10-K 1 d10k.txt FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2002 Commission file number: 0-19381 WESTWOOD CORPORATION (Exact name of Registrant as specified in its charter) Nevada 87-0430944 ------ ---------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 12402 East 60th Street, Tulsa, Oklahoma 74146 --------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 918/250-4411 Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.003 ----------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The approximate aggregate market value of the Registrant's common stock (based upon the June 20, 2002, closing bid price of the common stock as reported by NASDAQ Bulletin Board) held by non-affiliates was approximately $8,929,334. The number of outstanding shares of the Registrant's common stock as of June 20, 2002, was 6,891,647 shares. DOCUMENTS INCORPORATED BY REFERENCE See Exhibit Index at page 34. TABLE OF CONTENTS
Page Item Number and Caption Number ----------------------- -------- PART I ------ 1. Business 1 2. Properties 6 3. Legal Proceedings 6 4. Submission of Matters to a Vote of Security Holders 7 PART II ------- 5. Market for Registrant's Common Equity and Related Stockholder Matters 7 6. Selected Financial Data 8 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 7A. Quantitative and Qualitative Disclosures About Market Risk 17 8. Financial Statements and Supplementary Data 17 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18 PART III -------- 10. Directors and Executive Officers of the Registrant 18 11. Executive Compensation 20 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 29 13. Certain Relationships and Related Transactions 33 PART IV ------- 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 34
(i) PART I Item 1. Business General Westwood Corporation (the "Company"), a Nevada corporation formed in 1986, is engaged in the design, manufacture and sale of electrical generation, distribution, and automated control equipment and related products. The Company's business is conducted through its wholly owned subsidiaries, NMP Corp. ("NMP"), an Oklahoma corporation formed in 1988; TANO Corp. ("TANO"), a Louisiana corporation formed in May of 1997; and MC II Electric Company, Inc. ("MCII"), a Texas corporation formed in 1989. Mobile Power Systems MCII, acquired by the Company in 1997, is in the business of designing and manufacturing a broad family of diesel, natural gas and turbine mobile electrical generator sets for military applications. MCII's backlog consists primarily of the production of the next generation 30-60 kilowatt tactical quiet generator (TQG) sets for the U.S. Army. MCII is also an important supplier of spare parts for the TQG sets. MCII shares fabrication, testing and administrative facilities with NMP in Tulsa, Oklahoma. In fiscal 2002, assembly functions of NMP and MCII, which were previously combined in the Tulsa facility, were separated due to increased production by both companies. MCII has also designed computer software and flat panel control screens for monitoring and controlling all generator mechanical and operational functions. MCII has 71 employees. Automation and Control Systems TANO designs, manufactures, installs and services high-quality automation and control systems for major military and commercial ships. TANO is a leading and long-standing provider of automated machinery plant control systems for the U.S. Coast Guard, the U.S. Navy and the Military Sealift Command. TANO's backlog presently includes automation and control systems for a fleet of new USCG WLM (Coastal) and WLB (seagoing) Buoy Tenders. These two new ship programs are expected to result in 30 ships being built; at present, all 30 ships have been ordered. TANO's product lines are primarily divided into two segments: Systems, and Parts and Service. Systems consists of the design and manufacture of automation and control systems for new ships, as 1 well as complex retrofits for existing ships. Parts and Service consists of the aftermarket business whereby TANO provides parts and maintenance to a large, worldwide installed base of TANO systems. A typical TANO system consists of a ship control console located on the bridge, a central console located in the ship's engine room, and a number of remote terminal units (RTUs), distributed throughout the ship, which gather data from the ship's machinery and execute commands communicated by the consoles. TANO's systems fall into two broad categories: Propulsion Control Systems and Machinery Monitoring and Control Systems. Propulsion Control Systems monitor and control the different propulsion functions of a ship, including the ship's engine speed, clutches, controllable propeller pitch, z-drive, thrusters and reduction gears. Machinery Monitoring and Control Systems automatically control and monitor a wide variety of functions including the hydraulic systems, cargo monitoring, ballast distribution, electric power management and water and waste-water management. Alarm functions are linked with the monitoring systems to provide audible or visual alarms to alert the ship's operator or crew to problems detected by the monitoring systems. TANO supplies spare parts and service for all current systems, as well as parts and service for systems previously provided to customers over the past thirty years. Spare parts and service orders from TANO's installed base of approximately 600 ships provides a stable and ongoing source of revenue. Management believes a significant growth opportunity exists in this segment since the current level of business has been attained with minimal sales effort. TANO's offices and operations occupy 14,000 square feet of leased space in an office park located in New Orleans, Louisiana. In addition, TANO has field offices in San Diego, California, and Singapore to support field service commitments on the West Coast and the Pacific Rim. TANO has 41 employees. Engineered Products - Marine Electrical Switchgear NMP's marine engineered products line includes marine switchboards designed for the distribution of electrical power, interior communication, weapons systems, electrical plant control and power and lighting control on naval combat vessels. NMP's primary customers for switchboard products are the major shipbuilders that serve as prime defense contractors to the U.S. government. Equipment is also sold to Allied Foreign Governments with State Department approval, under the War Munitions Act. Major contracts in NMP's backlog include switchboards for the first four LPD 17-class amphibious assault ships being built by the Avondale Shipyard Division of Northrup Grumman. This contract includes options for eight additional ships scheduled for procurement through 2006. In addition, NMP currently has signal switching and loadcenter distribution switchboard contracts for 10 DDG 51 Arleigh Burke-class Aegis destroyers with options for the balance of the program, which is estimated to be seven additional ships. 2 NMP's offices and operations occupy 116,000 square feet of leased space in an office park in Tulsa, Oklahoma. NMP shares its fabrication, testing and administrative facilities with MCII. NMP has 99 employees. Marketing The Company's marketing efforts are carried out by employees with extensive experience in the required technical disciplines as well as experience in overall government contracting. Efforts are concentrated on maintaining active contact with customers and industry organizations and staying abreast of developments concerning defense-related procurements. The technical ability to respond in a relatively condensed time frame is of primary importance in the declining Department of Defense requirements. The majority of the Company's contracts are the result of Requests for Quotations ("RFQ"). In this contracting process, the customer requires detailed management and technical proposals, including detailed pricing data, and thereafter establishes a firm fixed price contract with the selected bidder. These contracts generally constitute a development contract for equipment design with an ensuing manufacturing contract for the delivery of equipment and related support services once the development units are approved for production by the customer. Revenues and estimated earnings under long-term fixed-price production contracts are recorded on a percentage of completion basis, generally using units of delivery as the measurement basis for effort accomplished. For long-term contracts which, among other things, provide for the delivery of minimal quantities or require a significant amount of development effort in relation to total contract value, the Company generally recognizes revenues and costs on the percentage-of-completion method, measured by the percentage of total labor costs or total costs incurred to date to estimated total labor costs or total costs for each contract. All other revenues are recognized when units are shipped. The Company normally issues progress billings upon achieving certain milestones defined in the development contracts. The timing of the progress billings is intended to fund 90% to 100% of actual costs incurred under the long-term contracts of the Company. These contracts may be for up to seven years and contain options for additional units at the discretion of the customers, primarily the Department of Defense, based upon its procurement budget as approved by the U. S. Congress. To meet production and delivery requirements and, in some cases, in anticipation of the exercise of options for additional units, the Company must purchase significant amounts of inventory. Beginning in fiscal year 1998, certain long-term contracts began to expire and options for additional units were not exercised due to cutbacks in appropriations in Department of Defense spending and the award of a large follow on contract to a competitor. This trend began to reverse in fiscal year 2000 with the addition of new long-term contracts and with the exercise of related options in fiscal years 2001 and 2002 at NMP and TANO. MCII was awarded a new follow-on long-term TQG contract in fiscal year 2002 (see Item 3 Legal Proceedings). The Company acquired MCII and TANO to expand its product offerings. MCII's original TQG contract, a new product for the Company and MCII, was purchased in the development stage and significant cost overruns were incurred to meet customer specifications. Such specifications were met in the fourth quarter of fiscal 2000 and production of the TQG unit began in the first quarter of fiscal 2001. 3 All domestic defense contracts and subcontracts to which the Company is a party are subject to audit, various profit and cost controls, and standard provisions for termination at the convenience of the U.S. government. Upon termination, other than for a contractor's default, the contractor will normally be entitled to reimbursement for allowable costs and an allowance for profit. Companies supplying defense related equipment to the U.S. government are subject to certain additional business risks peculiar to the industry. Among these risks is the ability of the U.S. government to unilaterally suspend the Company from new contracts pending resolution of alleged violations of procurement laws or regulations. Other risks include a dependence on appropriations by the U.S. government, changes in the U.S. government's procurement policies and the need to bid on programs in advance of design completion. A reduction in expenditures by the U.S. government for products and services of the type manufactured and provided by the Company, lower margins resulting from increasingly competitive procurement policies, a reduction in the volume of contracts or subcontracts awarded to the Company, or substantial cost overruns could have an adverse effect on the Company. There are a limited number of U. S. government defense programs with uncertain levels of funding. The defense programs in which the Company is involved must compete with other defense programs for this limited funding. The defense programs are also normally subject to termination by the government for convenience. The funding of defense programs also competes with non-defense spending of the U.S. government. Budget decisions made by the U. S. government are outside the Company's control and have long-term consequences for the size and structure of the Company. Competition The Company faces competition in most aspects of its business. The Company's products are of a highly technical nature and involve the use of techniques and materials similar to those used by its competitors. The principal competitive factors with respect to the Company's products are technological innovation, product quality, price, adherence to delivery schedules and product reliability. The Company's sales are primarily made under government contracts and subcontracts awarded on the basis of competitive bidding. In addition to price, the factors involved in the award of such contracts include the quality of the proposal and reputation of the bidder. Demand for many of the products sold by the Company is dependent on the level and nature of the U.S. government's defense expenditures. The Company's primary competitor in the military mobile power generation business is Fermont, a division of Engineered Support Systems, Inc. In the automation and control systems market, the Company's primary competitors are C.A.E. Link, Electronic Design, Inc. and Lockheed Martin. The Company's primary competitor in the U.S. Navy surface combatant marine power and switchboard equipment market is SPD Technologies, Inc. 4 Major and Foreign Customers Sales under contracts with the U.S. government or subcontracts with major shipbuilders under contract with the U.S. government accounted for approximately $44,367,000, or 85% of the Company's sales for the fiscal year ended March 31, 2002, $25,219,000, or 83% of the Company's sales for the fiscal year ended March 31, 2001, and $15,664,000, or 87%, of the Company's sales for the fiscal year ended March 31, 2000. Sales to foreign customers totaled $1,986,000 for the fiscal year ended March 31, 2002, $316,000 for the fiscal year ended March 31, 2001, and $605,000 for the fiscal year ended March 31, 2000. For a further discussion of sales to major customers and concentration of credit risk, refer to Note 8 of the Consolidated Financial Statements. Backlog The approximate backlog of third-party, fully-funded purchase orders issued to the Company from customers for the fiscal years ending March 31, 2002, 2001, and 2000, is as follows: 2002 2001 2000 ---- ---- ---- $78,000,000 $107,000,000 $52,000,000 Subsequent to the close of fiscal year 2002, the Company received one additional major order, which totaled approximately $1,000,000, and is expected to be completed during the next fiscal year. During fiscal year 2003, the Company should recognize approximately $63,000,000 in revenues from the existing backlog of outstanding purchase orders to be filled for its customers. Employees As of March 31, 2002, the Company, through its subsidiaries, had 211 employees, none of whom are represented by unions. Management considers its relations with its employees to be satisfactory. Patents and Trademarks The Company owns and has applied for various patents in connection with its equipment and control systems supplied to the U.S. government and commercial purchasers with varying expiration dates. Additionally, through its engineering and development efforts, the Company generates proprietary information and trade secrets regarding the design and manufacture of various products and systems. While the Company considers its proprietary information and patents to be valuable assets, the Company's business is not materially dependent upon patent protection. Because of rapidly changing technology and the need for confidentiality, the Company does not seek to obtain patents in many areas. 5 Materials and Supplies The Company's operations require a wide variety of electrical and mechanical components and raw materials. Except for certain limited sole-source items, which the U.S. government requires the Company to purchase, most items are available from several commercial sources. Environmental Protection The Company believes that it and each of its subsidiaries are currently in compliance with all federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment. Item 2. Properties The Company, through its subsidiaries, leases all of its manufacturing, engineering, warehousing and office facilities comprising a total of approximately 130,000 square feet. The Company's subsidiaries lease office and manufacturing facilities as follows: NMP and MCII, Tulsa, Oklahoma, 116,000 square feet; and TANO, New Orleans, Louisiana, 14,000 square feet. Facility leases for the Company's operations in Tulsa, Oklahoma, and New Orleans, Louisiana, expire between fiscal 2004 and 2009. The Company owns substantially all of its manufacturing, assembly and testing equipment. Item 3. Legal Proceedings On September 27, 2001, the Company announced the receipt of a new contract award for its subsidiary, MCII, for the follow on award of 30 and 60 kilowatt TQGs. The award specified a six-year term with an estimated value of $156,000,000. The award was not expected to impact the Company's results of operations until fiscal year 2004, which ends on March 31, 2004. In response to an October 2001 protest filed by a competing concern with the United States General Accounting Office ("GAO"), and over the objections of MCII, the U. S. Army announced in December 2001 that it would take "corrective action" concerning the procurement which resulted in the award to MCII. The GAO dismissed the protest in light of the Army's action. On January 29, 2002, the Army amended the solicitation and requested a submission of revised proposals, including new price proposals. On January 31, 2002, MCII filed an action in the United States Court of Federal Claims in Washington, D.C., for declaratory and injunctive relief from the Army's decision to take corrective action. MCII asserted that the "corrective action" was unnecessary or, at a minimum, overbroad. MCII also sought preliminary and injunctive relief to enjoin the Army from re-opening the competition. On March 18, 2002, Chief Judge Lawrence M. Baskir issued the Court's Opinion and Order enjoining the Army from re-opening the competition, having determined that resolicitation of the TQG procurement was unwarranted. The Order indicated that the Army could perform a re-evaluation limited to the performance risk criteria, but held that the submission of new proposals, including but not limited to price proposals, was not reasonable. Subsequent to the Court's Order, 6 the Army performed a re-evaluation of performance risk but did not re-open the competition. It is the position of MCII, after consultation with counsel concerning the legal and factual issues involved, that any such re-evaluation should not affect the Army's original decision that MCII was the best value offeror, therefore deserving the contract award. On March 20, 2002, the protester in the original GAO protest filed a request with the GAO that its protest be reinstated and heard on the merits. On April 22, 2002, the GAO dismissed the protest because it merely anticipated improper action that had not taken place since the Army was still re-evaluating the performance risk of MCII, the protestor and any other bidders of the TQG contract. The TQG contract remains suspended pending the re-evaluation. In the ordinary course of its business the Company has various other claims and suits pending. Based on an evaluation, which included consultation with counsel concerning the legal and factual issues involved, the Company's management is of the opinion that such pending claims and suits will not have a material adverse effect on the financial position of the Company. