AEROFLEX INCORPORATED
AND SUBSIDIARIES
FINANCIAL STATEMENTS FOR THE YEAR ENDED
JUNE 30, 2008
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I N D E X | | | |
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CONSOLIDATED FINANCIAL STATEMENTS: | | | |
| | | |
Report of Independent Registered Public Accounting Firm | | | F-2 | |
| | | | |
Consolidated financial statements: | | | | |
| | | | |
Balance sheets – June 30, 2008 (Successor) and 2007 (Predecessor) | | | F-3 | |
| | | | |
Statements of operations – | | | F-4 | |
Fiscal Years Ended June 30, 2007 and 2006 (Predecessor) | | | | |
Periods from July 1, 2007 to August 14, 2007 (Predecessor) | | | | |
and August 15, 2007 to June 30, 2008 (Successor) | | | | |
| | | | |
Statements of stockholder’s equity and comprehensive income (loss) - | | | F-5 | |
Fiscal Years Ended June 30, 2007 and 2006 (Predecessor) | | | | |
Periods from July 1, 2007 to August 14, 2007 (Predecessor) | | | | |
and August 15, 2007 to June 30, 2008 (Successor) | | | | |
| | | | |
Statements of cash flows – | | | F-6 | |
Fiscal Years Ended June 30, 2007 and 2006 (Predecessor) | | | | |
Periods from July 1, 2007 to August 14, 2007 (Predecessor) | | | | |
and August 15, 2007 to June 30, 2008 (Successor) | | | | |
| | | | |
Notes to the consolidated financial statements | | | F-7 – F-49 | |
| | | | |
Quarterly Financial Data (Unaudited) | | | F-50 | |
| | | | |
Schdule II-Valuation and Qualifying Accounts | | | F-51 | |
Report of Independent Registered Public Accounting Firm
The Board of Directors
Aeroflex Incorporated and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Aeroflex Incorporated and subsidiaries (the Company) as of June 30, 2008 (Successor Entity) and 2007 (Predecessor Entity), and the related consolidated statements of operations, stockholder’s equity and comprehensive income (loss), and cash flows for the periods from August 15, 2007 to June 30, 2008 (Successor Entity) and July 1, 2007 to August 14, 2007 (Predecessor Entity) and each of the years in the two year period ended June 30, 2007 (Predecessor Entity). In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, 2008 and 2007, and the results of their operations and their cash flows for the periods from August 15, 2007 to June 30, 2008 and July 1, 2007 to August 14, 2007 and each of the years in the two year period ended June 30, 2007, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related 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.
As discussed in note 12 to the consolidated financial statements, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109, effective July 1, 2007, as discussed in note 14 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, effective June 30, 2007, and as discussed in note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standard No. 123(R), Share-Based Payment, effective July 1, 2005, and the provisions of FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, effective June 30, 2006.
Aeroflex Incorporated
and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share data)
| | June 30, | | | June 30, | |
| | 2008 | | | 2007 | |
| | Successor Entity | | | Predecessor Entity | |
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 54,149 | | | $ | 13,000 | |
Marketable securities | | | - | | | | 9,500 | |
Accounts receivable, less allowance for doubtful | | | | | | | | |
accounts of $2,683 and $1,589 | | | 147,983 | | | | 139,041 | |
Inventories | | | 134,891 | | | | 139,857 | |
Deferred income taxes | | | 27,039 | | | | 16,520 | |
Assets of discontinued operations | | | - | | | | 6,394 | |
Prepaid expenses and other current assets | | | 12,184 | | | | 11,104 | |
Total current assets | | | 376,246 | | | | 335,416 | |
| | | | | | | | |
Property, plant and equipment, net | | | 104,649 | | | | 81,412 | |
Deferred income taxes | | | - | | | | 12,689 | |
Non-current marketable securities | | | 19,960 | | | | - | |
Deferred financing costs, net | | | 30,185 | | | | 36 | |
Other assets | | | 18,560 | | | | 16,107 | |
Intangible assets with definite lives, net | | | 344,866 | | | | 46,774 | |
Intangible assets with indefinite lives | | | 123,378 | | | | - | |
Goodwill | | | 461,155 | | | | 181,962 | |
| | | | | | | | |
Total assets | | $ | 1,478,999 | | | $ | 674,396 | |
| | | | | | | | |
Liabilities and Stockholder's Equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Current portion of long-term debt | | $ | 5,574 | | | $ | 2,164 | |
Accounts payable | | | 39,382 | | | | 38,277 | |
Advance payments by customers and deferred revenue | | | 27,144 | | | | 20,272 | |
Income taxes payable | | | 1,936 | | | | 7,612 | |
Liabilities of discontinued operations | | | - | | | | 2,394 | |
Accrued payroll expenses | | | 24,525 | | | | 21,092 | |
Accrued expenses and other current liabilities | | | 56,830 | | | | 42,002 | |
Total current liabilities | | | 155,391 | | | | 133,813 | |
| | | | | | | | |
Long-term debt | | | 873,237 | | | | 1,419 | |
Deferred income taxes | | | 159,457 | | | | - | |
Defined benefit plan obligations | | | 6,263 | | | | 17,528 | |
Other long-term liabilities | | | 8,003 | | | | 10,939 | |
Total liabilities | | | 1,202,351 | | | | 163,699 | |
| | | | | | | | |
Stockholder's equity: | | | | | | | | |
Predecessor preferred stock, par value $.10 per share; authorized 1,000,000 shares | | | | | | | | |
Series A Junior Participating Preferred Stock, par value | | | | | | | | |
$.10 per share, authorized 110,000 shares; none issued | | | - | | | | - | |
Predecessor common stock, par value $.10 per share; authorized 110,000,000 | | | | | | | | |
shares; issued and outstanding 75,194,000 shares | | | - | | | | 7,519 | |
Successor common stock, par value $.10 per share; authorized 1,000 | | | | | | | | |
shares; issued and outstanding 1,000 shares | | | - | | | | - | |
Additional paid-in capital | | | 381,666 | | | | 388,801 | |
Accumulated other comprehensive income (loss) | | | 407 | | | | 27,646 | |
Retained earnings (deficit) | | | (105,425 | ) | | | 86,731 | |
Total stockholder's equity | | | 276,648 | | | | 510,697 | |
| | | | | | | | |
Total liabilities and stockholder's equity | | $ | 1,478,999 | | | $ | 674,396 | |
See notes to consolidated financial statements
Aeroflex Incorporated and Subsidiaries
Consolidated Statements of Operations
(In thousands)
| | August 15, 2007 | | | July 1, 2007 | | | Year Ended | | | Year Ended | |
| | to June 30, | | | to August 14, | | | June 30, | | | June 30, | |
| | 2008 | | | 2007 | | | 2007 | | | 2006 | |
| | Successor Entity | | | Predecessor Entity | | | Predecessor Entity | | | Predecessor Entity | |
| | | | | | | | | | | | |
Net sales | | $ | 604,991 | | | $ | 38,221 | | | $ | 593,146 | | | $ | 546,243 | |
Cost of sales | | | 352,953 | | | | 22,861 | | | | 308,969 | | | | 284,312 | |
Gross profit | | | 252,038 | | | | 15,360 | | | | 284,177 | | | | 261,931 | |
| | | | | | | | | | | | | | | | |
Selling, general and administrative costs | | | 121,086 | | | | 19,031 | | | | 129,621 | | | | 122,871 | |
Research and development costs | | | 69,898 | | | | 12,178 | | | | 76,717 | | | | 72,055 | |
Amortization of acquired intangibles | | | 73,076 | | | | 1,692 | | | | 13,006 | | | | 13,778 | |
Acquired in-process research and development costs | | | 24,975 | | | | - | | | | - | | | | - | |
Company sale transaction expenses | | | 32,493 | | | | 3,717 | | | | 30,584 | | | | - | |
| | | 321,528 | | | | 36,618 | | | | 249,928 | | | | 208,704 | |
Operating income (loss) | | | (69,490 | ) | | | (21,258 | ) | | | 34,249 | | | | 53,227 | |
| | | | | | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | | | | | | |
Interest expense | | | (74,658 | ) | | | (275 | ) | | | (672 | ) | | | (608 | ) |
Other income (expense), net | | | 4,617 | | | | 294 | | | | 152 | | | | 1,669 | |
Total other income (expense) | | | (70,041 | ) | | | 19 | | | | (520 | ) | | | 1,061 | |
| | | | | | | | | | | | | | | | |
Income (loss) from continuing operations before income taxes | | | (139,531 | ) | | | (21,239 | ) | | | 33,729 | | | | 54,288 | |
Provision (benefit) for income taxes | | | (38,927 | ) | | | (6,831 | ) | | | 24,935 | | | | 20,540 | |
Income (loss) from continuing operations | | | (100,604 | ) | | | (14,408 | ) | | | 8,794 | | | | 33,748 | |
| | | | | | | | | | | | | | | | |
Income (loss) from discontinued operations, net of | | | | | | | | | | | | | | | | |
tax benefit | | | (4,821 | ) | | | (2,508 | ) | | | (3,868 | ) | | | (5,652 | ) |
| | | | | | | | | | | | | | | | |
Income (loss) before cumulative effect of a change in accounting | | | | | | | | | | | | | | | | |
principle | | | (105,425 | ) | | | (16,916 | ) | | | 4,926 | | | | 28,096 | |
| | | | | | | | | | | | | | | | |
Cumulative effect of a change in accounting principle, net | | | | | | | | | | | | | | | | |
of tax benefit of $490 | | | - | | | | - | | | | - | | | | (1,137 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (105,425 | ) | | $ | (16,916 | ) | | $ | 4,926 | | | $ | 26,959 | |
See notes to consolidated financial statements
Consolidated Statements of Stockholder's Equity
and Comprehensive Income (Loss)
(In thousands)
| | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | |
| | | | | | | | | | | Additional | | | Other Comp- | | | Retained | | | | | | | | | | |
| | | | | Common Stock | | | Paid-in | | | rehensive | | | Earnings | | | Treasury Stock | | | Comprehensive | |
| | Total | | | Shares | | | Par Value | | | Capital | | | Income(Loss) | | | (Deficit) | | | Shares | | | Cost | | | Income (Loss) | |
Predecessor Entity: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2005 | | $ | 443,980 | | | | 74,618 | | | $ | 7,462 | | | $ | 372,666 | | | $ | 9,020 | | | $ | 54,846 | | | | 4 | | | $ | (14 | ) | | | |
Stock issued upon exercise of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
stock options, including tax benefit | | | 5,913 | | | | 691 | | | | 69 | | | | 5,844 | | | | - | | | | - | | | | | | | | | | | | |
Share-based compensation | | | 6,772 | | | | - | | | | - | | | | 6,772 | | | | - | | | | - | | | | - | | | | - | | | | |
Stock repurchase and retirement | | | (402 | ) | | | (39 | ) | | | (4 | ) | | | (412 | ) | | | - | | | | - | | | | (4 | ) | | | 14 | | | | |
Other comprehensive income | | | 4,448 | | | | - | | | | - | | | | - | | | | 4,448 | | | | - | | | | - | | | | - | | | $ | 4,448 | |
Net income | | | 26,959 | | | | - | | | | - | | | | - | | | | - | | | | 26,959 | | | | - | | | | - | | | | 26,959 | |
Balance, June 30, 2006 | | | 487,670 | | | | 75,270 | | | | 7,527 | | | | 384,870 | | | | 13,468 | | | | 81,805 | | | | - | | | | - | | | $ | 31,407 | |
Stock issued upon exercise of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
stock options, including tax benefit | | | 17,031 | | | | 1,678 | | | | 168 | | | | 16,863 | | | | - | | | | - | | | | | | | | | | | | | |
Share-based compensation | | | 4,126 | | | | - | | | | - | | | | 4,126 | | | | - | | | | - | | | | - | | | | - | | | | | |
Stock repurchase and retirement | | | (17,234 | ) | | | (1,754 | ) | | | (176 | ) | | | (17,058 | ) | | | - | | | | - | | | | - | | | | - | | | | | |
Other comprehensive income | | | 14,906 | | | | - | | | | - | | | | - | | | | 14,906 | | | | - | | | | - | | | | - | | | $ | 14,906 | |
Net income | | | 4,926 | | | | - | | | | - | | | | - | | | | - | | | | 4,926 | | | | - | | | | - | | | | 4,926 | |
Adjustment related to adoption | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
of FASB Statement No. 158, net of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
tax (Note 14) | | | (728 | ) | | | - | | | | - | | | | - | | | | (728 | ) | | | - | | | | - | | | | - | | | | - | |
Balance, June 30, 2007 | | | 510,697 | | | | 75,194 | | | | 7,519 | | | | 388,801 | | | | 27,646 | | | | 86,731 | | | | - | | | | - | | | $ | 19,832 | |
Stock issued upon exercise of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
stock options, including tax benefit | | | 13,124 | | | | 51 | | | | 5 | | | | 13,119 | | | | - | | | | - | | | | | | | | | | | | | |
Share-based compensation | | | 214 | | | | - | | | | - | | | | 214 | | | | - | | | | - | | | | - | | | | - | | | | | |
Other comprehensive income | | | (497 | ) | | | - | | | | - | | | | - | | | | (497 | ) | | | - | | | | - | | | | - | | | $ | (497 | ) |
Net income (loss) - July 1, 2007 to | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
August 14, 2007 | | | (16,916 | ) | | | - | | | | - | | | | - | | | | - | | | | (16,916 | ) | | | - | | | | - | | | | (16,916 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjustments for the effects of the Merger | | | (506,622 | ) | | | (75,245 | ) | | | (7,524 | ) | | | (402,134 | ) | | | (27,149 | ) | | | (69,815 | ) | | | - | | | | - | | | | | |
| | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | $ | (17,413 | ) |
Successor Entity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from issuance of common stock | | | 378,350 | | | | 1 | | | | - | | | | 378,350 | | | | - | | | | - | | | | - | | | | - | | | | | |
Share-based compensation | | | 3,123 | | | | - | | | | - | | | | 3,123 | | | | - | | | | - | | | | - | | | | - | | | | | |
Accretion of interest on equity classified | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
award | | | 193 | | | | - | | | | - | | | | 193 | | | | - | | | | - | | | | - | | | | - | | | | | |
Other comprehensive income | | | 407 | | | | - | | | | - | | | | - | | | | 407 | | | | - | | | | - | | | | - | | | $ | 407 | |
Net income (loss) - August 15, 2007 to | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2008 | | | (105,425 | ) | | | - | | | | - | | | | - | | | | - | | | | (105,425 | ) | | | - | | | | - | | | | (105,425 | ) |
Balance, June 30, 2008 | | $ | 276,648 | | | | 1 | | | $ | - | | | $ | 381,666 | | | $ | 407 | | | $ | (105,425 | ) | | | - | | | $ | - | | | $ | (105,018 | ) |
See notes to consolidated financial statements
Aeroflex Incorporated
and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
| | August 15, 2007 | | | July 1, 2007 | | | Year | | | Year | |
| | to June 30, | | | to August 14, | | | Ended June 30, | | | Ended June 30, | |
| | 2008 | | | 2007 | | | 2007 | | | 2006 | |
| | Successor Entity | | | Predecessor Entity | | | Predecessor Entity | | | Predecessor Entity | |
| | | | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income (loss) | | $ | (105,425 | ) | | $ | (16,916 | ) | | $ | 4,926 | | | $ | 26,959 | |
Cumulative effect of change in accounting principle, net of tax | | | - | | | | - | | | | - | | | | 1,137 | |
Loss from discontinued operations, net of tax | | | 4,821 | | | | 2,508 | | | | 3,868 | | | | 5,652 | |
Income (loss) from continuing operations | | | (100,604 | ) | | | (14,408 | ) | | | 8,794 | | | | 33,748 | |
Adjustments to reconcile income (loss) from continuing | | | | | | | | | | | | | | | | |
operations to net cash provided by (used in) | | | | | | | | | | | | | | | | |
operating activities: | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 93,032 | | | | 3,662 | | | | 30,142 | | | | 30,371 | |
Acquired in-process research and development costs | | | 24,975 | | | | - | | | | - | | | | - | |
Acquisition related adjustment to cost of sales | | | 38,968 | | | | - | | | | - | | | | - | |
Acquisition related adjustment to sales | | | 2,510 | | | | - | | | | - | | | | - | |
Deferred income taxes | | | (40,830 | ) | | | 5,284 | | | | (7,184 | ) | | | (11,904 | ) |
Non - cash share based compensation | | | 3,123 | | | | 214 | | | | 4,126 | | | | 6,653 | |
Non - cash restructuring charges | | | 485 | | | | - | | | | 753 | | | | - | |
Amortization of deferred financing costs | | | 3,514 | | | | - | | | | - | | | | - | |
Paid in kind interest | | | 11,340 | | | | - | | | | - | | | | - | |
Excess tax benefits from share based compensation arrangements | | | - | | | | (12,542 | ) | | | (2,870 | ) | | | (551 | ) |
Other, net | | | 1,422 | | | | (24 | ) | | | 106 | | | | 666 | |
Change in operating assets and liabilities, | | | | | | | | | | | | | | | | |
net of effects from purchases of businesses: | | | | | | | | | | | | | | | | |
Decrease (increase) in accounts receivable | | | (56,051 | ) | | | 47,889 | | | | (19,902 | ) | | | (23,911 | ) |
Decrease (increase) in inventories | | | 13,509 | | | | (12,885 | ) | | | (7,878 | ) | | | (9,047 | ) |
Decrease (increase) in prepaid expenses | | | | | | | | | | | | | | | | |
and other assets | | | 23,677 | | | | (26,682 | ) | | | (760 | ) | | | 496 | |
Increase (decrease) in accounts payable, accrued | | | | | | | | | | | | | | | | |
expenses and other liabilities | | | (4,874 | ) | | | 21,246 | | | | 17,152 | | | | 14,770 | |
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) continuing operations | | | 14,196 | | | | 11,754 | | | | 22,479 | | | | 41,291 | |
Net cash provided by (used in) discontinued | | | | | | | | | | | | | | | | |
operations | | | (5,286 | ) | | | (461 | ) | | | (1,677 | ) | | | (4,594 | ) |
Net cash provided by (used in) operating activities | | | 8,910 | | | | 11,293 | | | | 20,802 | | | | 36,697 | |
| | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | |
Acquisition of predecessor entity, net of cash acquired | | | (1,118,293 | ) | | | - | | | | - | | | | - | |
Payment for purchase of businesses, net of cash acquired | | | (11,145 | ) | | | - | | | | (10,663 | ) | | | - | |
Contingent payment for purchase of business | | | - | | | | - | | | | (9,247 | ) | | | - | |
Capital expenditures | | | (13,179 | ) | | | (1,088 | ) | | | (18,427 | ) | | | (15,365 | ) |
Proceeds from the sale of property, plant and equipment | | | 229 | | | | - | | | | 480 | | | | 116 | |
Purchase of marketable securities | | | (631,805 | ) | | | (53,828 | ) | | | (589,577 | ) | | | (348,545 | ) |
Proceeds from sale of marketable securities | | | 611,853 | | | | 63,328 | | | | 608,409 | | | | 320,213 | |
Preacquisition tax refund received | | | - | | | | - | | | | - | | | | 1,232 | |
Other, net | | | - | | | | - | | | | - | | | | (77 | ) |
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities of continuing operations | | | (1,162,340 | ) | | | 8,412 | | | | (19,025 | ) | | | (42,426 | ) |
Net cash provided by (used in) discontinued operations | | | (36 | ) | | | (6 | ) | | | (88 | ) | | | (127 | ) |
Net cash provided by (used in) investing activities | | | (1,162,376 | ) | | | 8,406 | | | | (19,113 | ) | | | (42,553 | ) |
| | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Proceeds from issuance of common stock | | | 378,350 | | | | - | | | | - | | | | - | |
Purchase and retirement of treasury stock | | | - | | | | - | | | | (17,234 | ) | | | (402 | ) |
Borrowings under debt agreements | | | 870,000 | | | | - | | | | - | | | | - | |
Debt repayments | | | (6,083 | ) | | | (29 | ) | | | (611 | ) | | | (658 | ) |
Debt financing costs | | | (33,222 | ) | | | (477 | ) | | | - | | | | (308 | ) |
Excess tax benefits from share based compensation arrangements | | | - | | | | 12,542 | | | | 2,870 | | | | 551 | |
Proceeds from the exercise of stock options and warrants | | | - | | | | 583 | | | | 14,182 | | | | 4,565 | |
Amounts paid for withholding taxes on stock option exercises | | | (14,142 | ) | | | (56 | ) | | | (3,383 | ) | | | (1,062 | ) |
Withholding taxes collected for stock option exercises | | | 14,142 | | | | 56 | | | | 3,383 | | | | 1,062 | |
Net cash provided by (used in) financing activities of continuing operations | | | 1,209,045 | | | | 12,619 | | | | (793 | ) | | | 3,748 | |
Effect of exchange rate changes on cash | | | | | | | | | | | | | | | | |
and cash equivalents | | | (1,430 | ) | | | 178 | | | | 1,717 | | | | (479 | ) |
| | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 54,149 | | | | 32,496 | | | | 2,613 | | | | (2,587 | ) |
Cash and cash equivalents at beginning of period | | | - | | | | 13,000 | | | | 10,387 | | | | 12,974 | |
Cash and cash equivalents at end of period | | $ | 54,149 | | | $ | 45,496 | | | $ | 13,000 | | | $ | 10,387 | |
See notes to consolidated financial statements
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Principles and Policies
The Company and its Sale
Aeroflex Incorporated and its subsidiaries (the “Company,” “we” or “our”) design, engineer and manufacture microelectronics and test solution and measurement equipment that are sold primarily to the broadband communications, aerospace and defense markets. Our fiscal year ends on June 30.
On August 15, 2007, the Company was sold to affiliates of or funds managed by The Veritas Capital Fund Ill, L.P. (“Veritas”), Golden Gate Private Equity, Inc. (“Golden Gate”) and GS Direct, L.L.C. (“GS Direct”) and certain members of management (“the Merger”) (see Note 3).
Presentation and Use of Estimates
Our financial statements are prepared in conformity with U.S. GAAP. They consolidate our subsidiaries, all of which, except for Test Evolution Corporation (see Note 4) are wholly owned. All significant intercompany balances and transactions have been eliminated.
The consolidated financial statements presented as of June 30, 2008 and for the period from August 15, 2007 to June 30, 2008 represent the Company subsequent to its acquisition (the “Successor” or “Successor Entity”), whereas the consolidated financial statements as of June 30, 2007 and for the fiscal years ended June 30, 2007 and 2006 and the period from July 1, 2007 to August 14, 2007 represent the Company prior to the Merger (the “Predecessor” or “Predecessor Entity”). The purchase method of accounting was applied effective August 15, 2007 in connection with the Merger. Therefore, our consolidated financial statements for periods before August 15, 2007 are presented on a different basis than those for the periods after August 14, 2007 and, as such, are not comparable.
The preparation of financial statements and related disclosures in conformity with U.S. GAAP 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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among the more significant estimates included in our consolidated financial statements are revenue and cost recognition under long-term contracts; the valuation of accounts receivable, inventories, investments and deferred tax assets; the depreciable lives of fixed assets and useful lives of amortizable intangible assets; the valuation of assets acquired and liabilities assumed in business combinations; the recoverability of long-lived amortizable intangible assets and goodwill, as well as net assets of discontinued operations; share-based compensation; restructuring charges; asset retirement obligations and certain accrued expenses and contingencies.
The Company is subject to uncertainties such as the impact of future events, economic, environmental and political factors, and changes in the business climate; therefore, actual results may differ from those estimates. When no estimate in a given range is deemed to be better than any other when estimating contingent liabilities, the low end of the range is accrued. Accordingly, the accounting estimates in the preparation of our consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Changes in estimates are made when circumstances warrant them. Such changes and refinements in estimation methodologies are reflected in reported results of operations; if material, the effects of changes in estimates are disclosed in the notes to the consolidated financial statements.
Cash and Cash Equivalents
All highly liquid investments having maturities of three months or less at the date of acquisition are considered to be cash equivalents.
Marketable Securities
Marketable securities are classified as available-for-sale and are recorded at fair value with unrealized gains and losses, net of taxes, reported as a separate component of stockholder’s equity. Realized gains and losses and declines in market value judged to be other than temporary, of which there were none, for the three years ended June 30, 2008, are included in other income. Interest income and dividends are also included in other income.
At June 30, 2008, our marketable securities consisted primarily of $19.9 million of auction rate securities, whose carrying amount approximated their fair value. Auction rate securities represent long-term (generally maturities of ten years to thirty-five years from the date of issuance) variable rate bonds tied to short-term interest rates that are reset through an auction process, which occurs every seven to thirty-five days, and are classified as available for sale securities. All but one (with the one security having a carrying value of $1.9 million and a AA rating) of our auction rate securities retain a triple-A rating by at least one nationally recognized statistical rating organization. In addition, certain of our auction rate securities are backed by student loans whose principal and interest are federally guaranteed by the Family Federal Education Loan Program. To date, we have collected all interest payments on all our auction rate securities when due and expect to do so in the future.
At June 30, 2008, we concluded that the fair value of our auction rate securities would not be significantly different than the cost basis. However, given that there is currently no active secondary market for our investment in auction rate securities, the determination of fair value in the future could be negatively impacted by factors including, but not limited to:
| · | continuing illiquidity for an extended period of time; |
| · | lack of action by the issuers to establish different forms of financing to replace or redeem these securities; and |
| · | changes in the credit quality of the underlying securities. |
If fair values were to decrease below cost for a prolonged period of time, we would consider various factors in determining whether to recognize an other than temporary impairment charge, including the length of time and the extent to which the fair value has been below the cost basis, the current financial condition of the issuer and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
Auction rate securities are classified as non-current assets in the accompanying June 30, 2008 consolidated balance sheet. Marketable securities at June 30, 2007 of $9.5 million consisted of auction rate securities that equaled their fair value.
Inventories
Inventories, including amounts related to long-term contracts accounted for under percentage-of-completion accounting, are stated at the lower of cost (first-in, first-out) or market.
Financial Instruments and Derivatives
Foreign currency contracts are used to protect us from fluctuations in exchange rates. We enter into foreign currency contracts, which are not designated as hedges. Thus the change in fair value is included in income as it occurs, within other income (expense). As of June 30, 2008, we had $2.8 million of notional value foreign currency forward contracts maturing through September 2008. Notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the calculation of cash settlements under the contracts. The fair value of these contracts at June 30, 2008 and 2007 was insignificant.
Our interest rate swap derivatives are designated as cash flow hedges. As such, they are recorded on the balance sheet as assets or liabilities at their fair value, with changes in the fair value of such derivatives, net of taxes, recorded as a component of other comprehensive income. The fair value of the interest rate swap derivatives as of June 30, 2008 was an asset of $2.2 million ($1.4 million, net of taxes).
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, the selling price is fixed or determinable, and collectibility of the resulting receivable is reasonably assured.
For arrangements other than certain long-term contracts, revenue (including shipping and handling fees) is recognized when products are shipped and title has passed to the customer. If title does not pass until the product reaches the customer’s delivery site, then recognition of the revenue is deferred until that time. Certain of our sales are to distributors which have a right to return some portion of product within up to eighteen months of sale. We recognize revenue on these sales at the time of shipment to the distributor as the returns under these arrangements have been insignificant and can be reasonably estimated. A provision for such estimated returns is recorded at the time sales are recognized.
Long-term contracts are accounted for in accordance with SOP 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” We determine estimated contract profit rates and use the percentage-of-completion method to recognize revenues and associated costs as work progresses on certain long-term contracts. We measure the extent of progress toward completion generally based upon one of the following methods (based upon an assessment of which method most closely aligns to the underlying earnings process), (i) the units-of-delivery method, (ii) the cost-to-cost method, using the ratio of contract costs incurred as a percentage of total estimated costs at contract completion (based upon engineering and production estimates), or (iii) the achievement of contractual milestones. Provisions for anticipated losses or revisions in estimated profits on contracts-in-process are recorded in the period in which such anticipated losses or revisions become evident.
Revenue from sales of products where software is other than incidental to their performance, including related software support and maintenance contracts is recognized in accordance with SOP-97-2, “Software Revenue Recognition.” Accordingly, revenue for software is recognized when the software is delivered, if all of the above criteria for revenue recognition are met.
When a customer purchases software together with post contract support, we allocate a portion of the fee to the post contract support for its fair value based on the contractual renewal rate or the amount the support is sold for on a standalone basis. Post contract support fees are deferred in Advance Payments by Customers and Deferred Revenue and recognized as revenue ratably over the term of the related contract.
Acquisition Accounting
We use the purchase method to account for business combinations, whereby the total cost of an acquisition is allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the date of acquisition. The allocation of the purchase price is dependent upon certain valuations and other studies, which contain estimates and assumptions.
Long-Lived Assets
We test goodwill annually for impairment and whenever events or circumstances indicate impairment might have occurred. We evaluate the recoverability of goodwill using a two-step impairment test approach at the reporting unit level. In the first step, which is used to identify potential impairments, the overall fair value for the reporting unit is compared to its carrying amount including goodwill. If the fair value of a reporting unit is less than the carrying amount, a second step is performed which compares the implied fair value of the reporting unit’s goodwill to the carrying amount of the goodwill. The implied fair value for the goodwill is determined based on the difference between the fair value of the reporting unit and the fair value of its net identifiable assets. If the implied fair value of the goodwill is less than its carrying amount, the difference is recognized as an impairment.
