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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-8037
Aeroflex Incorporated
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(Exact name of registrant as specified in its charter)
Delaware 11-1974412
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
35 South Service Road, Plainview, New York 11803
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 694-6700
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Class Which Registered
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Common Stock, $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. (The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing).
As of September 8, 1997 approximately $104,160,613.
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Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date (applicable only to
corporate registrants). Common Stock, par value $.10 per share; outstanding as
of September 8, 1997 - 12,869,212 (excluding 131,756 shares held in treasury).
Documents incorporated by reference: Parts II and IV - The Annual Report to
Stockholders for the fiscal year ended June 30, 1997 to the extent specifically
identified or incorporated herein. Part III - Registrant's definitive proxy
statement to be filed pursuant to Regulation 14A of the Securities Act of 1934.
PART I
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ITEM ONE - BUSINESS
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Aeroflex Incorporated, through its subsidiaries (collectively, unless the
context requires otherwise, referred to as the "Company" or "Aeroflex") utilizes
advanced technologies to provide state-of-the-art electronic packaging and
testing solutions used in communication applications, among others. Aeroflex
designs and manufactures microelectronic circuits and interconnect products,
instrument products and motion control systems, for commercial and defense
markets. It also designs and manufactures shock and vibration stabilizing
systems used for commercial, industrial and defense applications.
Operations are grouped into three segments: microelectronics, electronics
and isolator products. These segments, their products and the markets they serve
are described below.
In March 1995, the Company adopted a plan to consolidate its Puerto Rican
manufacturing operations into its existing facilities in New York and New
Jersey. The Company has ceased manufacturing operations in Puerto Rico.
As of June 30, 1997, the Company has accounted for certain segments, namely
commercial and custom envelopes (Huxley Envelope Corp.) and telecommunication
systems services (T-CAS Corp.) as discontinued operations. The following
description of the Company's business does not include these discontinued
operations. These segments are described under the caption "Discontinued
Operations".
Microelectronics
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Microelectronic Modules - (Circuit Technology)
Since 1974, the Company has been engaged in the design, manufacture and
sale of state-of-the-art microelectronic assemblies for the electronics
industry. In January 1994, the Company acquired substantially all of the net
operating assets of the microelectronics division of Marconi Circuit Technology
Corporation, which manufactures a wide variety of microelectronic assemblies.
This acquisition increased the range of products offered and enhanced the
Company's engineering capability.
Microelectronic assemblies are called "Hybrids" because they combine
elements of integrated circuit and printed circuit board technologies. They
provide many of the advantages of integrated circuits relative to printed
circuit boards, such as miniaturization, increased capability and greater
reliability and environmental stability. However, unlike integrated circuits,
they can be economically manufactured in quantities of hundreds to several
thousands. Hybrids are multi-layered electronic circuits, containing very small
and barely visible passive and active elements (those that carry, transmit,
receive, generate or amplify signals) which are mounted and wired together on a
single multi-layered ceramic surface in patterns designed to perform specific
electronic functions. These functions include amplification, switching, signal
conversion, voltage regulation and decoding of microwave signals. They are
especially suited to aircraft, spacecraft, missile and industrial applications
where space is limited, such as in navigation equipment, airborne computers,
sonar systems, medical diagnostic instrumentation, satellite/telecom systems and
computer instrumentation.
One such Hybrid Microcircuit product family, the MIL-STD-1553 Data Bus
product line, has a particularly broad range of applications. These
microcircuits, which have been adopted by the Tri-services (Army, Navy, and Air
Force) as a standard interface, act as a digital data communication link between
various computer-based equipment.
-2-
A series of Monolithic Data-bus Transceivers and Remote Terminals, has been
transitioned to production by the Company, many of which are described by
"Standard Military Devices" (SMD) drawings, thereby facilitating their use in
current and future avionic systems.
The Company's Microcircuits are used on numerous avionic systems including
the F-14, F-15, F-16 and F-18 aircraft and the AMRAAM and Tomahawk-cruise
missiles. They are also qualified for possible further use on the updates to
older platforms. The Data-bus microcircuits are used in a wide variety of
aerospace and seaboard navigation and communication systems. A Motor Drive
Hybrid microcircuit is in production for the AN/PVS-6, a miniature, eyesafe,
laser rangefinder.
The Company has production contracts for the Serial Interface Module and
Current Mode Coupler Module used on the ARINC 629 Data-bus which is the
commercial equivalent of MIL-STD-1553. This commercial data communications
interface is used on the Boeing 777.
Multichip Modules (MCMs) are a further advancement of the hybrid
microcircuit technology, in which large digital devices such as microprocessors,
SRAM and EEPROM memories are combined with multilayer ceramic packages to form
complex digital systems or subsystems. Multichip modules perform functions
similar to hybrids, except the emphasis is on miniaturizing and synthesizing
digital functions such as microprocessor systems and mass memories. The Company
has been qualified on multiple MCM designs on both the F-16 and F-22 Advanced
Tactical Fighter (ATF), V-22, LAMPS, AWACS and AEGIS Missle and is participating
in pre-production and production contracts. Application specific multi-chip
modules have significant market potential in avionics, workstations,
telecommunications and satellites.
The Company has expanded its standard memory module product line with the
addition of thirty-five new memory modules in the past three years. These
products, which consist of SRAM and Flash memory modules, take advantage of the
Company's multichip module expertise. They are designed to be used for a wide
range of computer and general purpose circuit board applications.
The Company continues to expand its market for the R4400 family of
microprocessor modules with the sale of production units utilized in multiple
avionics/missile applications. The Intel I486 dual microprocessor module is
being utilized for avionics and missile applications, in production quantities.
Thin Film Interconnects - (MIC Technology)
In March 1996, the Company acquired MIC Technology Corporation (MIC) which
designs, develops, manufactures and markets microelectronics products in the
form of passive thin film circuits and interconnects. Its advanced circuit and
interconnect technology is emerging as a key technology for miniaturized, high
frequency, high performance electronic products for rapidly growing markets like
cellular telephones, personal communcation service devised (PCS) and microwave
data links. It continues to be an essential technology in satellite based
communication hardware, cable amplifiers and leading edge military electronic
products.
Thin film products allow dramatic reductions in the size and weight of
electronic devices and provide superior electrical and thermal performance
available today at high frequencies. Growth in thin film technology is expected
to complement the advances in semiconductor speed which have occurred during the
recent years in the digital world. Thin film removes limitations imposed by
other interconnect technologies for high clock rate digital circuits. In the
digital, analog R.F., and microwave domain, thin films allow the production of
hybrid integrated circuits with lumped elements at lower cost than full silicon
(Si) or gallium arsenide (GaAs) integration while retaining outstanding
performance.
-3-
MIC serves both commercial and military markets. Commercial markets include
wireless communications, cable television ("CATV"), fiber optics and digital
MCMs. Military markets include missile Transmit and Receive (T/R) modules, radar
T/R modules and advanced Electronic Counter Measures (ECM).
MIC designs and manufactures a variety of electronic components for
wireless/cellular PCS products including power amplifiers, band-pass filters,
mixers and down converters. Due to the growth in the cellular market, the
current 900 MHz cellular band is saturated. Therefore, new cellular operating
frequencies at 1.8+ GHz are being allocated. MIC's circuits operate at both the
existing and higher band widths. Competing technologies (thick film, epoxy, and
Teflon-based substrates) compromise performance at 1.8+ GHz operating
frequencies.
MIC manufactures high power substrates for CATV amplifiers. These receive,
filter, amplify and transmit signals that distribute cable service. In January
1997, MIC entered into a strategic sole source supplier agreement to manufacture
and supply all of Motorola's RF Semiconductor Division's thin film interconnects
supporting component applications in CATV, cellular and land mobile
communications.
Commercial satellite networks require high frequency T/R functions for
ground to satellite, satellite to satellite, and satellite to ground
transmission. MIC produces T/R module circuits for signal splitting,
amplification, phase shifting, and combining functions.
In July 1997, MIC entered into a multi-year strategic agreement under which
MIC will supply Lucent Technologies with film integrated circuits which are used
in communications applications. In connection with this agreement, MIC purchased
equipment, inventory and licenses for advanced technologies from two of Lucent's
telecommunications components operations which significantly increases MIC's
manufacturing capacity and it is expected to enhance its capabilities.
MIC is a key supplier to Texas Instruments and Raytheon for T/R modules on
the Army's Ground Based Radar program and a key supplier to Lockheed, TRW,
Westinghouse and Texas Instruments on the Air Force's Advanced Tactical Fighter
(F22).
Electronics
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Instrumentation
Frequency Synthesizers and Components - (Comstron)
In November 1989, the Company acquired Comstron Corporation which is now an
operating division of Aeroflex Laboratories Incorporated, a wholly-owned
subsidiary of Aeroflex. Comstron is a leader in radio frequency and microwave
technology used in the manufacture of fast switching frequency synthesizers and
components.
-4-
A frequency synthesizer is a device or circuit that synthetically produces
a large number of frequencies based upon a single reference frequency. The best
way to tune a radio or receiver is with a crystal frequency reference. When
multiple frequencies are necessary, multiple crystals and switches are required.
Eventually it becomes first impractical, and then impossible, to use a large
number of crystals due to size constraints. A frequency synthesizer replaces
millions or billions of crystals.
The Company's synthesizers operate in a broad frequency range of 10 MHz to
40GHz with excellent spectral purity. Their small size and modular construction
allow for easy systems configuration and facilitation of repair. The Company,
together with Hewlett Packard, helped develop the Modular Measurement System
(MMS) standard which has been selected as the architecture underlying the RF and
microwave sections of a number of automated test equipment (ATE) systems,
including CASS, the U.S. Navy's next generation ATE. The Company's synthesizers
also significantly improve the performance and reliability of existing radars.
The Company's synthesizers have been selected by Westinghouse to upgrade its TPS
63 and 70 series radars. Additionally, the synthesizers improve the performance
of threat simulators as well as radar cross section and antenna measurement
systems.
With the 1993 introduction of the new model FS-5000 synthesizer series, the
Company strengthened its leadership position in the Ultra-Fast Switching
Frequency Synthesizer market. The FS-5000 series is ten times faster, less than
half the size and offers superior performance to the Company's previous
synthesizers. In 1995, the Company introduced a phase-coherent version of the
FS-5000 which expands its application into numerous radar systems.
Component technology, which contributes to the exceptional performance of
the Company's synthesizer, includes custom microwave and RF hybrids and filters
manufactured by the Company.
High Speed Automatic Test Systems - (Lintek)
In January 1995, the Company acquired Lintek Inc. as a wholly owned
subsidiary of Aeroflex. Aeroflex Lintek Corp., the successor to Lintek, Inc., is
a leader in high speed instrumentation radar systems and antenna measurement
systems. These systems are used by the Department of Defense and by industry.
Lintek Inc. was incorporated in 1988 for the purpose of developing and selling
instrumentation radar systems, and currently has systems in place with many of
the large aerospace companies and with major government laboratories.
Instrumentation radar systems are used to measure the radar reflectivity or
Radar Cross Section (RCS), both scale models and actual examples, of aircraft
and other objects. These measurements are made in many diverse environments from
factory floor, to laboratory, to flight lines or aircraft carriers. These radar
systems operate in the frequency range of 100MHz to 100GHz. In addition to the
radar system hardware, Aeroflex Lintek Corp. has developed various analytical
processing and display algorithms to assist in the interpretation of the radar
data.
Aeroflex Lintek has three lines of radar systems: the Elan series, the
Model 5000, and the Model 4000. These systems vary in price and performance. The
Company believes that the Elan series radar system is the highest performance
system in the industry, the Model 5000 is a price performance leader, and the
Model 4000 is a low cost entry level system.
Antenna measurement systems are used in the design and manufacturing of all
types of antennas. The Company's product line is derived from the expertise
gained in high speed data acquisition and display techniques used in
instrumentation radar products. These products comprise a growing portion of
Aeroflex Lintek's sales due to the growth in personal communications and the
demand for these systems abroad.
-5-
Motion Control Systems - (Aeroflex Laboratories)
Scanning Devices
Since 1975, the Company has been engaged in the development and manufacture
of electro-optical scanning devices used in infra-red night vision systems.
These systems detect temperature differences in the infra-red radiation
emanating from objects in target areas. The differences are then electronically
amplified and converted to visible light to create a visual image of the zone
being scanned, enabling accurate observation and weapon firing control through
smoke, darkness and battlefield haze.
The Company has completed development and has started a production order
for the next generation polygon rotary scanner for the U.S. Army's thermal
weapons sight (TWS), under contract to Hughes Electro-Optical Data Systems
Group. TWS is a low cost, lightweight thermal imaging device that detects
targets based on thermal radiation contrasts with background and utilizes a
solid state thermal cooling system. This scanner is intended for use on standard
issue U.S. Army assault rifles and crew served weapons.
