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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, 1999
1-8931
Commission File Number
CUBIC CORPORATION
Exact Name of Registrant as Specified in its Charter
DELAWARE 95-1678055
State of Incorporation IRS Employer Identification No.
9333 Balboa Avenue
San Diego, California 92123
Telephone (619) 277-6780
COMMON STOCK AMERICAN STOCK EXCHANGE, INC.
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
--- ---
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
--- ---
The aggregate market value of voting stock held by non-affiliates of the
registrant is: $108,453,211 as of November 22, 1999, based on the closing stock
price on that date.
Number of shares of common stock outstanding as of November 22, 1999: 8,906,704
(after deducting 2,981,539 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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CUBIC CORPORATION - SEC FORM 10-K Page 2
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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, transceivers and
avionics systems.
Automatic revenue collection equipment including fare card technology,
passenger gates, and ticket vending machines for mass transit networks,
including rail systems and buses.
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's sales increased by 23% from fiscal 1998 to 1999 as the result of
large contracts awarded late in fiscal 1998. The contract to privatize the
London Transport fare collection system called "PRESTIGE" (Procurement of
Revenue Services, Ticketing, Information, Gates and Electronics) contributed
over $100 million to sales in fiscal 1999. Cubic's share of the work on this
system, not including all options, exceeds $500 million over the initial 12 year
period of the contract. Defense segment sales also increased by 6% from fiscal
1998.
During fiscal year 1999, approximately 33% of the Company's total business was
done, either directly or indirectly, with various agencies of the United States
government. The remaining 67% 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 14 to the Consolidated Financial Statements for the year ended
September 30, 1999, and follows at Item 14(a)(1) of this filing, on pages 41
through 43.
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CUBIC CORPORATION - SEC FORM 10-K Page 3
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(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, transceivers and
avionics systems. 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. CDS is also building two ground combat training
centers for the British Ministry of Defence.
In addition, CDS 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.
CDS is also producing the Multiple Integrated Laser Engagement System (MILES
2000) for the U.S. Army and Marine Corps, as well as allied forces. 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, 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 for the U. S. and foreign military markets and
transceivers for use in air traffic control.
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:
Defense segment sales backlog at September 30, 1999 was $232 million compared to
$230 million at September 30, 1998. Backlog does not include unexercised or
unfunded options on certain defense contracts. Approximately $116 million of the
September 30, 1999 backlog is not expected to be completed by September 30,
2000.
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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 that present or future activities will encounter,
particularly since the defense industry is subject to rapidly changing
competitive conditions, customer requirements and technological developments.
TRANSPORTATION SYSTEMS
The transportation systems segment designs, produces, installs and services
electronic and mechanical revenue collection systems for mass transit projects,
including railways and buses and is a leader in this industry, worldwide.
The segment has been awarded large contracts by cities such as New York,
Washington, D.C., San Francisco, Chicago, London, Shanghai and Guangzhou, China
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 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, and if extended for the
full 17 year period could total approximately $700 million.
There is worldwide demand for automatic revenue management systems in all forms
of public mass transit. The Company's transportation systems segment continues
to provide the technology and leadership to deliver quality products and
services to the world fare collection market, including new innovations such as
contactless smart card technology.
RAW MATERIALS:
Raw materials used in this segment include sheet steel, composite products,
copper electrical wire and castings. A significant portion of the segment's end
product is composed of purchased electronic components and subcontracted parts
and supplies. 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:
Transportation systems segment sales backlog at September 30, 1999 was $675
million, compared to $742 million at September 30, 1998. Unexercised options on
certain contracts, including the last five years of the PRESTIGE contract, are
not included in the backlog amounts. Approximately $448 million of the September
30, 1999 backlog is not expected to be completed by September 30, 2000.
COMPETITION:
The transportation systems segment is a leading supplier of automatic fare
collection systems for transit systems throughout the world. However, the
segment competes with large international companies and in many locations
encounters significant competition. It is not possible to predict the extent of
competition that present or future activities will encounter, particularly since
the transportation industry is subject to rapidly changing competitive
conditions, customer requirements, political situations and technological
developments.
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CUBIC CORPORATION - SEC FORM 10-K Page 5
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OTHER OPERATIONS
Consolidated Converting Company converts corrugated paper stock into
high-quality packaging and shipping containers and converts paper stock into
toilet seat covers.
In August 1999, the Company decided to exit the video and audio electronic mail
and intra-net based training business, which had been marketed under the
Company's Cubic VideoComm subsidiary. Also, in August 1999, the Company entered
into an agreement to merge the subsidiary, including its live surveillance
product line, into a new company temporarily named Cubic Video Technologies,
Inc. (CVTI). CVTI retained the services of some former employees of the Company
and will be operated by an investor group, which is led by CVTI management. The
Company retained a preferred stock minority interest in CVTI and the sale
agreement includes a provision for the Company to realize contingent royalty
income based on the success of the new company.
RAW MATERIALS:
Raw materials used by Consolidated Converting Company consist of paper products,
which are procured from commercial sources. In general, supplies of raw
materials are presently adequate to meet the requirements of this business.
Paper shortages could delay completion of customer orders in the future.
BACKLOG:
Consolidated Converting Company had little sales backlog at September 30, 1999
and 1998. The business does 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:
This business competes with concerns of varying size, including some very large
companies. It is not possible to predict the extent of the competition which
present or future activities will encounter, particularly since the market for
this subsidiary's products is subject to rapidly changing competitive
conditions.
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CUBIC CORPORATION - SEC FORM 10-K Page 6
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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 $51 million, $64
million and $34 million in 1999, 1998 and 1997, respectively. The cost of
Company sponsored research and development activities was $7,727,000,
$10,776,000 and $8,558,000 in 1999, 1998 and 1997, 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 3,600 persons employed by the Company and its
subsidiaries at September 30, 1999.
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 14 to the Consolidated Financial Statements for the year ended
September 30, 1999, and follows at Item 14(a)(1) of this filing, on page 43.
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CUBIC CORPORATION - SEC FORM 10-K Page 7
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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 in the United States and foreign
countries. 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. The
following table identifies significant properties by business segment:
<TABLE>
<CAPTION>
LOCATION OF PROPERTY OWNED OR LEASED
- --------------------------------------------- ---------------------------
<S> <C>
CORPORATE HEADQUARTERS:
San Diego, CA Owned
DEFENSE:
Alexandria, VA Leased
Arlington, VA Leased
Hampton, VA Leased
Lacey, WA Leased
Leavenworth, KS Leased
Orlando, FL Leased
San Diego, CA Leased
San Diego, CA Owned
Tijuana, Mexico Leased
TRANSPORTATION SYSTEMS:
Auburn, NSW Australia Leased
Brondby, Denmark Leased
Chantilly, VA Leased
Chicago, IL Leased
Merstham, Surrey, England Owned
New York, NY Leased
Kowloon Bay, Hong Kong Leased
London, England Leased
San Diego, CA Owned
Tullahoma, TN Owned
Wells, Somerset, England Leased
OTHER:
Whittier, CA Leased
</TABLE>
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CUBIC CORPORATION - SEC FORM 10-K Page 8
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ITEM 3. LEGAL PROCEEDINGS.
