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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, 1998 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 48-1197645
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
10200 WEST YORK STREET, WICHITA, KANSAS 67215
(Address of principal executive offices) (Zip Code)
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 1943 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 if Registration S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of September 7, 1998 was approximately $43,309,000.
As of September 7, 1998, there were 8,206,015 shares of Registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
PART OF 10-K
DOCUMENT INTO WHICH INCORPORATED
-------- ------------------------
1. Registrant's Annual Report to Shareholders for Parts I, II, and IV
the fiscal year ended June 30, 1998.
1. Registrant's Proxy Statement for the November Part III
5, 1998, Annual Meeting of Shareholders.
The Exhibit Index to this Form 10-K is located on pages 25 through 28.
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TABLE OF CONTENTS
Page No.
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PART I
ITEM 1 Business.............................................................4
Glossary............................................................16
ITEM 2 Properties..........................................................18
ITEM 3 Legal Proceedings...................................................18
ITEM 4 Submission of Matters to a Vote of Security Holders.................18
Executive Officers of the Registrant.........................................19
PART II
ITEM 5 Market for the Registrant's Common Equity
and Related Shareholder Matter....................................20
ITEM 6 Selected Financial Data.............................................20
ITEM 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................20
ITEM 7A Quantitative and Qualitative Disclosures about Market Risk..........20
ITEM 8 Financial Statements and Supplementary Data.........................20
ITEM 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................21
PART III
ITEM 10 Directors and Executive Officers of the Registrant..................21
ITEM 11 Executive Compensation..............................................21
ITEM 12 Security Ownership of Certain Beneficial Owners and Management......21
</TABLE>
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TABLE OF CONTENTS
(continued)
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ITEM 13 Certain Relationships and Related Transactions......................22
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.....22
Signatures ...............................................................23
Exhibit Index ...............................................................25
</TABLE>
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS.
IFR Systems, Inc. ("IFR" or the "Company") is a Delaware corporation,
incorporated in 1997 as a successor by merger to a corporation incorporated
in 1985, with its principal offices in Wichita, Kansas. IFR's predecessor
corporation was originally founded in 1968 as a supplier of specialized test
solutions to the avionics industry. IFR expanded its activities in 1974 to
apply its knowledge of radio frequency ("RF") and related technologies to the
development of test solutions for the then emerging wireless communications
market. Today, through its Electronics Test and Measurement ("ETM") and
Optical Test and Measurement ("OTM") divisions, IFR designs, manufactures,
and markets communications, test and measurement, avionics, and fiber optic
test instruments that are used to test a wide variety of radio products,
aircraft avionics systems and optical fiber.
REORGANIZATION INTO HOLDING COMPANY. Effective January 30, 1998, IFR
reorganized its corporate structure into a holding company structure. As a
result, IFR Systems, Inc. ("Old IFR"), whose name is now IFR Americas, Inc.,
is now an operating subsidiary of the new holding company and the former
shareholders of Old IFR are now shareholders of the new holding company. The
new holding company has been given Old IFR's former name, IFR Systems, Inc.
The reorganization was effected under Section 251(g) of the Delaware
General Corporation Law (the"DGCL") and did not require the approval of the
Company's shareholders. The reorganization was accomplished by first creating
a wholly owned subsidiary of Old IFR, IFR Holding Corporation ("Holding"),
and a wholly owned subsidiary of Holding called IFR Merger Corporation
("Merger Corporation"). Holding, Merger Corporation, and Old IFR are all
Delaware corporations.
Merger Corporation was merged with and into Old IFR with Old IFR
being the surviving corporation in the merger. Each share of Old IFR's issued
and outstanding common stock, par value $.01 per share, was automatically
converted in the merger into a share of common stock, par value $.01 per
share, of Holding and all options to acquire the Old IFR's common stock were
converted into identical options to purchase common stock of Holding on the
same terms and conditions as the former options. As a part of the merger, Old
IFR's corporate name has been changed to IFR Americas, Inc., and the
corporate name of Holding is now IFR Systems, Inc.
Each outstanding stock certificate representing shares of Old IFR's
common stock now represents an equal number of shares of common stock of the
new holding company. Because the new holding company has the same name as the
former name of Old IFR, IFR Systems, Inc., shareholders did not need to
exchange their existing stock certificates for new stock certificates of the
Company.
In the merger, Old IFR's existing Rights Agreement, dated February
28, 1989, with Harris Bank and Trust Company and the rights granted under
such agreement were assumed by the Company. Until certain events described in
the Rights Agreement occur, the rights are represented by the stock
certificates to which they relate and are not separately transferable.
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The certificate of incorporation and bylaws of the Company contain
identical terms to those contained in Old IFR's certificate of incorporation
and bylaws as in effect immediately prior to the merger except for certain
matters that do not materially affect the rights of the shareholders as
permitted by the DGCL.
ACQUISITION OF YORK SENSOR LTD. On December 22, 1997, the Company
acquired York Sensors Ltd., Hampshire, U.K. The acquired business is involved
in the design and manufacture of distributed temperature sensing (DTS)
equipment based on optical time domain reflectometer (OTDR) technology for
the electric utility, oil exploration, and other industries. The Company
acquired assets of approximately $930,000 and liabilities of approximately
$1,902,000 for a nominal purchase price. This resulted in goodwill of
approximately $972,000. The acquisition has been accounted for as a purchase
of assets.
ACQUISITION OF MARCONI INSTRUMENTS LIMITED. On February 6, 1998, the
Company acquired for cash all of the issued and outstanding capital stock of
Marconi Instruments Limited., Hertfordshire, U.K. (collectively with its
subsidiaries "Marconi") from The General Electric Company, p.l.c. ("GEC") for
a total purchase price of approximately $109,000,000. The purchase was made
pursuant to a Share Sale and Purchase Agreement, dated as of February 6,
1998, between IFR Systems, Inc., IFR Systems Limited, and GEC (the "Purchase
Agreement"). IFR Systems Limited together with its subsidiaries ("IFR-UK")
is a wholly owned subsidiary of the Company formed for the purpose of making
the acquisition. The Company used funds borrowed under a credit agreement, a
copy of which is filed as Exhibit 10.13 to this Form 10-K, to pay the
purchase price.
A copy of the Purchase Agreement is filed as Exhibit 2.1 to this Form
10-K. The following description of the Purchase Agreement is intended to be
only a summary of the Purchase Agreement. Reference is hereby made to the
Purchase Agreement for a full statement of its terms which are hereby
incorporated by reference.
In addition to containing typical provisions relating to a purchase
of a corporate subsidiary for cash, the Purchase Agreement provides that
IFR-UK and GEC and its subsidiaries granted each other non-exclusive,
irrevocable, non-transferable, royalty-free perpetual worldwide licenses to
use all intellectual property belonging to any of them and being used by the
other prior to the date of the acquisition for the purpose of developing,
manufacturing, and selling existing products and any improvement,
modification, or adaption of products manufactured or in the course of
development at such date. IFR-UK may not make any use of the Marconi trade
names after the expiration of nine months from the date of the transaction.
The Purchase Agreement also provides for GEC to assume the responsibility for
certain pending patent litigation and to retain any recovery received and for
GEC to assume the responsibility of bringing additional patent enforcement
proceedings with any net proceeds to be divided equally by GEC and the
Company.
As a result of the acquisition, the Company acquired the foreign
subsidiaries of Marconi which do business in France, Germany, Spain, and the
United States. IFR-UK also has branches in the Netherlands, Singapore, Hong
Kong, and China. IFR-UK also has distribution relationships and service
centers worldwide.
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The parties also entered into a "Deed of Tax Covenant" in connection
with the Purchase Agreement. The Tax Covenant provides generally for
indemnification by GEC for tax liabilities that might be incurred by the
Company (and in certain cases for indemnification by the Company for certain
losses that may be incurred by GEC) and for the manner in which GEC and the
Company will prepare various tax returns. Claims under the Tax Covenant must
be asserted within seven years. A copy of the Tax Covenant is filed as
Exhibit 2.2 to this Form 10-K. The preceding description of the Tax Covenant
is intended to be only a summary of the Tax Covenant. Reference is hereby
made to the Tax Covenant for a full statement of its terms which are hereby
incorporated by reference.
(b) NARRATIVE DESCRIPTION OF BUSINESS.
In the following description of the Company's business, reference to
"IFR" and to the "Company" include all subsidiaries of the Company including
Marconi, unless otherwise stated.
PRODUCTS. While the Company makes a broad variety of products,
substantially all of the Company's products are test instruments. Accordingly,
the Company considers its business to be in the single test instrument segment.
The following table sets forth the contribution to total net sales of
each of the Company's four classes of test instruments for the last three fiscal
years.
<TABLE>
<CAPTION>
Communications Test & Measurement Avionics Fiber Optics
-------------- ------------------ -------- ------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Amounts in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $36,999 41.1% $ 5,611 6.2% $8,837 9.8% $29,467 32.8%
1997 44,684 43.2 4,644 4.5 9,445 9.1 34,410 33.3
1998 46,516 31.5 21,023 14.2 8,851 6.0 39,178 26.5
</TABLE>
Set forth below are discussions of each of the four classes of test
instruments designed, manufactured, and sold by the Company: communications
test equipment; test and measurement test equipment, avionics test equipment,
and fiber optics test equipment. In addition, the Company sells fiber optics
accessories, such as cable cutters and splicers, and software computer
solutions to be used in connection with certain of the Company's test
equipment products.
COMMUNICATIONS TEST EQUIPMENT. The Company's communications test
equipment products are designed to test mobile radio products, such as mobile
telephones and cellular telephones, as well as base station equipment. IFR
products emulate the required system or parameters so the systems can be
tested for proper frequency transmission, signal modulation, power levels,
and other key performance parameters. The Company produces self-contained
portable test sets for both the digital and analog communications markets.
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 citizen band radios.
6
<PAGE>
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.
The mobile radio product industry is undergoing a transformation as
the result of the increased use of digital technology. Digital technology
offers spectral efficiencies, better voice quality, and more data services.
As a result, there is an increasing demand for products that use complex
digital modulation schemes. Cellular telephone systems currently deployed use
CDMA, GSM, and TDMA technologies. IFR provides a wide range of mobile radio
test products for both GSM and TDMA technologies and has recently secured
software licensing agreements with Qualcomm for marketing Qualcomm's
production test software for CDMA technology.
The professional mobile radio market, a traditionally strong market for
IFR, is also beginning to move towards digital technology with a new worldwide
terrestrial trunked radio access ("TETRA") protocol. IFR has been one of the
contributing suppliers for the initial test equipment requirements for TETRA
system design and production. IFR recently released its 2968 TETRA mobile radio
test set. IFR is presently researching other new technologies, including the
Project 25 ("P25") standard proposed by the Association of Public Communications
Officers International, and "iDEN", a Motorola technology used predominately by
Nextel for general trunked radio access, and "EDACS Prism" developed by
Ericsson.
IFR continues to sell products to test mobile and professional analog
telephones and systems. Analog telephone systems continue to be deployed in
South America and a majority of the professional mobile radio market, which
includes users such as police, ambulance, and other mission-critical
environments, still relies on analog technology.
TEST AND MEASUREMENT TEST EQUIPMENT. The Company's electronic test and
measurement products are sophisticated instruments for the test and maintenance
of digital and analog communication systems, laboratory and field measurement of
electromagnetic signals and radio frequency test equipment for the aviation
industry, and automated test equipment. Included in the Company's test and
measurement equipment are spectrum analyzers, signal generators, counter power
meters, and microwave and modulation analyzers. These products are primarily
used to bench test equipment and are sold to original equipment manufacturers,
service and repair companies, and educational institutions.
The Company's spectrum analyzers, which display and measure the level of
a signal across a swept range of frequencies, signal amplitude versus frequency,
are used as a tool in the design of communications transmitting and receiving
equipment. The Company does not have a significant share of the spectrum
analyzer market.
The Company's signal generators create time-varying waveforms with
defined characteristics that simulate radio frequency signals under test. This
product series is used in design, manufacture, and test of electronic
subassemblies, intermodulation distortion measurements and cordless telephone
manufacturing.
7
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IFR manufactures microwave products, including power meters, combined
counter power meters, and multifunction microwave test sets, which are used to
measure the output and frequency of a device under test. The products are used
in establishing the microwave links that form the core infrastructure of a
communication network. The Company does not have a significant share of the
microwave test product market.
Microwave and modulation analyzers are used to measure the
characteristics of forward and reverse gain input and output impedance on radio
frequency or microwave networks.
AVIONICS TEST EQUIPMENT. The Company's avionics test instruments include
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. Principal
products tested by IFR equipment include transponder simulation systems,
navigation, collision avoidance systems, weather radar systems, global
positioning systems ("GPS") and military variants of such products. IFR's
precision simulators are used to test the avionics electronics systems in
commercial, military, and general aviation aircraft. These products are
primarily used by general aviation service and repair companies, commercial
airlines, manufacturers, and the federal government.
IFR navigation test products are designed for testing instrument landing
systems, VHF omnidirectional radio range, marker beacons, automatic direction
finders, and selective calling systems and microwave landing system angle
receivers installed in aircraft.
IFR traffic alert and collision avoidance ("TCAS") products simulate the
airborne environment necessary to perform many of the required tests for
supplemental type certification.
IFR also has a weather radar simulation product, the RD-301A, that is
designed to test weather radar and narrow-pulse marine radar systems. This fully
integrated test set permits complete testing of routine radar functions and
provides the capabilities to satisfy simulation requirements for new generation
non-coherent radar systems.
