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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, 1998
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
(Exact name of registrant as specified in its charter)
Delaware 11-1974412
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
35 South Service Road, Plainview, New York 11803
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 694-6700
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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark 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 22, 1998 approximately $147,487,000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date (applicable only to
corporate registrants). Common Stock, par value $.10 per share; outstanding as
of September 22, 1998 - 17,426,618 (excluding 39,159 shares held in treasury).
Documents incorporated by reference: Parts II and IV - The Annual Report to
Stockholders for the fiscal year ended June 30, 1998 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
ITEM ONE - BUSINESS
Aeroflex Incorporated, through its subsidiaries (collectively, unless the
context requires otherwise, referred to as the "Company" or "Aeroflex"),
utilizes its advanced design, engineering and manufacturing capabilities to
produce state-of-the-art microelectronic module, interconnect and testing
solutions used in communication applications for commercial and defense markets.
Its products are used in the satellite, wireless and wireline communications,
cable television ("CATV") and defense communications markets. With the
acquisition of MIC Technology in 1996 and the interconnect assets of Lucent
Technologies Inc. in 1997, the Company believes it is currently the largest
merchant supplier of thin film interconnect products. The Company also designs
and manufactures motion control systems, and shock and vibration isolation
systems used for commercial, industrial and defense applications. The Company's
major customers include Lockheed Martin Corporation, Hughes Electronics
Corporation, Motorola, Inc., Lucent Technologies, Inc., Raytheon Company and
Northrop Grumman Corporation. The Company currently acts as sole source supplier
under supply agreements with Lucent Technologies and Motorola's RF semiconductor
division for thin film interconnect products.
Operations are grouped into three segments: Microelectronics; Test,
Measurement and Other Electronics; and Isolator Products. These segments, their
products and the markets they serve are described below.
Microelectronics
Thin Film Circuits and Interconnects - (MIC Technology)
In March 1996, the Company acquired MIC Technology Corporation ("MIC")
which designs, develops, manufactures and sells passive thin film circuits and
interconnects. Its advanced microcircuit and interconnect technology is emerging
as a key technology for miniaturized, high frequency, high performance
electronic products for rapidly growing markets such as cellular/PCS and
microwave data links. It continues to be an essential technology in satellite
based communication hardware, CATV amplifiers and leading edge military
electronic products.
Thin film products allow dramatic reductions in the size and weight of
electronic circuits and provide superior electrical and thermal performance.
Growth in the use of thin film technology is expected to complement the advances
in semiconductor speed which have occurred in recent years. Thin film removes
limitations imposed by other interconnect technologies for high clock rate
digital circuits. In the digital, analog RF and microwave domains, thin film
allows the production of hybrid integrated circuits with lumped elements at
lower cost than full silicon or gallium arsenide (GaAs) integration while
retaining outstanding performance.
The Company serves both commercial and military markets. Commercial markets
include satellite, wireless and wireline communications, CATV, fiber optics and
digital Multi-Chip Modules ("MCMs"). Military markets include missile Transmit
and Receive ("T/R") modules, radar T/R modules and advanced Electronic Counter
Measures.
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In its most basic form, simple interconnect incorporates conductors,
resistors, plated vias and selective high conductivity traces for high-volume,
low-cost, DC, RF and microwave products, including applications such as standard
microwave amplifiers and oscillators, CATV circuitry, A/D converters and
high-power regulation. Advanced interconnect incorporates all passive elements
in solid-state form. Microstrip conductors, resistors, inductors, capacitors,
air-bridges and filled thermal vias are integrated on a single substrate.
Applications include high-performance, low-noise and power amplifiers for use in
commercial wireless products and avionics. To address digital circuit
requirements, high-density digital interconnect substrates offer single or
double-sided, controlled impedance signal routing. These substrates also offer
integrated resistors and solid thermal vias, if required, for improved
performance. Applications include Application Specific Integrated Circuits
("ASIC"), control circuits, high-density memory modules and digital switching
networks. By incorporating features of advanced interconnect and high-density
digital interconnect in a single design, the Company has created PIMIC -Mixed
Signal Interconnect to address the expanding use of mixed technologies. This
unique PIMIC process allows integration of analog and digital functionality for
use in leading-edge miniaturized military, satellite and commercial electronics.
In July 1997, MIC entered into a multi-year strategic agreement under which
MIC will supply Lucent Technologies with film integrated circuits which are used
in communications applications. In connection with this agreement, MIC purchased
equipment, inventory and 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.
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.
Satellite
The Company has been designing and manufacturing hybrid and MCM
microelectronic circuits for space applications for over 15 years. The Company's
reputation and expertise in these areas results from significant experience
gained on Department of Defense ("DOD") and NASA programs such as MILSTAR, Space
Shuttle, LANDSAT and most recently, the Cassini probe to Saturn, as well as on
various classified programs. The Company's hybrids have been successfully
deployed on commercial programs such as DirecTV and IRIDIUM .
Multichip Modules
MCMs are a further advancement of 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. MCMs 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, V-22, LAMPS, AWACS and AEGIS
Missile and is participating in pre-production and production contracts.
Application specific MCMs have significant market potential in avionics,
workstations, telecommunications and satellites.
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The Company has expanded its standard memory module product line with the
addition of approximately 50 new memory modules in the past four years. These
products, which consist of SRAM and Flash memory modules, take advantage of the
Company's MCM expertise. They are designed to be used for a wide range of
computer and general purpose circuit board applications.
Data-bus
The Data-bus product line has a particularly broad range of applications.
These microcircuits, which have been adopted by the United States Army, Navy and
Air Force as a standard interface, act as a digital data communication link
between various computer-based equipment. A new commercial Data-bus interface
was developed by Boeing for use on its 777 Aircraft. The Company has production
contracts for the interface and coupler modules which provide the data
communications protocol and interface for all of the electronic systems in each
777 Aircraft.
The Company's microcircuits are used on numerous avionic systems including
the F-14, F-15, F-16 and F-18 aircraft and the Tomahawk-cruise and AMRAAM
missiles. They are also qualified for possible use on upgrades to older
platforms. The Data-bus microcircuits are used in a wide variety of aerospace
and seaboard navigations, and communication systems.
Application Specific Modules
The Company manufactures hybrids for a customer's particular need that
cannot be fulfilled with a standard commercial product. This capability has
historically been utilized to service defense markets domestically and
internationally. The electronic content of the worldwide defense market is
growing as governments determine it is more economical to upgrade existing
aircraft and missiles than to build new aircraft and missiles. This customer
base is faced with continuous retrofits to upgrade the ability of aging
equipment. The Company benefits from upgrade programs by supplying hybrids and
MCMs for the C-130, F-16, F-18 and AWACS aircraft programs, as well as newer
programs such as JAVELIN and AMRAAM missiles.
Test, Measurement and Other Electronics
Instrumentation
Frequency Synthesizers - (Comstron)
In November 1989, the Company acquired Comstron Corporation which is now an
operating division of Aeroflex Laboratories Incorporated, a wholly-owned
subsidiary of Aeroflex. Comstron is a leader in radio frequency and microwave
technology used in the manufacture of fast switching frequency synthesizers,
signal generators and components. The Company's synthesizers operate in a broad
frequency range of 10MHz 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 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 United States Navy's next
generation ATE. The CASS program is a high priority United States Navy
initiative designed to end the proliferation of unique ATE and related Test
Program Sets for United States Navy electronics. Historically, each individual
weapon system had its own testing system which required unique operator skills,
maintenance and scope of capabilities. The Company supplies the fast switching
frequency synthesizers, spread spectrum modulators and arbitrary waveform
generators for CASS. The Company's synthesizers also significantly improve the
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performance and reliability of existing radars. Additionally, the synthesizers
improve the performance of threat simulators, as well as radar cross section and
antenna measurement systems. In Fiscal 1998, the Company introduced its first
low-cost, fast switching, high-performance frequency synthesizer for commercial
ATE.
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 leading provider of high-speed instrumentation radar systems and antenna
measurement systems. Instrumentation radar systems are used to measure the radar
cross sections of aircraft and other objects using both scale models and actual
examples. These measurements are made in many diverse environments from factory
floor, to laboratory, to flight lines or aircraft carriers. In addition to the
radar system hardware, the Company has developed various analytical processing
and display algorithms to assist in the interpretation of the radar data.
Through expertise gained in high-speed data acquisition and display techniques
used in instrumentation radar products, the Company produces antenna measurement
systems used in the design, manufacturing and testing of all types of antennas.
In April 1998, Lintek was awarded a contract for next generation communication
satellite test equipment from Hughes Space and Communications. This testing
system combines Comstron's patented synthesizers with Lintek's proprietary
response measurement technology to more efficiently test satellite payloads both
on the ground and in space.
Motion Control Systems - (Aeroflex Laboratories)
Stabilization and Tracking Devices
The Company is engaged in the design, development and production of
stabilization tracking devices and systems, including pedestals. Pedestals,
through the continuous balancing action of gyroscopes and servo-mechanical
stabilizers operating in all three dimensions, enable equipment mounted on a
vehicle to remain almost perfectly balanced and motionless. The mounted
equipment can then automatically track or focus on a target as accurately as if
it were on solid ground despite the motion of the vehicle. The Company's
stabilization and tracking devices are used in reconnaissance and weapon firing
control systems and play an important role in high altitude aircraft as well as
in other aircraft, ships and ground vehicles which require precise, highly
stable mounting for cameras, antennae and lasers. In addition to military and
aerospace markets, the Company has delivered commercial units used to stabilize
airborne spectroscopy equipment for terrestrial mapping.
Magnetic Motors
The Company produces a variety of brushless DC motors. Brushless DC motors
differ from conventional DC motors and are well-suited for use under vacuum
conditions, such as outer space where lubricants needed to slow brushwear
dissipate rapidly. They are also well-suited for environments containing
volatile or explosive materials and gases and applications where clean operation
is critical. These motors are utilized in the Company's stabilization and
tracking systems and infra-red scanner modules, as well as other applications
where precise movement is required, such as for positioning antennae, optical
systems, mechanical vanes and valves.
Scanning Devices
Using its expertise gained in over 30 years of manufacturing infra-red
night vision scanners, the Company has developed and started production of the
next generation polygon rotary scanner for the United States Army's thermal
weapons sight, under contract to Hughes Electro-Optical Data Systems Group. This
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sight is a low cost, lightweight thermal imaging device that detects targets
based on thermal radiation contrasts with the background and is intended for use
on standard issue United States Army assault rifles and crew served weapons.
Additionally, the Company provides the Common Module Scanner used on the M-1
Tank, Bradley fighting vehicle and Comanche helicopter.
Isolator Products - (Aeroflex International, Vibration Mountings & Controls
and Korfund Dynamics)
The Company is engaged in the design, development, manufacture and sale of
shock and vibration isolation systems. These devices consist of helically-wound
steel wire rope contained between rugged metal retainer bars, which are used in
defense applications, and off-the-shelf rubber and spring shock, vibration and
noise control devices, which are used in commercial and industrial applications.
Purchasers of 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. Markets for
isolation systems include defense, aerospace, geophysical exploration, aircraft,
communications, transportation and utilities.
Customers
The Company has hundreds of customers in the communications, satellite,
aerospace/defense, transportation and construction industries. Except for Lucent
Technologies, (15.5%), in fiscal 1998, and Lockheed Martin (13.3%) and Hughes
(11.7%), in fiscal 1997, no one customer accounted for more than 10% of the
Company's net sales. The Company is currently a party to three key strategic
agreements:
In July 1997, MIC entered into a strategic agreement under which MIC will
supply Lucent Technologies with film integrated circuits which are used in
communications applications. The agreement expires December 31, 2000 and is
subject to annual renewal options. In addition, MIC purchased automatic
manufacturing and test equipment, inventory and licenses for advanced
technologies from two of Lucent's microelectronic component operations which
significantly increases the Company's manufacturing capacity to produce film
integrated circuits and MCMs.
