<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 0-14224
IFR SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 48-0777904
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
10200 WEST YORK STREET, WICHITA, KANSAS 67215
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code: (316) 522-4981
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common Stock, $.01 par value
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. [ ]
State the aggregate market value of the voting stock held by nonaffiliates of
the Registrant as of September 9, 1996: Common stock, $.01 par value,
$70,799,130.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of September 9, 1996: Common stock, $.01 par value, 5,482,449
shares.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Portions of the Registrant's annual report to shareholders for the year
ended June 30, 1996 are incorporated by reference into Parts I and II of this
Form 10-K.
(2) Portions of the Registrant's proxy statement for the November 7, 1996
annual meeting of shareholders are incorporated by reference into Part III of
this Form 10-K.
The exhibit index to this Form 10-K is located on pages 9 through 11.
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PART I
ITEM 1. BUSINESS
IFR Systems, Inc. ("IFR" or the "Company") is a Delaware corporation with
its principal offices in Wichita, Kansas. IFR designs, manufactures, and
markets communications, test and measurement, avionics, and fiber optic test
instruments. These products are used to test radio products, aircraft avionics
systems and optical fiber. IFR has been engaged in this general industry
directly, and through a predecessor corporation, in the same general type of
business since 1968, and its initial public offering of common stock was made in
1986. IFR's fiber optics test equipment products are manufactured by its wholly
owned subsidiaries, Photon Kinetics, Inc. ("PK") and York Technology, Ltd.
("York")
IFR's communications service monitors are used to test and maintain radio
products, including pagers, scanners, military comm-transceivers, and cellular,
land mobile, marine and citizens band radios. Service monitors test mobile
radio equipment for proper frequency transmission, signal modulation and power
output. The principal end users of communications service monitors are original
equipment manufacturers, service and repair companies, government agencies, and
users of mobile radio equipment.
IFR's portable spectrum analyzers (test and measurement) measure the
amplitude of various frequency components in transceivers and other radio
frequency devices. IFR targets these products for original equipment
manufacturers, service and repair companies, and educational institutions.
IFR's avionics test instruments consist of portable and stationary
precision simulators which duplicate airborne conditions to test the
communications, weather radar, and instrument landing and navigational systems
installed in aircraft and ground stations. IFR's precision simulators are used
to test the avionics electronics systems in commercial, military, and general
aviation aircraft. The principal end users of such precision simulators are
general aviation service and repair companies, commercial airlines,
manufacturing firms, and the federal government.
IFR's fiber optic test instruments consist of portable and stationary units
which are used to test and verify specific parameters of optical fibers. These
products are used by telephone companies, installers of voice/data
communications networks, cable television operators, utilities, contractors,
fiber manufacturers, and the military. IFR also manufactures certain machine
parts and purchases electronic components for assembly into finished test
instruments.
IFR is engaged in research and development in order to update and replace
products with new models and to develop additional products. Research and
development expenditures were $7,374,000, $7,892,000 and $7,505,000 for 1996,
1995, and 1994, respectively. IFR's product development is directed toward
identifying and filling niche markets and toward the product markets where IFR
believes better growth opportunities exist, as well as providing for periodic
introduction of new or enhanced products for all markets served by IFR's
products.
IFR is not engaged in any significant customer-sponsored research and
development. IFR owns no significant patents or product licenses and believes
these are not significant factors in its business or the test and measurement
industry generally. Although IFR believes alternative sources of supply could be
developed, certain components are presently available from only one supplier.
During the past year, supplies were generally adequate and lead times
acceptable.
MARKETING AND COMPETITION
- -------------------------
IFR operates in one dominant industry segment--the electronic test and
measurement industry. IFR's product line includes approximately 40 separate
product models which are marketed through agencies throughout the world. General
demand for electronics test and measurement products is not considered to be
highly seasonal. However, test instruments generally are a capital budget
expenditure
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for commercial and government agency customers, and purchases may be foregone or
postponed during periods of economic slump and tight budgets.
In addition to general economic conditions, economic conditions affecting
particular industries may affect demand for IFR's products. The group of
products manufactured by IFR's subsidiaries, PK and York, for fiber optics
testing are used primarily in the telecommunications industry, and sales are
affected by capital acquisitions budget priorities of telecommunications
companies, such as the regional Bell telephone companies.
IFR has maintained a portion of its business in military contracting. Over
the past 5 years the percentage of total revenues from sales to the military
have ranged from a high of 21.6% in 1995 to a low of 8.3% in 1992. IFR's only
significant military contract during fiscal 1996 and continuing in fiscal 1997
is a contract with the U.S. Army to supply test instruments and instruction
manuals for the Single Channel Ground and Airborne Radio System ("SINCGARS").
SINCGARS is a technically sophisticated radio system designed to prevent enemy
interception and monitoring of Army field communications. As of June 30, 1996,
there remains a backlog of approximately $8.6 million in orders which is
expected to ship during fiscal 1997 under the SINCGARS contract. Military
contracts generally provide an opportunity to diversify the customer base, but
typically involve lower margins than commercial sales to private industry. IFR
expects to continue to make military sales on a selective basis but has no
present plans to materially increase its military contracting.
IFR's products are marketed to a diverse customer base and no single
product line is a predominant factor in determining revenues and profits.
Except for the SINCGARS contract with the U.S. Army, backlog orders are not
material because most orders are in smaller quantities or on terms that allow
the customer to cancel or delay delivery without significant penalty. IFR
typically is able to meet its delivery schedules without maintaining large
inventories of completed goods and its customers generally do not require
extended payment terms. The ability to fund working capital requirements for
inventory and receivables financing is not a material factor affecting
competition in the industry.
IFR competes with numerous companies, foreign and domestic, many of which
have greater financial, marketing, and technical resources than IFR. The
principal competitors are domestic U.S. companies and competition is based
primarily on product quality, technological innovation, and customer service,
and IFR believes it is an effective competitor in these areas.
Financial information concerning export sales is incorporated herein by
reference from Note 7 of the "Notes to Consolidated Financial Statements"
contained on page 20 of IFR's annual report to shareholders for the year ended
June 30, 1996.
EMPLOYEES
- ---------
IFR presently employs approximately 800 persons, approximately 620 of whom
are employed at the corporate offices and manufacturing plant in Wichita,
Kansas, and 107 of whom are employed at Photon Kinetics' offices and
manufacturing plant in Beaverton, Oregon. Approximately 65 persons are employed
at York Technology's office and manufacturing plant in England and approximately
8 persons are employed at York Technology's office and manufacturing plant in
New Jersey. Management believes employee relations are satisfactory. None of
IFR's employees are currently represented by any collective bargaining unit.
REGULATION
- ----------
IFR is subject to laws and regulations affecting manufacturers and
employers generally and to certain Federal Communications Commission regulations
that affect equally all suppliers of similar products, and are not considered a
material factor in the Company's competitive position. Compliance with federal,
state, and local provisions which have been enacted or adopted regulating the
discharge of materials into the environment or otherwise relating to the
protection of the environment should not have a material effect upon IFR's
capital expenditures, earnings or competitive position.
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ITEM 2. PROPERTIES
IFR occupies facilities appropriate for electronic assembly operations.
IFR occupies 156,000 square feet on a fifteen acre plant site near Wichita,
Kansas, including a pre-engineered metal building containing 80,000 square
feet which was constructed in 1989. The plant addition and approximately
nine acres of the plant site upon which it is situated are leased, as
described more fully in Note 3 of the "Notes to Consolidated Financial
Statements" contained on pages 18 and 19 of IFR's annual report to
shareholders for the year ended June 30, 1996, incorporated herein by
reference. IFR owns a metal building system containing 76,000 square feet and
six acres of the Wichita, Kansas plant site.
IFR also occupies a 46,000 square feet plant site located in Beaverton,
Oregon, which is leased through an operating lease arrangement which expires in
December, 1999, a 24,000 square feet plant site located in Chandlers Ford,
England, which is financed through a bank loan secured by the property, payable
over a period of 15 years and a 4,826 square feet plant site located in
Princeton, New Jersey, which is leased through an operating lease arrangement
which expires on 6/30/97.
IFR believes that at June 30, 1996, its present facilities are adequate,
with the capability to meet its capacity demand for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
IFR is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of IFR's security holders during the
fiscal quarter ended June 30, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The market information and the approximate number of holders of IFR's
common stock required by Item 5 are incorporated herein by reference from
"Market Price Data" contained on page 11 of IFR's annual report to
shareholders for the year ended June 30, 1996.
No cash dividends were paid during the fiscal years ended June 30, 1996
and June 30, 1995. IFR's Board of Directors will review the appropriateness
of future dividend payments based on IFR's cash requirements and performance.
ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 6 is incorporated herein by reference
from the "Performance Highlights" contained on the inside front cover of
IFR's annual report to shareholders for the year ended June 30, 1996.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by Item 7 is incorporated herein by reference from
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained on pages 9 through 11 of the IFR's annual report to
shareholders for the year ended June 30, 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of IFR, included at pages
12 through 23 in IFR's annual report to shareholders for the year ended June 30,
1996, are incorporated herein by reference:
Consolidated Balance Sheets as of June 30, 1996 and 1995.
Consolidated Statements of Income for the years ended June 30, 1996, 1995,
and 1994.
Consolidated Statements of Shareholders' Equity for the years ended June
30, 1996, 1995, and 1994.
Consolidated Statements of Cash Flows for the years ended June 30, 1996,
1995, and 1994.
Notes to Consolidated Financial Statements.
Report of Independent Auditors
The supplementary financial information required by Item 8 is incorporated
herein by reference from "Quarterly Financial Data" contained on page 9 of IFR's
annual report to shareholders for the year ended June 30, 1996.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of all executive officers of IFR and all positions and
offices held by each of them are as follows:
Name and Age Position
------------ --------
Alfred H. Hunt, III, 60 Vice Chairman, President and
Chief Executive Officer
Friedel E. Arnold, 59 Vice President and General Manager
Jeffrey A. Bloomer, 39 Treasurer and Chief Financial Officer
Iain M. Robertson, 55 President, Photon Kinetics, Inc.
Managing Director, York Technology Ltd.
Each of said officers serves for a term of one year or until his successor
has been duly elected by the Board of Directors. There are no family
relationships between said officers and/or any director of the
5
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Company, and there are no arrangements or understandings between any officer and
any other person pursuant to which he was elected as an officer.
The business experience during the last five years of each of said
executive officers of the IFR is as follows:
Alfred H. Hunt, III has been President and Chief Executive Officer of IFR
since 1983. He became Vice Chairman of IFR in 1990. He was the Vice
President and General Manager of IFR from 1971 through 1983.
Friedel E. Arnold has been the General Manager of IFR since January 1995
and the Vice President since January 1996. During the period 1987 through
1994 he was the President of Dorne and Margolin, an aerospace manufacturing
company.
Jeffrey A. Bloomer has been the Treasurer and Chief Financial Officer of
IFR since November, 1995. He held the position of Director of Finance with
IFR from 1994 through 1995. During the period 1989 through 1993 he was
General Manager of Pawnee Industries, Inc. a plastics manufacturing
company.
Iain M. Robertson has been President of Photon Kinetics, Inc. and Managing
Director of York Technology Ltd. since July, 1995. During the period 1992
through 1995 he was a consultant and President of York Ltd. York Ltd. was
the parent corporation of York Technology Ltd., prior to the purchase by
IFR.
The other information required by Item 10, concerning directors of IFR, is
incorporated herein by reference from "Election of Directors" contained in IFR's
proxy statement for the November 7, 1996 annual meeting of shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
from "Election of Directors" and "Compensation of Executive Officers"
contained in IFR's proxy statement for the November 7, 1996 annual meeting of
shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
from "Outstanding Shares" and "Election of Directors" contained in IFR's proxy
statement for the November 7, 1996 annual meeting of shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
from "Certain Relationships" contained in IFR's proxy statement for the November
7, 1996 annual meeting of shareholders.
6
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements of IFR, included in IFR's annual
report to shareholders for the year ended June 30, 1996, are incorporated by
reference in Item 8 of this report:
Consolidated Balance Sheets as of June 30, 1996 and 1995
Consolidated Statements of Income for the years ended June 30, 1996, 1995,
and 1994
Consolidated Statements of Shareholders' Equity for the years ended June
30, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the years ended June 30, 1996,
1995, and 1994
Notes to Consolidated Financial Statements
Report of Independent Auditors
(a)(2) The supplementary financial information included in IFR's annual
report to shareholders for the year ended June 30, 1996 under the caption
"Quarterly Financial Data" is incorporated by reference in Item 8 of this
report. The following financial statement schedules of IFR are included in this
report in response to Item 14(d):
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related instructions or
are inapplicable, and therefore have been omitted.
