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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from July 1, 1998 to March 31, 1999
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:
Common Stock, $.01 par value
(Title of class)
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 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of June 7, 1999 was approximately $34,961,626 (based on the
June 7, 1999 closing price of $4.25 per share). As of June 7, 1999, there were
8,226,265 shares of Registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy statement for the 1999 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.
The Exhibit Index to this Form 10-K is located on pages 55 through 58.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I..................................................................................1
Item 1. Business................................................................1
Item 2. Properties.............................................................11
Item 3. Legal Proceedings......................................................11
Item 4. Submission of Matters to a Vote of Security Holders....................11
Item 4A. Executive Officers of the Registrant...................................12
PART II................................................................................13
Item 5. Market for the Registrant's Common Equity
and Related Shareholder Matters...................................13
Item 6. Selected Financial Data................................................14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.............21
Item 8. Financial Statements and Supplementary Data............................22
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................53
PART III...............................................................................53
Item 10. Directors and Executive Officers of the Registrant.....................53
Item 11. Executive Compensation.................................................53
Item 12. Security Ownership of Certain Beneficial Owners and Management.........53
Item 13. Certain Relationships and Related Transactions.........................53
PART IV................................................................................54
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........54
Exhibit Index .........................................................55
Signatures.............................................................59
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
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.
In the description of the Company's business, reference to "IFR" and to
the "Company" includes all subsidiaries of the Company, unless otherwise stated.
CHANGE IN FISCAL YEAR
In January 1999, the Company changed its fiscal year from a year
commencing on July 1 and ending on June 30 of the following year to a year
commencing on April 1 and ending on March 31 of the following year. The
information contained in this 10-K for the most recent fiscal year is for the
nine month transition period from July 1, 1998 to March 31, 1999.
DISCONTINUED OPERATIONS - see NOTE 12 to the consolidated financial statements
On June 25, 1999, the Board of Directors approved a formal plan to
sell the Company's Optical Test and Measurement (OTM) Division. The sale is
expected to be completed by July 31, 1999. The transaction is expected to
generate proceeds of approximately $43,000,000 in cash.
The results of operations for the OTM Division have been segregated and
classified as discontinued operations in the consolidated statements of
operations and prior periods have been restated. The consolidated balance sheets
have been segregated to reflect the OTM Division as discontinued operations and
prior periods have been restated. The consolidated statements of cash flows and
the consolidated statements of shareholders' equity include the OTM Division.
PRODUCTS
While the Company makes a broad variety of products, substantially
all of the Company's products are test instruments. The Company has two
segments: ETM Division and OTM Division. The OTM Division is reported as
discontinued operations. See NOTE 12 to the consolidated financial statements.
However, for purposes of the following discussion, sales from both
continuing and discontinued operations are included.
1
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The following table sets forth the contribution to total net sales of
each of the Company's four classes of test instruments for the periods ended
(amounts in thousands of dollars):
<TABLE>
<CAPTION>
(Nine Months)
June 30, 1997 June 30, 1998 March 31, 1999
------------- ------------- --------------
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Communications $44,684 43.2 $46,616 31.5 $31,654 24.4
Test & Measurement 4,644 4.5 20,836 14.1 26,441 20.4
Avionics 9,767 9.4 9,520 6.4 11,387 8.8
Fiber Optics 31,466 30.4 35,906 24.2 21,100 16.3
</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. 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.
2
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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, "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.
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.
3
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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 (INCLUDED IN DISCONTINUED OPERATIONS,
SEE NOTE 12 TO THE CONSOLIDATED FINANCIAL STATEMENTS). 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.
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: fiberglass 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.
4
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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 1997 acquisition of York Sensors 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.
5
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The following table sets forth the total sales of other products and
services of the Company for the periods ended (amounts in thousands of dollars):
<TABLE>
<CAPTION>
(Nine Months)
June 30, 1997 June 30, 1998 March 31, 1999
------------- ------------- --------------
<S> <C> <C> <C>
Service $9,837 $ 18,355 $ 19,755
Other 3,119 8,291 8,311
ATE & Solutions -- 8,545 10,869
</TABLE>
COMPETITION
IFR competes with numerous companies, foreign and domestic, many of
which have greater financial, marketing, and technical resources than IFR.
According to Prime Data, the test instrument global market is estimated at
approximately $8.0 billion. IFR's market share is estimated as approximately two
percent. Over 40% of the test instrument market is controlled by two suppliers.
Competition is based primarily on product quality, technological innovation,
product 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 identified quickly. With occasional
exceptions, purchased materials and components have generally been available to
the Company as needed with acceptable lead times.
6
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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 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 needs.
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 $33,500,000 at June 30, 1998, and $37,500,000 at
March 31, 1999. It is anticipated that all of the backlog orders will be filled
during the current fiscal year unless canceled or deferred by customers.
7
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GOVERNMENT AND MILITARY CONTRACTS
During the past fiscal year, approximately 3.1% 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 3.1% in fiscal
1999. 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 significantly 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
but uses new component and software technologies in the development of new
products. The Company's research and development expenditures excluding
discontinued operations were approximately $11,816,000 in fiscal 1999,
$9,208,000 in fiscal 1998, and $6,223,000 in fiscal 1997. As of May 31, 1999,
the Company had approximately 140 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.
8
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EMPLOYEES
At May 31, 1999, the Company had approximately 1,600 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 9 of
the "Notes to Consolidated Financial Statements" for the nine months ended March
31, 1999. 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 member countries of the
European Union adopted a common currency, the euro. 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 has converted to the euro. However,
data processing and accounting software is currently processing transactions in
euros as well as other foreign currencies. IFR does not anticipate any
significant impact of the euro currency on exchange gains or losses.
EFFECT OF GLOBAL ECONOMIC CONDITIONS
The impact from the economic problems and currency disruptions in
Asia 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. Although the Company believes the worst is now
behind it, the Company is cautious as to how quickly its markets will
recover. The cost reduction program which was implemented early in fiscal
1999 is proceeding as planned. At the same time, the Company is continuing to
invest in engineering and marketing to strengthen its competitive position
and prepare for renewed growth and a return to profitability.
9
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PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - 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. Forward-looking statements are all statements other than
statements of historical fact included in this report. 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 acquisition of Marconi
Instruments, Limited and (17) other risks described herein.
10
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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 six 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>
(1)
Square Lease
Location Footage Lease/Owned Expires Description
- -------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Wichita, Kansas 156,000 Capital lease (2) 2017 Mfg., Eng.,
Admin., Sales
Beaverton, Oregon (3) 46,000 Operating Lease 1999 Mfg., Eng.,
Admin., Sales
Stevenage, Hertfordshire, England
Longacres House 46,000 Operating Lease 2020 Admin., Sales
Six Hills Way Bldg 81,000 Owned N/A Mfg., Eng.
Gunnelswood Road Bldg 34,000 Owned N/A Manufacturing
Sanders Bldg 27,000 Owned N/A Inventory
Green Road, Luton, England 32,000 Operating Lease 1999 Customer Service
Chandlers Ford, England (3) 24,000 Owned N/A Mfg., Eng.,
Admin., 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.
(3) Part of discontinued operations.
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 March 31, 1999.
11
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Name Age Position
---- --- --------
Alfred H. Hunt, III 62 Chairman of the Board of Directors
and Chief Technology Officer
David A. Blaskowsky 35 General Manger OTM Division
Jeffrey A. Bloomer 42 Executive Vice President, Treasurer
and Chief Financial Officer
Iain M. Robertson 57 President and Chief Operating Officer
Friedel E. Arnold 61 General Manager, IFR Americas, Inc.
Executive officers are appointed by the Board of Directors on an
annual basis and serve until their successors have been duly elected. There
are no family relationships among any of the executive officers or directors
of the Company.
ALFRED H. HUNT, III was named Chairman of the Board of the Company
in April 1999 and is also the Chief Technology Officer. Mr. Hunt served as
the President & Chief Executive Officer of IFR since 1983 and became Vice
Chairman in 1990. He was the Vice President and General Manager of IFR from
1971 through 1983.
