10-Q 1 q22003.txt 2ND QUARTER FINANCIAL STATEMENT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended June 29, 2003 Commission File Number 0-13433 ------------------- MILTOPE GROUP INC. ----------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 11-2693062 ------------------------------------- -------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 3800 Richardson Road South Hope Hull, AL 36043 ----------------------------------- -------------------------- (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code (334) 284-8665 ------------------ Not Applicable ----------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No X ----- ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Outstanding at August 7, 2003: 5,908,909 shares of Common Stock, $.01 par value. PART I - FINANCIAL INFORMATION MILTOPE GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) June 29, December 31, ASSETS 2003 2002 ------ ------------ ------------ CURRENT ASSETS: $ 48,000 $ 589,000 Cash Accounts receivable, net of allowance of 120,000 7,043,000 7,799,000 (2003) and $344,000 (2002) Inventories 13,948,000 11,527,000 Deferred income taxes 1,686,000 1,816,000 Other current assets 343,000 371,000 ------------ ------------ Total current assets 23,068,000 22,102,000 ------------ ------------ PROPERTY AND EQUIPMENT - at cost: Machinery and equipment 7,925,000 7,625,000 Furniture and fixtures 1,511,000 1,526,000 Land, building and improvements 6,060,000 6,246,000 ------------ ------------ Total property and equipment 15,496,000 15,397,000 Less accumulated depreciation 9,878,000 9,659,000 ------------ ------------ Property and equipment - net 5,618,000 5,738,000 ------------ ------------ DEFERRED INCOME TAXES 4,355,000 5,126,000 OTHER ASSETS 402,000 437,000 ------------ ------------ TOTAL $ 33,443,000 $ 33,403,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 9,405,000 $ 7,573,000 Accrued expenses 1,879,000 2,061,000 Short-term debt 440,000 515,000 Current maturities of long-term debt 1,376,000 1,781,000 ------------ ------------ Total current liabilities 13,100,000 11,930,000 LONG-TERM DEBT 4,656,000 7,216,000 OTHER LIABILITIES 845,000 945,000 ------------ ------------ Total liabilities 18,601,000 20,091,000 ------------ ------------ CONTINGENCIES (Note 4) STOCKHOLDERS' EQUITY: Common stock - $.01 par value; 20,000,000 shares 68,000 68,000 authorized; 6,811,112 shares outstanding Capital in excess of par value 24,519,000 24,519,000 Retained earnings 4,297,000 2,858,000 ------------ ------------ 28,884,000 27,445,000 Less treasury stock at cost 14,042,000 14,133,000 ------------ ------------ Total stockholders' equity 14,842,000 13,312,000 ------------ ------------ TOTAL $ 33,443,000 $ 33,403,000

============ ============ See Notes To Condensed Consolidated Financial Statements -2- MILTOPE GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Thirteen Weeks Ended ---------------------------- June 29, June 30, 2003 2002 ------------ ------------ NET SALES $ 17,790,000 $ 11,053,000 ------------ ------------ COSTS AND EXPENSES: Cost of sales 13,822,000 8,907,000 Selling, general and administrative 2,138,000 1,264,000 Engineering, research and development 120,000 266,000 ------------ ------------ Total 16,080,000 10,437,000 ------------ ------------ INCOME FROM OPERATIONS 1,710,000 616,000 OTHER INCOME (EXPENSE): Interest expense (95,000) (145,000) Interest income 1,000 6,000 ------------ ------------ Total (94,000) (139,000) ------------ ------------ INCOME BEFORE INCOME TAXES 1,616,000 477,000 INCOME TAXES 600,000 - ------------ ------------ NET INCOME $ 1,016,000 $ 477,000 =========== ============ NET INCOME PER SHARE BASIC $ 0.17 $ 0.08 ============ ============ DILUTED $ 0.17 $ 0.08 ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: BASIC 5,894,667 5,875,077 ============ ============ DILUTED 6,130,066 6,027,084 =========== ============

See Notes To Condensed Consolidated Financial Statements -3- MILTOPE GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Twenty-Six Weeks Ended ---------------------------- June 29, June 30, 2003 2002 ------------ ------------ NET SALES $ 33,601,000 $ 20,407,000 ------------ ------------ COSTS AND EXPENSES: Cost of sales 26,499,000 15,486,000 Selling, general and administrative 4,243,000 2,450,000 Engineering, research and development 228,000 579,000 ------------ ------------ Total 30,970,000 18,515,000 ------------ ------------ INCOME FROM OPERATIONS 2,631,000 1,892,000 OTHER INCOME (EXPENSE): Interest expense (211,000) (259,000) Interest income 1,000 16,000 ------------ ------------ Total (210,000) (243,000) ------------ ------------ INCOME BEFORE INCOME TAXES 2,421,000 1,649,000 INCOME TAXES 900,000 - ------------ ------------ NET INCOME $ 1,521,000 $ 1,649,000 ============ ============ NET INCOME PER SHARE: BASIC $ .26 $ .28 ============ ============ DILUTED $ .25 $ .28 ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: BASIC 5,887,009 5,874,149 ============ ============ DILUTED 6,119,445 5,989,674 ============ ============

