SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 19971998
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to______ to______
Commission File No. 1-8037
Aeroflex Incorporated
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(Exact name of registrant as specified in its charter)
Delaware 11-1974412
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
35 South Service Road, Plainview, New York 11803
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 694-6700
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Class Which Registered
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Common Stock, $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X[X] No --- ---[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. (The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing).
As of September 8, 199722, 1998 approximately $104,160,613.
- ---------------------------------------------------$147,487,000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date (applicable only to
corporate registrants). Common Stock, par value $.10 per share; outstanding as
of September 8, 199722, 1998 - 12,869,21217,426,618 (excluding 131,75639,159 shares held in treasury).
Documents incorporated by reference: Parts II and IV - The Annual Report to
Stockholders for the fiscal year ended June 30, 19971998 to the extent specifically
identified or incorporated herein. Part III - Registrant's definitive proxy
statement to be filed pursuant to Regulation 14A of the Securities Act of 1934.
PART I
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ITEM ONE - BUSINESS
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Aeroflex Incorporated, through its subsidiaries (collectively, unless the
context requires otherwise, referred to as the "Company" or "Aeroflex"),
utilizes its advanced technologiesdesign, engineering and manufacturing capabilities to
provideproduce state-of-the-art electronic packagingmicroelectronic module, interconnect and testing
solutions used in communication applications among others. Aeroflex
designs and manufactures microelectronic circuits and interconnect products,
instrument products and motion control systems, for commercial and defense markets.
ItIts products are used in the satellite, wireless and wireline communications,
cable television ("CATV") and defense communications markets. With the
acquisition of MIC Technology in 1996 and the interconnect assets of Lucent
Technologies Inc. in 1997, the Company believes it is currently the largest
merchant supplier of thin film interconnect products. The Company also designs
and manufactures motion control systems, and shock and vibration stabilizingisolation
systems used for commercial, industrial and defense applications. The Company's
major customers include Lockheed Martin Corporation, Hughes Electronics
Corporation, Motorola, Inc., Lucent Technologies, Inc., Raytheon Company and
Northrop Grumman Corporation. The Company currently acts as sole source supplier
under supply agreements with Lucent Technologies and Motorola's RF semiconductor
division for thin film interconnect products.
Operations are grouped into three segments: microelectronics, electronicsMicroelectronics; Test,
Measurement and isolator products.Other Electronics; and Isolator Products. These segments, their
products and the markets they serve are described below.
Microelectronics
Thin Film Circuits and Interconnects - (MIC Technology)
In March 1995,1996, the Company adoptedacquired MIC Technology Corporation ("MIC")
which designs, develops, manufactures and sells passive thin film circuits and
interconnects. Its advanced microcircuit and interconnect technology is emerging
as a plankey technology for miniaturized, high frequency, high performance
electronic products for rapidly growing markets such as cellular/PCS and
microwave data links. It continues to consolidate its Puerto Rican
manufacturing operations into its existing facilitiesbe an essential technology in New Yorksatellite
based communication hardware, CATV amplifiers and New
Jersey.leading edge military
electronic products.
Thin film products allow dramatic reductions in the size and weight of
electronic circuits and provide superior electrical and thermal performance.
Growth in the use of thin film technology is expected to complement the advances
in semiconductor speed which have occurred in recent years. Thin film removes
limitations imposed by other interconnect technologies for high clock rate
digital circuits. In the digital, analog RF and microwave domains, thin film
allows the production of hybrid integrated circuits with lumped elements at
lower cost than full silicon or gallium arsenide (GaAs) integration while
retaining outstanding performance.
The Company has ceased manufacturing operationsserves both commercial and military markets. Commercial markets
include satellite, wireless and wireline communications, CATV, fiber optics and
digital Multi-Chip Modules ("MCMs"). Military markets include missile Transmit
and Receive ("T/R") modules, radar T/R modules and advanced Electronic Counter
Measures.
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In its most basic form, simple interconnect incorporates conductors,
resistors, plated vias and selective high conductivity traces for high-volume,
low-cost, DC, RF and microwave products, including applications such as standard
microwave amplifiers and oscillators, CATV circuitry, A/D converters and
high-power regulation. Advanced interconnect incorporates all passive elements
in Puerto Rico.
Assolid-state form. Microstrip conductors, resistors, inductors, capacitors,
air-bridges and filled thermal vias are integrated on a single substrate.
Applications include high-performance, low-noise and power amplifiers for use in
commercial wireless products and avionics. To address digital circuit
requirements, high-density digital interconnect substrates offer single or
double-sided, controlled impedance signal routing. These substrates also offer
integrated resistors and solid thermal vias, if required, for improved
performance. Applications include Application Specific Integrated Circuits
("ASIC"), control circuits, high-density memory modules and digital switching
networks. By incorporating features of June 30, 1997,advanced interconnect and high-density
digital interconnect in a single design, the Company has accountedcreated PIMIC -Mixed
Signal Interconnect to address the expanding use of mixed technologies. This
unique PIMIC process allows integration of analog and digital functionality for
certain segments, namelyuse in leading-edge miniaturized military, satellite and commercial electronics.
In July 1997, MIC entered into a multi-year strategic agreement under which
MIC will supply Lucent Technologies with film integrated circuits which are used
in communications applications. In connection with this agreement, MIC purchased
equipment, inventory and custom envelopes (Huxley Envelope Corp.)licenses for advanced technologies from two of Lucent's
telecommunications components operations which significantly increases MIC's
manufacturing capacity and telecommunication
systems services (T-CAS Corp.) as discontinued operations. The following
description of the Company's business does not include these discontinued
operations. These segments are described under the caption "Discontinued
Operations".
Microelectronics
- ----------------it is expected to enhance its capabilities.
Microelectronic Modules - (Circuit Technology)
Since 1974, the Company has been engaged in the design, manufacture and
sale of state-of-the-art microelectronic assemblies for the electronics
industry. In January 1994, the Company acquired substantially all of the net
operating assets of the microelectronics division of Marconi Circuit Technology
Corporation, which manufactures a wide variety of microelectronic assemblies.
This acquisition increased the range of products offered and enhanced the
Company's engineering capability.
Microelectronic assemblies are called "Hybrids" because they combine
elements of integrated circuit and printed circuit board technologies. They
provide many of the advantages of integrated circuits relative to printed
circuit boards, such as miniaturization, increased capability and greater
reliability and environmental stability. However, unlike integrated circuits,
they can be economically manufactured in quantities of hundreds to several
thousands. Hybrids are multi-layered electronic circuits, containing very small
and barely visible passive and active elements (those that carry, transmit,
receive, generate or amplify signals) which are mounted and wired together on a
single multi-layered ceramic surface in patterns designed to perform specific
electronic functions. These functions include amplification, switching, signal
conversion, voltage regulation and decoding of microwave signals. They are
especially suited to aircraft, spacecraft, missile and industrial applications
where space is limited, such as in navigation equipment, airborne computers,
sonar systems, medical diagnostic instrumentation, satellite/telecom systems and
computer instrumentation.
One such Hybrid Microcircuit product family, the MIL-STD-1553 Data Bus
product line, has a particularly broad range of applications. These
microcircuits, which have been adopted by the Tri-services (Army, Navy, and Air
Force) as a standard interface, act as a digital data communication link between
various computer-based equipment.
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A series of Monolithic Data-bus Transceivers and Remote Terminals, has been
transitioned to production by the Company, many of which are described by
"Standard Military Devices" (SMD) drawings, thereby facilitating their use in
current and future avionic systems.
The Company's Microcircuits are used on numerous avionic systems including
the F-14, F-15, F-16 and F-18 aircraft and the AMRAAM and Tomahawk-cruise
missiles. They are also qualified for possible further use on the updates to
older platforms. The Data-bus microcircuits are used in a wide variety of
aerospace and seaboard navigation and communication systems. A Motor Drive
Hybrid microcircuit is in production for the AN/PVS-6, a miniature, eyesafe,
laser rangefinder.Satellite
The Company has production contractsbeen designing and manufacturing hybrid and MCM
microelectronic circuits for space applications for over 15 years. The Company's
reputation and expertise in these areas results from significant experience
gained on Department of Defense ("DOD") and NASA programs such as MILSTAR, Space
Shuttle, LANDSAT and most recently, the Serial Interface ModuleCassini probe to Saturn, as well as on
various classified programs. The Company's hybrids have been successfully
deployed on commercial programs such as DirecTV and Current Mode Coupler Module used on the ARINC 629 Data-bus which is the
commercial equivalent of MIL-STD-1553. This commercial data communications
interface is used on the Boeing 777.IRIDIUM .
Multichip Modules
(MCMs)MCMs are a further advancement of the hybrid microcircuit technology in which
large digital devices such as microprocessors, SRAM and EEPROM memories are
combined with multilayer ceramic packages to form complex digital systems or
subsystems. Multichip modulesMCMs perform functions similar to hybrids, except the emphasis is on
miniaturizing and synthesizing digital functions such as microprocessor systems
and mass memories. The Company has been qualified on multiple MCM designs on
both the F-16 and F-22 Advanced Tactical Fighter, (ATF), V-22, LAMPS, AWACS and AEGIS
MissleMissile and is participating in pre-production and production contracts.
Application specific multi-chip
modulesMCMs have significant market potential in avionics,
workstations, telecommunications and satellites.
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The Company has expanded its standard memory module product line with the
addition of thirty-fiveapproximately 50 new memory modules in the past threefour years. These
products, which consist of SRAM and Flash memory modules, take advantage of the
Company's multichip moduleMCM expertise. They are designed to be used for a wide range of
computer and general purpose circuit board applications.
Data-bus
The Data-bus product line has a particularly broad range of applications.
These microcircuits, which have been adopted by the United States Army, Navy and
Air Force as a standard interface, act as a digital data communication link
between various computer-based equipment. A new commercial Data-bus interface
was developed by Boeing for use on its 777 Aircraft. The Company continues to expand its markethas production
contracts for the R4400 family of
microprocessorinterface and coupler modules withwhich provide the sale of production units utilized in multiple
avionics/missile applications. The Intel I486 dual microprocessor module is
being utilizeddata
communications protocol and interface for avionics and missile applications, in production quantities.
Thin Film Interconnects - (MIC Technology)
In March 1996, the Company acquired MIC Technology Corporation (MIC) which
designs, develops, manufactures and markets microelectronics products in the
form of passive thin film circuits and interconnects. Its advanced circuit and
interconnect technology is emerging as a key technology for miniaturized, high
frequency, high performance electronic products for rapidly growing markets like
cellular telephones, personal communcation service devised (PCS) and microwave
data links. It continues to be an essential technology in satellite based
communication hardware, cable amplifiers and leading edge military electronic
products.
Thin film products allow dramatic reductions in the size and weight of
electronic devices and provide superior electrical and thermal performance
available today at high frequencies. Growth in thin film technology is expected
to complement the advances in semiconductor speed which have occurred during the
recent years in the digital world. Thin film removes limitations imposed by
other interconnect technologies for high clock rate digital circuits. In the
digital, analog R.F., and microwave domain, thin films allow the production of
hybrid integrated circuits with lumped elements at lower cost than full silicon
(Si) or gallium arsenide (GaAs) integration while retaining outstanding
performance.
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MIC serves both commercial and military markets. Commercial markets include
wireless communications, cable television ("CATV"), fiber optics and digital
MCMs. Military markets include missile Transmit and Receive (T/R) modules, radar
T/R modules and advanced Electronic Counter Measures (ECM).
MIC designs and manufactures a variety of electronic components for
wireless/cellular PCS products including power amplifiers, band-pass filters,
mixers and down converters. Due to the growth in the cellular market, the
current 900 MHz cellular band is saturated. Therefore, new cellular operating
frequencies at 1.8+ GHz are being allocated. MIC's circuits operate at both the
existing and higher band widths. Competing technologies (thick film, epoxy, and
Teflon-based substrates) compromise performance at 1.8+ GHz operating
frequencies.
MIC manufactures high power substrates for CATV amplifiers. These receive,
filter, amplify and transmit signals that distribute cable service. In January
1997, MIC entered into a strategic sole source supplier agreement to manufacture
and supply all of Motorola's RF Semiconductor Division's thin film interconnects
supporting component applicationsthe electronic systems in CATV, cellulareach
777 Aircraft.
The Company's microcircuits are used on numerous avionic systems including
the F-14, F-15, F-16 and land mobile
communications.
Commercial satellite networks require high frequency T/R functionsF-18 aircraft and the Tomahawk-cruise and AMRAAM
missiles. They are also qualified for groundpossible use on upgrades to satellite, satellite to satellite, and satellite to ground
transmission. MIC produces T/R module circuits for signal splitting,
amplification, phase shifting, and combining functions.
In July 1997, MIC entered into a multi-year strategic agreement under which
MIC will supply Lucent Technologies with film integrated circuits whicholder
platforms. The Data-bus microcircuits are used in communications applications. In connectiona wide variety of aerospace
and seaboard navigations, and communication systems.
Application Specific Modules
The Company manufactures hybrids for a customer's particular need that
cannot be fulfilled with this agreement, MIC purchased
equipment, inventorya standard commercial product. This capability has
historically been utilized to service defense markets domestically and
licenses for advanced technologies from twointernationally. The electronic content of Lucent's
telecommunications components operations which significantly increases MIC's
manufacturing capacity andthe worldwide defense market is
growing as governments determine it is expectedmore economical to enhance its capabilities.
MICupgrade existing
aircraft and missiles than to build new aircraft and missiles. This customer
base is a key supplierfaced with continuous retrofits to Texas Instrumentsupgrade the ability of aging
equipment. The Company benefits from upgrade programs by supplying hybrids and
RaytheonMCMs for T/R modules on
the Army's Ground Based Radar programC-130, F-16, F-18 and a key supplier to Lockheed, TRW,
WestinghouseAWACS aircraft programs, as well as newer
programs such as JAVELIN and Texas Instruments on the Air Force's Advanced Tactical Fighter
(F22).AMRAAM missiles.
Test, Measurement and Other Electronics
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Instrumentation
Frequency Synthesizers and Components - (Comstron)
In November 1989, the Company acquired Comstron Corporation which is now an
operating division of Aeroflex Laboratories Incorporated, a wholly-owned
subsidiary of Aeroflex. Comstron is a leader in radio frequency and microwave
technology used in the manufacture of fast switching frequency synthesizers,
signal generators and components.
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A frequency synthesizer is a device or circuit that synthetically produces
a large number of frequencies based upon a single reference frequency. The best
way to tune a radio or receiver is with a crystal frequency reference. When
multiple frequencies are necessary, multiple crystals and switches are required.
Eventually it becomes first impractical, and then impossible, to use a large
number of crystals due to size constraints. A frequency synthesizer replaces
millions or billions of crystals. The Company's synthesizers operate in a broad
frequency range of 10 MHz10MHz to 40GHz with excellent spectral purity. Their small
size and modular construction allow for easy systems configuration and
facilitation of repair. The Company, together with Hewlett Packard, helped
develop the Modular Measurement System (MMS) standard which has been selected as the
architecture underlying the RF and microwave sections of a number of automated
test equipment (ATE)("ATE") systems, including CASS, the U.S.United States Navy's next
generation ATE. The CASS program is a high priority United States Navy
initiative designed to end the proliferation of unique ATE and related Test
Program Sets for United States Navy electronics. Historically, each individual
weapon system had its own testing system which required unique operator skills,
maintenance and scope of capabilities. The Company supplies the fast switching
frequency synthesizers, spread spectrum modulators and arbitrary waveform
generators for CASS. The Company's synthesizers also significantly improve the
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performance and reliability of existing radars.
The Company's synthesizers have been selected by Westinghouse to upgrade its TPS
63 and 70 series radars. Additionally, the synthesizers
improve the performance of threat simulators, as well as radar cross section and
antenna measurement systems. With the 1993 introduction of the new model FS-5000 synthesizer series, the
Company strengthened its leadership position in the Ultra-Fast Switching
Frequency Synthesizer market. The FS-5000 series is ten times faster, less than
half the size and offers superior performance to the Company's previous
synthesizers. In 1995,Fiscal 1998, the Company introduced a phase-coherent version of the
FS-5000 which expands its application into numerous radar systems.
Component technology, which contributes to the exceptional performance of
the Company'sfirst
low-cost, fast switching, high-performance frequency synthesizer includes custom microwave and RF hybrids and filters
manufactured by the Company.
High Speedfor commercial
ATE.
High-Speed Automatic Test Systems - (Lintek)
In January 1995, the Company acquired Lintek Inc. as a wholly ownedwholly-owned
subsidiary of Aeroflex. Aeroflex Lintek Corp., the successor to Lintek, Inc., is
a leader in high speedleading provider of high-speed instrumentation radar systems and antenna
measurement systems. These systems are used by the Department of Defense and by industry.
Lintek Inc. was incorporated in 1988 for the purpose of developing and selling
instrumentation radar systems, and currently has systems in place with many of
the large aerospace companies and with major government laboratories. Instrumentation radar systems are used to measure the radar
reflectivity or
Radar Cross Section (RCS),cross sections of aircraft and other objects using both scale models and actual
examples, of aircraft
and other objects.examples. These measurements are made in many diverse environments from factory
floor, to laboratory, to flight lines or aircraft carriers. These radar
systems operate in the frequency range of 100MHz to 100GHz. In addition to the
radar system hardware, Aeroflex Lintek Corp.the Company has developed various analytical processing
and display algorithms to assist in the interpretation of the radar data.
Aeroflex Lintek has three lines of radar systems: the Elan series, the
Model 5000, and the Model 4000. These systems vary in price and performance. The
Company believes that the Elan series radar system is the highest performance
system in the industry, the Model 5000 is a price performance leader, and the
Model 4000 is a low cost entry level system.
Antenna measurement systems are used in the design and manufacturing of all
types of antennas. The Company's product line is derived from theThrough expertise gained in high speedhigh-speed data acquisition and display techniques
used in instrumentation radar products. These products, comprisethe Company produces antenna measurement
systems used in the design, manufacturing and testing of all types of antennas.
In April 1998, Lintek was awarded a growing portion of
Aeroflexcontract for next generation communication
satellite test equipment from Hughes Space and Communications. This testing
system combines Comstron's patented synthesizers with Lintek's sales dueproprietary
response measurement technology to more efficiently test satellite payloads both
on the growthground and in personal communications and the
demand for these systems abroad.
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space.
Motion Control Systems - (Aeroflex Laboratories)
Scanning Devices
Since 1975, the Company has been engaged in the development and manufacture
of electro-optical scanning devices used in infra-red night vision systems.
These systems detect temperature differences in the infra-red radiation
emanating from objects in target areas. The differences are then electronically
amplified and converted to visible light to create a visual image of the zone
being scanned, enabling accurate observation and weapon firing control through
smoke, darkness and battlefield haze.
The Company has completed development and has started a production order
for the next generation polygon rotary scanner for the U.S. Army's thermal
weapons sight (TWS), under contract to Hughes Electro-Optical Data Systems
Group. TWS is a low cost, lightweight thermal imaging device that detects
targets based on thermal radiation contrasts with background and utilizes a
solid state thermal cooling system. This scanner is intended for use on standard
issue U.S. Army assault rifles and crew served weapons.
Stabilization and Tracking Devices
Since 1961, theThe Company has beenis engaged in the design, development and production of
stabilization tracking devices and systems. These are dynamically
positioned pedestals on or in moving vehicles such as trucks, ships and
aircraft, upon which tracking equipment, such as a radar antenna, is mounted.systems, including pedestals. Pedestals,
through the continuous balancing action of gyroscopes and servo-mechanical
stabilizers operating in all three dimensions, enable theequipment mounted equipmenton a
vehicle to remain almost perfectly balanced and motionless. The mounted
equipment can then automatically track or focus on a target as accurately as if
it were on solid ground despite the motion of the vehicle. The Company's
stabilization and tracking devices are a part of major surveillance,used in reconnaissance and weapon firing
control systems and play an important role in high altitude aircraft as well as
in other aircraft, ships and ground vehicles which require precise, highly
stable mounting for cameras, antennae and lasers. In addition to military and
aerospace markets, the Company has recently
delivered commercial units used to stabilize
airborne spectroscopy equipment for terrestrial mapping.
