty and related
accruals...................... (178) (181)
Contract percent of
completion.................... (281) (201)
Other........................... 167 21
--------- ---------
Deferred tax assets........... (4,697) (4,034)
--------- ---------
Total deferred tax
liability............. $ 4,755 $ 4,496
========= =========
</TABLE>
NOTE 9 -- STOCK OPTION PLANS
The Company's 1990 Stock Option Plan (the "1990 Plan") covers 1,158,000
shares of common stock and provided for the granting of stock options and stock
appreciation rights ("SARs") to key employees of the Company and to the
members of the Board of Directors who are not employees of the Company
("Nonemployee Directors"). Each option granted under the Plan had an exercise
price of 100% of the fair market value on the date of grant and had a term of
ten years. The options granted to key employees are exercisable 20% after one
year, with an additional 20% exercisable each six months thereafter. Options
granted to Nonemployee Directors are exercisable in full after one year. Shares
granted and subsequently canceled are available for future grants. Upon the
adoption of the 1998 Equity Incentive Plan (the "1998 Plan") by the
shareholders on April 28, 1998, no further options were available for grant
under the 1990 Plan.
SARs were granted in tandem with each stock option granted under the 1990
Plan. Any SARs granted under the 1990 Plan cannot be exercised without the
consent of the Compensation Committee of the Board of Directors except in
certain defined instances involving a change in control of the Company. Since
any exercises of SARs are expected to be allowed by the Committee only in
extenuating circumstances and in substitution for the holder's rights under the
related stock options, any liability for benefits derived therefrom will be
recognized only at the time the Committee gives its approval to such exercises.
No SARs have been exercised to date.
Effective October 15, 1998, approximately 278,700 employee stock options
previously granted were amended, with the consent of each optionee, to provide
for a revised exercise price of $21.25, the closing market price for the
Company's stock on such date. The vesting period for the amended stock options
was extended one year from the original vesting schedule, however none of the
repriced stock options are exercisable before October 16, 1999.
The 1998 Plan covers 750,000 shares of common stock and provides for the
granting of stock options to key employees of the Company and to Nonemployee
Directors. Each option has an exercise price of
F-17
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
100% of the fair market value on the date of grant and has a term of ten years.
The options granted to key employees are exercisable 25% after one year, with an
additional 25% exercisable each year thereafter. Options granted to Nonemployee
Directors are exercisable on date of grant. Shares granted and subsequently
canceled are available for future grants. At December 31, 1998, 600,000 options
were available for grant under the 1998 Plan.
Changes in outstanding options under the Company's stock option plans
during 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding, December 31, 1995....... 463,800 $ 15.20
Options granted................. 237,000 34.64
Options canceled................ (2,000) 27.89
Options exercised............... (68,780) 15.27
---------
Outstanding, December 31, 1996....... 630,020 22.47
Options granted................. 82,500 28.00
Options canceled................ (16,300) 32.00
Options exercised............... (38,650) 15.79
---------
Outstanding, December 31, 1997....... 657,570 23.32
Options granted................. 150,000 28.88
Options canceled................ (6,800) 29.79
Options exercised............... (50,000) 13.79
---------
Outstanding, December 31, 1998....... 750,770 20.61
=========
Exercisable options
December 31, 1996............... 376,096 $ 14.89
December 31, 1997............... 446,650 19.18
December 31, 1998............... 342,070 16.83
</TABLE>
The following table summarizes significant ranges of the Company's
outstanding and exercisable options at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE EXERCISE
EXERCISE PRICES SHARES LIFE IN YEARS PRICE SHARES PRICE
- ------------------------------------- ------- ------------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$ 8.00 - 12.00....................... 62,150 1.60 $ 8.06 62,150 $ 8.06