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.
In December 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 has appealed. 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.
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.
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CUBIC CORPORATION - SEC FORM 10-K Page 9
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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
-------------------------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
QUARTER ENDED: High Low High Low
<S> <C> <C> <C> <C> <C> <C>
December 31 22-3/8 16-1/2 38-1/4 30-1/2
March 31 23-1/8 15-3/4 33-3/4 23-1/4 $.19 $.19
June 30 26 15-3/4 30-1/4 22-3/4
September 30 25-7/8 22-1/2 28-3/4 20-3/8 $.19 $.19
</TABLE>
On November 22, 1999, the closing price of the Company's common stock on the
American Stock Exchange was $20.38.
There were approximately 1,600 shareholders of record of the Company's common
stock as of November 22, 1999.
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CUBIC CORPORATION - SEC FORM 10-K Page 10
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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
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Sales $510,759 $414,136 $388,154 $407,621 $370,065
Cost of sales 404,144 325,138 296,991 316,293 290,441
Selling, general and administrative expenses 75,725 77,721 66,349 68,066 59,240
Interest expense 4,313 1,962 1,837 3,081 2,995
Income taxes 7,482 154 6,598 6,568 3,437
Net income 14,008 889 12,193 11,063 5,392
Average number of shares outstanding 8,907 8,917 8,975 8,981 8,981
PER SHARE DATA:
Net income 1.57 .10 1.36 1.23 .60
Cash dividends .38 .38 .38 .367 .35
YEAR-END DATA:
Shareholders' equity $182,965 $173,552 $175,320 $167,667 $159,865
Equity per share 20.54 19.48 19.60 18.67 17.80
Total assets 330,161 293,991 282,282 266,638 299,694
Long-term debt 50,000 5,000 10,000 15,000 39,000
Shares outstanding 8,907 8,907 8,947 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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CUBIC CORPORATION - SEC FORM 10-K Page 11
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FISCAL 1999 COMPARED TO FISCAL 1998
The Company started fiscal 1999 with the highest recorded backlog in its history
resulting from record contract awards (bookings) in fiscal 1998. Fiscal 1999
bookings, although not at the record levels of 1998, exceeded $465 million to
allow the year to close with over $900 million in backlog. The Company's
operating profit and earnings per share from continuing operations for fiscal
1999 are at the highest levels in the decade at $24 million and $1.57,
respectively.
Following 1998's record year of bookings and backlog, fiscal 1999 saw the
Company achieve the highest sales year in its history at over $510 million,
representing a 23% increase over last year, which previously had been the
highest in the Company's history. The PRESTIGE contract to privatize the London
Transport fare collection system, awarded in the fourth quarter last year,
accounted for sales of more than $100 million, resulting in a sales increase of
42% in the transportation systems segment. The defense segment also recorded a
modest increase in sales of 6% from fiscal 1998.
Operating profits in the defense segment were 10% lower than in 1998 due
primarily to cost growth encountered in the MILES 2000 production program. The
Company continues to believe the MILES program will contribute favorably to
future profits as production problems are resolved and the system performs well
in the field. Additional orders are anticipated both from the U.S. and foreign
governments as the US military proves the effectiveness of this training system
and field acceptance occurs worldwide. The J-STARS Data Link product continues
to generate significant operating profits as this program is mature and the
product is continuously improved. Together with other Tactical Electronic
Products, such as Personnel Locator Systems, this product line accounted for
approximately 24% of the defense segment sales in 1999 and, after covering
losses from MILES, contributed 65% of defense segment profits. The balance of
this segment's operating profits were contributed by the computerized
battlefield simulations group which supports the training of military leaders
for the execution of their operational missions. Air and ground training ranges,
such as AWES in the U.K., which was awarded in the fourth quarter of 1998,
additional applications of the J-STARS technology internationally and other
defense products provide opportunities for continued profitability in this
segment.
A turnaround was effected in the transportation segment as all but one of the
Asian contracts acquired in the acquisition of Thorn Transit Systems
International have been substantially completed and the maintenance business
acquired continues to perform profitably. Together with other customer service
in this segment, the maintenance and repair business accounted for over 60% of
this segment's profits. The PRESTIGE program, mentioned above, contributed
modestly to operating profits this year as the program is in its early stages of
completion. The balance of profits in this segment was generated by rail revenue
collection projects in the U.S., U.K. and China. At fiscal year-end 1998, $14.2
million of accounts receivable had been subject to recovery through negotiations
of contract claims. Negotiations are now nearly complete and most of the funds
have been collected.
In 1998, the Company began seeking outside investment for its Cubic VideoComm
subsidiary, to fund development and marketing expenses for its video compression
product lines. In August 1999, the Company merged the subsidiary into a new
entity, established by subsidiary management and outside investors. The new
company will continue the digital live surveillance product line. Losses of $4.8
million in fiscal 1999 resulted primarily from severely competitive conditions
in the retail market for the video email product. This product has been
discontinued and the Company anticipates no further expenses related to this
venture. The Company has taken a preferred minority equity position in the new
company and will receive royalty payments if the new company is successful with
the digital surveillance product.
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CUBIC CORPORATION - SEC FORM 10-K Page 12
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Selling, general and administrative (SG&A) expenses for the year ended September
30, 1999 decreased by four percentage points compared to the previous year, from
18.8% to 14.8%. This experience, due primarily to the surge in sales generated
by the PRESTIGE project, also reflects a reduction in SG&A spending of almost $2
million. Reductions in SG&A were experienced as consolidation of administrative
activities occurred in the transportation segment, promotion for the compressed
video product was cut back and bid and proposal expenses for new order
opportunities were reduced.
In March 1998, the Accounting Standards Executive Committee of the AICPA issued
Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE. The Company will adopt the SOP effective
October 1, 1999. The SOP requires the capitalization of certain costs incurred
after the date of adoption in connection with developing or obtaining software
for internal use. The Company currently expenses the costs of developing
software for internal use as incurred. As a result of adopting the new SOP, the
Company expects to capitalize approximately $300,000 in fiscal 2000 related to
internal use software development projects that otherwise would have been
expensed as incurred. This is expected to result in an increase in net income of
approximately $200,000 or $.02 per share.
Net operating loss (NOL) carryforwards, which arose in the United Kingdom, were
reduced from approximately $30 million at September 30, 1998 to $12.8 million at
September 30, 1999, while the associated deferred tax asset decreased from $9.3
million to $4.0 million at those same dates. Other than the amount offset by a
valuation allowance, the Company expects to continue to generate taxable income
in the future, sufficient to realize the benefit of the remaining NOL
carryforwards.
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" 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.
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CUBIC CORPORATION - SEC FORM 10-K Page 13
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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. 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.