(a)(3) See Exhibit Index
(b) No Form 8-K was filed during the fourth quarter of the fiscal year
ended June 30, 1996.
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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.
IFR Systems, Inc.
(Registrant)
Date: September 23, 1996 By /s/ Alfred H. Hunt, III
------------------------------------
Alfred H. Hunt, III
President and Chief Executive Officer
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.
Date: September 23, 1996 By /s/ Alfred H. Hunt, III
-------------------------------------------
Alfred H. Hunt, III,
Director, President, and Chief
Executive Officer (Principal Executive Officer)
Date: September 23, 1996 By /s/ Ralph R. Whitney, Jr.
-------------------------------------------
Ralph R. Whitney, Jr.,
Chairman of the Board of Directors
Date: September 23, 1996 By /s/ Wilton W. Cogswell, III
-------------------------------------------
Wilton W. Cogswell, III,
Director
Date: September 23, 1996 By /s/ Donald L. Graf
-------------------------------------------
Donald L. Graf,
Director
Date: September 23, 1996 By /s/ Paul E. Reinken
-------------------------------------------
Paul E. Reinken,
Director
Date: September 23, 1996 By /s/ John V. Grose
-------------------------------------------
John V. Grose
Director
Date: September 23, 1996 By /s/ Oscar L. Tang
-------------------------------------------
Oscar L. Tang,
Director
Date: September 23, 1996 By /s/ Jeffrey A. Bloomer
-------------------------------------------
Jeffrey A. Bloomer
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
Sequentially
Exhibit No. Description of Exhibit Numbered Page
- ----------- ---------------------- -------------
3.1 Certificate of Amendment of Certificate of *
Incorporation of IFR Systems, Inc. (the "Company")
dated February 27, 1989. (Incorporated by
reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the year ended June 30,
1989, File No. 0-14224).
3.2 Certificate of Amendment of Certificate of Incorporation *
of the Company dated January 15, 1987.
(Incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year
ended June 30, 1987, File No. 0-14224).
3.3 Certificate of Incorporation of the Company. (Incorporated *
by reference to Exhibit 3.1 to the company's
Registration Statement on Form S-1 filed December 12,
1985, Reg. No. 33-2122).
3.4 By-Laws of the Company. (Incorporated by reference to *
Exhibit 3.3 to the Company's Annual Report on Form
10-K for the year ended June 30, 1987, File No. 0-
14224).
3.5 Amendment to By-Laws of the Company adopted *
January 26, 1990. (Incorporated by reference to
Exhibit 3.5 to the Company's Annual Report on Form
10-K for the year ended June 30, 1990, File No. 0-
14224).
4.1 Specimen certificate representing common stock of the *
Company. (Incorporated by reference to Exhibit 4.1 to
Amendment No. 2 to the Company's Registration
Statement on Form S-1 filed January 17, 1986, Reg. No
33-2122).
4.2 Article II of the Certificate of Incorporation of the *
Company, as amended by the Certificate of Amendment
of Certificate of Incorporation of the Company dated
January 15, 1987. (Included in Exhibit 3.2).
4.3 Articles I, III, and VII of the Certificate of *
Incorporation of the Company, (Included in Exhibits
3.1 and 3.3).
4.4 Articles 2, 3, and 5 of the By-Laws of the Company. *
(Included in Exhibit 3.4).
4.5 Rights Agreement between the Company and *
Harris Trust & Savings Bank dated as of February 28,
1989. (Incorporated by reference to Exhibit 4.5 to
the Company's Annual Report on Form 10-K for the year
ended June 30, 1989, File No. 0-14224).
4.6 Form of Rights Certificate of the Company. *
(Included in Exhibit 4.5).
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Sequentially
Exhibit No. Description of Exhibit Numbered Page
- ----------- ---------------------- -------------
4.7 IFR Systems, Inc. 1992 Nonqualified Stock Option *
Plan (Incorporated by reference to Exhibit 4(a) to
the Company's Registration Statement on Form S-8
filed January 8, 1993, Reg. No. 33-56862).
4.8 Form of Option Agreement for IFR Systems, Inc. 1992 *
Nonquailified Stock Option Plan (Incorporated by
reference to Exhibit 4(b) to the Company's
Registration Statement on Form S-8 filed January 8,
1993, Reg. No. 33-56862).
10.1 Description of Incentive Bonus Plan for Management
of the Company. (Incorporated by reference from page
8 of the 1996 Proxy Statement as filed on September
23, 1996, File No. 0-14224).
10.2 Amended Incentive Stock Option Plan of the Company *
(Incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the year
ended June 30, 1987, File No. 0-14224).
10.3 Form of Termination Agreement between the Company
and Alfred H. Hunt, III.
10.4 Form of Termination Agreement between the Company
and Friedel E. Arnold.
10.5 IFR Systems, Inc. Employees' Profit Sharing Plan *
(Incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year
ended June 30, 1990, File No. 0-14224).
10.6 Amended and Restated Trust Agreement IFR Systems, Inc. *
Employee's Profit Sharing Plan. (Incorporated by
reference to Exhibit 10.5 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1990,
File No. 0-14224).
10.7 Restricted Stock Grant Plan of the Company. (Incorporated *
by reference to Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the Year ended June 30, 1989,
File No. 0-14224).
10.8 1988 Incentive Stock Option Plan of the Company. *
(Incorporated by reference to Exhibit 10.7 to the
company's Annual Report on Form 10-K for the year
ended June 30, 1989, File No. 0-14224).
10.9 1996 Incentive Stock Option Plan of the Company
(Incorporated by reference from Exhibit A of the 1996
Proxy Statement as filed on September 23, 1996, File
No. 0-14224)
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Sequentially
Exhibit No. Description of Exhibit Numbered Page
- ----------- ---------------------- -------------
10.10 Form of Indemnity Agreement entered into between *
the Company and its directors and certain of its
officers as of February 27, 1989. (Incorporated by
reference to Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1989,
File No. 0-14224).
10.11 Lease between the Company and the City of Goddard, *
Kansas dated as of May 1, 1989. (Incorporated by
reference to Exhibit 10.9 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1989,
File No. 0-14224).
10.12 Guaranty Agreement between the Company and BANK IV *
Wichita, National Association, dated as of May 1,
1989. (Incorporated by reference to Exhibit 10.10 to
the Company's Annual Report on Form 10-K for the year
ended June 30, 1989, File No. 0-14224).
10.13 IFR Systems, Inc. Outside Director Compensation, Stock *
Option, and Retirement Plan. (Incorporated by
reference to Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1990,
File No. 0-14224).
11.0 Statement re: computation of per share earnings.
13.0 The Company's 1996 Annual Report to Shareholders.
23.0 Consent of Ernst & Young LLP
27.0 Financial Data Schedule
* Document has been previously filed with the Securities and Exchange
Commission and is incorporated herein by reference and made a part hereof.
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL C. COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at Beginning Charged to Costs Charged to Other Balance at End
DESCRIPTION of Period and Expenses Accounts--Describe Deductions--Describe (1) of Year
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended June 30,1996:
Allowance for doubtful accounts
(deducted in balance sheet from
accounts receivable) $472,381 $106,547 -- $148,004 $430,924
Year ended June 30,1995:
Allowance for doubtful accounts
(deducted in balance sheet from
accounts receivable) $240,722 $280,000 -- $48,341 $472,381
Year ended June 30,1994:
Allowance for doubtful accounts
(deducted in balance sheet from
accounts receivable) 355,222 85,000 -- 199,500 240,722
Note 1: Uncollectible accounts receivable charged off, less recoveries.
</TABLE>
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IFR SYSTEMS, INC.
EXHIBIT (11.0) - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(000's omitted, except per share data)
<S> <C> <C> <C>
PRIMARY:
Average shares outstanding 5,496 5,314 5,237
Net effect of dilutive stock
options-based on the treasury
stock method using average
market price 155 142 56
---------- ---------- ----------
Totals 5,651 5,456 5,293
---------- ---------- ----------
---------- ---------- ----------
Net Income $ 4,761 $ 2,251 $ 987
---------- ---------- ----------
---------- ---------- ----------
Per Share Amount $ 0.84 $ 0.41 $ 0.19
---------- ---------- ----------
---------- ---------- ----------
FULLY DILUTED:
Average shares outstanding 5,496 5,314 5,237
Net effect of dilutive stock
options-based on the treasury
stock method using the period-
end market price, if greater
than average market price 177 212 56
Assumed conversion of 10%
convertible notes 13 119 153
---------- ---------- ----------
Totals 5,686 5,645 5,446
---------- ---------- ----------
---------- ---------- ----------
Net Income $ 4,761 $ 2,251 $ 987
Add 10% convertible note interest,
net of federal income tax effect 7 58 81
---------- ---------- ----------
Totals $ 4,768 $ 2,309 $ 1,068
---------- ---------- ----------
---------- ---------- ----------
Per Share Amount $ 0.84 $ 0.41 $ 0.20
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Note: Average shares outstanding used for Net Income Per Share included in
the Company's financial statements do not reflect the effect of the
stock options granted or convertible notes since their aggregate
effect is less than 3%.
<PAGE>
TERMINATION AGREEMENT
THIS AGREEMENT, dated and effective as of the 28th day of August, 1996, is
made and entered into by and between IFR SYSTEMS, INC., a Delaware corporation
("IFR"), and Alfred H. Hunt, III ("Executive").
WHEREAS, Executive has made and is expected to make a major contribution to
the profitability, growth and financial strength of IFR; and
WHEREAS, IFR considers the continued services of Executive to be in the
best interests of IFR and its shareholders and desires to assure the continued
services of Executive on behalf of IFR on an objective and impartial basis and
without distraction or conflict of interest in the event of an attempt to change
control of IFR; and
WHEREAS, Executive is willing to remain in the employ of IFR upon the
understanding that IFR will provide him with income security upon the terms and
subject to the conditions reflected herein.
NOW THEREFORE, in consideration of the promises and the mutual covenants
and agreements hereinafter set forth, the parties hereto agree as follows:
SECTION 1. PAYMENT OF AMOUNTS TO EXECUTIVE. IFR will pay to Executive
the benefits described in Section 2 hereof in the event that: (a) a Change of
Control (as defined in Section 3 hereof) of IFR occurs; and (b) Executive's
employment with IFR is terminated within two years after the Change of Control
occurs either (i) by IFR for any reason other than Serious Executive Misconduct
(as defined in Section 4 hereof), death, normal retirement, or permanent and
total disability (defined as the inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
which can be expected to result in death or which has lasted or can be expected
to last for a continuous period of not less than 12 months), or (ii) by
Executive for Good Reason (as defined in Section 5 hereof).
SECTION 2. BENEFITS TO BE PAID TO EXECUTIVE. If required by the terms
of Section 1 of this Agreement, IFR will pay to Executive the following
benefits, in the time and manner described:
SECTION 2.01. SALARY AND BONUS. IFR will pay to Executive within ten
(10) days of the termination of his employment: (1) any amount of salary and
bonus or incentive compensation due; and (2) any portions thereof earned or
accrued but not yet due to Executive at the time of the termination of his
employment. In addition, with respect to any bonus or incentive compensation
based upon performance goals for a fiscal year or other period of time which has
not then expired, IFR shall, within sixty (60) days following the expiration of
such fiscal year or other period of time, pay to Executive the pro rata portion
of any such bonus or
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incentive compensation applicable to the portion of such fiscal year or other
period of time prior to the termination of employment.
IFR will also pay to Executive as severance compensation in a lump-sum
payment within ten (10) days of the termination of his employment an amount
equal to 2.95 times Executive's Average Annual Compensation. For purposes of
this Agreement, the term "Average Annual Compensation" shall mean the average of
Executive's salary, bonuses, and incentive compensation (exclusive of
compensation under any stock option, stock appreciation right or other similar
equity based compensation arrangement maintained by IFR or any of its
subsidiaries or affiliates which was includible in the gross income of Executive
for federal income tax purposes) for the five (5) most recent taxable years (or
such shorter period as Executive has been employed) of Executive ending before
the date on which the Change of Control occurred. Average Annual Compensation
shall not include reimbursements or other expense allowances, fringe benefits
(cash and non-cash), moving expenses, and welfare benefits. Average Annual
Compensation shall, however, include Elective Contributions made by IFR on
Executive's behalf. "Elective Contributions" are amounts excludable from
Executive's gross income under Code Sections 125, 402(a)(8), 402(h), or any
nonqualified deferred compensation plan.
