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, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File No. 1-8037
Aeroflex Incorporated
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(Exact name of registrant as specified in its charter)
Delaware 11-1974412
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
35 South Service Road, Plainview, New York 11803
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 694-6700
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Class Which Registered
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Common Stock, $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. (The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing).
As of September 9, 1999 approximately $301,892,000.
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 9, 1999 - 18,582,387 (excluding 43,345 shares held in treasury).
Documents incorporated by reference: Part III - Registrant's definitive proxy
statement to be filed pursuant to Regulation 14A of the Securities Act of 1934.
<PAGE>
ITEM ONE - BUSINESS
Overview
We produce state-of-the-art microelectronic module, integrated circuit,
interconnect and testing solutions using our advanced design, engineering and
manufacturing abilities. Our products are used in the following markets:
. satellite
. wireless and wireline communications
. cable television
. defense communications
As a result of our purchase of MIC Technology in 1996 and the interconnect
assets of Lucent Technologies Inc. in 1997, we believe we are the largest
merchant supplier of thin film interconnect products. We also design and
manufacture motion control systems, and shock and vibration isolation systems
used for commercial, industrial and defense applications. Our major customers
include Lucent Technologies, Motorola, Inc., Hughes Space and Communications
Corporation, Lockheed Martin Corporation, Raytheon Company and Northrop Grumman
Corporation.
Our operations are grouped into three segments:
. Microelectronics
. Test, Measurement and Other Electronics
. Isolator Products
These segments, their products and the markets they serve are described below.
Microelectronics
Silicon Integrated Circuits
In February 1999, we acquired UTMC Microelectronic Systems, Inc. which designs,
develops, manufactures and sells semicustom, military standard and
radiation-tolerant integrated circuits to aerospace and defense markets.
UTMC Microelectronic Systems is a fab-independent supplier. This means that,
through UTMC, we design and develop the integrated circuit and have third-party
foundries fabricate the silicon wafers using their processes and our
enhancements, which are proprietary. We then test the chip and complete the
final assembly prior to shipment to our customers. Our traditional customers now
benefit from the increased technology and manufacturing capabilities offered by
UTMC's multiple foundry partners.
<PAGE>
STANDARD PRODUCTS
We supply a broad range of standard products for avionics and space applications
including microcontrollers, logic, programmable logic, memory and serial
communication interfaces for MIL-STD-1553 and 1773. Many devices are available
to a Standard Microcircuit Drawing procurement, which greatly simplifies the
procurement and allows UTMC to deliver product off- the-shelf, eliminating the
costly paperwork of source control drawings.
UTMC is a world leader in supplying radiation-tolerant integrated circuits for
space applications. UTMC supplies a complete line of standard products such as:
. databus
. transceivers
. memories
. microcontrollers
. logic
. board products
UTMC's new Embedded Controller Card provides the satellite system integrator
with a commercial-off-the-shelf solution that is radiation-tolerant for space
and offers highly reliable subsystem interface and control functionality.
Targeted for spaceborne applications, UTMC's new LVDS (Low Voltage Differential
Signal) transmitter and receiver products will address an increasing demand to
move data quickly between points within a satellite. Moving large quantities of
data requires an extremely high performance solution that consumes low power,
generates little electrical noise and is relatively immune to such noise. LVDS
products from UTMC will provide high performance, low power, low noise and low
cost solutions to interface problems commonly found in satellite launch vehicle
applications. Also new, the UT82CRH51A USART is designed to provide data
communication between subsystems. UTMC recently announced two low-cost 4Mbit
SRAMs which are ideal for space applications.
Satellites such as the Cassini, Clementine, EOS, GPS, Hubble, Iridium,
Globalstar, Mars Observer, NEAR, Polar Observer, Pathfinder and Space Station
all use UTMC radiation- hardened standard product.
SEMICUSTOM PRODUCTS
UTMC now offers several technologies to meet a variety of ASIC needs. UTMC's
newest ASIC family, the UT0.18 CRH, is built in a commercial fab using UTMC
RadHard techniques with total dose hardness up to 300Krads. The UT0.18 CRH ASIC
Family offers up to 5,000,000 usable gates using gate array or standard cell.
The UT0.18 CRH ASIC Family is available in multiple product assurance levels
including QML Q and V, military, industrial and customer specific. The UT0.6 CRH
Gate Array Family is built in a commercial fab using advanced Commercial RadHard
CMOS technology with usable gates up to 600,000 and 300Krad total dose hardness.
For non-radiation environments, UTMC offers the UT0.18 and UT0.6 Gate Array
Family that is available in multiple product assurance levels including QML,
military, industrial and customer specific.
UTMC ASICs are used in various space applications such as the Cassini,
Pathfinder, GPS and International Space Station.
<PAGE>
Telecommunication Products
UTMC has developed a Content Addressable Memory (CAM) Engine, the UTCAM-Engine ,
which is beneficial for network and internet address processing, image
processing, pattern recognition, artificial intelligence learning systems and
database applications. The UTCAM- Engine is based on 0.35 m technology, runs at
100 MHz and delivers association matches in as little as 70ns when using fast
SRAM.
CIRCUIT CARD ASSEMBLY (CCA) CAPABILITY
The UTMC Circuit Card Assembly capability consists of full assembly, test and
coat in a high mix/low to medium volume operation. UTMC's processes and test
capabilities provide for state- of-the-art manufacturing. UTMC's SpaceCard
combines best commercial practices of the circuit card assembly with UTMC's
radiation-hardened integrated circuits to provide CCA solutions for the
commercial space industry. UTMC's CCA operation also assembles the UT131
Embedded Controller Card, a UTMC Standard Product Card. The UT131 ECC is ideal
for space applications.
<PAGE>
<TABLE>
<CAPTION>
Products Applications
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<S> <C>
Standard Products Commercial and Military Satellites
MIL-STD-1553 Transceivers Avionics
MIL-STD-1553 Protocol Devices Missiles
MIL-STD-1773 Transceivers
MIL-STD-1773 Protocol Devices
Memory Modules
Microcontrollers
Logic Devices
Board Products (Circuit Card
Assembly)
Semi-custom Products Satellites
Application Specific Integrated Avionics
Circuits
- Radiation tolerance up to
300 kilorads
- Up to 5 million gates
Telecommunications Products Networks
Content Addressable Memory Internet Infrastructure
</TABLE>
Thin Film Circuits and Interconnects
We design, develop, manufacture and sell passive thin film circuits and
interconnects. Our advanced microcircuit and interconnect technology is a key
technology for electronic products which are
. small
. high frequency and
. high performance
These products are used in rapidly growing markets such as cellular/PCS and
microwave data links. It continues to be an essential technology in
. fiber optic communications interconnect
. CATV amplifiers
. satellite based communication hardware
. leading edge military electronic products
<PAGE>
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 radio frequency, or RF, microwave
domains, thin film allows the production of hybrid integrated circuits with
lumped elements at lower cost than full silicon or gallium arsenide, or GaAs,
integration while retaining outstanding performance.
<TABLE>
<CAPTION>
PRODUCTS APPLICATIONS
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<S> <C>
Simple Interconnect Avionics
CATV circuitry
Mobile radio power amplifiers
Optical data transceivers
Satellite communications systems
Telephone switching systems
Advanced Interconnect Fiber optic products
Hybrid microelectronics modules
Missile systems
Radar T/R modules
Wireless handsets
High Density Digital High speed processor modules
Interconnect
instruments
Test equipment modules
Mixed-Signal Interconnect Missile systems
Radar T/R systems
Satellite avionics
</TABLE>
In its most basic form, simple interconnect incorporates (1) conductors, (2)
resistors, (3) plated vias and (4) selective high conductivity traces. This
results in high-volume, low-cost, DC, RF and microwave products. Advanced
interconnect incorporates all passive elements in solid-state form. Advanced
interconnect incorporates (1) microstrip conductors, (2) resistors, (3)
inductors, (4) capacitors, (5) air-bridges and (6) filled thermal vias on a
single substrate. High-density digital interconnect substrates offer single or
double-sided, controlled impedance signal routing to address digital circuit
requirements. These substrates also offer integrated resistors and solid thermal
vias, if required, for improved performance. We have incorporated features of
advanced interconnect and high-density digital interconnect in a single design
and created PIMIC-Mixed Signal Interconnect to address the expanding use of
mixed technologies. Our unique PIMIC process allows analog and digital
capabilities to be integrated for use in leading-edge miniaturized military,
satellite and commercial electronics.
<PAGE>
Microelectronic Modules
Multichip Modules, or MCMs, are a further advancement of hybrid microcircuit
technology. MCMs perform functions similar to hybrids, except MCMs emphasize
miniaturizing and synthesizing digital functions such as microprocessor systems
and mass memories.
<TABLE>
<CAPTION>
PRODUCTS APPLICATIONS
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<S> <C>
Satellite Commercial and
Power Hybrids military satellites
Multiplexers
Quad Drivers
Multichip Modules Military avionics
RISC Microprocessor Family Military computer
Flash and SRAM Missile systems
Memory Modules
Data-bus Boeing 777
ARINC 629 Military avionics
MIL-STD-1553 Transceivers Missiles
MIL-STD-1553 Protocol Devices VME boards
Application Specific Modules Military avionics
Video Encoders
Quadrant Receivers
64 Channel Multiplexers
</TABLE>
Test, Measurement and Other Electronics
Instrumentation
Our instrumentation division includes frequency synthesizers and high speed
automatic test systems. Our synthesizers operate in a broad frequency range of
10MHz to 40GHz with excellent spectral purity. We manufacture fast switching
frequency synthesizers, signal generators and components using our leading radio
frequency and microwave technology. We supply the fast switching frequency
synthesizers, spread spectrum modulators and arbitrary waveform generators for
CASS. CASS is the United States Navy's next generation automated test equipment.
Our synthesizers also significantly improve the performance and reliability of
existing radars. They also improve the performance of threat simulators, as well
as radar cross section and antenna measurement systems. The newly developed
FS-1000 synthesizer is used in Automatic Test Systems (ATE) by leading ATE
manufacturers to allow for high-speed verification and testing of wireless and
network communications mixed signal integrated circuits.
We are 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. In addition to the radar system hardware, we have developed
various analytical processing and display algorithms to help interpret the radar
data. Using expertise gained in high-speed data acquisition and display
techniques used in instrumentation radar products, we produce antenna
measurement systems used in the design, manufacturing and testing of all types
of antennas.
<PAGE>
Our Satellite Test Instrumentation system the STI-1000 is used for verification
and testing of satellite payload electronics. This instrumentation allows for
fast, precise data collection, presentation and storage.
We also product test equipment for measuring and evaluating the quality of
communication signals. Our instruments measure phase noise, timing jitter and
other noise and distortion induced parameters for almost the entire
communications spectrum.
