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 February 25, 1994 Commission file number 0-230
AEL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1353403
(State or other jurisdiction of (IRS Employer
Identification No.)
incorporation or organization)
305 Richardson Road, Lansdale, PA 19446
(Address of principal executive offices/Zip Code)
(Registrant's telephone number, including area code) (215) 822-2929
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock Par Value $1.00 (nonvoting)
Class B common stock Par Value $1.00 (voting)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. /X/<PAGE>
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. $769,451
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. (May 2, 1994)
Class A common stock, par value $1.00 - 3,336,292
Class B common stock, par value $1.00 - 434,717
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the Part
of the Form 10-K specified herein: (1) Annual Report to Shareholders for
fiscal year 1994 furnished to the Commission pursuant to Rule 14a-3(b)
under the Securities Exchange Act of 1934 (but only to the extent set forth
in Parts I and II of this Annual Report); (2) Proxy Statement dated May 18,
1994 for the 1994 Annual Meeting of Shareholders filed with the Securities
and Exchange Commission pursuant to Regulation 14A under the Securities
Exchange Act of 1934 (but only to the extent set forth in Part III of this
Annual Report).<PAGE>
PART I
ITEM 1. BUSINESS
AEL Industries, Inc. (the "Company" or "AEL") is principally engaged
in the Electronic Defense Products and Services business. This business
consists primarily of the design and manufacture of electronic
countermeasures systems, simulation systems, radar receivers, microwave
integrated circuits and other electronic equipment, and avionics installa-
tion and integration services for the United States and foreign governments
and their suppliers. The Company also provides other services such as
calibration, product testing and technical publication.
Incorporated in 1950 under the name American Electronic Laboratories,
Inc., the Company became a holding company and adopted its present name in
1976. During fiscal year 1992 the Company consolidated all of its domestic
operations into AEL Defense Corp., a wholly-owned subsidiary. On February
26, 1994 AEL Defense Corp. was merged into the Company. The Company's
registered office and principal administrative and executive offices are
located at 305 Richardson Road, Lansdale, Pennsylvania 19446, approximately
28 miles north of Philadelphia, and the telephone number is 215-822-2929.
Electronic Defense Products and Services
Products and Services
The Electronic Defense Products and Services business consists
primarily of the design, manufacture and servicing of products sold to U.S.
Government agencies and their suppliers. The Company also sells products
to foreign governments and their suppliers. Please refer to Note 10 of the
Notes to Consolidated Financial Statements for fiscal year 1994 for
industry segment information.
Revenues from aircraft avionics installation and integration programs
(including the ANVIS/HUD and QF-106 programs) were approximately 33%, 29%
and 34% of the Company's consolidated sales and service revenues in fiscal
years 1994, 1993 and 1992, respectively. Avionics installation and
integration programs for fixed and rotary wing aircraft are of continued
significance to the Company. Through these programs the Company has
installed electronic systems in a wide variety of aircraft.
Another significant product group is electronic countermeasures
systems, which accounted for 22%, 24% and 16% of the Company's consolidated
sales and service revenues in fiscal years 1994, 1993 and 1992,
respectively. These systems include the Army's TACJAM-A program which
accounted for 5% of consolidated revenues in fiscal year 1994, 11% in
fiscal year 1993 and 4% in fiscal year 1992, and a naval electronics
warfare system ordered by a foreign customer which accounted for 6% of
consolidated revenues in fiscal year 1994, 5% in fiscal year 1993 and 11%
in fiscal year 1992.
Sales of radar warning receivers (including the AN/ALR-67, AN/APR-39A
and SANTA) accounted for 10%, 8% and 7% of the Company's consolidated sales
and service revenues in fiscal years 1994, 1993 and 1992, respectively.
Jamming simulator programs (including the AN/MLQ-T4, AN/FSQ-T22 and
Embedded Radar Environment Simulators), accounted for 11%, 10% and 18% of
the Company's consolidated sales and service revenues in fiscal years 1994,
1993 and 1992, respectively.
In the manufacture of its products, the Company uses raw materials
which generally are readily available from several sources. The Company
owns various registered trademarks. The Company relies principally upon
engineering and marketing skills to maintain and enhance its competitive
position in the electronic defense markets. Although most of the Company's
business is not dependent upon patent or similar protection, the Company's
research and development efforts have yielded patents in certain areas of
technology.
The U.S. Government is a customer of particular significance to the
Electronic Defense Products and Services business. Sales directly to the
U.S. Government comprised approximately 47%, 47% and 53% of the Company's
consolidated sales and service revenues in fiscal years 1994, 1993 and
1992, respectively. The majority of additional domestic revenues are
attributable to contracts with suppliers to the U.S. Government. Contracts
awarded to the Company by the U.S. Government and its suppliers are
generally complex and occasionally require significant technological
advances. The loss of direct U.S. Government business would have a
material adverse effect on the operations of this business and the Company.
Any major curtailment in Government spending or appropriations for
electronic defense products and services could also materially and
adversely affect the Company's operations by reducing the Company's
opportunities to contract with other U.S. Government suppliers.
Approximately three-quarters of the Company's domestic revenues in
fiscal year 1994 were derived from contracts awarded on a fixed-price
basis, which obligate the Company to deliver equipment or perform services
at a fixed price without regard to the cost incurred. Fixed-price
contracts with the U.S. Government and suppliers to the U.S. Government
frequently include a progress payment or milestone payment clause, which
provides for payment to the Company of a significant portion of the costs
of performing a contract as they are incurred. The remaining one-quarter
of domestic revenues arose from contracts awarded on a cost-plus or time-
and-material basis, under which the Company is reimbursed for the cost of
performance (plus a fee or profit) up to a negotiated ceiling amount.
Contracts with the U.S. Government and suppliers to the U.S. Government
generally provide for termination at any time for the convenience of the
Government, and upon such termination a contractor is entitled to receive
payment for the work performed plus a pro rata portion of the profit it
would have earned but for the termination.
Competition
A considerable number of companies are engaged in the sale of
electronic defense products and services. Competition has significantly
increased over the last few years as a result of decreased Government
spending and appropriations. Overall, there are fewer programs (especially
start-ups) on which to bid and, therefore, the Company faces greater
competition in its traditional product areas. In response to competitive
pressures, the Company sometimes agrees to invest its own funds in the
performance of a program to enhance the likelihood of receiving a contract
award. Competitors of the Company include large diversified corporations
and smaller, highly specialized firms. The Company's competitive position
ultimately depends on its technical expertise and the price and quality of
its products and services. Because of the variety of its activities, it is
impossible to state precisely the competitive position of the Company with
respect to each of its product groups. The Company does not have dominance
in the markets for its products.
Marketing
The products and services of this business are marketed primarily in
the United States to the U.S. Government and its suppliers. The Company
also markets its products overseas through its AEL Systems International
Division. Sales are made on the basis of competitive bids or negotiated
contracts, primarily through direct contact between the Company's technical
and marketing employees and the technical and purchasing representatives of
its customers. The Company also generates sales through the use of trade
and catalog advertising.
Backlog
The backlog of firm orders was $121,478,000 at February 25, 1994 and
$156,306,000 at February 26, 1993. Approximately 12% of the backlog at
February 25, 1994 was firm but unfunded. Approximately 50% of the total
backlog consisted of orders from the U.S. Government and 22% from foreign
customers. As of February 25, 1994, approximately 29% of the backlog
consisted of orders for electronic countermeasures systems including 12%
for TACJAM-A and 11% for an order from a foreign government; 7%, orders for
jamming simulators; 35%, orders for avionics installation/integration
programs, including 17% for ANVIS/HUD; and 19%, orders for radar warning
receivers, including 18% for AN/APR-39A. Approximately 70% of the total
backlog is expected to be completed in fiscal year 1995.
<PAGE>
Other Business Information
Research and Development
During fiscal years 1994, 1993 and 1992 the Company expended
approximately $2,162,000, $2,501,000 and $1,742,000, respectively, on
Company-sponsored research and development. In addition, there were
expenditures for customer-sponsored research and development which are not
readily identifiable since many contracts awarded to the Company have R&D
effort commingled with production effort. In customer-sponsored research
and development contracts, the proprietary rights to the development belong
to the customer; however, the Company generally obtains technical know-how
which it may be able to apply in other fields.
Fluctuations in company-sponsored R&D result from changes in the
allocation of available cash and technical resources, including personnel.
Company-sponsored R&D may lead to innovations which are attractive to
potential customers and which may then be adapted to the customer's needs
and incorporated into systems. The Company's R&D focus is to create
technological and bidding advantages in major new system programs.
As a result of its research and development efforts, the Company may
become one of a small number of suppliers of the items developed, which may
result in the award of production contracts to the Company. The Company is
significantly involved in the field of advanced electronics which entails a
high degree of technological obsolescence resulting from the rapid
advancements made both by the Company and others within the industry. It
is therefore extremely difficult to measure the useful life of any specific
product or service at the time of development.
Employees
At April 29, 1994 the Company had 1162 employees, 332 of whom are
engineers. The Company believes its relations with employees are generally
satisfactory. The Company's employees are not covered by collective
bargaining agreements.