DAVID A. BLASKOWSKY has been the General Manager of the Optical Test
and Measurement Division since April 1998. Mr. Blaskowsky served as Director
of Finance and Administration of the OTM Division from July 1993 through
April 1998.
JEFFREY A. BLOOMER has been the Executive Vice President of the
Company since April 20, 1999 and its Treasurer and Chief Financial Officer
since November 1995. He served as the Company's Director of Finance from
August 1994 through November 1995. Prior to joining the Company, he was the
General Manager of Pawnee Industries, Inc., a plastics manufacturing company.
IAIN M. ROBERTSON was named the President and Chief Operating
Officer and elected to the Board of Directors of the Company in April 1999.
From April 1998 to April 1999, Mr. Robertson was the General Manager of the
Company's Electronic Test and Measurement Division. From July 1995 through
April 1998, he was the General Manager of the Optical Test and Measurement
Division. Prior to joining the Company, he was a consultant and Chief
Executive of York Ltd.
FRIEDEL E. ARNOLD retired from the Company on May 7, 1999. Mr.
Arnold was 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.
12
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
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 June 7, 1999, was 1,139. The high and low
sales prices of the Company's common stock for the fiscal quarters for the
periods ended are set forth below (in dollars).
<TABLE>
<CAPTION>
(Nine Months)
March 31, 1999 June 30, 1998 June 30, 1997
- --------------------------------------------------------------------
Quarters High Low High Low High Low
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First 23 1/4 4 1/8 22 11 1/2 10 11/16 7 3/16
Second 6 1/2 3 1/8 23 1/2 15 1/8 11 11/16 9 5/16
Third 7 4 5/8 25 1/2 14 1/8 12 3/4 10
Fourth - - 22 1/2 17 1/2 12 1/2 9 1/2
</TABLE>
No cash dividends were paid during the fiscal year ended March 31,
1999. The Company paid cash dividends in the fiscal year ended June 30, 1998
of $0.033 per share on September 12 and December 5, 1997.
The Company's credit agreement with First National Bank of Chicago
and other lenders precludes the payment of cash dividends by the Company.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999
(NINE MONTHS) 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Sales $ 106,159 $ 108,891 $ 67,710 $ 57,234 $ 53,692
Operating income (loss) 3,468 (16,137) 8,417 7,112 4,425
Operating income - excluding
non-recurring charges (1) 3,468 11,407 8,417 7,112 4,425
Research & development expense 11,816 9,208 6,223 4,153 4,203
Continuing operations:
Income (loss) (2,149) (18,078) 5,254 4,516 2,996
Income (loss) excluding non-
recurring charges (1) (2,149) 5,797 5,254 4,516 2,996
- ---------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $ 187,043 $ 190,757 $ 65,830 $ 60,713 $ 58,402
Working capital 46,163 49,692 33,515 27,273 22,948
Shareholders' equity 28,228 32,081 48,154 43,368 38,636
Long-term debt and
capital lease obligations 96,567 100,080 3,765 2,110 2,395
- ---------------------------------------------------------------------------------------------------------
PROFITABILITY RATIOS
Gross profit 44.6% 32.7% 39.4% 36.7% 34.4%
Gross profit - excluding
non-recurring charges (1) 44.6 43.6 39.4 36.7 34.4
Continuing operations:
Income (loss) (2.0) (16.6) 7.8 7.9 5.6
Income (loss) excluding non-
recurring charges (1) (2.0) 5.3 7.8 7.9 5.6
Effective income tax rate (1) 41.3 34.3 37.0 37.9 29.1
Return on assets (2) (1.5) (14.1) 8.3 7.6 5.5
Return on equity (2) (9.5) (45.1) 11.5 11.0 8.2
- ---------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE - DILUTED
Continuing operations:
Income (loss) $ (0.26) $ (2.21) $ 0.62 $ 0.53 $ 0.35
Income (loss) excluding non-
recurring charges (1) (0.26) 0.66 0.62 0.53 0.35
Book value 3.67 4.90 5.43 4.84 4.35
Dividends - 0.07 - - -
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Amounts differ from previously reported amounts since the results of
the OTM Division have been reflected as discontinued operations (see NOTE 12
to the consolidated financial statements).
(1) - Excludes pre-tax acquisition related charges of $11,844,000 in cost of
products sold and $15,700,000 in operating expenses. The effective income tax
rate excludes the effect of the acquisition adjustments.
(2) - Annualized the 1999 nine months loss from continuing operations
($2,149,000) to calculate these returns.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - 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. Forward-looking statements are all statements other than
statements of historical fact included in this report. 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 acquisition of Marconi Instruments, Limited
and (17) other risks described herein.
15
<PAGE>
SALE OF THE OTM DIVISION
On June 25, 1999, the Board of Directors approved a formal plan to
sell the Company's OTM Division. The sale is expected to be completed by July
31, 1999. The transaction is expected to generate proceeds of approximately
$43,000,000 in cash. Net proceeds of the sale will be utilized to reduce
long-term debt. The sale will allow the Company to further focus on the ETM
Division.
As a consequence of the divestiture, the results of operations for
the OTM Division have been segregated and classified as discontinued
operations in the consolidated statements of operations and prior periods
have been restated. The consolidated balance sheets have been segregated to
reflect the OTM Division as discontinued operations and prior periods have
been restated. The consolidated statements of cash flows and consolidated
statements of shareholders' equity include the OTM Division.
The net gain on disposal will be recognized in the period the sale
is completed. See Note 12 to the consolidated financial statements for
further discussion.
COMPARISON OF FISCAL 1999 (9 MONTHS) VS. 1998 (12 MONTHS)
Sales for the nine month fiscal year ended March 31, 1999 were
$106,159,000 compared to $108,891,000 for the twelve month fiscal year ended
June 30, 1998. This represents a decrease of 2.5%. The prior fiscal year
includes approximately five months sales of $46,822,000 from the Marconi
acquisition compared to nine months sales of $67,916,000 in fiscal year 1999.
Excluding the acquisition, sales declined by $23,826,000 or 38.4% due mainly
to one less quarter in the current fiscal year. International sales were
$67,776,000 (63.8% of sales) in fiscal year 1999 compared to $52,630,000
(48.3% of sales) in fiscal year 1998. The increase in foreign 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 as a percentage of sales increased from 32.7% in fiscal
year 1998 to 44.6% in fiscal year 1999. The prior year includes $11,844,000
(10.9% 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 percentage for 1998 was 43.6% or
1.0% lower than the current year.
Operating expenses decreased 6.2% to 41.3% of sales. The prior year
includes 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 acquisition adjustment, operating expenses increased to 41.3%
compared to 33.1% in fiscal year 1998. Significant cost reductions were
made in the latter part of the fiscal year 1999 but the impact on operating
expenses will not be dramatically realized until next year. Engineering
expenses increased as a percentage of sales from 10.4% in fiscal year 1998 to
12.9% for fiscal year 1999. This is due to the increased focus on the
development of new test instruments for the emerging wireless digital
telecommunications markets. Selling expenses increased as a percentage of
16
<PAGE>
sales from 14.5% in fiscal year 1998 to 17.3% for fiscal year 1999. The 2.8%
increase is due to the redirection of the Company to a direct sales force
after the purchase of Marconi and the increased cost of marketing
communications due to the purchase. Administrative expenses increased as a
percentage of sales from 8.2% in fiscal year 1998 to 11.1% for fiscal year
1999. The 2.9% increase is due to higher amortization costs related to the
acquisition.
Operating income as a percent of sales increased from a negative
14.8% for fiscal year 1998 to 3.3 % for fiscal year 1999. Excluding the
non-recurring acquisition adjustments in fiscal year 1998 noted above, the
$15,700,000 in process research and development and the $11,844,000 inventory
valuation, normalized operating income was $11,407,000 or 10.5% of sales
compared to 3.3% in fiscal year 1999. The 7.2% decrease is due to higher
operating expenses.