In September 1998, we acquired Europtest, a European company that designs,
develops, manufactures and sells test equipment primarily for phase noise and
related measurements. Phase noise is a corrupting fluctuation inherent in all
signals and is often a limiting factor in the quality of communication signals.
The ability to measure and control phase noise is an essential means to enhance
capacity and quality of communications systems.
We produce test equipment for measuring and evaluating the quality of
communication signals. Our instruments measure phase noise, timing jitter and
other noise and distortion induced parameters for almost the entire
communications spectrum.
Motion Control Systems
Motion control systems includes three divisions: stabilization and tracking
devices, magnetic motors and scanning devices. We design, develop and produce
stabilization tracking devices and systems. These products 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. Magnetic motors are utilized in our stabilization and tracking systems
and in other applications where precise movement is required, such as for
positioning antennae, optical systems, mechanical vanes and valves. We make
electro-optical scanning devices that are low cost, lightweight thermal imaging
devices that detect targets based on thermal radiation contrasts with the
background. These sights are intended for use on standard issue United States
Army assault rifles and crew served weapons.
Isolator Products
We design, develop, manufacture and sell shock and vibration isolation systems.
Some of these devices are helically-wound steel wire rope contained between
rugged metal retainer bars, which are primarily used in defense applications.
They are also 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 their equipment. There are multiple
markets for isolation systems including commercial, industrial and defense.
Customers
We have hundreds of customers in the communications, satellite,
aerospace/defense, transportation and construction industries. Except for
Lockheed Martin (12.2%) and Lucent Technologies (11.4%) in fiscal 1999, 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 our net
sales. We are currently a party to three key strategic agreements:
<PAGE>
. 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 increased our manufacturing capacity to produce film
integrated circuits and MCMs.
. In February 1997, we entered into an outsourcing agreement with the RF
Semiconductor Division of Motorola under which we 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 was renewed in February 1999 and is
subject to annual renewal options.
. In July 1996, we 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.
Marketing and Distribution
We use a team-based sales approach to assist our personnel to closely manage
relationships at multiple levels of the customer's organization, including
management, engineering and purchasing personnel. Our integrated sales approach
involves a team consisting of a senior executive, a business development
specialist and members of our engineering department. Our use of experienced
engineering personnel as part of the sales effort enables close technical
collaboration with our customers during the design and qualification phase of
new communications equipment. We believe that this is critical to the
integration of our product into our customers' equipment. Our executive officers
are also involved in all aspects of our relationships with our major customers
and work closely with their senior management. We also use manufacturers'
representatives and independent sales representatives as needed.
Research and Development
Our research and development efforts primarily involve:
. engineering and design relating to developing new products
. improving existing products
. adapting such products to new applications
. developing prototype components to bid on specific programs
Several of our officers and almost all of our engineers have been involved in
research and development at various times and to varying degrees. 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 our self-funded research activities were approximately
$9.6 million for fiscal 1999, $5.2 million for fiscal 1998 and $3.3 million for
fiscal 1997. The increases are primarily attributable to our development of a
low-cost, high speed, high performance frequency synthesizer intended for
commercial communication test systems and for fiscal 1999, the addition of the
expenses of UTMC Microelectronic Systems. Also in connection with our
acquisition of UTMC Microelectronic Systems in February 1999, we allocated $3.5
<PAGE>
million of the purchase price to incomplete research and development projects.
Since the research and development projects had not reached technological
feasibility, $3.5 million was charged to expense in fiscal 1999 in addition to
the $9.6 million, in accordance with generally accepted accounting principles.
We are currently focusing our research and development on:
. developing a 4 million bit Static Random Access Memory (SRAM) chip that
will operate in radiation environments in space for use in satellite
communication systems such as GPS, Astrolink, Teledesic and Ellipso.
. developing capabilities for customers to design custom chips of up to 5
million logic gates for use in satellite communication systems such as GPS,
Astrolink, Teledesic and Ellipso.
. developing a proprietary crosspoint switch for broadband satellite
communications networks. Our activity will focus on enhancements to the
prototype architecture developed in late fiscal 1999, specifically
developing a scaled-up version. MIC's MESFET-based switch is designed to
provide broadband, high speed, high isolation switching with extremely low
power consumption, scalability and meeting the environmental requirements
of space deployment.
. developing passive array component technology including R/L/C networks and
filters with our proprietary integrated passive technology. Preliminary
networks are scheduled to be demonstrated by the beginning of calendar 2000
using a newly enhanced process. Development of in-house ball grid array
(BGA) technology will continue with goals of lower cost and higher
manufacturing throughput.
Backlog
We include in backlog firm purchase orders or contracts providing for delivery
of products and services. At June 30, 1999, our order backlog was approximately
$93.8 million, approximately 85% of which was scheduled to be delivered on or
before June 30, 2000. Approximately 58% of this backlog represents commercial
contracts and approximately 42% of this backlog represents defense contracts.
Generally, government contracts are cancelable with payment to us of amounts
which we have spent under the contract together with a reasonable profit, if
any, while commercial contracts are not cancelable.
At June 30, 1998, our backlog of orders was approximately $80.1 million.
Approximately 85% was scheduled to be delivered before June 30, 1999.
Approximately 42% of this backlog represented orders for military or national
defense purposes.
Competition
In all phases of our operations, we compete in both performance and price with
companies, some of which are considerably larger, more diversified and have
greater financial resources and sales than we do. In the manufacture of
microelectronics, we believe our primary competitors are NTK, Texas Instruments
and ILC/Data Devices Corp. In the manufacture of instrument products, we believe
our primary competitors are Hewlett Packard and Scientific Atlanta. In the
manufacture of motion control products, we believe our primary competitors are
MPC Products Corp. and Schaeffer Magnetics Inc. In the manufacture of isolators,
we believe our primary competitors are Barry Controls, Inc., Lord Kinematics and
Mason Industries. We also experience significant competition from the in-house
capabilities of our current and potential customers. We believe that in all of
our operations we compete favorably in the principal competitive areas of:
<PAGE>
. technology
. performance
. reliability
. quality
. customer service
. price
We believe that to remain competitive in the future, we will need to invest
significant financial resources in research and development.
To the extent that we are engaged in government contracts, our success or
failure, to a large measure, is based upon our ability to compete successfully
for contracts and to complete them at a profit. 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 41% of our sales for fiscal 1999 and 42% of our sales for fiscal
1998 were to agencies of the United States Government or to prime defense
contractors or subcontractors of the United States Government. Our overall
dependence on the military has been declining due to our acquisition of MIC,
which is more commercially oriented, and a focusing of resources towards
developing standard products for the commercial markets. Our defense contracts
have been awarded either on a bid basis or after negotiation. The contracts are
primarily fixed price contracts, though we also have defense contracts providing
for cost plus fixed fee. Our defense contracts contain customary provisions for
termination at the convenience of the government without cause. In the event of
such termination, we are entitled to reimbursement for our 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, we have suffered reductions in sales volume due to
cutbacks in the military budget. In other product areas, we have 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 us.
Manufacturing
We assemble, test, package and ship products at our manufacturing facilities
located in:
. Colorado Springs, Colorado,
. Boca Raton, Florida,
. Bloomingdale, New Jersey,
. Farmingdale, New York,
. Pearl River, New York,
. Plainview, New York,
. Powell, Ohio and
. Richardson, Texas.
<PAGE>
We have been manufacturing products for defense programs for many years in
compliance with stringent military specifications. Our microelectronic module
manufacturing is certified to the status of Class "K," which means qualified for
space. We believe we have brought to the commercial market the manufacturing
quality and discipline we have demonstrated in the defense market. For example,
our Plainview and Farmingdale manufacturing plants are ISO- 9001 certified, as
well as certified to the more stringent Boeing D1-9000 standard, our Colorado
Springs plant is ISO-9000 certified and all three of these plants are QML
(Qualified Manufacturers List) suppliers at various levels.
Historically, our volume production requirements for the defense market did not
justify our widespread implementation of highly automated manufacturing
processes. Over the last several years, we have expanded our use of high volume
manufacturing techniques for product assembly and testing. In 1997, we purchased
film integrated circuit automatic manufacturing and test equipment from Lucent
Technologies and we expanded our Pearl River facility to accommodate this
equipment. We believe the Pearl River facility and UTMC's facilities in Colorado
Springs have the capacity required to handle additional future outsourcing by
captive suppliers of thin film communications products and integrated circuits
and the growing demand for such products.
The principal materials we use to manufacture and assemble our products are:
. ceramic,
. magnetic materials,
. gold,
. steel,
. aluminum,
. rubber,
. iron and
. copper.
Many of the component parts we use in our products are also purchased,
including:
. semiconductors,
. transformers,
. amplifiers and
. bearings.
Although we have several sole source arrangements, all the materials and
components we use, including those purchased from a sole source, are readily
available and are or can be purchased from time to time in the open market. We
have no long-term commitments for their purchase. No supplier provides more than
10% of our raw materials.
Patents and Trademarks
We own several patents, patent licenses and trademarks. In order to protect our
intellectual property rights, we rely on a combination of trade secret,
copyright, patent and trademark laws and employee and third-party nondisclosure
agreements. We also limit access to and distribution of our proprietary
information. While we believe that in the aggregate our patents and trademarks
are important in to our operations, we do not believe that one or any group of
them is so important that its termination could materially affect us.
<PAGE>
Employees
As of June 30, 1999, we had 1,100 employees, of whom 550 were employed in a
manufacturing capacity, and 550 were employed in engineering, sales,
administrative or clerical positions. 231 of our employees are covered by two
collective bargaining agreements. We believe that our employee relations are
satisfactory.
Regulation
Our operations are subject to various environmental, health and employee safety
laws. We have spent money and management has spent time complying with
environmental, health and worker safety laws which apply to our operations and
facilities and we expect that we will continue to do so. Our principal products
or services do not require any governmental approval. Compliance with
environmental laws has not historically materially affected our capital
expenditures, earnings or competitive position. We do not expect compliance with
environmental laws to have a material effect on us in the future.
Because we participate in the defense industry, we are subject to audit from
time to time for our compliance with government regulations by various agencies,
including (1) the Defense Contract Audit Agency, (2) the Defense Investigative
Service and (3) the Defense Logistics Agency. These and other governmental
agencies may also, from time to time, conduct inquiries or investigations
regarding a broad range of our activities. Responding to any audits, inquiries
or investigations may involve significant expense and divert management
attention. Also, an adverse finding in any audit, inquiry or investigation could
involve penalties that may have a material adverse effect on our business,
results of operation or financial condition.
We believe that we generally comply with all applicable environmental, health
and worker safety laws and governmental regulations. Nevertheless, we cannot
guarantee that in the future we will not incur additional costs for compliance
or that those 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, 1999 are set forth in Note 14 of Notes to Consolidated
Financial Statements.