In February 1997, the Company entered into an outsourcing agreement with
the RF Semiconductor Division of Motorola under which the Company will supply
virtually all of Motorola's thin film interconnects for its RF semiconductor
product lines, supporting component applications in CATV, cellular/PCS and land
mobile communications. This agreement expires in February 1999 and is subject to
annual renewal options.
In July 1996, the Company entered into a multi-year Volume Purchase
Agreement with Hughes Electronics to supply microelectronic modules for use on
both commercial and military satellites, and missile systems.
Competition
In all phases of its operations, the Company competes in both performance
and price with companies, some of which are considerably larger, more
diversified and have greater financial resources and sales than the Company. In
the manufacture of microelectronics, the Company believes its primary
competitors are NTK, Texas Instruments and ILC/Data Devices Corp. In the
manufacture of instrument products, the Company believes its primary competitors
are Hewlett Packard and Scientific Atlanta. In the manufacture of motion control
products, the Company believes its primary competitors are MPC Products Corp.
and Schaeffer Magnetics Inc. In the manufacture of isolators, the Company
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believes its primary competitors are Barry Controls, Inc., Lord Kinematics and
Mason Industries. The Company also experiences significant competition from the
in-house capabilities of its current and potential customers. The Company
believes that in all of its operations it competes favorably in the principal
competitive areas of technology, performance, reliability, quality, customer
service and price. The Company believes that to remain competitive in the
future, it will need to invest significant financial resources in research and
development.
To the extent that the Company is engaged in government contracts, its
success or failure, to a large measure, is based upon its ability to compete
successfully for contracts and to complete them at a profit. Such government
business is necessarily affected by many factors such as variations in the
military requirements of the government and defense budget allocations.
Government Sales
Approximately 42% and 50% of the Company's sales for fiscal 1998 and 1997,
respectively, were to agencies of the United States Government or to prime
defense contractors or subcontractors of the United States Government. The
Company's overall dependence on the military has been declining due to the
acquisition of MIC, which is more commercially oriented, and a focusing of
resources towards developing standard products for the commercial markets. The
Company's defense contracts have been awarded either on a bid basis or after
negotiation. The contracts are primarily fixed price contracts, though the
Company also has defense contracts providing for cost plus fixed fee. The
Company's defense contracts 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. Revenues and
costs on government contracts are recognized based upon shipments or billings.
In certain product areas, the Company has suffered reductions in sales
volume due to cutbacks in the military budget. In other product areas, the
Company has experienced increased sales volume due to a realignment of
government spending towards upgrading existing systems instead of purchasing
completely new systems. The overall effect of the cutbacks and realignment has
not been material to the Company.
Marketing and Distribution
The Company uses a team-based sales approach to facilitate close management
by Company personnel of relationships at multiple levels of the customer's
organization, including management, engineering and purchasing personnel. The
Company's integrated sales approach involves a team consisting of a senior
executive, a business development specialist and members of the Company's
engineering department. In particular, the use of experienced engineering
personnel as part of the sales effort enables close technical collaboration with
the customer during the design and qualification phase of new communications
equipment which, the Company believes, is critical to the integration of its
product into its customer's equipment. The Company's executive officers are also
involved in all aspects of the Company's relationships with its major customers
and work closely with their senior management. In addition, the Company utilizes
manufacturers' representatives and independent sales representatives as needed.
Product Research and Development
The Company's research and development efforts primarily involve
engineering and design relating to the development of new products, the
improvement of existing products and/or the adaptation of such products to new
applications. The Company's efforts also include developing prototype components
to bid on specific programs. Several of the Company's officers and almost all of
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its engineers have been involved at varioustimes and to varying degrees in these
activities. Certain product development and similar costs are recoverable under
contractual arrangements and those that are not recoverable are expensed in the
year incurred. The costs of Company sponsored research activities were
approximately $5.2 million, $3.3 million and $1.3 million for fiscal 1998, 1997
and 1996, respectively. The increase from fiscal 1997 to fiscal 1998 was
primarily due to the costs for development of a new low-cost, high-speed, high
performance frequency synthesizer intended for commercial communication test
systems. The increase from fiscal 1996 to fiscal 1997 was primarily due to MIC
which was acquired in March 1996. Further, in connection with the Company's
purchase of MIC, the Company allocated $23.2 million of the purchase price to
in-process research and development. Since the research and development projects
had not reached technological feasibility, the $23.2 million was charged to
expense in fiscal 1996 in accordance with generally accepted accounting
principles.
Backlog
The Company includes in backlog firm purchase orders or contracts providing
for delivery of products and services. At June 30, 1998, the Company's order
backlog was approximately $80.1 million, approximately 85% of which was
scheduled to be delivered on or before June 30, 1999. Approximately 58% and 42%
of this backlog represents commercial and defense contracts, respectively.
Generally, government contracts are cancellable with payment to the Company of
amounts expended under the contract together with a reasonable profit, if any,
while commercial contracts are not cancellable.
At June 30, 1997, the Company's backlog of orders was approximately $53.3
million. Approximately 90% was scheduled to be delivered before June 30, 1998.
Approximately 65% of this backlog represented orders for military or national
defense purposes.
Manufacturing
The Company assembles, tests, packages and ships products at its
manufacturing facilities located in Farmingdale, Pearl River and Plainview, New
York; Richardson, Texas; Bloomingdale, New Jersey; Powell, Ohio; and Boca Raton,
Florida. The Company has been manufacturing products for defense programs for
many years in compliance with stringent military specifications. The Company's
microelectronic module manufacturing is certified to the status of Class "K"
(space qualified) of which the Company believes only seven other vendors are
currently certified. The Company believes it has been able to bring to the
commercial market the manufacturing quality and discipline it has demonstrated
in the defense market. For example, the Company's Plainview and Farmingdale
manufacturing plants are ISO-9001 certified, as well as certified to the more
stringent Boeing D1-9000 standard.
Historically, the volume of the Company's production requirements in the
defense market was not sufficient to justify the widespread implementation of
highly automated manufacturing processes. Over the last several years, the
Company has expanded the use of high volume manufacturing techniques for product
assembly and testing. Recently, the Company purchased film integrated circuit
automatic manufacturing and test equipment from Lucent Technologies, which the
Company believes was the largest volume manufacturer of thin film integrated
circuits, and the Company is currently expanding its Pearl River facility to
accommodate this equipment. After its completion, the Company believes the Pearl
River facility will have the capacity required to handle additional future
outsourcing by captive suppliers of thin film communications products and the
growing demand for communication interconnect products.
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Principal Materials
The principal materials used by the Company in manufacturing and assembling
its products are ceramic, magnetic materials, gold, steel, aluminum, rubber,
iron and copper. Many of the component parts used by the Company in its products
are also purchased, including semiconductors, transformers, amplifiers and
bearings. Although the Company has several sole source arrangements, all the
materials and components used by the Company, including those purchased from a
sole source, are readily available and are or can be purchased from time to time
in the open market. The Company has no long-term commitments for their purchase.
No supplier provides more than 10% of the Company's raw materials.
Patents and Trademarks
The Company owns several patents, patent licenses and trademarks. In order
to protect its intellectual property rights, the Company relies on a combination
of trade secret, copyright, patent and trademark laws and employee and
third-party nondisclosure agreements, as well as limiting access to and
distribution of proprietary information. While the Company considers that in the
aggregate its patents and trademarks are important in its operations, it does
not consider that one or any group of them is of such importance that
termination could materially affect its business.
Employees
As of June 30, 1998 the Company had 842 employees, of whom 422 were engaged
in a manufacturing capacity, and 420 were engaged in engineering, sales,
administrative or clerical positions. 238 employees of the Company are covered
by two collective bargaining agreements. The Company considers its employee
relations to be satisfactory.
Seasonality
Although the Company's business is not affected by seasonality,
historically its revenues and earnings increase sequentially from quarter to
quarter within a fiscal year, but the first quarter is less than the previous
year's fourth quarter.
Regulation
The Company's activities are subject to various environmental, health and
employee safety laws. The Company has expended resources, both financial and
managerial, to comply with applicable environmental, health and worker safety
laws in its operations and at its facilities and anticipates that it will
continue to do so in the future. The Company does not require any governmental
approval of its principal products or services. Compliance with environmental
laws has not historically had a material effect on the Company's capital
expenditures, earnings or competitive position, and the Company does not
anticipate that such compliance will have a material effect on the Company in
the future.
Because of its participation in the defense industry, the Company is
subject to audit from time to time for its compliance with government
regulations by various agencies, including the Defense Contract Audit Agency,
the Defense Investigative Service and the Defense Logistics Agency. These and
other governmental agencies may also, from time to time, conduct inquiries or
investigations that may cover a broad range of Company activity. Responding to
any such audits, inquiries or investigations may involve significant expense and
divert management attention. Also, an adverse finding in any such audit, inquiry
or investigation could involve penalties that may have a material adverse effect
on the Company's business, results of operations or financial condition.
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The Company believes that it is generally in compliance with all applicable
environmental, health and worker safety laws and governmental regulations.
Nevertheless, there can be no assurance that additional costs for compliance
will not be incurred in the future or that such costs will not be material.
Financial Information About Industry Segments
The sales and operating profits of each industry segment and the
identifiable assets attributable to each industry segment for each of the three
years in the period ended June 30, 1998 are set forth in Note 14 of Notes to
Consolidated Financial Statements.
ITEM TWO - PROPERTIES
The executive offices of the Company and the manufacturing facilities of
Aeroflex Laboratories Incorporated, a subsidiary of the Company, occupying an
aggregate of approximately 69,000 square feet, are located in premises which the
Company owns in Plainview, Long Island, New York.
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 $116,000 and $81,000 respectively.
The Company's subsidiary, MIC Technology Corporation ("MIC"), acquired its
manufacturing facility in Pearl River, New York of approximately 63,000 square
feet in July 1998. MIC also leases a manufacturing facility of approximately
29,000 square feet in Richardson, Texas with an annual rent of approximately
$167,000.
The Company's subsidiary, Vibration Mountings and Controls, Inc., conducts
manufacturing operations at a plant located in Bloomingdale, New Jersey. The
plant, which the Company owns, consists of approximately 72,000 square feet.
The Company's subsidiary, Aeroflex Lintek Corp., occupies approximately
8,500 square feet of space in Powell, Ohio, with an annual rental of
approximately $54,000.
The Company believes that its facilities are adequate for its current and
presently foreseeable needs.
ITEM THREE - LEGAL PROCEEDINGS
Filtron Co. Inc., ("Filtron") a subsidiary of the Company whose operations
were discontinued in October 1991, was one of several defendants named in a
personal injury action initiated in 1994 by several plaintiffs in the Supreme
Court of the State of New York, County of Kings.
According to the allegations of the Amended Verified Complaint, the
plaintiffs, who are current or former employees of a company to whom Filtron
sold RFI filters/capacitors, and their dependents, are seeking to recover,
respectively, directly and derivatively, on diverse theories of negligence,
strict liability and breach of warranty, for injuries allegedly suffered from
exposure to a liquid substance or material which Filtron incorporated for a
period of time in the RFI filters/capacitors which it manufactured. The
plaintiffs are seeking damages which cumulatively may exceed $500 million.
This action is still in the early stages of discovery. Based upon available
information and considering its various defenses, together with its product
liability insurance, in the opinion of management of the Company, the outcome of
the action against its subsidiary will not have a materially adverse effect on
the Company's consolidated financial statements.
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The Company is involved in various other routine legal matters. Management
believes the outcome of these matters will not have a material adverse effect on
the Company.
ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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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
---- ---
1996
First Quarter........................ $5.13 $3.50
Second Quarter....................... 6.63 4.38
Third Quarter ....................... 6.13 4.63
Fourth Quarter....................... 4.75 4.13
1997
First Quarter........................ 4.88 3.50
Second Quarter....................... 5.13 3.25
Third Quarter........................ 11.25 4.44
Fourth Quarter....................... 12.06 7.13
1998
First Quarter......................... 14.63 7.88
Second Quarter........................ 14.31 8.50
Third Quarter(through September 8).... 11.56 6.69
(b) As of September 8, 1998, there were approximately 1,150 record holders
of the Company's Common Stock.
(c) The Company has never declared or paid any cash dividends on its Common
Stock. There have been no stock dividends declared or paid by the Company on its
Common Stock during the past three years. The Company currently intends to
retain any future earnings for use in the operation and development of its
business and for acquisitions and, therefore, does not intend to declare or pay
any cash dividends on its Common Stock in the foreseeable future. In addition,
the Company's Revolving Credit Agreement, as amended, prohibits it from paying
cash dividends.
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ITEM SIX - SELECTED FINANCIAL DATA
(In thousands except percentages and per share data)
Year ended June 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------
Earnings Statement Data
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Net Sales...................... $118,861 $ 94,299 $ 74,367 $ 71,113 $ 65,602
Income (Loss) from
Continuing Operations........ 8,406 4,420 (17,420)(1)(2) 6,587(4)(5) 5,850(6)
Income from
Discontinued Operations...... - - - 462 187
Net Income (Loss).............. 8,406 4,420 (17,420) 7,049 6,037(6)
Income (Loss) from Continuing
Operations Per Common Share
and Common Share Equivalent
Basic...................... $ .57 $ .36 $(1.46)(1)(2)$ .56(4)(5) $ .59(6)
Diluted.................... .51 .34 (3) .52(4)(5) .50(6)
Net Income (Loss) Per Common
Share and Common Share
Equivalent
Basic...................... .57 .36 (1.46) .60 .61
Diluted.................... .51 .34 (3) .56 .52
Weighted Average Number of
Common Shares and Common
Share Equivalents Outstanding
Basic...................... 14,802 12,446 11,971 11,733 9,962
Diluted.................... 16,527 14,620 (3) 14,052 12,235
June 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------
Balance Sheet Data
- ------------------
Working Capital................ $ 53,965 $ 25,872 $ 25,300 $ 31,721 $ 28,572
Total Assets................... 124,101 81,047 81,169 71,936 71,016
Long-term Debt
(including current portion).. 11,481 28,916 34,577 13,787 18,408
Stockholders' Equity........... 87,036 35,040 30,472 46,344 39,571
Other Statistics
- ----------------
After Tax Profit Margin (Loss)
(from continuing operations).. 7.1% 4.7% (23.4)%(1)(2) 9.3%(4)(5) 8.9%(6)
Return on Average Stockholders'
Equity (from continuing
operations).................. 13.8% 13.5% (45.4)%(1)(2) 15.3%(4)(5) 17.5%(6)
Stockholders' Equity
Per Share (7) $ 5.01 $ 2.81 $ 2.49 $ 3.95 $ 3.37
(1) Includes $23.2 million ($1.94 per share) 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 $437,000, net of tax, gain ($.04 per share) on the sale of
securities.
(3) As a result of the loss, all options, warrants and convertible debentures
are anti-dilutive.
(4) Includes $2.0 million ($.14 per diluted share and $.17 basic) of insurance
proceeds received on the death of the former chairman.
(5) Includes a $1.5 million, net of tax, restructuring charge ($.11 per diluted
share and $.13 basic) for the consolidation of the Company's Puerto Rican
operations into its domestic facilities.
(6) Includes an income tax benefit of $1.7 million, ($.14 per diluted share and
$.17 basic), relating to the recognition of a portion of the Company's
unrealized net operating loss carryforward in accordance with Statement of
Financial Accounting Standards No. 109.
(7) 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
Overview
Aeroflex Incorporated, founded in 1937, utilizes its advanced design,
engineering and manufacturing capabilities to produce state-of-the-art
microelectronic, interconnect and testing solutions used in communication
applications for commercial and defense markets. Its products are used in
satellite, wireless and wireline communications, cable television ("CATV") and
defense communications markets. It also designs and manufactures motion control
systems and shock and vibration isolation systems used for commercial,
industrial and defense applications. The Company's operations are grouped into
three segments: Microelectronics; Test, Measurement and Other Electronics; and
Isolator Products. The Company's consolidated financial statements include the
accounts of Aeroflex Incorporated and its wholly-owned subsidiaries.
The Microelectronics segment has been engaged in the design, manufacture and
sale of state-of-the-art microelectronics for the electronics industry since
1974. In January 1994, the Company acquired substantially all of the net
operating assets of the microelectronics division of Marconi Circuit Technology
Corporation, which manufactures a wide variety of microelectronic assemblies. In
March 1996, 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. Effective July 1, 1997,
MIC acquired certain equipment, inventory, licenses for technology and patents
of two of Lucent Technologies' telecommunications component units - multi-chip
modules and film integrated circuits. These units manufacture microelectronic
modules and interconnect products. The Company has also signed a multi-year
supply agreement to provide Lucent with film integrated circuits for use in the
telecommunications industry.
The Test, Measurement and Other Electronics segment consists of two
divisions: Instruments and Motion Control Products. The Instruments division
consists of: (i) Comstron , a leader in radio frequency and microwave technology
used in the manufacture of fast switching frequency signal generators and
components, which was acquired in November 1989 and is currently an operating
division of Aeroflex Laboratories Incorporated, a wholly-owned subsidiary of
Aeroflex; and (ii) Lintek, a leader in high speed instrumentation antenna
measurement systems and radar systems. The Motion Control Products division has
been engaged in the development and manufacture of electro-optical scanning
devices used in infra-red night vision systems since 1975. Additionally, it has
been engaged in the design, development and production of stabilization tracking
devices and systems and magnetic motors since 1961.
The Isolator Products segment has been engaged in the design, development,
manufacture and sale of severe service shock and vibration isolation systems
since 1961. These devices include a product line of helically wound steel wire
rope contained between rugged metal retainer bars which are used to store and
dissipate potentially destructive vibration and shock and are primarily used in
defense applications. In October 1983, the Company acquired Vibration Mountings
& Controls, Inc. (VMC), which manufactures a line of off-the-shelf rubber and
spring shock, vibration and structure borne noise control devices used in
commercial applications. In December 1986, the Company acquired the operating
assets of Korfund Dynamics Corporation (KDC), a manufacturer of an industrial
line of heavy duty spring and rubber shock mounts.
-14-
Revenue is recognized based upon shipments or billings. The Company records
costs on its long-term contracts using percentage-of-completion accounting under
which costs are recognized on revenues in the same relation that total estimated
manufacturing costs bear to total contract value. Estimated costs at completion
are based upon engineering and production estimates. Provisions for estimated
losses or revisions in estimated profits on contracts-in-process are recorded in
the period in which such losses or revisions are first determined.
Approximately 42%, 50% and 65% of the Company's sales for fiscal 1998, 1997
and 1996, respectively, were to agencies of the United States Government or to
prime defense contractors or subcontractors of the United States Government. The
Company's overall dependence on the 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
Company's defense contracts 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.
Management believes that potential reductions in defense 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.
The Company's product development efforts primarily involve engineering and
design relating to the development of new products, the improvement of existing
products or the adaption of such products to new applications. The Company's
efforts also include developing prototype components to bid on specific
programs. Some of the Company's development efforts are reimbursed under
contractual arrangements. Product development and similar costs not recoverable
under contractual arrangements are expensed in the period incurred.
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure About
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. This statement establishes
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major customers.
The Company has not determined the impact that the adoption of this new
accounting standard will have on its consolidated financial statement
disclosures. The Company will adopt this standard effective July 1, 1998, as
required.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. This statement requires companies to record
derivatives on the balance sheet as assets or liabilities at their fair value.
In certain circumstances changes in the value of such derivatives may be
required to be recorded as gains or losses. Management believes that the impact
of this statement will not have a material effect on the Company's consolidated
financial statements.
-15-
Market Risk
The Company is exposed to market risk related to changes in interest rates
and, to an immaterial extent, to foreign currency exchange rates. Most of the
Company's debt is at fixed rates of interest or at a variable rate with an
interest rate swap agreement to effectively make it a fixed rate of interest.
That debt which is subject to a floating rate of interest (30-day LIBOR) and is
not hedged by an interest rate swap amounts to approximately $5.6 million at
June 30, 1998. If market interest rates increase by 10 percent from levels at
June 30, 1998, the effect on the Company's results of operations would not be
material.
Year 2000 Compliance
Management has initiated a company-wide program and has developed a formal
plan of implementation to prepare the Company for the Year 2000. This includes
taking actions designed to ensure that the Company's information technology
("IT") systems, products and infrastructure are Year 2000 compliant and that its
customers, suppliers and service providers have taken similar action. The
Company is in the process of evaluating its internal issues - all of its IT
systems, products, equipment and other facilities systems - and modifying items
that are not compliant. With respect to its external issues customers, suppliers
and service providers - the Company is surveying them primarily through written
correspondence.
The Company expects to incur internal staff costs, as well as consulting and
other expenses, and believes the total costs to be incurred for all internal
Year 2000 compliance related projects will not have a material impact on the
Company's business, results of operations or financial condition. Management
expects to complete its investigation, remediation and contingency planning
activities for all mission critical systems and areas by December 31, 1998,
although there can be no assurance that it will. At this time, Management
believes that the Company does not have any internal mission critical Year 2000
issues that it cannot remedy. With respect to mission critical third parties, in
some instances the Company has protection under contracts and the Company
intends to create contingency plans to mitigate its exposure in the event such
third parties are not Year 2000 compliant. Despite its efforts to survey its
customers, suppliers and service providers, Management cannot be certain as to
the actual Year 2000 readiness of these third parties or the impact that any
non-compliance on their part may have on the Company's business, results of
operations or financial condition.
-16-
Statement of Operations
The following table sets forth certain items from the Company's statement of
operations as a percentage of net sales and in dollars by segment for the
periods indicated:
Year Ended June 30,
----------------------------
1998 1997 1996
---- ---- ----
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 65.0 66.9 68.7
------ ------ ------
Gross Profit 35.0 33.1 31.3
------ ------ ------
Operating Expenses:
Selling, General and
Administrative costs 18.1 19.3 19.0
Research and Development costs 4.4 3.5 1.6
Special Charge (1) - - 31.2
------ ------ ------
Total Operating Expenses 22.5 22.8 51.8
------ ------ ------
Operating Income (Loss) 12.5 10.3 (20.5)
Other Expense, net 1.4 3.0 1.2
------ ------ ------
Income (Loss) Before Income Taxes 11.1 7.3 (21.7)
Provision For Income Taxes 4.0 2.6 1.7
------ ------ ------
Net Income (Loss) 7.1% 4.7% (23.4)%
====== ====== ======
Business Segment Data (in thousands):
Year Ended June 30,
----------------------------
1998 1997 1996
---- ---- ----
Net Sales:
Microelectronics $ 74,263 $ 48,462 $28,414
Test, Measurement
and Other Electronics 25,685 28,144 30,109
Isolator Products 18,913 17,693 15,844
-------- -------- -------
Net Sales $118,861 $ 94,299 $74,367
======== ======== =======
Operating Profit (Loss):
Microelectronics $ 14,147 $ 6,644 $ 3,282
Test, Measurement
and Other Electronics 996 2,762 4,830
Isolator Products 3,063 2,844 2,150
General Corporate
Expenses (3,348) (2,514) (2,344)
-------- -------- -------
14,858 9,736 7,918
Special Charge (1) - - (23,200)
-------- -------- -------
Operating Profit (Loss) $ 14,858 $ 9,736 $(15,282)
======== ======== =======
(1) Write-off of in-process research and development acquired in connection
with the purchase of MIC.