SECTION 2.02. RETIREMENT PLANS. For the purposes of any employee
pension plan maintained by IFR or any of its subsidiaries or affiliates in which
Executive is a participant, Executive shall be deemed to be fully vested as of
the date of the termination of his employment. IFR will pay to Executive within
ten (10) days of the immediately following plan valuation date the difference
between such deemed amount and Executive's actual account balance(s) in such
plan(s) (valued as of the immediately following plan valuation date). IFR will
also pay to Executive, at the same time and as an additional benefit under this
Agreement, an amount equal to fifty percent (50%) of any payment made under this
Section 2.02.
SECTION 2.03. DISABILITY AND MEDICAL INSURANCE BENEFITS. Until the
sooner of (1) the date which is three years after the termination of Executive's
employment, or (2) the date of death of Executive, IFR will maintain in full
force and effect all disability and medical insurance policy, plan or program
coverage benefits for Executive to which Executive was entitled immediately
prior to the termination of Executive's employment. If the terms of any
disability or medical insurance policy, plan or program maintained by IFR do not
permit the continued coverage of, and participation, by Executive, then IFR will
arrange to provide to Executive a benefit substantially similar to, and at least
as favorable as, the incremental benefit which Executive would have been
entitled to receive under any such IFR policy, plan or program had the coverage
and participation by Executive in such policy, plan or program continued from
the date of Executive's termination of employment until a date three years
thereafter. If the provision of the above benefits results in additional income
being imputed to Executive for purposes of income or other taxes, within ten
(10) days of Executive giving notice of the imputation of such income, IFR will
pay to Executive, as an additional benefit under this Agreement, an amount equal
to fifty percent (50%) of the amount of additional income being imputed to
Executive as a result of the benefits provided under this Section 2.03.
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Executive shall also have the option, in lieu of the continuation of
benefits for the three year period described above, to have assigned to him at
no cost, and with no apportionment of prepaid premiums, any assignable
disability or medical insurance policy specifically relating to Executive which
is owned by IFR.
SECTION 2.04 LIFE INSURANCE. Notwithstanding the terms of any other
agreement to which IFR and Executive may be parties, Executive shall have the
option to have assigned to him, or to a trust established by him, in a manner
that will cause him not to incur any loss, cost or expense, and with no
apportionment of prepaid premiums, any assignable life insurance policy
specifically relating to Executive which is owned by IFR. For this purpose, the
phrase "loss, cost or expense" shall include, without limitation, indebtedness
to the insurer, IFR or any other party, federal or state income tax liability,
or any other indebtedness. If the assignment would, in the opinion of legal
counsel selected by Executive in the manner provided in the following sentence,
result in such a loss, cost or expense, IFR shall pay Executive, when it makes
the assignment, an amount of cash equal to the amount of any such loss, cost or
expense. In the event that Executive directs IFR to make such an assignment,
IFR shall not cause any such assignment to occur without having first received
from legal counsel selected by Executive an opinion that the manner of
assignment proposed by IFR satisfies the terms and conditions of this Section
2.04 and the remainder of this Agreement. IFR shall pay all legal fees and
expenses incurred by Executive in securing such opinion.
SECTION 2.05. TAXES. In addition to the above payments and benefits,
within ten (10) days of the termination of Executive's employment, IFR will pay
to Executive, as an additional benefit under this Agreement, the amount of any
tax imposed on Executive by Section 4999 of the Internal Revenue Code of 1986,
as amended, and any similar provision of any state tax code as a result of
receiving payments and benefits under this Agreement. Because such payment will
itself constitute compensation includible in Executive's gross income for income
tax purposes, IFR will also pay to Executive, as an additional benefit under
this Agreement, an amount equal to the incremental federal and state income
taxes incurred by Executive as a result of receiving any payments under this
Section 2.05 including the payment called for in this sentence. For purposes of
this section 2.05 it shall at all times be presumed that Executive is subject to
federal and state income taxes at the highest marginal rates then in effect,
including surcharge rates.
SECTION 3. DEFINITION OF CHANGE OF CONTROL. For purposes of this
Agreement, a "Change of Control" shall occur upon any Person (meaning any
individual, firm, corporation, partnership or other entity including any
successor of any such Person) together with all Affiliates and Associates
(having the respective meanings ascribed to such terms in Rule 12b-2 of the
General Rules and Regulations under the Securities Exchange Act of 1934 (the
"Exchange Act")) of such Person becoming the beneficial Owner (as defined below)
of twenty percent (20%) or more of the Common Stock then outstanding; excluding
IFR, any subsidiary of IFR (meaning with reference to IFR, any corporation or
other entity of which a majority of the voting power of the voting securities or
equity interest is beneficially owned, directly or indirectly, by IFR, or
otherwise controlled by IFR), any employee benefit plan of IFR or of
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any Subsidiary of IFR, or any Person or entity organized, appointed or
established by IFR for or pursuant to the terms of any such plan.
Notwithstanding the foregoing, a Change of Control will not occur as the result
of an acquisition of shares of Common Stock by the Company which, by reducing
the number of shares outstanding, increases the proportionate number of shares
beneficially owned by a Person to twenty percent (20%) or more of the shares of
the Common Stock then outstanding; PROVIDED, HOWEVER. that if a Person shall
become the Beneficial Owner of twenty percent (20%) or more of the shares of the
Common Stock then outstanding by reason of share purchases by IFR, and shall,
after such share purchases by IFR, become the Beneficial Owner of any additional
shares of the Common Stock, then a Change in Control shall be deemed to have
occurred.
For purposes of this Agreement a Person shall be deemed the "Beneficial
Owner" of, and shall be deemed to "beneficially own" any securities
(i) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether such
right is exercisable immediately or only after the passage of time)
pursuant to any agreement, arrangement or understanding (other than
customary agreements with and between underwriters and selling group
members with respect to a bona fide public offering of securities), whether
or not in writing; or upon the exercise of conversion rights, exchange
rights, rights (other than these Rights), warrants or options, or
otherwise; PROVIDED, HOWEVER, that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own" securities tendered
pursuant to a tender or exchange offer made by or on behalf of such Person
or any of such Person's Affiliates or Associates until such tendered
securities are accepted for purchase or exchange;
(ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or dispose of or
has "beneficial ownership" of (as determined pursuant to Rule 13d-3 of the
General Rules and Regulations under the Exchange Act), including pursuant
to any agreement, arrangement or understanding, whether or not in writing;
PROVIDED, HOWEVER, that a Person shall not be deemed the "beneficial Owner"
of, or to "beneficially own" any security under this subparagraph (ii) as a
result of an agreement, arrangement or understanding to vote such security
if such agreement, arrangement or understanding (A) arises solely from a
revocable proxy or consent given in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable
provisions of the General Rules and Regulations under the Exchange Act, and
(B) is not also then reportable by such Person on Schedule 13D under the
Exchange Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with which such Person
(or any of such Person's Affiliates or Associates) has any agreement,
arrangement or understanding (other than customary agreements with and
between underwriters and selling group members with respect to a bona fide
public offering of securities), whether or not in writing, for the
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purpose of acquiring, holding, voting (except pursuant to a revocable proxy
as described in the proviso to subparagraph (ii) of this paragraph) or
disposing of any voting securities of IFR.
Notwithstanding anything in this definition of Beneficial Ownership to the
contrary, the phrase "then outstanding," when used with reference to a Person's
Beneficial Ownership of securities of the Company, shall mean the number of such
securities then issued and outstanding together with the number of such
securities not then actually issued and outstanding which such Person would be
deemed to own beneficially hereunder.
SECTION 4. DEFINITION OF SERIOUS EXECUTIVE MISCONDUCT. For purposes of
this Agreement, the term "Serious Executive Misconduct" shall mean an act or
acts by Executive which: (a) would constitute a felony under Delaware law; or
(b) were dishonest and which resulted in, or were intended by Executive to
directly or indirectly result in, the personal enrichment of Executive at IFR's
expense.
SECTION 5. DEFINITION OF GOOD REASON. For purposes of this Agreement,
Executive shall have "Good Reason" to terminate his employment with IFR if:
(a) Executive is assigned any duties or responsibilities which are
inconsistent with his position, duties, responsibilities or
status on the date of this Agreement, or his reporting
responsibilities or titles in effect on the date of this
Agreement are changed;
(b) Executive's base compensation is reduced or he experiences in any
year a reduction in the ratio of his incentive and bonus
compensation to his base compensation in excess of the reduction
which would have occurred under the incentive and bonus formula
in effect immediately prior to the Change of Control;
(c) Executive is transferred to a principal work location which would
reasonably require a change in Executive's residence; or
(d) any provision of this Agreement is breached by IFR.
SECTION 6. TERM. The term of this Agreement (the "Term") shall begin
on the date of this Agreement and shall continue until December 31, 1997, and
thereafter, this Agreement shall be automatically renewed for successive one-
year terms unless terminated by either party giving the other written notice of
termination at least ninety (90) days prior to the expiration of such original
term or any such renewal term; PROVIDED, HOWEVER, THAT if a Change of Control
occurs on or before December 31, 1997 or on or before the expiration of any
renewal term, the Term of this Agreement shall continue at least until the date
which is three years after the anniversary date of this Agreement which first
follows the date on which a Change of Control occurs.
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SECTION 7. ENFORCEMENT OF AGREEMENT. IFR is aware that upon the
occurrence of a Change of Control the Board of Directors or a shareholder of IFR
may then cause, or attempt to cause, IFR to refuse to comply with its
obligations under this Agreement, or make, cause, or attempt to cause IFR to
institute, or may institute litigation seeking to have this Agreement declared
unenforceable, or may take or attempt to take, other action to deny Executive
the benefits intended under this Agreement. In these circumstances, the purpose
of this Agreement could be frustrated.
It is the intent of IFR that Executive not be required to incur the
expenses associated with the enforcement of his rights under this Agreement by
litigation or other legal action because the cost and expense thereof would
substantially detract from the benefits intended to be extended to Executive
hereunder. It is also the intent of IFR that Executive not be bound to
negotiate any settlement of his rights hereunder under threat of incurring such
expenses.
Accordingly, if following a Change of Control, it should appear to
Executive that IFR has failed to comply with any of its obligations under this
Agreement, or in the event that IFR or any other person takes any action to
declare this Agreement void or unenforceable, or institutes any litigation or
other legal action designed to deny, diminish or to recover from Executive the
benefits entitled to be provided to Executive hereunder, and if Executive has
complied with all of his obligations under this Agreement, then: (a) IFR
irrevocably authorizes Executive from time to time to retain counsel of his
choice at the expense of IFR as provided in this Section 7 to represent
Executive in connection with the initiation or defense of any litigation or
other legal action whether by or against IFR or any director, officer,
shareholder, or other person affiliated with IFR, in any jurisdiction
notwithstanding any existing or prior attorney-client relationship between IFR
and such counsel; and (b) IFR irrevocably consents to Executive entering into an
attorney-client relationship with such counsel, and IFR and Executive agree that
a confidential relationship shall exist between Executive and such counsel.
The reasonable fees and expenses of counsel selected from time to time by
Executive as hereinabove provided, and all other costs and expenses (including
court costs) incurred by Executive as a result of any claim, action or
proceeding arising out of, or challenging the validity, admissibility or
enforceability of this Agreement or any provision hereof, shall be paid (or
reimbursed to Executive) by IFR on a regular basis upon presentation by
Executive of a statement or statements prepared by his counsel in accordance
with its customary practices, up to a maximum aggregate amount of $750,000.
SECTION 8. SEVERANCE PAY; NO DUTY TO MITIGATE. All amounts payable to
Executive under this Agreement shall not be treated as damages but as severance
compensation to which Executive is entitled by reason of the termination of his
employment in the circumstances contemplated by this Agreement. Executive shall
not be required to mitigate the amount of a payment or benefit provided for in
this Agreement by seeking other employment or otherwise. IFR shall not be
entitled to set off against the amounts payable to Executive any amounts earned
by Executive in other employment after termination of his employment with IFR,
or
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any amounts which might or could have been earned by Executive in other
employment had he sought such other employment.
SECTION 9. CONTINUED EMPLOYMENT OF EXECUTIVE AFTER POTENTIAL CHANGE OF
CONTROL. Subject to the provisions of this Agreement, Executive agrees to
remain in the employ of IFR for a period of at least one (1) year following the
occurrence of a Potential Change of Control. For purposes of this Agreement, a
"Potential Change of Control" shall be deemed to have occurred if: (a) IFR
enters into an agreement the consummation of which would result in the
occurrence of a Change of Control within the meaning of Section 3 of this
Agreement; (b) if any person, including IFR, publicly announces an intention to
take or to consider taking actions which if consummated would constitute a
Change of Control within the meaning of Section 3 of this Agreement; (c) if any
person becomes the beneficial owner, directly or indirectly, of securities
representing ten percent (10%) or more of the voting power of IFR's then
outstanding voting shares; or (d) the Board of Directors of IFR adopts a
resolution to the effect that, for purposes of this Agreement, a Potential
Change of Control has occurred.