Magnetic Motors
Magnetic motor products consistThe Company produces a variety of electronically commutated brushless DC motors, stepping motors, segment and arc motors, actuators, limited angle torque
motors and solid state magnetic sensors.motors. Brushless DC motors
differ from conventional DC motors in that the current which produces mechanical energy is
applied to stationary coils via electronic switches, without physical contact,
rather than by stationary rods brushing against the rotating coil. By avoiding
friction, sparks and the wearing and fragmenting of the brush rods, brushless DC
motors provide cleaner operation and longer maintenance-free life than
conventional motors. These characteristics make brushless DC motorsare well-suited for use inunder vacuum
situationsconditions, such as outer space where lubricants needed to slow brushwear
dissipate rapidly, inrapidly. They are also well-suited for environments containing
volatile or explosive materials and gases and in applications where clean operation
is critical.
Actuators operate various mechanisms on spacecraft, satellites and aircraft,
including the forward wing mechanism of the Beech Starship. Torque motors are DC
motors which convert electrical current to mechanical force for precisely
controlled, usually repetitive movement, over limited distances and arcs less
than 180 degrees. These motors are utilized in the Company's stabilization and
tracking systems and infra-red scanner modules, as well as other applications
where precise movement is required, such as for positioning antennae, optical
systems, mechanical vanes and valves.
Electronic Control Systems
Building on technology acquired from Comstron, Aeroflex developsScanning Devices
Using its expertise gained in over 30 years of manufacturing infra-red
night vision scanners, the Company has developed and manufactures complex communications and guidance systems and subsystems
including HF, VHF and UHF receivers, communications jammer emulators, weather
radar receivers, up/down converters, frequency agile radar local oscillators and
low phase noise frequency sources. The Company is currentlystarted production of the
next generation polygon rotary scanner for the United States Army's thermal
weapons sight, under contract to developHughes Electro-Optical Data Systems Group. This
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sight is a frequency generatorlow cost, lightweight thermal imaging device that detects targets
based on thermal radiation contrasts with the background and is intended for use
on standard issue United States Army assault rifles and crew served weapons.
Additionally, the receiver/transmitterCompany provides the Common Module Scanner used inon the LAMPS
Program.
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The Company produces a receiver for the NOAA wind-profiler system which is
used to detect clean air turbulence around airports. The wind-profiler system
has made major improvements in the accuracy of operational weather forecasts.M-1
Tank, Bradley fighting vehicle and Comanche helicopter.
Isolator Products Group - (Aeroflex International, Vibration Mountings & - ----------------------- Controls
and Korfund Dynamics)
Since 1961, theThe Company has beenis engaged in the design, development, manufacture and sale of severe service
shock and vibration isolation systems. These devices consist of helically-wound
steel wire rope contained between rugged metal retainer bars, andwhich are used to storein
defense applications, and dissipate potentially
destructiveoff-the-shelf rubber and spring shock, vibration and
shock.noise control devices, which are used in commercial and industrial applications.
Purchasers of helical isolators are manufacturers or users of equipment sensitive to
shock and vibration who need to reduce shock/vibration to levels compatible with
equipment fragility to extend the useful life of this equipment. Isolators are also used to prevent vibrations
in equipment from causing disturbances to surrounding equipment, structures and
configurations.
Markets for helical
isolation systems include the military,defense, aerospace, geophysical exploration, aircraft,
communications, transportation and power
plants. Specific applications include sensitive mobileutilities.
Customers
The Company has hundreds of customers in the communications, satellite,
aerospace/defense, transportation and construction industries. Except for Lucent
Technologies, (15.5%), in fiscal 1998, and Lockheed Martin (13.3%) and Hughes
(11.7%), in fiscal 1997, no one customer accounted for more than 10% of the
Company's net sales. The Company is currently a party to three key strategic
agreements:
In July 1997, MIC entered into a strategic agreement under which MIC will
supply Lucent Technologies with film integrated circuits which are used in
communications applications. The agreement expires December 31, 2000 and is
subject to annual renewal options. In addition, MIC purchased automatic
manufacturing and test equipment, reusable
shipping containers, shipboard electronicsinventory and navigational equipment, avionicslicenses for advanced
technologies from two of Lucent's microelectronic component operations which
significantly increases the Company's manufacturing capacity to produce film
integrated circuits and other airborne gear, nuclear and seismic construction, power generation
equipment, and heavy duty rotating and reciprocating machines.MCMs.
In October 1983,February 1997, the Company acquired Vibration Mountings and Controls,
Inc. ("VMC"),entered into an outsourcing agreement with
the RF Semiconductor Division of Motorola under which manufactures a line of off-the-shelf noise, shock, vibration
and structureborne noise control devices including a version of the elastomeric
cupmount isolator referred to below. These rubber and spring isolators, which
are manufactured in a wide variety of sizes, load ratings and configurations,
are used primarily in commercial applications to protect heavy rotating
equipment, heating, ventilating and air conditioning equipment, and diesel
engines. In December 1986, the Company acquired the operating assetswill supply
virtually all of Korfund
Dynamics Corporation ("KDC"), a manufacturer of an industrial line of heavy duty
springMotorola's thin film interconnects for its RF semiconductor
product lines, supporting component applications in CATV, cellular/PCS and rubber shock mounts.
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A complementary line of off-the-shelf elastomeric cupmounts was introducedland
mobile communications. This agreement expires in fiscal 1991. The cupmountFebruary 1999 and is a lightweight, low profile isolator which is
available in two sizes and two types of elastomer-silicone for high temperature
applications and neoprene where extreme high temperature is not a factor. The
elastomer-in-compression design is particularly effective in interrupting
structure borne noise transmission. Cupmount isolators are produced and sold in
large quantities for military electronics and industrial equipment, where high
levels of shock are encountered.
During fiscal 1992,subject to
annual renewal options.
In July 1996, the Company introduced two new series of wire rope
isolators, the archentered into a multi-year Volume Purchase
Agreement with Hughes Electronics to supply microelectronic modules for use on
both commercial and the circular arch. The arch isolator offers greater
stability than the helical isolator for severe shock applications such as Navy
shipboard electronic equipment. The circular arch was developed in a compact,
circular configuration to fit into smaller space envelopesmilitary satellites, and compete on a
performance and cost basis with existing competitive proprietary designs. In
fiscal 1995, the Company successfully introduced the circular arch to the
industrial market as an improved solution to shock and vibration problems
encountered with data processing and electronic equipment in the mobile and
aerospace markets.
During the last several years, the Company has developed and introduced a
series of new products to the marketplace to broaden the VMC and KDC product
lines. These new complementary products have enabled the Company to enter new
markets, namely, the off-highway market, portable power market, truck and bus
market and the seismic marketplace.missile systems.
Competition
In all phases of its continuing operations, the Company competes in both performance
and price with companies, some of which are considerably larger, than itself inmore
diversified and have greater financial resources and sales and which are more diversified than the Company. In
the manufacturingmanufacture of stabilizationmicroelectronics, the Company believes its primary
competitors are NTK, Texas Instruments and tracking devices, scanning devices,
frequency synthesizers, high speed automatic test systems and isolators, there
are several major competitors manufacturing similar or comparable products.ILC/Data Devices Corp. In the
manufacture of microelectronic modulesinstrument products, the Company believes its primary competitors
are Hewlett Packard and thin-film interconnects, magnetic
motorsScientific Atlanta. In the manufacture of motion control
products, the Company believes its primary competitors are MPC Products Corp.
and electronic systems, thereSchaeffer Magnetics Inc. In the manufacture of isolators, the Company
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believes its primary competitors are numerous worldwide, regionalBarry Controls, Inc., Lord Kinematics and
local
competitors manufacturingMason Industries. The Company also experiences significant competition from the
in-house capabilities of its current and distributing similar or comparable products.potential customers. The Company
believes that in all of its operations it competes favorably in the principal
competitive factorsareas of technology, performance, reliability, quality, customer
service and price. The Company believes that to remain competitive in the
future, it will need to invest significant financial resources in research and
development.
To the extent that the Company is engaged in government contracts, its
success or failure, to a large measure, is based upon its ability to compete
successfully for contracts and to complete them at a profit. Such government
business is necessarily affected by many factors such as variations in the
military requirements of the government and defense budget allocations.
Government Sales
Approximately 50%42% and 65%50% of the Company's sales from continuing operations
for fiscal 19971998 and 1996,1997,
respectively, were to agencies of the United States Government or to prime
defense contractors or subcontractors of the United States Government. The
Company's overall dependence on the military has been declining due to the
acquisition of MIC, which is more commercially oriented, and a focusing of
resources towards developing standard products for the commercial markets. The
Company's governmentdefense contracts have been awarded either on a bid basis or after
negotiation. The contracts are primarily fixed price contracts, though the
Company also has governmentdefense contracts providing for cost plus fixed fee. The
contracts of the Company with the United States Government
and primeCompany's defense contractors or subcontractorscontracts contain customary provisions for termination at the
convenience of the government without cause. In the event of such termination,
the Company is entitled to reimbursement for its costs and to receive a
reasonable profit, if any, on the work done prior to termination. -8-
Revenues and
costs on government contracts are recognized based upon shipments or billings on manufacturing contracts. Revenues and costs on certain
consulting contracts are recognized based upon costs incurred.billings.
In certain product areas, the Company has suffered reductions in sales
volume due to cutbacks in the military budget. In other product areas, the
Company has experienced increased sales volume due to a realignment of
government spending towards upgrading existing systems instead of purchasing
completely new systems. The overall effect of the cutbacks and realignment has
not been material to the Company.
Marketing and Distribution
The Company markets its products through an internaluses a team-based sales forceapproach to facilitate close management
by Company personnel of 25
personsrelationships at multiple levels of the customer's
organization, including management, engineering and over 140 sales representative organizations located nationwide and
worldwide.purchasing personnel. The
Company's engineersintegrated sales approach involves a team consisting of a senior
executive, a business development specialist and marketing personnel, manymembers of whom have
technical backgrounds, advise prospective purchasers regarding the Company's
productsengineering department. In particular, the use of experienced engineering
personnel as part of the sales effort enables close technical collaboration with
the customer during the design and how such products can be custom designedqualification phase of new communications
equipment which, the Company believes, is critical to be incorporatedthe integration of its
product into specific government programsits customer's equipment. The Company's executive officers are also
involved in all aspects of the Company's relationships with its major customers
and other applications. These efforts are supported
by product brochureswork closely with their senior management. In addition, the Company utilizes
manufacturers' representatives and by published articles and advertisements in trade
journals.independent sales representatives as needed.
Product Research and Development
The Company's productresearch and development efforts primarily involve
engineering and design relating to the development of new products, the
improvement of existing products and/or the adaptation of such products to new
applications. The Company's efforts also include developing prototype components
to bid on specific programs. Several of the Company's officers and almost all of
-7-
its engineers have been involved at various timesvarioustimes and to varying degrees in these
activities. ProductCertain product development and similar costs notare recoverable under
contractual arrangements and those that are not recoverable are expensed in the
year incurred. The costs of Company sponsored research activities were
approximately $3,279,900, $1,260,000$5.2 million, $3.3 million and $2,389,000$1.3 million for fiscal 1998, 1997
and 1996, and 1995,
respectively. The increase from fiscal 1997 to fiscal 1998 was
primarily due to the costs for development of a new low-cost, high-speed, high
performance frequency synthesizer intended for commercial communication test
systems. The increase from fiscal 1996 to fiscal 1997 was primarily due to MIC
which was acquired in March 1996. Further, in connection with the Company's
purchase of MIC, Technology Corporation in March 1996, the Company allocated $23,200,000$23.2 million of the purchase price to
in-process research and development. Since the research and development projects
had not reached technological feasibility, the $23,200,000$23.2 million was charged to
expense in fiscal 1996 in accordance with generally accepted accounting
principles.
Backlog
The Company includes in backlog firm purchase orders or contracts providing
for delivery of products and services. At June 30, 1998, the Company's order
backlog was approximately $80.1 million, approximately 85% of which was
scheduled to be delivered on or before June 30, 1999. Approximately 58% and 42%
of this backlog represents commercial and defense contracts, respectively.
Generally, government contracts are cancellable with payment to the Company of
amounts expended under the contract together with a reasonable profit, if any,
while commercial contracts are not cancellable.
At June 30, 1997, the Company's backlog of orders was approximately $53,332,000. Approximately 90% was scheduled to be delivered on or before June
30, 1998. Approximately 65% of this backlog represents orders for military or
national defense purposes.
At June 30, 1996, the Company's backlog of orders was approximately
$37,457,000.$53.3
million. Approximately 90% was scheduled to be delivered before June 30, 1997.1998.
Approximately 79%65% of this backlog represented orders for military or national
defense purposes.
Manufacturing
The Company assembles, tests, packages and ships products at its
manufacturing facilities located in Farmingdale, Pearl River and Plainview, New
York; Richardson, Texas; Bloomingdale, New Jersey; Powell, Ohio; and Boca Raton,
Florida. The Company has been manufacturing products for defense programs for
many years in compliance with stringent military specifications. The Company's
microelectronic module manufacturing is certified to the status of Class "K"
(space qualified) of which the Company believes only seven other vendors are
currently certified. The Company believes it has been able to bring to the
commercial market the manufacturing quality and discipline it has demonstrated
in the defense market. For example, the Company's Plainview and Farmingdale
manufacturing plants are ISO-9001 certified, as well as certified to the more
stringent Boeing D1-9000 standard.
Historically, the volume of the Company's production requirements in the
defense market was not sufficient to justify the widespread implementation of
highly automated manufacturing processes. Over the last several years, the
Company has expanded the use of high volume manufacturing techniques for product
assembly and testing. Recently, the Company purchased film integrated circuit
automatic manufacturing and test equipment from Lucent Technologies, which the
Company believes was the largest volume manufacturer of thin film integrated
circuits, and the Company is currently expanding its Pearl River facility to
accommodate this equipment. After its completion, the Company believes the Pearl
River facility will have the capacity required to handle additional future
outsourcing by captive suppliers of thin film communications products and the
growing demand for communication interconnect products.
-8-
Principal Materials
The principal materials used by the Company in manufacturing and assembling
its products are ceramic, magnetic materials, gold, steel, aluminum, rubber, gold, ceramic, magnetic materials,
iron and copper. Many of the component parts used by the Company in its products
are also purchased, including semiconductors, transformers, amplifiers and
bearings. TheseAlthough the Company has several sole source arrangements, all the
materials and components none of whichused by the Company, including those purchased from a
sole source, are presently in short
supply,readily available and are or can be purchased from time to time
onin the open market. The Company has no long-term commitments for their purchase.
-9-
No supplier provides more than 10% of the Company's raw materials.
Patents and Trademarks
The Company owns several patents, patent licenses and trademarks. In order
to protect its intellectual property rights, the Company relies on a combination
of trade secret, copyright, patent and trademark laws and employee and
third-party nondisclosure agreements, as well as limiting access to and
distribution of proprietary information. While the Company considers that in the
aggregate its patents and trademarks are important in its operations, it does
not consider that one or any group of them is of such importance that
termination could materially affect its business.
Employees
As of June 30, 19971998 the Company had approximately 790842 employees, of whom approximately 400422 were engaged
in a manufacturing capacity, and approximately
390420 were engaged in engineering, sales,
administrative or clerical positions. Approximately
230238 employees of the Company are covered
by varioustwo collective bargaining agreements. The Company considers its employee
relations to be satisfactory.
Seasonality
Seasonality does not have a material impact uponAlthough the Company's revenues.business is not affected by seasonality,
historically its revenues and earnings increase sequentially from quarter to
quarter within a fiscal year, but the first quarter is less than the previous
year's fourth quarter.
Regulation
The Company's activities are subject to various environmental, health and
employee safety laws. The Company has expended resources, both financial and
managerial, to comply with applicable environmental, health and worker safety
laws in its operations and at its facilities and anticipates that it will
continue to do so in the future. The Company does not require any governmental
approval of its principal products or services. Compliance with environmental
laws has not historically had a material effect on the Company's capital
expenditures, earnings or competitive position, and the Company does not
anticipate that such compliance will have a material effect on the Company in
the future.
AlthoughBecause of its participation in the defense industry, the Company is
subject to audit from time to time for its compliance with government
regulations by various agencies, including the Defense Contract Audit Agency,
the Defense Investigative Service and the Defense Logistics Agency. These and
other governmental agencies may also, from time to time, conduct inquiries or
investigations that may cover a broad range of Company activity. Responding to
any such audits, inquiries or investigations may involve significant expense and
divert management attention. Also, an adverse finding in any such audit, inquiry
or investigation could involve penalties that may have a material adverse effect
on the Company's business, results of operations or financial condition.
-9-
The Company believes that it is generally in compliance with all applicable
environmental, health and worker safety laws and governmental regulations.
Nevertheless, there can be no assurance that additional costs for compliance
will not be incurred in the future or that such costs will not be material.
Financial Information About Industry Segments
The sales and operating profits of each industry segment and the
identifiable assets attributable to each industry segment for each of the three
years in the period ended June 30, 19971998 are set forth in Note 1614 of Notes to
Consolidated Financial Statements.
Discontinued Operations
The Company has accounted for certain segments as discontinued operations.
A description of these operations is as follows:
Commercial and Custom Envelopes
-------------------------------
In November 1993, the Company sold substantially all of the net operating
assets of its wholly-owned subsidiary, Huxley Envelope Corp. ("Huxley"), for
$5,550,000. Huxley is a manufacturer of specialized envelopes for high-volume
direct-mail users. The sale did not include Huxley's New York City manufacturing
facility which was sold in the fourth quarter of fiscal 1995 for approximately
$2,400,000. The sale of the facility, along with the resolution of certain other
contingencies, resulted in a net of tax gain of $240,000.
Telecommunication Systems Services
----------------------------------
Through T-CAS Corp. ("T-CAS"), a wholly-owned subsidiary which was acquired
in 1988, the Company also specialized in the design and implementation of
telecommunications and electronic systems for government, industrial and
commercial customers nationwide and abroad. T-CAS' services included systems
concepts and operational criteria, detailed engineering designs, equipment
specifications, site preparation, construction, field engineering,
installations, on-site training and technical assistance. The Company's plan to
discontinue this operation included the completion of existing contracts (which
were completed at June 30, 1993) and an orderly dissolution.
In May 1995, T-CAS received $170,000 in settlement of a claim against a
former customer. This settlement, together with other unrelated settlements of
claims and adjustments of previously recorded loss reserves, resulted in an
after tax gain of $222,000, which was included in discontinued operations in the
fourth quarter of fiscal 1995.
-10-
ITEM TWO - PROPERTIES
----------
The executive offices of the Company and the manufacturing facilities of
Aeroflex Laboratories Incorporated, a subsidiary of the Company, occupying an
aggregate of approximately 69,000 square feet, are located in premises which the
Company owns in Plainview, Long Island, New York.
An industrial development
agency loan is secured by the premises, with an outstanding balance of
approximately $63,000 at June 30, 1997.
Aeroflex Laboratories Incorporated also leases manufacturing facilities in
Farmingdale, Long Island, New York and Boca Raton, Florida of approximately
20,000 and 11,000 square feet, respectively. The annual rental of these
properties is approximately $143,000$116,000 and $76,000$81,000 respectively.
The Company's subsidiary, MIC Technology Corporation leases("MIC"), acquired its
manufacturing facilitiesfacility in Richardson, Texas and Pearl River, New York of approximately 29,000 and 63,000 square
feet respectively. Thein July 1998. MIC also leases a manufacturing facility of approximately
29,000 square feet in Richardson, Texas with an annual rentalrent of these
properties is approximately
$164,000 and $189,000, respectively.$167,000.