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 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. Long-term contract accounts receivable at
September 30, 1998 included approximately $14.2 million in revenue recognized
for customer-required work performed which was not specified in the related
contracts. This amount related to the Asian contracts mentioned above as well as
other contracts in the U.K. with London Transport.
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.
The Company continued to invest in the development and promotion of software
technology, which delivers compressed video and audio transmission over computer
networks. This investment amounted to $6.6 million for the year ended September
30, 1998. Sales of these products were less than expected causing the Company to
decide to look for a partner or a new owner for the product line.
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.
FINANCIAL POSITION AND LIQUIDITY
In fiscal 1999, the Company experienced a significant turn around in cash flow
from operations, with over $49 million generated by improvements in net income,
decreases in accounts receivable and inventory, and increases in payables.
Reductions in accounts receivable, which contributed over $15 million, reflect
improvements experienced in the defense segment, as certain contracts which had
been in adverse progress payment status at the end of fiscal 1998 were moved to
more favorable positions, primarily through the delivery of equipment, allowing
payments to flow. The experience in the transportation segment was mixed as
positive cash flow from U.S. customers with more mature programs were offset in
the U.K. as heavy start up costs for PRESTIGE and train operating company
projects required cash outlays.
Planned expenditures for capital equipment, primarily computing equipment and
software and test equipment, were $11.5 million and account for virtually all
investing activities. Financing activities were dominated by the private
placement, in November 1998, of $50 million in senior unsecured notes with an
average duration of approximately ten years, at an average coupon rate of 6.27%.
Proceeds of this borrowing were used to repay the short term borrowing from U.S.
banks and to provide working capital. At September 30, 1999 the Company had
working capital of $158 million and a current ratio of 2.73 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.
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CUBIC CORPORATION - SEC FORM 10-K Page 14
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YEAR 2000 ISSUE
The Year 2000 computer problem is a well-known issue that has been discussed
extensively in the media and in previous reports. The Company's Year 2000 Task
Force has now completed its oversight of the Company's Year 2000 preparation
efforts and believes that the Company has taken appropriate measures to mitigate
its exposure to operating and administrative problems resulting from this issue.
While the Company continues to believe that the Year 2000 issue 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.
OPERATING SYSTEMS, SOFTWARE AND DATA FILES
The Company has made appropriate modifications and updates to its internal
operating systems, software and data files. Final testing of all systems has
been completed, although a certain amount of assurance testing will continue
until December 31, 1999. The Company believes that it has, to the extent
possible, prepared its internal systems for the transition from the year 1999 to
the year 2000.
The Company has contacted its key suppliers and subcontractors and obtained
written certification of their preparedness for the Year 2000 issue. In
addition, alternate suppliers have been identified for critical purchased
materials and services. Although these certifications have been obtained and
alternate suppliers identified, there is no possible way to ensure that all
supplier's and subcontractor's systems will be Year 2000 compliant by December
31, 1999. However, the Company believes its efforts have been adequate to
minimize the potential impact of unprepared suppliers and subcontractors.
The Company has identified contracts that contained warranty provisions
stipulating that the Company is responsible for Year 2000 compliance of products
previously delivered and has worked with its customers to upgrade hardware and
software. The Company has also worked with its customers to identify products,
not under contractual warranty provisions, which could potentially fail after
December 31, 1999. In certain cases, the Company has received contracts with its
customers to upgrade previously delivered products to be Year 2000 compliant and
has completed work under these contracts.
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
believes it has taken the appropriate steps to mitigate this potential.
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.
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 15
- -------------------------------------------------------------------------------
COSTS TO ADDRESS THE ISSUE
During fiscal 1999, the Company expensed approximately $850,000 of incremental
Year 2000 remedial costs. Based on current estimates, the Company will incur
another $150,000 from October 31, 1999 through December 31, 1999. Although
significant problems after December 31, 1999 are not expected, additional costs
could be incurred to correct system deficiencies that may be encountered. The
magnitude of these costs will depend on the significance of the issues
identified, but are not expected to exceed $100,000. These costs consist
primarily of in-house labor and will continue to be expensed as incurred.
FORWARD LOOKING STATEMENTS
In addition to historical matters, this report contains forward-looking
statements. They can be identified by sentences that contain 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>
CUBIC CORPORATION - SEC FORM 10-K Page 16
- -------------------------------------------------------------------------------
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 a short-term borrowing
arrangement in the United Kingdom (U.K.), which is also tied to a floating
interest rate (the U.K. base rate). 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 8 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 arrangement is affected by changes in the general level of
interest rates in the 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 for some or all of the long-term debt outstanding. 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 CURRENCY 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 currency
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 currency 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 foreign 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 currency 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 expects to use this control to mitigate
foreign currency exchange risk.
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 17
- -------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
The following consolidated financial statements of the Company and its
subsidiaries, for the year ended September 30, 1999, are attached hereto, marked
Pages 18 and 22 through 44.
Report of Ernst & Young LLP, Independent Auditors
See Page 18
Consolidated Balance Sheet
September 30, 1999 and 1998
See Pages 23 and 24
Consolidated Statement of Income
Years ended September 30, 1999, 1998 and 1997
See Page 25
Consolidated Statement of Changes in Shareholders' Equity
Years ended September 30, 1999, 1998 and 1997
See Page 26
Consolidated Statement of Cash Flows
Years ended September 30, 1999, 1998 and 1997
See Page 27
Notes to Consolidated Financial Statements
September 30, 1999
See Pages 28 through 44
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 18
- -------------------------------------------------------------------------------
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, 1999 and 1998, and the related consolidated statements of
income, changes in shareholders' equity and cash flows for each of the three
years in the period ended September 30, 1999. 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, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1999, in conformity with generally accepted accounting principles.
Ernst & Young LLP
San Diego, California
November 29, 1999
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 19
- -------------------------------------------------------------------------------
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 12 to the Consolidated Financial Statements for the year ended
September 30, 1999, and follows at Item 14(a)(1) of this filing, on page 41.