See Notes To Condensed Consolidated Financial Statements -4- MILTOPE GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE TWENTY-SIX WEEKS ENDED JUNE 29, 2003 AND JUNE 30, 2002 (unaudited) June 29, June 30, 2003 2002 ------------ ------------ OPERATING ACTIVITIES: $ 1,521,000 $ 1,649,000 Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 445,000 459,000 Provision for slow-moving and obsolete inventories 335,000 600,000 Provision for (recovery of) doubtful accounts receivable (130,000) 345,000 Deferred income taxes 901,000 - Loss on sale of property and equipment 9,000 - Change in operating assets and liabilities: Accounts receivable 886,000 (1,586,000) Inventories (2,755,000) (874,000) Other current assets 28,000 76,000 Other assets (2,000) 219,000 Accounts payable and accrued expenses 1,572,000 (28,000) ------------ ------------ Net cash provided by operating activities 2,810,000 860,000 ------------ ------------ INVESTING ACTIVITIES: Purchase of property and equipment (319,000) (827,000) ------------ ------------ Net cash used in investing activities (319,000) (827,000) ------------ ------------ FINANCING ACTIVITIES: Proceeds from exercise of stock options 8,000 9,000 Net proceeds from line of credit 5,656,000 - Payments of long-term debt (8,696,000) (926,000) ------------ ------------ Net cash used in financing activities (3,032,000) (917,000) ------------ ------------ NET DECREASE IN CASH (541,000) (884,000) CASH, BEGINNING OF PERIOD 589,000 1,120,000 ------------ ------------ CASH, END OF PERIOD $ 48,000 $ 236,000 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments made for: $ 137,000 $ 173,000 ============ ============ Income taxes $ 264,000 $ 294,000 Interest ============ ============

See Notes To Condensed Consolidated Financial Statements -5- MILTOPE GROUP INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Financial Statements - In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary (consisting of only normal and recurring accruals) to present fairly the financial position of the Company and its subsidiaries as of June 29, 2003 and December 31, 2002 and the results of operations and cash flows for the twenty-six weeks ended June 29, 2003 and June 30, 2002. All amounts presented have been rounded to the nearest thousand. The results for the thirteen and twenty-six weeks ended June 29, 2003 are not necessarily indicative of the results for an entire year. It is suggested that these consolidated financial statements be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. Accounting Estimates - The Company's consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Long-Lived Assets - In accordance with Statement of Financial Accounting Standards ("SFAS") 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews its long-lived assets and identifiable intangibles for impairment when events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable based on estimates of future undiscounted cash flows without interest charges. An impairment loss is recognized only if the carrying amount of the asset is not recoverable and is measured as the difference between the carrying amount and the fair value of the asset. Assets held for disposal, if any, are carried at the lower of carrying amount or fair value, less estimated cost to sell such assets. Revenue Recognition - The Company generates revenue from its operating segments, commercial and military/rugged. All commercial products are generally priced to the customer on a price per unit basis. The Company recognizes revenue based on the price per unit at the time delivery of the product is made and title, ownership and risk of loss passes to the customer. In the military/rugged segment the Company recognizes revenue from fixed price contracts for products when deliveries are made or work performed and title, ownership and risk of loss passes to the customer. The Company recognizes revenue from cost- plus-fee contracts when work is performed and reimbursable and allowable costs are incurred and estimated fees are earned. Revenue for certain pre-production services pursuant to sales contracts is recognized when the service is performed. Stock Based Compensation - At June 29, 2003, the Company has two stock based compensation plans which are described more fully in Note 8 to the Company's Financial Statements presented in the Annual Report on Form 10-K for the year ended December 31, 2002. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and Related Interpretations. No stock-based employee compensation cost is reflected in net income, as this amount is insignificant. The following table illustrates the effect on net income and net income per share if the Company had applied the fair value recognition provisions of SFAS Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation: -6- Thirteen Weeks Ending --------------------------- June 29, June 30, 2003 2002 ------------ ----------- Net income, as reported: $ 1,016,000 $ 477,000 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (30,000) (19,000) ------------ ----------- Pro forma net income $ 986,000 $ 458,000 ============ =========== Basic net income per share: As reported $ 0.17 $ 0.08 Pro forma $ 0.17 $ 0.08 Diluted net income per share: As reported $ 0.17 $ 0.08 Pro forma $ 0.16 $ 0.08