IFR's global positioning simulator provides accurate and repeatable
testing of GPS receivers. It achieves this testing capability by simulating a
GPS satellite and generating specific vehicle and navigational data patterns.
FIBER OPTICS TEST EQUIPMENT. The Company's fiber optic test instruments
marketed under the "PK Technology" name, consist of portable and stationary
units used to test and verify specific parameters of optic fibers. IFR equipment
is used by telephone companies, installers of voice/data communications
networks, cable television operators, utilities, contractors, fiber
manufacturers, and the military.
The Company's fiber optics products are sold in seven basic market
sectors: video analysis products, index profiling products, dispersion products,
transmission products, telecom products, fiber accessory products, and component
test products.
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Video analysis products are used for measurement of the glass geometry
of fiber and the coating geometry of single fibers and ribbon fibers. There are
three segments to the video analysis market: fiber glass geometry, fiber coating
geometry, and fiber ribbon geometry. The Company believes PK Technology is the
leading supplier in the entire video analysis market and is the only commercial
supplier to the fiber coating geometry test market, which is generally limited
to customers in Japan and Korea.
Index profiling products are used to predict fiber performance before
the glass preform is drawn. Glass is preformed using one of three techniques:
outside vapor deposition ("OVD"), modified chemical vapor deposition ("MCVD"),
and vapor axial deposition ("VAD"). The Company has test products for all three
techniques.
The dispersion products of the Company, which are used to test chromatic
dispersion and polarization mode dispersion ("PMD"), are sold to fiber and some
cable manufacturers. Since such testing is only performed by these customers on
a sampling basis, the market is relatively limited and has experienced little if
any recent growth.
The company's transmission products, attenuation test equipment, are
marketed to fiber and cable manufacturers for the purpose of process control and
final quality assurance.
Optical fiber telephone equipment is a growing market, particularly in
the United States, Japan, and China, but the growth in the market has been
offset in large part by price reductions. The Company intends to focus its
marketing efforts in the faster growing dense wavelength division multiplex
("DVDM") sector of this product line where it believes there are better profit
margins.
The Company's recently acquired York Sensors unit provides a range of
distributed temperature sensing equipment based on optical time domain reflector
technology. These instruments are used to determine temperature distribution in
optical fibers and are used in electrical power transmission, plant monitoring,
down-hole and other fire detection applications.
In addition to the products described above, IFR sells fiber optics
accessories, such as cable cutters, cleavers, ribbon strippers, and splicers,
and provides custom-designed computer software products to specific customers to
be used in connection with IFR products used by such customers.
OTHER PRODUCTS AND SERVICES. IFR also offers calibration, repair, and
onsite field services for most types and makes of electronic test equipment. IFR
maintains major customer service facilities in the United States and the United
Kingdom which are ISO accredited facilities. Services performed include full
maintenance and calibration contracts, express calibration and facilities
management, including in-house calibration, repair, asset management, and
consultant services.
The Company's line of high-volume automated test equipment ("ATE")
includes products designed for the automotive, consumer electronics, and
communications industries. Such products include manufacturing defect analyzers,
in-circuit analyzers, and functional analyzers, all of which are used to test
printed circuit boards.
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The following table sets forth the total sales of other products and
services of the Company for the last three fiscal years.
<TABLE>
<CAPTION>
(Amounts in thousands of dollars)
1996 1997 1998
---------- ---------- ---------
<S> <C> <C> <C>
Service $ 6,087 $ 7,220 $13,407
Other 2,996 3,114 14,952
ATE -- -- 4,142
</TABLE>
GENERAL DISCUSSION
COMPETITION. IFR competes with numerous companies, foreign and domestic,
many of which have greater financial, marketing, and technical resources than
IFR. The test instrument global market is estimated at approximately $8.7
billion. According to Prime Data, IFR would be considered the eighth largest
supplier of test instruments with an approximately two percent market share.
Over 40% of the test instrument market is controlled by two suppliers.
Competition is based primarily on product quality, technological innovation and
features, and customer service. IFR believes it is an effective competitor in
all these areas.
MARKETING AND DISTRIBUTION. IFR products are marketed and sold
throughout the world by a combination of IFR sales persons and distributors. The
Company employs approximately 150 salespersons located in the United States, the
United Kingdom, Hong Kong, France, Germany, Spain, Netherlands, China, and
Singapore, who call on various major "house" accounts as well as call on and
assist independent distributors in selling IFR products. The Company has been
reducing the number of its nonexclusive independent distributors to eliminate
overlaps created by the Marconi acquisition and to reflect its increasing
emphasis on direct sales.
IFR's sales personnel and distributors are supported by an internal
marketing staff that performs market research and creates brochures and other
marketing materials.
SOURCES AND AVAILABILITY OF RAW MATERIALS. The Company's products
require a wide variety of electronic and mechanical components, most of which
are purchased. The Company has multiple sources for the vast majority of the
components and materials it uses; however, there are some instances where the
components are obtained from a sole-source supplier. If a sole-source supplier
ceased to deliver, the Company could experience a temporary adverse impact on
its operations; however, management believes alternative sources could be
developed quickly. With occasional exceptions, purchased materials and
components have generally been available to the Company as needed with
acceptable lead times.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES, AND CONCESSIONS. The Company
owns a number of patents in the United States and various foreign countries and
is licensed to use patents owned by others. IFR has granted licenses to use
certain of its patents, but does not anticipate revenues from licensing
activities will be material. There can be no assurances that any of the
Company's current patents will provide the Company with adequate protection. IFR
has registered its "IFR" trademark. While the Company considers its patents and
trademark registrations to be valuable in the aggregate, it does not consider
that the loss of any single patent or trademark registration would have a
material effect on the
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Company or its operations. Likewise, while the Company believes its products
do not infringe the patent or other intellectual property rights of third
parties, there can be no assurance that third parties will not assert
infringement claims against the Company or that the Company will prevail on
any such claim or that a license, if needed, would be available on acceptable
terms.
SEASONALITY. The Company's business is not seasonal in nature.
WORKING CAPITAL ITEMS. IFR is typically able to meet its delivery
schedules without maintaining large inventories of completed goods and its
customers generally do not require extended payment terms. Accordingly , the
ability to fund working capital requirements for inventory and receivables
financing is not a material factor and the Company does not consider itself to
have any unusual working capital.
DEPENDENCE ON SINGLE CUSTOMER OR A FEW CUSTOMERS. IFR's products are
marketed to a diverse customer base and no single product line is a predominant
factor in determining revenues or profits. IFR does not have a single customer
or a few customers, the loss of any one or more of which would have a material
adverse effect.
BACKLOG. Backlog is not a material factor in the Company's business
because most orders are in smaller quantities or on terms that allow the
customer to cancel or delay delivery without significant penalty. The Company's
backlog of firm orders was approximately $21,200,000 at June 30, 1997, and
$32,600,000 at June 30, 1998. It is anticipated that all of the backlog orders
will be filled during the current fiscal year unless canceled or deferred by
customers.
GOVERNMENT AND MILITARY CONTRACTS. During the past fiscal year,
approximately 11.2% of the Company's revenues were derived from sales to the
United States and its various agencies including the armed services. All
contracts with the United States Government and its agencies are subject to
termination at the convenience of the government.
IFR has maintained a portion of its business in military contracting.
Over the past five fiscal years, the percentage of total revenues from sales to
the military has ranged from a high of 21.6% in 1995 to a low of 11.2% in fiscal
1998. During fiscal 1997, the Company completed a significant military 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. Total sales under this contract
were approximately $47.6 million and took place over six years. Military
contracts generally provide an opportunity to diversify the customer base, but
typically involve lower margins than commercial sales to private industry. IFR
anticipates continuing to make military sales on a selective basis but has no
present plan to materially increase its military contracting.
RESEARCH AND DEVELOPMENT. The test equipment industry is characterized
by continuous technology changes which require an ongoing effort to enhance
existing products and to develop new products. IFR relies primarily on its
internal research and development programs for the development of new products
and for improvement of existing products. The Company does not perform basic
research
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but uses new component and software technologies in the development of new
products. The Company's research and development expenditures were
approximately $14,062,000 in fiscal 1998, $9,990,000 in fiscal 1997, and
$7,374,000 in fiscal 1996. As of September 1, 1998, the Company had
approximately 180 professional employees engaged in research and development
activities.
GOVERNMENTAL 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
have not had and are not expected to have a material effect upon IFR's
capital expenditures, earnings, or competitive position.
EMPLOYEES. At September 1, 1998, the Company had approximately 1,700
full-time employees. None of the Company's employees is covered by a collective
bargaining agreement or is represented by a labor union. The Company considers
its relationship with its employees to be satisfactory.
The design and manufacture of the Company's products require technical
capabilities in many disciplines. While the Company believes that the capability
and experience of its employees compare favorably with other similar
manufacturers, there can be no assurance that it can retain existing employees
or attract and hire a sufficient number of the highly capable employees it may
need in the future on satisfactory terms.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES. For information concerning the Company's export sales, see Note 7 of the
"Notes to Consolidated Financial Statements" contained on page 30 of the
Company's Annual Report to Shareholders for the year ended June 30, 1998, which
is hereby incorporated by reference. Because more than half of IFR's sales are
to customers located outside the United States, its results are affected by weak
economic conditions in other countries and by changes in various foreign
currency exchange rates.
On January 1, 1999, eleven of the fifteen countries comprising the
European Union are scheduled to establish fixed conversion ratios between their
currencies as a step toward adopting a common Eurodollar currency. IFR has
extensive sales into these countries and, while it is evaluating the potential
effect of the proposed European actions and can give no assurances as to these
matters, it does not believe they will have any material effect on its sales or
earnings. IFR believes that it has taken all necessary action to accommodate its
data processing and accounting software to the introduction of the Eurodollar
currency.
EFFECT OF GLOBAL ECONOMIC CONDITIONS. The impact from the economic
problems and currency disruptions in Asia has now spread to Eastern Europe,
Latin America, and elsewhere and has materially adversely affected the Company's
sales and earnings. The majority of the companies in the test equipment industry
have also announced declining sales and reduced earnings. As a result, the
Company is presently operating at a loss and anticipates that it will continue
to do so until it is able to effect necessary cost reductions or sales volume
increases. The Company also anticipates that it will be required to renegotiate
the leverage ratio financial covenant in the credit agreement. In response to
declining revenues, the
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Company is currently planning to reduce its annual operating expenses by
approximately $6,000,000, primarily through workforce reduction.
YEAR 2000 MATTERS. The Company, like all other companies, is confronted
with so-called "Year 2000" issues that might arise as a result of existing
computer programs and systems not being able to properly recognize a date in a
year that begins with "20" rather than "19". Year 2000 problems can arise (a)
because the operating, manufacturing, and the information technology equipment
operated by the Company fails to operate properly after December 31, 1999 (is
not "Year 2000 compliant"), (b) because the Company's products will not operate
properly after that date, or (c) because material customers and vendors of the
Company, or public utilities, financial systems, or others on whom the Company
is dependent are unable to conduct their business operations normally because of
Year 2000 problems.
Because of the pervasive nature of computers and computer systems in the
Company's products and equipment, as well as throughout the nation and world, it
is impossible for the Company to provide any assurances that its efforts at
identifying and remedying Year 2000 issues will be totally effective or that
Year 2000 problems of others will not have a material adverse effect on the
Company's operations and profits notwithstanding any efforts the Company may
make. Accordingly, the following discussion contains numerous "forward looking"
statements that are subject to the qualifications and cautionary statements
contained in this Report under the heading "Forward-Looking Statements".
Based on the results to date of its assessment of the Year 2000 issues
of which the Company is aware at this time, the Company does not believe Year
2000 problems will have a materially adverse effect on the Company or its
operations. No assurance can be given, however, that the Company has been able
to identify all potential Year 2000 problems or that if Year 2000 problems are
discovered by the Company in the future, it will be able to resolve them
satisfactorily and at an affordable cost.
IFR PRODUCTS. The Company has evaluated all of its existing products and
is currently evaluating those used by customers and has concluded such products
now being manufactured will not require modification in order to be Year 2000
compliant. The Company is still performing an assessment of products in the
field that may require modifications.
IFR'S OPERATING AND MANUFACTURING EQUIPMENT. IFR has conducted an
assessment of the majority of its manufacturing and other operating equipment
and has either upgraded or made arrangements for the upgrading of all material
items of equipment that are found not to be Year 2000 compliant. To date, the
Company has incurred approximately $200,000 in Year 2000 equipment upgrade
expenditures and anticipates spending approximately $100,000 to complete the
upgrade process. IFR does not anticipate any serious difficulty in completing
the upgrade process and testing its equipment prior to December 31, 1999.
INFORMATION TECHNOLOGY AND ACCOUNTING SYSTEMS. IFR is also completing
its assessment of its material information technology and principal accounting
systems and believes it has made a substantial portion of the modifications for
them to be Year 2000 compliant. Total expenditures to date for such
modifications have been approximately $1,300,000 of which approximately
$1,100,000 was spent to acquire new equipment or software prior to the time it
would otherwise have been acquired. It is
13
<PAGE>
anticipated that the Company will incur additional expenditures of
approximately $300,000 to upgrade its information technology and accounting
systems in order to make them Year 2000 compliant.
SUPPLIERS AND CUSTOMERS. The Company has written certain of its
customers and vendors whose failure to be able to conduct business normally
after December 31, 1999, because of Year 2000 problems might materially affect
IFR, requesting written information as to their Year 2000 compliance and
preparation. The Company has received written responses from most of such
customers and vendors that appear to indicate generally they are or expect to be
sufficiently Year 2000 compliant. The Company intends to continue to closely
monitor the Year 2000 compliance and preparation of its material customers and
vendors. This portion of the Company's Year 2000 compliance and assessment
program has not resulted in the incurrence of material expenditures by IFR and
is not anticipated to do so.