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 20
- -------------------------------------------------------------------------------
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, 1999 and 1998
Consolidated Statement of Income
Years ended September 30, 1999, 1998 and 1997
Consolidated Statement of Changes in Shareholders'
Equity Years ended September 30, 1999, 1998 and 1997
Consolidated Statement of Cash Flows
Years ended September 30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
September 30, 1999
(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>
CUBIC CORPORATION - SEC FORM 10-K Page 21
- -------------------------------------------------------------------------------
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
12/21/99 /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:
12/21/99 /s/ Walter J. Zable
- -------- --------------------------------------
Date WALTER J. ZABLE, President, Chief
Executive Officer and Chairman of the
Board of Directors
12/21/99 /s/ Walter C. Zable
- -------- --------------------------------------
Date WALTER C. ZABLE, Vice President and
Vice Chairman of the Board of Directors
12/21/99 /s/ Raymond E. Peet
- -------- --------------------------------------
Date RAYMOND E. PEET, Director
12/21/99 /s/ William W. Boyle
- -------- --------------------------------------
Date WILLIAM W. BOYLE, Director, Vice President
of Finance & Chief Financial Officer
12/21/99 /s/ Thomas A. Baz
- -------- --------------------------------------
Date THOMAS A. BAZ, Vice President and
Corporate Controller, Principal Accounting
Officer
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 22
- -------------------------------------------------------------------------------
ITEM 8, ITEM 14(a)(1) AND (2),(c) and (d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EXHIBITS
Cubic Corporation
Year Ended September 30, 1999
San Diego, California
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 23
- -------------------------------------------------------------------------------
CUBIC CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30
1999 1998
------------------- ------------------
(in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 61,540 $ 3,500
Marketable securities, available-for-sale 1,802 2,086
Accounts receivable:
Trade and other receivables 7,722 8,824
Long-term contracts--Note 6 125,855 141,047
Allowance for doubtful accounts (325) (231)
------------------- ------------------
133,252 149,640
Inventories--Note 7 36,400 39,623
Deferred income taxes--Note 10 9,974 9,060
Prepaid expenses and other current assets 6,566 6,236
------------------- ------------------
TOTAL CURRENT ASSETS 249,534 210,145
------------------- ------------------
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 12,936 13,075
Buildings and improvements 23,805 23,224
Machinery and other equipment 75,444 77,562
Leasehold improvements 2,916 2,630
Allowance for depreciation and amortization (72,125) (76,091)
------------------- ------------------
42,976 40,400
------------------- ------------------
OTHER ASSETS
Deferred income taxes--Note 10 1,373 4,756
Goodwill, less amortization 23,273 25,788
Miscellaneous other assets 13,005 12,902
------------------- ------------------
37,651 43,446
------------------- ------------------
TOTAL ASSETS $330,161 $293,991
=================== ==================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 24
- -------------------------------------------------------------------------------
CUBIC CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30
1999 1998
------------------- ------------------
(in thousands)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings--Note 8 $ 6,457 $ 30,321
Trade accounts payable 13,761 14,534
Customer advances 23,460 27,157
Salaries and wages, and amounts withheld from
employees' compensation 17,757 15,956
Other current liabilities 20,219 15,388
Income taxes payable 4,671 1,305
Current portion of long-term debt--Note 8 5,000 5,000
------------------- ------------------
TOTAL CURRENT LIABILITIES 91,325 109,661
------------------- ------------------
LONG-TERM DEBT, less current portion--Note 8 50,000 5,000
OTHER LIABILITIES
Deferred income taxes--Note 10 1,408 1,974
Deferred compensation 4,463 3,804
------------------- ------------------
5,871 5,778
------------------- ------------------
COMMITMENTS AND CONTINGENCIES--Notes 9 and 13
SHAREHOLDERS' EQUITY--Note 8 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 206,347 195,724
Accumulated other comprehensive income 317 1,527
Treasury stock at cost -- 2,981,239 shares (36,056) (36,056)
------------------- ------------------
182,965 173,552
------------------- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $330,161 $293,991
=================== ==================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 25
- -------------------------------------------------------------------------------
CUBIC CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended September 30
1999 1998 1997
------------- ------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C>
Revenue:
Sales $510,759 $414,136 $388,154
Interest and dividends 1,602 2,145 2,259
Other income 3,160 2,520 3,972
------------- ------------- -------------
515,521 418,801 394,385
------------- ------------- -------------
Costs and expenses:
Cost of sales 404,144 325,138 296,991
Selling, general and administrative 75,725 77,721 66,349
Research and development 7,727 10,776 8,558
Goodwill amortization 2,122 2,161 1,859
Interest 4,313 1,962 1,837
------------- ------------- -------------
494,031 417,758 375,594
------------- ------------- -------------
INCOME BEFORE INCOME TAXES 21,490 1,043 18,791
Income taxes--Note 10 7,482 154 6,598
------------- ------------- -------------
NET INCOME $ 14,008 $ 889 $ 12,193
============= ============= =============
Net income per share $ 1.57 $ .10 $ 1.36
============= ============= =============
Average number of shares outstanding 8,907 8,917 8,975
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 26
- -------------------------------------------------------------------------------
CUBIC CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other Additional
Comprehensive Retained Comprehensive Treasury Paid-in Common
(in thousands) Income Earnings Income Stock Capital Stock
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
October 1, 1996 $189,429 $ (393) $(33,726) $12,123 $234
Comprehensive income:
Net income $12,193 12,193
Foreign currency
translation adjustment (164) (164)
-----------------
Comprehensive income $12,029
=================
Cash dividends paid -- $.38
per share of common stock (3,409)
Treasury stock purchases (967)
-------------- ----------------- ------------- ------------- ------------
September 30, 1997 198,213 (557) (34,693) 12,123 234
Comprehensive income:
Net income $ 889 889
Foreign currency
translation adjustment 2,084 2,084
-----------------
Comprehensive income $2,973
=================
Cash dividends paid -- $.38
per share of common stock (3,378)
Treasury stock purchases (1,363)
-------------- ----------------- ------------- ------------- ------------
September 30, 1998 195,724 1,527 (36,056) 12,123 234
Comprehensive income:
Net income $14,008 14,008
Unrealized holding gains
on marketable securities 150 150
Foreign currency
translation adjustment (1,360) (1,360)
-----------------
Comprehensive income $12,798
=================
Cash dividends paid -- $.38
per share of common stock (3,385)
-------------- ----------------- ------------- ------------- ------------
September 30, 1999 $206,347 $ 317 $(36,056) $12,123 $234
============== ================= ============= ============= ============
</TABLE>
See accompanying notes to financial statements
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 27
- -------------------------------------------------------------------------------
CUBIC CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30
1999 1998 1997
------------- ------------- -------------
(in thousands)
<S> <C> <C> <C>
Operating Activities:
Net income $ 14,008 $ 889 $ 12,193
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 10,236 11,142 8,976
Deferred income taxes 1,636 (3,277) 4,150
Changes in operating assets and liabilities, net of effects from
acquisitions:
Accounts receivable 15,270 (40,240) 22,862
Inventories 2,798 (18,264) (7,986)
Prepaid expenses (366) (882) (469)
Accounts payable and other current liabilities 6,899 1,580 (9,834)
Customer advances (3,346) (3,980) (2,682)
Income taxes 3,347 1,136 (2,364)
Other items - net (1,151) 647 (2,875)
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 49,331 (51,249) 21,971
------------- ------------- -------------
Investing Activities:
Acquisition of business, net of cash acquired - - (11,844)
Proceeds from sale of business - - 31,996
Sale of marketable securities 434 315 333
Purchases of property, plant and equipment (11,511) (8,859) (7,374)
Other items - net 1,778 (521) (1,754)
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (9,299) (9,065) 11,357
------------- ------------- -------------
Financing Activities:
Change in short-term borrowings (23,463) 20,187 9,726
Long-term borrowing 50,000 - -
Principal payments on long-term debt (5,000) (5,000) (5,000)
Purchases of treasury stock - (1,363) (967)
Dividends paid to shareholders (3,385) (3,378) (3,409)
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,152 10,446 350
------------- ------------- -------------
Effect of exchange rates on cash (144) 111 (483)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 58,040 (49,757) 33,195
Cash and cash equivalents at the beginning of the year 3,500 53,257 20,062
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT
THE END OF THE YEAR $61,540 $ 3,500 $ 53,257
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 28
- -------------------------------------------------------------------------------
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF THE BUSINESS: Cubic Corporation (the Company)
designs, develops and manufactures products which are mainly electronic in
nature and provides services related to products previously produced and
products produced by others. The Company's principal lines of business are
defense electronics and transportation fare collection 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 majority-owned subsidiaries. All
significant intercompany balances and transactions are eliminated. 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, 1999, the effects of foreign currency translation on the Company's
consolidated financial position, results of operations and cash flows have not
been significant.