Our amortizable intangible assets, which are comprised primarily of developed technology and customer related intangibles, are subject to amortization over periods ranging up to 11 years, principally on a straight-line basis. Property, plant and equipment are stated at cost. Depreciation of plant and equipment is provided over the estimated useful lives of the respective assets, principally on the straight-line basis. Leasehold improvements are amortized over the life of the lease, including anticipated renewals, or the estimated life of the asset, whichever is shorter.
We periodically review our depreciable and amortizable long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.
In the fourth quarter of fiscal 2006, we adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations – An Interpretation of FASB Statement No. 143.” FIN 47 clarified the terms of FASB Statement No. 143 and requires an entity to recognize a liability for a conditional asset retirement obligation if there is sufficient information to reasonably estimate its fair value. The adoption of FIN 47 resulted in the recognition of fixed assets and an asset retirement obligation liability for certain leased premises of $2.4 million each, accumulated depreciation of $1.6 million and an after tax charge of $1.1 million which is reflected as a cumulative effect of change in accounting principle in the fiscal 2006 statement of earnings.
Research and Development Costs
We charge all research and development costs to expense as incurred, except those of our software products for which costs incurred between the date of product technological feasibility and the date that the software is available for general release are capitalized. We use a working model of the software or a detailed program design to assess technological feasibility. We capitalized software development costs of $1.2 million, $0, $593,000 and $0, for the periods from August 15, 2007 to June 30, 2008, July 1, 2007 to August 14, 2007 and the fiscal years ended June 30, 2007 and 2006, respectively. Capitalized software development costs are amortized to cost of sales based on the higher of a) the percentage of revenue for units delivered to total anticipated revenue for the related product or b) on a straight-line basis. Capitalized software development costs of $1.2 million and $242,000 were included in other assets at June 30, 2008 and 2007, respectively.
Income Taxes
We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Share Based Compensation
The fair value of share based payments is recognized as an expense in the consolidated statements of operations over the related vesting periods. Share based compensation expense is based on the fair value of the portion of share based payment awards that is ultimately expected to vest and has therefore been reduced for estimated forfeitures at the time of the grant, with subsequent revisions for differences between actual and the estimated forfeiture rates.
Foreign Currency Translations
The financial statements of our foreign subsidiaries are measured in their local currency and then translated into U.S. dollars using the current rate method. Under the current rate method, assets and liabilities are translated using the exchange rate at the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing throughout the year.
Gains and losses resulting from the translation of financial statements of foreign subsidiaries are accumulated in other comprehensive income (loss) and presented as part of stockholder’s equity. Realized and unrealized foreign currency exchange gains (losses) from the settlement of foreign currency transactions are reflected in other income (expense) and amounted to $2.3 million, $193,000, $(1.3 million) and $(23,000) for the periods from August 15, 2007 to June 30, 2008 and July 1, 2007 to August 14, 2007 and the fiscal years ended June 30, 2007 and 2006, respectively.
Comprehensive Income
Comprehensive income consists of net income (loss) and equity adjustments relating to foreign currency translation, changes in fair value of certain derivatives and minimum pension liability and is presented in the Consolidated Statements of Stockholder’s Equity and Comprehensive Income.
Earnings (Loss) Per Share
We have not presented earnings (loss) per share data because all 1,000 shares of common stock outstanding at June 30, 2008 are held by one shareholder.
Recently Issued Accounting Pronouncements Not Yet Adopted
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” to clarify the definition of fair value, establish a framework for measuring fair value in GAAP and expand the disclosures about fair value measurements. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). SFAS 157 also stipulates that, as a market-based measurement, fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability, and establishes a fair value hierarchy that distinguishes between (a) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (b) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements.
In February 2008, the FASB issued FSP No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13.” This FSP amends SFAS No. 157 to exclude certain leasing transactions accounted for under previously existing accounting guidance. However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination, regardless of whether those assets and liabilities are related to leases.
SFAS No. 157 becomes effective for us in the beginning of fiscal 2009. We are currently evaluating the impact of the provisions of SFAS No. 157 on our consolidated financial statements. In February 2008, the FASB issued FSP No. FAS 157-2, “Effective Date for FASB Statement No. 157.” This FSP permits the delayed application of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, as defined in this FSP, except for those that are recognized or disclosed at fair value in the financial statements at least annually, until the beginning of our fiscal 2010.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” to permit all entities to elect, at specified election dates, to measure eligible financial instruments and certain other items at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in earnings as incurred. SFAS 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS 157. An entity is prohibited from retrospectively applying SFAS 159, unless it chooses early adoption. The Company is currently evaluating the impact, if any, that the provisions of SFAS 159 will have on its consolidated financial statements when it becomes effective for the fiscal year ending June 30, 2009.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS 141(R) replaces SFAS No. 141. SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for us for acquisitions consummated on or after July 1, 2009.
In December 2007, the FASB issued SFAS No, 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51.” SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact, if any, the provisions of SFAS 160 will have on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.” SFAS 161 requires companies to provide qualitative disclosures about their objectives and strategies for using derivative instruments, quantitative disclosures of the fair values and gains and losses of these derivative instruments in a tabular format, as well as more information about liquidity by requiring disclosure of a derivative contract’s credit-risk-related contingent features. SFAS 161 also requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. The Company is currently evaluating the disclosure requirements of SFAS 161. As this is a disclosure-only standard, there will be no impact on the Company’s consolidated financial statements as a result of its adoption. SFAS 161 becomes effective for our March 2009 interim consolidated financial statements.
In April 2008, the FASB issued FSP FAS No. 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” This FSP also adds certain disclosures to those already proscribed in SFAS No. 142. FSP 142-3 becomes effective for the annual and interim periods within the year, beginning in the Company’s fiscal 2010. The guidance for determining useful lives must be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements must be applied prospectively to all intangible assets recognized as of the effective date.
In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This FSP provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform with the provisions in this FSP. Early application of this FSP is prohibited. We have not issued any share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents.
2. Discontinued Operations
As a result of continued operating losses, in June 2007 our then board of directors approved a formal plan to divest our radar business (“Radar”) and to seek a strategic buyer. This business had previously been included in the Test Solutions segment.�� As a result of this decision, the operating results of Radar, net of taxes, had been classified in the consolidated statements of operations as discontinued operations for all periods presented and we recorded a $1.6 million ($1.0 million, net of tax) impairment charge in June 2007 based upon appraisals of the business performed by third parties, which resulted in the write-off of $771,000 of goodwill and $322,000 of equipment, with the balance reducing inventory. We recorded further losses on disposal of $3.7 million ($2.4 million, net of tax) in the predecessor period July 1, 2007 to August 14, 2007, to reflect the net assets of Radar at their net realizable value based on the May 15, 2008 sale of the business for $750,000. The sale agreement provided for additional contingent consideration, which is not included in the calculation of the loss on disposal as realization is not probable.
Net sales and income (loss) from discontinued operations (including impairment charges), which were solely related to Radar, were as follows:
| | | | | | | | Fiscal Year | | | Fiscal Year | |
| | August 15, 2007 to | | | July 1, 2007 to | | | Ended | | | Ended | |
| | June 30, 2008 | | | August 14, 2007 | | | June 30, 2007 | | | June 30, 2006 | |
| | Successor | | | Predecessor | | | Predecessor | | | Predecessor | |
| | (In thousands) | |
| | | | | | |
Net sales | | $ | 893 | | | $ | 120 | | | $ | 6,422 | | | $ | 6,918 | |
| | | | | | | | | | | | | | | | |
Income (loss) from discontinued | | | | | | | | | | | | | | | | |
operations before income taxes | | $ | (5,928 | ) | | $ | (3,861 | ) | | $ | (6,041 | ) | | $ | (8,971 | ) |
Income tax (benefit) | | | (1,107 | ) | | | (1,353 | ) | | | (2,173 | ) | | | (3,319 | ) |
Income (loss) from | | | | | | | | | | | | | | | | |
discontinued operations | | $ | (4,821 | ) | | $ | (2,508 | ) | | $ | (3,868 | ) | | $ | (5,652 | ) |
As of June 30, 2008 and 2007, the net assets of the discontinued operations consisted of the following:
| | June 30, | | | June 30, | |
| | 2008 | | | 2007 | |
| | (In thousands) | |
| | | | | | |
Accounts receivable | | $ | - | | | $ | 984 | |
Inventory | | | - | | | | 5,410 | |
Current assets | | | - | | | | 6,394 | |
Accounts payable | | | - | | | | 74 | |
Accrued expenses | | | - | | | | 2,320 | |
Current liabilities | | | - | | | | 2,394 | |
Net assets | | $ | - | | | $ | 4,000 | |
In March 2005, we sold the net assets of our shock and vibration control device manufacturing business (“VMC”). Under the terms of the sale agreements, we retained certain liabilities relating to adverse environmental conditions that existed at the premises occupied by VMC as of the date of sale. We recorded a liability for the estimated remediation costs related to adverse environmental conditions that existed at the VMC premises when it was sold. The accrued environmental liability at June 30, 2008 is $1.1 million, of which $322,000 is expected to be paid within one year.
3. Company Sale Transaction
On March 2, 2007, we entered into an agreement to be acquired by investment entities affiliated with General Atlantic LLC and Francisco Partners II, L.P. (“GA” and “Francisco”). The agreement contained a provision under which we were permitted to solicit alternative acquisition proposals from third parties through April 18, 2007. In the event we accepted a superior proposal received prior to April 19, 2007, a breakup fee of $15 million plus up to $7.5 million of expenses would be payable by the Company. On May 25, 2007, upon entering into the merger agreement described below, we provided a letter of termination to affiliates of GA and Francisco that the merger with them was terminated (“Terminated Merger”). In connection with such termination, we paid a $22.5 million breakup fee, as we determined that the acquisition proposal, that resulted in the merger agreement, constituted a superior proposal.
On June 4, 2007, an affiliate of GA and Francisco filed an action against us alleging, among other things, that we breached the terminated merger agreement by paying GA and Francisco a breakup fee of $22.5 million instead of $37.5 million (a $30.0 million termination fee plus reimbursement of $7.5 million in expenses) that GA and Francisco contended they were owed. We settled this action for $2.5 million in January 2008, which is reflected in the results of operations for the period July 1, 2007 to August 14, 2007.
On August 15, 2007, the Company was acquired by and merged with AX Acquisition Corp. (“AX Acquisition”), a wholly-owned subsidiary of AX Holding Corp. (the “Parent”), (the “Merger”). Upon consummation of the Merger, the Company became a wholly-owned subsidiary of Parent and each share of common stock of the Company then outstanding was converted into a right to receive $14.50 in cash. Therefore, on August 15, 2007 each holder of shares of our common stock no longer had any rights with respect to the shares, except for the right to receive the merger consideration. The merger agreement also provided that all of our stock options were cancelled and converted into the right to receive a cash payment equal to the number of shares of our common stock underlying the options multiplied by the amount, if any, by which $14.50 exceeded the exercise price of the option, without interest and less any applicable withholding taxes. The aggregate merger consideration paid to our shareholders and stock option holders was approximately $1.1 billion.
The Merger was funded by a $378.4 million equity investment in Parent by Veritas, Golden Gate and GS Direct (collectively, the “Sponsors”) and certain members of our management. In addition, primarily in order to finance the Merger, on August 15, 2007 the Company entered into a $575 million senior secured credit facility, which consisted of $525 million of term loans and a $50 million revolving credit facility, and two exchangeable senior unsecured credit facilities totaling $345 million (see Note 9).
Upon the closing of the Merger, we paid severance of approximately $6.7 million, $18.6 million of Merger transaction expenses, a $22 million advisory fee to the Sponsors or their affiliates and $18.3 million in financing costs.
Upon consummation of the Merger, we entered into a new employment agreement with one of our officers that, in addition to specified annual remuneration and bonuses, provided for a one-time bonus of $887,000 which was recorded as compensation expense in the period from August 15, 2007 to June 30, 2008, plus $3.7 million for a covenant not to compete which is being amortized over the seven year term, both of which were paid in January 2008.
At the closing of the Merger, we entered into an advisory agreement with the Sponsors or their designated affiliates under which the Sponsors will provide certain advisory services to us. We will pay an annual advisory fee in the aggregate amount of the greater of $2.2 million, or 1.8% of adjusted EBITDA for the prior fiscal year, as defined in the agreement, and transaction fees on all future financings and liquidity events. The advisory agreement has an initial term expiring on December 31, 2013 and will be automatically renewable for additional one year terms thereafter unless we or the Sponsors give notice of non-renewal.
In connection with the Merger and Terminated Merger, for the periods from August 15, 2007 to June 30, 2008 and July 1, 2007 to August 14, 2007 and the fiscal year ended June 30, 2007, we incurred company sale transaction and related expenses that we expensed as incurred of $32.5 million, $3.7 million and $30.6 million, respectively, consisting primarily of merger-related severance and other change of control related payments, a merger termination fee and the related lawsuit settlement charge and legal and other professional fees (“Company Sale Transaction expenses”).
Purchase Accounting
The Merger constituted a change in control of the Company. In accordance with GAAP, the Company recorded its assets and liabilities at fair value as of the date of the Merger, whereby the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Independent third-party appraisers were engaged to assist management and perform valuations of certain of the tangible and intangible assets acquired.
We allocated the purchase price, including the acquisition costs of approximately $22.9 million, based on the estimated fair value of the assets acquired and liabilities assumed as follows:
| | In thousands | |
| | | |
Current assets (excluding cash of $45.5 million) | | $ | 335,252 | |
Property, plant and equipment | | | 111,804 | |
Other assets | | | 16,537 | |
Developed technology | | | 195,500 | |
Customer related intangible assets | | | 211,582 | |
Other acquired intangible assets | | | 6,290 | |
Intangible assets with indefinite lives (tradenames) | | | 122,870 | |
Goodwill | | | 452,791 | |
In-process research and development | | | 24,340 | |
Total assets acquired | | | 1,476,966 | |
Current liabilities | | | (137,751 | ) |
Long-term liabilities | | | (220,922 | ) |
Total liabilities assumed | | | (358,673 | ) |
Net assets acquired | | $ | 1,118,293 | |
At the acquisition date, the acquired in-process research and development (IPR&D) was not considered to have reached technological feasibility and had no alternative future uses. Therefore, the fair value of the IPR&D of $24.3 million was expensed at the time of the acquisition in operating costs. The allocation to in-process research and development represents the estimated fair value of such incomplete research and development, at the acquisition date, based on future cash flows. As of the acquisition date, cash flows from these projects were expected to commence in fiscal year 2009. In determining the fair values of IPR&D, risk adjusted discount rates that ranged from 17% to 25% were applied to the projects’ cash flows, which have taken into account the respective projects’ completion percentage.
The unaudited pro forma results of operations presented below for the period from July 1, 2007 to August 14, 2007 and the fiscal year ended June 30, 2007 are presented as though the Merger had occurred on July 1, 2006, after giving effect to purchase accounting adjustments relating to depreciation and amortization of the revalued assets, interest expense associated with the new credit facilities and other acquisition-related adjustments in connection with the Merger and our acquisition of MicroMetrics (which was consummated on April 12, 2007) as if it occurred on July 1, 2006. The pro forma results of operations are not necessarily indicative of the combined results that would have occurred had the Merger and acquisition of MicroMetrics been consummated at July 1, 2006, nor are they necessarily indicative of future operating results.
| | Period from | | | | |
| | July 1, 2007 to | | | Fiscal Year Ended | |
| | August 14, 2007 | | | June 30, 2007 | |
| | (In thousands) | |
| | | | | | |
Net sales | | $ | 38,178 | | | $ | 598,241 | |
Net income (loss) | | $ | (27,554 | ) | | $ | (123,105 | ) |
4. Acquisition of Businesses and Intangible Assets
Racal Instruments Wireless Solutions Group
On July 31, 2003, we acquired the Racal Instruments Wireless Solutions Group (“RIWS”) for cash of $38 million and a deferred payment of up to $16.5 million in either cash or Aeroflex common stock, at our option, depending on RIWS achieving certain performance goals for the year ending July 31, 2004. In October 2006, a final determination of the deferred payment was made requiring us to pay $9.2 million, which we paid in cash and recorded as an increase to goodwill. We did not include this contingent consideration in any previously issued balance sheet as the payment of this consideration was not considered to be certain beyond a reasonable doubt.
MicroMetrics, Inc.
On April 12, 2007, we purchased the outstanding stock of MicroMetrics, Inc. (“MMI”) for $9.9 million of cash and repaid approximately $700,000 of MMI’s bank debt. MMI, located in New Hampshire, is a design and full service manufacturer of both standard and application specific RF/Microwave diodes and semiconductor devices. MMI strengthens our high-reliability, high-performance RF/Microwave product portfolio of semiconductor solutions.
We allocated the purchase price, including acquisition costs of approximately $72,000, based on the estimated fair value of the assets acquired and liabilities assumed as follows:
| | (In thousands) | |
Current assets (excluding cash of $9,000) | | $ | 3,250 | |
Property, plant and equipment | | | 1,147 | |
Tradenames | | | 70 | |
Customer related intangibles | | | 3,190 | |
Goodwill | | | 4,633 | |
Total assets acquired | | | 12,290 | |
Current liabilities | | | (1,619 | ) |
Long term debt | | | (8 | ) |
Total liabilities assumed | | | (1,627 | ) |
Net assets acquired | | $ | 10,663 | |
The customer related intangibles and tradenames are being amortized on a straight-line basis over a range of 1 to 9.5 years. The goodwill is deductible for tax purposes.
The operating results of MMI have been included in the consolidated statements of operations and the Microelectronics segment from the acquisition date. On a pro forma basis, had the MMI acquisition taken place as of the beginning of fiscal 2007, our results of operations would not have been materially affected.
Test Evolution Corporation
On October 1, 2007, we purchased 40% of the outstanding stock of Test Evolution Corporation (“TEC”) for $4.0 million ($2.0 million at closing and $2.0 million to be paid at a later date). TEC, located in Massachusetts, develops and manufactures digital, analog and RF semiconductor automated test equipment. We have determined that we have control of this company and have consolidated TEC’s assets and liabilities and results of operations, all of which were insignificant, into our financial statements commencing October 1, 2007. The non-controlling interest of 60% in each of the equity and operations of TEC are not material to our consolidated financial statements and have been included in other long-term liabilities and other income (expense), respectively. TEC is included in our ATS segment.
Gaisler Research AB
On June 30, 2008, we acquired the stock of Gaisler Research AB (“Gaisler”) for $12.7 million cash (net of $2.7 million cash acquired), plus up to another $15 million over the next three years provided specified EBITDA targets are achieved. Located in Sweden, Gaisler provides integrated circuit software products and services to European space system suppliers, plus other U.S., Japanese and Russian space agencies. Gaisler is included in our AMS segment.
We preliminarily allocated the purchase price, including acquisition costs of approximately $359,000, based on the estimated fair value of the assets acquired and liabilities assumed as follows:
| | In thousands | |
| | | |
Current assets (excluding cash of $2.7 million) | | $ | 987 | |
Property, plant and equipment | | | 62 | |
Developed technology | | | 2,920 | |
Customer related intangibles | | | 1,650 | |
Tradenames | | | 508 | |
Goodwill | | | 8,261 | |
In-process research and development | | | 635 | |
Total assets acquired | | | 15,023 | |
Current liabilities | | | (1,076 | ) |
Deferred taxes | | | (1,280 | ) |
Total liabilities assumed | | | (2,356 | ) |
Net assets acquired | | $ | 12,667 | |
As of June 30, 2008, we are in the process of completing our assessment of the fair value of certain assets and liabilities as of the date of acquisition which is expected to be finalized upon the receipt and completion of additional information and analysis during fiscal 2009.
The customer related intangibles and developed technology are being amortized on a straight-line basis over a range of 1 to 7 years.
On a pro forma basis, had the Gaisler acquisition taken place as of the beginning of fiscal 2007, our results of operations would not have been materially affected.
Intangible Assets with Definite Lives
The components of amortizable intangible assets are as follows:
| | June 30, 2008 | | | June 30, 2007 | |
| | (Successor) | | | (Predecessor) | |
| | (In thousands) | |
| | | | | | | | | | | | |
| | Gross | | | | | | Gross | | | | |
| | Carrying | | | Accumulated | | | Carrying | | | Accumulated | |
| | Amount | | | Amortization | | | Amount | | | Amortization | |
| | | | | | | | | | | | |
Developed technology | | $ | 198,420 | | | $ | 29,631 | | | $ | 87,931 | | | $ | 47,403 | |
Customer related intangibles | | | 213,232 | | | | 42,433 | | | | 12,161 | | | | 5,915 | |
Non-compete arrangements | | | 6,290 | | | | 1,012 | | | | - | | | | - | |
Total | | $ | 417,942 | | | $ | 73,076 | | | $ | 100,092 | | | $ | 53,318 | |
The aggregate amortization expense for amortizable intangible assets was $73.1 million, $1.7 million, $13.0 million and $13.8 million for the periods August 15, 2007 to June 30, 2008 and July 1, 2007 to August 14, 2007 and fiscal years ended June 30, 2007 and 2006, respectively.
The estimated aggregate amortization expense for each of the next five fiscal years ending June 30, is as follows:
| | (In thousands) | |
| | | |
2009 | | $ | 63,475 | |
2010 | | | 59,385 | |
2011 | | | 58,987 | |
2012 | | | 58,718 | |
2013 | | | 52,424 | |
Goodwill
The carrying amount of goodwill is as follows:
| | AMS | | | ATS | | | Total | |
| | (In thousands) | |
| | | | | | | | | |
Balance at July 1, 2006 (predecessor entity) | | $ | 46,688 | | | $ | 115,778 | | | $ | 162,466 | |
Acquisition of MicroMetrics | | | 4,633 | | | | - | | | | 4,633 | |
Final determination of RIWS acquisition earnout | | | | | | | | | | | | |
payment | | | - | | | | 9,247 | | | | 9,247 | |
Adjustment (1) | | | - | | | | (1,740 | ) | | | (1,740 | ) |
Impact of foreign currency translation | | | - | | | | 7,356 | | | | 7,356 | |
Balance at June 30, 2007 (predecessor entity) | | | 51,321 | | | | 130,641 | | | | 181,962 | |
Goodwill adjustment recorded in purchase | | | | | | | | | | | | |
accounting from allocation of purchase price (2) | | | 243,456 | | | | 27,373 | | | | 270,829 | |
Balance at August 15, 2007 (successor entity) | | | 294,777 | | | | 158,014 | | | | 452,791 | |
Acquisition of Test Evolution Corporation | | | - | | | | 1,868 | | | | 1,868 | |
Acquisition of Gaisler Research, AB | | | 8,261 | | | | - | | | | 8,261 | |
Impact of foreign currency translation | | | (268 | ) | | | (1,497 | ) | | | (1,765 | ) |
Balance at June 30, 2008 (successor entity) | | $ | 302,770 | | | $ | 158,385 | | | $ | 461,155 | |
(1) | These adjustments to goodwill are primarily the result of the tax adjustments pertaining to pre-acquisition tax periods related to the acquisitions of Aeroflex International Ltd. and RIWS. |
(2) | The predecessor entity goodwill has been written off in purchase accounting for the Merger. |
5. Restructuring Charges
In fiscal 2006, we initiated steps to consolidate our three Test Solutions businesses in the United Kingdom. Pursuant to the plan, our manufacturing operations were moved into one facility and we created a shared-services environment for all finance and administrative functions. In connection with this plan, approximately 40 employees were terminated and certain contract positions were eliminated. In fiscal 2006, we recorded charges of $3.2 million primarily for workforce reductions in all departments. During fiscal 2007, we recorded an additional charge of $100,000 for these workforce reductions. The workforce restructuring charges were allocated solely to general and administrative costs.
In fiscal 2007, we initiated and completed restructuring activity in the Wireless division of our Test Solutions businesses in the United Kingdom. Pursuant to the plan, 23 employees were terminated, resulting in $1.4 million of severance costs, and certain contract positions were eliminated. We also abandoned a leased facility and recorded a fixed asset impairment charge, which in the aggregate amounted to $1.3 million. During the fiscal year ended June 30, 2007, we recorded approximately $2.8 million in restructuring costs including the write-off of $753,000 of net fixed assets, all in research and development costs except for $35,000 allocated to selling, general and administrative costs, and all of which was paid as of June 30, 2007.
In fiscal 2008, we initiated additional actions to restructure our United Kingdom business units by further consolidating our manufacturing, research and development and selling, general and administrative activities. In addition, we initiated a restructuring in our Whippany, New Jersey, component manufacturing facility to address a slowdown in sales of its integrated products line. These actions resulted in the termination of approximately 120 employees, which resulted in restructuring costs, principally severance, for the periods from August 15, 2007 to June 30, 2008 and July 1, 2007 to August 14, 2007 of $6.5 million ($0.9 million in cost of sales, $2.1 million in selling, general and administrative costs and $3.9 million in research and development costs) and $3.8 million ($1.6 million in selling, general and administrative costs and $2.2 million in research and development costs), respectively. Substantially all of the workforce reduction costs were paid prior to June 30, 2008. Other restructuring charges include $2.6 million of accrued contractual commitments under operating leases for two facilities in the U.K. that we exited in May 2008, which will be paid through December 2010. In addition, approximately $485,000 of fixed asset impairment charges were recorded in selling, general and administrative costs in the fourth quarter of 2008 for the write-off of leasehold improvements in the abandoned facilities.
The following table sets forth the charges and payments related to the restructuring liability for the periods indicated:
| | | | | Year Ended June 30, 2008 | | | | | | | |
| | Balance | | | July 1, | | | August 15, | | | July 1, | | | August 15, | | | | | | Balance | |
| | June 30, | | | 2007 to | | | 2007 to | | | 2007 to | | | 2007 to | | | | | | June 30, | |
| | 2007 | | | August 14, | | | June 30, | | | August 14, | | | June 30, | | | Effect of | | | 2008 | |
| | Restructuring | | | 2007 | | | 2008 | | | 2007 | | | 2008 | | | foreign | | | Restructuring | |
| | Liability | | | Net Additions | | | Cash Payments | | | currency | | | Liability | |
| | | | | Predecessor | | | Successor | | | Predecessor | | | Successor | | | | | | | |
| | | | | | | | (In thousands) | | | | | | | | | | |
Work force | | | | | | | | | | | | | | | | | | | | | |
reduction | | $ | - | | | $ | 3,778 | | | $ | 3,270 | | | $ | (1,186 | ) | | $ | (5,850 | ) | | $ | - | | | $ | 12 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | | - | | | | - | | | | 3,230 | | | | - | | | | - | | | | 12 | | | | 3,242 | |
Total | | $ | - | | | $ | 3,778 | | | $ | 6,500 | | | $ | (1,186 | ) | | $ | (5,850 | ) | | $ | 12 | | | $ | 3,254 | |
| | Balance | | | | | | | | | | | | Balance | |
| | June 30, | | | | | | | | | | | | June 30, | |
| | 2006 | | | Year Ended June 30, 2007 | | | 2007 | |
| | | | | | | | | | | Effect of | | | | |
| | Restructuring | | | | | | | | | foreign | | | Restructuring | |
| | Liability | | | Net Additions | | | Cash Payments | | | currency | | | Liability | |
| | | | | (In thousands) | | | | |
Work force | | | | | | | | | | | | | | | |
reduction | | $ | 1,091 | | | $ | 1,488 | | | $ | (2,641 | ) | | $ | 62 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | |
Other | | | 100 | | | | 570 | | | | (670 | ) | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,191 | | | $ | 2,058 | | | $ | (3,311 | ) | | $ | 62 | | | $ | - | |
6. Inventories
Inventories consist of the following:
| | June 30, | | | June 30, | |
| | 2008 | | | 2007 | |
| | (In thousands) | |
| | | | | | |
Raw materials | | $ | 64,533 | | | $ | 65,006 | |
Work in process | | | 41,056 | | | | 50,485 | |
Finished goods | | | 29,302 | | | | 24,366 | |
| | $ | 134,891 | | | $ | 139,857 | |
7. Property, Plant and Equipment
Property, plant and equipment consists of the following:
| | June 30, | | Estimated |
| | 2008 | | | 2007 | | Useful Life |
| | (In thousands) | | In Years |
| | | | | | | |
Land | | $ | 17,120 | | | $ | 12,078 | | |
Buildings and leasehold improvements | | | 30,303 | | | | 34,629 | | 1 to 40 |
Machinery and equipment | | | 64,304 | | | | 120,877 | | 2 to 10 |
Furniture and fixtures | | | 12,925 | | | | 20,192 | | 1 to 10 |
Assets recorded under capital leases | | | 403 | | | | 6,110 | | 2 to 30 |
| | | 125,055 | | | | 193,886 | | |
Less accumulated depreciation and | | | | | | | | | |
amortization | | | 20,406 | | | | 112,474 | | |
| | $ | 104,649 | | | $ | 81,412 | | |
Depreciation expense on property, plant and equipment was $20.0 million for the period August 15, 2007 to June 30, 2008, $2.0 million for the period July 1, 2007 to August 14, 2007 and $17.0 million and $16.6 million for the years ended June 30, 2007 and 2006, respectively.
8. Product Warranty
We warrant our products against defects in design, materials and workmanship, generally for one year from their date of shipment. A provision for estimated future costs relating to these warranties is recorded when the related revenue is recognized and is included in cost of sales. Quarterly we analyze our warranty liability for reasonableness based on a 15-month history of warranty costs incurred, the nature of the products shipped subject to warranty and anticipated warranty trends.
