10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) CQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2001 . --------------------------------------- or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _________________ to __________________. Commission File Number: 0-19381 . -------------------------------------------- WESTWOOD CORPORATION (Exact name of registrant as specified in its charter) Nevada 87-0430944 -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 12402 East 60th Street, Tulsa, Oklahoma 74146 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (918) 250-4411 --------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (x) Yes ( ) No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Outstanding at August 10, 2001 ----------------------------- ------------------------------ Common Stock, $.003 par value 6,891,647 INDEX ----- Page No. ------- PART I FINANCIAL INFORMATION: Item 1. Financial Statements: Consolidated Balance Sheets as of June 30, 2001 and March 31, 2001 1 Consolidated Statements of Operations for the three months ended June 30, 2001 and 2000 3 Consolidated Statement of Cash Flows for the Three Months ended June 30, 2001 and 2000 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk. 11 PART II OTHER INFORMATION: Item 1. Legal Proceedings. (None) - Item 2. Changes in Securities. (None) - Item 3. Defaults Upon Senior Securities. (None) - Item 4. Submission of Matters to a Vote of Security Holders. (None) - Item 5. Other Information. 11 Item 6. Exhibits and Reports on Form 8-K. 12 Signatures 12 (i) PART I. FINANCIAL INFORMATION Item 1. Financial Statements. -------------------- WESTWOOD CORPORATION CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Data)
June 30 March 31 2001 2001 ------------------ (Unaudited) Assets Current assets: Cash and cash equivalents $ 185 $ 545 Accounts receivable (including retainage receivable of $743 at June 30, 2001 and $733 at March 31, 2001), net of allowance for doubtful accounts 5,269 6,987 Costs and estimated earnings in excess of billings on uncompleted contracts 1,252 1,153 Inventories 7,662 5,831 Prepaid expenses 113 92 Note Receivable 250 250 ------- ------- Total current assets 14,731 14,858 Plant and equipment, at cost: Leasehold improvements 382 382 Machinery and equipment 4,882 4,717 Patterns and tools 115 109 ------- ------- 5,379 5,208 Accumulated depreciation (3,790) (3,647) ------- ------- 1,589 1,561 Goodwill (net) 4,249 4,346 Note receivable 219 213 Loan origination costs (net) 42 45 Long-term accounts receivable, retainage 193 210 ------- ------- Total Assets $21,023 $21,233 ======= =======
See accompanying notes. WESTWOOD CORPORATION CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Data)
June 30 March 31 2001 2001 ------------------ (Unaudited) Liabilities and stockholders' equity Current liabilities: Accounts payable $ 4,003 $ 5,073 Accrued liabilities 878 858 Billings in excess of costs and estimated earnings on uncompleted contracts 5,423 4,459 Current portion of long-term debt due to related parties 715 715 Current portion of long-term debt 3,445 3,476 ------- ------- Total current liabilities 14,464 14,581 Long-term debt due to related parties 850 850 Long-term debt 1,187 1,285 Stockholders' equity: Preferred stock, 5,000,000 shares authorized, $.001 par value, no shares issued and outstanding - - Common stock, 20,000,000 shares authorized, $.003 par value, 6,891,647 shares issued and outstanding at June 30, 2001, and March 31, 2001, respectively 21 21 Capital in excess of par value 5,978 5,978 Accumulated deficit (1,382) (1,387) Treasury stock, 127,000 shares at cost (95) (95) ------- ------- Total stockholders' equity 4,522 4,517 ------- ------- Total liabilities and stockholders' equity $21,023 $21,233 ======= =======
See accompanying notes. 2 WESTWOOD CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Share Data)
Three Months Ended June 30 2001 2000 ------- ------ (Unaudited) Sales $11,246 $6,124 Cost of sales 9,878 5,089 ------- ------ Gross profit 1,368 1,035 Operating expenses: Selling, general & administrative 1,204 1,006 ------- ------ Operating income 164 29 Other income: Interest expense (145) (102) Other income 59 85 ------- ------ (86) (17) ------- ------ Income before taxes 78 12 Provision for income taxes 73 4 ------- ------ Net income $ 5 $ 8 ======= ====== Basic, and diluted, earnings per share $ .00 $ .00 Weighted average common shares used in computing earnings per share 6,764,647 6,764,647 Cash dividends per share $ - $ -
See accompanying notes. 3 WESTWOOD CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
Three Months Ended June 30 2001 2000 ------- ------- (Unaudited) Operating activities Net income $ 5 $ 8 Adjustments to reconcile net income to cash provided (used) in operations: Depreciation and amortization 154 132 Amortization of goodwill 97 97 Non-cash interest income (6) (19) Cash flows impacted by changes in: Accounts receivable 1,718 (1,642) Costs and estimated earnings in excess of billings on uncompleted contracts (99) 978 Inventories (1,831) (2,989) Prepaid expenses (21) (11) Long-term accounts receivable, retainage 17 68 Accounts payable (1,070) 1,256 Accrued liabilities 20 73 Billings in excess of costs and estimated earnings on uncompleted contracts 964 710 ------- ------- Net cash used in operating activities (52) (1,339) Investing activities Purchase of plant and equipment (179) (120) Financing activities Principal payments on debt (129) (122) Borrowings on debt - 1,337 ------- ------- Net cash (used) provided by financing activities (129) 1,215 ------- ------- Net decrease in cash (360) (244) Cash at beginning of period 545 293 ------- ------- Cash at end of period $ 185 $ 49 ======= =======
