10-Q 1 q32003.txt 3RD QUARTER FINANCIALS 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 September 28, 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 October 24, 2003: 5,962,623 shares of Common Stock, $.01 par value. PART I - FINANCIAL INFORMATION MILTOPE GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) September 28, December 31, ASSETS 2003 2002 CURRENT ASSETS: Cash $ 151,000 $ 589,000 Accounts receivable, net of allowance of $113,000 8,704,000 7,799,000 (2003) and $344,000 (2002) Inventories 15,746,000 11,527,000 Deferred income taxes 1,666,000 1,816,000 Other current assets 447,000 371,000 ----------- ----------- Total current assets 26,714,000 22,102,000 ----------- ----------- PROPERTY AND EQUIPMENT - at cost: Machinery and equipment 8,029,000 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 15,600,000 15,397,000 Less accumulated depreciation 10,084,000 9,659,000 ----------- ----------- Property and equipment - net 5,516,000 5,738,000 ----------- ----------- DEFERRED INCOME TAXES 3,844,000 5,126,000 OTHER ASSETS 394,000 437,000 ----------- ----------- TOTAL $36,468,000 $33,403,000 =========== =========== LIABILITIES AND STOCKHOLDERS'EQUITY CURRENT LIABILITIES: Accounts payable $ 8,843,000 $7,573,000 Accrued expenses 2,356,000 2,061,000 Short-term debt 290,000 515,000 Current maturities of long-term debt 1,175,000 1,781,000 ----------- ----------- Total current liabilities 12,664,000 11,930,000 LONG-TERM DEBT 7,002,000 7,216,000 OTHER LIABILITIES 645,000 945,000 ----------- ----------- Total liabilities 20,311,000 20,091,000 ----------- ----------- CONTINGENCIES (Note 4) STOCKHOLDERS' EQUITY: Common stock - $.01 par value; 20,000,000 shares authorized; 6,811,112 shares outstanding 68,000 68,000 Capital in excess of par value 24,519,000 24,519,000 Retained earnings 4,798,000 2,858,000 ----------- ----------- 29,385,000 27,445,000 Less treasury stock at cost, 848,489 and 932,203 shares at September 28,2003 and December 31,2002, respectively 13,228,000 14,133,000 ----------- ----------- Total stockholders' equity 16,157,000 13,312,000 ----------- ----------- TOTAL $36,468,000 $33,403,000 =========== ===========

See Notes To Condensed Consolidated Financial Statements MILTOPE GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) Thirteen Weeks Ended --------------------------- September 28, September 29, 2003 2002 ------------ ------------ NET SALES $17,195,000 $12,784,000 ----------- ----------- COSTS AND EXPENSES: Cost of sales 12,978,000 10,485,000 Selling, general and administrative 2,184,000 1,550,000 Engineering, research and development 158,000 240,000 ----------- ----------- Total 15,320,000 12,275,000 ----------- ----------- INCOME FROM OPERATIONS 1,875,000 509,000 OTHER INCOME (EXPENSE): Interest expense (75,000) (188,000) Interest income 5,000 5,000 ----------- ----------- Total (70,000) (183,000) ----------- ----------- INCOME BEFORE INCOME TAXES 1,805,000 326,000 INCOME TAXES 661,000 - ----------- ----------- NET INCOME $ 1,144,000 $ 326,000 =========== =========== NET INCOME PER SHARE BASIC $ 0.19 $ 0.06 =========== =========== DILUTED $ 0.18 $ 0.05 WEIGHTED AVERAGE NUMBER OF =========== =========== SHARES OUTSTANDING: BASIC 5,928,321 5,878,207 =========== =========== DILUTED 6,193,773 6,020,293 =========== ===========

See Notes To Condensed Consolidated Financial Statements MILTOPE GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) Thirty-Nine Weeks Ended ----------------------------- September 28, September 29, 2003 2002 ------------- ------------- NET SALES $50,796,000 $33,191,000 ----------- ----------- COSTS AND EXPENSES: Cost of sales 39,477,000 25,971,000 Selling, general and administrative 6,427,000 4,000,000 Engineering, research and development 386,000 819,000 ----------- ----------- Total 46,290,000 30,790,000 ----------- ----------- INCOME FROM OPERATIONS 4,506,000 2,401,000 OTHER INCOME (EXPENSE): Interest expense (286,000) (447,000) Interest income 6,000 21,000 ----------- ----------- Total (280,000) (426,000) ----------- ----------- INCOME BEFORE INCOME TAXES 4,226,000 1,975,000 INCOME TAXES 1,561,000 - ----------- ----------- NET INCOME $ 2,665,000 $ 1,975,000 =========== =========== NET INCOME PER SHARE: BASIC $ .45 $ .34 =========== =========== DILUTED $ .43 $ .33 =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: BASIC 5,900,881 5,874,671 =========== =========== DILUTED 6,133,212 6,000,677 =========== ===========