-17-
Fiscal Year Ended June 30, 1998 Compared to Fiscal Year Ended June 30, 1997
Net Sales. Net sales increased 26.0% to $118.9 million in fiscal 1998 from
$94.3 million in fiscal 1997. Net sales in the Microelectronics segment
increased 53.2% to $74.3 million for fiscal 1998 from $48.5 million for fiscal
1997 due to increased sales volume in both thin film interconnects and
microelectronic modules. Sales of thin film interconnects increased primarily
due to the commencement of a strategic supply contract with Lucent Technologies
effective July 1, 1997. Net sales in the Test, Measurement and Other Electronics
segment decreased 8.7% to $25.7 million in fiscal 1998 from $28.1 million for
fiscal 1997 primarily as a result of reduced sales volume of frequency
synthesizers partially offset by increased sales of high speed instrumentation
test systems. Net sales in the Isolator Products segment increased 6.9% to $18.9
million for fiscal 1998 from $17.7 million for fiscal 1997 primarily due to
higher sales volume of industrial and commercial isolators.
Gross Profit. Cost of sales includes materials, direct labor and overhead
expenses such as engineering labor, fringe benefits, allocable occupancy costs,
depreciation and manufacturing supplies. Gross profit increased 33.3% to $41.6
million in fiscal 1998 from $31.2 million in fiscal 1997. Gross margin increased
to 35.0% in fiscal 1998 from 33.1% in fiscal 1997. This increase was primarily
as a result of increased margins in the Microelectronics segment reflecting the
greater efficiency of higher volume.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist of office and management salaries, fringe
benefits, commissions and advertising costs. Selling, general and administrative
expenses increased 18.5% to $21.5 million (18.1% of net sales) in fiscal 1998
from $18.2 million (19.3% of net sales) in fiscal 1997. The increase was
primarily due to labor related expenses including salaries for additional hires,
recruitment and relocation costs in connection with the Company's growth.
Research and Development Costs. Research and development costs consists of
material, engineering labor and allocated overhead. Company sponsored research
and development costs increased 57.7% to $5.2 million (4.4% of net sales) for
the year ended June 30, 1998 from $3.3 million (3.5% of net sales) for the year
ended June 30, 1997. This increase was primarily attributable to the costs for
development of a new low-cost, high speed, high performance frequency
synthesizer intended for commercial communication test systems.
Other Expense (Income). Other expense was $1.7 million in fiscal 1998
compared to $2.9 million in fiscal 1997. Net interest expense decreased 43.9% to
$1.6 million in fiscal 1998 from $2.9 million in fiscal 1997. The decrease in
net interest expense was primarily due to reduced levels of borrowings and
increased levels of cash equivalents due to the conversion of $10.0 million of
debentures and net proceeds of $31.3 million from stock issued in a public
offering. Other expense included $102,000 of debenture redemption costs in
fiscal 1998.
Provision for Income Taxes. Income taxes recorded by the Company increased
95.1% to $4.8 million (an effective income tax rate of 36.1%) in fiscal 1998
from $2.4 million (an effective income tax rate of 35.5%) in fiscal 1997. The
income tax provisions for the years ended June 30, 1998 and 1997 were different
from the amounts computed by applying the U.S. Federal income tax rate to income
before income taxes primarily due to state and local income taxes, and for the
year ended June 30, 1998, due to research and development credits.
-18-
Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996
Net Sales. Net sales increased 26.8% to $94.3 million for fiscal 1997 from
$74.4 million in fiscal 1996. Net sales in the Microelectronics segment
increased 70.6% to $48.5 million for fiscal 1997 from $28.4 million for fiscal
1996 due to the acquisition of MIC in March 1996 and increased sales in the
existing product lines. MIC sales for fiscal 1997 and from acquisition until
June 30, 1996 were approximately $21.9 million and $6.2 million, respectively.
Net sales in the Test, Measurement and Other Electronics segment decreased 6.5%
to $28.1 million for fiscal 1997 from $30.1 million for fiscal 1996 primarily as
a result of reduced frequency synthesizer sales partially offset by increased
sales of stabilization and tracking devices. The reduction in frequency
synthesizer sales was due to the early completion of the current CASS contract
and the transition from custom to commercial markets. Net sales in the Isolator
Products segment increased 11.7% to $17.7 million for fiscal 1997 from $15.8
million for fiscal 1996. The increase reflects higher sales volume of industrial
and commercial isolators partially offset by decreased sales volume of military
isolators.
Gross Profit. Gross profit increased 33.9% to $31.2 million in fiscal 1997
from $23.3 million in fiscal 1996. Gross margin increased to 33.1% in fiscal
1997 from 31.3% in fiscal 1996. This increase was primarily as a result of
increased margins in the Microelectronics and Isolator Products segments
reflecting the greater efficiencies of higher volumes and because MIC generally
has higher margins than the balance of the Company.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 28.7% to $18.2 million (19.3% of net sales) in
fiscal 1997 from $14.1 million (19.0% of net sales) in fiscal 1996. This
increase was primarily as a result of the addition of MIC, which has a higher
selling, general and administrative cost structure than the balance of the
Company.
Research and Development Costs. Company sponsored research and development
costs increased 160.2% to $3.3 million (3.5% of net sales) for the year ended
June 30, 1997 from $1.3 million (1.6% of net sales) for the year ended June 30,
1996. This increase was primarily attributable to MIC which was acquired in
March 1996.
Special Charge. In connection with the Company's purchase of MIC, the
Company allocated $23.2 million of the purchase price to in-process research and
development. Since the research and development projects had not reached
technological feasibility, the $23.2 million was charged to expense in fiscal
1996 in accordance with generally accepted accounting principles.
Other Expense (Income). Other expense increased 233.4% to $2.9 million in
fiscal 1997 from $864,000 in fiscal 1996. Net interest expense increased 100.3%
to $2.9 million in fiscal 1997 from $1.4 million in fiscal 1996. The increase in
net interest expense was primarily due to the increased level of borrowings and
lower interest income on reduced cash amounts due to the purchase of MIC. Other
income decreased in fiscal 1997 due to a securities related gain in fiscal 1996.
Provision for Income Taxes. Income taxes recorded by the Company increased
91.1% to $2.4 million (an effective income tax rate of 35.5%) in fiscal 1997
from $1.3 million on a loss before income taxes of $16.1 million in fiscal 1996.
The income tax provisions for the years ended June 30, 1997 and 1996 were
different from amounts computed by applying the U.S. Federal income tax rate to
income before income taxes primarily due to state and local income taxes, and,
for the year ended June 30, 1996, because of the non-deductibility of the $23.2
million special charge and the tax benefits of loss carryforwards (both
unrealized and realized).
-19-
Seasonality
Although the Company's business is not affected by seasonality,
historically its revenues and earnings increase sequentially from quarter to
quarter within a fiscal year, but the first quarter is less than the previous
year's fourth quarter.
Liquidity and Capital Resources
As of June 30, 1998, the Company had $54.0 million in working capital. The
current ratio was 3.3 to 1 at June 30, 1998. As of March 31, 1998, the Company
replaced a previous agreement with a revised revolving credit 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
$27.0 million which expires in March 2001. The interest rate on borrowings under
this agreement is at various rates depending upon certain financial ratios, with
the current rate substantially equivalent to the prime rate (8.5% at June 30,
1998). The terms of the agreement require compliance with certain covenants
including minimum consolidated tangible net worth and pre-tax earnings,
maintenance of certain financial ratios, limitations on capital expenditures and
indebtedness and prohibition of the payment of cash dividends. At June 30, 1998,
the outstanding borrowings under the revolving credit line were $4.7 million.
The Company has entered into an interest rate swap agreement for the $4.7
million then outstanding under the revolving credit line at 7.6% in order to
reduce the interest rate risk associated with these outstanding borrowings.
During June 1994, the Company completed a sale of $10.0 million principal
amount of 7-1/2% Senior Subordinated Convertible Debentures to non-U.S. persons.
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 were convertible into the Company's Common
Stock at a price of $5-5/8 per share through October 6, 1997. All of the
principal amount was converted. In connection with the conversions, $599,000 of
deferred bond issuance costs were charged to additional paid-in capital.
Effective March 19, 1996, the Company acquired all of the outstanding stock
of MIC for approximately $36.0 million of cash, 300,000 shares of common stock
and warrants to purchase 400,000 shares of common stock (at exercise prices
ranging from $7.05 to $7.50 per share). The purchase price was paid with
available cash of $9.0 million and borrowings under the Company's bank loan
agreement of $27.0 million. MIC manufactures high frequency thin film circuits
and interconnects for miniaturized, high frequency, high performance electronic
products for growing commercial markets such as wireless communications, cable
communications, satellite based communications hardware and high technology
military electronics. The acquired company's net sales were approximately $25.0
million for its fiscal year ended October 31, 1995.
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 $4.4 million in cash. These units
manufacture microelectronic modules and interconnect products. The Company has
also signed a multi-year supply agreement to provide Lucent with film integrated
circuits for use in the telecommunications industry. The purchase price has been
allocated to the assets acquired, based on their fair values, and certain
obligations assumed relating to the various agreements.
-20-
In fiscal 1998, the Company's operations provided cash of $13.7 million
from the continued profitability of the Company, collection of receivables and
an increase in current liabilities partially offset by an increase in
inventories. In fiscal 1998, the Company's investing activities used cash of
$15.0 million primarily for capital expenditures, including the renovation of
MIC's Pearl River facility and the purchase of equipment and inventory from
Lucent Technologies. In fiscal 1998, the Company's financing activities provided
cash of $25.1 million primarily from the public offering of stock and equipment
financing offset, in part, by debt payments.
In March 1998, the Company sold 2.6 million shares of its Common Stock in a
public offering for $31.3 million, net of an underwriting discount of $2.0
million and issuance costs of $496,000. Of these net proceeds, $9.6 million was
used to repay bank indebtedness. The balance of the net proceeds, which is
included in cash and cash equivalents, will be used for general corporate
purposes, including working capital, capital expenditures and facilities
expansion and may be used for potential acquisitions.
Management of the Company believes that internally generated funds and
available lines of credit will be sufficient for its working capital
requirements, capital expenditure needs and the servicing of its debt for at
least the next twelve months. At June 30, 1998, the Company's available unused
line of credit was approximately $20.0 million.
A subsidiary of the Company whose operations were discontinued in
1991, is one of several defendants named in a personal injury action initiated
in August, 1994, by a group of plaintiffs. The plaintiffs are seeking damages
which cumulatively may exceed $500 million. The complaint alleges, among other
things, that the plaintiffs suffered injuries from exposure to substances
contained in products sold by the subsidiary to one of its customers. This
action is in the early stages of discovery. Based upon available information and
considering its various defenses, together with its product liability insurance,
in the opinion of management of the Company, the outcome of the action against
its subsidiary will not have a materially adverse effect on the Company's
consolidated financial statements.
The Company is involved in various other routine legal matters. Management
believes the outcome of these matters will not have a materially adverse effect
on the Company's consolidated financial statements.
The Company is undergoing routine audits by various taxing authorities of
its state and local income tax returns covering periods from 1994 to 1996.
Management believes that the probable outcome of these various audits should not
materially affect the consolidated financial statements of the Company.
The Company's backlog of orders at June 30, 1998 and 1997 was $80.1 million
and $53.3 million, respectively.
Financial Information About Industry Segments
The sales and operating profits of each industry segment and the
identifiable assets attributable to each industry segment for each of the three
years in the period ended June 30, 1998 are set forth in Note 14 of Notes to
Consolidated Financial Statements.