Twenty-Six Weeks Ending ---------------------------- June 29, June 30, 2003 2002 ------------ ------------ Net income, as reported: $ 1,521,000 $ 1,649,000 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (61,000) (38,000) ------------ ------------ Pro forma net income $ 1,460,000 $ 1,611,000 ============ ============ Basic net income per share: As reported $ 0.26 $ 0.28 Pro forma $ 0.25 $ 0.27 Diluted net income per share: As reported $ 0.25 $ 0.28 Pro forma $ 0.24 $ 0.27

For purposes of SFAS 123, the weighted average fair value of the options granted during 2003 and 2002 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: June 29, June 30, 2003 2002 --------- -------- Expected life (years) 10.0 10.0 Risk-free interest rate 5.51% 5.00% Dividend rate 0% 0% Expected volatility 99.16% 111.42%

-7- Net Income Per Share - Basic and diluted earnings per share are computed by dividing the net income by the weighted average common shares outstanding (basic EPS) or weighted average common shares outstanding assuming dilution (diluted EPS). Options that could potentially dilute basic net income per share in the future were included in the computation of diluted net income per share for the thirteen and twenty-six weeks ending June 29, 2003 and June 30, 2002, as detailed below: Thirteen Weeks Twenty-six Weeks Ended Ended ---------------------- ---------------------- June 29, June 30, June 29, June 30, 2003 2002 2003 2002 ---------- ---------- --------- ---------- Weighted average common shares outstanding - basic 5,894,667 5,875,077 5,887,009 5,874,149 Dilutive effect of stock options 235,399 152,007 232,436 115,525 ---------- ---------- --------- ---------- Weighted average common shares outstanding - diluted 6,130,066 6,027,084 6,119,445 5,989,674 ========== ========== ========== ==========

All options that would have an anti-dilutive effect on net income per share if exercised were excluded from the computation of diluted net income per share. Anti-dilutive options for the thirteen week periods ended June 29, 2003 and June 30, 2002 were 31,393. Anti- dilutive options for the twenty-six weeks ended June 29, 2003 and June 30, 2002 were 31,393 and 80,952, respectively. 2. Inventories - Net - Inventories consist of the following: June 29, 2003 December 31, 2002 ------------- ----------------- Purchased parts and Subassemblies $ 11,326,000 $ 8,578,000 Work-in-process 2,622,000 2,949,000 ------------ ------------ Total $ 13,948,000 $ 11,527,000 ============ ============

Inventories include a reserve for slow-moving and obsolete items of $1,246,000 and $1,971,000 at June 29, 2003 and December 31, 2002, respectively. 3. Income Taxes - The Company recognized tax expense at the estimated effective statutory rate for the thirteen and twenty-six week period ended June 29, 2003. However, the Company does not have a tax payment liability due to the use of a portion of the net operating loss carry- forward the Company has available to it. No income tax expense was recorded for the thirteen and twenty-six weeks ended June 30, 2002 since the Company's income was offset by the utilization of its net operating loss carryforward. A valuation allowance which had fully reserved the deferred tax assets was reversed during the fourth quarter of 2002. 4. Contingencies: Litigation - As noted in the Company's Form 10K for the year ended December 31, 2002, the Company is a claimant in a lawsuit in the U.S. District Court, Eastern District of New York against former officers, directors, and employees of PGI and against two competitors of Miltope and PGI. The complaint alleges damages based on breach of fiduciary duties by the former officers and directors, theft of trade secrets, violations of the Lanham Act, conspiracy to commit these violations and other claims. The corporate defendants answered the complaint, denied the claims against them but have not filed any counterclaims. The individual defendants who were former officers and directors of Miltope and PGI have filed counterclaims. The Company believes that such litigation and claims will be resolved without a material effect on the Company's financial position, results of operations, or cash flows. -8- In addition, the Company, from time to time, is a party to pending or threatened legal proceedings and arbitration in the ordinary course of business. Based upon information currently available, and in light of legal and other defenses available to the Company, management does not consider any potential liability from any threatened or pending litigation to be material to the consolidated financial statements. Claims - From time to time the Company may have certain of its contracts that may be subject to final negotiation or modification with the customer in the ordinary course of business. Although the ultimate outcome of these negotiations or modifications is unknown at June 29, 2003, the Company believes that any additional costs evolving from these negotiations would not be material to the consolidated financial statements. 