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UNITED STATES
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 September 30, 1998
1-8931
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Commission File Number
CUBIC CORPORATION
Exact Name of Registrant as Specified in its Charter
Delaware 95-1678055
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State of Incorporation IRS Employer Identification No.
9333 Balboa Avenue
San Diego, California 92123
Telephone (619) 277-6780
Common Stock American Stock Exchange, Inc.
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Title of each class Name of exchange on which registered
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, 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K.
Yes X No
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The aggregate market value of voting stock held by non-affiliates of the
registrant is: $115,329,520 as of November 25, 1998, based on the closing stock
price on that date.
Number of shares of common stock outstanding as of November 25, 1998: 8,907,004
(after deducting 2,981,239 shares held as treasury stock).
Parts I and III incorporate information by reference from the Registrant's
definitive proxy statement which will be filed no later than 120 days after the
close of the Registrant's year-end, and no later than 30 days prior to the
Annual Shareholders' Meeting.
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PART I
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS.
The Registrant, CUBIC CORPORATION (the Company), was incorporated in the State
of California in 1949 and began operations in 1951. In 1984, the Company moved
its Corporate domicile to the State of Delaware.
The Company, its subsidiaries and divisions design, develop, manufacture,
install and service products which are mainly electronic in nature, such as:
Equipment for use in customized military range instrumentation, training
and applications systems, communications and surveillance systems, HF and
VHF/UHF surveillance receivers, avionics systems and space RF/digital
products.
Automatic revenue collection equipment including fare card technology,
passenger gates, and ticket vending machines for mass transit networks,
including rail systems, buses and parking lots.
High-fidelity, high speed video and audio compression software for
applications including electronic mail, intra-net based training and
surveillance.
The Company also performs a variety of services, such as computer simulation
training, distributed interactive simulation and development of training
doctrine, as well as field operations and maintenance services related to
products previously produced and products produced by others. The Company also
manufactures replacement parts for its own such products. In addition, it
operates a corrugated paper converting facility through its subsidiary,
Consolidated Converting Company.
The Company achieved record sales and contract awards in fiscal 1998, resulting
in the highest backlog in its history at September 30, 1998. In the fourth
quarter of the fiscal year a joint venture, in which Cubic has 37.5% ownership,
was awarded a contract called "PRESTIGE" (Procurement of Revenue Services,
Ticketing, Information, Gates and Electronics) to privatize the London Transport
fare collection system. This contract is estimated to be worth a total of $1.75
billion over a 17 year period, making it the largest automatic fare collection
contract ever awarded. Cubic's share of the work, not including all options,
exceeds $500 million over the initial 12 year period of the contract. In
addition, the defense segment was awarded a contract worth more than $130
million to build two ground combat training centers for the British Ministry of
Defence, the largest international defense contract in its history. However,
unexpected losses on several Asian contracts assumed in the acquisition of Thorn
Transit Systems International (TTSI) in April 1997 and disappointing sales of
the Company's new video email product resulted in reduced profits for the year.
Sales for the year ended September 30, 1998 increased by almost 7% over 1997,
due to the additional sales volume added by TTSI and the new contracts described
above. Defense segment sales in 1998 were virtually equal to 1997, as the
increase from the new combat training center contract was offset by a decrease
in receiver product sales. The addition of TTSI and the PRESTIGE contract
resulted in an increase of 16% in transportation systems segment sales despite
somewhat lower sales volume on contracts in the United States.
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During fiscal year 1998, approximately 43% of the Company's total business was
done, either directly or indirectly, with various agencies of the United States
government. The remaining 57% of the business is classified as commercial.
The Company's products and services are sold almost entirely by its employees.
Overseas sales are made either directly or through representatives or licensees.
(b) FINANCIAL INFORMATION RELATING TO INDUSTRY
SEGMENTS AND CLASSES OF PRODUCTS OR SERVICES.
Information regarding the amounts of revenue, operating profit and loss and
identifiable assets attributable to each of the Company's industry segments, is
set forth in Note 12 to the Consolidated Financial Statements for the year ended
September 30, 1998, and follows at Item 14(a)(1) of this filing, on pages 38
through 40.
(c) NARRATIVE DESCRIPTION OF BUSINESSES.
DEFENSE
The defense segment's products include customized military range
instrumentation, training and applications systems, communications and
surveillance systems, HF and UHF/VHF surveillance receivers, avionics systems
and space RF/digital products. Services provided by the segment include
computer simulation training, distributed interactive simulation, development of
training doctrine and field operations and maintenance.
Cubic Defense Systems, Inc. (CDS) is best known for its combat training systems
for military field exercises. These systems use lasers or computer software to
simulate "live fire," plus instrumentation to record the force-on-force
engagement. When the missions are completed, computer data is replayed on
display screens for review by the instructors and personnel involved. The TACTS
(Tactical Aircrew Combat Training System) is used by the U. S. Navy and Marine
Corps, and ACMI (Air Combat Maneuvering Instrumentation) by the Air Force. A
new generation of air ranges based on the GPS (Global Positioning System) has
also been developed for the Air Force. Instrumented training ranges at the CMTC
(Combat Maneuver Training Center) and JRTC (Joint Readiness Training Center) are
for use by the U. S. Army. In September 1998, CDS was awarded a contract to
build two ground combat training centers for the British Ministry of Defence,
the largest international defense contract in its history.
Cubic Defense Systems, Inc. also produces the air/ground data link for the
J-STARS reconnaissance system (Joint Surveillance and Target Attack Radar
System) being built for the Air Force by Northrop Grumman. This subsidiary also
builds avionics products, such as the PLS (Personnel Locator System) for
helicopters, and a GCAS (Ground Collision Avoidance System) which provides
warnings for flight safety, for the U. S. military, aircraft prime contractors
and foreign governments.
In 1995, this subsidiary was selected by the U.S. Army for the Multiple
Integrated Laser Engagement System (MILES) 2000 program. MILES is a family of
products that uses lasers to realistically simulate weapons firing and detection
systems to register hits or kills without endangering the target. These
products, which are in the early stages of production, are being used by U.S.
Army and Marine Corp. personnel as well as allied forces in realistic
force-on-force combat training exercises.
Cubic Applications, Inc. is a tactical knowledge based service company that
teaches commanders to make correct decisions in battle situations by using
computer simulation for training.
Cubic Communications, Inc. designs and produces HF and VHF/UHF surveillance
receivers and direction finders primarily for the U. S. and foreign military
markets.
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RAW MATERIALS:
The principal raw materials used by the defense segment are sheet aluminum and
steel, copper electrical wire, and composite products. A significant portion of
the segment's end product is composed of purchased electronic components and
subcontracted parts and supplies. These items are primarily procured from
commercial sources. In general, supplies of raw materials and purchased parts
are presently adequate to meet the requirements of the segment.
BACKLOG:
The defense segment's sales backlog at September 30, 1998 was $230 million
compared to $105 million at September 30, 1997. Approximately $125 million is
not expected to be completed by September 30, 1999.
COMPETITION:
The defense segment competes with concerns of varying size, including some of
the largest corporations in the country. It is not possible to predict the
extent of competition which present or future activities will encounter,
particularly since the defense industry is subject to rapidly changing
competitive conditions, customer requirements and technological developments.
However, it is expected that United States government spending for defense
programs will continue at a lower level than in the past, resulting in continued
heavy competition for this segment.
TRANSPORTATION SYSTEMS
The transportation systems segment includes five subsidiaries which work
together to design, produce and service rail and bus fare collection systems.
These include Cubic Transportation Systems, Inc. (formerly Cubic Automatic
Revenue Collection Group), Cubic Transportation Systems Limited, Southern Cubic
Pty. Ltd., Cubic Transportation Systems Far East Limited and Scanpoint
Technology A/S. This group of companies is the acknowledged leader in a market
that serves rapid, mass transit systems the world over.
The rail system product line, headquartered in San Diego, designs computerized
systems for rapid transit rail systems. The manufacture of these systems is
accomplished at the Tullahoma, Tennessee facility. The Company and its
subsidiaries, Cubic Transportation Systems, Inc. and Cubic Transportation
Systems Limited, have been awarded large contracts by cities such as New York,
Washington, D.C., Chicago, London and Sydney, Australia. These programs provide
a solid base of current business and the potential for additional future
business as the programs are expanded. In 1997 the Company was awarded
contracts by the Shanghai Metro Corporation and the Guangzhou Metro Corporation
to install automatic fare collection equipment in China's first two modern heavy
rail systems. In 1998 a joint venture, in which Cubic has 37.5% ownership, was
awarded a contract called "PRESTIGE" to privatize the London Transport fare
collection system. This contract is estimated to be worth a total of $1.75
billion over a 17 year period, making it the largest automatic fare collection
contract ever awarded. Cubic's share of the work, not including all options,
exceeds $500 million over the initial 12 year period of the contract.
Cubic Transportation Systems, Inc. is also a major supplier of bus fareboxes.
Public bus systems across the United States and in foreign countries are being
equipped with computerized fareboxes, which accept all denominations of coins,
paper bills and magnetically encoded passes. These systems have been installed
in cities such as New York and Chicago.
There is worldwide demand for automatic revenue management systems in all forms
of public transit. The Company's transportation systems segment continues to
provide the technology and leadership to give the world fare collection market
quality products and service.
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RAW MATERIALS:
Raw materials used in this segment include sheet steel, composite products,
copper electrical wire and castings. All of these items are procured from
commercial sources. In general, supplies of raw materials and purchased parts
are presently adequate to meet the requirements of the segment.
BACKLOG:
The transportation systems segment sales backlog at September 30, 1998 was $742
million, compared to $252 million at September 30, 1997. The increase in
backlog from 1997 to 1998 was primarily the result of the award of a contract to
privatize the automatic fare collection system in the city of London, England,
which added approximately $535 million to backlog at September 30, 1998.
Approximately $563 million of the September 30, 1998 backlog is not expected to
be completed by September 30, 1999.