Interest expense increased by $3,805,000 compared to the prior year
due to higher interest expense related to the acquisition (nine months
expense compared to five months in the prior year) and higher short-term bank
borrowings ($6,700,000). Interest income decreased $64,000 from the prior
year. Other expense was $22,000 compared to $0 in the prior year.
Excluding the effect of the acquisition adjustments, the effective
income tax rate from continuing operations was 34.3% for fiscal year 1998
compared to 41.3% for fiscal year 1999.
The loss from continuing operations as a percent of revenue was a
negative 2.0% in fiscal year 1999 compared to a negative 16.6% in the prior
year. In fiscal year 1998, the components include the $15,700,000 in process
research and development, the $11,844,000 before tax inventory valuation and
the increased interest incurred in the purchase of Marconi. Income from
continuing operations is 5.3% after normalization of these components
compared to negative 2.0% in fiscal year 1999. The 7.3% decrease is mainly
due to higher operating expenses.
COMPARISON OF 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 $108,891,000 compared to $67,710,000
in fiscal year 1997, which represents an increase of 60.8%. The current year
includes approximately five months sales valued at $47,052,000 from the
Marconi acquisition. Excluding the acquisition, sales declined by $5,871,000
or 8.7% due to lower sales of communications test instruments to government
and commercial customers. International sales increased from $14,784,000
(21.8% of sales) in fiscal year 1997 to $52,630,000 (48.3% 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.
17
<PAGE>
Gross profit decreased from 39.4% in fiscal year 1997 to 32.7% in
fiscal year 1998. The current year includes $11,844,000 (10.9% 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 by 4.2% to 43.6% in fiscal year 1998. This
increase is due to completion of the Army SINCGARS contract in March 1997 and
introduction of higher margin commercial communication test equipment.
Operating expenses increased 20.6% to 47.5% 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
acquisition adjustment, operating expenses were 33.1% compared to 26.9% in
fiscal year 1997. Engineering expenses increased slightly as a percentage of
sales from 9.6% in fiscal year 1997 to 10.4% for fiscal year 1998. This is
due to the increased focus on the development of new test instruments for the
emerging wireless digital telecommunications markets. Selling expenses
increased as a percentage of sales from 9.3% in fiscal year 1997 to 14.5% for
fiscal year 1998. The 5.2% 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 increased
slightly as a percentage of sales from 8.0% in fiscal year 1997 to 8.2% 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 12.4% for
fiscal year 1997 to a negative 14.8% for fiscal year 1998. Excluding the
non-recurring acquisition adjustments noted above, normalized operating
income is $11,407,000 or 10.5% of sales for fiscal year 1998. The 1.9%
decrease is due to higher operating expenses.
Interest expense increased by $3,372,000 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 $132,000 over the prior year. Other income was $0 compared to other
income of $149,000 in fiscal year 1997.
Excluding the effect of the acquisition adjustments, the effective
income tax rate from continuing operations was 34.3 % for fiscal year 1998
compared to 38.7% for fiscal year 1997.
The loss from continuing operations as a percentage of sales
declined to a negative 16.6% from a prior year income from continuing
operations of 7.8%. The change of 24.4% is due to the purchase of Marconi.
The components include the $15,700,000 in process research and development,
the $11,844,000 inventory valuation and the increased interest expense
incurred in the purchase of Marconi. Fiscal 1998 income from continuing
operations is 5.3% of sales after normalization of these components. In
future years, only the interest component will be retained.
18
<PAGE>
YEAR 2000 READINESS DISCLOSURES
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 private
securities litigation reform act of 1995 -- "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 has evaluated those used by customers and has concluded such products now
being manufactured will not require modification in order to be Year 2000
compliant.
IFR'S OPERATING AND MANUFACTURING EQUIPMENT. IFR has conducted an
assessment of all of its manufacturing and other operating equipment and has
either upgraded or made arrangements for the upgrade of all significant items
of equipment that are found not to be Year 2000 compliant. To date, the
Company has incurred approximately $300,000 in Year 2000 equipment upgrade
expenditures and anticipates spending approximately $10,000 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.
19
<PAGE>
INFORMATION TECHNOLOGY AND ACCOUNTING SYSTEMS. IFR has completed its
assessment of its significant information technology and principal accounting
systems and 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 $1,575,000 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 $185,000 to complete the upgrade of
its information technology in order to be 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 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 and is continuing to develop
contingency plans that address the processes necessary to maintain critical
business functions should a significant third party system or critical
internal system fail. These contingency plans generally include the repair of
existing systems and, in some instances, the use of alternative systems or
procedures. The Company is developing business continuity plans specific to
Year 2000 issues that are based on these existing plans.
20
<PAGE>
EURO CURRENCY
On January 1, 1999, eleven of the fifteen member countries of the
European Union adopted a common currency, the euro. 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 converted to the euro. However, IFR's
data processing and accounting software is currently processing transactions in
euros and other foreign currencies. IFR does not anticipate any significant
impact of the euro on exchange gains or losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains an adequate financial position with working
capital of $46,163,000 at March 31, 1999. The Company generated cash from
operations of $5,059,000 in fiscal year 1999 and $3,683,000 in fiscal year 1998.
Cash flows used in investing activities and cash flows provided in
financing activities reflect primarily the acquisition payment and resulting
loans, subsequent debt payments and capital expenditures.
A $.033 per share cash dividend was authorized by the Board of
Directors and paid in the first and second quarter of fiscal year 1998. No cash
dividends were paid in fiscal year 1999. 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.
At March 31, 1999, the Company was in violation of the leverage
ratio restrictive covenant of its amended and restated credit agreement. The
Company signed Amendment No. 2 to the agreement which cured the violation at
March 31, 1999. The Company anticipates that it will not meet certain
financial covenants in the next twelve months without taking some curative
action. The Company plans to rectify the covenant violation by signing an
amendment to the agreement and selling the OTM Division. On June 25, 1999,
the Company signed Amendment No. 3 to the agreement which changed certain
financial covenants. On June 29, 1999, the Company signed a definitive sale
agreement to dispose of the OTM Division. If this contract does not close,
the Company will be in violation of its covenants. While the Company believes
this sale will be consummated, there can be no assurance that it will be
finalized.
The Company anticipates that the available line of credit and funds
generated from operations will be adequate to meet capital asset expenditures,
interest 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No information is required in response to this Item.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
IFR SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Responsibility for Financial Statements...................................23
Report of Independent Auditors............................................24
Consolidated Balance Sheets as of March 31, 1999 and June 30, 1998........25
Consolidated Statements of Operations for the nine months
ended March 31, 1999 and years ended June 30, 1998 and 1997...............27
Consolidated Statements of Shareholders' Equity for the nine months
ended March 31, 1999 and years ended June 30, 1998 and 1997...............28
Consolidated Statements of Cash Flows for the nine months
ended March 31, 1999 and years ended June 30, 1998 and 1997...............29
Notes to Consolidated Financial Statements................................30
Quarterly Results of Operations (unaudited)...............................50
</TABLE>
22
<PAGE>
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of IFR Systems, Inc. is responsible for the
preparation of the financial statements and financial statement schedule,
the Annual Report and for the integrity and objectivity of the information
presented. The financial statements and financial statement schedule 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.
Jeffrey A. Bloomer
Executive Vice President, Treasurer and
Chief Financial Officer
23
<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 March 31, 1999 and June 30, 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for the nine
months ended March 31, 1999 and for each of the two years in the period ended
June 30, 1998. Our audits also included the financial statement schedule listed
in the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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 March 31, 1999 and June 30, 1998, and the consolidated results of its
operations and its cash flows for the nine months ended March 31, 1999 and for
each of the two years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Indianapolis, Indiana
June 25, 1999,
except for Note 12, as to which the date is
June 29, 1999
24
<PAGE>
IFR Systems, Inc.