Stabilization and Tracking Devices
Since 1961, the Company has been engaged in the design, development and
production of stabilization tracking devices and systems. These are dynamically
positioned pedestals on or in moving vehicles such as trucks, ships and
aircraft, upon which tracking equipment, such as a radar antenna, is mounted.
Pedestals, through the continuous balancing action of gyroscopes and
servo-mechanical stabilizers operating in all three dimensions, enable the
mounted equipment to remain almost perfectly balanced and motionless. The
equipment can then automatically track or focus on a target as accurately as if
it were on solid ground despite the motion of the vehicle. The Company's
stabilization and tracking devices are a part of major surveillance,
reconnaissance and weapon firing control systems and play an important role in
high altitude aircraft as well as in other aircraft, ships and ground vehicles
which require precise, highly stable mounting for cameras, antennae and lasers.
In addition to military and aerospace markets, the Company has recently
delivered commercial units used to stabilize airborne spectroscopy equipment for
terrestrial mapping.
Magnetic Motors
Magnetic motor products consist of electronically commutated brushless DC
motors, stepping motors, segment and arc motors, actuators, limited angle torque
motors and solid state magnetic sensors. Brushless DC motors differ from
conventional DC motors in that the current which produces mechanical energy is
applied to stationary coils via electronic switches, without physical contact,
rather than by stationary rods brushing against the rotating coil. By avoiding
friction, sparks and the wearing and fragmenting of the brush rods, brushless DC
motors provide cleaner operation and longer maintenance-free life than
conventional motors. These characteristics make brushless DC motors well-suited
for use in vacuum situations such as outer space where lubricants needed to slow
brushwear dissipate rapidly, in environments containing volatile or explosive
materials and gases, and in applications where clean operation is critical.
Actuators operate various mechanisms on spacecraft, satellites and aircraft,
including the forward wing mechanism of the Beech Starship. Torque motors are DC
motors which convert electrical current to mechanical force for precisely
controlled, usually repetitive movement, over limited distances and arcs less
than 180 degrees. These motors are utilized in the Company's stabilization
systems and infra-red scanner modules, as well as other applications where
precise movement is required, such as for positioning antennae, optical systems,
mechanical vanes and valves.
Electronic Control Systems
Building on technology acquired from Comstron, Aeroflex develops and
manufactures complex communications and guidance systems and subsystems
including HF, VHF and UHF receivers, communications jammer emulators, weather
radar receivers, up/down converters, frequency agile radar local oscillators and
low phase noise frequency sources. The Company is currently under contract to
develop a frequency generator for the receiver/transmitter used in the LAMPS
Program.
-6-
The Company produces a receiver for the NOAA wind-profiler system which is
used to detect clean air turbulence around airports. The wind-profiler system
has made major improvements in the accuracy of operational weather forecasts.
Isolator Products Group - (Aeroflex International, Vibration Mountings &
- ----------------------- Controls and Korfund Dynamics)
Since 1961, the Company has been engaged in the design, development,
manufacture and sale of severe service shock and vibration isolation systems.
These devices consist of helically-wound steel wire rope contained between
rugged metal retainer bars, and are used to store and dissipate potentially
destructive vibration and shock. Purchasers of helical isolators are
manufacturers or users of equipment sensitive to shock and vibration who need to
reduce shock/vibration to levels compatible with equipment fragility to extend
the useful life of this equipment. Isolators are also used to prevent vibrations
in equipment from causing disturbances to surrounding equipment, structures and
configurations.
Markets for helical isolation systems include the military, aerospace,
geophysical exploration, aircraft, communications, transportation and power
plants. Specific applications include sensitive mobile equipment, reusable
shipping containers, shipboard electronics and navigational equipment, avionics
and other airborne gear, nuclear and seismic construction, power generation
equipment, and heavy duty rotating and reciprocating machines.
In October 1983, the Company acquired Vibration Mountings and Controls,
Inc. ("VMC"), which manufactures a line of off-the-shelf noise, shock, vibration
and structureborne noise control devices including a version of the elastomeric
cupmount isolator referred to below. These rubber and spring isolators, which
are manufactured in a wide variety of sizes, load ratings and configurations,
are used primarily in commercial applications to protect heavy rotating
equipment, heating, ventilating and air conditioning equipment, and diesel
engines. In December 1986, the Company acquired the operating assets of Korfund
Dynamics Corporation ("KDC"), a manufacturer of an industrial line of heavy duty
spring and rubber shock mounts.
-7-
A complementary line of off-the-shelf elastomeric cupmounts was introduced
in fiscal 1991. The cupmount is a lightweight, low profile isolator which is
available in two sizes and two types of elastomer-silicone for high temperature
applications and neoprene where extreme high temperature is not a factor. The
elastomer-in-compression design is particularly effective in interrupting
structure borne noise transmission. Cupmount isolators are produced and sold in
large quantities for military electronics and industrial equipment, where high
levels of shock are encountered.
During fiscal 1992, the Company introduced two new series of wire rope
isolators, the arch and the circular arch. The arch isolator offers greater
stability than the helical isolator for severe shock applications such as Navy
shipboard electronic equipment. The circular arch was developed in a compact,
circular configuration to fit into smaller space envelopes and compete on a
performance and cost basis with existing competitive proprietary designs. In
fiscal 1995, the Company successfully introduced the circular arch to the
industrial market as an improved solution to shock and vibration problems
encountered with data processing and electronic equipment in the mobile and
aerospace markets.
During the last several years, the Company has developed and introduced a
series of new products to the marketplace to broaden the VMC and KDC product
lines. These new complementary products have enabled the Company to enter new
markets, namely, the off-highway market, portable power market, truck and bus
market and the seismic marketplace.
Competition
In all phases of its continuing operations, the Company competes in both
performance and price with companies considerably larger than itself in
financial resources and sales, and which are more diversified than the Company.
In the manufacturing of stabilization and tracking devices, scanning devices,
frequency synthesizers, high speed automatic test systems and isolators, there
are several major competitors manufacturing similar or comparable products. In
the manufacture of microelectronic modules and thin-film interconnects, magnetic
motors and electronic systems, there are numerous worldwide, regional and local
competitors manufacturing and distributing similar or comparable products. The
Company believes that in all of its operations it competes favorably in the
principal competitive factors of technology, performance, reliability, quality,
customer service and price.
To the extent that the Company is engaged in government contracts, its
success or failure, to a large measure, is based upon its ability to compete
successfully for contracts and to complete them at a profit. Such government
business is necessarily affected by many factors such as variations in the
military requirements of the government and defense budget allocations.
Government Sales
Approximately 50% and 65% of the Company's sales from continuing operations
for fiscal 1997 and 1996, respectively, were to agencies of the United States
Government or to prime defense contractors or subcontractors of the United
States Government. The Company's overall dependence on the military has been
declining due to the acquisition of MIC, which is more commercially oriented,
and a focusing of resources towards developing standard products for the
commercial markets. The Company's government contracts have been awarded either
on a bid basis or after negotiation. The contracts are primarily fixed price
contracts, though the Company also has government contracts providing for cost
plus fixed fee. The contracts of the Company with the United States Government
and prime defense contractors or subcontractors contain customary provisions for
termination at the convenience of the government without cause. In the event of
such termination, the Company is entitled to reimbursement for its costs and to
receive a reasonable profit, if any, on the work done prior to termination.
-8-
Revenues and costs on government contracts are recognized based upon
shipments or billings on manufacturing contracts. Revenues and costs on certain
consulting contracts are recognized based upon costs incurred.
In certain product areas, the Company has suffered reductions in sales
volume due to cutbacks in the military budget. In other product areas, the
Company has experienced increased sales volume due to a realignment of
government spending towards upgrading existing systems instead of purchasing
completely new systems. The overall effect of the cutbacks and realignment has
not been material to the Company.
Marketing and Distribution
The Company markets its products through an internal sales force of 25
persons and over 140 sales representative organizations located nationwide and
worldwide. The Company's engineers and marketing personnel, many of whom have
technical backgrounds, advise prospective purchasers regarding the Company's
products and how such products can be custom designed to be incorporated into
specific government programs and other applications. These efforts are supported
by product brochures and by published articles and advertisements in trade
journals.
Product Research and Development
The Company's product development efforts primarily involve engineering and
design relating to the improvement of existing products or the adaptation of
such products to new applications. The Company's efforts also include developing
prototype components to bid on specific programs. Several of the Company's
officers and almost all of its engineers have been involved at various times and
to varying degrees in these activities. Product development and similar costs
not recoverable under contractual arrangements are expensed in the year
incurred. The costs of Company sponsored research activities were approximately
$3,279,900, $1,260,000 and $2,389,000 for fiscal 1997, 1996 and 1995,
respectively. The increase from fiscal 1996 to fiscal 1997 was primarily due to
MIC which was acquired in March 1996. Further, in connection with the Company's
purchase of MIC Technology Corporation in March 1996, the Company allocated
$23,200,000 of the purchase price to in-process research and development. Since
the research and development projects had not reached technological
feasibility, the $23,200,000 was charged to expense in fiscal 1996 in accordance
with generally accepted accounting principles.
Backlog
At June 30, 1997, the Company's backlog of orders was approximately
$53,332,000. Approximately 90% was scheduled to be delivered on or before June
30, 1998. Approximately 65% of this backlog represents orders for military or
national defense purposes.
At June 30, 1996, the Company's backlog of orders was approximately
$37,457,000. Approximately 90% was scheduled to be delivered before June 30,
1997. Approximately 79% of this backlog represented orders for military or
national defense purposes.
Principal Materials
The principal materials used by the Company in manufacturing and assembling
its products are steel, aluminum, rubber, gold, ceramic, magnetic materials,
iron and copper. Many of the component parts used by the Company in its products
are also purchased, including semiconductors, transformers, amplifiers and
bearings. These materials and components, none of which are presently in short
supply, are purchased from time to time on the open market. The Company has no
long-term commitments for their purchase.
-9-
Patents and Trademarks
The Company owns several patents, patent licenses and trademarks. While the
Company considers that in the aggregate its patents and trademarks are important
in its operations, it does not consider that one or any group of them is of such
importance that termination could materially affect its business.
Employees
As of June 30, 1997 the Company had approximately 790 employees, of whom
approximately 400 were engaged in a manufacturing capacity, and approximately
390 in engineering, sales, administrative or clerical positions. Approximately
230 employees of the Company are covered by various collective bargaining
agreements. The Company considers its employee relations to be satisfactory.
Seasonality
Seasonality does not have a material impact upon the Company's revenues.
Regulation
The Company's activities are subject to various environmental, health and
employee safety laws. The Company has expended resources, both financial and
managerial, to comply with applicable environmental, health and worker safety
laws in its operations and at its facilities and anticipates that it will
continue to do so in the future. The Company does not require any governmental
approval of its principal products or services. Compliance with environmental
laws has not historically had a material effect on the Company's capital
expenditures, earnings or competitive position, and the Company does not
anticipate that such compliance will have a material effect on the Company in
the future. Although the Company believes that it is generally in compliance
with all applicable environmental, health and worker safety laws, there can be
no assurance that additional costs for compliance will not be incurred in the
future or that such costs will not be material.
Financial Information About Industry Segments
The sales and operating profits of each industry segment and the
identifiable assets attributable to each industry segment for each of the three
years in the period ended June 30, 1997 are set forth in Note 16 of Notes to
Consolidated Financial Statements.
Discontinued Operations
The Company has accounted for certain segments as discontinued operations.
A description of these operations is as follows:
Commercial and Custom Envelopes
-------------------------------
In November 1993, the Company sold substantially all of the net operating
assets of its wholly-owned subsidiary, Huxley Envelope Corp. ("Huxley"), for
$5,550,000. Huxley is a manufacturer of specialized envelopes for high-volume
direct-mail users. The sale did not include Huxley's New York City manufacturing
facility which was sold in the fourth quarter of fiscal 1995 for approximately
$2,400,000. The sale of the facility, along with the resolution of certain other
contingencies, resulted in a net of tax gain of $240,000.
Telecommunication Systems Services
----------------------------------
Through T-CAS Corp. ("T-CAS"), a wholly-owned subsidiary which was acquired
in 1988, the Company also specialized in the design and implementation of
telecommunications and electronic systems for government, industrial and
commercial customers nationwide and abroad. T-CAS' services included systems
concepts and operational criteria, detailed engineering designs, equipment
specifications, site preparation, construction, field engineering,
installations, on-site training and technical assistance. The Company's plan to
discontinue this operation included the completion of existing contracts (which
were completed at June 30, 1993) and an orderly dissolution.