Activity related to our product warranty liability was as follows:
| | | | | | | | Fiscal Year | |
| | August 15, 2007 to | | | July 1, 2007 to | | | Ended | |
| | June 30, 2008 | | | August 14, 2007 | | | June 30, 2007 | |
| | Successor | | | Predecessor | | | Predecessor | |
| | (In thousands) | |
| | | | | | | | | |
Balance at beginning of period | | $ | 3,002 | | | $ | 2,929 | | | $ | 2,536 | |
Provision for warranty obligations | | | 2,192 | | | | 469 | | | | 3,734 | |
Cost of warranty obligations | | | (2,259 | ) | | | (394 | ) | | | (3,405 | ) |
Foreign currency impact | | | 9 | | | | (2 | ) | | | 64 | |
Balance at end of period | | $ | 2,944 | | | $ | 3,002 | | | $ | 2,929 | |
9. Long Term Debt and Credit Agreements
On August 15, 2007, we entered into a $575 million senior secured credit facility, which consisted of $525 million of term loans and a $50 million revolving credit facility, and two exchangeable senior unsecured credit facilities totaling $345 million. Total long term debt, outstanding as of June 30, 2008 and 2007, consists of the following:
| | | June 30, 2008 | | | June 30, 2007 | |
| | | (In thousands) | |
| | | | | | | |
Revolving credit facility | (a) | | $ | - | | | $ | - | |
Senior secured B-1 term loan | (b) | | | 397,000 | | | | - | |
Senior secured B-2 term loan | (c) | | | 124,063 | | | | - | |
Total senior secured debt | | | | 521,063 | | | | - | |
Exchangeable senior unsecured loan | (d) | | | 225,000 | | | | - | |
Senior subordinated unsecured term loan | (e) | | | 131,340 | | | | - | |
Other | | | | 1,408 | | | | 3,583 | |
Total Debt | | | | 878,811 | | | | 3,583 | |
Less Current Maturities | | | | 5,574 | | | | 2,164 | |
Total Long Term Debt | | | $ | 873,237 | | | $ | 1,419 | |
The following is a summary of required principal repayments of long-term debt for the next five years and thereafter as of June 30, 2008:
Year ending June 30, | | (In thousands) | |
2009 | | $ | 5,574 | |
2010 | | | 5,590 | |
2011 | | | 5,610 | |
2012 | | | 5,635 | |
2013 | | | 5,250 | |
Thereafter | | | 851,152 | |
| | $ | 878,811 | |
| (a) | The revolving credit facility provides for borrowings of up to $50 million through August 15, 2013 at a rate based on the LIBOR rate (3 month period) plus 325 basis points (6.04% at June 30, 2008). The senior secured credit facility allows us to utilize up to $25 million of the revolving credit facility for letters of credit and up to $5 million for a swing loan. At June 30, 2008, there are no outstanding amounts or letters of credit issued against the facility. Any borrowings would be secured by substantially all of the Company’s assets. We are obligated to pay a 0.5% fee on any undrawn revolver commitments. |
| (b) | The B-1 term loan in the original amount of $400 million matures on August 15, 2014 and bears interest at a rate based on the LIBOR rate (3 month period) plus 325 basis points (5.94% at June 30, 2008). The B-1 term loan has scheduled quarterly repayments of $1 million that commenced December 31, 2007 and continue through June 30, 2014, with $373 million due on August 15, 2014. The borrowings are secured by substantially all of the Company’s assets, excluding those of our foreign subsidiaries. |
In October 2007, the Company entered into an interest rate swap agreement for the last $125 million of this loan, which expires November 15, 2010, effectively fixing the interest rate on this portion of the loan at 8.21% for that period. In April 2008, the Company entered into an interest rate swap agreement for an additional $250 million which expires February 15, 2011, effectively fixing the interest rate on this portion of the loan at 6.23%. After considering the swaps, the effective interest rate on the total amount outstanding under the B-1 term loan is 6.84% at June 30, 2008.
| (c) | The B-2 term loan in the original amount of $125 million matures on August 15, 2014 and bears interest at a rate based on the LIBOR rate (3 month period) plus 375 basis points (6.44% at June 30, 2008). The B-2 term loan has scheduled quarterly repayments of $312,500 that commenced December 31, 2007 and continue through June 30, 2014, with $116.6 million due on August 15, 2014. The borrowings are secured by substantially all of the Company’s assets, excluding those of our foreign subsidiaries. |
In April 2008, the Company entered into two additional interest rate swap agreements for $50 million expiring February 16, 2010 and February 15, 2011, effectively fixing the interest rate on the respective portions of the loan at 6.46% and 6.74%, respectively. After considering the swaps, the effective interest rate on the total amount outstanding for the B-2 term loan is 6.57% at June 30, 2008.
| (d) | On August 7, 2008, the 11.75% exchangeable senior unsecured loan in the amount of $225 million with an ultimate maturity on February 15, 2015 was refinanced with an unsecured senior note with the same interest rate and maturity date. We may prepay the senior notes commencing August 15, 2011 at 105.875% of the principal amount prepaid, which decreases to 102.938% on August 15, 2012 and to 100% on or after August 15, 2013. In addition, we may redeem up to 35% of the original aggregate principal balance of the senior notes, at any time prior to August 15, 2010, with the net proceeds of certain equity offerings at 111.75% of the principal amount redeemed. We have entered into an agreement to file an exchange offer registration statement with the SEC by February 3, 2009 to publicly register debt securities with similar terms to the senior notes and to use commercially reasonable efforts to have such registration statement declared effective on or prior to May 4, 2009. If we fail to timely file the registration statement or it is not timely declared effective, then we will pay special interest on the senior notes equal to 0.25% on the outstanding principal amount of the notes with respect to the first ninety days following the registration default event, which will increase by an additional 0.25% with respect to each subsequent ninety day period until all registration defaults have been cured, up to a maximum of 1%. |
| (e) | The senior subordinated unsecured term loan in the original amount of $120 million bears interest at 11.75% and matures on February 15, 2015. On September 21, 2007 we repaid an exchangeable senior subordinated unsecured loan with the proceeds from this term loan. Interest on the loan is payable entirely by adding such interest to the unpaid principal amount of the loan through August 15, 2010, which through June 30, 2008 amounted to $11.3 million. Subsequent to August 15, 2010 interest on the term loan is payable in cash. We may prepay the term loan commencing August 15, 2011 at 105.875% of the principal amount prepaid, which decreases to 102.9375% on August 15, 2012 and to 100% on or after August 15, 2013. |
The senior secured credit facility agreement provides that if the Company sells assets (with certain exceptions, including the sale of the Radar business) or issues new debt or equity securities to unrelated parties, the proceeds must be used to prepay term or revolving credit loans. If such a prepayment event occurs, or the term loans are voluntarily prepaid, prior to August 15, 2009, a prepayment premium of 1% must be paid on the amount of the B-2 term loans repaid. In addition, commencing October 1, 2008, to the extent we have consolidated excess cash flows, as defined in the senior secured credit agreement, we must use specified portions of the excess cash flows to prepay senior secured debt.
Financial covenants in the senior secured credit facility consist of a maximum leverage ratio of total debt (less up to $15 million of cash) to adjusted EBITDA, as defined in the agreement, and maximum consolidated capital expenditures. Additional covenants include restrictions on indebtedness, liens, investments, dividends, disposition of assets, acquisitions and transactions with shareholders and affiliates.
The senior unsecured loan agreements have similar terms to the senior secured credit facility regarding mandatory prepayment events and restrictive covenants and contain no financial covenants.
As of June 30, 2008, we are in compliance with all of the covenants contained in the above described loan agreements.
In connection with the credit facilities discussed above, we capitalized deferred financing costs of $33.2 million and $477,000 for the period August 15, 2007 to June 30, 2008 and July 1, 2007 to August 14, 2007, respectively, primarily consisting of facility, legal and advisory fees. We are amortizing these costs over the terms of the related facilities. For the period August 15, 2007 to June 30, 2008, we amortized $3.5 million to interest expense.
Interest paid was $53.9 million for the period August 15, 2007 to June 30, 2008, $57,000 for the period July 1, 2007 to August 14, 2007 and $674,000 and $597,000 for the years ended June 30, 2007 and 2006, respectively.
The fair value of our debt instruments are summarized as follows:
| | June 30, 2008 | |
| | Carrying | | | Estimated | |
| | Amount | | | Fair Value | |
| | (In thousands) | |
| | | | | | |
Senior secured B-1 term loan | | $ | 397,000 | | | $ | 376,158 | |
Senior secured B-2 term loan | | | 124,063 | | | | 114,758 | |
Exchangeable senior unsecured loan | | | 225,000 | | | | 200,250 | |
Senior subordinated unsecured term loan | | | 131,340 | | | | 111,639 | |
Other | | | 1,408 | | | | 1,408 | |
Total debt | | $ | 878,811 | | | $ | 804,213 | |
The carrying value of debt of $3.6 million as of June 30, 2007 approximated fair value.
The estimated fair values of each of our debt instruments are based on quoted market prices for the same or similar issues. Fair value estimates related to our debt instruments are made at a specific point in time based on relevant market information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
10. Stockholders’ Equity
Stock Repurchase Program
During fiscal 2005, our then Board of Directors authorized a stock repurchase program. During fiscal 2007 and 2006, a total of 1,753,838 and 35,000 shares, respectively, were repurchased for $17.2 million and $402,000, respectively, and retired.
Share Based Compensation
Stock Options
All of our stock option plans were terminated on August 15, 2007. The merger agreement provided that all stock options were cancelled and converted into the right to receive a cash payment equal to the number of shares of our common stock underlying the options multiplied by that amount, if any, by which $14.50 exceeded the exercise price, without interest and less any withholding taxes. On August 15, 2007 the Company paid $43.9 million to option holders to cancel all options outstanding in connection with the Merger.
Under our stock option plans that were in effect until August 15, 2007, the exercise period for all stock options did not exceed ten years from the date of grant. Stock option grants to individuals generally became exercisable in substantially equal tranches over a service period of up to five years and the exercise price was equal to the market value of the common stock at the grant date for all plans. We have elected to recognize compensation cost for an award with only service conditions that has a graded vesting schedule on a straight line basis over the requisite service period for the entire award.
Our stock option plans allowed employees to use shares received from the exercise of options only to satisfy the minimum tax withholding requirements. During fiscal years 2007 and 2006 no payroll taxes on stock option exercises were withheld from employees in shares of the Company’s common stock. In fiscal 2007, one employee tendered 55,951 previously owned common shares upon the exercise of options to pay for the exercise price.
The weighted average grant date fair value of stock options granted for the years ended June 30, 2007 and 2006 was $7.96 and $8.86, respectively. The total intrinsic value of stock options exercised for the years ended June 30, 2007 and 2006 was $9.0 million and $3.6 million, respectively.
The fair value of each share option award is estimated on the date of grant using the Black-Scholes option-pricing model based on the weighted average assumptions noted in the following table. Expected volatilities are based on historical volatility of our shares using daily price observations over a period consistent with the expected life. Forfeitures were estimated based on historical experience.
We used the Securities and Exchange Commission’s safe harbor guidance in SAB 107 (the average of the vesting period and the option term) to estimate the expected life of options granted during fiscal 2007 and 2006. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods similar to the expected life of the option.
| | Years Ended June 30, | |
| | 2007 | | | 2006 | |
| | | | | | |
Weighted average expected stock price volatility | | | 66 | % | | | 92 | % |
Weighted average expected option life | | 5.5 years | | | 6.1 years | |
Average risk free interest rate | | | 4.6 | % | | | 4.5 | % |
Average dividend yield | | | - | | | | - | |
Discount for post-vesting restrictions | | | N/A | | | | N/A | |
Member Interests
On August 15, 2007 certain members of our management were granted Class B member interests in a limited liability company (parent LLC) that is the ultimate parent of the Company, and which owns all of the common stock of the Parent. The parent LLC is a holding company with no operations or employees of its own. The parent LLC has two classes of membership interests. The Class A members include the Sponsors or their affiliates and Company employees that made equity investments to partially fund the Merger and Class B members consist of Company employees. Pursuant to the terms of the limited liability company operating agreement governing the parent LLC, the holders of Class B member interests are entitled to receive a percentage of all distributions, if any, made by the parent LLC after (x) the holders of the Class A members in the parent LLC have received a return of their invested capital, plus a 12% per annum internal rate of return (compounded annually) on their invested capital and (y) certain members of our management that received Class A interests for their capital contributions have received a special distribution in the aggregate amount of $3.2 million, together with a 12% per annum internal rate of return (compounded annually). The Class B member interests are non-transferable and vest ratably over five years, with any unvested interests reverting to the holders of Class A interests in the event they are forfeited or repurchased. In accordance with the provisions of SFAS No. 123(R), “Share-Based Payment” and FSP FAS No. 123(R)-4, “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event”, the Class B members interests are equity classified awards and, therefore, the $9.8 million fair value of the Class B members’ interests at the grant date is being recorded as compensation expense over the five year vesting period, which amounted to $1.7 million for the period August 15, 2007 to June 30, 2008. In addition, since the Class A employee members paid less than fair value for their Class A member interests, as only they are entitled to the $3.2 million special distribution and there is no vesting associated with the special distribution, the present value of the discount from fair value of $1.4 million was recorded by the Company as compensation expense on August 15, 2007. The accretion of $193,000 for the period August 15, 2007 to June 30, 2008 was recorded as interest expense.
Compensation expense attributable to share based compensation was $3.1 million ($2.0 million after tax) for the successor period August 15, 2007 to June 30, 2008, $214,000 ($135,000 after tax) for the predecessor period July 1, 2007 to August 14, 2007 and $4.1 million ($2.6 million after tax) and $6.8 million ($4.2 million after tax) for the fiscal years ended June 30, 2007 and 2006, respectively.
A summary of the changes to outstanding stock options from July 1, 2007 to August 15, 2007 is presented below:
| | | | | Weighted | |
| | | | | Average | |
| | | | | Exercise | |
| | Shares | | | Price | |
| | (In thousands) | | | | |
| | | | | | |
Outstanding at June 30, 2007 | | | 13,003 | | | $ | 12.37 | |
Granted | | | - | | | | - | |
Forfeited | | | (27 | ) | | | 19.30 | |
Expired | | | - | | | | - | |
Exercised | | | (51 | ) | | | 11.39 | |
Cancelled | | | (3,825 | ) | | | 18.74 | |
Paid out on Merger | | | (9,100 | ) | | | 9.68 | |
Outstanding at August 15, 2007 | | | - | | | | | |
As no stock options were granted from August 15, 2007 to June 30, 2008, there are also no stock options outstanding at June 30, 2008.
Cash received from stock option exercises was none for the successor period August 15, 2007 to June 30, 2008, $583,000 for the predecessor period July 1, 2007 to August 14, 2007 and $14.2 million and $4.6 million for the fiscal years ended June 30, 2007 and 2006, respectively. The tax benefit received from stock option exercises was $16.1 million for the successor period August 15, 2007 to June 30, 2008, $41,000 for the predecessor period July 1, 2007 to August 14, 2007 and $3.3 million and $1.3 million for the fiscal years ended June 30, 2007 and 2006, respectively.
11. Comprehensive Income
The components of comprehensive income (loss) are as follows:
| | | | | | | | Fiscal Year | | | Fiscal Year | |
| | August 15, 2007 to | | | July 1, 2007 to | | | Ended | | | Ended | |
| | June 30, 2008 | | | August 14, 2007 | | | June 30, 2007 | | | June 30, 2006 | |
| | Successor | | | Predecessor | | | Predecessor | | | Predecessor | |
| | (In thousands) | |
| | | | | | | | | | | | |
Net income (loss) | | $ | (105,425 | ) | | $ | (16,916 | ) | | $ | 4,926 | | | $ | 26,959 | |
Unrealized gain (loss) on interest rate | | | | | | | | | | | | | | | | |
swap agreements, net of tax provision | | | | | | | | | | | | | | | | |
(benefit) of $829, $0, $3 and $37 | | | 1,411 | | | | - | | | | 5 | | | | 63 | |
Minimum pension liability adjustment | | | | | | | | | | | | | | | | |
net of tax of $(4), $0, $(160) and $(349) | | | (6 | ) | | | - | | | | (267 | ) | | | (548 | ) |
Foreign currency translation adjustment | | | (998 | ) | | | (497 | ) | | | 15,168 | | | | 4,933 | |
Total comprehensive income (loss) | | $ | (105,018 | ) | | $ | (17,413 | ) | | $ | 19,832 | | | $ | 31,407 | |
Accumulated other comprehensive income (loss) is as follows:
| | Unrealized | | | | | | | | | | |
| | Gain (Loss) | | | Minimum | | | | | | | |
| | on Interest | | | Pension | | | Foreign | | | | |
| | Rate Swap | | | Liability | | | Currency | | | | |
| | Agreements | | | Adjustment | | | Translation | | | Total | |
| | (net of tax) | | | (net of tax) | | | Adjustment | | | (net of tax) | |
| | | | | (In thousands) | | | | |
| | | | | | | | | | | | |
Balance, June 30, 2005 | | $ | (75 | ) | | $ | (3,632 | ) | | $ | 12,727 | | | $ | 9,020 | |
Annual change | | | 63 | | | | (548 | ) | | | 4,933 | | | | 4,448 | |
Balance June 30, 2006 | | | (12 | ) | | | (4,180 | ) | | | 17,660 | | | | 13,468 | |
Annual change | | | 5 | | | | (267 | ) | | | 15,168 | | | | 14,906 | |
Adjustment related to | | | | | | | | | | | | | | | | |
initial adoption of SFAS 158 | | | - | | | | (728 | ) | | | - | | | | (728 | ) |
Balance, June 30, 2007 | | | (7 | ) | | | (5,175 | ) | | | 32,828 | | | | 27,646 | |
Predecessor period | | | - | | | | - | | | | (497 | ) | | | (497 | ) |
Adjustments for the effect | | | | | | | | | | | | | | | | |
of the Merger | | | 7 | | | | 5,175 | | | | (32,331 | ) | | | (27,149 | ) |
| | | - | | | | - | | | | - | | | | - | |
Successor period | | | 1,411 | | | | (6 | ) | | | (998 | ) | | | 407 | |
Balance, June 30, 2008 | | $ | 1,411 | | | $ | (6 | ) | | $ | (998 | ) | | $ | 407 | |
The foreign currency translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries.
12. Income Taxes
The amount of income (loss) from continuing operations before income taxes attributable to domestic and foreign operations are as follows:
| | | | | | | | Fiscal Year | | | Fiscal Year | |
| | August 15, 2007 to | | | July 1, 2007 to | | | Ended | | | Ended | |
| | June 30, 2008 | | | August 14, 2007 | | | June 30, 2007 | | | June 30, 2006 | |
| | Successor | | | Predecessor | | | Predecessor | | | Predecessor | |
| | (In thousands) | |
| | | | | | | | | | | | |
Domestic | | $ | (134,861 | ) | | $ | (10,199 | ) | | $ | 41,710 | | | $ | 59,898 | |
| | | | | | | | | | | | | | | | |
Foreign | | | (4,670 | ) | | | (11,040 | ) | | | (7,981 | ) | | | (5,610 | ) |
| | $ | (139,531 | ) | | $ | (21,239 | ) | | $ | 33,729 | | | $ | 54,288 | |
The provision (benefit) for income taxes from continuing operations consists of the following:
| | | | | | | | Fiscal Year | | | Fiscal Year | |
| | August 15, 2007 to | | | July 1, 2007 to | | | Ended | | | Ended | |
| | June 30, 2008 | | | August 14, 2007 | | | June 30, 2007 | | | June 30, 2006 | |
| | Successor | | | Predecessor | | | Predecessor | | | Predecessor | |
| | (In thousands) | |
| | | | | | | | | | | | |
Current: | | | | | | | | | | | | |
Federal | | $ | 2,024 | | | $ | (12,245 | ) | | $ | 28,800 | | | $ | 28,003 | |
State and local | | | - | | | | - | | | | 2,973 | | | | 3,075 | |
Foreign | | | (121 | ) | | | 130 | | | | 346 | | | | 1,366 | |
| | | 1,903 | | | | (12,115 | ) | | | 32,119 | | | | 32,444 | |
| | | | | | | | | | | | | | | | |
Deferred: | | | | | | | | | | | | | | | | |
Federal | | | (40,355 | ) | | | 9,503 | | | | (4,356 | ) | | | (7,635 | ) |
State and local | | | (1,783 | ) | | | (1,256 | ) | | | (48 | ) | | | 105 | |
Foreign | | | 1,308 | | | | (2,963 | ) | | | (2,780 | ) | | | (4,374 | ) |
| | | (40,830 | ) | | | 5,284 | | | | (7,184 | ) | | | (11,904 | ) |
| | $ | (38,927 | ) | | $ | (6,831 | ) | | $ | 24,935 | | | $ | 20,540 | |
The provision for income taxes varies from the amount computed by applying the U.S. Federal income tax rate to income from continuing operations before income taxes as a result of the following:
| | August 15, 2007 to | | | July 1, 2007 to | | | Fiscal Year Ended | | | Fiscal Year Ended | |
| | June 30 2008 | | | August 14, 2007 | | | June 30, 2007 | | | June 30, 2006 | |
| | Successor | | | Predecessor | | | Predecessor | | | Predecessor | |
| | (In thousands) | |
| | | | | | | | | | | | |
Tax at federal statutory rate | | $ | (48,836 | ) | | $ | (7,434 | ) | | $ | 11,805 | | | $ | 19,001 | |
| | | | | | | | | | | | | | | | |
Non-deductible acquired in-process research | | | | | | | | | | | | | | | | |
and development charge | | | 8,744 | | | | - | | | | - | | | | - | |
Undistributed earnings of foreign subsidiaries | | | (1,265 | ) | | | (184 | ) | | | (1,342 | ) | | | (1,306 | ) |
Increase in valuation allowance | | | 5,420 | | | | 237 | | | | 2,772 | | | | 546 | |
State and local income taxes, net of federal benefit | | | (1,783 | ) | | | (1,256 | ) | | | 1,951 | | | | 2,105 | |
Domestic manufacturing credit | | | (210 | ) | | | - | | | | (550 | ) | | | (664 | ) |
Non-deductible merger expenses | | | 5,861 | | | | 1,111 | | | | 10,704 | | | | - | |
Foreign tax rate differential | | | 931 | | | | 848 | | | | 838 | | | | 221 | |
Research and development credit and deduction | | | (2,148 | ) | | | (53 | ) | | | (721 | ) | | | (170 | ) |
Settlement of and change in tax contingencies | | | (3,416 | ) | | | - | | | | 1,000 | | | | 353 | |
Other, net | | | (2,225 | ) | | | (100 | ) | | | (1,522 | ) | | | 454 | |
| | $ | (38,927 | ) | | $ | (6,831 | ) | | $ | 24,935 | | | $ | 20,540 | |
The tax effects of temporary differences which give rise to significant portions of deferred tax assets and liabilities consist of:
| | June 30, | |
| | 2008 | | | 2007 | |
| | Successor | | | Predecessor | |
| | (In thousands) | |
| | | | | | |
Accounts receivable | | $ | 250 | | | $ | 381 | |
Inventories | | | 17,191 | | | | 12,573 | |
Accrued expenses and other current liabilities | | | 20,652 | | | | 12,466 | |
Other long-term liabilities | | | 3,440 | | | | 20,061 | |
Capital loss carryforwards | | | 11,145 | | | | 8,192 | |
Tax loss carryforwards | | | 10,396 | | | | 6,424 | |
Tax credit carryforwards | | | - | | | | 44 | |
Gross deferred tax assets | | | 63,074 | | | | 60,141 | |
Less: valuation allowance | | | (23,131 | ) | | | (15,800 | ) |
Net deferred tax assets | | | 39,943 | | | | 44,341 | |
Property, plant and equipment | | | (8,249 | ) | | | (1,359 | ) |
Intangible assets | | | (164,112 | ) | | | (13,773 | ) |
Gross deferred tax liabilities | | | (172,361 | ) | | | (15,132 | ) |
Net deferred tax assets (liabilities) | | $ | (132,418 | ) | | $ | 29,209 | |
We recorded increases of $0, $12.5 million, $2.9 million and $1.3 million to additional paid-in capital during the periods August 15, 2007 to June 30, 2008 and July 1, 2007 to August 14, 2007 and the years ended June 30, 2007 and 2006, respectively, in connection with the excess of the realized tax benefit related to compensation deductions on the exercise of stock options and issuance of restricted shares over the deferred tax asset attributable to stock compensation costs for such awards.
As of June 30, 2008, we have capital loss carryforwards of $30.0 million, of which $21.6 million expires in 2010 and $8.4 million expires in 2013, and foreign net operating loss carryforwards of $12.7 million in the UK, $11.8 million in France and $6.0 million in China which have no expiration. We have state net operating loss carryforwards that create a utilizable net tax benefit of $1.6 million. We have provided a valuation allowance against all our capital loss carryforwards, all net operating loss carryforwards in France and China, $10.6 million net operating loss carryforwards in the UK, and certain other deferred tax assets that are not deemed realizable.
Deferred tax assets have resulted primarily from our future deductible temporary differences and net operating loss and capital loss carryforwards. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company’s ability to realize its deferred tax assets depends upon the generation of sufficient future taxable income to allow for the utilization of its deductible temporary differences and loss carryforwards. If such estimates and related assumptions change in the future, we may be required to record additional valuation allowances against our deferred tax assets resulting in additional income tax expense in our consolidated statements of operations. Management evaluates the realizability of the deferred tax assets and the need for additional valuation allowances quarterly. At this time, based on current facts and circumstances, management believes that it is more likely than not that we will realize benefit for our gross deferred tax assets, except those deferred tax assets against which a valuation allowance has been recorded.
Deferred U.S. income taxes have not been provided on undistributed foreign earnings since we expect that substantially all of these earnings will be permanently reinvested in foreign operations. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liabilities and potential foreign tax credits is not practical to calculate because of the complexity of this hypothetical calculation.
In June 2006 we repatriated $1.5 million of foreign earnings. This $1.5 million dividend was an extraordinary dividend that qualified under the provisions of the American Jobs Creation Act for the 85 percent dividend received deduction.
We made income tax payments of $7.8 million, $191,000, $28.8 million and $25.7 million and received refunds of $27.1 million, $0, $284,000 and $2.9 million during the periods August 15, 2007 to June 30, 2008 and July 1, 2007 to August 14, 2007 and the years ended June 30, 2007 and 2006, respectively. As a result of the Merger and the payments to option holders, we had a taxable loss for the period July 1, 2007 to August 14, 2007 of $78.9 million. This net operating loss was carried back to fiscal years 2007 and 2006, resulting in a $27.1 million Federal tax refund, which we received in May 2008.
On July 1, 2007, we adopted FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes-an Interpretation of SFAS No. 109.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of an income tax position taken or expected to be taken in an income tax return. FIN 48 provides that unrecognized tax benefits should be based on the facts, circumstances and information available at each balance sheet date and that subsequent changes in judgment should be based on new facts and circumstances and any resulting change in the amount of unrecognized tax benefit should be accounted for in the interim period in which the change occurs. The adoption of FIN 48 had no impact on our consolidated financial statements.
The aggregate amount of unrecognized tax benefits included in liabilities was as follows (in thousands):
Balance at June 30, 2007 | | $ | 4,421 | |
Gross increase related to tax positions taken | | | | |
prior to fiscal year | | | 495 | |
Gross decrease related to tax positions taken | | | | |
prior to fiscal year | | | (58 | ) |
Reduction as a result of a lapse of the | | | | |
applicable statute of limitations | | | (3,853 | ) |
| | | | |
Balance at June 30, 2008 | | $ | 1,005 | |
Interest and penalties related to income tax liabilities recognized in accordance with the provisions of FIN 48 are included in income tax expense, consistent with our historical policy and amounted to $124,000 and $0 for the periods from August 15, 2007 to June 30, 2008 and July 1, 2007 to July 14, 2007, respectively. At June 30, 2008 and 2007 accrued interest on uncertain tax positions was $188,000 and $815,000, respectively, net of the Federal benefit.
In September 2007, we settled a New York State income tax audit for the fiscal years 2002 through 2004. The decrease in the liability of $58,000 was for the reversal of a liability previously recognized.
Currently, we are being audited by the Internal Revenue Service for the fiscal years 2006 and 2007 and the period July 1, 2007 to August 14, 2007; the state of New York for fiscal years 2005 and 2006; and the state of Kansas for the fiscal years 2004 through 2007. Management does not believe that the resolution of the ongoing income tax examinations described above will have a material adverse impact on our financial position. Changes in the liabilities for uncertain tax positions will be recognized in the interim period in which the positions are effectively settled or there is a change in factual circumstances. The statute of limitations for our fiscal year 2004 Federal and the majority of our State tax returns has expired.
13. Employment Contracts
We have employment agreements with our officers and certain other key employees for periods through December 31, 2013 with annual remuneration ranging from $108,000 to $525,000, 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 $7.7 million. Certain of the contracts provide for a three-year consulting period at the expiration of the employment term at two-thirds of salary. In addition, certain of these officers have the option to terminate their employment agreements upon a change in control of the Company, as defined, and receive lump sum payments equal to the salary and bonus, if any, for the remainder of the term.
14. Employee Benefit Plans
401(k) and Profit Sharing Plans
All employees of the Company and certain subsidiaries who are not members of a collective bargaining agreement are eligible to participate in a Company sponsored 401(k) plan. Each participant has the option to contribute a portion of his or her compensation and receive a discretionary employer matching contribution. Furthermore, employees of one subsidiary are eligible to participate in a qualified profit sharing plan and receive an allocation of a discretionary share of the subsidiary’s profits. For the periods August 15, 2007 to June 30, 2008 and July 1, 2007 to August 14, 2007 and fiscal years ended June 30, 2007 and 2006, aggregate expenses related to these 401(k) and profit sharing plans were $4.7 million, $413,000, $4.7 million and $3.9 million, respectively.
