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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-230
_____
For the thirteen weeks ended May 26, 1995
____________
AEL INDUSTRIES, INC.
____________________________________________________________________
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1353403
____________________________________________________________________
(State or other jurisdiction of (IRS Employer
incorporation of organization) Identification No.)
305 Richardson Road, Lansdale, Pennsylvania
19446
____________________________________________________________________
(Address of principal executive offices and Zip Code)
(215) 822-2929
____________________________________________________________________
(Registrant's telephone number, including area code)
N/A
____________________________________________________________________
(Former name, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all re-
ports 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
_______ _______
The number of shares outstanding of each class of common stock is as
follows:
Class Outstanding at July 5, 1995
__________________________________ ___________________________
Class A common stock, $1 par value 3,585,766
Class B common stock, $1 par value 416,163
Page 1 of 12
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AEL INDUSTRIES, INC.
FORM 10-Q
THIRTEEN WEEKS ENDED MAY 26, 1995
INDEX
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PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance 3
Sheets - May 26, 1995 and
February 24, 1995
Consolidated Statements of Oper- 4
ations Thirteen Weeks Ended
May 26, 1995 and May 27, 1994
Consolidated Statements of Cash 5
Flows - Thirteen Weeks Ended
May 26, 1995 and May 27, 1994
Notes to Condensed Consolidated 6
Financial Statements
Management's Discussion and 8
Analysis of Results of Oper-
ations and Financial Condition
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports
on Form 8-K 11
Signature 12
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Page 2 of 12
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<CAPTION>
PART I. FINANCIAL INFORMATION FORM 10-Q
AEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
May 26, February 24,
1995 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $134 $3,140
Marketable securities 728 724
Receivables, including unbilled amounts
of $25,092 at May 26, 1995 and
$29,244 at February 24, 1995:
U. S. Government 39,316 40,695
Other 4,628 5,273
------------ ------------
43,944 45,968
Inventories 1,566 1,312
Deferred income taxes 1,720 1,928
Other current assets 1,194 208
------------ ------------
Total current assets 49,286 53,280
Property, plant and equipment (net of
accumulated depreciation and amorti-
zation of $58,273 at May 26, 1995
and $56,941 at February 24, 1995) 42,161 42,639
Other assets 5,391 5,499
------------ ------------
$96,838 $101,418
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $3,950
Accounts payable 2,054 $7,732
Accrued salaries, wages and employee benefits 4,700 5,062
Other current liabilities 7,178 7,039
Current portion of long-term debt 3,857 3,857
------------ ------------
Total current liabilities 21,739 23,690
Long-term debt, net of current portion 12,377 15,742
Other liabilities 1,777 1,764
Commitments and contingent liabilities -
Note 4
Shareholders' equity 60,945 60,222
------------ ------------
$96,838 $101,418
============ ============
See accompanying notes.
Page 3 of 12
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<CAPTION>
AEL INDUSTRIES, INC. FORM 10-Q
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
Thirteen Thirteen
Weeks Weeks
Ended Ended
May 26, 1995 May 27, 1994
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<S> <C> <C>
Sales and service revenues $33,100 $30,574
Operating costs and expenses:
Cost of products and services 25,265 23,088
Administrative and selling expenses 4,458 4,509
Bid and proposal costs 1,182 1,615
Research and development costs 643 577
----------- -----------
31,548 29,789
----------- -----------
Operating income 1,552 785
Interest expense (327) (369)
Investment income 50 84
Other expense, net of other income (246) (20)
----------- -----------
Income before income taxes 1,029 480
Income tax provision 360 144
----------- -----------
Net income $669 $336
=========== ===========
Earnings per common and common equivalent share:
Primary $.17 $.09
=========== ===========
Fully diluted $.16 $.09
=========== ===========
Weighted average number of common and common equivalent shares:
Primary 3,915,000 3,816,000
=========== ===========
Fully diluted 4,101,000 3,816,000
=========== ===========
See accompanying notes.