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to the Company's stockholders for a vote during the fourth quarter of the fiscal year ended March 31, 2002. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock is traded on the NASDAQ Bulletin Board Market under the symbol WNMP. On March 31, 2002, there were 120 stockholders of record, and approximately 500 beneficial owners of the Company's common stock. The range of sales prices for the Company's common stock for the last two years, as reported by the National Association of Securities Dealers, Inc., and cash dividends declared were as follows: Quarter Ended High Bid Low Bid Cash Dividends ------------- -------- ------- -------------- Mar. 31, 2002 $ 1.40 $ 1.03 $ 0.00 Dec. 31, 2001 1.85 1.15 0.00 Sept. 30, 2001 1.47 0.72 0.00 June 30, 2001 0.94 0.50 0.00 Mar. 31, 2001 $ 0.875 $ 0.5312 $ 0.00 Dec. 31, 2000 0.9375 0.4375 0.00 Sept. 30, 2000 1.00 0.5625 0.00 June 30, 2000 1.00 0.5625 0.00 7 Due to the continued need for operating capital and current bank credit facility restrictions of dividend payments, it is not anticipated that any cash dividends will be paid during fiscal year 2003. However, future decisions regarding dividend payments will be made by the Board Directors, in advance of each quarter, based on the Company's then existing current capital needs and bank credit facility restrictions. Item 6. Selected Financial Data The following selected financial data should be read in conjunction with the financial statements and related notes thereto for the periods indicated, which are included in this report: Fiscal Years Ended March 31 ----------------------------------------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- (In thousands, except per share data) Sales $ 52,147 $ 30,476 $ 18,052 $ 30,390 $ 29,435 Net Income (Loss) 1,008 (843) (1,715) (2,844) (1,317) Total Assets 22,917 21,233 16,077 19,683 24,831 Long-Term Debt 1,675 2,135 2,686 557 3,152 Net Income (Loss) Per Common Share*: Basic .15 (.12) (.25) (.41) (.19) Diluted .14 (.12) (.25) (.41) (.19) Cash Dividends -- -- -- .01 .04 *Per share amounts have been adjusted to reflect a 10% stock dividend declared in fiscal 1998. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In December 2001 and January 2002, the Securities and Exchange Commission ("SEC") issued statements regarding disclosures by companies within their Management's Discussion and Analysis of Financial Condition and Results of Operations for the current year. In those statements, the SEC cited certain items that the companies should consider in the current year Form 10-K, including identification of critical accounting policies and expanded disclosure of certain liquidity matters and transactions similar to related party activities. The following discussions include items that the SEC has encouraged companies to disclose. The following management comments regarding the Company's financial condition and results of operations should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements included herein. The analysis includes the Company's wholly owned 8 subsidiaries NMP, TANO and MCII. Roflan Associates, Inc., and its wholly owned subsidiary, Peter Gray Corporation, were completely wound down in fiscal year 2000. Critical Accounting Policies and Estimates The Company's financial statements reflect the selection and application of accounting policies, which require management to make significant estimates and assumptions. The Company believes that the following are some of the more critical judgment areas in the application of its accounting policies that currently affect its financial condition and results of operations. Revenue and Estimated Earnings Recognition on Long-Term Contracts Revenue and estimated earnings under long-term high-volume fixed-price contracts are recorded on a percentage of completion basis, generally using units of delivery as the measurement basis for effort accomplished. Estimated earnings are recognized in proportion to recorded revenues. For long-term contracts, which, among other things, provide for the delivery of minimal quantities or require a significant amount of development effort in relation to contract value, the Company generally recognizes revenues and costs on the percentage-of-completion method, measured by the percentage of total labor costs by the marine electrical switchgear segment, as this segment performs its own fabrication and assembly functions to complete its long-term contracts, or total costs by the automation and control systems segment, as this segment outsources its fabrication and assembly functions to complete its long-term contracts. Estimated losses on contracts are provided for in full when they become apparent. The effect of changes in estimates of contract profits can be dramatic depending on the whether the long-term contract requires significant amounts of development effort and testing and if the long-term contract is in the early stages of production. The Company has processes in place to develop its estimates-to-complete on long-term contracts and the associated contract profits based on the most current information available from engineers, test technicians and production personnel. However, actual results and revised estimates-to-complete and contract profits can materially differ from management's earlier estimates. In fiscal year 2002, the effect of changes in estimates-to-complete and contract profits was to decrease operating income by approximately $979,000 from that which would have been reported had the revised estimates been used as the basis of recognition of contract revenues and estimated earnings in the preceding year. The original DDG and LPD contract estimates-to-complete and estimated profits were based upon historical information when the Company produced DDG and LHD electrical switchgear equipment in the mid-1990's. The restart of production under the new DDG and LPD contracts, which were awarded in fiscal year 2000 but not in full production until fiscal year 2002 as to the DDG contract and fourth quarter fiscal year 2002 as to the LPD contract, required more resources than anticipated. Changes in electronic components, additional engineering associated with the electrical switchgear equipment in order to make it smaller than historically produced, related changes in the testing and production processes, and new personnel in fiscal year 2002 caused additional costs to be incurred related to the current DDG and LPD production, as well as changes in the estimates to complete the remaining DDG and LPD shipsets in the Company's backlog. 9 Impairment Assessments of Goodwill and Other Long-Lived Assets The Company evaluates its long-lived assets, including goodwill and other intangibles, of identifiable business activities for impairment when events or changes in circumstances indicate, in management's judgment, that the carrying value of such assets may not be recoverable. In fiscal year 2002, no long-lived assets were determined to be impaired under a "held for use" computation. These computations utilized judgments and assumptions inherent in management's estimate of undiscounted cash flows to determine recoverability of an asset. Management's estimate of future undiscounted cash flows assumes completion of the Company's backlog at March 31, 2002, removal of the suspension of production by the U.S. Army against the new TQG contract awarded on September 27, 2001 (see Item 3 Legal Proceedings), the exercise of options associated with existing contracts, and the award of additional contracts. It is possible that a computation under a "held for sale" situation for certain of these long-lived assets could result in a different assessment because of market conditions, specific transaction terms and a buyer's different viewpoint of future cash flows. Realization of Deferred Tax Assets The Company is required to assess the ultimate realization of deferred tax assets generated from the basis difference in certain assets and liabilities. This assessment takes into consideration tax planning strategies, including assumptions regarding the availability and character of future taxable income. At March 31, 2002, the Company had a $1,147,000 valuation allowance against its net deferred tax assets as $783,000 of the deferred tax assets were comprised of net operating loss carryforwards generated over the past four years, as well as other deferred tax assets, all of whose realization is dependent on future taxable income and tax planning strategies. The ultimate amount of deferred tax assets realized could be materially different from those recorded, as influenced by potential changes in federal and state income tax laws and the accuracy of the assumptions and estimates used to calculate the warranty and inventory deferred tax assets. Warranty, Inventory Obsolescence and Contingent Loss Reserves The Company establishes reserves for estimated warranty, inventory obsolescence and loss contingencies when it is management's assessment that a loss is probable and the amount of the loss is reasonably estimated. Revisions to these reserves are reflected in income in the period in which different facts or information become known or circumstances change that affect the previous assumptions with respect to the likelihood or amount of loss. Reserves for warranty, inventory obsolescence and loss contingencies are based on management's assumptions and estimates and advice of legal counsel or other third parties regarding the probable outcomes of contingent matters. Should the outcome differ from the assumptions and estimates, revisions of the estimated reserves would be required. 10 Results of Operations Twelve Months Ended March 31, 2002 and 2001 For the fiscal year ended March 31, 2002, the Company earned net income of $1,008,000, compared to a net loss of $843,000 for the fiscal year ended March 31, 2001. The diluted earnings per share was $.14 per share compared to a loss of $.12 per share last year. The primary reason for the change in earnings per share is due to an increase in sales at all segments in fiscal year 2002 when compared to fiscal year 2001 as more fully described below. Consolidated revenues for the fiscal year ended March 31, 2002, increased 71.1% to $52,147,000, compared to $30,476,000 for last year. This increase resulted from the $17,164,000 increase in revenues at MCII due to a full year of production of TQG units in fiscal year 2002, $3,702,000 increase in revenues at NMP due to increased foreign sales as well as increased production on the DDG 51 and LPD 17 long-term contracts, and $805,000 increase in revenues at TANO due to increased sales of automation and control systems as well as spare parts and field service revenue. Mobile power system revenues at MCII for fiscal year 2002 were $28,913,000, a 146% increase from last year's revenues of $11,749,000. The higher sales volume is due to a full year of production of TQG units under a long-term contract with the U.S. government. Sales under this long-term contract did not begin until September 2000. Sales in fiscal year 2001 included a $1,107,000 one-time sale to a prime contractor. Marine electrical switchgear revenues at NMP for fiscal 2002 were $17,022,000, a 27.8% increase from last year's revenues of $13,320,000. The higher sales volume is due to increased production on the DDG and LPD long-term contracts for the U.S. Navy. This increase was partially offset by changes in estimates to complete the final non-recurring test procedures on the first shipset of the DDG long-term contract. The actual non-recurring test procedures were completed in fiscal 2002. The change in estimated total contract cost had the effect of reducing the increase in the percent complete of the contract, which resulted in a smaller increase in revenues. Marine automation and control system revenues by TANO for fiscal 2002 were $6,212,000, a 14.9% increase from last year's revenues of $5,407,000. The higher sales volume was primarily due to higher purchases of spare parts as well as a new field service customer. Gross profit for fiscal 2002 as a percentage of sales increased to 12.3%, compared to 9.9% in fiscal 2001. Gross margins improved in fiscal 2002 due to the realization of production efficiencies. Gross margins for fiscal 2001 were impacted by start-up costs incurred due to initial production against a long-term contract between the U.S. Army and MCII beginning in September 2000. These efficiencies were offset somewhat by production delays due to temporary shortages of certain vendor parts and final non-recurring test procedures on the lead ship of the DDG long-term contract in fiscal 2002. Operating expenses were $4,884,000 in fiscal 2002, compared to $4,251,000 in fiscal 2001, a 14.9% increase. The $633,000 increase is primarily due to an additional $85,000 in legal costs defending a protest by a competitor of the award of the new six-year TQG contract to MCII in September 2001, 11 $94,000 in severance due to the resignation of the Company's previous chief financial officer on April 2, 2001, $68,000 in investment banker fees to assist the Company in identifying potential new lenders and strategic alliance partners, increased salaries of $146,000, increased commission expenses to foreign sales brokers of $60,000, increased facility costs due to new building rent of $70,000 and increased medical self-insurance and other fringe benefit costs of $72,000. The remaining increase is due to the overall increase in production at the Company's subsidiaries. Interest expense for fiscal 2002 was $536,000, compared to $581,000 for fiscal 2001, a 7.7% decrease. The decrease was due to a 261 basis point decrease in variable interest rates on the Company's revolving credit line, partially offset by a $739,000 increase in the average revolving credit line daily balance in fiscal 2002 compared to fiscal 2001. The effective income tax rate for fiscal 2002 was 11.8%. This provision is due to state income taxes associated with TANO's operations, as was the provision for fiscal 2001. No other income taxes were accrued in fiscal 2002 or 2001 due to 100% valuation allowances resulting from the utilization of federal and an increase in Oklahoma net operating loss carryforwards. Twelve Months Ended March 31, 2001 and 2000 For the fiscal year ended March 31, 2001, the Company incurred a net loss of $843,000, compared to a net loss of $1,715,000 for the fiscal year ended March 31, 2000. The loss per share was $.12, compared to a loss of $.25 per share for the prior year. The primary reason for the decrease in the net loss is due to the settlement of a patent infringement claim in fiscal 2001 for $1,080,000. This amount is recorded as other income in the Consolidated Statement of Operations. Consolidated revenues for the fiscal year ended March 31, 2001, increased 68.8% to $30,476,000, compared to $18,052,000 for the prior year. This increase resulted primarily from the $8,521,000 increase in sales at MCII due to production of the TQG units beginning in fiscal 2001 and the $7,775,000 increase in revenues at NMP due to increased production on the DDG 51 and LPD contracts, which were awarded in fiscal 2000. These increases were offset by the cessation of operations of Peter Gray and NMP's marine hardware product lines in fiscal year 2000 (a $2,243,000 impact) and delays in the production of MFM 3s at TANO causing a reduction in sales of $1,629,000. Mobile power system revenues at MCII for fiscal year 2001 were $11,749,000, a 264% increase from the prior year's revenues of $3,228,000. The higher sales volume was due to the sale of $8,224,000 in TQG production units, which began shipping in the second quarter of fiscal year 2001. Marine electrical switchgear sales by NMP were $13,320,000 for fiscal year 2001, compared to $5,545,000 for the prior year, an increase of $7,775,000, or 140%. Sales increased due to increased production on the DDG 51 and LPD contracts, which were awarded in fiscal year 2000. This increase in marine electrical switchgear sales was offset by the sale of the hardware products line, which was effected July 1, 1999. Sales of marine electrical hardware products by NMP were $1,916,000 for the first quarter of fiscal year 2000, the only quarter in fiscal 2000 with hardware product sales. Peter Gray recorded final hardware products sales totaling $327,000 prior to the sale of all of its assets during the first quarter of fiscal year 2000. 