-21-
ITEM EIGHT - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data listed in the accompanying
Index to Financial Statements and Schedules is attached as part of this report.
ITEM NINE - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information required by Part III is incorporated by reference to the
Company's definitive proxy statement in connection with its Annual Meeting of
Stockholders scheduled to be held in November 1998, to be filed with the
Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year ended June 30, 1998.
PART IV
ITEM FOURTEEN - EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) See Index to Financial Statements at beginning of attached
financial statements.
(b) Reports on Form 8-K:
None
(c) Exhibits
3.1 Certificate of Incorporation, as amended.
3.2 By-Laws, as amended (Exhibit 3 to Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998).
4.1 Third Amended and Restated Loan and Security Agreement dated as of
March 15, 1996 among the Registrant, certain of its subsidiaries,
Chemical Bank and NatWest Bank, N.A. (Exhibit 10 of Report on Form 8-K
dated March 19, 1996).
4.2 Second Amendment to the Third Amended and Restated Loan and Security
Agreement dated as of April 30, 1998 among the Registrant, certain of
its subsidiaries, The Chase Manhattan Bank (as successor to Chemical
Bank) and Fleet Bank, N.A. (as successor to NatWest Bank, N.A.)
10.1 1989 Non-Qualified Stock Option Plan, as amended (Exhibit 10.8 of
Annual Report on Form 10-K for the year ended June 30, 1990).
10.2 1994 Non-Qualified Stock Option Plan. (Exhibit 10.2 of Annual Report
on Form 10-K for the year ended June 30, 1994).
10.3 1994 Outside Directors Stock Option Plan. (Exhibit 10.3 of Annual
Report on Form 10-K for the year ended June 30, 1994).
-22-
10.4 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).
10.5 Amendment No. 1 to Employment Agreement between Aeroflex Incorporated
and Michael Gorin (Exhibit 10.2 to Report on Form 8-K dated May 17,
1997).
10.6 Amendment No. 1 to Employment Agreement between Aeroflex Incorporated
and Leonard Borow (Exhibit 10.3 to Report on Form 8-K dated May 17,
1997).
10.7 Deferred Compensation Agreement between Aeroflex Incorporated and
Harvey R. Blau (Exhibit 10.4 to Report on Form 8-K dated May 17,
1997).
10.8 Employment Agreement between Aeroflex Incorporated and Carl Caruso
(Exhibit 10.5 to Report on Form 8-K dated May 17, 1997).
10.9 1996 Stock Option Plan (Exhibit A to Definitive Schedule 14A filed
September 30, 1996).
10.10 1998 Stock Option Plan (Exhibit 10 to Quarterly Report on Form
10-Q for the quarter ended March 31, 1998).
10.11 Amendment No. 2 to Employment Agreement between Aeroflex Incorporated
and Harvey R. Blau.
10.12 Amendment No. 2 to Employment Agreement between Aeroflex
Incorporated and Michael Gorin.
10.13 Amendment No. 2 to Employment Agreement between Aeroflex Incorporated
and Leonard Borow.
22 The following is a list of the Company's subsidiaries:
State of
Name Incorporation
---- -------------
Aeroflex Laboratories Incorporated Delaware
Aeroflex Lintek Corp. Ohio
Aeroflex Systems Corp. Delaware
MIC Technology Corporation Texas
Vibration Mountings and Controls, Inc. New York
23 Consent of Independent Auditors
27 Financial Data Schedule
99 Additional Exhibit
The following undertakings are incorporated by reference into the Company's
Registration Statements on Form S-8 and Form S-3 (Registration Nos. 33-75496,
33-88868, 33-88878, 333-42399, 333-42405, 333- 15339, 333-21803 and 333-46689).
-23-
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan or
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) For the purpose of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(f) (1) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus to each employee to whom the prospectus is sent or
given a copy of the registrant's annual report to stockholders for its last
fiscal year, unless such employee otherwise has received a copy of such report,
in which case the registrant shall state in the prospectus that it will promptly
furnish, without charge, a copy of such report on written request of the
employee. If the last fiscal year of the registrant has ended within 120 days
prior to the use of the prospectus, the annual report of the registrant for the
preceding fiscal year may be so delivered, but within such 120 day period the
annual report for the last fiscal year will be furnished to each such employee.
(2) The undersigned registrant hereby undertakes to transmit or cause to be
transmitted to all employees participating in the plan who do not otherwise
receive such material as stockholders of the registrant, at the time and in the
manner such material is sent to its stockholders, copies of all reports, proxy
statements and other communications distributed to its stockholders generally.
-24-
(3) Where interests in a plan are registered herewith, the undersigned
registrant and plan hereby undertake to transmit or cause to be transmitted
without charge, to any participant in the plan who makes a written request, a
copy of the then latest annual report of the plan filed pursuant to Section 15
(d) of the Securities Exchange Act of 1934 (Form 11-K). If such report is filed
separately on Form 11-K, such form shall be delivered upon written request. If
such report is filed as a part of the registrant's annual report on Form 10-K,
that entire report (excluding exhibits) shall be delivered upon written request.
If such report is filed as a part of the registrant's annual report to
stockholders delivered pursuant to paragraph (1) or (2) of this undertaking,
additional delivery shall not be required.
(4) If the registrant is a foreign private issuer, eligible to use Form 20-F,
then the registrant shall undertake to deliver or cause to be delivered with the
prospectus to each employee to whom the prospectus is sent or given, a copy of
the registrant's latest filing on Form 20-F in lieu of the annual report to
stockholders.
(i) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
-25-
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 25th day of
September 1998.
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, 1998 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
Leonard Borow and Director(Chief Operating Officer)
- ------------------------- Director
Paul Abecassis
/s/ Robert Bradley, Sr.
- ------------------------- Director
Robert Bradley, Sr.
/s/ Milton Brenner
- ------------------------- Director
Milton Brenner
/s/ Ernest E. Courchene, Jr.
- ------------------------- Director
Ernest E. Courchene, Jr.
/s/ Donald S. Jones
- ------------------------- Director
Donald S. Jones
/s/ Eugene Novikoff
- ------------------------- Director
Eugene Novikoff
/s/ John S. Patton
- ------------------------- Director
John S. Patton
-26-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
FINANCIAL STATEMENTS AND SCHEDULES
COMPRISING ITEM 8 OF ANNUAL REPORT ON FORM 10-K
TO SECURITIES AND EXCHANGE COMMISSION
AS OF JUNE 30, 1998 AND 1997
AND FOR THE YEARS
ENDED JUNE 30, 1998, 1997 AND 1996
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, 1998 and 1997 S-2-3
Statements of operations - each of the three years
in the period ended June 30, 1998 S-4
Statements of stockholders' equity - each of the
three years in the period ended June 30, 1998 S-5
Statements of cash flows - each of the three years
in the period ended June 30, 1998 S-6
Notes (1-15) S-7-21
Quarterly financial data (unaudited) S-22
2. FINANCIAL STATEMENT SCHEDULES:
II - Valuation and qualifying accounts S-23
All other schedules have been omitted because they are inapplicable, not
required, or the information is included elsewhere in the financial statements
or notes thereto.
Independent Auditors' Report
The Board of Directors and Stockholders of Aeroflex Incorporated
Plainview, New York
We have audited the accompanying consolidated balance sheets of Aeroflex
Incorporated and subsidiaries as of June 30, 1998 and 1997 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, 1998. Our audits also
included the financial statement schedule listed in the Index at item 14(a)2.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aeroflex
Incorporated and subsidiaries as of June 30, 1998 and 1997 and the results of
their operations and their cash flows for each of the years in the three year
period ended June 30, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
/s/ KPMG Peat Marwick LLP
Jericho, New York
August 13, 1998
S-1
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
June 30,
------------------------
ASSETS 1998 1997
---- ----
Current assets:
Cash and cash equivalents............................... $ 24,408 $ 600
Accounts receivable, less allowance for doubtful accounts
of $317 and $417 at June 30, 1998 and 1997,
respectively.......................................... 19,853 21,843
Inventories............................................. 29,851 20,319
Deferred income taxes................................... 1,861 2,043
Prepaid expenses and other current assets............... 1,197 812
-------- --------
Total current assets............................... 77,170 45,617
Property, plant and equipment, net........................ 26,994 14,487
Intangible assets acquired in connection with the purchase
of businesses, net of accumulated amortization of $1,993
and $1,224 at June 30, 1998 and 1997, respectively...... 7,578 8,046
Cost in excess of fair value of net assets of
businesses acquired, net of accumulated amortization
of $2,724 and $2,399 at June 30, 1998 and 1997,
respectively............................................ 9,827 9,903
Other assets.............................................. 2,532 2,994
-------- --------
Total assets.............................................. $124,101 $ 81,047
======== ========
See notes to consolidated financial statements.
S-2
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
June 30,
---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
---- ----
Current liabilities:
Current portion of long-term debt....................... $ 1,755 $ 4,247
Accounts payable........................................ 6,668 5,093
Accrued expenses and other current liabilities.......... 12,932 8,564
Income taxes payable.................................... 1,850 1,841
-------- --------
Total current liabilities.......................... 23,205 19,745
Long-term debt............................................ 9,726 14,688
Deferred income taxes..................................... 1,156 334
Other long-term liabilities............................... 2,978 1,259
Senior subordinated convertible debentures................ - 9,981
-------- -------
Total liabilities......................................... 37,065 46,007
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, par value $.10 per share; authorized 1,000
shares: Series A Junior Participating Preferred Stock, par
value $.10 per share; authorized 150 shares;
none issued........................................... - -
Common Stock, par value $.10 per share; authorized
25,000 shares; issued 17,378 and 12,658 shares at
June 30, 1998 and 1997, respectively.................. 1,738 1,266
Additional paid-in capital.............................. 100,481 58,110
Accumulated deficit..................................... (15,178) (23,584)
-------- --------
87,041 35,792
Less: Treasury stock, at cost (1 and 169 shares at
June 30, 1998 and 1997, respectively.................. 5 752
-------- --------
Total stockholders' equity................................ 87,036 35,040
-------- --------
Total liabilities and stockholders' equity................ $124,101 $ 81,047
======== ========
See notes to consolidated financial statements.
S-3
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years Ended June 30,
---------------------------------------------
1998 1997 1996
---- ---- ----
Net sales................................ $118,861 $ 94,299 $ 74,367
Cost of sales........................... 77,286 63,109 51,070
-------- -------- ---------
Gross profit......................... 41,575 31,190 23,297
-------- -------- ---------
Operating costs:
Selling, general and administrative
costs................................ 21,545 18,175 14,119
Research and development costs........ 5,172 3,279 1,260
Special charge (note 2).............. - - 23,200
-------- -------- ---------
Total operating costs......... 26,717 21,454 38,579
-------- -------- ---------
Operating income (loss).................. 14,858 9,736 (15,282)
-------- -------- ---------
Other expense (income):
Interest expense....................... 2,011 2,974 1,939
Other expense (income) (including
interest income and dividends of
$389, $84 and $496)................... (309) (93) (1,075)
-------- -------- ---------
Total other expense (income)...... 1,702 2,881 864
-------- -------- ---------
Income (loss) before income taxes........ 13,156 6,855 (16,146)
Provision for income taxes............... 4,750 2,435 1,274
-------- -------- ---------
Net income (loss)........................ $ 8,406 $ 4,420 (17,420)
======== ======== =========
Income (loss) per common share and common
share equivalent:
Basic............................... $ .57 $ .36 $(1.46)
======== ======== =========
Diluted............................... $ .51 $ .34 *
======== ========
Weighted average number of common
shares and common share equivalents
outstanding:
Basic................................. 14,802 12,446 11,971
Diluted............................... 16,527 14,620 *
*As a result of the loss, all options, warrants and convertible debentures are
anti-dilutive.