The Company's subsidiary, Vibration Mountings and Controls, Inc., conducts
manufacturing operations at a plant located in Bloomingdale, New Jersey. The
plant, which the Company owns, consists of approximately 72,000 square feet.
The Company's subsidiary, Aeroflex Lintek Corp., occupies approximately
8,500 square feet of space in Powell, Ohio, with an annual rental of
$43,000.approximately $54,000.
The Company believes that its facilities are adequate for its current and
presently foreseeable needs.
ITEM THREE - LEGAL PROCEEDINGS
-----------------
Filtron Co. Inc., ("Filtron") a subsidiary of the Company whose operations
were discontinued in October 1991, was one of several defendants named in a
personal injury action initiated in 1994 by several plaintiffs in the Supreme
Court of the State of New York, County of Kings.
According to the allegations of the Amended Verified Complaint, the
plaintiffs, who are current or former employees of a company to whom Filtron
sold RFI filters/capacitors, and their wives,dependents, are seeking to recover,
respectively, directly and derivatively, on diverse theories of negligence,
strict liability and breach of warranty, for injuries allegedly suffered from
exposure to a liquid substance or material which Filtron incorporated for a
period of time in the RFI filters/capacitors which it manufactured. The
plaintiffs are seeking damages which cumulatively may exceed $500 million.
This action is still in the early stages of discovery. Based upon available
information and considering its various defenses, together with its product
liability insurance, in the opinion of management of the Company, the outcome of
the action against its subsidiary will not have a materially adverse effect on
the Company's consolidated financial statements.
-11--10-
The Company is involved in various other routine legal matters. Management
believes the outcome of these matters will not have a material adverse effect on
the Company.
ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
-11-
PART II
-------
ITEM FIVE - MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
--------------------------------------
(a) The Common Stock trades on the New York Stock Exchange under the symbol
ARX. The following table shows the quarterly range of the high and low closing
prices for the Common Stock, as reported by the National Quotation Bureau
Incorporated, for the calendar periods indicated.
Common Stock
High Low
---- ---
1995
- ----
First Quarter .................... $4.38 $3.50
Second Quarter ................... 4.88 3.63
Third Quarter .................... 5.63 4.25
Fourth Quarter ................... 5.00 3.88
1996
- ----
First Quarter .................... 5.13 3.50
Second Quarter ................... 6.63 4.38
Third Quarter .................... 6.13 4.63
Fourth Quarter ................... 4.75 4.13
1997
- ----
First Quarter .................... 4.88 3.50
Second Quarter ................... 5.13 3.25
Third Quarter (through August 29) 8.88Common Stock
High Low
---- ---
1996
First Quarter........................ $5.13 $3.50
Second Quarter....................... 6.63 4.38
Third Quarter ....................... 6.13 4.63
Fourth Quarter....................... 4.75 4.13
1997
First Quarter........................ 4.88 3.50
Second Quarter....................... 5.13 3.25
Third Quarter........................ 11.25 4.44
Fourth Quarter....................... 12.06 7.13
1998
First Quarter......................... 14.63 7.88
Second Quarter........................ 14.31 8.50
Third Quarter(through September 8).... 11.56 6.69
(b) As of August 29, 1997,September 8, 1998, there were approximately 1,2001,150 record holders
of the Company's Common Stock.
(c) The Company has never declared or paid any cash dividends on its Common
Stock. There have been no stock dividends declared or paid by the Company on its
Common Stock during the past three years. FutureThe Company currently intends to
retain any future earnings for use in the operation and development of its
business and for acquisitions and, therefore, does not intend to declare or pay
any cash dividends if any, will be dependent
uponon its Common Stock in the earnings and financial position of the Company and such other factors
as the Board of Directors shall deem appropriate.foreseeable future. In addition,
the Company's Revolving Credit Agreement, as amended, prohibits and its 7-1/2% Senior
Subordinated Convertible Debenture Indenture Agreement limits, it from paying
cash dividends.
-12-
ITEM SIX - SELECTED FINANCIAL DATA
(In thousands except ratiospercentages and per share data)
Year ended June 30,
--------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
1993
--------------------------------------------------------------------------------------------------------------------
Earnings Statement Data
(7)
- -----------------------
Net Sales...................... $118,861 $ 94,299 $ 74,367 $ 71,113 $ 65,602
$ 52,031
Income (Loss) from
Continuing Operations........ 8,406 4,420 (17,420)(1)(2) 6,587(4)(5) 5,850(6)
1,736
Income from
Discontinued Operations...... - - - 462 187 500
Net Income (Loss).............. 8,406 4,420 (17,420) 7,049 6,037(6) 2,236
Income (Loss) from Continuing
Operations Per Common Share
and Common Share Equivalent
Primary....................Basic...................... $ .34.57 $ .36 $(1.46)(1)(2)$ .53(4).56(4)(5) $ .55(6) $ .20
Fully Diluted.............. .33.59(6)
Diluted.................... .51 .34 (3) .52(4)(5) .50(6) .19
Net Income (Loss) Per Common
Share and Common Share
Equivalent
Primary....................Basic...................... .57 .36 (1.46) .60 .61
Diluted.................... .51 .34 (1.46) .57 .57 .26
Fully Diluted.............. .33 (3) .55 .51 .24.56 .52
Weighted Average Number of
Common Shares and Common
Share Equivalents Outstanding
Primary.................... 13,057Basic...................... 14,802 12,446 11,971 12,352 10,526 8,757
Fully Diluted.............. 15,14211,733 9,962
Diluted.................... 16,527 14,620 (3) 14,249 12,401 10,92014,052 12,235
June 30,
-------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
1993
-------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
- ------------------
Working Capital................ $ 53,965 $ 25,872 $ 25,300 $ 31,721 $ 28,572
$ 14,982
Total Assets................... 124,101 81,047 81,169 71,936 71,016 60,185
Long-term Debt
(including current portion).. 11,481 28,916 34,577 13,787 18,408
21,871
Stockholders' Equity........... 87,036 35,040 30,472 46,344 39,571 27,208
Other Statistics
- ----------------
After Tax Profit Margin (Loss)
(from continuing operations).. 7.1% 4.7% (23.4)%(1)(2) 9.3%(4)(5) 8.9%(6) 3.3%
Return on Average Stockholders'
Equity (from continuing
operations).................. 13.8% 13.5% (45.4)%(1)(2) 15.3%(4)(5) 17.5%(6)
6.6%
Stockholders' Equity
Per Share (8)................(7) $ 5.01 $ 2.81 $ 2.49 $ 3.95 $ 3.37
$ 3.14
(1) Includes $23,200,000$23.2 million ($1.94 per share) for the year ended June 30, 1996, for the write-off of in-process
research and development acquired in connection with the purchase of MIC
Technology Corporation in March 1996.
(2) Includes a $437,000, net of tax, or $.04gain ($.04 per share gainshare) on the sale of
securities
for the year ended June 30, 1996.securities.
(3) As a result of the loss, all options, warrants and convertible debentures
are anti-dilutive.
(4) Includes $2,000,000$2.0 million ($.14 per diluted share fully diluted and $.16 primary)$.17 basic) of insurance
proceeds received on the death of the former chairman.
(5) Includes a $1,494,000$1.5 million, net of tax, restructuring charge ($.10.11 per diluted
share fully
diluted and $.12 primary)$.13 basic) for the consolidation of the Company's Puerto Rican
operations into its domestic facilities.
(6) Includes an income tax benefit of $1,716,000, or $.14$1.7 million, ($.14 per diluted share ($.16 per
share primary)and
$.17 basic), relating to the recognition of a portion of the Company's
unrealized net operating loss carryforward in accordance with Statement of
Financial Accounting Standards No. 109.
(7) See Note 4 to the Consolidated Financial Statements for a discussion of
discontinued operations.
(8) Calculated by dividing stockholders' equity, at the end of the year, by the
number of shares outstanding at the end of the year.
-13-
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
ResultsOverview
Aeroflex Incorporated, founded in 1937, utilizes its advanced design,
engineering and manufacturing capabilities to produce state-of-the-art
microelectronic, interconnect and testing solutions used in communication
applications for commercial and defense markets. Its products are used in
satellite, wireless and wireline communications, cable television ("CATV") and
defense communications markets. It also designs and manufactures motion control
systems and shock and vibration isolation systems used for commercial,
industrial and defense applications. The Company's operations are grouped into
three segments: Microelectronics; Test, Measurement and Other Electronics; and
Isolator Products. The Company's consolidated financial statements include the
accounts of Operations
Fiscal 1997 Compared to FiscalAeroflex Incorporated and its wholly-owned subsidiaries.
The Microelectronics segment has been engaged in the design, manufacture and
sale of state-of-the-art microelectronics for the electronics industry since
1974. In January 1994, the Company acquired substantially all of the net
operating assets of the microelectronics division of Marconi Circuit Technology
Corporation, which manufactures a wide variety of microelectronic assemblies. In
March 1996, Net sales increased to $94,299,000 in fiscal 1997 from $74,367,000 in fiscal
1996. Net income was $4,420,000 in fiscal 1997 compared to a net loss of
$(17,420,000) in fiscal 1996. Fiscal 1996 results included a one-time write-off
of $23,200,000 for in-process research and development related to the purchase
ofCompany acquired MIC Technology Corporation ("MIC") which
designs, develops, manufactures and markets microelectronics products in the
form of passive thin film circuits and interconnects. Effective July 1, 1997,
MIC acquired certain equipment, inventory, licenses for technology and patents
of two of Lucent Technologies' telecommunications component units - multi-chip
modules and film integrated circuits. These units manufacture microelectronic
modules and interconnect products. The Company has also signed a netmulti-year
supply agreement to provide Lucent with film integrated circuits for use in the
telecommunications industry.
The Test, Measurement and Other Electronics segment consists of tax gaintwo
divisions: Instruments and Motion Control Products. The Instruments division
consists of: (i) Comstron , a leader in radio frequency and microwave technology
used in the manufacture of $437,000fast switching frequency signal generators and
components, which was acquired in November 1989 and is currently an operating
division of Aeroflex Laboratories Incorporated, a wholly-owned subsidiary of
Aeroflex; and (ii) Lintek, a leader in high speed instrumentation antenna
measurement systems and radar systems. The Motion Control Products division has
been engaged in the development and manufacture of electro-optical scanning
devices used in infra-red night vision systems since 1975. Additionally, it has
been engaged in the design, development and production of stabilization tracking
devices and systems and magnetic motors since 1961.
The Isolator Products segment has been engaged in the design, development,
manufacture and sale of severe service shock and vibration isolation systems
since 1961. These devices include a product line of helically wound steel wire
rope contained between rugged metal retainer bars which are used to store and
dissipate potentially destructive vibration and shock and are primarily used in
defense applications. In October 1983, the Company acquired Vibration Mountings
& Controls, Inc. (VMC), which manufactures a line of off-the-shelf rubber and
spring shock, vibration and structure borne noise control devices used in
commercial applications. In December 1986, the Company acquired the operating
assets of Korfund Dynamics Corporation (KDC), a manufacturer of an industrial
line of heavy duty spring and rubber shock mounts.
-14-
Revenue is recognized based upon shipments or billings. The Company records
costs on its long-term contracts using percentage-of-completion accounting under
which costs are recognized on revenues in the same relation that total estimated
manufacturing costs bear to total contract value. Estimated costs at completion
are based upon engineering and production estimates. Provisions for estimated
losses or revisions in estimated profits on contracts-in-process are recorded in
the period in which such losses or revisions are first determined.
Approximately 42%, 50% and 65% of the Company's sales for fiscal 1998, 1997
and 1996, respectively, were to agencies of the United States Government or to
prime defense contractors or subcontractors of the United States Government. The
Company's overall dependence on the sale of securities.
Net sales in the microelectronics segment increased to $48,462,000 for the year
ended June 30, 1997 from $28,414,000 for the year ended June 30, 1996military has been declining due to the
acquisition of MIC, in March 1996which is more commercially oriented, and increased sales in the existing product
lines. MIC sales for fiscal 1997 and from acquisition until June 30, 1996 were
approximately $21,900,000 and $6,200,000, respectively. Operating profits,
exclusivea focusing of the special write-off of $23,200,000 in 1996, were $6,644,000 and
$3,282,000 for the years ended June 30, 1997 and 1996, respectively. The
increase is due to the increased sales and higher overall profit margins.
Net sales in the electronics segment decreased to $28,144,000 for the year ended
June 30, 1997 from $30,109,000 for the year ended June 30, 1996 primarily as a
result of reduced frequency synthesizer sales partially offset by increased
sales of stabilization and tracking devices. The reduction in frequency
synthesizer sales was due to the early completion of the current CASS contract
and the transition from custom to commercial markets. Operating profits
decreased to $2,762,000 from $4,830,000 for the years ended June 30, 1997 and
1996, respectively, due to the decrease in sales and lower profit margins. In an
effort to transition from custom products to commercial products, the Company
has directed its
resources towards developing standard products for the commercial markets. Net sales inThe
Company's government contracts have been awarded either on a bid basis or after
negotiation. The contracts are primarily fixed price contracts, though the
isolator products segment increased to $17,693,000Company also has government contracts providing for cost plus fixed fee. The
Company's defense contracts contain customary provisions for termination at the
year
ended June 30, 1997 from $15,844,000 for the year ended June 30, 1996. The
increase reflects higher sales volume of industrial and commercial isolators
partially offset by decreased sales volume of military isolators. Operating
profits increased by $694,000 as a resultconvenience of the increased salesgovernment without cause. In the event of such termination,
the Company is entitled to reimbursement for its costs and higherto receive a
reasonable profit, margins, partially offset by increased selling, general and
administrative costs.
Cost of sales as a percentage of sales decreasedif any, on the work done prior to 66.9% from 68.7% between the
two years primarily as a result of increased margins in the microelectronics and
isolator segments during the year ended June 30, 1997. Selling, general and
administrative costs (exclusive of the special charge in 1996) as a percentage
of sales increased to 22.8% from 20.7% as a result of the addition of MIC which
has a higher selling, general and administrative cost structure than the balance
of the Company.
Interest expense increased to $2,974,000 from $1,939,000 due to increased levels
of borrowings required to purchase MIC. Interest and other income decreased to
$93,000 from $1,075,000 due to lower interest income on reduced cash amounts
which were used to acquire MIC and a securities related gain in fiscal 1996.
-14-
The income tax provisions for the years ended June 30, 1997 and 1996 were
different from the amounts computed by applying the U.S. Federal income tax rate
to income before income taxes primarily as a result of the tax benefits of loss
carryforwards (both unrealized and realized), state and local income taxes, and,
for the year ended June 30, 1996, because of the non-deductibility of the
$23,200,000 special charge.termination.
Management believes that potential reductions in militarydefense spending will not
materially affect its operations. In certain product areas, the Company has
suffered reductions in sales volume due to cutbacks in the military budget. In
other product areas, the Company has experienced increased sales volume due to a
realignment of government spending towards upgrading existing systems instead of
purchasing completely new systems. The overall effect of the cutbacks and
realignment has not been material to the Company.
Furthermore,The Company's product development efforts primarily involve engineering and
design relating to the development of new products, the improvement of existing
products or the adaption of such products to new applications. The Company's
overall dependenceefforts also include developing prototype components to bid on the military has been declining. Approximately 50%, 65%
and 74%specific
programs. Some of the Company's salesdevelopment efforts are reimbursed under
contractual arrangements. Product development and similar costs not recoverable
under contractual arrangements are expensed in the period incurred.
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure About
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. This statement establishes
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major customers.
The Company has not determined the impact that the adoption of this new
accounting standard will have on its consolidated financial statement
disclosures. The Company will adopt this standard effective July 1, 1998, as
required.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. This statement requires companies to record
derivatives on the balance sheet as assets or liabilities at their fair value.
In certain circumstances changes in the value of such derivatives may be
required to be recorded as gains or losses. Management believes that the impact
of this statement will not have a material effect on the Company's consolidated
financial statements.
-15-
Market Risk
The Company is exposed to market risk related to changes in interest rates
and, to an immaterial extent, to foreign currency exchange rates. Most of the
Company's debt is at fixed rates of interest or at a variable rate with an
interest rate swap agreement to effectively make it a fixed rate of interest.
That debt which is subject to a floating rate of interest (30-day LIBOR) and is
not hedged by an interest rate swap amounts to approximately $5.6 million at
June 30, 1998. If market interest rates increase by 10 percent from levels at
June 30, 1998, the effect on the Company's results of operations would not be
material.
Year 2000 Compliance
Management has initiated a company-wide program and has developed a formal
plan of implementation to prepare the Company for the fiscal years 1997, 1996Year 2000. This includes
taking actions designed to ensure that the Company's information technology
("IT") systems, products and 1995,
respectively, wereinfrastructure are Year 2000 compliant and that its
customers, suppliers and service providers have taken similar action. The
Company is in the process of evaluating its internal issues - all of its IT
systems, products, equipment and other facilities systems - and modifying items
that are not compliant. With respect to agenciesits external issues customers, suppliers
and service providers - the Company is surveying them primarily through written
correspondence.
The Company expects to incur internal staff costs, as well as consulting and
other expenses, and believes the total costs to be incurred for all internal
Year 2000 compliance related projects will not have a material impact on the
Company's business, results of operations or financial condition. Management
expects to complete its investigation, remediation and contingency planning
activities for all mission critical systems and areas by December 31, 1998,
although there can be no assurance that it will. At this time, Management
believes that the United States governmentCompany does not have any internal mission critical Year 2000
issues that it cannot remedy. With respect to mission critical third parties, in
some instances the Company has protection under contracts and the Company
intends to create contingency plans to mitigate its exposure in the event such
third parties are not Year 2000 compliant. Despite its efforts to survey its
customers, suppliers and service providers, Management cannot be certain as to
the actual Year 2000 readiness of these third parties or to prime
defense contractorsthe impact that any
non-compliance on their part may have on the Company's business, results of
operations or subcontractorsfinancial condition.
-16-
Statement of Operations
The following table sets forth certain items from the United States government.Company's statement of
operations as a percentage of net sales and in dollars by segment for the
periods indicated:
Year Ended June 30,
----------------------------
1998 1997 1996
---- ---- ----
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 65.0 66.9 68.7
------ ------ ------
Gross Profit 35.0 33.1 31.3
------ ------ ------
Operating Expenses:
Selling, General and
Administrative costs 18.1 19.3 19.0
Research and Development costs 4.4 3.5 1.6
Special Charge (1) - - 31.2
------ ------ ------
Total Operating Expenses 22.5 22.8 51.8
------ ------ ------
Operating Income (Loss) 12.5 10.3 (20.5)
Other Expense, net 1.4 3.0 1.2
------ ------ ------
Income (Loss) Before Income Taxes 11.1 7.3 (21.7)
Provision For Income Taxes 4.0 2.6 1.7
------ ------ ------
Net Income (Loss) 7.1% 4.7% (23.4)%
====== ====== ======
Business Segment Data (in thousands):
Year Ended June 30,
----------------------------
1998 1997 1996
---- ---- ----
Net Sales:
Microelectronics $ 74,263 $ 48,462 $28,414
Test, Measurement
and Other Electronics 25,685 28,144 30,109
Isolator Products 18,913 17,693 15,844
-------- -------- -------
Net Sales $118,861 $ 94,299 $74,367
======== ======== =======
Operating Profit (Loss):
Microelectronics $ 14,147 $ 6,644 $ 3,282
Test, Measurement
and Other Electronics 996 2,762 4,830
Isolator Products 3,063 2,844 2,150
General Corporate
Expenses (3,348) (2,514) (2,344)
-------- -------- -------
14,858 9,736 7,918
Special Charge (1) - - (23,200)
-------- -------- -------
Operating Profit (Loss) $ 14,858 $ 9,736 $(15,282)
======== ======== =======
(1) Write-off of in-process research and development acquired in connection
with the purchase of MIC.