ITEM TWO - PROPERTIES
----------
Our executive offices and the manufacturing facilities of Aeroflex Laboratories
Incorporated, one of our subsidiaries, are an aggregate of approximately 69,000
square feet and are located in premises which we own in Plainview, Long Island,
New York.
<PAGE>
Aeroflex Laboratories Incorporated also leases manufacturing facilities in
Farmingdale, Long Island, New York of approximately 20,000 square feet and Boca
Raton, Florida of approximately 11,000 square feet. The annual rental of these
properties is approximately $120,000 for Farmingdale and $157,000 for Boca
Raton.
Our subsidiary, MIC Technology Corporation, owns its manufacturing facility in
Pearl River, New York consisting of approximately 63,000 square feet. MIC leases
a manufacturing facility of approximately 29,000 square feet in Richardson,
Texas with an annual rent of approximately $180,000.
Our subsidiary, Vibration Mountings and Controls, Inc., conducts manufacturing
operations at a plant located in Bloomingdale, New Jersey. The plant, which we
own, is approximately 72,000 square feet.
Our subsidiary, Aeroflex Lintek Corp., occupies approximately 20,000 square feet
of space in Powell, Ohio, with an annual rental of approximately $214,000.
Our subsidiary, UTMC Microelectronic Systems, Inc., conducts manufacturing
operations at a plant located in Colorado Springs, Colorado. The plant, which we
own, is approximately 102,000 square feet.
We believe that our facilities are adequate for our current and presently
foreseeable needs.
Legal Proceedings
Our former subsidiary Filtron Co. Inc.,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. Filtron's operations were
discontinued in October 1991.
The plaintiffs in the action are current or former employees of a company to
whom Filtron sold RFI filters/capacitors. According to the allegations of the
amended verified complaint, the plaintiffs 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 in the discovery stage. We intend to defend against
this action vigorously. We believe that, considering our various defenses and
that we have product liability insurance, the outcome of this action will not
have a material adverse effect on us, however we cannot guarantee that will be
the case.
We are involved in various other routine legal matters. We believe the outcome
of these matters will not have a material adverse effect on us.
ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
<PAGE>
PART II
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ITEM FIVE - MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
--------------------------------------
(a) Our 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.
<TABLE>
<CAPTION>
Common Stock
---------------
High Low
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<S> <C> <C>
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................................ 11.56 6.69
Fourth Quarter............................... 15.13 7.50
1999
- ----
First Quarter................................ 18.38 12.06
Second Quarter............................... 19.75 13.00
Third Quarter (through September 9, 1999)... 21.56 15.94
</TABLE>
(b) As of September 9, 1999, there were approximately 950 record holders of our
common stock.
(c) We have never declared or paid any cash dividends on our common stock. There
have been no stock dividends declared or paid on our common stock during the
past three years. We currently intend to retain any future earnings for use in
the operation and development of our business and for acquisitions and,
therefore, do not intend to declare or pay any cash dividends on our common
stock in the foreseeable future. In addition, our revolving credit, term loan
and mortgage agreement, as amended, prohibits us from paying cash dividends.
<PAGE>
ITEM SIX - SELECTED FINANCIAL DATA
-----------------------
(In thousands, except percentages, footnotes and per share data)
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings Statement Data
- -----------------------
Net Sales...................... $157,104 $118,861 $ 94,299 $ 74,367 $ 71,113
Income (Loss) from
Continuing Operations........ 9,757(1) 8,406 4,420 (17,420)(2)(3) 6,587(5)(6)
Income from
Discontinued Operations...... - - - - 462
Net Income (Loss).............. 9,757 8,406 4,420 (17,420) 7,049
Income (Loss) from Continuing
Operations Per Common Share
and Common Share Equivalent
Basic...................... $ .55(1) $ .57 $ .36 $(1.46)(2)(3)$ .56(5)(6)
Diluted.................... .51(1) .51 .34 (4) .52(5)(6)
Net Income (Loss) Per Common
Share and Common Share
Equivalent
Basic...................... .55 .57 .36 (1.46) .60
Diluted.................... .51 .51 .34 (4) .56
Weighted Average Number of
Common Shares and Common
Share Equivalents Outstanding
Basic...................... 17,784 14,802 12,446 11,971 11,733
Diluted.................... 19,128 16,527 14,620 (4) 14,052
June 30,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------
Balance Sheet Data
- ------------------
Working Capital................ $ 50,366 $ 53,965 $ 25,872 $ 25,300 $ 31,721
Total Assets................... 165,216 124,101 81,047 81,169 71,936
Long-term Debt
(including current portion).. 31,117 11,481 28,916 34,577 13,787
Stockholders' Equity........... 102,093 87,036 35,040 30,472 46,344
Other Statistics
After Tax Profit Margin (Loss)
(from continuing operations).. 6.2%(1) 7.1% 4.7% (23.4)%(2)(3) 9.3%(5)(6)
Return on Average Stockholders'
Equity (from continuing
operations).................. 10.3%(1) 13.8% 13.5% (45.4)%(2)(3) 15.3%(5)(6)
Stockholders' Equity
Per Share (7) $ 5.54 $ 5.01 $ 2.81 $ 2.49 $ 3.95
</TABLE>
(1) Includes $3.5 million ($.18 per diluted share and $.20 basic) for the
write-off of in-process research and development acquired in connection
with the purchase of UTMC Microelectronic Systems, Inc. in February 1999.
(2) 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.
(3) Includes a $437,000, net of tax, gain ($.04 per share) on the sale of
securities.
(4) As a result of the loss, all options, warrants and convertible debentures
are anti-dilutive.
(5) Includes $2.0 million ($.14 per diluted share and $.17 basic) of insurance
proceeds received on the death of the former chairman.
(6) 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.
(7) Calculated by dividing stockholders' equity, at the end of the year, by the
number of shares outstanding at the end of the year.
<PAGE>
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Overview
We use our advanced design, engineering and manufacturing abilities to produce
state-of-the-art microelectronic module, integrated circuit, interconnect and
testing solutions. Our products are used in satellite, wireless, wireline
(including fiber optic), cable television ("CATV") and defense communications
markets. We also design and manufacture motion control systems and shock and
vibration isolation systems which are used for commercial, industrial and
defense applications. Our operations are grouped into three segments:
. microelectronics
. test, measurement and other electronics
. isolator products
Our consolidated financial statements include the accounts of Aeroflex
Incorporated and all of our subsidiaries. All of our subsidiaries are
wholly-owned except for Europtest, S.A., of which we own 90%.
Our microelectronics segment has been designing, manufacturing and selling
state-of-the-art microelectronics for the electronics industry since 1974. In
January 1994, we 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, we
acquired MIC Technology Corporation which designs, develops, manufactures and
markets microelectronics products in the form of passive thin film circuits and
interconnects. In July 1997, MIC Technology 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. In February 1999, we acquired all of the outstanding stock of UTMC
Microelectronic Systems, Inc., which designs, develops and manufacturers
integrated circuits and microelectronic modules for numerous communications
applications.
Our test, measurement and other electronics segment consists of two divisions:
(1) instruments and (2) motion control products, including the following product
lines:
. Comstron, a leader in radio frequency and microwave technology used in
the manufacture of fast switching frequency signal generators and
components, which we acquired in November 1989. Comstron is currently
an operating division of Aeroflex Laboratories Incorporated, one of
our wholly-owned subsidiaries.
. Lintek, a leader in high speed instrumentation antenna measurement
systems, radar systems and satellite test systems, which we acquired
in January 1995.
. Europtest, which develops and sells specialized software-driven test
equipment used primarily in cellular, satellite and other
communications applications. We acquired 90% of the stock of
Europtest, S.A. (France) in September 1998.
<PAGE>
. Our 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 is
engaged in the design, development and production of stabilization
tracking devices and systems and magnetic motors used in satellites
and other high reliability applications.
Our isolator products segment has been designing, developing, manufacturing and
selling severe service shock and vibration isolation systems since 1961. These
devices are primarily used in defense applications. In October 1983, we acquired
Vibration Mountings & Controls, Inc., which manufactures a line of off-the-shelf
rubber and spring shock, vibration and structure borne noise control devices
used in commercial and industrial applications. In December 1986, we acquired
the operating assets of Korfund Dynamics Corporation, a manufacturer of an
industrial line of heavy duty spring and rubber shock mounts.
We recognize revenue based upon shipments or billings. We record costs on our
long-term contracts using percentage-of-completion accounting. Under
percentage-of-completion accounting, 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 41% of our sales for fiscal 1999, 42% of our sales for fiscal 1998
and 50% of our sales for fiscal 1997 were to agencies of the United States
Government or to prime defense contractors or subcontractors of the United
States Government. Our overall dependence on the military has been declining due
to the acquisition of MIC Technology, which is more commercially oriented, and a
focusing of resources towards developing standard products for the commercial
markets. Our government contracts have been awarded either on a bid basis or
after negotiation. Our government contracts are primarily fixed price contracts,
although we also have or had government contracts providing for cost plus fixed
fee. Our defense contracts have customary provisions for termination at the
convenience of the government without cause. In the event of such termination,
we are entitled to reimbursement for our costs and to receive a reasonable
profit, if any, on the work done prior to termination.
We believe that potential reductions in defense spending will not materially
affect our operations. In certain product areas, we have suffered reductions in
sales volume due to cutbacks in the military budget. In other product areas, we
have 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 our operations.
Our product development efforts primarily involve engineering and design
relating to:
. developing new products
. improving existing products
. adapting existing products to new applications
. developing prototype components to bid on specific programs
Some of our development efforts are reimbursed under contractual arrangements.
Product development and similar costs which we cannot recover under contractual
arrangements are expensed in the period incurred.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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. We have adopted
this standard effective July 1, 1998, as required.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is effective for fiscal years beginning after
June 15, 2000. 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. We believe that the impact of this statement will
not have a material effect on our consolidated financial statements.
<PAGE>
Statement of Operations
The following table sets forth our net sales and operating income by business
segment for the periods indicated. Special charge represents a $3.5 million
charge for the write-off of in-process research and development acquired in
connection with the purchase of UTMC Microelectronic Systems in February 1999.