COMPETITION:
The Company's transportation systems segment is a leading manufacturer of
automatic fare collection systems for rapid transit systems throughout the
world. The Company's state-of-the-art systems and equipment, together with
continuing research and development, should enable it to maintain its leading
position in the industry for the immediate foreseeable future. Incident to the
sale of its transportation systems products, the Company's subsidiaries are
subject to possible liability by reason of warranties against defects in design,
material and workmanship.
COMMERCIAL OPERATIONS
Two businesses are included in the commercial operations segment. Consolidated
Converting Co. converts corrugated paper stock into high-quality packaging and
shipping containers and converts paper stock into seat covers. Cubic VideoComm
produces high fidelity, high-speed audio and video compression software for
commercial applications including electronic mail, intra-net based training and
surveillance.
RAW MATERIALS:
Raw materials used in the commercial operations segment include paper and
composite products, integrated circuitry, and peripheral electronic equipment.
All of these items are procured from commercial sources. In general, supplies
of raw materials and purchased parts are presently adequate to meet the
requirements of the segment. Paper shortages could delay completion of customer
orders in the future.
BACKLOG:
The commercial operations segment had an immaterial amount of sales backlog at
September 30, 1998 and 1997. The businesses in this segment do not track sales
backlog due to the short-term conversion of customer orders into sales and the
absence of any significant long-term contracts.
COMPETITION:
In the commercial operations segment, the subsidiaries of the Company compete
with concerns of varying size, including some of the largest corporations in the
country. It is not possible to predict the extent of the competition which
present or future activities will encounter, particularly since many of the
activities of the Company's subsidiaries are subject to rapidly changing
competitive conditions.
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GENERAL
The Company pursues a policy of seeking patent protection for its products,
where deemed advisable, but it does not regard itself as materially dependent on
its patents for the maintenance of its competitive position.
The Company does not engage in any significant business that is seasonal in
nature.
The estimated dollar amounts spent for customer sponsored research activities
relating to the development of new products or services was $64 million, $34
million and $55 million in 1998, 1997 and 1996, respectively. The cost of
Company sponsored research and development activities was $10,776,000,
$8,558,000 and $7,186,000 in 1998, 1997 and 1996, respectively.
The Company must comply with federal, state and local laws and regulations
regarding discharge of materials into the environment and the handling and
disposal of materials classed as hazardous and/or toxic. Such compliance has no
material effect upon the capital expenditures, earnings or competitive position
of the Company.
There were approximately 3,700 persons employed by the Company and its
subsidiaries at September 30, 1998.
Typically, the Company's long-term contracts provide for progress or advance
payments by its customers, which provide assistance in financing the working
capital requirements on those contracts.
(d) FINANCIAL INFORMATION ABOUT FOREIGN
AND DOMESTIC OPERATIONS AND EXPORT SALES
Information regarding foreign and domestic operations and export sales is set
forth in Note 12 to the Consolidated Financial Statements for the year ended
September 30, 1998, and follows at Item 14(a)(1) of this filing, on page 40.
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ITEM 2. PROPERTIES.
The Company conducts its operations in approximately 1.1 million square feet in
both owned and leased properties located throughout the world. Approximately
50% of the square footage is owned by the Company, including 425,000 square feet
located in the City of San Diego. All owned and leased properties are
considered in good condition and adequately utilized, with approximately 40%
dedicated to manufacturing and the remainder utilized for engineering and
administrative purposes. The following table identifies significant properties
by business segment:
<TABLE>
<CAPTION>
LOCATION OF PROPERTY OWNED OR LEASED
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<S> <C>
CORPORATE HEADQUARTERS:
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San Diego, CA Owned
DEFENSE:
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Alexandria, VA Leased
Hampton, VA Leased
Lacey, WA Leased
Leavenworth, KS Leased
Orlando, FL Leased
Salisbury, Wilts, England Leased
San Diego, CA Owned
San Diego, CA Leased
Shalimar, FL Leased
Washington, DC Leased
TRANSPORTATION SYSTEMS:
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Auburn, NSW Australia Leased
Brondby, Denmark Leased
Chicago, IL Leased
Merstham, Surrey, England Owned
New York, NY Leased
Oakland, CA Leased
Kowloon Bay, Hong Kong Leased
San Diego, CA Owned
Tullahoma, TN Owned
Vienna, VA Leased
Wells, Somerset, England Leased
COMMERCIAL OPERATIONS:
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San Diego, CA Owned
Whittier, CA Leased
</TABLE>
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ITEM 3. LEGAL PROCEEDINGS.
Since 1991, the Company and two of its subsidiaries, on a de minimus basis, have
shared response costs with a group of other potentially responsible parties to
remediate a used oil and solvent recycling facility in San Diego County, even
though the Company was not involved in the transport or disposal of alleged
hazardous materials. The Company believes that its insurance policies provide
coverage for any additional costs it may incur in connection with this activity.
It is management's opinion that any possible liability resulting from this
situation will not have a material effect on the Company's financial statements.
Information regarding other legal proceedings is set forth in Note 11 to the
Consolidated Financial Statements for the year ended September 30, 1998, and
follows at Item 14(a)(1) of this filing, on page 38.
Neither the Company nor any of its subsidiaries are presently a party to any
material pending proceedings other than ordinary litigation incidental to the
business, the outcome of which will not, in management's opinion, have a
materially adverse effect on the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Information regarding submission of matters to a vote of security holders is
incorporated herein by reference from the Company's definitive Proxy Statement,
which will be filed no later than 30 days prior to the date of the Annual
Meeting of Shareholders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.
The principal market on which the Company's common stock is being traded is the
American Stock Exchange, Inc. The closing high and low sales prices for the
stock, as reported in the consolidated transaction reporting system on the
American Stock Exchange, Inc. for the quarterly periods during the past two
fiscal years, and dividend information for those periods, are as follows.
MARKET AND DIVIDEND INFORMATION
<TABLE>
<CAPTION>
Sales Price of Common Shares Dividends per Share
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1998 1997 1998 1997
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<S> <C> <C> <C> <C> <C> <C>
QUARTER ENDED: High Low High Low
December 31 38-1/4 30-1/2 24-1/4 19
March 31 33-3/4 23-1/4 27-7/8 22-1/2 $.19 $.19
June 30 30-1/4 22-3/4 27-1/4 20-1/4
September 30 28-3/4 20-3/8 40 24-1/4 $.19 $.19
</TABLE>
On November 25, 1998, the closing price of the Company's common stock on the
American Stock Exchange was $21.63.
There were approximately 1,700 shareholders of record of the Company's common
stock as of November 25, 1998.
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ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL HIGHLIGHTS AND SUMMARY OF CONSOLIDATED OPERATIONS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended September 30
1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Sales $414,136 $388,154 $407,621 $370,065 $260,622
Cost of sales 325,138 296,991 316,293 290,441 200,549
Selling, general and administrative expenses 79,882 68,208 69,359 60,505 52,071
Interest expense 1,962 1,837 3,081 2,995 2,535
Income taxes 154 6,598 6,568 3,437 825
Income from continuing operations 889 12,193 11,063 5,392 2,533
Loss from discontinued operations - - - - (153)
Cumulative effect of accounting change - - - - 1,379
Net income 889 12,193 11,063 5,392 3,759
Average number of shares outstanding 8,917 8,975 8,981 8,981 9,035
PER SHARE DATA:
Income from continuing operations $ .10 $ 1.36 $ 1.23 $ .60 $ .28
Loss from discontinued operations - - - - (.02)
Cumulative effect of accounting change - - - - .15
Net income .10 1.36 1.23 .60 .41
Cash dividends .38 .38 .367 .35 .35
YEAR-END DATA:
Shareholders' equity $173,552 $175,320 $167,667 $159,865 $157,645
Equity per share 19.48 19.60 18.67 17.80 17.55
Total assets 293,991 282,282 266,638 299,694 288,673
Long-term debt 5,000 10,000 15,000 39,000 35,000
Shares outstanding 8,907 8,947 8,981 8,981 8,981
</TABLE>
This summary should be read in conjunction with the related consolidated
financial statements and accompanying notes.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FISCAL 1998 COMPARED TO FISCAL 1997
The Company achieved record sales and contract awards in fiscal 1998,
resulting in the highest backlog in its history at September 30, 1998. In the
fourth quarter of the fiscal year, a joint venture in which Cubic has 37.5%
ownership, was awarded a contract called "PRESTIGE" (Procurement of Revenue
Services, Ticketing, Information, Gates and Electronics) to privatize the
London Transport fare collection system. This contract is estimated to be
worth a total of $1.75 billion over a 17-year period, making it the largest
automatic fare collection contract ever awarded. Cubic's share of the work,
not including all options, exceeds $500 million over the initial 12-year
period of the contract. In addition, the defense segment was awarded a
contract worth more than $130 million to build two ground combat training
centers for the British Ministry of Defence, the largest international
defense contract in its history. However, unexpected losses on several Asian
contracts assumed in the acquisition of Thorn Transit Systems International
(TTSI) in April 1997 and disappointing sales of the Company's new video email
product resulted in reduced profits for the year.
Sales for the year ended September 30, 1998 increased by almost 7% over 1997,
due to the additional sales volume added by TTSI and the new contracts described
above. These new contracts contributed to a significant increase in fourth
quarter sales, as pre-contract costs that had been incurred throughout the year
were converted to contract costs upon award, thereby generating the higher sales
volume. Defense segment sales in 1998 were virtually equal to 1997, as the
increase from the new combat training center contract was offset by a decrease
in receiver product sales. The addition of TTSI and the PRESTIGE contract
resulted in an increase of 16% in transportation systems segment sales despite
somewhat lower sales volume on contracts in the United States.
