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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- ------------
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
incorporation or organization) Identification No.)
10200 WEST YORK STREET, WICHITA, KANSAS 67215
(Address and zip code of principal executive offices)
(316) 522-4981
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods 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
----- -----
There were 8,206,015 shares of common stock, par value $.01 per share, of
the Registrant outstanding as of October 20, 1998.
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IFR SYSTEMS, INC.
FORM 10 - Q
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30,
1998 and June 30, 1998 3
Condensed Consolidated Statements of Operations for the
three months ended September 30, 1998 and 1997. 5
Condensed Consolidated Statements of Cash Flow for the
three months ended September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II -- OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 14
SIGNATURES 15
</TABLE>
2
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PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
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(UNAUDITED) (NOTE)
(000'S OMITTED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,073 $ 159
Accounts receivable, less $903 and $927
allowance for doubtful accounts, respectively 34,853 41,761
Inventories:
Finished products 18,840 18,122
Work in process 10,974 9,556
Materials 19,948 19,298
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49,762 46,976
Prepaid expenses and sundry 4,389 4,083
Deferred income taxes 4,045 4,025
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TOTAL CURRENT ASSETS 95,122 97,004
PROPERTY AND EQUIPMENT, LESS
ALLOWANCES FOR DEPRECIATION (DEDUCTION) 26,821 27,425
PROPERTY UNDER CAPITAL LEASE, LESS
ALLOWANCES FOR DEPRECIATION (DEDUCTION) 3,470 3,317
OTHER ASSETS
Cost in excess of net assets acquired and other
intangibles, less amortization of $6,462 and
$5,928, respectively 41,976 42,454
Developed technology, less amortization
of $624 and $390, respectively 18,176 18,410
Other 2,051 2,147
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62,203 63,011
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$ 187,616 $ 190,757
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</TABLE>
Note: The balance sheet at June 30, 1998 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
3
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<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
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(UNAUDITED) (NOTE)
(000'S OMITTED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank borrowings (Note 2) $ 11,000 $ 11,000
Accounts payable 11,446 11,168
Accrued compensation and payroll taxes 6,732 8,169
Other liabilities and accrued expenses 12,507 12,669
Federal and state income taxes and local taxes 65 621
Current maturity of capital lease obligations 185 185
Current maturity of long-term debt 3,750 3,500
--------- ---------
TOTAL CURRENT LIABILITIES 45,685 47,312
CAPITAL LEASE OBLIGATIONS 3,534 3,580
LONG-TERM DEBT 95,375 96,500
DEFERRED INCOME TAXES 11,146 11,284
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value---authorized
1,000,000 shares, none issued - -
Common stock, $.01 par value---authorized
50,000,000 shares, issued 9,266,250 shares 93 93
Additional paid-in capital 7,094 7,121
Cost of common stock in treasury---1,060,235
and 1,065,313 shares, respectively (deduction) (8,638) (8,679)
Cumulative translation adjustment 1,807 386
Retained earnings 31,520 33,160
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31,876 32,081
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$ 187,616 $ 190,757
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</TABLE>
See notes to condensed consolidated financial statements.
4
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IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------
1998 1997
(000'S OMITTED, EXCEPT PER SHARE DATA)
<S> <C> <C>
SALES $40,900 $25,521
COST OF PRODUCTS SOLD 22,467 14,584
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GROSS PROFIT 18,433 10,937
OPERATING EXPENSES
Selling 7,243 2,718
Administrative 5,027 1,899
Engineering 6,388 3,141
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18,658 7,758
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OPERATING INCOME (LOSS) (225) 3,179
OTHER EXPENSE 2,313 47
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INCOME (LOSS) BEFORE INCOME TAXES (2,538) 3,132
INCOME TAXES (BENEFIT) (898) 1,257
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NET INCOME (LOSS) $(1,640) $1,875
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NET INCOME (LOSS) PER COMMON SHARE $(0.20) $ 0.23
------- -------
------- -------
NET INCOME (LOSS) PER COMMON SHARE
ASSUMING DILUTION $(0.20) $ 0.22
------- -------
------- -------
AVERAGE COMMON SHARES
OUTSTANDING 8,205 8,168
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------- -------
DILUTIVE COMMON SHARES
OUTSTANDING 8,205 8,562
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------- -------
</TABLE>
See notes to condensed consolidated financial statements.