In May 1995, T-CAS received $170,000 in settlement of a claim against a
former customer. This settlement, together with other unrelated settlements of
claims and adjustments of previously recorded loss reserves, resulted in an
after tax gain of $222,000, which was included in discontinued operations in the
fourth quarter of fiscal 1995.
-10-
ITEM TWO - PROPERTIES
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The executive offices of the Company and the manufacturing facilities of
Aeroflex Laboratories Incorporated, a subsidiary of the Company, occupying an
aggregate of approximately 69,000 square feet, are located in premises which the
Company owns in Plainview, Long Island, New York. An industrial development
agency loan is secured by the premises, with an outstanding balance of
approximately $63,000 at June 30, 1997.
Aeroflex Laboratories Incorporated also leases manufacturing facilities in
Farmingdale, Long Island, New York and Boca Raton, Florida of approximately
20,000 and 11,000 square feet, respectively. The annual rental of these
properties is approximately $143,000 and $76,000 respectively.
The Company's subsidiary, MIC Technology Corporation, leases manufacturing
facilities in Richardson, Texas and Pearl River, New York of approximately
29,000 and 63,000 square feet, respectively. The annual rental of these
properties is approximately $164,000 and $189,000, respectively.
The Company's subsidiary, Vibration Mountings and Controls, Inc., conducts
manufacturing operations at a plant located in Bloomingdale, New Jersey. The
plant, which the Company owns, consists of approximately 72,000 square feet.
The Company's subsidiary, Aeroflex Lintek Corp., occupies approximately
8,500 square feet of space in Powell, Ohio, with an annual rental of $43,000.
The Company believes that its facilities are adequate for its current and
presently foreseeable needs.
ITEM THREE - LEGAL PROCEEDINGS
-----------------
Filtron Co. Inc., ("Filtron") a subsidiary of the Company whose operations
were discontinued in October 1991, was one of several defendants named in a
personal injury action initiated in 1994 by several plaintiffs in the Supreme
Court of the State of New York, County of Kings.
According to the allegations of the Amended Verified Complaint, the
plaintiffs, who are current or former employees of a company to whom Filtron
sold RFI filters/capacitors, and their wives, are seeking to recover,
respectively, directly and derivatively, on diverse theories of negligence,
strict liability and breach of warranty, for injuries allegedly suffered from
exposure to a liquid substance or material which Filtron incorporated for a
period of time in the RFI filters/capacitors which it manufactured. The
plaintiffs are seeking damages which cumulatively may exceed $500 million.
This action is still in the early stages of discovery. Based upon available
information and considering its various defenses, together with its product
liability insurance, in the opinion of management of the Company, the outcome of
the action against its subsidiary will not have a materially adverse effect on
the Company's consolidated financial statements.
-11-
ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
PART II
-------
ITEM FIVE - MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
--------------------------------------
(a) The Common Stock trades on the New York Stock Exchange under the symbol
ARX. The following table shows the quarterly range of the high and low closing
prices for the Common Stock, as reported by the National Quotation Bureau
Incorporated, for the calendar periods indicated.
Common Stock
High Low
---- ---
1995
- ----
First Quarter .................... $4.38 $3.50
Second Quarter ................... 4.88 3.63
Third Quarter .................... 5.63 4.25
Fourth Quarter ................... 5.00 3.88
1996
- ----
First Quarter .................... 5.13 3.50
Second Quarter ................... 6.63 4.38
Third Quarter .................... 6.13 4.63
Fourth Quarter ................... 4.75 4.13
1997
- ----
First Quarter .................... 4.88 3.50
Second Quarter ................... 5.13 3.25
Third Quarter (through August 29) 8.88 4.44
(b) As of August 29, 1997, there were approximately 1,200 record holders of
the Company's Common Stock.
(c) The Company has never paid any cash dividends on its Common Stock.
There have been no stock dividends declared or paid by the Company on its Common
Stock during the past three years. Future dividends, if any, will be dependent
upon the earnings and financial position of the Company and such other factors
as the Board of Directors shall deem appropriate. In addition, the Company's
Revolving Credit Agreement, as amended, prohibits, and its 7-1/2% Senior
Subordinated Convertible Debenture Indenture Agreement limits, it from paying
cash dividends.
-12-
ITEM SIX - SELECTED FINANCIAL DATA
(In thousands except ratios and per share data)
Year ended June 30,
------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------
Earnings Statement Data (7)
- -----------------------
Net Sales...................... $ 94,299 $ 74,367 $ 71,113 $ 65,602 $ 52,031
Income (Loss) from
Continuing Operations........ 4,420 (17,420)(1)(2) 6,587(4)(5) 5,850(6) 1,736
Income from
Discontinued Operations...... - - 462 187 500
Net Income (Loss).............. 4,420 (17,420) 7,049 6,037(6) 2,236
Income (Loss) from Continuing
Operations Per Common Share
and Common Share Equivalent
Primary.................... $ .34 $(1.46)(1)(2)$ .53(4)(5) $ .55(6) $ .20
Fully Diluted.............. .33 (3) .52(4)(5) .50(6) .19
Net Income (Loss) Per Common
Share and Common Share
Equivalent
Primary.................... .34 (1.46) .57 .57 .26
Fully Diluted.............. .33 (3) .55 .51 .24
Weighted Average Number of
Common Shares and Common
Share Equivalents Outstanding
Primary.................... 13,057 11,971 12,352 10,526 8,757
Fully Diluted.............. 15,142 (3) 14,249 12,401 10,920
June 30,
-----------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------
Balance Sheet Data
- ------------------
Working Capital................ $ 25,872 $ 25,300 $ 31,721 $ 28,572 $ 14,982
Total Assets................... 81,047 81,169 71,936 71,016 60,185
Long-term Debt
(including current portion).. 28,916 34,577 13,787 18,408 21,871
Stockholders' Equity........... 35,040 30,472 46,344 39,571 27,208
Other Statistics
- ----------------
After Tax Profit Margin (Loss)
(from continuing operations).. 4.7% (23.4)%(1)(2) 9.3%(4)(5) 8.9%(6) 3.3%
Return on Average Stockholders'
Equity (from continuing
operations).................. 13.5% (45.4)%(1)(2) 15.3%(4)(5) 17.5%(6) 6.6%
Stockholders' Equity
Per Share (8)................ $ 2.81 $ 2.49 $ 3.95 $ 3.37 $ 3.14
(1) Includes $23,200,000 ($1.94 per share) for the year ended June 30, 1996, for
the write-off of in-process research and development acquired in connection with
the purchase of MIC Technology Corporation in March 1996.
(2) Includes a $437,000 net of tax, or $.04 per share gain on the sale of securities
for the year ended June 30, 1996.
(3) As a result of the loss, all options, warrants and convertible debentures
are anti-dilutive.
(4) Includes $2,000,000 ($.14 per share fully diluted and $.16 primary) of
insurance proceeds received on the death of the former chairman.
(5) Includes a $1,494,000 net of tax restructuring charge ($.10 per share fully
diluted and $.12 primary) for the consolidation of the Company's Puerto
Rican operations into its domestic facilities.
(6) Includes income tax benefit of $1,716,000, or $.14 per share ($.16 per
share primary), relating to the recognition of a portion of the Company's
unrealized net operating loss carryforward in accordance with Statement of
Financial Accounting Standards No. 109.
(7) See Note 4 to the Consolidated Financial Statements for a discussion of
discontinued operations.
(8) Calculated by dividing stockholders' equity, at the end of the year, by
the number of shares outstanding at the end of the year.
-13-
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
Fiscal 1997 Compared to Fiscal 1996
Net sales increased to $94,299,000 in fiscal 1997 from $74,367,000 in fiscal
1996. Net income was $4,420,000 in fiscal 1997 compared to a net loss of
$(17,420,000) in fiscal 1996. Fiscal 1996 results included a one-time write-off
of $23,200,000 for in-process research and development related to the purchase
of MIC Technology Corporation ("MIC") and a net of tax gain of $437,000 on the
sale of securities.
Net sales in the microelectronics segment increased to $48,462,000 for the year
ended June 30, 1997 from $28,414,000 for the year ended June 30, 1996 due to the
acquisition of MIC in March 1996 and increased sales in the existing product
lines. MIC sales for fiscal 1997 and from acquisition until June 30, 1996 were
approximately $21,900,000 and $6,200,000, respectively. Operating profits,
exclusive of the special write-off of $23,200,000 in 1996, were $6,644,000 and
$3,282,000 for the years ended June 30, 1997 and 1996, respectively. The
increase is due to the increased sales and higher overall profit margins.
Net sales in the electronics segment decreased to $28,144,000 for the year ended
June 30, 1997 from $30,109,000 for the year ended June 30, 1996 primarily as a
result of reduced frequency synthesizer sales partially offset by increased
sales of stabilization and tracking devices. The reduction in frequency
synthesizer sales was due to the early completion of the current CASS contract
and the transition from custom to commercial markets. Operating profits
decreased to $2,762,000 from $4,830,000 for the years ended June 30, 1997 and
1996, respectively, due to the decrease in sales and lower profit margins. In an
effort to transition from custom products to commercial products, the Company
has directed its resources towards developing standard products for the
commercial markets.
Net sales in the isolator products segment increased to $17,693,000 for the year
ended June 30, 1997 from $15,844,000 for the year ended June 30, 1996. The
increase reflects higher sales volume of industrial and commercial isolators
partially offset by decreased sales volume of military isolators. Operating
profits increased by $694,000 as a result of the increased sales and higher
profit margins, partially offset by increased selling, general and
administrative costs.
Cost of sales as a percentage of sales decreased to 66.9% from 68.7% between the
two years primarily as a result of increased margins in the microelectronics and
isolator segments during the year ended June 30, 1997. Selling, general and
administrative costs (exclusive of the special charge in 1996) as a percentage
of sales increased to 22.8% from 20.7% as a result of the addition of MIC which
has a higher selling, general and administrative cost structure than the balance
of the Company.
Interest expense increased to $2,974,000 from $1,939,000 due to increased levels
of borrowings required to purchase MIC. Interest and other income decreased to
$93,000 from $1,075,000 due to lower interest income on reduced cash amounts
which were used to acquire MIC and a securities related gain in fiscal 1996.
-14-
The income tax provisions for the years ended June 30, 1997 and 1996 were
different from the amounts computed by applying the U.S. Federal income tax rate
to income before income taxes primarily as a result of the tax benefits of loss
carryforwards (both unrealized and realized), state and local income taxes, and,
for the year ended June 30, 1996, because of the non-deductibility of the
$23,200,000 special charge.
Management believes that potential reductions in military spending will not
materially affect its operations. In certain product areas, the Company has
suffered reductions in sales volume due to cutbacks in the military budget. In
other product areas, the Company has experienced increased sales volume due to a
realignment of government spending towards upgrading existing systems instead of
purchasing completely new systems. The overall effect of the cutbacks and
realignment has not been material to the Company. Furthermore, the Company's
overall dependence on the military has been declining. Approximately 50%, 65%
and 74% of the Company's sales for the fiscal years 1997, 1996 and 1995,
respectively, were to agencies of the United States government or to prime
defense contractors or subcontractors of the United States government.
Fiscal 1996 Compared to Fiscal 1995
Net sales increased to $74,367,000 in fiscal 1996 from $71,113,000 in fiscal
1995. The net loss was $(17,420,000) in fiscal 1996 including a one-time
write-off of $23,200,000 for in-process research and development related to the
purchase of MIC and a net of tax gain of $437,000 on the sale of securities.
Income from continuing operations for fiscal 1995 was $6,587,000 including
$2,000,000 of insurance proceeds received on the death of the former chairman
and a net of tax restructuring charge of $1,494,000 for the consolidation of the
Company's Puerto Rico operations into its existing domestic facilities.
Net sales in the microelectronics segment increased to $28,414,000 for the year
ended June 30, 1996 from $24,250,000 for the year ended June 30, 1995 primarily
as a result of the acquisition of MIC in March 1996. MIC sales, from its
acquisition until June 30, 1996, were approximately $6,200,000. Operating
profits, exclusive of the special write-off of $23,200,000 in 1996, were
$3,282,000 and $2,075,000 for the years ended June 30, 1996 and 1995,
respectively. The increase is due to the increase in sales and increased profit
margins partially offset by increased selling, general and administrative costs.
Net sales in the electronics segment decreased to $30,109,000 for the year ended
June 30, 1996 from $31,357,000 for the year ended June 30, 1995 primarily as a
result of reduced sales volume of scanning devices partially offset by the
acquisition of Lintek, Inc. in January 1995. Operating profits decreased to
$4,830,000 from $6,028,000 for the years ended June 30, 1996 and 1995,
respectively. The decrease was due primarily to lower profit margins, primarily
in instrument products and magnetic motors, and the reduced sales.