Page 4 of 12
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<CAPTION>
AEL INDUSTRIES, INC. FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Thirteen Thirteen
Weeks Weeks
Ended Ended
May 26, 1995 May 27, 1994
------------------ ------------------
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Cash flows from operating activities:
Net income $669 $336
Adjustments to reconcile net income
to net cash (absorbed) provided by operating activities:
Depreciation 1,508 1,616
Amortization of other assets 108 101
Deferred income taxes 171 (215)
Other 42 (93)
Decrease (increase) in receivables 2,024 (2,302)
(Increase) decrease in inventories and other
current assets (1,240) 972
(Decrease) increase in accounts payable, accrued
liabilities and other current liabilities (5,901) 872
------------------ ------------------
Net cash (absorbed) provided by operating activities (2,619) 1,287
------------------ ------------------
Cash flows from investing activities:
Additions to property, plant and equipment (1,040) (1,333)
Liquidations of marketable securities 20 875
Other 10 25
------------------ ------------------
Net cash absorbed by investing activities (1,010) (433)
------------------ ------------------
Cash flows from financing activities:
Short-term borrowings, net of repayments 3,950
Reductions in long-term debt (3,365) (5,065)
Other 38 17
------------------ ------------------
Net cash provided (absorbed) by financing activities 623 (5,048)
------------------ ------------------
Decrease in cash and equivalents (3,006) (4,194)
Cash and equivalents at beginning of period 3,140 10,414
------------------ ------------------
Cash and equivalents at end of period $134 $6,220
================== ==================
See accompanying notes.
Page 5 of 12
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FORM 10-Q
AEL INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the instructions to
Form 10-Q and, therefore, do not include all information necessary
for a fair presentation of financial position, results of operations
and cash flows in conformity with generally accepted accounting
principles. In the opinion of management, all adjustments necessary
for a fair presentation of the results of the interim periods have
been made and are of a normal, recurring nature.
The condensed consolidated financial statements should be read
in conjunction with the Registrant's Annual Report on Form 10-K for
the fiscal year ended February 24, 1995.
2. On February 28, 1995, the Company's controlling shareholders,
Dr. Leon Riebman and Claire E. Riebman, transferred all of their
class A nonvoting and class B voting common stock into a voting trust
controlled by four independent directors of the Company to provide
the Company's Board of Directors with increased flexibility in
exploring the possible sale of the Company. The voting trust has an
initial term of nine months with an extension period of up to one
additional year, subject to certain conditions. The voting trustees
have full power to vote the Riebmans' stock with regard to any
proposed transaction for the sale of the Company. At May 26, 1995,
such stock constitutes approximately 7% of all outstanding shares,
excluding the 180,947 class A shares described below, and 55% of all
outstanding class B shares. Any proposal for the sale of the Company,
and the agreements with the Riebmans referred to below, are subject
to ratification by the class A and class B shareholders, each voting
as a separate class. Ratification of a proposal for the sale of the
Company and ratification of the agreements with the Riebmans must be
voted upon by the shareholders as a single proposition.
In consideration of the controlling shareholders entering the
voting trust agreement, transferring their shares to the voting
trust, and agreeing to accept the same per share price for their
voting stock as other shareholders receive for their stock in the
event of a sale of the Company, the Company issued 180,947 shares of
class A nonvoting stock to the Riebmans on February 28, 1995. These
shares have also been transferred into the voting trust and will be
returned to the Company for cancellation without any payment to the
Riebmans if a sale of the Company does not occur while the voting
trust is in effect. If a sale does occur, the issuance of 180,947
shares will result in a charge against income for an amount equal to
market value of the shares at the time the Company is sold.
Under separate agreements also entered into on February 28,
1995, the Company has agreed to make the following payments to Dr.
Riebman if the Company is sold while the voting trust is in effect:
payments totalling $675,000 for consulting services to be provided by
Dr. Riebman for a three-year period commencing with his employment
termination; a change-in-control payment of $500,000 if Dr. Riebman's
employment terminates after the sale of the Company; and a noncompe-
tition payment of up to $1,900,000.
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FORM 10-Q
AEL INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company also has agreements with eight other officers which
could result in severance payments to those officers if their
employment were to terminate during a period up to two years
following a change in control of the Company. Aggregate severance
payments under such agreements could range up to approximately
$2,800,000 depending on the number of officers terminated and the
timing of the terminations.
3. Under fixed price contracts, the Company may encounter, and on
certain programs 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 complexity, 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 revised 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 entirety upon receipt of such
contracts by the Company. Contract cost estimates and profitability
adjustments resulted in net charges to income of $1,000,000 and
$2,100,000 for the quarters ended May 26, 1995 and May 27, 1994,
respectively.