Operating profits in the defense segment were 60% higher in fiscal 1998 than in
1997. The J-STARS Data Link product line contributed higher profits again in
1998 and was the major contributor to the profits of the segment. In addition,
1997 operating profits in the segment had been reduced by the recognition of
losses caused by cost growth in the development of MILES 2000. Although not yet
a contributor to profits, the MILES 2000 product line has moved into production
in 1998 and is expected to be profitable in future years. The decrease in
receiver product sales, which was caused by cutbacks in U.S. government
spending, and development costs for a new product resulted in losses from the
receiver product line for the year. A reorganization of management and
streamlining of costs, including the completion of the development effort for
the new product, should result in improved results from this product area for
fiscal 1999.
During the second quarter, the Company established a $9.5 million reserve,
before applicable income taxes, for estimated losses on several contracts in
Asia, related to the TTSI subsidiary referred to above. The Company has
restructured management in the United Kingdom to realign resources and address
the operating issues that resulted in these losses, including the merging of
TTSI into the previously existing U.K. operations. Management believes the
reserve is sufficient to cover all losses associated with these contracts;
however, not all issues have yet been resolved. Long-term contract accounts
receivable at September 30, 1998 includes approximately $14.2 million in revenue
recognized for customer-required work performed which was not specified in the
related contracts. This amount relates to the Asian contracts mentioned above as
well as other contracts in the U.K. with London Transport. It is expected that
the Company will recover this amount through the negotiation of contract claims.
Lower sales volume and profit margins on contracts in the United States also
negatively impacted operating profits in the transportation systems segment.
Contracts in New York City and Chicago have matured and did not generate as much
sales volume as they had in recent years. This decrease in sales and profits
from United States customers was partially offset by increased sales and profits
from customers in China.
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The Company has continued to invest in the development and promotion of its
proprietary software technology which delivers compressed video and audio
transmission over computer networks for applications including email, intra-net
based training and surveillance. This investment, which has resulted in losses
in the commercial operations segment, amounted to $6.6 million for the year
ended September 30, 1998. Sales of these products have been less than expected
and the Company has decided to look for a partner or a new owner for this
product line which can supply the expertise and the additional investment needed
over the longer term to take the technology to its business potential.
Selling, general and administrative expenses in fiscal 1998 increased, both
nominally and as a percentage of sales, over the level in fiscal 1997. This
increase resulted from marketing and promotion expenses related to the video
compression software technology mentioned above, general and administrative
costs of the TTSI subsidiary and selling costs related to procurement of the
PRESTIGE contract.
Net operating loss (NOL) carryforwards, which arose in the United Kingdom,
amounted to approximately $30 million at September 30, 1998 resulting in a
deferred tax asset of $9.3 million at that date. Despite the current year losses
in the United Kingdom, the Company expects to generate future taxable income
sufficient to realize the benefit of such NOL carryforwards as the result of
contracts that have been awarded, the most significant of which is the PRESTIGE
contract. The valuation allowance of $2.1 million against this asset at
September 30, 1998 was provided due to NOL carryforwards of approximately $6.5
million that existed at the time of the acquisition of TTSI. The Company
believes it is unlikely that a tax benefit from this portion of the NOL
carryforward will ever be realized, as profits from the PRESTIGE contract cannot
be utilized to generate this tax benefit. Management believes that the award of
the PRESTIGE contract provides a basis to expect that the net deferred tax asset
in the U.K. at September 30, 1998 will be realized. However, if expected profits
in the U.K. are not realized in the future, the value of the deferred tax asset
related to this NOL carryforward could be less than recorded and as low as zero.
Deferred tax assets will be evaluated on a quarterly basis and appropriate
adjustment to the valuation allowance will be made if required.
FISCAL 1997 COMPARED TO FISCAL 1996
As a result of the acquisition of TTSI, the decrease in sales caused by the sale
of the toll collection product line in 1996 was somewhat mitigated. Sales in the
transportation systems segment were down nearly 14% from fiscal 1996 to 1997
because of the sale of the toll collection product line, while overall sales
were down about 5%. Defense segment sales increased again in fiscal 1997 as a
result of contracts awarded for the production of additional J-STARS Data Link
systems.
Profitability of the transportation systems segment was somewhat lower than
in the prior fiscal year because of the disposal of the toll collection
product line mentioned above. In the second and third quarters of fiscal
1996, prior to its disposal, the product line had produced a profit. In
addition, pursuit of the contract to upgrade and maintain the London
Transport fare collection system continued to impact the profitability of
this segment. Despite these costs, operating profits for the bus and rail
product lines in this segment were higher than in fiscal 1996.
Operating profits in the defense business were also lower in fiscal 1997 than in
1996. This was the result of cost growth on the contract to develop the new
MILES 2000 (Multiple Integrated Laser Engagement System) technology. This cost
growth resulted from higher than expected costs to resolve technical issues in
the development of the system.
The increase in J-STARS Data Link sales described above resulted in higher
profits from this product line than in the previous year, helping to offset the
impact of the MILES 2000 cost growth. In addition, higher profits were realized
in fiscal 1997 from the Company's avionics product line, including the Personnel
Locator System.
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During fiscal 1997, the Company sold two product lines in its commercial
operations segment that did not offer good long-term prospects to the Company.
The sale of the electro-optical and freeway callbox product lines generated an
aggregate pretax gain of approximately $1.5 million, which is included in other
income on the Consolidated Statement of Income and Retained Earnings. This gain
was nearly offset by costs incurred in the development and marketing of new
software technology for sending video email over the Internet.
Selling, general and administrative expenses, although somewhat lower in amount,
increased as a percentage of sales from 17.0% in 1996 to 17.6% in 1997. This
increase was the result of selling expenses related to the video email product
and the proposal effort for the London Transport project. Interest expense was
$1.2 million lower in fiscal 1997 than in 1996 because of a $24 million
reduction of long-term debt in 1996.
FINANCIAL POSITION AND LIQUIDITY
During the year ended September 30, 1998, the Company experienced negative cash
flow of $51 million from operations. This was the result of growth in long-term
contract accounts receivable and inventories. Contractual terms under U.S.
government contracts provide progress payments prior to the final delivery of
the product sold. However, during certain phases of work under these contracts,
especially during the system design phase, these progress payments provide cash
flow of only 70-80% of costs incurred. At September 30, 1998, the Company had
several U. S. Government contracts in this phase of completion, with a
substantial amount of costs subject to these progress-billing provisions,
resulting in negative cash flows. A large contract received near the end of
fiscal 1998 also contributed to the growth in receivables under commercial
contracts. Pre-contract costs totaling $7.2 million had been incurred for this
contract, but were not billable until after September 30, 1998 due to the
contract being awarded late in the fiscal year. In addition, commercial
long-term contract accounts receivable included revenues recognized related to
costs totaling $14.2 million which were incurred as a result of
customer-required work performed not specified in contract provisions and were,
therefore, not billable as of September 30, 1998. It is expected that as further
progress is made on these contracts, contract modifications are completed and
product deliveries or system installations begin, positive cash flows will be
generated. The growth in inventories is reflective of the Company's production
of several products that have become standard, rather than being custom designed
under contract. Standard gates being built for the PRESTIGE project represented
the largest portion of the increase in inventories from the 1997 year end to the
1998 year end.
Investing activities included $8.8 million of planned expenditures for capital
equipment. Financing activities included a net increase in short-term
borrowings of $20 million to provide the working capital required as a result of
the growth in accounts receivable. Cash was also used to pay a dividend to
shareholders and make a scheduled $5 million annual installment payment on a
long-term note.
In November 1998, the Company completed a private placement of $50 million in
senior unsecured notes with an average duration of approximately 10 years, at
an average coupon rate of 6.27%. Proceeds of this borrowing were used to
repay the short-term borrowings from U.S. banks and to provide working
capital. At September 30, 1998 the Company had working capital of $100
million and a current ratio of 1.9 to 1. The Company expects that cash on
hand and its unused debt capacity will be adequate to meet its short- and
long-term financing needs.
<PAGE>
Page 13
YEAR 2000 ISSUE
The Year 2000 issue arises from the fact that many existing computer software
programs use only the last two digits to refer to a specific year, instead of
all four digits. As a result, computer programs that have date-sensitive
software, or operate with date-sensitive data, may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculation causing disruptions in operations,
including, among other things, the temporary inability to process
transactions or engage in normal business activities.
General
The Company has assembled a Year 2000 Task Force, which includes personnel
from corporate and business unit management to ensure that the Company, as a
whole, is Year 2000 compliant by December 31, 1999. The objectives of this
task force are to: (1) identify non-compliant operating systems, software,
and data files, (2) assess, to the extent possible, the potential problems of
being non-compliant, (3) estimate both the amount and timing of costs to be
incurred to fix the potential problems of being non-compliant, and (4)
develop and execute a comprehensive strategy, including contingency plans, to
fix these problems.
Identification of Operating Systems, Software and Data Files
The Company recognizes that it must make remedial changes to its own operating
systems, software and data files, as well as assess the remedial efforts
undertaken by its suppliers and customers. In addition, the Company may have
potential exposure to make products previously delivered compliant, depending on
the terms and conditions of its existing contracts.
The Company is making appropriate modifications and updates to its internal
information systems, some of which have been or are being done in the ordinary
course of business. Final testing of all systems should be completed by the
third calendar quarter of 1999. The Company's goal is to ensure, to the extent
possible, that the transition from the year 1999 to the year 2000 will not have
a materially adverse impact on its engineering, manufacturing or administrative
capabilities.
The Company began contacting key suppliers and subcontractors in 1998. The
current plan is to obtain written certification of their compliance to the Year
2000 issue. In cases where this cannot be obtained, the Company will develop
precautionary plans, on a case by case basis, to minimize disruptions caused by
their non-compliance. There is no possible way to ensure that all suppliers and
subcontractors will be Year 2000 compliant by December 31, 1999, and any such
failure could have a materially adverse impact on the Company's business.
Therefore, the Company's goal is to minimize the potentially adverse impact by
monitoring suppliers and subcontractors' compliance efforts, and by identifying
alternate suppliers where possible.