SECTION 10. OTHER PROVISIONS.
SECTION 10.01. ASSIGNMENT. No right, benefit or interest hereunder
shall be subject to assignment, anticipation, alienation, sale, encumbrance,
charge, pledge, hypothecation or set off in respect of any claim, debt or
obligation, or to execution, attachment, levy or similar process; provided,
however, that Executive may assign any right, benefit or interest hereunder if
such assignment is permitted under the terms of any plan or policy of insurance
or annuity contract governing such right, benefit or interest.
SECTION 10.02. MODIFICATION. This Agreement may not be amended,
modified, supplemented or cancelled except by written agreement of the parties.
SECTION 10.03. WAIVER. No provision of this Agreement may be waived
except by a writing signed by the party to be bound thereby.
SECTION 10.04. SEVERABILITY. In the event that any provision or
portion of this Agreement shall be determined to be invalid or unenforceable for
any reason, the remaining provisions of this Agreement shall remain in full
force and effect to the fullest extent permitted by law.
SECTION 10.05. BINDING ON SUCCESSORS AND ASSIGNS. This Agreement
shall be binding upon and inure to the benefit of Executive (and his personal
representatives, heirs and assigns). This Agreement shall also be binding upon
and inure to the benefit of IFR and any successor organization or organizations
which shall succeed to substantially all of the business and property of IFR,
whether by means of merger, consolidation, acquisition of substantially all of
the assets of IFR or otherwise, including by operation of law.
SECTION 10.06. NOTICES. Except as specifically set forth in this
Agreement, all notices and other communications hereunder shall be in writing
and shall be deemed to have been duly given if delivered in person or sent by
registered or certified mail, postage prepaid,
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addressed as set forth below, or to such other address as shall be furnished in
writing by the party which is the addressee to the other party:
If to IFR: IFR Sytems, Inc.
10200 West York Street
Wichita, Kansas 67215
If to Executive: Alfred H. Hunt, III
#8 Quail Valley
Garden Plain, Kansas 67050
SECTION 10.07. ENTIRE AGREEMENT. This Agreement sets forth the entire
agreement and understanding of the parties hereto with respect to the matters
covered hereby. All representations, promises and prior or contemporaneous
understandings between the parties are merged into and expressed in this
Agreement.
SECTION 10.08. GOVERNING LAW. This Agreement has been made pursuant
to, and shall be governed and construed in accordance with the laws of the State
of Delaware.
SECTION 10.09. PRIOR AGREEMENTS. This Agreement supersedes and
replaces all prior Termination Agreements between IFR and Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first written above.
IFR SYSTEMS, INC.
By /s/ Jeff Bloomer
--------------------------------------
EXECUTIVE
/s/ Alfred H. Hunt, III
------------------------------------------
ALFRED H. HUNT, III
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TERMINATION AGREEMENT
THIS AGREEMENT, dated and effective as of the 28th day of August, 1996, is
made and entered into by and between IFR SYSTEMS, INC., a Delaware corporation
("IFR"), and Friedel E. Arnold ("Executive").
WHEREAS, Executive has made and is expected to make a major contribution to
the profitability, growth and financial strength of IFR; and
WHEREAS, IFR considers the continued services of Executive to be in the
best interests of IFR and its shareholders and desires to assure the continued
services of Executive on behalf of IFR on an objective and impartial basis and
without distraction or conflict of interest in the event of an attempt to change
control of IFR; and
WHEREAS, Executive is willing to remain in the employ of IFR upon the
understanding that IFR will provide him with income security upon the terms and
subject to the conditions reflected herein.
NOW THEREFORE, in consideration of the promises and the mutual covenants
and agreements hereinafter set forth, the parties hereto agree as follows:
SECTION 1. PAYMENT OF AMOUNTS TO EXECUTIVE. IFR will pay to Executive
the benefits described in Section 2 hereof in the event that: (a) a Change of
Control (as defined in Section 3 hereof) of IFR occurs; and (b) Executive's
employment with IFR is terminated within two years after the Change of Control
occurs either (i) by IFR for any reason other than Serious Executive Misconduct
(as defined in Section 4 hereof), death, normal retirement, or permanent and
total disability (defined as the inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
which can be expected to result in death or which has lasted or can be expected
to last for a continuous period of not less than 12 months), or (ii) by
Executive for Good Reason (as defined in Section 5 hereof).
SECTION 2. BENEFITS TO BE PAID TO EXECUTIVE. If required by the terms
of Section 1 of this Agreement, IFR will pay to Executive the following
benefits, in the time and manner described:
SECTION 2.01. SALARY AND BONUS. IFR will pay to Executive within ten
(10) days of the termination of his employment: (1) any amount of salary and
bonus or incentive compensation due; and (2) any portions thereof earned or
accrued but not yet due to Executive at the time of the termination of his
employment. In addition, with respect to any bonus or incentive compensation
based upon performance goals for a fiscal year or other period of time which has
not then expired, IFR shall, within sixty (60) days following the expiration of
such fiscal year or other period of time, pay to Executive the pro rata portion
of any such bonus or
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incentive compensation applicable to the portion of such fiscal year or other
period of time prior to the termination of employment.
IFR will also pay to Executive as severance compensation in a lump-sum
payment within ten (10) days of the termination of his employment an amount
equal to 2.95 times Executive's Average Annual Compensation. For purposes of
this Agreement, the term "Average Annual Compensation" shall mean the average of
Executive's salary, bonuses, and incentive compensation (exclusive of
compensation under any stock option, stock appreciation right or other similar
equity based compensation arrangement maintained by IFR or any of its
subsidiaries or affiliates which was includible in the gross income of Executive
for federal income tax purposes) for the five (5) most recent taxable years (or
such shorter period as Executive has been employed) of Executive ending before
the date on which the Change of Control occurred. Average Annual Compensation
shall not include reimbursements or other expense allowances, fringe benefits
(cash and non-cash), moving expenses, and welfare benefits. Average Annual
Compensation shall, however, include Elective Contributions made by IFR on
Executive's behalf. "Elective Contributions" are amounts excludable from
Executive's gross income under Code Sections 125, 402(a)(8), 402(h), or any
nonqualified deferred compensation plan.
SECTION 2.02. RETIREMENT PLANS. For the purposes of any employee
pension plan maintained by IFR or any of its subsidiaries or affiliates in which
Executive is a participant, Executive shall be deemed to be fully vested as of
the date of the termination of his employment. IFR will pay to Executive within
ten (10) days of the immediately following plan valuation date the difference
between such deemed amount and Executive's actual account balance(s) in such
plan(s) (valued as of the immediately following plan valuation date). IFR will
also pay to Executive, at the same time and as an additional benefit under this
Agreement, an amount equal to fifty percent (50%) of any payment made under this
Section 2.02.
SECTION 2.03. DISABILITY AND MEDICAL INSURANCE BENEFITS. Until the
sooner of (1) the date which is three years after the termination of Executive's
employment, or (2) the date of death of Executive, IFR will maintain in full
force and effect all disability and medical insurance policy, plan or program
coverage benefits for Executive to which Executive was entitled immediately
prior to the termination of Executive's employment. If the terms of any
disability or medical insurance policy, plan or program maintained by IFR do not
permit the continued coverage of, and participation, by Executive, then IFR will
arrange to provide to Executive a benefit substantially similar to, and at least
as favorable as, the incremental benefit which Executive would have been
entitled to receive under any such IFR policy, plan or program had the coverage
and participation by Executive in such policy, plan or program continued from
the date of Executive's termination of employment until a date three years
thereafter. If the provision of the above benefits results in additional income
being imputed to Executive for purposes of income or other taxes, within ten
(10) days of Executive giving notice of the imputation of such income, IFR will
pay to Executive, as an additional benefit under this Agreement, an amount equal
to fifty percent (50%) of the amount of additional income being imputed to
Executive as a result of the benefits provided under this Section 2.03.
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Executive shall also have the option, in lieu of the continuation of
benefits for the three year period described above, to have assigned to him at
no cost, and with no apportionment of prepaid premiums, any assignable
disability or medical insurance policy specifically relating to Executive which
is owned by IFR.
SECTION 2.04 LIFE INSURANCE. Notwithstanding the terms of any other
agreement to which IFR and Executive may be parties, Executive shall have the
option to have assigned to him, or to a trust established by him, in a manner
that will cause him not to incur any loss, cost or expense, and with no
apportionment of prepaid premiums, any assignable life insurance policy
specifically relating to Executive which is owned by IFR. For this purpose, the
phrase "loss, cost or expense" shall include, without limitation, indebtedness
to the insurer, IFR or any other party, federal or state income tax liability,
or any other indebtedness. If the assignment would, in the opinion of legal
counsel selected by Executive in the manner provided in the following sentence,
result in such a loss, cost or expense, IFR shall pay Executive, when it makes
the assignment, an amount of cash equal to the amount of any such loss, cost or
expense. In the event that Executive directs IFR to make such an assignment,
IFR shall not cause any such assignment to occur without having first received
from legal counsel selected by Executive an opinion that the manner of
assignment proposed by IFR satisfies the terms and conditions of this Section
2.04 and the remainder of this Agreement. IFR shall pay all legal fees and
expenses incurred by Executive in securing such opinion.
SECTION 2.05. TAXES. In addition to the above payments and benefits,
within ten (10) days of the termination of Executive's employment, IFR will pay
to Executive, as an additional benefit under this Agreement, the amount of any
tax imposed on Executive by Section 4999 of the Internal Revenue Code of 1986,
as amended, and any similar provision of any state tax code as a result of
receiving payments and benefits under this Agreement. Because such payment will
itself constitute compensation includible in Executive's gross income for income
tax purposes, IFR will also pay to Executive, as an additional benefit under
this Agreement, an amount equal to the incremental federal and state income
taxes incurred by Executive as a result of receiving any payments under this
Section 2.05 including the payment called for in this sentence. For purposes of
this section 2.05 it shall at all times be presumed that Executive is subject to
federal and state income taxes at the highest marginal rates then in effect,
including surcharge rates.
SECTION 3. DEFINITION OF CHANGE OF CONTROL. For purposes of this
Agreement, a "Change of Control" shall occur upon any Person (meaning any
individual, firm, corporation, partnership or other entity including any
successor of any such Person) together with all Affiliates and Associates
(having the respective meanings ascribed to such terms in Rule 12b-2 of the
General Rules and Regulations under the Securities Exchange Act of 1934 (the
"Exchange Act")) of such Person becoming the beneficial Owner (as defined below)
of twenty percent (20%) or more of the Common Stock then outstanding; excluding
IFR, any subsidiary of IFR (meaning with reference to IFR, any corporation or
other entity of which a majority of the voting power of the voting securities or
equity interest is beneficially owned, directly or indirectly, by IFR, or
otherwise controlled by IFR), any employee benefit plan of IFR or of
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any Subsidiary of IFR, or any Person or entity organized, appointed or
established by IFR for or pursuant to the terms of any such plan.
Notwithstanding the foregoing, a Change of Control will not occur as the result
of an acquisition of shares of Common Stock by the Company which, by reducing
the number of shares outstanding, increases the proportionate number of shares
beneficially owned by a Person to twenty percent (20%) or more of the shares of
the Common Stock then outstanding; PROVIDED, HOWEVER. that if a Person shall
become the Beneficial Owner of twenty percent (20%) or more of the shares of the
Common Stock then outstanding by reason of share purchases by IFR, and shall,
after such share purchases by IFR, become the Beneficial Owner of any additional
shares of the Common Stock, then a Change in Control shall be deemed to have
occurred.
For purposes of this Agreement a Person shall be deemed the "Beneficial
Owner" of, and shall be deemed to "beneficially own" any securities
(i) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether such
right is exercisable immediately or only after the passage of time)
pursuant to any agreement, arrangement or understanding (other than
customary agreements with and between underwriters and selling group
members with respect to a bona fide public offering of securities), whether
or not in writing; or upon the exercise of conversion rights, exchange
rights, rights (other than these Rights), warrants or options, or
otherwise; PROVIDED, HOWEVER, that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own" securities tendered
pursuant to a tender or exchange offer made by or on behalf of such Person
or any of such Person's Affiliates or Associates until such tendered
securities are accepted for purchase or exchange;
(ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or dispose of or
has "beneficial ownership" of (as determined pursuant to Rule 13d-3 of the
General Rules and Regulations under the Exchange Act), including pursuant
to any agreement, arrangement or understanding, whether or not in writing;
PROVIDED, HOWEVER, that a Person shall not be deemed the "beneficial Owner"
of, or to "beneficially own" any security under this subparagraph (ii) as a
result of an agreement, arrangement or understanding to vote such security
if such agreement, arrangement or understanding (A) arises solely from a
revocable proxy or consent given in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable
provisions of the General Rules and Regulations under the Exchange Act, and
(B) is not also then reportable by such Person on Schedule 13D under the
Exchange Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with which such Person
(or any of such Person's Affiliates or Associates) has any agreement,
arrangement or understanding (other than customary agreements with and
between underwriters and selling group members with respect to a bona fide
public offering of securities), whether or not in writing, for the
4
<PAGE>
purpose of acquiring, holding, voting (except pursuant to a revocable proxy
as described in the proviso to subparagraph (ii) of this paragraph) or
disposing of any voting securities of IFR.