5
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IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------- -------
(000'S OMITTED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(1,640) $ 1,875
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation of property and equipment 1,481 657
Amortization of intangibles 768 152
Deferred income taxes (158) -
Changes in operating assets and liabilities:
Accounts receivable 8,080 263
Inventories (2,824) (93)
Other current assets (306) (238)
Accounts payable and accrued liabilities (2,034) (1,515)
Other current liabilities (556) 1,001
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NET CASH PROVIDED BY OPERATING ACTIVITIES 2,811 2,102
INVESTING ACTIVITIES
Purchases of property and equipment (1,110) (1,006)
Sundry 101 44
------- -------
NET CASH USED IN INVESTING ACTIVITIES (1,009) (962)
FINANCING ACTIVITIES
Purchases of capital stock for treasury - (24)
Principal payments on capital lease obligations (46) -
Principal payments on long-term debt (875) -
Principal payments on short-term bank borrowings - (1,435)
Proceeds from short-term bank borrowings - 1,150
Proceeds from exercise of common stock options 14 441
Payment of dividends - (273)
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NET CASH USED IN FINANCING ACTIVITIES (907) (141)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,019 (43)
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 1,914 956
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 159 2,379
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,073 $ 3,335
------- -------
------- -------
</TABLE>
See notes to condensed consolidated financial statements.
6
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IFR SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended September 30,
1998 are not necessarily indicative of the results that may be expected for the
year ending June 30, 1999. For further information, refer to the Consolidated
Financial Statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended June 30, 1998.
NOTE 2 -- BANK BORROWINGS
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. The total interest
rate on the outstanding portion of the lines of credit was 7.82% at September
30, 1998. The Agreement also includes a counter indemnity with a foreign
bank to provide letters of credit and overdraft facilities totaling
$8,500,000. As of September 30, 1998, the Company has available lines of
credit aggregating $10,500,000. On November 3, 1998, the Company completed
an amendment to the Agreement which increases the interest rate by
approximately 75 basis points.
NOTE 3 -- 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. The acquired
7
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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.
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
was allocated to the assets and liabilities based on their estimated fair values
at the date of acquisition.
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
was 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, 1997, after giving
effect to certain adjustments including amortization of intangibles, increased
interest expense and related income tax effects. The pro forma data 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.
<TABLE>
<CAPTION>
(in thousands, except per share data)
Three Months Ended
September 30, 1997
------------------
<S> <C>
Sales $53,855
Net income $ 1,280
Net income per common share $ 0.16
Net income per common share
assuming dilution $ 0.15
</TABLE>
8
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ITEM 2. 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 not 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
of 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.
9
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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.
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.
10
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INFORMATION TECHNOLGY 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 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.
11
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RESULTS OF OPERATIONS
Sales for the first quarter ended September 30, 1998 were $40,900,000
compared to $25,521,000 in the first quarter of the prior year. This represents
an increase of 60.3% or $15,379,000. The current year includes sales valued at
$21,092,000 from the acquisition of IFR Ltd., formerly Marconi Instruments Ltd.,
which was completed on February 6, 1998. Excluding the acquisition, sales
declined by $5,713,000 or 22.4% due to lower sales of communication test
instruments to government and commercial customers and lower sales of production
and lab test equipment to fiber optic manufacturers.
Gross margins increased to 45.1% for the current year quarter as compared
to 42.9% in the previous year quarter. This increase is due to a more favorable
product mix.
Operating expenses increased 15.2% to 45.6% of sales for the current
quarter. Selling expenses increased 7.0% as a percentage of sales due to the
utilization of a direct sales force after the purchase of Marconi and
increased product marketing communications. Administrative expenses
increased 4.9% as a percentage of sales primarily due to recurring
amortization charges related to the acquisition. Engineering expenses
increased 3.3% in support of the development of new test instruments for the
fiber optics and emerging wireless digital telecommunications markets.
Operating expenses in general increased as a percent of sales because of the
lower sales volume. The Company is implementing a program to bring costs in
line with current sales, including reductions in personnel, wage freezes and
other cost reductions. When fully implemented, these cost reductions are
expected to reduce expenses by approximately $6,000,000 annually.
Other expenses increased $2,266,000 compared to the prior year quarter as
the result of higher interest expense related to the debt incurred to fund the
acquisition.
The estimated effective income tax rate was approximately 35.4% for the
current period and 40.1% for the previous year period. The decrease represents
the impact of the foreign subsidiaries and their related tax rates.