See accompanying notes. 4 WESTWOOD CORPORATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2001 Note 1 - Basis of Presentation ------------------------------ The accompanying unaudited consolidated financial statements include Westwood's wholly owned subsidiaries NMP Corp. ("NMP"), TANO Corp. ("TANO"), and MCII Electric Company, Inc. ("MCII"). These statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Management believes all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter ended June 30, 2001, may not necessarily be indicative of the results that may be expected for the fiscal year ending March 31, 2002. For further information, refer to the consolidated financial statements and footnotes included in Westwood Corporation's annual report on Form 10-K for the year ended March 31, 2001. Note 2 - Inventories -------------------- Inventories consists of the following:
June 30, March 31, 2001 2001 ------------------------- (In Thousands) Work in process, primarily related to unit-of-delivery contracts in process $ 8,672 $ 9,117 Less contract billings to date (4,256) (6,426) ------------------------- 4,416 2,691 Raw materials and purchased parts 3,246 3,140 ------------------------- $ 7,662 $ 5,831 =========================
Note 3 - Long-Term Debt ----------------------- The Company entered into a new credit facility in August 1999, which included a $2,000,000 revolving credit line and $2,000,000 five-year term note, which is payable monthly and matures in August 2004. In October 2000, the revolving credit line was increased to $2,800,000. As additional security for the $800,000 increase in the revolving credit 5 line in October 2000, the Company's President provided a personal guarantee and pledged 750,000 shares of the Company's common stock owned by him. The personal guarantee and pledge of common stock are limited to the repayment of the additional $800,000 of the revolving credit line. On June 25, 2001, the Company renewed its revolving credit facility until October 15, 2001. At June 30, 2001, there was no remaining borrowing available from the revolving credit line. The Company is having ongoing discussions with its current and other lenders to increase and extend the current revolving credit facility prior to the October 15, 2001, maturity date. In December 1999, the Company completed a $1,000,000 convertible subordinated debenture offering. The private placement was purchased by a small group of outside investors as well as officers and directors of the Company. The debentures bear interest of 10% per annum and mature on December 22, 2004. The debentures are convertible into common stock at one share for each $1.00 of debentures exercised. In connection with the issuance of the debentures, the Company issued warrants to purchase up to 500,000 shares of common stock of the Company at $1.00 per share. The warrants are exercisable within five years from the date of issuance. As of June 30, 2001, none of the warrants were exercisable. In February 2001, the Company completed an $880,000 convertible subordinated debenture offering. The private placement was purchased by a small group of outside investors, as well as officers and directors of the Company. The debentures bear interest of 12% per annum, which is payable each June 30 and December 31, and mature on February 13, 2002. The debentures are convertible into common stock at one share for each $1.00 of debentures exercised after June 30, 2001. In connection with the issuance of the debentures, the Company issued warrants to purchase up to 340,000 shares of common stock of the Company at $1.00 per share. The warrants are exercisable within five years from the date of issuance. In connection with the December 1999 settlement of contingencies related to the acquisition of MCII in 1997, the Company replaced the 1997 non-interest bearing note with a new $300,000 non-interest bearing note and $100,000 cash payable to the former owner of MCII. The new note requires eight quarterly installments, beginning April 2000, of $37,500. The Company recorded the new note at a discount rate of 8.25%, which was consistent with the rate obtainable from the lender of the new revolving credit facility in December 1999. Note 4 - Income Taxes --------------------- The Company settled an Internal Revenue Service audit in the first quarter of fiscal 2002. As part of the settlement, the Company paid 6 $48,000. The remaining provision for income taxes for the first quarter of fiscal 2002 and 2001 is primarily due to state income taxes as the Company utilized a portion of its federal net operating loss carryforward, which has a 100% valuation allowance against it. Note 5 - Comprehensive Income ----------------------------- For the three-month periods ended June 30, 2001 and 2000, comprehensive income and net income are the same. Note 6 - Segment Information ----------------------------