Foreign Sales
The Company has no foreign operations. However, foreign sales
accounted for approximately 13%, 10% and 15% of consolidated sales and
service revenues in fiscal years 1994, 1993 and 1992, respectively. All
sales of military products to foreign customers must be approved by the
U.S. Government; such approvals are subject to revocation and may be
adversely affected by changes in U.S. Government export policy. There
exist certain risks inherent in foreign transactions which may not be
present in domestic transactions, including currency fluctuations, changes
in foreign government policies, differences in international laws and
difficulties in negotiating and litigating with foreign entities. The
Company has taken reasonable measures to reduce such risks by requiring in
appropriate cases payment in U.S. currency, letters of credit, advanced
deposits, and by retaining title to goods delivered until payment.
Environmental Matters - See Item 3 of this report.
ITEM 2. PROPERTIES
As of May 6, 1994, the Company owned or leased a total of
approximately 750,000 square feet of office and plant space with main
facilities in Pennsylvania, Illinois, Georgia, Virginia, New Jersey and
Ohio. The Company owns most of these facilities. The operations of the
Electronic Defense Products and Services business are carried on at all of
the Company's main facilities. In order to consolidate its Pennsylvania
operations, approximately 50,000 square feet were added to the Company's
headquarters facility in fiscal year 1994. No discussion of productive
capacity and extent of utilization is provided because the Company is not
involved in a traditional manufacturing business. Its products are
principally custom designed and sold in small quantities. The present
facilities are considered to be suitable, adequate, and well-equipped for
the Company's operations.
ITEM 3. LEGAL PROCEEDINGS
The Company has provided documents relating to the AN/MLQ-T4 Ground
Jammer program to the Department of Defense pursuant to a subpoena issued
by its Inspector General in September 1992. At this time the Company
cannot determine when the Government will complete its investigation or
whether it will seek remedies in connection with this investigation.
In March 1989 the United States Environmental Protection Agency
("EPA") placed a site that includes the Company's Richardson Road property
on the National Priorities List for detailed study and cleanup of alleged
environmental contamination. A revised Remedial Investigation/Feasibility
Study Work Plan, written under the direction of the Company and other
potentially responsible parties and under the overall guidance of the EPA,
was submitted to the EPA in September 1993. The Company continues to
cooperate with the EPA in the study of this site. The cost of performing
the Study defined in the Plan and the eventual remediation, if required, is
not expected to have a material adverse impact on the Company's financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter ended February 25, 1994.<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive
officers of the Company. Officers serve at the discretion of the Board of
Directors.
Name Age Position
Dr. Leon Riebman 74 Chairman of the Board, President
and Chief Executive Officer
George King 56 Executive Vice President and Chief
Financial Officer
Dr. Riebman is a founder of the Company and has served as a director and
Chief Executive Officer since the Company's organization in 1950, and as
Chairman of the Board of Directors since 1987. In 1993 he reassumed the
role of President, a position he had held from 1950 to 1983. Dr. Riebman
is also a director of Ampal Corp. (New York, NY) and Bank & Trust Co. of
Old York Road (Willow Grove, PA).
Mr. King joined the Company as Vice President in 1975 and was named
Senior Vice President in 1985 and Executive Vice President in 1992.<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Class A common stock of the Company is traded in the over-the-counter
market and is listed in the National Market System maintained by the
National Association of Securities Dealers under the symbol AELNA. The
Class B common stock trades only sporadically in the over-the-counter
market, which does not constitute an established public trading market. On
May 2, 1994 there were 1546 record holders of Class A common stock and 85
record holders of Class B common stock. The following table sets forth for
the periods shown the high and low closing prices for the Company's Class A
common stock as furnished by NASDAQ.
Fiscal Year High Low
1993
First Quarter.................. 8-1/4 7
Second Quarter................. 8-1/2 5-3/8
Third Quarter.................. 7-1/2 5-1/2
Fourth Quarter................. 7 5-3/4
1994
First Quarter.................. 7-1/4 5-3/4
Second Quarter................. 7-1/4 5
Third Quarter.................. 8-1/4 6-1/2
Fourth Quarter................. 10-1/4 7-1/4
The Company has never paid, and there are no present plans to pay, a cash
dividend on its common stock. Future dividend policy will be determined by
the Board of Directors in light of the prevailing financial needs and
earnings of the Company and other relevant factors.
ITEM 6. SELECTED FINANCIAL DATA
The information appearing under the caption "Selected Financial Data"
contained in the Company's Annual Report to Shareholders for fiscal year
1994 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information appearing under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" contained in the
Company's Annual Report to Shareholders for fiscal year 1994 is incorpor-
ated herein by reference.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information listed below appears in the Company's Annual Report to
Shareholders for fiscal year 1994 and is incorporated herein by reference.
Report of Independent Auditors
Consolidated Balance Sheets at February 25, 1994 and February 26, 1993
Consolidated Statements of Operations for the three years ended February
25, 1994
Consolidated Statements of Cash Flows for the three years ended February
25, 1994
Consolidated Statements of Shareholders' Equity for the three years ended
February 25, 1994
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information under the caption "Election of Directors" contained in
the Company's Proxy Statement for the 1994 Annual Meeting of Shareholders
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the caption "Executive Compensation" contained in
the Company's Proxy Statement for the 1994 Annual Meeting of Shareholders
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information under the caption "Security Ownership of Certain
Beneficial Owners and Management" contained in the Company's Proxy
Statement for the 1994 Annual Meeting of Shareholders is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
No reportable transactions.<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.
(a) List of documents filed as part of this report.
1. Financial statements
a. The financial statements of the Company
set forth under Item 8 of this report.
b. The financial statement schedules listed in the
accompanying index to financial statement schedules.
2. Exhibits
The exhibits listed in the accompanying index to exhibits are
filed as part of this annual report. EXHIBITS 10A THROUGH 10K
IN THE ACCOMPANYING INDEX TO EXHIBITS, LISTING THE COMPANY'S
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS ARE FILED
PURSUANT TO ITEM 14(C) OF THIS REPORT.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of
fiscal year 1994. <PAGE>
AEL INDUSTRIES, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULES
(Item 14)
Schedule V - Property, plant and equipment for the
three years ended February 25, 1994
Schedule VI - Accumulated depreciation, depletion and
amortization of property, plant and equipment for
the three years ended February 25, 1994
Schedule VIII - Valuation and qualifying accounts for
the three years ended February 25, 1994
Schedule IX - Short-term borrowings for the three years
ended February 25, 1994
All other schedules are omitted since the required information is not present
or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements and notes thereto.
AEL INDUSTRIES, INC.
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE THREE YEARS ENDED FEBRUARY 25, 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
Balance Additions
at and Sales Balance
beginning transfers and at end
Description of period at cost Retirements of period
- - ------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
February 28, 1992:
Land. . . . . . . . . . . . . . . . . . . . $1,875 $1,875
Buildings and improvements . . . 33,157 $672 33,829
Machinery, equipment and tools 32,790 2,812 $547 35,055
Office furniture and equipment. . 9,983 2,508 461 12,030
Construction in progress. . . . . . . 526 (394) 132
--------- --------- --------- ---------
Total. . . . . . . . . . . . . . $78,331 $5,598 $1,008 $82,921
========= ========= ========= =========
February 26, 1993:
Land. . . . . . . . . . . . . . . . . . . . $1,875 $11 $1,886
Buildings and improvements . . . 33,829 1,492 35,321
Machinery, equipment and tools 35,055 2,656 $959 36,752
Office furniture and equipment. . 12,030 2,115 91 14,054
Construction in progress. . . . . . . 132 2,420 2,552
--------- --------- --------- ---------
Total. . . . . . . . . . . . . . $82,921 $8,694 $1,050 $90,565
========= ========= ========= =========
February 25, 1994:
Land. . . . . . . . . . . . . . . . . . . . $1,886 $11 $1,897
Buildings and improvements . . . 35,321 4,935 40,256
Machinery, equipment and tools 36,752 2,628 $53 39,327
Office furniture and equipment. . 14,054 1,364 200 15,218
Construction in progress. . . . . . . 2,552 (2,552)
--------- --------- --------- ---------
Total. . . . . . . . . . . . . . $90,565 $6,386 $253 $96,698
========= ========= ========= =========
</TABLE>
AEL INDUSTRIES, INC.
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION
AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
FOR THE THREE YEARS ENDED FEBRUARY 25, 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
Balance Additions
at charged to Sales Balance at
beginning costs and and end of
Description of period expenses Retirements period
- - ----------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
February 28, 1992:
Buildings and improvements . . . $8,431 $1,495 $9,926
Machinery, equipment and tools 20,636 3,177 $561 23,252
Office furniture and equipment . . 5,779 1,620 321 7,078
--------- --------- --------- ---------
Total. . . . . . . . . . . . . . $34,846 $6,292 $882 $40,256
========= ========= ========= =========
February 26, 1993:
Buildings and improvements . . . $9,926 $1,597 $11,523
Machinery, equipment and tools 23,252 3,289 $818 25,723
Office furniture and equipment . . 7,078 1,848 84 8,842
--------- --------- --------- ---------
Total. . . . . . . . . . . . . . $40,256 $6,734 $902 $46,088
========= ========= ========= =========
February 25, 1994:
Buildings and improvements . . . $11,523 $1,590 $13,113
Machinery, equipment and tools 25,723 3,098 $39 28,782
Office furniture and equipment . . 8,842 1,831 193 10,480
--------- --------- --------- ---------
Total. . . . . . . . . . . . . . $46,088 $6,519 $232 $52,375
========= ========= ========= =========
</TABLE>
AEL INDUSTRIES, INC.