Defined Benefit Pension Plans
Effective January 1, 1994, we established a Supplemental Executive Retirement Plan (the “SERP”) which provides retirement, death and disability benefits to certain of our current and former officers. As of June 30, 2008, the SERP is unfunded, however, there are funds being held in a rabbi trust for the SERP consisting primarily of cash surrender value of life insurance policies that specify the SERP as the beneficiary. Those assets (which are included in other assets) totaled $8.0 million and $7.1 million at June 30, 2008 and 2007, respectively, and are not considered in the fair value of plan assets. The measurement date for the SERP is June 30. Due to the retirement in 2005 of one of our officers we made payments of $523,000, $105,000, $674,000 and $267,000 in the period August 15, 2007 to June 30, 2008, the period July 1, 2007 to August 14, 2007 and the fiscal years 2007 and 2006, respectively, and are required to make payments of $628,000 in each fiscal year hereafter pursuant to the SERP. Payments to this officer cease December 31, 2015 or upon death, whichever is later.
The Merger constituted a change in control of the Company that accelerated the vesting of benefits under our SERP in the event of termination of employment of the participants on or prior to August 15, 2008. The SERP was amended to provide that no additional benefits are earned after August 31, 2007. Accordingly, if a participant’s employment was terminated prior to August 15, 2008, the participant would have received a lump sum payment of the present value of the benefits at retirement age based on average pay through August 31, 2007. The additional benefits payable under the SERP resulting from the change of control of $16.6 million was recorded as compensation expense (included in sale transaction expenses) in August 2007 (Successor period). The Company entered into amended employment agreements with certain participants in the SERP which, among other terms, provided that if such participants remain employed beyond August 15, 2008, which they have, specified payments, approximating the benefits earned under the SERP, plus 6% interest per annum from August 15, 2007, would be payable to those participants in full satisfaction of the benefits payable under the SERP, payable the earlier of December 31, 2008 to January 5, 2009 or upon specified events, including an additional change of control of the Company or termination. The aggregate liability to these participants under the SERP, including the related interest, was $19.1 million at June 30, 2008. Thus the amounts payable under the SERP have been fixed, except for the payments due one retired employee for which an actuarially determined liability of $6.9 million is recorded as of June 30, 2008. In the fiscal year ended June 30, 2008, we paid $10.3 million of benefits to participants in our SERP and the remaining liability related to the SERP at June 30, 2008 is $26.0 million, of which the $19.1 million that is payable no later than December 2008 or January 2009 is included in Accrued Expenses and Other Current Liabilities. We expect to pay $628,000 to the one remaining participant in the SERP plan in the fiscal year ending June 30, 2009 and $6.3 million thereafter, which is included in accrued expenses and long-term defined benefit obligations, respectively, in the June 30, 2008 balance sheet. In the Successor period from August 15, 2007 to June 30, 2008, we recorded $858,000 of interest expense incurred on the SERP liabilities and $343,000 of expense, included in general and administrative expenses in the accompanying statement of operations, for an increase in the SERP liability.
Adoption of FASB Statement No. 158
Effective June 30, 2007, the Company adopted the recognition and disclosure provisions of Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an Amendment of FASB Statements No. 87, 88, 106 and 132(R),” which requires employers to recognize in their balance sheets the overfunded or underfunded status of defined benefit postretirement plans, measured as the difference between the fair value of plan assets and the benefit obligation (the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for other postretirement plans). Employers must recognize the change in the funded status of the plan in the year in which the change occurs through accumulated other comprehensive income. SFAS No. 158 also requires plan assets and obligations to be measured as of the employer’s balance sheet date.
Prior to the adoption of SFAS No. 158, changes in the funded status of our plans were not immediately recognized, rather they were deferred and recognized ratably over future periods. Upon adoption of SFAS No. 158, we recognized the amounts of prior changes in the funded status of our SERP through accumulated other comprehensive income which had the following impact on the individual line items in the June 30, 2007 balance sheet:
Effect of Applying SFAS No. 158
on Individual Line Items in the Statement of Financial Position
June 30, 2007
(In thousands)
| | Before | | | | | | After | |
| | Application of | | | | | | Application of | |
| | Statement 158 | | | Adjustments | | | Statement 158 | |
| | | | | | | | | |
Deferred income taxes | | $ | 12,261 | | | $ | 428 | | | $ | 12,689 | |
Other assets | | | 16,456 | | | | (349 | ) | | | 16,107 | |
Total assets | | | 674,317 | | | | 79 | | | | 674,396 | |
| | | | | | | | | | | | |
Defined benefit plan and other | | | | | | | | | | | | |
postretirement plan obligations | | | 16,721 | | | | 807 | | | | 17,528 | |
Total liabilities | | | 162,892 | | | | 807 | | | | 163,699 | |
Accumulated other comprehensive income | | | 28,374 | | | | (728 | ) | | | 27,646 | |
Total stockholders' equity | | | 511,425 | | | | (728 | ) | | | 510,697 | |
Total liabilities and stockholders' equity | | | 674,317 | | | | 79 | | | | 674,396 | |
Obligations and Funded Status of the SERP:
| | Year Ended | |
| | June 30, | |
| | 2007 | |
| | (In thousands) | |
| | | |
Change in projected benefit obligation | | | |
Benefit obligation at beginning of year | | $ | 17,158 | |
Service cost | | | 151 | |
Interest cost | | | 1,051 | |
Actuarial loss | | | 470 | |
Benefits paid | | | (674 | ) |
Benefit obligation at end of year | | $ | 18,156 | |
| | | | |
Change in plan assets | | | | |
Fair value of plan assets at beginning of year | | $ | - | |
Actual return on plan assets | | | - | |
Employer contributions | | | 674 | |
Benefits paid | | | (674 | ) |
Fair value of plan assets at end of year | | $ | - | |
| | | | |
Unfunded status at end of year | | $ | (18,156 | ) |
Amounts recognized in the balance sheet consist of:
| | June 30, | |
| | 2007 | |
| | (In thousands) | |
| | | |
Accrued benefit cost | | $ | (18,215 | ) |
Accumulated other comprehensive income | | | 8,159 | |
| | | | |
Net amount recognized | | $ | (10,056 | ) |
The Company’s net unfunded liability relating to its defined benefit and other postretirement benefit plans at June 30, 2007 is as follows:
| | June 30, | |
| | 2007 | |
| | (In thousands) | |
| | | |
SERP | | $ | (18,156 | ) |
Less: Current portion | | | 628 | |
Long-term defined benefit plan | | | | |
obligations | | $ | (17,528 | ) |
| | | | |
Components of Net Periodic Benefit Cost
| | Years Ended June 30, | |
| | 2007 | | | 2006 | |
| | (In thousands) | |
| | | | | | |
Service cost | | $ | 151 | | | $ | 147 | |
Interest cost | | | 1,051 | | | | 923 | |
Expected return on plan assets | | | - | | | | - | |
Amortization of net transition (asset) obligation | | | 38 | | | | 38 | |
Recognized actuarial loss | | | 537 | | | | 687 | |
Net periodic benefit cost | | $ | 1,777 | | | $ | 1,795 | |
Additional Information
| Years Ended June 30, |
| 2007 | | 2006 |
| (In thousands) |
| | | |
Increase (decrease) in minimum liability included | | | |
in other comprehensive income | $ | 394 | | $ | 1,095 |
Assumptions
Weighted-average assumptions used to determine benefit obligations
| | SERP | |
| | Years Ended June 30, | |
| | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | |
| | | | | | | | | |
Discount rate | | | 5.00 | % | | | 6.25 | % | | | 6.25 | % |
Rate of compensation increase | | | * | | | | 3.00 | % | | | 3.00 | % |
Weighted-average assumptions used to determine net periodic benefit cost
| | SERP | |
| | Years Ended June 30, | |
| | 2008 | | | 2007 | | | 2006 | |
| | | | | | |
| | | | | | | | | |
Discount rate | | | 5.00 | % | | | 6.25 | % | | | 5.25 | % |
Expected long-term return on plan assets | | | N/A | | | | N/A | | | | N/A | |
Rate of compensation increase | | | * | | | | 3.00 | % | | | 3.00 | % |
| * | Not applicable as the one participant in the SERP whose liability is actuarially determined atJune 30, 2008 is an inactive retired employee. |
Plan Assets
As of June 30, 2008 and 2007 the SERP is unfunded.
15. Legal Matters
As discussed in Note 3, we settled the action with GA and Francisco for $2.5 million in January
2008.
During the quarter ended March 31, 2007, we became aware that certain RadHard bidirectional multipurpose transceivers sold by us since 1999 may have been subject to the licensing jurisdiction of the U.S. Department of State in accordance with the International Traffic in Arms Regulations (“ITAR”). Accordingly, we filed a Voluntary Disclosure with the Directorate of Defense Trade Controls, Department of State, describing the details of the possible inadvertent misclassification. Simultaneously, we flied a Commodity Jurisdiction request providing detailed information and data supporting our contention that the product is not subject to ITAR and requested a determination that such product is not ITAR controlled. By letter dated November 15, 2007, we were informed that the Department of State had determined in response to our Commodity Jurisdiction request, that the product is subject to the licensing jurisdiction of the Department of State in accordance with ITAR. We requested reconsideration of this determination. On February 7, 2008, we filed an addendum to the above referenced Voluntary Disclosure advising the Directorate of Defense Trade Controls that other products sold by us similar in nature to the transceiver described above may also be subject to the ITAR. The Directorate of Defense Trade Controls has agreed to extend the Company’s time to file such Voluntary Disclosure until there is a decision with respect to the Company’s request for reconsideration of the determination in connection with the above-referenced Commodity Jurisdiction request. On August 5, 2008, the Company received a letter from the Office of Defense Trade Controls Compliance (“DTCC”) requesting that the Company provide documentation and/or information relating to the Company’s ITAR compliance initiatives after November 15, 2007 as well as the results of any product reviews conducted by the Company, and indicating that a civil penalty against the Company could be warranted in connection with this matter following the review of such materials. The Company has complied with the request by DTCC and has provided the detailed information requested. In August 2008, the Company received the determination by the Directorate of Defense Trade Controls with respect to the request for reconsideration of the Commodity Jurisdiction determination. The Directorate of Defense Trade Controls denied the Company’s request for reconsideration and determined that the product is subject to the licensing jurisdiction of the Department of State in accordance with the ITAR. Accordingly, on September 18, 2008, the Company filed an addendum to its Voluntary Disclosure identifying other products that may have been subject to the licensing jurisdiction of the U.S. Department of State in accordance with the ITAR but were inadvertently misclassified. At this time it is not possible to determine whether any fines or other penalties will be asserted against us, or the materiality of any outcome.
During the quarter ended June 30, 2007, we became aware that certain components that our Plainview subsidiary manufactures and sells to a customer in Canada may have been subject to the ITAR. Additionally, we have recently learned that a shipment of upgrade kits for a product sold by the Company to the United States Air Force was inadvertently shipped directly to Canada and incorrectly exported under the authority of the Export Administration Regulations. Accordingly, we filed a Voluntary Disclosure with the Directorate of Defense Trade Controls, Department of State, describing the details of the possible inadvertent misclassifications. We were notified that this matter was closed without the assessment of fines or any other penalties.
In October, 2007, we were advised that United States Customs had held up the export of a component part of a test system sold by us. After extensive analysis of the component, we have determined that a General Purpose Communications Test Set sold by our Wichita subsidiary may have been subject to the licensing jurisdiction of the Department of State in accordance with the ITAR. Accordingly, on May 5, 2008, a Voluntary Disclosure was filed with the Directorate of Defense Trade Controls, Department of State, with respect to this product. Included as part of this Voluntary Disclosure was a shipment made by our KDI subsidiary which failed to properly demarcate a previously approved ITAR export license. We were notified on May 13, 2008 that this matter was closed without the assessment of fines or any other penalties.
During May 2008, we became further aware that a certain product sold by our KDI subsidiary may have inadvertently been misclassified as not ITAR controlled. On August 5, 2008, the Company filed a Voluntary Disclosure with the Directorate of Defense Trade Controls, Department of State, describing the inadvertent misclassification of this product. At this time it is not possible to determine whether any fines or other penalties will be asserted against us, or the materiality of any outcome.
An amended class action complaint was filed against us and our board of directors on June 20, 2007 in the Supreme Court of the State of New York, Nassau County. The complaint alleges that our board breached its fiduciary duties to our stockholders (i) by issuing a preliminary proxy statement on June 5, 2007 that was issued in connection with seeking stockholder approval of the Merger and (ii) in approving certain amendments, that were allegedly beyond the scope of our corporate power to our Supplemental Executive Retirement Plan and the employment agreements of defendants Harvey R. Blau, our then Chairman and Chief Executive Officer, and Leonard Borow, our then President and Chief Operating Officer. The plaintiffs sought injunctive relief with respect to the first cause of action, seeking to enjoin the July 26, 2007 special meeting of our stockholders on the grounds that we and our board of directors provided inadequate disclosures, and the recovery of money damages with respect to the second cause of action. The plaintiffs subsequently withdrew their motion for preliminary injunctive relief. On July 9, 2007, we and our board of directors filed a motion to dismiss the amended class action complaint and that motion is currently pending. We are currently in settlement discussions with the plaintiffs and have accrued an insignificant liability for the settlement. The July 26, 2007 stockholders meeting went forward and the Company’s stockholders approved the Merger. On August 15, 2007, the acquisition of the Company was completed.
We are also involved in various claims and legal actions that arise in the ordinary course of business. We do not believe that the ultimate resolution of any of these actions will have a material adverse effect on our financial position, results of operations, liquidity or capital resources.
16. Other Commitments and Contingencies
Operating Leases
Several of our operating facilities and certain machinery and equipment are leased under agreements expiring through 2020. The leases for machinery and equipment generally contain purchase options at the then fair value of the related leased assets at the end of their lease term.
Future minimum payments under operating leases as of June 30, 2008 are as follows for the fiscal years:
| | (In thousands) | |
2009 | | $ | 5,492 | |
2010 | | | 4,512 | |
2011 | | | 3,187 | |
2012 | | | 1,757 | |
2013 | | | 764 | |
Thereafter | | | 1,029 | |
Future minimum lease payments | | $ | 16,741 | |
Rental expense was $7.0 million, $1.1 million, $9.5 million and $9.5 million for the periods August 15, 2007 to June 30, 2008 and July 1, 2007 to August 14, 2007 and for the fiscal years 2007 and 2006, respectively. Sub-lease rental income was $486,000, $145,000, $1.2 million and $1.1 million for the periods August 15, 2007 to June 30, 2008 and July 1, 2007 to August 14, 2007 and the fiscal years 2007 and 2006, respectively.
Our business segments and major products included in each segment, are as follows:
Microelectronic Solutions (“AMS”)
| · | Microelectronic Components, Sub-assemblies and Modules |
Test Solutions (“ATS”)
| · | Instrument Products and Test Systems |
We are a manufacturer of advanced technology systems and components for commercial industry, government and defense contractors. Approximately 29% of our sales for the period August 15, 2007 to June 30, 2008, 21% for the period July 1, 2007 to August 14, 2007, and 30% and 29% for the fiscal years ended June 30, 2007 and 2006, respectively, were to agencies of the United States government or to prime defense contractors or subcontractors of the United States government. No one customer constituted more than 10% of sales during any of the periods presented. Inter-segment sales were not material and have been eliminated from the tables below.
The majority of our operations are located in the United States; however, we also have operations in Europe and Asia, with our most significant international operations in the United Kingdom. Net sales from facilities located in the United Kingdom were approximately $167.7 million for the period August 15, 2007 to June 30, 2008 and $11.7 million for the period July 1, 2007 to August 14, 2007 and $166.7 million and $152.9 million for the fiscal years ended June 30, 2007 and 2006, respectively. Total assets of the United Kingdom operations were $237.5 million as of June 30, 2008 and $230.0 million as of June 30, 2007.
Revenues, based on the customers’ locations, attributed to the United States and other regions are as follows:
| | Period | | | Period | | | Fiscal Year | | | Fiscal Year | |
| | August 15, 2007 to | | | July 1, 2007 to | | | Ended | | | Ended | |
| | June 30, 2008 | | | August 14, 2007 | | | June 30, 2007 | | | June 30, 2006 | |
| | Successor | | | Predecessor | | | Predecessor | | | Predecessor | |
| | (In thousands) | |
| | | | | | | | | | | | |
United States of America | | $ | 329,226 | | | $ | 21,183 | | | $ | 346,235 | | | $ | 318,244 | |
Europe and Middle East | | | 141,422 | | | | 10,357 | | | | 155,905 | | | | 148,517 | |
Asia and Australia | | | 123,887 | | | | 6,242 | | | | 84,779 | | | | 71,866 | |
Other regions | | | 10,456 | | | | 439 | | | | 6,227 | | | | 7,616 | |
| | $ | 604,991 | | | $ | 38,221 | | | $ | 593,146 | | | $ | 546,243 | |
Selected financial data by segment is as follows:
| | August 15, 2007 | | | July 1, 2007 | | | Fiscal Year | | | Fiscal Year | |
| | to June 30, | | | to August 14, | | | Ended June 30, | | | Ended June 30, | |
| | 2008 | | | 2007 | | | 2007 | | | 2006 | |
| | Successor Entity | | | Predecessor Entity | | | Predecessor Entity | | | Predecessor Entity | |
| | (In thousands) | |
Net sales: | | | | | | | | | | | | |
Microelectronic solutions ("AMS") | | $ | 283,695 | | | $ | 19,017 | | | $ | 266,515 | | | $ | 241,437 | |
Test solutions ("ATS") | | | 321,296 | | | | 19,204 | | | | 326,631 | | | | 304,806 | |
Net sales | | $ | 604,991 | | | $ | 38,221 | | | $ | 593,146 | | | $ | 546,243 | |
| | | | | | | | | | | | | | | | |
Segment adjusted operating income: | | | | | | | | | | | | | | | | |
- AMS | | $ | 74,802 | | | $ | 24 | | | $ | 63,908 | | | $ | 58,467 | |
- ATS | | | 54,216 | | | | (7,582 | ) | | | 38,582 | | | | 34,771 | |
General corporate expense | | | (8,176 | ) | | | (2,347 | ) | | | (17,727 | ) | | | (15,279 | ) |
Adjusted operating income (loss) | | | 120,842 | | | | (9,905 | ) | | | 84,763 | | | | 77,959 | |
| | | | | | | | | | | | | | | | |
Amortization of acquired intangibles | | | | | | | | | | | | | | | | |
- AMS | | | (44,085 | ) | | | (279 | ) | | | (1,911 | ) | | | (2,134 | ) |
- ATS | | | (28,991 | ) | | | (1,413 | ) | | | (11,095 | ) | | | (11,644 | ) |
Share based compensation | | | | | | | | | | | | | | | | |
- AMS | | | - | | | | (83 | ) | | | (965 | ) | | | (1,488 | ) |
- ATS | | | - | | | | 95 | | | | (958 | ) | | | (1,731 | ) |
- Corporate | | | (3,123 | ) | | | (226 | ) | | | (2,161 | ) | | | (3,433 | ) |
Restructuring charges | | | | | | | | | | | | | | | | |
- AMS | | | (414 | ) | | | - | | | | - | | | | - | |
- ATS | | | (6,581 | ) | | | (3,778 | ) | | | (2,840 | ) | | | (3,214 | ) |
One-time lease termination costs | | | | | | | | | | | | | | | | |
- ATS | | | - | | | | (576 | ) | | | - | | | | - | |
Merger related expenses - Corporate | | | (4,092 | ) | | | (1,319 | ) | | | - | | | | - | |
Acquired in-process R&D costs | | | | | | | | | | | | | | | | |
- AMS | | | (16,335 | ) | | | - | | | | - | | | | - | |
- ATS | | | (8,640 | ) | | | - | | | | - | | | | - | |
Current period impact of acquisition | | | | | | | | | | | | | | | | |
related adjustments: | | | | | | | | | | | | | | | | |
Inventory - AMS | | | (23,817 | ) | | | (57 | ) | | | - | | | | - | |
Inventory - ATS | | | (15,151 | ) | | | - | | | | - | | | | (1,088 | ) |
Depreciation - AMS | | | (1,025 | ) | | | - | | | | - | | | | - | |
Depreciation - ATS | | | (2,882 | ) | | | - | | | | - | | | | - | |
Depreciation - Corporate | | | (193 | ) | | | - | | | | - | | | | - | |
Deferred revenue - ATS | | | (2,510 | ) | | | - | | | | - | | | | - | |
Sale transaction expenses | | | (32,493 | ) | | | (3,717 | ) | | | (30,584 | ) | | | - | |
Operating income (loss) (GAAP) | | | (69,490 | ) | | | (21,258 | ) | | | 34,249 | | | | 53,227 | |
| | | | | | | | | | | | | | | | |
Interest expense | | | (74,658 | ) | | | (275 | ) | | | (672 | ) | | | (608 | ) |
Other income (expense), net | | | 4,617 | | | | 294 | | | | 152 | | | | 1,669 | |
Income (loss) from continuing | | | | | | | | | | | | | | | | |
operations before income taxes | | $ | (139,531 | ) | | $ | (21,239 | ) | | $ | 33,729 | | | $ | 54,288 | |
| | As of | | | | | | As of June 30, | |
| | June 30, 2008 | | | | | | 2007 | | | 2006 | |
| | (In thousands) | |
| | | | | | | | | | | | |
Total Assets: | | | | | | | | | | | | |
AMS | | $ | 754,451 | | | | | | $ | 229,046 | | | $ | 186,531 | |
ATS | | | 605,120 | | | | | | | 404,548 | | | | 377,190 | |
Corporate | | | 119,428 | | | | | | | 34,408 | | | | 59,700 | |
Assets of discontinued operations | | | - | | | | | | | 6,394 | | | | 9,970 | |
Total assets | | $ | 1,478,999 | | | | | | $ | 674,396 | | | $ | 633,391 | |
| | | | | | | | | | | | | | | |
| | August, 15, 2007 | | | July 1, 2007 to | | | For the Year Ended June 30, | |
| | to June 30, 2008 | | | August 14, 2007 | | | 2007 | | | 2006 | |
Capital expenditures: | | (In thousands) | |
AMS | | $ | 7,087 | | | $ | 338 | | | $ | 9,942 | | | $ | 6,255 | |
ATS | | | 5,950 | | | | 501 | | | | 7,155 | | | | 8,777 | |
Corporate | | | 142 | | | | 249 | | | | 1,330 | | | | 333 | |
Total capital expenditures | | $ | 13,179 | | | $ | 1,088 | | | $ | 18,427 | | | $ | 15,365 | |
| | | | | | | | | | | | | | | | |
Depreciation and amortization expense: | | | | | | | | | | | | | |
AMS | | $ | 51,419 | | | $ | 1,137 | | | $ | 8,675 | | | $ | 8,949 | |
ATS | | | 41,060 | | | | 2,509 | | | | 21,258 | | | | 21,249 | |
Corporate | | | 553 | | | | 16 | | | | 209 | | | | 173 | |
Total depreciation and | | | | | | | | | | | | | | | | |
amortization expense | | $ | 93,032 | | | $ | 3,662 | | | $ | 30,142 | | | $ | 30,371 | |
Management evaluated the operating results of the two segments based upon pre-tax operating income, before costs related to restructuring, lease termination charges, amortization of acquired intangibles, share-based compensation, acquired in-process research and development costs, Company Sale Transaction expenses, merger related expenses and the impact of any acquisition related adjustments.
18. Guarantor/Non-Guarantor Financial Information
The following supplemental condensed consolidating financial information sets forth, on an unconsolidated basis, the balance sheets at June 30, 2008 and June 30, 2007 and the statements of operations, and cash flows for the periods from August 15, 2007 to June 30, 2008 and July 1, 2007 to August 14, 2007 and the years ended June 30, 2007 and 2006 for Aeroflex Incorporated (the “Parent Company”), and for the Guarantor Subsidiaries and, on a combined basis, the Non-Guarantor Subsidiaries. The supplemental condensed consolidating financial information reflects for all fiscal periods, the investments of the Parent Company in the Guarantor Subsidiaries as well as the investments of the Parent Company and the Guarantor Subsidiaries in the Non-Guarantor Subsidiaries, in all cases using the equity method. The Parent Company’s purchase price allocation adjustments, including applicable intangible assets, arising from business acquisitions have been pushed down to the applicable subsidiary columns (see Notes 3 and 4).