The Company is in discussions with customers to diagnose and make compliant
delivered products and services. The Company has also identified contracts that
contained warranty provisions stipulating that the Company is responsible for
Year 2000 compliance of products previously delivered. Current estimates
indicate that the costs to make these products compliant will be minimal. In
certain cases, the Company has received contracts with its customers to upgrade
previously delivered products to be Year 2000 compliant.
The Company is aware of the potential that claims could be made against it and
other companies for damages arising from products and services that are not Year
2000 compliant. The Company is not in a position to identify or to avoid all
possible scenarios that could lead to claims against it. However, the Company
will assess scenarios and take steps in 1999 to mitigate the impact of various
scenarios if they were to occur.
<PAGE>
Page 14
Potential Problems of Non-compliance
The potential problems of internal or external non-compliance include, but are
not limited to: (1) penalties caused by the inability of the Company to receive
supplies and subcontracted deliverables in a timely manner to meet delivery
schedules stipulated under existing contracts, (2) cashflow restrictions caused
by the failure of significant customers to make payments in accordance with
contract terms, and (3) productivity loss caused by disruptions in engineering,
manufacturing and administrative capabilities.
Costs to Address the Issue
During fiscal 1998, the Company expensed approximately $100,000 of incremental
Year 2000 remedial costs. Based on current estimates, and assuming there is not
a material change in available resources, the Company will incur another
$300,000 to $500,000 through the fourth calendar quarter of 1999. These costs
consist primarily of in-house labor, outside services, and computer hardware and
software purchases and will be expensed as incurred.
Development and Execution of Comprehensive Strategy
With the assembly of the Year 2000 Task Force in 1998, the Company began the
development of a corporate-wide comprehensive strategy to address the problems
associated with the Year 2000 transition. It is expected that this strategy
will continually evolve as new issues arise and old ones disappear. While the
Company continues to believe that the Year 2000 matters discussed above will not
have a materially adverse impact on its business, financial condition or results
of operations, it is not possible to determine with certainty whether or to what
extent the Company may be affected.
In addition to historical matters, this report contains forward-looking
statements. They can be identified by words such as ANTICIPATE, HOPE, ESTIMATE,
PLAN, POTENTIAL, FEEL, EXPECT, SHOULD, and CONFIDENT. These forward-looking
statements are made pursuant to the safe harbor provisions of the Securities
Litigation Reform Act of 1995. Investors are cautioned that forward-looking
statements involve risks and uncertainties which may affect the Company's
business and prospects. These include the effects of politics on negotiations
and business dealings with government entities, reductions in defense budgets,
economic conditions in the various countries in which the Company does or hopes
to do business, competition and technology changes in the defense and
transportation industries, and other competitive and technological factors.
<PAGE>
Page 15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
The Company invests in money market instruments and short-term marketable debt
and equity securities that are tied to floating interest rates being offered at
the time the investment is made. The Company maintains short term borrowing
arrangements in the U.S. and the United Kingdom (U.K.) also tied to floating
interest rates, typically a base rate (i.e. LIBOR or the U.K. base rate) plus a
basis point credit spread. The Company also has senior unsecured notes payable
to insurance companies that are due in annual installments. These notes have
fixed coupon interest rates. See Note 6 to the Consolidated Financial Statements
for more information.
Interest income earned on the Company's short-term investments is affected by
changes in the general level of U.S., U.K and Danish interest rates. These
income streams are generally not hedged. Interest expense incurred under the
short term borrowing arrangements is affected by changes in the general level of
interest rates in the U.S. and U.K. The expense related to these cost streams
is usually not hedged since it is either revolving, payable within three months
and/or immediately callable by the lender at any time. Interest expense incurred
under the long-term notes payable is not affected by changes in any interest
rate because it is fixed. However, the Company has in the past, and may in the
future, use an interest rate swap to essentially convert this fixed rate into a
floating rate. The purpose of the swap is to tie the interest expense risk
related to these borrowings to the interest income risk on the Company's
short-term investments, thereby mitigating the Company's net interest rate risk.
The Company believes that it is not significantly exposed to interest rate risk
because of these activities.
FOREIGN EXCHANGE RISK
In the ordinary course of business, the Company enters into firm sale and
purchase commitments denominated in many foreign currencies. The Company has a
policy to hedge those commitments greater than $20,000 by using foreign exchange
forward and option contracts that are denominated in currencies other than the
functional currency of the subsidiary responsible for the commitment, typically
the British Pound, German Mark, Hong Kong Dollar and Australian Dollar. These
contracts are effective hedges regardless of the direction or magnitude of any
foreign exchange rate change because they result in an equal and opposite income
or cost stream that offsets the change in the value of the underlying
commitment. See Note 1 to the Consolidated Financial Statements for more
information on the Company's currency translation and transaction accounting
policies. The Company also uses balance sheet hedges to mitigate foreign
exchange risk. This strategy involves incurring British Pound denominated debt
(See Interest Rate Risk above), and having the option of paying off the debt
using U.S. Dollar or British Pound funds, depending on which currency is
stronger at the time the payment is made. The Company believes that it is not
significantly exposed to foreign exchange rate risk because of these activities.
The Company's investments in its foreign subsidiaries in the U.K., Denmark,
Australia, Singapore and Hong Kong are not hedged because they are considered to
be invested indefinitely. However, the Company has control over the timing and
amount of earnings repatriation, and will use this control to mitigate foreign
exchange risk.
<PAGE>
Page 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
The following consolidated financial statements of the Company and its
subsidiaries, for the year ended September 30, 1998, are attached hereto, marked
Pages 17 and 21 through 40.
Report of Ernst & Young LLP, Independent Auditors
See Page 17
Consolidated Balance Sheet
September 30, 1998 and 1997
See Pages 22 and 23
Consolidated Statement of Income and Retained Earnings
Years ended September 30, 1998, 1997 and 1996
See Page 24
Consolidated Statement of Cash Flows
Years ended September 30, 1998, 1997 and 1996
See Page 25
Notes to Consolidated Financial Statements
September 30, 1998
See Pages 26 through 40
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
<PAGE>
Page 17
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Shareholders
Cubic Corporation
We have audited the accompanying consolidated balance sheet of Cubic Corporation
as of September 30, 1998 and 1997, and the related consolidated statements of
income and retained earnings and cash flows for each of the three years in the
period ended September 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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 that 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 consolidated financial position of Cubic
Corporation at September 30, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
Ernst & Young LLP
San Diego, California
November 25, 1998,
Except for the second paragraph of Note 11, as to which the date is
December 7, 1998
<PAGE>
Page 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain information regarding directors and executive officers is incorporated
herein by reference from the Company's definitive Proxy Statement, which will be
filed no later than 30 days prior to the date of the Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation is incorporated herein by reference
from the Company's definitive Proxy Statement, which will be filed no later than
30 days prior to the date of the Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
Proxy Statement, which will be filed no later than 30 days prior to the date of
the Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding "Certain Relationships and Related Transactions" is
included in Note 10 to the Consolidated Financial Statements for the year ended
September 30, 1998, and follows at Item 14(a)(1) of this filing, on page 37.
<PAGE>
Page 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report:
(1) The following consolidated financial statements of Cubic Corporation
and subsidiaries, as referenced in Item 8:
Consolidated Balance Sheet
September 30, 1998 and 1997
Consolidated Statement of Income and Retained Earnings
Years ended September 30, 1998, 1997 and 1996
Consolidated Statement of Cash Flows
Years ended September 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
September 30, 1998
(2) The following consolidated financial statement schedules of Cubic
Corporation and subsidiaries, as referenced in Item 14(d):
None
Schedules, for which provision is made in the applicable accounting
rules and regulations of the Securities and Exchange Commission, are
not required under the related instructions or are not applicable and,
therefore, have been omitted.