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED FEBRUARY 25, 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
Balance at Charged Balance at
beginning to costs & end of
Description of period expenses Deductions period
- - ----------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
February 28, 1992:
Allowance for contract losses $13,333 $6,425 $12,187 (a) $7,571
========= ========= ========= =========
Inventory allowance . . . . . . . . $1,022 $400 $149 (b) $1,273
========= ========= ========= =========
Allowance for bad debts . . . . $200 $20 $19 (c) $201
========= ========= ========= =========
February 26, 1993:
Allowance for contract losses $7,571 $6,494 $9,656 (a) $4,409
========= ========= ========= =========
Inventory allowance . . . . . . . . $1,273 $465 $714 (b) $1,024
========= ========= ========= =========
Allowance for bad debts . . . . $201 $7 $7 (c) $201
========= ========= ========= =========
February 25, 1994:
Allowance for contract losses $4,409 $6,650 $7,195 (a) $3,864
========= ========= ========= =========
Inventory allowance . . . . . . . . $1,024 $245 $311 (b) $958
========= ========= ========= =========
Allowance for bad debts . . . . $201 $9 $26 (c) $184
========= ========= ========= =========
</TABLE>
___________________________________________
(a) Deductions are a result of allowance usage over the
terms of the related contracts.
(b) Deductions are a result of physical disposal of inventory
for which allowances were previously provided.
(c) Deductions are a result of write-offs of uncollectible
accounts receivable for which allowances were
previously provided.
AEL INDUSTRIES, INC.
SCHEDULE IX - SHORT-TERM BORROWINGS
FOR THE THREE YEARS ENDED FEBRUARY 25, 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
Weighted
Balance Interest Maximum amount Average amount average
at the end Rate at end outstanding outstanding interest rate
Category of Borrowing of period of period during period during period(2) during period (3)
- - -------------------------------- --------- --------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
February 28, 1992:
Note payable to bank (1) $0 6.5% $3,875 $912 8.6%
February 26, 1993:
Note payable to bank (1) $0 6.0% $900 $7 6.2%
February 25, 1994
Note payable to bank (1) $0 6.0% $0 $0 0.0%
</TABLE>
________________________________________________
(1) Note payable to bank represents borrowings under a line of credit
agreement The agreement existing at February 25, 1994 expires
June 30, 1994 at which time it will be reviewed for renewal.
(2) The average amount outstanding during the period is computed by
dividing the total daily outstanding principal balances by the total
days in the fiscal year.
(3) The weighted average interest rate during the period was computed
by dividing the actual interest expense by the average short-term
borrowings outstanding.
SIGNATURES
Pursuant to the requirements of Section 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.
AEL INDUSTRIES, INC.
Attest:
/s/John R. Cox By: /s/George King
John R. Cox George King, Executive Vice
Secretary President and Chief Financial
Officer
Date: May 18, 1994
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.
Signature Title Date
(i) Principal Executive
Officer
/s/Leon Riebman Chairman of the Board May 18, 1994
Leon Riebman
(ii) Principal Financial
Officer
/s/George King Executive Vice President May 18, 1994
George King and Chief Financial Officer
(iii) Principal Accounting
Officer
/s/John F. Sharkey Vice President, Finance May 18, 1994
John F. Sharkey
Signature Title Date
(iv) A Majority of the Board
of Directors
/s/Francis J. Dunleavy Director May 18, 1994
Francis J. Dunleavy
/s/Frederick R. Einsidler Director May 18, 1994
Frederick R. Einsidler
/s/Conrad J. Fowler Director May 18, 1994
Conrad J. Fowler
/s/Leeam Lowin Director May 18, 1994
Leeam Lowin
/s/Lloyd W. Moffit Director May 18, 1994
Lloyd W. Moffit
/s/Claire E. Riebman Director May 18, 1994
Claire E. Riebman
/s/Leon Riebman Director May 18, 1994
Leon Riebman
<PAGE>
INDEX TO EXHIBITS
3A Articles of Incorporation as amended and restated through April
2, 1993. (Incorporated by reference to Exhibit 3A in the
Company's Form 10K Report for the fiscal year ended February 26,
1993)
3B Bylaws as amended through April 22, 1993. (Incorporated by
reference to Exhibit 3B in the Company's Form 10-K Report for the
fiscal year ended February 26, 1993)
10A Incentive Stock Option Plan effective January 1, 1992
(Incorporated by reference to Exhibit 10A in the Company's Form
10-K Report for the fiscal year ended February 28, 1992)
10B Nonqualified Stock Option Plan as amended through April 10, 1991
(Incorporated by reference to Exhibit 10B in the Company's Form
10-K Report for the fiscal year ended February 22, 1991)
10C AEL Bonus Plan for Senior Employees amended and restated as of
February 28, 1992 (Incorporated by reference to Exhibit 10C in
the Company's Form 10-K Report for the fiscal year ended February
28, 1992)
10D Stock Repurchase Agreement dated April 16, 1986 between AEL
Industries, Inc. and Leon Riebman (Incorporated by reference to
Exhibit 10G in the Company's Form 10-K Report for the fiscal year
ended February 28, 1986)
10E Employment and Retirement Agreement dated January 9, 1982 between
AEL Industries, Inc. and Leon Riebman (Incorporated by reference
to Exhibit 10A in the Company's Form 10-K Report for the fiscal
year ended February 26, 1982)
10F Amendment No. 1 dated November 14, 1991 to Employment and Retirement
Agreement dated January 9, 1982 between AEL Industries, Inc. and Leon
Riebman (Incorporated by reference to Exhibit 10F in the Company's
Form 10-K Report for the fiscal year ended February 28, 1992)
10G Employment and Retirement Agreement dated October 15, 1980
between AEL Industries, Inc. and Conrad J. Fowler (Incorporated
by reference to Company's S-1 Registration Statement No. 2-71264,
Amendment No. 2, dated May 15, 1981)
10H Supplemental Benefits Agreement dated April 25, 1988, Between AEL
Industries, Inc. and Mark H. Ronald (Incorporated by reference to
Exhibit 10I in the Company's Form 10-K Report for the fiscal year
ended February 24, 1989)
10I Change of Control, Nonqualified Stock Option and Supplemental Benefits
Agreements dated May 16, 1988, between AEL Industries, Inc. and George
King (Incorporated by reference to Exhibit 10I in the Company's Form
10-K Report for the fiscal year ended February 24, 1989)
10J Agreements between AEL Industries, Inc. and Senior Executives
dated as of August 1, 1993.
10K Agreement between AEL Industries, Inc. and Teachers Insurance and
Annuity Association of America dated March 30, 1988 (Incorporated
by reference to Exhibit 10M in the Company's Form 10-K Report for
the fiscal year ended February 24, 1989)
11 Statement re computation of per share earnings (or loss)
13 Portions of 1994 Annual Report to Shareholders specifically
incorporated by reference elsewhere in this report.
22 List of Subsidiaries
23 Consent of Ernst & Young
EXHIBIT 11
AEL INDUSTRIES, INC.
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
Fiscal Year Ended
1994 1993 1992
------------------------------------------
<S> <C> <C> <C>
Computation of number of shares for computation
of net income (loss) per share:
Primary:
Average number of class A shares outstanding
during the year 3,314,000 3,435,000 3,446,000
Average number of class B shares outstanding
during the year 435,000 436,000 436,000
Incremental shares issuable on exercise of
stock options 31,000 30,000 10,000
----------- ----------- ------------
Total shares for computation of net income
per share 3,780,000 3,901,000 3,892,000
=========== ===========
============
Net income $1,617,000 $484,000 $12,302,000
=========== ===========
============
Net income per share $0.43 $0.12 $3.16
=========== ===========
============
Fully diluted:
Average number of class A shares outstanding
during the year 3,314,000 3,435,000 3,446,000
Average number of class B shares outstanding
during the year 435,000 436,000 436,000
Incremental shares issuable on exercise of
stock options 63,000 31,000 44,000
----------- ----------- ------------
Total shares for computation of net income
per share assuming full dilution 3,812,000 3,902,000 3,926,000
=========== ===========
============
Net income $1,617,000 $484,000 $12,302,000
=========== ===========
============
Net income per share assuming full
dilution $0.42 $0.12 $3.13
=========== ===========
============
</TABLE>
AEL INDUSTRIES, INC.