Other current liabilities at May 26, 1995 and February 24, 1995
include allowances for contract losses and other contract allowances
aggregating $3,100,000 and $3,600,000, respectively. In addition,
receivables at May 26, 1995 include unbilled amounts of $3,100,000
for costs subject to future negotiations with the U.S. Government
which may not be billed within one year.
4. From time to time, the Company may be involved in lawsuits,
investigations and other legal proceedings 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 continues to cooperate with the Department of
Defense in an investigation which commenced in 1992 regarding the
AN/MLQ-T4 Ground Jammer program. At this time, management is unable
to determine when the Government will complete its inquiry or whether
it will seek any remedies.
Page 7 of 12<PAGE>
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FORM 10-Q
AEL INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis provides information
which management believes is relevant to an assessment and
understanding of the Company's consolidated results of operations for
the thirteen weeks (quarter) ended May 26, 1995, as compared with the
thirteen weeks (quarter) ended May 27, 1994, and its consolidated
financial condition at May 26, 1995. The discussion should be read
in conjunction with the condensed consolidated financial statements
and notes thereto which appear elsewhere in this Form 10-Q.
Results of Operations
Sales and service revenues for the quarter ended May 26, 1995
were $33,100,000, up 8% over revenues reported for the quarter ended
May 27, 1994. The growth primarily resulted from electronic counter-
measures programs which in the aggregate provided 31% of total
revenues in the current year compared with 24% in the prior year.
Individually, the TACJAM-A electronic countermeasures program
generated 21% of revenues in the current year, up from 14% in the
prior year. Revenues in the current year were also favorably impacted
by the AN/ALR-67 radar warning receiver program, which contributed 7%
of total revenues for the quarter ended May 26, 1995, compared with
only 1% for the quarter ended May 27, 1994. Partially offsetting
these increases were declines in revenues from avionics
installation/integration programs and the AN/APR-39A radar warning
receiver program. The AN/APR-39A program provided 7% and 10% of total
revenues in the current and prior years, respectively.
Operating income for the quarter ended May 26, 1995 was
$1,552,000 as compared with $785,000 for the quarter ended May 27,
1994. The increase in operating income was primarily due to a
decrease of $1,100,000 in adverse contract cost estimates and
profitability adjustments and a decrease of $433,000 in bid and pro-
posal spending, partially offset by overall lower gross margin
percentages on revenues reported for the current year compared with
revenues reported for the prior year. The lower gross margin
percentages were the result of a less favorable mix of program reve-
nues in the current year.
Interest expense for the quarter ended May 26, 1995 decreased
slightly from the comparable period of the prior year due to lower
average debt levels. In the first quarters of fiscal years 1996 and
1995, the Company repaid $3,300,000 and $5,000,000, respectively, of
its 10.03% unsecured note payable. Other income for the quarter
ended May 27, 1994 included $202,000 for royalties received under a
license agreement with a foreign vendor. No comparable royalties were
received during the quarter ended May 26, 1995.
Page 8 of 12<PAGE>
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FORM 10-Q
AEL INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The income tax provision for the quarter ended May 26, 1995 is
based on an annual effective tax rate of 35% compared with an annual
effective tax rate of 30% in fiscal year 1995. The higher rate in the
current year is due primarily to an anticipated decrease in tax
credits.
The Company had a firm orders backlog of approximately
$91,700,000, (13% unfunded) at May 26, 1995 compared to $106,600,000
(7% unfunded) at February 24, 1995. The firm orders backlog is
expected to increase throughout the balance of the current fiscal
year.
Besides the potential impact of a possible sale of the Company
as described in Note 2 to the consolidated financial statements,
fiscal year 1996 operating results will be influenced by various
other 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 and such factors could impact future operating results.
The Company presently has a program for which certain unanticipated
costs are subject to negotiations with the U.S. Government, and the
outcome of those negotiations could impact future operating results.
At May 26, 1995, the Company had recorded an unbilled receivable of
$3,100,000 relating to such costs. In addition, the Company in the
past has sought high-technology seed programs and may do so again in
the future. Such programs, which are intended to provide a base for
the Company's future operations, may require contract investment
provisions or significant Company-sponsored research and development
expenditures, both reflecting the Company's commitment of its own
funds.
Management is continuing its strategic planning efforts in
order to enhance the Company's ability to be responsive to the
Government's changing national defense 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 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 of 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. In addition to its
business with the U.S. Government, the Company continues to seek
commercial applications for its products and services, including the
development of wide dynamic range fiber optic links for use in CATV
and cellular communications systems, and the expansion of its
aircraft modification business into commercial aviation.