See notes to consolidated financial statements.
S-4
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1998, 1997 and 1996
(In thousands)
Common Stock Additional
------------ Paid-in Accumulated Treasury Stock
Total Shares Par Value Capital Deficit Shares Cost
----- ------ --------- ----------- ----------- ------ ----
Balance, July 1, 1995............... $ 46,344 11,818 $ 1,182 $ 56,101 $ (10,584) 92 $ (355)
Stock issued upon
conversion of
debentures........................ 19 3 - 19 - - -
Treasury stock received
from the employee
stock ownership plan.............. (285) - - - - 56 (285)
Stock issued upon exercise
of stock options.................. 440 159 16 366 - (19) 58
Stock and warrants issued
to acquire business............... 1,074 300 30 1,044 - - -
Stock issued in connection
with bank refinancing............. 300 100 10 290 - - -
Net loss............................ (17,420) - - - (17,420) - -
------- ------- ------ ------- -------- ------- --------
Balance, June 30, 1996.............. 30,472 12,380 1,238 57,820 (28,004) 129 (582)
Stock issued upon exercise
of stock options.................. 586 278 28 290 - (69) 268
Purchase of treasury
stock............................. (438) - - - - 109 (438)
Net income.......................... 4,420 - - - 4,420 - -
------- ------- ------ ------- -------- ------- --------
Balance, June 30, 1997.............. 35,040 12,658 1,266 58,110 (23,584) 169 (752)
Stock issued in public offering..... 31,285 2,597 260 31,025 - - -
Stock issued upon exercise
of stock options and warrants..... 2,923 349 35 2,141 - (168) 747
Stock issued upon conversion
of debentures..................... 9,382 1,774 177 9,205 - - -
Net income.......................... 8,406 - - - 8,406 - -
------- ------- ------ --------- --------- -------- --------
Balance, June 30, 1998.............. $ 87,036 17,378 $ 1,738 $ 100,481 $ (15,178) 1 $ (5)
======= ======= ======= ========= ========= ======== ========
See notes to consolidated financial statements.
S-5
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended June 30,
-----------------------------------------
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income (loss)............................................ $ 8,406 $ 4,420 $ (17,420)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Special charge........................................... - - 23,200
Depreciation and amortization............................ 4,884 4,322 3,091
Amortization of deferred gain............................ (588) - -
Gain on sale of securities............................... - - (533)
Deferred income taxes.................................... 1,004 (10) (461)
Other.................................................... (10) 57 (112)
Change in operating assets and liabilities, net of
effects from purchase of businesses:
Decrease (increase) in accounts receivable............... 1,975 1,421 (2,220)
Decrease (increase) in inventories....................... (8,397) (3,403) (2,654)
Decrease (increase) in prepaid
expenses and other assets.............................. (633) 879 (6)
Increase (decrease) in accounts
payable, accrued expenses and
other long-term liabilities............................ 5,374 375 434
Increase (decrease) in income taxes payable.............. 1,648 668 1,189
-------- -------- --------
Net cash provided by operating activities...................... 13,663 8,729 4,508
-------- -------- --------
Cash flows from investing activities:
Payment for purchase of businesses,
net of cash acquired....................................... (249) (162) (35,190)
Purchase of equipment, inventory and technology rights
from Lucent Technolgies.................................... (4,435) - -
Capital expenditures......................................... (10,613) (2,931) (1,687)
Proceeds from sale of property,
plant and equipment........................................ 209 16 2,318
Net proceeds from sale of securities......................... 110 81 1,242
-------- -------- --------
Net cash used in investing activities.......................... (14,978) (2,996) (33,317)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common shares in public offering... 31,781 - -
Costs in connection with public offering..................... (496) - -
Borrowings under debt agreements............................. 6,231 58 27,250
Debt repayments.............................................. (13,685) (5,719) (9,210)
Bank debt financing costs.................................... - - (403)
Purchase of treasury stock................................... - (438) -
Proceeds from the exercise of stock options and warrants..... 1,292 305 503
-------- -------- --------
Net cash provided by (used in)
financing activities......................................... 25,123 (5,794) 18,140
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents............................................. 23,808 (61) (10,669)
Cash and cash equivalents at beginning of period............... 600 661 11,330
-------- -------- --------
Cash and cash equivalents at end of period..................... $ 24,408 $ 600 $ 661
======== ======== ========
See notes to consolidated financial statements.
S-6
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. All significant intercompany balances and transactions have
been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires that management of the Company make a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities. Among
the more significant estimates included in the financial statements are the
estimated costs to complete contracts in process.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments having maturities of
three months or less at the date of acquisition to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories related to long-term contracts are recorded at cost less amounts
expensed under percentage-of- completion accounting.
Financial Instruments
The fair values of all financial instruments, other than long-term debt and
the convertible debentures (see Notes 7 and 8), approximate book values
because of the short maturity of these instruments.
Revenue and Cost Recognition on Contracts
Revenue is recognized based upon shipments or billings. The Company records
gross profit on its long-term contracts using percentage-of-completion
accounting under which costs are recognized on revenues in the same relation
that total estimated manufacturing costs bear to total contract value.
Estimated costs at completion are based upon engineering and production
estimates. Provisions for estimated losses or revisions in estimated profits
on contracts-in-process are recorded in the period in which such losses or
revisions are first determined.
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. 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, 1998, the cost in excess of fair value of net
assets of businesses acquired consists substantially of $8,398,000 related to
the 1989 acquisition of Comstron Corporation, a manufacturer of frequency
synthesizers, subsystems and components.
Long-Lived Assets
Effective July 1, 1996 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", which requires that
long-lived assets and certain identifiable intangibles to be held and used or
disposed of by an entity be reviewed for possible impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The adoption of SFAS No. 121 did not have any impact on
the Company's consolidated financial position or results of operations.
Income (Loss) Per Share
For the year ended June 30, 1998, the Company has adopted SFAS No. 128
"Earnings Per Share." In accordance with SFAS No. 128, earnings per common
share ("Basic EPS") is computed by dividing net income by weighted average
common shares outstanding. Earnings per common share assuming dilution
("Diluted EPS") is computed by dividing net income plus a pro forma addback
of debenture interest by weighted average common shares outstanding plus
potential dilution from the conversion of debentures and the exercise of
stock options and warrants. Income (loss) per share amounts for prior periods
have been restated to conform to the provisions of SFAS No. 128.
Accounting for Stock-Based Compensation
The Company records compensation expense for employee and director stock
options only if the current market price of the underlying stock exceeds the
exercise price on the date of the grant. Effective July 1, 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The Company
has elected not to implement the fair value based accounting method for
employee and director stock options, but instead has elected to disclose the
pro forma net earnings and pro forma earnings per share for employee and
director stock option grants made beginning in fiscal 1996 as if such method
had been used to account for stock-based compensation cost as described in
SFAS No. 123.
Income Taxes
In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company
measures deferred tax assets and liabilities based upon the differences
between the financial accounting and tax bases of assets and liabilities.
Reclassifications
Reclassifications have been made to the 1997 and 1996 consolidated financial
statements to conform to the 1998 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:
(In thousands)
--------------
Net tangible assets....................... $ 6,190
Identifiable intangible assets............ 8,453
In-process research and development....... 23,200
--------
$ 37,843
========
The identifiable intangible assets which include existing technology,
customer relationships and assembled work force are being amortized on a
straight-line basis over thirteen years based on the study described above.
The acquired in-process research and development was not considered to have
reached technological feasibility and, in accordance with generally accepted
accounting principles, the value of such was expensed in the third quarter of
fiscal 1996.
Summarized below are the unaudited pro forma results of operations of the
Company as if MIC had been acquired at the beginning of the fiscal period
presented.
Pro Forma Year Ended
June 30, 1996
-------------------------------------
(In thousands, except per share data)
Net sales........................ $ 90,097
Net loss......................... (19,392)
Loss per share
Basic.......................... $ (1.62)
Diluted........................ *
* Due to the loss, all options, warrants and convertible debentures are
anti-dilutive.
The pro forma financial information presented above for the MIC acquisition
is not necessarily indicative of either the results of operations that would
have occurred had the acquisition taken place at the beginning of the period
presented or of future operating results of the combined companies.
S-9
Lintek
In January 1995, the Company acquired substantially all of the net operating
assets of Lintek, Inc. ("Lintek") for $537,000 plus contingent consideration
based on the next five years' earnings to a maximum of an additional
$675,000. Additional consideration of $249,000, $162,000 and $63,000 was
earned as of December 31, 1997, 1996 and 1995 and paid in March 1998 and
February 1997 and 1996, respectively. Such amounts, and any further
contingent consideration earned, will be treated as cost in excess of fair
value of net assets acquired. Lintek designs, develops and manufactures
radar cross section and antenna pattern measurement systems for commercial
and military applications, as well as surface penetrating radars.
The 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. Acquisition of Assets From Lucent Technologies
Effective July 1, 1997, the Company's subsidiary, MIC, acquired certain
equipment, inventory, licenses for technology and patents of two of Lucent
Technologies' microelectronics components units - multi-chip modules and
film integrated circuits - for approximately $4,400,000 in cash. These units
manufacture microelectronic modules and interconnect products. The Company
has also signed a multi-year supply agreement to provide Lucent with film
integrated circuits for use in telecommunications applications. The purchase
price has been allocated to the assets acquired, based on their fair values,
and certain obligations assumed relating to the agreements.
4. Inventories
Inventories consist of the following:
June 30,
------------------------
1998 1997
---------- ----------
(In thousands)
Raw materials.................... $ 12,012 $ 11,191
Work-in-process.................. 12,737 6,642
Finished goods................... 5,102 2,486
-------- --------
$ 29,851 $ 20,319
======== ========
Inventories include contracts-in-process of $13,227,000 and $3,318,000 at
June 30, 1998 and 1997, respectively, which consist substantially of
unbilled material, labor and overhead costs that are or were expected to be
billed during the succeeding fiscal year.
5. Property, Plant and Equipment
Property, plant and equipment consists of the following:
June 30,
----------------------------
1998 1997
------------ --------------
(In thousands)
Land............................ $ 725 $ 725
Building and leasehold
improvements.................. 17,479 11,742
Machinery, equipment, tools
and dies...................... 29,285 19,583
Furniture and fixtures.......... 5,968 5,196
Assets recorded under
capital leases................ 2,334 2,392
Transportation equipment........ 115 85
--------- ---------
55,906 39,723
Less accumulated depreciation
and amortization.............. 28,912 25,236
--------- ---------
$ 26,994 $ 14,487
========= =========
S-10
Repairs and maintenance expense on property, plant and equipment was
$1,384,000, $1,131,000 and $481,000 for the years ended June 30, 1998, 1997
and 1996, respectively.
6.Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities include accrued salaries,
wages and other compensation of $4,311,000 and $2,874,000 at June 30, 1998
and 1997, respectively.
7.Long-Term Debt and Credit Arrangements Long-term debt consists of the
following:
June 30,
------------------------
1998 1997
---------- ---------
(In thousands)
Revolving credit and term
loan agreement (a).......... $ 4,720 $ 17,150
Equipment loans (b)........... 5,624 -
Capitalized lease
obligations (c)............. 1,019 1,536
Other......................... 118 249
-------- --------
11,481 18,935
Less current maturities....... 1,755 4,247
-------- --------
$ 9,726 $ 14,688
======== ========
Aggregate long-term debt as of June 30, 1998 matures in each fiscal year
as follows:
(In thousands)
1999............... $ 1,755
2000............... 938
2001............... 5,591
2002............... 941
2003............... 1,681
Thereafter......... 575
--------
$ 11,481
========
Interest paid was $2,099,000, $2,647,000 and $1,584,000 during the years
ended June 30, 1998, 1997 and 1996, respectively.