12.01 - 18.00....................... 187,050 4.27 15.35 187,050 15.35
18.01 - 27.00....................... 362,570 7.60 21.40 53,870 22.28
27.01 - 34.63....................... 139,000 8.98 31.24 39,000 30.42
------- -------
8.00 - 34.63....................... 750,770 6.53 20.61 342,070 16.83
======= =======
</TABLE>
F-18
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted for
its stock options under the fair value method of FAS 123. The fair value of the
options at date of grant was estimated using a Black-Scholes option pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------- --------- ---------
<S> <C> <C> <C>
Expected life........................ 8 years 5.4 years 6.3 years
Interest rate........................ 5.17% 6.38% 6.18%
Volatility........................... 29% 24% 29%
Dividend yield....................... 0% 0% 0%
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. The Company's pro forma
net income and earnings per share was as follows (in thousands except per share
data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Income from continuing operations
after tax, as reported............. $ 3,786 $ 3,071 $ 20,695
<S> <C> <C> <C>
Income from continuing operations
after tax, proforma................ 2,179 2,242 20,234
Income from discontinued operations
after tax, as reported............. 1,309 4,378 2,680
Income from discontinued operations
after tax, proforma................ 653 3,896 2,331
Net income, as reported.............. 5,095 7,449 22,340
Net income, proforma................. 2,832 6,138 21,530
Earnings per common share
Continuing operations, as
reported
Basic...................... .63 .51 3.26
Diluted.................... .61 .50 3.19
Continuing operations, proforma
Basic...................... .36 .37 3.19
Diluted.................... .35 .36 3.11
Discontinued operations, as
reported
Basic...................... .22 .72 .42
Diluted.................... .21 .71 .41
Discontinued operations,
proforma
Basic...................... .11 .65 .37
Diluted.................... .11 .63 .36
Net income, as reported
Basic...................... .84 1.23 3.52
Diluted.................... .83 1.21 3.44
Net income, proforma
Basic...................... .47 1.02 3.39
Diluted.................... .46 1.00 3.31
Weighted average fair value of
options granted during the year.... $ 13.49 $ 10.33 $ 14.09
</TABLE>
Pro forma income from discontinued operations after tax, includes
compensation expense related to the Company's majority owned subsidiary,
GeoScience, of $656,000, $482,000 and $349,000 for the years 1998, 1997 and
1996, respectively.
F-19
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma effect on net income for 1998, 1997 and 1996 is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
NOTE 10 -- SHAREHOLDERS' INVESTMENT
STOCK REPURCHASES
The Company's Board of Directors has authorized the Company to repurchase
shares of its common stock through open market purchases or privately negotiated
transactions. The shares are held by the Company and accounted for using the
treasury stock method. The Company is currently authorized to repurchase up to
77,800 additional shares.
NOTE 11 -- BENEFIT PLANS
The Company maintains a defined contribution retirement plan covering
substantially all domestic employees. The annual Company contribution and
administrative costs of the plan were $1,328,000 for 1998, $1,314,000 for 1997
and $1,254,000 for 1996. The Company's policy is to fund these retirement costs
currently.
The Company has executive retirement agreements with certain executive
officers of the Company and a nonemployee directors' retirement plan (the
"Plan") for those directors that have never been employees of the Company. The
executive retirement agreements generally provide for the payment of specified
amounts in the event of retirement at or after age 62, total and permanent
disability, death or termination of employment by the Company without cause. The
nonemployee directors' agreements generally provide for the payment of specified
amounts upon retirement on or after age 65 or upon termination of service due to
disability or death. Separately, the Company has segregated certain assets in a
grantor trust to meet these obligations, but those assets are available to
creditors of the Company in the event of its bankruptcy or insolvency. Such
assets, therefore, have not been reflected as assets of the Plan. These assets
aggregating $7,317,000 and $6,445,000 at December 31, 1998 and 1997,
respectively, are included in other assets.