12
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LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operations were $2,811,000 and $2,102,000 for the
three months period ended September 30, 1998 and 1997, respectively. The
increase in funds provided was due to a decrease in accounts receivable
and an increase in depreciation and amortization of intangibles. Partially
offsetting these items was an increase in inventories, a decrease in accrued
liabilities and a decrease in operating income.
Cash flows used in financing activities were $907,000 and $141,000 for the
three months period ended September 30, 1998 and 1997, respectively. The
increase in funds used is due primarily to principal payments on long-term debt.
A $.033 per share cash dividend was authorized by the Board of Directors
and paid in the first quarter of fiscal 1998. Certain restrictive payments
concerning the debt incurred with the purchase of Marconi allow for cash
dividends to be paid only when certain leverage ratios are obtained.
Working capital decreased from $49,692,000 at June 30, 1998 to $49,437,000
at September 30, 1998.
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 the anticipated excess cash flow during
the year. As of September 30, 1998, the Company had purchased an aggregate of
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.
At September 30, 1998, $11,000,000 was outstanding under the lines of
credit.
On November 3, 1998, the Company signed and completed negotiations on
an amendment to its primary credit agreement (the Agreement). The amendment
includes a waiver for a violation of the leverage ratio financial covenant
for the period ending September 30, 1998. In addition, the leverage ratio
test is suspended through the fiscal quarters ending on March 31, 1999. The
Company anticipates the negotiations of new financial covenants after this
date.
The Company anticipates that available lines of credit and funds generated
from operations will be adequate to meet capital asset expenditures and working
capital needs for the current fiscal year ending June 30, 1999.
13
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OUTLOOK
The Company expects the current softness in orders and sales to continue
for several quarters. During the second quarter, the Company's cost reduction
program will be in effect and management expects profits to resume in the second
half of the fiscal year.
In addition to efforts on the cost side, management is committed to the
development of new products. A number of new products were launched during the
first quarter, including test instruments for GSM digital protocols. More new
products are scheduled to be introduced during the year.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.0 Amendment No. 1 and Waiver (dated as of November 3, 1998) to the
Amended and Restated Credit Agreement
11.0 Statement Re: Computation of Per Share Earnings
27.0 Financial Data Schedule
(b) No Form 8-K was filed during the quarter ended September 30, 1998.
14
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IFR SYSTEMS, INC.
Date: November 9, 1998 /s/ Alfred H. Hunt, III
----------------- ------------------------------
Alfred H. Hunt, III,
President and CEO
(Duly authorized officer)
/s/ Jeffrey A. Bloomer
-------------------------------
Jeffrey A. Bloomer,
Chief Financial Officer
and Treasurer
(Principal financial and chief
accounting officer)
15
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AMENDMENT NO. 1
AND WAIVER
Dated as of November 3, 1998
to
AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of March 19, 1998
THIS AMENDMENT NO. 1 AND WAIVER ("Amendment") is made as of
November 3, 1998 by and among IFR SYSTEMS, INC. (the "Borrower"), the financial
institutions parties hereto as Lenders, and THE FIRST NATIONAL BANK OF CHICAGO,
in its capacity as contractual representative (the "Agent") under that certain
Amended and Restated Credit Agreement dated as of March 19, 1998 by and among
the Borrower, the Lenders and the Agent (as amended, restated, supplemented or
otherwise modified from time to time, the "Credit Agreement"). Defined terms
used herein and not otherwise defined herein shall have the respective meanings
given to them in the Credit Agreement.
WHEREAS, the Borrower, the Lenders and the Agent are parties to
the Credit Agreement; and
WHEREAS, the Borrower has notified the Agent and the Lenders that
the Borrower is in violation of Section 7.4(B) of the Credit Agreement to the
extent that the Borrower's Leverage Ratio for the fiscal quarter ending on
September 30, 1998 was greater than 4.25 to 1.0 (the "Applicable Default");
WHEREAS, the Borrower has requested that the Agent and the
Required Lenders waive the Applicable Default and amend the Credit Agreement in
certain respects, and the Required Lenders and the Agent are willing to waive
the Applicable Default and to amend the Credit Agreement on the terms and
conditions set forth herein, it being expressly understood that the waiver set
forth herein shall in no event constitute a waiver by the Lenders or the Agent
of any other breach of the Credit Agreement or any of the Lenders' or Agent's
rights or remedies with respect thereto;
NOW, THEREFORE, in consideration of the premises set forth above,
the terms and conditions contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Borrower, the Lenders and the Agent have agreed to the following amendments to
the Credit Agreement:
1. AMENDMENT TO CREDIT AGREEMENT. Effective as of the Effective
Date (as defined below) and subject to the satisfaction of the conditions
precedent set forth in SECTION 3 below, the Credit Agreement is hereby amended
as follows:
1.1 SECTION 1.1 of the Credit Agreement is amended (i) to
delete the definition of "REVOLVING CREDIT AVAILABILITY" now appearing therein,
and to substitute the following therefor:
"REVOLVING CREDIT AVAILABILITY" means, at any particular time, the
amount by which (i) the Aggregate Revolving Loan Commitment at such time
exceeds (ii) the
-1-
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sum of (a) the Dollar Amount of the Revolving Credit Obligations at
such time PLUS (b) the Seasonal Reserve.