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, June 30,
1999 1998
-------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,086 $ 159
Accounts receivable, less allowance for doubtful
accounts of $731 in 1999 and $773 in 1998 27,306 33,369
Inventories:
Finished products 15,568 14,975
Work in process 8,811 8,393
Materials 13,650 14,372
-------------------------------------
38,029 37,740
Prepaid expenses and sundry 6,042 3,899
Deferred income taxes (NOTE 5) 2,492 3,068
Current assets of discontinued operations 17,460 18,769
-------------------------------------
TOTAL CURRENT ASSETS 96,415 97,004
PROPERTY AND EQUIPMENT:
Land 4,670 4,728
Buildings 8,183 8,289
Machinery 23,226 22,200
Allowances for depreciation (deduction) (13,835) (11,303)
-------------------------------------
22,244 23,914
PROPERTY UNDER CAPITAL LEASE (NOTE 4):
Building 2,757 2,754
Machinery 2,444 2,179
Allowances for depreciation (deduction) (1,962) (1,616)
-------------------------------------
3,239 3,317
PROPERTY AND EQUIPMENT PENDING DISPOSITION, NET OF
ALLOWANCES FOR DEPRECIATION OF $4,380 IN 1999
AND $3,800 IN 1998 3,058 3,511
OTHER ASSETS (NOTE 2):
Cost in excess of net assets acquired, less
accumulated amortization of $812 in 1999
and $290 in 1998 21,485 20,534
Developed technology, less accumulated amortization
of $1,092 in 1999 and $390 in 1998 17,708 18,410
Other intangibles, less accumulated amortization
of $1,594 in 1999 and $955 in 1998 13,172 13,811
Other 2,090 2,069
Other assets related to discontinued operations - net 7,632 8,187
-------------------------------------
62,087 63,011
-------------------------------------
TOTAL ASSETS $ 187,043 $ 190,757
-------------------------------------
-------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, June 30,
1999 1998
--------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank borrowings (NOTE 4) $ 17,700 $ 11,000
Accounts payable 9,883 9,886
Accrued compensation and payroll taxes 4,401 6,406
Other liabilities and accrued expenses (NOTE 10) 8,890 11,413
State and local taxes 564 489
Federal income taxes 556 -
Current maturity of capital lease obligations 185 185
Current maturity of long-term debt 4,250 3,500
Current liabilities of discontinued operations 3,823 4,433
--------------------------------------
TOTAL CURRENT LIABILITIES 50,252 47,312
CAPITAL LEASE OBLIGATIONS (NOTE 4) 3,442 3,580
LONG-TERM DEBT (NOTE 4) 93,125 96,500
DEFERRED INCOME TAXES (NOTE 5) 11,828 11,114
DEFERRED INCOME TAXES OF DISCONTINUED OPERATIONS 168 170
SHAREHOLDERS' EQUITY (NOTE 7):
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 93
Additional paid-in capital 7,368 7,121
Cost of common stock in treasury - 1,056,985
shares in 1999 and 1,065,313 shares in 1998 (8,611) (8,679)
Accumulated other comprehensive income (loss) (1,187) 386
Retained earnings 30,565 33,160
--------------------------------------
Total shareholders' equity 28,228 32,081
--------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 187,043 $ 190,757
--------------------------------------
--------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
26
<PAGE>
IFR Systems, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS Years ended
ENDED -------------------------------
MARCH 31, June 30, June 30,
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
SALES $ 106,159 $108,891 $ 67,710
COST OF PRODUCTS SOLD 58,858 73,257 41,066
-------------------------------------------
GROSS PROFIT 47,301 35,634 26,644
OPERATING EXPENSES:
Selling 18,329 15,810 6,270
Administrative 11,799 8,942 5,442
Engineering 13,705 11,319 6,515
Acquired research and development (NOTE 2) - 15,700 -
-------------------------------------------
43,833 51,771 18,227
-------------------------------------------
OPERATING INCOME (LOSS) 3,468 (16,137) 8,417
OTHER INCOME (EXPENSE):
Interest income 578 642 510
Interest expense (7,685) (3,880) (508)
Other, net (22) - 149
-------------------------------------------
(7,129) (3,238) 151
-------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (BENEFIT) (3,661) (19,375) 8,568
INCOME TAXES (BENEFIT) (NOTE 5) (1,512) (1,297) 3,314
-------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (2,149) (18,078) 5,254
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
LESS APPLICABLE INCOME TAXES (NOTE 12) (446) 2,141 1,392
-------------------------------------------
NET INCOME (LOSS) $ (2,595) $ (15,937) $ 6,646
-------------------------------------------
-------------------------------------------
EARNINGS (LOSS) PER SHARE - BASIC:
Income (loss) from continuing operations $ (0.26) $ (2.21) $ 0.65
Income (loss) from discontinued operations (0.06) 0.26 0.17
-------------------------------------------
Net income (loss) $ (0.32) $ (1.95) $ 0.82
-------------------------------------------
-------------------------------------------
EARNINGS (LOSS) PER SHARE - DILUTED:
Income (loss) from continuing operations $ (0.26) $ (2.21) $ 0.62
Income (loss) from discontinued operations (0.06) 0.26 0.17
-------------------------------------------
Net income (loss) $ (0.32) $ (1.95) $ 0.79
-------------------------------------------
-------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING 8,207 8,191 8,130
-------------------------------------------
-------------------------------------------
DILUTIVE COMMON SHARES OUTSTANDING 8,207 8,191 8,422
-------------------------------------------
-------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
27
<PAGE>
IFR Systems, Inc.
Consolidated Statements of Shareholders' Equity
(In thousands)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK OTHER
---------------- PAID-IN ------------------ COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL SHARES AMOUNT INCOME (LOSS) EARNINGS TOTAL
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1996 9,266 $ 62 $ 6,135 (981) $ (5,708) $ (149) $ 43,028 $ 43,368
Net income - - - - - - 6,646 6,646
Translation adjustments - - - - - 207 - 207
--------
Comprehensive income - - - - - - - 6,853
Purchases for treasury - - - (468) (4,477) - - (4,477)
Incentive stock options exercised - - (318) 198 1,331 - - 1,013
Tax benefit from exercise of stock options - - 207 - - - - 207
Payment of York Ltd. note - - 371 120 803 - - 1,174
Restricted stock grants (NOTE 7) - - 5 1 11 - - 16
-------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1997 9,266 62 6,400 (1,130) (8,040) 58 49,674 48,154
Net loss - - - - - - (15,937) (15,937)
Translation adjustments - - - - - 328 - 328
--------
Comprehensive loss - - - - - - - (15,609)
Purchases for treasury - - - (128) (2,057) - - (2,057)
Incentive stock options exercised - - (237) 193 1,418 - - 1,181
Stock split effected in the form of a dividend - 31 - - - - (31) -
Dividends - $.067 per share - - - - - - (546) (546)
Tax benefit from exercise of stock options - - 958 - - - - 958
-------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998 9,266 93 7,121 (1,065) (8,679) 386 33,160 32,081
Net loss - - - - - - (2,595) (2,595)
Translation adjustments - - - - - (1,573) - (1,573)
--------
Comprehensive loss - - - - - - - (4,168)
Incentive stock options exercised - - (17) 5 44 - - 27
Tax benefit from exercise of stock options - - 288 - - - - 288
Restricted stock grants (NOTE 7) - - (24) 3 24 - - -
-------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1999 9,266 $ 93 $ 7,368 (1,057) $ (8,611) $ (1,187) $ 30,565 $ 28,228
-------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
28
<PAGE>
IFR Systems, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS Years ended
ENDED --------------------------
MARCH 31, June 30, June 30,
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (2,595) $ (15,937) $ 6,646
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation of property and equipment 4,422 4,234 2,263
Amortization of intangibles 2,276 2,207 801
Write off of acquired research and development - 15,700 -
Deferred income taxes 910 (3,622) (701)
Deferred compensation expense - - 16
Utilization of acquired tax loss carryforwards - 416 272
Changes in operating assets and liabilities
(net of effects of acquired businesses):
Accounts receivable 8,971 (3,081) (3,213)
Inventories (494) 13,810 1,421
Other current assets (2,974) 1,320 51
Accounts payable and accrued liabilities (6,549) (7,044) 2,514
Other current liabilities 1,092 (4,320) 715
-------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,059 3,683 10,785
INVESTING ACTIVITIES
Payments for acquired businesses - (108,851) -
Purchases of property and equipment, net (3,239) (4,543) (3,334)
Proceeds from sale of equipment - 1,071 -
Sundry (525) (1,832) (32)
-------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (3,764) (114,155) (3,366)
FINANCING ACTIVITIES
Purchases of capital stock for treasury - (2,057) (4,477)
Principal payments on capital lease obligations (138) (175) (2,009)
Principal payments on long-term debt (2,625) - (1,198)
Principal payments on short-term bank borrowings (8,100) (3,535) (32,115)
Proceeds from short-term bank borrowings 14,800 12,150 29,380
Proceeds from acquisition loan - 100,000 -
Proceeds from exercise of common stock options 315 2,139 1,220
Proceeds from issuance of Industrial Revenue Bond - - 3,940
Payment of dividends - (546) -
-------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,252 107,976 (5,259)
Effect of exchange rate changes on cash (620) 276 (47)
-------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,927 (2,220) 2,113
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 159 2,379 266
-------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,086 $ 159 $ 2,379
-------------------------------------------
-------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
29
<PAGE>
IFR Systems, Inc.