See Notes To Condensed Consolidated Financial Statements MILTOPE GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2003 AND SEPTEMBER 29, 2002 (unaudited) September 28, September 29, 2003 2002 ------------- ------------- OPERATING ACTIVITIES: Net income $ 2,665,000 $ 1,975,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 672,000 705,000 Provision for slow-moving and obsolete inventories 458,000 850,000 Provision for (recovery of) doubtful accounts receivable (123,000) 353,000 Deferred income taxes 1,431,000 - (Gain) loss on sale of property and equipment (5,000) 15,000 Change in operating assets and liabilities: Accounts receivable (782,000) (2,810,000) Inventories (4,677,000) (2,209,000) Other current assets (75,000) (65,000) Other assets (2,000) 217,000 Accounts payable and accrued expenses 1,287,000 3,151,000 ----------- ----------- Net cash provided by operating activities 849,000 2,182,000 ----------- ----------- INVESTING ACTIVITIES: Purchase of property and equipment (423,000) (954,000) ----------- ----------- Net cash used in investing activities (423,000) (954,000) ----------- ----------- FINANCING ACTIVITIES: Proceeds from exercise of stock options 180,000 10,000 Net proceeds from line of credit 7,471,000 - Payments of long-term debt (8,515,000) (1,386,000) ----------- ----------- Net cash used in financing activities (864,000) (1,376,000) ----------- ----------- NET DECREASE IN CASH (438,000) (148,000) CASH, BEGINNING OF PERIOD 589,000 1,120,000 ----------- ----------- CASH, END OF PERIOD $ 151,000 $ 972,000 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments made for: Income taxes $ 227,000 $ 244,000 =========== =========== Interest $ 320,000 $ 400,000 =========== ===========

See Notes To Condensed Consolidated Financial Statements 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 September 28, 2003 and December 31, 2002 and the results of operations and cash flows for the thirteen and thirty-nine weeks ended September 28, 2003 and September 29, 2002. All amounts presented have been rounded to the nearest thousand. The results for the thirteen and thirty-nine weeks ended September 28, 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 September 28, 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: Thirteen Weeks Ended ---------------------------- September 28, September 29, 2003 2002 ------------- ------------- Net income, as reported: $ 1,144,000 $ 326,000 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (57,000) (56,000) ----------- ---------- Pro forma net income $ 1,087,000 $ 270,000 =========== ========== Basic net income per share: As reported $ 0.19 $ 0.06 Pro forma $ 0.18 $ 0.05 Diluted net income per share: As reported $ 0.18 $ 0.05 Pro forma $ 0.18 $ 0.04 Thirty-Nine Weeks Ended ---------------------------- September 28, September 29, 2003 2002 ------------- ------------- Net income, as reported: $ 2,665,000 $ 1,975,000 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (90,000) (130,000) ------------- ----------- Pro forma net income $ 2,575,000 $ 1,845,000 =========== =========== Basic net income per share: As reported $ 0.45 $ 0.34 Pro forma $ 0.44 $ 0.31 Diluted net income per share: As reported $ 0.43 $ 0.33 Pro forma $ 0.42 $ 0.31

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: September 28, September 29, 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%

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 thirty-nine weeks ending September 28, 2003 and September 29, 2002, as detailed below: Thirteen Weeks Ended Thirty-nine Weeks Ended --------------------------- --------------------------- September 28, September 29, September 28, September 29, 2003 2002 2003 2002 ------------- ------------- ------------- ------------- Weighted average common shares outstanding - basic 5,928,321 5,878,207 5,900,881 5,874,671 Dilutive effect of stock options 265,452 142,086 232,331 126,006 --------- --------- --------- --------- Weighted average common shares outstanding - diluted 6,193,773 6,020,293 6,133,212 6,000,677 ========= ========= ========= =========

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 September 28, 2003 and September 29, 2002 were 3,361 and 35,952, respectively. Anti-dilutive options for the thirty-nine weeks ended September 28, 2003 and September 29, 2002 were 14,393 and 197,952, respectively. 2. Inventories - Net - Inventories consist of the following: September 28, 2003 December 31, 2002 ------------------ ----------------- Purchased parts and Subassemblies $14,000,000 $ 8,578,000 Work-in-process 1,746,000 2,949,000 ----------- ----------- Total $15,746,000 $11,527,000 =========== ===========