Selected Financial Data
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended
_________________________________________________________
Feb. 25, Feb. 26, Feb. 28, Feb. 22, Feb. 23,
1994 1993 1992 1991 1990
_________ _________ _________ _________ _________
<S> <C> <C> <C> <C> <C>
Sales and service revenues $123,632 $113,132 $140,112 $144,258 $121,159
Operating income (loss) 3,742 2,143 5,323 6,621 (4,752)
Interest expense (1,719) (2,418) (3,272) (3,809) (4,503)
Investment income 455 843 322 321 552
Other expense, net of other income (167) (318) (644) (425) (689)
Provision for claims settlement (2,200)
Gain on redemption of shares in foreign company 14,368
_________ _________ _________ _________ _________
2,311 (1,950) 16,097 2,708 (9,392)
Income tax provision (benefit) 694 106 5,641 986 (405)
_________ _________ _________ _________ _________
Income (loss) before extraordinary credit and
cumulative effect of change in accounting principle 1,617 (2,056) 10,456 1,722 (8,987)
Extraordinary credit-benefit of net operating loss
carryforward 1,846 852
Cumulative effect of change in accounting for income
taxes 2,540
_________ _________ _________ _________ _________
Net income (loss) $1,617 $484 $12,302 $2,574 ($8,987)
========= ========= ========= ========= =========
Earnings per share:
Income (loss) before extraordinary credit and
cumulative effect of change in accounting principle $0.43 ($0.52) $2.69 $0.44 ($2.31)
Extraordinary credit-benefit of net operating loss
carryforward 0.47 0.22
Cumulative effect of change in accounting for income
taxes 0.64
_________ _________ _________ _________ _________
Net income (loss) $0.43 $0.12 $3.16 $0.66 ($2.31)
========= ========= ========= ========= =========
Working capital $29,241 $33,678 $42,517 $22,425 $18,607
Total assets 109,156 114,646 114,384 118,120 129,514
Long-term debt 19,599 25,141 32,119 37,603 33,674
Shareholders' equity 58,065 56,320 56,701 44,393 41,861
Backlog 121,478 156,306 127,417 187,265 211,238
</TABLE>
All fiscal years contain fifty-two weeks, except fiscal year 1992 which
contains fifty-three weeks.
Note 8 of the consolidated financial statements describes legal matters and
related uncertainties.
Fiscal year end backlogs included unfunded amounts as follows:
1994 - $14,747,000; 1993 - $16,039,000; 1992 - $4,370,000; 1991 - $23,915,000
;and 1990 - $26,253,000.
Operating results for the year ended February 23, 1990 include a contract
investment provision of $8,000,000 associated with the AN/ALR-67 ASR
radar warning receiver program.
<PAGE>
AEL INDUSTRIES, INC.
Consolidated Balance Sheets
February 25, 1994 and February 26, 1993
(Dollars in thousands)
<TABLE>
<CAPTION>
Assets 1994 1993
_____________________________________________________________________________________________________
<S> <C> <C>
Current assets:
Cash and equivalents $10,414 $4,168
Marketable securities 1,428 12,123
Receivables, including unbilled amounts of $26,985 at February 25, 1994 and
$22,423 at February 26, 1993:
U.S. Government 35,717 37,360
Other 4,202 2,277
_________ _________
39,919 39,637
Inventories 4,375 3,634
Deferred income taxes 2,646 3,646
Other current assets 238 1,172
_________ _________
Total current assets 59,020 64,380
Property, plant and equipment, at cost:
Land 1,897 1,886
Buildings and improvements 40,256 35,321
Machinery and equipment 39,327 36,752
Office furniture and equipment 15,218 14,054
Construction in progress 2,552
_________ _________
96,698 90,565
Less accumulated depreciation 52,375 46,088
_________ _________
Net property, plant and equipment 44,323 44,477
Other assets 5,813 5,789
_________ _________
$109,156 $114,646
========= =========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity 1994 1993
_____________________________________________________________________________________________________
<S> <C> <C>
Current liabilities:
Accounts payable $4,795 $4,460
Accrued salaries, wages and employee benefits 5,811 5,995
Other current liabilities 13,631 13,269
Current portion of long-term debt 5,542 6,978
_________ _________
Total current liabilties 29,779 30,702
Long-term debt, net of current portion 19,599 25,141
Other liabilities 1,713 2,483
Commitments and contingent liabilities-Note 8
Shareholders' equity:
Class A common stock (non-voting), $1 par value; 20,000,000 shares authorized;
shares issued and outstanding, 1994- 3,333,000; 1993- 3,305,000 3,333 3,305
Class B common stock (voting), $1 par value; 600,000 shares authorized;
shares issued and outstanding, 1994- 435,000 ; 1993- 436,000 435 436
Capital in excess of par value 2,557 2,257
Retained earnings 51,740 50,322
_________ _________
Total shareholders' equity 58,065 56,320
_________ _________
$109,156 $114,646
========= =========
</TABLE>
<PAGE>
AEL INDUSTRIES, INC.
Consolidated Statements of Operations
Three years ended February 25, 1994
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1994 1993 1992
__________ __________ __________
<S> <C> <C> <C>
Sales and service revenues $123,632 $113,132 $140,112
Operating costs and expenses:
Cost of products and services 94,164 84,696 106,759
Administrative and selling expenses 17,674 18,824 19,105
Bid and proposal costs 5,890 4,968 7,183
Research and development costs 2,162 2,501 1,742
__________ __________ __________
119,890 110,989 134,789
__________ __________ __________
Operating income 3,742 2,143 5,323
__________ __________ __________
Interest expense (1,719) (2,418) (3,272)
Investment income 455 843 322
Other expense, net of other income (167) (318) (644)
Provision for claims settlement (2,200)
Gain on redemption of shares in foreign company 14,368
__________ __________ __________
(1,431) (4,093) 10,774
__________ __________ __________
Income (loss) before income taxes, extraordinary credit
and cumulative effect of change in accounting principle 2,311 (1,950) 16,097
Income tax provision 694 106 5,641
__________ __________ __________
Income (loss) before extraordinary credit and cumulative
effect of change in accounting principle 1,617 (2,056) 10,456
Extraordinary credit-benefit of net operating loss carryforward 1,846
Cumulative effect of change in accounting for income taxes 2,540
__________ __________ __________
Net income $1,617 $484 $12,302
========== ========== ==========
Earnings per share:
Income (loss) before extraordinary credit and cumulative
effect of change in accounting principle $0.43 ($0.52) $2.69
Extraordinary credit-benefit of net operating loss carryforward 0.47
Cumulative effect of change in accounting for income taxes 0.64
__________ __________ __________
Net income $0.43 $0.12 $3.16
========== ========== ==========
Weighted average shares outstanding 3,780,000 3,901,000 3,892,000
========== ========== ==========
</TABLE>
See accompanying notes.
<PAGE>
AEL INDUSTRIES, INC.
Consolidated Statements of Cash Flows
Three years ended February 25, 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1994 1993 1992
_______________________________________________________________________________________________________
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,617 $484 $12,302
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 6,519 6,734 6,292
Amortization of other assets 407 407 410
Cumulative effect of change in accounting for income taxes (2,540)
Deferred income taxes 274 610 2,209
Accrued retirement benefits (294) 45 86
Gain on redemption of shares in foreign company (14,368)
Other (131)
(Increase) decrease in receivables (282) (4,856) 12,585
(Increase) decrease in inventories and other current assets 193 725 (989)
Increase (decrease) in accounts payable, accrued liabilities
and other current liabilities 513 1,446 (6,279)
_________ _________ _________
Net cash provided by operating activities 8,816 3,055 12,248
Cash flows from investing activities:
Additions to property, plant and equipment (6,386) (8,694) (5,598)
Purchases of marketable securities (31,369)
Sales of marketable securities 10,687 22,016 54
Proceeds from redemption of shares in foreign company 25,000
Other 29 237 (211)
_________ _________ _________
Net cash provided (absorbed) by investing activities 4,330 (17,810) 19,245
Cash flows from financing activities:
Reductions of short-term debt (3,875)
Long-term borrowings 1,298
Reductions in long-term debt (6,978) (728) (8,625)
Stock option exercises 302 27 6
Repurchases of common stock (224) (892)
_________ _________ _________
Net cash absorbed by financing activities (6,900) (1,593) (11,196)
_________ _________ _________
Increase (decrease) in cash and equivalents 6,246 (16,348) 20,297
Cash and equivalents at beginning of period 4,168 20,516 219
_________ _________ _________
Cash and equivalents at end of period $10,414 $4,168 $20,516
========= ========= =========
</TABLE>
See accompanying notes.
<PAGE>
AEL INDUSTRIES, INC.
Consolidated Statements of Shareholders' Equity
Three years ended February 25, 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
Total
Common Stock Capital in Class A Share-
_____________________ Excess of Retained Treasury holders'
Class A Class B Par Value Earnings Shares Equity
____________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Balance at February 22, 1991 $4,442 $436 $2,230 $46,630 ($9,345) $44,393
Stock option exercises 1 5 6
Net income for the year 12,302 12,302
_________ _________ _________ _________ _________ _________
Balance at February 28, 1992 4,443 436 2,235 58,932 (9,345) 56,701
Stock option exercises 5 22 27
Purchases of common stock for treasury (892) (892)
Retirement of treasury stock (1,143) (9,094) 10,237 -
Net income for the year 484 484
_________ _________ _________ _________ _________ _________
Balance at February 26, 1993 3,305 436 2,257 50,322 - 56,320
Conversion of Class B to Class A 1 (1) -
Stock option exercises 52 250 302
Tax benefit from stock option exercises 50 50
Purchases of common stock for treasury (224) (224)
Retirement of treasury stock (25) (199) 224 -
Net income for the year 1,617 1,617
_________ _________ _________ _________ _________ _________
Balance at February 25, 1994 $3,333 $435 $2,557 $51,740 - $58,065
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Fiscal Year. The Company's fiscal year ends on the last Friday in
February. Fiscal years ended February 25, 1994 and February 26, 1993
each contain fifty-two weeks while the fiscal year ended February 28,
1992 contains fifty-three weeks.
Principles of Consolidation. The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries.
Intercompany accounts and transactions have been eliminated in consol-
idation.