(a) As of March 31, 1998, the Company replaced a previous agreement with a
revised revolving credit agreement with two banks which is secured by
substantially all of the Company's assets. The agreement provides for a
revolving credit line of $27,000,000, which expires on March 31, 2001. The
interest rate on borrowings under this agreement is at various rates
depending upon certain financial ratios, with the present rate substantially
equivalent to the prime rate (8.5% at June 30, 1998). The Company has entered
into an interest rate swap agreement for the $4,720,000 then outstanding
under the revolving credit line at 7.6% in order to reduce the interest rate
risk associated with these outstanding borrowings. The Company paid a
facility fee of $20,000 and is required to pay a commitment fee of 1/4% per
annum of the average unused portion of the credit line.
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 certain materials for use in manufacturing,
the Company has a letter of credit facility of $2,000,000. At June 30, 1998,
the Company's available unused line of credit was approximately $20,000,000
after consideration of the letter of credit. The Company believes that the
carrying amount of this debt approximates fair value after considering the
interest rate swap agreement discussed above, since the interest rate is
effectively fixed at a rate commensurate with rates available to the Company
under similar terms.
S-11
(b) During the year ended June 30, 1998, the Company entered into equipment
loans with two banks totaling $6,232,000. The loans are repayable monthly
through July 2004 and bear interest at a floating rate 200 basis points above
the 30-day London Interbank Offered Rate (7.6 and 7.7% at June 30, 1998). The
Company believes that the carrying amount of this debt approximates fair
value since the interest rate is variable and the margins are consistent with
those available to the Company under similar terms.
(c) The Company has various capitalized lease obligations with financial
institutions which have various terms through 2000 and interest rates ranging
from 7.1% to 9.5%.
8.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 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 debentures were convertible into
the Company's common stock at a price of $5.625 per share. On September 8,
1997, the Company called for the redemption of all outstanding 7-1/2% Senior
Subordinated Convertible Debentures at 104.5% of the principal amount. All of
the principal amount of the Company's 7-1/2% Senior Subordinated Convertible
Debentures was converted. In connection with the conversions, $599,000 of
deferred bond issuance costs were charged to additional paid-in capital.
9. Stockholders' Equity
(a) Common Stock Offering
In March 1998, the Company sold 2,597,000 shares of its Common Stock in a
public offering for $31,285,000, net of an underwriting discount of
$1,973,000 and issuance costs of $496,000. Of these net proceeds, $9,639,000
was used to repay bank indebtedness. The balance of the net proceeds, which
is included in cash and cash equivalents, will be used for general corporate
purposes, including working capital, capital expenditures and facilities
expansion and may be used for potential acquisitions.
(b) Stock Option Plans
Under the Company's stock option plans, options may be granted to purchase
shares of the Company's common stock exercisable at prices equal to the fair
market value on the date of grant. During 1990, the Company's shareholders
approved the Non-Qualified Stock Option Plan (the "NQSOP"). In December 1993,
the Board of Directors adopted the Outside Director Stock Option Plan (the
"Directors' Plan") which provides for options to non-employee directors,
which become exercisable in three installments and expire ten years from the
date of grant. The Directors' Plan, as amended, covers 500,000 shares of the
Company's Common Stock. In November 1994, the shareholders approved this plan
and the 1994 Non-Qualified Stock Option Plan (the "1994 Plan"). In November
1996, the shareholders approved the 1996 Stock Option Plan (the "1996 Plan").
In April 1998, the Board of Directors adopted the 1998 Stock Option Plan (the
"1998 Plan"). The NQSOP, the 1994 Plan, the 1996 Plan and the 1998 Plan
provide for options which become exercisable in one or more installments and
each covers 1,500,000 shares of the Company's Common Stock. Options under the
NQSOP and the 1994 Plan expire five years from the date of grant. Options
under the 1996 Plan and the 1998 Plan shall expire not later than ten years
from the date of grant.
The Company has also issued to employees, who are not executive officers,
options to purchase 275,000 shares of common stock exercisable at $4.00 per
share. Such grants were not covered by one of the above plans.
S-12
Additional information with respect to the Company's stock options is as
follows:
Weighted Shares
Average Under
Exercise Outstanding
Prices Options
---------- -------------
(In thousands)
Balance, July 1,
1995......... $3.11 2,592
Granted....... 3.93 960
Forfeited..... 2.98 (68)
Exercised..... 2.77 (191)
------
Balance, June 30,
1996......... 3.38 3,293
Granted....... 4.47 668
Forfeited..... 3.17 (71)
Exercised..... 2.04 (570)
------
Balance, June 30,
1997......... 3.83 3,320
Granted....... 9.94 1,043
Forfeited..... 3.65 (35)
Exercised..... 3.17 (436)
------
Balance, June 30,
1998......... $ 5.54 3,892
======
Options to purchase 2,317,000, 2,168,000 and 2,092,000 shares were
exercisable at weighted average exercise prices of $3.90, $3.61 and $3.06 as
of June 30, 1998, 1997 and 1996, respectively.
The options outstanding as of June 30, 1998 are summarized in ranges as
follows:
Options Outstanding
----------------------------------------------
Weighted Weighted
Range of Average Average
Exercise Exercise Options Remaining
Prices Price Outstanding Life
------------ -------- ----------- ---------
(In thousands)
$2.00-$ 3.50 $2.85 305 0.3 years
$3.75-$ 5.38 4.07 2,552 4.0
$8.19-$13.44 9.98 1,035 9.4
-----
3,892
=====
Options Exercisable
------------------------------------------
Weighted
Range of Average
Exercise Exercise Options
Prices Price Exercisable
--------- --------- -----------
(In thousands)
$2.00-$ 3.50 $2.85 305
$3.75-$ 5.38 3.99 1,992
$8.19-$13.44 10.81 20
-----
2,317
=====
S-13
The per share weighted average fair value of stock options granted during
fiscal 1998, 1997 and 1996 was $7.39, $2.37 and $1.31, respectively, on the
date of grant using the Black Scholes option-pricing model with the following
weighted average assumptions: 1998 - expected dividend yield of 0%, risk free
interest rate of 5.8%, expected stock volatility of 80%, and an expected
option life of 7.4 years; 1997 - expected dividend yield of 0%, risk free
interest rate of 6.3%, expected stock volatility of 40%, and an expected
option life of 7.4 years; 1996 - expected dividend yield of 0%, risk free
interest rate of 5.4%, expected stock volatility of 30%, and an expected
option life of 4.3 years.
(c) Accounting for Stock-Based Compensation.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which the Company adopted in
fiscal 1997. The Company has chosen not to implement the fair value based
accounting method for employee and director stock options, but has elected to
disclose the pro forma net income and earnings per share as if such method
had been used to account for stock-based compensation cost as described in
SFAS No. 123. The pro forma compensation cost before income taxes, based on
the fair value at the grant date for options granted only in fiscal years
1998, 1997 and 1996 was $2,021,000, $783,000 and $429,000 for the years ended
June 30, 1998, 1997 and 1996, respectively. The Company's net income (loss)
and net income (loss) per share using this pro forma compensation cost would
have been:
Years Ended
-------------------------------------
(In thousands, except per share data)
June 30, 1996
--------------------------
As Reported Pro Forma
----------- ---------
Net Loss............... $(17,420) $(17,772)
Net Loss Per Share
- Basic............ $ (1.46) $(1.48)
- Diluted.......... * *
June 30, 1997
--------------------------
As Reported Pro Forma
----------- ---------
Net Income............. $ 4,420 $ 3,919
Net Income Per Share
-Basic............. $ 0.36 $ 0.31
-Diluted........... 0.34 0.30
June 30, 1998
--------------------------
As Reported Pro Forma
----------- ----------
Net Income............. $ 8,406 $ 7,112
Net Income Per Share
-Basic............. $ 0.57 $ 0.48
-Diluted........... $ 0.51 $ 0.44
* As a result of the loss, all options, warrants and convertible
debentures are anti-dilutive.
Since the pro forma compensation cost reflects only options granted in fiscal
years 1998, 1997 and 1996, the full impact of calculating stock-based
compensation costs under SFAS No. 123 is not reflected in the pro forma net
income (loss) because compensation cost is recognized over the respective
vesting period and compensation cost for options granted prior to fiscal year
1996 was not reflected.
S-14
(d) Shareholders' Rights Plan
In August 1988, the Company's Board of Directors approved a Shareholders'
Rights Plan which provided for rights which would have become exercisable
only in the event a person or group accumulated 20 percent or more of the
Company's common shares. The rights expired on August 30, 1998 and a new
Shareholders' Rights Plan was approved. See Note 15 for a discussion of this
new plan.
(e) Earnings Per Share
A reconciliation of the numerators and denominators of the Basic EPS and
Diluted EPS calculations is as follows:
Years Ended June 30,
--------------------------------
1998 1997 1996
---- ---- ----
(In thousands, except per share data)
Computation of Adjusted Net Income (Loss):
Net income (loss) for basic earnings per
common share............................. $ 8,406 $ 4,420 $(17,420)
=========
Add: Debenture interest and amortization
expense, net of income taxes............. 103 504 *
-------- --------
Adjusted net income for diluted
earnings per common share................ $ 8,509 $ 4,924 *
======== ========
Computation of Adjusted Weighted Average
Shares Outstanding:
Weighted average shares outstanding........ 14,802 12,446 11,971
=======
Add: Shares assumed to be issued upon
conversion of debentures................. 392 400 *
Add: Effect of dilutive options and
warrants outstanding..................... 1,333 1,774 *
-------- -------
Weighted average shares and common share
equivalents used for computation of
diluted earnings per common share........ 16,527 14,620 *
======== ========
Net Income (Loss) Per Common Share:
Basic.................................... $.57 $ .36 $(1.46)
======== ======== =======
Diluted.................................. $.51 $ .34 *
======== ========
-----------
* As a result of the loss in fiscal 1996, all options, warrants and convertible
debentures are anti-dilutive.
Options to purchase 290,000 shares at an exercise price of $13.44 per share
were outstanding as of June 30, 1998 but were not included in the computation
of Diluted EPS because the exercise prices of these options were greater than
the average market price of the common shares.
S-15
10. Income Taxes
The provision (benefit) for income taxes consists of the following:
Years Ended June 30,
----------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Current:
Federal............... $ 3,178 $ 1,752 $ 1,166
State and local....... 568 693 569
------- ------- -------
3,746 2,445 1,735
------- ------- -------
Deferred:
Federal............... 932 404 (776)
State and local....... 72 (414) 201
U.S. Territory........ - - 114
------- ------- -------
1,004 (10) (461)
------- ------- -------
$ 4,750 $ 2,435 $ 1,274
======= ======= =======
The provision for income taxes varies from the amount computed by applying
the U.S. Federal income tax rate to income (loss) before income taxes as a
result of the following:
Years Ended June 30,
----------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Tax at statutory rate... $ 4,505 $ 2,331 $(5,490)
Non-deductible special
charge (Note 2)........ - - 7,888
Utilization of net
operating loss
carryforwards.......... - - (1,437)
State, local and U.S.
Territory income tax... 416 184 376
Research and Development
credit................. (250) - -
Other, net.............. 79 (80) (63)
--------- -------- --------
$ 4,750 $ 2,435 $ 1,274
========= ======== ========
S-16
Deferred tax assets and liabilities consist of:
June 30,
---------------------------
1998 1997
---- ----
(In thousands)
Accounts receivable....................... $ 106 $ 148
Inventories............................... 1,671 1,676
Accrued expenses.......................... 84 219
-------- --------
Current assets.......................... 1,861 2,043
-------- --------
Other long-term liabilities............... 781 -
Capital loss carryforwards................ 2,493 2,684
Tax loss carryforwards.................... 238 1,737
Tax credit carryforwards.................. 3,737 3,477
Less valuation allowance.................. (3,379) (3,569)
-------- --------
Non-current assets...................... 3,870 4,329
-------- --------
Property, plant and equipment............. (1,848) (955)
Intangibles............................... (3,125) (3,654)
Other..................................... (53) (54)
-------- --------
Long-term liabilities................... (5,026) (4,663)
-------- --------
Net non-current liabilities............. (1,156) (334)
-------- --------
Total................................. $ 705 $ 1,709
======== ========
In accordance with SFAS No. 109, the Company records a valuation allowance
against deferred tax assets if it is more likely than not that some or all of
the deferred tax asset will not be realized.