Inventories include a reserve for slow-moving and obsolete items of $1,045,000 and $1,971,000 at September 28, 2003 and December 31, 2002, respectively. 3. Income Taxes - The Company recognized tax expense at the estimated effective statutory rate for the thirteen and thirty-nine week period ended September 28, 2003. However, the Company does not have an income tax 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 thirty-nine weeks ended September 29, 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. 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 September 28, 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 September 28, 2003 and September 29, 2002 -------------------------------------------------------------- General September 28, 2003 Military/Rugged Commercial Eliminations Corporate Consolidated --------------------- --------------- ----------- ------------ ----------- ------------ Net sales from external customers $15,200,000 $ 1,995,000 $17,195,000 =========== =========== =========== Segment operating income $ 1,556,000 $ 319,000 $ 1,875,000 =========== =========== =========== Other income (expense) $ - $ - $ - $ (70,000) $( 70,000) =========== =========== ============= ========== =========== Income (loss) before income taxes $ 1,556,000 $ 319,000 $ - $ (70,000) $ 1,805,000 =========== =========== ============= ========== =========== Identifiable assets $22,969,000 $ 6,997,000 $6,502,000 $36,468,000 =========== =========== ========== =========== Capital expenditures $ 99,000 $ 13,000 $ 112,000 =========== =========== =========== Depreciation and amortization $ 216,000 $ 12,000 $ 228,000 =========== =========== =========== General September 29, 2002 Military/Rugged Commercial Eliminations Corporate Consolidated --------------------- --------------- ----------- ------------ ----------- ------------ Net sales from external customers $11,584,000 $ 1,266,000 $ (66,000) $12,784,000 =========== =========== =========== =========== Segment operating income $ 469,000 $ 40,000 $ - $ 509,000 =========== =========== =========== =========== Identifiable assets $21,856,000 $ 6,641,000 $ - $5,861,000 $34,358,000 =========== ========== =========== Capital expenditures $ 114,000 $ 13,000 $ - $ 127,000 =========== =========== =========== =========== Depreciation and amortization $ 236,000 $ 10,000 $ - $ 246,000 =========== =========== =========== =========== Thirty-nine Weeks Ended September 28, 2003 and September 29, 2002 ----------------------------------------------------------------- General September 28, 2003 Military/Rugged Commercial Eliminations Corporate Consolidated --------------------- --------------- ----------- ------------ ----------- ------------ Net sales from external customers $45,086,000 $ 5,710,000 $ - $50,796,000 =========== =========== =========== =========== Segment operating income $ 3,475,000 $ 1,031,000 $ - $ 4,506,000 =========== =========== =========== =========== Other income (expense) $ - $ - $ - $ (280,000) $ (280,000) =========== ========== =========== ========== =========== Income (loss) before income taxes $ 3,475,000 $ 1,031,000 $ - $ (280,000) $ 4,226,000 =========== ========== =========== ========== =========== Identifiable assets $22,969,000 $ 6,997,000 $6,502,000 $36,468,000 =========== ========== =========== ========== =========== Capital expenditures $ 374,000 $ 49,000 $ - $ 423,000 =========== =========== =========== =========== Depreciation and amortization $ 637,000 $ 35,000 $ - $ 672,000 =========== =========== =========== =========== General September 29, 2002 Military/Rugged Commercial Eliminations Corporate Consolidated --------------------- --------------- ----------- ------------ ----------- ------------ Net sales from external customers $25,776,000 $ 7,481,000 $ (66,000) $33,191,000 =========== =========== =========== =========== Segment operating income $ 99,000 $ 2,302,000 $ - $ 2,401,000 =========== =========== =========== =========== Identifiable assets $21,856,000 $ 6,641,000 $ - $5,861,000 $34,358,000 =========== =========== =========== ========== =========== Capital expenditures $ 705,000 $ 249,000 $ - $ 954,000 =========== =========== =========== =========== Depreciation and amortization $ 681,000 $ 24,000 $ - $ 705,000 =========== =========== =========== =========== General December 31, 2002 Military/Rugged Commercial Eliminations Corporate Consolidated --------------------- --------------- ----------- ------------ ----------- ------------ Identifiable assets $20,240,000 $ 4,824,000 $ - $8,339,000 $33,403,000 =========== =========== =========== ========== ===========