5. Segment Information - The Company's reportable segments are organized around its two main products and services segments, Military/Rugged and Commercial. Through its military/rugged segment, the Company is engaged in the design, manufacture and testing of computer and computer peripheral equipment for military and other specialized applications requiring reliable operations in severe land, sea and airborne environments. These products are generally sold by the Company's business development group through the federal government bid process. The Company's commercial segment designs, develops, manufactures and markets commercial computer related products primarily for transportation, telecommunications and in-field maintenance markets. These products are sold through an established network of marketing representatives and Company employed sales people to a broad base of customers both international and domestic. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company's Annual Report on Form 10-K. The Company's determination of segment operating profit (loss) does not reflect other income (expense) or income taxes. Thirteen Weeks Ended June 29, 2003 and June 30, 2002 ---------------------------------------------------- General June 29, 2003 Military/Rugged Commercial Eliminations Corporate Consolidated -------------------------------- --------------- ----------- ------------ ---------- ------------ Net sales from external customers $ 15,981,000 $ 1,809,000 $ 17,790,000 ============ =========== ============ Segment operating income $ 1,388,000 $ 322,000 $ 1,710,000 ============ =========== ============ Other income (expense) $ - $ - $ - $ (94,000) $ (94,000) ============ =========== =========== =========== ============ Income (loss) before income taxes $ 1,388,000 $ 322,000 $ - $ (94,000) $ 1,616,000 ============ =========== =========== =========== ============ Identifiable assets $ 20,554,000 $ 6,054,000 $ 6,835,000 $ 33,443,000 ============ =========== =========== ============ Capital expenditures $ 82,000 $ 9,000 $ 91,000 ============ =========== ============ Depreciation and amortization $ 207,000 $ 12,000 $ 219,000 ============ =========== ============ General June 30, 2002 Military/Rugged Commercial Eliminations Corporate Consolidated -------------------------------- --------------- ----------- ------------ ---------- ------------ Net sales from external customers $ 8,104,000 $ 2,949,000 $ 11,053,000 ============ =========== ============ Segment operating income $ (1,041,000) $ 1,657,000 $ 616,000 ============ =========== ============ Other income (expense) $ - $ - $ - $ (139,000) $ (139,000) ============ =========== ============ =========== ============ Income (loss) before income taxes $ (1,041,000) $ 1,657,000 $ - $ (139,000) $ 477,000 ============ =========== ============ =========== ============ Identifiable assets $ 18,139,000 $ 8,183,000 $4,976,000 $ 31,298,000 ============ =========== =========== ============ Capital expenditures $ 477,000 $ 169,000 $ 646,000 ============ =========== ============ Depreciation and amortization $ 226,000 $ 10,000 $ 236,000 ============ =========== ============

-9- Twenty-Six Weeks Ended June 29, 2003 and June 30, 2002 ------------------------------------------------------ General June 29, 2003 Military/Rugged Commercial Eliminations Corporate Consolidated -------------------------------- --------------- ----------- ------------ ---------- ------------ Net sales from external customers $ 29,886,000 $ 3,715,000 $ - $ 33,601,000 ============ =========== ============ ============ Segment operating income $ 1,919,000 $ 712,000 $ - $ 2,631,000 ============ =========== ============ ============ Other income (expense) $ - $ - $ - $ (210,000) $ (210,000) ============ =========== ============ ========== ============ Income (loss) before income taxes $ 1,919,000 $ 712,000 $ - $ (210,000) $ 2,421,000 ============ =========== ============ ========== ============ Identifiable assets $ 20,554,000 $ 6,054,000 $ - $6,835,000 $ 33,443,000 ============ =========== ============ ========== ============ Capital expenditures $ 282,000 $ 37,000 $ - $ 319,000 ============ =========== ============ ============ Depreciation and amortization $ 421,000 $ 24,000 $ - $ 445,000 ============ =========== ============ ============ General June 30, 2002 Military/Rugged Commercial Eliminations Corporate Consolidated -------------------------------- --------------- ----------- ------------ ---------- ------------ Net sales from external customers $ 14,192,000 $ 6,215,000 $ - $ 20,407,000 ============ =========== ============ ============ Segment operating income (loss) $ (370,000) $ 2,262,000 $ - $ 1,892,000 ============ =========== ============ ============ Other income (expense) $ - $ - $ - $ (243,000) $ (243,000) ============ =========== ============ ========== ============ Income (loss) before income taxes $ (370,000) $ 2,262,000 $ - $ (243,000) $ 1,649,000 ============ =========== ============ ========== ============ Identifiable assets $ 18,139,000 $ 8,183,000 $ - $4,976,000 $ 31,298,000 ============ =========== ============ ========== ============ Capital expenditures $ 591,000 $ 236,000 $ - $ 827,000 ============ =========== ============ ============ Depreciation and amortization $ 445,000 $ 14,000 $ - $ 459,000 ============ =========== ============ ============ General December 31, 2002 Military/Rugged Commercial Eliminations Corporate Consolidated -------------------------------- --------------- ----------- ------------ ---------- ------------ ~~Identifiable assets $ 20,240,000 $ 4,824,000 $ - $8,339,000 $ 33,403,000~~