Net sales in the isolator products segment increased to $15,844,000 for the year
ended June 30, 1996 from $15,506,000 for the year ended June 30, 1995. The
increase reflects higher sales volume of industrial and commercial isolators
partially offset by decreased sales volume of military isolators. Operating
profits decreased by $227,000 as a result of lower profit margins, as discussed
below, partially offset by the increased sales volume and reduced selling,
general and administrative costs as a result of the consolidation of facilities.
-15-
Cost of sales as a percentage of sales increased to 68.7% from 66.9% between the
two years primarily as a result of inefficiencies in the final production runs
of military isolators in the Company's Puerto Rican facility and start-up costs
of the transition to the New Jersey facility. Selling, general and
administrative costs (exclusive of the respective special charges) decreased to
$15,379,000 from $15,752,000 as a result of cost savings from the consolidation
of certain operations of the Company's Puerto Rican facility into the Company's
other facilities.
Interest expense increased to $1,939,000 from $1,464,000 due to increased levels
of borrowings required to purchase MIC. Interest and other income increased to
$1,075,000 from $751,000 due to a securities related gain partially offset by
lower interest income on reduced cash amounts which were used to acquire MIC.
The income tax provisions for the years ended June 30, 1996 and 1995 were
different from the amounts computed by applying the U.S. Federal income tax rate
to income before income taxes primarily as a result of the tax benefits of loss
carryforwards (both unrealized and realized) and, for the year ended June 30,
1996, because of the non-deductibility of the $23,200,000 special charge, and
for the year ended June 30, 1995, because of the non-taxable life insurance
proceeds of $2,000,000.
Income from discontinued operations for the year ended June 30, 1995 includes a
gain related to the sale of the former Huxley Envelope Corp. ("Huxley") building
of $240,000 and a gain related to T-CAS Corp. ("T-CAS") of $222,000. The gain of
$222,000 is due primarily to a settlement of a claim against a former customer.
Liquidity and Capital Resources
June 30, 1997 Compared To June 30, 1996
The Company's working capital at June 30, 1997 was $25,872,000 as compared to
$25,300,000 at June 30, 1996. The current ratio was 2.3 to 1 at both June 30,
1997 and 1996. The increase in working capital was primarily due to an increase
in inventories offset in part by a reduction in accounts receivable.
Cash provided from operating activities was $8,729,000 for the year ended June
30, 1997 and $4,508,000 for the year ended June 30, 1996. The increase was due
primarily to lower year-end accounts receivables. Cash used by investing
activities of $2,996,000 in 1997 was primarily for capital expenditures. Debt
was reduced by $5,661,000 in 1997.
Effective March 19, 1996, the Company acquired all of the outstanding stock of
MIC for approximately $36,000,000 of cash, 300,000 shares of common stock and
warrants to purchase 400,000 shares of common stock (at exercise prices ranging
from $7.05 to $7.50 per share). The purchase price was paid with available cash
of $9,000,000 and borrowings under the Company's bank loan agreement of
$27,000,000. MIC manufactures high frequency thin film circuits and
interconnects for miniaturized, high frequency, high performance electronic
products for growing commercial markets such as wireless communications,
satellite based communications hardware and high technology military
electronics. The acquired company's net sales were approximately $25,000,000 for
its fiscal year ended October 31, 1995.
As of March 15, 1996 the Company replaced a previous agreement with a revised
revolving credit and term loan agreement with two banks which is secured by
substantially all of the Company's assets not otherwise encumbered. The
agreement provides for a revolving credit line of $22,000,000 and a term loan of
$16,000,000. The revolving credit line expires in March 1999. The term loan is
payable in quarterly installments of $900,000 with final payment on September
-16-
30, 2000. The interest rate on borrowings under this agreement is at
various rates depending upon certain financial ratios, with the present rate
substantially equivalent to the prime rate (8.5% at June 30, 1997) on the
revolving credit borrowings and prime plus 1/4% on the term loan borrowings. At
June 30, 1997, the outstanding borrowings under the revolving credit line and
term loan were $8,109,000 and $9,041,000, respectively. The terms of the
agreement require compliance with certain covenants including minimum
consolidated tangible net worth and pre-tax earnings, maintenance of certain
financial ratios, limitations on capital expenditures and indebtedness and
prohibition of the payment of cash dividends.
During June 1994, the Company completed a sale of $10,000,000 principal amount
of 7-1/2% Senior Subordinated Convertible Debentures to non-U.S. persons. The
debentures are due June 15, 2004 subject to prior sinking fund payments of 10%,
10%, 15% and 15% of the principal amount on September 15, 2000, 2001, 2002 and
2003, respectively. The debentures are convertible into the Company's common
stock at a price of $5-5/8 per share. During the fiscal year 1996, $19,000
principal amount of debentures was converted.
Management of the Company believes that internally generated funds and available
lines of credit will be sufficient for its working capital requirements, capital
expenditure needs and the servicing of its debt for the fiscal year ending June
30, 1998. At June 30, 1997, the Company's available unused line of credit was
approximately $12,000,000.
A subsidiary of the Company whose operations were discontinued in 1991, is one
of several defendants named in a personal injury action initiated in August,
1994, by a group of plaintiffs. The plaintiffs are seeking damages which
cumulatively may exceed $500 million. The complaint alleges, among other things,
that the plaintiffs suffered injuries from exposure to substances contained in
products sold by the subsidiary to one of its customers. This action is in the
early stages of discovery. Based upon available information and considering its
various defenses, together with its product liability insurance, in the opinion
of management of the Company, the outcome of the action against its subsidiary
will not have a materially adverse effect on the Company's consolidated
financial statements.
The Company is involved in various other routine legal matters. Management
believes the outcome of these matters will not have a materially adverse effect
on the Company's consolidated financial statements.
The Company's backlog of orders at June 30, 1997 and 1996 was $53,332,000 and
$37,457,000, respectively.
At June 30, 1997, the Company had net operating loss carryforwards of
approximately $4,000,000 for Federal income tax purposes.
The Company is undergoing routine audits by various taxing authorities of
several of its state and local income tax returns covering different periods
from 1992 to 1995. Management believes that the probable outcome of these
various audits should not materially affect the consolidated financial
statements of the Company.
In the second quarter of fiscal 1998 the Company will be required to adopt SFAS
No. 128 "Earnings Per Share". This statement establishes standards for computing
and presenting earnings per share ("EPS"), replacing the presentation of
currently required Primary EPS with a presentation of Basic EPS. For entities
with complex capital structures, the statement requires the dual presentation of
both Basic EPS and Diluted EPS on the face of the statement of operations. When
SFAS No. 128 is adopted the Company will be required to restate its EPS data for
all prior periods presented. The Company does not expect the impact of the
adoption of this statement to be material to previously reported EPS amounts.
-17-
Effective July 1, 1997, the Company's subsidiary, MIC Technology Corporation,
acquired certain equipment, inventory, licenses for technology and patents of
two of Lucent Technologies' telecommunications component units - multi chip
modules and film integrated circuits - for approximately $4,400,000 in cash.
These units manufacture interconnect products for the communications industry.
The Company has also signed a multi-year supply agreement to provide Lucent with
film integrated circuits.
On September 8, 1997, the Company called for the redemption of all of its
outstanding 7-1/2% Senior Subordinated Convertible Debentures at 104-1/2% of the
principal amount. The Debentures are convertible into the Company's Common Stock
at a price of $5-5/8 per share through October 6, 1997. Any outstanding
Debentures on October 13, 1997 will be redeemed.
-18-
ITEM EIGHT - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements and supplementary data listed in the accompanying
Index to Financial Statements and Schedules is attached as part of this report.
ITEM NINE - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
-----------------------------------------
None.
PART III
--------
The information required by Part III is incorporated by reference to the
Company's definitive proxy statement in connection with its Annual Meeting of
Stockholders scheduled to be held in November 1997, to be filed with the
Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year ended June 30, 1997.
PART IV
-------
ITEM FOURTEEN - EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
---------------------------------------
(a) See Index to Financial Statements at beginning of attached financial
statements.
(b) Reports on Form 8-K:
-------------------
Report on Form 8-K dated May 17, 1997 with respect to Item 5.
(c) Exhibits
--------
3.1 Certificate of Incorporation, as amended (Exhibit 3.1 of Annual Report
on Form 10-K for the year ended June 30, 1987)
3.2 By-Laws, as amended (Exhibit 3.2 of Annual Report on Form 10-K for the
year ended June 30, 1987)
4.1 Third Amended and Restated Loan and Security Agreement dated as of
March 15, 1996 among the Registrant, certain of its subsidiaries,
Chemical Bank and NatWest Bank, N.A. (Exhibit 10 of Report on Form
8-K dated March 19, 1996).
4.2 Indenture Agreement between Registrant and American Stock Transfer &
Trust Company dated as of June 23, 1994. (Exhibit 4.2 of Annual
Report on Form 10-K for the year ended June 30, 1994).
10.1 1989 Non-Qualified Stock Option Plan, as amended (Exhibit 10.8 of
Annual Report on Form 10-K for the year ended June 30, 1990).
-19-
10.2 1994 Non-Qualified Stock Option Plan. (Exhibit 10.2 of Annual Report
on Form 10-K for the year ended June 30, 1994).
10.3 1994 Outside Directors Stock Option Plan. (Exhibit 10.3 of Annual
Report on Form 10-K for the year ended June 30, 1994).
10.4 Common Stock Purchase Agreement dated as of February 13, 1996 and closed
on March 19, 1996 among Aeroflex Acquisition Corp. (as assignee of the
Registrant), MIC Technology Corporation and the stockholders of MIC
Technology Corporation (Exhibit 2 of Report on Form 8-K dated March 19,
1996).
10.5 Amendment No. 1 to Employment Agreement between Aeroflex Incorporated
and Harvey R. Blau (Exhibit 10.1 to Report on Form 8-K dated May 17,
1997).
10.6 Amendment No. 1 to Employment Agreement between Aeroflex Incorporated
and Michael Gorin (Exhibit 10.2 to Report on Form 8-K dated May 17,
1997).
10.7 Amendment No. 1 to Employment Agreement between Aeroflex Incorporated
and Leonard Borow (Exhibit 10.3 to Report on Form 8-K dated May 17,
1997).
10.8 Deferred Compensation Agreement between Aeroflex Incorporated and Harvey
R. Blau (Exhibit 10.4 to Report on Form 8-K dated May 17, 1997).
10.9 Employment Agreement between Aeroflex Incorporated and Carl Caruso
(Exhibit 10.5 to Report on Form 8-K dated May 17, 1997).
11 Computation of Earnings Per Common Share
22 The following is a list of the Company's subsidiaries:
State of
Name Incorporation
---- -------------
Aeroflex International Inc. Delaware
Aeroflex Laboratories Incorporated Delaware
Aeroflex Lintek Corp. Ohio
Aeroflex Systems Corp. Delaware
MIC Technology Corporation Texas
Vibration Mountings and Controls, Inc. New York
23 Consent of Independent Auditors
99 Additional Exhibit
The following undertakings are incorporated by reference into the Company's
Registration Statements on Form S-8 and Form S-3 (Registration Nos. 33-75496,
33-88868, 33-88878, 333-15339 and 333-21803).
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan or
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
-20-
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) For the purpose of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(f) (1) The undersigned registrant hereby undertakes to deliver or cause to
be delivered with the prospectus to each employee to whom the prospectus is sent
or given a copy of the registrant's annual report to stockholders for its last
fiscal year, unless such employee otherwise has received a copy of such report,
in which case the registrant shall state in the prospectus that it will promptly
furnish, without charge, a copy of such report on written request of the
employee. If the last fiscal year of the registrant has ended within 120 days
prior to the use of the prospectus, the annual report of the registrant for the
preceding fiscal year may be so delivered, but within such 120 day period the
annual report for the last fiscal year will be furnished to each such employee.
(2) The undersigned registrant hereby undertakes to transmit or cause to be
transmitted to all employees participating in the plan who do not otherwise
receive such material as stockholders of the registrant, at the time and in the
manner such material is sent to its stockholders, copies of all reports, proxy
statements and other communications distributed to its stockholders generally.
(3) Where interests in a plan are registered herewith, the undersigned
registrant and plan hereby undertake to transmit or cause to be transmitted
without charge, to any participant in the plan who makes a written request, a
copy of the then latest annual report of the plan filed pursuant to Section 15
(d) of the Securities Exchange Act of 1934 (Form 11-K). If such report is filed
separately on Form 11-K, such form shall be delivered upon written request. If
such report is filed as a part of the registrant's annual report on Form 10-K,
that entire report (excluding exhibits) shall be delivered upon written request.