Condensed Consolidating Statement of Operations
For the Period from August 15, 2007 to June 30, 2008
(In thousands)
| | | | | Subsidiary | | | Subsidiary | | | | | | | |
| | Parent | | | Guarantors | | | Non-Guarantors | | | Eliminations | | | Consolidated | |
| | | | | | | | | | | | | | | |
Net sales | | $ | - | | | $ | 429,372 | | | $ | 180,832 | | | $ | (5,213 | ) | | $ | 604,991 | |
Cost of sales | | | - | | | | 253,291 | | | | 104,857 | | | | (5,195 | ) | | | 352,953 | |
Gross profit | | | - | | | | 176,081 | | | | 75,975 | | | | (18 | ) | | | 252,038 | |
Selling, general and administrative costs | | | 15,584 | | | | 66,265 | | | | 39,237 | | | | - | | | | 121,086 | |
Research and development costs | | | - | | | | 40,097 | | | | 29,801 | | | | - | | | | 69,898 | |
Amortization of acquired intangibles | | | - | | | | 63,477 | | | | 9,599 | | | | - | | | | 73,076 | |
Acquired in-process R&D costs | | | - | | | | 21,820 | | | | 3,155 | | | | - | | | | 24,975 | |
Company sale transaction expenses | | | 32,493 | | | | - | | | | - | | | | - | | | | 32,493 | |
Operating income (loss) | | | (48,077 | ) | | | (15,578 | ) | | | (5,817 | ) | | | (18 | ) | | | (69,490 | ) |
| | | | | | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | (74,563 | ) | | | (95 | ) | | | - | | | | - | | | | (74,658 | ) |
Other income (expense), net | | | 1,943 | | | | 147 | | | | 2,527 | | | | - | | | | 4,617 | |
Intercompany charges | | | 81,994 | | | | (80,482 | ) | | | (1,512 | ) | | | - | | | | - | |
Income (loss) from continuing operations | | | | | | | | | | | | | | | | | | | | |
before income taxes | | | (38,703 | ) | | | (96,008 | ) | | | (4,802 | ) | | | (18 | ) | | | (139,531 | ) |
Provision (benefit) for income taxes | | | (11,525 | ) | | | (28,589 | ) | | | 1,187 | | | | - | | | | (38,927 | ) |
Income (loss) from continuing | | | | | | | | | | | | | | | | | | | | |
operations | | | (27,178 | ) | | | (67,419 | ) | | | (5,989 | ) | | | (18 | ) | | | (100,604 | ) |
Loss from discontinued operations, | | | | | | | | | | | | | | | | | | | | |
net of tax | | | - | | | | (4,821 | ) | | | - | | | | - | | | | (4,821 | ) |
Equity in income (loss) of subsidiaries | | | (78,247 | ) | | | (5,712 | ) | | | - | | | | 83,959 | | | | - | |
Net income (loss) | | $ | (105,425 | ) | | $ | (77,952 | ) | | $ | (5,989 | ) | | $ | 83,941 | | | $ | (105,425 | ) |
Condensed Consolidating Statement of Operations
For the Period from July 1, 2007 to August 14, 2007
(In thousands)
| | | | | Subsidiary | | | Subsidiary | | | | | | | |
| | Parent | | | Guarantors | | | Non-Guarantors | | | Eliminations | | | Consolidated | |
| | | | | | | | | | | | | | | |
Net sales | | $ | - | | | $ | 25,858 | | | $ | 12,809 | | | $ | (446 | ) | | $ | 38,221 | |
Cost of sales | | | - | | | | 15,066 | | | | 8,074 | | | | (279 | ) | | | 22,861 | |
Gross profit | | | - | | | | 10,792 | | | | 4,735 | | | | (167 | ) | | | 15,360 | |
Selling, general and administrative costs | | | 3,892 | | | | 7,571 | | | | 7,568 | | | | - | | | | 19,031 | |
Research and development costs | | | - | | | | 5,526 | | | | 6,652 | | | | - | | | | 12,178 | |
Amortization of acquired intangibles | | | - | | | | 601 | | | | 1,091 | | | | - | | | | 1,692 | |
Company sale transaction expenses | | | 3,717 | | | | - | | | | - | | | | - | | | | 3,717 | |
Operating income (loss) | | | (7,609 | ) | | | (2,906 | ) | | | (10,576 | ) | | | (167 | ) | | | (21,258 | ) |
| | | | | | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | (261 | ) | | | (14 | ) | | | - | | | | - | | | | (275 | ) |
Other income (expense), net | | | 157 | | | | 27 | | | | 110 | | | | - | | | | 294 | |
Intercompany charges | | | 5,544 | | | | (5,109 | ) | | | (435 | ) | | | - | | | | - | |
Income (loss) from continuing operations | | | | | | | | | | | | | | | | | | | | |
before income taxes | | | (2,169 | ) | | | (8,002 | ) | | | (10,901 | ) | | | (167 | ) | | | (21,239 | ) |
Provision (benefit) for income taxes | | | (853 | ) | | | (3,145 | ) | | | (2,833 | ) | | | - | | | | (6,831 | ) |
Income (loss) from continuing | | | | | | | | | | | | | | | | | | | | |
operations | | | (1,316 | ) | | | (4,857 | ) | | | (8,068 | ) | | | (167 | ) | | | (14,408 | ) |
Loss from discontinued operations, | | | | | | | | | | | | | | | | | | | | |
net of tax | | | - | | | | (2,508 | ) | | | - | | | | - | | | | (2,508 | ) |
Equity in income (loss) of subsidiaries | | | (15,600 | ) | | | (7,814 | ) | | | - | | | | 23,414 | | | | - | |
Net income (loss) | | $ | (16,916 | ) | | $ | (15,179 | ) | | $ | (8,068 | ) | | $ | 23,247 | | | $ | (16,916 | ) |
Condensed Consolidating Statement of Operations
For the Year Ended June 30, 2007
(In thousands)
| | | | | Subsidiary | | | Subsidiary | | | | | | | |
| | Parent | | | Guarantors | | | Non-Guarantors | | | Eliminations | | | Consolidated | |
| | | | | | | | | | | | | | | |
Net sales | | $ | - | | | $ | 422,347 | | | $ | 177,586 | | | $ | (6,787 | ) | | $ | 593,146 | |
Cost of sales | | | - | | | | 217,025 | | | | 98,927 | | | | (6,983 | ) | | | 308,969 | |
Gross profit | | | - | | | | 205,322 | | | | 78,659 | | | | 196 | | | | 284,177 | |
Selling, general and administrative costs | | | 19,888 | | | | 71,125 | | | | 38,608 | | | | - | | | | 129,621 | |
Research and development costs | | | - | | | | 42,241 | | | | 34,476 | | | | - | | | | 76,717 | |
Amortization of acquired intangibles | | | - | | | | 4,498 | | | | 8,508 | | | | - | | | | 13,006 | |
Company sale transaction expenses | | | 30,584 | | | | - | | | | - | | | | - | | | | 30,584 | |
Operating income (loss) | | | (50,472 | ) | | | 87,458 | | | | (2,933 | ) | | | 196 | | | | 34,249 | |
| | | | | | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | (534 | ) | | | (127 | ) | | | (11 | ) | | | - | | | | (672 | ) |
Other income (expense), net | | | 1,479 | | | | 205 | | | | (1,532 | ) | | | - | | | | 152 | |
Intercompany charges | | | 45,158 | | | | (41,672 | ) | | | (3,486 | ) | | | - | | | | - | |
Income (loss) from continuing operations | | | | | | | | | | | | | | | | | | | | |
before income taxes | | | (4,369 | ) | | | 45,864 | | | | (7,962 | ) | | | 196 | | | | 33,729 | |
Provision (benefit) for income taxes | | | (2,882 | ) | | | 30,251 | | | | (2,434 | ) | | | - | | | | 24,935 | |
Income (loss) from continuing | | | | | | | | | | | | | | | | | | | | |
operations | | | (1,487 | ) | | | 15,613 | | | | (5,528 | ) | | | 196 | | | | 8,794 | |
Loss from discontinued operations, | | | | | | | | | | | | | | | | | | | | |
net of tax | | | - | | | | (3,868 | ) | | | - | | | | - | | | | (3,868 | ) |
Equity in income (loss) of subsidiaries | | | 6,413 | | | | (4,629 | ) | | | - | | | | (1,784 | ) | | | - | |
Net income (loss) | | $ | 4,926 | | | $ | 7,116 | | | $ | (5,528 | ) | | $ | (1,588 | ) | | $ | 4,926 | |
Condensed Consolidating Statement of Operations
For the Year Ended June 30, 2006
(In thousands)
| | | | | Subsidiary | | | Subsidiary | | | | | | | |
| | Parent | | | Guarantors | | | Non-Guarantors | | | Eliminations | | | Consolidated | |
| | | | | | | | | | | | | | | |
Net sales | | $ | - | | | $ | 378,283 | | | $ | 174,509 | | | $ | (6,549 | ) | | $ | 546,243 | |
Cost of sales | | | - | | | | 196,093 | | | | 94,877 | | | | (6,658 | ) | | | 284,312 | |
Gross profit | | | - | | | | 182,190 | | | | 79,632 | | | | 109 | | | | 261,931 | |
Selling, general and administrative costs | | | 18,712 | | | | 63,188 | | | | 40,971 | | | | - | | | | 122,871 | |
Research and development costs | | | - | | | | 38,317 | | | | 33,738 | | | | - | | | | 72,055 | |
Amortization of acquired intangibles | | | - | | | | 4,722 | | | | 9,056 | | | | - | | | | 13,778 | |
Operating income (loss) | | | (18,712 | ) | | | 75,963 | | | | (4,133 | ) | | | 109 | | | | 53,227 | |
| | | | | | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | (403 | ) | | | (144 | ) | | | (61 | ) | | | - | | | | (608 | ) |
Other income (expense), net | | | 779 | | | | 832 | | | | 58 | | | | - | | | | 1,669 | |
Intercompany charges | | | 38,829 | | | | (36,443 | ) | | | (2,386 | ) | | | - | | | | - | |
Income (loss) from continuing operations | | | | | | | | | | | | | | | | | | | | |
before income taxes | | | 20,493 | | | | 40,208 | | | | (6,522 | ) | | | 109 | | | | 54,288 | |
Provision (benefit) for income taxes | | | 7,950 | | | | 15,598 | | | | (3,008 | ) | | | - | | | | 20,540 | |
Income (loss) from continuing | | | | | | | | | | | | | | | | | | | | |
operations | | | 12,543 | | | | 24,610 | | | | (3,514 | ) | | | 109 | | | | 33,748 | |
Loss from discontinued operations, | | | | | | | | | | | | | | | | | | | | |
net of tax | | | - | | | | (5,652 | ) | | | - | | | | - | | | | (5,652 | ) |
Change in accounting principle | | | 12,543 | | | | 18,958 | | | | (3,514 | ) | | | 109 | | | | 28,096 | |
Cumulative effect of a change in | | | | | | | | | | | | | | | | | | | | |
accounting principle, net of tax benefit | | | - | | | | (15 | ) | | | (1,122 | ) | | | - | | | | (1,137 | ) |
Equity in income (loss) of subsidiaries | | | 14,416 | | | | (4,274 | ) | | | - | | | | (10,142 | ) | | | - | |
Net income (loss) | | $ | 26,959 | | | $ | 14,669 | | | $ | (4,636 | ) | | $ | (10,033 | ) | | $ | 26,959 | |
Condensed Consolidating Balance Sheet
As of June 30, 2008
(In thousands)
| | | | | Subsidiary | | | Subsidiary | | | | | | | |
| | Parent | | | Guarantors | | | Non-Guarantors | | | Eliminations | | | Consolidated | |
Assets | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 39,285 | | | $ | (2,379 | ) | | $ | 17,243 | | | $ | - | | | $ | 54,149 | |
Accounts receivable, net | | | - | | | | 90,343 | | | | 57,640 | | | | - | | | | 147,983 | |
Inventories | | | - | | | | 91,856 | | | | 43,537 | | | | (502 | ) | | | 134,891 | |
Deferred income taxes | | | (2,352 | ) | | | 23,539 | | | | 5,852 | | | | - | | | | 27,039 | |
Prepaid expenses and other current assets | | | 2,464 | | | | 2,616 | | | | 7,104 | | | | - | | | | 12,184 | |
Total current assets | | | 39,397 | | | | 205,975 | | | | 131,376 | | | | (502 | ) | | | 376,246 | |
| | | | | | | | | | | | | | | | | | | | |
Property, plant and equipment, net | | | 13,406 | | | | 63,964 | | | | 27,279 | | | | - | | | | 104,649 | |
Non-current marketable securities | | | 19,960 | | | | - | | | | - | | | | - | | | | 19,960 | |
Deferred financing costs | | | 30,185 | | | | - | | | | - | | | | - | | | | 30,185 | |
Other assets | | | 16,480 | | | | 2,474 | | | | (394 | ) | | | - | | | | 18,560 | |
Intangible assets with definite lives, net | | | - | | | | 297,408 | | | | 47,458 | | | | - | | | | 344,866 | |
Intangible assets with indefinite lives | | | - | | | | 90,229 | | | | 33,149 | | | | - | | | | 123,378 | |
Goodwill | | | - | | | | 435,570 | | | | 25,101 | | | | 484 | | | | 461,155 | |
Total assets | | $ | 119,428 | | | $ | 1,095,620 | | | $ | 263,969 | | | $ | (18 | ) | | $ | 1,478,999 | |
| | | | | | | | | | | | | | | | | | | | |
Liabilities and Stockholder's Equity | | | | | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | | | | | |
Current portion of long-term debt | | $ | 5,250 | | | $ | 324 | | | $ | - | | | $ | - | | | $ | 5,574 | |
Accounts payable | | | 554 | | | | 19,882 | | | | 18,946 | | | | - | | | | 39,382 | |
Deferred revenue, including advance payments | | | - | | | | 8,621 | | | | 18,523 | | | | - | | | | 27,144 | |
Income taxes payable | | | 409 | | | | - | | | | 1,527 | | | | - | | | | 1,936 | |
Accrued payroll expense | | | 2,106 | | | | 18,200 | | | | 4,219 | | | | - | | | | 24,525 | |
Accrued expenses and other current liabilities | | | 31,205 | | | | 12,272 | | | | 13,353 | | | | - | | | | 56,830 | |
Total current liabilities | | | 39,524 | | | | 59,299 | | | | 56,568 | | | | - | | | | 155,391 | |
| | | | | | | | | | | | | | | | | | | | |
Long-term debt | | | 872,152 | | | | 1,085 | | | | - | | | | - | | | | 873,237 | |
Deferred income taxes | | | (12,254 | ) | | | 150,400 | | | | 21,311 | | | | - | | | | 159,457 | |
Defined benefit plan obligations | | | 6,263 | | | | - | | | | - | | | | - | | | | 6,263 | |
Other long-term liabilities | | | 1,368 | | | | 487 | | | | 6,148 | | | | - | | | | 8,003 | |
Intercompany investment | | | (248,051 | ) | | | 2,944 | | | | 245,107 | | | | - | | | | - | |
Intercompany receivable/payable | | | (895,004 | ) | | | 953,623 | | | | (58,619 | ) | | | - | | | | - | |
Total liabilities | | | (236,002 | ) | | | 1,167,838 | | | | 270,515 | | | | - | | | | 1,202,351 | |
| | | | | | | | | | | | | | | | | | | | |
Stockholder's equity | | | 355,430 | | | | (72,218 | ) | | | (6,546 | ) | | | (18 | ) | | | 276,648 | |
Total liabilities and stockholder's equity | | $ | 119,428 | | | $ | 1,095,620 | | | $ | 263,969 | | | $ | (18 | ) | | $ | 1,478,999 | |
Condensed Consolidating Balance Sheet
As of June 30, 2007
(In thousands)
| | | | | Subsidiary | | | Subsidiary | | | | | | | |
| | Parent | | | Guarantors | | | Non-Guarantors | | | Eliminations | | | Consolidated | |
Assets | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 6,807 | | | $ | (1,573 | ) | | $ | 7,766 | | | $ | - | | | $ | 13,000 | |
Marketable securities | | | 9,500 | | | | - | | | | - | | | | - | | | | 9,500 | |
Accounts receivable, net | | | - | | | | 81,041 | | | | 58,000 | | | | - | | | | 139,041 | |
Inventories | | | - | | | | 94,756 | | | | 45,417 | | | | (316 | ) | | | 139,857 | |
Deferred income taxes | | | (13,554 | ) | | | 29,994 | | | | 80 | | | | - | | | | 16,520 | |
Assets of discontinued operations | | | - | | | | 6,394 | | | | - | | | | - | | | | 6,394 | |
Prepaid expenses and other current assets | | | 1,970 | | | | 2,431 | | | | 6,703 | | | | - | | | | 11,104 | |
Total current assets | | | 4,723 | | | | 213,043 | | | | 117,966 | | | | (316 | ) | | | 335,416 | |
| | | | | | | | | | | | | | | | | | | | |
Property, plant and equipment, net | | | 2,446 | | | | 53,021 | | | | 25,945 | | | | - | | | | 81,412 | |
Deferred income taxes | | | 12,689 | | | | - | | | | - | | | | - | | | | 12,689 | |
Deferred financing costs | | | 36 | | | | - | | | | - | | | | - | | | | 36 | |
Other assets | | | 14,513 | | | | 563 | | | | 1,031 | | | | - | | | | 16,107 | |
Intangible assets with definite lives, net | | | - | | | | 23,358 | | | | 23,416 | | | | - | | | | 46,774 | |
Goodwill | | | 84 | | | | 90,268 | | | | 91,610 | | | | - | | | | 181,962 | |
Total assets | | $ | 34,491 | | | $ | 380,253 | | | $ | 259,968 | | | $ | (316 | ) | | $ | 674,396 | |
| | | | | | | | | | | | | | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | | | | | |
Current portion of long-term debt | | $ | 1,835 | | | $ | 329 | | | $ | - | | | $ | - | | | $ | 2,164 | |
Accounts payable | | | 3,774 | | | | 15,733 | | | | 18,770 | | | | - | | | | 38,277 | |
Deferred revenue, including advance payments | | | - | | | | 6,946 | | | | 13,326 | | | | - | | | | 20,272 | |
Income taxes payable | | | (3,171 | ) | | | 14,888 | | | | (4,105 | ) | | | - | | | | 7,612 | |
Liabilities of discontinued operations | | | - | | | | 2,394 | | | | - | | | | - | | | | 2,394 | |
Accrued expenses and other current liabilities | | | 11,406 | | | | 28,167 | | | | 23,521 | | | | - | | | | 63,094 | |
Total current liabilities | | | 13,844 | | | | 68,457 | | | | 51,512 | | | | - | | | | 133,813 | |
| | | | | | | | | | | | | | | | | | | | |
Long-term liabilities | | | 12,837 | | | | 10,145 | | | | 6,904 | | | | - | | | | 29,886 | |
Investment in subsidiaries | | | (229,783 | ) | | | 4,853 | | | | 224,930 | | | | - | | | | - | |
Intercompany receivable/payable | | | (204,844 | ) | | | 176,079 | | | | 28,765 | | | | - | | | | - | |
Total liabilities | | | (407,946 | ) | | | 259,534 | | | | 312,111 | | | | - | | | | 163,699 | |
| | | | | | | | | | | | | | | | | | | | |
Stockholder's equity: | | | 442,437 | | | | 120,719 | | | | (52,143 | ) | | | (316 | ) | | | 510,697 | |
Total liabilities and stockholder's equity | | $ | 34,491 | | | $ | 380,253 | | | $ | 259,968 | | | $ | (316 | ) | | $ | 674,396 | |
Condensed Consolidating Statement of Cash Flows
For the Period from August 15, 2007 to June 30, 2008
(In thousands)
| | | | | | | | Non- | | | | | | | |
| | | | | Guarantor | | | Guarantor | | | Consolidating | | | | |
| | Parent | | | Subsidiaries | | | Subsidiaries | | | Adjustments | | | Consolidated | |
| | | | | | | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (105,425 | ) | | $ | (77,952 | ) | | $ | (5,989 | ) | | $ | 83,941 | | | $ | (105,425 | ) |
Loss from discontinued operations, net of tax | | | - | | | | 4,821 | | | | - | | | | - | | | | 4,821 | |
Income (loss) from continuing operations | | | (105,425 | ) | | | (73,131 | ) | | | (5,989 | ) | | | 83,941 | | | | (100,604 | ) |
Changes in operating assets and liabilities and non cash items, included in net income (loss) | | | 95,482 | | | | 88,036 | | | | 15,223 | | | | (83,941 | ) | | | 114,800 | |
Net cash provided by (used in) continuing operations | | | (9,943 | ) | | | 14,905 | | | | 9,234 | | | | - | | | | 14,196 | |
Net cash provided by (used in) discontinued operations | | | - | | | | (5,286 | ) | | | - | | | | - | | | | (5,286 | ) |
Net cash provided by (used in) operating activities | | | (9,943 | ) | | | 9,619 | | | | 9,234 | | | | - | | | | 8,910 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
Acquisition of predecessor entity, net of cash acquired | | | (1,128,915 | ) | | | (2,593 | ) | | | 13,215 | | | | - | | | | (1,118,293 | ) |
Payment for purchase of businesses, net of cash acquired | | | (11,145 | ) | | | - | | | | - | | | | - | | | | (11,145 | ) |
Capital expenditures | | | (142 | ) | | | (9,386 | ) | | | (3,651 | ) | | | - | | | | (13,179 | ) |
Proceeds from the sale of property, plant and equipment | | | - | | | | 52 | | | | 177 | | | | - | | | | 229 | |
Purchase of marketable securities | | | (631,805 | ) | | | - | | | | - | | | | - | | | | (631,805 | ) |
Proceeds from sale of marketable securities | | | 611,853 | | | | - | | | | - | | | | - | | | | 611,853 | |
Net cash provided by (used in) investing activities of continuing operations | | | (1,160,154 | ) | | | (11,927 | ) | | | 9,741 | | | | - | | | | (1,162,340 | ) |
Net cash provided by (used in) discontinued operations | | | - | | | | (36 | ) | | | - | | | | - | | | | (36 | ) |
Net cash provided by (used in) investing activities | | | (1,160,154 | ) | | | (11,963 | ) | | | 9,741 | | | | - | | | | (1,162,376 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Proceeds from issuance of common stock | | | 378,350 | | | | - | | | | - | | | | - | | | | 378,350 | |
Borrowings under debt agreements | | | 870,000 | | | | - | | | | - | | | | - | | | | 870,000 | |
Debt repayments | | | (5,746 | ) | | | (35 | ) | | | (302 | ) | | | - | | | | (6,083 | ) |
Debt financing costs | | | (33,222 | ) | | | - | | | | - | | | | - | | | | (33,222 | ) |
Amounts paid for withholding taxes on stock option exercises | | | (14,142 | ) | | | - | | | | - | | | | - | | | | (14,142 | ) |
Witholding taxes collected for stock option exercises | | | 14,142 | | | | - | | | | - | | | | - | | | | 14,142 | |
Net cash provided by (used in) financing activities of continuing operations | | | 1,209,382 | | | | (35 | ) | | | (302 | ) | | | - | | | | 1,209,045 | |
Effect of exchange rate changes on cash and cash equivalents | | | - | | | | - | | | | (1,430 | ) | | | - | | | | (1,430 | ) |
Net increase in cash and cash equivalents | | | 39,285 | | | | (2,379 | ) | | | 17,243 | | | | - | | | | 54,149 | |
Cash and cash equivalents at beginning of period | | | - | | | | - | | | | - | | | | - | | | | - | |
Cash and cash equivalents at end of period | | $ | 39,285 | | | $ | (2,379 | ) | | $ | 17,243 | | | $ | - | | | $ | 54,149 | |
Condensed Consolidating Statement of Cash Flows
For the Period from July 1, 2007 to August 14, 2007
(In thousands)
| | | | | | | | Non- | | | | | | | |
| | | | | Guarantor | | | Guarantor | | | Consolidating | | | | |
| | Parent | | | Subsidiaries | | | Subsidiaries | | | Adjustments | | | Consolidated | |
| | | | | | | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (16,916 | ) | | $ | (15,179 | ) | | $ | (8,068 | ) | | $ | 23,247 | | | $ | (16,916 | ) |
Loss from discontinued operations, net of tax | | | - | | | | 2,508 | | | | - | | | | - | | | | 2,508 | |
Income (loss) from continuing operations | | | (16,916 | ) | | | (12,671 | ) | | | (8,068 | ) | | | 23,247 | | | | (14,408 | ) |
Changes in operating assets and liabilities and non cash items, included in net income (loss) | | | 23,110 | | | | 12,708 | | | | 13,591 | | | | (23,247 | ) | | | 26,162 | |
Net cash provided by (used in) continuing operations | | | 6,194 | | | | 37 | | | | 5,523 | | | | - | | | | 11,754 | |
Net cash provided by (used in) discontinued operations | | | - | | | | (461 | ) | | | - | | | | - | | | | (461 | ) |
Net cash provided by (used in) operating activities | | | 6,194 | | | | (424 | ) | | | 5,523 | | | | - | | | | 11,293 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | (249 | ) | | | (587 | ) | | | (252 | ) | | | - | | | | (1,088 | ) |
Purchase of marketable securities | | | (53,828 | ) | | | - | | | | - | | | | - | | | | (53,828 | ) |
Proceeds from sale of marketable securities | | | 63,328 | | | | - | | | | - | | | | - | | | | 63,328 | |
Net cash provided by (used in) investing activities of continuing operations | | | 9,251 | | | | (587 | ) | | | (252 | ) | | | - | | | | 8,412 | |
Net cash provided by (used in) discontinued operations | | | - | | | | (6 | ) | | | - | | | | - | | | | (6 | ) |
Net cash provided by (used in) investing activities | | | 9,251 | | | | (593 | ) | | | (252 | ) | | | - | | | | 8,406 | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Debt repayments | | | (26 | ) | | | (3 | ) | | | - | | | | - | | | | (29 | ) |
Debt financing costs | | | (477 | ) | | | - | | | | - | | | | - | | | | (477 | ) |
Excess tax benefits from share based compensation arrangements | | | 12,542 | | | | - | | | | - | | | | - | | | | 12,542 | |
Proceeds from the exercise of stock options and warrants | | | 583 | | | | - | | | | - | | | | - | | | | 583 | |
Amounts paid for withholding taxes on stock option exercises | | | (56 | ) | | | - | | | | - | | | | - | | | | (56 | ) |
Withholding taxes collected for stock option exercises | | | 56 | | | | - | | | | - | | | | - | | | | 56 | |
Net cash provided by (used in) financing activities of continuing operations | | | 12,622 | | | | (3 | ) | | | - | | | | - | | | | 12,619 | |
Effect of exchange rate changes on cash and cash equivalents | | | - | | | | - | | | | 178 | | | | - | | | | 178 | |
Net increase (decrease) in cash and cash equivalents | | | 28,067 | | | | (1,020 | ) | | | 5,449 | | | | - | | | | 32,496 | |
Cash and cash equivalents at beginning of period | | | 6,807 | | | | (1,573 | ) | | | 7,766 | | | | - | | | | 13,000 | |
Cash and cash equivalents at end of period | | $ | 34,874 | | | $ | (2,593 | ) | | $ | 13,215 | | | $ | - | | | $ | 45,496 | |
Condensed Consolidating Statement of Cash Flows
For the Year Ended June 30, 2007
(In thousands)
| | | | | | | | Non- | | | | | | | |
| | | | | Guarantor | | | Guarantor | | | Consolidating | | | | |
| | Parent | | | Subsidiaries | | | Subsidiaries | | | Adjustments | | | Consolidated | |
| | | | | | | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 4,926 | | | $ | 7,116 | | | $ | (5,528 | ) | | $ | (1,588 | ) | | $ | 4,926 | |
Loss from discontinued operations, net of tax | | | - | | | | 3,868 | | | | - | | | | - | | | | 3,868 | |
Income (loss) from continuing operations | | | 4,926 | | | | 10,984 | | | | (5,528 | ) | | | (1,588 | ) | | | 8,794 | |
Changes in operating assets and liabilities and non cash items, included in net income (loss) | | | 2,779 | | | | 726 | | | | 8,592 | | | | 1,588 | | | | 13,685 | |
Net cash provided by (used in) continuing operations | | | 7,705 | | | | 11,710 | | | | 3,064 | | | | - | | | | 22,479 | |
Net cash provided by (used in) discontinued operations | | | - | | | | (1,677 | ) | | | - | | | | - | | | | (1,677 | ) |
Net cash provided by (used in) operating activities | | | 7,705 | | | | 10,033 | | | | 3,064 | | | | - | | | | 20,802 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
Payment for purchase of business, net of cash acquired | | | (10,663 | ) | | | - | | | | - | | | | - | | | | (10,663 | ) |
Contingent payment for purchase of business | | | (9,247 | ) | | | - | | | | - | | | | - | | | | (9,247 | ) |
Capital expenditures | | | (1,331 | ) | | | (12,766 | ) | | | (4,330 | ) | | | - | | | | (18,427 | ) |
Proceeds from the sale of property, plant and equipment | | | - | | | | 382 | | | | 98 | | | | - | | | | 480 | |
Purchase of marketable securities | | | (589,577 | ) | | | - | | | | - | | | | - | | | | (589,577 | ) |
Proceeds from sale of marketable securities | | | 608,409 | | | | - | | | | - | | | | - | | | | 608,409 | |
Net cash provided by (used in) investing activities of continuing operations | | | (2,409 | ) | | | (12,384 | ) | | | (4,232 | ) | | | - | | | | (19,025 | ) |
Net cash provided by (used in) discontinued operations | | | - | | | | (88 | ) | | | - | | | | - | | | | (88 | ) |
Net cash provided by (used in) investing activities | | | (2,409 | ) | | | (12,472 | ) | | | (4,232 | ) | | | - | | | | (19,113 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Purchase and retirement of treasury stock | | | (17,234 | ) | | | - | | | | - | | | | - | | | | (17,234 | ) |
Debt repayments | | | (315 | ) | | | (11 | ) | | | (285 | ) | | | - | | | | (611 | ) |
Excess tax benefits from share based compensation arrangements | | | 2,870 | | | | - | | | | - | | | | - | | | | 2,870 | |
Proceeds from the exercise of stock options and warrants | | | 14,182 | | | | - | | | | - | | | | - | | | | 14,182 | |
Amounts paid for withholding taxes on stock option exercises | | | (3,383 | ) | | | - | | | | - | | | | - | | | | (3,383 | ) |
Withholding taxes collected for stock options exercises | | | 3,383 | | | | - | | | | - | | | | - | | | | 3,383 | |
Net cash provided by (used in) financing activities of continuing operations | | | (497 | ) | | | (11 | ) | | | (285 | ) | | | - | | | | (793 | ) |
Effect of exchange rate changes on cash and cash equivalents | | | - | | | | - | | | | 1,717 | | | | - | | | | 1,717 | |
Net increase (decrease) in cash and cash equivalents | | | 4,799 | | | | (2,450 | ) | | | 264 | | | | - | | | | 2,613 | |
Cash and cash equivalents at beginning of period | | | 2,008 | | | | 877 | | | | 7,502 | | | | - | | | | 10,387 | |
Cash and cash equivalents at end of period | | $ | 6,807 | | | $ | (1,573 | ) | | $ | 7,766 | | | $ | - | | | $ | 13,000 | |
Condensed Consolidating Statement of Cash Flows
For the Year Ended June 30, 2006
(In thousands)
| | | | | | | | Non- | | | | | | | |
| | | | | Guarantor | | | Guarantor | | | Consolidating | | | | |
| | Parent | | | Subsidiary | | | Subsidiaries | | | Adjustments | | | Consolidated | |
| | | | | | | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 26,959 | | | $ | 14,669 | | | $ | (4,636 | ) | | $ | (10,033 | ) | | $ | 26,959 | |
Cumulative effect in accounting principle, net of tax | | | - | | | | 15 | | | | 1,122 | | | | - | | | | 1,137 | |
Loss from discontinued operations, net of tax | | | - | | | | 5,652 | | | | - | | | | - | | | | 5,652 | |
Income (loss) from continuing operations | | | 26,959 | | | | 20,336 | | | | (3,514 | ) | | | (10,033 | ) | | | 33,748 | |
Changes in operating assets and liabilities and non cash items, included in net income (loss) | | | (4,148 | ) | | | (6,878 | ) | | | 8,536 | | | | 10,033 | | | | 7,543 | |
Net cash provided by (used in) continuing operations | | | 22,811 | | | | 13,458 | | | | 5,022 | | | | - | | | | 41,291 | |
Net cash provided by (used in) discontinued operations | | | - | | | | (4,594 | ) | | | - | | | | - | | | | (4,594 | ) |
Net cash provided by (used in) operating activities | | | 22,811 | | | | 8,864 | | | | 5,022 | | | | - | | | | 36,697 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | (334 | ) | | | (9,006 | ) | | | (6,025 | ) | | | - | | | | (15,365 | ) |
Proceeds from the sale of property, plant and equipment | | | - | | | | 11 | | | | 105 | | | | - | | | | 116 | |
Purchase of marketable securities | | | (348,545 | ) | | | - | | | | - | | | | - | | | | (348,545 | ) |
Proceeds from sale of marketable securities | | | 320,213 | | | | - | | | | - | | | | - | | | | 320,213 | |
Preacquisition tax refund received | | | - | | | | - | | | | 1,232 | | | | - | | | | 1,232 | |
Other, net | | | - | | | | 234 | | | | (311 | ) | | | - | | | | (77 | ) |
Net cash provided by (used in) investing activities of continuing operations | | | (28,666 | ) | | | (8,761 | ) | | | (4,999 | ) | | | - | | | | (42,426 | ) |
Net cash provided by (used in) discontinued operations | | | - | | | | (127 | ) | | | - | | | | - | | | | (127 | ) |
Net cash provided by (used in) investing activities | | | (28,666 | ) | | | (8,888 | ) | | | (4,999 | ) | | | - | | | | (42,553 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Purchase and retirement of treasury stock | | | (402 | ) | | | - | | | | - | | | | - | | | | (402 | ) |
Debt repayments | | | (325 | ) | | | (333 | ) | | | - | | | | - | | | | (658 | ) |
Debt financing costs | | | (308 | ) | | | - | | | | - | | | | - | | | | (308 | ) |
Excess tax benefits from share based compensation arrangements | | | 551 | | | | - | | | | - | | | | - | | | | 551 | |
Proceeds from the exercise of stock options and warrants | | | 4,565 | | | | - | | | | - | | | | - | | | | 4,565 | |
Amounts paid for withholding taxes on stock option exercises | | | (1,062 | ) | | | - | | | | - | | | | - | | | | (1,062 | ) |
Withholding taxes collected for stock option exercises | | | 1,062 | | | | - | | | | - | | | | - | | | | 1,062 | |
Net cash provided by (used in) financing activities of continuing operations | | | 4,081 | | | | (333 | ) | | | - | | | | - | | | | 3,748 | |
Effect of exchange rate changes on cash and cash equivalents | | | - | | | | - | | | | (479 | ) | | | - | | | | (479 | ) |
Net increase in cash and cash equivalents | | | (1,774 | ) | | | (357 | ) | | | (456 | ) | | | - | | | | (2,587 | ) |
Cash and cash equivalents at beginning of period | | | 3,782 | | | | 1,234 | | | | 7,958 | | | | - | | | | 12,974 | |
Cash and cash equivalents at end of period | | $ | 2,008 | | | $ | 877 | | | $ | 7,502 | | | $ | - | | | $ | 10,387 | |
Quarterly Financial Data (Unaudited)
(In thousands)
| | Quarter | | | Year Ended | |
2008 | | First | | | Second | | | Third | | | Fourth | | | June 30, | |
Net sales | | $ | 140,236 | | | $ | 160,757 | | | $ | 157,304 | | | $ | 184,915 | | | $ | 643,212 | |
Gross profit | | | 52,615 | | | | 54,633 | | | | 69,236 | | | | 90,914 | | | | 267,398 | |
Income (loss) from continuing operations | | | (63,944 | ) | | | (29,068 | ) | | | (15,437 | ) | | | (6,563 | ) | | | (115,012 | ) |
| | Quarter | | | Year Ended | |
2007 | | First | | | Second | | | Third | | | Fourth | | | June 30, | |
Net sales | | $ | 135,330 | | | $ | 143,047 | | | $ | 149,854 | | | $ | 164,915 | | | $ | 593,146 | |
Gross profit | | | 64,030 | | | | 68,783 | | | | 71,401 | | | | 79,963 | | | | 284,177 | |
Income (loss) from continuing operations | | | 7,903 | | | | 10,093 | | | | 6,573 | | | | (15,775 | ) | | | 8,794 | |
Note: We are not presenting per share data here as we currently only have one shareholder.