-10- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ----------------------------------------------------------------------- "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 ----------------------------------------------------------------------- The matters and statements made in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. All such statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Wherever possible, the Company has identified these forward-looking statements by words such as "anticipates," "may," "believes," "estimates," "projects," "expects" "intends," and words of similar import. In addition to the statements included in this Quarterly Report on Form 10-Q, the Company and its representatives may from time to time make other oral or written forward-looking statements. All forward-looking statements involve certain assumptions, risks and uncertainties that could cause actual results to differ materially from those included in or contemplated by the statements. These assumptions, risks, and uncertainties include, but are not limited to, general business conditions, including the timing or extent of any recovery of the economy, the highly competitive nature of the industry in which the Company operates, the continued involvement of military forces in the war on terrorism, the speed with which consumers regain confidence in the safety of air transportation actions of competitors, termination convenience of the United States government, customer funding variations in connection with multi-year contracts of contracts at the and other risks and uncertainties. All such forward-looking statements may be affected by inaccurate assumptions or by known or unknown risks and uncertainties, and therefore those statements may turn out to be wrong. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. All forward-looking statements are made as of the date of filing or publication. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Investors are advised, however, to consult any further disclosures the Company makes in future filings with the Securities and Exchange Commission or in any of its press releases. GENERAL ------- The following discussion and analysis presents certain factors affecting the Company's results of operations for the thirteen and twenty-six weeks ended June 29, 2003, as compared to the thirteen and twenty-six weeks ended June 30, 2002. -11- RESULTS OF OPERATIONS --------------------- Thirteen weeks ended June 29, 2003 compared to thirteen weeks ended June 30, 2002 ----------------------------------------------------------------------- Net sales for the thirteen weeks ended June 29, 2003 (second quarter of 2003) were $17,790,000 compared to net sales for the thirteen weeks ended June 30, 2002 (second quarter of 2002) of $11,053,000. Military sales increased in the second quarter of 2003 to $15,981,000 as compared to $8,104,000 in the second quarter of 2002. Commercial sales decreased in the second quarter of 2003 to $1,809,000 from $2,949,000 in the second quarter of 2002. The 97.2% increase in military sales year to year was primarily the result of $13,280,000 in revenue attributable to the full ramped up production level of the TSC- 750 under the Maintenance Support Device ("MSD") Indefinite Delivery Indefinite Quantity ("IDIQ") contract partially offset by the loss of $5,969,000 in revenue attributable to the SPORT program, a five-year hand-held computer contract completed in June 2002. The Company also benefited from increased sales of tactical computers for the SMART T program with Raytheon and the CONFIRE program with both Honeywell Corporation and the U.S. Army's Picatinny Arsenal. Both of these programs utilize computers that were originally designed by one of the Company's subsidiaries but have been subsequently redesigned by Miltope Corporation to conform to the environmental requirements of the respective programs. These sales accounted for $1,471,000 in the second quarter of 2003 as compared to $1,255,000 for the same period in 2002. The 38.7% decrease in commercial sales was directly attributable to decreased orders from the commercial airline industry primarily caused by the continued uncertainty plaguing that industry segment. The gross margin percentage for the second quarter of 2003 was 22.3% compared to 19.4% for the same period in 2002. This increase is largely due to increased efficiencies at the higher MSD production levels. Selling, general and administrative expenses for the second quarter of 2003 increased 69.1% from the second quarter of 2002, to $2,138,000. These expenses as a percent of sales were 12.0% in the second quarter of 2003 compared to 11.4% for the similar period in 2002. The increase as a percent of sales is primarily attributable to increased legal expenses related to the litigation described in Note 4 to the condensed consolidated financial statements. These associative legal expenses were in the amount of $745,000 in the second quarter of 2003 as compared to $207,000 in the second quarter of 2002. Company funded engineering, research and development expenses for the second quarter of 2003 decreased to $120,000 from $266,000 in the second quarter of 