-17-
Fiscal 1996Year Ended June 30, 1998 Compared to Fiscal 1995Year Ended June 30, 1997
Net Sales. Net sales increased 26.0% to $74,367,000$118.9 million in fiscal 19961998 from
$71,113,000$94.3 million in fiscal 1995. The net loss was $(17,420,000) in fiscal 1996 including a one-time
write-off of $23,200,000 for in-process research and development related to the
purchase of MIC and a net of tax gain of $437,000 on the sale of securities.
Income from continuing operations for fiscal 1995 was $6,587,000 including
$2,000,000 of insurance proceeds received on the death of the former chairman
and a net of tax restructuring charge of $1,494,000 for the consolidation of the
Company's Puerto Rico operations into its existing domestic facilities.1997. Net sales in the microelectronicsMicroelectronics segment
increased 53.2% to $28,414,000$74.3 million for the year
ended June 30, 1996fiscal 1998 from $24,250,000$48.5 million for the year ended June 30, 1995fiscal
1997 due to increased sales volume in both thin film interconnects and
microelectronic modules. Sales of thin film interconnects increased primarily
as a result of the acquisition of MIC in March 1996. MIC sales, from its
acquisition until June 30, 1996, were approximately $6,200,000. Operating
profits, exclusive of the special write-off of $23,200,000 in 1996, were
$3,282,000 and $2,075,000 for the years ended June 30, 1996 and 1995,
respectively. The increase is
due to the increase in sales and increased profit
margins partially offset by increased selling, general and administrative costs.commencement of a strategic supply contract with Lucent Technologies
effective July 1, 1997. Net sales in the electronicsTest, Measurement and Other Electronics
segment decreased 8.7% to $30,109,000$25.7 million in fiscal 1998 from $28.1 million for
the year ended
June 30, 1996 from $31,357,000 for the year ended June 30, 1995fiscal 1997 primarily as a result of reduced sales volume of scanning devicesfrequency
synthesizers partially offset by increased sales of high speed instrumentation
test systems. Net sales in the acquisitionIsolator Products segment increased 6.9% to $18.9
million for fiscal 1998 from $17.7 million for fiscal 1997 primarily due to
higher sales volume of Lintek, Inc.industrial and commercial isolators.
Gross Profit. Cost of sales includes materials, direct labor and overhead
expenses such as engineering labor, fringe benefits, allocable occupancy costs,
depreciation and manufacturing supplies. Gross profit increased 33.3% to $41.6
million in January 1995. Operating profitsfiscal 1998 from $31.2 million in fiscal 1997. Gross margin increased
to 35.0% in fiscal 1998 from 33.1% in fiscal 1997. This increase was primarily
as a result of increased margins in the Microelectronics segment reflecting the
greater efficiency of higher volume.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist of office and management salaries, fringe
benefits, commissions and advertising costs. Selling, general and administrative
expenses increased 18.5% to $21.5 million (18.1% of net sales) in fiscal 1998
from $18.2 million (19.3% of net sales) in fiscal 1997. The increase was
primarily due to labor related expenses including salaries for additional hires,
recruitment and relocation costs in connection with the Company's growth.
Research and Development Costs. Research and development costs consists of
material, engineering labor and allocated overhead. Company sponsored research
and development costs increased 57.7% to $5.2 million (4.4% of net sales) for
the year ended June 30, 1998 from $3.3 million (3.5% of net sales) for the year
ended June 30, 1997. This increase was primarily attributable to the costs for
development of a new low-cost, high speed, high performance frequency
synthesizer intended for commercial communication test systems.
Other Expense (Income). Other expense was $1.7 million in fiscal 1998
compared to $2.9 million in fiscal 1997. Net interest expense decreased 43.9% to
$4,830,000$1.6 million in fiscal 1998 from $6,028,000$2.9 million in fiscal 1997. The decrease in
net interest expense was primarily due to reduced levels of borrowings and
increased levels of cash equivalents due to the conversion of $10.0 million of
debentures and net proceeds of $31.3 million from stock issued in a public
offering. Other expense included $102,000 of debenture redemption costs in
fiscal 1998.
Provision for Income Taxes. Income taxes recorded by the Company increased
95.1% to $4.8 million (an effective income tax rate of 36.1%) in fiscal 1998
from $2.4 million (an effective income tax rate of 35.5%) in fiscal 1997. The
income tax provisions for the years ended June 30, 19961998 and 1995,
respectively. The decrease was1997 were different
from the amounts computed by applying the U.S. Federal income tax rate to income
before income taxes primarily due primarily to lower profit margins, primarily
in instrument productsstate and magnetic motors,local income taxes, and the reduced sales.
Net sales in the isolator products segment increased to $15,844,000 for the
year ended June 30, 1996 from $15,506,000 for the year ended1998, due to research and development credits.
-18-
Fiscal Year Ended June 30, 1995.1997 Compared to Fiscal Year Ended June 30, 1996
Net Sales. Net sales increased 26.8% to $94.3 million for fiscal 1997 from
$74.4 million in fiscal 1996. Net sales in the Microelectronics segment
increased 70.6% to $48.5 million for fiscal 1997 from $28.4 million for fiscal
1996 due to the acquisition of MIC in March 1996 and increased sales in the
existing product lines. MIC sales for fiscal 1997 and from acquisition until
June 30, 1996 were approximately $21.9 million and $6.2 million, respectively.
Net sales in the Test, Measurement and Other Electronics segment decreased 6.5%
to $28.1 million for fiscal 1997 from $30.1 million for fiscal 1996 primarily as
a result of reduced frequency synthesizer sales partially offset by increased
sales of stabilization and tracking devices. The reduction in frequency
synthesizer sales was due to the early completion of the current CASS contract
and the transition from custom to commercial markets. Net sales in the Isolator
Products segment increased 11.7% to $17.7 million for fiscal 1997 from $15.8
million for fiscal 1996. The increase reflects higher sales volume of industrial
and commercial isolators partially offset by decreased sales volume of military
isolators.
Operating
profits decreased by $227,000Gross Profit. Gross profit increased 33.9% to $31.2 million in fiscal 1997
from $23.3 million in fiscal 1996. Gross margin increased to 33.1% in fiscal
1997 from 31.3% in fiscal 1996. This increase was primarily as a result of
lower profitincreased margins as discussed
below, partially offset byin the increased sales volumeMicroelectronics and reduced selling,Isolator Products segments
reflecting the greater efficiencies of higher volumes and because MIC generally
has higher margins than the balance of the Company.
Selling, General and Administrative Expenses. Selling, general and
administrative costsexpenses increased 28.7% to $18.2 million (19.3% of net sales) in
fiscal 1997 from $14.1 million (19.0% of net sales) in fiscal 1996. This
increase was primarily as a result of the consolidationaddition of facilities.
-15-
Cost of sales asMIC, which has a percentage of sales increased to 68.7% from 66.9% between the
two years primarily as a result of inefficiencies in the final production runs
of military isolators in the Company's Puerto Rican facility and start-up costs
of the transition to the New Jersey facility. Selling,higher
selling, general and administrative costs (exclusivecost structure than the balance of the
respective special charges) decreasedCompany.
Research and Development Costs. Company sponsored research and development
costs increased 160.2% to $15,379,000$3.3 million (3.5% of net sales) for the year ended
June 30, 1997 from $15,752,000 as a result$1.3 million (1.6% of cost savings fromnet sales) for the consolidationyear ended June 30,
1996. This increase was primarily attributable to MIC which was acquired in
March 1996.
Special Charge. In connection with the Company's purchase of certain operationsMIC, the
Company allocated $23.2 million of the Company's Puerto Rican facility intopurchase price to in-process research and
development. Since the Company's
other facilities.
Interestresearch and development projects had not reached
technological feasibility, the $23.2 million was charged to expense in fiscal
1996 in accordance with generally accepted accounting principles.
Other Expense (Income). Other expense increased 233.4% to $1,939,000$2.9 million in
fiscal 1997 from $1,464,000$864,000 in fiscal 1996. Net interest expense increased 100.3%
to $2.9 million in fiscal 1997 from $1.4 million in fiscal 1996. The increase in
net interest expense was primarily due to the increased levelslevel of borrowings required to purchase MIC. Interest and other income increased to
$1,075,000 from $751,000 due to a securities related gain partially offset by
lower interest income on reduced cash amounts which were useddue to acquirethe purchase of MIC. Other
income decreased in fiscal 1997 due to a securities related gain in fiscal 1996.
Provision for Income Taxes. Income taxes recorded by the Company increased
91.1% to $2.4 million (an effective income tax rate of 35.5%) in fiscal 1997
from $1.3 million on a loss before income taxes of $16.1 million in fiscal 1996.
The income tax provisions for the years ended June 30, 19961997 and 19951996 were
different from the amounts computed by applying the U.S. Federal income tax rate to
income before income taxes primarily as a result of the tax benefits of loss
carryforwards (both unrealizeddue to state and realized)local income taxes, and,
for the year ended June 30, 1996, because of the non-deductibility of the $23,200,000$23.2
million special charge and for the tax benefits of loss carryforwards (both
unrealized and realized).
-19-
Seasonality
Although the Company's business is not affected by seasonality,
historically its revenues and earnings increase sequentially from quarter to
quarter within a fiscal year, ended June 30, 1995, because ofbut the non-taxable life insurance
proceeds of $2,000,000.
Income from discontinued operations forfirst quarter is less than the year ended June 30, 1995 includes a
gain related to the sale of the former Huxley Envelope Corp. ("Huxley") building
of $240,000 and a gain related to T-CAS Corp. ("T-CAS") of $222,000. The gain of
$222,000 is due primarily to a settlement of a claim against a former customer.previous
year's fourth quarter.
Liquidity and Capital Resources
As of June 30, 1997 Compared To June 30, 1996
The Company's1998, the Company had $54.0 million in working capital at June 30, 1997 was $25,872,000 as compared to
$25,300,000 at June 30, 1996.capital. The
current ratio was 2.33.3 to 1 at both June 30, 1997 and 1996. The increase in working capital was primarily due to an increase
in inventories offset in part by a reduction in accounts receivable.
Cash provided from operating activities was $8,729,000 for the year ended June
30, 1997 and $4,508,000 for the year ended June 30, 1996. The increase was due
primarily to lower year-end accounts receivables. Cash used by investing
activities of $2,996,000 in 1997 was primarily for capital expenditures. Debt
was reduced by $5,661,000 in 1997.
Effective March 19, 1996, the Company acquired all of the outstanding stock of
MIC for approximately $36,000,000 of cash, 300,000 shares of common stock and
warrants to purchase 400,000 shares of common stock (at exercise prices ranging
from $7.05 to $7.50 per share). The purchase price was paid with available cash
of $9,000,000 and borrowings under the Company's bank loan agreement of
$27,000,000. MIC manufactures high frequency thin film circuits and
interconnects for miniaturized, high frequency, high performance electronic
products for growing commercial markets such as wireless communications,
satellite based communications hardware and high technology military
electronics. The acquired company's net sales were approximately $25,000,000 for
its fiscal year ended October 31, 1995.1998. As of March 15, 199631, 1998, the Company
replaced a previous agreement with a revised revolving credit and term loan agreement with two
banks which is secured by substantially all of the Company's assets not
otherwise encumbered. The agreement provides for a revolving credit line of
$22,000,000 and a term loan of
$16,000,000. The revolving credit line$27.0 million which expires in March 1999. The term loan is
payable in quarterly installments of $900,000 with final payment on September
-16-
30, 2000.2001. The interest rate on borrowings under
this agreement is at various rates depending upon certain financial ratios, with
the presentcurrent rate substantially equivalent to the prime rate (8.5% at June 30,
1997) on the
revolving credit borrowings and prime plus 1/4% on the term loan borrowings. At
June 30, 1997, the outstanding borrowings under the revolving credit line and
term loan were $8,109,000 and $9,041,000, respectively.1998). The terms of the agreement require compliance with certain covenants
including minimum consolidated tangible net worth and pre-tax earnings,
maintenance of certain financial ratios, limitations on capital expenditures and
indebtedness and prohibition of the payment of cash dividends. At June 30, 1998,
the outstanding borrowings under the revolving credit line were $4.7 million.
The Company has entered into an interest rate swap agreement for the $4.7
million then outstanding under the revolving credit line at 7.6% in order to
reduce the interest rate risk associated with these outstanding borrowings.
During June 1994, the Company completed a sale of $10,000,000$10.0 million principal
amount of 7-1/2% Senior Subordinated Convertible Debentures to non-U.S. persons.
The
debentures are due June 15, 2004 subject to prior sinking fund paymentsOn September 8, 1997, the Company called for the redemption of 10%,
10%, 15% and 15%all of its
outstanding 7-1/2% Senior Subordinated Convertible Debentures at 104-1/2% of the
principal amount on September 15, 2000, 2001, 2002 and
2003, respectively.amount. The debentures areDebentures were convertible into the Company's common
stockCommon
Stock at a price of $5-5/8 per share. Duringshare through October 6, 1997. All of the
principal amount was converted. In connection with the conversions, $599,000 of
deferred bond issuance costs were charged to additional paid-in capital.
Effective March 19, 1996, the Company acquired all of the outstanding stock
of MIC for approximately $36.0 million of cash, 300,000 shares of common stock
and warrants to purchase 400,000 shares of common stock (at exercise prices
ranging from $7.05 to $7.50 per share). The purchase price was paid with
available cash of $9.0 million and borrowings under the Company's bank loan
agreement of $27.0 million. MIC manufactures high frequency thin film circuits
and interconnects for miniaturized, high frequency, high performance electronic
products for growing commercial markets such as wireless communications, cable
communications, satellite based communications hardware and high technology
military electronics. The acquired company's net sales were approximately $25.0
million for its fiscal year 1996, $19,000
principal amountended October 31, 1995.
Effective July 1, 1997, the Company's subsidiary, MIC, acquired certain
equipment, inventory, licenses for technology and patents of debenturestwo of Lucent
Technologies' telecommunications component units - multi-chip modules and film
integrated circuits - for approximately $4.4 million in cash. These units
manufacture microelectronic modules and interconnect products. The Company has
also signed a multi-year supply agreement to provide Lucent with film integrated
circuits for use in the telecommunications industry. The purchase price has been
allocated to the assets acquired, based on their fair values, and certain
obligations assumed relating to the various agreements.
-20-
In fiscal 1998, the Company's operations provided cash of $13.7 million
from the continued profitability of the Company, collection of receivables and
an increase in current liabilities partially offset by an increase in
inventories. In fiscal 1998, the Company's investing activities used cash of
$15.0 million primarily for capital expenditures, including the renovation of
MIC's Pearl River facility and the purchase of equipment and inventory from
Lucent Technologies. In fiscal 1998, the Company's financing activities provided
cash of $25.1 million primarily from the public offering of stock and equipment
financing offset, in part, by debt payments.
In March 1998, the Company sold 2.6 million shares of its Common Stock in a
public offering for $31.3 million, net of an underwriting discount of $2.0
million and issuance costs of $496,000. Of these net proceeds, $9.6 million was
converted.used to repay bank indebtedness. The balance of the net proceeds, which is
included in cash and cash equivalents, will be used for general corporate
purposes, including working capital, capital expenditures and facilities
expansion and may be used for potential acquisitions.
Management of the Company believes that internally generated funds and
available lines of credit will be sufficient for its working capital
requirements, capital expenditure needs and the servicing of its debt for at
least the fiscal year ending June
30, 1998.next twelve months. At June 30, 1997,1998, the Company's available unused
line of credit was approximately $12,000,000.$20.0 million.
A subsidiary of the Company whose operations were discontinued in
1991, is one of several defendants named in a personal injury action initiated
in August, 1994, by a group of plaintiffs. The plaintiffs are seeking damages
which cumulatively may exceed $500 million. The complaint alleges, among other
things, that the plaintiffs suffered injuries from exposure to substances
contained in products sold by the subsidiary to one of its customers. This
action is in the early stages of discovery. Based upon available information and
considering its various defenses, together with its product liability insurance,
in the opinion of management of the Company, the outcome of the action against
its subsidiary will not have a materially adverse effect on the Company's
consolidated financial statements.
The Company is involved in various other routine legal matters. Management
believes the outcome of these matters will not have a materially adverse effect
on the Company's consolidated financial statements.
The Company's backlog of orders at June 30, 1997 and 1996 was $53,332,000 and
$37,457,000, respectively.
At June 30, 1997, the Company had net operating loss carryforwards of
approximately $4,000,000 for Federal income tax purposes.
The Company is undergoing routine audits by various taxing authorities of
several of its state and local income tax returns covering different periods from 19921994 to 1995.1996.
Management believes that the probable outcome of these various audits should not
materially affect the consolidated financial statements of the Company.
InThe Company's backlog of orders at June 30, 1998 and 1997 was $80.1 million
and $53.3 million, respectively.
Financial Information About Industry Segments
The sales and operating profits of each industry segment and the
second quarter of fiscal 1998 the Company will be requiredidentifiable assets attributable to adopt SFAS
No. 128 "Earnings Per Share". This statement establishes standardseach industry segment for computing
and presenting earnings per share ("EPS"), replacing the presentation of
currently required Primary EPS with a presentation of Basic EPS. For entities
with complex capital structures, the statement requires the dual presentation of
both Basic EPS and Diluted EPS on the faceeach of the statementthree
years in the period ended June 30, 1998 are set forth in Note 14 of operations. When
SFAS No. 128 is adopted the Company will be requiredNotes to
restate its EPS data for
all prior periods presented. The Company does not expect the impact of the
adoption of this statement to be material to previously reported EPS amounts.
-17-
Effective July 1, 1997, the Company's subsidiary, MIC Technology Corporation,
acquired certain equipment, inventory, licenses for technology and patents of
two of Lucent Technologies' telecommunications component units - multi chip
modules and film integrated circuits - for approximately $4,400,000 in cash.
These units manufacture interconnect products for the communications industry.
The Company has also signed a multi-year supply agreement to provide Lucent with
film integrated circuits.
On September 8, 1997, the Company called for the redemption of all of its
outstanding 7-1/2% Senior Subordinated Convertible Debentures at 104-1/2% of the
principal amount. The Debentures are convertible into the Company's Common Stock
at a price of $5-5/8 per share through October 6, 1997. Any outstanding
Debentures on October 13, 1997 will be redeemed.
-18-Consolidated Financial Statements.
-21-
ITEM EIGHT - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements and supplementary data listed in the accompanying
Index to Financial Statements and Schedules is attached as part of this report.
ITEM NINE - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------------
None.
PART III
--------
The information required by Part III is incorporated by reference to the
Company's definitive proxy statement in connection with its Annual Meeting of
Stockholders scheduled to be held in November 1997,1998, to be filed with the
Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year ended June 30, 1997.1998.
PART IV
-------
ITEM FOURTEEN - EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
---------------------------------------
(a) See Index to Financial Statements at beginning of attached
financial statements.
(b) Reports on Form 8-K:
-------------------
Report on Form 8-K dated May 17, 1997 with respect to Item 5.None
(c) Exhibits
--------
3.1 Certificate of Incorporation, as amended (Exhibit 3.1 of Annual Report
on Form 10-K for the year ended June 30, 1987)amended.
3.2 By-Laws, as amended (Exhibit 3.2 of Annual3 to Quarterly Report on Form 10-K10-Q for
the yearquarter ended June 30, 1987)March 31, 1998).
4.1 Third Amended and Restated Loan and Security Agreement dated as of
March 15, 1996 among the Registrant, certain of its subsidiaries,
Chemical Bank and NatWest Bank, N.A. (Exhibit 10 of Report on Form 8-K
dated March 19, 1996).