; and (ii) to insert alphabetically the following new definition:
"SEASONAL RESERVE" means, for the period commencing on November 3,
1998 through and including June 29, 1999, Five Million Dollars
($5,000,000), and at all other times, $0.
1.2 SECTION 2.2 of the Credit Agreement is amended to insert
the phrase "PLUS the Seasonal Reserve" immediately after the phrase "Revolving
Credit Obligations" now appearing in the first sentence thereof.
1.3 SECTION 2.3(A) of the Credit Agreement is amended to insert
the phrase "PLUS the Seasonal Reserve" immediately after the phrase "Revolving
Credit Obligations" now appearing in the first sentence thereof.
1.4 SECTION 2.5(B)(i)(c) of the Credit Agreement is amended to
insert the phrase "PLUS the Seasonal Reserve" immediately after each occurrence
of the phrase "Revolving Credit Obligations" now appearing therein.
1.5 SECTION 2.5(B)(ii) of the Credit Agreement is amended to
insert the phrase "PLUS the Seasonal Reserve" immediately after the phrase
"Revolving Credit Obligations" now appearing therein.
1.6 SECTION 2.6 of the Credit Agreement is amended to insert
the phrase "PLUS the Seasonal Reserve" immediately after each occurrence of the
phrase "Revolving Credit Obligations" now appearing in the first sentence
thereof.
1.7 SECTION 2.15(C) of the Credit Agreement is amended to
insert the phrase "PLUS the Seasonal Reserve" immediately after the phrase
"Revolving Credit Obligations (excluding the outstanding principal amount of the
Swing Line Loans)" now appearing therein.
1.8 SECTION 2.15(D) of the Credit Agreement is amended by
adding the following new SUBSECTION (iv) at the end thereof:
"(iv) Notwithstanding anything herein to the contrary, from
November 3, 1998 to but not including the fifth Business
Day following receipt of the Borrower's financial
statements delivered pursuant to SECTION 7.1(A)(i) for the
fiscal quarter ending on June 30, 1999, (x) the Applicable
Floating Rate Margins shall be equal to (i) 1.75% with
respect to all Tranche A Term Loans and Revolving Loans,
and (ii) 2.25% with respect to all Tranche B Term Loans,
and (y) the Applicable Eurocurrency Margins shall be equal
to (i) 2.75% with respect to all Tranche A Term Loans and
Revolving Loans and (ii) 3.25% with respect to all Tranche
B Term Loans."
-2-
<PAGE>
1.9 SECTION 3.3(i) of the Credit Agreement is amended to insert
the phrase "PLUS the Seasonal Reserve" immediately after the phrase "Revolving
Credit Obligations" now appearing therein.
1.10 SECTION 5.2(iii) of the Credit Agreement is amended to
insert the phrase "PLUS the Seasonal Reserve" immediately after the phrase
"Revolving Credit Obligations" now appearing therein.
1.11 SECTION 7.3(F) of the Credit Agreement is hereby deleted in
its entirety, and the following is substituted therefor:
"(F) RESTRICTED PAYMENTS. From and after November 3, 1998, the
Borrower shall not declare or make any Restricted Payment."
1.12 SECTION 7.3(N) is hereby amended to insert immediately
prior to the period (".") at the end thereof, the following:
"; PROVIDED, HOWEVER, that the Borrower and its Subsidiaries may
change its fiscal year to be the twelve-month accounting period
ending on the last day of March each year."