2002. These expenses as a percent of sales were 0.7% in the second quarter of 2003 and 2.4% in 2002. The decrease is primarily attributable to an increase in customer funded development projects which utilized engineering resources that would have been used on Company funded development projects. Most of the customer funded development projects continue to generate revenue and therefore all costs associated with these revenues are included in the Cost of Sales line. Income or loss from these customer funded development programs is included in the gross margin for each period. Interest expense was $95,000 in the second quarter of 2003 compared to $145,000 for the similar period in 2002. This decrease is a result of a decreased level of debt due to lower working capital requirements in the first quarter of 2003 offset partially by a higher variable cost of debt under the terms of the Company's new credit agreement entered into in January 2003. The Company had virtually no interest income in the second quarter of 2003 compared to $6,000 for the similar period in 2002, as a result of the terms of the new credit agreement. The Company recognized tax expense at the estimated effective statutory rate for the thirteen week period ended June 29, 2003. However, the Company does not have a tax payment liability due to the use of a portion of the net operating loss carry-forward the Company has available to it. No income tax expense was recorded for the thirteen weeks ended June 30, 2002 since the Company's income was offset by the utilization of its net operating loss carryforward. A valuation allowance which had fully reserved the deferred tax assets was reversed during the fourth quarter of 2002. -12- The consolidated net income for the second quarter of 2003 was $1,016,000 compared to net income of $477,000 in the second quarter of 2002. The basic net income per share was $0.17 for the second quarter of 2003 based on the weighted average of 5,894,667 shares outstanding. The diluted net income per share was $0.17 based on a diluted weighted average of 6,130,066 shares outstanding. The basic and diluted net income per share was $0.08 for the similar period in 2002 based on a weighted average of 5,875,077 shares of the Company's common stock outstanding. Twenty-six weeks ended June 29, 2003 compared to twenty-six weeks ended June 30, 2002 ----------------------------------------------------------------------- Net sales for the twenty-six weeks ended June 29, 2003 were $33,601,000 compared to net sales for the twenty-six weeks ended June 30, 2002 of $20,407,000. Military sales increased in the first half of 2003 to $29,886,000 as compared to $14,192,000 in the first half of 2002. Commercial sales decreased in the first half of 2003 to $3,715,000 from $6,215,000 in the first half of 2002. The 110.6% increase in military sales year to year was primarily the result of $22,851,000 in revenue attributable to the full ramped up production level of the TSC-750 under the MSD IDIQ contract partially offset by the loss of $10,836,000 in revenue attributable to the SPORT program, a five-year hand-held computer contract completed in June 2002. The Company also benefited from increased sales of tactical computers for the SMART T program with Raytheon and the CONFIRE program with both Honeywell Corporation and the U.S Army's Picatinny Arsenal. Both of these programs utilize computers that were originally designed by one of the Company's subsidiaries but have been subsequently redesigned by Miltope Corporation to conform to the environmental requirements of the respective programs. These sales accounted for $4,138,000 for the twenty-six week period ended June 29, 2003 as compared to $1,731,000 for the twenty-six week period ended June 30, 2002. The 40.2% decrease in commercial sales is directly attributable to decreased orders from the commercial airline industry primarily caused by the current uncertainty plaguing that industry segment. The gross margin percentage for the first half of 2003 was 21.1% compared to 24.1% for the same period in 2002. This decrease is largely due to a shift in product mix from the higher margin revenue generated by the commercial airborne products to the lower margin revenue generated by the MSD contract products. Selling, general and administrative expenses for the first half of 2003 increased 73.2% from the first half of 2002, to $4,243,000. These expenses as a percent of sales were 12.6% in the first half of 2003 compared to 12.0% for the similar period in 2002. The increase as a percent of sales is primarily attributable to increased legal expenses related to the litigation described in Note 4 to the condensed consolidated financial statements. These associative legal expenses were in the amount of $1,362,000 for the twenty-six week period ended June 29, 2003 as compared to $329,000 for the twenty-six week period ended June 30, 2002. Company funded engineering, research and development expenses for the first half of 2003 decreased to $228,000 from $579,000 in the first half of 2002. These expenses as a percent of sales were 0.7% in the first half of 2003 and 2.8% in 2002. The decrease is primarily attributable to an increase in customer funded development