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net Sales:
Microelectronics $ 96,846 $ 74,263 $48,462
Test, Measurement
and Other Electronics 41,515 25,685 28,144
Isolator Products 18,743 18,913 17,693
-------- -------- -------
Net Sales $157,104 $118,861 $94,299
======== ======== =======
Operating Income:
Microelectronics $ 20,104 $ 14,147 $ 6,644
Test, Measurement
and Other Electronics 3,134 996 2,762
Isolator Products 2,108 3,063 2,844
General Corporate
Expenses (4,262) (3,348) (2,514)
-------- -------- -------
21,084 14,858 9,736
Special Charge (3,500) - -
-------- -------- -------
Operating Income $ 17,584 $ 14,858 $ 9,736
======== ======== =======
</TABLE>
The following table sets forth certain items from our statement of operations as
a percentage of net sales for the periods indicated. Special charge represents a
$3.5 million charge for the write-off of in-process research and development
acquired in connection with the purchase of UTMC Microelectronic Systems in
February 1999.
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 62.8 65.0 66.9
------ ------ ------
Gross Profit 37.2 35.0 33.1
------ ------ ------
Operating Expenses:
Selling, General and
Administrative Costs 17.7 18.1 19.3
Research and Development Costs 6.1 4.4 3.5
Special Charge 2.2 - -
------ ------ ------
Total Operating Expenses 26.0 22.5 22.8
------ ------ ------
Operating Income 11.2 12.5 10.3
Other Expense, Net 0.4 1.4 3.0
------ ------ ------
Income Before Income Taxes 10.8 11.1 7.3
Provision For Income Taxes 4.6 4.0 2.6
------ ------ ------
Net Income 6.2% 7.1% 4.7%
====== ====== ======
</TABLE>
<PAGE>
Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 1998
Net Sales. Net sales increased 32.2% to $157.1 million in fiscal 1999 from
$118.9 million in fiscal 1998. Net sales in our microelectronics segment
increased 30.4% to $96.9 million in fiscal 1999 from $74.3 million in fiscal
1998 due to increased sales volume in both thin film interconnects and
microelectronic modules and due to the acquisition of UTMC Microelectronic
Systems at the end of February 1999. Net sales in our test, measurement and
other electronics segment increased 61.6% to $41.5 million in fiscal 1999 from
$25.7 million in fiscal 1998 primarily due to increased sales volume in both
frequency synthesizers (including shipments under the new Navy CASS program) and
high speed automatic test systems (primarily satellite payload test equipment
for Hughes Space and Communications) and due to the acquisition of Europtest in
September 1998 offset in part by decreased sales volume of stabilization and
tracking devices. Net sales in our isolator products segment were $18.7 million
in fiscal 1999 and $18.9 million in fiscal 1998.
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 40.6% to $58.5
million in fiscal 1999 from $41.6 million in fiscal 1998. Gross margin increased
to 37.2% in fiscal 1999 from 35.0% in fiscal 1998. This increase was primarily
as a result of increased margins in our microelectronics segment and Comstron
product line, reflecting the greater efficiency of higher volume, as well as a
favorable sales mix in our microelectronics segment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist of office and management salaries, fringe
benefits and commissions. Selling, general and administrative expenses increased
28.9% to $27.8 million (17.7% of net sales) in fiscal 1999 from $21.5 million
(18.1% of net sales) in fiscal 1998. The increase was primarily due to labor
related expenses, including salaries for additional personnel, in connection
with our growth and the addition of the expenses of UTMC Microelectronic
Systems.
Research and Development Costs. Research and development costs consists of
material, engineering labor and allocated overhead. Our self-funded research and
development costs increased 85.8% to $9.6 million (6.1% of net sales) in fiscal
1999 from $5.2 million (4.4% of net sales) in fiscal 1998. This increase was
primarily attributable to the addition of the expenses of UTMC Microelectronic
Systems and the costs for continued development of a low-cost, high speed, high
performance frequency synthesizer intended for commercial communication test
systems.
Acquired In-Process Research and Development. In connection with the acquisition
of UTMC Microelectronic Systems, we allocated $3.5 million of the purchase price
to incomplete research and development projects. This allocation represents the
estimated fair value based on future cash flows that have been adjusted by the
projects' completion percentage. At the acquisition date, the development of
these projects had not yet reached technological feasibility and the research
and development in progress had no alternative future uses. Accordingly, we
expensed these costs as of the acquisition date.
We used an independent third-party appraiser to assess and value the in-process
research and development. The value assigned to this asset was determined by
identifying significant research projects for which technological feasibility
had not been established. In the case of UTMC Microelectronic Systems, this
included the design, development, and testing activities associated with its
commercial products, data bus products, radiation hardened products and
application specific integrated circuits. The research and development projects
are associated with the introduction of several new products as well as specific
significant enhancements to existing products. Valuation of development efforts
in the future has been excluded from the research and development appraisal.
The nature of the efforts to develop the acquired in-process technology into a
commercially viable product relate to the completion of all planning, designing,
prototyping and testing activities that are necessary to establish that the
proposed technologies meet their design specifications including functional,
technical and economic performance requirements.
<PAGE>
The value assigned to purchased in-process technology was determined by
estimating the contribution of the purchased in-process technology in developing
a commercially viable product, estimating the resulting net cash flows from the
expected sales of such a product, and discounting the net cash flows to their
present value using an appropriate discount rate.
Revenue growth rates for UTMC Microelectronic Systems were estimated by the
third party appraiser based on a detailed forecast we prepared, as well as the
appraiser's discussions with our finance, marketing and engineering personnel
and those of UTMC Microelectronic Systems. Allocation of total UTMC
Microelectronic Systems' projected revenues to in-process research and
development was based on the appraiser's discussions with UTMC Microelectronic
Systems' management and us. A significant portion of UTMC Microelectronic
Systems' future revenues was expected to originate from the sale of products
that were not yet completed at acquisition. However, UTMC Microelectronic
Systems' existing products and technologies are expected to generate sales
through 2008.
Selling, general and administrative expenses and profitability estimates were
determined based on our forecasts as well as an analysis of comparable
companies' margin expectations.
The projections utilized in the transaction pricing and purchase price
allocation exclude the potential synergetic benefits related specifically to our
ownership. Due to the relatively early stage of the development and reliance on
future, unproven products and technologies, the cost of capital (discount rate)
for UTMC Microelectronic Systems was estimated using venture capital rates of
return. Due to the nature of the forecast and the risks associated with the
projected growth and profitability of the development projects, a discount rate
of 45 percent was used to discount cash flows from the in-process products. This
discount rate was commensurate with UTMC Microelectronic Systems' market
position, the uncertainties in the economic estimates described above, the
inherent uncertainty surrounding the successful development of the purchased
in-process technology, the useful life of such technology, the profitability
levels of such technology, and the uncertainty related to technological advances
that could render even UTMC Microelectronic Systems' development stage
technologies obsolete.
We believe that the foregoing assumptions used in the forecasts were reasonable
at the time of the acquisition. No assurance can be given, however, that the
underlying assumptions used to estimate sales, development costs or
profitability, or the events associated with such projects will transpire as
estimated. For these reasons, actual results may vary from projected results.
Remaining development efforts for UTMC Microelectronic Systems' research and
development include various phases of design, development and testing. Funding
for such projects is expected to come from internally generated sources.
As evidenced by the continued support of the development of its projects, we
believe we have a reasonable chance of successfully completing the research and
development programs. However, as with all of our technology development, there
is risk associated with the completion of the UTMC Microelectronic Systems'
research and development projects, and there is no assurance that technological
or commercial success will be achieved.
If the development of UTMC Microelectronic Systems' in-process research and
development project is unsuccessful, our sales and profitability may be
adversely affected in future periods. Commercial results are also subject to
certain market events and risks, which are beyond our control, such as trends in
technology, changes in government regulation, market size and growth, and
product introduction or other actions by competitors.
<PAGE>
Other Expense (Income). Interest expense decreased to $1.5 million in fiscal
1999 from $2.0 million in fiscal 1998, primarily due to reduced levels of
borrowings throughout most of the current period. Other income of $777,000 in
fiscal 1999 and $309,000 in fiscal 1998 consisted primarily of interest income.
Interest income increased due to increased levels of cash equivalents throughout
most of the current period. The reduced levels of borrowings and the increased
levels of cash equivalents resulted from the net proceeds of $31.3 million from
stock issued in our public offering completed in March 1998. In connection with
our acquisition of UTMC Microelectronic Systems at the end of February 1999, we
used most of our cash equivalents and increased our borrowings by $20.0 million.
Provision for Income Taxes. Income taxes increased 50.5% to $7.2 million (an
effective income tax rate of 35.0%, exclusive of the special charge) in fiscal
1999, from $4.8 million (an effective income tax rate of 36.1%) in fiscal 1998.
The income tax provisions for the years ended June 30, 1999 and 1998 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
research and development credits, and for the year ended June 30, 1999, due to
the non-deductibility of the $3.5 million special charge.
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 our microelectronics segment increased
53.2% to $74.3 million in fiscal 1998 from $48.5 million in 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 our test, measurement and other electronics segment
decreased 8.7% to $25.7 million in fiscal 1998 from $28.1 million in 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 our isolator products segment increased 6.9% to $18.9 million in
fiscal 1998 from $17.7 million in fiscal 1997 primarily due to higher sales
volume of industrial and commercial isolators.
Gross Profit. 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 our microelectronics segment reflecting the greater efficiency of
higher volume.
Selling, General and Administrative Expenses. 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. This
increase was primarily due to labor related expenses including salaries for
additional personnel, recruitment and relocation costs in connection with our
growth.
Research and Development Costs. Our self-sponsored research and development
costs increased 57.7% to $5.2 million (4.4% of net sales) in fiscal 1998 from
$3.3 million (3.5% of net sales) in fiscal 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 our public offering.
Other expense included $102,000 of debenture redemption costs in fiscal 1998.
<PAGE>
Provision for Income Taxes. Income taxes 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.
Market Risk
We are exposed to market risk related to changes in interest rates and, to an
immaterial extent, to foreign currency exchange rates. Some of our debt is at
fixed rates of interest or at a variable rate with an interest rate swap
agreement which effectively converts the variable rate debt into a fixed rate of
debt. Our debt which is subject to a floating LIBOR rate of interest and is not
hedged by an interest rate swap amounts to approximately $22.4 million at June
30, 1999. If market interest rates increase by 10 percent from levels at June
30, 1999, the effect on our net income would be a reduction of approximately
$100,000.
Year 2000 Readiness
We have initiated a company-wide program and have developed a formal plan of
implementation to prepare us for the year 2000. This includes taking actions
designed to ensure that our information technology systems, products and
infrastructure are year 2000 compliant and that our customers, suppliers and
service providers have taken similar action. We have evaluated all of our:
. information technology systems
. products
. equipment
. other facilities systems
We have modified items that are not compliant.
We have completed substantially all of our investigation, remediation and
contingency planning activities for all mission critical systems and areas. We
have incurred internal staff costs, as well as consulting and other expenses in
connection with our internal year 2000 compliance and expect to continue to do
so. We have spent an aggregate $54,000 on third-party costs for year 2000
compliance and do not expect total costs to exceed $100,000. Accordingly, we
believe the total costs incurred and to be incurred for all internal year 2000
readiness related projects will not have a material impact on our business,
results of operations or financial condition.