Revenue Recognition. Contract revenue is recognized principally on
the percentage-of-completion method in the ratio that cost incurred
bears to estimated cost at completion. Other revenue is recorded on
the basis of shipment of products or performance of services.
Contract Provisions. Under certain fixed price contracts, the Company
from time to time has encountered cost overruns caused by increased
material, labor, or overhead costs, design or production difficulties
and various other factors such as technical and manufacturing complex-
ity, which must be, and in such cases have been, borne by the Company.
Adjustments to contract cost estimates are made in the periods in
which the facts requiring such revisions become known. When the re-
vised estimate indicates a loss, such loss is provided for currently
in its entirety. In addition, the Company from time to time commits
to invest its own funds, particularly in the case of high-technology
seed programs. The estimated costs of such investments in excess of
the related contract values are provided for currently in their en-
tirety upon receipt of such contracts by the Company.
Cash and Equivalents. Cash and equivalents include all highly liquid
investments with original maturities of three months or less.
Marketable Securities. Marketable securities are carried at cost.
Aggregate market value of securities was $1,697,000 and $12,429,000 at
February 25, 1994 and February 26, 1993, respectively.
Receivables. Unbilled receivables represent costs and profits in ex-
cess of billed amounts on contracts accounted for on the percentage-
of-completion method and are billable upon shipment of the product or
performance of the service, achievement of milestones or completion of
the contract. Such amounts are generally billed and collected within
one year, however, approximately $2,400,000 of unbilled receivables at
February 25, 1994 are expected to be billed and collected after one
year.
Inventories. Inventories are stated at the lower of cost or market
and consist primarily of work-in-process. Raw materials are valued
generally at an average cost; work-in-process and finished goods are
valued generally on a first-in, first-out basis.
Inventoried costs relating to long-term contracts are stated
principally at actual production cost, including overhead, tooling and
other related nonrecurring costs, less costs allocated to delivered
items. Costs attributed to units delivered under long-term contracts
are based on the average cost of all units expected to be produced.
In accordance with industry practice, inventories include amounts
relating to contracts having production cycles longer than one year.
Such amounts are not significant.
Plant and Equipment. Depreciation of plant and equipment is computed
on the straight-line method for financial statement purposes based
upon the following estimated useful lives:
Buildings and improvements 10 to 40 years
Machinery and equipment 3 to 10 years
Office furniture and equipment 5 to 8 years
Other Assets. Other assets include $7,300,000 representing the excess
of the purchase price over the fair value of the assets acquired and
liabilities assumed in connection with an acquisition in 1987. Such
amount is being amortized on a straight-line basis over 20 years.
Accumulated amortization was $2,403,000 and $2,038,000 at February 25,
1994 and February 26, 1993, respectively.
Income Taxes. In fiscal year 1993, the Company adopted the asset and
liability method of accounting for income taxes as provided for by
Statement of Financial Accounting Standards No. 109. Accordingly, for
fiscal years 1994 and 1993, deferred tax assets and liabilities are
recognized for the tax consequences of temporary differences by apply-
ing enacted statutory tax rates applicable to future years to differ-
ences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. In fiscal year 1992, income
taxes were provided based on earnings reported for financial statement
purposes, and deferred income taxes were provided for timing differ-
ences in the recognition of certain income and expense items for
financial reporting and tax purposes.
Interest. The Company capitalizes interest costs associated with the
cost of constructing major new facilities. Interest of $88,000 and
$61,000 incurred in fiscal years 1994 and 1993, respectively, has been
capitalized.
Earnings Per Share. Per share data are based on the weighted average
number of shares of stock outstanding each year including the dilutive
effect of stock options. Per share computations on a fully diluted
basis are the same as those reported.
Reclassifications. Certain financial statement items for fiscal years
1993 and 1992 have been reclassified in order to conform with the
current year's presentation.
2. Investment in Foreign Company
In December 1986, the Company exchanged its 58.7% interest in
Elisra Electronic Systems Ltd. for redeemable shares representing a 6%
interest in Tadiran Ltd., an electronics company in Israel. The
Company accounted for the exchange under the cost method of accounting
and recognized no gain at that time for financial reporting purposes.
In February 1992, the Company received $25,000,000 in settlement of
its rights arising from redemption of the redeemable shares. For
financial reporting purposes, the Company recognized a gain of
$14,368,000, net of related expenses, in fiscal year 1992.
3. Line of Credit and Letters of Credit
The Company has a line of credit agreement expiring June 30, 1994
which provides for unsecured borrowings of up to $5,000,000 at the
prime rate. The Company did not borrow under the line of credit
agreement during the year ended February 25, 1994 and had only nominal
temporary borrowings during the year ended February 26, 1993. The
terms of the line of credit agreement contain, among other provisions,
requirements for maintaining defined levels of working capital, net
worth, annual capital expenditures and debt to equity. The agreement
also requires an annual commitment fee of approximately $31,000.
At February 25, 1994, standby letters of credit of approximately
$13,600,000 have been issued under an agreement, expiring June 30,
1994, which is being maintained as security for performance and
advances received on long-term contracts, and as security for debt
service payments under industrial revenue bond loan agreements. The
agreement provides a maximum commitment for letters of credit of
$17,500,000 and requires an annual commitment fee of approximately
$90,000.
4. Long-Term Borrowings
Long-term borrowings consist of:
(Dollars in thousands)
February 25, February 26,
1994 1993
___________ ___________
10.03% senior unsecured note pay-
able, principal due annually
through April 1997. $13,400 $20,000
Industrial revenue bonds, interest
is variable (2.8% at February 25,
1994 and 2.4% at February 26, 1993),
principal due September 1994 through
2010. (Bonds are collateralized by
certain property and equipment at the
Company's St. Louis Regional Airport
facility.) 6,500 6,500
Industrial revenue bonds, interest
is variable (2.8% at February 25, 1994
and 2.4% at February 26, 1993), princi-
pal due April 2009. (Bonds are colla-
teralized by certain property and equip-
ment of the Company's Cross Systems
Division.) 4,000 4,000
Obligation under capital lease, inter-
est at prime plus 1%, principal due
quarterly through December 1996. (Lease
is collateralized by data processing
equipment.) 779 1,039
Other 462 580
_______ _______
25,141 32,119
Less current portion 5,542 6,978
_______ _______
$19,599 $25,141
======= =======
Aggregate maturities of long-term borrowings over the next five
fiscal years are as follows: 1995 - $5,542,000; 1996 - $3,857,000;
1997 - $3,872,000; 1998 - $2,127,000 and 1999 - $342,000. Aggregate
maturities reflect the Company's exercised option to accelerate, from
the end of the loan term to April 1994, repayment of $1,700,000 of the
10.03% senior unsecured note payable.
The terms of certain financing agreements contain, among other
provisions, requirements for maintaining defined levels of working
capital, net worth, capital expenditures and various financial ratios,
including debt to equity.
The Company paid interest of $1,965,000, $2,507,000 and
$3,430,000 on short-term and long-term borrowings during fiscal years
1994, 1993 and 1992, respectively.
5. Income Taxes:
Effective for fiscal year 1993, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes". As permitted under SFAS No. 109, the Company has not restated
financial statements prior to fiscal year 1993 to apply the provisions
of SFAS No. 109. The cumulative effect of the accounting change as of
the beginning of fiscal year 1993 was $2,540,000, or $.64 per share,
primarily resulting from recording tax benefits related to contract
loss provisions recorded in prior years and adjusting tax rates on
previously recorded tax assets and liabilities. The cumulative effect
included the recognition of a valuation allowance of $200,000 to re-
flect the potential loss of state tax benefits. The effect of the
adoption of SFAS No. 109 on fiscal year 1993's income tax provision
decreased net income by $920,000, or $.24 per share, primarily rela-
ting to the establishment of a valuation allowance for the deferred
tax assets.
The income tax provisions for the three years ended February 25,
1994 are comprised of the following:
(Dollars in thousands)
1994 1993 1992
____ ____ ____
Current:
Federal $420 $(533) $ 373
State 29 60
Foreign 1,153
____ _____ ______
420 (504) 1,586
Deferred:
Federal 177 669 2,129
State 97 (59) 80
____ _____ ______
274 610 2,209
Charges equivalent to benefits of
net operating loss carryforwards 1,846
____ ______ ______
Total provision $694 $ 106 $5,641
==== ====== ======
The significant components of the deferred tax provisions for the
years ended February 26, 1993 and February 28, 1992 are summarized as
follows:
(Dollars in thousands)
1993 1992
____ ____
Inventory and contract loss allow-
ances $ 198 $ 583
Employee benefits (108) (385)
Depreciation expense (184) (352)
Valuation allowance 980
Gain on redemption of shares in
foreign company 2,694
Other (276) (331)
_____ ______
$ 610 $2,209
===== ======
The provisions for income taxes for the three years ended
February 25, 1994 differ from the provisions computed by applying the
statutory federal income tax rate due to the following:
(Dollars in thousands)
1994 1993 1992
____ ____ ____
Statutory federal income tax $ 786 $ (663) $5,473
Increase (decrease) resulting from:
Tax exempt investment income (79) (237) (64)
Amortization of intangible
assets 124 124 124
State income taxes 97 (42) 96
Foreign income 42 39 32
Valuation allowance 980
Tax credits (303) (110) (32)
Other 27 15 12
_____ ______ ______
$ 694 $ 106 $5,641
===== ====== ======
The significant components of the deferred tax liabilities and
assets are as follows:
(Dollars in thousands)
February 25, February 26,
1994 1993
___________ ___________
Deferred tax liabilities:
Depreciation $(1,197) $(1,337)
Other (7) (42)
_______ _______
(1,204) (1,379)
Deferred tax assets:
Employee benefits 1,437 1,866
Inventory and contract loss allow-
ances 2,304 2,660
Provision for claims settlement 440 880
Tax credit carryforwards 768
Other 331 323
_______ _______
5,280 5,729
Valuation allowance (1,180) (1,180)
_______ _______
Net deferred tax asset $ 2,896 $ 3,170
======= =======
At February 25, 1994, the Company has general business credit
carryforwards of approximately $254,000 which expire in the years 2008
and 2009. The Company also has alternative minimum tax credits of
approximately $514,000 which can be utilized against regular taxes in
the future.