Notwithstanding anything in this definition of Beneficial Ownership to the
contrary, the phrase "then outstanding," when used with reference to a Person's
Beneficial Ownership of securities of the Company, shall mean the number of such
securities then issued and outstanding together with the number of such
securities not then actually issued and outstanding which such Person would be
deemed to own beneficially hereunder.
SECTION 4. DEFINITION OF SERIOUS EXECUTIVE MISCONDUCT. For purposes of
this Agreement, the term "Serious Executive Misconduct" shall mean an act or
acts by Executive which: (a) would constitute a felony under Delaware law; or
(b) were dishonest and which resulted in, or were intended by Executive to
directly or indirectly result in, the personal enrichment of Executive at IFR's
expense.
SECTION 5. DEFINITION OF GOOD REASON. For purposes of this Agreement,
Executive shall have "Good Reason" to terminate his employment with IFR if:
(a) Executive is assigned any duties or responsibilities which are
inconsistent with his position, duties, responsibilities or status on
the date of this Agreement, or his reporting responsibilities or
titles in effect on the date of this Agreement are changed;
(b) Executive's base compensation is reduced or he experiences in any
year a reduction in the ratio of his incentive and bonus compensation
to his base compensation in excess of the reduction which would have
occurred under the incentive and bonus formula in effect immediately
prior to the Change of Control;
(c) Executive is transferred to a principal work location which would
reasonably require a change in Executive's residence; or
(d) any provision of this Agreement is breached by IFR.
SECTION 6. TERM. The term of this Agreement (the "Term") shall
begin on the date of this Agreement and shall continue until December 31,
1997, and thereafter, this Agreement shall be automatically renewed for
successive one-year terms unless terminated by either party giving the other
written notice of termination at least ninety (90) days prior to the
expiration of such original term or any such renewal term; PROVIDED, HOWEVER,
THAT if a Change of Control occurs on or before December 31, 1997 or on or
before the expiration of any renewal term, the Term of this Agreement shall
continue at least until the date which is three years after the anniversary
date of this Agreement which first follows the date on which a Change of
Control occurs.
5
<PAGE>
SECTION 7. ENFORCEMENT OF AGREEMENT. IFR is aware that upon the
occurrence of a Change of Control the Board of Directors or a shareholder of IFR
may then cause, or attempt to cause, IFR to refuse to comply with its
obligations under this Agreement, or make, cause, or attempt to cause IFR to
institute, or may institute litigation seeking to have this Agreement declared
unenforceable, or may take or attempt to take, other action to deny Executive
the benefits intended under this Agreement. In these circumstances, the purpose
of this Agreement could be frustrated.
It is the intent of IFR that Executive not be required to incur the
expenses associated with the enforcement of his rights under this Agreement by
litigation or other legal action because the cost and expense thereof would
substantially detract from the benefits intended to be extended to Executive
hereunder. It is also the intent of IFR that Executive not be bound to
negotiate any settlement of his rights hereunder under threat of incurring such
expenses.
Accordingly, if following a Change of Control, it should appear to
Executive that IFR has failed to comply with any of its obligations under this
Agreement, or in the event that IFR or any other person takes any action to
declare this Agreement void or unenforceable, or institutes any litigation or
other legal action designed to deny, diminish or to recover from Executive the
benefits entitled to be provided to Executive hereunder, and if Executive has
complied with all of his obligations under this Agreement, then: (a) IFR
irrevocably authorizes Executive from time to time to retain counsel of his
choice at the expense of IFR as provided in this Section 7 to represent
Executive in connection with the initiation or defense of any litigation or
other legal action whether by or against IFR or any director, officer,
shareholder, or other person affiliated with IFR, in any jurisdiction
notwithstanding any existing or prior attorney-client relationship between IFR
and such counsel; and (b) IFR irrevocably consents to Executive entering into an
attorney-client relationship with such counsel, and IFR and Executive agree that
a confidential relationship shall exist between Executive and such counsel.
The reasonable fees and expenses of counsel selected from time to time by
Executive as hereinabove provided, and all other costs and expenses (including
court costs) incurred by Executive as a result of any claim, action or
proceeding arising out of, or challenging the validity, admissibility or
enforceability of this Agreement or any provision hereof, shall be paid (or
reimbursed to Executive) by IFR on a regular basis upon presentation by
Executive of a statement or statements prepared by his counsel in accordance
with its customary practices, up to a maximum aggregate amount of $750,000.
SECTION 8. SEVERANCE PAY; NO DUTY TO MITIGATE. All amounts payable to
Executive under this Agreement shall not be treated as damages but as severance
compensation to which Executive is entitled by reason of the termination of his
employment in the circumstances contemplated by this Agreement. Executive shall
not be required to mitigate the amount of a payment or benefit provided for in
this Agreement by seeking other employment or otherwise. IFR shall not be
entitled to set off against the amounts payable to Executive any amounts earned
by Executive in other employment after termination of his employment with IFR,
or
6
<PAGE>
any amounts which might or could have been earned by Executive in other
employment had he sought such other employment.
SECTION 9. CONTINUED EMPLOYMENT OF EXECUTIVE AFTER POTENTIAL CHANGE OF
CONTROL. Subject to the provisions of this Agreement, Executive agrees to
remain in the employ of IFR for a period of at least one (1) year following the
occurrence of a Potential Change of Control. For purposes of this Agreement, a
"Potential Change of Control" shall be deemed to have occurred if: (a) IFR
enters into an agreement the consummation of which would result in the
occurrence of a Change of Control within the meaning of Section 3 of this
Agreement; (b) if any person, including IFR, publicly announces an intention to
take or to consider taking actions which if consummated would constitute a
Change of Control within the meaning of Section 3 of this Agreement; (c) if any
person becomes the beneficial owner, directly or indirectly, of securities
representing ten percent (10%) or more of the voting power of IFR's then
outstanding voting shares; or (d) the Board of Directors of IFR adopts a
resolution to the effect that, for purposes of this Agreement, a Potential
Change of Control has occurred.
SECTION 10. OTHER PROVISIONS.
SECTION 10.01. ASSIGNMENT. No right, benefit or interest hereunder
shall be subject to assignment, anticipation, alienation, sale, encumbrance,
charge, pledge, hypothecation or set off in respect of any claim, debt or
obligation, or to execution, attachment, levy or similar process; provided,
however, that Executive may assign any right, benefit or interest hereunder if
such assignment is permitted under the terms of any plan or policy of insurance
or annuity contract governing such right, benefit or interest.
SECTION 10.02. MODIFICATION. This Agreement may not be amended,
modified, supplemented or cancelled except by written agreement of the parties.
SECTION 10.03. WAIVER. No provision of this Agreement may be waived
except by a writing signed by the party to be bound thereby.
SECTION 10.04. SEVERABILITY. In the event that any provision or
portion of this Agreement shall be determined to be invalid or unenforceable for
any reason, the remaining provisions of this Agreement shall remain in full
force and effect to the fullest extent permitted by law.
SECTION 10.05. BINDING ON SUCCESSORS AND ASSIGNS. This Agreement
shall be binding upon and inure to the benefit of Executive (and his personal
representatives, heirs and assigns). This Agreement shall also be binding upon
and inure to the benefit of IFR and any successor organization or organizations
which shall succeed to substantially all of the business and property of IFR,
whether by means of merger, consolidation, acquisition of substantially all of
the assets of IFR or otherwise, including by operation of law.
SECTION 10.06. NOTICES. Except as specifically set forth in this
Agreement, all notices and other communications hereunder shall be in writing
and shall be deemed to have been duly given if delivered in person or sent by
registered or certified mail, postage prepaid,
7
<PAGE>
addressed as set forth below, or to such other address as shall be furnished in
writing by the party which is the addressee to the other party:
If to IFR: IFR Sytems, Inc.
10200 West York Street
Wichita, Kansas 67215
If to Executive: Fred Arnold
3218 Keywest
Wichita, Kansas 67204
SECTION 10.07. ENTIRE AGREEMENT. This Agreement sets forth the entire
agreement and understanding of the parties hereto with respect to the matters
covered hereby. All representations, promises and prior or contemporaneous
understandings between the parties are merged into and expressed in this
Agreement.
SECTION 10.08. GOVERNING LAW. This Agreement has been made pursuant
to, and shall be governed and construed in accordance with the laws of the State
of Delaware.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first written above.
IFR SYSTEMS, INC.
By /s/ Jeff A. Bloomer
-----------------------------------------
EXECUTIVE
/s/ Friedel E. Arnold
-----------------------------------------
FRIEDEL E. ARNOLD
<PAGE>
IFR SYSTEMS, INC.
Exhibit (11) - Statement Re: Computation of Earnings Per Share
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(000'S OMITTED, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
PRIMARY:
Average shares outstanding 5,496 5,314 5,237
Net effect of dilutive stock
options-based on the treasury
stock method using average
market price 155 142 56
---------- ---------- ----------
Totals 5,651 5,456 5,293
---------- ---------- ----------
---------- ---------- ----------
Net Income $ 4,761 $ 2,251 $ 987
---------- ---------- ----------
---------- ---------- ----------
Per Share Amount $ 0.84 $ 0.41 $ 0.19
---------- ---------- ----------
---------- ---------- ----------
FULLY DILUTED:
Average shares outstanding 5,496 5,314 5,237
Net effect of dilutive stock
options-based on the treasury
stock method using the period-
end market price, if greater
than average market price 177 212 56
Assumed conversion of 10%
convertible notes 13 119 153
---------- ---------- ----------
Totals 5,686 5,645 5,446
---------- ---------- ----------
---------- ---------- ----------
Net Income $ 4,761 $ 2,251 $ 987
Add 10% convertible note interest,
net of federal income tax effect 7 58 81
---------- ---------- ----------
Totals $ 4,768 $ 2,309 $ 1,068
---------- ---------- ----------
---------- ---------- ----------
Per Share Amount $ 0.84 $ 0.41 $ 0.20
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<PAGE>
1996 IFR SYSTEMS, INC.
ANNUAL REPORT
- -------------------------------------------------------------------------------
PERFORMANCE HIGHLIGHTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Sales $89,997 $75,994 $65,073 $60,791 $39,710
Operating Income 8,316 3,683 2,002 1,851 2,163
Research & Development Expense 7,374 7,892 7,505 6,107 5,968
Net Income 4,761 2,251 987 877 1,612
- ------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total Assets $60,713 $58,402 $51,232 $49,047 $43,326
Working Capital 27,273 22,948 21,498 20,148 19,886
Shareholders' Equity 43,368 38,636 34,802 33,578 33,110
Long-term Debt and
Capital Lease Obligations 2,755 4,981 3,419 4,058 4,269
- ------------------------------------------------------------------------------------------------------------------------
PROFITABILITY RATIOS
Gross Margin 37.7% 37.5% 36.3% 34.4% 39.6%
Net Income 5.3 3.0 1.5 1.4 4.1
Effective Income Tax Rate 39.5 35.6 41.6 50.5 39.9
Return on Assets 8.0 4.1 2.0 1.9 3.8
Return on Equity 11.6 6.1 2.9 2.6 4.9
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE
Net Income $0.84 $ 0.41 $ 0.19 $ 0.17 $ 0.30
Book Value 7.85 7.08 6.65 6.43 6.19
Dividends -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
CONTENTS
----------------------------------
PAGE 1 Letter to Shareholders
PAGE 4 Product Highlights
PAGE 6 Overview
PAGE 9 Financial Review
PAGE 24 Corporate Data
1996 SALES
BY PRINCIPAL MARKETS
(in thousands)
U.S. Domestic - $38,915 (43%)
Export - $33,192 (37%)
U.S. Government - $12,400 (14%)
Parts & Service - $5,490 (6%)
<PAGE>
FINANCIAL REVIEW
Quarterly Financial Data
The following quarterly financial data summarizes the unaudited quarterly
results for the years ended June 30, 1996 and 1995.