If such report is filed as a part of the registrant's annual report to
stockholders delivered pursuant to paragraph (1) or (2) of this undertaking,
additional delivery shall not be required.
(4) If the registrant is a foreign private issuer, eligible to use Form 20-F,
then the registrant shall undertake to deliver or cause to be delivered with the
prospectus to each employee to whom the prospectus is sent or given, a copy of
the registrant's latest filing on Form 20-F in lieu of the annual report to
stockholders.
-21-
(i) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 25th day of
September 1997.
Aeroflex Incorporated
By:/s/Harvey R. Blau
---------------------------------
Harvey R. Blau, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on September 25th, 1997 by the following persons in
the capacities indicated:
/s/ Harvey R. Blau
- --------------------------- Chairman of the Board
Harvey R. Blau (Chief Executive Officer)
/s/ Michael Gorin
- --------------------------- President and Director
Michael Gorin (Chief Financial Officer and Principal
Accounting Officer)
/s/ Leonard Borow
- -------------------------- Executive Vice President, Secretary and
Leonard Borow Director
(Chief Operating Officer)
/s/ Robert Bradley, Sr.
- -------------------------- Director
Robert Bradley, Sr.
/s/Milton Brenner
- -------------------------- Director
Milton Brenner
/s/ Ernest E. Courchene, Jr.
- -------------------------- Director
Ernest E. Courchene, Jr.
/s/ Donald S. Jones
- ------------------------- Director
Donald S. Jones
/s/ Eugene Novikoff
- ------------------------- Director
Eugene Novikoff
/s/ John S. Patton
- ------------------------- Director
John S. Patton
AEROFLEX INCORPORATED
AND SUBSIDIARIES
-----------------------
FINANCIAL STATEMENTS AND SCHEDULES
COMPRISING ITEM 8 OF ANNUAL REPORT ON FORM 10-K
TO SECURITIES AND EXCHANGE COMMISSION
AS OF JUNE 30, 1997 AND 1996
AND FOR THE YEARS
ENDED JUNE 30, 1997, 1996 AND 1995
FINANCIAL STATEMENTS AND SCHEDULES
----------------------------------
I N D E X PAGE
------------- ----
ITEM FOURTEEN (a)
1. FINANCIAL STATEMENTS:
Independent auditors' report S-1
Consolidated financial statements:
Balance sheets - June 30, 1997 and 1996 S-2-3
Statements of operations - each of the three years
in the period ended June 30, 1997 S-4
Statements of stockholders' equity - each of the
three years in the period ended June 30, 1997 S-5
Statements of cash flows - each of the three years
in the period ended June 30, 1997 S-6
Notes (1-17) S-7-20
Quarterly financial data (unaudited) S-21
2. FINANCIAL STATEMENT SCHEDULES:
II - Valuation and qualifying accounts S-22
All other schedules have been omitted because they are inapplicable, not
required, or the information is included elsewhere in the financial statements
or notes thereto.
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders of Aeroflex Incorporated
Plainview, New York
We have audited the accompanying consolidated balance sheets of Aeroflex
Incorporated and subsidiaries as of June 30, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three year period ended June 30, 1997. Our audits also
included the financial statement schedule listed in the Index at item 14(a)2.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aeroflex
Incorporated and subsidiaries as of June 30, 1997 and 1996 and the results of
their operations and their cash flows for each of the years in the three year
period ended June 30, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Jericho, New York
August 14, 1997 (except as to Note 17(b),
which is as of September 8, 1997)
S-1
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS June 30,
- -----------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 600,000 $ 661,000
Current portion of invested cash 69,000 -
Accounts receivable, less allowance for doubtful
accounts of $417,000 and $354,000 at
June 30, 1997 and 1996, respectively 21,843,000 23,336,000
Income tax refund receivable - 926,000
Inventories 20,319,000 16,916,000
Deferred income taxes 2,043,000 1,871,000
Prepaid expenses and other current assets 743,000 554,000
- -----------------------------------------------------------------------------------
Total Current Assets 45,617,000 44,264,000
Invested Cash 453,000 603,000
Property, Plant and Equipment, net 14,487,000 14,854,000
Intangible Assets Acquired in Connection with
the Purchase of Businesses, net of accumulated
amortization of $1,224,000 and $516,000 at
June 30, 1997 and 1996, respectively 8,046,000 8,707,000
Cost in Excess of Fair Value of Net Assets of
Businesses Acquired, net of accumulated amortization
of $2,399,000 and $2,086,000 at June 30, 1997
and 1996, respectively 9,903,000 10,054,000
Other Assets 2,541,000 2,687,000
- -----------------------------------------------------------------------------------
Total Assets $ 81,047,000 $ 81,169,000
===================================================================================
See notes to consolidated financial statements.
S-2
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY June 30,
- -----------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------
Current Liabilities:
Current portion of long-term debt $ 4,247,000 $ 4,259,000
Accounts payable 5,093,000 3,968,000
Accrued expenses and other current liabilities 8,564,000 8,967,000
Income taxes payable 1,841,000 1,770,000
- -----------------------------------------------------------------------------------
Total Current Liabilities 19,745,000 18,964,000
Long-Term Debt 14,688,000 20,337,000
Deferred Income Taxes 334,000 172,000
Other Long-Term Liabilities 1,259,000 1,243,000
Senior Subordinated Convertible Debentures 9,981,000 9,981,000
- -----------------------------------------------------------------------------------
Total Liabilities 46,007,000 50,697,000
- -----------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, par value $.10 per share;
authorized 1,000,000 shares:
Series A Junior Participating Preferred stock,
par value $.10 per share; authorized 150,000 shares;
none issued - -
Common stock, par value $.10 per share; authorized
25,000,000 shares; issued 12,658,000 and 12,380,000
shares at June 30, 1997 and 1996, respectively 1,266,000 1,238,000
Additional paid-in capital 58,110,000 57,820,000
Accumulated deficit (23,584,000) (28,004,000)
- -----------------------------------------------------------------------------------
35,792,000 31,054,000
Less: Treasury stock, at cost (169,000 and
129,000 shares at June 30, 1997 and 1996,
respectively) 752,000 582,000
- -----------------------------------------------------------------------------------
Total Stockholders' Equity 35,040,000 30,472,000
- -----------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 81,047,000 $ 81,169,000
===================================================================================
See notes to consolidated financial statements.
S-3
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
- ------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Net Sales $ 94,299,000 $ 74,367,000 $ 71,113,000
Cost of Sales 63,109,000 51,070,000 47,542,000
- ------------------------------------------------------------------------------------
Gross Profit 31,190,000 23,297,000 23,571,000
Selling, General and Administrative Costs 21,454,000 15,379,000 15,752,000
Special Charge (Note 2) - 23,200,000 -
Restructuring Charge (Note 3) - - 1,669,000
- ------------------------------------------------------------------------------------
Operating Income (Loss) 9,736,000 (15,282,000) 6,150,000
- ------------------------------------------------------------------------------------
Other Income (Expense)
Life Insurance Proceeds (Note 13) - - 2,000,000
Interest Expense (2,974,000) (1,939,000) (1,464,000)
Other Income (including interest and
dividends of $84,000, $496,000 and
$669,000) 93,000 1,075,000 751,000
- ------------------------------------------------------------------------------------
Total Other Income (Expense) (2,881,000) (864,000) 1,287,000
- ------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations
Before Income Taxes 6,855,000 (16,146,000) 7,437,000
Provision For Income Taxes 2,435,000 1,274,000 850,000
- ------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations 4,420,000 (17,420,000) 6,587,000
- ------------------------------------------------------------------------------------
Discontinued Operations (Note 4):
Gain on disposal of subsidiaries,
net of income taxes - - 462,000
- ------------------------------------------------------------------------------------
Income From Discontinued Operations - - 462,000
- ------------------------------------------------------------------------------------
Net Income (Loss) $ 4,420,000 $(17,420,000) $7,049,000
====================================================================================
Income (Loss) Per Common Share:
Primary
Continuing Operations $ .34 $(1.46) $ .53
Discontinued Operations - - .04
- ------------------------------------------------------------------------------------
Net Income (Loss) $ .34 $(1.46) $ .57
====================================================================================
Fully Diluted
Continuing Operations $ .33 * $ .52
Discontinued Operations - * .03
- ------------------------------------------------------------------------------------
Net Income $ .33 * $ .55
====================================================================================
Weighted Average Number of Common
Shares Outstanding
Primary 13,057,000 11,971,000 12,352,000
Fully Diluted 15,142,000 * 14,249,000
====================================================================================
* As a result of the loss, all options, warrants and convertible debentures are
anti-dilutive.
See notes to consolidated financial statements.
S-4
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1997, 1996 and 1995
Additional
Common Stock Paid-in Accumulated Treasury Stock
Total Shares Par Value Capital Deficit Shares Cost
- -----------------------------------------------------------------------------------------------------------------------
Balance, July 1, 1994 $ 39,571,000 11,799,000 $ 1,180,000 $ 56,116,000 $(17,633,000) 58,000 $ (92,000)
Treasury Stock Received
from the Employee
Stock Ownership Plan (28,000) - - - - 7,000 (28,000)
Retirement of Treasury
Stock - (65,000) (6,000) (114,000) - (65,000) 120,000
Purchase of Treasury
Stock (355,000) - - - - 92,000 (355,000)
Stock Issued Upon Exercise
of Stock Options 107,000 84,000 8,000 99,000 - - -
Net Income 7,049,000 - - - 7,049,000 - -
- -----------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 46,344,000 11,818,000 1,182,000 56,101,000 (10,584,000) 92,000 (355,000)
Stock Issued Upon
Conversion of
Debentures 19,000 3,000 - 19,000 - - -
Treasury Stock Received
from the Employee
Stock Ownership Plan (285,000) - - - - 56,000 (285,000)
Stock Issued Upon Exercise
of Stock Options 440,000 159,000 16,000 366,000 - (19,000) 58,000
Stock and Warrants Issued
to Acquire Business 1,074,000 300,000 30,000 1,044,000 - - -
Stock Issued in Connection
with Bank Refinancing 300,000 100,000 10,000 290,000 - - -
Net Loss (17,420,000) - - - (17,420,000) - -
- -----------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 30,472,000 12,380,000 1,238,000 57,820,000 (28,004,000) 129,000 (582,000)
Stock Issued Upon Exercise
of Stock Options 586,000 278,000 28,000 290,000 - (69,000) 268,000
Purchase of Treasury
Stock (438,000) - - - - 109,000 (438,000)
Net Income 4,420,000 - - - 4,420,000 - -
- -----------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 $ 35,040,000 12,658,000 $ 1,266,000 $ 58,110,000 $(23,584,000) 169,000 $(752,000)
=======================================================================================================================
See notes to consolidated financial statements.
S-5
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
- ------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Cash Flows From Operating Activities:
Net income (loss) $ 4,420,000 $(17,420,000) $ 7,049,000
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Special charge - 23,200,000 -
Gain from discontinued operations,
net - - (462,000)
Depreciation and amortization 4,322,000 3,091,000 3,133,000
Gain on sale of securities - (533,000) -
Deferred income taxes (10,000) (461,000) (13,000)
Other 57,000 (112,000) (69,000)
Change in operating assets and
liabilities, net of effects from
purchase of businesses:
Decrease (increase) in accounts
receivable 1,421,000 (2,220,000) (1,965,000)
Decrease (increase) in inventories (3,403,000) (2,654,000) 2,263,000
Decrease (increase) in prepaid
expenses and other assets 879,000 (6,000) (279,000)
Increase (decrease) in accounts
payable, accrued expenses and
other long-term liabilities 375,000 434,000 (1,232,000)
Increase (decrease) in income
taxes payable 668,000 1,189,000 (125,000)
- ------------------------------------------------------------------------------------
Net Cash Provided By
Operating Activities 8,729,000 4,508,000 8,300,000
- ------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Payment for purchase of businesses,
net of cash acquired (162,000) (35,190,000) (536,000)
Net cash provided by
discontinued operations - - 3,058,000
Capital expenditures (2,931,000) (1,687,000) (2,919,000)
Proceeds from sale of property,
plant and equipment 16,000 2,318,000 182,000
Net proceeds from sale of securities - 533,000 -
Decrease in invested cash 81,000 709,000 194,000
- ------------------------------------------------------------------------------------
Net Cash Used In
Investing Activities (2,996,000) (33,317,000) (21,000)
- ------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Borrowings under debt agreements 58,000 27,250,000 293,000
Debt repayments (5,719,000) (9,210,000) (5,232,000)
Bank debt financing costs - (403,000) -
Purchase of treasury stock (438,000) - (355,000)
Proceeds from the exercise of stock
options 305,000 503,000 107,000
- ------------------------------------------------------------------------------------
Net Cash Provided By (Used In)
Financing Activities (5,794,000) 18,140,000 (5,187,000)
- ------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash and
Cash Equivalents (61,000) (10,669,000) 3,092,000
Cash and Cash Equivalents At Beginning
Of Year 661,000 11,330,000 8,238,000
- ------------------------------------------------------------------------------------
Cash and Cash Equivalents At End Of Year $ 600,000 $ 661,000 $ 11,330,000
====================================================================================
See notes to consolidated financial statements.