12 Automation and control systems sales by TANO were $5,407,000 for fiscal year 2001, compared to the prior year's sales of $ 7,036,000, a decrease of 23.2%. The decrease was primarily due to delays in the production of the new MFM 3 as a result of ongoing design reviews by customers. Gross profit for fiscal 2001 as a percentage of sales declined to 9.9%, compared to 18.6% in fiscal year 2000. The decline in gross profit for fiscal year 2001 resulted from the $1.2 million loss from the production start up in fiscal 2001 of the TQG units and $640,000 of engineering overruns incurred on the lead units of the DDG 51, MFM 3 and LPD contracts, which were awarded in fiscal 2000 and 2001. Production is increasing to meet delivery dates in fiscal 2002 on the long-term contracts and the TQG production units and gross profit is expected to improve as volumes increase, lead-unit engineering is completed and learning curves are improved. Write-downs for obsolete or slow-moving inventories also contributed to the lower gross profit in fiscal 2001. Write-downs of inventory in fiscal year 2001 were $165,000 and resulted from the continued evaluation of inventory not associated with long-term contracts. Operating expenses were $4,251,000 for fiscal year 2001, compared to $5,065,000 for the prior year, a 16% decrease. Marketing and selling expenses decreased $373,000 and general and administrative expenses decreased $441,000. The sale of the hardware products line at the end of the first quarter of fiscal 2000 accounted for most of the reduction in marketing and selling expenses. The decrease in general and administrative expenses was due to the reduction in administrative personnel at NMP and $223,000 lower incentive compensation. Interest expense increased from $430,000 to $581,000 due to an additional $2,381,000 in net borrowings and 110 basis point increase in the weighted-average interest rate in fiscal year 2001. The fiscal 2001 and 2000 tax provisions do not include any federal income tax impact due to the tax net operating losses incurred by the Company in both years. Income taxes in fiscal 2001 are due to state income taxes at TANO. The fiscal 2000 income tax benefit includes $137,000 of income tax refunds due to revisions of fiscal 1999 estimated taxes offset by $47,000 of state income taxes at TANO. A valuation allowance on net deferred tax assets, including the net operating loss carryforward asset, of $374,000 and $333,000 was added in fiscal year 2001 and 2000, respectively, due to the losses incurred by the Company in both years. Liquidity and Capital Resources Cash flow used in operations for the fiscal year ended March 31, 2002 was $476,000. During this period cash was provided by depreciation and amortization of $974,000; decreased costs and estimated earnings on uncompleted contracts of $156,000; increased accounts payable of $1,781,000; and increased accrued liabilities of $82,000. Major uses of cash were increases of accounts receivable of $1,165,000; increases in inventory of $1,838,000; increases in long-term accounts receivable retainage of $186,000; and decreases in billings in excess of costs and estimated earnings on uncompleted contracts of $1,284,000. Accounts receivable increased due to billings related to the shipment of TQG units. Inventory, accounts payable and accrued liabilities increased due to increased production in fiscal 2002 on the 13 TQG, DDG and LPD contracts at MCII and NMP. Long-term accounts receivable retainage increased due to completion of the first two shipsets of the DDG long-term contract in fiscal 2002, which is also the reason for the net decrease in progress billings in excess of costs and estimated earnings on uncompleted contracts. Investing activities for fiscal year 2002 included purchases of $536,000 in equipment. These purchases were primarily for manufacturing and test equipment and leasehold improvements at a new facility leased by NMP to improve production efficiencies on long-term contracts. The cash used for the equipment purchases was partially offset by the receipt of the second $250,000 annual installment on the note receivable from the purchaser of the marine hardware business sold in July 1999 as well as the sale of equipment no longer required for production under the Company's long-term contracts. Cash flow used in operations for the fiscal year ended March 31, 2001, was $2,043,000. During this period, cash was provided by depreciation and amortization of $1,015,000; non-cash interest expense of $101,000; increased progress billings in excess of costs and estimated earnings on uncompleted contracts of $3,258,000; and increases in accounts payable of $772,000. Major uses of cash were increases in inventory of $1,147,000, increases in accounts receivable of $4,465,000, increases in costs and estimated earnings in excess of billings on uncompleted contracts of $211,000, reductions of accrued liabilities of $513,000, and the net loss of $843,000. Accounts receivable increased due to billings related to the shipment of TQG units and the $1,080,000 receivable as a result of the settlement of a patent infringement claim. Also, accounts receivable increased due to an increase in progress billings as a result of additional milestones being achieved on the NMP long-term contracts entered into in fiscal 2000. Inventory and accounts payable also increased in fiscal 2001 due to increased production in fiscal 2001 on the new contracts entered into in fiscal 2000 at MCII and NMP. Accrued liabilities decreased due to the settlement of certain liabilities ($160,000) of Peter Gray, which ceased operations in the first quarter of fiscal 2000, lower incentive compensation accruals ($223,000) and lower warranty reserves ($90,000). Investing activities for fiscal year 2001 included purchases of $391,000 of equipment. These purchases were primarily in connection with the relocation of MCII's manufacturing facilities to Tulsa, Oklahoma, and replacement of aging equipment at NMP and TANO. The relocation of MCII was completed in April 2000. Cash flow from operations for the fiscal year ended March 31, 2000, was $1,043,000. During this period, cash was provided by depreciation and amortization of $933,000; decreases in accounts receivable of $1,174,000, long-term accounts receivable retainage of $264,000, and income taxes receivable of $789,000, increased progress billings in excess of costs and estimated earnings on uncompleted contracts of $700,000; decreased costs and estimated earnings in excess of billings on uncompleted contracts of $1,256,000; and increases in accounts payable of $1,904,000. Major uses of cash were increases in inventory of $3,951,000, reductions of accrued liabilities of $148,000, and the net loss of $1,715,000. 14 Accounts receivable and long-term accounts receivable retainage collections increased $134,000 due to completion of long-term production contracts and the collection of $1,040,000 of receivables related to the operations of Peter Gray and NMP's marine electrical hardware business which were sold in fiscal 2000. Income taxes receivable decreased due to the collection of the receivable related to the carryback of the fiscal 1999 net loss to previous periods, whereby previously paid income taxes were claimed for refund. Throughout the fourth quarter of fiscal year 2000, the Company was allowed, under contract agreement, to invoice the U.S. Army for the receipt of major materials received under the TQG contract. At the end of the fiscal year, the proceeds from these progress billings, in the amount of $2.1 million, were used to fund the payment of materials and labor required under the contract. In the first quarter of fiscal 2001, the Company began to produce the generator sets on a commercial basis and cash receipts for units, which were not 100% progress billed, began to be received in fiscal 2001. NMP also met certain milestones in fiscal 2000 that allowed progress billings on new long-term contracts entered into in fiscal 2000. Inventory and accounts payable also increased in fiscal 2000 due to the new contracts that entered into production late in the year at MCII and NMP. Accrued liabilities decreased due to the settlement of certain liabilities of Peter Gray, which ceased operations in the first quarter of fiscal 2000. Investing activities for fiscal year 2000 included purchases of $637,000 of equipment. These purchases were primarily in connection with the relocation of MCII's manufacturing facilities to Tulsa, Oklahoma. The relocation was completed in April 2000. Investing activities for fiscal year 2000 also included $1.9 million in proceeds from the sale of certain assets of Peter Gray and NMP's marine electrical hardware product line. On August 13, 1999, the Company entered into a new Loan Agreement with the Stillwater National Bank and Trust Company of Stillwater, Oklahoma. As amended on October 25, 2000, the Loan Agreement established a $2.8 million revolving credit facility. On December 18, 2001, the revolving credit line was increased to $3.8 million and on March 15, 2002, was increased again to $4.5 million. The proceeds under the revolving credit facility are used from time to time to finance working capital needs. Interest on the revolving credit facility is paid monthly. As additional security for the $800,000 increase in the revolving credit line in October 2000, the Company's President provided a personal guarantee and pledged 750,000 shares his stock in the Company. The personal guarantee was released with the amendment to the revolving credit line on March 15, 2002. At March 31, 2002, there was $1.5 million available under the revolving credit line. In addition, the Loan Agreement also established a $2.0 million term loan for a period of five years, which matures on August 13, 2004. The proceeds of the term loan were used to repay in full a previously existing loan with NationsBank, N.A. The term loan has a monthly amortization 15 schedule for the payment of interest and the repayment of principal. The term loan balance at March 31, 2002 is $1,083,000 compared to $1,487,000 at March 31, 2001. In November 2001, the Company obtained a commitment from its bank through June 30, 2002, for up to $1.0 million in additional short-term revolving credit lines based upon foreign customer irrevocable letters of credit on outstanding purchase orders. The letters of credit expire between January 2002 and June 2002. Proceeds from these financings were to be used to fund production on these foreign customer orders prior to shipment. During November 2001, the Company obtained a $430,000 revolving credit facility using two of its foreign customer irrevocable letters of credit as collateral. At March 31, 2002, $400,000 was outstanding under this letter of credit revolving credit facility. The facility matured and was repaid on May 31, 2002, when one of the collateralized letters of credit expired. Interest on this revolving credit facility was paid upon maturity. On December 23, 1999, the Company issued 10% Subordinated Convertible Notes (the "1999 Notes") in the face amount of $1.0 million. The 1999 Notes bear a fixed 10% rate of interest and are convertible into common stock of the Company at the option of the 1999 Note holders. The 1999 Notes mature on December 23, 2004. The net proceeds of the 1999 Notes were used for general cash requirements of the Company. In February 2001, the Company issued 12% Subordinated Convertible Notes (the "2001 Notes") in the face amount of $880,000. The 2001 Notes bear a fixed 12% rate of interest and are convertible into common stock of the Company at the option of the 2001 Note holders subsequent to June 30, 2001. The net proceeds of the 2001 Notes were used for the working capital needs of the Company. The 2001 Notes were amended in fiscal 2002 to mature on February 13, 2003. In fiscal year 2003, the Company expects to fund capital expenditures, debt payments and working-capital requirements through cash generated from operations and the use of the available portion of its $4.5 million revolving credit line. The revolving credit line matures on July 15, 2002, at which time the entire outstanding principal of the revolving credit facility is to be paid in full by either renewal or repayment. The Company is having ongoing discussions with its current and other lenders to increase and extend the current revolving credit facility prior to its maturity date on July 15, 2002. The Company believes it will continue to be in compliance with the financial covenants and ratios as defined in the revolving credit facility agreement (see Note 4 to the Consolidated Financial Statements), no events of default as defined in the agreement will occur, the representations and warranties made in the agreement will continue to be accurate, and the borrowing base comprised of acceptable receivables and inventories will be maintained. In fiscal year 2002, the Company engaged an investment banker to assist in evaluating options to enhance shareholder value, including strategic alliances and/or strategic combinations. This engagement is expected to continue through fiscal year 2003. 16 Recently Issued Accounting Standards See Note 1 to the Consolidated Financial Statements for a discussion of SFAS No. 142, "Goodwill and Other Intangible Assets," and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Forward Looking Information Certain matters discussed in this report, excluding historical information, include forward-looking statements. Although the Company believes such forward-looking statements are based on reasonable assumptions, no assurance can be given that every objective will be reached. Such statements are made in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. As required by such Act, the Company hereby identifies the following important factors that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted by the Company in forward-looking statements: (i) risks and uncertainties impacting the Company as a whole related to changes in general economic conditions in the United States; the availability and cost of capital; changes in laws and regulations to which the Company is subject, including tax, environmental and employment laws and regulations; the cost and effects of legal and administrative claims and proceedings against the Company or its subsidiaries or which may be brought against the Company or its subsidiaries; conditions of the capital markets utilized by the Company to access capital to finance operations; and, to the extent the Company increases its investments and activities abroad, such investments and activities will be subject to foreign economies, laws, and regulations; and (ii) for the Company's defense related businesses, business conditions in the military and commercial industries served by the Company; U.S. government defense budgeting processes; compliance with government contract and inspection programs; and other risk factors listed from time to time in the Company's reports with the Securities and Exchange Commission. Item 7A. 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 revolving credit line and a term loan with interest rates at prime plus 1.5% and .75%, respectively. (See Notes 4 and 13 to the Consolidated Financial Statements included elsewhere herein.) The Company has no exposure with foreign currency contracts. Item 8. Financial Statements and Supplementary Data The information required by this item begins at page F-1, attached. 17 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure There have been no disagreements with the Company's independent public accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. PART III Item 10. Directors and Executive Officers of the Registrant As of March 31, 2002, the Board of Directors consisted of Ernest H. McKee, Richard E. Minshall, Anthony Pantaleoni, John H. Williams, Sr., and William J. Preston. David L. Shepherd has served as Chief Financial Officer and Secretary-Treasurer since April 23, 2001. Executive Officers and Directors Name Age Position ---- --- -------- Ernest H. McKee 64 President, Chief Executive Officer, and Chairman of the Board David L. Shepherd 35 Chief Financial Officer and Secretary-Treasurer Richard E. Minshall 64 Director Anthony Pantaleoni 63 Director John H. Williams, Sr. 84 Director William J. Preston 67 Director Ernest H. McKee has served as President, Chief Executive Officer, and Chairman of the Board of Directors of Westwood Corporation since 1988. From 1984 to 1987, Mr. McKee was Chief Executive Officer and principal owner of Four-Em Enterprises, Tulsa, Oklahoma, a company engaged in the manufacture and sale of piping products and other manufacturing goods for the petrochemical industry. From 1968 to 1984, Mr. McKee was President and Chief Executive Officer of Flo-Bend, Inc., Sand Springs, Oklahoma, a manufacturer of products for the refining and petrochemical industry. From 1960 to 1967, Mr. McKee was product manager for U.S. Steel Company, Pittsburgh, Pennsylvania. Mr. McKee received his Bachelor of Science degree from Kent State University in 1960. 18 David L. Shepherd has served as Chief Financial Officer and Secretary-Treasurer of Westwood Corporation since April 23, 2001. Prior to joining the Company, Mr. Shepherd had been with Ernst & Young LLP since 1988. Mr. Shepherd is a member of the Financial Executives International, the American Institute of Certified Public Accountants and the Oklahoma Society of Certified Public Accountants. Mr. Shepherd received his BS in Accounting degree from Southwest Missouri State University in 1988. Richard E. Minshall has served as a Director of Westwood Corporation since 1988. Mr. Minshall has been President and Chairman of the Board of Directors of Capital Advisors, Inc., of Tulsa, Oklahoma, since 1978. Mr. Minshall is a Director of American Gilsonite Company and First National Bank & Trust Company of Broken Arrow. Mr. Minshall is a member of the Oklahoma Society of Financial Analysts and the Oklahoma Bar Association. Anthony Pantaleoni has served as a Director of Westwood Corporation since 1988. Mr. Pantaleoni has been a member of the law firm of Fulbright & Jaworski L.L.P., New York, New York, from 1989 until 2002, when he became Of Counsel to the firm. Mr. Pantaleoni is a Director of Universal Health Services, Inc. (NYSE: UHSB), American Gilsonite Company, and AAON, Inc (NASDAQ). John H. Williams, Sr. has served as a Director of Westwood Corporation since 1997. Mr. Williams is an honorary Director of The Williams Companies, Inc. (NYSE: WMB), of Tulsa, Oklahoma, having resigned as Chairman of the Board and Chief Executive Officer in late 1978. Mr. Williams joined the Williams Brothers Company in 1946, and was elected President and Chief Executive Officer in 1950. In 1971, the name of the company was changed to The Williams Companies, Inc. Mr. Williams received his civil engineering degree from Yale University in 1940. Mr. Williams presently serves on the Board of Directors of Apco Argentina Inc., Unit Corporation (NYSE: UNT) and Willbros Group, Inc. (NYSE: WG). William J. Preston has served on the Board of Directors since October 1999. Since 1978, Mr. Preston has been a principal and one of the founding partners of Preston Exploration, L.L.C., a privately owned oil and gas exploration and production company located in The Woodlands, Texas. In 1978, Mr. Preston retired from the active practice of medicine after twelve years of practice in Tulsa, Oklahoma, in the field of otolaryngology. Mr. Preston received an undergraduate degree in engineering from the University of Tulsa, and graduated from the University of Oklahoma Medical School. During the fiscal year ended March 31, 2002, the Board of Directors held four regular meetings and numerous teleconferences. Each Director attended the meetings in person or by teleconference. The Audit Committee of the Board of Directors is composed of Richard E. Minshall, Anthony Pantaleoni and John H. Williams, Sr. Other than the Audit Committee, the Board of Directors presently has no standing committees. 19 Item 11. Executive Compensation The following Tables I through III present information concerning the cash compensation and stock options provided to Messrs. McKee and Shepherd. The notes to these tables provide more specific information regarding compensation as of March 31, 2002. Ernest H. McKee and David L. Shepherd were the only Executive Officers of the Company during the fiscal year ended March 31, 2002. No other persons were considered to be Executive Officers and received compensation in excess of $100,000 for the fiscal year ended March 31, 2002. Table I Summary Compensation Table