CASH EQUIVALENTS: The Company considers highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
CONCENTRATION OF CREDIT RISK: The Company has established guidelines pursuant to
which its cash and cash equivalents are diversified among various money market
instruments and funds. These guidelines emphasize the preservation of capital by
requiring minimum credit ratings assigned by established credit organizations.
Diversification is achieved by specifying maximum investments in each fund type
and issuer. The majority of these investments are not on deposit in federally
insured accounts.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities,
are carried at cost, which management believes approximates the fair value
because of the short-term maturity of these instruments.
MARKETABLE SECURITIES, AVAILABLE-FOR-SALE: Marketable securities are classified
as available-for-sale and are stated at fair market value on September 30, 1999
and at cost on September 30, 1998, as the difference between cost and fair value
of the securities was immaterial. The difference between cost and fair market
value at September 30, 1999 is included in Accumulated Other Comprehensive
Income on the Consolidated Balance Sheet.
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, 1999 and 1998 were immaterial.
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 29
- -------------------------------------------------------------------------------
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 $8,037,000, $8,874,000 and $7,199,000 in 1999, 1998 and 1997, 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, 1999
and 1998 was $9,037,000 and $6,954,000, 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 currency 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, 1999, the
Company had foreign exchange contracts with a notional value of $90.5 million
outstanding. The net amount of deferred gains and losses at that date was
immaterial.
NEW ACCOUNTING PRONOUNCEMENTS: Effective October 1, 1998 the Company adopted
FASB Statement No. 130, REPORTING COMPREHENSIVE INCOME. 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. The
adoption of Statement No. 130 did not affect results of operations or financial
position, but did result in the disclosure of other comprehensive income. The
Company has added a Statement of Changes in Shareholders' Equity, which provides
additional information relating to the change in the foreign currency
translation adjustment component of Shareholders' Equity and its effect on
comprehensive income.
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 30
- -------------------------------------------------------------------------------
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED): Effective October 1, 1998 the Company
adopted FASB Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. This pronouncement superceded FASB Statement No. 14,
FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. Statement No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. Statement No. 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The adoption of Statement No. 131 did not affect results of
operations or financial position of the Company, but did affect the disclosure
of segment information (see Note 14).
Effective October 1, 1998 the Company adopted FASB Statement No. 132, EMPLOYERS'
DISCLOSURES ABOUT PENSIONS AND OTHER POST RETIREMENT BENEFITS. This
pronouncement revised and standardized, as much as possible, the disclosure
requirements of FASB Statement No. 87, EMPLOYERS ACCOUNTING FOR PENSIONS, FASB
Statement No. 88, EMPLOYERS ACCOUNTING FOR SETTLEMENTS & CURTAILMENTS OF DEFINED
BENEFIT PENSION PLANS AND FOR TERMINATION BENEFITS and FASB Statement No. 106,
EMPLOYERS ACCOUNTING FOR POST RETIREMENT BENEFITS OTHER THAN PENSIONS. The
adoption of Statement No. 132 did not affect the calculation of pension expense,
the results of operations or financial position of the Company, but did affect
the disclosure of pension information (see Note 11). The Company has no other
post retirement benefit plans subject to the provisions of Statement No. 132.
In March 1998, the Accounting Standards Executive Committee of the AICPA issued
Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE. The Company will adopt the SOP effective
October 1, 1999. The SOP requires the capitalization of certain costs incurred
after the date of adoption in connection with developing or obtaining software
for internal use. The Company currently expenses the costs of developing
software for internal use as incurred.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The required
adoption date for this standard has been delayed to fiscal years beginning after
June 15, 2000, therefore, the Company expects to adopt the statement effective
October 1, 2000. 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. Currently, the Company's use of derivative financial
instruments is limited to hedging foreign currency exchange risk through the use
of forward and option contracts. Although it is not possible to determine with
certainty what affect the adoption of Statement No. 133 will have on the
earnings and financial position of the Company, its effect is expected to be
immaterial.
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 31
- -------------------------------------------------------------------------------
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
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 and installation schedule. To date, the
Company has met the delivery and installation schedule of the contract and
believes it has the capability to continue to meet these performance
requirements and to realize the expected profits from this subcontract.
NOTE 2--ACQUISITION
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.
Unaudited pro forma results of the Company's operations, assuming the
acquisition had occurred as of October 1, 1996, 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
acquisition had taken place on the date indicated or which may occur in the
future.
<TABLE>
<CAPTION>
Year Ended September 30, 1997
- ---------------------------------------------------------------------- --------------------
<S> <C>
Net sales $399,760
Net income 12,193
Net income per share 1.36
</TABLE>
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 32
- -------------------------------------------------------------------------------
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 3--SALE OF BUSINESS
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.
NOTE 4 - DISCONTINUED PRODUCT LINE
In August 1999, the Company discontinued the video and audio electronic mail and
intra-net based training business, which had been marketed under the Company's
Cubic VideoComm subsidiary. Also, in August 1999, the Company entered into an
agreement to merge the subsidiary, including its live surveillance product line,
into a new company temporarily named Cubic Video Technologies, Inc. (CVTI). CVTI
retained the services of some former employees of the Company and will be
operated by an investor group, which is led by CVTI management. The Company
retained a preferred stock minority interest in CVTI, which is carried on the
Company's Balance Sheet at no value. No cash consideration was involved in the
transaction. The sale agreement includes a provision for the Company to realize
contingent royalty income based on the success of the new company.
NOTE 5 - INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
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 1998, Transys was awarded the
contract and began operations. Through September 30, 1999, over $500 million of
the work to be performed by Transys has been subcontracted to the Company as a
part of the joint venture arrangement. The long-term debt of Transys is
non-recourse to Cubic.