POTENTIAL EFFECTS OF YEAR 2000 PROBLEMS. The Company is unable to
predict with any degree of certainty the potential consequences to it of Year
2000 issues. Obviously, any sort of major prolonged inability of public
utilities or financial systems in any portion of the world where the Company
operates manufacturing facilities or has substantial customers or vendors could
materially adversely impact the Company's revenue or delay the receipt of
revenue and could, theoretically, even cause a national or global economic
crisis or downturn. Similarly, the inability of a significant number of the
Company's customers or vendors to operate normally, either because of their own
Year 2000 problems or because of Year 2000 problems of persons on whom they, in
turn, are dependent, could have a material adverse impact on the Company. There
is also some likelihood that an inability of the Company to deliver its products
in the normal manner might cause it to lose customers or incur contractual
liability to customers. While the Company has no reason to believe that any of
such matters will occur in such a manner as to produce severe economic
consequences to the Company, all of these matters are beyond the ability of the
Company to predict or quantify with any assurance.
CONTINGENCY PLANS. The Company has not adopted any Year 2000 contingency
plan. It has not decided whether to do so.
FORWARD-LOOKING STATEMENTS. In addition to historical information, this
report contains forward-looking statements and information that are based on
management's beliefs and assumptions, as well as information currently available
to management. When used in this document, the words "anticipate", "estimate",
"expect", "intend", "believe", and similar expressions are intended to identify
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable and are based on
reasonable assumptions within the bounds of its knowledge of its business and
operations, it can give no assurance that such expectations will prove to be
correct and that actual results will not differ materially from the Company's
expectations. Such forward-looking statements speak only as of the date of this
report, and the Company cautions readers not to place undue reliance on such
statements.
Factors that could cause actual results to differ from expectations
include: (1) the degree and nature of competition, including pricing pressure
and the development of new products or discoveries of new technologies by
competitors, (2) fluctuations in the global economy and various foreign
countries including recent developments adversely affecting the economies of
various Asian, Latin America, and
14
<PAGE>
other countries, (3) demand for the Company's products, (4) loss of
significant customers, (5) the Company experiencing delays in developing new
products and technologies, (6) the ability of the Company to continue the
transition to digital technologies in the communications test equipment
products, (7) the failure of such technologies or products to perform
according to expectations, (8) difficulties in manufacturing new products so
they may be profitably priced on a competitive basis, (9) lack of adequate
market acceptance of new products or technologies, (10) changes in products
or sales mix and the related effects on gross margins, (11) availability of
components, parts, and supplies from third party suppliers on a timely basis
and at reasonable prices, (12) currency fluctuations and devaluations, as
well as the effect of the adoption of the Eurodollar currency by members of
the European Union commencing January 1, 1999, (13) inventory risks due to
changes in market demand or the Company's business strategies, (14)
unanticipated problems arising from the failure of one or more suppliers or
customers of the Company or others to be able to maintain normal business
operations after 1999 because of "Year 2000" computer difficulties, (15)
inability to hire sufficient personnel at reasonable levels of compensation
and other labor problems, (16) inability to realize anticipated efficiencies
and savings from the Company's recent acquisition of Marconi Instruments, Ltd
and (17) other risks, described elsewhere in this Item and in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." incorporated by reference in Item 7 of this Report.
15
<PAGE>
GLOSSARY OF TERMS/ACRONYMS
ATE AUTOMATED TEST EQUIPMENT
Equipment designed to test circuit boards and systems during the
manufacturing process.
CDMA CODE DIVISION MULTIPLE ACCESS
A digital cellular system that separates users by unique codes rather
than by radio frequency channels or time slots.
DVDM DENSE WAVELENGTH DIVISION MULTIPLEX
A type of transmission technology utilized in fiber optics.
EDACS ENHANCED DIGITAL ACCESS COMMUNICATIONS SYSTEM
A digital trunking system developed by Ericsson/GE. The system has been
installed in over 20 different countries.
GSM GLOBAL SYSTEM FOR MOBILE COMMUNICATIONS
A digital cellular system initially designed for the European market.
GSM has become the de facto world standard with the exception of North
America.
GPS GLOBAL POSITIONING SYSTEM
A method of determining location with satellites.
MCVD MODIFIED CHEMICAL VAPOR DISTRIBUTION
A technique for forming glass fiber.
OVD OUTSIDE VAPOR DEPOSITION
A technique for forming glass fiber.
16
<PAGE>
GLOSSARY OF TERMS/ACRONYMS
(CONT'D)
PMR PRIVATE MOBILE RADIO
Mobile radio systems that organizations own, maintain and operate to
meet their internal communications needs.
PCS PERSONAL COMMUNICATIONS SYSTEM
A new generation of communications systems providing a wide range of
applications including cellular, cordless telephones, wireless PABX and
various types of data services.
TDMA TIME DIVISION MULTIPLE ACCESS
A digital cellular system that separates users by time slots or separate
radio frequency channels.
TETRA TERRESTRIAL TRUNKED RADIO (TransEuropean Trunked Radio prior to April
1997.)
A new digital trunked radio system being developed for the European and
Asian markets.
VAD VAPOR AXIAL DEPOSITION
A technique for forming glass fiber.
17
<PAGE>
ITEM 2. PROPERTIES
IFR's principal executive offices and principal manufacturing facilities
are located at 10200 West York Street, Wichita, Kansas, 67215. Its other major
facility in the United States is located in Beaverton, Oregon. IFR also operates
manufacturing facilities and sales offices in the United Kingdom and has sales
offices in seven other countries.
IFR generally considers the productive capacity of its plants adequate
and suitable for the requirements of the company. The extent of utilization of
such manufacturing facilities varies from plant to plant and from time to time
during the year. The following table describes the Company's principal
facilities.
<TABLE>
<CAPTION>
SQUARE TYPE OF LEASE EXPIRATION DESCRIPTION
LOCATION FOOTAGE INTEREST DATE (1) OF USE
- -------- ------- -------- --------------- -------------
<S> <C> <C> <C> <C>
Wichita, Kansas 156,000 Capital Lease (2) 2017 Manufacturing, Engineering,
Administrative, Sales
Beaverton, Oregon 46,000 Operating Lease 1999 Manufacturing, Engineering,
Administrative, Sales
Stevenage, Hertfordshire, England
Longacres House 46,000 Operating Lease 2020 Administrative, Sales
Six Hills Way Bldg 81,000 Owned Manufacturing, Engineering
Gunnelswood Road Bldg 34,000 Owned Manufacturing
Sanders Bldg 27,000 Owned Inventory
Green Road, Luton, England 32,000 Operating Lease 1998 Customer Service
Chandlers Ford, England 24,000 Owned Manufacturing, Engineering,
Administrative, Sales
</TABLE>
- -----------------------------
(1) Includes renewal option periods where appropriate.
(2) Industrial revenue bond financing in which the Company has an option
to purchase for a nominal price.
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, 1998.
18
<PAGE>
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:
<TABLE>
<CAPTION>
Name and Age Position
------------ ---------
<S> <C>
Alfred H. Hunt, III, 62 Vice Chairman, President and
Chief Executive Officer
Jeffrey A. Bloomer, 41 Treasurer and Chief Financial Officer
Iain M. Robertson, 57 Managing Director, IFR Ltd.
Friedel E. Arnold, 61 General Manager, IFR Americas, Inc.
</TABLE>
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 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
officers of 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.
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 the General Manager of the Company's
ETM Division since April 1998 and was President of PK
Technology, Inc., and Managing Director of PK Technology Ltd.
from July 1995 through April 1998. During the period 1992
through 1995 he was a consultant and Chief Executive of York
Ltd. York Ltd. was the parent corporation of PK Technology, Ltd.
(then called York Technology Ltd) prior to its being purchased
by IFR.
Friedel E. Arnold has been the General Manager of IFR Americas,
Inc., and its predecessors, since January 1995 and was the Vice
President from January 1996 to November 1997. During the period
1987 through 1994 he was the President of Dorne and Margolin, an
aerospace manufacturing company.
19
<PAGE>
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 18 of IFR's Annual Report to
Shareholders for the Year Ended June 30, 1998 (the "1998 Annual Shareholders
Report").
No cash dividends were paid during the fiscal year ended June 30,
1997. The Company paid cash dividends of $0.033 per share on September 12 and
December 5, 1997. The Company has paid no cash dividends in 1998.
For information on the dividend restrictions contained in the
Company's credit agreement with First National Bank of Chicago and other
lenders, which currently precludes the payment of cash dividends by the
Company, see Note 3 to the Company's financial statements included in 1998
Annual Shareholders Report.
ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 6 is incorporated herein by reference
from the "Performance Highlights" contained on page 1 of the 1998 Annual
Shareholders Report.
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 16 through 18 of the 1998 Annual Shareholders
Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No information is required in response to this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of IFR, included at
pages 19 through 32 in the 1998 Annual Shareholders Report, are incorporated
herein by reference:
Consolidated Balance Sheets as of June 30, 1997 and 1998
20
<PAGE>
Consolidated Statements of Operations for the years ended June 30,
1996, 1997, and 1998
Consolidated Statements of Shareholders' Equity for the years ended June
30, 1996, 1997, and 1998
Consolidated Statements of Cash Flows for the years ended June 30, 1996,
1997, and 1998
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 16 of the 1998 Annual Shareholders Report.
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 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 its November 5, 1998 annual meeting of shareholders (the
"1998 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
from "Election of Directors" and "Compensation of Directors", "Executive
Compensation", and "Compensation Committee Report on Executive Compensation"
contained in the 1998 Proxy Statement.
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 the 1998
Proxy Statement.
21
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by
reference from "Certain Relationships" contained in the 1998 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a)(1) The following financial statements of IFR, included in the 1998
Annual Shareholders Report, are incorporated by reference in Item 8 of this
report:
Consolidated Balance Sheets as of June 30, 1997 and 1998
Consolidated Statements of Operations for the years ended June 30,
1996, 1997, and 1998
Consolidated Statements of Shareholders' Equity for the years ended
June 30, 1996, 1997, and 1998
Consolidated Statements of Cash Flows for the years ended June 30,
1996, 1997, and 1998
Notes to Consolidated Financial Statements
Report of Independent Auditors
(a)(2) The supplementary financial information included in the 1998
Annual Shareholders Report under the caption "Quarterly Financial Data" is
incorporated by reference in Item 8 of this report. The following financial
statement schedule of IFR is 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 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, 1998.
22
<PAGE>
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 21, 1998 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 21, 1998 By /s/ Alfred H. Hunt, III
--------------------------
Alfred H. Hunt, III
Director, President and Chief
Executive Officer
(Principal Executive Officer)
Date: September 21, 1998 By /s/ Ralph R. Whitney, Jr.
----------------------------
Ralph R. Whitney, Jr.,
Chairman of the Board of Directors
Date: September 21, 1998 By /s/ Wilton W. Cogswell, III
------------------------------
Wilton W. Cogswell, III,
Director
Date: September 21, 1998 By /s/ Donald L. Graf
---------------------
Donald L. Graf,
Director
Date: September 21, 1998 By /s/ John V. Grose
--------------------
John V. Grose,
Director
23
<PAGE>
Date: September 21, 1998 By /s/ Oscar L. Tang
--------------------
Oscar L. Tang,
Director
Date: September 21, 1998 By /s/ Jeffrey A. Bloomer
-------------------------
Jeffrey A. Bloomer,
Treasurer and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
24
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
2.1 Share Sale and Purchase Agreement, dated February 6, 1998, among
IFR Systems, Inc., IFR Systems Limited, and The General Electric
Company p.l.c. (Exhibit 2.01 to Form 8-K, dated February 6,
1998, previously filed by Registrant).*
2.2 Deed of Tax Covenant, dated February 6, 1998, between The
General Electric Company p.l.c., as Covenantor, and IFR Systems
Limited, as Purchaser (Exhibit 2.02 to Form 8-K, dated February
6, 1998, previously filed by Registrant).*
2.3 Agreement and Plan of Merger of IFR Systems, Inc., with IFR
Merger Corporation, dated as of January 20, 1998 (Exhibit 2 to
Form 8-K, dated January 30, 1998, previously filed by
Registrant).*
3.1 Amended and Restated Certificate of Incorporation of IFR
Systems, Inc. (the "Company"), dated January 30, 1998 (Exhibit
3.01 to Form 8-K, dated January 30, 1998, previously filed by
Registrant).*
3.2 Bylaws of the Company.
4.1 Specimen certificate representing common stock of the Company
(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,
as previously filed by Registrant).*
4.2 Article II of the Amended and Restated Certificate of
Incorporation of the Company, (Included in Exhibit 3.1).*
4.3 Articles I, III, and VII of the Amended and Restated Certificate
of Incorporation of the Company, (Included in Exhibit 3.1).*
4.4 Articles 2, 3, and 5 of the By-laws of the Company. (Included in
Exhibit 3.2).*
4.5 Rights Agreement between the Company and Harris Trust & Savings
Bank dated as of February 28, 1989 (Exhibit 4.5 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1989,
File No. 0-14224, previously filed by Registrant).*
4.6 Form of Rights Certificate of the Company. (Included in Exhibit
4.5).*
4.7 IFR Systems, Inc., 1992 Nonqualified Stock Option Plan (Exhibit
4(a) to the Company's Registration Statement on Form S-8 filed
January 8, 1993, Reg. No. 33-56862, previously filed by
Registrant).*
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ---------- ----------------------
<S> <C>
4.8 Form of Option Agreement for IFR Systems, Inc., 1992
Nonqualified Stock Option Plan (Exhibit 4(b) to the Company's
Registration Statement on Form S-8 filed January 8, 1993, Reg.