Long-Term Annual Compensation(a) Compensation --------------------------------------- -------------------------- Other Annual Securities All Other Name and Fiscal Compen- Underlying Compen- Principal Position Year Salary Bonus sation(b) Options sation(c) ------------------ ---- ------ ----- --------- ------------- --------- Ernest H. McKee 2002 $225,000 $ ---- ---- ---- $6,938 Chief Executive 2001 225,000 ---- ---- ---- 5,246 Officer 2000 225,000 ---- ---- ---- 6,750 David L. Shepherd 2002 $119,708 $ ---- ---- ---- $2,869 Chief Financial Officer(d)
(a) Amounts shown include cash compensation earned by Executive Officers. (b) The value of other benefits to any Officer during fiscal year 2002 did not exceed the lesser of $50,000 or 10% of the Executive Officer's total annual salary and bonus or fall within any other category requiring inclusion. (c) Amounts contributed to the Company's 401K Plan on behalf of the named Executive Officer. (d) Represents compensation commencing April 23, 2001, when Mr. Shepherd joined the Company at his current position. Mr. Shepherd's employment contract commenced April 23, 2001, for a two-year term. 20 Table II Option Grants in Last Fiscal Year One option grant to an Executive Officer was made in fiscal 2002. On April 23, 2001, Mr. Shepherd received a one-time grant of an option to acquire 50,000 shares of the Company's common stock at an exercise price of $1.00 per share. The option vests at 20% per year each April 23, beginning on April 23, 2002, and ending on April 23, 2006. Each 20% increment shall be exercisable beginning six months from the vesting date until five years from the vesting date of such 20% increment. Table III Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Value of Unexercised Unexercised Options In-the-Money Options at March 31, 2002 at March 31, 2002(c) ---------------------- ----------------------- Acquired on Value Exer- Unexer- Exer- Unexer- Name Exercise Realized cisable cisable cisable cisable ---- --------------- -------- -------- ------- ------- -------- Ernest H. McKee 0 $0 144,924(a) 30,000(a) $5,800 $0 David L. Shepherd 0 $0 --(b) 50,000(b) $ 0 $0
(a) Represents grants of options to acquire 16,106 shares of the Company's common stock annually on March 20, 1993, through 1996, pursuant to the 1992 Directors' Stock Option Plan, as amended on October 27, 1999 (the "1992 Directors' Plan"). The shares issued under these options have been automatically adjusted for the 10% stock dividends occurring annually from calendar 1993 through 1997. The exercise prices of the 1993, 1994, 1995 and 1996 option grants were $3.125, $3.50, $2.25 and $1.75, per share, respectively, which were the NASDAQ closing prices on the date of the grants ($1.94, $2.39, $1.69, and $1.45 per share, respectively, after automatic adjustment for the 10% stock dividends occurring annually from calendar 1993 through 1997). The options became exercisable six (6) months after the date of the grants, and expire ten (10) years from the date of grant. On September 3, 1996, an additional one-time grant of an option to acquire 60,500 shares (as adjusted for the 10% stock dividends occurring on December 22, 1996, and 1997) was made pursuant to the 1992 Directors' Plan. The exercise price of this option grant was $2.125 per share ($1.75 after automatic adjustment for the 10% stock dividends in calendar 1996 and 1997), which was the NASDAQ closing price on September 3, 1996. This option vests at the rate of 20% (12,100 shares) per year commencing on September 3, 1997, through 2001, and each 20% increment is exercisable for a period of ten (10) years commencing on the vesting date. 21 On June 7, 2000, the Company's Board of Directors adopted the 2000 Directors' Stock Option Plan (the "2000 Directors' Plan") and granted an option to purchase 50,000 shares of the Company's common stock to each of the Company's five directors. The shareholders of the Company approved the 2000 Directors' Plan on December 14, 2000. The exercise price of the options granted on June 7, 2000, are $1.00 per share, which was greater than the NASDAQ closing price of the Company's common stock on the date of the grant ($.75 per share). These options vest at the rate of 20% (10,000 shares) per year commencing on December 7, 2000, through 2004, and each 20% increment is exercisable for a period of ten (10) years commencing on the vesting date. (b) On April 23, 2001, Mr. Shepherd received a one-time grant of an option to purchase up to 50,000 shares of the common stock of the Company at an exercise price of $1.00 per share. This option was granted pursuant to the Company's 1992 Employees' Incentive and Nonqualified Stock Option Plan. The option granted to Mr. Shepherd vests at 20% per year each April 23, beginning on April 23, 2002 and ending on April 23, 2006. Each 20% increment shall be exercisable beginning six months from the vesting date until five years from the vesting date of such 20% increment. (c) Based on the $1.29 closing price of the Company's common stock on March 29, 2002 (the last trading day for the year ended March 31, 2002), less the exercise price. The values shown reflect the value of options accumulated over periods of up to two years. Such values had not been realized at that date and may not be realized. In the event the options are exercised, their value will depend on the market price of the Company's common stock on the date of the exercise. The Company maintains a 401K Plan, which was effective January 1, 1989, and is available for participation by all employees without minimum age or service requirements. Each participating employee can defer up to 17% of his annual compensation to a specified limit. The Company matches 100% of the employee's deferrals, with such matching contributions not to exceed 3% of the employee's annual compensation. The Company's total contributions to the Plan for fiscal year 2002 were $189,000. Directors' fees are payable to each outside Director at the rate of $2,500 per quarter. Richard E. Minshall, Anthony Pantaleoni, William J. Preston and John H. Williams, Sr., the Company's outside Directors, have each been paid the sum of $10,000 during fiscal year 2002. Mr. McKee, although a Director, was not paid a Director's fee. 22 Stock Performance Graph The following graph compares the Company's five-year cumulative total return to the NASDAQ U.S. Stock Index and the S&P Aerospace/Defense Index over a period beginning on March 31, 1997, and ending on March 31, 2002. The total stockholder return assumes $100 invested on March 31, 1997, in the Company and each of the Indexes shown. It also assumes reinvestment of all dividends. The Company is in a unique industry and has few competitors manufacturing electrical generation and control equipment, primarily for military application, switching panelboards, switchboards, and electronic components. The Company's primary competitors are not publicly traded on any U.S. Stock Market and therefore, no financial data is obtainable for comparative purposes. With the acquisition of E. Systems, Inc., in mid-1995 and Loral Corp. in January of 1996, the S&P Electronic Defense Index, the index used by the Company until fiscal year 2002, became composed solely of one company, Raytheon Company. Since the S&P Electronic Defense Index contained only one company, Standard and Poor discontinued the index in fiscal year 2002. The Company explored other possible indexes for purposes of future reporting and determined the S&P Aerospace/Defense Index was the best existing industry index available for comparison purposes. However, the Company does not believe that any existing industry segment index provides meaningful comparisons as of this date as the S&P Aerospace/Defense Index is currently comprised of much larger companies, including Boeing Company, General Dynamics, Goodrich Corporation, Honeywell International, Inc., Lockheed Martin Corporation, Northrup Grumman Corporation, Raytheon Company, Rockwell Collins and United Technologies. Price performance of the Company's common stock may be affected by many factors other than earnings, including the small capitalization of the Company, limited availability of public float, and the relatively small number of market makers in the Company stock. Past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. 23 Table IV Comparison of 5 Year Cumulative Total Return Assumes Initial Investment of $100 March 2002 [Graph] Tabular Description of Performance Graph Measurement Period Westwood NASDAQ S&P Aerospace/ (Fiscal Year Covered) Corporation U.S. Stock Index Defense Index --------------------- ----------- ---------------- --------------- March 31, 1997 $100 $100 $100 FYE 03/31/98 103 151.57 117.87 FYE 03/31/99 51.96 204.77 83.89 FYE 03/31/00 56.68 380.94 77.02 FYE 03/31/01 47.23 152.35 115.56 FYE 03/31/02 97.49 153.23 128.67 _________________ Assumes $100 invested on March 31, 1997 and reinvestment of dividends, in Westwood common stock, NASDAQ U.S. Stock Index and S&P Aerospace/Defense Index. 24 Compensation Report The Board of Directors is responsible for setting the policies that govern the Company's compensation programs, administering the Company's stock option plans and establishing the cash compensation of Executive Officers. Due to its small size, the Board has determined that a Compensation Committee is not needed and all matters of compensation for Executive Officers is determined by the Board as a whole. Generally, the Board considers compensation matters in April of each year when sufficient financial information is available for the Board to review projected year-end results. While the Board reviews the financial performance of the Company on an annual basis in connection with its compensation review, such policies of the Board are informal and are, to a large part, subjective. The Board's determination of executive compensation is centered on six factors, including: 1. Earnings per share; 2. Enhancement of net worth; 3. Backlog/development of defense contracts; 4. Reputation for quality; 5. Expansion of product base and services, including development of new electrical generation and control devices, within the defense industry; and, 6. Diversification into commercial, non-defense related, products. The Board has no quantifiable compensation formulas or policies based on the six factors set forth above. The level of bonus compensation paid to the Company's Executive Officers is based upon the performance of the Company, and a comparison of the salary structures of the Company's Executive Officers with the general economic conditions of corporations in the Tulsa, Oklahoma area, as well as other corporations in the defense industry. Mr. McKee's salary of $225,000 per annum was established on March 31, 1997. Mr. McKee, as a Director of the Company, also participates in options granted pursuant to the 1992 and 2000 Directors' Plans, along with each of the other four Directors. However, as set forth in Tables II and III hereof, participation in the 1992 and 2000 Directors' Plans cannot be said to provide an adequate incentive or award for the services of the Company's Chief Executive Officer. Subsequent to March 31, 2002, the Board of Directors approved a $75,000 bonus to Mr. McKee as a result of his efforts in returning the Company to profitability in fiscal 2002. Mr. Shepherd was hired on April 23, 2001, as Chief Financial Officer and Secretary-Treasurer of the Company. The salary of Mr. Shepherd was established for a two-year period by the employment 25 agreement entered into between Mr. Shepherd and the Company at the rate of $127,500 per annum, payable in equal monthly installments. Subsequent to March 31, 2002, Mr. Shepherd's annual salary was increased to $135,000 as a result of his efforts in assisting Mr. McKee in returning the Company to profitability in fiscal 2002. The 1992 Directors' Plan, as adopted by the Stockholders of the Company in 1992, and as amended in 1993, provided for the annual issuance of options to acquire 16,106 shares (as adjusted for the annual stock dividends occurring from calendar 1993 through 1997) of the Company's common stock to Directors of the Company for a five-year period at an exercise price equal to the reported closing price of the Company's common stock by NASDAQ on the date of each grant. In 1996, the 1992 Directors' Plan was amended to increase the term of the options granted thereunder from five to ten years and to provide for the one-time grant of an option to acquire 60,500 shares (as adjusted for the annual 10% stock dividends occurring in calendar 1996 and 1997) of the Company's common stock at an exercise price equal to NASDAQ's reported closing price of the Company's common stock on September 3, 1996. The 1996 option vests 20% of the 60,500 shares annually on September 3, 1997, through 2001. The 1992 Directors' Plan is automatic in that the amount of the March 20, 1992, through March 20, 1996, grants and the computation of the exercise price of the related options were fixed by the 1992 Directors' Plan, as previously adopted by the Stockholders, and no action by the Board of Directors is required to perfect the award. It was originally designed as an incentive to maintain appropriate members on the Board, and to induce others to become members of the Board, should that be in the best interest of the Company's Stockholders. The options issued on March 20, 1992 expired on March 20, 2002. Subsequent to March 31, 2002, the Board of Directors approved a $7,500 bonus to each of the original three directors, which includes Mr. McKee, Mr. Minshall, and Mr. Pantaleoni for their efforts since the inception of the operations of the Company in March 1988. On June 7, 2000, the Company's Board of Directors adopted the 2000 Directors' Plan and granted an option to purchase 50,000 shares of the Company's common stock to each of the Company's five directors. The shareholders of the Company approved the 2000 Directors' Plan on December 14, 2000. The exercise price of the options granted on June 7, 2000, is $1.00 per share, which was greater than the NASDAQ closing price of the Company's common stock on the date of the grant ($.75 per share). These options vest at the rate of 20% (10,000 shares) per year commencing on December 7, 2000, through 2004, and each 20% increment is exercisable for a period of ten (10) years commencing on the vesting date. The 2000 Directors' Plan was adopted and approved by the Stockholders: 1) as all of the shares reserved for issuance under the 1992 Directors' Plan had been issued as of March 31, 1997; 2) to strengthen the ability of the Company to maintain appropriate members of the Board by increasing their proprietary interest in the Company's success and to compensate them for the substantial communication, input and effort they dispense; and 3) should it be in the best interest of the Company to do so, to attract and retain well-qualified individuals to become members of the Board. 26 Stock Option Plans Incentive and Non-Qualified Stock Option Plan of Westwood Corporation On March 20, 1992, the Board of Directors of the Company adopted the Incentive and Non-Qualified Stock Option Plan (the "Incentive Stock Option Plan"), which was approved by the Stockholders of the Company at the Annual Meeting held September 24, 1992. The Incentive Stock Option Plan is intended to assist the Company in securing and retaining key employees by allowing them to participate in the ownership and growth of the Company through the grant of incentive and non-qualified options to full-time employees of the Company and its subsidiaries. Incentive stock options granted under the Incentive Stock Option Plan are intended to be "Incentive Stock Options" as defined by Section 422 of the Internal Revenue Code. The Incentive Stock Option Plan originally provided that 300,000 shares of common stock were reserved for issuance upon exercise of options to be granted under the Incentive Stock Option Plan. The Incentive Stock Option Plan was automatically adjusted as a result of the 10% stock dividends occurring annually from calendar 1993 through 1997. A total of 483,153 shares are now reserved for issuance under its terms. The Incentive Stock Option Plan is administered by the Board of Directors, which determines who shall receive options, the number of shares of common stock that may be purchased under options, the time and manner of exercise of options and option prices. The term of options granted under the Incentive Stock Option Plan may not exceed ten years (five years in the case of an incentive stock option granted to an optionee owning more than 10% of the voting stock of the Company (a "10% Holder")). The price for incentive stock options shall not be less than 100% of the "fair market value" of the shares of common stock at the time the option is granted; provided, however, that with respect to an incentive stock option, in the case of a 10% Holder, the purchase price per share shall be at least 110% of such fair market value. The price for non-qualified options shall not be less than 75% of the "fair market value" of the shares of common stock at the time the option is granted. The aggregate fair market value of the shares of common stock as to which an optionee may exercise incentive stock options may not exceed $100,000 in any calendar year. Payment for shares of common stock purchased upon exercise of options is to be made in cash, check or other instrument, but in the discretion of the Board of Directors, may be made by delivery of other shares of common stock of the Company. Under certain circumstances involving a change in the number of outstanding shares of common stock without the receipt by the Company of any consideration therefor, such as a stock split, stock consolidation or payment of a stock dividend, the class and aggregate number of shares of common stock in respect of which options may be granted under the Incentive Stock Option Plan, the class and number of shares subject to each outstanding option and the option price per share will be proportionately adjusted. In addition, if the Company is involved in a merger or consolidation, the options granted under the Incentive Stock Option Plan will be adjusted proportionately. An option may not be transferred other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order and, during the lifetime of the option holder, may be exercised only by such holder. 