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
(c) Exhibits:
21. List of Subsidiaries
27. Financial Data Schedule
(d) Financial Statement Schedules
None
<PAGE>
Page 20
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized:
(Registrant) CUBIC CORPORATION
12/23/98 /s/ Walter J. Zable
- ---------- -----------------------------------------
Date WALTER J. ZABLE, President
- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
12/23/98 /s/ Walter J. Zable
- -------- -----------------------------------------
Date WALTER J. ZABLE, President, Chief
Executive Officer and Chairman of the
Board of Directors
12/23/98 /s/ Walter C. Zable
- -------- -----------------------------------------
Date WALTER C. ZABLE, Vice President and
Vice Chairman of the Board of Directors
12/23/98 /s/ Richard G. Duncan
- -------- -----------------------------------------
Date RICHARD G. DUNCAN, Director
12/23/98 /s/ Raymond E. Peet
- -------- -----------------------------------------
Date RAYMOND E. PEET, Director
12/23/98 /s/ William W. Boyle
- -------- -----------------------------------------
Date WILLIAM W. BOYLE, Director, Vice President of
Finance & Chief Financial Officer
12/23/98 /s/ Thomas A. Baz
- -------- -----------------------------------------
Date THOMAS A. BAZ, Vice President and
Corporate Controller, Principal Accounting Officer
<PAGE>
Page 21
ITEM 8, ITEM 14(a)(1) AND (2),(c) AND (d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EXHIBITS
Cubic Corporation
Year Ended September 30, 1998
San Diego, California
<PAGE>
Page 22
CUBIC CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30
1998 1997
----------- -----------
(in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $3,500 $53,257
Marketable securities, available-for-sale 2,086 2,426
Accounts receivable:
Trade and other receivables 8,824 10,053
Long-term contracts--Note 4 141,047 97,951
Allowance for doubtful accounts (231) (197)
----------- -----------
149,640 107,807
Inventories--Note 5 39,623 20,955
Deferred income taxes--Note 8 9,060 10,454
Prepaid expenses and other current assets 6,236 5,329
----------- -----------
TOTAL CURRENT ASSETS 210,145 200,228
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 13,075 12,886
Buildings and improvements 23,224 22,179
Machinery and other equipment 77,562 70,510
Leasehold improvements 2,630 1,888
Allowance for depreciation and amortization (76,091) (67,353)
----------- -----------
40,400 40,110
----------- -----------
OTHER ASSETS
Deferred income taxes--Note 8 4,756 -
Cost in excess of net tangible assets of
purchased businesses, less amortization 25,788 27,281
Miscellaneous other assets 12,902 14,663
----------- -----------
43,446 41,944
----------- -----------
TOTAL ASSETS $293,991 $282,282
----------- -----------
----------- -----------
See accompanying notes
</TABLE>
<PAGE>
Page 23
CUBIC CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30
1998 1997
----------- -----------
(in thousands)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings--Note 6 $ 30,321 $ 9,620
Trade accounts payable 14,534 8,380
Customer advances 27,157 30,896
Salaries and wages, and amounts withheld from
employees' compensation 15,956 13,476
Other current liabilities 15,388 24,414
Income taxes payable 1,305 206
Current portion of long-term debt--Note 6 5,000 5,000
----------- -----------
TOTAL CURRENT LIABILITIES 109,661 91,992
----------- -----------
LONG-TERM DEBT, less current portion--Note 6 5,000 10,000
OTHER LIABILITIES
Deferred income taxes--Note 8 1,974 2,131
Deferred compensation 3,804 2,839
----------- -----------
5,778 4,970
----------- -----------
COMMITMENTS AND CONTINGENCIES--Notes 7 and 11
SHAREHOLDERS' EQUITY--Note 6
Common stock, no par value:
Authorized--20,000,000 shares
Issued--11,888,243 shares 234 234
Additional paid-in capital 12,123 12,123
Retained earnings 195,724 198,213
Foreign currency translation adjustment 1,527 (557)
Treasury stock at cost:
1998--2,981,239 shares
1997--2,941,585 shares (36,056) (34,693)
----------- -----------
173,552 175,320
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $293,991 $282,282
----------- -----------
----------- -----------
</TABLE>
See accompanying notes
<PAGE>
Page 24
CUBIC CORPORATION
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Year Ended September 30
1998 1997 1996
---------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C>
Revenue:
Sales $414,136 $388,154 $407,621
Interest and dividends 2,145 2,259 2,901
Other income 2,520 3,972 3,743
---------- ---------- ----------
418,801 394,385 414,265
---------- ---------- ----------
Costs and expenses:
Cost of sales 325,138 296,991 316,293
Selling, general and administrative 79,882 68,208 69,359
Research and development 10,776 8,558 7,186
Interest 1,962 1,837 3,081
---------- ---------- ----------
417,758 375,594 395,919
---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 1,043 18,791 18,346
Income taxes--Note 8 154 6,598 6,568
Minority interest in income of subsidiary - - 715
---------- ---------- ----------
NET INCOME 889 12,193 11,063
Cash dividends paid (per share of common stock:
1998 -- $.38, 1997 -- $.38 and 1996 -- $.367) (3,378) (3,409) (3,299)
Retained earnings at the beginning of the year 198,213 189,429 181,665
---------- ---------- ----------
RETAINED EARNINGS AT THE END OF THE YEAR $195,724 $198,213 $189,429
---------- ---------- ----------
---------- ---------- ----------
Net income per share $ .10 $ 1.36 $ 1.23
---------- ---------- ----------
---------- ---------- ----------
Average number of shares outstanding 8,917 8,975 8,981
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes
<PAGE>
Page 25
CUBIC CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
(in thousands)
Operating Activities:
Net income $ 889 $ 12,193 $ 11,063
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 11,142 8,976 10,520
Minority interest - - 715
Deferred income taxes (3,277) 4,150 (3,549)
Changes in operating assets and liabilities,
net of effects from acquisitions:
Accounts receivable (40,240) 22,862 25,235
Inventories (18,264) (7,986) 2,270
Prepaid expenses (882) (469) (551)
Accounts payable and other current liabilities 1,580 (9,834) (1,815)
Customer advances (3,980) (2,682) (6,324)
Income taxes 1,136 (2,364) (1,573)
Other items - net 647 (2,875) (583)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (51,249) 21,971 35,408
---------- ---------- ----------
Investing Activities:
Acquisition of businesses, net of cash acquired - (11,844) (6,632)
Proceeds from sale of businesses - 31,996 17,731
Sale of marketable securities 315 333 646
Additions to toll equipment under operating leases - - (2,789)
Purchases of property, plant and equipment (8,859) (7,374) (10,047)
Other items - net (521) (1,754) (3,944)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (9,065) 11,357 (5,035)
---------- ---------- ----------
Financing Activities:
Change in short-term borrowings 20,187 9,726 -
Principal payments on long-term debt (5,000) (5,000) (24,000)
Purchases of treasury stock (1,363) (967) (3)
Dividends paid to minority interest - - (3,300)
Dividends paid to shareholders (3,378) (3,409) (3,299)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 10,446 350 (30,602)
---------- ---------- ----------
Effect of exchange rates on cash 111 (483) (414)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (49,757) 33,195 (643)
Cash and cash equivalents at the beginning of the year 53,257 20,062 20,705
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT
THE END OF THE YEAR $ 3,500 $ 53,257 $ 20,062
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes
<PAGE>
Page 26
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF THE BUSINESS: Cubic Corporation (the Company), was
incorporated in the State of California in 1949 and began operations in 1951. In
1984, the Company moved its corporate domicile to the State of Delaware. The
Company's subsidiaries design, develop and manufacture products which are mainly
electronic in nature and provide services related to products previously
produced and products produced by others. The Company's principal lines of
business are defense electronics and transportation systems. Principal customers
for defense products and services are the United States and foreign governments.
Transportation fare collection systems are sold primarily to large local
government agencies in the United States and worldwide.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Cubic Corporation and its subsidiaries. All significant intercompany
balances and transactions are eliminated.
The Company owns 37.5% of the common stock of Transys, an unconsolidated joint
venture company in the United Kingdom. This joint venture was formed to bid on a
contract called "PRESTIGE" (Procurement of Revenue Services, Ticketing,
Information, Gates and Electronics), the purpose of which is to privatize the
London Transport fare collection system. In August of 1998, Transys was awarded
the contract and began operations. Over $500 million of the work to be performed
by Transys has been subcontracted to the Company, through September 30, 1998, as
a part of the joint venture arrangement. As of September 30, 1998, Transys had
not yet generated revenues or incurred expenses and the Company's share of its
assets was less than 5% of consolidated total assets.
The consolidation of foreign subsidiaries requires financial statement
translation in accordance with FASB Statement No. 52. Assets and liabilities are
translated into U.S. dollars at year end exchange rates. Statements of income
and cash flows are translated at the average exchange rates for each year. As of
September 30, 1998, the effects of foreign currency translation on the Company's
consolidated financial position, results of operations and cash flows have been
minimal.
CASH EQUIVALENTS: The Company considers highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
MARKETABLE SECURITIES, AVAILABLE-FOR-SALE: Marketable securities are classified
as available-for-sale and are stated at cost at September 30, 1998 and 1997, as
the difference between cost and fair value of the securities was immaterial.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost is
determined using primarily the first-in, first-out (FIFO) method, which
approximates current replacement cost.
Work in process is stated at the actual production and engineering costs
incurred to date, including applicable overhead, and is reduced by charging any
amounts in excess of estimated realizable value to cost of sales. Although costs
incurred for certain government contracts include general and administrative
costs, the amounts remaining in inventory at September 30, 1998 and 1997 were
immaterial.
<PAGE>
Page 27
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are carried at
cost. Depreciation is provided in amounts sufficient to amortize the cost of the
depreciable assets over their estimated useful lives. Straight-line and
accelerated methods are each used for approximately one-half of the depreciable
plant and equipment. Provisions for depreciation of plant and equipment amounted
to $8,874,000, $7,199,000 and $9,151,000 in 1998, 1997 and 1996, respectively.
COST IN EXCESS OF NET TANGIBLE ASSETS OF PURCHASED BUSINESSES: Cost in excess
of net tangible assets of purchased businesses is amortized on a straight-line
basis over a period of 15 years. Accumulated amortization at September 30, 1998
and 1997 was $6,954,000 and $4,915,000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS: In accordance with FASB Statement No. 121,
"ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF," the Company records impairment losses on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. To date, no impairments have been identified.
REVENUE RECOGNITION: Sales under long-term contracts are recognized as costs
are incurred and fees are earned on cost-plus-fee contracts, and as costs are
incurred and estimated profits are earned on long-term, fixed price contracts.
Such estimated profits are computed by applying the various percentages of
completion of the contracts to the estimated ultimate profits. Provisions are
made on a current basis to fully recognize any anticipated losses on contracts.
DERIVATIVE FINANCIAL INSTRUMENTS: The Company's use of derivative financial
instruments is limited to hedging foreign exchange and interest rate risk
through the use of forward and option contracts. Foreign exchange forward and
option contracts are used to hedge significant, firm contract sales and purchase
commitments that are denominated in currencies other than the functional
currency of the subsidiary responsible for the commitment. Gains and losses from
hedging activities are recognized when the hedged sale or purchase commitment is
settled and the hedge is closed out. At September 30, 1998, the Company had
foreign exchange contracts with a notional value of $27.4 million outstanding.
The net amount of deferred gains and losses at that date was immaterial.
NEW ACCOUNTING PRONOUNCEMENTS: As of October 1, 1997, the Company adopted FASB
Statement No. 128, "EARNINGS PER SHARE," however, due to the current simple
capital structure of the Company, there was no effect on the calculation of
earnings per share.
The Company will adopt FASB Statement No. 130, "REPORTING COMPREHENSIVE INCOME,"
effective October 1, 1998. This pronouncement establishes standards for
reporting and display of comprehensive income, which includes all components of
the change in Shareholders' Equity during a period, except those resulting from
investment by or distribution to shareholders. As a result of adopting this
statement, the Company will begin displaying additional information relating to
the change in the foreign currency translation adjustment component of
Shareholders' Equity. The Company does not believe that comprehensive income
will be materially different than net income.