No. 33-56862, previously filed by Registrant).*
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 Termination Agreement between the Company and Alfred H. Hunt,
III (Exhibit 10.2 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1997, previously filed by
Registrant).*
10.3 Termination Agreement between the Company and Friedel E. Arnold
(Exhibit 10.3 to the Company's Annual Report on Form 10-K for
the year ended June 30, 1997, previously filed by Registrant).*
10.4 Termination Agreement between the Company and Jeffrey A. Bloomer
(Exhibit 10.0 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998, previously filed by
Registrant).*
10.5 Termination Agreement between the Company and Iain M. Robertson
(Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998, previously filed by
Registrant).*
10.6 IFR Systems, Inc. Employees' Profit Sharing Plan ( Exhibit 10.4
to the Company's Annual Report on Form 10-K for the year ended
June 30, 1990, File No. 0-14224, previously filed by
Registrant).*
10.7 Restricted Stock Grant Plan of the Company (Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the year ended June 30,
1989, File No. 0-14224, previously filed by Registrant).*
10.8 1988 Incentive Stock Option Plan of the Company (Exhibit 10.7 to
the Company's Annual Report on Form 10-K for the year ended June
30, 1989, File No. 0-14224, previously filed by Registrant).*
10.9 1996 Incentive Stock Option Plan of the Company (Exhibit A of
the 1996 Proxy Statement as filed on September 23, 1996, File
No. 0-14224, previously filed by Registrant).*
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ---------- ----------------------
<S> <C>
10.10 Form of Indemnity Agreement entered into between the Company and
its directors and certain of its officers as of February 27,
1989 (Exhibit 10.8 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1989, File No. 0-14224, previously
filed by Registrant).*
10.11 IFR Systems, Inc., Outside Director Compensation, Stock Option,
and Retirement Plan (Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1990, File No.
0-14224, previously filed by Registrant).*
10.12 Lease between the Company and the City of Goddard, Kansas, dated
as of March 15, 1997 (Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997,
previously filed by Registrant)*
10.13 Credit Agreement, dated as of February 5, 1998, among IFR
Systems, Inc., The First National Bank of Chicago, and various
lenders (Exhibit 10.01 to the Form 8-K, dated February 6, 1998,
previously filed by Registrant).*
10.14 Form of Security Agreement executed by Registrants and its
United States subsidiaries (Exhibit 10.02 to Form 8-K, dated
February 6, 1998, previously filed by Registrant).*
10.15 Form of Guaranty executed by each of Registrants United States
subsidiaries (Exhibit 10.03 to Form 8-K, dated February 6, 1998,
previously filed by Registrant).*
10.16 Pledge Agreement between Registrant and First National Bank of
Chicago (Exhibit 10.04 to Form 8-K, dated February 6, 1998,
previously filed by Registrant).*
10.17 Equitable Share Change by Registrant to First National Bank of
Chicago (Exhibit 10.05 to Form 8-K, dated February 6, 1998,
previously filed by Registrant).*
10.18 Form of Copyright Security Agreement executed by Registrant and
each of its United States subsidiaries (Exhibit 10.06 to Form
8-K, dated February 6, 1998, previously filed by Registrant).*
10.19 Form of Patent Security Agreement executed by Registrant and
each of its United States subsidiaries (Exhibit 10.07 to Form
8-K, dated February 6, 1998, previously filed by Registrant).*
10.20 Form of Trademark Security Agreement Security Agreement executed
by Registrant and each of its United States subsidiaries
(Exhibit 10.08 to Form 8-K, dated February 6, 1998, previously
filed by Registrant).*
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ---------- ----------------------
<S> <C>
11.0 Statement regarding computation of per share earnings
13.0 The portions of the Company's 1998 Annual Report to Shareholders
that are expressly incorporated herein by reference.
21.0 Subsidiaries of the Registrant
23.0 Consent of Ernst & Young LLP
27.0 Financial Data Schedule
- ------------------------
</TABLE>
*Document has been previously filed with the Securities and Exchange
Commission and is incorporated by reference and made a part hereof.
28
<PAGE>
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 Deductions-- Balance at End
DESCRIPTION of Period and Expenses Accounts-- Describe (1) of Year
Describe (2)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended June 30,1998:
Allowance for doubtful accounts
(deducted in balance sheet
from accounts receivable) $499,996 $223,314 $303,000 $ 98,699 $927,611
Year ended June 30,1997:
Allowance for doubtful accounts
(deducted in balance sheet
from accounts receivable) $430,924 $ 87,293 -- $ 18,221 $499,996
Year ended June 30,1996:
Allowance for doubtful accounts
(deducted in balance sheet
from accounts receivable) $472,381 $106,547 -- $148,004 $430,924
</TABLE>
Note 1: Uncollectible accounts receivable charged off, less recoveries.
Note 2: Beginning balance at February 6,1998 upon purchase of Marconi
Instruments Ltd.
<PAGE>
BYLAWS
OF
IFR SYSTEMS, INC.
----------------------------------
ARTICLE I - IDENTIFICATION
Section 1.1. Name. The name of the corporation is IFR Systems, Inc.
(hereinafter referred to as the "Corporation").
Section 1.2. Registered Office. The registered office of the
Corporation in the State of Delaware shall be located at 1209 Orange Street,
Wilmington, Delaware 19899, and the name of the Corporation's registered
agent is The Corporation Trust Company.
Section 1.3. Other Offices. The Corporation may have offices at such
other places both within or without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation
may require.
Section 1.4. Fiscal Year. The fiscal year of the Corporation shall
commence on July 1 of each year and end on June 30 of the next succeeding
year.
Section 1.5. Use of Facsimile Signatures. In addition to the
provisions for the use of facsimile signatures elsewhere specifically
authorized in these Bylaws, facsimile signatures of any officer or officers
of the Corporation may be used whenever and as authorized by the Board of
Directors or a committee thereof.
ARTICLE 2 - CAPITAL STOCK
Section 2.1. Certificates of Stock. Each Shareholder shall be entitled
to a certificate signed by, or in the name of the Corporation by, the
President and the Secretary, certifying the number of shares owned by him.
Any or all the signatures on the certificate may be facsimile.
Section 2.2. Transfer of Stock. The capital stock of the Corporation
shall be transferable on the books of the Corporation upon surrender of the
certificate or certificates representing the same, properly endorsed by the
registered holder or by his duly authorized attorney, such
1
<PAGE>
endorsement or endorsements to be witnessed by one witness. The requirement
for such witnessing may be waived in writing upon the form of endorsement by
the President of the Corporation.
Section 2.3. Equitable Interests in Stock Need Not Be Recognized. The
Corporation and its officers shall be entitled to treat the holder of record
of any share or shares of stock of the Corporation as the holder in fact
thereof, and accordingly shall not be required to recognize any equitable or
other claim to or interest in such share or shares on the part of any other
person or persons, whether or not it shall have express or other notice
thereof, except as otherwise required by the laws of Delaware.
Section 2.4. Record Date. The Board of Directors may fix a record
date, which shall not be more than sixty (60) nor less than ten (10) days
before the date of any meeting of Shareholders, nor more than sixty (60) days
prior to the time for the other action hereinafter described, as of which
there shall be determined the Shareholders who are entitled: to notice of or
to vote at any meeting of Shareholders or any adjournment thereof; to receive
payment of any dividend or other distribution or allotment of any rights; or
to exercise any rights with respect to any change, conversion or exchange of
stock or with respect to any other lawful action.
Section 2.5. Lost, Stolen or Destroyed Certificate. In the event of
the loss, theft or destruction of any certificate of stock, another may be
issued in its place pursuant to such regulations as the Board of Directors
may establish concerning proof of such loss, theft or destruction and
concerning the giving of a satisfactory bond or bonds of indemnity.
Section 2.6. Regulations. The issue, transfer, conversion and
registration of certificates of stock shall be governed by such other
regulations as the Board of Directors may establish.
ARTICLE 3 - MEETINGS OF SHAREHOLDERS
Section 3.1. Place of Meetings. All meetings of Shareholders of the
Corporation shall be held at such place, within or without the State of
Delaware, as may be determined by the Board of Directors and specified in the
respective notices or waivers of notice thereof, or proxies to represent
shareholders thereat.
Section 3.2. Annual Meeting. The annual meeting of the shareholders
for the election of Directors, and for the transaction of such other business
as may properly come before the meeting, shall be held at such time and such
date as shall be determined by the Board of Directors.
2
<PAGE>
Section 3.3. Notice of Meetings. A written or printed notice, stating
the place, day and hour of the meeting, and in case of a special meeting the
purpose or purposes for which the meeting is called, shall be delivered or
mailed by the Secretary and by the Board of Directors after calling the
meeting, to each holder of the capital stock of the Corporation at the time
entitled to vote, at such address as appears upon the records of the
Corporation, at least ten (10) days but not more than sixty (60) days before
the date of the meeting. Notice of any such meeting may be waived in writing
by any Shareholder. Attendance at any meeting, in person or by proxy, shall
constitute a waiver or notice of such meeting.
Section 3.4. Voting at Meetings.
Clause 3.41. Voting Rights. Except as otherwise provided by law or
by the provisions of the Certificates of Incorporation including, without
limitation, the provisions which grant to the Board of Directors of the
Corporation the authority to provide as to any series of Preferred Stock,
such voting powers, full or limited, or no voting powers, as are from time
to time permitted under the General Corporation Law of the State of
Delaware, every holder of the capital stock of the Corporation shall have
the right at all meetings of the Shareholders of the Corporation to one
vote for each share of stock standing in his name on the books of the
Corporation. Voting may be by voice vote.
Clause 3.42. Proxies. A Shareholder may vote, either in person or by
proxy executed in writing by the Shareholder or a only authorized
attorney-in-fact. No proxy shall be valid after three (3) years from the
date of its execution, unless a longer time is expressly provided therein.
Clause 3.43. Quorum. Unless otherwise provided by the Certificate of
Incorporation, at any meeting of Shareholders, a majority of the Shares of
the capital stock outstanding and entitled to a vote, represented in person
or by proxy, shall constitute a quorum.
Section 3.5. Notice of Stockholder Business.
Clause 3.51. Annual Meetings of Shareholders.
A. The proposal of business to be considered by the Shareholders may
be made at an annual meeting of Shareholders only (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the
Board of Directors or (iii) by any Shareholder of the Corporation who
was a Shareholder or record at the time
3
<PAGE>
of giving of notice provided for in this Bylaw, who is entitled to
vote at the meeting and who complies with the notice procedures set
forth in this Bylaw.
B. For business to be properly brought before an annual meeting by a
Shareholder pursuant to clause (iii) of paragraph 3.51(A) of this
Bylaw, the Shareholder must have given timely notice thereof in
writing to the Secretary of the Corporation and such other business
must otherwise be a proper matter for Shareholder action. To be
timely, a Shareholder's notice shall be delivered to the Secretary at
the principal executive offices of the Corporation not later than the
close of business on the 60th day nor earlier than the close of
business on the 90th day prior to the first anniversary of the
preceding year's annual meeting; PROVIDED, HOWEVER, that in the event
that the date of the annual meeting is more than 30 days before or
more than 60 days after such anniversary date, notice by the
Shareholder to be timely must be so delivered not earlier than the
close of business on the 90th day prior to such annual meeting or the
10th day following the day on which public announcement of the date of
such meeting is first made by the Corporation. In no event shall the
public announcement of an adjournment of an annual meeting commence a
new time period for the giving of a Shareholder's notice as described
above. Such Shareholder's notice shall set forth (i) a brief
description of the business desired to be brought before the meeting,
the reasons for conducting such business at the meeting and any
material interest in such business of such Shareholder and the
beneficial owner, if any, on whose behalf the proposal is made; and
(ii) as to the Shareholder giving the notice and the beneficial owner,
if any, on whose behalf the proposal is made (a) the name and address
of such stockholder, as they appear on the Corporation's books, and of
such beneficial owner and (b) the class and number of shares of the
Corporation which are owned beneficially and of record by such
Shareholder and such beneficial owner.
Clause 3.52. Special Meetings of Shareholders. Only such business
shall be conducted at a special meeting of Shareholders as shall have been
brought before the meeting pursuant to the Corporation's notice of meeting.
Clause 3.53. General.
A. Only such business shall be conducted at a meeting of
Shareholders as shall have been brought before the meeting in
accordance with the procedures set forth in this Bylaw. Except as
otherwise provided by law, the Certificate of Incorporation, or these
Bylaws, the Chairman of the meeting shall have the power and duty to
determine whether any business proposed to be brought before the
meeting was proposed in accordance with the procedures set forth in
this Bylaw
4
<PAGE>
and, if any proposed business is not in compliance with
this Bylaw, to declare that such defective proposal shall be
disregarded.
B. For purposes of this Bylaw, 'public announcement' shall mean
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document
publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14, or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") or any successor
thereto.
C. Notwithstanding the foregoing provisions of this Bylaw, a
Shareholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to
the matters set forth in this Bylaw. Nothing in this Bylaw shall be
deemed to affect any rights of Shareholders to request inclusion of
proposals in the Corporation's proxy statement pursuant to Rule 14a-8
under the Exchange Act.
ARTICLE 4 - NEGOTIABLE INSTRUMENTS,
DEEDS, CONTRACTS AND STOCK
Section 4.1. Execution of Negotiable Instruments. All checks, drafts,
notes, bonds, bills of exchange and order for the payment of money of the
Corporation shall, unless otherwise directed by the Board of Directors, or
unless otherwise required by law, be signed by the Chief Executive Officer or
the President. The Board of Directors may, however, authorize any Officer to
sign checks, drafts and orders for the payment of money and without necessity of
countersignature.