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 of | | | costs and | | | accounts - | | | Deductions - | | | end of | |
Description | | period | | | expenses | | | describe | | | describe | | | period | |
| | | | | | | | | | | | | | | |
PERIOD FROM AUGUST 15, 2007 | | | | | | | | | | | | | | | |
THROUGH JUNE 30, 2008 (SUCCESSOR ENTITY) | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 1,531 | | | $ | 1,295 | | | $ | - | | | $ | 143 | (B) | | $ | 2,683 | |
| | | | | | | | | | | | | | | | | | | | |
PERIOD FROM JULY 1, 2007 | | | | | | | | | | | | | | | | | | | | |
THROUGH AUGUST 14, 2007 (PREDECESSOR ENTITY) | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 1,589 | | | $ | (33 | ) | | $ | - | | | $ | 25 | (B) | | $ | 1,531 | |
| | | | | | | | | | | | | | | | | | | | |
YEAR ENDED JUNE 30, 2007: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 1,273 | | | $ | 416 | | | $ | 25 | (A) | | $ | 125 | (B) | | $ | 1,589 | |
| | | | | | | | | | | | | | | | | | | | |
YEAR ENDED JUNE 30, 2006: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 1,118 | | | $ | 292 | | | $ | - | | | $ | 137 | (B) | | $ | 1,273 | |
Note: (A) - - Acquired in purchase of businesses.
(B) - Net write-offs of uncollectible amounts.
AEROFLEX INCORPORATED
AND SUBSIDIARIES
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
INDEX | | PAGE |
| | |
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS | | F-53 |
September 30, 2008 and June 30, 2008 | | |
| | |
| | |
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | | F-54 |
Three Months Ended September 30, 2008 | | |
Periods from July 1, 2007 to August 14, 2007 | | |
and August 15, 2007 to September 30, 2007 | | |
| | |
| | |
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | | F-55 |
Three Months Ended September 30, 2008 | | |
Periods from July 1, 2007 to August 14, 2007 | | |
and August 15, 2007 to September 30, 2007 | | |
| | |
| | |
| | |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | | F-56 – F-81 |
Aeroflex Incorporated
and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(In thousands except share and per share data)
| | September 30, | | | June 30, | |
| | 2008 | | | 2008 | |
| | Successor Entity | | | Successor Entity | |
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 73,066 | | | $ | 54,149 | |
Accounts receivable, less allowance for doubtful | | | | | | | | |
accounts of $2,829 and $2,683 | | | 110,297 | | | | 147,983 | |
Inventories | | | 136,977 | | | | 134,891 | |
Deferred income taxes | | | 26,460 | | | | 27,039 | |
Prepaid expenses and other current assets | | | 12,445 | | | | 12,184 | |
Total current assets | | | 359,245 | | | | 376,246 | |
| | | | | | | | |
Property, plant and equipment, net | | | 101,349 | | | | 104,649 | |
Non-current marketable securities | | | 18,755 | | | | 19,960 | |
Deferred financing costs, net | | | 29,435 | | | | 30,185 | |
Other assets | | | 15,141 | | | | 18,560 | |
Intangible assets with definite lives, net | | | 321,760 | | | | 344,866 | |
Intangible assets with indefinite lives | | | 120,051 | | | | 123,378 | |
Goodwill | | | 456,193 | | | | 461,155 | |
| | | | | | | | |
Total assets | | $ | 1,421,929 | | | $ | 1,478,999 | |
| | | | | | | | |
Liabilities and Stockholder's Equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Current portion of long-term debt | | $ | 5,570 | | | $ | 5,574 | |
Accounts payable | | | 31,882 | | | | 39,382 | |
Advance payments by customers and deferred revenue | | | 18,997 | | | | 27,144 | |
Income taxes payable | | | 2,097 | | | | 1,936 | |
Accrued payroll expenses | | | 25,754 | | | | 24,525 | |
| | | | | | | | |
Accrued expenses and other current liabilities | | | 58,767 | | | | 56,830 | |
Total current liabilities | | | 143,067 | | | | 155,391 | |
Long-term debt | | | 875,813 | | | | 873,237 | |
Deferred income taxes | | | 143,491 | | | | 159,457 | |
Defined benefit plan obligations | | | 6,156 | | | | 6,263 | |
Other long-term liabilities | | | 7,470 | | | | 8,003 | |
Total liabilities | | | 1,175,997 | | | | 1,202,351 | |
| | | | | | | | |
Stockholder's equity: | | | | | | | | |
Common stock, par value $.10 per share; authorized 1,000 | | | | | | | | |
shares; issued and outstanding 1,000 shares | | | - | | | | - | |
Additional paid-in capital | | | 382,214 | | | | 381,666 | |
Accumulated other comprehensive income (loss) | | | (23,960 | ) | | | 407 | |
Accumulated deficit | | | (112,322 | ) | | | (105,425 | ) |
Total stockholder's equity | | | 245,932 | | | | 276,648 | |
| | | | | | | | |
Total liabilities and stockholder's equity | | $ | 1,421,929 | | | $ | 1,478,999 | |
Aeroflex Incorporated and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(In thousands)
| | Three Months Ended | | | August 15, 2007 | | | July 1, 2007 | |
| | September 30, 2008 | | | to September 30, 2007 | | | to August 14, 2007 | |
| | Successor Entity | | | Successor Entity | | | Predecessor Entity | |
| | | | | | | | | |
Net sales | | $ | 140,845 | | | $ | 102,015 | | | $ | 38,221 | |
Cost of sales | | | 73,486 | | | | 64,760 | | | | 22,861 | |
Gross profit | | | 67,359 | | | | 37,255 | | | | 15,360 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Selling, general and administrative costs | | | 31,484 | | | | 18,984 | | | | 19,031 | |
Research and development costs | | | 17,029 | | | | 10,480 | | | | 12,178 | |
Amortization of acquired intangibles | | | 17,968 | | | | 10,470 | | | | 1,692 | |
Acquired in-process research and development costs | | | - | | | | 24,340 | | | | - | |
Company sale transaction expenses | | | - | | | | 30,295 | | | | 3,717 | |
| | | 66,481 | | | | 94,569 | | | | 36,618 | |
Operating income (loss) | | | 878 | | | | (57,314 | ) | | | (21,258 | ) |
| | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | | |
Interest expense | | | (21,215 | ) | | | (11,136 | ) | | | (275 | ) |
Other income (expense), net | | | 3,086 | | | | (255 | ) | | | 294 | |
Total other income (expense) | | | (18,129 | ) | | | (11,391 | ) | | | 19 | |
| | | | | | | | | | | | |
Income (loss) from continuing operations before income taxes | | | (17,251 | ) | | | (68,705 | ) | | | (21,239 | ) |
Provision (benefit) for income taxes | | | (10,354 | ) | | | (19,169 | ) | | | (6,831 | ) |
Income (loss) from continuing operations | | | (6,897 | ) | | | (49,536 | ) | | | (14,408 | ) |
| | | | | | | | | | | | |
Income (loss) from discontinued operations, net of | | | | | | | | | | | | |
tax provision (benefit) | | | - | | | | (962 | ) | | | (2,508 | ) |
| | | | | | | | | | | | |
Net income (loss) | | $ | (6,897 | ) | | $ | (50,498 | ) | | $ | (16,916 | ) |
Aeroflex Incorporated
and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
| | Three Months Ended | | | August 15, 2007 | | | July 1, 2007 | |
| | September 30, | | | to September 30, | | | to August 14, | |
| | 2008 | | | 2007 | | | 2007 | |
| | Successor Entity | | | Successor Entity | | | Predecessor Entity | |
Cash flows from operating activities: | | | | | | | | | |
Net income (loss) | | $ | (6,897 | ) | | $ | (50,498 | ) | | $ | (16,916 | ) |
Loss from discontinued operations, net of tax | | | - | | | | 962 | | | | 2,508 | |
Income (loss) from continuing operations | | | (6,897 | ) | | | (49,536 | ) | | | (14,408 | ) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | | | |
Depreciation and amortization | | | 23,497 | | | | 13,302 | | | | 3,662 | |
Acquired in-process research and development costs | | | - | | | | 24,340 | | | | - | |
Acquisition related adjustment to cost of sales | | | - | | | | 12,400 | | | | - | |
Acquisition related adjustment to sales | | | 97 | | | | 676 | | | | - | |
Deferred income taxes | | | (12,444 | ) | | | 11,142 | | | | 5,284 | |
Non - cash share based compensation | | | 489 | | | | 1,657 | | | | 214 | |
Amortization of deferred financing costs | | | 1,189 | | | | 267 | | | | 217 | |
Paid in kind interest | | | 3,888 | | | | - | | | | - | |
Excess tax benefits from share based compensation arrangements | | | - | | | | - | | | | (12,542 | ) |
Other, net | | | 508 | | | | 72 | | | | (24 | ) |
Change in operating assets and liabilities, | | | | | | | | | | | | |
net of effects from purchases of businesses: | | | | | | | | | | | | |
Decrease (increase) in accounts receivable | | | 32,411 | | | | (36,848 | ) | | | 47,889 | |
Decrease (increase) in inventories | | | (7,024 | ) | | | 7,579 | | | | (12,885 | ) |
Decrease (increase) in prepaid expenses | | | | | | | | | | | | |
and other assets | | | (9 | ) | | | 31,319 | | | | (26,899 | ) |
Increase (decrease) in accounts payable, accrued expenses and other liabilities | | | (7,195 | ) | | | (45,433 | ) | | | 21,246 | |
| | | | | | | | | | | | |
Net cash provided by (used in) continuing operations | | | 28,510 | | | | (29,063 | ) | | | 11,754 | |
Net cash provided by (used in) discontinued operations | | | - | | | | (1,325 | ) | | | (461 | ) |
Net cash provided by (used in) operating activities | | | 28,510 | | | | (30,388 | ) | | | 11,293 | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Acquisition of Predecessor Entity, net of cash acquired | | | - | | | | (1,118,293 | ) | | | - | |
Capital expenditures | | | (3,343 | ) | | | (1,422 | ) | | | (1,088 | ) |
Purchase of marketable securities | | | - | | | | (317,104 | ) | | | (53,828 | ) |
Proceeds from sale of marketable securities | | | - | | | | 267,426 | | | | 63,328 | |
Other | | | 2 | | | | 15 | | | | - | |
| | | | | | | | | | | | |
Net cash provided by (used in) investing activities by continuing operations | | | (3,341 | ) | | | (1,169,378 | ) | | | 8,412 | |
Net cash provided by (used in) discontinued operations | | | - | | | | (2 | ) | | | (6 | ) |
Net cash provided by (used in) investing activities | | | (3,341 | ) | | | (1,169,380 | ) | | | 8,406 | |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Proceeds from issuance of common stock | | | - | | | | 378,350 | | | | - | |
Borrowings under debt agreements | | | - | | | | 870,000 | | | | - | |
Debt repayments | | | (1,317 | ) | | | (1,814 | ) | | | (29 | ) |
Debt financing costs | | | (439 | ) | | | (27,145 | ) | | | (477 | ) |
Excess tax benefits from share based compensation arrangements | | | - | | | | - | | | | 12,542 | |
Proceeds from the exercise of stock options and warrants | | | - | | | | - | | | | 583 | |
Amounts paid for withholding taxes on stock option exercises | | | - | | | | (14,142 | ) | | | (56 | ) |
Withholding taxes collected for stock option exercises | | | - | | | | 14,142 | | | | 56 | |
Net cash provided by (used in) financing activities | | | (1,756 | ) | | | 1,219,391 | | | | 12,619 | |
Effect of exchange rate changes on cash and cash equivalents | | | (4,496 | ) | | | (564 | ) | | | 178 | |
| | | | | | | | | | | | |
Net increase in cash and cash equivalents | | | 18,917 | | | | 19,059 | | | | 32,496 | |
Cash and cash equivalents at beginning of period | | | 54,149 | | | | - | | | | 13,000 | |
Cash and cash equivalents at end of period | | $ | 73,066 | | | $ | 19,059 | | | $ | 45,496 | |
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The condensed consolidated financial statements of Aeroflex Incorporated and Subsidiaries (the “Company”,”we”, or “our’’) presented herein are unaudited. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly our financial position, results of operations and cash flows as of and for all periods presented have been made. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been omitted. These condensed consolidated financial statements should be read in conjunction with the Company’s June 30, 2008 audited financial statements and notes thereto.
Results of operations for the three months ended September 30, 2008 are not necessarily indicative of results of operations for future interim periods or for the full fiscal year ending June 30, 2009.
The Company and its Sale
We design, engineer and manufacture microelectronics and test solution and measurement equipment that are sold primarily to the broadband communications, aerospace and defense markets. Our fiscal year ends on June 30.
On August 15, 2007, the Company was sold to affiliates of or funds managed by The Veritas Capital Fund Ill, L.P. (“Veritas”), Golden Gate Private Equity, Inc. (“Golden Gate”) and GS Direct, L.L.C. (“GS Direct”) and certain members of management (“the Merger”) (see Note 3).
Presentation and Use of Estimates
Our financial statements are prepared in conformity with U.S. GAAP. We consolidate our subsidiaries, all of which, except for Test Evolution Corporation (see Note 4) are wholly owned. All significant intercompany balances and transactions have been eliminated.
The condensed consolidated financial statements presented as of September 30, 2008 and June 30, 2008 and the three months ended September 30, 2008 and the period from August 15, 2007 to September 30, 2007 represent the Company subsequent to its acquisition (the “Successor” or “Successor Entity”), whereas the consolidated financial statements for the period from July 1, 2007 to August 14, 2007 represent the Company prior to the Merger (the “Predecessor” or “Predecessor Entity”). The purchase method of accounting was applied effective August 15, 2007 in connection with the Merger. Therefore, our consolidated financial statements for periods before August 15, 2007 are presented on a different basis than those for the periods after August 14, 2007 and, as such, are not comparable.
The preparation of financial statements and related disclosures in conformity with U.S. GAAP 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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among the more significant estimates included in our consolidated financial statements are revenue and cost recognition under long-term contracts; the valuation of accounts receivable, inventories, investments and deferred tax assets; the depreciable lives of fixed assets and useful lives of amortizable intangible assets; the valuation of
assets acquired and liabilities assumed in business combinations; the recoverability of long-lived amortizable intangible assets and goodwill, as well as net assets of discontinued operations; share-based compensation; restructuring charges; asset retirement obligations and certain accrued expenses and contingencies.
We are subject to uncertainties such as the impact of future events, economic, environmental and political factors, and changes in the business climate; therefore, actual results may differ from those estimates. When no estimate in a given range is deemed to be better than any other when estimating contingent liabilities, the low end of the range is accrued. The accounting estimates used in the preparation of our consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Changes in estimates are made when circumstances warrant them. Such changes and refinements in estimation methodologies are reflected in reported results of operations. If material, the effects of changes in estimates are disclosed in the notes to the consolidated financial statements.
Cash and Cash Equivalents
All highly liquid investments having maturities of three months or less at the date of acquisition are considered to be cash equivalents.
Marketable Securities
Marketable securities are classified as available-for-sale and are recorded at fair value with unrealized gains and losses, net of taxes, reported as a separate component of stockholder’s equity. Realized gains and losses and declines in market value judged to be other than temporary, of which there were none, are included in other income. Interest income is also included in other income.
At September 30, 2008, our marketable securities consisted primarily of $19.9 million of auction rate securities at par value. Auction rate securities represent long-term (generally maturities of ten years to thirty-five years from the date of issuance) variable rate bonds tied to short-term interest rates that are reset through an auction process, which occurs every seven to thirty-five days, and are classified as available for sale securities. All but one (with the one security having a carrying value of $1.9 million and a AA rating) of our auction rate securities retain a triple-A rating by at least one nationally recognized statistical rating organization. In addition, certain of our auction rate securities are backed by student loans whose principal and interest are federally guaranteed by the Family Federal Education Loan Program. To date, we have collected all interest payments on all our auction rate securities when due, and since early February 2008 (when auctions began to fail) have redeemed $26.5 million of auction rate securities at par.
At September 30, 2008, we concluded that the fair value of our auction rate securities was $18.7 million. Since many auctions are failing and given that there is currently no active secondary market for our investment in auction rate securities, the determination of fair value was based on the following factors:
| · | lack of action by the issuers to establish different forms of financing to replace or redeem these securities; and |
| · | the credit quality of the underlying securities. |
If fair values were to continue to be below cost for a prolonged period of time, we would consider various factors in determining whether to recognize an other than temporary impairment charge, including the length of time and the extent to which the fair value has been below the cost basis, the current financial condition of the issuer and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
Auction rate securities are classified as non-current assets in the accompanying September 30, 2008 and June 30, 2008 consolidated balance sheets.
Inventories
Inventories, including amounts related to long-term contracts accounted for under percentage-of-completion accounting, are stated at the lower of cost (first-in, first-out) or market.
Financial Instruments and Derivatives
Foreign currency contracts are used to protect us from fluctuations in exchange rates. We enter into foreign currency contracts, which are not designated as hedges. Thus the change in fair value is included in income as it occurs, within other income (expense). As of September 30, 2008, we had $2.4 million of notional value foreign currency forward contracts maturing through December 2008. Notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the calculation of cash settlements under the contracts. The fair value of these contracts at September 30, 2008 and June 30, 2008 was insignificant.
Our interest rate swap derivatives are designated as cash flow hedges. As such, they are recorded on the balance sheet as assets or liabilities at their fair value, with changes in the fair value of such derivatives, net of taxes, recorded as a component of other comprehensive income. The fair value of the interest rate swap derivatives as of September 30, 2008 was a liability of $665,000 ($419,000, net of taxes) and as of June 30, 2008 was an asset of $2.2 million ($1.4 million, net of taxes).
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, the selling price is fixed or determinable, and collectibility of the resulting receivable is reasonably assured.
For arrangements other than certain long-term contracts, revenue (including shipping and handling fees) is recognized when products are shipped and title has passed to the customer. If title does not pass until the product reaches the customer’s delivery site, recognition of the revenue is deferred until that time. Certain of our sales are to distributors which have a right to return some portion of product within up to eighteen months of sale. We recognize revenue on these sales at the time of shipment to the distributor as the returns under these arrangements have been insignificant and can be reasonably estimated. A provision for such estimated returns is recorded at the time sales are recognized.
Long-term contracts are accounted for in accordance with SOP 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” We determine estimated contract profit rates and use the percentage-of-completion method to recognize revenues and associated costs as work progresses on certain long-term contracts. We measure the extent of progress toward completion generally based upon one of the following methods (based upon an assessment of which method most closely aligns to the underlying earnings process), (i) the units-of-delivery method, (ii) the cost-to-cost method, using the ratio of contract costs incurred as a percentage of total estimated costs at contract completion (based upon engineering and production estimates), or (iii) the achievement of contractual milestones. Provisions for anticipated losses or revisions in estimated profits on contracts-in-process are recorded in the period in which such anticipated losses or revisions become evident.
Revenue from sales of products where software is other than incidental to their performance, including related software support and maintenance contracts is recognized in accordance with SOP 97-2, “Software Revenue Recognition.” Accordingly, revenue for software is recognized when the software is delivered, if all of the above criteria for revenue recognition are met.
When a customer purchases software together with post contract support, we allocate a portion of the fee to the post contract support for its fair value based on the contractual renewal rate or the amount the support is sold for on a standalone basis. Post contract support fees are deferred in Advance Payments by Customers and Deferred Revenue, and recognized as revenue ratably over the term of the related contract.
Acquisition Accounting
We use the purchase method to account for business combinations, whereby the total cost of an acquisition is allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the date of acquisition. The allocation of the purchase price is dependent upon certain valuations and other studies, which contain estimates and assumptions.
Long-Lived Assets
We test goodwill annually for impairment and whenever events or circumstances indicate impairment might have occurred. We evaluate the recoverability of goodwill using a two-step impairment test approach at the reporting unit level. In the first step, which is used to identify potential impairments, the overall fair value for the reporting unit is compared to its carrying amount including goodwill. If the fair value of a reporting unit is less than the carrying amount, a second step is performed which compares the implied fair value of the reporting unit’s goodwill to the carrying amount of the goodwill. The implied fair value for the goodwill is determined based on the difference between the fair value of the reporting unit and the fair value of its net identifiable assets. If the implied fair value of the goodwill is less than its carrying amount, the difference is recognized as an impairment.
Our amortizable intangible assets, which are comprised primarily of developed technology and customer related intangibles, are subject to amortization over periods ranging up to 11 years, on a straight-line basis. Property, plant and equipment are stated at cost. Depreciation of plant and equipment is provided over the estimated useful lives of the respective assets, principally on a straight-line basis. Leasehold improvements are amortized over the life of the lease, including anticipated renewals, or the estimated life of the asset, whichever is shorter.
We periodically review our depreciable and amortizable long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.
Research and Development Costs
We charge all research and development costs to expense as incurred, except those of our software products for which costs incurred between the date of product technological feasibility and the date that the software is available for general release are capitalized. We use a working model of the software or a detailed program design to assess technological feasibility. We capitalized software development costs of $209,000, $0 and $0 for the three months ended September 30, 2008 and the periods from August 15, 2007 to September 30, 2007 and July 1, 2007 to August 14, 2007, respectively. Capitalized software development costs are amortized to cost of sales based on the higher of a) the percentage of revenue for units delivered to total anticipated revenue for the related product or b) on a straight-line basis. Capitalized software development costs of $727,000 and $1.2 million were included in Other Assets at September 30, 2008 and June 30, 2008, respectively.
Income Taxes
We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Foreign Currency Translations
The financial statements of our foreign subsidiaries are measured in their local currency and then translated into U.S. dollars using the current rate method. Under the current rate method, assets and liabilities are translated using the exchange rate at the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing throughout the year.
Gains and losses resulting from the translation of financial statements of foreign subsidiaries are accumulated in other comprehensive income (loss) and presented as part of stockholder’s equity. Realized and unrealized foreign currency exchange gains (losses) from the settlement of foreign currency transactions are reflected in other income (expense) and amounted to $2.3 million, $(372,000) and $193,000 for the three months ended September 30, 2008 and the periods from August 15, 2007 to September 30, 2007 and July 1, 2007 to August 14, 2007, respectively.
Comprehensive Income
Comprehensive income consists of net income (loss) and equity adjustments relating to foreign currency translation, changes in fair value of certain derivatives and non-current marketable securities and adjustments to the minimum pension liability.
Earnings (Loss) Per Share
We have not presented earnings (loss) per share data because all 1,000 shares of common stock outstanding at June 30, 2008 and September 30, 2008 are held by one shareholder.
Recently Adopted Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 157, “Fair Value Measurements,” to clarify the definition of fair value, establish a framework for measuring fair value and expand the disclosures on fair value measurements. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). SFAS 157 also stipulates that, as a market-based measurement, fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability, and establishes a fair value hierarchy that distinguishes between (a) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (b) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).
In February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13.” This FSP amends SFAS 157 to exclude certain leasing transactions accounted for under previously existing accounting guidance. However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination, regardless of whether those assets and liabilities are related to leases.
In February 2008, the FASB issued FSP No. FAS 157-2, “Effective Date for FASB Statement No. 157.” This FSP permits the delayed application of SFAS 157 for nonfinancial assets and nonfinancial liabilities, as defined in this FSP, except for those that are recognized or disclosed at fair value in the financial statements at least annually, until the beginning of our fiscal 2010. As of July 1, 2008, we adopted SFAS 157 (see Note 8), with the exception of its application to nonfinancial assets and nonfinancial liabilities, which we will defer in accordance with FSP No. FAS 157-2. We are currently evaluating the impact on our consolidated financial statements of adopting SFAS 157 at the beginning of fiscal 2010 for such nonfinancial assets and nonfinancial liabilities.
In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The FSP is effective upon issuance, including prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application should be accounted for as a change in accounting estimate following the guidance in SFAS 154, “Accounting Changes and Error Corrections.” However, the disclosure provisions in SFAS 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application. We adopted SFAS 157 beginning in our fiscal 2009 first quarter. We used these key considerations in evaluating the fair value measurements of our financial assets (see Note 8) and recorded a $1.2 million valuation allowance against the value of our auction rate securities.
In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” to permit all entities to choose to elect, at specified election dates, to measure eligible financial instruments at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in earnings as incurred and not deferred. SFAS 159 became effective for us as of July 1, 2008. As we did not elect the fair value option for our financial instruments (other than those already measured at fair value in accordance with SFAS No. 157), the adoption of this standard did not have an impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In December 2007, the FASB issued SFAS 141(R), “Business Combinations.” SFAS 141(R) replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for us for acquisitions consummated on or after July 1, 2009.
In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51.” SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact, if any, the provisions of SFAS 160 will have on our consolidated financial statements.
In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.” SFAS 161 requires companies to provide qualitative disclosures about their objectives and strategies for using derivative instruments, quantitative disclosures of the fair values and gains and losses of these derivative instruments in a tabular format, as well as more information about liquidity by requiring disclosure of a derivative contract’s credit-risk-related contingent features. SFAS 161 also requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. We are currently evaluating the disclosure requirements of SFAS 161. As this is a disclosure-only standard, there will be no impact on our consolidated financial statements as a result of its adoption. SFAS 161 becomes effective for our March 2009 interim consolidated financial statements.
In April 2008, the FASB issued FSP FAS No. 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible Assets.” This FSP also adds certain disclosures to those already prescribed in SFAS 142. FSP 142-3 becomes effective for the annual and interim periods within the year, beginning in our fiscal 2010. The guidance for determining useful lives must be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements must be applied prospectively to all intangible assets recognized as of the effective date.
In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This FSP provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform with the provisions in this FSP. Early application of this FSP is prohibited. We have not issued any share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents.
| 2. | Discontinued Operations |
As a result of continued operating losses, in June 2007 our then board of directors approved a formal plan to divest our radar business (“Radar”) and to seek a strategic buyer. This business had previously been included in the Test Solutions segment. As a result of this decision, the operating results of Radar, net of taxes, had been classified in the consolidated statements of operations as discontinued operations for all periods presented. We recorded a loss on disposal of $3.7 million ($2.4 million, net of tax) in the predecessor period July 1, 2007 to August 14, 2007, to reflect the net assets of Radar at their net realizable value based on the May 15, 2008 sale of the business for $750,000. The sale agreement provided for additional contingent consideration, which is not included in the calculation of the loss on disposal as realization is not probable.
Net sales and income (loss) from discontinued operations (including impairment charges), which were solely related to Radar, were as follows:
| | Three Months Ended | | | August 15, 2007 to | | | July 1, 2007 to | |
| | September 30, 2008 | | | September 30, 2007 | | | August 14, 2007 | |
| | Successor | | | Successor | | | Predecessor | |
| | (In thousands) | |
| | | | | | | | | |
Net sales | | $ | - | | | $ | 207 | | | $ | 120 | |
| | | | | | | | | | | | |
Income (loss) from discontinued operations before income taxes | | $ | - | | | $ | (1,182 | ) | | $ | (3,861 | ) |
Income tax (benefit) | | | - | | | | (220 | ) | | | (1,353 | ) |
Income (loss) from discontinued operations | | $ | - | | | $ | (962 | ) | | $ | (2,508 | ) |
In March 2005, we sold the net assets of our shock and vibration control device manufacturing business (“VMC”). Under the terms of the sale agreements, we retained certain liabilities relating to adverse environmental conditions that existed at the premises occupied by VMC as of the date of sale. We recorded a liability for the estimated remediation costs related to adverse environmental conditions that existed at the VMC premises when it was sold. The accrued environmental liability at September 30, 2008 is $1.2 million, of which $322,000 is expected to be paid within one year.