We are surveying our customers, suppliers and service providers through written
correspondence regarding their year 2000 readiness. We have received written
correspondence from substantially all mission critical third parties indicating
their compliance but have also created contingency plans such as increasing
inventory levels and identifying alternative sources. Our risks involved with
not solving the year 2000 problem include, but are not limited to, the
following: loss of local or regional electrical power, loss of telecommunication
services, delays or cancellations of merchandise shipments, manufacturing
shutdowns, delays in processing customer transactions, bank errors and computer
errors by suppliers. Despite our efforts to survey customers, suppliers and
service providers, we cannot be certain as to the actual year 2000 readiness of
these third parties and because our year 2000 compliance is dependent upon
certain third parties (including infrastructure providers) also being year 2000
compliant on a timely basis, there is no assurance that our efforts will prevent
a material adverse impact on our business, results of operations or financial
condition.
<PAGE>
Seasonality
Although our business is not affected by seasonality, historically our 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, 1999, we had $50.4 million in working capital. Our current ratio
was 2.5 to 1 at June 30, 1999. As of February 25, 1999, we replaced a previous
agreement with a revised revolving credit, term loan and mortgage agreement with
two banks which is secured by substantially all of our assets not otherwise
encumbered. The agreement provides for a revolving credit line of $23.0 million,
a term loan of $20.0 million and a mortgage on our Plainview property for $4.5
million. The revolving credit and term loans expire in December 2002. The term
loan is payable in quarterly installments of $1.25 million beginning September
30, 1999 with final payment on December 31, 2002. As of June 30, 1999, the
outstanding term loan was $17.5 million. The interest rate on borrowings under
this agreement is at various rates depending upon certain financial ratios, with
the current rate substantially equivalent to 90-day LIBOR (approximately 5.4% at
June 30, 1999 and 5.7% at June 30, 1998) plus 1.50% on the revolving credit
borrowings and LIBOR plus 1.75% on the term loan borrowings. The mortgage is
payable in monthly installments of approximately $26,000 through March 2008 and
a balloon payment of $1.6 million in April 2008. The Company has entered into an
interest rate swap agreement for the outstanding amount under the mortgage
agreement at approximately 7.6% in order to reduce the interest rate risk
associated with these borrowings.
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, we have a letter of
credit facility of $2.0 million.
During June 1994, we 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, we called for the redemption of all of the outstanding 7-1/2%
Senior Subordinated Convertible Debentures at 104-1/2% of the principal amount.
The Debentures were convertible into our 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 July 1, 1997, our subsidiary, MIC Technology, 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. We 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.
In March 1998, we sold 2.6 million shares of our 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 was used primarily for
our purchase of UTMC Microelectronic Systems in February 1999.
<PAGE>
Effective September 1, 1998, we acquired 90% of the stock of Europtest, S.A.
(France) for approximately $1.1 million. The purchase agreement also requires
that we purchase the remaining 10% of Europtest pro rata over a three-year
period at prices determined based upon net sales of Europtest products.
Europtest develops and sells specialized software-driven test equipment used
primarily in cellular, satellite and other communications applications. The
acquired company's net sales were approximately $1.9 million for the year ended
March 31, 1998.
In December 1998, we financed the acquisition and renovation of the land and
building of our Pearl River, NY facility and received proceeds amounting to $4.2
million. These borrowings are payable in annual installments of approximately
$200,000 through 2019.
Effective February 25, 1999, we acquired all of the outstanding stock of UTMC
Microelectronic Systems, Inc. for $42.5 million of cash. Prior to the
acquisition, UTMC Microelectronic Systems distributed by dividend to its
then-parent, United Technologies Corporation, the assets and United Technologies
assumed the liabilities of the circuit card assembly portion of UTMC
Microelectronic Systems business. The purchase price was paid with available
cash of $22.5 million and borrowings under our bank loan agreement of $20.0
million. UTMC Microelectronic Systems is a leader in supplying
radiation-tolerant integrated circuits for satellite communications. The
acquired company's net sales, excluding the circuit card assembly business, were
approximately $33.4 million for the year ended December 31, 1998.
In fiscal 1999, our operations provided cash of $11.4 million from our continued
profitability, partially offset by an increase in receivables due to our higher
sales volume and timing of billings. In fiscal 1999, our investing activities
used cash of $51.6 million primarily for our acquisition of UTMC Microelectronic
Systems and for capital expenditures. In fiscal 1999, our financing activities
provided cash of $18.5 million primarily from bank financing for the acquisition
of UTMC Microelectronic Systems.
We believe that internally generated funds and available lines of credit will be
sufficient for our working capital requirements, capital expenditure needs and
the servicing of our debt for at least the next twelve months. At June 30, 1999,
our available unused line of credit was $21.0 million after consideration of the
letter of credit.
One of our subsidiaries 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 our subsidiary to one of its customers. This action is in the discovery
stage. Based upon available information and considering our various defenses,
together with our product liability insurance, in our opinion, the outcome of
the action against our subsidiary will not have a materially adverse effect on
our consolidated financial statements.
We are involved in various other routine legal matters. We believe the outcome
of these matters will not have a materially adverse effect on our consolidated
financial statements.
We are undergoing routine audits by various taxing authorities of our state and
local income tax returns covering periods from 1994 to 1996. We believe that the
probable outcome of these various audits should not materially affect our
consolidated financial statements.
Our backlog of orders was $93.8 million at June 30, 1999 and $80.1 million at
June 30, 1998.
<PAGE>
Forward-Looking Statements
All statements other than statements of historical fact included in this Annual
Report, including without limitation statements under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" regarding our
financial position, business strategy and plans and objectives of our management
for future operations, are forward-looking statements. When used in this Annual
Report, words such as "anticipate," "believe," "estimate," "expect," "intend"
and similar expressions, as they relate to Aeroflex or our management, identify
forward-looking statements. Such forward-looking statements are based on the
beliefs of our management, as well as assumptions made by and information
currently available to our management. Actual results could differ materially
from those contemplated by the forward-looking statements as a result of certain
factors, including but not limited to, competitive factors and pricing
pressures, changes in legal and regulatory requirements, technological change or
difficulties, product development risks, commercialization difficulties and
general economic conditions. Such statements reflect our current views with
respect to future events and are subject to these and other risks, uncertainties
and assumptions relating to our operations, results of operations, growth
strategy and liquidity.
ITEM EIGHT - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements and supplementary data listed in the accompanying Index
to Financial Statements and Schedules are 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 our
definitive proxy statement in connection with our Annual Meeting of Stockholders
scheduled to be held in November 1999. The proxy statement is to be filed with
the Securities and Exchange Commission within 120 days following the end of our
fiscal year ended June 30, 1999.
<PAGE>
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. (Exhibit 3.1 to Form 10-K for the
year ended June 30, 1998)
3.2 By-Laws, as amended (Exhibit 3 to Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998).
4.1 Fourth Amended and Restated Loan and Security Agreement dated as of
February 25, 1999 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.) (Exhibit 10.5 to Form 8-K dated
February 25, 1999)
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).
10.4 Employment Agreement between Aeroflex Incorporated and Harvey R. Blau
(Exhibit 10.1 to Report on Form 10-Q for the quarter ended March 31, 1999).
10.5 Employment Agreement between Aeroflex Incorporated and Michael Gorin
(Exhibit 10.2 to Report on Form 10-Q for the quarter ended March 31, 1999).
10.6 Employment Agreement between Aeroflex Incorporated and Leonard Borow
(Exhibit 10.3 to Report on Form 10-Q for the quarter ended March 31, 1999).
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).
<PAGE>
10.101998 Stock Option Plan (Exhibit 10 to Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998).
10.11Common Stock Purchase Agreement made as of February 25, 1999 between the
Registrant and United Technolgoies Corporation acting through its Hamilton
Standard Division as the owner of all of the issued and outstanding capital
stock of UTMC Microelectronic Systems, Inc.. (Exhibit 10.1 to Form 8-K
dated February 25, 1999).
10.12Long Term Agreement made as of February 25, 1999 between United
Technologies Corporation and UTMC Microelectronic Systems, Inc. (Exhibit
10.2 to Form 8-K dated February 25, 1999).
10.13Facilities Lease and Services Agreement made as of February 25, 1999
between UTMC Microelectronic Systems, Inc., United Technologies Corporation
and Hamilton Standard Electronics. (Exhibit 10.3 to Form 8-K dated February
25, 1999).
10.14Assignment and License-Back Agreement made as of February 25, 1999 between
UTMC Microelectronic Systems, Inc. and United Technologies Corporation.
(Exhibit 10.4 to Form 8-K dated February 25, 1999).
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
Europtest, S.A. France
MIC Technology Corporation Texas
UTMC Microelectronic Systems, Inc. Delaware
Vibration Mountings and Controls, Inc. New York
23 Consent of Independent Auditors
27 Financial Data Schedule
99 Undertakings
<PAGE>
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 28th day of September 1999.
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 28th, 1999 by the following persons in the
capacities indicated:
/s/ Harvey R. Blau Chairman of the Board
Harvey R. Blau (Chief Executive Officer)
/s/ Michael Gorin President and Director
Michael Gorin (Chief Financial Officer and Principal Accounting
Officer)
/s/ Leonard Borow Executive Vice President, Secretary and Director
Leonard Borow (Chief Operating Officer)
/s/ Paul Abecassis Director
Paul Abecassis
/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
<PAGE>
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, 1999 AND 1998
AND FOR THE YEARS
ENDED JUNE 30, 1999, 1998 AND 1997
<PAGE>
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, 1999 and 1998 S-2-3
Statements of earnings - each of the three years
in the period ended June 30, 1999 S-4
Statements of stockholders' equity - each of the
three years in the period ended June 30, 1999 S-5
Statements of cash flows - each of the three years
in the period ended June 30, 1999 S-6
Notes (1-14) S-7-20
Quarterly financial data (unaudited) S-21
2. FINANCIAL STATEMENT SCHEDULES:
II - Valuation and qualifying accounts S-22
All other schedules have been omitted because they are inapplicable, not
required, or the information is included elsewhere in the financial statements
or notes thereto.
<PAGE>
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, 1999 and 1998 and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the years in the three year period ended June 30, 1999. 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, 1999 and 1998 and the results of
their operations and their cash flows for each of the years in the three year
period ended June 30, 1999, 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.