Section 4.2. Execution of Deeds, Contracts, etc. All deeds and mortgages
by the Corporation and all other written contracts and agreements to which the
Corporation shall be a party shall be executed in its name by the Chief
Executive Officer or the President and attested by the Secretary.
Section 4.3. Endorsements of Stock Certificates. Subject always to the
further orders and directions of the Board of Directors, any share or shares of
stock issued by any other corporation and owed by the Corporation (including
required shares of stock of the Corporation) may, for sale or transfer, be
endorsed in the name of the Corporation by the Chief Executive Officer or the
President and such endorsement shall be duly attested by the Secretary either
with or without affixing thereto the corporate seal.
5
<PAGE>
Section 4.4. Voting of Stock Owned by Corporation. Subject always to
the further orders and directions of the Board of Directors, any share or
shares of stock issued by any other corporation and owned or controlled by
the Corporation may be voted at any Shareholder's meeting of such other
corporation by the Chief Executive Officer or the President of the
Corporation. Whenever, in the judgment of the Chief Executive Officer or the
President, it is desirable for the Corporation to execute a proxy or give a
Shareholder's consent in respect to any share or shares of stock issued by
any other corporation and owned by the Corporation, such proxy or consent
shall be executed in the name of the Corporation and shall be attested by the
Secretary of the Corporation under the corporate seal. Any person or persons
designated in the manner above stated as the proxy or proxies of the
Corporation shall have the full right, power, and authority to vote the share
or shares of stock issued by such other corporation and owned by the
Corporation the same as such share or shares might be voted by the
Corporation.
ARTICLE 5 - AMENDMENTS
Section 5.1. In General. Subject to the provisions of the Certificate
of Incorporation, these Bylaws may be altered, amended or repealed at any
annual meeting of the Shareholders (or at any special meeting thereof duly
called for that purpose) by the affirmative vote of the holders of 85% or
more of the shares represented and entitled to vote at such meeting
(considered for this purpose as one class); provided that in the notice of
such special meeting notice of such purpose shall be given. Subject to the
laws of the State of Delaware, the Certificate of Incorporation and these
Bylaws, the Board of Directors may by majority vote of those present at any
meeting at which a quorum is present amend these Bylaws, or enact such other
Bylaws as in their judgment may be advisable for the regulation of the
conduct of the affairs of the Corporation.
ADOPTED by the Board of Directors on this 28th day of January, 1998.
/s/ Alfred H. Hunt, III
------------------------------------
Alfred H. Hunt, III, President
ATTEST:
/s/ Charles J. Woodin
- -------------------------------
Charles J. Woodin, Secretary
6
<PAGE>
IFR SYSTEMS, INC.
EXHIBIT (11.0) - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -----
(000'S OMITTED, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
BASIC:
Average shares outstanding 8,191 8,130 8,244
----- ----- -----
----- ----- -----
Net Income $(15,937) $6,646 $4,761
----- ----- -----
----- ----- -----
Per Share Amount $ (1.95) $ 0.82 $ 0.58
----- ----- -----
----- ----- -----
DILUTED:
Average shares outstanding 8,191 8,130 8,244
Net effect of dilutive stock
options-based on the treasury
stock method using the average
market price 570 292 233
----- ----- -----
Totals 8,761 8,422 8,477
----- ----- -----
----- ----- -----
Net Income $(15,937) $6,646 $4,761
----- ----- -----
----- ----- -----
Per Share Amount $ (1.82) $ 0.79 $ 0.56
----- ----- -----
----- ----- -----
</TABLE>
<PAGE>
PERFORMANCE HIGHLIGHTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data
Sales $148,069 $103,517 $89,997 $75,994 $65,073
Operating Income (Loss) (11,905) 10,907 8,316 3,683 2,002
R & D Expense 14,062 9,990 7,374 7,892 7,505
Net Income (Loss) (15,937) 6,646 4,761 2,251 987
- --------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Total Assets $190,757 $ 65,830 $60,713 $58,402 $51,232
Working Capital 49,692 33,515 27,273 22,948 21,498
Shareholders' Equity 32,081 48,154 43,368 38,636 34,802
Long-term Debt and
Capital Lease Obligations 100,080 3,765 2,755 4,981 3,419
- --------------------------------------------------------------------------------------------------------------------
Profitability Ratios
Gross Margin 36.5% 40.8% 37.7% 37.5% 36.3%
Net Income (Loss) (10.8) 6.4 5.3 3.0 1.5
Effective Income Tax Rate 2.9 39.6 39.5 35.6 41.6
Return on Assets (12.4) 10.5 8.0 4.1 2.0
Return on Equity (39.7) 14.5 11.6 6.1 2.9
- --------------------------------------------------------------------------------------------------------------------
Per Share
Diluted Net Income (Loss) $(1.95) $0.79 $0.56 $0.27 $0.13
Book Value 4.90 5.43 4.84 4.49 4.35
Dividends 0.07 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
1998 SALES - PRINCIPAL MARKETS
(IN THOUSANDS)
U.S. PARTS
U.S. DOMESTIC INTERNATIONAL U.S. GOVERNMENT & SERVICE
$45,493 $76,940 $16,534 $9,102
--- --- --- ---
- -------------31%-------------------52%------------------11%---------------6%
[ARTWORK]
<PAGE>
FINANCIAL REVIEW
QUARTERLY FINANCIAL DATA
The following quarterly financial data summarizes the unaudited quarterly
results for the years ended June 30, 1998 and 1997.
(Dollars in thousands except net income per share.)
QUARTERS ENDED
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
FISCAL 1998 SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1997 1997 1998 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $25,521 $27,539 $ 45,778 $49,231
Gross Profit 10,937 12,223 14,526 16,430
Net Income (Loss) 1,875 2,291 (16,984) (3,119)
Diluted Net Income (Loss) Per Share $ 0.22 $ 0.26 $ (2.08) $ (0.38)
<CAPTION>
- --------------------------------------------------------------------------------------------------
FISCAL 1997 SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1997 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $23,258 $26,987 $26,238 $27,034
Gross Profit 8,864 10,702 10,933 11,722
Net Income 1,210 1,616 1,726 2,094
Diluted Net Income Per Share $ 0.14 $ 0.19 $ 0.20 $ 0.25
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD LOOKING STATEMENTS
In addition to historical information, this report contains
forward-looking statements and information that is based on management's
beliefs and assumptions, as well as information currently available to
management. When used in this document, the words "anticipate", "estimate",
"expect", "intend", "believe", and similar expressions are intended to
identify forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable and
are based on reasonable assumptions within the bounds of its knowledge of its
business and operations, it can give no assurance that such expectations will
prove to be correct and that actual results will not differ materially from
the Company's expectations. Such forward-looking statements speak only as of
the date of this report, and the Company cautions readers not to place undue
reliance on such statements.
Factors that could cause actual results to differ from expectations
include: (1) the degree and nature of competition, including pricing pressure
and the development of new products or discoveries of new technologies by
competitors, (2) fluctuations in the global economy and various foreign
countries including recent developments adversely affecting the economies of
various Asian countries, (3) demand for the Company's products, (4) loss of
significant customers, (5) the Company experiencing delays in developing new
products and technologies, (6) the ability of the Company to continue the
transition to digital technologies in the communications test equipment
products, (7) the failure of such technologies or products to perform
according to expectations, (8) difficulties in manufacturing new products so
they may be profitably priced on a competitive basis, (9) lack of adequate
market acceptance of new products or technologies, (10) changes in products
or sales mix and the related effects on gross margins, (11) availability of
components, parts, and supplies from third party suppliers on a timely basis
and at reasonable prices, (12) currency fluctuations, (13) inventory risks
due to changes in market demand or the Company's business strategies, (14)
unanticipated problems arising from the failure of one or more suppliers or
customers of the Company or others to be able to maintain normal business
operations after 1999 because of "Year 2000" computer difficulties, (15)
inability to hire sufficient personnel at reasonable levels of compensation
and other labor problems, (16) inability to realize anticipated efficiencies
and savings from the Company's recent acquisition of Marconi Instruments
Limited, and (17) other risks described herein.
FISCAL 1998 VS. 1997
The Company completed the purchase of Marconi Instruments Limited on
February 6, 1998, resulting in fiscal 1998 purchase accounting related
adjustments, specifically the $15,700,000 write off of in-process research
and development and $11,844,000 of inventory valuations increasing cost of
products sold which are recorded in the third and fourth quarter of fiscal
1998.
Sales for fiscal year 1998 were $148,069,000 compared to $103,517,000 in
fiscal year 1997, which represents an increase of 43 percent. The current
year includes approximately five months sales valued at $47,052,000 from the
Marconi acquisition. Excluding the acquisition, sales declined by $2,270,000
or two percent due to lower sales of communications test instruments to
government and commercial customers. International sales increased from
$39,091,000 (38 percent of sales) in fiscal year 1997 to $76,940,000 (52
percent of sales) in fiscal year 1998. The increase in international sales is
due to the purchase of Marconi and their presence in the foreign markets. The
majority of the increase in international sales took place in Europe and the
Pacific Rim.
Gross profit decreased from 41 percent in fiscal year 1997 to 37 percent
in fiscal year 1998. The current year includes $11,844,000 (eight percent of
sales) of non-recurring charges due to the recording of inventory valuations
related to the Marconi acquisition. Excluding the acquisition related
charges, the normalized gross profit increased to 45 percent. This increase
is due to a higher mix of fiber optic test equipment, completion of the Army
SINCGARS contract in March 1997 and introduction of higher margin commercial
communication test equipment.
Operating expenses increased 15 percent to 45 percent of sales due to a
non-recurring write-off ($15,700,000) of in-process research and development
technology related to the Marconi acquisition. Excluding the effect of the
16
<PAGE>
acquisition adjustment, operating expenses were 34 percent compared to 30
percent in fiscal year 1997. Engineering expenses increased slightly as a
percentage of sales from 10.8 percent in fiscal year 1997 to 11.6 percent for
fiscal year 1998. This is due to the increased focus on the development of
new test instruments for the fiber optics and emerging wireless digital
telecommunications markets. Selling expenses increased as a percentage of
sales from 11 percent in fiscal year 1997 to 14.1 percent for fiscal year
1998. The three percent increase is due to the utilization of a direct sales
force after the purchase of Marconi and the increased cost of marketing
communications due to the purchase. Administrative expenses decreased
slightly as a percentage of sales from 8.5 percent in fiscal year 1997 to 8.3
percent for fiscal year 1998. The amount expensed to purchased in-process
research and development in fiscal 1998 ($15,700,000) arose from the
acquisition of Marconi Instruments Limited.
Operating income as a percent of sales decreased from 11 percent for
fiscal year 1997 to a negative eight percent for fiscal year 1998. Excluding
the non-recurring acquisition adjustments noted above, normalized operating
income is $15,639,000 or 11 percent of sales and remained unchanged as a
percent of sales from last year.
Interest expense increased by $3,311,000 compared to the prior year.
Short-term bank borrowings increased $10,670,000 and long-term debt increased
$100,000,000 related to the acquisition (see Note 3). Interest income
increased $202,000 over the prior year. Other expense was $23,000 compared to
other income of $554,000 in the prior year. The other income in fiscal year
1997 was primarily due to the foreign exchange rate translation gains.
Excluding the effect of the acquisition adjustments, the effective
income tax rate was 37.1 percent for fiscal year 1998 compared to 39.6
percent for fiscal year 1997.
Net income (loss) as a percentage of sales declined to a negative 10.7
percent from a prior year net income of 6.4 percent. The change of 17.1
percent is due to the purchase of Marconi. The components include the
$15,700,000 in-process research and development (negative 10.6 percent) and
the $11,844,000 inventory valuation (negative 5.5 percent) and the increased
interest expense incurred in the purchase of Marconi (negative 1.5 percent).
Fiscal 1998 net income is 6.8 percent of sales after normalization of these
components. In future years, only the interest component will be retained.
FISCAL 1997 VS. 1996
Sales for fiscal year 1997 were $103,517,000 compared to $89,997,000 in
fiscal year 1996, an increase of 15 percent. International sales increased
from $33,192,000, or 37 percent of sales in fiscal year 1996 to $39,091,000,
or 38 percent of sales in fiscal year 1997. The majority of the increase in
international sales took place in Europe. Sales of avionics test equipment
were up seven percent over fiscal year 1996. Test and measurement equipment
sales decreased 17 percent compared to fiscal year 1996. This decrease is
related to product line changes during the year, resulting in the
distribution base depleting their stock on hand before ordering new
inventory. Sales of communication test equipment were up 21 percent. This
increase was primarily driven by sales of SINCGARS equivalent test equipment
to the military. Sales of fiber optics test equipment increased 15 percent
over fiscal year 1996. The majority of this increase was in sales of
production and lab test equipment to fiber optic manufacturers.
Gross margin increased from 38 percent for fiscal year 1996 to 41
percent for fiscal year 1997. This is primarily due to the increase in fiber
optics test equipment and communications test equipment sales. With the
increase in sales, the fixed portion of the cost of sales has decreased as a
percent of sales resulting in additional improvements in the gross margin.
Operating expenses increased as a percent of sales from 28 percent for
fiscal year 1996 to 30 percent for fiscal year 1997. Selling expenses
remained unchanged as a percent of sales. Engineering expenses increased one
percent as a percent of sales over fiscal year 1996. This increase was
planned and is intended to support the Company's long term growth plans.