Notes to Consolidated Financial Statements
March 31, 1999
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 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 other comprehensive
income. Gains or losses resulting from foreign currency transactions are
included in other income.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
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.
30
<PAGE>
INTANGIBLE ASSETS
The cost in excess of net assets acquired (goodwill), developed technology
and other intangibles are being amortized by the straight-line method over
periods ranging from 10 to 30 years.
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.
COMPREHENSIVE INCOME
Effective July 1 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (Statement 130).
Under provisions of this statement, the Company has reported components of other
comprehensive income and total comprehensive income in the Consolidated
Statements of Shareholders' Equity. Statement 130 requires the Company's foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. As a result of this change, certain balance sheet reclassifications for
previously reported amounts were necessary to achieve the required presentation
of comprehensive income. Implementation of this disclosure standard did not
affect the Company's financial position or results of operations.
REVENUE RECOGNITION
Revenue from the sale 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
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.
31
<PAGE>
SEGMENT INFORMATION
Effective March 31, 1999, the Company adopted Statement of Financial
Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION (Statement 131). Statement 131 requires public business
enterprises to disclose certain information about reportable operating segments
in complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods. It also requires public enterprises to
present certain "enterprise-wide" information, including revenues related to
products and services and geographic areas in which they operate. The adoption
of Statement 131 did not affect the Company's financial position or results of
operation, but did affect the disclosure of segment information. See Note 9.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES (Statement 133), which is required to be adopted in years
beginning after June 15, 1999. A recent amendment to this statement, if
approved, will extend this date to June 15, 2000. Management does not
anticipate that the adoption of Statement 133 will have a significant effect
on earnings or the financial position of the Company.
CHANGE IN FISCAL YEAR
In January 1999, the Company's Board of Directors approved an amendment of
the Bylaws to change the fiscal year from June 30 to March 31. The change in
year end was done to allow more efficient alignment of the planning and
accounting functions of the business which has changed significantly with the
increase in the Company's international presence.
RECLASSIFICATIONS
Certain amounts in the 1998 consolidated financial statements have been
reclassified to conform with the 1999 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 4). 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.
32
<PAGE>
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, as
adjusted during fiscal 1999, 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 2,459
- ----------------------------------------------------------------
Total purchase price $109,398
- ----------------------------------------------------------------
Total current assets $61,737
Property and equipment - net 20,850
Developed technology (amortized over 20 years) 18,800
Goodwill (amortized over 30 years) 22,297
Other intangible assets (amortized over 1-20 years) 14,766
Acquired research and development 15,700
- ----------------------------------------------------------------
Total assets 154,150
Total current liabilities assumed (32,181)
Deferred income taxes (12,571)
- ----------------------------------------------------------------
Total net assets $109,398
- ----------------------------------------------------------------
</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 $7.7 million were recorded for
costs associated with the shutdown of certain acquired facilities for severance
and related costs. Payments in the amount of $5.4 million have been charged
against the liability through March 31, 1999.
33
<PAGE>
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. York Sensors is part of the Optical Test and
Measurement (OTM) Division which has been segregated and classified as
discontinued operations (see NOTE 12).
PRO FORMA INFORMATION
The following pro forma data presents the consolidated results of
operations as if the Marconi acquisition 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 data)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Sales $174,688 $177,464
Income from continuing operations 4,916 2,201
Income from continuing
operations per common share $ 0.60 $ 0.27
Assuming dilution $ 0.56 $ 0.26
</TABLE>
3. RESTRUCTURING
In January 1999, management approved the plan to consolidate the
manufacturing operations of its Optical Test & Measurement (OTM) Division into
the facility in Beaverton, Oregon. The Division currently has manufacturing
facilities both in Beaverton and Chandlers Ford, England. Restructuring
liabilities of approximately $1.0 million were recorded for severance costs
related to the move. Payments in the amount of $0.3 million have been charged
against the liability through March 31, 1999. The OTM Division has been
segregated and classified as discontinued operations (see NOTE 12).
34
<PAGE>
4. DEBT AND LEASE ARRANGEMENTS
Long-term debt consisted of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
<S> <C> <C>
- -------------------------------------------------------------------------------
Term Loan A $47,750 $ 50,000
Term Loan B 49,625 50,000
- -------------------------------------------------------------------------------
97,375 100,000
Less current maturities 4,250 3,500
- -------------------------------------------------------------------------------
Total long-term debt $93,125 $ 96,500
- -------------------------------------------------------------------------------
</TABLE>
TERM LOANS PAYABLE TO BANK: In March 1998, the Company entered into an amended
and restated Credit Agreement with a 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>
2000 $ 4,250
2001 5,250
2002 9,250
2003 12,000
2004 25,312
Thereafter 41,313
- -------------------------------------------------------------------------------
Total $97,375
- -------------------------------------------------------------------------------
</TABLE>
Under the terms of the Agreement, borrowings bear interest at a spread
up to 3.25% per annum over the London Interbank Offered Rate (LIBOR) which
varies depending on the Term Loan and the current leverage ratio as defined
in the Agreement. At March 31, 1999, the spread was 2.75% on Term Loan A and
3.25% on Term Loan B. The interest rate on the loans at March 31, 1999 was
7.88% on Term Loan A and 8.38% on Term Loan B.
The Company is subject to certain restrictive covenants contained in the
Agreement. The Company was in violation of the leverage ratio covenant at
March 31, 1999. On March 31, 1999, the Company signed Amendment No. 2 to the
Agreement which cured the violation at March 31, 1999 (see Note 12 for
further information on debt covenants).
LINES OF CREDIT: In March 1998, the Company entered into an amended and restated
Credit Agreement with the bank syndication (the Credit Agreement) to provide
available lines of credit aggregating $30,000,000. The Credit Agreement expires
on February 5, 2004. Under the terms of the Credit Agreement, borrowings bear
interest at a spread over LIBOR based on certain financial criteria. At March
31, 1999, this spread was 2.75%. The total interest rate on the outstanding
portion of the lines of credit was 7.75% at March 31, 1999. As of March 31,
1999, the Company has available lines of credit aggregating $14,000,000.
SWING LINE NOTE: The Credit Agreement allows for swing line loans for an amount
not to exceed $5,000,000. At March 31, 1999, the Company had available funds
aggregating $3,300,000 at an interest rate of 7.75%.