27 The Incentive Stock Option Plan will terminate on September 24, 2002, and may be terminated at any time prior to that date by the Board of Directors. On December 1, 2000, options for 151,300 shares of the Company's common stock were granted to employees. The options are exercisable for the period from six months to five (5) years from the grant date. On April 23, 2001, an option for 50,000 shares of the Company's common stock was granted to Mr. Shepherd. The option vests at 20% (10,000 shares) per annum, beginning on April 23, 2002 through 2006. The option is exercisable for the period from six months to five (5) years from the vesting date. There have been no additional issuances of options under the Incentive Stock Option Plan since April 23, 2001. Directors' Stock Option Plans On March 20, 1992, the Board of Directors of the Company adopted the 1992 Directors' Stock Option Plan (the "1992 Directors' Plan"), which was approved by Stockholders of the Company at the Annual Meeting held September 24, 1992. The 1992 Directors' Plan originally provided for the issuance of up to 100,000 shares of common stock. The Stockholders authorized an additional 100,000 shares for issuance under the 1992 Directors' Plan on October 28, 1993. On March 20, 1996, grants of options to acquire 16,106 shares of the Company's common stock were issued to each of the Directors of the Company pursuant to the terms of the 1992 Directors' Plan, which represented the final options reserved under the October 28, 1993, authorization. In September 1996, the 1992 Directors' Plan was amended (the "1996 Amendment"), as approved by the Stockholders of the Company at the Annual Meeting, to provide each Director who had served for five (5) years the one-time grant of an option to acquire 60,500 shares (as adjusted for the annual 10% stock dividend occurring in calendar 1996 and 1997) of the Company's common stock at $2.125 per share ($1.75 per share as adjusted for the annual 10% stock dividend occurring in calendar 1996 and 1997). The 1996 Amendment imposed a vesting schedule which vests 20% of the 60,500 shares on each of September 3, 1997, through 2001. Additionally, the 1996 Amendment increased the term of the options granted pursuant to the 1992 Directors' Plan to ten (10) years from the grant date of each option and increased the number of shares available under the Directors' Plan by an additional 200,000 shares, from 266,000 to 466,000. The 1992 Directors' Plan has been automatically adjusted for the annual 10% stock dividends occurring from calendar 1993 through 1997. The 1992 Directors' Plan was also increased as a result of amendments approved by the Stockholders at the 1997 and 1999 Annual Meetings of Stockholders ("Amendments") for the additional authorization of options representing 55,000 shares of the Company's common stock to John H. Williams, Sr., and 50,000 shares to William J. Preston, upon their appointment to the Board of Directors. As a result of the Amendments and the 10% stock dividend occurring in calendar 1997, a total of 669,102 shares are now reserved for issuance under the terms of the 1992 Directors' Plan. The options granted under the 1992 Directors' Plan from calendar 1993 through 1996, are exercisable six months after the grant date, and expire ten years after the grant date. The options granted on September 3, 1996, vest at the rate of 20% (12,100 shares) per year, and each vested 20% increment 28 is exercisable for a period of ten years, commencing on the vesting date. In the case of a Director's death or permanent disability, the options immediately vest and are exercisable for a period of one year thereafter and then terminate. If a Director's membership on the Board of Directors terminates for any reason, any option held on such date may be exercised for a period of one year after the date of termination, unless the option terminates sooner by its terms. The 1992 Directors' Plan was originally adopted to provide additional incentive to Directors of the Company, the benefits of which would be tied directly to stock performance of the Company. Moreover, it was hoped that the 1992 Directors' Plan could partially compensate the four outside Directors, Messrs. Minshall, Pantaleoni, Williams and Preston, for the considerable amount of consulting and communication time spent by them outside of Board meetings. When the 1992 Directors' Plan was originally adopted, the average trading price for common stock of the Company was approximately $3.00 per share and it was hoped that the price per share of the common stock would grow by approximately 10% per year, which would result in a potential gain to each Director of approximately $3,000 on an annual basis. However, as of the date hereof, none of the Options issued to Directors over the last ten years have resulted in any gain and none have been exercised. In fact, the March 20, 1992 options, representing 48,318 shares, expired on March 20, 2002. On June 7, 2000, the Company's Board of Directors adopted the 2000 Directors' Stock Option Plan (the "2000 Directors' Plan"), reserved 500,000 shares of the Company's common stock for issuance thereunder, and granted an option to purchase 50,000 shares of the Company's common stock to each of the Company's five directors. The shareholders of the Company approved the 2000 Directors' Plan on December 14, 2000. The exercise price of the options granted on June 7, 2000, is $1.00 per share, which was greater than the NASDAQ closing price of the Company's common stock on the date of the grant ($.75 per share). These options vest at the rate of 20% (10,000 shares) per year commencing on December 7, 2000, through 2004, and each 20% increment is exercisable for a period of ten (10) years commencing on the vesting date. The 2000 Directors' Plan was adopted and approved by the Stockholders: 1) as all of the shares reserved for issuance under the 1992 Directors' Plan had been issued as of March 31, 1997; 2) to strengthen the ability of the Company to maintain appropriate members of the Board by increasing their proprietary interest in the Company's success and to compensate them for the substantial communication, input and effort they dispense; and 3) should it be in the best interest of the Company to do so, to attract and retain well-qualified individuals to become members of the Board. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following table sets forth information regarding the ownership of the Company's common stock by (i) each beneficial owner of more than 5% of the outstanding common stock, (ii) each Director, (iii) the Chief Executive Officer, and Chief Financial Officer and (iv) the Executive Officers and Directors as a group. The information is given as of March 31, 2002, except as noted. Unless otherwise indicated, each of the Stockholders has sole voting and investment power with respect to the shares beneficially owned. 29 Number of Shares
----------------------------------------------------------------------------------------------------------------------------------- 10% Convertible 12% Convertible Percent of Name of Owner or Subordinated Subordinated Common Outstanding Identity of Group Options Notes (a) Notes (b) Warrants (c) Stock (d) Stock (e) ----------------------------------------------------------------------------------------------------------------------------------- Ernest H. McKee 2902 E. 74th Street 174,924(f) 190,000 68,750 121,563 1,377,040 26.1% Tulsa, Oklahoma 74136 ----------------------------------------------------------------------------------------------------------------------------------- David L. Shepherd 7909 S. 77th East Avenue 50,000(g) ---- ---- ---- ---- 0.7% Tulsa, OK 74133 ----------------------------------------------------------------------------------------------------------------------------------- William J. Preston 1717 Woodstead Court 100,000(h) 190,000 178,750 164,063 770,558 18.3% The Woodlands, Texas 77380 ----------------------------------------------------------------------------------------------------------------------------------- Richard E. Minshall 320 S. Boston Avenue 174,924(f) 190,000(i) 178,750(i) 164,063(i) 416,669(j) 14.7% Suite 1300 Tulsa, Oklahoma 74103 ----------------------------------------------------------------------------------------------------------------------------------- Anthony Pantaleoni 666 Fifth Avenue 174,924(f) 140,000(k) 178,750 139,063(l) 196,938(m) 10.9% New York, New York 10103 ----------------------------------------------------------------------------------------------------------------------------------- John H. Williams, Sr. 1800 S. Baltimore Ave. 105,000(n) 90,000 110,000 87,500 17,000 5.3% Tenth Floor Tulsa, Oklahoma 74119 ----------------------------------------------------------------------------------------------------------------------------------- Robert E. Lorton 1440 S. Owasso Ave. ---- ---- ---- ---- 348,491 5.2% Tulsa, Oklahoma 74120-5609 ----------------------------------------------------------------------------------------------------------------------------------- All Executive Officers and Directors as a Group 779,772 800,000 715,000 676,252 2,778,205 58.1% (6 persons) -----------------------------------------------------------------------------------------------------------------------------------
(a) On December 23, 1999, the Company issued 10% Subordinated Convertible Notes in the face amount of $1,000,000. The shares set forth in this column are convertible pursuant to the 10% Convertible Subordinated Notes included within Units of the Company purchased for $10,000 per Unit. Each Unit consists of a 10% Convertible Note in the amount of $10,000, convertible into 10,000 shares of common stock of the Company, and one warrant to purchase 5,000 shares of common stock at an exercise price of $1.00 per share. The maturity date for each 10% Convertible Subordinated Note, and the expiration date of each 1999 warrant, is December 23, 2004. The 10% Subordinated Convertible Notes are callable by the Company, under certain conditions, at the 30 Company's option after December 15, 2001, upon thirty (30) days' notice, in the event the Company's common stock closing price is in excess of $2.50 per share for thirty (30) consecutive days within sixty (60) days of notice of redemption. (b) In February 2001, the Company issued 12% Convertible Subordinated Notes in the face amount of $880,000, pursuant to the terms of a Note Purchase Agreement dated effective as of February 14, 2001 (the "Agreement"). Each 12% Convertible Subordinated Note is convertible into a like number of shares of the Company from July 1, 2001 through the maturity date, as amended, of February 13, 2003. The Agreement further provided for the issuance of warrants to acquire common stock of the Company to the note holders as follows: (i) upon execution of the Agreement, for a pro rata share of 120,000 shares, as determined in accordance with the Agreement; and (ii) on each of February 28, March 14 and March 28, 2001 (or such other dates, as adjusted for the note holders' respective funding dates), based on the principal outstanding under the 12% Convertible Subordinated Notes on such date, if any. Each warrant is exercisable for a period of five years from the issuance date. (c) Total shares under all warrants issued. See notes (a) and (b) above. (d) Does not include shares pursuant to the 10% and 12% Convertible Subordinated Notes, warrants or unexercised options. (e) For purposes of this computation, the percentage of ownership shown presumes exercise of all options, convertible notes and warrants as to each individual. (f) Pursuant to the 1992 and 2000 Directors' Plans, Messrs. McKee, Minshall and Pantaleoni have received options to acquire a total of 174,924 shares of the Company's common stock. As of March 31, 2002, each of these Directors is vested in, and holds exercisable options to acquire 144,924 shares. Each Director's option to acquire the balance of 30,000 shares under the 2000 Directors' Plan will vest and become excercisable at the rate of 10,000 shares per year on December 7, 2002 through 2004. (g) On April 23, 2001, Mr. Shepherd received an option to acquire 50,000 shares of the Company's common stock under the Incentive Stock Option Plan pursuant to his employment agreement. This option vests at the rate of 10,000 shares on each April 23, 2002 through 2006. The option becomes exercisable, as to each vested portion, on each October 23, 2002, through 2006. (h) Pursuant to the 1992 and 2000 Directors' Plans, Mr. Preston received options to acquire a total of 100,000 shares of the Company's common stock. At March 31, 2002, Mr. Preston is vested in, and holds exercisable options to acquire 40,000 shares. The option to acquire the balance of 30,000 shares pursuant to the 1992 Directors' Plan will vest and become exercisable at the rate of 10,000 shares per year on each October 27, 2002, through 2004. The option to acquire the balance of 30,000 shares pursuant to the 2000 Directors' Plan will vest and become exercisable at the rate of 10,000 shares per year on each December 7, 2002 through 2004. 31 (i) The amounts represented are held by Capital Advisors, Inc., of which Mr. Minshall is the Chief Executive Officer and controlling shareholder. (j) Includes 129,967 shares of common stock owned beneficially by Mr. Minshall individually; 5,368 shares owned beneficially by Mr. Minshall's wife; 181,933 shares held beneficially by Capital Advisors, Inc., 1,084 shares owned by Minshall & Company, Inc., and 98,317 shares owned by a revocable trust for the benefit of Mr. Minshall's mother, of which Mr. Minshall is Trustee, as to which he disclaims any beneficial ownership. Mr. Minshall is the Chief Executive Officer and controlling shareholder of Capital Advisors, Inc., and Minshall & Company, Inc. (k) Includes 50,000 shares convertible by Mr. Pantaleoni; 50,000 shares convertible by Mr. Pantaleoni's wife, as to which he disclaims beneficial ownership; and 40,000 shares convertible by the Anthony Pantaleoni Trust, of which Mr. Pantaleoni is a trustee and a beneficiary. (l) Includes warrants to acquire 94,063 shares issued to Mr. Pantaleoni; a warrant to acquire 25,000 shares issued to Mr. Pantaleoni's wife, as to which he disclaims beneficial ownership; and a warrant to acquire 20,000 shares issued to the Anthony Pantaleoni Trust, of which Mr. Pantaleoni is a trustee and a beneficiary. (m) Includes 56,705 shares of common stock owned beneficially by Mr. Pantaleoni; 60,000 shares held by a trust of which Mr. Pantaleoni is a trustee and a beneficiary; 40,233 shares owned by Mr. Pantaleoni's wife, as to which he disclaims beneficial ownership; and 40,000 shares held by trusts of which Mr. Pantaleoni is a trustee, and as to which he disclaims beneficial ownership. (n) Pursuant to the 1992 and 2000 Directors' Plans, Mr. Williams received options to acquire a total of 105,000 shares (as adjusted for the 10% stock dividend occurring on December 22, 1997) of the Company's common stock. As of March 31, 2002, Mr. Williams is vested in, and holds exercisable options to acquire 64,000 shares. The option to acquire the balance of 11,000 shares pursuant to the 1992 Directors' Plan will vest and become exercisable on June 6, 2002. The option to acquire the balance of 30,000 shares under the 2000 Directors' Plan will vest and become exercisable at the rate of 10,000 shares per year on each December 7, 2002 through 2004. The following table sets forth information regarding the Company's common stock that is authorized for issuance under equity compensation plans. The information is given as of March 31, 2002, except as noted. 32 Equity Compensation Plan Information
---------------------------------------------------------------------------------------------------------------------------------- Number of Securities Remaining Available for Future Issuance Under Number of Securities to Equity Compensation be Issued Upon Exercise of Weighted-Average Plans (Excluding of Outstanding Options Exercise Price of Securities Reflected in Plan Category (a) Outstanding Options Column (a)) ---------------------------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by security holders 931,072 $1.37 721,183 ---------------------------------------------------------------------------------------------------------------------------------- Equity compensation plans not approved by security holders 120,000 $1.00 -- ---------------------------------------------------------------------------------------------------------------------------------- Total 1,051,072 $1.27 721,183 ----------------------------------------------------------------------------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions Mr. McKee was employed pursuant to a written employment contract with the Company through March 2000. This contract, as amended effective March 31, 1997, provided for a base salary of $225,000 and bonus provisions subject to the discretion of the Board of Directors. The contract provided for other benefits, including a Company-owned automobile, club memberships, and reimbursement of business expenses. Mr. McKee is being compensated as President on the same terms as contained in the former written agreement. There are currently no plans by the Company or Mr. McKee to formalize Mr. McKee's current employment terms into a written agreement. Richard Minshall, a director of the Company, is the Chief Executive Officer and controlling shareholder of Capital Advisors, Inc. Capital Advisors, Inc. provides services to the Company in regard to public news releases and public relations matters. A fee of $1,500 per month is paid to Capital Advisors, Inc. for these services. Capital Advisors, Inc. also served as an investment advisor for two of the Company's 401(k) plans until October 1, 2001. For the fiscal year ended March 31, 2002, the total sum of $38,000 was paid to Capital Advisors, Inc., in connection with these services. Matthew E. McKee, a son of Ernest H. McKee, served as Operations Manager of NMP Corp. in fiscal year 2002. In May 2002, Matthew E. McKee became the Operations Manager for NMP Corp. and MCII. For the Company's fiscal year ending March 31, 2002, Matthew E. McKee received a salary of $75,000. Matthew E. McKee's current salary is $85,000 per year. Matthew E. McKee obtained a B.B.A. degree from the University of Texas, College of Business in 1992 and has been employed in various management capacities at the Company since 1992. 