F-20
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The costs for the executive retirement agreements and the nonemployee
directors' retirement plan in 1998, 1997 and 1996 were $988,000, $750,000 and
$813,000, respectively. The status of the retirement plans at December 31, was
as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning
of year........................ $ 6,778 $ 6,483
Service cost.................... 177 146
Interest cost................... 506 466
Special termination benefits.... 270
Benefits paid................... (312) (107)
Plan amendment.................. 251
Actuarial loss (gain)........... 211 (210)
--------- ---------
Benefit obligation at end of
year........................... $ 7,881 $ 6,778
========= =========
Change in plan assets
Fair value of plan assets at
beginning of year.............. $ -- $ --
Employer contributions.......... 312 107
Benefits paid................... (312) (107)
--------- ---------
Fair value of plan assets at end
of year........................ $ -- $ --
========= =========
Reconciliation of funded status
Funded status................... $ (7,881) $ (6,778)
Unrecognized actuarial loss..... 521 311
Unamortized transition (asset)
or obligation.................. 245 325
Unamortized prior service
cost........................... 221 27
--------- ---------
Net amount recognized........... $ (6,894) $ (6,115)
========= =========
Amounts recognized in the statement
of financial position consist of
Accrued benefit liability....... $ (7,469) $ (6,577)
Intangible asset................ 466 462
Accumulated other comprehensive
income......................... 109
--------- ---------
Net amount recognized........... $ (6,894) $ (6,115)
========= =========
Weighted average assumptions as of
December 31,
Discount rate................... 7.0% 7.5%
Rate of compensation increase... 5.0% 5.0%
Components of net periodic benefit
cost
Service cost.................... $ 177 $ 146
Interest cost................... 506 466
Amortization of prior service
cost........................... 57 60
Amortization of transitional
(asset) or obligation.......... 80 80
Recognized actuarial (gain) or
loss........................... (14)
--------- ---------
Net periodic benefit cost....... $ 820 $ 738
========= =========
</TABLE>
The projected benefit obligation was developed assuming a beginning
discount rate of 7% in 1998 and 7.5% in 1997 and 1996 and an annual rate of
increase in compensation levels of 5% in 1998, 1997 and
F-21
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996. The accrued benefits liability of $7,469,000 and $6,577,000 at December
31, 1998 and 1997, respectively, is classified as other liabilities on the
Consolidated Balance Sheet.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk are primarily cash and cash equivalents, short-term
investments, receivables, unbilled revenue and long-term receivables. The
Company places its cash, cash equivalents and marketable securities investments
in investment grade, short-term debt instruments and limits the amount of credit
exposure to any one commercial issuer. A portion of the Company's receivables
and unbilled revenue are concentrated with various agencies of the U.S.
Government. Concentrations of credit risk with respect to the receivables,
unbilled revenues and long-term receivables from customers other than the U.S.
Government are generally limited due to the large number of customers in the
Company's customer base, and their dispersion across different industries and
geographic areas.
FINANCIAL INSTRUMENTS
The Company enters into various types of financial instruments in the
normal course of business. The Company does not hold or issue financial
instruments for trading purposes.
The carrying value of the Company's financial instruments approximated fair
value at December 31, 1998 and 1997. Cash and cash equivalents, receivables,
accounts payable and accrued liabilities approximate fair value due to their
short maturities while the fair value of long-term receivables and debt is
estimated based on competitive interest rates.
LETTERS OF CREDIT
The Company has outstanding irrevocable letters of credit in the amount of
$3,781,000 as of December 31, 1998. These letters, which have terms from one
month to three years, are primarily maintained as security for performance and
for advances received on long-term contracts. The letters of credit reflect fair
value as a condition of their underlying purpose and are subject to fees
competitively determined in the market place.
LEASE COMMITMENTS
The Company leases manufacturing and other facilities and equipment under
certain long-term agreements which expire at various dates through 2003. Total
rentals charged to operations under such operating leases for 1998, 1997 and
1996 were $805,000, $723,000 and $702,000, respectively.
Future minimum rental commitments under all noncancelable operating leases
in effect at December 31, 1998 totaled $1,788,000 and are payable as follows:
$972,000 in 1999; $571,000 in 2000; $224,000 in 2001; $12,000 in 2002 and $9,000
in 2003.
LITIGATION
In the ordinary course of business, the Company is involved in various
pending or threatened legal actions. While management is unable to predict the
ultimate outcome of these actions, it believes that any ultimate liability
arising from these actions will not have a material adverse effect on the
Company's consolidated financial position, operating results or cash flows.
F-22
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER COMMITMENTS AND CONTINGENCIES
The Company has no commitments or contingent liabilities which, in the
judgment of management, would result in losses that would materially affect the
Company's consolidated financial position, operating results or cash flows.
NOTE 13 -- SEGMENT INFORMATION
In 1998, the Company adopted FAS 131. The Company manages its businesses
primarily on a product basis. The Company's reportable segments are
communications, defense systems and weather information systems. The reportable
segments provide products as described in Note 1. The accounting policies of the
segments are the same as those described in the "Summary of Significant
Accounting Policies" in Note 1.