Page 9 of 12<PAGE>
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FORM 10-Q
AEL INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company from time to time is subject to claims and
investigations arising from the conduct of its business with the U.S.
Government. In one such instance, the Company continues to cooperate
with the Department of Defense in an investigation which commenced in
1992 regarding the AN/MLQ-T4 Ground Jammer program. At this time,
management is unable to determine when the Government will complete
its inquiry or whether it will seek any remedies. This matter and
other ongoing legal matters which may impact future operating results
are described in Note 4 to the consolidated financial statements.
Liquidity and Capital Resources
The Company's primary source of short-term financing is cost
reimbursements under contracts with the U.S. Government and its
suppliers. That financing is supplemented, when necessary, through
borrowings under a line of credit agreement. The absorption of cash
flows for the quarter ended May 26, 1995 was primarily to repay long-
term debt and fund operating activities and capital expenditures. At
May 26, 1995, the Company has available cash and equivalents of
approximately $900,000 and a line of credit agreement, which expires
July 31, 1995, providing for borrowings up to $8,000,000. Borrowings
under the line of credit agreement were $3,950,000 at May 26, 1995.
The Company expects to renew the line of credit agreement at July 31,
1995 at essentially the same terms and for an amount required to
satisfy its needs for the foreseeable future.
The ratio of current assets to current liabilities was 2.3 to 1
at May 26, 1995 compared with 2.2 to 1 at February 24, 1995. The
long-term debt to equity ratio at May 26, 1995 was reduced slightly
from the ratio at February 24, 1995 due to an April 1995 repayment of
$3,300,000 on the Company's 10.03% unsecured note obligation. The
Company's next installment repayment of $3,300,000 on its 10.03%
unsecured note obligation is due April 1996.
In June 1995, the Company began construction of a building
addition at its Richardson Road facility. The building addition is
expected to be completed by the end of fiscal year 1996 at an esti-
mated cost, including related expenditures, of approximately
$1,300,000. Expenditures for the addition will be funded through cash
provided from operations and short-term borrowings.
Management believes that the Company's current working capital
position and available borrowing capacity should provide sufficient
capital resources to meet the Company's operating needs, capital
improvements and debt maturities for the foreseeable future.
Page 10 of 12<PAGE>
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FORM 10-Q
PART II. OTHER INFORMATION
AEL INDUSTRIES, INC.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
------- -----------
27 Financial Data Schedule *
* Schedule submitted in electronic format only.
(b) Reports on Form 8-K
On March 15, 1995, the Registrant filed a Form 8-K dated
February 28, 1995, in connection with the possible sale of the
Company as described therein and in Note 2 to the consolidated
financial statements in Part I of this report.
The items reported in the Form 8-K were: Item 1 (Change in
Control of Registrant) and Item 7 (Financial Statements and
Exhibits).
Page 11 of 12<PAGE>
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FORM 10-Q
AEL INDUSTRIES, INC.
SIGNATURE
Pursuant to the requirements 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.
____________________________________________________________________
(Registrant)
Date: July 7, 1995 /S/ John F. Sharkey
____________ _______________________
John F. Sharkey
Vice President, Finance
Page 12 of 12<PAGE>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AEL
INDUSTRIES, INC. FORM 10-Q FOR PERIOD ENDED MAY 26, 1995 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-23-1996
<PERIOD-END> MAY-26-1995
<CASH> 134
<SECURITIES> 728
<RECEIVABLES> 43,944
<ALLOWANCES> 0
<INVENTORY> 1,566
<CURRENT-ASSETS> 49,286
<PP&E> 100,434
<DEPRECIATION> 58,273
<TOTAL-ASSETS> 96,838
<CURRENT-LIABILITIES> 21,739
<BONDS> 12,377
<COMMON> 3,995
0
0
<OTHER-SE> 56,950
<TOTAL-LIABILITY-AND-EQUITY> 96,838
<SALES> 33,100
<TOTAL-REVENUES> 33,100
<CGS> 25,265
<TOTAL-COSTS> 25,265
<OTHER-EXPENSES> 643
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 327
<INCOME-PRETAX> 1,029
<INCOME-TAX> 360
<INCOME-CONTINUING> 669
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 669
<EPS-PRIMARY> .17
<EPS-DILUTED> .16
</TABLE>