projects which utilized engineering resources that would have been used on Company funded development projects. Most of the customer funded development projects continue to generate revenue and therefore all costs associated with these revenues are included in the Cost of Sales line. Income or loss from these customer funded development programs is included in the gross margin for each period. Interest expense was $211,000 in the first half of 2003 compared to $259,000 for the similar period in 2002. This decrease is a result of a decreased level of debt due to lower working capital requirements in the first quarter of 2003 offset partially by a higher variable cost of debt under the terms of the Company's new credit agreement entered into in January 2003. The Company had virtually no interest income in the first half of 2003 compared to $16,000 for the similar period in 2002, as a result of the terms of the new credit agreement. -13- The Company recognized tax expense at the estimated effective statutory rate for the thirteen week period ended June 29, 2003. However, the Company does not have a tax payment liability due to the use of a portion of the net operating loss carry-forward the Company has available to it. No income tax expense was recorded for the twenty- six weeks ended June 30, 2002 since the Company's income was offset by the utilization of its net operating loss carryforward. A valuation allowance which had fully reserved the deferred tax assets was reversed during the fourth quarter of 2002. The consolidated net income for the first half of 2003 was $1,521,000 compared to net income of $1,649,000 in the first half of 2002. The basic net income per share was $0.26 for the first half of 2003 based on the weighted average of 5,887,009 shares outstanding. The diluted net income per share was $0.25 based on a diluted weighted average of 6,119,445 shares outstanding. The basic and diluted net income per share was $0.28 for the similar period in 2002 based on a weighted average of 5,874,149 shares of the Company's common stock outstanding. -14- LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Working capital was $9,968,000 at June 29, 2003 compared to $10,172,000 at December 31, 2002. Accounts receivable decreased $756,000 as a result of higher levels of military sales in December than June. Inventory levels increased $2,421,000 compared to December 31, 2002 balances as the Company prepared for increased production demands in the 3rd and 4th quarter of 2003. Accounts payable increased $1,832,000 reflecting an increase in inventory purchases at the end of the 2nd quarter. Current maturities of long-term debt decreased $405,000 reflecting the amortization of the remaining $1 million due to the former lender. Capital expenditures totaled $319,000 for the first six months of 2003 compared to $827,000 in the first six months of 2002. The decrease in 2003 from 2002 is due to the capitalization of tooling and test equipment in 2002 in relation to the start up of the MSD contract. The Company expects capital expenditures for the full year 2003 to be approximately $450,000. Depreciation and amortization expense for the first six months of 2003 totaled $445,000 compared to $459,000 for the first six months of 2002. Depreciation and amortization expense for the remainder of 2003 is expected to be approximately $431,000. In January of 2003, the Company entered into a new credit agreement with Citizen's Business Credit ("Citizen's") that will provide up to $8,000,000 of financing under a revolving line of credit over an initial three-year period. The initial proceeds of this line of credit were used to pay down $4,700,000 of the $5,700,000 balance due under the existing credit facility provided by its former primary lender. The Company entered into an agreement with its former primary lender to amortize the remaining $1,000,000 balance of the existing line of credit over the next twelve months. The Company anticipates that this new line of credit and cash generated internally will provide adequate funding to meet its cash flow needs for the year ended December 31, 2003. The agreement includes various provisions requiring the maintenance of certain financial ratios and certain other limitations. The Company's accounts receivable, contract rights and inventories are pledged as collateral to the agreement. CRITICAL ACCOUNTING POLICIES ---------------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements. We believe application of accounting policies and the estimates inherently required therein, are reasonable. These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change. Our accounting policies are more fully described in Note 1 to the financial statements, presented elsewhere in this report on Form 10-Q. We have identified certain critical accounting policies that are described below. -15- Inventories-Provision for Slow Moving and Obsolescence - The Company has various components in its inventory that relate to discontinued products and warranty replacement parts and repairs. The Company identifies slow moving or obsolete inventories and estimates appropriate loss provisions related thereto. On an on-going basis the Company evaluates its estimates