Summarized financial information for this unconsolidated joint venture is as
follows:
<TABLE>
<CAPTION>
September 30, 1999 1998
- ------------------------------------------------------------------ ----------------- -----------------
(In millions)
<S> <C> <C>
BALANCE SHEET:
Current assets $ 34.4 $26.1
Non-current unbilled contract accounts receivable 90.6 4.7
------- -------
Total Assets $125.0 $30.8
====== =====
Current liabilities $ 12.3 $ 4.6
Long-term debt 112.7 26.2
Equity - -
------- -------
Total Liabilities and Equity $125.0 $30.8
====== =====
</TABLE>
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 33
- -------------------------------------------------------------------------------
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 5 - INVESTMENT IN UNCONSOLIDATED SUBSIDIARY--Continued
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998
- ------------------------------------------------------------------ ----------------- -----------------
(In millions)
<S> <C> <C>
STATEMENT OF INCOME:
Sales $126.9 $10.4
Operating profit $ - $ -
Net income $ - $ -
</TABLE>
The terms of Transys' subcontracts with the Company and other parties to the
joint venture provide for the pass-through of virtually all revenues from London
Transport. As a result, Transys has operated on a break-even basis and is
expected to continue to do so.
NOTE 6--ACCOUNTS RECEIVABLE
The components of accounts receivable under long-term contracts are as follows:
<TABLE>
<CAPTION>
September 30, 1999 1998
- ------------------------------------------------------------------ ----------------- -----------------
(in thousands)
<S> <C> <C>
U.S. Government Contracts:
Amounts billed $ 15,892 $ 19,811
Recoverable costs and accrued profits on
progress completed--not billed 27,340 45,187
----------------- -----------------
43,232 64,998
Commercial Customers:
Amounts billed 41,828 34,292
Recoverable costs and accrued profits on
progress completed--not billed 40,795 41,757
----------------- -----------------
82,623 76,049
----------------- -----------------
$125,855 $141,047
================= =================
</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, with an immaterial amount subject to retainage provisions of the
contracts. It is anticipated that substantially all of the unbilled portion of
receivables will be billed under progress billing provisions of the contracts or
upon completion of performance tests and/or acceptance by the customers during
2000.
Commercial long-term contract accounts receivable included revenues recognized
related to costs totaling approximately $3 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.
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 34
- -------------------------------------------------------------------------------
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 7--INVENTORIES
Inventories are classified as follows:
<TABLE>
<CAPTION>
September 30, 1999 1998
- ------------------------------------------------------------------ ----------------- --- -----------------
(in thousands)
<S> <C> <C>
Finished products $ 1,515 $ 2,615
Work in process 22,926 27,172
Materials and purchased parts 11,959 9,836
================= =================
$36,400 $ 39,623
================= =================
</TABLE>
Finished product and work in process inventories include costs incurred to
produce certain standard products. In some cases these products are produced in
common lots for efficiency, and will not be identified with a particular
contract until completion. Other products are produced at risk, in anticipation
of contract award. At September 30, 1999, approximately $12.4 million of the
finished product and work in process inventories represented costs at risk,
subject to the award of contracts. It is anticipated that all of these
inventories will be sold during 2000.
NOTE 8--FINANCING ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, 1999 1998
- ------------------------------------------------------------------ ----------------- --- ----------------
(in thousands)
<S> <C> <C>
Unsecured notes payable to a group of insurance
companies, with annual principal payments of
$4,000,000 commencing November 2004. Interest at
6.31% is payable semi-annually in November and May. $40,000 $ -
Unsecured note payable to an insurance company, with
annual principal payments of $1,429,000 commencing
November 2002. Interest at 6.11% is payable semi-
annually in November and May. 10,000 -
Unsecured note payable to an insurance company, due
June 30, 2000. Interest at 6.09% is payable
semi-annually in December and June. 5,000 10,000
----------------- ----------------
55,000 10,000
Less current portion (5,000) (5,000)
----------------- ----------------
$50,000 $ 5,000
================= ================
</TABLE>
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 35
- -------------------------------------------------------------------------------
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 8--FINANCING ARRANGEMENTS-- Continued
The terms of the notes 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. The Company
has also 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. At September 30, 1999, the most restrictive covenant under these
agreements leaves consolidated retained earnings of $22.7 million available for
the payment of dividends to shareholders, purchases of the Company's common
stock and other charges to shareholders' equity. 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.
The Company maintains a short-term borrowing arrangement totaling 10 million
British Pounds (equivalent to approximately $16.5 million) with a United Kingdom
financial institution to help meet the short-term working capital requirements
of its subsidiary, Cubic Transportation Systems Ltd. The outstanding balances
are guaranteed by Cubic Corporation and are repayable on demand. At September
30, 1999, $6.5 million was outstanding, bearing interest at 6.25%, payable
quarterly.
Maturities of long-term debt for each of the five years in the period ending
September 30, 2004, are as follows: 2000--$5,000,000; 2001--$0; 2002--$0;
2003--$1,429,000; 2004--$1,429,000; thereafter--$47,142,000.
Interest paid amounted to $3,262,000, $1,992,000 and $1,913,000 in 1999, 1998
and 1997, respectively.
As of September 30, 1999 the Company had letters of credit and bank guarantees
outstanding totaling $42.3 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 $5.7 million as of
September 30, 1999, which guarantee the Company's payment of certain
self-insured liabilities. Management believes self-insurance liabilities
recorded on the balance sheet as of September 30, 1999 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.
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 36
- -------------------------------------------------------------------------------
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 9--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 2009. 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 $4,708,000,
$3,808,000 and $4,171,000 in 1999, 1998 and 1997, respectively.
Future minimum payments, net of minimum sublease income, under non-cancelable
operating leases with initial terms of one year or more consist of the following
at September 30, 1999 (in thousands):
<TABLE>
<S> <C>
2000 $ 2,717
2001 1,651
2002 1,405
2003 557
2004 276
Thereafter 1,070
=============
$7,676
=============
</TABLE>
NOTE 10--INCOME TAXES
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- ---------------
(in thousands)
<S> <C> <C> <C>
Current:
Federal $ 3,885 $ 2,463 $ 1,498
State 1,355 750 737
Foreign 606 218 213
--------------- --------------- ---------------
Total current 5,846 3,431 2,448
--------------- --------------- ---------------
Deferred (credit):
Federal (2,911) 327 2,548
State (116) (40) 471
Foreign 4,663 (3,564) 1,131
--------------- --------------- ---------------
Total deferred 1,636 (3,277) 4,150
=============== =============== ===============
Total income tax expense $7,482 $ 154 $ 6,598
=============== =============== ===============
</TABLE>
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 37
- -------------------------------------------------------------------------------
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 10--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, 1999 1998
- ------------------------------------------------------------------ ----------------- -----------------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Accrued employee benefits $ 2,701 $ 1,557
Inventory reserves and long-term contract accounting 7,756 4,899
Self-insurance reserves 893 1,019
Deferred compensation 1,687 1,522
Foreign net operating loss carryforwards 3,966 9,303
Other 2,470 2,546
----------------- -----------------
Total deferred tax assets 19,473 20,846
Valuation allowance for deferred tax assets (2,042) (2,100)
----------------- -----------------
Net deferred tax assets 17,431 18,746
----------------- -----------------
Deferred tax liabilities:
Tax over book depreciation 644 767
Leveraged lease accounting 2,831 2,831
Intangible asset amortization 1,745 1,291
Other 2,272 2,015
----------------- -----------------
Total deferred tax liabilities 7,492 6,901
================= =================
Net deferred tax assets $ 9,939 $11,842
================= =================
</TABLE>
Net operating loss (NOL) carryforwards, which arose in the United Kingdom,
amounted to approximately $12.8 million and $30 million at September 30, 1999
and 1998, respectively, and have no expiration date. The Company expects to
generate future taxable income sufficient to realize the benefit of these NOL
carryforwards, as the result of profitable U. K. contracts currently in backlog,
except for the portion of the these NOL carryforwards for which a valuation
allowance has been provided. This valuation allowance is for approximately $6.5
million of the NOL carryforwards, which existed at the time of the TTSI
acquisition. It is uncertain whether tax benefit from this portion of the NOL
carryforwards will be realized; therefore, the valuation allowance associated
with this amount continues to be required. If in the future it becomes clear
that this portion of the NOL carryforwards 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>
CUBIC CORPORATION - SEC FORM 10-K Page 38
- -------------------------------------------------------------------------------
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 10--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, 1999 1998 1997
- ----------------------------------------------------------------- ------------- -- ------------- --- -------------
(in thousands)
<S> <C> <C> <C>
Tax at federal statutory rate $7,522 $ 355 $6,577
State income taxes, net of federal tax benefit 805 469 785
Tax exempt interest and dividend income (36) (297) (432)
Foreign sales corporation (530) (404) (206)
Non-deductible expenses 427 557 182
Effect of change in tax rates on deferred tax asset (176) 176 -
Tax effect from foreign subsidiaries (386) 123 189
Change in deferred tax asset valuation allowance - (435) 435
Tax credits and other (144) (390) (932)
============= ============= =============
$7,482 $ 154 $6,598
============= ============= =============
</TABLE>
The Company made income tax payments, net of refunds, totaling $2,513,000,
$2,290,000 and $4,770,000 in 1999, 1998 and 1997, respectively.