The Company paid income taxes, net of refunds, of $380,000,
$75,000 and $1,349,000 in fiscal years 1994, 1993 and 1992, respec-
tively.
6. Employee Benefit Plans
Under the Company's Retirement Savings Plan which covers all
eligible employees, the Company makes a matching contribution not
exceeding three percent of an employee's annual compensation, but
otherwise equivalent to one-half of the employee's contribution. The
Company also made additional contributions to the plan, for all
eligible employees, equal to a percentage of their compensation, 2%
prior to January 1992 and 1% subsequent to December 1993, until
compensation exceeded the Federal Insurance Contributions Act maximum
taxable wage base, at which point the Company doubled its additional
contribution. From January 1992 to December 1993, the Company
suspended its additional contributions while continuing its matching
contribution. The Company's aggregate contributions to the Retirement
Savings Plan for fiscal years 1994, 1993 and 1992 were $1,139,000,
$1,017,000 and $2,010,000, respectively.
The Company also maintains individual unfunded supplemental
retirement benefit plans for two current executive officers and one
former executive officer. Supplemental retirement benefits are based
on the officers' final average annual earnings from the Company and
are payable in installments over ten years upon retirement, disabil-
ity, death, or, if no longer employed by the Company, at age 62.
Expense recognized for the benefits accrued under the plans was
$95,000, $61,000 and $101,000 in fiscal years 1994, 1993 and 1992, re-
spectively. In addition, the resignation of an executive resulted in
a curtailment gain of $381,000 recognized in fiscal year 1994. Other
liabilities on the consolidated balance sheets as of February 25, 1994
and February 26, 1993 include amounts of $1,625,000 and $1,911,000,
respectively, for the supplemental retirement benefit plans.
7. Other Current Liabilities
Other current liabilities include allowances for contract losses
and other contract allowances aggregating $3,900,000 and $4,400,000 at
February 25, 1994 and February 26, 1993, respectively. In addition,
other current liabilities at February 25, 1994 include approximately
$4,600,000 representing billings in excess of revenues recognized on
uncompleted contracts.
In the fourth quarter of fiscal year 1993, the Company
established an allowance of $2,200,000 based on an agreement to settle
civil claims pertaining to the pricing of a 1985 fixed-price contract
modification. The Company paid $1,100,000 in July 1993 and expects to
pay the remaining $1,100,000 in July 1994.
8. Commitments and Contingencies
Rent expense under operating leases was $735,000, $703,000 and
$646,000 for fiscal years 1994, 1993 and 1992, respectively. Fiscal
year minimum lease payments under noncancellable operating leases are
as follows: 1995 - $678,000; 1996 - $410,000; 1997 - $297,000; 1998 -
$214,000; 1999 - $144,000; and 2000 and beyond - $410,000.
From time to time the Company may be involved in lawsuits,
investigations and other legal proceeding arising from the ordinary
conduct of its business with the U.S. Government and others. One such
action relates to the U.S. Environmental Protection Agency (EPA)
which, in 1989, placed a site that includes the Company's Richardson
Road property on the National Priorities List for detailed study and
cleanup of alleged environmental contamination. The Company continues
to cooperate with the EPA in the study of this site. In the opinion
of management, except for the matter described below, these legal
proceedings will not have a material adverse effect on consolidated
financial position.
The Company has provided documents, relating to its AN/MLQ-T4
Ground Jammer program, to the Department of Defense pursuant to a sub-
poena issued by its Inspector General in September 1992. At this
time, management is unable to determine when the Government will
complete its investigation or whether it will seek any remedies as a
result of its investigation.
9. Common Stock and Stock Option Plans
At February 25, 1994, shares of class A common stock were re-
served as follows: 986,000 shares for the exercise of stock options
and 435,000 shares for the conversion of class B common stock. Class
B common shares are convertible into class A common shares on a one-
for-one basis. If, at any time, a majority of class B common share-
holders vote in favor of conversion or if less than 50,000 class B
common shares remain outstanding, all class B common shares will
automatically be deemed converted into class A common shares, which
will then assume voting rights.
At February 25, 1994, options were exercisable for 103,000 class
A shares at prices ranging from $4.56 to $10.00 per share. Changes in
the number of shares of class A common stock subject to outstanding
but unexercised options for the two years ended February 25, 1994 are
as follows:
(in thousands)
1994 1993
____ ____
Balance, beginning of period 298 421
Options granted at prices of $6.14
to $8.00 per share 53 59
Options exercised at prices of
$4.75 to $8.81 per share (52) (5)
Options cancelled and terminated (97) (177)
___ ____
Balance, end of period 202 298
=== ====
Generally, options granted are fully exercisable two years from
the date granted and all unexercised options terminate five years
after the date granted, upon the resignation of the optionee, or three
months after the termination of employment if by other than resig-
nation. No charges to income have been made in accounting for op-
tions. Options are granted at a price equal to the fair market value
of class A common stock on the date of grant.
10. Segment Reporting
The Company's principal business is electronic defense products
and services, which consists primarily of the design and manufacture
of electronic countermeasures systems, simulation systems, radars and
receivers. The Company is also engaged in the installation and in-
tegration design of avionics and electronic warfare systems.
The Company provides other products such as antennas, microwave
integrated circuits and hybrid microcircuits, and services such as
calibration, product testing and technical publication.
Presented below are the sources of revenues for each segment by
type of customer for the three years ended February 25, 1994:
(Dollars in thousands)
1994 1993 1992
____ ____ ____
Sales and service revenues:
Domestic:
U.S. Government:
Electronic Defense Products
and Services $ 98,282 $ 93,913 $111,875
Other Products and Services 50 99 104
Commercial:
Electronic Defense Products
and Services 1,160 1,568 1,608
Other Products and Services 7,772 5,851 5,517
_________ ________ ________
107,264 101,431 119,104
International:
Israel (substantially to Govern-
ment of Israel):
Electronic Defense Products
and Services 7,572 5,393 16,103
Other:
Electronic Defense Products
and Services 8,796 6,308 4,905
________ ________ ________
16,368 11,701 21,008
________ ________ ________
$123,632 $113,132 $140,112
======== ======== ========
Sales and service revenues from the U.S. Government include
sales and service revenues recognized under contracts with sup-
pliers to the U.S. Government.
<PAGE>
11. Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Quarter Ended
May 28, Aug. 27, Nov. 26, Feb. 25,
Fiscal Year 1994 1993 1993 1993 1994
_________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
Revenues $30,731 $27,754 $27,292 $37,855
Operating expenses 29,682 26,561 26,504 37,143
_________ _________ _________ _________
Operating income 1,049 1,193 788 712
Other expense, net of other income (251) (462) (362) (356)
_________ _________ _________ _________
798 731 426 356
Income tax provision 360 326 8 (a)
_________ _________ _________ _________
Net income $438 $405 $426 $348
========= ========= ========= =========
Net income per share $0.12 $0.10 $0.12 $0.09
========= ========= ========= =========
Quarter Ended
May 29, Aug. 28, Nov. 27, Feb. 26,
Fiscal Year 1993 1992 1992 1992 1993
_________________________________________________________________________________________________________
Revenues $27,444 $24,551 $28,154 $32,983
Operating expenses 26,903 24,275 28,463 31,348
_________ _________ _________ _________
Operating income (loss) 541 276 (309) 1,635
Other expense, net of other income (498) (601) (388) (2,606)(b)
_________ _________ _________ _________
43 (325) (697) (971)
Income tax provision (benefit) 17 (143) 232
_________ _________ _________ _________
Income (loss) before cumulative effect of change in
accounting principle 26 (182) (697) (1,203)
Cumulative effect of change in accounting for
income taxes 2,540
_________ _________ _________ _________
Net income (loss) $2,566 ($182) ($697) ($1,203)
========= ========= ========= =========
Earnings per share:
Income (loss) before cumulative effect of
change in accounting principle $0.01 ($0.04) ($0.18) ($0.31)
Cumulative effect of change in accounting for income
taxes 0.64
_________ _________ _________ _________
Net income (loss) $0.65 ($0.04) ($0.18) ($0.31)
========= ========= ========= =========
</TABLE>
(a) Income tax provisions in the third and fourth quarters were reduced by
deferred tax benefits pertaining to the retroactive reenactment of
federal income tax research credits.