Income Revenues (Loss) ------------------- Before Three Mos. Ended Inter- Income Total June 30, 2001 External Segment Total Taxes Assets ------------- -------- ------- ----- ------ ------ Marine Electrical Switchgear $ 3,846 $1,191 $ 5,037 $312 $20,991 Mobile Power Systems 5,856 - 5,856 (264) 4,884 Marine Automation & Control 1,544 738 2,282 276 5,307 Other - - - 57 12,897 Eliminations - (1,929) (1,929) (303) (23,056) ------- ------- ------- ----- ------ Total $11,246 $ - $11,246 $ 78 $21,023 ======= ======= ======= ==== ======= Three Mos. Ended June 30, 2000 ------------- Marine Electrical Switchgear $2,229 $534 $2,763 $137 $17,340 Mobile Power Systems 2,242 - 2,242 (239) 6,938 Marine Automation & Control 1,653 139 1,792 115 5,238 Other - - - 8 11,998 Eliminations - (673) (673) (9) (22,175) ----- ---- ---- ----- ------- Total $6,124 $ - $6,124 $ 12 $19,339 ====== ===== ====== ==== =======
Note 7 - New Accounting Standard -------------------------------- In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets." This standard requires that goodwill and certain other intangible assets no longer be amortized, but be evaluated on at least an annual basis for impairment based on the fair value of the reporting segment in which the goodwill and other intangible assets are associated. The standard also requires additional disclosures about 7 goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 is not required to be adopted by the Company until the first quarter of fiscal year 2003. The Company has not determined the impact of adopting this standard on its financial position or results of operations. Item 2. Management's Discussion and Analysis of Financial Condition ----------------------------------------------------------- And Results of Operations. ------------------------- Results of Operations - First Quarter Ended June 30, 2001 and 2000 ------------------------------------------------------------------ For the first quarter ended June 30, 2001, the Company had a net profit of $5,000 as compared to net income of $8,000 for the same quarter of the previous year. The net income per share was $.00 for both quarters. Consolidated sales for the first quarter increased 83.6%, to $11,246,000, as compared to $6,124,000 for the first quarter of last year. A breakdown of sales by the Company's major product groups is as follows: . Mobile power system sales by MCII for the first quarter of fiscal year 2002 were $5,856,000, as compared to $2,242,000 for the same period last year. Primarily, the 161% increase in revenue was due to the sale of 237 tactical quiet generator ("TQG") sets to the U.S. government. Sales of these generators under a long-term contract with the U.S. government did not start until September 2000. This increase in sales was offset by a $1,107,000 one-time sale of generators to Raytheon in the same period last year and a decrease in spare parts sales at MCII from $1,135,000 for the first quarter of fiscal year 2001 to $306,000 for the same period this year. . Marine automation and control system sales for TANO for the first quarter of fiscal year 2002 totaled $1,544,000, as compared to $1,653,000 for the first quarter of last year, a 6.6% reduction for the quarter-to-quarter period comparison. The $109,000 decrease is due to a change in product mix between the two quarters. . Marine electrical switchgear sales by NMP for the first quarter of fiscal year 2002 totaled $3,846,000, as compared to $2,229,000 for the first quarter of last year. The 72.5% increase in revenues is the result of increased production on two major contracts for the U.S. Navy's DDG 51 class and LPD17 class ships. 8 Gross profit as a percentage of sales was 12.2% for the first quarter of fiscal year 2002, compared to 16.9% for the same period last year. The decrease in the gross margin percentage is primarily due to the 1% margin on the TQG sets. Efforts are ongoing to improve production efficiency on these units during the current contract period, which started in September 2000 and continues into fiscal 2003. Operating expenses for the quarter-to-quarter comparison increased from $1,006,000 in fiscal 2001 to $1,204,000 for the first quarter of fiscal year 2002. This increase of approximately 19.7% in operating expenses is due to the accrual of $94,000 in severance in the first quarter of fiscal 2002 in conjunction with the resignation of the Company's chief financial officer on April 2, 2001. Salaries increased $48,000 in the quarter-to-quarter comparison. The remaining increase is due to significant labor costs incurred in the first quarter of fiscal 2002 in competitively bidding two long-term TQG contracts. The U.S. government is not expected to award these contracts until the second and third quarter of fiscal 2002, respectively. Interest expense for the first quarter of fiscal year 2002 was $145,000, as compared to $102,000 for the first quarter of last year. The 42.2% increase is due to $1,138,000 in additional borrowings in the first quarter of fiscal 2002 compared to the same period in the prior year. The effective income tax rate for the first quarter of fiscal 2002 is 93.6% compared to a rate of 33.3% in the same period last year. The increased effective income tax rate is due to the $48,000 settlement of an Internal Revenue Service audit in the first quarter of fiscal 2002. The remaining provision for income taxes for the first quarter of fiscal 2002 and 2001 is primarily due to state income taxes associated with TANO's operations. No other income taxes were accrued due to the utilization of net operating loss carryforwards. Liquidity and Capital Resources ------------------------------- Operating activities for the first quarter of fiscal year 2002 resulted in net cash used of $52,000. Cash from payments of accounts receivable of $1,718,000, depreciation and goodwill amortization of $251,000, and progress billings exceeding