Administrative expenses increased one percent as a percent of sales for
fiscal year 1997. This increase is related to recruiting costs associated
with hiring additional engineering professionals. Operating income as a
percent of sales increased from nine percent for fiscal year 1996 to 11
percent for fiscal year 1997.
Interest expense decreased $184,000 or 24 percent compared to fiscal
year 1996. Short-term bank borrowings decreased $2.7 million for the year.
Other income increased $303,000 over fiscal year 1996. This was primarily due
to the foreign exchange rate translation gains recorded in the books of PK
Technology Ltd. (formerly York Technology Ltd.) for normal trading activity
in the intercompany loan account.
The Company has recorded, for financial reporting purposes, a valuation
allowance for deferred tax assets aggregating $620,000, for capital loss
carryforwards and tax credit carryforwards related to the acquisition of PK
Technology, Inc. (formerly Photon Kinetics, Inc.). When realized through a
reduction in the valuation allowance, the tax benefit from the tax credit
carryforwards will be applied to reduce goodwill. 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 39.5 percent for fiscal 1996 as
compared to 39.6 percent for fiscal year 1997.
YEAR 2000 MATTERS
The Company, like all other companies, is confronted with so-called
"Year 2000" issues that might arise as a result of existing computer programs
and systems not being able to properly recognize a date in a year that begins
with "20" rather than "19". Year 2000 problems can arise (a) because the
operating, manufacturing, and the information technology equipment operated
by the Company fails to operate properly after December 31, 1999 (is not
"Year 2000 compliant"), (b) because the Company's products will not operate
properly after that date, or (c) because material customers and vendors of
the Company, or public utilities, financial systems, or others on whom the
Company is dependent are unable to conduct their business operations normally
because of Year 2000 problems.
Because of the pervasive nature of computers and computer systems in the
Company's products and equipment, as well as throughout the nation and world,
it is impossible for the Company to provide any assurance that its efforts at
identifying and remedying Year 2000 issues will be totally effective or that
Year 2000 problems of others will not have a material adverse effect on the
Company's operations and profits notwithstanding any efforts the Company may
make. Accordingly, the following discussion contains numerous "forward
looking" statements that are subject to the qualifications and cautionary
statements contained in this report under the heading "Forward-Looking
Statements".
Based on the results to date of its assessment of the Year 2000 issues
of which the Company is aware at this time, the Company does not believe Year
2000 problems will have a materially adverse effect on the Company or its
operations. No assurance can be given, however, that the Company has been
able to identify all potential Year 2000 problems or that if Year 2000
problems are discovered by the Company in the future, it will be able to
resolve them satisfactorily and at an affordable cost.
17
<PAGE>
IFR Products. The Company has evaluated all of its existing products and
is currently evaluating those used by customers and has concluded such
products now being manufactured will not require modification in order to be
Year 2000 compliant. The Company is still performing an assessment of
products in the field that may require modifications.
IFR's Operating and Manufacturing Equipment. IFR has conducted an
assessment of the majority of its manufacturing and other operating equipment
and has either upgraded or made arrangements for the upgrading of all
material items of equipment that are found not to be Year 2000 compliant. To
date, the Company has incurred approximately $200,000 in Year 2000 equipment
upgrade expenditures and anticipates spending approximately $100,000 to
complete the upgrade process. IFR does not anticipate any serious difficulty
in completing the upgrade process and testing its equipment prior to December
31, 1999.
Information Technology and Accounting Systems. IFR is also completing
its assessment of its material information technology and principal
accounting systems and believes it has made a substantial portion of the
modifications for them to be Year 2000 compliant. Total expenditures to date
for such modifications have been approximately $1,300,000 of which
approximately $1,100,000 was spent to acquire new equipment or software prior
to the time it would otherwise have been acquired. It is anticipated that the
Company will incur additional expenditures of approximately $300,000 to
upgrade its information technology and accounting systems in order to make
them Year 2000 compliant.
Suppliers and Customers. The Company has written certain of its
customers and vendors whose failure to be able to conduct business normally
after December 31, 1999, because of Year 2000 problems might materially
affect IFR, requesting written information as to their Year 2000 compliance
and preparation. The Company has received written responses from most of such
customers and vendors that appear to indicate generally they are or expect to
be sufficiently Year 2000 compliant. The Company intends to continue to
closely monitor the Year 2000 compliance and preparation of its material
customers and vendors. This portion of the Company's Year 2000 compliance and
assessment program has not resulted in the incurrence of material
expenditures by IFR and is not anticipated to do so.
Potential Effects of Year 2000 Problems. The Company is unable to
predict with any degree of certainty the potential consequences to it of Year
2000 issues. Obviously, any sort of major prolonged inability of public
utilities or financial systems in any portion of the world where the Company
operates manufacturing facilities or has substantial customers or vendors
could materially adversely impact the Companys revenue or delay the receipt
of revenue and could, theoretically, even cause a national or global economic
crisis or downturn. Similarly, the inability of a significant number of the
Company's customers or vendors to operate normally, either because of their
own Year 2000 problems or because of Year 2000 problems of person on whom
they, in turn, are dependent, could have a material adverse impact on the
Company. There is also some likelihood that an inability of the Company to
deliver its products in the normal manner might cause it to lose customers or
incur contractual liability to customers. While the Company has no reason to
believe that any of such matters will occur in such a manner as to produce
severe economic consequences to the Company, all of these matters are beyond
the ability of the Company to predict or quantify with any assurance.
Contingency Plans. The Company has not adopted any Year 2000 contingency
plan. It has not decided whether to do so.
EURO CURRENCY
On January 1, 1999, eleven of the fifteen member countries of the
European Union are scheduled to establish fixed conversion rates between
their sovereign currencies, the Eurodollar. IFR has extensive sales to these
countries and has significant operations in the United Kingdom. The United
Kingdom is not one of the countries that will convert to the Eurodollar. IFR
is currently evaluating the materiality of the impact of this change on
exchange gains or losses and computer systems.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a strong financial position with working capital
of $49,692,000 at June 30, 1998. The Company generated cash from operations
of $4,754,000 in fiscal year 1998 and $10,785,000 in fiscal year 1997. The
decrease in funds provided was due to an increase in interest expense and
accounts receivable and a decrease in accounts payable partially offset by an
increase in operating income before non-cash, non-recurring charges.
Cash flows used in investing activities and cash flows provided in
financing activities reflect primarily the acquisition payment and resulting
loans.
A $.033 per share cash dividend was authorized by the Board of Directors
and paid in the first and second quarter of fiscal 1998. Certain restrictive
covenants concerning the debt incurred with the purchase of Marconi allow for
cash dividends to be paid only when certain leverage ratios are obtained.
On September 20, 1996, the Board of Directors of the Company authorized
the repurchase of up to 750,000 shares of the Company's common stock. The
main purpose of the shares buyback program is to offset stock option
exercises from treasury stock and as a utilization of excess cash flow during
the year. As of June 30, 1998, the Company had purchased 470,000 shares under
the program. Certain restrictive covenants concerning the debt incurred with
the purchase of Marconi limit the amount of capital stock allowed to be
purchased.
The Company anticipates that the available line of credit and funds
generated from operations will be adequate to meet capital asset
expenditures, interest and debt requirements and working capital needs for
the next twelve months.
INFLATION
Changes in product mix from year to year and highly competitive markets
make it very difficult to define accurately 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 7, 1998, was 1,300. 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
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------
QUARTERS HIGH LOW High Low
<S> <C> <C> <C> <C>
First 22 11 1/2 10 11/16 7 3/16
Second 23 1/2 15 1/8 11 11/16 9 5/16
Third 25 1/2 14 1/8 12 3/4 10
Fourth 22 1/2 17 1/2 12 1/2 9 1/2
</TABLE>
18
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30 (IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES $148,069 $103,517 $89,997
COST OF PRODUCTS SOLD 93,953 61,296 56,097
- -----------------------------------------------------------------------------------------------------------
GROSS PROFIT 54,116 42,221 33,900
OPERATING EXPENSES:
Selling 20,859 11,400 10,102
Administrative 12,302 8,781 6,874
Engineering 17,160 11,133 8,608
Acquired research and development (NOTE 2) 15,700 -- --
- -----------------------------------------------------------------------------------------------------------
66,021 31,314 25,584
- -----------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (11,905) 10,907 8,316
OTHER INCOME (EXPENSE):
Interest income 320 118 55
Interest expense (3,882) (571) (755)
Other, net (23) 554 251
- -----------------------------------------------------------------------------------------------------------
(3,585) 101 (449)
- -----------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (15,490) 11,008 7,867
INCOME TAXES (NOTE 4) 447 4,362 3,106
- -----------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(15,937) $ 6,646 $ 4,761
- -----------------------------------------------------------------------------------------------------------
----------------------------------------
NET INCOME (LOSS) PER COMMON SHARE $ (1.95) $ 0.82 $ 0.58
- -----------------------------------------------------------------------------------------------------------
----------------------------------------
NET INCOME (LOSS) PER COMMON SHARE
ASSUMING DILUTION $ (1.95) $ 0.79 $ 0.56
- -----------------------------------------------------------------------------------------------------------
----------------------------------------
AVERAGE COMMON SHARES OUTSTANDING 8,191 8,130 8,244
- -----------------------------------------------------------------------------------------------------------
----------------------------------------
DILUTIVE COMMON SHARES OUTSTANDING 8,191 8,422 8,477
- -----------------------------------------------------------------------------------------------------------
----------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 (DOLLARS IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 159 $ 2,379
Accounts receivable, less allowance for doubtful
accounts of $927 in 1998 and $500 in 1997 41,761 19,707
Inventories:
Finished products 18,122 8,744
Work in process 9,556 6,517
Materials 19,298 7,144
- ----------------------------------------------------------------------------------------------
46,976 22,405
Prepaid expenses and sundry 4,083 99
Deferred income taxes (NOTE 4) 4,025 2,191
- ----------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 97,004 46,781
PROPERTY AND EQUIPMENT
Land 4,728 55
Buildings 10,095 4,622
Machinery 23,519 13,554
Allowances for depreciation (deduction) (10,917) (10,053)
- ----------------------------------------------------------------------------------------------
27,425 8,178
PROPERTY UNDER CAPITAL LEASE (NOTE 3)
Building 2,754 2,676
Machinery 2,179 1,085
Allowances for depreciation (deduction) (1,616) (1,278)
- ----------------------------------------------------------------------------------------------
3,317 2,483
OTHER ASSETS (NOTE 2)
Cost in excess of net assets acquired and other
intangibles, less accumulated amortization of
$5,928 in 1998 and $4,111 in 1997 42,454 8,202
Developed technology, less accumulated
amortization of $390 in 1998 18,410 --
Other 2,147 186
- ----------------------------------------------------------------------------------------------
63,011 8,388
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $190,757 $65,830
- ----------------------------------------------------------------------------------------------
---------------------------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
JUNE 30 (DOLLARS IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank borrowings (NOTE 3) $ 11,000 $ 330
Accounts payable 11,168 3,649
Accrued compensation and payroll taxes 8,169 5,634
Accrued warranty expense 1,708 862
Other liabilities and accrued expenses (NOTE 8) 10,961 1,360
State and local taxes 621 426
Federal income taxes -- 830
Current maturity of capital lease obligations 185 175
Current maturity of long-term debt 3,500 --
- ----------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 47,312 13,266
CAPITAL LEASE OBLIGATIONS (NOTE 3) 3,580 3,765
LONG-TERM DEBT (NOTE 3) 96,500 --
DEFERRED INCOME TAXES (NOTE 4) 11,284 645
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 - 9,266,250 93 62
Additional paid-in capital 7,121 6,400
Cost of common stock in treasury - 1,065,313
shares in 1998 and 1,130,014 shares in
1997 (deduction) (8,679) (8,040)
Cumulative translation adjustment 386 58
Retained earnings 33,160 49,674
- ----------------------------------------------------------------------------------------------
Total shareholders equity 32,081 48,154
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $190,757 $65,830
- ----------------------------------------------------------------------------------------------
--------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
21
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK CUMULATIVE
------------------ PAID-IN ------------------- TRANSLATION RETAINED
(IN THOUSANDS) SHARES AMOUNT CAPITAL SHARES AMOUNT ADJUSTMENTS EARNINGS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1995 9,266 $62 $6,187 (1,035) $(5,880) $ -- $ 38,267
Net income -- -- -- -- -- -- 4,761
Translation adjustments -- -- -- -- -- (149) --
Purchases for treasury -- -- -- (75) (565) -- --
Incentive stock options exercised -- -- (187) 117 668 -- --
Tax benefit from exercise of stock options -- -- 140 -- -- -- --
Conversion of Photon notes -- -- (5) 12 69 -- --
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1996 9,266 62 6,135 (981) (5,708) (149) 43,028
Net income -- -- -- -- -- -- 6,646
Translation adjustments -- -- -- -- -- 207 --
Purchases for treasury -- -- -- (468) (4,477) -- --
Incentive stock options exercised -- -- (318) 198 1,331 -- --
Tax benefit from exercise of stock options -- -- 207 -- -- -- --
Payment of York Ltd. note -- -- 371 120 803 -- --
Restricted stock grants (NOTE 6) -- -- 5 1 11 -- --
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1997 9,266 62 6,400 (1,130) (8,040) 58 49,674
Net loss -- -- -- -- -- -- (15,937)
Translation adjustments -- -- -- -- -- 328 --
Purchases for treasury -- -- -- (128) (2,057) -- --
Incentive stock options exercised -- -- (237) 193 1,418 -- --
Stock split effected in the form of a dividend -- 31 -- -- -- -- (31)
Dividends - $.067 per share -- -- -- -- -- -- (546)
Tax benefit from exercise of stock options -- -- 958 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998 9,266 $93 $7,121 (1,065) $(8,679) $ 386 $33,160
- -------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
22
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30 (DOLLARS IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ (15,937) $ 6,646 $ 4,761
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation of property and equipment 4,234 2,263 2,115
Amortization of intangibles 2,207 801 837
Write off of acquired research and development 15,700 -- --
Deferred income taxes (3,622) (701) (718)
Deferred compensation expense -- 16 --
Utilization of acquired tax loss carryforwards 416 272 530
Changes in operating assets and liabilities
(net of effects of acquired businesses):
Accounts receivable (3,081) (3,213) (4,675)
Inventories 13,810 1,421 235
Other current assets 1,320 51 146
Accounts payable and accrued liabilities (7,044) 2,514 497
Other current liabilities (4,320) 715 207
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 3,683 10,785 3,935
INVESTING ACTIVITIES
Payments for acquired businesses (108,851) -- --
Purchases of property and equipment (4,543) (3,334) (1,573)
Proceeds from sale of equipment 1,071 -- --
Sundry (1,832) (32) 2
- --------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (114,155) (3,366) (1,571)
FINANCING ACTIVITIES
Purchases of capital stock for treasury (2,057) (4,477) (565)
Principal payments on convertible securities -- -- (34)
Principal payments on capital lease obligations (175) (2,009) (238)
Principal payments on long-term debt -- (1,198) (22)
Proceeds from acquisition loan 100,000 -- --
Proceeds from exercise of common stock options 2,139 1,220 621
Proceeds from issuance of Industrial Revenue Bond -- 3,940 --
Proceeds from short-term bank borrowings 12,150 29,380 23,365
Principal payments on short-term bank borrowings (3,535) (32,115) (25,845)
Payment of dividends (546) -- --
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 107,976 (5,259) (2,718)
Effect of exchange rate changes on cash 276 (47) (42)
- --------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,220) 2,113 (396)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,379 266 662
- --------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 159 $ 2,379 $ 266
- --------------------------------------------------------------------------------------------------------------------------
-----------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Stock Split
On November 7, 1997, the Company's Board of Directors approved a
three-for-two stock split to be effected in the form of a 50% stock dividend.