33 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements - The Index to Consolidated Financial Statements is found on page F-1, attached 2. Financial Statement Schedules - Schedule II - Valuation and Qualifying Accounts, is found at page F-28, attached 3. List of Exhibits - The following documents are included as exhibits to this Form 10-K. The exhibits listed below and incorporated by reference from previous filings are indicated as such by the information supplied in the parenthetical thereafter. Exhibits marked with an asterisk ("*") are filed herewith. 2.1 Exchange Agreement between Westwood Corporation and NMP Corp. dated March 29, 1988 (Exhibit 2.1 to Form 10 Registration Statement, filed July 2, 1991 ("Form 10")) 2.2 Asset Purchase Agreement between NMP Corp. and General Signal (Exhibit 2.2 to Form 10) 3.1 Articles of Incorporation of Westwood Corporation (Exhibit 3.1 to Form 10) 3.2 Bylaws of Westwood Corporation (Exhibit 3.2 to Form 10) 3.3 Certificate of Amendment to Article IV of Articles of Incorporation of Westwood Corporation (Exhibit 3.3 to Form 8-K Report, filed February 6, 1992) 4.1 Specimen Stock Certificate (Exhibit 4.1 to Form 10) 4.2 Subordinated NMP Corp. Note (Exhibit 4.2 to Form 10) 4.3 Westwood Corporation 10% Convertible Subordinated Note (Specimen), dated December 23, 1999 (Exhibit 4.3 to Form 10-K/A for the year ended March 31, 2000 filed on April 2, 2001) 4.4 Westwood Corporation Common Stock Warrant (Specimen), dated December 23, 1999 (Exhibit 4.4 to Form 10-K/A for the year ended March 31, 2000 filed on April 2, 2001) 4.5 Westwood Corporation 12% Convertible Subordinated Note (Specimen), dated February 13, 2001 (Exhibit 4.5 to Form 10-K for the year ended March 31, 2001 filed June 29, 2001) 34 4.6 Westwood Corporation Common Stock Warrant (Specimen), dated February 13, 2001 Exhibit 4.6 to Form 10-K for the year ended March 31, 2001 filed on June 29, 2001) 10.1 Employment Agreement, as amended, of Ernest H. McKee (Exhibit 10.1 to Form 10) 10.2 Employment Agreement, as amended, of Paul R. Carolus (Exhibit 10.2 to Form 10) 10.3 Credit Agreement Fourth National Bank of Tulsa (Exhibit 10.3 to Form 10) 10.4 Bath Iron Works Corporation, contract for constructing DDG-51 Class Guided Missile Destroyer Program (Exhibit 10.4 to Form 8 Amendment No. 1 to Form 10, filed August 16, 1991 ("Form 10 Amendment")) 10.5 China Shipbuilding Corporation, contract for construction of PFG-2 Guided Missile Frigate (Exhibit 10.5 to Form 10 Amendment) 10.6 Exclusive Manufacturing and Territory Sales Agreement, dated January 22, 1992, between NMP Corp., and Roxtec AB (Exhibit 10.6 to Form 10-K for the year ended March 31, 1992, filed June 18, 1992) 10.7 1992 Employees' Stock Option Plan of Westwood Corporation (Exhibit 10.7 to Form 10-K for the year ended March 31, 1992, filed June 18, 1992) 10.8 1992 Directors' Stock Option Plan of Westwood Corporation (Exhibit 10.8 to Form 10-K for the year ended March 31, 1992, filed June 18, 1992) 10.9 1992 Directors' Stock Option Plan as amended October 28, 1993 (Exhibit 10.9 to Form 10-K for the year ended March 31, 1994, filed June 29, 1994) 10.10 Stock Purchase Agreement, by and between Roflan Associates, Inc., and the Company, dated May 1, 1996 (Exhibit to Form 8-K Report, filed May 15, 1996) 10.11 Agreement of Purchase and Sale of Assets, by and between Westwood/TANO, Inc., and TANO Automation, Inc., dated May 13, 1997 (Exhibit to Form 8-K Report, filed June 5, 1997) 10.12 Stock Purchase Agreement, by and between MCII Electric Company, Inc., and the Company, dated May 28, 1997 (Exhibit to Form 8-K Report, filed June 12, 1997) 10.13 Stock Purchase Agreement I, by and between Roxtec Holding, AB, and the Company, dated September 30, 1997 (Exhibit to Form 8-K Report, filed October 15, 1997) 35 10.14 Loan Agreement, by and between Stillwater National Bank and Trust Company of Stillwater, Oklahoma, the Company and its subsidiaries, dated August 13, 1999 (Exhibit 10.14 to Form 10-K/A for the year ended March 31, 2000, filed on April 2, 2001) 10.15 2000 Directors' Stock Option Plan of Westwood Corporation (Exhibit B to the Proxy Statement dated October 31 2000, filed on November 1, 2000) 10.16 Employment Agreement of David L. Shepherd (Exhibit 10.16 to Form 10-K for the year ended March 31, 2001 filed on June 29, 2001) 10.17 Loan Agreement, as amended, by and between Stillwater National Bank and Trust Company of Stillwater, Oklahoma, the Company and its subsidiaries, dated October 25, 2000 (Exhibit 10.17 to Form 10-K for the year ended March 31, 2001 filed on June 29, 2001) 10.18 Guaranty Agreement by and between Stillwater National Bank and Trust Company of Stillwater, Oklahoma and Ernest H. McKee, dated October 25, 2000 (Exhibit 10.18 to Form 10-K for the year ended March 31, 2001 filed on June 29, 2001) 10.19* Amended Loan Agreement by and between Stillwater National Bank and Trust Company of Stillwater, Oklahoma, the Company and its subsidiaries, effective as of June 25, 2001 10.20* Second Amended Loan Agreement by and between Stillwater National Bank and Trust Company of Stillwater, Oklahoma, the Company and its subsidiaries, dated December 18, 2001 10.21* Third Amended Loan Agreement by and between Stillwater National Bank and Trust Company of Stillwater, Oklahoma, the Company and its subsidiaries, dated March 15, 2002 21.1* Subsidiaries of the Registrant 22.1 Articles of Incorporation of NMP Corp. (Exhibit 22.1 to Form 10) 22.2 Bylaws of NMP Corp. (Exhibit 22.2 to Form 10) 36 (b) Reports on Form 8-K The following filings on Form 8-K were made during the last quarter of the fiscal year ending March 31, 2002: On January 31, 2002, the Company filed a current report on Form 8-K to report that the award of the TQG long-term contract to MCII as announced on October 3, 2001 has been protested by a competing concern and an amendment to the solicitation was issued on January 29, 2002, which required the resubmission of certain pricing criteria and subsequent re-evaluation. The January 31, 2002 Form 8-K also reported that the Company filed on January 31, 2002 a lawsuit in the United States Court of Federal Claims for declaratory and injunctive relief of the United States Army's decision to take corrective action in response to the filed protest. The lawsuit also sought preliminary and permanent injunctive relief to enjoin the United States Army from conducting an unnecessary and improper reopening of competition with respect to the contract properly awarded to MCII. On March 26, 2002, the Company filed a current report on Form 8-K to report that the United States Court of Federal Claims had issued an opinion and order as of March 18, 2002 to enjoin the United States Army from re-opening the competition, having determined that resolicitation of the TQG procurement was unwarranted. The order indicated that the United States Army could perform a re-evaluation limited to the performance risk criteria, but held that the submission of new proposals, including but not limited to price proposals, was not reasonable. Subsequent to the Court order, the Army indicated that it would perform a re-evaluation of performance risk but would not reopen the competition. The TQG contract remains suspended pending the re-evaluation. 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. WESTWOOD CORPORATION By: /s/ Ernest H. McKee By: /s/ Richard E. Minshall --------------------------------- ------------------------------- Ernest H. McKee Richard E. Minshall President and Director Director By: /s/ David L. Shepherd By: /s/ Anthony Pantaleoni --------------------------------- ------------------------------- David L. Shepherd Anthony Pantaleoni Secretary/Treasurer and Director Chief Financial Officer By: /s/ John H. Williams By: /s/ William J. Preston --------------------------------- ------------------------------- John H. Williams William J. Preston Director Director DATE: June 21, 2002 38 Westwood Corporation Index to Consolidated Financial Statements and Schedule
Page ---- Covered by Report of Independent Auditors Report of Independent Auditors ................................................................ F-2 Consolidated Balance Sheets as of March 31, 2002 and 2001 .............................................................................. F-3 Consolidated Statements of Operations for the years ended March 31, 2002, 2001 and 2000 ....................................................................................... F-5 Consolidated Statements of Stockholders' Equity for the years ended March 31, 2002, 2001 and 2000 ....................................................................................... F-6 Consolidated Statements of Cash Flows for the years ended March 31, 2002, 2001 and 2000 .................................................. F-7 Notes to Consolidated Financial Statements for the years ended March 31, 2002, 2001 and 2000................................................... F-9 Schedule for the years ended March 31, 2002, 2001 and 2000: II - Valuation and Qualifying Accounts ................................................... F-28 Not Covered by Report of Independent Auditors: Selected Quarterly Financial Information (unaudited) .......................................... F-29
All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the respective financial statements or notes thereto. F-1 Report of Independent Auditors To Board of Directors Westwood Corporation We have audited the accompanying consolidated balance sheets of Westwood Corporation as of March 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 2002. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Westwood Corporation at March 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Tulsa, Oklahoma June 7, 2002 F-2 Westwood Corporation Consolidated Balance Sheets
March 31 2002 2001 ----------------------------- (In Thousands) Assets Current assets: Cash $ - $ 545 Accounts receivable (including retainage receivable of $643 in 2002 and $733 in 2001), net of allowance for doubtful accounts of $24 in 2002 and $35 in 2001 8,090 6,987 Costs and estimated earnings in excess of billings on uncompleted contracts 997 1,153 Inventories 7,669 5,831 Prepaid expenses 54 92 Note receivable 239 250 ----------------------------- Total current assets 17,049 14,858 Plant and equipment, at cost: Leasehold improvements 476 382 Machinery and equipment 4,059 4,717 Patterns and tools 115 109 ----------------------------- 4,650 5,208 Accumulated depreciation (3,168) (3,647) ----------------------------- 1,482 1,561 Note receivable - 213 Loan origination costs (net of accumulated amortization costs of $27 in 2002 and $15 in 2001) 33 45 Goodwill (net of accumulated amortization of $2,091 in 2002 and $1,702 in 2001) 3,957 4,346 Long-term accounts receivable, retainage 396 210 ----------------------------- Total assets $ 22,917 $ 21,233 =============================
F-3
March 31 2002 2001 ----------------------------- (In Thousands, except for share amounts) Liabilities and stockholders' equity Current liabilities: Accounts payable $ 6,854 $ 5,073 Accrued liabilities 940 858 Billings in excess of costs and estimated earnings on uncompleted contracts 3,175 4,459 Current portion of long-term debt due to related parties 715 715 Current portion of long-term debt 4,033 3,476 ----------------------------- Total current liabilities 15,717 14,581 Long-term debt due to related parties 850 850 Long-term debt 825 1,285 Stockholders' equity: Preferred stock, 5,000,000 shares authorized, $.001 par value, no shares issued or outstanding -- -- Common stock, 20,000,000 shares authorized, $.003 par value, 6,891,647 shares issued and outstanding 21 21 Capital in excess of par value 5,978 5,978 Accumulated deficit (379) (1,387) Treasury stock, 127,000 shares at cost (95) (95) ----------------------------- Total stockholders' equity 5,525 4,517 ----------------------------- Total liabilities and stockholders' equity $ 22,917 $ 21,233 =============================
See accompanying notes. F-4 Westwood Corporation Consolidated Statements of Operations
Year ended March 31 2002 2001 2000 ---------------------------------------------- (In Thousands, except earnings per share) Sales $ 52,147 $ 30,476 $ 18,052 Cost of sales 45,758 27,458 14,699 ---------------------------------------------- Gross profit 6,389 3,018 3,353 Operating expenses: Marketing and selling expenses 464 431 804 General and administrative expenses 4,420 3,820 4,261 ---------------------------------------------- 4,884 4,251 5,065 ---------------------------------------------- Operating profit (loss) 1,505 (1,233) (1,712) Other income (expense): Interest expense (536) (581) (430) Net gain on sale of subsidiary/product lines -- -- 190 Patent infringement settlement -- 1,080 -- Other 174 7 147 ---------------------------------------------- (362) 506 (93) ---------------------------------------------- Income (loss) before income taxes 1,143 (727) (1,805) Provision (benefit) for income taxes 135 116 (90) ---------------------------------------------- Net income (loss) $ 1,008 $ (843) $ (1,715) ============================================== Basic and diluted earnings (loss) per share: Basic earnings (loss) per share $ .15 $ (.12) $ (.25) Diluted earnings (loss) per share $ .14 $ (.12) $ (.25)
See accompanying notes. F-5 Westwood Corporation Consolidated Statements of Stockholders' Equity
Retained Capital in Earnings Preferred Common Excess of (Accumulated Treasury Stock Stock Par Value Deficit) Stock Total ---------------------------------------------------------------------------------- (In Thousand, except for share amounts) Balance at March 31, 1999 $ -- $ 21 $ 5,978 $ 1,171 $ -- $ 7,170 Net loss -- -- -- (1,715) -- (1,715) Purchase of 127,000 shares of common stock -- -- -- -- (95) (95) ---------------------------------------------------------------------------------- Balance at March 31, 2000 -- 21 5,978 (544) (95) 5,360 Net loss -- -- -- (843) -- (843) ---------------------------------------------------------------------------------- Balance at March 31, 2001 -- 21 5,978 ( 1,387) (95) 4,517 Net income -- -- -- 1,008 -- 1,008 ---------------------------------------------------------------------------------- Balance at March 31, 2002 $ -- $ 21 $ 5,978 $ (379) $ (95) $ 5,525 ==================================================================================
See accompanying notes. F-6 Westwood Corporation Consolidated Statements of Cash Flows
Year ended March 31 2002 2001 2000 ---------------------------------------- (In Thousands) Operating activities Net income (loss) $ 1,008 $ (843) $ (1,715) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 974 1,015 933 Non-cash interest expense 4 101 30 Non-cash interest income (26) (45) (37) Gain on sale of subsidiary/product lines -- -- (190) (Gain) loss on asset disposals (20) -- 61 Cash flows impacted by changes in: Accounts receivable (1,165) (4,465) 1,174 Costs and estimated earnings in excess of billings on uncompleted contracts 156 (211) 1,256 Inventories (1,838) (1,147) (3,951) Prepaid expenses 38 (25) (27) Long-term accounts receivable, retainage (186) 60 264 Accounts payable 1,781 772 1,904 Accrued liabilities 82 (513) (148) Billings in excess of costs and estimated earnings on uncompleted contracts (1,284) 3,258 700 Income taxes receivable -- -- 789 ---------------------------------------- Net cash provided by (used in) operating activities (476) (2,043) 1,043
F-7 Westwood Corporation Consolidated Statements of Cash Flows (continued)
Year ended March 31 2002 2001 2000 ----------------------------------------- (In Thousands, except for share amounts) Investing activities Purchases of plant and equipment $ (536) $ (391) $ (637) Proceeds from sales of plant and equipment 124 55 - Proceeds from sale of subsidiary/ product lines -- -- 1,946 Receipt of payment on note receivable 250 250 - ----------------------------------------- Net cash provided by (used in) investing activities (162) (86) 1,309 Financing activities Principal payments on debt (528) (536) (9,187) Borrowings of debt 621 2,202 5,150 Borrowings of debt from related parties -- 715 850 Acquisition of 127,000 shares of common stock -- -- (95) Loan origination cost payments -- -- (60) ----------------------------------------- Net cash provided by (used in) financing activities 93 2,381 (3,342) ----------------------------------------- Net increase (decrease) in cash (545) 252 (990) Cash at beginning of year 545 293 1,283 ----------------------------------------- Cash at end of year $ - $ 545 $ 293 =========================================