(Dollars in thousands except net income per share.)
<TABLE>
<CAPTION>
QUARTERS ENDED
- -------------------------------------------------------------------------------------------
FISCAL 1996 SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1996 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $19,857 $23,507 $22,802 $23,831
Gross Profit 7,075 8,635 8,658 9,532
Net Income 407 1,293 1,479 1,582
Net Income Per Share $ 0.07 $ 0.24 $ 0.26 $ 0.28
- -------------------------------------------------------------------------------------------
FISCAL 1995 SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1994 1994 1995 1995
- -------------------------------------------------------------------------------------------
Sales $17,196 $21,220 $19,384 $18,194
Gross Profit 5,969 8,263 7,238 6,997
Net Income 184 878 655 534
Net Income Per Share $ 0.03 $ 0.17 $ 0.12 $ 0.09
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FISCAL 1996 VS. 1995
Sales for fiscal 1996 were $89,997,000 compared to $75,994,000 in fiscal
1995, an increase of 18 percent. Sales of communications service monitors to
the U.S. Government decreased $4,000,000, or 30 percent compared to the prior
year. This decrease was a planned decline in the shipping schedule as
determined by the U.S. Government. Sales of avionics test equipment
increased 36 percent over the prior year. Test and Measurement sales
increased 42 percent compared to the prior year. The majority of the
increase is related to the private label agreement with Marconi Instruments,
Ltd. The agreement was announced in October 1995 whereby Marconi has
exclusive rights to distribute IFR products under their name in Europe and
certain other countries. Sales of communications test equipment, excluding
the U.S. Government, were up 23 percent compared to the prior year.
International sales increased from $25,681,000, or 34 percent of sales in
fiscal 1995 to $33,192,000, or 37 percent of sales in fiscal 1996. Gross
margin remained unchanged at 37 percent for fiscal 1996 as compared to fiscal
1995.
Operating expenses increased three percent over the prior year. Current
year operating expenses represented 28 percent of fiscal 1996 sales, while
fiscal 1995 operating expenses were 32 percent of fiscal 1995 sales. Selling
expenses increased $928,000, or 10 percent compared to the prior year. This is
due primarily to the higher sales commission expense from the increase in sales.
Administrative expenses increased $1,294,000, or 23 percent compared to fiscal
1995. This increase is primarily related to the acquisition of York Technology,
Ltd. and staff additions at IFR Systems, Inc. On a percent of sales basis,
administrative expenses were unchanged at seven percent for fiscal 1996 and
fiscal 1995. Engineering expenses decreased $1,421,000, or 14 percent compared
to the prior year. This decrease is related to cost reductions realized from
the integration of York Technology Companies and the funding of certain research
and development projects.
Interest expense increased $271,000, or 56 percent over the prior year.
This increase is related to the funding through notes payable for the York
acquisition at the beginning of fiscal 1996. Short-term bank borrowings
decreased $2.5 million for the year.
The Company has recorded, for financial reporting purposes, deferred tax
assets aggregating $782,000, for net operating loss carryforwards and tax credit
carryforwards related to the acquisition of Photon. Realization of the deferred
tax assets is dependent upon Photon's ability to generate taxable income in the
future. Based on an analysis of Photon's existing taxable temporary
differences, the presence of significant non-deductible acquisition
<PAGE>
costs and historical pretax operating results, a valuation allowance of $800,000
was reserved at June 30, 1996 to offset the deferred tax assets. The Company
evaluates the realizability of the deferred tax assets quarterly. See Note 4 of
the Notes to Consolidated Financial Statements for further discussion.
The effective income tax rate was 39 percent for fiscal 1996 compared to 36
percent for fiscal 1995. The increase in the rate is due primarily to the
elimination of the research and development credit for fiscal 1996.
No cash dividends were paid in fiscal 1996 or fiscal 1995. The Board of
Directors periodically reviews the appropriateness of dividend payments taking
into consideration numerous factors including the Company's cash requirements
and performance.
FISCAL 1995 VS. 1994
Sales for fiscal 1995 were $75,994,000 compared to $65,073,000 in fiscal
1994, an increase of 17 percent. Sales of communications service monitors to the
U.S. Government increased $7,000,000, or 131 percent over fiscal 1994. Fiscal
1995 sales of fiber optics test equipment increased 12 percent, while commercial
communications test equipment sales remained flat and avionics and test and
measurement sales were down slightly compared to fiscal 1994. International
sales increased from $16,877,000, or 26 percent of total sales in fiscal 1994 to
$25,681,000, or 34 percent of total sales in fiscal 1995.
Gross margin improved from 36 percent in fiscal 1994 to 37 percent in
fiscal 1995. This increase was due to a higher mix of fiber optics sales and
reduced production costs related to the manufacturing of the FM-1600 family for
the U.S. Army AN/GRM-114B test sets.
Operating expenses increased 15 percent over fiscal 1994. Operating
expenses represented 32 percent of fiscal 1995 sales, while fiscal 1994
operating expenses were 33 percent of fiscal 1994 sales. Selling expenses
increased 17 percent during fiscal 1995 due primarily to higher sales
commissions expense from the increase in sales. Fiscal 1995 administrative
expenses increased 17 percent as a result of increased pension expense. Fiscal
1995 engineering expenses increased 12 percent. This is related primarily to the
introduction of two new products. The mini-OTDR and MicroCell-100.
Interest expense decreased 22 percent compared to fiscal 1994. Improved
collection of accounts receivable reduced the Company's average borrowings from
the bank. The conversion of notes related to the Photon Kinetics ("Photon")
acquisition also contributed to the decrease.
The Company has recorded, for financial reporting purposes, deferred tax
assets aggregating $1,170,000, for net operating loss carryforwards and tax
credit carryforwards related to the acquisition of Photon. Realization of the
deferred tax assets is dependent upon Photon's ability to generate taxable
income in the future. Based on an analysis of Photon's existing taxable
temporary differences, the presence of significant non-deductible acquisition
costs and historical pretax operating results, a valuation allowance of
$1,077,000 was recognized during fiscal 1995 to offset the deferred tax assets.
The Company evaluates the realizability of the deferred tax assets quarterly.
See Note 4 of the Notes to Consolidated Financial Statements for further
discussion.
The effective income tax rate was 36 percent for fiscal 1995 compared to 42
percent for fiscal 1994. The decrease in the rate is due primarily to an
increase in the pre-tax income relative to the amount of nondeductible goodwill
amortization. Consistent with fiscal 1994, use of research and development
credits resulted in a reduction in the effective tax rate.
No cash dividends were paid in fiscal 1995 or fiscal 1994. The Board of
Directors periodically reviews the appropriateness of dividend payments taking
into consideration numerous factors including the Company's cash requirements
and performance.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a strong financial position, with working capital of
$27,273,000 at June 30, 1996. The Company generated $3,900,000 of cash from
operations, for both 1996 and 1995. The increase in accounts receivable of
$4,700,000 was offset by a decrease in inventory and the higher net income for
fiscal 1996. Cash generated from operations in both 1996 and 1995 was more than
sufficient to support the Company's increase in sales. Net property and
equipment additions were $1,600,000, $1,300,000 and $2,600,000 for fiscal 1996,
1995 and 1994. These additions were funded through a combination of cash flow
from operations and borrowings on the lines of credit. It is anticipated that
fiscal 1997 additions, estimated to be $2.5 million, will be funded from
operations.
On June 21, 1995 the Company acquired the assets of York Technology
Companies. The total adjusted purchase price of approximately $6.6 million
consisted of cash consideration of approximately $4.7 million, issuance of a non
interest bearing term note in the amount of $1.6 million due December 31, 1996
and related transaction costs. See Note 2 of the Notes to Consolidated
Financial Statements for further information concerning this acquisition.
<PAGE>
FINANCIAL REVIEW
The Board of Directors has authorized the repurchase of up to 1,000,000
shares of the Company's common stock. As of June 30, 1996, the Company had
purchased an aggregate of 835,950 shares under the program.
The Company has unsecured lines of credit for $15,000,000 which expire on
June 30, 1997. At June 30, 1996, available credit under these lines aggregated
$11,935,000. In the Company's opinion, these lines together with cash generated
from operations will be sufficient to meet the Company's working capital needs
in fiscal 1996.
INFLATION
Changes in product mix from year to year and highly competitive markets
make it very difficult to accurately define the impact of inflation on profit
margins. The Company believes that during the recent period of moderate
inflation it has been able to reduce inflationary effects by vendor partnering
arrangements and continuing expense control.
MARKET PRICE DATA
The Company's common stock is traded on the national over-the-counter
market under the NASDAQ symbol IFRS. The approximate number of shareholders of
record as of September 9, 1996, was 1,533. The high and low sales prices of the
Company's common shares for the fiscal quarters for the past two years are set
forth below.
STOCK PRICE PER SHARE
1996 1995
- -------------------------------------------------------------------------
QUARTERS HIGH LOW HIGH LOW
First 12 1/4 9 3/4 7 3/4 6 1/2
Second 10 3/4 9 10 3/4 7
Third 13 3/4 9 1/4 13 3/4 9 5/16
Fourth 16 11 3/4 14 1/2 9 3/4
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 (DOLLARS IN THOUSANDS) 1996 1995
- -----------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 266 $ 662
Accounts receivable, less allowance for doubtful
accounts of $431 in 1996 and $472 in 1995 16,494 11,819
Inventories:
Finished products 9,146 8,268
Work in process 7,167 7,673
Materials 7,513 8,120
- -----------------------------------------------------------------------------------------------
23,826 24,061
Prepaid expenses and sundry 150 296
Deferred income taxes (Note 4) 1,032 822
- -----------------------------------------------------------------------------------------------
Total current assets 41,768 37,660
PROPERTY AND EQUIPMENT
Land 55 55
Buildings 4,100 4,065
Machinery 11,332 9,561
Accumulated depreciation (deduction) (8,115) (6,204)
- -----------------------------------------------------------------------------------------------
7,372 7,477
PROPERTY UNDER CAPITAL LEASE (Note 3)
Building 2,545 2,545
Machinery 890 890
Accumulated amortization (deduction) (1,328) (1,124)
- -----------------------------------------------------------------------------------------------
2,107 2,311
OTHER ASSETS (Note 2)
Cost in excess of net assets acquired, less accumulated
amortization of $1,818 in 1996 and $1,271 in 1995 8,647 9,843
Patents, trademarks and other intangibles, less accumulated
amortization of $1,492 in 1996 and $1,202 in 1995 315 605
Loan proceeds appropriated for debt service (Note 3) 350 350
Other 154 156
- -----------------------------------------------------------------------------------------------
9,466 10,954
- -----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 60,713 $ 58,402
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 (DOLLARS IN THOUSANDS) 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank borrowings (Note 3) $ 3,065 $ 5,545
Accounts payable 3,218 3,500
Accrued compensation and payroll taxes 4,207 3,272
Other liabilities and accrued expenses 1,566 1,722
Current maturities of capital lease obligations 249 251
Current maturities of long-term debt 1,649 88
State and local taxes 394 135
Federal income taxes 147 199
- -----------------------------------------------------------------------------------------------
Total current liabilities 14,495 14,712
Capital lease obligations (Note 3) 2,110 2,346
Long-term debt (Note 3) 645 2,635
Deferred income taxes (Note 4) 95 73
Shareholders' equity (Note 6)
Preferred Stock, $.01 par value:
Authorized shares -- 1,000,000, none issued -- --
Common Stock, $.01 par value:
Authorized shares -- 50,000,000
Issued shares --_6,177,500 62 62
Additional paid-in capital 6,135 6,187
Cost of common stock in treasury -- 654,195 shares in
1996 and 689,784 shares in 1995 (deduction) (5,708) (5,880)
Cumulative translation adjustment (149) --
Retained earnings 43,028 38,267
- -----------------------------------------------------------------------------------------------
Total shareholders' equity 43,368 38,636
- -----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $60,713 $58,402
</TABLE>
See accompanying notes.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30 (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994
<S> <C> <C> <C>
SALES $89,997 $75,994 $65,073
COST OF PRODUCTS SOLD 56,097 47,528 41,467
- ----------------------------------------------------------------------------------------------------
GROSS PROFIT 33,900 28,466 23,606
OPERATING EXPENSES
Selling 10,102 9,174 7,867
Administrative 6,874 5,580 4,757
Engineering 8,608 10,029 8,980
- ----------------------------------------------------------------------------------------------------
25,584 24,783 21,604
- ----------------------------------------------------------------------------------------------------
OPERATING INCOME 8,316 3,683 2,002
OTHER INCOME (EXPENSE)
Interest income 55 62 73
Interest expense (755) (484) (620)
Other, net 251 233 236
- ----------------------------------------------------------------------------------------------------
(449) (189) (311)
- ----------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 7,867 3,494 1,691
INCOME TAXES (Note 4) 3,106 1,243 704
- ----------------------------------------------------------------------------------------------------
NET INCOME $ 4,761 $ 2,251 $ 987
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ 0.84 $ 0.41 $ 0.19
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING 5,651 5,456 5,237
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30 (DOLLARS IN THOUSANDS) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,761 $ 2,251 $ 987
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of property and equipment 1,911 1,830 1,698
Amortization of intangibles 837 792 797
Amortization of property under capital lease 204 190 233
Deferred income taxes (718) (460) (370)
Deferred compensation expense - 62 93
Utilization of acquired tax loss carryforwards 530 111 351
Changes in operating assets and liabilities
(net of effects of acquired businesses):
Accounts receivable (4,675) 1,939 (493)
Inventories 235 (3,137) (2,299)
Other current assets 146 (43) 41
Accounts payable and accrued liabilities 497 652 540
Other current liabilities 207 (325) 484
- ----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 3,935 3,862 2,062
INVESTING ACTIVITIES
Payments for acquired businesses -- (4,728) -
Purchases of property and equipment, net (1,573) (1,253) (2,565)
Sundry 2 (19) 333
- ----------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,571) (6,000) (2,232)
FINANCING ACTIVITIES
Purchases of capital stock for treasury (565) -- --
Proceeds from bank term loan -- 720 --
Principal payments on convertible securities (34) (65) --
Principal payments on capital lease obligations (238) (235) (234)
Principal payments on long-term debt (22) -- --
Proceeds from exercise of Common Stock options 621 491 143
Proceeds from short-term bank borrowings 23,365 29,905 22,355
Principal payments on short-term bank borrowings (25,845) (28,080) (22,095)
- ----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (2,718) 2,736 169
Effect of exchange rates on cash (42) -- --
- ----------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (396) 598 (1)
Cash and cash equivalents at beginning of year 662 64 65
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 266 $ 662 $ 64
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unamortized
Common Stock Additional Treasury Stock Restricted Cumulative
------------------ Paid-in ------------------ Stock Translation Retained
(IN THOUSANDS) Shares Amount Capital Shares Amount Compensation Adjustments Earnings
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1993 6,178 $62 $6,643 (954) $(8,133) $(21) $ - $35,029
Net income -- -- -- -- -- -- -- 987
Incentive stock options exercised -- -- (59) 24 202 -- -- --
Restricted stock grants (Note 6):
Amortization -- -- -- -- -- 21 -- --
Change in market value of shares -- -- (12) -- -- -- -- --
Stock granted -- -- 2 9 82 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1994 6,178 62 6,574 (921) (7,849) -- -- 36,016
Net income -- -- -- -- -- -- -- 2,251
Incentive stock options exercised -- -- (382) 93 791 -- -- --
Conversion of Photon notes -- -- (67) 129 1,096 -- -- --
Restricted stock grants (Note 6):
Stock granted -- -- 62 9 82 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1995 6,178 62 6,187 (690) (5,880) -- -- 38,267
Net income -- -- -- -- -- -- -- 4,761
Translation adjustments -- -- -- -- -- -- (149) --
Purchases for treasury -- -- -- (50) (565) -- -- --
Incentive stock options exercised -- -- (187) 78 668 -- -- --
Tax benefit from exercise of stock
options -- -- 140 -- -- -- -- --
Conversion of Photon Notes -- -- (5) 8 69 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 6,178 $62 $6,135 (654) $(5,708) $ -- $(149) $43,028
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of all subsidiaries after elimination of intercompany accounts and
transactions.