35
<PAGE>
INTEREST SWAP AGREEMENT: In February 1998, the Company entered into two separate
interest swap agreements for $25,000,000 each. The first swap 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 swap agreement is for a fixed
interest rate of 5.76% 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 March 31, 1999 and June 30, 1998, the unused
cash balance was $0 and $170,203, 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 March 31, 1999, are as follows (IN THOUSANDS):
<TABLE>
<S> <C>
2000 $ 400
2001 396
2002 396
2003 400
2004 399
Thereafter 3,442
- -------------------------------------------------------------------------------
Total minimum lease payments 5,433
Amounts representing interest 1,806
- -------------------------------------------------------------------------------
Present value of minimum lease payments 3,627
Current maturities 185
- -------------------------------------------------------------------------------
Long-term portion $3,442
- -------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
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 equipment to the lessor. Generally, management expects
that, after the initial lease term, the equipment will be purchased for the then
fair value.
Minimum payments for operating leases having initial or remaining
noncancelable terms in excess of one year are as follows (IN THOUSANDS):
<TABLE>
<S> <C>
2000 $ 2,351
2001 1,969
2002 1,412
2003 1,101
2004 889
Thereafter 10,865
- -------------------------------------------------------------------------------
Total minimum lease payments $18,587
- -------------------------------------------------------------------------------
</TABLE>
Total rent expense for all operating leases amounted to approximately
$1,094,000, $691,000, and $261,000 for 1999, 1998 and 1997, respectively.
INTEREST PAID: Interest paid during 1999, 1998 and 1997 was
approximately $7,257,000, $3,681,000, and $492,000, respectively.
5. 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) from continuing operations
before income taxes is as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
March 31, June 30, June 30,
1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. $(2,672) $ 6,812 $8,568
Foreign (989) (26,187) --
- --------------------------------------------------------------------------------
Total $(3,661) $(19,375) $8,568
- --------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
Income tax expense (benefit) from continuing operations is summarized as
follows (IN THOUSANDS):
<TABLE>
<CAPTION>
March 31, June 30, June 30,
1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $(1,308) $ 1,425 $2,905
Deferred 343 619 (286)
Foreign:
Current 1,369 343 --
Deferred (1,633) (4,202) --
State (283) 518 695
-------------------------------------
Income tax expense $(1,512) $(1,297) $3,314
-------------------------------------
</TABLE>
Significant components of the Company's deferred tax liabilities and assets
are as follows (IN thousands):
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ 822 $ 565
Purchased intangibles 10,468 10,454
Other 538 95
- -------------------------------------------------------------------------------
Total deferred tax liabilities 11,828 11,114
Deferred tax assets:
Net operating loss carryforwards 1,242 500
Capital loss carryforward 170 153
Exit costs 45 1,376
Inventory reserve 594 279
Accrued vacation 395 307
Warranty reserve 303 198
Allowance for bad debts 154 136
Foreign interest deduction 614 351
Other-net 518 421
- -------------------------------------------------------------------------------
Total deferred tax assets 4,035 3,721
Valuation allowance for deferred tax assets (1,543) (653)
- -------------------------------------------------------------------------------
Net deferred tax assets 2,492 3,068
- -------------------------------------------------------------------------------
Net total deferred tax liabilities $(9,336) $(8,046)
- -------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
At March 31, 1999, 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.
At March 31, 1999, the Company had foreign interest deductions of
$1,981,000 that can be utilized in foreign group relief schemes when the Company
returns to profitability. For financial reporting purposes, a valuation
allowance has been recognized to offset the deferred tax assets related to the
interest deduction.
Deferred taxes have not been provided on undistributed earnings of foreign
subsidiaries since substantially all of these earnings are expected to be
permanently reinvested in foreign operations. Determination of the amount of
unrecognized deferred U.S. income tax liabilities and potential foreign tax
credits is not practicable to calculate because of the complexity related with
this hypothetical calculation.
The effective income tax rate from continuing operations varied from the
statutory federal income tax rate as follows for the periods ended:
<TABLE>
<CAPTION>
March 31, June 30, June 30,
1999 1998 1997
- -------------------------------------------------------------------------------
<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 3.4 (1.9) 5.4
Amortization of goodwill and
intangibles (7.5) (0.2) --
Valuation allowance 7.2 -- --
Change in tax rate 4.5 -- --
Acquired Research and Development -- (27.6) --
Foreign Rate Differential (4.6) (0.6) --
Research and development tax credits -- 0.7 (0.6)
Other 4.3 2.3 (0.1)
- -------------------------------------------------------------------------------
41.3% 6.7% 38.7%
- -------------------------------------------------------------------------------
</TABLE>
Income taxes paid during 1999, 1998 and 1997 were approximately
$2,732,000, $4,001,000, and $3,826,000, respectively.
6. RESEARCH AND DEVELOPMENT COSTS
Research and development costs, excluding the acquired research and
development, were approximately $11,816,000, $9,208,000, and $6,223,000 for
1999, 1998 and 1997, respectively.
39
<PAGE>
7. SHAREHOLDERS' EQUITY
INCENTIVE STOCK OPTION PLANS: The Company has two incentive stock option plans -
the 1988 and 1996 Plan (the Plan). The 1988 Plan expired in February 1999 and
therefore has no shares available for grant. Under the 1996 Plan, 600,000 shares
of Common Stock have been reserved for issuance. The Plan permits the granting
of qualified stock options to officers and key employees. The option price per
share under the Plan 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 option
price under the Outside Director Plan is the fair market value of a share of
Common Stock on the date of grant. The Outside Director Plan expired in February
1999.
The following table summarizes information concerning options outstanding
and exercisable at March 31, 1999 for all plans:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------- ------------------------------------
Weighted-
Average
Range of Remaining Weighted-
Exercise Number Contractual Weighted-Average Number Average
Prices Outstanding Life Exercise Price Exercisable Exercise Price
- ---------------- ----------------- --------------- ------------------------ --------------- --------------------
<S> <C> <C> <C> <C> <C>
$ 1 - $ 5 183,870 5.18 $4.72 165,870 $4.67
$ 6 - $ 8 233,485 6.23 $7.63 147,069 $7.68
$ 9 - $11 141,750 7.30 $10.46 71,500 $10.47
$12 - $18 251,250 8.40 $14.27 63,324 $14.27
$19 - $22 163,000 8.65 $20.20 7,875 $20.26
</TABLE>
40
<PAGE>
Stock option activity during 1997-1999 is summarized below:
<TABLE>
<CAPTION>
Number of Weighted- Number of
Shares Average Shares Weighted-Average
Outstanding Exercise Price Exercisable Exercise Price
------------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
July 1, 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
Granted 25,500 5.47
Exercised (5,400) 5.11
Canceled or
Expired (17,000) 19.75
------------------------------------- ------------------------------------
March 31, 1999 973,355 $11.31 455,638 $8.16
------------------------------------- ------------------------------------
------------------------------------- ------------------------------------
</TABLE>
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, 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 data)
March 31, June 30, June 30,
1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from continuing operations:
As reported $ (2,149) $ (18,078) $ 5,254
Pro forma (2,927) (18,777) 5,087
Income (loss) from continuing operations
per share - diluted:
As reported $ (0.26) $ (2.21) $ 0.62
Pro forma (0.36) (2.29) 0.60
</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.
41
<PAGE>
The fair values of the options were determined by using a Black-Scholes
option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1998 June 30, 1997
- ----------------------------------- ----------------------- ----------------------- -------------------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Volatility 61% 46% 45%
Risk-free interest rate 6% 6% 6%
Expected life 6 years 6 years 6 years
</TABLE>
The weighted average fair value of options granted at the market price for
1999, 1998 and 1997 were $3.42, $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 1999 and 1998, the Company made grants
of 3,000 and 4,000 shares, respectively.
The market value of restricted shares granted is being amortized as
compensation expense over the vesting period. Total expense of $15,000 was
recognized in 1999 in connection with the restricted stock grant plan. The
shares reserved for future grants are 124,041 as of March 31, 1999.
SHAREHOLDER RIGHTS PLAN: The Board of Directors of the Company amended its
Shareholder Rights Plan on January 21, 1999, 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
January 25, 1999. The Rights will expire on January 20, 2009. Each Right
entitles shareholders to buy one share of common stock of the Company at an
exercise price of $65 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.