/s/ KPMG LLP
KPMG LLP
Melville, New York
August 10, 1999
S-1
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30,
----------------------
ASSETS 1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 2,714 $ 24,408
Accounts receivable, less allowance for doubtful
accounts of $381 and $317 at June 30, 1999 and 1998,
respectively.......................................... 39,967 19,853
Inventories, net........................................ 32,637 29,851
Deferred income taxes................................... 5,291 1,861
Prepaid expenses and other current assets............... 2,314 1,197
-------- --------
Total current assets............................... 82,923 77,170
Property, plant and equipment, net........................ 50,802 26,994
Intangible assets acquired in connection with
the purchase of businesses, net of accumulated
amortization of $3,084 and $1,993 at June 30, 1999 and
1998, respectively...................................... 13,777 7,578
Cost in excess of fair value of
net assets of businesses acquired, net of accumulated
amortization of $3,161 and $2,724 at June 30, 1999 and 1998,
respectively............................................ 14,019 9,827
Other assets.............................................. 3,695 2,532
-------- --------
Total assets.............................................. $165,216 $124,101
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
S-2
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30,
--------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
-------- --------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt....................... $ 6,509 $ 1,755
Accounts payable........................................ 8,070 6,668
Accrued expenses and other current liabilities.......... 16,923 12,932
Income taxes payable.................................... 1,055 1,850
-------- --------
Total current liabilities.......................... 32,557 23,205
Long-term debt............................................ 24,608 9,726
Deferred income taxes..................................... 3,582 1,156
Other long-term liabilities............................... 2,376 2,978
-------- --------
Total liabilities......................................... 63,123 37,065
-------- --------
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 40 shares;
none issued........................................... - -
Common Stock, par value $.10 per share; authorized
40,000 shares; issued 18,429 and 17,378 shares at
June 30, 1999 and 1998, respectively.................. 1,843 1,738
Additional paid-in capital.............................. 105,720 100,481
Accumulated deficit..................................... (5,421) (15,178)
-------- --------
102,142 87,041
Less: Treasury stock, at cost (6 and 1 shares at
June 30, 1999 and 1998, respectively)................. 49 5
-------- --------
Total stockholders' equity................................ 102,093 87,036
-------- --------
Total liabilities and stockholders' equity................ $165,216 $124,101
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
S-3
<PAGE>
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales................................ $157,104 $118,861 $ 94,299
Cost of sales............................ 98,645 77,286 63,109
-------- -------- --------
Gross profit........................... 58,459 41,575 31,190
-------- -------- --------
Operating costs:
Selling, general and administrative
costs................................ 27,763 21,545 18,175
Research and development costs......... 9,612 5,172 3,279
Acquired in-process research and
development (Note 2)................. 3,500 - -
-------- -------- --------
Total operating costs............. 40,875 26,717 21,454
-------- -------- --------
Operating income ........................ 17,584 14,858 9,736
-------- -------- --------
Other expense (income):
Interest expense....................... 1,454 2,011 2,974
Other expense (income) (including
interest income and dividends of
$781, $389 and $84).................. (777) (309) (93)
-------- -------- --------
Total other expense (income)...... 677 1,702 2,881
-------- -------- --------
Income before income taxes............... 16,907 13,156 6,855
Provision for income taxes............... 7,150 4,750 2,435
-------- -------- --------
Net income .............................. $ 9,757 $ 8,406 $ 4,420
======== ======== ========
Net income per common share and
common share equivalent:
Basic................................. $ .55 $ .57 $ .36
===== ===== =====
Diluted............................... $ .51 $ .51 $ .34
===== ===== =====
Weighted average number of common shares
and common share equivalents
outstanding:
Basic................................. 17,784 14,802 12,446
Diluted............................... 19,128 16,527 14,620
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
S-4
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated Treasury Stock
Total Shares Par Value Capital Deficit Shares Cost
--------- ------ ---------- ----------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 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)
Stock issued upon exercise
of stock options and warrants.......... 4,967 1,051 105 4,563 - (34) 299
Purchase of treasury stock............... (343) - - - - 39 (343)
Deferred compensation.................... 676 - - 676 - - -
Net income............................... 9,757 - - - 9,757 - -
--------- ------ ---------- ----------- ----------- ------ ----------
Balance, June 30, 1999................... $ 102,093 18,429 $ 1,843 $ 105,720 $ (5,421) 6 $ (49)
========= ====== ======== ========== ========== ====== ==========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
S-5
<PAGE>
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .................................................. $ 9,757 $ 8,406 $ 4,420
Adjustments to reconcile net income to
net cash provided by operating activities:
Acquired in-process research and development............. 3,500 - -
Depreciation and amortization............................ 6,554 4,884 4,322
Amortization of deferred gain............................ (588) (588) -
Deferred income taxes.................................... 1,812 1,004 (10)
Other.................................................... 292 (10) 57
Change in operating assets and liabilities, net
of effects from purchase of businesses:
Decrease (increase) in accounts receivable............... (16,365) 1,975 1,421
Decrease (increase) in inventories....................... 3,825 (8,397) (3,403)
Decrease (increase) in prepaid
expenses and other assets.............................. (2,238) (633) 879
Increase (decrease) in accounts payable, accrued expenses
and other long-term liabilities........................ 2,739 5,384 691
Increase (decrease) in income taxes payable.............. 2,090 1,648 668
-------- -------- ---------
Net cash provided by operating activities...................... 11,378 13,673 9,045
Cash flows from investing activities: -------- -------- ---------
Payment for purchase of businesses,
net of cash acquired....................................... (43,656) (249) (162)
Purchase of equipment, inventory and technology rights
from Lucent Technolgies.................................... - (4,435) -
Capital expenditures......................................... (9,104) (10,613) (2,931)
Proceeds from sale of property,
plant and equipment........................................ 967 209 16
Proceeds from sale of securities............................. 198 110 81
-------- -------- ---------
Net cash used in investing activities.......................... (51,595) (14,978) (2,996)
-------- -------- ---------
Cash flows from financing activities:
Borrowings under debt agreements............................. 24,191 6,231 58
Debt repayments.............................................. (4,663) (13,685) (5,719)
Bank debt financing costs.................................... (438) - -
Proceeds from issuance of common shares in public offering... - 31,781 -
Costs in connection with public offering..................... - (496) -
Proceeds from the exercise of stock options and warrants..... 2,539 1,292 305
Amounts paid for withholding taxes on stock option
exercises.................................................. (5,434) (1,512) (663)
Withholding taxes collected for stock option exercises....... 2,671 1,502 347
Purchase of treasury stock................................... (343) - (438)
-------- -------- --------
Net cash provided by (used in)
financing activities......................................... 18,523 25,113 (6,110)
Net increase (decrease) in cash and -------- -------- --------
cash equivalents............................................. (21,694) 23,808 (61)
Cash and cash equivalents at beginning of period............... 24,408 600 661
-------- -------- ---------
Cash and cash equivalents at end of period..................... $ 2,714 $ 24,408 $ 600
======== ======== =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
S-6
<PAGE>
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 with the exception of Europtest which is 90% owned (see
Note 2). All 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 on-balance sheet financial instruments, other than
long-term debt (see Note 7), approximate book values because of the short
maturity of these instruments. Amounts receivable or payable under interest
rate swap agreements are accounted for as adjustments to interest expense.
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 acquired in-process research and development.
S-7
<PAGE>
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 15 to 40
years except for certain costs allocated to existing technology, assembled
workforce, customer relationships and patents which are amortized over 6 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.
Income Per Share
Beginning with the year ended June 30, 1998, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share." In
accordance with SFAS No. 128, income per common share ("Basic EPS") is
computed by dividing net income by the weighted average common shares
outstanding. Income 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 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 income and pro forma net income 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 1998 and 1997 consolidated
financial statements to conform to the 1999 presentation.
Recent Accounting Pronouncements
Effective July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement requires presentation of
comprehensive income and its components in the financial statements. The
adoption of this statement did not have a material effect on our
consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued 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 adopted this standard effective
July 1, 1998, as required.
S-8
<PAGE>
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for fiscal years beginning after June 15, 2000. 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.
2. Acquisition of Businesses
UTMC
----
Effective February 25, 1999, the Company acquired all of the outstanding
stock of UTMC Microelectronic Systems, Inc. ("UTMC") for $42.5 million of
cash. The purchase price was paid with available cash of $22.5 million and
borrowings under the Company's bank loan agreement of $20.0 million. UTMC
is a supplier of radiation-tolerant integrated circuits for satellite
communications. The acquired company's net sales were approximately $33.4
million for the year ended December 31, 1998.
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, including acquisition costs of approximately
$500,000, as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Net tangible assets $28,771
Identifiable intangible assets 6,300
Costs in excess of fair value of net assets 4,429
In-process research and development 3,500
-------
$43,000
=======
</TABLE>
The identifiable intangible assets include existing technology, customer
relationships and assembled work force. The identifiable intangibles and
costs in excess of fair value of net assets are being amortized on a
straight-line basis over 6 to 15 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 1999.
Summarized below are the unaudited pro forma results of operations of the
Company as if UTMC had been acquired at the beginning of the fiscal periods
presented. The $3.5 million write-off has been included in the June 30,
1999 pro forma income but not the June 30, 1998 pro forma income in order
to provide comparability to the respective actual results.
<TABLE>
<CAPTION>
Pro Forma Years Ended
June 30,
-----------------------------------
1999 1998
---- ----
(In thousands, except per share data)
<S> <C> <C>
Net sales $ 177,149 $ 155,371
Net income 9,469 11,267
Net income per share
Basic $ .53 $ .76
Diluted .50 .69
</TABLE>
The pro forma financial information presented above is not necessarily
indicative of either the results of operations that would have occurred had
the acquisition taken place at the beginning of the periods presented or of
future operating results of the combined companies.
S-9
<PAGE>
Europtest
---------
Effective September 1, 1998, the Company acquired 90% of the stock of
Europtest, S.A. (France) for approximately $1.1 million. The purchase
agreement also requires that the Company purchase the remaining 10% of
Europtest pro rata over a three-year period at prices determined based upon
net sales of Europtest products. Europtest develops and sells specialized
software-driven test equipment used primarily in cellular, satellite and
other communications applications. The acquired company's net sales were
approximately $1.9 million for the year ended March 31, 1998. On a pro
forma basis, had the Europtest acquisition taken place as of the beginning
of the periods presented, results of operations for those periods would not
have been materially affected. The purchase price has been allocated to the
assets acquired and liabilities assumed based on their fair values.
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 $200,000, $250,000,
$162,000 and $63,000 was earned as of December 31, 1998, 1997, 1996 and
1995 and paid in February 1999, March 1998, February 1997 and 1996,
respectively. Such amounts have been 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 UTMC, Europtest and Lintek are included in the consolidated
statements of earnings from the respective acquisition dates.