The Company is undergoing routine audits by various taxing authorities of its
state and local income tax returns covering periods from 1994 to 1996.
Management believes that the probable outcome of these various audits should
not materially affect the consolidated financial statements of the Company.
The Company made income tax payments of $2,123,000, $1,468,000 and $588,000
and received refunds of $26,000, $1,117,000 and $268,000 during the years
ended June 30, 1998, 1997 and 1996, respectively.
A tax benefit of $1,641,000 was credited to additional paid-in capital during
the year ended June 30, 1998 in connection with the exercise of stock options
and warrants.
11. Employment Contracts
In February 1997, the Company entered into employment agreements, as amended,
with certain of its officers for periods through December 31, 2002 with
annual remuneration ranging from $180,000 to $289,000, plus cost of living
adjustments and, in some cases, additional compensation based upon earnings
of the Company. Future aggregate minimum payments under these contracts are
$1,007,000 per year. In addition, these officers have the option to terminate
their employment agreements upon change in 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.
S-17
12. Employee Benefit Plans
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 1998, 1997 and 1996 calendar years, the Board
of Directors has elected to provide an employer contribution, which vests
immediately, equal to 30% of employee contributions subject to certain
limitations. The ARX 401(k) expense for the fiscal years ended June 30, 1998,
1997 and 1996 was $298,000, $263,000 and $230,000, 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 $512,000, $450,000 and $104,000 for the fiscal
years ended June 30, 1998 and 1997 and for the period from acquisition to
June 30, 1996, respectively.
Effective January 1, 1994, the Company established a Supplemental Executive
Retirement Plan (the "SERP") which provides retirement, death and disability
benefits to certain of its officers. The SERP expense for the fiscal years
ended June 30, 1998, 1997 and 1996 was $324,000, $300,000 and $217,000,
respectively. The assets of the SERP are held in a Rabbi Trust and amounted
to $744,000 and $386,000 at June 30, 1998 and 1997, respectively. The
accumulated benefit obligation was $1,695,000 and $1,259,000 at June 30, 1998
and 1997, respectively. No participants are currently receiving benefits.
13. Commitments and Contingencies
a. Operating Leases
Several of the Company's operating facilities and certain machinery and
equipment are leased under agreements expiring through 2005. The leases for
machinery and equipment generally contain options to purchase at the then
fair market value of the related leased assets.
Future minimum payments under operating leases as of June 30, 1998 are as
follows for the fiscal years:
(In thousands)
--------------
1999............... $ 1,404
2000............... 1,118
2001............... 1,046
2002............... 808
2003............... 760
Thereafter......... 402
-------
$ 5,538
=======
These future minimum payments exclude payments under a lease of the Company's
Pearl River, New York facility which was terminated upon the Company's
purchase of the facility in July 1998 as further described in Note 15.
Rental expense was $1,869,000, $1,560,000 and $790,000 during the fiscal
years 1998, 1997 and 1996, respectively.
S-18
b. Legal Matters
A subsidiary of the Company whose operations were discontinued in 1991, is
one of several defendants named in a personal injury action initiated in
August, 1994, by a group of plaintiffs. The plaintiffs are seeking damages
which cumulatively 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.
14. Business Segments
The Company's business segments and major products included in each segment,
are as follows:
Microelectronics: Isolator Products:
a)Microelectronic Modules a)Commercial spring and rubber isolators (VMC)
(Circuit Technology) b)Industrial spring and rubber isolators
b)Thin Film Interconnects (Korfund)
(MIC Technology) c)Military wire-rope isolators
(Aeroflex International)
Test, Measurement and
Other Electronics:
a)Instrument products
(Comstron and Lintek)
b)Motion Control Systems
- Scanning devices
- Stabilization and tracking
devices
- Magnetic devices
S-19
The Company is a manufacturer of advanced technology systems and components
for commercial industry, government and defense contractors. Approximately
42%, 50% and 65% of the Company's sales for the fiscal years 1998, 1997 and
1996, respectively, were to agencies of the United States government or to
prime defense contractors or subcontractors of the United States government.
The only customers which constituted more than 10% of the Company's sales
during any year in the period presented were Lucent Technologies which
comprised 15.5% of sales in fiscal year 1998 and Lockheed Martin and Hughes
which comprised 13.3% and 11.7% of sales in fiscal year 1997, respectively.
Years Ended June 30,
----------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Business Segment Data:
Net sales:
Microelectronics....................... $ 74,263 $ 48,462 $ 28,414
Test, Measurement and
Other Electronics.................... 25,685 28,144 30,109
Isolator Products...................... 18,913 17,693 15,844
--------- --------- ---------
Net sales............................ $ 118,861 $ 94,299 $ 74,367
========= ========= =========
Operating income (loss):
Microelectronics....................... $ 14,147 $ 6,644 $ 3,282
Test, Measurement and
Other Electronics.................... 996 2,762 4,830
Isolator Products...................... 3,063 2,844 2,150
General corporate expenses............. (3,348) (2,514) (2,344)
--------- --------- ---------
14,858 9,736 7,918
Special charge (1)..................... - - (23,200)
Interest expense....................... (2,011) (2,974) (1,939)
Other income, net...................... 309 93 1,075
--------- --------- ---------
Income (loss) before income taxes.... $ 13,156 $ 6,855 $(16,146)
========= ========= =========
Identifiable assets:
Microelectronics....................... $ 58,053 $ 37,741 $ 35,445
Test, Measurement and
Other Electronics.................... 27,522 28,603 31,354
Isolator Products...................... 10,163 9,700 9,752
Corporate.............................. 28,363 5,003 4,618
--------- --------- ---------
Total assets......................... $ 124,101 $ 81,047 $ 81,169
========= ========= =========
Capital expenditures:
Microelectronics....................... $ 8,792 $ 1,637 $ 766
Test, Measurement and
Other Electronics.................... 848 996 597
Isolator Products...................... 970 293 315
Corporate.............................. 3 5 9
--------- --------- ---------
Total capital expenditures........... $ 10,613 $ 2,931 $ 1,687
========= ========= =========
Depreciation and amortization
expense:
Microelectronics....................... $ 2,802 $ 2,230 $ 996
Test, Measurement and
Other Electronics.................... 1,553 1,528 1,530
Isolator Products...................... 500 532 535
Corporate.............................. 29 32 30
--------- --------- ---------
Total depreciation and
amortization........................ $ 4,884 $ 4,322 $ 3,091
========= ========= =========
(1) The special charge for the write-off of in-process research and development
acquired in the purchase of MIC Technology is allocable fully to the
microelectronics segment.
S-20
15. Subsequent Events
a. Purchase of MIC's Pearl River Facility
In July 1998, the Company purchased a previously leased operating facility in
Pearl River, New York for $2,500,000 in cash.
b. Shareholders' Rights Plan
On August 13, 1998, the Company's Board of Directors approved a Shareholders'
Rights Plan which provides for a dividend distribution of one right for each
share to holders of record of the Company's common stock on August 31, 1998 and
the issuance of one right for each share of common stock that shall be
subsequently issued. The rights will become exercisable only in the event a
person or group ("Acquiring Person") accumulates 15% or more of the Company's
common stock, or if an Acquiring Person announces an offer which would result
in it owning 15% or more of the common stock. The rights will expire on August
31, 2008. Each right will entitle the holder to buy one one-thousandth of a
share of Series A Junior Participating Preferred Stock, as amended, of the
Company at a price of $65. In addition, upon the occurrence of a merger or
other business combination, or the acquisition by an Acquiring Person of 50% or
more of the common stock, holders of the rights, other than the Acquiring
Person, will be entitled to purchase either common stock of the Company or
common stock of the Acquiring Person at half their respective market value.
The Company will be entitled to redeem the rights for $.01 per right at any
time prior to a person becoming an Acquiring Person.
S-21
Quarterly Financial Data (Unaudited):
(In thousands except per share data)
Quarter
------------------------------------------ Year Ended
1998 First Second Third Fourth June 30
---- --------------------------------------------------------
Net Sales $ 23,885 $ 29,325 $ 31,221 $ 34,430 $118,861
Gross Profit 8,212 9,919 10,883 12,561 41,575
Net Income $ 1,152 $ 1,686 $ 2,057 $ 3,511 $ 8,406
======== ======== ======== ======== ========
Income Per Share:
Basic $ .09 $ .12 $ .14 $ .20 $ .57
====== ====== ====== ====== ======
Diluted $ .08 $ .11 $ .13 $ .19 $ .51
====== ====== ====== ====== ======
Quarter
------------------------------------------ Year Ended
1998 First Second Third Fourth June 30
---- ----------------------------------------------------
Net Sales $ 19,061 $ 22,914 $ 22,937 $ 29,387 $ 94,299
Gross Profit 6,278 7,257 7,759 9,896 31,190
Net Income $ 651 $ 893 $ 917 $ 1,959 $ 4,420
-------- -------- -------- -------- --------
Income Per Share:
Basic $ .05 $ .07 $ .07 $ .16 $ .36
======== ======== ======== ======== ========
Diluted $ .05 $ .07 $ .07 $ .15 $ .34
======== ======== ======== ======== ========
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-22
AEROFLEX INCORPORATED
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Column A Column B Column C Column D Column E
Additions
----------------------
Charged
Balance at Charged to to other Balance at
beginning costs and accounts Deductions end of
Description of period expenses - describe - describe period
- ----------- ----------- ----------- -------- ----------- ----------
YEAR ENDED JUNE 30, 1998:
Allowance for doubtful
accounts $ 417 $ 15 $ - $ 115 (A) $ 317
====== ====== ====== ====== ======
Reserve for inventory
obsolescence $4,055 $ 150 $ - $ 613 (B) $3,592
====== ====== ====== ====== ======
YEAR ENDED JUNE 30, 1997:
Allowance for doubtful
accounts $ 354 $ 72 $ - $ 9 (A) $ 417
====== ====== ====== ====== ======
Reserve for inventory
obsolescence $4,260 $ 100 $ - $ 305 (B) $4,055
====== ====== ====== ====== ======
YEAR ENDED JUNE 30, 1996:
Allowance for doubtful
accounts $ 437 $ (55) $ - $ 28 (A) $ 354
====== ====== ====== ====== ======
Reserve for inventory
obsolescence $4,380 $ 497 $ - $ 617 (B $4,260
====== ====== ====== ====== ======
Note: (A) - Net write-offs of uncollectible amounts.
(B) - Write-off of inventory.
S-23
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Aeroflex Incorporated:
We consent to incorporation by reference in the registration statements
(Nos. 33-75496, 33-88868, 33-88878, 333-42399 and 333-42405) on Form S-8 and
(Nos. 333-15339, 333-21803 and 333-46689) on Form S-3 of Aeroflex Incorporated
of our report dated August 13,1998, relating to the consolidated balance sheets
of Aeroflex Incorporated and subsidaries as of June 30, 1998 and 1997 and the
related consolidated statements of operations, stockholders' equity and cash
flows and related schedule for each of the years in the three-year period ended
June 30, 1998 which report appears in the June 30, 1998 annual report on Form
10-K of Aeroflex Incorporated.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Jericho, New York
September 25, 1998