costs and estimated earning on uncompleted contracts by $865,000 were used to purchase $1,831,000 of inventory and pay $1,070,000 of accounts payable. The major payment of accounts receivable was the $1,080,000 received from the patent infringement settlement in the fourth quarter of fiscal year 2001 and was used to pay suppliers. Progress billings exceeding costs and estimated earnings was due to continued progress in meeting milestones on long-term contracts, which were set to fund production 9 against the contracts. Inventory was purchased for the production against the long-term contracts. Operating activities for the first quarter of fiscal year 2001 resulted in net cash used from operations of $1,339,000. During this period, the increase in accounts receivable and inventory used $4,631,000, which was offset by funds provided by the increase in trade accounts payable of $1,256,000. Changes in costs and estimated earnings in excess of billings, and billings in excess of costs and estimated earnings accounted for funds provided by operations of $1,688,000. The balance of the net funds used from operations was offset by depreciation and amortization of $229,000 for the first quarter of fiscal year 2001. The reason for the increases and decreases was due to production beginning on long-term marine contracts and inventory purchases beginning on the long-term TQG contract in the first quarter of fiscal year 2001. Investing activities in both first quarters of fiscal years 2002 and 2001 were due to equipment purchases of $179,000 and $120,000, respectively, to improve the production efficiencies on the long-term contracts. Financing activities in both first quarter of fiscal years 2002 and 2001 were to scheduled payments on term loans outstanding. The Company also borrowed $1,337,000 against its revolving credit facility during the first quarter of fiscal year 2001. During the first quarter of fiscal year 2002, the Company extended the maturity of its $2,800,000 revolving credit facility to October 15, 2001. The balance of the revolving credit facility at June 30, 2001, is $2,800,000. At June 30, 2001, there was no remaining borrowing available from the revolving credit facility. The Company is having ongoing discussions with its current and other lenders to increase and extend the current revolving credit facility prior to the October 15, 2001, maturity date. Forward Looking Information --------------------------- Certain matters discussed in this report, excluding historical information, include forward-looking statements. Although the Company believes such forward- looking statements are based on reasonable assumptions, no assurance can be given that every objective will be reached. Such statements are made in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. As required by such Act, the Company hereby identifies the following important factors that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted by the Company in forward-looking statements: (i) risks and uncertainties impacting the Company as a whole related to changes in general economic 10 conditions in the U.S.; the availability and cost of capital; changes in laws and regulations to which the Company is subject, including tax, environmental and employment laws and regulations; the cost and effects of legal and administrative claims and proceedings against the Company or its subsidiaries or which may be brought against the Company or its subsidiaries; conditions of the capital markets utilized by the Company to access capital to finance operations; and, to the extent the Company increases its investments and activities abroad, such investments and activities will be subject to foreign economies, laws, and regulations; and (ii) for the Company's defense-related business, business conditions in the military and commercial industries served by the Company; the federal government's defense budgeting process; compliance with government contract and inspection programs; and other risk factors listed from time to time in the Company's reports with the Securities and Exchange Commission. Item 3. Quantitative and Qualitative Disclosures About Market Risk. ---------------------------------------------------------- The Company is exposed to the impact of interest rate fluctuations as a result of current borrowings under a line of credit and a term loan that bear interest at prime plus 1.5% and .5%, respectively. The Company has no exposure with foreign currency contracts. PART II OTHER INFORMATION Item 1. Legal Proceedings. ----------------- Not applicable. Item 2. Changes in Securities and Use of Proceeds. ----------------------------------------- Not applicable. Item 3. Defaults Upon Senior Securities. ------------------------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. --------------------------------------------------- Not applicable. Item 5. Other Information. ----------------- Not applicable. 11 Item 6. Exhibits and Reports on Form 8-K. -------------------------------- (a) Exhibits: None. (b) Reports on Form 8-K: There were no current reports filed on Form 8-K during the three months ended June 30, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned hereunto duly authorized. DATE: August 10, 2001 WESTWOOD CORPORATION By: /s/ Ernest H. McKee --------------------------- Ernest H. McKee, Director, President and Chief Executive Officer By: /s/ David L. Shepherd -------------------------- David L. Shepherd, Secretary/Treasurer and Chief Financial Officer 12