3. Acquisition of Assets From Lucent Technologies
Effective July 1, 1997, the Company's subsidiary, MIC Technology ("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 $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 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:
<TABLE>
<CAPTION>
June 30,
------------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Raw materials.................... $ 18,441 $ 12,012
Work-in-process.................. 11,148 12,737
Finished goods................... 3,048 5,102
-------- --------
$ 32,637 $ 29,851
======== ========
</TABLE>
Inventories include contracts-in-process of $9.6 million and $13.2 million
at June 30, 1999 and 1998, respectively, which consist substantially of
unbilled material, labor and overhead costs that are or were expected to be
billed during the succeeding fiscal year.
S-10
<PAGE>
5. Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
June 30, Estimated
--------------------------
1999 1998 Useful Life
---- ----
(In thousands) In Years
-----------
<S> <C> <C> <C>
Land............................ $ 4,725 $ 725
Building and leasehold
improvements.................. 32,353 17,479 2 to 40
Machinery, equipment, tools
and dies...................... 37,727 29,400 3 to 10
Furniture and fixtures.......... 7,521 5,968 5 to 10
Assets recorded under
capital leases................ 2,334 2,334 5 to 10
---------- ----------
84,660 55,906
Less accumulated depreciation
and amortization.............. 33,858 28,912
---------- ----------
$ 50,802 $ 26,994
========== ==========
</TABLE>
In July 1998, the Company purchased a previously leased operating facility
in Pearl River, New York for $2.5 million in cash.
Repairs and maintenance expense on property, plant and equipment was $2.3
million, $1.4 million and $1.1 million for the years ended June 30, 1999,
1998 and 1997, respectively.
6. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities include accrued salaries,
wages and other compensation of $7.1 million and $4.3 million at June 30,
1999 and 1998, respectively.
7. Long-Term Debt and Credit Arrangements
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30,
-------------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Revolving credit, term loan
and mortgage agreement (a).. $ 21,853 $ 4,720
Building mortgage (b)......... 4,165 -
Equipment loans (c)........... 4,877 5,624
Capitalized lease
obligations ................ 124 1,019
Other......................... 98 118
-------- --------
31,117 11,481
Less current maturities....... 6,509 1,755
-------- --------
$ 24,608 $ 9,726
======== ========
</TABLE>
Aggregate long-term debt as of June 30, 1999 matures in each fiscal
year as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
2000............... $ 6,509
2001............... 6,422
2002............... 6,455
2003............... 4,695
2004............... 1,044
Thereafter......... 5,992
--------
$ 31,117
========
</TABLE>
Interest paid was $1.6 million, $2.1 million and $2.6 million during the
years ended June 30, 1999, 1998 and 1997, respectively.
S-11
<PAGE>
(a) As of February 25, 1999, the Company replaced a previous agreement with
a revised revolving credit, term loan and mortgage 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 $23.0
million, a term loan of $20.0 million and a mortgage on the Company's
Plainview property for $4.5 million. The revolving credit and term loans
expire in December 2002. The term loan is payable in quarterly installments
of $1.25 million beginning September 30, 1999 with final payment on
December 31, 2002. As of June 30, 1999, the outstanding term loan was $17.5
million. The interest rate on borrowings under this agreement is at various
rates depending upon certain financial ratios, with the current rate
substantially equivalent to 90- day LIBOR (approximately 5.4% and 5.7% at
June 30, 1999 and 1998, respectively) plus 1.50% on the revolving credit
borrowings and LIBOR plus 1.75% on the term loan borrowings. The Company
paid a facility fee of $100,000 and is required to pay a commitment fee of
.25% per annum of the average unused portion of the credit line. The
mortgage is payable in monthly installments of approximately $26,000
through March 2008 and a balloon payment of $1.6 million in April 2008. The
Company has entered into an interest rate swap agreement for the
outstanding amount under the mortgage agreement at approximately 7.6% in
order to reduce the interest rate risk associated with these borrowings.
The fair market value of the interest rate swap agreement was $40,000 as of
June 30, 1999 in favor of the Company.
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 $2.0 million.
At June 30, 1999, the Company's available unused line of credit was $21.0
million after consideration of the letter of credit.
(b) In December 1998, the Company financed the acquisition and renovation
of the land and building of its Pearl River, NY facility and received
proceeds amounting to $4.2 million. These borrowings are payable in annual
installments of approximately $200,000 through 2019.
(c) During the year ended June 30, 1998, the Company entered into equipment
loans with two banks totaling $6.2 million. The loans are repayable monthly
through July 2004 and bear interest at a floating rate 200 basis points
above the 30-day LIBOR (approximately 5.2% and 5.7% at June 30, 1999 and
1998, respectively). 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.
8. Senior Subordinated Convertible Debentures
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. 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 in fiscal 1996. 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.
S-12
<PAGE>
9. Stockholders' Equity
(a) Common Stock Offering 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 was used primarily for the purchase of UTMC.
(b) Stock Options and Warrants
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 the Directors' 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 1.5 million
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 548,000 shares of Common Stock exercisable between
$4.00 and $13.63 per share. Such grants were not covered by one of the
above plans.
Additional information with respect to the Company's stock options is as
follows:
<TABLE>
<CAPTION>
Weighted Shares
Average Under
Exercise Outstanding
Prices Options
-------- -----------
(In thousands)
<S> <C> <C>
Balance, July 1,
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
Granted....... 11.82 1,155
Forfeited..... 4.50 (3)
Exercised..... 3.74 (1,460)
Balance, June 30, -----
1999......... $ 8.30 3,584
=====
</TABLE>
During fiscal years 1999, 1998 and 1997, payroll tax on stock option
exercises were withheld from employees in shares of the Company's Common
Stock amounting to $2.6 million, $10,000 and $316,000, respectively, as
permitted by the option plan provisions.
S-13
<PAGE>
Options to purchase 1.5 million, 2.3 million and 2.2 million shares were
exercisable at weighted average exercise prices of $5.07, $3.90 and $3.61
as of June 30, 1999, 1998 and 1997, respectively.
The options outstanding as of June 30, 1999 are summarized in ranges as
follows:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------
Weighted Weighted
Range of Average Average
Exercise Exercise Options Remaining
Prices Price Outstanding Life
-------- -------- ----------- ---------
(In thousands)
<S> <C> <C> <C>
$ 3.75-$ 5.38 $ 4.17 1,402 4.5 years
$ 8.19-$11.63 9.76 1,589 8.6
$13.44-$17.56 14.15 593 9.2
-----
3,584
=====
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
--------------------------------
Weighted
Range of Average
Exercise Exercise Options
Prices Price Exercisable
-------- -------- -----------
(In thousands)
<S> <C> <C>
$ 3.75-$ 5.38 $4.12 1,225
$ 8.19-$11.63 8.75 259
$13.44-$17.56 13.99 23
-----
1,507
=====
</TABLE>
The Company has outstanding warrants to purchase 387,000 shares of its
Common Stock exercisable between $6.75 and $7.50 per share through June
2004. These warrants were issued primarily in connection with the
acquisition of MIC in fiscal 1996.
(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 net income per share as if such method had been used to account
for stock-based compensation cost as described in SFAS No. 123.
The per share weighted average fair value of stock options granted during
fiscal 1999, 1998 and 1997 was $7.50, $7.39 and $2.37, respectively, on the
date of grant using the Black Scholes option-pricing model with the
following weighted average assumptions: 1999 - expected dividend yield of
0%, risk free interest rate of 5.3%, expected stock volatility of 77%, and
an expected option life of 5.1 years; 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. The pro forma compensation cost before
income taxes was $4.8 million, $2.0 million and $783,000 for the years
S-14
<PAGE>
ended June 30, 1999, 1998 and 1997, respectively, based on the
aforementioned fair value at the grant date only for options granted after
fiscal year 1995. The Company's net income and net income per share using
this pro forma compensation cost would have been:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------
(In thousands, except per share data)
1997
-------------------------
As Reported Pro Forma
----------- ---------
<S> <C> <C>
Net income................. $ 4,420 $ 3,919
Net income per share
-Basic............. $ 0.36 $ 0.31
-Diluted........... 0.34 0.30
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
1999
------------------------
As Reported Pro Forma
----------- ---------
Net income............... $ 9,757 $ 6,608
Net income per share
- Basic............ $ 0.55 $ 0.37
- Diluted.......... 0.51 0.36
</TABLE>
Since the pro forma compensation cost reflects only options granted after
fiscal year 1995, the full impact of calculating stock-based compensation
costs under SFAS No. 123 is not reflected in the pro forma net income
because compensation cost is recognized over the respective vesting period
and compensation cost for options granted prior to fiscal year 1996 was not
reflected.
(d) 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 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 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 values.
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-15
<PAGE>
(e) Net Income Per Share
A reconciliation of the numerators and denominators of the Basic EPS and
Diluted EPS calculations is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------
1999 1998 1997
---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C>
Computation of Adjusted Net Income:
Net income for basic earnings per
common share............................. $ 9,757 $ 8,406 $ 4,420
Add: Debenture interest and amortization
expense, net of income taxes............. - 103 504
Adjusted net income for diluted -------- -------- --------
earnings per common share................ $ 9,757 $ 8,509 $ 4,924
Computation of Adjusted Weighted Average ======== ======== ========
Shares Outstanding:
Weighted average shares outstanding........ 17,784 14,802 12,446
Add: Shares assumed to be issued upon
conversion of debentures................. - 392 1,774
Add: Effect of dilutive options and
warrants outstanding..................... 1,344 1,333 400
Weighted average shares and common share -------- -------- --------
equivalents used for computation of
diluted earnings per common share........ 19,128 16,527 14,620
Net Income Per Common Share: ======== ======== ========
Basic.................................... $0.55 $0.57 $0.36
===== ===== =====
Diluted.................................. $0.51 $0.51 $0.34
===== ===== =====
</TABLE>
Options to purchase 92,500 shares at exercise prices ranging between $15.75
and $17.56 per share were outstanding as of June 30, 1999 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.