<PAGE>
Page 28
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED): The Company will adopt FASB Statement
No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,"
effective October 1, 1998. Among other changes, this new standard requires that
segment information be provided using what is termed the "management approach."
The management approach is based on the way that management organizes segments
for making operating decisions and assessing performance. Although there will be
minor changes in the Company's disclosure of segment information, current
disclosures are largely in compliance with this statement.
In February 1998, the Financial Accounting Standards Board issued Statement No.
132, "EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS,"
which is required to be adopted in fiscal years beginning after December 15,
1997. The Company will adopt the statement effective October 1, 1998. This
statement will require the Company to provide additional information relative to
its pension and defined contribution retirement plans and eliminates certain
disclosures that are no longer considered useful.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," which is
required to be adopted in fiscal years beginning after June 15, 1999. The
Company expects to adopt the statement effective October 1, 1999. The statement
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through earnings. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company has not
yet determined what the effect of Statement 133 will be on the earnings and
financial position of the Company.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES: The Company is subject to the normal risks and
uncertainties of performing large, multi-year, often fixed-price contracts. In
addition, certain contracts provide the customer with fixed-price options which,
if exercised, could result in losses to the Company upon performance.
The Company's subcontract with Transys is the largest the Company has been
awarded to date. A portion of the subcontract obligates the Company to produce
and install, over a four year period, equipment which is generally similar to
that previously provided to London Transport (the ultimate customer). Under the
terms of the subcontract, the revenue to be realized, and therefore the ultimate
profitability of this portion of the subcontract, could vary substantially if
the Company fails to meet the delivery schedule. The Company believes it has the
capability to meet these performance requirements and to realize the expected
profits from this subcontract.
<PAGE>
Page 29
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 2--ACQUISITIONS
On April 9, 1997, the Company acquired all of the outstanding stock of Thorn
Transit Systems International, a United Kingdom company engaged in revenue
collection equipment design, fabrication, and installation, for $11.8 million,
net of cash acquired. The acquisition was accounted for by the purchase method,
and the assets and liabilities were recorded at their estimated fair values at
the date of acquisition. The amount by which the purchase price exceeded the
book value of the net assets acquired was $8 million and is being amortized over
a period of 15 years using the straight-line method.
On September 30, 1996, the Company acquired 50% of the outstanding stock of its
subsidiary, Cubic Transportation Systems Limited (CTSL), formerly Westinghouse
Cubic Limited, for $6.6 million, giving the Company control of 100% of the
outstanding stock. The amount by which the purchase price exceeded the book
value of the net assets acquired was $5 million, and is being amortized over a
period of 15 years using the straight-line method. CTSL is a United Kingdom
company engaged in revenue collection equipment design, fabrication, and
installation.
Unaudited pro forma results of the Company's operations, assuming the
acquisitions had occurred as of October 1, 1996 and 1995, are presented below
(in thousands, except per share data). In addition to purchase accounting
adjustments, the pro forma amounts include certain adjustments to historical
financial data, including elimination of inter-company sales, reduction of
non-recurring general and administrative expenses, reduction of interest
income and the income tax effect of these adjustments. The pro forma
operating results may not be indicative of the results that actually would
have occurred if the acquisitions had taken place on the dates indicated or
which may occur in the future.
<TABLE>
<CAPTION>
Year Ended September 30, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $399,760 $433,706
Net income 12,193 11,488
Net income per share 1.36 1.28
</TABLE>
NOTE 3--SALE OF BUSINESSES
In 1993, the Company sold all of the outstanding common stock of its subsidiary,
United States Elevator Corp. (USEC), to Thyssen Holding Corporation (Thyssen)
but retained $20 million in preferred stock. The agreement for the sale of USEC
provided the Company an option for additional consideration based on a formula
relating to the post-sale earnings of USEC. In the year ended September 30,
1997, the Company exercised this option and received a $32 million payment, $20
million for the preferred stock and $12 million related to the contingent
payment provision. The contingent payment was used to offset the costs of
certain product liability and warranty obligations that were incorporated in the
original sale agreement.
During the quarter ended June 30, 1996, the Company sold its toll collection
product line and its subsidiary Cubic Toll Systems, Inc., resulting in a modest
gain, which is included in other income on the Consolidated Statement of Income
and Retained Earnings for the year ended September 30, 1996. The assets sold
included all toll equipment under operating leases, related inventory and
accounts receivable. Proceeds of the sale, totalling $17.7 million, were used
primarily to repay the line of credit borrowings which had been secured by the
leases, leased equipment and capital stock of Cubic Toll Systems, Inc.
<PAGE>
Page 30
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 4--ACCOUNTS RECEIVABLE
The components of accounts receivable for long-term contracts are as follows:
<TABLE>
<CAPTION>
September 30, 1998 1997
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
U.S. Government Contracts:
Amounts billed $ 19,811 $19,000
Recoverable costs and accrued profits on
progress completed--not billed 45,187 27,002
--------- ---------
64,998 46,002
Commercial Customers:
Amounts billed 34,292 28,991
Recoverable costs and accrued profits on
progress completed--not billed 41,757 22,958
--------- ---------
76,049 51,949
--------- ---------
$141,047 $97,951
--------- ---------
--------- ---------
</TABLE>
A portion of recoverable costs and accrued profits on progress completed is
billable under progress payment provisions of the related contracts. The
remainder of these amounts is billable upon delivery of products or furnishing
of services. During the development phase of work under these contracts, these
progress payments may reimburse only 70-80% of costs incurred. At September 30,
1998, the Company had several U. S. Government contracts in this phase of
completion, with a substantial amount of costs subject to these progress-billing
provisions, resulting in an increase in the amount not billed. It is anticipated
that such receivables from the U.S. Government at September 30, 1998 will be
billed during 1999 as development and production are completed and units are
delivered.
A large contract received near the end of fiscal 1998 contributed to the growth
in unbilled receivables under commercial contracts. Pre-contract costs totaling
$7.2 million had been incurred for this contract, but were not billable until
after September 30, 1998 due to the contract being awarded late in the fiscal
year. In addition, commercial long-term contract accounts receivable included
revenues recognized related to costs totaling $14.2 million which were incurred
as a result of customer-required work performed not specified in contract
provisions, the recovery of which is subject to future determination through
contract negotiations. The Company believes it will ultimately recover these
amounts through modification of the related contracts. It is anticipated that
the unbilled portion of receivables from commercial customers will be billed
upon completion of performance tests and/or acceptance by the customers during
1999.
<PAGE>
Page 31
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 5--INVENTORIES
Inventories are classified as follows:
<TABLE>
<CAPTION>
September 30, 1998 1997
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Finished products $ 2,615 $ 2,501
Work in process 27,172 10,300
Materials and purchased parts 9,836 8,154
--------- ---------
$39,623 $20,955
--------- ---------
--------- ---------
</TABLE>
The growth in work in process inventories from 1997 to 1998 is reflective of
several of the Company's products that have become standard as opposed to being
custom designed under contract. These standard products are built in common lots
and are not identified with a particular contract until completion. A
significant portion of work in process at September 30, 1998 consisted of
standard gates used in automatic fare collection systems. Virtually all of these
gates were being built to meet requirements under existing contracts, the most
significant of which is the PRESTIGE contract. Other products that have become
standard, resulting in an increase in inventory, are personnel locator systems
and pods used in air combat training systems. It is anticipated that inventories
related to these and other products will be sold during 1999.
NOTE 6--FINANCING ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, 1998 1997
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Unsecured note payable to an insurance company,
due $5,000,000 annually on June 30, plus
interest at 6.09% payable semi-annually $10,000 $15,000
Less current portion (5,000) (5,000)
--------- ---------
$ 5,000 $10,000
--------- ---------
--------- ---------
</TABLE>
The terms of the note payable include provisions that require and/or limit,
among other financial ratios and measurements, the permitted levels of working
capital, debt and tangible net worth and coverage of fixed charges. At September
30, 1998, a covenant included in the agreement leaves consolidated retained
earnings of $8.1 million available for the payment of dividends to shareholders,
purchases of the Company's common stock and other charges to shareholders'
equity.
<PAGE>
Page 32
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 6--FINANCING ARRANGEMENTS--continued
As of September 30, 1998 the Company had short-term borrowing arrangements with
various U.S. banks totaling $35 million, to help meet the short-term working
capital requirements of its subsidiaries. Generally the terms of these borrowing
arrangements required repayment within one month of the borrowing date. At
September 30, 1998, $19 million was outstanding, bearing interest at a
weighted-average rate of 6.41%, payable at maturity.
The Company also maintains short-term borrowing arrangements totaling 10 million
British Pounds (equivalent to approximately $17 million) with a United Kingdom
financial institution to help meet the short-term working capital requirements
of CTSL. The outstanding balances are guaranteed by Cubic Corporation and are
repayable on demand. At September 30, 1998, $11.3 million was outstanding,
bearing interest at a weighted-average rate of 7.75%, payable quarterly.
Interest paid amounted to $1,992,000, $1,913,000 and $3,186,000 in 1998, 1997
and 1996, respectively.
The Company has provided certain performance guarantees to various parties
related to the PRESTIGE contract and the Transys joint venture. As consideration
for the performance guarantee, the Company has agreed to certain financial
covenants including limits on working capital, debt, tangible net worth and cash
flow coverage. The most restrictive covenant under these agreements leaves
consolidated retained earnings of $11.9 million available for the payment of
dividends to shareholders. If the Company violates any of these covenants it may
be required to provide collateral for the guarantees. To date, there have been
no such violations and the Company believes it will be able to meet its
performance obligations.