The additional stock was distributed on December 5, 1997 to shareholders of
record on November 21, 1997. All references to number of shares, share prices
and per share amounts have been restated to reflect the stock split.
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. Gains or losses resulting from foreign currency
transactions are included in other income.
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) is being amortized
by the straight-line method over periods ranging from 10 to 30 years.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed by
straight-line and double-declining methods at rates based on the estimated
useful lives of the assets.
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. Depreciation of leased property is computed by the straight-line
method over the useful life of the asset.
Revenue Recognition
Revenue from sales of products is recognized at the time products are
shipped or when services have been rendered to the customer.
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.
Earnings (Loss) Per Share
In 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, EARNINGS PER SHARE. This statement requires dual
presentation of newly defined basic and diluted earnings per share. All per
share amounts for prior periods have been restated to conform to SFAS No. 128.
Basic earnings (loss) per share is calculated based on the
weighted-average number of outstanding common shares. Diluted earnings (loss)
per share is calculated based on the weighted-average number of outstanding
common shares, plus the effect of dilutive stock options. The dilutive
securities for the Company only include stock options.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Interest Swap Agreements
The Company is required by the bank syndicate to enter into interest
rate swaps to manage interest rate exposures. The Company designates the
interest rate swaps as hedges of the underlying debt. Interest expense on the
debt is adjusted to include the payments made or received under the swap
agreements.
Income Taxes
Deferred taxes are recognized for the future tax effects of temporary
differences between financial and income tax reporting based on enacted tax
laws and rates. Federal income taxes are provided on the portion of the
income of foreign subsidiaries that is expected to be remitted to the United
States and be taxable.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. This
statement becomes effective for the Company's fiscal year ending June 30,
1999. The Company believes that comprehensive income in future periods will
fluctuate as a result of changes in the cumulative translation account, which
is a component of comprehensive income. The Company has not yet evaluated the
impact of adoption of SFAS No. 130.
In July 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION. Under SFAS No. 131, the Company
will report financial and descriptive information about its operating
segments. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. The Company plans to adopt SFAS No. 131 on July 1, 1998. The
Company has not yet evaluated the impact of adoption of SFAS No. 131.
24
<PAGE>
Reclassification
Certain amounts in the 1997 consolidated financial statements have been
reclassified to conform with the 1998 presentation.
2. ACQUISITIONS
Marconi Instruments
On February 6, 1998, IFR acquired for cash all of the issued and
outstanding capital stock of Marconi Instruments Limited, Hertfordshire, U.K.
(Marconi), from The General Electric Company, p.l.c. (GEC). The purchase
price for Marconi was approximately $109,000,000, paid in cash funded
primarily by debt (SEE NOTE 3). The acquired business is engaged in the
design, manufacture, distribution and sale of test and measurement equipment
for the telecommunications and electronics industries. As a result of the
acquisition, IFR acquired the foreign subsidiaries of Marconi which conduct
business in France, Germany, Spain, and the United States. Marconi also has
branches in the Netherlands, Singapore, Hong Kong, and China.
In addition to containing typical provisions relating to a purchase of a
corporate subsidiary for cash, the purchase agreement provides that Marconi
and GEC and its subsidiaries grant each other non-exclusive, irrevocable,
non-transferable, royalty-free perpetual worldwide licenses to use all
intellectual property belonging to any of them and being used by the other
prior to the date of the acquisition for the purpose of developing,
manufacturing, and selling existing products and any improvement,
modification or adaptation of products manufactured or in the course of
development at such date. IFR may not make any use of the Marconi trade
names after the expiration of nine months from the date of the transaction.
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 and liabilities based on their
estimated fair values at the date of acquisition as follows
(IN THOUSANDS):
<TABLE>
<S> <C>
Purchase price per agreement $ 106,939
Direct acquisition costs 1,912
- ------------------------------------------------------------------------------
Total purchase price $ 108,851
- ------------------------------------------------------------------------------
----------
Total current assets $ 61,737
Property and equipment - net 20,850
Developed technology (amortized over 20 years) 18,800
Goodwill (amortized over 30 years) 20,824
Other intangible assets (amortized over 1-20 years) 14,766
Acquired research and development 15,700
- ------------------------------------------------------------------------------
Total assets 152,677
Total current liabilities assumed (31,530)
Deferred income taxes (12,296)
- ------------------------------------------------------------------------------
Total net assets $ 108,851
- ------------------------------------------------------------------------------
----------
</TABLE>
The amounts allocated to acquired research and development were
determined through established valuation techniques. Since technological
feasibility had not been established and no future alternative uses existed,
these amounts were expensed upon acquisition.
Restructuring liabilities of approximately $6.7 million were recorded
for costs associated with the shutdown of certain acquired facilities and for
severance and related costs. Payments in the amount of $1.8 million have been
charged against the liability through June 30, 1998.
York Sensors
On December 22, 1997, the Company acquired York Sensors Ltd. in
Hampshire, U.K. The acquired business is involved in the design and
manufacture of distributed temperature sensing (DTS) equipment based on
optical time domain reflectometer (OTDR) technology for the electric utility,
oil exploration and other industries.
The Company acquired assets of approximately $930,000 and assumed
liabilities of approximately $1,902,000 for a nominal purchase price. This
resulted in goodwill of approximately $972,000 which is being amortized over
10 years. 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 and liabilities based on
their estimated fair values at the date of acquisition.
The following pro forma data presents the consolidated results of
operations as if the acquisitions had occurred on July 1, 1996, after giving
effect to certain adjustments including amortization of intangibles,
increased interest expense and related income tax effects. The pro forma data
for both years does not include non-recurring charges related to acquired
research and development ($15,700,000) and inventory valuations
($11,844,000). 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 acquisitions been in effect on the date
indicated or which may occur in the future. (IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Sales $213,866 $213,271
Net income (loss) 7,057 3,593
Net income (loss) per common share $ .86 $ .44
Assuming dilution $ .81 $ .43
</TABLE>
3. DEBT AND LEASE ARRANGEMENTS
Long-term debt consisted of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
1998
- -----------------------------------------------------------------------------
<S> <C>
Term Loan A $ 50,000
Term Loan B 50,000
- -----------------------------------------------------------------------------
100,000
Less current maturities 3,500
- -----------------------------------------------------------------------------
Total long-term debt $ 96,500
- -----------------------------------------------------------------------------
--------
</TABLE>
25
<PAGE>
TERM LOANS PAYABLE TO BANK: In March, the Company entered into an amended and
restated Credit Agreement with the bank syndication (the Agreement) to borrow
$100,000,000 in connection with the Marconi acquisition (NOTE 2). Both of the
term loans are payable in quarterly installments of principal pursuant to a
schedule contained in the Agreement which calls for such payments to increase
over the term of the loan. Term Loan A is payable over six years and Term
Loan B is payable over seven years. Summary payments by year are as follows
(IN THOUSANDS):
<TABLE>
<S> <C>
1999 $ 3,500
2000 4,500
2001 5,500
2002 10,500
2003 12,500
Thereafter 63,500
- -----------------------------------------------------------------------------
Total $100,000
- -----------------------------------------------------------------------------
--------
</TABLE>
Under the terms of the Agreement, borrowings bear interest at a spread
over the London Interbank Offered Rate (LIBOR) which varies up to 2.5% per
annum depending on the Term Loan and the current leverage ratio as defined in
the Agreement. At June 30, 1998, the spread was 1.75% on Term Loan A and
2.25% on Term Loan B. The interest rate on the loans at June 30, 1998 was
7.44% on Term Loan A and 7.94% on Term Loan B.
LINES OF CREDIT: In March 1998, the Company entered into an amended and
restated Credit Agreement with the bank syndication (the Agreement) to
provide available lines of credit aggregating $30,000,000. The Agreement
expires on February 5, 2004. Under the terms of the Agreement, borrowings
bear interest at a spread over LIBOR based on certain financial criteria. At
June 30, 1998, this spread was 1.75%. The total interest rate on the
outstanding portion of the lines of credit were 7.44% at June 30, 1998. The
Agreement also includes a counter indemnity with a foreign bank to provide
letters of credit and overdraft facilities totaling $8,250,000. As of June
30, 1998, the Company has available lines of credit aggregating $10,750,000.
SWING LINE NOTE: The Credit Agreement allows for swing line loans for an
amount not to exceed $5,000,000. At June 30, 1998, the Company had available
funds aggregating $5,000,000.
INTEREST SWAP: In February, the Company entered into two separate interest
swap agreements for $25,000,000 each. The first agreement is for a fixed
interest rate of 5.8% and expires on March 30, 2001 with an option to extend
an additional two years. The second agreement is for a fixed interest rate of
6.01% and expires on March 30, 2001. The swap agreements limit the exposure
to increased LIBOR rates on the Term Loans.
CAPITAL LEASES: In March 1997, the Company entered into a capital lease to
refund and redeem the industrial revenue bonds dated May 1, 1989 which were
issued in the original principal amount of $3,500,000 of which $2,330,000
were outstanding; and to finance manufacturing support equipment and building
improvements to the existing facility. This lease was entered into in
connection with an issuance of industrial revenue bonds dated March 15, 1997
(the 97 Bonds) by the City of Goddard, Kansas (the City). The transaction for
the 97 Bonds totaled $3,940,000. All remaining funds after the payoff of the
May 1, 1989 Bond are contractually restricted. At June 30, 1998 and 1997, the
unused cash balance was $170,203 and $1,594,000, respectively. The Company
has guaranteed the future repayment of all amounts due relating to the 97
Bonds. The City has retained title to the facilities and related equipment.
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 97
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 97 Bonds when due. The 97 Bonds mature serially over a 15
year period which commenced May 1, 1997, and are callable for early
redemption by the Company on or after May 1, 2004. 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% of the outstanding Common Stock (unless waived by
the Board of Directors), the subsequent determination that the Bonds are
taxable or other specified events.
Amortization for the 97 Bonds is included in depreciation expense.
Future minimum lease payments, based upon scheduled redemptions of the
Bonds as of June 30, 1998, are as follows (IN THOUSANDS):
<TABLE>
<S> <C>
1999 $ 404
2000 400
2001 401
2002 406
2003 404
Thereafter 3,666
- -----------------------------------------------------------------------------
Total minimum lease payments 5,681
Amounts representing interest 1,916
- -----------------------------------------------------------------------------
Present value of minimum lease payments 3,765
Current maturities 185
- -----------------------------------------------------------------------------
Long-term portion $3,580
- -----------------------------------------------------------------------------
</TABLE>
OPERATING LEASES: The Company also leases certain facilities and equipment under
operating leases that expire at various dates. 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 equip-
26
<PAGE>
ment 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):
<TABLE>
<S> <C>
1999 $ 2,885
2000 2,143
2001 1,467
2002 1,050
2003 952
Thereafter 12,191
- ------------------------------------------------------------------------
Total minimum lease payments $20,688
- ------------------------------------------------------------------------
-------
</TABLE>
Total rent expense for all operating leases amounted to approximately
$1,464,000, $825,000, and $625,000 for 1998, 1997 and 1996, respectively.
INTEREST PAID: Interest paid during 1998, 1997 and 1996 was approximately
$3,681,000, $555,000, and $730,000, respectively.
4. INCOME TAXES
The Company files a consolidated federal income tax return for all U.S.
subsidiaries and files group relief or separate returns for foreign
subsidiaries. Income reported for federal and foreign tax purposes differs
from pre-tax accounting income due to variations between the requirements of
the jurisdictional tax codes and the Company's accounting practices.