The Company evaluates the performance of its segments and allocates
resources to them based on revenue and income from continuing operations;
however, there is a charge to allocate corporate headquarter's cost to each of
its operating segments. The prior year's segment information has been restated
to present the Company's reportable segments.
The table below presents information about revenue from unaffiliated
customers, income from continuing operations before tax and segment assets as of
and for the year ended December 31, 1998:
<TABLE>
<CAPTION>
WEATHER
COMMUNI- DEFENSE INFORMATION RECONCILING
CATIONS SYSTEMS SYSTEMS ITEMS TOTAL
----------- -------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenue from unaffiliated
customers.......................... $67,906 $ 56,520 $16,053 $ $ 140,479
Interest expense..................... 598 9 698 (1) 1,305
Depreciation and amortization
expense............................ 2,931 1,324 270 607 (2) 5,132
Income from continuing operations
before income taxes................ (2,027) 4,277 4,244 (847)(3) 5,647
Total assets......................... 57,896 46,668 14,252 105,285 (4) 224,101
</TABLE>
RECONCILING ITEMS FOR 1998
(1) Corporate interest expense.
(2) Corporate depreciation and amortization.
(3) Corporate interest expense and other, net.
(4) Assets held for sale of $86,806 and corporate assets of $18,479.
F-23
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The table below presents information about revenue from unaffiliated
customers, income from continuing operations before tax and segment assets as of
and for the year ended December 31, 1997:
<TABLE>
<CAPTION>
WEATHER
COMMUNI- DEFENSE INFORMATION RECONCILING
CATIONS SYSTEMS SYSTEMS ITEMS TOTAL
-------- -------- ----------- ----------- --------
Revenue from unaffiliated
customers.......................... $66,760 $ 58,408 $15,394 $ $140,562
<S> <C> <C> <C> <C> <C>
Interest expense..................... 630 15 784 (1) 1,429
Depreciation and amortization
expense............................ 2,772 1,495 253 533 (2) 5,053
Income from continuing operations
before income taxes................ (919) 5,151 3,162 (3,260)(3) 4,134
Total assets......................... 54,433 54,332 16,409 103,430 (4) 228,604
</TABLE>
RECONCILING ITEMS FOR 1997
(1) Corporate interest expense.
(2) Corporate depreciation and amortization.
(3) Corporate interest expense and other, net.
(4) Assets held for sale of $94,315 and corporate assets of $9,115.
The table below presents information about revenue from unaffiliated
customers, income from continuing operations before tax and segment assets as of
and for the year ended December 31, 1996:
<TABLE>
<CAPTION>
WEATHER
COMMUNI- DEFENSE INFORMATION RECONCILING
CATIONS SYSTEMS SYSTEMS ITEMS TOTAL
-------- -------- ----------- ----------- --------
Revenue from unaffiliated
customers.......................... $59,305 $ 71,041 $11,737 $ $142,083
<S> <C> <C> <C> <C> <C>
Interest expense..................... 474 1,326(1) 1,800
Depreciation and amortization
expense............................ 2,651 1,884 239 250(2) 5,024
Income from continuing operations
before income taxes................ 1,967 6,083 1,805 19,420(3) 29,275
Total assets......................... 50,181 57,197 11,430 87,596(4) 206,404
</TABLE>
RECONCILING ITEMS FOR 1996
(1) Corporate interest expense.
(2) Corporate depreciation and amortization.
(3) Corporate interest expense and other, net. Includes gain on issuance of
subsidiary stock of $21,166.
(4) Assets held for sale of $82,664 and corporate assets of $4,932.
Included in the interest and other income caption of the Consolidated
Statement of Income is the Company's equity in the net income of joint venture
investments. The net income of such investments totaled $534,000, $648,000 and
$780,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Investments in the joint ventures are classified within the other long-term
assets caption of the balance sheet.
F-24
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue related to continuing operations in the United States and foreign
countries for the years ended December 31, 1998, 1997 and 1996 are presented
below. Long-lived assets related to continuing operations in the United States
and foreign countries as of the years ended December 31, 1998, 1997 and 1996 are
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Revenue from unaffiliated Customers
<S> <C> <C> <C>
United States................... $ 96,596 $ 105,927 $ 111,213
Foreign......................... 43,883 34,635 30,870
---------- ---------- ----------
Total...................... $ 140,479 $ 140,562 $ 142,083
========== ========== ==========
Long-lived assets at end of year
United States................... $ 20,652 $ 20,802 $ 19,892
Scotland........................ 3,391 3,189 3,275
---------- ---------- ----------
Total...................... $ 24,043 $ 23,991 $ 23,167
========== ========== ==========
</TABLE>
Sales under contracts and subcontracts where the U.S. Government is the
ultimate customer accounted for approximately 53%, 57% and 62% of the Company's
sales in 1998, 1997 and 1996, respectively.