42
<PAGE>
8. EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominators used in
computing basic and diluted earnings per share from continuing operations (IN
THOUSANDS, EXCEPT PER SHARE DATA):
<TABLE>
<CAPTION>
March 31, June 30, June 30,
1999 1998 1997
- ---------------------------------------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
NUMERATOR
Income (loss) from continuing operations
available to common shareholders $(2,149) $(18,078) $5,254
---------------- ---------------- ----------------
DENOMINATORS
Basic earnings (loss) per share:
Weighted-average common shares
outstanding 8,207 8,191 8,130
---------------- ---------------- ----------------
Basic earnings (loss) per share from
continuing operations $(0.26) $(2.21) $0.65
---------------- ---------------- ----------------
Diluted earnings (loss) per share:
Weighted-average common shares
outstanding 8,207 8,191 8,130
Effect of stock options 47 570 292
---------------- ---------------- ----------------
Weighted-average common shares
outstanding - diluted 8,254 8,761 8,422
---------------- ---------------- ----------------
Diluted earnings (loss) per share from
continuing operations (0.26) $(2.06) $0.62
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
Note - Since the effect of stock options for 1999 and 1998 is
antidilutive, the statements of operations reflect diluted per share amounts
equal to the basic per share amounts.
43
<PAGE>
9. SEGMENTS
DESCRIPTION OF THE TYPES OF PRODUCTS AND SERVICES FROM WHICH EACH REPORTABLE
SEGMENT DERIVES ITS REVENUES
The Company has two segments: electronic test and measurement equipment
(ETM Division) and optical test and measurement equipment (OTM Division). On
June 25, 1999, the Company committed itself to a formal plan to dispose of
the OTM Division (see Note 12). Consequently, the OTM Division is reported as
discontinued operations and has been excluded from the following reportable
segment tables.
The ETM Division consists of IFR Americas, Inc. based in Wichita, Kansas
and IFR Ltd. based in Stevenage, Hertfordshire, United Kingdom. The ETM Division
offers a broad array of test instruments for the commercial and government
communications market (mobile radios and paging products), the general test &
measurement market (signal generators, spectrum analyzers, and microwave
products), the automatic test equipment market (manufacturing defect analyzers,
in-circuit analyzers and functional analyzers) and the avionics market (global
positioning, collision avoidance, weather radar and navigation systems) as well
as service and repair for these products.
The OTM Division consists of PK Technology Inc. based in Beaverton, Oregon
and PK Technology Ltd. and York Sensors Ltd. both based in Hampshire, United
Kingdom. The OTM Division's product portfolio includes a range of automated test
systems for measuring preforms, optical fibers and geometric parameters, high
performance Optical Time Domain Reflectometers (OTDR) and a line of
quick-connect fiber-to-fiber coupling devices for the manufacturers of optical
fiber. The division also provides test equipment such as Mini-OTDRs, optical
channel analyzers, power meters and stabilized light sources for the
installation, maintenance and repair of optical fiber networks. In addition, the
division provides a range of sensing equipment used to determine temperature
distribution in optical fibers and offers fiber preparation and cleaving tools
used by fiber and cable manufacturers.
MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS
The Company evaluates performance and allocates resources based on profit
or loss from operations before income taxes and other income or expense. The
accounting policies of the reportable segment is the same as those described in
the summary of significant accounting policies (see Note 1). However, goodwill
and restructuring costs are shown in other income (expense) for segment
reporting and reclassified to operating expenses for external reporting.
There are no intersegment sales and transfers. Sales are attributed to
geographic areas based on the location of the customers.
44
<PAGE>
FACTORS MANAGEMENT USED TO IDENTIFY REPORTABLE SEGMENTS
The Company's reportable segment is a strategic business unit that offers
similar products and services. The reportable segment is managed separately
because it requires different technology and marketing strategies. Operating
segments have been aggregated into the reportable segment.
The Company utilizes the following information for purposes of making
decisions about allocating resources to a segment and assessing a segment's
performance:
<TABLE>
<CAPTION>
Nine months Years ended
ended ------------------------------------
March 31, June 30, June 30,
(IN THOUSANDS) 1999 1998 1997
------------------ ------------------ -----------------
<S> <C> <C> <C>
SALES FROM EXTERNAL CUSTOMERS
ETM Division $106,159 $108,891 $67,710
------------------ ------------------ -----------------
DEPRECIATION AND AMORTIZATION EXPENSE
ETM Division $ 5,558 $ 5,011 $ 1,208
------------------ ------------------ -----------------
OPERATING INCOME
ETM Division $ 7,245 $ 12,893 $ 8,417
------------------ ------------------ -----------------
TOTAL ASSETS
ETM Division $193,015 $184,446 $60,673
------------------ ------------------ -----------------
EXPENDITURES FOR LONG-LIVED ASSETS
ETM Division $ 2,879 $ 3,586 $ 2,158
------------------ ------------------ -----------------
</TABLE>
45
<PAGE>
A reconciliation of reportable segment amounts to the Company's
consolidated balances is as follows:
<TABLE>
<CAPTION>
Nine months Years ended
ended --------------------------------
March 31, June 30, June 30,
(IN THOUSANDS) 1999 1998 1997
------------------ ------------------ -------------
<S> <C> <C> <C>
OPERATING INCOME (LOSS)
Per reportable segment $ 7,245 $ 12,893 $ 8,417
Goodwill amortization (1,863) (1,635) 0
Corporate expenses (1,914) 149 0
Non-recurring - inventory valuation 0 (11,844) 0
Non-recurring - acquired R&D 0 (15,700) 0
------------------ ------------------ -------------
Total $ 3,468 $(16,137) $ 8,417
------------------ ------------------ -------------
------------------ ------------------ -------------
TOTAL ASSETS
Per reportable segment $193,015 $184,446 $60,673
Discontinued operations 29,547 31,859 28,665
Corporate eliminations (35,519) (25,548) (23,508)
------------------ ------------------ -------------
Total $187,043 $190,757 $65,830
------------------ ------------------ -------------
------------------ ------------------ -------------
</TABLE>
Sales include $3,325,000, $16,534,000 and $21,084,000 in 1999, 1998
and 1997, respectively, to the United States government.
46
<PAGE>
<TABLE>
<CAPTION>
Nine months Years ended
ended ---------------------------------
March 31, June 30, June 30,
(IN THOUSANDS) 1999 1998 1997
------------------ ------------------ --------------
<S> <C> <C> <C>
GEOGRAPHIC AREA SALES
United States $ 38,383 $ 56,261 $52,926
South America and Canada 7,325 4,127 4,019
------------------ ------------------ --------------
Total Americas 45,708 60,388 56,945
------------------ ------------------ --------------
United Kingdom 23,361 17,891 2,914
France 8,582 5,721 688
Germany 5,045 3,664 61
Other 9,190 7,234 938
------------------ ------------------ --------------
Total Europe 46,178 34,510 4,601
------------------ ------------------ --------------
Pacific Rim 10,090 9,359 4,321
Rest Of World 4,183 4,634 1,843
------------------ ------------------ --------------
Total $106,159 $108,891 $67,710
------------------ ------------------ --------------
------------------ ------------------ --------------
GEOGRAPHIC AREA LONG-LIVED ASSETS
United States $ 10,382 $ 10,282 $ 7,490
South America and Canada - - -
------------------ ------------------ --------------
Total Americas 10,382 10,282 7,490
------------------ ------------------ --------------
United Kingdom 69,145 70,634 -
France 210 399 -
Germany 71 129 -
Other 57 115 -
------------------ ------------------ --------------
Total Europe 69,483 71,277 -
------------------ ------------------ --------------
Pacific Rim 73 80 -
------------------ ------------------ --------------
Total $ 79,938 $ 81,639 $ 7,490
------------------ ------------------ --------------
------------------ ------------------ --------------
SALES BY MARKET SECTOR
Communications $ 31,654 $ 46,616 $44,684
Test & Measurement 26,441 20,836 4,644
Avionics 11,387 9,520 8,050
ATE & Solutions 10,869 8,545 -
Service 17,497 15,083 7,213
Other 8,311 8,291 3,119
------------------ ------------------ --------------
Total $106,159 $108,891 $ 67,710
------------------ ------------------ --------------
------------------ ------------------ --------------
</TABLE>
47
<PAGE>
10. 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
1999, 1998 and 1997 were approximately $0, $1,229,000, and $961,000,
respectively.