10. Income Taxes
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------
1999 1998 1997
--------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Current:
Federal............... $ 4,465 $ 3,178 $ 1,752
State and local....... 873 568 693
--------- --------- ---------
5,338 3,746 2,445
--------- --------- ---------
Deferred:
Federal............... 1,989 932 404
State and local....... (177) 72 (414)
--------- --------- ---------
1,812 1,004 (10)
--------- --------- ---------
$ 7,150 $ 4,750 $ 2,435
========= ========= =========
</TABLE>
The provision for income taxes varies from the amount computed by applying
the U.S. Federal income tax rate to income before income taxes as a result
of the following:
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Tax at statutory rate... $ 5,917 $ 4,505 $ 2,331
Non-deductible acquired
in-process research
and development charge. 1,225 - -
State and local
income tax............. 452 416 184
Research and development
credit................. (500) (250) -
Other, net.............. 56 79 (80)
--------- --------- ---------
$ 7,150 $ 4,750 $ 2,435
========= ========= =========
</TABLE>
S-16
<PAGE>
Deferred tax assets and liabilities consist of:
<TABLE>
<CAPTION>
June 30,
--------------------------
1999 1998
--------- --------
(In thousands)
<S> <C> <C>
Accounts receivable....................... $ 160 $ 106
Inventories............................... 5,025 1,671
Accrued expenses.......................... 106 84
--------- --------
Current assets.......................... 5,291 1,861
--------- --------
Other long-term liabilities............... 801 781
Capital loss carryforwards................ 2,543 2,493
Tax loss carryforwards.................... 1,434 238
Tax credit carryforwards.................. 3,864 3,737
Less: valuation allowance................. (3,426) (3,379)
--------- --------
Non-current assets...................... 5,216 3,870
--------- --------
Property, plant and equipment............. (3,572) (1,848)
Intangibles............................... (5,205) (3,125)
Other..................................... (21) (53)
--------- --------
Long-term liabilities................... (8,798) (5,026)
--------- --------
Net non-current liabilities............. (3,582) (1,156)
--------- --------
Total................................. $ 1,709 $ 705
========= ========
</TABLE>
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 $3.3 million, $2.1 million and $1.5
million and received refunds of $75,000, $26,000 and $1.1 million during
the years ended June 30, 1999, 1998 and 1997, respectively.
A tax benefit of $5.2 million, $1.6 million and $598,000 was credited to
additional paid-in capital during the years ended June 30, 1999, 1998 and
1997, respectively in connection with the exercise of stock options and
warrants.
11. Employment Contracts
As of June 30, 1999, the Company has employment agreements with certain of
its officers for periods through June 30, 2004 with annual remuneration
ranging from $180,000 to $350,000, 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 $1.2 million
per year. Certain of the contracts provide for a three-year consulting
period at the expiration of the employment term at two-thirds of salary. In
addition, 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 the salary and bonus, if any, for the remainder
of the term.
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.
S-17
<PAGE>
For each of the 1999, 1998 and 1997 calendar years, the Board of Directors
has elected to provide an employer contribution, which vests immediately,
equal to 40%, 30% and 30%, respectively of employee contributions subject
to certain limitations. The ARX 401(k) expense for the fiscal years ended
June 30, 1999, 1998 and 1997 was $507,000, $298,000 and $263,000,
respectively.
Employees of MIC, who are excluded from the ARX 401(k), are eligible to
participate in the MIC 401(k) and Profit Sharing Plan (the "MIC Plan"). 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 profits. The MIC Plan expense was
$500,000, $512,000 and $450,000 for the fiscal years ended June 30, 1999,
1998 and 1997, 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, 1999, 1998 and 1997 was $384,000, $324,000 and
$300,000, respectively. The assets of the SERP are held in a Rabbi Trust
and amounted to $1.2 million and $744,000 at June 30, 1999 and 1998,
respectively. The accumulated benefit obligation was $2.0 million and $1.7
million at June 30, 1999 and 1998, respectively. No participants are
currently receiving benefits.
13. Commitments and Contingencies
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, 1999 are as
follows for the fiscal years:
<TABLE>
<CAPTION>
(In thousands)
------------
<S> <C>
2000............... $ 2,191
2001............... 1,990
2002............... 1,677
2003............... 1,598
2004............... 783
Thereafter......... 361
--------
$ 8,600
========
</TABLE>
Rental expense was $2.3 million, $1.9 million and $1.6 million during the
fiscal years 1999, 1998 and 1997, respectively.
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 discovery stage. Based upon available information and
considering its various defenses, together with its product liability
insurance, in the opinion of management of the Company the outcome of the
action against its subsidiary will not have a materially adverse effect on
the Company's consolidated financial statements.
The Company is involved in various other routine legal matters. Management
believes the outcome of these matters will not have a materially adverse
effect on the Company's consolidated financial statements.
S-18
<PAGE>
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
b)Thin Film Interconnects b)Industrial spring and rubber isolators
c)Integrated Circuits c)Military wire-rope isolators
Test, Measurement and
Other Electronics:
a)Instrument Products
b)Motion Control Systems
- Scanning devices
- Stabilization and tracking
devices
- Magnetic devices
S-19
<PAGE>
The Company is a manufacturer of advanced technology systems and components
for commercial industry, government and defense contractors. Approximately
41%, 42% and 50% of the Company's sales for the fiscal years 1999, 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 only customers which constituted more than 10% of the
Company's sales during any year in the period presented were Lockheed
Martin and Lucent Technologies which comprised 12.2% and 11.4% of sales in
fiscal year 1999, respectively, Lucent Technologies which comprised 15.4%
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. The Company's
customers are located primarily in the United States, but export sales
accounted for 7.7%, 5.5% and 8.8% in fiscal years 1999, 1998 and 1997,
respectively.
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------
Business Segment Data: 1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net sales:
Microelectronics....................... $ 96,846 $ 74,263 $ 48,462
Test, Measurement and
Other Electronics.................... 41,515 25,685 28,144
Isolator Products...................... 18,743 18,913 17,693
-------- -------- --------
Net sales............................ $157,104 $118,861 $ 94,299
======== ======== ========
Operating income:
Microelectronics....................... $ 20,104 $ 14,147 $ 6,644
Test, Measurement and
Other Electronics.................... 3,134 996 2,762
Isolator Products...................... 2,108 3,063 2,844
General corporate expenses............. (4,262) (3,348) (2,514)
-------- -------- --------
21,084 14,858 9,736
Acquired in-process research
and development(1)................... (3,500) - -
Interest expense....................... (1,454) (2,011) (2,974)
Other income, net...................... 777 309 93
-------- -------- --------
Income before income taxes........... $ 16,907 $ 13,156 $ 6,855
======== ======== ========
Total assets:
Microelectronics....................... $104,222 $ 58,053 $ 37,741
Test, Measurement and
Other Electronics.................... 43,958 27,522 28,603
Isolator Products...................... 10,020 10,163 9,700
Corporate.............................. 7,016 28,363 5,003
-------- -------- --------
Total assets......................... $165,216 $124,101 $ 81,047
======== ======== ========
Capital expenditures:
Microelectronics....................... $ 6,955 $ 8,792 $ 1,637
Test, Measurement and
Other Electronics.................... 1,559 848 996
Isolator Products...................... 586 970 293
Corporate.............................. 4 3 5
-------- -------- --------
Total capital expenditures........... $ 9,104 $ 10,613 $ 2,931
======== ======== ========
Depreciation and amortization
expense:
Microelectronics....................... $ 4,112 $ 2,802 $ 2,230
Test, Measurement and
Other Electronics.................... 1,849 1,553 1,528
Isolator Products...................... 563 500 532
Corporate.............................. 30 29 32
-------- -------- --------
Total depreciation and
amortization expense................ $ 6,554 $ 4,884 $ 4,322
======== ======== ========
<FN>
(1) The special charge for the write-off of in-process research and
development acquired in the purchase of UTMC is allocable fully to the
Microelectronics segment.
</FN>
</TABLE>
S-20
<PAGE>
Quarterly Financial Data (Unaudited):
(In thousands, except per share data and footnotes)
<TABLE>
<CAPTION>
Quarter Year Ended
1999 First Second Third Fourth June 30
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 31,629 $ 36,197 $ 40,604 $ 48,674 $157,104
Gross Profit 11,125 12,402 15,399 19,533 58,459
Net Income (1) $ 2,258 $ 2,810 $ 188 $ 4,501 $ 9,757
Net income per share: ======== ======== ======== ======== ========
Basic (1) $ .13 $ .16 $ .01 $ .25 $ .55
======= ======= ======= ======= =======
Diluted (1) $ .12 $ .15 $ .01 $ .23 $ .51
======= ======= ======= ======= =======
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
Net income per share: ======== ======== ======== ======== ========
Basic $ .09 $ .12 $ .14 $ .20 $ .57
======= ======= ======= ======= =======
Diluted $ .08 $ .11 $ .13 $ .19 $ .51
======= ======= ======= ======= =======
<FN>
(1) Includes $3.5 million ($.18 per diluted share and $.20 basic) for the
year ended June 30, 1999 and quarter ended March 31, 1999, for the write-off
of the in- process research and development acquired in connection with the
purchase of UTMC Microelectronic Systems, Inc.
</FN>
</TABLE>
Since per share information is computed independently for each quarter and the
full year, based on the respective average number of common and common
equivalent shares outstanding, the sum of the quarterly per share amounts does
not necessarily equal the per share amounts for each year.
S-21
<PAGE>
AEROFLEX INCORPORATED
---------------------
AND SUBSIDIARIES
----------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
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
- ----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1999:
- ------------------------
Allowance for doubtful
accounts $ 317 $ 152 $ - $ 88 (A) $ 381
Reserve for inventory ====== ====== ======= ====== ======
obsolescence $3,592 $ 805 $ - $ 43 (B) $4,354
====== ====== ======= ====== ======
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
====== ====== ======= ====== ======
<FN>
Note: (A) - Net write-offs of uncollectible amounts.
(B) - Write-off of inventory.
</FN>
</TABLE>
S-22
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, 333-42405 and 333-64611) 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 10, 1999 relating to the consolidated
balance sheets of Aeroflex Incorporated and subsidiaries as of June 30, 1999 and
1998 and the related consolidated statements of earnings, stockholders' equity
and cash flows and related schedule for each of the years in the three-year
period ended June 30, 1999 which report appears in the June 30, 1999 annual
report on Form 10-K of Aeroflex Incorporated.
/s/ KPMG LLP
KPMG LLP
Melville, New York
September 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements for the year ended June 30, 1999 and is
qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,714,000
<SECURITIES> 0
<RECEIVABLES> 40,348,000
<ALLOWANCES> 381,000
<INVENTORY> 32,637,000
<CURRENT-ASSETS> 82,923,000
<PP&E> 84,660,000
<DEPRECIATION> 33,858,000
<TOTAL-ASSETS> 165,216,000
<CURRENT-LIABILITIES> 32,557,000
<BONDS> 0
0
0
<COMMON> 1,843,000
<OTHER-SE> 100,250,000
<TOTAL-LIABILITY-AND-EQUITY> 165,216,000
<SALES> 157,104,000
<TOTAL-REVENUES> 157,104,000
<CGS> 98,645,000
<TOTAL-COSTS> 139,520,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,454,000
<INCOME-PRETAX> 16,907,000
<INCOME-TAX> 7,150,000
<INCOME-CONTINUING> 9,757,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,757,000
<EPS-BASIC> 0.55
<EPS-DILUTED> 0.51
</TABLE>
UNDERTAKINGS
------------
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- 64611, 333-15339, 333-21803 and
333-46689).
(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.
(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.