of loss provisions by using various 7reports and analysis to focus on inventory throughput trends, inventory composition and inventory utilization over discrete periods of time. Additionally, the Company tracks projected parts usage to parts on hand inventory to minimize risk of overstocks. Deferred Taxes - The Company records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company was to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made. In 2002, the Company eliminated the valuation allowance against its deferred tax assets. Impairment of Long-lived Assets - The Company, using its best estimates based on reasonable and supportable assumptions and projections, reviews for impairment of long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The financial statements referred to above reflect all adjustments required by Statement 144 as of December 31, 2002. Item 3. Quantitative and Qualitative Disclosures about Market Risk ------------------------------------------------------------------- Market risk is the risk of loss arising from adverse changes in market prices and interest rates. The Company is exposed to interest risk inherent in its financial instruments. The Company is not currently subject to foreign currency or commodity price risk. The Company manages its exposure to these market risks through its regular operating and financing activities. The Company has a revolving credit loan and an Industrial Development Authority Bond Issue that are exposed to changes in interest rates during the course of their maturity. Both debt instruments bear interest at current market rates and thus approximate fair market value. A 10% increase in interest rates (from 4.8% to 5.3%) would affect the Company's variable debt obligations and could potentially reduce future net earnings by a maximum of approximately $33,000 per year. -16- Item 4. Controls and Procedures -------------------------------- Evaluation of Disclosure Controls and Procedures ------------------------------------------------ As of the end of the period covered by this report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer, Mr. Thomas R. Dickinson, and the Chief Financial Officer, Mr. Tom B. Dake, of the effectiveness of the Company's disclosure controls and procedures as defined in Exchange Act Rules 13a- 15(e) and 15d-15(e). Based upon that evaluation, Mr. Dickinson and Mr. Dake have conluded that the Company's disclosure controls and procedures are functioning effectively to provide reasonable assurance that information the Company is required to disclose in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. These disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information the Company is required to disclose in such reports is accumulated and communicated to Company management, including the chief executive officer and the chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Change in Internal Controls --------------------------- There have been no significant changes in the Company's internal controls over financial reporting or in other factors that have materially affected or is reasonable likely to materially affect internal controls since the date of Mr. Dickinson's and Mr. Dake's most recent reviews of the Company's internal control systems. The design of any system of internal controls and procedures is based upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goal under all potential future conditions, regardless of how remote. -17- PART II - OTHER INFORMATION --------------------------- Item 1 - Legal Proceedings As noted in the Company's Form 10K for the year ending December 31, 2002, the Company is a claimant in a lawsuit in the U.S. District Court, Eastern District of New York against former officers, directors, and employees of PGI and against two competitors of Miltope and PGI. The complaint alleges damages based on breach of fiduciary duties by the former officers and directors, theft of trade secrets, violations of the Lanham Act, conspiracy to commit these violations and other claims. The corporate defendants answered the complaint, denied the claims against them but have not filed any counterclaims. The individual defendants who were former officers and directors of Miltope and PGI have filed counterclaims. The Company believes that such litigation and claims will be resolved without a material effect on the Company's financial position or results of operations. The Company, from time to time, is a party to pending or threatened legal proceedings and arbitrations. Based upon information presently available, and in light of legal and other defenses available to the Company, management does not consider liability from any threatened or pending litigation to be material. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits -------- 31.1 Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 99.1 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K ------------------ None -18- SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MILTOPE GROUP INC. By: /s/ Tom B. Dake ----------------------------------- Tom B. Dake, Vice President Finance and Chief Financial Officer (Principal Accounting Officer) Dated: August 13, 2003 -19-

MILTOPE GROUP INC 10-Q