USE OF ESTIMATES: Preparation of the financial statements requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
FOREIGN CURRENCY TRANSLATION: The functional currency for the Company's
foreign operations is the applicable local currency. The translation from the
applicable foreign currencies to U.S. dollars is performed for balance sheet
accounts using the exchange rates in effect at the balance sheet date and for
revenue and expense accounts using a weighted average exchange rate during the
period. The gains or losses resulting from such translation are included in
shareholders' equity.
INVENTORIES: Inventories are valued at the lower of cost (first-in, first-out
method) or market.
INTANGIBLE ASSETS: The cost in excess of net assets acquired (goodwill) and the
cost of patents, trademarks and other intangible assets are amortized by the
straight-line method over periods ranging from 3 to 20 years.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost. Depreciation
is computed by straight-line and double-declining methods.
PROPERTY UNDER CAPITAL LEASE: Property under capital lease is recorded at the
lower of the fair market value of the leased property or the present value of
the minimum lease payments. Amortization of leased property is computed by the
straight-line method over the estimated useful life of the asset.
LONG-TERM CONTRACTS: Sales and cost of sales on long-term contracts are
recorded as deliveries are made. Estimates of cost to complete are revised
periodically throughout the lives of the contracts, and any estimated losses on
contracts are recorded in the accounting period in which the revisions are made.
NET INCOME PER COMMON SHARE: Net income per common share is computed on the
basis of the weighted average number of shares outstanding during each year plus
the dilutive effect, if any, of outstanding common stock equivalents.
CASH EQUIVALENTS: The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
STOCK OPTIONS: In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation. Companies are required to adopt the provisions of this Statement
for fiscal years beginning after December 15, 1995. The Company has not yet
adopted the new rules and, upon adoption next year, presently intends to
continue to measure compensation cost using Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees."
RECLASSIFICATIONS: Certain balances in the 1995 financial statements have been
reclassified to conform to current year presentation.
NOTE 2 -- ACQUISITION
On June 21, 1995, the Company consummated the acquisition of substantially
all of the assets of York Technology Limited, a company incorporated in England
("York Tech Ltd."), and York Technology Inc., a New Jersey corporation, as well
as the real estate and building previously leased by York Tech Ltd. The acquired
businesses are involved in the research, development, design, manufacture and
sale of quality assurance testing equipment for optical fibers. The original
total purchase price, including estimated direct costs of acquisition, was
approximately $6,900,000 and consisted of cash consideration of approximately
$4,728,000, the issuance of a non-interest bearing term note in the amount of
$1,872,000 due December 31, 1996, and related transaction costs.
The purchase agreement specifies that the purchase price may be increased
or decreased by an amount not to exceed $425,000, based on the level of sales
achieved by the acquired businesses in fiscal 1996. During fiscal 1996 the sales
were below the agreed upon level requiring a favorable adjustment of $287,395.
This amount has been deducted from the term note as specified in the agreement
and is reflected as an adjustment to cost in excess of net assets acquired. The
note may be repaid, at the option of the Company, by the issuance of the
Company's common stock. In connection with the purchase of the real estate and
building, the Company obtained a term loan with a bank in the amount of
$720,000.
The acquisition has been accounted for as a purchase and, accordingly, the
net assets and results of operations are included in the consolidated financial
statements from the effective date of acquisition. The purchase price has been
allocated to the assets based on their estimated fair values at the date of
acquisition.
Allocation of the purchase price was as follows (IN THOUSANDS):
Inventories $1,791
Intangibles 3,465
Property and equipment 1,357
- -------------------------------------------------------------------------------
$6,613
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On an unaudited pro forma basis, sales, net income and net income per share
for the year ended June 30, 1995, were $82,991,000, $1,663,000 and $.30,
respectively, and for the year ended June 30, 1994, were $73,778,000, $1,192,000
and $.23, respectively. This pro forma data presents the consolidated results of
operations as if the acquisition had occurred on July 1, 1993, after giving
effect to certain adjustments, including amortization of intangibles, increased
interest expense and related income tax effects. The pro forma results have been
prepared for comparative purposes only and do not purport to indicate the
results of operations which would actually have occurred had the acquisition
been in effect on the date indicated, or which may occur in the future.
NOTE 3 -- DEBT AND LEASE ARRANGEMENTS
Long-term debt consisted of the following (IN THOUSANDS):
1996 1995
- -------------------------------------------------------------------------------
Term note payable to shareholders
of York Tech Ltd. (Note 2) $1,585 $1,872
Term loan payable to bank, due
in 180 monthly installments of
principal and interest of $7,598,
interest at the bank's base rate
plus 3% (Note 2) 676 720
Convertible securities 33 131
- -------------------------------------------------------------------------------
2,294 2,723
Less current maturities 1,649 88
- -------------------------------------------------------------------------------
$ 645 $2,635
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CONVERTIBLE SECURITIES: In connection with the 1992 acquisition of Photon
Kinetics, Inc., a wholly-owned subsidiary (PK), the Company issued $1,225,185 in
five year, 10 percent unsecured notes convertible into IFR Systems common stock
at a conversion rate of $8.00 per share. The notes may be converted in whole or
in part, at the option of the holder, before April 1, 1997. During 1996, certain
note holders exercised their right to convert notes into stock. Total shares
exercised were 8,027 at a conversion value of $64,216. The remaining outstanding
balance of $33,117 matures in 1997.
CAPITAL LEASES: In May 1989, the Company entered into a capital lease to
finance an addition to its office and manufacturing facility. This lease was
entered into in connection with an issuance of industrial revenue bonds (the
Bonds) by the City of Goddard, Kansas (the City). The Company has guaranteed
the future repayment of all amounts due relating to the Bonds. The City has
retained title to the new facilities and related equipment; however, the
Company has the option to purchase the facilities and equipment for a nominal
amount after repayment in full of all amounts due relating to the Bonds.
Under the terms of the lease, the Company is required to make quarterly
payments in an amount sufficient to pay the principal and interest
installments of the Bonds when due. The Bonds mature serially over a 15 year
period which commenced May 1, 1990, and are callable for early redemption by
the Company after eight years. Upon the occurrence of certain events, the
Bonds are subject to immediate redemption at the option of each Bond holder.
These events include the acquisition or right to acquire beneficial ownership
of 25 percent of the outstanding Common Stock (unless waived by the Board of
Directors), the subsequent determination that the Bonds are taxable or other
specified events.
Loan proceeds appropriated for debt service consist of Bond proceeds held
in restricted trust funds. The Company is required to maintain a minimum of
$350,000 on deposit in the trust accounts until the Bonds are paid in full.
The Company has other capital lease arrangements to finance the acquisition
of equipment. Future minimum lease payments, based upon scheduled redemptions of
the Bonds and payments under other lease arrangements, as of June 30, 1996, are
as follows (IN THOUSANDS):
- -------------------------------------------------------------------------------
1997 $ 427
1998 411
1999 411
2000 409
2001 410
Thereafter 1,212
- -------------------------------------------------------------------------------
Total minimum lease payments 3,280
Amounts representing interest 921
- -------------------------------------------------------------------------------
Present value of minimum lease payments 2,359
Current maturities 249
- -------------------------------------------------------------------------------
Long-term portion $2,110
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
OPERATING LEASES: The Company also leases certain facilities and equipment
under operating leases which expire over the next one to five years. The
equipment leases provide the Company with the option after the initial lease
term to purchase the property at the then fair value, renew its lease at the
then fair rental value for a period of one year or return the equipment to the
lessor. Generally, management expects that after the initial lease term the
equipment will be purchased for the then fair value.
Minimum payments for operating leases having initial or remaining
noncancelable terms in excess of one year are as follows (in thousands):
- -------------------------------------------------------------------------------
1997 $ 718
1998 707
1999 684
2000 291
2001 17
- -------------------------------------------------------------------------------
Total minimum lease payments $2,417
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total rent expense for all operating leases amounted to approximately
$625,000, $466,000 and $679,000 for 1996, 1995 and 1994, respectively.
LINES OF CREDIT: The Company has available unsecured lines of credit
aggregating $15,000,000 which expire on June 30, 1997. As of June 30, 1996,
the Company has unused lines of credit aggregating $11,935,000. The interest
rate on the outstanding portion of the lines of credit is 1/2% below prime
(7.75% at June 30, 1996).
INTEREST PAID: Interest paid during 1996, 1995 and 1994 was approximately
$730,000, $495,000 and $547,000, respectively.