S-6
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 1997, 1996 and 1995
1. Summary of Significant Accounting Principles and Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Aeroflex Incorporated and its subsidiaries ("the Company"), all of which are
wholly-owned. The Company has accounted for certain subsidiaries, namely
telecommunication systems services (T-CAS Corp.) and commercial and custom
envelopes (Huxley Envelope Corp.), as discontinued operations. These
subsidiaries have not been consolidated as part of the Company's continuing
operations (Note 4). All significant intercompany balances and transactions
have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management of the Company make
a number of estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities.
Among the more significant estimates included in the financial statements
are the estimated costs to complete contracts in process. Actual results
could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments having maturities of
three months or less at the date of acquisition to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Financial Instruments
The fair values of all financial instruments, other than long-term debt and
the convertible debentures (see Notes 9 and 10), approximate book values
because of the short maturity of these instruments.
Revenue and Cost Recognition on Contracts
Revenue and costs on contracts are recognized based upon shipments or
billings for manufacturing contracts and upon costs incurred for certain
engineering and support services contracts. Estimated costs at completion
are based upon engineering and production estimates. Provisions for
estimated losses on contracts-in-process are recorded in the period in which
such losses are first determined.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation computed on a straight-line basis over the estimated useful
lives of the related assets. Leasehold improvements are amortized over the
life of the lease or the estimated life of the asset, whichever is shorter.
Research and Development Costs
All research and development costs are charged to expense as incurred and
are classified as selling, general and administrative costs. Research and
development expenses were approximately $3,279,000, $1,260,000 and
$2,389,000 during the fiscal years 1997, 1996 and 1995, respectively. See
Note 2 for a discussion of purchased in-process research and development.
S-7
Intangible Assets
Intangible assets are recorded at cost, less accumulated amortization. The
excess of purchase price over the fair value of tangible assets acquired is
being amortized on a straight-line basis over periods ranging from 20 to 40
years except for certain costs allocated to existing technology, workforce
in-place, customer relationships and patents which are amortized over 13 to
15 years, the estimated remaining lives of the intangibles at the time they
were acquired by the Company. The Company periodically evaluates the
recoverability of the carrying value of its intangible assets and the
related amortization periods. The Company assesses the recoverability of
unamortized goodwill based on the undiscounted projected future earnings of
the related businesses. As of June 30, 1997, the cost in excess of fair
value of net assets of businesses acquired consists substantially of
$8,666,000 related to the 1989 acquisition of Comstron Corporation, a
manufacturer of frequency synthesizers, subsystems and components.
Long-Lived Assets
Effective July 1, 1996 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", which requires that
long-lived assets and certain identifiable intangibles to be held and used
or disposed of by an entity be reviewed for possible impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The adoption of SFAS No. 121 did not have any
impact on the Company's consolidated financial position or results of
operations.
Invested Cash
Invested cash consists of government securities and certificates of deposit,
having original maturities of greater than three months, and is carried at
cost, which approximates market.
Income (Loss) Per Share
Income per share is computed based upon the weighted average number of
common shares outstanding after giving effect to the assumed exercise of
dilutive stock options and warrants and, for fully diluted purposes, the
assumed conversion of debentures. Loss per share is computed based upon only
the weighted average number of common shares outstanding.
Accounting for Stock-Based Compensation
The Company records compensation expense for employee and director stock
options only if the current market price of the underlying stock exceeds the
exercise price on the date of the grant. Effective July 1, 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The Company
has elected not to implement the fair value based accounting method for
employee and director stock options, but instead has elected to disclose the
pro forma net earnings and pro forma earnings per share for employee and
director stock option grants made beginning in fiscal 1996 as if such method
had been used to account for stock-based compensation cost as described in
SFAS No. 123.
Income Taxes
In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company
measures deferred tax assets and liabilities based upon the differences
between the financial accounting and tax bases of assets and liabilities.
Reclassifications
Reclassifications have been made to the 1996 and 1995 consolidated financial
statements to conform to the 1997 presentation.
S-8
2. Acquisition of Businesses
MIC
---
Effective March 19, 1996, the Company acquired all of the outstanding stock
of MIC Technology Corporation ("MIC") for approximately $36,000,000 of cash,
300,000 shares of common stock and warrants to purchase 400,000 shares of
common stock (at exercise prices ranging from $7.05 to $7.50 per share). The
purchase price was paid with available cash of approximately $9,000,000 and
borrowings under the Company's bank loan agreement of approximately
$27,000,000. MIC manufactures high frequency thin film circuits and
interconnects for miniaturized, high frequency, high performance electronic
products for growing commercial markets such as wireless communications,
satellite based communications hardware and high technology military
electronics. The acquired company's net sales were approximately $25,000,000
for its fiscal year ended October 31, 1995.
The Company commissioned an independent asset valuation study of acquired
tangible and identifiable intangible assets to serve as a basis for
allocation of the purchase price. Based on this study, the Company allocated
the purchase price as follows:
Net tangible assets $ 6,190,000
Identifiable intangible assets 8,453,000
In-process research and development 23,200,000
------------
$ 37,843,000
============
The identifiable intangible assets which include existing technology,
customer relationships and assembled work force are being amortized on a
straight-line basis over thirteen years based on the study described above.
The acquired in-process research and development was not considered to have
reached technological feasibility and, in accordance with generally accepted
accounting principles, the value of such was expensed in the third quarter
of fiscal 1996.
Summarized below are the unaudited pro forma results of operations of the
Company as if MIC had been acquired at the beginning of the fiscal periods
presented. The $23,200,000 write-off has been included in the June 30, 1996
pro forma loss but not the June 30, 1995 pro forma income in order to
provide comparability to the respective historical periods.
Pro Forma Year Ended
June 30,
---------------------------------------
1996 1995
---------------- ----------------
(in thousands, except per share data)
Net Sales $ 90,097 $ 95,300
Income (Loss) From Continuing
Operations (19,392) 6,729
Net Income (Loss) (19,392) 7,191
Earnings (Loss) Per Share
Primary
Continuing Operations $ (1.62) $ .53
Net Income (Loss) (1.62) .56
Fully Diluted
Continuing Operations * .51
Net Income * .54
* Due to the loss, all options, warrants and convertible debentures are anti-
dilutive.
S-9
Lintek
In January 1995, the Company acquired substantially all of the net operating
assets of Lintek, Inc. ("Lintek") for $537,000 plus contingent consideration
based on the next five years' earnings to a maximum of an additional
$675,000. Additional consideration of $162,000 and $63,000 was earned as of
December 31, 1996 and 1995 and paid in February 1997 and 1996, respectively.
Such amounts, and any further contingent consideration earned, will be
treated as cost in excess of fair value of net assets acquired. Lintek
designs, develops and manufactures radar cross section and antenna pattern
measurement systems for commercial and military applications, as well as
surface penetrating radars. The acquired company's net sales were
approximately $2,600,000 for the year ended December 31, 1994. On a pro
forma basis, had the Lintek acquisition taken place as of the beginning of
the periods presented, results of operations for those periods would not
have been materially affected.
The pro forma financial information presented above for the MIC acquisition
is not necessarily indicative of either the results of operations that would
have occurred had the acquisition taken place at the beginning of the
periods presented or of future operating results of the combined companies.
The acquisitions have been accounted for as purchases and, accordingly, the
acquired assets and liabilities assumed have been recorded at their
estimated fair values at the respective dates of acquisition. The operating
results of MIC and Lintek are included in the consolidated statements of
operations from the respective acquisition dates.
3. Restructuring Charge
In March 1995, the Company adopted a plan to consolidate its Puerto Rican
manufacturing operations into its existing facilities in New York and New
Jersey. The Company has ceased manufacturing operations in Puerto Rico. In
connection with this restructuring, the Company recorded a charge to
earnings of $1,669,000 in fiscal 1995, representing costs of abandonment of
leasehold improvements, severance costs for approximately 100 employees,
lease termination costs, write-down of excess equipment and other related
costs. Approximately $597,000 of this amount were non-cash costs.
Expenditures related to the restructuring have been consistent in all
material respects with the original charges taken.
4. Discontinued Operations
In November 1993, the Company sold substantially all of the net operating
assets of its wholly-owned subsidiary, Huxley Envelope Corp. ("Huxley"), for
$5,550,000. Huxley is a manufacturer of specialized envelopes for
high-volume direct-mail users. The sale did not include Huxley's New York
City manufacturing facility which was sold in the fourth quarter of fiscal
1995 for approximately $2,400,000. The sale of the facility, along with the
resolution of certain other contingencies, resulted in a net of tax gain of
$240,000.
Effective June 30, 1991, the Board of Directors of the Company approved a
formal plan to discontinue the operations of its wholly-owned subsidiary,
T-CAS Corp. ("T-CAS"), which was involved in the design and implementation
of telecommunication and electronic systems. The plan called for completion
of existing contracts and an orderly dissolution. As of June 30, 1993, all
contracts were completed.
In May 1995, T-CAS received $170,000 in settlement of a claim against a
former customer. This settlement, together with other unrelated settlements
of claims and adjustments of previously recorded loss reserves, resulted in
an after tax gain of $222,000, which was included in discontinued operations
in the fourth quarter of fiscal 1995.
Huxley and T-CAS have been reported as discontinued operations and,
accordingly, the Company's equity earnings (loss) from these subsidiaries
and the estimated gain (loss) on disposal, sale or discontinuance have been
reported separately from continuing operations.
S-10
5. Invested Cash
Invested cash represents funds held in qualified Puerto Rican investments
which enabled the Company to take advantage of reduced withholding taxes
when the earnings from its subsidiary in Puerto Rico were repatriated. These
funds are currently invested in government securities and certificates of
deposit. Despite the cessation of operations in Puerto Rico, the funds will
be maintained in such investments for the required statutory periods through
the year 1999.
6. Inventories
Inventories consist of the following:
June 30,
--------------------------------------------------------------------
1997 1996
--------------------------------------------------------------------
Raw materials $ 11,191,000 $ 9,352,000
Work-in-process 6,642,000 5,301,000
Finished goods 2,486,000 2,263,000
--------------------------------------------------------------------
$ 20,319,000 $ 16,916,000
====================================================================
Inventories include contracts-in-process of $3,318,000 and $2,269,000 at
June 30, 1997 and 1996, respectively, which consist substantially of
unbilled material, labor and overhead costs that are or were expected to be
billed during the succeeding fiscal year.
7. Property, Plant and Equipment
Property, plant and equipment consists of the following:
June 30,
--------------------------------------------------------------------
1997 1996
--------------------------------------------------------------------
Land $ 725,000 $ 725,000
Building and leasehold
improvements 11,742,000 11,370,000
Machinery, equipment, tools
and dies 19,583,000 17,293,000
Furniture and fixtures 5,196,000 5,070,000
Assets recorded under
capital leases 2,392,000 2,707,000
Transportation equipment 85,000 63,000
--------------------------------------------------------------------
39,723,000 37,228,000
Less accumulated depreciation
and amortization 25,236,000 22,374,000
--------------------------------------------------------------------
$ 14,487,000 $ 14,854,000
====================================================================
Repairs and maintenance expense on property, plant and equipment was
$1,131,000, $481,000 and $475,000 for the years ended June 30, 1997, 1996
and 1995, respectively.
8. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities include accrued salaries,
wages and other compensation of $2,874,000 and $2,789,000 at June 30, 1997
and 1996, respectively.
S-11
9. Long-Term Debt and Credit Arrangements
Long-term debt consists of the following:
June 30,
--------------------------------------------------------------------
1997 1996
--------------------------------------------------------------------
Revolving credit and term
loan agreement (a) $ 17,150,000 $ 22,200,000
Capitalized lease
obligations (b) 1,536,000 2,047,000
Bank loans (c) 187,000 187,000
Other 62,000 162,000
--------------------------------------------------------------------
18,935,000 24,596,000
Less current maturities 4,247,000 4,259,000
--------------------------------------------------------------------
$ 14,688,000 $ 20,337,000
====================================================================
(a) As of March 15, 1996, the Company replaced a previous agreement with a
revised revolving credit and term loan agreement with two banks which is
secured by substantially all of the Company's assets. The agreement provides
for a revolving credit line of $22,000,000, which expires on March 31, 1999,
and a term loan of $16,000,000. The term loan is payable in quarterly
principal installments of $900,000 with final payment on September 30, 2000.