See accompanying notes. F-8 Westwood Corporation Notes to Consolidated Financial Statements March 31, 2002, 2001 and 2000 1. Description of Business Activities and Significant Accounting Policies Business Activities The wholly owned operating subsidiaries included in the consolidated financial statements of Westwood Corporation ("Company"), a holding company, are: Subsidiary Nature of Business -------------------------------- -------------------------------------------- NMP Corp. ("NMP") NMP designs and manufactures electrical distribution and signal switching equipment in accordance with specifications of the U.S. Navy for use in combat ships. NMP also manufactured and marketed a diversified line of marine electrical hardware products, primarily for the U.S. Navy, until July 1999. TANO Corp. ("TANO") Designs, manufactures, sells and services automation and control systems for both military and commercial ships and machinery plant automation and control systems. MCII Electric Company, Inc. Designs, manufactures, sells and supports ("MCII") mobile generator sets for both military and commercial applications. Peter Gray Corporation, Commercial cold forger, serving mostly ("Peter Gray") wholly owned commercial markets within the U.S. until subsidiary of Roflan and June 1999. Associates, Inc., a holding company In the third quarter of fiscal 1999, the Company decided to cease its Peter Gray operations and completed the sale of certain assets in the first quarter of fiscal 2000 for $696,000. Peter Gray's gain on disposal of these assets was $294,000 in 2000. In July 1999, the Company sold certain marine hardware-related assets of NMP for a total sales price of $2,000,000. Of the total sales price, $1,250,000 was received by March 31, 2000. The remaining balance of $750,000 is due in three annual installments of F-9 1. Description of Business Activities and Significant Accounting Policies (continued) $250,000 beginning September 1, 2000 and is represented by a non-interest-bearing note receivable. The Company recorded a $104,000 loss in fiscal 2000 in connection with the sale, primarily due to the Company recording the note receivable at a discount rate of 8.75%. Estimates and Assumptions The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions, in particular estimates of anticipated contract costs and revenues utilized in the earnings recognition process, that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Estimates and assumptions which, in the opinion of management, are significant to the underlying amounts included in the financial statements and for which it would be reasonably possible that future events or information could change those estimates include: 1) revenues and estimated earnings on long-term contracts, 2) impairment assessments of goodwill and long-lived assets, 3) realization of deferred net operating loss carryforward income tax assets and 4) warranty and inventory obsolescence reserves. Consolidation Policy The consolidated financial statements include the account balances of the Company and its wholly owned subsidiaries. All intercompany balances have been eliminated. Contracts Revenues and estimated earnings under long-term fixed-price production contracts are recorded on a percentage of completion basis, generally using units of delivery as the measurement basis for effort accomplished. Estimated earnings are recognized in proportion to recorded revenues. For long-term contracts which, among other things, provide for the delivery of minimal quantities or require a significant amount of development effort in relation to total contract value, the Company generally recognizes revenues and costs on the percentage-of-completion method, measured by the percentage of total labor costs or total costs incurred to date to estimated total labor costs or total costs for each contract. All other revenues are derived from the sale of spare parts and contracts that are started and completed in 90 days, and are recognized when the parts or units are shipped. Estimated losses on contracts are provided for in full when they become apparent. F-10 1. Description of Business Activities and Significant Accounting Policies (continued) The excess of any accumulated costs and estimated earnings over billings is presented as a current asset in the accompanying balance sheet. When billings exceed costs incurred and estimated earnings, the excess of such billings is presented as a current liability. The effect of changes in estimates of contract profits was to decrease 2002 net operating income and increase 2001 and 2000 net operating loss by approximately $979,000, $228,000 and $437,000, respectively, from that which would have been reported had the revised estimates been used as the basis of recognition of contract profits in the preceding years. Research and Development The Company does not generally incur research and development costs for its own behalf. Customer-sponsored research and development costs incurred pursuant to contracts are recorded as contract costs. Inventories Inventories are stated at the lower of cost or market. Cost is determined principally on the average cost method. Depreciation Plant and equipment are depreciated using the straight-line method over their estimated useful lives. Depreciation expense of $573,000, $606,000 and $540,000 is included in the 2002, 2001 and 2000 statements of operations, respectively, based on the utilization of the particular assets. Major replacements and improvements are capitalized while minor replacements, maintenance and repairs which do not extend useful lives are expensed. Loan Origination Costs Loan origination costs are being amortized on a straight-line basis over the scheduled five-year maturity period of the convertible subordinate debentures (see Note 4). Goodwill Goodwill, which represents the excess of cost over fair value of net assets of businesses acquired, is amortized on a straight line basis over periods not exceeding 15 years. F-11 1. Description of Business Activities and Significant Accounting Policies (continued) Income Taxes The Company includes the operations of its subsidiaries in its consolidated federal income tax return. Deferred income taxes are computed using the liability method and are provided on all temporary differences between the financial basis and the tax basis of the Company's assets and liabilities. Management's judgment and income tax assumptions are used to determine the levels, if any, of valuation allowances associated with deferred tax assets. Employee/Director Stock-Based Awards Employee/director stock-based awards are accounted for under Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. Fixed-plan common stock options generally do not result in compensation expense because the exercise price of the stock options equals or is more than the market price of the underlying stock on the date of grant. Treasury Stock Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Gains or losses on the subsequent reissuance of shares are credited or charged to capital in excess of par value using the average-cost method. Earnings Per Share Basic earnings per share are based upon the average number of common shares outstanding. Diluted earnings per share include any dilutive effect of stock options, warrants or convertible subordinated debentures. Long-Lived Assets The Company evaluates the long-lived assets, including related goodwill and other intangibles, of identifiable business activities for impairment when events or changes in circumstances indicate, in management's judgment, that the carrying value of such assets may not be recoverable. When such a determination has been made, management's estimate of undiscounted future cash flows attributable to the assets is compared to the carrying value of the assets to determine whether an impairment has occurred. If an impairment of the carrying value has occurred, the amount of the impairment recognized in the financial statements is determined by estimating the fair value of the assets and recording a loss for the amount that the carrying value exceeds the estimated fair value. F-12 1. Description of Business Activities and Significant Accounting Policies (continued) For assets identified to be disposed of in the future, the carrying value of these assets is compared to the estimated fair value less the cost to sell to determine if recognition of an impairment is required. Until the assets are disposed of, the estimated fair value is redetermined when related events or circumstances change. Judgments and assumptions are inherent in management's estimate of undiscounted cash flows used to determine recoverability of an asset and the estimate of an asset's fair value used to calculate the amount of impairment to recognize. The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the financial statements. Shipping and Handling Costs Shipping and handling costs are included in cost of sales in the Consolidated Statements of Operations. New Accounting Standards The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses accounting and reporting standards for goodwill and other intangible assets. Under the provisions of this Statement, goodwill and intangible assets with indefinite useful lives are no longer amortized, but will be tested annually for impairment. The Company applied the new rules on accounting for goodwill and other intangible assets beginning April 1, 2002. Application of the nonamortization provisions of the Statement will materially impact the comparability of the Consolidated Statements of Operations as goodwill amortization expense was $389,000 in both fiscal 2002 and 2001. During first-quarter 2003, the Company began the initial impairment test of goodwill as of April 1, 2002. Preliminary results of these tests have indicated that there will not be a significant unfavorable impact of adopting this Statement; however, all tests have not been completed. The FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, " and amends Accounting Principles Board Opinion No. 30, " Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The Statement retains the basic framework of SFAS No. 121, resolves certain implementation issues of SFAS No. 121, extends applicability to discontinued operations, and broadens the presentation of discontinued operations to include a component of an entity. The Statement is being applied prospectively beginning April 1, 2002. Initial adoption of the Statement did not have any impact on the Company's results of operations or financial position. F-13 2. Related Parties The Company subleased office and warehouse space as well as provided other administrative services to Rox Corp. (a wholly owned subsidiary until September 30, 1997) via an administrative services agreement. The agreement, which could be cancelled by either party with adequate notice, contained various market comparable prices for the services provided or space occupied. The Company received $51,000 in 2000 related to the administrative services agreement. The sublease and administrative services agreement were terminated in 2000. Additionally, the Company's NMP subsidiary sells materials and parts to Rox Corp. which resulted in revenues to the Company of $40,000, and $256,000 in 2001 and 2000, respectively. There were no sales to Rox Corp. in 2002. 3. Inventories and Uncompleted Contracts Inventories at March 31 consists of the following:
2002 2001 ------------------------------- (In Thousands) Work in process, primarily related to unit-of-delivery contracts in process $ 4,153 $ 9,117 Less contract billings to date (2,732) (6,426) ------------------------------- 1,421 2,691 Raw materials and purchased parts 6,248 3,140 ------------------------------- $ 7,669 $ 5,831 ===============================
F-14 3. Inventories and Uncompleted Contracts (continued) At March 31, costs incurred on uncompleted contracts where revenues and costs are measured by the percentage of total labor costs or total costs incurred to date to estimated total labor costs or total costs, related estimated earnings and related contract billings to date are as follows:
2002 2001 ---------------------------------- (In Thousands) Costs incurred on uncompleted contracts $ 55,540 $ 44,395 Estimated earnings 22,928 19,749 ---------------------------------- 78,468 64,144 Less contract billings to date 80,646 67,450 ---------------------------------- $ (2,178) $ (3,306) ================================== Included in the accompanying balance sheets under the following captions: Costs and estimated earnings in excess of billings on uncompleted contracts $ 997 $ 1,153 Billings in excess of costs and estimated earnings on uncompleted contracts (3,175) (4,459) ---------------------------------- $ (2,178) $ (3,306) ==================================
Accounts receivable include approximately $1,903,000 and $2,345,000 of progress billings at March 31, 2002 and 2001, respectively. 4. Long-Term Debt Long-term debt at March 31 consists of the following:
2002 2001 ---------------------------------- (In Thousands) Revolving credit facility $ 3,000 $ 2,800 Letter of credit revolving credit facility 400 - Term note 1,083 1,487 MCII acquisition note - 108 Convertible subordinate debentures 1,880 1,880 Other 60 51 ---------------------------------- 6,423 6,326 Less current maturities 4,748 4,191 ---------------------------------- $ 1,675 $ 2,135 ==================================
F-15 4. Long-Term Debt (continued) Annual maturities on long-term debt are: 2003 - $4,748,000; 2004 - $456,000; and 2005 - $1,219,000. On August 13, 1999, the Company entered into a new bank credit facility for a $2,000,000 revolving credit line and $2,000,000 5-year term note. Proceeds from this new credit facility were used to repay all amounts outstanding under the previous bank facility and term note. In October 2000, the revolving credit line was increased to $2,800,000. On December 18, 2001, the revolving credit line was increased to $3,800,000 and on March 15, 2002 was increased again to $4,500,000. The revolving credit line matures on July 15, 2002. The term note bears interest at the Wall Street Journal prime rate plus .25% to .75% based on the debt service coverage ratio of the Company each quarter (total rate of 5.5% at March 31, 2002). The revolving credit line bore interest at the same rate as the term note until October 2000, since then the rate has changed to the Wall Street Journal prime rate plus 1.5%, but not lower than 6.25% (total rate of 6.25% at March 31, 2002). The revolving credit line is based on a borrowing base of acceptable receivables and inventories, which was $6,507,000 at March 31, 2002. Interest on the revolving credit line is paid monthly. The term loan facility requires monthly principal payments of $33,898 plus accrued interest through August 13, 2004. The Company is having ongoing discussions with its current and other lenders to increase and extend, prior to the July 15, 2002 maturity date, the current revolving credit facility. The revolving credit line and the term note contain covenants, including the restriction of cash dividends, incurrence of additional indebtedness, and leverage and liquidity ratios, and are secured by accounts receivable, equipment, and inventories of all the Company's subsidiaries. The revolving credit line also has conditions for future borrowings, which include the absence of default of any covenants and continued accuracy of the representations and warranties contained in the revolving credit line agreement. As additional security for the $800,000 increase in the revolving credit 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 was removed as collateral with the amendment to the revolving credit line on March 15, 2002. The Company has been in compliance with the liquidity and leverage covenants since October 31, 2000. The Company had obtained a waiver for the liquidity and leverage covenant violations from March 31, 2000 through October 31, 2000. At March 31, 2002, there was $1,500,000 of availability under the revolving credit line. Borrowings on the revolving credit facilities averaged $2,849,000, $2,110,000 and $2,222,000 per day during 2002, 2001 and 2000, respectively, with the highest month-end balance being $3,650,000, $2,800,000 and $3,965,000, respectively. The weighted-average interest rate was 7.47%, 10.08% and 8.98% during 2002, 2001 and 2000, respectively. F-16 4. Long-Term Debt (continued) In November 2001, the Company obtained a commitment from its bank through June 30, 2002 for up to $1,000,000 in additional short-term revolving credit lines based upon foreign customer irrevocable letters of credit on outstanding purchase orders, which expire between January 2002 and June 2002. Proceeds from these financings will be used to fund production on these foreign customer orders prior to shipment. During November 2001, the Company obtained a $430,000 revolving credit facility using two of its foreign customer irrevocable letters of credit as collateral. At March 31, 2002, $400,000 was outstanding under this letter of credit revolving credit facility. The facility matured and was repaid on May 31, 2002 when one of the collateralized letters of credit expired. This revolving credit facility bore interest at the Wall Street Journal prime rate plus 1.5%, but not lower than 7.00% (total rate of 7.00% at March 31, 2002). Interest on this revolving credit facility was due at maturity of the facility. 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, which is payable each June 30 and December 31, 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. 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 was to mature on February 13, 2002. In February 2002, the maturity of the debentures was extended to February 13, 2003. 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 original date of issuance. F-17 4. Long-Term Debt (continued) In connection with the acquisition of MCII in fiscal 1998, the Company signed a $1,500,000 noninterest-bearing note payable to the former owner of MCII. The note required three annual installments, beginning in May 1998, of $500,000. In December 1999, the Company agreed to settle litigation related to the acquisition of MCII with the former owner of MCII. The settlement replaced the noninterest-bearing note, which had a discounted balance at settlement of $1,470,000, with a new $300,000 noninterest-bearing note and $100,000 cash payable to the former owner of MCII. The new note required eight quarterly installments, beginning in April 2000, of $37,500. The final payment was made on December 31, 2001. As a result, the $1,135,000 purchase price settlement reduced previously recorded goodwill. The settlement also required the Company to repurchase 127,000 shares of the Company's common stock from the former owner of MCII for $95,000. 5. Income Taxes The components of the provisions (benefit) for income taxes from loss before extraordinary gain are as follows: 2002 2001 2000 ----------------------------------- (In Thousands) Current: Federal $ - $ - $ (137) State 135 116 47 ----------------------------------- $ 135 $ 116 $ (90) =================================== The difference between the expected tax rate and the effective tax rate for the provision (benefit) for income taxes before extraordinary gain is due to the following:
2002 2001 2000 ------------------------------------- (In Thousands) Expected provision (benefit) for federal income taxes at the statutory rate $ 389 $ (247) $ (614) State income taxes - net of federal benefit 67 (7) 16 Increase (decrease) in valuation allowance (360) 374 333 Revisions to prior years' estimated taxes - - 137 Other 39 (4) 38 ------------------------------------- Provision (benefit) for income taxes $ 135 $ 116 $ (90) =====================================