1.13 SECTION 7.4(B) of the Credit Agreement is amended (a) to
delete the phrase, "(i) 4.25 to 1.00 for each fiscal quarter for the period
commencing with the fiscal quarter ending on June 30, 1998 through the fiscal
quarter ending on September 30, 1998; and (ii) 4.00 to 1.00 for each fiscal
quarter for the period commencing with the fiscal quarter ending on December 31,
1998 through the fiscal quarter ending March 31, 1999; and" now appearing
therein and (b) to renumber the remaining clauses accordingly.
1.14 SECTION 7.4 of the Credit Agreement is hereby amended to
insert the following new SUBSECTION (E):
"(E) MINIMUM EBITDA. The Borrower shall not
permit its EBITDA to be less than (i) $3,800,000 for the
fiscal quarter ending on December 31, 1998 and (ii)
$4,700,000 for the fiscal quarter ending on March 31, 1999.
For purposes of this SECTION 7.4(E), EBITDA shall be
calculated determined as of the last day of each fiscal
quarter based on the actual amount for the three-month
period ending on such day, calculated, with respect to
Permitted Acquisitions, on a PRO FORMA basis using
historical audited and reviewed unaudited financial
statements obtained from the seller, broken down by fiscal
quarter in the Borrower's reasonable judgment."
2. WAIVER.
2.1 Upon the effectiveness of this Amendment in accordance with
the provisions of SECTION 3 below, and only so long as the Borrower's EBITDA
(determined as of the last day of the fiscal quarter ending on September 30,
1998 based on the actual amount for the three-month period ending on such day)
shall be equal to or greater than $1,975,000, the
-3-
<PAGE>
Agent and the Required Lenders hereby waive the Applicable Default, and the
Lenders' and the Agent's rights and remedies arising therefrom.
3. CONDITIONS OF EFFECTIVENESS. The effectiveness of this
Amendment is subject to the condition precedent that the Agent shall have
received the following documents:
(i) duly executed originals of this Amendment
from the Borrower, the Required Lenders and the Agent;
(ii) duly executed originals of the Reaffirmation
attached hereto from each Domestic Incorporated Subsidiary
of the Borrower;
(iii) an amendment fee paid to the Agent in
immediately available funds for the account of each Lender
equal to .25% of the aggregate Commitment of each Lender;
(iv) duly executed originals of the Fee Letter,
dated as of November 3, 1998, from the Borrower; and
(v) such other documents, instruments and
agreements as the Agent may reasonably request.
Upon the satisfaction of the foregoing conditions precedent, this Amendment
shall become effective (the "Effective Date").
4. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower
hereby represents and warrants as follows:
(a) This Amendment and the Credit Agreement as previously
executed and as amended hereby, constitute legal, valid and binding obligations
of the Borrower and are enforceable against the Borrower in accordance with
their terms.
(b) Upon the effectiveness of this Amendment, the Borrower
hereby reaffirms all covenants, representations and warranties made in the
Credit Agreement, as amended hereby, and agrees that all such covenants,
representations and warranties shall be deemed to have been remade as of the
Effective Date of this Amendment.
5. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT.
(a) Upon the effectiveness of SECTION 1 hereof, each reference to
the Credit Agreement in the Credit Agreement and each other Loan Document shall
mean and be a reference to the Credit Agreement as amended hereby.
(b) Except as specifically amended above, the Credit Agreement
and all other documents, instruments and agreements executed and/or delivered in
connection therewith shall remain in full force and effect and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein with respect to the Applicable
Default, operate as a waiver
-4-
<PAGE>
of any right, power or remedy of the Agent or the Lenders, nor constitute a
waiver of any provision of the Credit Agreement or any other documents,
instruments and agreements executed and/or delivered in connection therewith.
6 GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the internal laws (including, without limitation,
735 ILCS 105/5-1 et seq., but otherwise without regard to the conflicts of laws
provisions) of the State of Illinois.
7. HEADINGS. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
8. COUNTERPARTS. This Amendment may be executed by one or more
of the parties to the Amendment on any number of separate counterparts, and all
of said counterparts taken together shall be deemed to constitute one and the
same instrument.
-5-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed as of
the day and year first above written.
IFR SYSTEMS, INC.