The interest rate on borrowings under this agreement is at various rates
depending upon certain financial ratios, with the present rate substantially
equivalent to the prime rate (8.5% at June 30, 1997) on the revolving credit
borrowings and prime plus 1/4% on the term loan outstandings. The Company
paid a facility fee of $200,000 and 100,000 shares of common stock, and is
required to pay a commitment fee of 3/8% per annum of the average unused
portion of the revolving credit line. An additional payment of $125,000 is
payable if the term loan is greater than $4,000,000 at December 31, 1997.
The terms of the agreement require compliance with certain covenants
including minimum consolidated tangible net worth and pretax earnings,
maintenance of certain financial ratios, limitations on capital expenditures
and indebtedness and prohibition of the payment of cash dividends. In
connection with the purchase of commodities for use in manufacturing, the
Company has a letter of credit facility of $1,600,000. At June 30, 1997, the
Company's available unused line of credit was approximately $12,000,000
after consideration of the letter of credit. The Company believes that the
carrying amount of this debt approximates fair value since the interest rate
is variable and the margins are consistent with those available to the
Company under similar terms.
(b) The Company has various capitalized lease obligations with financial
institutions which have various terms through 2000 and interest rates
ranging from 7.1% to 9.5%.
(c) The Company has loans with a bank bearing interest at rates ranging from
6.1% to 6.4%. These loans mature at various dates through July 1998 and are
fully collateralized by the invested cash.
Aggregate long-term debt as of June 30, 1997 matures in each fiscal year as
follows:
1998...............$ 4,247,000
1999............... 12,724,000
2000............... 1,964,000
---------------------------------------
$ 18,935,000
=======================================
Interest paid was $2,647,000, $1,584,000 and $1,333,000 during the years
ended June 30, 1997, 1996 and 1995, respectively.
S-12
10. Senior Subordinated Convertible Debentures
During June 1994, the Company completed a sale of $10,000,000 principal
amount of 7-1/2% Senior Subordinated Convertible Debentures to non-U.S.
persons. The debentures are due June 15, 2004 subject to prior sinking fund
payments of 10%, 10%, 15%, and 15% of the principal amount on September 15,
2000, 2001, 2002 and 2003, respectively. The debentures are convertible into
the Company's common stock at a price of $5-5/8 per share. The Company may
redeem the debentures at a price of 104-1/2% of the principal amount,
declining by 1.5 points per year beginning June 15, 1998 to 100% at June 15,
2000 and thereafter. The net proceeds from the offering were used initially
to retire certain bank indebtedness and for general working capital with
excess proceeds placed in temporary short term bank related investments
until ultimately used for the purchase of MIC. The cost of issuing these
debentures, $947,000, included a 6% fee paid and 100,000 warrants,
exercisable at $6.75 per share, issued to the placement agent. This amount
is included in the Consolidated Balance Sheet under the caption "Other
Assets" and is being amortized over the term of the debentures as interest
expense. As of June 30, 1997, $19,000 principal amount of bonds has been
converted into common stock. The Company estimates the fair value of the
debentures as of June 30, 1997 to be approximately $10,430,000 based on
quoted market prices.
11. Stockholders' Equity
(a) Stock Option Plans
Under stock option plans approved by the Company's shareholders, options may
be granted to purchase shares of the Company's common stock exercisable at
prices equal to the fair market value on the date of grant. During 1990, the
Company's shareholders approved the Non-Qualified Stock Option Plan (the
"NQSOP"). In December 1993, the Board of Directors adopted the Outside
Director Stock Option Plan (the "Directors' Plan") which provides for
options to non-employee directors, which become exercisable in three
installments and expire ten years from the date of grant. The Directors'
Plan, as amended, covers 500,000 shares of the Company's Common Stock. In
November 1994, the shareholders approved this plan and the 1994
Non-Qualified Stock Option Plan (the "1994 Plan"). In November 1996, the
shareholders approved the 1996 Stock Option Plan (the "1996 Plan"). The
NQSOP, the 1994 Plan and the 1996 Plan provide for options which become
exercisable in one or more installments and each covers 1,500,000 shares of
the Company's Common Stock. Options under the NQSOP and the 1994 Plan expire
five years from the date of grant. Options under the 1996 Plan shall expire
not later than ten years from the date of grant.
The Company has also issued to employees, who are not executive officers,
options to purchase 275,000 shares of common stock exercisable at $4.00 per
share. Such grants were not covered by one of the above plans.
S-13
Additional information with respect to the Company's stock options is as
follows:
Weighted Shares
Average Under
Exercise Outstanding
Prices Options
----------------------------------------
Balance,
July 1,
1994 $2.61 1,725,000
Granted 3.89 1,160,000
Expired 3.88 (135,000)
Forfeited 2.63 (74,000)
Exercised 2.70 (84,000)
----------------------------------------
Balance,
June 30,
1995 3.11 2,592,000
Granted 3.93 960,000
Forfeited 2.98 (68,000)
Exercised 2.77 (191,000)
----------------------------------------
Balance,
June 30,
1996 3.38 3,293,000
Granted 4.47 668,000
Forfeited 3.17 (71,000)
Exercised 2.04 (570,000)
----------------------------------------
Balance
June 30,
1997 $3.83 3,320,000
========================================
Options to purchase 2,168,000, 2,092,000 and 1,764,000 shares were
exercisable at weighted average exercise prices of $3.61, $3.06 and $2.75 as
of June 30, 1997, 1996 and 1995, respectively.
The options outstanding as of June 30, 1997 are summarized in ranges as
follows:
Options Outstanding Options Exercisable
------------------------------- -------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Exercise Options Remaining Options Exercise
Prices Price Outstanding Life Exercisable Price
----------- -------- ----------- --------- ----------- --------
$2.00-$3.50 $2.57 523,000 1.0 years 523,000 $2.57
$3.75-$5.38 4.07 2,797,000 4.8 1,645,000 3.94
--------- ---------
3,320,000 2,168,000
========= =========
The per share weighted-average fair value of stock options granted during
fiscal 1997 and 1996 was $2.37 and $1.31, respectively, on the date of grant
using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1997 - expected dividend yield of 0%, risk
free interest rate of 6.3%, expected stock volatility of 40%, and an
expected option life of 7.4 years; 1996 - expected dividend yield of 0%,
risk free interest rate of 5.4%, expected stock volatility of 30%, and an
expected option life of 4.3 years.
S-14
(b) In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which the Company has
adopted in fiscal 1997. The Company has chosen not to implement the fair value
based accounting method for employee and director stock options, but has elected
to disclose the pro forma net income and earnings per share as if such method
had been used to account for stock-based compensation cost as described in SFAS
No. 123. The pro forma compensation cost before income taxes, based on the fair
value at the grant date for options granted only in fiscal years 1997 and 1996,
was $783,000 and $429,000 for the years ended June 30, 1997 and 1996,
respectively. The Company's net income (loss) and net income (loss) per share
using this pro forma compensation cost would have been:
Year Ended June 30,
------------------------------------------------------
1997 1996
---------------------- -----------------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
Net Income (Loss) $4,420,000 $3,919,000 $(17,420,000) $(17,772,000)
Net Income (Loss)
Per Share
- Primary $ .34 $ .30 $(1.46) $(1.48)
- Fully Diluted .33 .30 * *
* As a result of the loss, all options, warrants and convertible
debentures are anti-dilutive.
Since the pro forma compensation cost reflects only options granted in
fiscal years 1996 and 1997, the full impact of calculating stock-based
compensation costs under SFAS No. 123 is not reflected in the pro forma net
income (loss) because compensation cost is recognized over the respective
vesting period and compensation cost for options granted prior to fiscal
year 1996 was not reflected.
(c) Shareholders' Rights Plan
In August 1988, the Company's Board of Directors approved a Shareholders'
Rights Plan which provided for a dividend distribution of one right for each
share to holders of record of the Company's common shares on August 31,
1988. The rights will become exercisable only in the event a person or group
accumulates 20 percent or more of the Company's common shares, or if any
person or group announces an offer which would result in it owning 20
percent or more of the common shares. The rights will expire August 30,
1998. Each right will entitle the holder to buy one one-hundredth of a share
of a new series of Series A Junior Participating Preferred Stock of the
Company at the price of $25. In addition, upon the occurrence of a merger or
other business combination, or the acquisition by a person or group
("Acquiring Person") of 25 percent or more of the common shares, holders of
the rights, other than the Acquiring Person, will be entitled to purchase
either common shares of the Company or common shares of the Acquiring Person
at half their market value.
The Company will be entitled to redeem the rights for $0.01 per right at any
time until the tenth day following a public announcement of the acquisition
of a 20 percent position in its common shares.
S-15
12. Income Taxes
The provision (benefit) for income taxes consists of the following:
Year Ended June 30,
-----------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------
Current:
Federal $ 1,752,000 $ 1,166,000 $ 307,000
State and local 693,000 569,000 454,000
U.S. Territory - - 102,000
-----------------------------------------------------------------
2,445,000 1,735,000 863,000
-----------------------------------------------------------------
Deferred:
Federal 404,000 (776,000) 43,000
State and local (414,000) 201,000 (54,000)
U.S. Territory - 114,000 (2,000)
-----------------------------------------------------------------
(10,000) (461,000) (13,000)
-----------------------------------------------------------------
$ 2,435,000 $ 1,274,000 $ 850,000
=================================================================
The provision for income taxes varies from the amount computed by applying
the U.S. Federal income tax rate to income (loss) from continuing operations
before income taxes as a result of the following:
Year Ended June 30,
-----------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------
Tax at statutory rate $ 2,331,000 $(5,490,000) $ 2,529,000
Non-deductible special
charge (Note 2) - 7,888,000 -
Utilization of net
operating loss
carryforwards - (1,437,000) (1,702,000)
State, local and U.S.
Territory income tax 184,000 376,000 392,000
Officers' life insurance
premiums and (proceeds) 59,000 21,000 (658,000)
Other, net (139,000) (84,000) 289,000
-------------------------------------------------------------------
$ 2,435,000 $ 1,274,000 $ 850,000
===================================================================
Deferred tax assets and liabilities consist of:
June 30,
- ---------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------
Accounts receivable $ 148,000 $ 139,000
Inventories 1,676,000 1,604,000
Accrued expenses 219,000 128,000
- ---------------------------------------------------------------------------------
Current assets 2,043,000 1,871,000
- ---------------------------------------------------------------------------------
Other long-term liabilities - 155,000
Unrealized capital loss 1,428,000 1,315,000
Tax loss carryforwards 1,737,000 2,972,000
Tax credit carryforwards 3,477,000 2,449,000
Capital loss carryforwards 1,256,000 1,670,000
Less valuation allowance (3,569,000) (3,884,000)
- ---------------------------------------------------------------------------------
Non-current assets 4,329,000 4,677,000
- ---------------------------------------------------------------------------------
Property, plant and equipment (955,000) (966,000)
Intangibles (3,654,000) (3,838,000)
Other (54,000) (45,000)
- ---------------------------------------------------------------------------------
Long-term liabilities (4,663,000) (4,849,000)
- ---------------------------------------------------------------------------------
Net non-current assets (liabilities) (334,000) (172,000)
- ---------------------------------------------------------------------------------
Total $ 1,709,000 $ 1,699,000
=================================================================================
In accordance with SFAS No. 109, the Company records a valuation allowance
against deferred tax assets if it is more likely than not that some or all
of the deferred tax asset will not be realized. The valuation allowance
decreased by $315,000 during fiscal 1997 primarily as a result of the
expiration of unused capital loss carryforwards. In connection with the
acquisition of MIC in 1996
S-16
(Note 2), the Company recorded approximately $3,800,000 of deferred tax
liabilities related to identifiable intangible assets which are not
deductible for tax purposes. Concurrently, the Company reduced its valuation
allowance against its deferred tax assets by the same amount to recognize
the net operating loss carryforwards that can offset these deferred tax
liabilities.
At June 30, 1997, the Company had net operating loss carryforwards of
approximately $4,000,000 for Federal income tax purposes which expire
through 2006.
For fiscal 1995 and prior years, the earnings of Aeroflex International,
Inc. (the Company's Puerto Rican subsidiary) were substantially exempt from
United States income taxes. These earnings were also partially exempt from
Puerto Rican income taxes. As a result of the consolidation of the Company's
Puerto Rican operations into its domestic facilities (Note 3), the Company
no longer has this partial exemption from income taxes.