(b) Includes a provision of $2,200,000 related to the settlement of civil claims
pertaining to the pricing of a 1985 fixed price contract modification.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis provide information which
management believes is relevant to an assessment and understanding of the
Company's consolidated results of operations and financial condition. The
discussion should be read in conjunction with the consolidated financial
statements and notes thereto.
Results of Operations - Fiscal 1994 versus Fiscal 1993
Sales and service revenues of $123,632,000 reflect an increase of 9%
from the $113,132,000 in revenues reported for fiscal year 1993. The
revenue increase was primarily attributable to the avionics
installation/integration programs which generated revenues of $41,307,000
in fiscal year 1994 compared with revenues of $32,732,000 in fiscal year
1993. The Company's ANVIS/HUD avionics program individually produced
revenues of $10,285,000 in 1994 versus $4,262,000 in 1993. In addition to
the avionics programs, revenues from radar warning receiver programs
increased $3,357,000 in the current year, primarily due to the AN/APR-39A
program revenues of $10,352,000 which were approximately double the
revenues reported in fiscal year 1993. Partially offsetting the revenue
growths in the avionics and receiver programs was a decline in revenues
from the electronic countermeasures program group in fiscal year 1994.
Within the countermeasures group, the TACJAM-A program contributed revenues
of $6,615,000 in fiscal year 1994, down from $12,996,000 in fiscal year
1993. However, the Band 9/10 program, another major electronic counter-
measures program, increased its contribution to revenues by $2,656,000 in
1994, and revenues from a major electronic countermeasures program with a
foreign government also increased by $2,012,000 in the current year.
Operating income for fiscal year 1994 was $3,742,000 as compared with
$2,143,000 for fiscal year 1993. The increase in operating income was
primarily due to the current year's growth in sales and service revenues, a
reduction in administrative and selling expenses, and significantly less
costs in fiscal year 1994 associated with restructuring, corporate
downsizing, and consolidation of resources. The administrative and selling
expenses reduction reflects the Company's continuing efforts to contain
costs in those areas, as well as a one time curtailment gain of $381,000
related to a supplemental retirement benefit plan for a former executive
officer. Partially offsetting these favorable items, operating income in
fiscal year 1994 was adversely impacted by an increase in bid and proposal
spending, as well as contract cost estimate and profitability adjustments,
which in the aggregate had an unfavorable effect of $3,900,000 in fiscal
year 1994 as compared with $2,500,000 in fiscal year 1993. Revisions to
the estimated final costs on several engineering development programs re-
sulted in contract loss provisions in fiscal year 1994 which were
$3,100,000 above comparable provisions for those programs in fiscal year
1993. Conversely, a profitability adjustment to the AN/ MLQ-34 TACJAM
program, resulting from a prolonged contract modification negotiation,
produced a favorable impact of $1,800,000 on operating income in fiscal
year 1994 with no comparable adjustments in fiscal year 1993. Bid and
proposal costs increased $922,000 in fiscal year 1994 reflecting the Com-
pany's increased bidding activity for a major aircraft modification program
and development programs associated with long-term production contracts.
Finally, company-sponsored research and development spending decreased
$339,000 in fiscal year 1994 due to the Company's re-allocation of
available technical resources, including personnel, to customer-sponsored
engineering development efforts, including the development programs refer-
enced above. Company-sponsored research and development spending is
expected to resume its upward trend in fiscal year 1995.
Interest expense in fiscal year 1994 decreased $699,000 from fiscal
year 1993 primarily due to lower average debt levels. In April 1993, the
Company repaid $6,600,000 of its $20,000,000, 10.03% unsecured note
payable. Investment income for fiscal year 1994 decreased $388,000 from
fiscal year 1993 primarily due to the sale of marketable securities to meet
the $6,600,000 debt repayment. Also, marketable securities were sold to
fund capital expenditures including a significant building addition at the
Company's Richardson Road facility which was completed in August 1993.
Other income for fiscal years 1994 and 1993 included $498,000 and $368,000,
respectively, for royalties received under a license agreement with a
foreign vendor. Finally, in fiscal year 1993 the Company established an
allowance of $2,200,000 relating to a settlement of civil claims pertaining
to the pricing of a 1985 fixed-price contract modification.
The income tax provisions for fiscal years 1994 and 1993 were based on
annual effective tax rates of 30% and 42%, respectively. Operating results
for the purpose of calculating the annual effective tax rate in fiscal year
1993 exclude the provision for claims settlement of $2,200,000. See Note 5
to the consolidated financial statements for the reconciliation of the
statutory federal income tax rate to the Company's effective tax rates in
fiscal years 1994 and 1993.
As of the beginning of fiscal year 1993, the Company adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" and recorded the cumulative effect of the accounting change of
$2,540,000, or $.64 per share, primarily resulting from the recording of
tax benefits related to contract loss provisions recorded in prior years
and adjusting tax rates on previously recorded tax assets and liabilities.
In addition, the Financial Accounting Standards Board issued SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" and
SFAS No. 112, "Employers' Accounting for Postemployment Benefits". The
Company's adoption of these two standards has not impacted current
operating results and is not expected to have a material impact on future
operating results.
Results of Operations - Fiscal 1993 versus Fiscal 1992
Sales and service revenues of $113,132,000 reflected a decrease of 19%
from the $140,112,000 in revenues reported for fiscal year 1992. The
revenue decline directly reflected the low level of new contract awards
received during the last six months of fiscal year 1992. Revenues from
avionics installation/integration programs reflected the most significant
decline in fiscal year 1993, contributing $32,732,000 of revenues in that
year as compared with $47,982,000 in fiscal year 1992. In addition,
revenues attributable to simulator programs declined $13,155,000 in fiscal
year 1993 primarily due to the maturation of individual jamming simulator
programs such as the AN/ MLQ-T4 Ground Jammer, the AN/FSQ-T22, the HPMAS
ALT-40 and the Guided Weapons Evaluation Facility. The decline was
partially offset by increased revenues from radar environmental simulator
programs with several foreign customers. Electronic countermeasures
programs experienced revenue growth of $4,738,000 in fiscal year 1993 when
compared with fiscal year 1992. Revenues from the TACJAM-A program, a
major electronic countermeasures program, contributed $12,996,000 for fis-
cal year 1993 as compared to $6,128,000 for fiscal year 1992. That revenue
growth combined with a revenue growth of $7,636,000 in the Band 9/10
program, another electronic countermeasures program, were partially offset
by a decline in revenues from a major electronic countermeasures program
with a foreign government which contributed only $5,310,000 to revenues in
fiscal year 1993, down from $15,746,000 in fiscal year 1992.
Operating income was $2,143,000 in fiscal year 1993 as compared with
$5,323,000 in fiscal year 1992. The decline in sales and service revenues
for fiscal year 1993 had a corresponding adverse impact on gross margins.
Operating income for fiscal year 1993 was also adversely impacted by
$2,500,000 resulting from net unfavorable contract performance adjustments
to final cost estimates. The fiscal year 1993 adjustments included
additional contract loss allowances of $1,800,000 and $1,100,000
established for the AN/ALR-67 ASR program and the AN/FSQ-T22 program, re-
spectively. Fiscal year 1992 performance adjustments were essentially
offsetting. Administrative and selling expenses for fiscal year 1993 were
fairly consistent with the amount of expenses reported for fiscal year
1992. However, due to the decline in revenues, administrative and selling
expenses, which are generally fixed, increased significantly as a
percentage of revenues. Operating income in fiscal year 1993 was adversely
impacted by costs associated with restructuring, corporate downsizing, and
consolidation of resources, which increased by approximately $1,200,000
from the amount of similar costs recorded in the prior year. Such costs
were allocated to the Company's contracts as well as administrative and
selling expenses, thereby, representing contributing factors to the
aforementioned comparisons of contracts' gross margins, contracts'
performance adjustments and administrative and selling expenses. Finally,
fiscal year 1993 had reduced bid and proposal activity, decreasing related
costs by $2,215,000 from fiscal year 1992, and growth in research and
development activity, increasing related costs by $759,000 from fiscal year
1992.
Interest expense in fiscal year 1993 was $2,418,000 as compared with
$3,272,000 in fiscal year 1992. The decrease was due to lower average
borrowing levels combined with lower average interest rates. The lower
borrowing levels in fiscal year 1993 were due to reductions in short-term
and long-term borrowings which occurred primarily in the fourth quarter of
fiscal year 1992 and resulted from cash provided by the settlement of a
claim in February 1992. The claim settlement, which resulted in a gain of
$14,368,000 being recognized in fiscal year 1992, related to the redemption
of the Company's shares in Tadiran, Ltd. Investment income for fiscal year
1993 was $843,000 as compared to $322,000 in fiscal year 1992. The
increase was due to the investment of funds received from the
aforementioned claim settlement with Tadiran, Ltd. Finally, in fiscal year
1993 the Company established an allowance of $2,200,000 relating to a
settlement of civil claims pertaining to the pricing of a 1985 fixed-price
contract modification.
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes" in fiscal year 1993. As permitted
under SFAS No. 109, the Company has not restated the prior year's financial
statements to apply the provisions of SFAS No. 109. The cumulative effect
of the accounting change as of the beginning of fiscal year 1993 was
$2,540,000, or $.64 per share, primarily resulting from the recording of
tax benefits related to contract loss provisions recorded in prior years
and adjusting tax rates on previously recorded tax assets and liabilities.