As of September 30, 1998 the Company had letters of credit and bank guarantees
outstanding totaling $45.5 million, which guarantee either the Company's
performance or customer advances under certain contracts. In addition, the
Company had financial letters of credit outstanding totaling $7.0 million as of
September 30, 1998, which guarantee the Company's payment of certain
self-insured liabilities. Management believes self-insurance reserves recorded
on the balance sheet as of September 30, 1998 are adequate to meet the
underlying obligations. The Company has never had a drawing on a letter of
credit instrument, nor are any anticipated; therefore, the fair value of these
instruments is estimated to be zero.
In November 1998, the Company completed a private placement of $50 million in
senior unsecured notes with an average duration of approximately 10 years, at an
average coupon rate of 6.27%. The first principal payment of $1.4 million is due
in November of 2002, with interest due semi-annually, beginning in May 1999.
Proceeds of this borrowing were used to repay the short-term borrowings from
U.S. banks and to provide working capital.
<PAGE>
Page 33
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 7--COMMITMENTS
The Company leases certain office, manufacturing and warehouse space and
miscellaneous computer and other office equipment under non-cancelable operating
leases expiring in various years through 2003. These leases, some of which may
be renewed for periods up to 10 years, generally require the lessee to pay all
maintenance, insurance and property taxes. Several leases are subject to
periodic adjustment based on price indices or cost increases. Rental expense,
net of sublease income, for all operating leases amounted to $3,808,000,
$4,171,000 and $3,286,000 in 1998, 1997 and 1996, respectively.
Future minimum payments under non-cancelable operating leases with initial terms
of one year or more consist of the following at September 30, 1998 (in
thousands):
<TABLE>
<S> <C>
1999 $ 4,163
2000 3,162
2001 1,585
2002 1,159
2003 319
Thereafter 7
-------
$10,395
-------
-------
</TABLE>
NOTE 8--INCOME TAXES
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
Year ended September 30, 1998 1997 1996
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Current:
Federal $ 2,463 $ 1,498 $ 7,660
State 750 737 1,418
Foreign 218 213 1,039
------- ------- -------
Total current 3,431 2,448 10,117
------- ------- -------
Deferred (credit):
Federal 327 2,548 (3,002)
State (40) 471 (520)
Foreign (3,564) 1,131 (27)
------- ------- -------
Total deferred (3,277) 4,150 (3,549)
------- ------- -------
Total income tax expense $ 154 $ 6,598 $ 6,568
------- ------- -------
------- ------- -------
</TABLE>
<PAGE>
Page 34
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 8--INCOME TAXES--Continued
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Significant components of the Company's deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
September 30, 1998 1997
- ---------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Accrued employee benefits $ 1,557 $ 2,621
Inventory reserves and long-term contract accounting 4,899 6,843
Self-insurance reserves 1,019 1,178
Deferred compensation 1,522 1,169
Foreign net operating loss carryforwards 9,303 2,535
Other 2,546 2,875
-------- --------
Total deferred tax assets 20,846 17,221
Valuation allowance for deferred tax assets (2,100) (2,535)
-------- --------
Net deferred tax assets 18,746 14,686
-------- --------
Deferred tax liabilities:
Tax over book depreciation 767 864
Leveraged lease accounting 2,831 2,831
Intangible asset amortization 1,291 70
Other 2,015 2,598
-------- --------
Total deferred tax liabilities 6,904 6,363
-------- --------
Net deferred tax assets $11,842 $ 8,323
-------- --------
-------- --------
</TABLE>
Net operating loss (NOL) carryforwards, which arose in the United Kingdom,
amounted to approximately $30 million at September 30, 1998 and $8.2 million at
September 30, 1997 and have no expiration date. Despite the current year losses
in the United Kingdom, the Company expects to generate future taxable income
sufficient to realize the benefit of such NOL carryforwards as the result of
contracts that have been awarded, the most significant of which is the PRESTIGE
contract. The valuation allowance established in the year ended September 30,
1997 was provided due to NOL carryforwards of approximately $6.5 million that
existed at the time of acquisition of TTSI and for tax losses of approximately
$1.7 million incurred at TTSI from the date of acquisition to September 30,
1997. During 1998, the Company merged TTSI into CTSL providing the opportunity
to realize the benefit of the NOL carryforwards that had arisen since the date
of acquisition; therefore, the valuation allowance was reduced by the associated
tax benefit. The Company believes it is unlikely that tax benefit from the NOL
carryforward existing at the time of acquisition will ever be realized;
therefore, the valuation allowance associated with this amount continues to be
required. If in the future it becomes likely that this portion of the NOL
carryforward will be utilized, the tax benefit would first reduce any
unamortized balance of cost in excess of net tangible assets of the TTSI
business, with any remaining benefit credited to tax expense.
<PAGE>
Page 35
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 8--INCOME TAXES--Continued
The reconciliation of income tax computed at the U.S. federal statutory tax rate
to income tax expense is as follows:
<TABLE>
<CAPTION>
Year ended September 30, 1998 1997 1996
- --------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Tax at federal statutory rate $ 355 $6,577 $6,421
State income taxes, net of federal tax benefit 469 785 583
Tax exempt interest and dividend income (297) (432) (494)
Foreign sales corporation (404) (206) (403)
Non-deductible expenses 557 182 714
Effect of change in tax rates on deferred tax asset 176 - (226)
Tax effect from foreign subsidiaries 123 189 234
Change in deferred tax asset valuation allowance (435) 435 -
Tax credits and other (390) (932) (261)
------- ------- -------
$ 154 $6,598 $6,568
------- ------- -------
------- ------- -------
</TABLE>
The Company made income tax payments, net of refunds, totaling $2,290,000,
$4,770,000 and $11,689,000 in 1998, 1997 and 1996, respectively.
Income (loss) before income taxes and minority interest include the following
components:
<TABLE>
<CAPTION>
Year ended September 30, 1998 1997 1996
- --------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
United States $11,007 $15,757 $15,295
Foreign (9,964) 3,034 3,051
------- ------- -------
Total $ 1,043 $18,791 $18,346
------- ------- -------
------- ------- -------
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $5 million at September 30, 1998. Those earnings are considered to
be indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes and withholding taxes payable to the foreign countries
but would also be able to offset unrecognized foreign tax credit carryforwards.
Determination of the amount of unrecognized deferred U.S. income tax liability
is not practicable because of the complexities associated with its hypothetical
calculation; however, the Company does not believe the amount will be material.
<PAGE>
Page 36
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 9--PENSION AND OTHER RETIREMENT PLANS
The Company maintains a defined benefit pension plan covering substantially
all non-union U.S. employees of certain of its subsidiaries. Benefits under
this plan are based on the employee's earnings during the period of
employment. The Company's policy is to fund this plan based on legal
requirements, tax considerations and investment opportunities. Plan assets
include equities, short- and long-term debt instruments and real estate
investments.
Net pension cost for this plan included the following components:
<TABLE>
<CAPTION>
Year ended September 30, 1998 1997 1996
- --------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Service cost--benefits earned during the period $ 1,964 $ 1,643 $ 1,681
Interest cost on projected benefit obligation 3,042 2,729 2,453
Actual return on plan assets (3,252) (8,567) (3,516)
Net amortization and deferral (512) 5,652 1,062
------- ------- -------
Net pension cost $ 1,242 $ 1,457 $ 1,680
------- ------- -------
------- ------- -------
</TABLE>
The following table sets forth the funded status and amounts recognized in the
Consolidated Balance Sheet for the Company's defined benefit pension plan:
<TABLE>
<CAPTION>
September 30, 1998 1997
- ------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $43,324 $35,478
Non vested benefits 1,248 1,128
--------- ---------
Accumulated benefit obligation $44,572 $36,606
--------- ---------
--------- ---------
Plan assets at fair value $47,908 $43,054
Projected benefit obligation for services rendered to date 49,656 40,587
--------- ---------
Plan assets in excess of (or less than) projected benefit
obligation (1,748) 2,467
Unrecognized net transition asset (21) (72)
Unrecognized prior service costs (11) (14)
Unrecognized net (gain) loss 3,817 (1,546)
--------- ---------
Pension asset recognized in the consolidated balance sheet $ 2,037 $ 835
--------- ---------
--------- ---------
</TABLE>
<PAGE>
Page 37
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 9--PENSION AND OTHER RETIREMENT PLANS--Continued
Major assumptions are as follows:
<TABLE>
<CAPTION>
September 30, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 6.5% 7.2% 7.7%
Rate of increase in compensation level 4.5% 4.5% 4.5%
Expected long-term rate of return on assets 8.5% 8.5% 8.5%
</TABLE>
Net periodic pension cost is determined using the assumptions as of the
beginning of the year. The funded status is determined using the assumptions as
of the end of the year.
The Company and certain of its subsidiaries also have other retirement plans
that provide benefits for participating employees. An employee is eligible to
participate in these plans after six months to one year of service, and may make
additional contributions to the plans from their date of hire. These plans
provide for full vesting of benefits over five to seven years. A substantial
portion of Company contributions to these plans is discretionary with the Board
of Directors. Company contributions to the plans aggregated $7,225,000,
$7,001,000 and $6,215,000 in 1998, 1997 and 1996, respectively.
NOTE 10--RELATED PARTY TRANSACTION
In October 1992, a trust established by Mr. and Mrs. Walter J. Zable entered
into an agreement with the Company whereby the Company agreed to make advances
of premiums payable on a split-dollar life insurance policy purchased by the
trust on the life of Mrs. Zable. The agreement is so designed that if the
assumptions made as to mortality experience, policy dividends and other factors
are realized, at the death of Mrs. Zable the Company will recover all of its
insurance premium payments as well as other costs associated with the policy.
The advances are secured by a collateral assignment of the policy to the
Company. The agreement is intended to prevent the possibility of a large block
of the Company's common shares being put on the market, to the detriment of the
share price, in order for the beneficiaries to pay estate taxes. The Company may
cause the agreement to be terminated and the policy to be surrendered at any
time. The difference between policy premiums and other payments, and the
increase in the cash surrender value of the policy has been expensed in the year
incurred. The amounts expensed related to the policy were $85,000, $165,000 and
$130,000 in 1998, 1997 and 1996, respectively. However, should the policy be
held to maturity, all payments advanced to carry this policy will be returned.