NOTE 14 -- OTHER FINANCIAL INFORMATION
Other accrued liabilities are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
Commissions payable.................. $ 774 $ 1,691
<S> <C> <C>
Employee related payables............ 4,071 3,674
Accrued product warranty and related
services........................... 365 416
Other................................ 2,451 4,078
--------- ---------
$ 7,661 $ 9,859
========= =========
</TABLE>
F-25
<PAGE>
TECH-SYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly financial data for the
years 1998 and 1997 (in thousands except per share amounts):
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1998:
Revenue......................... $33,293 $ 32,607 $35,038 $ 39,541
Gross margin.................... 9,327 10,020 9,296 11,230
Income from continuing
operations.................... 1,127 836 971 852
Income (loss) from discontinued
operations.................... 2,125 3,389 1,957 (6,162)
Net income (loss)............... 3,252 4,225 2,928 (5,310)
Earnings (loss) per common share
Continuing operations
Basic...................... $ .19 $ .14 $ .16 $ .14
Diluted.................... .18 .13 .16 .14
Discontinued operations
Basic...................... .35 .56 .32 (1.02)
Diluted.................... .35 .55 .32 (1.00)
Net income
Basic...................... .54 .70 .48 (.88)
Diluted.................... .53 .68 .48 (.87)
1997:
Revenue......................... $34,086 $ 33,503 $36,883 $ 36,090
Gross margin.................... 8,884 8,194 9,507 11,291
Income from continuing
operations.................... 873 543 641 1,013
Income from discontinued
operations.................... 673 900 88 2,718
Net income...................... 1,546 1,443 729 3,731
Earnings per common share
Continuing operations
Basic...................... $ .15 $ .09 $ .11 $ .17
Diluted.................... .14 .09 .11 .17
Discontinued operations
Basic...................... .11 .15 .01 .45
Diluted.................... .11 .14 .01 .44
Net income....................
Basic...................... .26 .24 .12 .62
Diluted.................... .25 .23 .12 .61
</TABLE>
Earnings per common share are computed independently for each of the
quarters presented and therefore may not sum to the totals for the year.
F-26
<PAGE>
TECH-SYM CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
CHARGED CHARGED
BALANCE TO COSTS AND BALANCE TO COSTS AND
RESERVES DEDUCTED AT END EXPENSES DEDUCTIONS AT END EXPENSES DEDUCTIONS
FROM ASSETS OF 1995 1996 1996 OF 1996 1997 1997
- ---------------------------------------- -------- ------------ ---------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Inventory............................... $2,045 $1,109 $1,612 $1,542 $419 $
Current receivables..................... 380 134 248 266 214 313
<CAPTION>
CHARGED
BALANCE TO COSTS AND BALANCE
RESERVES DEDUCTED AT END EXPENSES DEDUCTIONS AT END
FROM ASSETS OF 1997 1998 1998 OF 1998
- ---------------------------------------- -------- ------------ ---------- --------
<S> <C> <C> <C> <C>
Inventory............................... $1,961 $533 $617 $1,877
Current receivables..................... 167 268 96 339
</TABLE>
F-27
<PAGE>
The exhibits indicated by an asterisk (*) are incorporated by reference to
a prior filing as indicated in parentheses.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
*3(a) -- Articles of Incorporation of Registrant, as amended [Registrant's 10-K (1989), SEC File
No. 1-4371, Exhibit 3(a)].
*3(b) -- By-Laws of Registrant, as amended [Registrant's 10-Q (filed 8/13/98), SEC File No. 1-4371,
Exhibit 3(b)].
*10(a)+ -- 1990 Stock Option Plan, as amended effective April 29, 1997. [Registrant's 10-K (1997),
SEC File No. 1-4371, Exhibit 10(a)].