F-18 5. Income Taxes (continued) Significant components of the Company's deferred tax liabilities and assets as of March 31 are as follows: 2002 2001 ------------------- (In Thousands) Deferred tax liabilities: Tax over book depreciation and amortization $ 208 $ 124 Deferred tax assets: Allowance for doubtful accounts 9 13 State net operating loss carryforward 180 144 Federal net operating loss carryforward 603 807 Inventory reserves 33 198 Warranty reserve 99 82 Vacation accrual 89 79 Tax inventory overhead capitalization 342 308 Less valuation allowance (1,147) (1,507) ------------------- Total deferred tax assets 208 124 ------------------- Net deferred tax asset $ - $ - =================== Management believes a valuation allowance is required due to sufficient uncertainty existing regarding the realizability of the Company's net deferred tax assets. The decrease of $360,000 in the valuation allowance during 2002 was primarily due to the utilization of federal net operating loss carryforwards, and the increase of $374,000 and $470,000 in the valuation allowance during 2001 and 2000, respectively, was due to an assessment of the Company's ability to realize its net deferred tax assets in the future as a result of the operating losses in 2001 and 2000. At March 31, 2002 and 2001, the Company had $4,497,000 and $3,776,000, respectively, of state net operating loss carryforwards, which expire between 2013 and 2017. At March 31, 2002 and 2001, the Company also had federal net operating loss carryforwards of $1,773,000 and $2,396,000, respectively, which expire between 2020 and 2021. F-19 6. Leases The Company leases all of its premises and various equipment under non-cancelable operating lease agreements. The future minimum lease payments for all operating leases are as follows: 2003 $ 724,000 2004 601,000 2005 492,000 2006 429,000 2007 397,000 Thereafter 368,000 ------------ $ 3,011,000 ============ Rent expense incurred under operating lease agreements was $737,000, $645,000 and $659,000 for 2002, 2001 and 2000, respectively. 7. Employee Benefit Plans The Company maintained three 401(k) plans until October 1, 2001, when the plans were merged into one plan. Participating employees in the plans defer up to 17% of their annual compensation up to a specified limit. The Company matches 100% of each participating employee's deferrals, not to exceed 3% of each participating employee's annual compensation. The Company contributions to the plans for 2002, 2001 and 2000 were $189,000, $161,000 and $138,000, respectively. The Company does not provide any post-retirement benefits other than the 401(k) plans. 8. Major Customers and Concentration of Credit Risk The Company's customers are primarily the U.S. government and companies engaged in the defense contractor industry located throughout the U.S. who have contracts with the U.S. government. Sales to individual companies and the U.S. government which were greater than 10% of consolidated sales are as follows: 2002 2001 2000 -------------------------------------- (In Thousands) U.S. Government $ 30,595 $ 11,228 $ 5,594 Bath Iron Works 6,159 3,464 2,574 Ingalls Shipbuilding 4,827 7,855 1,922 Marinette Marine Corporation 2,786 2,672 3,729 Bath Iron Works, Ingalls Shipbuilding and Marinette Marine Corporation's sales were generated by the marine electrical switchgear and the automation and control systems segments. The U.S. government's sales were generated by all segments. F-20 8. Major Customers and Concentration of Credit Risk (continued) At March 31, 2002, approximately $5,853,000 (72.3%) of accounts receivable, including current retainage, are due from the Bath Iron Works, Ingalls Shipbuilding, Marinette Marine Corporation and the U.S. government. The Company generally does not require collateral from its customers as progress billings are rendered to customers as the work is performed, which results in substantial receipt of amounts due prior to the time the products are shipped. Credit losses relating to customers in the defense contractor industry have not been significant. 9. Statement of Cash Flows Cash payments for interest were $513,000, $486,000 and $439,000 for 2002, 2001 and 2000, respectively. Cash payments (refunds) for income taxes were $257,000, $166,000 and $(933,000) for 2002, 2001 and 2000, respectively. 10. Common Stock Prior to December 2000, the Company had two stock option plans covering directors and employees, respectively. In December 2000, the shareholders of the Company approved a new 2000 directors' plan. The number of shares of common stock reserved under the 2000 directors' plan is 500,000 shares. In fiscal 2000, the Board of Directors increased the number of shares of common stock reserved under the 1992 directors' plan by 50,000 shares to a total of 669,000 shares. The number of shares of common stock reserved under the employees' plan is 483,000 shares. Awards are granted for no consideration other than prior and future services. Options vest and are exercisable as determined by the Board of Directors on a grant-by-grant basis, generally 20% to 100% per year and ten years, respectively. The exercise price per share is specified separately in each option agreement issued to a director or employee under each plan but cannot be less than the fair market value per share of common stock on the date of the grant. At March 31, 2002, 250,000, 189,000 and 282,000 common shares were reserved by the Company for future option grants under the 2000 directors', 1992 directors' and employee plans, respectively. The 1992 directors' plan terminates in 2005 and the employee plan terminates in 2003. The 2000 directors' plan terminates at the option of the board of directors. F-21 10. Common Stock (continued) A summary of the Company's stock option activity and related information for the years ended March 31 follows:
Stock Options Outstanding Stock Options Vested --------------------------------- -------------------------------- Weighted Weighted Average Average Options Exercise Price Options Exercise Price --------------------------------- ------------------------------- At March 31, 1999 765,000 $ 1.77 540,000 $ 1.78 Granted with exercise price equal to market price of Company's common stock 50,000 .81 Granted with exercise price in excess of market price of Company's common stock 120,000 1.00 Forfeited (82,000) 1.60 Expired (88,000) 1.54 --------- At March 31, 2000 765,000 1.63 549,000 1.74 Granted with exercise price in excess of market price of Company's common stock 401,000 1.00 Forfeited (117,000) 1.83 Expired - --------- At March 31, 2001 1,049,000 1.36 751,000 1.45 Granted with exercise price in excess of market price of Company's common stock 50,000 1.00 Expired (48,000) 1.86 --------- At March 31, 2002 1,051,000 $ 1.27 810,000 $ 1.42 =========
No options were exercised or cancelled during 2002, 2001 or 2000. The exercise price for options outstanding as of March 31, 2002 ranged from $.81 to $2.39. Subsequent to March 31, 2002, 6,300 options to acquire the Company's common stock at an exercise price of $1.00 per share were forfeited. F-22 10. Common Stock (continued) At March 31, 2002, the contractual life of options outstanding ranged from five to ten years. The weighted average remaining contractual life of those options is 5.26 years. The weighted average grant date fair value of options granted with the exercise price equal to the market price of the Company's common stock during 2000 was $.65. The weighted average grant date fair value of options granted with the exercise price in excess of the market price of the Company's common stock during 2002, 2001 and 2000 was $.35, $.52 and $.47, respectively. Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's director and employee stock options have characteristics significantly different from traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of fair value of its director and employee options. The fair value of the options was estimated at the date of the grant using the Black-Scholes option-pricing model with the following assumptions for 2002, 2001 and 2000: 2002 2001 2000 ------------------------------------------- Risk free interest rate 5.25% 7.00% 6.65% Weighted-average expected life 10.00 years 8.11 years 6.47 years Expected volatility 69% 68% 78% Expected dividends 0.00% 0.00% 0.00% Pro forma net income (loss) and earnings per share, assuming the Company had applied the fair-value method of SFAS No. 123 , "Accounting for Stock-Based Compensation" in measuring compensation cost beginning with the 1997 stock-based awards, are as follows: 2002 2001 2000 ------------------------------------ Net income (loss): As reported $ 1,008 $ (843) $ (1,715) Pro forma 944 (975) (1,777) Net income (loss) per basic share: As reported $ .15 $ (.12) $ (.25) Pro forma .14 (.14) (.26) Net income (loss) per diluted share: As reported $ .14 $ (.12) $ (.25) Pro forma .13 (.14) (.26) F-23 10. Common Stock (continued) Pro forma amounts include compensation expense for the vested portion of options granted in 1999 through 2002, due to the graded vesting policy of these options. Since compensation expense from stock options is recognized over the future years' vesting period for pro forma disclosure purposes, and additional awards generally are made each year, pro forma amounts may not be representative of future years' amounts. 11. Earnings Per Share The following sets forth the computation of basic and diluted income (loss) per share for the years ended March 31 (in thousands, except per share data):
2002 2001 2000 ----------------------------------------- Numerator --------- Net income (loss) and numerator for basic earnings (loss) per share $ 1,008 $ (843) $(1,715) Effect of dilutive securities: 10% and 12% convertible debentures 206 - - ----------------------------------------- Numerator for diluted earnings (loss) per share after assumed conversions $ 1,214 $ (843) $(1,715) Denominator ----------- Denominator for basic earnings (loss) per share--weighted-average shares 6,765 6,765 6,860 Effect of dilutive securities: Stock options and warrants 38 - - 10% and 12% convertible debentures 1,880 - - ----------------------------------------- Dilutive potential common shares 1,918 - - ----------------------------------------- Denominator for diluted earnings (loss) per share--adjusted weighted-average share and assumed conversions 8,863 6,765 6,860 Basic earnings (loss) per share $ .15 $ (.12) $ (.25) Diluted earnings (loss) per share $ .14 $ (.12) $ (.25)
Approximately 430,000, 1,889,000 and 1,028,000 options and warrants to purchase shares of common stock with weighted-average exercise prices of $1.83, $1.17, and $1.38, respectively, were outstanding on March 31, 2002, 2001 and 2000, respectively, but have been excluded from the computation of diluted earnings per share. Convertible subordinated debt, which is convertible into 1,880,000 and 1,000,000 shares of common stock, respectively, have also been excluded from the computation of diluted earnings per share in 2001 and 2000, respectively. Inclusion of these shares would have been antidilutive, as the exercise prices of the options exceeded the average market prices of the common shares in 2002 and the Company incurred a net loss in 2001 and 2000. F-24 12. Legal Contingencies and Commitments The Company is involved in various claims and legal actions arising in the ordinary course of business. Management does not believe that the ultimate resolution of these matters will have a material impact on the Company's financial position, results of operations or cash flow. As of March 31, 2001, the Company had an employment contract through October 27, 2001 with one of its principal officers. The contract provided for a base salary with an aggregate total annual salary commitment of $172,000. As of April 2, 2001, the officer resigned and received a severance package of $94,000, which was accrued in the first quarter of fiscal 2002. On April 23, 2001, the Company entered into an employment contract through April 22, 2003 with one of its principal officers. The contract provides for a base salary with an aggregate total annual salary commitment of $128,000. Bonus provisions are subject to the discretion of the Board of Directors of the Company. 13. Financial Instruments The following methods and assumptions were used by the Company in estimating its fair-value disclosures for financial instruments: Notes receivable: As the maturity of this receivable is less than eighteen months, fair value is estimated to approximate the historically recorded amount. Long-term debt: The fair value of the Company's long-term debt is based on the prices of similar securities with similar terms and credit ratings. At March 31, 2002 the carrying amount and fair value of the Company's long-term debt is $6,423,000 and $6,466,000, respectively. At March 31, 2001 the carrying amount and fair value of the Company's long-term debt was $6,326,000 and $6,373,000, respectively. 14. Segment Disclosures The Company evaluates performance based upon segment income (loss) before income taxes, which includes revenues from external and internal customers, cost of sales, operating expenses, and depreciation and amortization. The accounting policies of the segments are the same as those described in Note 1, Description of Business Activities and Significant Accounting Policies. Intersegment sales are generally accounted for as if the sales were to unaffiliated third parties, that is, at current market prices. The Company's reportable segments are strategic business units that offer different products and services. The segments are managed separately because each segment requires different technology, marketing strategies and industry knowledge. Other includes primarily cash, the Company's equity method investment in its subsidiaries and notes receivable from the sale of certain marine hardware-related assets. Long-lived assets are comprised of plant and equipment, goodwill and deferred charges. F-25 14. Segment Disclosures (continued)
Revenues Additions ------------------------------- Income to Depreciation Revenues Inter- (Loss) Before Total Long-Lived and External Segment Total Income Taxes Assets Assets Amortization ------------------------------- ------------------------------------------------- 2002 ---------------------- Marine electrical switchgear $ 17,022 $ 3,774 $ 20,796 $ 976 $ 18,206 $ 371 $ 140 Mobile power systems 28,913 -- 28,913 (376) 8,207 2 494 Automation and control systems 6,212 3,550 9,762 1,035 3,207 163 278 Other -- -- -- 1,008 12,205 -- 62 Eliminations -- (7,324) (7,324) (1,500) (18,782) -- -- ------------------------------- ------------------------------------------------- Total $ 52,147 $ -- $ 52,147 $ 1,143 $ 23,043 $ 536 $ 974 =============================== ================================================= 2001 ---------------------- Marine electrical switchgear $ 13,320 $ 3,020 $ 16,340 $ 759 $ 20,685 $ 125 $ 146 Mobile power systems 11,749 -- 11,749 (2,526) 4,789 115 574 Automation and control systems 5,407 1,680 7,087 1,525 6,646 151 249 Other -- -- -- (843) 13,113 -- 46 Eliminations -- (4,700) (4,700) 358 (24,000) -- -- ------------------------------- ------------------------------------------------- Total $ 30,476 $ -- $ 30,476 $ (727) $ 21,233 $ 391 $ 1,015 =============================== ================================================= 2000 ---------------------- Marine electrical switchgear $ 7,788 $ 444 $ 8,232 $ 228 $ 14,326 $ 215 $ 152 Mobile power systems 3,228 -- 3,228 (1,984) 6,778 285 542 Automation and control systems 7,036 418 7,454 702 5,137 137 211 Other -- -- -- (1,715) 11,551 -- 28 Eliminations -- (862) (862) 964 (21,715) -- -- ------------------------------- ------------------------------------------------- Total $ 18,052 $ -- $ 18,052 $ (1,805) $ 16,077 $ 637 $ 933 =============================== =================================================
Marine switchgear revenues were 100% of 2002 and 2001 total marine electrical switchgear segment revenues. Marine hardware revenues were 27% and marine switchgear revenues were 73% of 2000 total marine electrical switchgear segment revenues. Included in Other 2002 income before income taxes is $94,000 in severance pay due to the resignation of the Company's chief financial officer on April 2, 2001. Included in automation and control systems' 2001 income before income taxes is $1,080,000 in other income resulting from the settlement of a patent infringement claim. Included in mobile power systems' 2001 loss before income taxes are $987,000 in losses resulting from the production start-up of a long-term contract and $166,000 in additions to the excess and obsolete inventory reserves due to the completion of long-term production contracts. Included in marine electrical switchgears' 2001 income before income taxes is $640,000 of engineering cost overruns incurred during the development stage of certain long-term contracts. F-26 14. Segment Disclosures (continued) Included in mobile power systems' 2000 loss before income taxes are $335,000 of contract losses related to unexpected development completion costs incurred on a long-term development contract and the completion of a long-term production contract. Included in marine electrical switchgear's 2000 income before income taxes is $185,000 due to expected warranty costs to be incurred on one of the segment's new products. F-27 Westwood Corporation Schedule II - Valuation and Qualifying Accounts
Amounts Amounts Balance at Assumed Charged Balance at Beginning in (Credited) End of Description of Period Acquisition to Expenses Deductions Period --------------------------------------------------------------------------------------------------------- (In Thousands) Year ended March 31, 2002: Allowance for doubtful accounts $ 35 $ -- $ 4 $ (15) $ 24 Reserves for inventory 520 -- 21 (455) 86 Year ended March 31, 2001: Allowance for doubtful accounts $ 35 $ -- $ -- $ -- $ 35 Reserves for inventory 354 -- 166 -- 520 Year ended March 31, 2000: Allowance for doubtful accounts $ 126 $ -- $ -- $ (91) $ 35 Reserves for inventory 1,391 -- 8 (1,045) 354
The deduction of the reserves for inventory in 2002 and 2000 is due to the sale and scrapping of excess and obsolete inventory. The deduction of allowance for doubtful accounts in 2000 is due to balances written off, net of recoveries. Both the allowance for doubtful accounts and the reserves for inventory are deducted from related accounts. F-28 Westwood Corporation Selected Quarterly Financial Information (Unaudited)
Basic Diluted Earnings Earnings (Loss) Per (Loss) Per Net Average Share Average Share Gross Income of Common of Common Sales Profit (Loss) Stock Stock ----------------------------------------------------------------------------------------- (In Thousands, except earnings per share) 2002: First $ 11,246 $1,368 $ 5 $ .00 $ .00 Second 12,683 1,413 218 .03 .03 Third 12,533 1,830 492 .07 .06 Fourth 15,685 1,778 293 .04 .04 2001: First $ 6,124 $1,035 $ 8 $ .00 $ .00 Second 5,476 498 (649) (.09) (.09) Third 10,614 986 (253) (.04) (.04) Fourth 8,262 499 51 .01 .01
The sum of earnings (loss) per share for the four quarters may not equal the total earnings (loss) per share for the year due to changes in the average number of common shares outstanding and rounding. The first quarter of 2002 includes $94,000 in severance pay due to the resignation of the Company's chief financial officer on April 2, 2001. The fourth quarter of 2001 includes $1,080,000 of other income resulting from the settlement of a patent infringement claim. Gross profit in the first, second, third and fourth quarter of 2001 was reduced by engineering cost overruns incurred during the development stage of certain long-term contracts of $183,000, $167,000, $128,000 and $162,000, respectively. Gross profit in the first, second, third and fourth quarter of 2001 was reduced by production start-up costs associated with a long-term contract of $80,000, $262,000, $276,000 and $369,000, respectively. The fourth quarter of 2001 includes $166,000 in additions to the excess and obsolete inventory reserves. F-29