NOTE 4 -- INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets for the years ended as of
June 30 are as follows (in thousands):
1996 1995
- -------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Tax over book depreciation $ 533 $ 632
Amortization of intangibles 107 205
- -------------------------------------------------------------------------------
Total deferred tax liabilities $ 640 $ 837
- -------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Tax credit carryforwards $ 590 $ 696
Net operating loss carryforwards 192 474
Inventory reserves 647 460
Accrued vacations 333 54
Warranty reserves 273 290
Other-net 342 689
- -------------------------------------------------------------------------------
Total deferred tax assets 2,377 2,663
Valuation allowance for deferred tax assets (800) (1,077)
- -------------------------------------------------------------------------------
Net deferred tax assets 1,577 1,586
- -------------------------------------------------------------------------------
Net total deferred tax assets $ 937 $ 749
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
The composition of the provision for income taxes is as follows (in thousands):
1996 1995 1994
- -------------------------------------------------------------------------------
Current:
Federal $2,236 $1,271 $ 618
State 545 321 105
- -------------------------------------------------------------------------------
Total current 2,781 1,592 723
Benefit of net operating
loss carryforward 530 111 351
Deferred federal (205) (460) (370)
- -------------------------------------------------------------------------------
$3,106 $1,243 $ 704
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
The effective income tax rate varied from the statutory federal income tax rate
as follows for the years ended June 30:
1996 1995 1994
- -------------------------------------------------------------------------------
Statutory federal income
tax rate 34.0% 34.0% 34.0%
Increases (decreases):
State income taxes,
net of federal tax benefit 4.6 6.1 4.1
Amortization of goodwill
and intangibles 1.6 3.5 9.9
Research and development
tax credits -- (7.5) (8.3)
Other (.7) (.5) 1.9
- -------------------------------------------------------------------------------
39.5% 35.6% 41.6%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Income tax payments for 1996, 1995 and 1994 were approximately $2,749,000,
$1,463,000 and $571,000, respectively.
NOTE 5 -- RESEARCH AND DEVELOPMENT COSTS
Research and development costs were $7,374,000, $7,892,000 and $7,505,000,
for 1996, 1995 and 1994, respectively.
NOTE 6 -- SHAREHOLDERS' EQUITY
INCENTIVE STOCK OPTION PLANS: The Company has two incentive stock option plans
the 1985 and 1988 Plans (the Plans). Under the 1985 and 1988 Plans, 100,000
shares and 300,000 shares, respectively, of Common Stock have been reserved for
issuance. The Plans permit the granting of qualified stock options to officers
and key employees. The option price per share under the Plans is not to be less
than the fair market value of a share of Common Stock on the date of grant.
Incentive stock options exercised amounted to 39,047 shares in 1996, 62,678
shares in 1995 and 21,309 shares in 1994. The purchase price per share averaged
$7.33, $6.81 and $6.08 in 1996, 1995 and 1994, respectively.
NONQUALIFIED STOCK OPTION PLAN: In November 1992, shareholders of the Company
approved the 1992 Nonqualified Stock Option Plan whereby all employees of the
Company are eligible to be granted nonqualified stock options. A total of
500,000 authorized but unissued or treasury shares of the Company's Common Stock
were reserved for grant under the plan. The Board of Directors Compensation
Committee determines the time or times at which options will be granted, selects
the employees to whom options will be granted, and determines the number of
shares covered by each option, purchase price, time of exercise and other terms.
Nonqualified stock options exercised amounted to 33,881 shares in 1996,
30,200 shares in 1995 and 2,400 shares in 1994. The purchase price per share
averaged $7.31, $6.87 and $6.88 in 1996, 1995 and 1994, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following presents information regarding options granted through June 30,
1996:
Options
Outstanding
Available and Option Price
for Grant Exercisable Per Share
- --------------------------------------------------------------------------------
The 1985 Plan 0 10,000 $6.125 to $11.25
The 1988 Plan 4,874 152,859 2.97 to 12.50
The 1992 Plan 77,167 108,034 6.75 to 15.375
RESTRICTED STOCK GRANT PLAN: On February 27, 1989, the shareholders of the
Company approved a restricted stock grant plan whereby officers and key
employees may be granted restricted shares of the Company's Common Stock. The
restrictions lapse over various vesting periods not to exceed ten years. A
total of 300,000 authorized but unissued or treasury shares of the Company's
Common Stock were reserved for grant under the plan. These restricted shares may
be granted during the next ten years at a price equal to par value. In 1995 and
1994, the Company made additional grants each year of 9,600 shares with
restrictions lapsing June 30, 1995 and 1994, respectively. No grants were made
in 1996.
The market value of restricted shares granted is being amortized as
compensation expense over the vesting period. Total expense of $62,000 and
$104,000 was recognized in 1995 and 1994, respectively, in connection with the
restricted stock grant plan. The shares reserved for future grants are 85,694
as of June 30, 1996.
SHAREHOLDER RIGHTS PLAN: The Board of Directors of the Company adopted a
Shareholder Rights Plan on February 28, 1989, whereby common stock purchase
rights (the Rights) were distributed as a dividend at the rate of one Right for
each share of the Company's Common Stock held as of the close of business on
March 10, 1989. The Rights will expire on February 27, 1999. Each Right
entitles shareholders to buy one share of common stock of the Company at an
exercise price of $50 per share. The Rights are exercisable only if a person or
group acquires beneficial ownership of 20% or more of the Company's Common Stock
or announces a tender or exchange offer upon consummation of which such person
or group would beneficially own 20% or more of the Common Stock.
Following the acquisition of 20% or more, but less than 50%, of the
Company's Common Stock by a person or group, the Board of Directors may
authorize the exchange of the Rights (except those owned by the acquirer), in
whole or in part, for shares of the Company's Common Stock at an exchange ratio
of one share for each Right.
The Board of Directors of IFR will generally be able to redeem the Rights
at $.01 per Right at any time prior to the time that a 20% position in the
Company has been acquired. If a bidder who owns less than 5% of the Common
Stock offers to buy all of the Common Stock at a price which a nationally
recognized investment banker states in writing is fair and if the bidder has
full financing for the bid, the shareholders of the Company may cause the Rights
to be automatically redeemed immediately prior to the consummation of the offer,
provided that such offer or another offer is consummated within 60 days at a
price per share that is not less than the price approved by the shareholders.
OUTSIDE DIRECTOR PLAN: In November 1989, an Outside Director Compensation,
Stock Option and Retirement Plan (Outside Director Plan) was approved by the
shareholders. The Outside Director Plan provides that each director who is not
an employee of the Company will be granted an option to purchase 1,000 shares of
the Company's Common Stock on the third business day after the annual meeting of
the shareholders in each of the next ten years, commencing in 1989. The total
number of shares to be issued under the Outside Director Plan cannot exceed
60,000 shares. The option price under the Outside Director Plan is not to be
less than the fair market value of a share of Common Stock on the date of grant.
At June 30, 1996, 28,000 options were outstanding, 22,000 of which are currently
exercisable at option prices ranging from $6.25 to $12.625 per share with the
remaining 6,000 options becoming exercisable in November 1996, at an option
price of $9.125 per share. Options exercised under the Outside Director Plan
amounted to 5,000 shares in 1996. The purchase price per share averaged $7.87.
NOTE 7 -- INDUSTRY SEGMENTS
The Company operates exclusively in one dominant industry segment, the
electronic test and measurement equipment industry. The primary use of its
products is for receiving, analyzing and transceiving video, voice and data
information.
Sales include $12,400,000, $16,400,000 and $8,500,000 in 1996, 1995 and
1994, respectively, to the United States government.
Export sales to unaffiliated customers by destination of sales are
summarized as follows (in thousands ):
Years ended June 30
-------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
Europe $ 8,622 $ 5,184 $ 4,400
Western Hemisphere 5,883 4,884 2,719
Pacific Rim 14,894 10,090 3,488
Other 3,793 5,523 6,270
- -------------------------------------------------------------------------------
$33,192 $25,681 $16,877
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
NOTES TO CONSOLIDAATED FINANCIAL STATEMENTS
NOTE 8 -- EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS: The Company has a trusteed defined contribution retirement
plan for substantially all employees. Company contributions are discretionary
with respect to the plan. Employee benefits are based on amounts accumulated
from contributions and investment gains or losses. Because it is a defined
contribution plan, there are no unfunded past service costs. Total retirement
plan expenses for 1996, 1995 and 1994 were $1,083,000, $1,036,000 and $-0-,
respectively. These amounts were accrued at year end and are included in the
balance sheet caption Other Liabilities and Accrued Expenses.
In January 1993, the Company established a savings and investment plan for
substantially all employees under Section 401(k) of the Internal Revenue Code.
Employees may contribute to the plan up to 12% of their salary. Matching
Company contributions are discretionary with respect to the plan. During 1996,
1995 and 1994, the Company matched 50% of each employee's contribution up to 4%
of their salary. Company contributions charged to expense in 1996, 1995 and
1994, were $298,000, $254,000 and $255,000, respectively.
INCENTIVE BONUS PLAN: The Company has established a bonus plan payable to all
employees based on pre-established operating income goals approved by the Board
of Directors. Total bonus plan expense amounted to $783,000 for 1996. No
expenses were incurred in 1995 and 1994.
VEBA TRUST: The Company has a voluntary employees' beneficiary association
(VEBA), which funds certain employee welfare plan benefits. The Company is
obligated to fund a trust as needed to provide for actual claims and trust
expenses incurred. Total VEBA expenses for 1996, 1995 and 1994 were $1,183,000,
$1,206,000 and $1,005,000, respectively.
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
The Company has a contract with the United States Army (the Army) under
which the Army had the option to purchase up to $50,000,000 of test instruments,
technical manuals, and other services at a fixed sales price during a five-year
period which ended December 1993. At June 30, 1996, the Company had a backlog
of $8.6 million and orders pursuant to the contract were being shipped as
specified by the contract.
<PAGE>
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of IFR Systems, Inc. is responsible for the preparation of
the financial statements, the Annual Report and for the integrity and
objectivity of the information presented. The financial statements have been
prepared in conformity with generally accepted accounting principles and
necessarily include amounts which are estimates and judgments. The fairness of
the presentation in these statements of the Company's financial position,
results of operations and cash flows is reported on by the independent auditors.
To assist in carrying out the above responsibility, the Company has
internal systems which provide for selection of personnel, segregation of duties
and the maintenance of accounting policies, systems, procedures and related
controls.
Although no cost effective system can insure the elimination of errors, the
Company's systems have been designed to provide reasonable but not absolute
assurances that assets are safeguarded, that policies and procedures are
followed, and that the financial records are adequate to permit the production
of reliable financial statements.
The Audit Committee of the Board of Directors, which is composed of
directors who are not employees of the Company, meets regularly with Company
officers and independent auditors in connection with the adequacy and integrity
of the Company's financial reporting and internal controls.
/s/ Jeffrey A. Bloomer
Jeffrey A. Bloomer
TREASURER AND
CHIEF FINANCIAL OFFICER
<PAGE>
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
Board of Directors
IFR Systems, Inc.
We have audited the accompanying consolidated balance sheets of IFR
Systems, Inc. as of June 30, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended June 30, 1996. 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 IFR Systems,
Inc. at June 30, 1996 and 1995, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended June 30,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Indianapolis, Indiana
July 29, 1996
<PAGE>
EXHIBIT 23--CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of IFR Systems, Inc. of our report dated July 29, 1996, included in the 1996
Annual Report to Shareholders of IFR Systems, Inc.
Our audits also included the financial statement schedule of IFR Systems, Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We consent to the incorporation by reference in the Registration Statement 33-
5272 on Form S-8 of the Incentive Stock Option Plan dated April 29, 1986,
Registration Statement 33-27329 on Form S-8 of the Restricted Stock Grant Plan
dated March 2, 1989, Registration Statement 33-27330 on Form S-8 of the
Incentive Stock Option Plan dated March 2, 1989, Registration Statement
33-32060 on Form S-8 of the Outside Director Compensation, Stock Option and
Retirement Plan dated November 14, 1989, and Registration Statement 33-56862
on Form S-8 of the Nonqualified Stock Option Plan of our report dated July 29,
1996, with respect to the consolidated financial statements and schedules of
IFR Systems, Inc. included or incorporated by reference in the Annual Report
on Form 10-K for the year ended June 30, 1996.
Indianapolis, Indiana
September 25, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FROM FORM
10-K FOR JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 266
<SECURITIES> 0
<RECEIVABLES> 16925
<ALLOWANCES> 431
<INVENTORY> 23826
<CURRENT-ASSETS> 41768
<PP&E> 18922
<DEPRECIATION> 9443
<TOTAL-ASSETS> 60713
<CURRENT-LIABILITIES> 14495
<BONDS> 2755
62
0
<COMMON> 0
<OTHER-SE> 43306
<TOTAL-LIABILITY-AND-EQUITY> 60713
<SALES> 89997
<TOTAL-REVENUES> 89997
<CGS> 56097
<TOTAL-COSTS> 81681
<OTHER-EXPENSES> 251
<LOSS-PROVISION> 107
<INTEREST-EXPENSE> 755
<INCOME-PRETAX> 7867
<INCOME-TAX> 3106
<INCOME-CONTINUING> 4761
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4761
<EPS-PRIMARY> .84
<EPS-DILUTED> .84
</TABLE>