Further, should the policy be held for ten years, the Company estimates that the
cash surrender value will exceed all payments made, and amounts previously
expensed in the early years of the policy will have been reversed.
<PAGE>
Page 38
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 11--LEGAL MATTERS
In 1991, the government of Iran commenced an arbitration proceeding against the
Company seeking $12.9 million for reimbursement of payments made for equipment
that was to comprise an Air Combat Maneuvering Range pursuant to a sales
contract and an installation contract executed in 1977, and an additional $15
million for unspecified damages. The Company contested the action and brought a
counterclaim for compensatory damages of $10.4 million. In May 1997, the
arbitral tribunal awarded the government of Iran a decision in the amount of
$2.8 million, plus simple interest at the rate of 12% per annum from September
21, 1991 through May 5, 1997.
On December 7, 1998, the United States District Court granted a motion by the
government of Iran confirming the arbitral award. The Company believes the
Court avoided authorities previously established by the Ninth Circuit Court
in reaching its decision and plans to appeal. The Company believes that the
ultimate outcome of the matter will not have a material effect on its
financial statements and, to date, no expense has been accrued.
NOTE 12--BUSINESS SEGMENT INFORMATION
The Company's operations are best grouped into three main product segments:
defense, transportation systems, and commercial operations. A description of
each segment's primary activities follows:
DEFENSE--work under U.S. and foreign government contracts relating to electronic
defense systems and equipment, computer simulation training, distributed
interactive simulation, development of training doctrine and field operations
and maintenance. Products include customized range instrumentation and training
systems, communications and surveillance systems, HF and UHF/VHF surveillance
receivers, avionics systems and space RF/digital products.
TRANSPORTATION SYSTEMS--the design, production, installation and servicing of
electronic and mechanical revenue collection systems for mass transit projects,
including railways, buses, and highways.
COMMERCIAL OPERATIONS--includes the manufacture of corrugated paper products and
the development of high-speed video and audio compression software for
applications including electronic mail, intra-net based training, and
surveillance. In the years ended September 30, 1998, 1997 and 1996, the software
development business did not generate significant sales.
<PAGE>
Page 39
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 12--BUSINESS SEGMENT INFORMATION--Continued
Business segment financial data is presented below.
<TABLE>
<CAPTION>
Year ended September 30, 1998 1997 1996
- -----------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
REVENUE:
Defense $ 207.0 $ 206.2 $ 195.9
Transportation systems 192.3 165.2 192.8
Commercial operations 15.0 17.9 21.0
--------- --------- ---------
414.3 389.3 409.7
Corporate 4.5 5.1 4.6
--------- --------- ---------
Consolidated Totals $ 418.8 $ 394.4 $ 414.3
--------- --------- ---------
--------- --------- ---------
OPERATING PROFIT:
Defense $ 10.6 $ 6.6 $ 7.6
Transportation systems (2.6) 12.3 14.4
Commercial operations (5.7) 1.1 0.8
--------- --------- ---------
Consolidated Operating Profit 2.3 20.0 22.8
Corporate 0.7 0.6 (1.4)
Interest expense (2.0) (1.8) (3.1)
--------- --------- ---------
Income before Income Taxes and Minority
Interest $ 1.0 $ 18.8 $ 18.3
--------- --------- ---------
--------- --------- ---------
IDENTIFIABLE ASSETS:
Defense $ 135.1 $ 106.9 $ 107.6
Transportation systems 133.9 98.1 86.1
Commercial operations 4.0 3.3 5.1
--------- --------- ---------
273.0 208.3 198.8
Corporate 21.0 74.0 67.8
--------- --------- ---------
Consolidated Totals $ 294.0 $ 282.3 $ 266.6
--------- --------- ---------
--------- --------- ---------
DEPRECIATION AND AMORTIZATION:
Defense $ 4.8 $ 4.8 $ 4.6
Transportation systems 5.3 3.3 5.0
Commercial operations 0.2 0.2 0.3
--------- --------- ---------
10.3 8.3 9.9
Corporate 0.8 0.7 0.6
--------- --------- ---------
Consolidated Totals $ 11.1 $ 9.0 $ 10.5
--------- --------- ---------
--------- --------- ---------
GROSS CAPITAL EXPENDITURES:
Defense $ 3.4 $ 3.4 $ 6.7
Transportation systems 5.0 2.9 5.0
Commercial operations 0.3 0.2 0.2
--------- --------- ---------
8.7 6.5 11.9
Corporate 0.2 0.9 0.9
--------- --------- ---------
Consolidated Totals $ 8.9 $ 7.4 $ 12.8
--------- --------- ---------
--------- --------- ---------
</TABLE>
<PAGE>
Page 40
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 12--BUSINESS SEGMENT INFORMATION--Continued
Inter-segment sales are immaterial. Defense segment sales include $178.3
million, $183.0 million and $170.8 million in 1998, 1997 and 1996, respectively,
to United States Government agencies. Transportation systems sales include $31.3
million, $47.4 million and $35.2 million in 1998, 1997 and 1996, respectively,
to the New York City Transit Authority in addition to $28.1 million, $33.0
million and $39.1 million in 1998, 1997 and 1996, respectively, to the London
Transport. No other single customer accounts for 10% or more of the Company's
revenue.
Domestic revenue includes $56.3 million, $33.7 million and $44.7 million in
1998, 1997 and 1996, respectively, for export. Foreign revenue consists of
$103.0 million, $66.1 million and $59.2 million of sales made by foreign
subsidiaries in the transportation systems segment during 1998, 1997 and 1996,
respectively. Consolidated operating profit includes $9.2 million of operating
losses from these foreign subsidiaries in 1998 and $4.6 million and $3.3 million
of operating profits in 1997 and 1996, respectively. Foreign identifiable assets
represented $83.0 million, $62.7 million and $23.1 million of total assets in
1998, 1997 and 1996, respectively.
NOTE 13--SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1998
Net sales $ 91,752 $ 89,825 $ 99,544 $133,015
Gross profit 22,947 12,930 22,755 30,366
Net income (loss) 2,642 (5,664) 1,782 2,129
Net income (loss) per share .30 (.64) .20 .24
1997
Net sales $ 84,058 $ 96,187 $109,828 $ 98,081
Gross profit 20,489 21,190 24,461 25,023
Net income 2,895 2,675 3,257 3,366
Net income per share .32 .30 .36 .38
</TABLE>
<PAGE>
Page 41
EXHIBIT 21
SUBSIDIARY CORPORATIONS OF CUBIC CORPORATION
PLACE OF INCORPORATION AND PERCENTAGE OWNED
<TABLE>
<CAPTION>
PLACE OF PERCENTAGE
SUBSIDIARY INCORPORATION OWNED
---------- ------------- ----------
<S> <C> <C>
CONSOLIDATED CONVERTING CO
Whittier, California California 100%
CUBIC APPLICATIONS, INC
Lacey, Washington California 100%
CUBIC TRANSPORTATION SYSTEMS, INC
San Diego, California California 100%
CUBIC COMMUNICATIONS, INC
San Diego, California California 100%
CUBIC DATA SYSTEMS, INC
San Diego, California California 90%
CUBIC DEFENSE SYSTEMS, INC
San Diego, California California 100%
CUBIC FOREIGN SALES, INC St. Thomas
San Diego, California U.S. Virgin Islands 100%
CUBIC LAND, INC
San Diego, California California 100%
CUBIC TRANSPORTATION SYSTEMS LIMITED
London, England England 100% *
* (100% owned subsidiary of Cubic (UK) Limited)
CUBIC (UK) LIMITED
London, England England 100%
CUBIC VIDEOCOMM, INC
San Diego, California Delaware 100%
CUBIC WORLDWIDE TECHNICAL SERVICES, INC
San Diego, California Delaware 100%
NAVSAT CORPORATION
San Diego, California California 100%
</TABLE>
<PAGE>
Page 42
SUBSIDIARY CORPORATIONS OF CUBIC CORPORATION--CONTINUED
<TABLE>
<CAPTION>
PLACE OF PERCENTAGE
SUBSIDIARY INCORPORATION OWNED
---------- ------------- ----------
<S> <C> <C>
SCANPOINT TECHNOLOGY A/S
Brondby, Denmark Denmark 100%*
* (100% owned subsidiary of Cubic Transportation Systems, Inc.)
SOUTHERN CUBIC PTY., LTD
New South Wales, Australia Australia 100% *
* (50% owned subsidiary of Cubic Corporation and
50% owned subsidiary of Cubic Transportation Systems, Inc.)
THORN TRANSIT SYSTEMS INTERNATIONAL
Wells, England England 100% *
* (100% owned subsidiary of Cubic (UK) Limited)
CUBIC TRANSPORTATION SYSTEMS FAR EAST LIMITED
Hong Kong, China Hong Kong 100%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPEMBER 30, 1998 AND THE RELATED CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,500
<SECURITIES> 2,086
<RECEIVABLES> 149,871
<ALLOWANCES> 231
<INVENTORY> 39,623
<CURRENT-ASSETS> 210,145
<PP&E> 116,491
<DEPRECIATION> 76,091
<TOTAL-ASSETS> 293,991
<CURRENT-LIABILITIES> 109,661
<BONDS> 0
0
0
<COMMON> 234
<OTHER-SE> 173,318
<TOTAL-LIABILITY-AND-EQUITY> 293,991
<SALES> 414,136
<TOTAL-REVENUES> 418,801
<CGS> 325,138
<TOTAL-COSTS> 325,138
<OTHER-EXPENSES> 90,658
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,962
<INCOME-PRETAX> 1,043
<INCOME-TAX> 154
<INCOME-CONTINUING> 889
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 889
<EPS-PRIMARY> .10
<EPS-DILUTED> 0
</TABLE>