4.2 IndentureSecond Amendment to the Third Amended and Restated Loan and Security
Agreement between Registrant and American Stock Transfer &
Trust Company dated as of June 23, 1994. (Exhibit 4.2April 30, 1998 among the Registrant, certain of
Annual
Report on Form 10-K for the year ended June 30, 1994).its subsidiaries, The Chase Manhattan Bank (as successor to Chemical
Bank) and Fleet Bank, N.A. (as successor to NatWest Bank, N.A.)
10.1 1989 Non-Qualified Stock Option Plan, as amended (Exhibit 10.8 of
Annual Report on Form 10-K for the year ended June 30, 1990).
-19-
10.2 1994 Non-Qualified Stock Option Plan. (Exhibit 10.2 of Annual Report
on Form 10-K for the year ended June 30, 1994).
10.3 1994 Outside Directors Stock Option Plan. (Exhibit 10.3 of Annual
Report on Form 10-K for the year ended June 30, 1994).
-22-
10.4 Common Stock Purchase Agreement dated as of February 13, 1996 and closed
on March 19, 1996 among Aeroflex Acquisition Corp. (as assignee of the
Registrant), MIC Technology Corporation and the stockholders of MIC
Technology Corporation (Exhibit 2 of Report on Form 8-K dated March 19,
1996).
10.5 Amendment No. 1 to Employment Agreement between Aeroflex Incorporated
and Harvey R. Blau (Exhibit 10.1 to Report on Form 8-K dated May 17,
1997).
10.610.5 Amendment No. 1 to Employment Agreement between Aeroflex Incorporated
and Michael Gorin (Exhibit 10.2 to Report on Form 8-K dated May 17,
1997).
10.710.6 Amendment No. 1 to Employment Agreement between Aeroflex Incorporated
and Leonard Borow (Exhibit 10.3 to Report on Form 8-K dated May 17,
1997).
10.810.7 Deferred Compensation Agreement between Aeroflex Incorporated and
Harvey R. Blau (Exhibit 10.4 to Report on Form 8-K dated May 17,
1997).
10.910.8 Employment Agreement between Aeroflex Incorporated and Carl Caruso
(Exhibit 10.5 to Report on Form 8-K dated May 17, 1997).
11 Computation of Earnings Per Common Share10.9 1996 Stock Option Plan (Exhibit A to Definitive Schedule 14A filed
September 30, 1996).
10.10 1998 Stock Option Plan (Exhibit 10 to Quarterly Report on Form
10-Q for the quarter ended March 31, 1998).
10.11 Amendment No. 2 to Employment Agreement between Aeroflex Incorporated
and Harvey R. Blau.
10.12 Amendment No. 2 to Employment Agreement between Aeroflex
Incorporated and Michael Gorin.
10.13 Amendment No. 2 to Employment Agreement between Aeroflex Incorporated
and Leonard Borow.
22 The following is a list of the Company's subsidiaries:
State of
Name Incorporation
---- -------------
Aeroflex International Inc. Delaware
Aeroflex Laboratories Incorporated Delaware
Aeroflex Lintek Corp. Ohio
Aeroflex Systems Corp. Delaware
MIC Technology Corporation Texas
Vibration Mountings and Controls, Inc. New York
23 Consent of Independent Auditors
27 Financial Data Schedule
99 Additional Exhibit
The following undertakings are incorporated by reference into the Company's
Registration Statements on Form S-8 and Form S-3 (Registration Nos. 33-75496,
33-88868, 33-88878, 333-15339333-42399, 333-42405, 333- 15339, 333-21803 and 333-21803)333-46689).
-23-
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan or
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
-20-
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) For the purpose of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(f) (1) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus to each employee to whom the prospectus is sent or
given a copy of the registrant's annual report to stockholders for its last
fiscal year, unless such employee otherwise has received a copy of such report,
in which case the registrant shall state in the prospectus that it will promptly
furnish, without charge, a copy of such report on written request of the
employee. If the last fiscal year of the registrant has ended within 120 days
prior to the use of the prospectus, the annual report of the registrant for the
preceding fiscal year may be so delivered, but within such 120 day period the
annual report for the last fiscal year will be furnished to each such employee.
(2) The undersigned registrant hereby undertakes to transmit or cause to be
transmitted to all employees participating in the plan who do not otherwise
receive such material as stockholders of the registrant, at the time and in the
manner such material is sent to its stockholders, copies of all reports, proxy
statements and other communications distributed to its stockholders generally.
-24-
(3) Where interests in a plan are registered herewith, the undersigned
registrant and plan hereby undertake to transmit or cause to be transmitted
without charge, to any participant in the plan who makes a written request, a
copy of the then latest annual report of the plan filed pursuant to Section 15
(d) of the Securities Exchange Act of 1934 (Form 11-K). If such report is filed
separately on Form 11-K, such form shall be delivered upon written request. If
such report is filed as a part of the registrant's annual report on Form 10-K,
that entire report (excluding exhibits) shall be delivered upon written request.
If such report is filed as a part of the registrant's annual report to
stockholders delivered pursuant to paragraph (1) or (2) of this undertaking,
additional delivery shall not be required.
(4) If the registrant is a foreign private issuer, eligible to use Form 20-F,
then the registrant shall undertake to deliver or cause to be delivered with the
prospectus to each employee to whom the prospectus is sent or given, a copy of
the registrant's latest filing on Form 20-F in lieu of the annual report to
stockholders.
-21-
(i) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
-25-
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 25th day of
September 1997.1998.
Aeroflex Incorporated
By:/s/ /s/ Harvey R. Blau
---------------------------------------------------------
Harvey R. Blau, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on September 25th, 19971998 by the following persons in
the capacities indicated:
/s/ Harvey R. Blau
- ---------------------------------------------------- Chairman of the Board
Harvey R. Blau (Chief Executive Officer)
/s/ Michael Gorin
- ---------------------------------------------------- President and Director
Michael Gorin (Chief Financial Officer and
Principal Accounting Officer)
/s/ Leonard Borow
- --------------------------------------------------- Executive Vice President, Secretary
and
Leonard Borow Director
(Chiefand Director(Chief Operating Officer)
- ------------------------- Director
Paul Abecassis
/s/ Robert Bradley, Sr.
- --------------------------------------------------- Director
Robert Bradley, Sr.
/s/Milton Brenner
- --------------------------------------------------- Director
Milton Brenner
/s/ Ernest E. Courchene, Jr.
- --------------------------------------------------- Director
Ernest E. Courchene, Jr.
/s/ Donald S. Jones
- ------------------------- Director
Donald S. Jones
/s/ Eugene Novikoff
- ------------------------- Director
Eugene Novikoff
/s/ John S. Patton
- ------------------------- Director
John S. Patton
-26-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
-----------------------
FINANCIAL STATEMENTS AND SCHEDULES
COMPRISING ITEM 8 OF ANNUAL REPORT ON FORM 10-K
TO SECURITIES AND EXCHANGE COMMISSION
AS OF JUNE 30, 19971998 AND 19961997
AND FOR THE YEARS
ENDED JUNE 30, 1998, 1997 1996 AND 19951996
FINANCIAL STATEMENTS AND SCHEDULES
----------------------------------
I N D E X PAGE
------------- ----
ITEM FOURTEEN (a)
1. FINANCIAL STATEMENTS:
Independent auditors' report S-1
Consolidated financial statements:
Balance sheets - June 30, 1997 and 1996 S-2-3
Statements of operations - each of the three years
in the period ended June 30, 1997 S-4
Statements of stockholders' equity - each of the
three years in the period ended June 30, 1997 S-5
Statements of cash flows - each of the three years
in the period ended June 30, 1997 S-6
Notes (1-17) S-7-20I N D E X
PAGE
----
ITEM FOURTEEN (a)
1. FINANCIAL STATEMENTS:
Independent auditors' report S-1
Consolidated financial statements:
Balance sheets - June 30, 1998 and 1997 S-2-3
Statements of operations - each of the three years
in the period ended June 30, 1998 S-4
Statements of stockholders' equity - each of the
three years in the period ended June 30, 1998 S-5
Statements of cash flows - each of the three years
in the period ended June 30, 1998 S-6
Notes (1-15) S-7-21
Quarterly financial data (unaudited) S-21
2. FINANCIAL STATEMENT SCHEDULES:
II - Valuation and qualifying accounts S-22
2. FINANCIAL STATEMENT SCHEDULES:
II - Valuation and qualifying accounts S-23
All other schedules have been omitted because they are inapplicable, not
required, or the information is included elsewhere in the financial statements
or notes thereto.
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders of Aeroflex Incorporated
Plainview, New York
We have audited the accompanying consolidated balance sheets of Aeroflex
Incorporated and subsidiaries as of June 30, 19971998 and 19961997 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three year period ended June 30, 1997.1998. Our audits also
included the financial statement schedule listed in the Index at item 14(a)2.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aeroflex
Incorporated and subsidiaries as of June 30, 19971998 and 19961997 and the results of
their operations and their cash flows for each of the years in the three year
period ended June 30, 1997,1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
/s/ KPMG Peat Marwick LLP
Jericho, New York
August 14, 1997 (except as to Note 17(b),
which is as of September 8, 1997)13, 1998
S-1
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
ASSETS June 30,
- -----------------------------------------------------------------------------------------------------------
ASSETS 1998 1997
1996
- --------------------------------------------------------------------------------------- ----
Current Assets:assets:
Cash and cash equivalentsequivalents............................... $ 600,00024,408 $ 661,000
Current portion of invested cash 69,000 -600
Accounts receivable, less allowance for doubtful accounts
of $417,000$317 and $354,000$417 at June 30, 1998 and 1997,
and 1996, respectively 21,843,000 23,336,000
Income tax refund receivable - 926,000
Inventories 20,319,000 16,916,000respectively.......................................... 19,853 21,843
Inventories............................................. 29,851 20,319
Deferred income taxes 2,043,000 1,871,000taxes................................... 1,861 2,043
Prepaid expenses and other current assets............... 1,197 812
-------- --------
Total current assets............................... 77,170 45,617
Property, plant and equipment, net........................ 26,994 14,487
Intangible assets 743,000 554,000
- -----------------------------------------------------------------------------------
Total Current Assets 45,617,000 44,264,000
Invested Cash 453,000 603,000
Property, Plant and Equipment, net 14,487,000 14,854,000
Intangible Assets Acquiredacquired in Connectionconnection with the Purchasepurchase
of Businesses,businesses, net of accumulated amortization of $1,224,000$1,993
and $516,000$1,224 at June 30, 1998 and 1997, and 1996, respectively 8,046,000 8,707,000respectively...... 7,578 8,046
Cost in Excessexcess of Fair Valuefair value of Net Assetsnet assets of
Businesses Acquired,businesses acquired, net of accumulated amortization
of $2,399,000$2,724 and $2,086,000$2,399 at June 30, 1998 and 1997,
and 1996, respectively 9,903,000 10,054,000respectively............................................ 9,827 9,903
Other Assets 2,541,000 2,687,000
- -----------------------------------------------------------------------------------assets.............................................. 2,532 2,994
-------- --------
Total Assetsassets.............................................. $124,101 $ 81,047,000 $ 81,169,000
===================================================================================81,047
======== ========
See notes to consolidated financial statements.
S-2
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
June 30,
---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY June 30,
- -----------------------------------------------------------------------------------1998 1997
1996
- --------------------------------------------------------------------------------------- ----
Current Liabilities:liabilities:
Current portion of long-term debtdebt....................... $ 4,247,0001,755 $ 4,259,0004,247
Accounts payable 5,093,000 3,968,000payable........................................ 6,668 5,093
Accrued expenses and other current liabilities 8,564,000 8,967,000liabilities.......... 12,932 8,564
Income taxes payable 1,841,000 1,770,000payable.................................... 1,850 1,841
-------- --------
Total current liabilities.......................... 23,205 19,745
Long-term debt............................................ 9,726 14,688
Deferred income taxes..................................... 1,156 334
Other long-term liabilities............................... 2,978 1,259
Senior subordinated convertible debentures................ - -----------------------------------------------------------------------------------9,981
-------- -------
Total Current Liabilities 19,745,000 18,964,000
Long-Term Debt 14,688,000 20,337,000
Deferred Income Taxes 334,000 172,000
Other Long-Term Liabilities 1,259,000 1,243,000
Senior Subordinated Convertible Debentures 9,981,000 9,981,000
- -----------------------------------------------------------------------------------
Total Liabilities 46,007,000 50,697,000
- -----------------------------------------------------------------------------------liabilities......................................... 37,065 46,007
-------- --------
Commitments and Contingenciescontingencies
Stockholders' Equity:equity:
Preferred stock,Stock, par value $.10 per share; authorized 1,000,0001,000
shares: Series A Junior Participating Preferred stock,Stock, par
value $.10 per share; authorized 150,000150 shares;
none issuedissued........................................... - -
Common stock,Stock, par value $.10 per share; authorized
25,000,00025,000 shares; issued 12,658,00017,378 and 12,380,00012,658 shares at
June 30, 1998 and 1997, and 1996, respectively 1,266,000 1,238,000respectively.................. 1,738 1,266
Additional paid-in capital 58,110,000 57,820,000capital.............................. 100,481 58,110
Accumulated deficit (23,584,000) (28,004,000)
- -----------------------------------------------------------------------------------
35,792,000 31,054,000deficit..................................... (15,178) (23,584)
-------- --------
87,041 35,792
Less: Treasury stock, at cost (169,000(1 and 129,000169 shares at
June 30, 1998 and 1997, respectively.................. 5 752
-------- --------
Total stockholders' equity................................ 87,036 35,040
-------- --------
Total liabilities and 1996,
respectively) 752,000 582,000
- -----------------------------------------------------------------------------------
Total Stockholders' Equity 35,040,000 30,472,000
- -----------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equitystockholders' equity................ $124,101 $ 81,047,000 $ 81,169,000
===================================================================================81,047
======== ========
See notes to consolidated financial statements.
S-3
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
YearYears Ended June 30,
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
---- ---- ----
Net Salessales................................ $118,861 $ 94,299,00094,299 $ 74,367,000 $ 71,113,00074,367
Cost of Sales 63,109,000 51,070,000 47,542,000
- ------------------------------------------------------------------------------------sales........................... 77,286 63,109 51,070
-------- -------- ---------
Gross Profit 31,190,000 23,297,000 23,571,000profit......................... 41,575 31,190 23,297
-------- -------- ---------
Operating costs:
Selling, Generalgeneral and Administrative Costs 21,454,000 15,379,000 15,752,000administrative
costs................................ 21,545 18,175 14,119
Research and development costs........ 5,172 3,279 1,260
Special Charge (Notecharge (note 2) - 23,200,000 -
Restructuring Charge (Note 3).............. - - 1,669,000
- ------------------------------------------------------------------------------------23,200
-------- -------- ---------
Total operating costs......... 26,717 21,454 38,579
-------- -------- ---------
Operating Income (Loss) 9,736,000 (15,282,000) 6,150,000
- ------------------------------------------------------------------------------------income (loss).................. 14,858 9,736 (15,282)
-------- -------- ---------
Other Income (Expense)
Life Insurance Proceeds (Note 13) - - 2,000,000expense (income):
Interest Expense (2,974,000) (1,939,000) (1,464,000)expense....................... 2,011 2,974 1,939
Other Incomeexpense (income) (including
interest income and dividends of
$84,000, $496,000$389, $84 and $669,000) 93,000 1,075,000 751,000
- ------------------------------------------------------------------------------------$496)................... (309) (93) (1,075)
-------- -------- ---------
Total Otherother expense (income)...... 1,702 2,881 864
-------- -------- ---------
Income (Expense) (2,881,000) (864,000) 1,287,000
- ------------------------------------------------------------------------------------(loss) before income taxes........ 13,156 6,855 (16,146)
Provision for income taxes............... 4,750 2,435 1,274
-------- -------- ---------
Net income (loss)........................ $ 8,406 $ 4,420 (17,420)
======== ======== =========
Income (Loss) From Continuing Operations
Before Income Taxes 6,855,000 (16,146,000) 7,437,000
Provision For Income Taxes 2,435,000 1,274,000 850,000
- ------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations 4,420,000 (17,420,000) 6,587,000
- ------------------------------------------------------------------------------------
Discontinued Operations (Note 4):
Gain on disposal of subsidiaries,
net of income taxes - - 462,000
- ------------------------------------------------------------------------------------
Income From Discontinued Operations - - 462,000
- ------------------------------------------------------------------------------------
Net Income (Loss)(loss) per common share and common
share equivalent:
Basic............................... $ 4,420,000 $(17,420,000) $7,049,000
====================================================================================
Income (Loss) Per Common Share:
Primary
Continuing Operations.57 $ .36 $(1.46)
======== ======== =========
Diluted............................... $ .51 $ .34 $(1.46) $ .53
Discontinued Operations - - .04
- ------------------------------------------------------------------------------------
Net Income (Loss) $ .34 $(1.46) $ .57
====================================================================================
Fully Diluted
Continuing Operations $ .33 *
$ .52
Discontinued Operations -======== ========
Weighted average number of common
shares and common share equivalents
outstanding:
Basic................................. 14,802 12,446 11,971
Diluted............................... 16,527 14,620 *
.03
- ------------------------------------------------------------------------------------
Net Income $ .33 * $ .55
====================================================================================
Weighted Average Number of Common
Shares Outstanding
Primary 13,057,000 11,971,000 12,352,000
Fully Diluted 15,142,000 * 14,249,000
====================================================================================
* As*As a result of the loss, all options, warrants and convertible debentures are
anti-dilutive.
See notes to consolidated financial statements.
S-4
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1998, 1997 and 1996
and 1995(In thousands)
Additional
Common Stock Additional
------------ Paid-in Accumulated Treasury Stock
Total Shares Par Value Capital Deficit Shares Cost
- ---------------------------------------------------------------------------------------------------------------------------- ------ --------- ----------- ----------- ------ ----
Balance, July 1, 19941995............... $ 39,571,000 11,799,00046,344 11,818 $ 1,180,0001,182 $ 56,116,000 $(17,633,000) 58,00056,101 $ (92,000)(10,584) 92 $ (355)
Stock issued upon
conversion of
debentures........................ 19 3 - 19 - - -
Treasury Stock Receivedstock received
from the Employee
Stock Ownership Plan (28,000)employee
stock ownership plan.............. (285) - - - - 7,000 (28,000)
Retirement56 (285)
Stock issued upon exercise
of Treasurystock options.................. 440 159 16 366 - (19) 58
Stock and warrants issued
to acquire business............... 1,074 300 30 1,044 - (65,000) (6,000) (114,000) - (65,000) 120,000-
Stock issued in connection
with bank refinancing............. 300 100 10 290 - - -
Net loss............................ (17,420) - - - (17,420) - -
------- ------- ------ ------- -------- ------- --------
Balance, June 30, 1996.............. 30,472 12,380 1,238 57,820 (28,004) 129 (582)
Stock issued upon exercise
of stock options.................. 586 278 28 290 - (69) 268
Purchase of Treasury
Stock (355,000)treasury
stock............................. (438) - - - - 92,000 (355,000)109 (438)
Net income.......................... 4,420 - - - 4,420 - -
------- ------- ------ ------- -------- ------- --------
Balance, June 30, 1997.............. 35,040 12,658 1,266 58,110 (23,584) 169 (752)
Stock Issued Upon Exerciseissued in public offering..... 31,285 2,597 260 31,025 - - -
Stock issued upon exercise
of stock options and warrants..... 2,923 349 35 2,141 - (168) 747
Stock Options 107,000 84,000 8,000 99,000issued upon conversion
of debentures..................... 9,382 1,774 177 9,205 - - -
Net Income 7,049,000income.......................... 8,406 - - - 7,049,0008,406 - -
- ------------------------------------------------------------------------------------------------------------------------------ ------- ------ --------- --------- -------- --------
Balance, June 30, 1995 46,344,000 11,818,000 1,182,000 56,101,000 (10,584,000) 92,000 (355,000)
Stock Issued Upon
Conversion of
Debentures 19,000 3,000 - 19,000 - - -
Treasury Stock Received
from the Employee
Stock Ownership Plan (285,000) - - - - 56,000 (285,000)
Stock Issued Upon Exercise
of Stock Options 440,000 159,000 16,000 366,000 - (19,000) 58,000
Stock and Warrants Issued
to Acquire Business 1,074,000 300,000 30,000 1,044,000 - - -
Stock Issued in Connection
with Bank Refinancing 300,000 100,000 10,000 290,000 - - -
Net Loss (17,420,000) - - - (17,420,000) - -
- -----------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 30,472,000 12,380,000 1,238,000 57,820,000 (28,004,000) 129,000 (582,000)
Stock Issued Upon Exercise
of Stock Options 586,000 278,000 28,000 290,000 - (69,000) 268,000
Purchase of Treasury
Stock (438,000) - - - - 109,000 (438,000)
Net Income 4,420,000 - - - 4,420,000 - -
- -----------------------------------------------------------------------------------------------------------------------
Balance, June 30, 19971998.............. $ 35,040,000 12,658,00087,036 17,378 $ 1,266,0001,738 $ 58,110,000 $(23,584,000) 169,000 $(752,000)
=======================================================================================================================100,481 $ (15,178) 1 $ (5)
======= ======= ======= ========= ========= ======== ========
See notes to consolidated financial statements.