3. Company Sale Transaction
The Merger on August 15, 2007 was funded by a $378.4 million equity investment by Veritas, Golden Gate, GS Direct and certain members of our management and the majority of the proceeds from term loans aggregating $525 million and two exchangeable unsecured credit facilities totaling $345 million. An advisory agreement with the non-management equity investors or their designated affiliates requires us to pay advisory services fees of $2.3 million for fiscal 2009. Refer to Note 3 to our June 30, 2008 annual financial statements for complete details of our Merger and a terminated merger.
In connection with the Merger and Terminated Merger, for the periods from August 15, 2007 to September 30, 2007 and July 1, 2007 to August 14, 2007, we incurred company sale transaction and related expenses that we expensed as incurred of $30.3 million and $3.7 million, respectively, consisting primarily of merger-related severance and other change of control related payments, a merger termination fee and the related lawsuit settlement charge and legal and other professional fees (“Company Sale Transaction expenses”).
The Merger constituted a change in control of the Company. In accordance with GAAP, we recorded its assets and liabilities at fair value as of the date of the Merger, whereby the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Independent third-party appraisers were engaged to assist management and perform valuations of certain of the tangible and intangible assets acquired. We allocated the purchase price based on the appraisals associated with the valuation of certain acquired assets and assumed liabilities.
We allocated the purchase price, including the acquisition costs of approximately $22.9 million, based on the estimated fair value of the assets acquired and liabilities assumed as follows:
| | In thousands | |
| | | |
Current assets (excluding cash of $45.5 million) | | $ | 335,252 | |
Property, plant and equipment | | | 111,804 | |
Other assets | | | 16,537 | |
Developed technology | | | 195,500 | |
Customer related intangible assets | | | 211,582 | |
Other acquired intangible assets | | | 6,290 | |
Intangible assets with indefinite lives (tradenames) | | | 122,870 | |
Goodwill | | | 452,756 | |
In-process research and development | | | 24,340 | |
Total assets acquired | | | 1,476,931 | |
Current liabilities | | | (137,751 | ) |
Long-term liabilities | | | (220,887 | ) |
Total liabilities assumed | | | (358,638 | ) |
Net assets acquired | | $ | 1,118,293 | |
At the acquisition date, the acquired in-process research and development (IPR&D) was not considered to have reached technological feasibility and had no alternative future uses. Therefore, the fair value of the IPR&D of $24.3 million was expensed at the time of the acquisition in operating costs. The allocation to in-process research and development represents the estimated fair value of such incomplete research and development, at the acquisition date, based on future cash flows. As of the acquisition date, cash flows from these projects were expected to commence in fiscal year 2009. In determining the fair values of IPR&D, risk adjusted discount rates that ranged from 17% to 25% were applied to the projects’ cash flows, which have taken into account the respective projects’ completion percentage.
The unaudited pro forma results of operations presented below for the period from July 1, 2007 to August 14, 2007 are presented as though the Merger had occurred on July 1, 2006, after giving effect to purchase accounting adjustments relating to depreciation and amortization of the revalued assets, interest expense associated with the new credit facilities and other acquisition-related adjustments in connection with the Merger. The pro forma results of operations are not necessarily indicative of the combined results that would have occurred had the Merger been consummated at July 1, 2006, nor are they necessarily indicative of future operating results.
| | Period from | |
| | July 1, 2007 to | |
| | August 14, 2007 | |
| | Predecessor | |
| | (In thousands) | |
| | | |
Net sales | | $ | 38,178 | |
Net income (loss) | | $ | (27,554 | ) |
4. Acquisition of Businesses and Intangible Assets
Test Evolution Corporation
On October 1, 2007, we purchased 40% of the outstanding stock of Test Evolution Corporation (“TEC”) for $4.0 million ($2.0 million at closing and $2.0 million paid in October 2008). TEC, located in Massachusetts, develops and manufactures digital, analog and RF semiconductor automated test equipment. We have determined that we have control of this company and have consolidated TEC’s assets and liabilities and results of operations, all of which were insignificant, into our financial statements commencing October 1, 2007. The non-controlling interest of 60% in each of the equity and operations of TEC are not material to our consolidated financial statements and have been included in other long-term liabilities and other income (expense), respectively. TEC is included in our Test Solutions segment.
Gaisler Research AB
On June 30, 2008, we acquired the stock of Gaisler Research AB (“Gaisler”) for $12.7 million cash (net of $2.7 million cash acquired), plus up to another $15 million over the next three years provided specified EBITDA targets are achieved. Located in Sweden, Gaisler provides integrated circuit software products and services to European space system suppliers, plus other U.S., Japanese and Russian space agencies. Gaisler is included in our Microelectronic Solutions segment.
We preliminarily allocated the purchase price, including acquisition costs of approximately $379,000, based on the estimated fair value of the assets acquired and liabilities assumed as follows:
| | In thousands | |
| | | |
Current assets (excluding cash of $2.7 million) | | $ | 987 | |
Property, plant and equipment | | | 62 | |
Developed technology | | | 2,920 | |
Customer related intangibles | | | 1,650 | |
Tradenames | | | 508 | |
Goodwill | | | 8,424 | |
In-process research and development | | | 635 | |
Total assets acquired | | | 15,186 | |
Current liabilities | | | (1,096 | ) |
Deferred taxes | | | (1,423 | ) |
Total liabilities assumed | | | (2,519 | ) |
Net assets acquired | | $ | 12,667 | |
As of September 30, 2008, we were in the process of completing our assessment of the fair value of certain assets and liabilities as of the date of acquisition which is expected to be finalized upon the receipt and completion of additional information and analysis during fiscal 2009.
The customer related intangibles and developed technology are being amortized on a straight-line basis over a range of 1 to 7 years.
On a pro forma basis, had the Gaisler acquisition taken place as of the beginning of fiscal 2008, our results of operations would not have been materially affected.
Intangible Assets with Definite Lives
The components of amortizable intangible assets are as follows:
| | September 30, 2008 | | | June 30, 2008 | |
| | (In thousands) | |
| | Gross | | | | | | Gross | | | | |
| | Carrying | | | Accumulated | | | Carrying | | | Accumulated | |
| | Amount | | | Amortization | | | Amount | | | Amortization | |
| | | | | | | | | | | | |
Developed technology | | $ | 194,561 | | | $ | 37,419 | | | $ | 198,420 | | | $ | 29,631 | |
Customer related intangibles | | | 210,881 | | | | 51,251 | | | | 213,232 | | | | 42,433 | |
Non-compete arrangements | | | 6,290 | | | | 1,302 | | | | 6,290 | | | | 1,012 | |
Total | | $ | 411,732 | | | $ | 89,972 | | | $ | 417,942 | | | $ | 73,076 | |
The aggregate amortization expense for amortizable intangible assets was $18.0 million, $10.5 million and $1.7 million for the three months ended September 30, 2008 and the periods August 15, 2007 to September 30, 2007 and July 1, 2007 to August 14, 2007, respectively.
The estimated aggregate amortization expense for each of the twelve-month periods ending September 30, is as follows:
| | (In thousands) | |
| | | |
2009 | | $ | 59,282 | |
2010 | | | 58,255 | |
2011 | | | 57,964 | |
2012 | | | 56,824 | |
2013 | | | 47,910 | |
Goodwill
The carrying amount of goodwill is as follows:
| | AMS | | | ATS | | | Total | |
| | (In thousands) | |
| | | | | | | | | |
Balance at June 30, 2007 (predecessor entity) | | $ | 51,321 | | | $ | 130,641 | | | $ | 181,962 | |
Goodwill adjustment recorded in purchase accounting from allocation of purchase price (1) | | | 243,456 | | | | 27,373 | | | | 270,829 | |
Balance at August 15, 2007 (successor entity) | | | 294,777 | | | | 158,014 | | | | 452,791 | |
Acquisition of Test Evolution Corporation | | | - | | | | 1,868 | | | | 1,868 | |
Acquisition of Gaisler | | | 8,261 | | | | - | | | | 8,261 | |
Impact of foreign currency translation | | | (268 | ) | | | (1,497 | ) | | | (1,765 | ) |
Balance at June 30, 2008 (successor entity) | | | 302,770 | | | | 158,385 | | | | 461,155 | |
Final adjustment to goodwill recorded in purchase accounting | | | 494 | | | | (529 | ) | | | (35 | ) |
Adjustment to goodwill for acquisition of Gaisler | | | 163 | | | | - | | | | 163 | |
Impact of foreign currency translation | | | (1,175 | ) | | | (3,915 | ) | | | (5,090 | ) |
Balance at September 30, 2008 (successor entity) | | $ | 302,252 | | | $ | 153,941 | | | $ | 456,193 | |
(1) The predecessor entity goodwill has been written off in purchase accounting for the Merger.
5. Restructuring Charges
In fiscal 2008, we initiated actions to restructure our United Kingdom business units by further consolidating our manufacturing, research and development and selling, general and administrative activities. In addition, we initiated a restructuring in our Whippany, New Jersey, component manufacturing facility to address a slowdown in sales of its integrated products line. These actions resulted in the termination of approximately 120 employees, which resulted in restructuring costs, principally severance, for the periods from August 15, 2007 to September 30, 2007 and July 1, 2007 to August 14, 2007 of $31,000 (all in selling, general and administrative costs) and $3.8 million ($1.6 million in selling, general and administrative costs and $2.2 million in research and development costs), respectively. Substantially all of the workforce reduction costs were paid prior to June 30, 2008. Other restructuring charges include $2.6 million of accrued contractual commitments under operating leases for two facilities in the U.K. that we exited in May 2008, which will be paid through December 2010. In addition, approximately $485,000 of fixed asset impairment charges were recorded in selling, general and administrative costs in the fourth quarter of 2008 for the write-off of leasehold improvements in the abandoned facilities.
In the first quarter of fiscal 2009, we incurred $402,000 of severance costs for an additional eleven employees terminated in our U.K. business unit ($306,000 in cost of sales, $32,000 in S,G&A and $64,000 in research and development).
The following table sets forth the charges and payments related to the restructuring liability for the periods indicated:
| | Balance | | | | | | | | | | | | Balance | |
| | June 30, | | | | | | | | | | | | September 30, | |
| | 2008 | | | Three Months Ended September 30, 2008 | | | | | | 2008 | |
| | | | | | | | | | | Effect of | | | | |
| | Restructuring | | | | | | | | | foreign | | | Restructuring | |
| | Liability | | | Net Additions | | | Cash Payments | | | currency | | | Liability | |
| | (In thousands) | |
Work force reduction | | $ | 12 | | | $ | 402 | | | $ | (414 | ) | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | |
Other | | | 3,242 | | | | - | | | | (334 | ) | | | (315 | ) | | | 2,593 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 3,254 | | | $ | 402 | | | $ | (748 | ) | | $ | (315 | ) | | $ | 2,593 | |
6. Inventories
Inventories consist of the following:
| | September 30, | | | June 30, | |
| | 2008 | | | 2008 | |
| | (In thousands) | |
| | | | | | |
Raw materials | | $ | 60,632 | | | $ | 64,533 | |
Work in process | | | 52,182 | | | | 41,056 | |
Finished goods | | | 24,163 | | | | 29,302 | |
| | $ | 136,977 | | | $ | 134,891 | |
7. Product Warranty
We warrant our products against defects in design, materials and workmanship, generally for one year from their date of shipment. A provision for estimated future costs relating to these warranties is recorded when the related revenue is recognized and is included in cost of sales. Quarterly we analyze our warranty liability for reasonableness based on a 15-month history of warranty costs incurred, the nature of the products shipped subject to warranty and anticipated warranty trends.
Activity related to our product warranty liability was as follows:
| | Three Months Ended | | | August 15, 2007 to | | | July 1, 2007 to | |
| | September 30, 2008 | | | September 30, 2007 | | | August 14, 2007 | |
| | Successor | | | Successor | | | Predecessor | |
| | (In thousands) | |
| | | | | | | | | |
Balance at beginning of period | | $ | 2,944 | | | $ | 3,002 | | | $ | 2,929 | |
Provision for warranty obligations | | | 618 | | | | 629 | | | | 469 | |
Cost of warranty obligations | | | (654 | ) | | | (576 | ) | | | (394 | ) |
Foreign currency impact | | | (100 | ) | | | 12 | | | | (2 | ) |
Balance at end of period | | $ | 2,808 | | | $ | 3,067 | | | $ | 3,002 | |
8. Fair Value Measurements
We adopted the provisions of SFAS 157 for financial assets and liabilities as of July 1, 2008. In connection with the adoption of SFAS 157, we recorded a $1.2 million valuation allowance against the value of our auction rate securities. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. SFAS 157 also establishes a fair value hierarchy which requires the entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
SFAS 157 describes three levels of inputs that may be used to measure fair value:
Level 1: | |
Level 2: | Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
Level 3: | Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instruments valuation. |
The following table presents for each hierarchy level, financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2008:
| | Quoted Prices in | | | | | | | | | | |
| | Active Markets | | | Significant Other | | | Significant | | | | |
| | for Identical | | | Observable | | | Unobservable | | | | |
| | Assets | | | Inputs | | | Inputs | | | | |
| | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total | |
| | (In thousands) | |
Assets: | | | | | | | | | | | | |
Non-current marketable securities | | $ | - | | | $ | - | | | $ | 18,755 | | | $ | 18,755 | |
Liabilities: | | | | | | | | | | | | | | | | |
Foreign currency forward contracts | | $ | - | | | $ | 152 | | | $ | - | | | $ | 152 | |
Interest rate swap contracts | | | - | | | | 665 | | | | - | | | | 665 | |
Total Liabilities | | $ | - | | | $ | 817 | | | $ | - | | | $ | 817 | |
The change in the fair value of Level 3 financial assets impacted net income (loss) and Other Comprehensive Income by $0 and $755,000, net of tax, respectively, for the three months ended September 30, 2008.
Foreign Currency Forward Contracts – The fair value of our foreign currency forward contracts were valued using a pricing model with all significant inputs based on observable market data such as measurement date spot and forward rates.
Non-Current Marketable Securities – Non-current marketable securities consist of auction rate securities that currently have no active market from which we could obtain pricing. Since we adopted SFAS 157 on July 1, 2008, auction rate securities have been classified as Level 3 as their valuation requires substantial judgment and estimation of factors that are not currently observable in the market due to the lack of trading in the securities. Since February 2008, when auctions for these securities began to fail, we have redeemed $26.5 million of Auction Rate Securities at par. To date, we have collected all interest payments on all our Auction Rate Securities when due. Furthermore, we have the intent and are able to hold these securities until the credit markets recover, or until maturity, if necessary. However, based on a discounted cash flow analysis, which considered, among other items, the collateral underlying the securities, the credit worthiness of the issuer, the timing of future cash flows and liquidity risks, we have recorded a $1.2 million valuation allowance against the auction rate securities.
Interest Rate Swap Contracts – The fair value of our outstanding interest rate swap contracts were based on valuations received from the counterparties and corroborated by measurement date equivalent swap rates.
9. Long Term Debt and Credit Agreements
On August 7, 2008, the 11.75% exchangeable senior unsecured loan in the amount of $225 million with an ultimate maturity on February 15, 2015 was refinanced with an unsecured senior note with the same interest rate and maturity date. We may prepay the senior notes commencing August 15, 2011 at 105.875% of the principal amount prepaid, which decreases to 102.938% on August 15, 2012 and to 100% on or after August 15, 2013. In addition, we may redeem up to 35% of the original aggregate principal balance of the senior notes, at any time prior to August 15, 2010, with the net proceeds of certain equity offerings at 111.75% of the principal amount redeemed. We have entered into an agreement to file an exchange offer registration statement with the SEC by February 3, 2009 to publicly register debt securities with similar terms to the senior notes and to use commercially reasonable efforts to have such registration statement declared effective on or prior to May 4, 2009. If we fail to timely file the registration statement or it is not timely declared effective, then we will pay special interest on the senior notes equal to 0.25% on the outstanding principal amount of the notes with respect to the first ninety days following the registration default event, which will increase by an additional 0.25% with respect to each subsequent ninety day period until all registration defaults have been cured, up to a maximum of 1%.
As of September 30, 2008, we are in compliance with all of the covenants contained in our loan agreements.
In connection with our credit facilities, we capitalized deferred financing costs of $439,000, $27.1 million and $477,000 for the three months ended September 30, 2008 and the periods August 15, 2007 to September 30, 2007 and July 1, 2007 to August 14, 2007, respectively, primarily consisting of facility, legal and advisory fees. We are amortizing these costs over the terms of the related facilities. For the three months ended September 30, 2008, the periods August 15, 2007 to September 30, 2007 and July 1, 2007 to August 14, 2007, we amortized $1.2 million, $267,000 and $217,000, respectively, to interest expense.
Interest paid was $11.9 million for the three months ended September 30, 2008, $44,000 for the period August 15, 2007 to September 30, 2007, and $57,000 for the period July 1, 2007 to August 14, 2007.
10. Stockholder’s Equity
Share Based Compensation
Stock Options
All of our stock option plans were terminated on August 15, 2007. The Merger agreement provided that all stock options were cancelled and converted into the right to receive a cash payment equal to the number of shares of our common stock underlying the options multiplied by that amount, if any, by which $14.50 exceeded the exercise price, without interest and less any withholding taxes. On August 15, 2007 we paid $43.9 million to option holders to cancel all options outstanding in connection with the Merger.
Member Interests
On August 15, 2007 certain members of our management were granted Class B member interests in a limited liability company (parent LLC) that is the ultimate parent of the Company, and which owns all of the common stock of the Parent. The parent LLC is a holding company with no operations or employees of its own. The parent LLC has two classes of membership interests. Our non-management equity investors or their affiliates and Company employees that made equity investments to partially fund the Merger and Class B members consist of Company employees. Pursuant to the terms of the limited liability company operating agreement governing the parent LLC, the holders of Class B member interests are entitled to receive a percentage of all distributions, if any, made by the parent LLC after (x) the holders of the Class A members in the parent LLC have received a return of their invested capital, plus a 12% per annum internal rate of return (compounded annually) on their invested capital and (y) certain members of our management that received Class A interests for their capital contributions have received a special distribution in the aggregate amount of $3.2 million, together with a 12% per annum internal rate of return (compounded annually). The Class B member interests are non-transferable and vest ratably over five years, with any unvested interests reverting to the holders of Class A interests in the event they are forfeited or repurchased.
Compensation expense attributable to share based compensation was $489,000 ($308,000 after tax) for the three months ended September 30, 2008, $1.7 million ($1.0 million after tax) for the period August 15, 2007 to September 30, 2007 and $214,000 ($135,000 after tax) for the period July 1, 2007 to August 14, 2007.
A summary of the changes to outstanding stock options from July 1, 2007 to August 15, 2007 is presented below:
| | Shares | | | Price | |
| | (In thousands) | | | | |
| | | | | | |
Outstanding at June 30, 2007 | | | 13,003 | | | $ | 12.37 | |
Granted | | | - | | | | - | |
Forfeited | | | (27 | ) | | | 19.30 | |
Expired | | | - | | | | - | |
Exercised | | | (51 | ) | | | 11.39 | |
Cancelled | | | (3,825 | ) | | | 18.74 | |
Paid out on Merger | | | (9,100 | ) | | | 9.68 | |
Outstanding at August 15, 2007 | | | - | | | | | |
As no stock options were granted subsequent to August 15, 2007, there are no stock options outstanding at September 30, 2008.
Cash received from stock option exercises was $0 for the three months ended September 30, 2008, $0 for the period August 15, 2007 to September 30, 2007 and $583,000 for the period July 1, 2007 to August 14, 2007. The tax benefit received from stock option exercises was $0 for the three months ended September 30, 2008, $16.1 million for the period August 15, 2007 to September 30, 2007 and $41,000 for the period July 1, 2007 to August 14, 2007.
11. Comprehensive Income
The components of comprehensive income (loss) are as follows:
| | | | | | | | | |
| | Three Months Ended | | | August 15, 2007 to | | | July 1, 2007 to | |
| | September 30, 2008 | | | September 30, 2007 | | | August 14, 2007 | |
| | Successor | | | Successor | | | Predecessor | |
| | (In thousands) | |
| | | | | | | | | |
Net income (loss) | | $ | (6,897 | ) | | $ | (50,498 | ) | | $ | (16,916 | ) |
Unrealized gain (loss) on interest rate | | | | | | | | | | | | |
swap agreements, net of tax provision | | | | | | | | | | | | |
(benefit) of ($1.1 million), $0, and $0 | | | (1,831 | ) | | | - | | | | - | |
Valuation allowance against | | | | | | | | | | | | |
non-current marketable securities, net | | | | | | | | | | | | |
of tax benefit of $443,000 | | | (755 | ) | | | - | | | | - | |
Foreign currency translation adjustment | | | (21,781 | ) | | | 4,315 | | | | (497 | ) |
Total comprehensive income (loss) | | $ | (31,264 | ) | | $ | (46,183 | ) | | $ | (17,413 | ) |
Accumulated other comprehensive income (loss) is as follows:
| | Unrealized | | | Valuation | | | | | | | | | | |
| | Gain (Loss) | | | Allowance Against | | | Minimum | | | | | | | |
| | on Interest | | | Non-Current | | | Pension | | | Foreign | | | | |
| | Rate Swap | | | Marketable | | | Liability | | | Currency | | | | |
| | Agreements | | | Securities | | | Adjustment | | | Translation | | | Total | |
| | (net of tax) | | | (net of tax) | | | (net of tax) | | | Adjustment | | | (net of tax) | |
| | | | | | | | (In thousands) | | | | | | | |
Balance, June 30, 2008 | | $ | 1,411 | | | $ | - | | | $ | (6 | ) | | $ | (998 | ) | | $ | 407 | |
Three months' activity | | | (1,831 | ) | | | (755 | ) | | | - | | | | (21,781 | ) | | | (24,367 | ) |
Balance, September 30, 2008 | | $ | (420 | ) | | $ | (755 | ) | | $ | (6 | ) | | $ | (22,779 | ) | | $ | (23,960 | ) |
The foreign currency translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries.
12. Legal Matters
During the quarter ended March 31, 2007, we became aware that certain RadHard bidirectional multipurpose transceivers sold by us since 1999 may have been subject to the licensing jurisdiction of the U.S. Department of State in accordance with the International Traffic in Arms Regulations (“ITAR”). Accordingly, we filed a Voluntary Disclosure with the Directorate of Defense Trade Controls, Department of State, describing the details of the possible inadvertent misclassification. Simultaneously, we flied a Commodity Jurisdiction request providing detailed information and data supporting our contention that the product is not subject to ITAR and requested a determination that such product is not ITAR controlled. By letter dated November 15, 2007, we were informed that the Department of State had determined in response to our Commodity Jurisdiction request, that the product is subject to the licensing jurisdiction of the Department of State in accordance with ITAR. We requested reconsideration of this determination. On February 7, 2008, we filed an addendum to the above referenced Voluntary Disclosure advising the Directorate of Defense Trade Controls that other products sold by us similar in nature to the transceiver described above may also be subject to the ITAR. The Directorate of Defense Trade Controls agreed to extend the time for us to file such Voluntary Disclosure until there was a decision with respect to our request for reconsideration of the determination in connection with the above-referenced Commodity Jurisdiction request. On August 5, 2008, we received a letter from the Office of Defense Trade Controls Compliance (“DTCC”) requesting that we provide documentation and/or information relating to our ITAR compliance initiatives after November 15, 2007 as well as the results of any product reviews conducted by us, and indicating that a civil penalty against us could be warranted in connection with this matter following the review of such materials. We have complied with the request by DTCC and have provided the detailed information requested. In August 2008, we received the determination by the Directorate of Defense Trade Controls with respect to the request for reconsideration of the Commodity Jurisdiction determination. The Directorate of Defense Trade Controls denied our request for reconsideration and determined that the product is subject to the licensing jurisdiction of the Department of State in accordance with the ITAR. Accordingly, on September 18, 2008, we filed an addendum to our Voluntary Disclosure identifying other products that may have been subject to the licensing jurisdiction of the U.S. Department of State in accordance with the ITAR but were inadvertently misclassified. At this time it is not possible to determine whether any fines or other penalties will be asserted against us, or the materiality of any outcome.
During May 2008, we became further aware that a certain product sold by our KDI subsidiary may have inadvertently been misclassified as not ITAR controlled. On August 5, 2008, we filed a Voluntary Disclosure with the Directorate of Defense Trade Controls, Department of State, describing the inadvertent misclassification of this product. At this time it is not possible to determine whether any fines or other penalties will be asserted against us, or the materiality of any outcome.
An amended class action complaint was filed against us and our board of directors on June 20, 2007 in the Supreme Court of the State of New York, Nassau County. The complaint alleges that our board breached its fiduciary duties to our stockholders (i) by issuing a preliminary proxy statement on June 5, 2007 that was issued in connection with seeking stockholder approval of the Merger and (ii) in approving certain amendments, that were allegedly beyond the scope of our corporate power to our Supplemental Executive Retirement Plan and the employment agreements of defendants Harvey R. Blau, our then Chairman and Chief Executive Officer, and Leonard Borow, our then President and Chief Operating Officer. The plaintiffs sought injunctive relief with respect to the first cause of action, seeking to enjoin the July 26, 2007 special meeting of our stockholders on the grounds that we and our board of directors provided inadequate disclosures, and the recovery of money damages with respect to the second cause of action. The plaintiffs subsequently withdrew their motion for preliminary injunctive relief. On July 9, 2007, we and our board of directors filed a motion to dismiss the amended class action complaint and that motion is currently pending. The July 26, 2007 stockholders meeting went forward and our stockholders approved the Merger. On August 15, 2007, the acquisition of the Company was completed. We are currently in settlement discussions with the plaintiffs and have accrued an insignificant liability for the settlement.
We are also involved in various claims and legal actions that arise in the ordinary course of business. We do not believe that the ultimate resolution of any of these actions will have a material adverse effect on our financial position, results of operations, liquidity or capital resources.
13. Commitment
Our Supplemental Executive Retirement Plan (the “SERP”) is unfunded. Excluding the monthly payments due one retired participant through at least December 31, 2015, we are required to make $18.3 million of payments, plus 6% interest per annum from August 15, 2007, in full satisfaction of the benefits payable under the SERP to all remaining participants the earlier of December 31, 2008 to January 5, 2009 or upon specified events, including an additional change of control of the Company or termination. The aggregate accrued liability to those participants, including the related interest, was $19.4 million at September 30, 2008.
14. Business Segments
Our business segments and major products included in each segment, are as follows:
Microelectronic Solutions (“AMS”)
| · | Microelectronic Components, Sub-assemblies and Modules |
Test Solutions (“ATS”)
| · | Instrument Products and Test Systems |
We are a manufacturer of advanced technology systems and components for commercial industry, government and defense contractors. Approximately 32.6% of our sales for the three months ended September 30, 2008, 27.8% of our sales for the period August 15, 2007 to September 30, 2007 and 21% for the period July 1, 2007 to August 14, 2007 were to agencies of the United States government or to prime defense contractors or subcontractors of the United States government. No one customer constituted more than 10% of sales during any of the periods presented. Inter-segment sales were not material and have been eliminated from the tables below.
The majority of our operations are located in the United States; however, we also have operations in Europe and Asia, with our most significant international operations in the United Kingdom. Net sales from facilities located in the United Kingdom were approximately $34.4 million for the three months ended September 30, 2008, $28.2 million for the period August 15, 2007 to September 30, 2007 and $11.7 million for the period July 1, 2007 to August 14, 2007. Total assets of the United Kingdom operations were $200.3 million and $237.5 million as of September 30, 2008 and June 30, 2008, respectively.