5. Subsequent Event - On October 21, 2003, the Company entered into an Agreement and Plan of Merger with Vision Technologies Kinetics, Inc. ("VTK"). As a result of the merger, the Company will be a wholly-owned subsidiary of VTK. Completion of the merger is subject to a number of terms and conditions, including the receipt of all required regulatory approvals and approval by a majority of the stockholders of the Company at a special meeting of the stockholders to be held in the future. Pursuant to the terms of the Merger Agreement, upon the closing of the merger, each holder of the Company's common stock will receive, in exchange for each such share, $5.78, without interest thereon, and one contingent value right ("CVR"). Each CVR represents the non- transferable right to receive a pro rata share of 50% of the net proceeds, if any, from the Company's lawsuit against DRS Technologies Inc. and other parties, after adjustments for taxes. The Company will retain the remaining 50% of the net proceeds from the lawsuit. In addition, $700,000 has been reserved by VTK to fund certain costs and expenses associated with the lawsuit. 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 discussed in this news release that are not historical facts are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and the Company intends that such forward looking statements be subject to the safe harbors created thereby. The Company warns that caution should be taken in relying upon any forward looking statements contained herein, as they involve a number of risks and uncertainties that may cause the actual results of the Company to be materially different from any future results expressed or implied by such forward looking statements. Examples of such risks and uncertainties include, but are not limited to, the ability of the Company to enter into definitive agreements for the sale of the Company, the ability of the Company and any potential buyer to consummate the sale of the Company, future demand for the Company's products and services, general economic conditions, actions of competitors, termination of contracts at the convenience of the United States government, customer funding variations in connection with multi-year contracts and follow-on options, and other risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. The Company does not undertake any obligation to update or revise any forward looking statement made by it or on its behalf, whether as a result of new information, future events or otherwise 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 thirty-nine weeks ended September 28, 2003, as compared to the thirteen and thirty-nine weeks ended September 29, 2002. RESULTS OF OPERATIONS --------------------- Thirteen weeks ended September 28, 2003 compared to thirteen weeks ended September 29, 2002 ------------------------------------------------------------------ Net sales for the thirteen weeks ended September 28, 2003 (third quarter of 2003) were $17,195,000 compared to net sales for the thirteen weeks ended September 29, 2002 (third quarter of 2002) of $12,784,000. Military sales increased in the third quarter of 2003 to $15,200,000 as compared to $11,584,000 in the third quarter of 2002. Commercial sales increased in the third quarter of 2003 to $1,995,000 from $1,266,000 in the third quarter of 2002. The 31.2% increase in military sales year to year was primarily the result of $3,662,000 in revenue attributable to 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 $462,000 in the third quarter of 2002. The 57.6% increase in commercial sales was directly attributable to resurgence in the airline industry. The gross margin percentage for the third quarter of 2003 was 24.5% compared to 18.0% 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 third quarter of 2003 increased 40.9% from the third quarter of 2002, to $2,184,000. These expenses as a percent of sales were 12.7% in the third quarter of 2003 compared to 12.1% 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 $690,000 in the third quarter of 2003 as compared to $332,000 in the third quarter of 2002. Company funded engineering, research and development expenses for the third quarter of 2003 decreased to $158,000 from $240,000 in the third quarter of 2002. These expenses as a percent of sales were 0.9% in the third quarter of 2003 and 1.9% 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 $75,000 in the third quarter of 2003 compared to $188,000 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 interest income of $5,000 in both the third quarter of 2003 and 2002. The Company recognized tax expense at the estimated effective statutory rate for the thirteen-week period ended September 28, 2003. However, the Company does not have an income tax 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 September 29, 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 third quarter of 2003 was $1,144,000 compared to net income of $326,000 in the third quarter of 2002. The basic net income per share was $0.19 for the third quarter of 2003 based on the weighted average of 5,928,321 shares outstanding. The diluted net income per share was $0.18 based on a diluted weighted average of 6,193,773 shares outstanding. The basic net income per share was $0.06 for the third quarter of 2002 based on the weighted average of 5,878,207 shares outstanding. The diluted net income per share was $0.05 based on a diluted weighted average of 6,020,293 shares outstanding. Thirty-nine weeks ended September 28, 2003 compared to thirty-nine weeks ended September 29, 2002 ----------------------------------------------------------------------- Net sales for the twenty-nine weeks ended September 29, 2003 were $50,796,000 compared to net sales for the thirty-nine weeks ended September 28, 2002 of $33,191,000. Military sales increased in the first nine months of 2003 to $45,086,000 as compared to $25,776,000 in the nine months of 2002. Commercial sales decreased in the first nine months of 2003 to $5,710,000 from $7,481,000 in the first nine months of 2002. The 74.9% increase in military sales year to year was primarily the result of $32,696,000 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 $8,159,000 for the thirty-nine week period ended September 28, 2003 as compared to $2,120,000 for the thirty-nine week period ended September 29, 2002. The 23.7% 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 nine months of 2003 was 22.3% compared to 21.8% 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 first nine months of 2003 increased 60.7% from the first nine months of 2002, to $6,427,000. These expenses as a percent of sales were 12.7% in the first nine months of 2003 compared to 12.1% 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 $2,052,000 for the thirty-nine week period ended September 28, 2003 as compared to $661,000 for the thirty-nine week period ended September 29, 2002. Company funded engineering, research and development expenses for the first nine months of 2003 decreased to $386,000 from $819,000 in the first nine months of 2002. These expenses as a percent of sales were 0.8% in the first nine months of 2003 and 2.5% 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 $286,000 in the first nine months of 2003 compared to $447,000 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 nine months 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 interest income in the first nine months of 2003 of $6,000 compared to $21,000 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 thirty-nine week period ended September 28, 2003. However, the Company does not have an income tax 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 thirty-nine weeks ended September 29, 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 nine months of 2003 was $2,665,000 compared to net income of $1,975,000 in the first nine months of 2002. The basic net income per share was $0.45 for the first nine months of 2003 based on the weighted average of 5,900,881 shares outstanding. The diluted net income per share was $0.43 based on a diluted weighted average of 6,133,212 shares outstanding. The basic net income per share was $0.34 for the first nine months of 2002 based on the weighted average of 5,874,671 shares outstanding. The diluted net income per share was $0.33 based on a diluted weighted average of 6,000,677 shares outstanding. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Working capital was $14,050,000 at September 28, 2003 compared to $10,172,000 at December 31, 2002. Accounts receivable increased $905,000 as a result of higher levels of military sales in September than December. Inventory levels increased $4,219,000 compared to December 31, 2002 balances reflecting a build-up of components and sub- assemblies for products to be shipped in the 4th quarter of 2003. Accounts payable increased $1,270,000 reflecting an increase in inventory purchases at the end of the 3rd quarter. Current maturities of long-term debt decreased $606,000 reflecting the amortization of the remaining $1 million due to the former lender. Capital expenditures totaled $423,000 for the first nine months of 2003 compared to $954,000 in the first nine months of 2002. The decrease in 2003 from 2002 is due to the purchase of tooling and test equipment in 2002 in relation to the MSD contract. The Company expects capital expenditures for the full year 2003 to be approximately $500,000. Depreciation and amortization expense for the first nine months of 2003 totaled $672,000 compared to $705,000 for the first nine months of 2002. Depreciation and amortization expense for the remainder of 2003 is expected to be approximately $225,000. 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 ending 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. On October 21, 2003, the Company entered into an Agreement and Plan of Merger with Vision Technologies Kinetics, Inc. ("VTK"). As a result of the merger, the Company will be a wholly-owned subsidiary of VTK. Completion of the merger is subject to a number of terms and conditions, including the receipt of all required regulatory approvals and approval by a majority of the stockholders of the Company at a special meeting of the stockholders to be held in the future. Pursuant to the terms of the Merger Agreement, upon the closing of the merger, each holder of the Company's common stock will receive, in exchange for each such share, $5.78, without interest thereon, and one contingent value right ("CVR"). Each CVR represents the non-transferable right to receive a pro rata share of 50% of the net proceeds, if any, from the Company's lawsuit against DRS Technologies Inc. and other parties, after adjustments for taxes. The Company will retain the remaining 50% of the net proceeds from the lawsuit. In addition, $700,000 has been reserved by VTK to fund certain costs and expenses associated with the lawsuit. 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. 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 reports 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. 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 concluded 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. 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 4 - Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of the Company was held on July 18, 2003 at which the following matters were brought before and voted upon by the shareholders. 1. The election of the following to the Board of Directors to serve until the 2004 Annual Meeting of Shareholders. For Against Abstain --------- ------- ------- William L. Dickinson 5,702,957 -0- 21,645 Henry Guy 5,670,257 -0- 54,345 Jerry O. Tuttle 5,702,957 -0- 21,645 Ronald V. Hite 5,702,957 -0- 21,645 David E. Marcus 5,702,957 -0- 21,645

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 Sarbabes-Oxley Act of 2002 99.1 Certification of Principal Financial Officer, pursuant of 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 of 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 ------------------- A Form 8-K was filed August 22, 2003 reporting under Item 12 the Registrant's press release announcing financial results for the quarter ended June 29, 2003. A Form 8-K was filed October 14, 2003 reporting under Item 5 the Registrant's press release announcing a non-binding agreement in principle to be acquired. A Form 8-K was filed October 24, 2003 reporting under Item 5 an Agreement and Plan of Merger with Vision Technologies Kinetics, Inc. 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: November 11, 2003

MILTOPE GROUP INC 10-Q