S-5
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YearYears Ended June 30,
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
---- ---- ----
Cash Flows From Operating Activities:flows from operating activities:
Net income (loss)............................................ $ 4,420,000 $(17,420,000)8,406 $ 7,049,0004,420 $ (17,420)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Special charge - 23,200,000 -
Gain from discontinued operations,
netcharge........................................... - - (462,000)23,200
Depreciation and amortization 4,322,000 3,091,000 3,133,000amortization............................ 4,884 4,322 3,091
Amortization of deferred gain............................ (588) - -
Gain on sale of securitiessecurities............................... - (533,000) - (533)
Deferred income taxes (10,000) (461,000) (13,000)
Other 57,000 (112,000) (69,000)taxes.................................... 1,004 (10) (461)
Other.................................................... (10) 57 (112)
Change in operating assets and liabilities, net of
effects from purchase of businesses:
Decrease (increase) in accounts receivable 1,421,000 (2,220,000) (1,965,000)receivable............... 1,975 1,421 (2,220)
Decrease (increase) in inventories (3,403,000) (2,654,000) 2,263,000inventories....................... (8,397) (3,403) (2,654)
Decrease (increase) in prepaid
expenses and other assets 879,000 (6,000) (279,000)assets.............................. (633) 879 (6)
Increase (decrease) in accounts
payable, accrued expenses and
other long-term liabilities 375,000 434,000 (1,232,000)liabilities............................ 5,374 375 434
Increase (decrease) in income taxes payable 668,000 1,189,000 (125,000)
- ------------------------------------------------------------------------------------payable.............. 1,648 668 1,189
-------- -------- --------
Net cash provided by operating activities...................... 13,663 8,729 4,508
-------- -------- --------
Cash Provided By
Operating Activities 8,729,000 4,508,000 8,300,000
- ------------------------------------------------------------------------------------
Cash Flows From Investing Activities:flows from investing activities:
Payment for purchase of businesses,
net of cash acquired (162,000) (35,190,000) (536,000)
Net cash provided by
discontinued operationsacquired....................................... (249) (162) (35,190)
Purchase of equipment, inventory and technology rights
from Lucent Technolgies.................................... (4,435) - -
3,058,000
Capital expenditures (2,931,000) (1,687,000) (2,919,000)expenditures......................................... (10,613) (2,931) (1,687)
Proceeds from sale of property,
plant and equipment 16,000 2,318,000 182,000equipment........................................ 209 16 2,318
Net proceeds from sale of securitiessecurities......................... 110 81 1,242
-------- -------- --------
Net cash used in investing activities.......................... (14,978) (2,996) (33,317)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common shares in public offering... 31,781 - 533,000 -
DecreaseCosts in invested cash 81,000 709,000 194,000connection with public offering..................... (496) - ------------------------------------------------------------------------------------
Net Cash Used In
Investing Activities (2,996,000) (33,317,000) (21,000)
- ------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Borrowings under debt agreements 58,000 27,250,000 293,000agreements............................. 6,231 58 27,250
Debt repayments (5,719,000) (9,210,000) (5,232,000)repayments.............................................. (13,685) (5,719) (9,210)
Bank debt financing costscosts.................................... - (403,000) - (403)
Purchase of treasury stock (438,000)stock................................... - (355,000)(438) -
Proceeds from the exercise of stock options 305,000 503,000 107,000
- ------------------------------------------------------------------------------------and warrants..... 1,292 305 503
-------- -------- --------
Net Cash Provided By (Used In)
Financing Activities (5,794,000) 18,140,000 (5,187,000)
- ------------------------------------------------------------------------------------cash provided by (used in)
financing activities......................................... 25,123 (5,794) 18,140
-------- -------- --------
Net Increase (Decrease) Inincrease (decrease) in cash and
cash equivalents............................................. 23,808 (61) (10,669)
Cash and Cash Equivalents (61,000) (10,669,000) 3,092,000cash equivalents at beginning of period............... 600 661 11,330
-------- -------- --------
Cash and Cash Equivalents At Beginning
Of Year 661,000 11,330,000 8,238,000
- ------------------------------------------------------------------------------------
Cash and Cash Equivalents At End Of Yearcash equivalents at end of period..................... $ 600,00024,408 $ 661,000600 $ 11,330,000
====================================================================================661
======== ======== ========
See notes to consolidated financial statements.
S-6
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 1997, 1996 and 1995
1. Summary of Significant Accounting Principles and Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Aeroflex Incorporated and its subsidiaries ("the Company"(the "Company"), all of which are
wholly-owned. The Company has accounted for certain subsidiaries, namely
telecommunication systems services (T-CAS Corp.) and commercial and custom
envelopes (Huxley Envelope Corp.), as discontinued operations. These
subsidiaries have not been consolidated as part of the Company's continuing
operations (Note 4). All significant intercompany balances and transactions have
been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires that management of the Company make a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities. Among
the more significant estimates included in the financial statements are the
estimated costs to complete contracts in process.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments having maturities of
three months or less at the date of acquisition to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories related to long-term contracts are recorded at cost less amounts
expensed under percentage-of- completion accounting.
Financial Instruments
The fair values of all financial instruments, other than long-term debt and
the convertible debentures (see Notes 97 and 10)8), approximate book values
because of the short maturity of these instruments.
Revenue and Cost Recognition on Contracts
Revenue and costs on contracts areis recognized based upon shipments or billings forbillings. The Company records
gross profit on its long-term contracts using percentage-of-completion
accounting under which costs are recognized on revenues in the same relation
that total estimated manufacturing contracts and upon costs incurred for certain
engineering and support services contracts.bear to total contract value.
Estimated costs at completion are based upon engineering and production
estimates. Provisions for estimated losses or revisions in estimated profits
on contracts-in-process are recorded in the period in which such losses or
revisions are first determined.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation computed on a straight-line basis over the estimated useful
lives of the related assets. Leasehold improvements are amortized over the
life of the lease or the estimated life of the asset, whichever is shorter.
Research and Development Costs
All research and development costs are charged to expense as incurred and
are classified as selling, general and administrative costs. Research and
development expenses were approximately $3,279,000, $1,260,000 and
$2,389,000 during the fiscal years 1997, 1996 and 1995, respectively.incurred. See
Note 2 for a discussion of purchased in-process research and development.
S-7
Intangible Assets
Intangible assets are recorded at cost, less accumulated amortization. The
excess of purchase price over the fair value of tangible assets acquired is
being amortized on a straight-line basis over periods ranging from 20 to 40
years except for certain costs allocated to existing technology, workforce
in-place, customer relationships and patents which are amortized over 13 to
15 years, the estimated remaining lives of the intangibles at the time they
were acquired by the Company. The Company periodically evaluates the
recoverability of the carrying value of its intangible assets and the related
amortization periods. The Company assesses the recoverability of unamortized
goodwill based on the undiscounted projected future earnings of the related
businesses. As of June 30, 1997,1998, the cost in excess of fair value of net
assets of businesses acquired consists substantially of $8,666,000$8,398,000 related to
the 1989 acquisition of Comstron Corporation, a manufacturer of frequency
synthesizers, subsystems and components.
Long-Lived Assets
Effective July 1, 1996 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", which requires that
long-lived assets and certain identifiable intangibles to be held and used or
disposed of by an entity be reviewed for possible impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The adoption of SFAS No. 121 did not have any impact on
the Company's consolidated financial position or results of operations.
Invested Cash
Invested cash consists of government securities and certificates of deposit,
having original maturities of greater than three months, and is carried at
cost, which approximates market.
Income (Loss) Per Share
IncomeFor the year ended June 30, 1998, the Company has adopted SFAS No. 128
"Earnings Per Share." In accordance with SFAS No. 128, earnings per common
share ("Basic EPS") is computed based upon theby dividing net income by weighted average
numbercommon shares outstanding. Earnings per common share assuming dilution
("Diluted EPS") is computed by dividing net income plus a pro forma addback
of debenture interest by weighted average common shares outstanding after giving effect toplus
potential dilution from the assumedconversion of debentures and the exercise of
dilutive
stock options and warrants and, for fully diluted purposes, the
assumed conversion of debentures. Losswarrants. Income (loss) per share is computed based upon onlyamounts for prior periods
have been restated to conform to the weighted average numberprovisions of common shares outstanding.SFAS No. 128.
Accounting for Stock-Based Compensation
The Company records compensation expense for employee and director stock
options only if the current market price of the underlying stock exceeds the
exercise price on the date of the grant. Effective July 1, 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The Company
has elected not to implement the fair value based accounting method for
employee and director stock options, but instead has elected to disclose the
pro forma net earnings and pro forma earnings per share for employee and
director stock option grants made beginning in fiscal 1996 as if such method
had been used to account for stock-based compensation cost as described in
SFAS No. 123.
Income Taxes
In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company
measures deferred tax assets and liabilities based upon the differences
between the financial accounting and tax bases of assets and liabilities.
Reclassifications
Reclassifications have been made to the 19961997 and 19951996 consolidated financial
statements to conform to the 19971998 presentation.
S-8
2. Acquisition2.Acquisition of Businesses
MIC
---
Effective March 19, 1996, the Company acquired all of the outstanding stock
of MIC Technology Corporation ("MIC") for approximately $36,000,000 of cash,
300,000 shares of common stock and warrants to purchase 400,000 shares of
common stock (at exercise prices ranging from $7.05 to $7.50 per share). The
purchase price was paid with available cash of approximately $9,000,000 and
borrowings under the Company's bank loan agreement of approximately
$27,000,000. MIC manufactures high frequency thin film circuits and
interconnects for miniaturized, high frequency, high performance electronic
products for growing commercial markets such as wireless communications,
satellite based communications hardware and high technology military
electronics. The acquired company's net sales were approximately $25,000,000
for its fiscal year ended October 31, 1995.
The Company commissioned an independent asset valuation study of acquired
tangible and identifiable intangible assets to serve as a basis for
allocation of the purchase price. Based on this study, the Company allocated
the purchase price as follows:
(In thousands)
--------------
Net tangible assetsassets....................... $ 6,190,0006,190
Identifiable intangible assets 8,453,000assets............ 8,453
In-process research and development 23,200,000
------------development....... 23,200
--------
$ 37,843,000
============37,843
========
The identifiable intangible assets which include existing technology,
customer relationships and assembled work force are being amortized on a
straight-line basis over thirteen years based on the study described above.
The acquired in-process research and development was not considered to have
reached technological feasibility and, in accordance with generally accepted
accounting principles, the value of such was expensed in the third quarter of
fiscal 1996.
Summarized below are the unaudited pro forma results of operations of the
Company as if MIC had been acquired at the beginning of the fiscal periodsperiod
presented. The $23,200,000 write-off has been included in the June 30, 1996
pro forma loss but not the June 30, 1995 pro forma income in order to
provide comparability to the respective historical periods.
Pro Forma Year Ended
June 30, ---------------------------------------
1996
1995
---------------- ----------------
(in-------------------------------------
(In thousands, except per share data)
Net Salessales........................ $ 90,097
$ 95,300
Income (Loss) From Continuing
OperationsNet loss......................... (19,392)
6,729
Net Income (Loss) (19,392) 7,191
Earnings (Loss) Per Share
Primary
Continuing OperationsLoss per share
Basic.......................... $ (1.62)
$ .53
Net Income (Loss) (1.62) .56
Fully Diluted
Continuing OperationsDiluted........................ * .51
Net Income * .54
* Due to the loss, all options, warrants and convertible debentures are
anti-
dilutive.anti-dilutive.
The pro forma financial information presented above for the MIC acquisition
is not necessarily indicative of either the results of operations that would
have occurred had the acquisition taken place at the beginning of the period
presented or of future operating results of the combined companies.
S-9
Lintek
In January 1995, the Company acquired substantially all of the net operating
assets of Lintek, Inc. ("Lintek") for $537,000 plus contingent consideration
based on the next five years' earnings to a maximum of an additional
$675,000. Additional consideration of $249,000, $162,000 and $63,000 was
earned as of December 31, 1997, 1996 and 1995 and paid in March 1998 and
February 1997 and 1996, respectively. Such amounts, and any further
contingent consideration earned, will be treated as cost in excess of fair
value of net assets acquired. Lintek designs, develops and manufactures
radar cross section and antenna pattern measurement systems for commercial
and military applications, as well as surface penetrating radars.
The acquired company's net sales were
approximately $2,600,000 for the year ended December 31, 1994. On a pro
forma basis, had the Lintek acquisition taken place as of the beginning of
the periods presented, results of operations for those periods would not
have been materially affected.
The pro forma financial information presented above for the MIC acquisition
is not necessarily indicative of either the results of operations that would
have occurred had the acquisition taken place at the beginning of the
periods presented or of future operating results of the combined companies.
The acquisitions have been accounted for as purchases and, accordingly, the
acquired assets and liabilities assumed have been recorded at their
estimated fair values at the respective dates of acquisition. The operating
results of MIC and Lintek are included in the consolidated statements of
operations from the respective acquisition dates.
3. Restructuring Charge
In March 1995,Acquisition of Assets From Lucent Technologies
Effective July 1, 1997, the Company adopted a plan to consolidate its Puerto Rican
manufacturing operations into its existing facilitiesCompany's subsidiary, MIC, acquired certain
equipment, inventory, licenses for technology and patents of two of Lucent
Technologies' microelectronics components units - multi-chip modules and
film integrated circuits - for approximately $4,400,000 in New Yorkcash. These units
manufacture microelectronic modules and New
Jersey.interconnect products. The Company
has ceased manufacturing operationsalso signed a multi-year supply agreement to provide Lucent with film
integrated circuits for use in Puerto Rico. In
connection with this restructuring, the Company recorded a charge to
earnings of $1,669,000 in fiscal 1995, representing costs of abandonment of
leasehold improvements, severance costs for approximately 100 employees,
lease termination costs, write-down of excess equipment and other related
costs. Approximately $597,000 of this amount were non-cash costs.
Expenditures relatedtelecommunications applications. The purchase
price has been allocated to the restructuring have been consistent in all
material respects withassets acquired, based on their fair values,
and certain obligations assumed relating to the original charges taken.agreements.
4. Discontinued Operations
In November 1993, the Company sold substantially all of the net operating
assets of its wholly-owned subsidiary, Huxley Envelope Corp. ("Huxley"), for
$5,550,000. Huxley is a manufacturer of specialized envelopes for
high-volume direct-mail users. The sale did not include Huxley's New York
City manufacturing facility which was sold in the fourth quarter of fiscal
1995 for approximately $2,400,000. The sale of the facility, along with the
resolution of certain other contingencies, resulted in a net of tax gain of
$240,000.
Effective June 30, 1991, the Board of Directors of the Company approved a
formal plan to discontinue the operations of its wholly-owned subsidiary,
T-CAS Corp. ("T-CAS"), which was involved in the design and implementation
of telecommunication and electronic systems. The plan called for completion
of existing contracts and an orderly dissolution. As of June 30, 1993, all
contracts were completed.
In May 1995, T-CAS received $170,000 in settlement of a claim against a
former customer. This settlement, together with other unrelated settlements
of claims and adjustments of previously recorded loss reserves, resulted in
an after tax gain of $222,000, which was included in discontinued operations
in the fourth quarter of fiscal 1995.
Huxley and T-CAS have been reported as discontinued operations and,
accordingly, the Company's equity earnings (loss) from these subsidiaries
and the estimated gain (loss) on disposal, sale or discontinuance have been
reported separately from continuing operations.
S-10
5. Invested Cash
Invested cash represents funds held in qualified Puerto Rican investments
which enabled the Company to take advantage of reduced withholding taxes
when the earnings from its subsidiary in Puerto Rico were repatriated. These
funds are currently invested in government securities and certificates of
deposit. Despite the cessation of operations in Puerto Rico, the funds will
be maintained in such investments for the required statutory periods through
the year 1999.
6. Inventories
Inventories consist of the following:
June 30,
--------------------------------------------------------------------------------------------
1998 1997
1996
------------------------------------------------------------------------------ ----------
(In thousands)
Raw materialsmaterials.................... $ 11,191,00012,012 $ 9,352,000
Work-in-process 6,642,000 5,301,00011,191
Work-in-process.................. 12,737 6,642
Finished goods 2,486,000 2,263,000
--------------------------------------------------------------------goods................... 5,102 2,486
-------- --------
$ 20,319,00029,851 $ 16,916,000
====================================================================20,319
======== ========
Inventories include contracts-in-process of $3,318,000$13,227,000 and $2,269,000$3,318,000 at
June 30, 19971998 and 1996,1997, respectively, which consist substantially of
unbilled material, labor and overhead costs that are or were expected to be
billed during the succeeding fiscal year.
7.5. Property, Plant and Equipment
Property, plant and equipment consists of the following:
June 30,
------------------------------------------------------------------------------------------------
1998 1997
1996
-------------------------------------------------------------------------------- --------------
(In thousands)
LandLand............................ $ 725,000725 $ 725,000725
Building and leasehold
improvements 11,742,000 11,370,000improvements.................. 17,479 11,742
Machinery, equipment, tools
and dies 19,583,000 17,293,000dies...................... 29,285 19,583
Furniture and fixtures 5,196,000 5,070,000fixtures.......... 5,968 5,196
Assets recorded under
capital leases 2,392,000 2,707,000leases................ 2,334 2,392
Transportation equipment 85,000 63,000
--------------------------------------------------------------------
39,723,000 37,228,000equipment........ 115 85
--------- ---------
55,906 39,723
Less accumulated depreciation
and amortization 25,236,000 22,374,000
--------------------------------------------------------------------amortization.............. 28,912 25,236
--------- ---------
$ 14,487,00026,994 $ 14,854,000
====================================================================14,487
========= =========
S-10
Repairs and maintenance expense on property, plant and equipment was
$1,384,000, $1,131,000 $481,000 and $475,000$481,000 for the years ended June 30, 1998, 1997
and 1996, and 1995, respectively.
8. Accrued6.Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities include accrued salaries,
wages and other compensation of $2,874,000$4,311,000 and $2,789,000$2,874,000 at June 30, 1998
and 1997, and 1996, respectively.