Income (loss) before income taxes include the following components:
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
- ----------------------------------------------------------------- ------------- -- ------------- --- -------------
(in thousands)
<S> <C> <C> <C>
United States $ 7,763 $11,007 $15,757
Foreign 13,727 (9,964) 3,034
============= ============= =============
Total $21,490 $ 1,043 $18,791
============= ============= =============
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $13.7 million at September 30, 1999. 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>
CUBIC CORPORATION - SEC FORM 10-K Page 39
- -------------------------------------------------------------------------------
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 11--PENSION AND OTHER RETIREMENT PLANS
The Company and certain of its subsidiaries have defined contribution 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 years. A substantial portion of
Company contributions to these plans is discretionary with the Board of
Directors. Company contributions to the plans aggregated $7,422,000, $7,225,000
and $7,001,000 in 1999, 1998 and 1997, respectively.
The Company also maintains a defined benefit pension plan covering substantially
all non-union U.S. employees of certain of its subsidiaries. The following table
sets forth changes in the benefit obligation and plan assets for this plan and
the net amount recognized in the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
September 30, 1999 1998
- --------------------------------------------------------------------------- ---------------- --- ----------------
(in thousands)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Net benefit obligation at the beginning of the year $49,656 $40,587
Service cost 2,256 1,807
Interest cost 3,353 3,042
Actuarial (gain) loss (7,454) 5,017
Gross benefits paid (1,038) (797)
---------------- ----------------
Net benefit obligation at the end of the year 46,773 49,656
---------------- ----------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at the beginning of the year 47,908 43,054
Actual return on plan assets 7,525 3,252
Employer contributions - 2,445
Gross benefits paid (1,038) (797)
Administrative expenses (65) (46)
---------------- ----------------
Fair value of plan assets at the end of the year 54,330 47,908
---------------- ----------------
NET AMOUNT RECOGNIZED:
Funded status 7,557 (1,748)
Unrecognized net actuarial (gain) loss (7,301) 3,817
Unrecognized prior service cost (8) (11)
Unrecognized net transition asset - (21)
================ ================
Amount recognized in the Consolidated Balance Sheet $ 248 $ 2,037
================ ================
Major assumptions as of the end of the plan year:
Discount rate 7.7% 6.5%
Expected return on plan assets 8.5% 8.5%
Rate of compensation increase 4.5% 4.5%
</TABLE>
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 40
- -------------------------------------------------------------------------------
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 11--PENSION AND OTHER RETIREMENT PLANS--Continued
The components of net periodic pension cost for this plan are as follows:
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
- ------------------------------------------------------------- --------------- --- -------------- --- ---------------
(in thousands)
<S> <C> <C> <C>
Service cost $ 2,256 $ 1,807 $ 1,511
Interest cost 3,353 3,042 2,729
Expected return on plan assets (3,992) (3,709) (2,859)
Amortization of:
Transition asset (21) (52) (52)
Prior service cost (3) (3) (3)
Administrative expenses 196 157 131
=============== ============== ===============
Net pension cost $1,789 1,242 $ 1,457
=============== ============== ===============
Major assumptions as of the beginning of the plan year:
Discount rate 6.5% 7.2% 7.7%
Expected return on plan assets 8.5% 8.5% 8.5%
Rate of compensation increase 4.5% 4.5% 4.5%
</TABLE>
NOTE 12--RELATED PARTY TRANSACTIONS
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 or added to
income in the year incurred. The amount added to income in 1999 was $254,000,
while in 1998 and 1997, $85,000 and $165,000, respectively, was expensed. Should
the policy be held for ten years, the Company estimates that the cash surrender
value will exceed all payments made and should the policy be held to maturity,
all payments advanced to carry the policy will be returned.
In 1999, in accordance with a long-standing purchase agreement with the Company,
Walter J. Zable, Chairman and President of the Company purchased a certain
residential rental property that had been owned by the Company since 1982. The
purchase price was approximately $750,000, which was the carrying value of the
property on the books of the Company.
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 41
- -------------------------------------------------------------------------------
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 13--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.
In December 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 has appealed. 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 14--BUSINESS SEGMENT INFORMATION
DESCRIPTION OF THE TYPES OF PRODUCTS AND SERVICES FROM WHICH EACH REPORTABLE
SEGMENT DERIVES ITS REVENUES: The Company has two primary business segments:
transportation systems and defense, and one segment, software development, which
is reportable due to the significance of losses incurred in 1998 and 1999. The
transportation systems segment designs, produces, installs and services
electronic and mechanical revenue collection systems for mass transit projects,
including railways and buses. The defense segment consists of four operating
units that perform work under U.S. and foreign government contracts relating to
electronic defense systems and equipment, computer simulation training,
development of training doctrine and field operations and maintenance. Products
include customized range instrumentation and training systems, communications
and surveillance systems, avionics systems, transceivers and receivers. The
software development segment has developed high-speed video and audio
compression software for applications including electronic mail and
surveillance. As discussed in Note 4, the Company has discontinued this business
and does not expect significant revenues or expenses to be generated by it in
the future.
MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS:
The Company evaluates performance and allocates resources based on total segment
operating profit or loss. The accounting policies of the reportable segments are
the same as those described in the summary of significant accounting policies.