By:
----------------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF
CHICAGO, as Agent and as Lender
By:
----------------------------------
Name:
Title:
INTRUST BANK, as a Lender
By:
----------------------------------
Name:
Title:
THE BANK OF NOVA SCOTIA, as a Lender
By:
----------------------------------
Name:
Title:
HARRIS TRUST AND SAVINGS BANK, as a Lender
By:
----------------------------------
Name:
Title:
SIGNATURE PAGE TO AMENDMENT NO. 1
TO AMENDED AND RESTATED CREDIT AGREEMENT
-6-
<PAGE>
NATIONAL WESTMINSTER BANK PLC, as a Lender
By:
----------------------------------
Name:
Title:
UNION BANK OF CALIFORNIA, N.A., as a Lender
By:
----------------------------------
Name:
Title:
LLOYDS BANK PLC, as a Lender
By:
----------------------------------
Name:
Title:
SIGNATURE PAGE TO AMENDMENT NO. 1
TO AMENDED AND RESTATED CREDIT AGREEMENT
-7-
<PAGE>
REAFFIRMATION
Each of the undersigned hereby acknowledges receipt of a copy of
the foregoing Amendment No. 1 and Waiver to the Amended and Restated Credit
Agreement dated as of March 19, 1998 by and among IFR Systems, Inc., a Delaware
corporation (the "Borrower"), the lenders from time to time parties thereto
(collectively, the "Lenders") and The First National Bank of Chicago, as one of
the Lenders and in its capacity as contractual representative (the "Agent") on
behalf of itself and the other Lenders, (as amended and as the same may be
amended, restated, supplemented or otherwise modified from time to time, the
"CREDIT AGREEMENT") which Amendment No. 1 and Waiver is dated as of November 3,
1998 (the "WAIVER AND AMENDMENT"). Capitalized terms used in this Reaffirmation
and not defined herein shall have the meanings given to them in the Credit
Agreement. Without in any way establishing a course of dealing by the Agent or
any Lender, each of the undersigned reaffirms the terms and conditions of the
Guaranty, Security Agreement and any other Loan Document executed by it and
acknowledges and agrees that such agreement and each and every such Loan
Document executed by the undersigned in connection with the Credit Agreement
remains in full force and effect and are hereby reaffirmed, ratified and
confirmed. All references to the Credit Agreement contained in the
above-referenced documents shall be a reference to the Credit Agreement as so
modified by the Waiver and Amendment and as the same may from time to time
hereafter be amended, modified or restated.
Dated: November 3, 1998 IFR AMERICAS, INC., formerly known as
IFR Instruments, Inc.
PK TECHNOLOGY, INC.
IFR INSTRUMENTS OF TEXAS, INC.,
formerly known as Marconi Instruments, Inc.
IFR FINANCE, INC.
By
-----------------------------------------
Name:
Title:
-8-
<PAGE>
IFR SYSTEMS, INC.
EXHIBIT (11.0) - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------- ------
(000'S OMITTED, EXCEPT PER SHARE DATA)
<S> <C> <C>
BASIC:
Average shares outstanding 8,205 8,168
------- ------
------- ------
Net income (loss) $(1,640) $1,875
------- ------
------- ------
Per share amount $(0.20) $0.23
------- ------
------- ------
DILUTED:
Average shares outstanding 8,205 8,168
Net effect of dilutive stock
options-based on the treasury
stock method using the average
market price 86 394
------- ------
Totals 8,291 8,562
------- ------
------- ------
Net income (loss) $(1,640) $1,875
------- ------
------- ------
Per share amount (A) $(0.20) $0.22
------- ------
------- ------
</TABLE>
Note - All references to number of shares, share prices and per share amounts
have been restated to reflect the stock split.
(A) - Since the per share amounts for the FY99 interim periods are
antidilutive, the face of the statements of operations reflects
diluted per share amounts equal to the basic per share amounts.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS IN THE COMPANY'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,073
<SECURITIES> 0
<RECEIVABLES> 35,756
<ALLOWANCES> 903
<INVENTORY> 49,762
<CURRENT-ASSETS> 95,122
<PP&E> 47,499
<DEPRECIATION> 17,208
<TOTAL-ASSETS> 187,616
<CURRENT-LIABILITIES> 45,685
<BONDS> 98,909
0
0
<COMMON> 93
<OTHER-SE> 31,783
<TOTAL-LIABILITY-AND-EQUITY> 187,616
<SALES> 40,900
<TOTAL-REVENUES> 40,900
<CGS> 22,467
<TOTAL-COSTS> 22,467
<OTHER-EXPENSES> 18,658
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,398
<INCOME-PRETAX> (2,538)
<INCOME-TAX> (898)
<INCOME-CONTINUING> (1,640)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,640)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