S-11
9. Long-Term7.Long-Term Debt and Credit Arrangements Long-term debt consists of the
following:
June 30,
--------------------------------------------------------------------------------------------
1998 1997
1996
------------------------------------------------------------------------------ ---------
(In thousands)
Revolving credit and term
loan agreement (a).......... $ 17,150,0004,720 $ 22,200,00017,150
Equipment loans (b)........... 5,624 -
Capitalized lease
obligations (b) 1,536,000 2,047,000
Bank loans (c) 187,000 187,000
Other 62,000 162,000
--------------------------------------------------------------------
18,935,000 24,596,000............. 1,019 1,536
Other......................... 118 249
-------- --------
11,481 18,935
Less current maturities 4,247,000 4,259,000
--------------------------------------------------------------------maturities....... 1,755 4,247
-------- --------
$ 14,688,0009,726 $ 20,337,000
====================================================================14,688
======== ========
Aggregate long-term debt as of June 30, 1998 matures in each fiscal year
as follows:
(In thousands)
1999............... $ 1,755
2000............... 938
2001............... 5,591
2002............... 941
2003............... 1,681
Thereafter......... 575
--------
$ 11,481
========
Interest paid was $2,099,000, $2,647,000 and $1,584,000 during the years
ended June 30, 1998, 1997 and 1996, respectively.
(a) As of March 15, 1996,31, 1998, the Company replaced a previous agreement with a
revised revolving credit and term loan agreement with two banks which is secured by
substantially all of the Company's assets. The agreement provides for a
revolving credit line of $22,000,000,$27,000,000, which expires on March 31, 1999,
and a term loan of $16,000,000. The term loan is payable in quarterly
principal installments of $900,000 with final payment on September 30, 2000.2001. The
interest rate on borrowings under this agreement is at various rates
depending upon certain financial ratios, with the present rate substantially
equivalent to the prime rate (8.5% at June 30, 1997) on1998). The Company has entered
into an interest rate swap agreement for the $4,720,000 then outstanding
under the revolving credit borrowings and prime plus 1/4% online at 7.6% in order to reduce the term loan outstandings.interest rate
risk associated with these outstanding borrowings. The Company paid a
facility fee of $200,000 and 100,000 shares of common stock,$20,000 and is required to pay a commitment fee of 3/8%1/4% per
annum of the average unused portion of the revolving credit line. An additional payment of $125,000 is
payable if the term loan is greater than $4,000,000 at December 31, 1997.
The terms of the agreement require compliance with certain covenants
including minimum consolidated tangible net worth and pretax earnings,
maintenance of certain financial ratios, limitations on capital expenditures
and indebtedness and prohibition of the payment of cash dividends. In
connection with the purchase of commoditiescertain materials for use in manufacturing,
the Company has a letter of credit facility of $1,600,000.$2,000,000. At June 30, 1997,1998,
the Company's available unused line of credit was approximately $12,000,000$20,000,000
after consideration of the letter of credit. The Company believes that the
carrying amount of this debt approximates fair value after considering the
interest rate swap agreement discussed above, since the interest rate is
effectively fixed at a rate commensurate with rates available to the Company
under similar terms.
S-11
(b) During the year ended June 30, 1998, the Company entered into equipment
loans with two banks totaling $6,232,000. The loans are repayable monthly
through July 2004 and bear interest at a floating rate 200 basis points above
the 30-day London Interbank Offered Rate (7.6 and 7.7% at June 30, 1998). The
Company believes that the carrying amount of this debt approximates fair
value since the interest rate is variable and the margins are consistent with
those available to the Company under similar terms.
(b)(c) The Company has various capitalized lease obligations with financial
institutions which have various terms through 2000 and interest rates ranging
from 7.1% to 9.5%.
(c) The Company has loans with a bank bearing interest at rates ranging from
6.1% to 6.4%. These loans mature at various dates through July 1998 and are
fully collateralized by the invested cash.
Aggregate long-term debt as of June 30, 1997 matures in each fiscal year as
follows:
1998...............$ 4,247,000
1999............... 12,724,000
2000............... 1,964,000
---------------------------------------
$ 18,935,000
=======================================
Interest paid was $2,647,000, $1,584,000 and $1,333,000 during the years
ended June 30, 1997, 1996 and 1995, respectively.
S-12
10. Senior8.Senior Subordinated Convertible Debentures
During June 1994, the Company completed a sale of $10,000,000 principal
amount of 7-1/2% Senior Subordinated Convertible Debentures to non-U.S.
persons. The debentures are due June 15, 2004 subject to prior sinking fund
payments of 10%, 10%, 15%, and 15% of the principal amount on September 15,
2000, 2001, 2002 and 2003, respectively. The debentures are convertible into
the Company's common stock at a price of $5-5/8 per share. The Company may
redeem the debentures at a price of 104-1/2% of the principal amount,
declining by 1.5 points per year beginning June 15, 1998 to 100% at June 15,
2000 and thereafter. The net proceeds from the offering were used initially to retire
certain bank indebtedness and for general working capital with excess
proceeds placed in temporary short term bank related investments until
ultimately used for the purchase of MIC. The costdebentures were convertible into
the Company's common stock at a price of issuing$5.625 per share. On September 8,
1997, the Company called for the redemption of all outstanding 7-1/2% Senior
Subordinated Convertible Debentures at 104.5% of the principal amount. All of
the principal amount of the Company's 7-1/2% Senior Subordinated Convertible
Debentures was converted. In connection with the conversions, $599,000 of
deferred bond issuance costs were charged to additional paid-in capital.
9. Stockholders' Equity
(a) Common Stock Offering
In March 1998, the Company sold 2,597,000 shares of its Common Stock in a
public offering for $31,285,000, net of an underwriting discount of
$1,973,000 and issuance costs of $496,000. Of these debentures, $947,000, included a 6% fee paid and 100,000 warrants,
exercisable at $6.75 per share, issuednet proceeds, $9,639,000
was used to repay bank indebtedness. The balance of the placement agent. This amountnet proceeds, which
is included in the Consolidated Balance Sheet under the caption "Other
Assets"cash and is being amortized over the term of the debentures as interest
expense. As of June 30, 1997, $19,000 principal amount of bonds has been
converted into common stock. The Company estimates the fair value of the
debentures as of June 30, 1997 tocash equivalents, will be approximately $10,430,000 based on
quoted market prices.
11. Stockholders' Equity
(a)used for general corporate
purposes, including working capital, capital expenditures and facilities
expansion and may be used for potential acquisitions.
(b) Stock Option Plans
Under the Company's stock option plans, approved by the Company's shareholders, options may be granted to purchase
shares of the Company's common stock exercisable at prices equal to the fair
market value on the date of grant. During 1990, the Company's shareholders
approved the Non-Qualified Stock Option Plan (the "NQSOP"). In December 1993,
the Board of Directors adopted the Outside Director Stock Option Plan (the
"Directors' Plan") which provides for options to non-employee directors,
which become exercisable in three installments and expire ten years from the
date of grant. The Directors' Plan, as amended, covers 500,000 shares of the
Company's Common Stock. In November 1994, the shareholders approved this plan
and the 1994 Non-Qualified Stock Option Plan (the "1994 Plan"). In November
1996, the shareholders approved the 1996 Stock Option Plan (the "1996 Plan").
In April 1998, the Board of Directors adopted the 1998 Stock Option Plan (the
"1998 Plan"). The NQSOP, the 1994 Plan, the 1996 Plan and the 19961998 Plan
provide for options which become exercisable in one or more installments and
each covers 1,500,000 shares of the Company's Common Stock. Options under the
NQSOP and the 1994 Plan expire five years from the date of grant. Options
under the 1996 Plan and the 1998 Plan shall expire not later than ten years
from the date of grant.
The Company has also issued to employees, who are not executive officers,
options to purchase 275,000 shares of common stock exercisable at $4.00 per
share. Such grants were not covered by one of the above plans.
S-13S-12
Additional information with respect to the Company's stock options is as
follows:
Weighted Shares
Average Under
Exercise Outstanding
Prices Options
-------------------------------------------------- -------------
(In thousands)
Balance, July 1,
1994 $2.61 1,725,000
Granted 3.89 1,160,000
Expired 3.88 (135,000)
Forfeited 2.63 (74,000)
Exercised 2.70 (84,000)
----------------------------------------1995......... $3.11 2,592
Granted....... 3.93 960
Forfeited..... 2.98 (68)
Exercised..... 2.77 (191)
------
Balance, June 30,
1995 3.11 2,592,000
Granted 3.93 960,000
Forfeited 2.98 (68,000)
Exercised 2.77 (191,000)
----------------------------------------1996......... 3.38 3,293
Granted....... 4.47 668
Forfeited..... 3.17 (71)
Exercised..... 2.04 (570)
------
Balance, June 30,
1996 3.38 3,293,000
Granted 4.47 668,000
Forfeited1997......... 3.83 3,320
Granted....... 9.94 1,043
Forfeited..... 3.65 (35)
Exercised..... 3.17 (71,000)
Exercised 2.04 (570,000)
----------------------------------------(436)
------
Balance, June 30,
1997 $3.83 3,320,000
========================================1998......... $ 5.54 3,892
======
Options to purchase 2,317,000, 2,168,000 2,092,000 and 1,764,0002,092,000 shares were
exercisable at weighted average exercise prices of $3.90, $3.61 $3.06 and $2.75$3.06 as
of June 30, 1998, 1997 1996 and 1995,1996, respectively.
The options outstanding as of June 30, 19971998 are summarized in ranges as
follows:
Options Outstanding
Options Exercisable
------------------------------- -------------------
Weighted----------------------------------------------
Weighted Weighted
Range of Average Average
Exercise Exercise Options Remaining
Prices Price Outstanding Life
------------ -------- ----------- ---------
(In thousands)
$2.00-$ 3.50 $2.85 305 0.3 years
$3.75-$ 5.38 4.07 2,552 4.0
$8.19-$13.44 9.98 1,035 9.4
-----
3,892
=====
Options Exercisable
------------------------------------------
Weighted
Range of Average
Exercise Exercise Options
Remaining Options Exercise
Prices Price Outstanding Life Exercisable
Price
----------- -------- -------------------- --------- -----------
--------(In thousands)
$2.00-$3.50 $2.57 523,000 1.0 years 523,000 $2.57$2.85 305
$3.75-$5.38 4.07 2,797,000 4.8 1,645,000 3.94
--------- ---------
3,320,000 2,168,000
========= =========3.99 1,992
$8.19-$13.44 10.81 20
-----
2,317
=====
S-13
The per share weighted-averageweighted average fair value of stock options granted during
fiscal 1998, 1997 and 1996 was $7.39, $2.37 and $1.31, respectively, on the
date of grant using the Black Scholes option-pricing model with the following
weighted-averageweighted average assumptions: 1998 - expected dividend yield of 0%, risk free
interest rate of 5.8%, expected stock volatility of 80%, and an expected
option life of 7.4 years; 1997 - expected dividend yield of 0%, risk free
interest rate of 6.3%, expected stock volatility of 40%, and an expected
option life of 7.4 years; 1996 - expected dividend yield of 0%, risk free
interest rate of 5.4%, expected stock volatility of 30%, and an expected
option life of 4.3 years.
S-14
(b)(c) Accounting for Stock-Based Compensation.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which the Company has adopted in
fiscal 1997. The Company has chosen not to implement the fair value based
accounting method for employee and director stock options, but has elected to
disclose the pro forma net income and earnings per share as if such method
had been used to account for stock-based compensation cost as described in
SFAS No. 123. The pro forma compensation cost before income taxes, based on
the fair value at the grant date for options granted only in fiscal years
1998, 1997 and 1996 was $2,021,000, $783,000 and $429,000 for the years ended
June 30, 1998, 1997 and 1996, respectively. The Company's net income (loss)
and net income (loss) per share using this pro forma compensation cost would
have been:
YearYears Ended
-------------------------------------
(In thousands, except per share data)
June 30, ------------------------------------------------------
1997 1996
---------------------- -----------------------------
As Reported Pro Forma--------------------------
As Reported Pro Forma
----------- ---------
Net Loss............... $(17,420) $(17,772)
Net Loss Per Share
- Basic............ $ (1.46) $(1.48)
- Diluted.......... * *
June 30, 1997
--------------------------
As Reported Pro Forma
----------- ---------
Net Income............. $ 4,420 $ 3,919
Net Income Per Share
-Basic............. $ 0.36 $ 0.31
-Diluted........... 0.34 0.30
June 30, 1998
--------------------------
As Reported Pro Forma
----------- ----------
Net Income (Loss) $4,420,000 $3,919,000 $(17,420,000) $(17,772,000)Income............. $ 8,406 $ 7,112
Net Income (Loss)
Per Share
- Primary-Basic............. $ .340.57 $ .30 $(1.46) $(1.48)
- Fully Diluted .33 .30 * *
0.48
-Diluted........... $ 0.51 $ 0.44
* As a result of the loss, all options, warrants and convertible
debentures are anti-dilutive.
Since the pro forma compensation cost reflects only options granted in fiscal
years 19961998, 1997 and 1997,1996, the full impact of calculating stock-based
compensation costs under SFAS No. 123 is not reflected in the pro forma net
income (loss) because compensation cost is recognized over the respective
vesting period and compensation cost for options granted prior to fiscal year
1996 was not reflected.
(c)S-14
(d) Shareholders' Rights Plan
In August 1988, the Company's Board of Directors approved a Shareholders'
Rights Plan which provided for a dividend distribution of one right for each
share to holders of record of the Company's common shares on August 31,
1988. The rights willwhich would have become exercisable
only in the event a person or group accumulatesaccumulated 20 percent or more of the
Company's common shares. The rights expired on August 30, 1998 and a new
Shareholders' Rights Plan was approved. See Note 15 for a discussion of this
new plan.
(e) Earnings Per Share
A reconciliation of the numerators and denominators of the Basic EPS and
Diluted EPS calculations is as follows:
Years Ended June 30,
--------------------------------
1998 1997 1996
---- ---- ----
(In thousands, except per share data)
Computation of Adjusted Net Income (Loss):
Net income (loss) for basic earnings per
common share............................. $ 8,406 $ 4,420 $(17,420)
=========
Add: Debenture interest and amortization
expense, net of income taxes............. 103 504 *
-------- --------
Adjusted net income for diluted
earnings per common share................ $ 8,509 $ 4,924 *
======== ========
Computation of Adjusted Weighted Average
Shares Outstanding:
Weighted average shares outstanding........ 14,802 12,446 11,971
=======
Add: Shares assumed to be issued upon
conversion of debentures................. 392 400 *
Add: Effect of dilutive options and
warrants outstanding..................... 1,333 1,774 *
-------- -------
Weighted average shares and common share
equivalents used for computation of
diluted earnings per common share........ 16,527 14,620 *
======== ========
Net Income (Loss) Per Common Share:
Basic.................................... $.57 $ .36 $(1.46)
======== ======== =======
Diluted.................................. $.51 $ .34 *
======== ========
-----------
* As a result of the loss in fiscal 1996, all options, warrants and convertible
debentures are anti-dilutive.
Options to purchase 290,000 shares or if any
person or group announcesat an offer which would resultexercise price of $13.44 per share
were outstanding as of June 30, 1998 but were not included in it owning 20
percent or morethe computation
of Diluted EPS because the exercise prices of these options were greater than
the average market price of the common shares.
The rights will expire August 30,
1998. Each right will entitle the holder to buy one one-hundredth of a share
of a new series of Series A Junior Participating Preferred Stock of the
Company at the price of $25. In addition, upon the occurrence of a merger or
other business combination, or the acquisition by a person or group
("Acquiring Person") of 25 percent or more of the common shares, holders of
the rights, other than the Acquiring Person, will be entitled to purchase
either common shares of the Company or common shares of the Acquiring Person
at half their market value.
The Company will be entitled to redeem the rights for $0.01 per right at any
time until the tenth day following a public announcement of the acquisition
of a 20 percent position in its common shares.
S-15
12.10. Income Taxes
The provision (benefit) for income taxes consists of the following:
YearYears Ended June 30,
---------------------------------------------------------------------------------------------------------
1998 1997 1996
1995
--------------------------------------------------------------------- ---- ----
(In thousands)
Current:
FederalFederal............... $ 1,752,0003,178 $ 1,166,0001,752 $ 307,0001,166
State and local 693,000 569,000 454,000local....... 568 693 569
------- ------- -------
3,746 2,445 1,735
------- ------- -------
Deferred:
Federal............... 932 404 (776)
State and local....... 72 (414) 201
U.S. TerritoryTerritory........ - - 102,000
-----------------------------------------------------------------
2,445,000 1,735,000 863,000
-----------------------------------------------------------------
Deferred:
Federal 404,000 (776,000) 43,000
State and local (414,000) 201,000 (54,000)
U.S. Territory - 114,000 (2,000)
-----------------------------------------------------------------
(10,000) (461,000) (13,000)
-----------------------------------------------------------------114
------- ------- -------
1,004 (10) (461)
------- ------- -------
$ 2,435,0004,750 $ 1,274,0002,435 $ 850,000
=================================================================1,274
======= ======= =======
The provision for income taxes varies from the amount computed by applying
the U.S. Federal income tax rate to income (loss) from continuing operations
before income taxes as a
result of the following:
YearYears Ended June 30,
---------------------------------------------------------------------------------------------------
1998 1997 1996
1995
--------------------------------------------------------------------- ---- ----
(In thousands)
Tax at statutory raterate... $ 2,331,000 $(5,490,000)4,505 $ 2,529,0002,331 $(5,490)
Non-deductible special
charge (Note 2)........ - 7,888,000 - 7,888
Utilization of net
operating loss
carryforwardscarryforwards.......... - (1,437,000) (1,702,000)- (1,437)
State, local and U.S.
Territory income tax 184,000 376,000 392,000
Officers' life insurance
premiumstax... 416 184 376
Research and (proceeds) 59,000 21,000 (658,000)Development
credit................. (250) - -
Other, net (139,000) (84,000) 289,000
-------------------------------------------------------------------net.............. 79 (80) (63)
--------- -------- --------
$ 2,435,0004,750 $ 1,274,0002,435 $ 850,000
===================================================================1,274
========= ======== ========
S-16
Deferred tax assets and liabilities consist of:
June 30,
- ------------------------------------------------------------------------------------------------------------
1998 1997
1996
- ------------------------------------------------------------------------------------- ----
(In thousands)
Accounts receivablereceivable....................... $ 148,000106 $ 139,000
Inventories 1,676,000 1,604,000148
Inventories............................... 1,671 1,676
Accrued expenses 219,000 128,000
- ---------------------------------------------------------------------------------expenses.......................... 84 219
-------- --------
Current assets 2,043,000 1,871,000
- ---------------------------------------------------------------------------------assets.......................... 1,861 2,043
-------- --------
Other long-term liabilitiesliabilities............... 781 -
155,000
Unrealized capitalCapital loss 1,428,000 1,315,000carryforwards................ 2,493 2,684
Tax loss carryforwards 1,737,000 2,972,000carryforwards.................... 238 1,737
Tax credit carryforwards 3,477,000 2,449,000
Capital loss carryforwards 1,256,000 1,670,000carryforwards.................. 3,737 3,477
Less valuation allowance (3,569,000) (3,884,000)
- ---------------------------------------------------------------------------------allowance.................. (3,379) (3,569)
-------- --------
Non-current assets 4,329,000 4,677,000
- ---------------------------------------------------------------------------------assets...................... 3,870 4,329
-------- --------
Property, plant and equipment (955,000) (966,000)
Intangibles (3,654,000) (3,838,000)
Other (54,000) (45,000)
- ---------------------------------------------------------------------------------equipment............. (1,848) (955)
Intangibles............................... (3,125) (3,654)
Other..................................... (53) (54)
-------- --------
Long-term liabilities (4,663,000) (4,849,000)
- ---------------------------------------------------------------------------------liabilities................... (5,026) (4,663)
-------- --------
Net non-current assets (liabilities) (334,000) (172,000)
- ---------------------------------------------------------------------------------
Totalliabilities............. (1,156) (334)
-------- --------
Total................................. $ 1,709,000705 $ 1,699,000
=================================================================================1,709
======== ========
In accordance with SFAS No. 109, the Company records a valuation allowance
against deferred tax assets if it is more likely than not that some or all of
the deferred tax asset will not be realized.