Intersegment sales and transfers are immaterial.
FACTORS MANAGEMENT USED TO IDENTIFY THE COMPANY'S REPORTABLE SEGMENTS:
The Company's reportable segments are business units that offer different
products and services. The reportable segments are each managed separately
because they develop and manufacture distinct products with different customer
bases.
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 42
- -------------------------------------------------------------------------------
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 14--BUSINESS SEGMENT INFORMATION--Continued
Business segment financial data is presented below:
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
- ------------------------------------------------------------------ ------------- --- ------------- -- -------------
(in millions)
<S> <C> <C> <C>
REVENUES:
Transportation systems $274.1 $192.3 $165.2
Defense 219.5 207.0 206.2
Software development 1.8 .7 .9
Other 15.4 14.3 17.0
------------- ------------- -------------
Total segment revenues 510.8 414.3 389.3
Other 4.7 4.5 5.1
============= ============= =============
Total consolidated revenues $515.5 $418.8 $394.4
============= ============= =============
OPERATING PROFIT (LOSS):
Transportation systems $ 17.9 $ (2.6) $ 12.3
Defense 9.7 10.6 7.9
Software development (4.8) (6.6) (1.3)
Other 1.2 .9 1.1
------------- ------------- -------------
Total segment operating profit 24.0 2.3 20.0
Other 1.8 0.7 0.6
Interest expense (4.3) (2.0) (1.8)
============= ============= =============
Income before income taxes $ 21.5 $ 1.0 $ 18.8
============= ============= =============
ASSETS:
Transportation systems $125.5 $133.9 $ 98.1
Defense 121.4 135.1 106.9
Software development .2 1.0 .5
Other 3.6 3.0 2.8
-------------- ------------- -------------
Total segment assets 250.7 273.0 208.3
Other 79.3 21.0 74.0
============== ============= =============
Total consolidated assets $330.0 $294.0 $282.3
============== ============= =============
DEPRECIATION AND AMORTIZATION:
Transportation systems $ 4.5 $ 5.3 $ 3.3
Defense 4.8 4.8 4.8
Software development - - -
Other 0.2 0.2 0.2
-------------- ------------- -------------
Total segment depreciation and amortization 9.5 10.3 8.3
Other 0.7 0.8 0.7
-------------- ------------- -------------
Total consolidated depreciation and amortization $10.2 $ 11.1 $ 9.0
============== ============= =============
</TABLE>
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 43
- -------------------------------------------------------------------------------
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 14--BUSINESS SEGMENT INFORMATION--Continued
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
- ------------------------------------------------------------------ -------------- -- ------------- --- -------------
(in millions)
<S> <C> <C> <C>
EXPENDITURES FOR LONG-LIVED ASSETS:
Transportation systems $ 5.0 $ 5.0 $ 2.9
Defense 5.9 3.4 3.4
Software development - - -
Other 0.1 0.3 0.2
-------------- ------------- -------------
Total segment expenditures 11.0 8.7 6.5
Other 0.5 0.2 0.9
============== ============= =============
Total consolidated expenditures for long-lived assets $ 11.5 $ 8.9 $ 7.4
============== ============= =============
GEOGRAPHIC INFORMATION:
Revenues (a):
United States $259.3 $252.1 $294.7
United Kingdom 183.6 74.5 40.4
Far East 43.0 69.0 32.2
Other foreign countries 29.6 23.2 27.1
============== ============= ==============
Total consolidated revenues $515.5 $418.8 $394.4
============== ============= ==============
(a) Revenues are attributed to countries or regions based on the location of
customers.
Long-lived assets:
United States $ 59.8 $ 59.1 $ 62.7
United Kingdom 19.0 19.4 18.6
Other foreign countries .4 .6 .8
============== ============= ==============
Total consolidated long-lived assets $ 79.2 $ 79.1 $ 82.1
============== ============= ==============
</TABLE>
Defense segment revenues include $168.6 million, $178.3 million and $183.0
million in 1999, 1998 and 1997, respectively, of sales to United States
Government agencies. Transportation systems revenues include $104.5 million of
sales to Transys in 1999. No other single customer accounts for 10% or more of
the Company's revenue.
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K Page 44
- -------------------------------------------------------------------------------
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 15--SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- ------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
FISCAL 1999
Net sales $ 98,758 $ 139,644 $129,289 $ 143,068
Gross profit 21,680 27,403 24,989 32,543
Net income (loss) 2,665 3,230 3,741 4,372
Net income (loss) per share .30 .36 .42 .49
FISCAL 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
</TABLE>
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K
- -------------------------------------------------------------------------------
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 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 MICROCHIP DEVELOPMENT CORPORATION
San Diego, California California 100%
CUBIC TRANSPORTATION SYSTEMS, INC
San Diego, California California 100%
CUBIC TRANSPORTATION SYSTEMS FAR EAST LIMITED
Hong Kong, China Hong Kong 100%
CUBIC TRANSPORTATION SYSTEMS LIMITED
London, England England 100% *
* (100% owned subsidiary of Cubic (UK) Limited)
CUBIC TRANSPORTATION SYSTEMS (AUSTRALIA) PTY LIMITED
New South Wales, Australia Australia 100% *
* (50% owned subsidiary of Cubic Corporation and
50% owned subsidiary of Cubic Transportation Systems, Inc.)
<PAGE>
CUBIC CORPORATION - SEC FORM 10-K
- -------------------------------------------------------------------------------
SUBSIDIARY CORPORATIONS OF CUBIC CORPORATION--CONTINUED
<CAPTION>
PLACE OF PERCENTAGE
SUBSIDIARY INCORPORATION OWNED
---------- ------------- ----------
<S> <C> <C>
CUBIC (UK) LIMITED
London, England England 100%
CUBIC WORLDWIDE TECHNICAL SERVICES, INC
San Diego, California Delaware 100%
NAVSAT CORPORATION
San Diego, California California 100%
SCANPOINT TECHNOLOGY A/S
Brondby, Denmark Denmark 100%*
* (100% owned subsidiary of Cubic Transportation Systems, Inc.)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 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-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 61,540
<SECURITIES> 1,802
<RECEIVABLES> 133,577
<ALLOWANCES> 325
<INVENTORY> 36,400
<CURRENT-ASSETS> 249,534
<PP&E> 115,101
<DEPRECIATION> 72,125
<TOTAL-ASSETS> 330,161
<CURRENT-LIABILITIES> 91,325
<BONDS> 0
0
0
<COMMON> 234
<OTHER-SE> 182,731
<TOTAL-LIABILITY-AND-EQUITY> 330,161
<SALES> 510,759
<TOTAL-REVENUES> 515,521
<CGS> 404,144
<TOTAL-COSTS> 404,144
<OTHER-EXPENSES> 85,574
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,313
<INCOME-PRETAX> 21,490
<INCOME-TAX> 7,482
<INCOME-CONTINUING> 14,008
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,008
<EPS-BASIC> 1.57
<EPS-DILUTED> 0
</TABLE>