*10(b)+ -- 1998 Equity Incentive Plan, as amended [Registrant's 10-Q (filed 8/13/98), SEC File No.
1-4371, Exhibit 10(a)].
*10(c)+ -- Written description of incentive bonus compensation plan effective January 1, 1997
[Registrant's 10-K (1997), SEC File No. 1-4371, Exhibit 10(b)].
*10(d)+ -- Termination Agreement dated as of May 1, 1998, between the Registrant and J. Michael Camp
[Registrant's 10-Q (filed 8/13/98), SEC File No. 1-4371, Exhibit 10(b)].
*10(e)+ -- Termination Agreement dated May 1, 1991, between the Registrant and Ray F. Thompson
[Registrant's 10-K (1991), SEC File No. 1-4371, Exhibit 10(r)].
*10(f)+ -- Termination Agreement dated May 1, 1991, between the Registrant and Richard F. Miles
[Registrant's 10-K (1991), SEC File No. 1-4371, Exhibit 10(s)].
*10(g)+ -- First Amendment to Termination Agreement, dated April 26, 1994, between the Registrant and
Richard F. Miles [Registration No. 33-56533, Exhibit 10(s)].
*10(h)+ -- Termination Agreement dated May 1, 1991, between the Registrant and J. Rankin Tippins
[Registrant's 10-K (1991), SEC File No. 1-4371, Exhibit 10(t)].
*10(i)+ -- Termination Agreement dated August 15, 1996, between the Registrant and Paul L. Harp
[Registrant's 10-K (1996), SEC File No. 1-4371, Exhibit 10(p)].
*10(j) -- Trust Agreement dated June 11, 1991 between the Registrant and Texas Commerce Bank
National Association [Registrant's 10-K (1991), SEC File No. 1-4371, Exhibit 10(w)].
*10(k) -- First Amendment dated June 1, 1992, to Trust Agreement dated June 11, 1991, between the
Registrant and Texas Commerce Bank National Association [Registrant's 10-K (1992), SEC
File No. 1-4371, Exhibit 10(x)].
*10(l)+ -- Nonemployee Director Retirement Plan of the Registrant effective January 1, 1992
[Registrant's 10-K (1991), SEC File No. 1-4371, Exhibit 10(x)].
*10(m)+ -- Executive Retirement Agreement, as amended and restated, dated April 30, 1998, between the
Registrant and Wendell W. Gamel [Registrant's 10-Q (filed 8/13/98), SEC File No. 1-4371,
Exhibit 10(c)].
*10(n)+ -- Executive Retirement Agreement, as amended and restated, dated April 30, 1998, between the
Registrant and Coy J. Scribner [Registrant's 10-Q (filed 8/13/98), SEC File No. 1-4371,
Exhibit 10(d)].
*10(o)+ -- Executive Retirement Agreement, as amended and restated, dated April 30, 1992, between the
Registrant and Ray F. Thompson [Registrant's 10-K (1996), SEC File No. 1-4371, Exhibit
10(v)].
*10(p)+ Executive Retirement Agreement, as amended and restated, dated April 30, 1992, between
Registrant and J. Rankin Tippins [Registrant's 10-K (1996), SEC File No. 1-4371, Exhibit
10(x)].
*10(q)+ -- Executive Retirement Agreement dated April 26, 1994, between the Registrant and Richard F.
Miles [Registration No. 33-56533, Exhibit 10(ee)].
</TABLE>
X-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
*10(r)+ -- Executive Retirement Agreement dated January 1, 1998, between the Registrant and Paul L.
Harp [Registrant's 10-K (1997), SEC File No. 1-4371, Exhibit 10(r)].
21 -- Subsidiaries of the Registrant.
22 -- Power of Attorney.
23 -- Consent of independent accountants.
27 -- Financial Data Schedule which is deemed not to be filed for purposes of liability under
the federal securities laws.
</TABLE>
- ------------
* Incorporated by reference to prior filing, as indicated.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.