The valuation allowance
decreased by $315,000 during fiscal 1997 primarily as a result of the
expiration of unused capital loss carryforwards. In connection with the
acquisition of MIC in 1996
S-16
(Note 2), the Company recorded approximately $3,800,000 of deferred tax
liabilities related to identifiable intangible assets which are not
deductible for tax purposes. Concurrently, the Company reduced its valuation
allowance against its deferred tax assets by the same amount to recognize
the net operating loss carryforwards that can offset these deferred tax
liabilities.
At June 30, 1997, the Company had net operating loss carryforwards of
approximately $4,000,000 for Federal income tax purposes which expire
through 2006.
For fiscal 1995 and prior years, the earnings of Aeroflex International,
Inc. (the Company's Puerto Rican subsidiary) were substantially exempt from
United States income taxes. These earnings were also partially exempt from
Puerto Rican income taxes. As a result of the consolidation of the Company's
Puerto Rican operations into its domestic facilities (Note 3), the Company
no longer has this partial exemption from income taxes.
The Company is undergoing routine audits by various taxing authorities of several of its
state and local income tax returns covering different periods from 19921994 to 1995.1996.
Management believes that the probable outcome of these various audits should
not materially affect the consolidated financial statements of the Company.
The Company made income tax payments of $2,123,000, $1,468,000 $588,000 and $1,004,000$588,000
and received refunds of $26,000, $1,117,000 $268,000 and $16,000$268,000 during the years
ended June 30, 1998, 1997 and 1996, respectively.
A tax benefit of $1,641,000 was credited to additional paid-in capital during
the year ended June 30, 1998 in connection with the exercise of stock options
and 1995, respectively.
13.warrants.
11. Employment Contracts and Life Insurance Proceeds
In February 1997, the Company entered into employment agreements, as amended,
with certain of its officers for periods through December 31, 2002 with
annual remuneration ranging from $180,000 to $275,000,$289,000, plus cost of living
adjustments and, in some cases, additional compensation based upon earnings
of the Company. Future aggregate minimum payments under these contracts are
$991,000$1,007,000 per year. In addition, these officers have the option to terminate
their employment agreements upon change in the present control of the Company, as
defined, and receive lump sum payments equal to three times annual
compensation, as defined, or, in one case, a lump sum payment equal to the
salary for the remainder of the term.
During fiscal 1995, the Company received $2,000,000 of insurance proceeds on
the death of the Company's former chairman.
14.S-17
12. Employee Benefit Plans
The Company had established an Employee Stock Ownership Plan ("the ESOP")
which covered substantially all employees not covered by collective
bargaining agreements and who met certain service requirements. The annual
contribution to the ESOP was determined by the Company's Board of Directors.
For the plan years ended December 31, 1995 and 1994 the Board of Directors
did not elect to make a contribution to the ESOP. During 1995, the Company
received a favorable determination letter from the Internal Revenue Service
for the termination of the ESOP and completed the formal termination of the
ESOP in December 1995.
The Aeroflex Incorporated Employees' 401(k) Plan ("the ARX(the "ARX 401(k)") was
established pursuant to Section 401(k) of the Internal Revenue Code. All
employees of the Company and certain subsidiaries who are not members of a
collective bargaining agreement may participate in the ARX 401(k). Each
participant has the option to contribute a portion of his or her
compensation. For each of the 1998, 1997 1996 and 19951996 calendar years, the Board
S-17
of Directors has elected to provide an employer contribution, which vests
immediately, equal to 30% of employee contributions subject to certain
limitations. The ARX 401(k) expense for the fiscal years ended June 30, 1998,
1997 and 1996 was $298,000, $263,000 and 1995 was $263,000, $230,000, and $219,000, respectively.
Employees of MIC Technology, who are excluded from the ARX 401(k), are
eligible to participate in the MIC 401(k) Plan and MIC Profit Sharing Plan
("the MIC(the "MIC Plans"). In addition to contributing a portion of his or her
compensation and receiving an employer contribution, eligible employees also
receive an allocation of a discretionary share of the MIC Technology profits.
The MIC Plans' expense was $512,000, $450,000 and $104,000 for the fiscal
yearyears ended June 30, 1998 and 1997 and for the period from acquisition to
June 30, 1996, respectively.
Effective January 1, 1994, the Company established a Supplemental Executive
Retirement Plan ("the SERP"(the "SERP") which provides retirement, death and disability
benefits to certain of its officers. The SERP expense for the fiscal years
ended June 30, 1998, 1997 and 1996 was $324,000, $300,000 and 1995 was $300,000, $217,000, and $347,000,
respectively. The assets of the SERP are held in a Rabbi Trust and amounted
to $386,000$744,000 and $234,000$386,000 at June 30, 19971998 and 1996,1997, respectively. The
accumulated benefit obligation was $1,259,000$1,695,000 and $843,000$1,259,000 at June 30, 19971998
and 1996,1997, respectively. No participants are currently receiving benefits.
15.13. Commitments and Contingencies
a. Operating Leases
Several of the Company's operating facilities and certain machinery and
equipment are leased under agreements expiring through 2007.2005. The leases for
machinery and equipment generally contain options to purchase at the then
fair market value of the related leased assets.
Future minimum payments under operating leases as of June 30, 19971998 are as
follows for the fiscal years:
(In thousands)
--------------
1998...............1999............... $ 1,662,0001,404
2000............... 1,118
2001............... 1,068,000
1999............... 1,188,0001,046
2002............... 994,000
2000............... 1,070,000808
2003............... 760
Thereafter......... 2,444,000
- --------------------------------------------------------------------------------
$8,426,000
================================================================================402
-------
$ 5,538
=======
These future minimum payments exclude payments under a lease of the Company's
Pearl River, New York facility which was terminated upon the Company's
purchase of the facility in July 1998 as further described in Note 15.
Rental expense was $1,869,000, $1,560,000 $790,000 and $837,000$790,000 during the fiscal
years 1998, 1997 and 1996, and 1995, respectively.
S-18
b. Legal Matters
A subsidiary of the Company whose operations were discontinued in 1991, is
one of several defendants named in a personal injury action initiated in
August, 1994, by a group of plaintiffs. The plaintiffs are seeking damages
which cumulatively may exceed $500 million. The complaint alleges, among other
things, that the plaintiffs suffered injuries from exposure to substances
contained in products sold by the subsidiary to one of its customers. This
action is in the early stages of discovery. Based upon available information
and considering its various defenses, together with its product liability
insurance, in the opinion of management of the Company the outcome of the
action against its subsidiary will not have a materially adverse effect on
the Company's consolidated financial statements.
The Company is involved in various other routine legal matters. Management
believes the outcome of these matters will not have a materially adverse
effect on the Company's consolidated financial statements.
S-18
16.14. Business Segments
The Company's business segments of continuing operations and major products included in each segment,
are as follows:
Microelectronics: Isolator Products:
a)Microelectronic Modules a)Commercial spring and rubber isolators (VMC)
(Circuit Technology) b)Industrial spring and rubber isolators
b)Thin Film Interconnects (Korfund)
(MIC Technology) c)Military wire-rope isolators
(Aeroflex International)
Test, Measurement and
Other Electronics:
a)Instrument products
(Comstron and Lintek)
b)Motion Control Systems
- Scanning devices
- Motion Control Systems
- Stabilization and tracking
devices
- Magnetic devices
- Electronic control systemsS-19
The Company is a manufacturer of advanced technology systems and components
for commercial industry, government and defense contractors. Approximately
50%42%, 65%50% and 74%65% of the Company's sales for the fiscal years 1998, 1997 1996 and
1995,1996, respectively, were to agencies of the United States government or to
prime defense contractors or subcontractors of the United States government.
S-19
The only customers which constituted more than 10% of the Company's sales
during any year in the period presented were Lucent Technologies which
comprised 15.5% of sales in fiscal year 1998 and Lockheed Martin and Hughes
which comprised 13.3% and 11.7% of sales in fiscal year 1997, respectively.
YearYears Ended June 30,
- ------------------------------------------------------------------------------------
Business Segment Data:----------------------------------
1998 1997 1996
1995
- ---------------------------------------------------------------------------------------- ---- ----
(In thousands)
Business Segment Data:
Net sales:
MicroelectronicsMicroelectronics....................... $ 48,462,00074,263 $ 28,414,00048,462 $ 24,250,000
Electronics 28,144,000 30,109,000 31,357,00028,414
Test, Measurement and
Other Electronics.................... 25,685 28,144 30,109
Isolator Products 17,693,000 15,844,000 15,506,000
- ------------------------------------------------------------------------------------Products...................... 18,913 17,693 15,844
--------- --------- ---------
Net salessales............................ $ 94,299,000118,861 $ 74,367,00094,299 $ 71,113,000
====================================================================================74,367
========= ========= =========
Operating profitincome (loss):
MicroelectronicsMicroelectronics....................... $ 6,644,00014,147 $ 3,282,0006,644 $ 2,075,000
Electronics 2,762,000 4,830,000 6,028,0003,282
Test, Measurement and
Other Electronics.................... 996 2,762 4,830
Isolator Products 2,844,000 2,150,000 2,377,000Products...................... 3,063 2,844 2,150
General corporate expenses (2,514,000) (2,344,000) (2,661,000)
- ------------------------------------------------------------------------------------
9,736,000 7,918,000 7,819,000expenses............. (3,348) (2,514) (2,344)
--------- --------- ---------
14,858 9,736 7,918
Special Chargecharge (1) - (23,200,000) -
Restructuring costs (2)..................... - - (1,669,000)(23,200)
Interest expense (2,974,000) (1,939,000) (1,464,000)
Interest and otherexpense....................... (2,011) (2,974) (1,939)
Other income, 93,000 1,075,000 2,751,000
- ------------------------------------------------------------------------------------net...................... 309 93 1,075
--------- --------- ---------
Income (loss) from continuing
operations before income taxestaxes.... $ 6,855,000 $(16,146,000)13,156 $ 7,437,000
====================================================================================6,855 $(16,146)
========= ========= =========
Identifiable assets:
MicroelectronicsMicroelectronics....................... $ 37,741,00058,053 $ 35,445,00037,741 $ 14,430,000
Electronics 28,603,000 31,354,000 33,625,00035,445
Test, Measurement and
Other Electronics.................... 27,522 28,603 31,354
Isolator Products 9,700,000 9,752,000 10,159,000
Corporate 5,003,000 4,618,000 13,722,000
- ------------------------------------------------------------------------------------Products...................... 10,163 9,700 9,752
Corporate.............................. 28,363 5,003 4,618
--------- --------- ---------
Total assetsassets......................... $ 81,047,000124,101 $ 81,169,00081,047 $ 71,936,000
====================================================================================81,169
========= ========= =========
Capital expenditures:
MicroelectronicsMicroelectronics....................... $ 1,637,0008,792 $ 766,0001,637 $ 908,000
Electronics 996,000 597,000 1,440,000766
Test, Measurement and
Other Electronics.................... 848 996 597
Isolator Products 293,000 315,000 554,000
Corporate 5,000 9,000 17,000
- ------------------------------------------------------------------------------------Products...................... 970 293 315
Corporate.............................. 3 5 9
--------- --------- ---------
Total capital expendituresexpenditures........... $ 2,931,00010,613 $ 1,687,0002,931 $ 2,919,000
====================================================================================1,687
========= ========= =========
Depreciation and amortization
expense:
MicroelectronicsMicroelectronics....................... $ 2,230,0002,802 $ 996,0002,230 $ 691,000
Electronics 1,528,000 1,530,000 1,697,000996
Test, Measurement and
Other Electronics.................... 1,553 1,528 1,530
Isolator Products 532,000 535,000 717,000
Corporate 32,000 30,000 28,000
- ------------------------------------------------------------------------------------Products...................... 500 532 535
Corporate.............................. 29 32 30
--------- --------- ---------
Total depreciation and
amortizationamortization........................ $ 4,322,0004,884 $ 3,091,0004,322 $ 3,133,000
====================================================================================3,091
========= ========= =========
(1) The special charge for the write-off of in-process research and development
acquired in the purchase of MIC Technology is allocable fully to the
microelectronics segment.
(2) Approximately 35% and 65% of the restructuring charge is allocable to
the electronics and isolator products segments, respectively.
S-20
17.15. Subsequent Events
(a) Effectivea. Purchase of MIC's Pearl River Facility
In July 1, 1997,1998, the Company purchased a previously leased operating facility in
Pearl River, New York for $2,500,000 in cash.
b. Shareholders' Rights Plan
On August 13, 1998, the Company's subsidiary, MIC, acquired certain
equipment, inventory, licensesBoard of Directors approved a Shareholders'
Rights Plan which provides for technology and patentsa dividend distribution of twoone right for each
share to holders of Lucent
Technologies' telecommunications component units - multi chip modules and
film integrated circuits - for approximately $4,400,000 in cash. These units
manufacture interconnect products for the communications industry. The
Company has also signed a multi-year supply agreement to provide Lucent with
film integrated circuits.
(b) On September 8, 1997, the Company called for the redemption of all of
its outstanding 7-1/2% Senior Subordinated Convertible Debentures at 104-
1/2%record of the principal amount.Company's common stock on August 31, 1998 and
the issuance of one right for each share of common stock that shall be
subsequently issued. The Debentures are convertible intorights will become exercisable only in the event a
person or group ("Acquiring Person") accumulates 15% or more of the Company's
Commoncommon stock, or if an Acquiring Person announces an offer which would result
in it owning 15% or more of the common stock. The rights will expire on August
31, 2008. Each right will entitle the holder to buy one one-thousandth of a
share of Series A Junior Participating Preferred Stock, as amended, of the
Company at a price of $5-5/8 per share through October 6,
1997. Any outstanding Debentures on October 13, 1997$65. In addition, upon the occurrence of a merger or
other business combination, or the acquisition by an Acquiring Person of 50% or
more of the common stock, holders of the rights, other than the Acquiring
Person, will be redeemed.
S-20entitled to purchase either common stock of the Company or
common stock of the Acquiring Person at half their respective market value.
The Company will be entitled to redeem the rights for $.01 per right at any
time prior to a person becoming an Acquiring Person.
S-21
Quarterly Financial Data (Unaudited):
(In thousands except per share data and footnotes)data)
Quarter
----------------------------------------Year------------------------------------------ Year Ended
19971998 First Second Third Fourth June 30
- ------------------------------------------------------------------------------------ --------------------------------------------------------
Net Sales $ 23,885 $ 29,325 $ 31,221 $ 34,430 $118,861
Gross Profit 8,212 9,919 10,883 12,561 41,575
Net Income $ 1,152 $ 1,686 $ 2,057 $ 3,511 $ 8,406
======== ======== ======== ======== ========
Income Per Share:
Basic $ .09 $ .12 $ .14 $ .20 $ .57
====== ====== ====== ====== ======
Diluted $ .08 $ .11 $ .13 $ .19 $ .51
====== ====== ====== ====== ======
Quarter
------------------------------------------ Year Ended
1998 First Second Third Fourth June 30
---- ----------------------------------------------------
Net Sales $ 19,061 $ 22,914 $ 22,937 $ 29,387 $ 94,299
Gross Profit 6,278 7,257 7,759 9,896 31,190
Net Income $ 651 $ 893 $ 917 $ 1,959 $ 4,420
-------- -------- -------- -------- --------
Income Per Share:
Basic $ .05 $ .07 $ .07 $ .16 $ .36
======== ======== ======== ======== ========
Income Per Share:
PrimaryDiluted $ .05 $ .07 $ .07 $ .15 $ .34
======== ======== ======== ======== ========
Fully Diluted $ .05 $ .07 $ .07 $ .14 $ .33
======== ======== ======== ======== ========
Quarter
------------------------------------------ Year Ended
1996 First Second Third Fourth June 30
- ----------------------------------------------------------------------------------
Net Sales $ 13,149 $ 15,195 $ 15,956 $ 30,067 $ 74,367
Gross Profit 4,069 4,560 5,016 9,652 23,297
Net Income (Loss) (1)(2) $ 607 $ 998 $(22,084) $ 3,059 $(17,420)
======== ======== ======== ======== ========
Income (Loss) Per Share:
Primary (1)(2) $ .05 $ .08 $(1.85) $ .23 $(1.46)
======== ======== ======== ======== ========
Fully Diluted (2) $ .05 $ .08 (3) $ .21 (3)
======== ======== ========
(1) Includes $23,200,000 ($1.94 per share) for the year ended June 30, 1996 and
quarter ended March 31, 1996, for the write-off of in-process research and
development acquired in connection with the purchase of MIC Technology
Corporation.
(2) Includes a $437,000 net of tax, or $.04 per share, gain on the sale of
securities for the year ended June 30, 1996 and $339,000 net of tax, or $.02
primary and fully diluted, for the quarter ended June 30, 1996.
(3) As a result of the loss, all options, warrants and convertible debentures
are anti-dilutive.
Since per share information is computed independently for each quarter and the
full year, based on the respective average number of common and common
equivalent shares outstanding, the sum of the quarterly per share amounts does
not necessarily equal the per share amounts for each year.
S-21S-22
AEROFLEX INCORPORATED
---------------------
AND SUBSIDIARIES
----------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------(In thousands)
Column A Column B Column C Column D Column E
- ------- -------- -------- -------- --------
Additions
----------------------------------------------
Charged
Balance at Charged to to other Balance at
beginning costs and accounts Deductions end of
Description of period expenses - describe - describe period
- ----------- -------------------- ----------- -------- ----------- ---------- ---------- ---------- ----------
YEAR ENDED JUNE 30, 1997:
- ------------------------
YEAR ENDED JUNE 30, 1998:
Allowance for doubtful
accounts $ 354,000417 $ 72,00015 $ - $ 9,000(A)115 (A) $ 417,000
========== ========== ========== ========== ==========317
====== ====== ====== ====== ======
Reserve for inventory
obsolescence $4,260,000$4,055 $ 100,000150 $ - $ 305,000(B) $4,055,000
========== ========== ========== ========== ==========613 (B) $3,592
====== ====== ====== ====== ======
YEAR ENDED JUNE 30, 1997:
Allowance for doubtful
accounts $ 354 $ 72 $ - $ 9 (A) $ 417
====== ====== ====== ====== ======
Reserve for inventory
obsolescence $4,260 $ 100 $ - $ 305 (B) $4,055
====== ====== ====== ====== ======
YEAR ENDED JUNE 30, 1996:
- ------------------------
Allowance for doubtful
accounts $ 437,000437 $ (55,000)(55) $ - $ 28,000(A)28 (A) $ 354,000
========== ========== ========== ========== ==========354
====== ====== ====== ====== ======
Reserve for inventory
obsolescence $4,380,000$4,380 $ 497,000497 $ - $ 617,000(B) $4,260,000
========== ========== ========== ========== ==========
YEAR ENDED JUNE 30, 1995:617 (B $4,260
====== ====== ====== ====== ======
Note: (A) - ------------------------
Allowance for doubtful
accounts $ 434,000 $ 10,000 $Net write-offs of uncollectible amounts.
(B) - $ 7,000(A) $ 437,000
========== ========== ========== ========== ==========
Reserve for inventory
obsolescence $3,478,000 $ 968,000 $ - $ 66,000(B) $4,380,000
========== ========== ========== ========== ==========
Note: (A) - Net write-offsWrite-off of uncollectible amounts.
(B) - Write-off of inventory.
S-22S-23
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Aeroflex Incorporated:
We consent to incorporation by reference in the registration statements
(Nos. 33-75496, 33-88868, 33-88878, 333-42399 and 333-42405) on Form S-8 and
(Nos. 333-15339, 333-21803 and 333-46689) on Form S-3 of Aeroflex Incorporated
of our report dated August 13,1998, relating to the consolidated balance sheets
of Aeroflex Incorporated and subsidaries as of June 30, 1998 and 1997 and the
related consolidated statements of operations, stockholders' equity and cash
flows and related schedule for each of the years in the three-year period ended
June 30, 1998 which report appears in the June 30, 1998 annual report on Form
10-K of Aeroflex Incorporated.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Jericho, New York
September 25, 1998