The effect of the adoption of SFAS No. 109 on the income tax provision for
fiscal year 1993 decreased net income by $920,000, or $.24 per share,
primarily related to the establishment of a valuation allowance for the
deferred tax assets. Extraordinary credits were recognized in fiscal year
1992 based on the carryforward of losses from prior years.
Results of Operations - Outlook for Fiscal Year 1995
The Company completed fiscal year 1994 with a firm orders backlog of
$121,478,000, approximately 22% lower than the backlog amount reported at
the end of fiscal year 1993. It is anticipated that approximately 70% of
the backlog will be completed in fiscal year 1995, thereby contributing to
sales and service revenues for that year. Sales and service revenues in
fiscal year 1995 are expected to approximate the level reported in fiscal
year 1994, however, revenues recognized will be partially dependent upon
the timing and amounts of anticipated new orders. The level of new orders
in fiscal year 1995 is expected to exceed the level of new orders received
in fiscal year 1994. The backlog at February 25, 1994 included an unfunded
amount of $14,747,000.
Fiscal year 1995 operating results will be influenced by various
internal and external factors. The Company is presently engaged in several
programs involving complicated engineering development efforts and, as is
the case with most development efforts, technical and other complexities
are often encountered. These complexities have resulted in increased
contract cost estimates in the past and could have the same result in the
future. The Company could also encounter similar risks on other long-term
contracts as well as research and development efforts, and such factors
could impact future operating results. In addition, the Company continues
to seek high-technology seed programs which are intended to provide a base
for the Company's future operations. Such programs may require contract
investment provisions or significant Company-sponsored research and
development expenditures, both reflecting the Company's commitment of its
own funds.
Ongoing changes in many countries around the world have resulted in
the U.S. Government reassessing its approach to national defense spending.
Although it is clear that defense spending will continue to decline, it is
unclear how that spending will be redirected. Management is continuing its
strategic planning efforts in order to enhance the Company's ability to be
responsive to the Government's requirements and to select products and
business areas which will enable the Company to effectively compete and
perform in a very demanding marketplace. Although the uncertainties of
future world events and the corresponding changes in national defense
spending hang over the defense industry, the Company's products, heavily
concentrated in the field of defense electronics, and management's constant
thrust to improve its design, manufacturing and quality systems, provide
the Company with the prerequisites to be competitive. The U.S. Government
and its suppliers continue to be the most significant customers to the
Company and a significant reduction in one or more of the Company's major
defense programs, existing or anticipated, could adversely effect the
Company's future operating results.
The Company from time to time is subject to claims and
investigations arising from the conduct of its business with the U.S.
Government. Under one such investigation, the Company has supplied the
Inspector General of the Department of Defense with certain documents
related to the AN/ MLQ-T4 Ground Jammer program. At this time, management
is unable to determine when the Government will complete its investigation
or whether the Government will seek remedies as a result of its
investigation. This matter and other ongoing legal matters which may
impact future operating results are described in Note 8 to the consolidated
financial statements.
The Company's consolidated balance sheet at February 25, 1994 contains
a net deferred tax asset of $2,896,000 including a valuation allowance of
$1,180,000 primarily for the uncertainty relating to the realization of
future income tax benefits. The Company believes it is more likely than
not that the majority of the net deferred tax asset will be realized
through future reversals of existing taxable temporary differences and
future taxable income. The Company's conclusion that it is "more likely
than not" that the majority of the deferred tax asset will be realized is
based on a history of earnings, forecasted earnings for fiscal year 1995
and the prospects for continued earnings after 1995. However, significant
subsequent events related to the uncertainties discussed above could have a
material adverse effect on expected future income and, consequently, the
realization of the Company's deferred tax asset. The Company will continue
to periodically review the tax criteria related to the recognition of the
deferred tax asset.
Inflation
Because the Company's products and services are predominantly custom-
made, the impact of inflation on operating results is typically not
significant. The Company attempts to alleviate inflationary pressures by
increasing selling prices to help offset rising costs (subject to
competitive conditions and regulatory requirements), increasing
productivity and improving design and manufacturing techniques.
Liquidity and Capital Resources
The Company's primary source of short-term financing is from cost
reimbursements under contracts with the U.S. Government and its suppliers.
That financing is supplemented, when necessary, through the liquidation of
short-term investments and borrowings under a line of credit agreement.
Cash flows in fiscal year 1994 were provided through operations and
liquidation of marketable securities, and were absorbed to repay long-term
debt and fund capital expenditures. At February 25, 1994, the Company has
available cash and equivalents and liquid marketable securities of
approximately $11,800,000, and a line of credit agreement providing for
borrowings up to $5,000,000. The line of credit agreement expires June 30,
1994, at which time the Company expects to renew the agreement at
essentially the same terms and for an amount required to satisfy its needs
for the foreseeable future.
The Company's second installment repayment of $3,300,000 on its 10.03%
unsecured note obligation is due April 1994. The Company has exercised an
option to accelerate the repayment of an additional $1,700,000. This
additional payment will reduce the maturity of the unsecured note obli-
gation from April 1998 to April 1997. See Note 4 to the consolidated
financial statements for the aggregate maturities of long-term borrowings
over the next five fiscal years. The Company's ratio of current assets to
current liabilities decreased from 2.1 to 1 at February 26, 1993 to 2 to 1
at February 25, 1994, and the long-term debt to equity ratio decreased from
.4 to 1 at February 26, 1993 to .3 to 1 at February 25, 1994.
During fiscal year 1994, the Company completed construction of a major
building addition at its Richardson Road facility. The total cost,
including related expenditures, of approximately $4,300,000 was funded
through the sale of marketable securities. No major building additions are
planned in fiscal year 1995 and beyond.
In 1993, the Company agreed to pay $2,200,000 in settlement of civil
claims pertaining to the pricing of a 1985 fixed-price contract
modification. The Company paid $1,100,000 in July 1993 and will pay the
balance in July 1994.
With a substantial amount of highly liquid assets and a strong working
capital position at February 25, 1994, capital resources should be
sufficient to meet the Company's operating needs for the foreseeable
future, as well as long-term debt maturities and other anticipated cash
outlays.
<PAGE>
Responsibility for Financial Statements
The Company's management is responsible for the fair presentation of
the financial statements and other financial information contained in this
Annual Report. The financial statements, which include amounts based on
estimates and judgements, are prepared in accordance with generally accep-
ted accounting principles.
Management fulfills its responsibility primarily by establishing and
maintaining accounting systems and practices which are adequately supported
by internal accounting controls. Controls are designed to provide
reasonable assurance that assets are safeguarded, transactions are executed
in accordance with management's authorization and the financial records are
reliable for the purpose of preparing financial statements. Controls
include the selection and training of management and supervisory personnel;
maintenance of an organizational structure providing for the delegation of
authority and the establishment of responsibilities; communication of
requirements for compliance with approved accounting, control and business
practices throughout the organization; business planning and review; and a
program of internal audit.
The Board of Directors pursues its responsibility for the Company's
financial statements through its Audit Committee comprised solely of
outside directors, who meet periodically with the internal auditors,
independent auditors, and representatives of management to discuss auditing
and financial reporting matters. The independent auditors have access to
the Audit Committee, without management representatives present, to discuss
the adequacy of internal accounting controls, as well as the scope and
results of their examination and their opinion on the quality of financial
reporting and other matters.
_______________________
Chief Financial Officer
<PAGE>
Report of Independent Auditors
To the Board of Directors and Shareholders of AEL Industries, Inc.
We have audited the accompanying consolidated balance sheets of AEL
Industries, Inc. as of February 25, 1994 and February 26, 1993, and the
related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended February 25,
1994. 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 about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
AEL Industries, Inc. at February 25, 1994 and February 26, 1993, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended February 25, 1994, in conformity with
generally accepted accounting principles.
As discussed in the last paragraph of Note 8 to the consolidated
financial statements, the outcome of a U.S. Government investigation
associated with a fixed-price contract is presently not determinable. No
provision for any liability that may result from this matter has been made
in the accompanying financial statements.
As discussed in Note 5 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in fiscal year
1993.
Philadelphia, Pennsylvania
March 29, 1994
<PAGE>
Exhibit 22
SUBSIDIARIES OF THE REGISTRANT
NAME STATE OR JURISDICTION OF INCORPORATION
AEL Foreign Sales Corp. U.S. Virgin Islands
AEL Microwave/Hybrid-1983,
Inc. Pennsylvania
AEL International Marketing
Services, Inc. Delaware
UltraVest Corp. Delaware
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form
10-K) of AEL Industries, Inc. of our report dated March 29, 1994, included
in the 1994 Annual Report to Shareholders of AEL Industries, Inc.
Our audits also included the financial statement schedules of AEL
Industries, Inc. listed in Item 14(a). These schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, the financial
statement schedules referred to above, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements pertaining to the Incentive Stock Option Plans (Form S-8 No. 2-
87030 and No. 33-64512) and the Non-Qualified Stock Option Plans (Forms S-8
No. 2-18195, No. 33-41025, and No. 33-64510) of AEL Industries, Inc. of our
report dated March 29, 1994, with respect to the financial statements
incorporated herein by reference and our report included in the preceding
paragraph with respect to the financial statement schedules included in the
1994 Annual Report (Form 10-K) of AEL Industries, Inc.
/s/ Ernst & Young
Philadelphia, Pennsylvania
May 17, 1994