X-2
EXHIBIT 21
SUBSIDIARIES OF TECH-SYM CORPORATION
Set forth below is certain information with respect to each of the
Registrant's subsidiaries:
<TABLE>
<CAPTION>
STATE OR
OTHER
JURISDICTION
OF INCORPORATION
SUBSIDIARY OR ORGANIZATION
- ------------------------------------- -----------------
<S> <C>
Anarad, Inc.......................... California
Continental Electronics
Corporation........................ Nevada
Continental-Lensa S.A........... Chile
TELEFUNKEN Sendertechnik GmbH... Germany
Enterprise Electronics Corporation... Alabama
GeoScience Corporation............... Nevada
GeoScience International Foreign
Sales Corporation............. Barbados
GeoSensor Corporation........... Delaware
Symtronix Corporation........... Nevada
Symtronix Company.......... Russia
Syntron, Inc.................... Delaware
Innovative Transducers
Inc..................... Delaware
Syntron Asia Pte. Ltd...... Singapore
Syntron Europe Limited..... Scotland
PolySeis Limited...... Scotland
Syntron (UK)
Limited............ Scotland
Zhong Hai Syntron (TianJin)
Geophysical Cable
Company Ltd............. China
Metric Systems Corporation........... Florida
Paratech Corporation................. Delaware
ParallelTools, L.L.C............ Texas
T-S Holding Corporation.............. Texas
Tech-Sym Management Corporation...... Delaware
Tech-Sym International (FSC), Inc.... Barbados
TRAK Communications Inc.............. Delaware
Daden-Anthony Associates,
Inc........................... Nevada
Tecom Industries,
Incorporated.................. California
Tecom Limited.............. Scotland
TRAK Ceramics Inc............... Delaware
TRAK Microwave Corporation...... Delaware
TRAK Microwave Limited.......... Scotland
</TABLE>
The Registrant has certain other subsidiaries which are not named above.
Such subsidiaries, when considered in the aggregate as a single subsidiary,
would not constitute a significant subsidiary.
EXHIBIT 22
POWER OF ATTORNEY
Each of the undersigned, a director of Tech-Sym Corporation (the
"Company"), does hereby constitute and appoint J. Michael Camp and Ray F.
Thompson his true and lawful attorney-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, to
sign the Company's Form 10-K Annual Report pursuant to Section 13 of the
Securities Exchange Act of 1934 for the fiscal year ended December 31, 1998, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto the
attorneys-in-fact full power and authority to sign such documents on behalf of
the undersigned and to make such filing, as fully to all intents and purposes as
the undersigned might or could do in person, hereby ratifying and confirming all
that the attorneys-in-fact, or his substitutes, may lawfully do or cause to be
done by virtue hereof.
Dated: March 26, 1999
TECH-SYM CORPORATION
<TABLE>
<S> <C>
/s/WENDELL W. GAMEL /s/A. A. GALLOTTA, JR.
Wendell W. Gamel A. A. Gallotta, Jr.
Director Director
/s/W. L. CREECH /s/CHRISTOPHER C. KRAFT, JR.
W. L. Creech Christopher C. Kraft, Jr.
Director Director
/s/MICHAEL C. FORREST /s/COY J. SCRIBNER
Michael C. Forrest Coy J. Scribner
Director Director
/s/RICHARD S. FRIEDLAND /s/CHARLES K. WATT
Richard S. Friedland Charles K. Watt
Director Director
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 33-38208, 33-61846, 33-56535) of Tech-Sym
Corporation of our report dated February 23, 1999 (except as to paragraphs 4 and
6 of Note 2, which are as of March 15 and March 24, 1999, respectively),
appearing on page F-2 of this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM TECH-SYM CORPORATION 1998 10K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,417
<SECURITIES> 228
<RECEIVABLES> 25,610
<ALLOWANCES> 339
<INVENTORY> 24,753
<CURRENT-ASSETS> 186,025
<PP&E> 26,630
<DEPRECIATION> 1,877
<TOTAL-ASSETS> 224,101
<CURRENT-LIABILITIES> 36,573
<BONDS> 0
0
0
<COMMON> 804
<OTHER-SE> 166,927
<TOTAL-LIABILITY-AND-EQUITY> 224,101
<SALES> 140,479
<TOTAL-REVENUES> 140,479
<CGS> 100,606
<TOTAL-COSTS> 134,832
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,305
<INCOME-PRETAX> 5,647
<INCOME-TAX> 1,861
<INCOME-CONTINUING> 3,786
<DISCONTINUED> 1,309
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,095
<EPS-PRIMARY> .84
<EPS-DILUTED> .83
</TABLE>