For financial reporting purposes, income (loss) before income taxes is
as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. $ 10,697 $ 9,550 $7,843
Foreign (26,187) 1,458 24
- ------------------------------------------------------------------------------
Total $(15,490) $11,008 $7,867
- ------------------------------------------------------------------------------
---------------------------------------
</TABLE>
Income tax expense (benefit) is summarized as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 2,698 $3,623 $2,236
Deferred 580 (817) (205)
Foreign:
Current 512 363 --
Deferred (4,202) 111 --
State 859 810 545
Benefit of tax
carryforwards -- 272 530
- -----------------------------------------------------------------------------
Income tax expense $ 447 $4,362 $3,106
- -----------------------------------------------------------------------------
--------------------------------------
</TABLE>
Significant components of the Company's deferred tax liabilities and assets
as of June 30 are as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ 717 $ 539
Purchased intangibles 10,472 9
Other 95 113
- ------------------------------------------------------------------------------
Total deferred tax liabilities 11,284 661
Deferred tax assets:
Tax credit carryforwards 51 463
Capital loss carryforward 153 153
Exit costs 1,376 --
Inventory reserve 993 1,020
Accrued vacation 372 365
Warranty reserve 290 290
Allowance for bad debts 170 --
Deferred interest 351 --
Other-net 473 536
- ------------------------------------------------------------------------------
Total deferred tax assets 4,229 2,827
Valuation allowance for deferred tax assets (204) (620)
- ------------------------------------------------------------------------------
Net deferred tax assets 4,025 2,207
- ------------------------------------------------------------------------------
Net total deferred tax assets (liabilities) $(7,259) $1,546
- ------------------------------------------------------------------------------
-------------------------
</TABLE>
At June 30, 1998, the Company had unused investment tax credits of
$51,000 and an unused capital loss carryforward of $450,000 that expire in
years 1999 through 2006. For financial reporting purposes, a valuation
allowance has been recognized to fully offset the deferred tax assets related
to those carryforwards. When realized through a reduction in the valuation
allowance, the tax benefit from the tax credit carryforwards of $51,000 will
be applied to reduce goodwill related to a prior acquisition. Such reduction
was $416,000 in 1998.
Deferred taxes have not been provided on approximately $1,130,000 of
undistributed earnings of foreign subsidiaries since substantially all of
these earnings are expected to be permanently reinvested in foreign
operations. It is not practicable to calculate the deferred taxes associated
with these earnings, however, foreign tax credits would be available to
reduce federal income taxes in the event of distribution.
27
<PAGE>
The effective income tax rate varied from the statutory federal income
tax rate as follows for the years ended June 30:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal
income tax rate (34.0)% 34.0% 34.0%
Increases (decreases):
State income taxes,
net of federal tax
benefit 3.7 4.9 4.6
Amortization of goodwill
and intangibles 1.9 1.1 1.6
Acquired Research &
Development 34.4 -- --
Research & Development
tax credits (0.9) (.8) --
Other (2.2) .4 (.7)
- ------------------------------------------------------------------------------
2.9% 39.6% 39.5%
- ------------------------------------------------------------------------------
------------------------------
</TABLE>
Income taxes paid during 1998, 1997 and 1996 were approximately
$4,569,000, $3,872,000, and $2,749,000, respectively.
5. RESEARCH AND DEVELOPMENT COSTS
Research and development costs, excluding the acquired research and
development, were $14,062,000, $9,990,000, and $7,374,000 for 1998, 1997 and
1996, respectively.
6. SHAREHOLDERS' EQUITY
INCENTIVE STOCK OPTION PLANS: The Company has two incentive stock option
plans -- the 1988 and 1996 Plans (the Plans). Under the 1988 and 1996 Plans,
450,000 shares and 600,000 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. All grants are made by the Compensation Committee.
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
750,000 authorized but unissued or treasury shares of the Company's Common
Stock were reserved for grant under the plan. The 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.
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 1,500
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 90,000 shares. The option price under the Outside Director Plan
is the fair market value of a share of Common Stock on the date of grant.
The following table summarizes information concerning options
outstanding and exercisable at June 30, 1998 for all plans:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------- -----------------------------------
Range of Weighted-Average
Exercise Number Remaining Weighted-Average Number Weighted-Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C>
$ 1 - $ 5 169,770 5.45 $ 4.67 166,770 $ 4.48
$ 6 - $ 8 227,485 6.88 $ 7.67 138,301 $ 7.66
$ 9 - $11 141,750 8.21 $10.44 47,750 $10.42
$12 - $18 251,250 9.15 $12.93 -- --
$19 - $22 180,000 9.27 $20.16 -- --
</TABLE>
Stock option activity during 1996-1998 is summarized below:
<TABLE>
<CAPTION>
Number of Shares Weighted-Average Number of Shares Weighted-Average
Outstanding Exercise Price Exercisable Exercise Price
------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
July 1, 1995 964,710 $ 5.66 463,812 $5.20
Granted 104,801 8.75
Exercised (116,892) 4.69
Canceled or expired (87,930) 5.38
------------------------------------- --------------------------------------
June 30, 1996 864,689 6.23 406,340 5.07
Granted 105,000 10.49
Exercised (198,116) 5.11
Canceled or expired (31,425) 7.23
------------------------------------- --------------------------------------
June 30, 1997 740,148 7.09 392,583 6.08
Granted 484,250 17.02
Exercised (193,194) 6.03
Canceled or expired (60,949) 17.86
------------------------------------- --------------------------------------
June 30, 1998 970,255 $11.58 352,821 $6.62
------------------------------------- --------------------------------------
------------------------------------- --------------------------------------
</TABLE>
28
<PAGE>
The Company accounts for stock option awards as prescribed by Accounting
Principles Board Opinion No. 25. Accordingly, no compensation cost has been
recognized in the Consolidated Statements of Operations. Had the Company
recorded compensation expense for the fair value of the options granted in
fiscal 1998, 1997 and 1996, as provided by SFAS No. 123, the Company's net
income (loss) and net income (loss) per common share would have been as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) As reported $(15,937) $6,646 $4,761
Pro forma (16,636) 6,479 4,726
Net income (loss)
per share - diluted As reported $ (1.95) $ 0.79 $ 0.56
Pro forma (2.03) 0.77 0.56
</TABLE>
Because SFAS No. 123 is applicable to options granted subsequent to June
30, 1995, and the options have vesting periods up to five years, the pro
forma effect will not be fully reflected until 2000.
In order to calculate the fair value at the date of grant, the Company
used the Black-Scholes option pricing model with the following assumptions:
(i) dividend yield of 0%, (ii) expected volatility of 46%, 45% and 45%,
respectively, for 1998, 1997 and 1996, (iii) weighted average risk-free
interest rates of 6% for 1998, 1997 and 1996, and (iv) weighted average
expected life of 6 years for 1998, 1997 and 1996. The weighted average fair
value of options granted at the market price for 1998 and 1997 were $8.06 and
$4.41, respectively. The weighted average fair value and weighted average
exercise price of nonqualified options granted below the market price for
1998 was $11.98 and $19.75, respectively.
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 450,000 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 at a price equal to par value. In 1997, the Company made a
grant of 1,500 shares.
The market value of restricted shares granted is being amortized as
compensation expense over the vesting period. Total expense of $16,000 was
recognized in 1997 in connection with the restricted stock grant plan. The
shares reserved for future grants are 123,541 as of June 30, 1998.
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.
7. INDUSTRY SEGMENTS
The Company operates exclusively in one dominant industry segment, the
electronic test and measurement equipment industry.
Sales include $16,534,000, $21,084,000, and $12,400,000 in 1998, 1997
and 1996, 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
1998 1997 1996
- -----------------------------------------------------------------------------
Europe $41,897 $14,631 $ 8,622
Western Hemisphere 5,469 6,389 5,883
Pacific Rim 23,938 15,078 14,653
Other 5,636 2,993 4,034
- -----------------------------------------------------------------------------
$76,940 $39,091 $33,192
- -----------------------------------------------------------------------------
--------------------------------
29
<PAGE>
For fiscal 1998 and 1997, sales generated by the Company's foreign
operations were $63,959,000 and $15,739,000, respectively. Income (loss)
before income taxes generated by the Company's foreign operations were
($26,187,000) and $1,458,000, respectively. At June 30, 1998 and 1997,
identifiable assets of the foreign operations were $127,157,000 and
$10,604,000, respectively.
The following table sets forth the contribution to total net sales of
each of the Company's classes of test instruments for the last three fiscal
years (IN THOUSANDS):
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Communications $ 46,516 $ 44,684 $36,999
Test & Measurement 21,023 4,644 5,611
Avionics 8,851 9,445 8,837
Fiber Optics 39,178 34,410 29,467
Other 32,501 10,334 9,083
- -----------------------------------------------------------------------------
$148,069 $103,517 $89,997
- -----------------------------------------------------------------------------
-------------------------------------------
</TABLE>
8. BENEFIT PLANS
RETIREMENT PLAN: The Company has a trusteed defined contribution retirement
plan for all U.S. 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. In addition the
Company has obligations from the acquisition of Marconi Instruments to fund
the Defined Benefit Plan established by GEC. These payments are no longer
required after July 31, 1998 as the Company has established a defined
contribution plan for foreign employees. Total retirement plan expenses for
1998, 1997 and 1996 were $1,536,000, $1,268,000, and $1,083,000, respectively.
DIRECTORS RETIREMENT PLAN: The Company maintains an unfunded retirement plan
for nonemployee directors of the Company. Benefits are not to exceed a
maximum length of 10 years of service and are payable when the Plan's
requirements are satisfied. The estimated liability at June 30, 1998 and 1997
was $309,000 and $403,000, respectively, and is included in the balance sheet
caption Other Liabilities and Accrued Expenses.
SAVINGS AND INVESTMENT PLAN: The Company has a savings and investment plan
for substantially all U.S. 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 1998, 1997 and 1996, the Company matched 50% of each employee's
contribution up to 4% of their salary. Company contributions charged to
expense in 1998, 1997 and 1996, were $357,000, $345,000, and $298,000,
respectively.
INCENTIVE BONUS PLAN: The Company has established a bonus plan payable to
selected employees based on pre-established operating income goals approved
by the Board of Directors. Total bonus plan expenses for 1998, 1997 and 1996
were $700,000, $1,426,000 and $783,000, respectively.
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 1998, 1997 and 1996 were
$1,163,000, $1,378,000, and $1,183,000, respectively.
30
<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/ J.A. Bloomer
Jeffrey A. Bloomer
TREASURER AND
CHIEF FINANCIAL OFFICER
31
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
IFR Systems, Inc.
We have audited the accompanying consolidated balance sheets of IFR
Systems, Inc. as of June 30, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended June 30, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance 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, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Indianapolis, Indiana
July 31, 1998
32
<PAGE>
EXHIBIT 21
IFR SYSTEMS, INC.
Subsidiaries
<TABLE>
<CAPTION>
Name State or Jurisdiction of Incorporation
---- --------------------------------------
<S> <C>
SUBSIDIARIES OF IFR SYSTEMS, INC.
IFR Americas, Inc. Delaware
PK Technology, Inc. Oregon
IFR Finance, Inc. Kansas
IFR Instruments of Texas, Inc. Delaware
IFR International, Inc. Barbados
IFR Systems Ltd. United Kingdom
IFR Finance Limited Partnership United Kingdom
SUBSIDIARIES OF IFR SYSTEMS LTD
PK Technology Ltd. United Kingdom
York Sensors Ltd. United Kingdom
IFR Ltd. United Kingdom
IFR International Ltd United Kingdom
IFR International SA France
IFR Technologies SA Spain
IFR Gmbh Germany
</TABLE>
IFR Systems, Inc. owns 100% of the capital stock of each of its
subsidiaries, except for IFR Finance Limited Partnership in which IFR Finance,
Inc. owns an interest. IFR Systems Ltd. owns 100% of the capital stock of each
of its subsidiaries.
All subsidiaries do business under their own names.
<PAGE>
Exhibit 23.0
IFR Systems, Inc.
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 31, 1998, included in the
1998 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 also 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, Registration Statement
33-56862 on Form S-8 of the Nonqualified Stock Option Plan dated January 8,
1993, Registration Statement 333-18649 on Form S-3 relating to the
registration of common shares dated December 23, 1996, and Registration
Statement 333-52911 on Form S-8 pertaining to the 1996 Incentive Stock Option
Plan dated May 18, 1998 of our report dated July 31, 1998, with respect to
the consolidated financial statements and schedule of IFR Systems, Inc.
incorporated by reference in the Annual Report on Form 10-K for the year
ended June 30, 1998.
Indianapolis, Indiana
September 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS IN THE
COMPANY'S FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 159
<SECURITIES> 0
<RECEIVABLES> 40,834
<ALLOWANCES> 927
<INVENTORY> 46,976
<CURRENT-ASSETS> 97,004
<PP&E> 43,275
<DEPRECIATION> 12,533
<TOTAL-ASSETS> 190,757
<CURRENT-LIABILITIES> 47,312
<BONDS> 100,080
0
0
<COMMON> 93
<OTHER-SE> 31,988
<TOTAL-LIABILITY-AND-EQUITY> 190,757
<SALES> 148,069
<TOTAL-REVENUES> 148,069
<CGS> 93,953
<TOTAL-COSTS> 93,953
<OTHER-EXPENSES> 66,021
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,882
<INCOME-PRETAX> (15,490)
<INCOME-TAX> 447
<INCOME-CONTINUING> (15,937)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,937)
<EPS-PRIMARY> (1.95)
<EPS-DILUTED> (1.95)
</TABLE>