The Company is undergoing routine audits by various taxing authorities of
several of its state and local income tax returns covering different periods
from 1992 to 1995. Management believes that the probable outcome of these
various audits should not materially affect the consolidated financial
statements of the Company.
The Company made income tax payments of $1,468,000, $588,000 and $1,004,000
and received refunds of $1,117,000, $268,000 and $16,000 during the years
ended June 30, 1997, 1996 and 1995, respectively.
13. Employment Contracts and Life Insurance Proceeds
In February 1997, the Company entered into employment agreements with
certain of its officers for periods through December 31, 2002 with annual
remuneration ranging from $180,000 to $275,000, plus cost of living
adjustments and, in some cases, additional compensation based upon earnings
of the Company. Future aggregate minimum payments under these contracts are
$991,000 per year. In addition, these officers have the option to terminate
their employment agreements upon change in the present control of the
Company, as defined, and receive lump sum payments equal to three times
annual compensation, as defined, or, in one case, a lump sum payment equal
to the salary for the remainder of the term.
During fiscal 1995, the Company received $2,000,000 of insurance proceeds on
the death of the Company's former chairman.
14. Employee Benefit Plans
The Company had established an Employee Stock Ownership Plan ("the ESOP")
which covered substantially all employees not covered by collective
bargaining agreements and who met certain service requirements. The annual
contribution to the ESOP was determined by the Company's Board of Directors.
For the plan years ended December 31, 1995 and 1994 the Board of Directors
did not elect to make a contribution to the ESOP. During 1995, the Company
received a favorable determination letter from the Internal Revenue Service
for the termination of the ESOP and completed the formal termination of the
ESOP in December 1995.
The Aeroflex Incorporated Employees' 401(k) Plan ("the ARX 401(k)") was
established pursuant to Section 401(k) of the Internal Revenue Code. All
employees of the Company and certain subsidiaries who are not members of a
collective bargaining agreement may participate in the ARX 401(k). Each
participant has the option to contribute a portion of his or her
compensation. For each of the 1997, 1996 and 1995 calendar years, the Board
S-17
of Directors has elected to provide an employer contribution, which vests
immediately, equal to 30% of employee contributions subject to
certain limitations. The ARX 401(k) expense for the fiscal years ended
June 30, 1997, 1996 and 1995 was $263,000, $230,000 and $219,000,
respectively.
Employees of MIC Technology, who are excluded from the ARX 401(k), are
eligible to participate in the MIC 401(k) Plan and MIC Profit Sharing Plan
("the MIC Plans"). In addition to contributing a portion of his or her
compensation and receiving an employer contribution, eligible employees also
receive an allocation of a discretionary share of the MIC Technology
profits. The MIC Plans' expense was $450,000 and $104,000 for the fiscal
year ended June 30, 1997 and the period from acquisition to June 30, 1996,
respectively.
Effective January 1, 1994, the Company established a Supplemental Executive
Retirement Plan ("the SERP") which provides retirement, death and disability
benefits to certain of its officers. The SERP expense for the fiscal years
ended June 30, 1997, 1996 and 1995 was $300,000, $217,000 and $347,000,
respectively. The assets of the SERP are held in a Rabbi Trust and amounted
to $386,000 and $234,000 at June 30, 1997 and 1996, respectively. The
accumulated benefit obligation was $1,259,000 and $843,000 at June 30, 1997
and 1996, respectively. No participants are currently receiving benefits.
15. Commitments and Contingencies
a. Operating Leases
Several of the Company's operating facilities and certain machinery and
equipment are leased under agreements expiring through 2007. The leases for
machinery and equipment generally contain options to purchase at the then
fair market value of the related leased assets.
Future minimum payments under operating leases as of June 30, 1997 are as
follows for the fiscal years:
1998...............$ 1,662,000 2001............... 1,068,000
1999............... 1,188,000 2002............... 994,000
2000............... 1,070,000 Thereafter......... 2,444,000
- --------------------------------------------------------------------------------
$8,426,000
================================================================================
Rental expense was $1,560,000, $790,000 and $837,000 during the fiscal years
1997, 1996 and 1995, respectively.
b. Legal Matters
A subsidiary of the Company whose operations were discontinued in 1991, is
one of several defendants named in a personal injury action initiated in
August, 1994, by a group of plaintiffs. The plaintiffs are seeking damages
which cumulatively may exceed $500 million. The complaint alleges, among
other things, that the plaintiffs suffered injuries from exposure to
substances contained in products sold by the subsidiary to one of its
customers. This action is in the early stages of discovery. Based upon
available information and considering its various defenses, together with
its product liability insurance, in the opinion of management of the Company
the outcome of the action against its subsidiary will not have a materially
adverse effect on the Company's consolidated financial statements.
The Company is involved in various other routine legal matters. Management
believes the outcome of these matters will not have a materially adverse
effect on the Company's consolidated financial statements.
S-18
16. Business Segments
The Company's business segments of continuing operations and major products
included in each segment, are as follows:
Microelectronics: Isolator Products:
a)Microelectronic Modules a)Commercial spring and rubber isolators (VMC)
(Circuit Technology) b)Industrial spring and rubber isolators
b)Thin Film Interconnects (Korfund)
(MIC Technology) c)Military wire-rope isolators
(Aeroflex International)
Electronics:
a)Instrument products
(Comstron and Lintek)
b)Motion Control Systems
- Scanning devices
- Motion Control Systems
- Stabilization and tracking
devices
- Magnetic devices
- Electronic control systems
The Company is a manufacturer of advanced technology systems and components
for commercial industry, government and defense contractors. Approximately
50%, 65% and 74% of the Company's sales for the fiscal years 1997, 1996 and
1995, respectively, were to agencies of the United States government or to
prime defense contractors or subcontractors of the United States government.
S-19
Year Ended June 30,
- ------------------------------------------------------------------------------------
Business Segment Data: 1997 1996 1995
- ------------------------------------------------------------------------------------
Net sales:
Microelectronics $ 48,462,000 $ 28,414,000 $ 24,250,000
Electronics 28,144,000 30,109,000 31,357,000
Isolator Products 17,693,000 15,844,000 15,506,000
- ------------------------------------------------------------------------------------
Net sales $ 94,299,000 $ 74,367,000 $ 71,113,000
====================================================================================
Operating profit (loss):
Microelectronics $ 6,644,000 $ 3,282,000 $ 2,075,000
Electronics 2,762,000 4,830,000 6,028,000
Isolator Products 2,844,000 2,150,000 2,377,000
General corporate expenses (2,514,000) (2,344,000) (2,661,000)
- ------------------------------------------------------------------------------------
9,736,000 7,918,000 7,819,000
Special Charge (1) - (23,200,000) -
Restructuring costs (2) - - (1,669,000)
Interest expense (2,974,000) (1,939,000) (1,464,000)
Interest and other income 93,000 1,075,000 2,751,000
- ------------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes $ 6,855,000 $(16,146,000) $ 7,437,000
====================================================================================
Identifiable assets:
Microelectronics $ 37,741,000 $ 35,445,000 $ 14,430,000
Electronics 28,603,000 31,354,000 33,625,000
Isolator Products 9,700,000 9,752,000 10,159,000
Corporate 5,003,000 4,618,000 13,722,000
- ------------------------------------------------------------------------------------
Total assets $ 81,047,000 $ 81,169,000 $ 71,936,000
====================================================================================
Capital expenditures:
Microelectronics $ 1,637,000 $ 766,000 $ 908,000
Electronics 996,000 597,000 1,440,000
Isolator Products 293,000 315,000 554,000
Corporate 5,000 9,000 17,000
- ------------------------------------------------------------------------------------
Total capital expenditures $ 2,931,000 $ 1,687,000 $ 2,919,000
====================================================================================
Depreciation and amortization
expense:
Microelectronics $ 2,230,000 $ 996,000 $ 691,000
Electronics 1,528,000 1,530,000 1,697,000
Isolator Products 532,000 535,000 717,000
Corporate 32,000 30,000 28,000
- ------------------------------------------------------------------------------------
Total depreciation and
amortization $ 4,322,000 $ 3,091,000 $ 3,133,000
====================================================================================
(1) The special charge for the write-off of in-process research and
development acquired in the purchase of MIC Technology is allocable
fully to the microelectronics segment.
(2) Approximately 35% and 65% of the restructuring charge is allocable to
the electronics and isolator products segments, respectively.
17. Subsequent Events
(a) Effective July 1, 1997, the Company's subsidiary, MIC, acquired certain
equipment, inventory, licenses for technology and patents of two of Lucent
Technologies' telecommunications component units - multi chip modules and
film integrated circuits - for approximately $4,400,000 in cash. These units
manufacture interconnect products for the communications industry. The
Company has also signed a multi-year supply agreement to provide Lucent with
film integrated circuits.
(b) On September 8, 1997, the Company called for the redemption of all of
its outstanding 7-1/2% Senior Subordinated Convertible Debentures at 104-
1/2% of the principal amount. The Debentures are convertible into the
Company's Common Stock at a price of $5-5/8 per share through October 6,
1997. Any outstanding Debentures on October 13, 1997 will be redeemed.
S-20
Quarterly Financial Data (Unaudited):
(In thousands except per share data and footnotes)
Quarter
----------------------------------------Year Ended
1997 First Second Third Fourth June 30
- --------------------------------------------------------------------------------
Net Sales $ 19,061 $ 22,914 $ 22,937 $ 29,387 $ 94,299
Gross Profit 6,278 7,257 7,759 9,896 31,190
Net Income $ 651 $ 893 $ 917 $ 1,959 $ 4,420
======== ======== ======== ======== ========
Income Per Share:
Primary $ .05 $ .07 $ .07 $ .15 $ .34
======== ======== ======== ======== ========
Fully Diluted $ .05 $ .07 $ .07 $ .14 $ .33
======== ======== ======== ======== ========
Quarter
------------------------------------------ Year Ended
1996 First Second Third Fourth June 30
- ----------------------------------------------------------------------------------
Net Sales $ 13,149 $ 15,195 $ 15,956 $ 30,067 $ 74,367
Gross Profit 4,069 4,560 5,016 9,652 23,297
Net Income (Loss) (1)(2) $ 607 $ 998 $(22,084) $ 3,059 $(17,420)
======== ======== ======== ======== ========
Income (Loss) Per Share:
Primary (1)(2) $ .05 $ .08 $(1.85) $ .23 $(1.46)
======== ======== ======== ======== ========
Fully Diluted (2) $ .05 $ .08 (3) $ .21 (3)
======== ======== ========
(1) Includes $23,200,000 ($1.94 per share) for the year ended June 30, 1996 and
quarter ended March 31, 1996, for the write-off of in-process research and
development acquired in connection with the purchase of MIC Technology
Corporation.
(2) Includes a $437,000 net of tax, or $.04 per share, gain on the sale of
securities for the year ended June 30, 1996 and $339,000 net of tax, or $.02
primary and fully diluted, for the quarter ended June 30, 1996.
(3) As a result of the loss, all options, warrants and convertible debentures
are anti-dilutive.
Since per share information is computed independently for each quarter and the
full year, based on the respective average number of common and common
equivalent shares outstanding, the sum of the quarterly per share amounts does
not necessarily equal the per share amounts for each year.
S-21
AEROFLEX INCORPORATED
---------------------
AND SUBSIDIARIES
----------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
Column A Column B Column C Column D Column E
- ------- -------- -------- -------- --------
Additions
------------------------
Charged
Balance at Charged to to other Balance at
beginning costs and accounts Deductions end of
Description of period expenses - describe - describe period
- ----------- --------- ---------- ---------- ---------- ----------
YEAR ENDED JUNE 30, 1997:
- ------------------------
Allowance for doubtful
accounts $ 354,000 $ 72,000 $ - $ 9,000(A) $ 417,000
========== ========== ========== ========== ==========
Reserve for inventory
obsolescence $4,260,000 $ 100,000 $ - $ 305,000(B) $4,055,000
========== ========== ========== ========== ==========
YEAR ENDED JUNE 30, 1996:
- ------------------------
Allowance for doubtful
accounts $ 437,000 $ (55,000) $ - $ 28,000(A) $ 354,000
========== ========== ========== ========== ==========
Reserve for inventory
obsolescence $4,380,000 $ 497,000 $ - $ 617,000(B) $4,260,000
========== ========== ========== ========== ==========
YEAR ENDED JUNE 30, 1995:
- ------------------------
Allowance for doubtful
accounts $ 434,000 $ 10,000 $ - $ 7,000(A) $ 437,000
========== ========== ========== ========== ==========
Reserve for inventory
obsolescence $3,478,000 $ 968,000 $ - $ 66,000(B) $4,380,000
========== ========== ========== ========== ==========
Note: (A) - Net write-offs of uncollectible amounts.
(B) - Write-off of inventory.
S-22