Revenues, based on the customers’ locations, attributed to the United States and other regions are as follows:
| | | | | Period | | | Period | |
| | Three Months Ended | | | August 15, 2007 to | | | July 1, 2007 to | |
| | September 30, 2008 | | | September 30, 2007 | | | August 14, 2007 | |
| | Successor | | | Successor | | | Predecessor | |
| | (In thousands) | |
| | | | | | | | | |
United States of America | | $ | 75,015 | | | $ | 56,227 | | | $ | 21,183 | |
Europe and Middle East | | | 37,121 | | | | 23,787 | | | | 10,357 | |
Asia and Australia | | | 26,886 | | | | 20,622 | | | | 6,242 | |
Other regions | | | 1,823 | | | | 1,379 | | | | 439 | |
| | $ | 140,845 | | | $ | 102,015 | | | $ | 38,221 | |
Selected financial data by segment is as follows:
| | Three Months Ended | | | August 15, 2007 | | | July 1, 2007 | |
| | September 30, | | | to September 30, | | | to August 14, | |
| | 2008 | | | 2007 | | | 2007 | |
| | Successor Entity | | | Successor Entity | | | Predecessor Entity | |
| | (In thousands) | |
Net sales: | | | | | | | | | |
Microelectronic solutions ("AMS") | | $ | 67,580 | | | $ | 48,396 | | | $ | 19,017 | |
Test solutions ("ATS") | | | 73,265 | | | | 53,619 | | | | 19,204 | |
Net sales | | $ | 140,845 | | | $ | 102,015 | | | $ | 38,221 | |
| | | | | | | | | | | | |
Segment adjusted operating income: | | | | | | | | | | | | |
- AMS | | $ | 14,613 | | | $ | 15,233 | | | $ | 24 | |
- ATS | | | 9,630 | | | | 10,568 | | | | (7,582 | ) |
- General corporate expense | | | (2,696 | ) | | | (480 | ) | | | (2,347 | ) |
Adjusted operating income (loss) | | | 21,547 | | | | 25,321 | | | | (9,905 | ) |
| | | | | | | | | | | | |
Amortization of acquired intangibles | | | | | | | | | | | | |
- AMS | | | (10,677 | ) | | | (6,257 | ) | | | (279 | ) |
- ATS | | | (7,291 | ) | | | (4,212 | ) | | | (1,413 | ) |
Share based compensation | | | | | | | | | | | | |
- AMS | | | - | | | | - | | | | (83 | ) |
- ATS | | | - | | | | - | | | | 95 | |
- Corporate | | | (489 | ) | | | (1,657 | ) | | | (226 | ) |
Restructuring charges | | | | | | | | | | | | |
- AMS | | | - | | | | - | | | | - | |
- ATS | | | (402 | ) | | | (31 | ) | | | (3,778 | ) |
One-time lease termination costs | | | | | | | | | | | | |
- ATS | | | - | | | | - | | | | (576 | ) |
Merger related expenses - Corporate | | | (634 | ) | | | (2,182 | ) | | | (1,319 | ) |
Acquired in-process R&D costs | | | | | | | | | | | | |
- AMS | | | - | | | | (15,700 | ) | | | - | |
- ATS | | | - | | | | (8,640 | ) | | | - | |
Current period impact of acquisition related adjustments: | | | | | | | | | | | | |
Inventory - AMS | | | - | | | | (7,160 | ) | | | (57 | ) |
Inventory - ATS | | | - | | | | (5,240 | ) | | | - | |
Depreciation - AMS | | | (286 | ) | | | (146 | ) | | | - | |
Depreciation - ATS | | | (738 | ) | | | (412 | ) | | | - | |
Depreciation - Corporate | | | (55 | ) | | | (27 | ) | | | - | |
Deferred revenue - ATS | | | (97 | ) | | | (676 | ) | | | - | |
Sale transaction expenses | | | - | | | | (30,295 | ) | | | (3,717 | ) |
Operating income (loss) (GAAP) | | | 878 | | | | (57,314 | ) | | | (21,258 | ) |
| | | | | | | | | | | | |
Interest expense | | | (21,215 | ) | | | (11,136 | ) | | | (275 | ) |
Other income (expense), net | | | 3,086 | | | | (255 | ) | | | 294 | |
Income (loss) from continuing operations before income taxes | | $ | (17,251 | ) | | $ | (68,705 | ) | | $ | (21,239 | ) |
Management evaluated the operating results of the two segments based upon pre-tax operating income, before costs related to restructuring, lease termination charges, amortization of acquired intangibles, share-based compensation, acquired in-process research and development costs, Company Sale Transaction expenses, merger related expenses and the impact of any acquisition related adjustments.
15. Guarantor/Non-Guarantor Financial Information
The following supplemental condensed consolidating financial information sets forth, on an unconsolidated basis, the balance sheets at September 30, 2008 and June 30, 2008 and the statements of operations, and cash flows for the three months ended September 30, 2008 and the periods from August 15, 2007 to September 30, 2007 and July 1, 2007 to August 14, 2007 for Aeroflex Incorporated (the “Parent Company”), and for the Guarantor Subsidiaries and, on a combined basis, the Non-Guarantor Subsidiaries. The supplemental condensed consolidating financial information reflects, for all fiscal periods presented, the investments of the Parent Company in the Guarantor Subsidiaries as well as the investments of the Parent Company and the Guarantor Subsidiaries in the Non-Guarantor Subsidiaries, in all cases, using the equity method. The Parent Company’s purchase price allocation adjustments, including applicable intangible assets, arising from business acquisitions have been pushed down to the applicable subsidiary columns (see Notes 3 and 4).
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2008
(In thousands)
| | | | | Subsidiary | | | Subsidiary | | | | | | | |
| | Parent | | | Guarantors | | | Non-Guarantors | | | Eliminations | | | Consolidated | |
| | | | | | | | | | | | | | | |
Net sales | | $ | - | | | $ | 95,641 | | | $ | 46,807 | | | $ | (1,603 | ) | | $ | 140,845 | |
Cost of sales | | | - | | | | 50,454 | | | | 24,686 | | | | (1,654 | ) | | | 73,486 | |
Gross profit | | | - | | | | 45,187 | | | | 22,121 | | | | 51 | | | | 67,359 | |
Selling, general and administrative costs | | | 3,873 | | | | 17,985 | | | | 9,626 | | | | - | | | | 31,484 | |
Research and development costs | | | - | | | | 11,167 | | | | 5,862 | | | | - | | | | 17,029 | |
Amortization of acquired intangibles | | | - | | | | 15,313 | | | | 2,655 | | | | - | | | | 17,968 | |
Operating income (loss) | | | (3,873 | ) | | | 722 | | | | 3,978 | | | | 51 | | | | 878 | |
| | | | | | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | (21,183 | ) | | | (22 | ) | | | (10 | ) | | | - | | | | (21,215 | ) |
Other income (expense), net | | | 63 | | | | 242 | | | | 2,781 | | | | - | | | | 3,086 | |
Intercompany charges | | | 22,186 | | | | (21,573 | ) | | | (613 | ) | | | - | | | | - | |
Income (loss) before income taxes | | | (2,807 | ) | | | (20,631 | ) | | | 6,136 | | | | 51 | | | | (17,251 | ) |
Provision (benefit) for income taxes | | | (1,047 | ) | | | (7,843 | ) | | | 1,196 | | | | (2,660 | ) | | | (10,354 | ) |
Equity in income(loss) of subsidiaries | | | (5,137 | ) | | | 5,228 | | | | - | | | | (91 | ) | | | - | |
Net income (loss) | | $ | (6,897 | ) | | $ | (7,560 | ) | | $ | 4,940 | | | $ | 2,620 | | | $ | (6,897 | ) |
Condensed Consolidating Statement of Operations
For the Period from August 15, 2007 to September 30, 2007
(In thousands)
| | | | | Subsidiary | | | Subsidiary | | | | | | | |
| | Parent | | | Guarantors | | | Non-Guarantors | | | Eliminations | | | Consolidated | |
| | | | | | | | | | | | | | | |
Net sales | | $ | - | | | $ | 72,458 | | | $ | 31,015 | | | $ | (1,458 | ) | | $ | 102,015 | |
Cost of sales | | | - | | | | 46,288 | | | | 20,077 | | | | (1,605 | ) | | | 64,760 | |
Gross profit | | | - | | | | 26,170 | | | | 10,938 | | | | 147 | | | | 37,255 | |
Selling, general and administrative costs | | | 4,347 | | | | 9,494 | | | | 5,143 | | | | - | | | | 18,984 | |
Research and development costs | | | - | | | | 6,343 | | | | 4,137 | | | | - | | | | 10,480 | |
Amortization of acquired intangibles | | | - | | | | 9,098 | | | | 1,372 | | | | - | | | | 10,470 | |
Acquired in-process R&D costs | | | - | | | | 21,820 | | | | 2,520 | | | | - | | | | 24,340 | |
Company sale transaction expenses | | | 30,295 | | | | - | | | | - | | | | - | | | | 30,295 | |
Operating income (loss) | | | (34,642 | ) | | | (20,585 | ) | | | (2,234 | ) | | | 147 | | | | (57,314 | ) |
| | | | | | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | (11,124 | ) | | | (14 | ) | | | 2 | | | | - | | | | (11,136 | ) |
Other income (expense), net | | | 325 | | | | (22 | ) | | | (558 | ) | | | - | | | | (255 | ) |
Intercompany charges | | | 5,924 | | | | (5,485 | ) | | | (439 | ) | | | - | | | | - | |
Income (loss) from continuing operations before income taxes | | | (39,517 | ) | | | (26,106 | ) | | | (3,229 | ) | | | 147 | | | | (68,705 | ) |
Provision (benefit) for income taxes | | | (11,767 | ) | | | (7,774 | ) | | | 798 | | | | (426 | ) | | | (19,169 | ) |
Income (loss) from continuing operations | | | (27,750 | ) | | | (18,332 | ) | | | (4,027 | ) | | | 573 | | | | (49,536 | ) |
Loss from discontinued operations, net of tax | | | - | | | | (962 | ) | | | - | | | | - | | | | (962 | ) |
Equity in income (loss) of subsidiaries | | | (22,748 | ) | | | (4,035 | ) | | | - | | | | 26,783 | | | | - | |
Net income (loss) | | $ | (50,498 | ) | | $ | (23,329 | ) | | $ | (4,027 | ) | | $ | 27,356 | | | $ | (50,498 | ) |
Condensed Consolidating Statement of Operations
For the Period from July 1, 2007 to August 14, 2007
(In thousands)
| | | | | Subsidiary | | | Subsidiary | | | | | | | |
| | Parent | | | Guarantors | | | Non-Guarantors | | | Eliminations | | | Consolidated | |
| | | | | | | | | | | | | | | |
Net sales | | $ | - | | | $ | 25,858 | | | $ | 12,809 | | | $ | (446 | ) | | $ | 38,221 | |
Cost of sales | | | - | | | | 15,066 | | | | 8,074 | | | | (279 | ) | | | 22,861 | |
Gross profit | | | - | | | | 10,792 | | | | 4,735 | | | | (167 | ) | | | 15,360 | |
Selling, general and administrative costs | | | 3,892 | | | | 7,571 | | | | 7,568 | | | | - | | | | 19,031 | |
Research and development costs | | | - | | | | 5,526 | | | | 6,652 | | | | - | | | | 12,178 | |
Amortization of acquired intangibles | | | - | | | | 601 | | | | 1,091 | | | | - | | | | 1,692 | |
Company sale transaction expenses | | | 3,717 | | | | - | | | | - | | | | - | | | | 3,717 | |
Operating income (loss) | | | (7,609 | ) | | | (2,906 | ) | | | (10,576 | ) | | | (167 | ) | | | (21,258 | ) |
| | | | | | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | (261 | ) | | | (14 | ) | | | - | | | | - | | | | (275 | ) |
Other income (expense), net | | | 157 | | | | 27 | | | | 110 | | | | - | | | | 294 | |
Intercompany charges | | | 5,544 | | | | (5,109 | ) | | | (435 | ) | | | - | | | | - | |
Income (loss) from continuing operations before income taxes | | | (2,169 | ) | | | (8,002 | ) | | | (10,901 | ) | | | (167 | ) | | | (21,239 | ) |
Provision (benefit) for income taxes | | | (853 | ) | | | (3,145 | ) | | | (2,833 | ) | | | - | | | | (6,831 | ) |
Income (loss) from continuing operations | | | (1,316 | ) | | | (4,857 | ) | | | (8,068 | ) | | | (167 | ) | | | (14,408 | ) |
Loss from discontinued operations, net of tax | | | - | | | | (2,508 | ) | | | - | | | | - | | | | (2,508 | ) |
Equity in income (loss) of subsidiaries | | | (15,600 | ) | | | (7,814 | ) | | | - | | | | 23,414 | | | | - | |
Net income (loss) | | $ | (16,916 | ) | | $ | (15,179 | ) | | $ | (8,068 | ) | | $ | 23,247 | | | $ | (16,916 | ) |
Condensed Consolidating Balance Sheet
As of September 30, 2008
(In thousands)
| | | | | Subsidiary | | | Subsidiary | | | | | | | |
| | Parent | | | Guarantors | | | Non-Guarantors | | | Eliminations | | | Consolidated | |
Assets | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 49,739 | | | $ | (1,292 | ) | | $ | 24,619 | | | $ | - | | | $ | 73,066 | |
Accounts receivable, net | | | - | | | | 70,660 | | | | 39,637 | | | | - | | | | 110,297 | |
Inventories | | | - | | | | 97,275 | | | | 40,152 | | | | (450 | ) | | | 136,977 | |
Deferred income taxes | | | (2,333 | ) | | | 23,753 | | | | 5,040 | | | | - | | | | 26,460 | |
Prepaid expenses and other current assets | | | 4,590 | | | | 2,697 | | | | 5,158 | | | | - | | | | 12,445 | |
Total current assets | | | 51,996 | | | | 193,093 | | | | 114,606 | | | | (450 | ) | | | 359,245 | |
| | | | | | | | | | | | | | | | | | | | |
Property, plant and equipment, net | | | 13,237 | | | | 63,682 | | | | 24,430 | | | | - | | | | 101,349 | |
Non-current marketable securities | | | 18,755 | | | | - | | | | - | | | | - | | | | 18,755 | |
Deferred financing costs | | | 29,435 | | | | - | | | | - | | | | - | | | | 29,435 | |
Deferred income taxes | | | (42 | ) | | | - | | | | 42 | | | | - | | | | - | |
Other assets | | | 11,792 | | | | 2,357 | | | | 992 | | | | - | | | | 15,141 | |
Intangible assets with definite lives, net | | | - | | | | 276,704 | | | | 45,056 | | | | - | | | | 321,760 | |
Intangible assets with indefinite lives | | | - | | | | 90,229 | | | | 29,822 | | | | - | | | | 120,051 | |
Goodwill | | | - | | | | 411,426 | | | | 44,283 | | | | 484 | | | | 456,193 | |
Total assets | | $ | 125,173 | | | $ | 1,037,491 | | | $ | 259,231 | | | $ | 34 | | | $ | 1,421,929 | |
| | | | | | | | | | | | | | | | | | | | |
Liabilities and Stockholder's Equity | | | | | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | | | | | |
Current portion of long-term debt | | $ | 5,250 | | | $ | 320 | | | $ | - | | | $ | - | | | $ | 5,570 | |
Accounts payable | | | 740 | | | | 17,129 | | | | 14,013 | | | | - | | | | 31,882 | |
Deferred revenue, including advance payments | | | - | | | | 7,645 | | | | 11,352 | | | | - | | | | 18,997 | |
Income taxes payable | | | (605 | ) | | | (387 | ) | | | 3,089 | | | | - | | | | 2,097 | |
Accrued payroll expense | | | 2,303 | | | | 20,896 | | | | 2,555 | | | | | | | | 25,754 | |
Accrued expenses and other current liabilities | | | 34,555 | | | | 13,253 | | | | 10,959 | | | | - | | | | 58,767 | |
Total current liabilities | | | 42,243 | | | | 58,856 | | | | 41,968 | | | | - | | | | 143,067 | |
| | | | | | | | | | | | | | | | | | | | |
Long-term debt | | | 874,728 | | | | 1,085 | | | | - | | | | - | | | | 875,813 | |
Deferred income taxes | | | (14,844 | ) | | | 142,437 | | | | 18,558 | | | | (2,660 | ) | | | 143,491 | |
Other long-term liabilities | | | 7,545 | | | | 468 | | | | 5,613 | | | | - | | | | 13,626 | |
Intercompany investment | | | (250,070 | ) | | | 4,126 | | | | 245,944 | | | | - | | | | - | |
Intercompany receivable/payable | | | (886,062 | ) | | | 915,879 | | | | (29,817 | ) | | | - | | | | - | |
Total liabilities | | | (226,460 | ) | | | 1,122,851 | | | | 282,266 | | | | (2,660 | ) | | | 1,175,997 | |
| | | | | | | | | | | | | | | | | | | | |
Stockholder's equity | | | 351,633 | | | | (85,360 | ) | | | (23,035 | ) | | | 2,694 | | | | 245,932 | |
Total liabilities and stockholder's equity | | $ | 125,173 | | | $ | 1,037,491 | | | $ | 259,231 | | | $ | 34 | | | $ | 1,421,929 | |
Condensed Consolidating Balance Sheet
As of June 30, 2008
(In thousands)
| | | | | Subsidiary | | | Subsidiary | | | | | | | |
| | Parent | | | Guarantors | | | Non-Guarantors | | | Eliminations | | | Consolidated | |
Assets | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 39,285 | | | $ | (2,379 | ) | | $ | 17,243 | | | $ | - | | | $ | 54,149 | |
Accounts receivable, net | | | - | | | | 90,343 | | | | 57,640 | | | | - | | | | 147,983 | |
Inventories | | | - | | | | 91,856 | | | | 43,537 | | | | (502 | ) | | | 134,891 | |
Deferred income taxes | | | (2,352 | ) | | | 23,539 | | | | 5,852 | | | | - | | | | 27,039 | |
Prepaid expenses and other current assets | | | 2,464 | | | | 2,616 | | | | 7,104 | | | | - | | | | 12,184 | |
Total current assets | | | 39,397 | | | | 205,975 | | | | 131,376 | | | | (502 | ) | | | 376,246 | |
| | | | | | | | | | | | | | | | | | | | |
Property, plant and equipment, net | | | 13,406 | | | | 63,964 | | | | 27,279 | | | | - | | | | 104,649 | |
Non-current marketable securities | | | 19,960 | | | | - | | | | - | | | | - | | | | 19,960 | |
Deferred financing costs | | | 30,185 | | | | - | | | | - | | | | - | | | | 30,185 | |
Other assets | | | 16,480 | | | | 2,474 | | | | (394 | ) | | | - | | | | 18,560 | |
Intangible assets with definite lives, net | | | - | | | | 297,408 | | | | 47,458 | | | | - | | | | 344,866 | |
Intangible assets with indefinite lives | | | - | | | | 90,229 | | | | 33,149 | | | | - | | | | 123,378 | |
Goodwill | | | - | | | | 435,570 | | | | 25,101 | | | | 484 | | | | 461,155 | |
Total assets | | $ | 119,428 | | | $ | 1,095,620 | | | $ | 263,969 | | | $ | (18 | ) | | $ | 1,478,999 | |
| | | | | | | | | | | | | | | | | | | | |
Liabilities and Stockholder's Equity | | | | | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | | | | | |
Current portion of long-term debt | | $ | 5,250 | | | $ | 324 | | | $ | - | | | $ | - | | | $ | 5,574 | |
Accounts payable | | | 554 | | | | 19,882 | | | | 18,946 | | | | - | | | | 39,382 | |
Deferred revenue, including advance payments | | | - | | | | 8,621 | | | | 18,523 | | | | - | | | | 27,144 | |
Income taxes payable | | | 409 | | | | - | | | | 1,527 | | | | - | | | | 1,936 | |
Accrued payroll expense | | | 2,106 | | | | 18,200 | | | | 4,219 | | | | - | | | | 24,525 | |
Accrued expenses and other current liabilities | | | 31,205 | | | | 12,272 | | | | 13,353 | | | | - | | | | 56,830 | |
Total current liabilities | | | 39,524 | | | | 59,299 | | | | 56,568 | | | | - | | | | 155,391 | |
| | | | | | | | | | | | | | | | | | | | |
Long-term debt | | | 872,152 | | | | 1,085 | | | | - | | | | - | | | | 873,237 | |
Deferred income taxes | | | (12,254 | ) | | | 150,400 | | | | 21,311 | | | | - | | | | 159,457 | |
Defined benefit plan obligations | | | 6,263 | | | | - | | | | - | | | | - | | | | 6,263 | |
Other long-term liabilities | | | 1,368 | | | | 487 | | | | 6,148 | | | | - | | | | 8,003 | |
Intercompany investment | | | (248,051 | ) | | | 2,944 | | | | 245,107 | | | | - | | | | - | |
Intercompany receivable/payable | | | (895,004 | ) | | | 953,623 | | | | (58,619 | ) | | | - | | | | - | |
Total liabilities | | | (236,002 | ) | | | 1,167,838 | | | | 270,515 | | | | - | | | | 1,202,351 | |
| | | | | | | | | | | | | | | | | | | | |
Stockholder's equity | | | 355,430 | | | | (72,218 | ) | | | (6,546 | ) | | | (18 | ) | | | 276,648 | |
Total liabilities and stockholder's equity | | $ | 119,428 | | | $ | 1,095,620 | | | $ | 263,969 | | | $ | (18 | ) | | $ | 1,478,999 | |
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended September 30, 2008
(In thousands)
| | | | | | | | Non- | | | | | | | |
| | | | | Guarantor | | | Guarantor | | | Consolidating | | | | |
| | Parent | | | Subsidiaries | | | Subsidiaries | | | Adjustments | | | Consolidated | |
| | | | | | | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (6,897 | ) | | $ | (7,560 | ) | | $ | 4,940 | | | $ | 2,620 | | | $ | (6,897 | ) |
Changes in operating assets and liabilities and non cash items, included in net income (loss) | | | 19,121 | | | | 10,397 | | | | 8,509 | | | | (2,620 | ) | | | 35,407 | |
Net cash provided by (used in) operating activities | | | 12,224 | | | | 2,837 | | | | 13,449 | | | | - | | | | 28,510 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | (5 | ) | | | (1,746 | ) | | | (1,592 | ) | | | | | | | (3,343 | ) |
Other | | | (13 | ) | | | - | | | | 15 | | | | - | | | | 2 | |
Net cash provided by (used in) investing activities | | | (18 | ) | | | (1,746 | ) | | | (1,577 | ) | | | - | | | | (3,341 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Debt repayments | | | (1,313 | ) | | | (4 | ) | | | | | | | | | | | (1,317 | ) |
Debt financing costs | | | (439 | ) | | | - | | | | - | | | | - | | | | (439 | ) |
Net cash provided by (used in) financing activities | | | (1,752 | ) | | | (4 | ) | | | - | | | | - | | | | (1,756 | ) |
Effect of exchange rate changes on cash and cash equivalents | | | - | | | | - | | | | (4,496 | ) | | | | | | | (4,496 | ) |
Net increase in cash and cash equivalents | | | 10,454 | | | | 1,087 | | | | 7,376 | | | | - | | | | 18,917 | |
Cash and cash equivalents at beginning of period | | | 39,285 | | | | (2,379 | ) | | | 17,243 | | | | - | | | | 54,149 | |
Cash and cash equivalents at end of period | | $ | 49,739 | | | $ | (1,292 | ) | | $ | 24,619 | | | $ | - | | | $ | 73,066 | |
Condensed Consolidating Statement of Cash Flows
For the Period from August 15, 2007 to September 30, 2007
(In thousands)
| | | | | | | | Non- | | | | | | | |
| | | | | Guarantor | | | Guarantor | | | Consolidating | | | | |
| | Parent | | | Subsidiaries | | | Subsidiaries | | | Adjustments | | | Consolidated | |
| | | | | | | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (50,498 | ) | | $ | (23,329 | ) | | $ | (4,027 | ) | | $ | 27,356 | | | $ | (50,498 | ) |
Loss from discontinued operations, net of tax | | | - | | | | 962 | | | | - | | | | - | | | | 962 | |
Income (loss) from continuing operations | | | (50,498 | ) | | | (22,367 | ) | | | (4,027 | ) | | | 27,356 | | | | (49,536 | ) |
Changes in operating assets and liabilities and non cash items, included in net income (loss) | | | 18,690 | | | | 24,058 | | | | 439 | | | | (22,714 | ) | | | 20,473 | |
Net cash provided by (used in) continuing operations | | | (31,808 | ) | | | 1,691 | | | | (3,588 | ) | | | 4,642 | | | | (29,063 | ) |
Net cash provided by (used in) discontinued operations | | | - | | | | (1,325 | ) | | | - | | | | - | | | | (1,325 | ) |
Net cash provided by (used in) operating activities | | | (31,808 | ) | | | 366 | | | | (3,588 | ) | | | 4,642 | | | | (30,388 | ) |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
Acquisition of predecessor entity, net of cash acquired | | | (1,128,915 | ) | | | (2,593 | ) | | | 13,215 | | | | - | | | | (1,118,293 | ) |
Capital expenditures | | | (57 | ) | | | (1,161 | ) | | | (204 | ) | | | - | | | | (1,422 | ) |
Proceeds from the sale of property, plant and equipment | | | - | | | | - | | | | 15 | | | | - | | | | 15 | |
Purchase of marketable securities | | | (317,104 | ) | | | - | | | | - | | | | - | | | | (317,104 | ) |
Proceeds from sale of marketable securities | | | 267,426 | | | | - | | | | - | | | | - | | | | 267,426 | |
Net cash provided by (used in) investing activities of continuing operations | | | (1,178,650 | ) | | | (3,754 | ) | | | 13,026 | | | | - | | | | (1,169,378 | ) |
Net cash provided by (used in) discontinued operations | | | - | | | | (2 | ) | | | - | | | | - | | | | (2 | ) |
Net cash provided by (used in) investing activities | | | (1,178,650 | ) | | | (3,756 | ) | | | 13,026 | | | | - | | | | (1,169,380 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Proceeds from issuance of common stock | | | 378,350 | | | | - | | | | - | | | | - | | | | 378,350 | |
Borrowings under debt agreements | | | 870,000 | | | | - | | | | - | | | | - | | | | 870,000 | |
Debt repayments | | | (1,809 | ) | | | (5 | ) | | | - | | | | - | | | | (1,814 | ) |
Debt financing costs | | | (27,145 | ) | | | - | | | | - | | | | - | | | | (27,145 | ) |
Amounts paid for withholding taxes on stock option exercises | | | (14,142 | ) | | | - | | | | - | | | | - | | | | (14,142 | ) |
Witholding taxes collected for stock option exercises | | | 14,142 | | | | - | | | | - | | | | - | | | | 14,142 | |
Net cash provided by (used in) financing activities of continuing operations | | | 1,219,396 | | | | (5 | ) | | | - | | | | - | | | | 1,219,391 | |
Effect of exchange rate changes on cash and cash equivalents | | | - | | | | - | | | | (564 | ) | | | - | | | | (564 | ) |
Net increase in cash and cash equivalents | | | 8,938 | | | | (3,395 | ) | | | 8,874 | | | | 4,642 | | | | 19,059 | |
Cash and cash equivalents at beginning of period | | | - | | | | - | | | | - | | | | - | | | | - | |
Cash and cash equivalents at end of period | | $ | 8,938 | | | $ | (3,395 | ) | | $ | 8,874 | | | $ | 4,642 | | | $ | 19,059 | |
Condensed Consolidating Statement of Cash Flows
For the Period from July 1, 2007 to August 14, 2007
(In thousands)
| | | | | | | | Non- | | | | | | | |
| | | | | Guarantor | | | Guarantor | | | Consolidating | | | | |
| | Parent | | | Subsidiaries | | | Subsidiaries | | | Adjustments | | | Consolidated | |
| | | | | | | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (16,916 | ) | | $ | (15,179 | ) | | $ | (8,068 | ) | | $ | 23,247 | | | $ | (16,916 | ) |
Loss from discontinued operations, net of tax | | | - | | | | 2,508 | | | | - | | | | - | | | | 2,508 | |
Income (loss) from continuing operations | | | (16,916 | ) | | | (12,671 | ) | | | (8,068 | ) | | | 23,247 | | | | (14,408 | ) |
Changes in operating assets and liabilities and non cash items, included in net income (loss) | | | 23,110 | | | | 12,708 | | | | 13,591 | | | | (23,247 | ) | | | 26,162 | |
Net cash provided by (used in) continuing operations | | | 6,194 | | | | 37 | | | | 5,523 | | | | - | | | | 11,754 | |
Net cash provided by (used in) discontinued operations | | | - | | | | (461 | ) | | | - | | | | - | | | | (461 | ) |
Net cash provided by (used in) operating activities | | | 6,194 | | | | (424 | ) | | | 5,523 | | | | - | | | | 11,293 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | (249 | ) | | | (587 | ) | | | (252 | ) | | | - | | | | (1,088 | ) |
Purchase of marketable securities | | | (53,828 | ) | | | - | | | | - | | | | - | | | | (53,828 | ) |
Proceeds from sale of marketable securities | | | 63,328 | | | | - | | | | - | | | | - | | | | 63,328 | |
Net cash provided by (used in) investing activities of continuing operations | | | 9,251 | | | | (587 | ) | | | (252 | ) | | | - | | | | 8,412 | |
Net cash provided by (used in) discontinued operations | | | - | | | | (6 | ) | | | - | | | | - | | | | (6 | ) |
Net cash provided by (used in) investing activities | | | 9,251 | | | | (593 | ) | | | (252 | ) | | | - | | | | 8,406 | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Debt repayments | | | (26 | ) | | | (3 | ) | | | - | | | | - | | | | (29 | ) |
Debt financing costs | | | (477 | ) | | | - | | | | - | | | | - | | | | (477 | ) |
Excess tax benefits from share based compensation arrangements | | | 12,542 | | | | - | | | | - | | | | - | | | | 12,542 | |
Proceeds from the exercise of stock options and warrants | | | 583 | | | | - | | | | - | | | | - | | | | 583 | |
Amounts paid for withholding taxes on stock option exercises | | | (56 | ) | | | - | | | | - | | | | - | | | | (56 | ) |
Withholding taxes collected for stock option exercises | | | 56 | | | | - | | | | - | | | | - | | | | 56 | |
Net cash provided by (used in) financing activities of continuing operations | | | 12,622 | | | | (3 | ) | | | - | | | | - | | | | 12,619 | |
Effect of exchange rate changes on cash and cash equivalents | | | - | | | | - | | | | 178 | | | | - | | | | 178 | |
Net increase (decrease) in cash and cash equivalents | | | 28,067 | | | | (1,020 | ) | | | 5,449 | | | | - | | | | 32,496 | |
Cash and cash equivalents at beginning of period | | | 6,807 | | | | (1,573 | ) | | | 7,766 | | | | - | | | | 13,000 | |
Cash and cash equivalents at end of period | | $ | 34,874 | | | $ | (2,593 | ) | | $ | 13,215 | | | $ | - | | | $ | 45,496 | |