DIRECTORS RETIREMENT PLAN: The Company maintains an unfunded retirement plan for
nonemployee directors of the Company. Benefits will not accrue for periods in
excess of 10 years of service and are payable when the Plan's requirements are
satisfied. The Plan expired in February 1999. The estimated liability at March
30, 1999 and June 30, 1998 was $345,000 and $309,000, 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. The Company also has a defined contribution plan for substantially all
U.K. employees. Employees may contribute to the plan up to 12% of their salary.
Matching Company contributions are discretionary with respect to the plan.
During 1999, 1998 and 1997, the Company matched 50% of each U.S. employee's
contribution up to 4% of their salary. During 1999 and 1998, the Company matched
50% of each U.K. employee's contribution up to 10% of their salary. Company
contributions charged to expense in 1999, 1998 and 1997, were approximately
$1,954,000, $260,000, and $265,000, 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 1999, 1998 and 1997 were
approximately $0, $116,000 and $936,000, 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 1999, 1998 and 1997 were
approximately $1,034,000, $1,163,000, and $1,378,000, respectively.
48
<PAGE>
11. SPECIFIED FINANCIAL INFORMATION
The following comparative information is presented for the nine month
periods ending March 31, 1999 and March 31, 1998 (IN THOUSANDS, EXCEPT PER SHARE
DATA):
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------------
(Unaudited)
<S> <C> <C>
Sales $ 106,159 $ 69,076
Gross profit 47,301 23,397
Income taxes (benefit) (1,512) 1,098
Continuing operations:
Loss (2,149) (15,039)
Loss per share (0.26) (1.84)
Loss per share assuming dilution (0.26) (1.84)
</TABLE>
The net loss for 1998 includes acquisition-related charges of $15,700,000
for the write-off of in-process research and development and $4,738,000 before
taxes for inventory related charges included in cost of goods sold.
Since the per share amounts for 1999 and 1998 are antidilutive, the diluted
per share amounts equal the basic per share amounts.
12. DISCONTINUED OPERATIONS
On June 25, 1999, the Board of Directors approved a formal plan to sell
the Company's Optical Test and Measurement (OTM) Division. The sale is
expected to be completed by July 31, 1999. The transaction is expected to
generate proceeds of approximately $43,000,000 and a gain of approximately
$12,000,000 ($1.45 per share) after taxes of approximately $7,000,000. The
net proceeds from the sale will be used to pay down the term loans in the
Agreement (see NOTE 4).
The results of operations for the OTM Division have been segregated and
classified as discontinued operations in the consolidated statements of
operations and prior periods have been restated. Selected results of operations
for the OTM Division follows: (IN THOUSANDS):
<TABLE>
<CAPTION>
March 31, June 30, June 30,
1999 1998 1997
- ---------------------------------------------------------- --------------- ---------------- ----------------
<S> <C> <C> <C>
Sales $23,358 $39,178 $35,807
Income tax expense (benefit) (6) 1,744 1,048
Income (loss) from discontinued operations (446) 2,141 1,392
</TABLE>
The consolidated balance sheets have been segregated to reflect the OTM
Division as discontinued operations and prior periods have been restated. The
consolidated statements of cash flows and consolidated statements of
shareholders' equity include the OTM Division.
The Company anticipates that it will not meet certain financial
covenants contained in its Agreement in the next twelve months without taking
some curative action. The Company plans to rectify the potential covenant
violations through the disposal of its OTM Division. On June 25, 1999, the
Company signed Amendment No. 3 to the Agreement which modified certain
financial covenants. On June 29, 1999, the Company signed a definitive sale
agreement to dispose of the OTM Division which is expected to close by July
31, 1999. Completion of the disposition is subject only to ordinary and
customary antitrust review. If this sale is not consummated by July 31, 1999,
the Company will be in violation of its debt covenants. While the Company
believes this sale will be consummated, there can be no assurance that it
will be finalized.
49
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
QUARTERS ENDED
- ---------------------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUN. 30,
FISCAL 1999 1998 1998 1999 1999
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales from continuing operations $33,157 $36,072 $36,930 N/A
Sales from discontinued operations 7,743 8,046 7,569 N/A
Gross profit from continuing operations 15,005 15,773 16,523 N/A
Income (loss) from:
Continuing operations (1,549) (534) (66) N/A
Discontinued operations (91) 133 (488) N/A
Net income (loss) (1,640) (401) (554) N/A
Earnings (loss) per share - basic:
Continuing operations $ (0.19) $ (0.07) $ (0.01) N/A
Discontinued operations (0.01) 0.02 (0.06) N/A
Net income (0.20) (0.05) (0.07) N/A
Earnings (loss) per share - diluted:
Continuing operations $ (0.19) $ (0.07) $ (0.01) N/A
Discontinued operations (0.01) 0.02 (0.06) N/A
Net income (0.20) (0.05) (0.07) N/A
Average common shares outstanding 8,205 8,208 8,208 N/A
Dilutive common shares outstanding 8,205 8,208 8,208 N/A
</TABLE>
Amounts differ from previously reported amounts since the results of the
OTM Division have been reflected as discontinued operations (see NOTE 12).
The effect of stock options for fiscal year 1999 is antidilutive
because of the net loss. In these cases, the diluted per share amounts equal
the basic per share amounts.
50
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
QUARTERS ENDED
- -------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUN. 30,
Fiscal 1998 1997 1997 1998 1998
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales from continuing operations $15,692 $17,230 $ 36,154 $39,815
Sales from discontinued operations 9,829 10,309 9,624 9,416
Gross profit from continuing operations 6,178 7,275 9,944 12,237
Income (loss) from:
Continuing operations 1,013 1,386 (17,438) (3,039)
Discontinued operations 862 905 454 (80)
Net income (loss) 1,875 2,291 (16,984) (3,119)
Earnings (loss) per share - basic:
Continuing operations $ 0.12 $ 0.17 $ (2.13) $ (0.37)
Discontinued operations 0.11 0.11 0.05 (0.01)
Net income 0.23 0.28 (2.08) (0.38)
Earnings (loss) per share - diluted:
Continuing operations $ 0.12 $ 0.16 $ (2.13) $ (0.37)
Discontinued operations 0.10 0.10 0.05 (0.01)
Net income 0.22 0.26 (2.08) (0.38)
Average common shares outstanding 8,168 8,228 8,173 8,196
Dilutive common shares outstanding 8,562 8,711 8,173 8,196
</TABLE>
Amounts differ from previously reported amounts since the results of the
OTM Division have been reflected as discontinued operations (see NOTE 12).
The quarter ending March 31, 1998 reflects acquisition-related charges
of $15,700,000 for the write-off of in-process research and development and
$4,738,000 before taxes for inventory related charges included in cost of
goods sold.
The quarter ending June 30, 1998 includes an additional write-off of
$7,106,000 before taxes for acquisition-related inventory charges.
The effect of stock options for the third and fourth quarter of fiscal
year 1998 is antidilutive because of the net loss. In these cases, the
diluted per share amounts equal the basic per share amounts.
51
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
QUARTERS ENDED
- -------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUN. 30,
Fiscal 1998 1996 1996 1997 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales from continuing operations $15,748 $17,533 $17,039 $17,390
Sales from discontinued operations 7,510 9,454 9,199 9,644
Gross profit from continuing operations 5,626 6,715 6,813 7,490
Income (loss) from:
Continuing operations 983 1,228 1,366 1,677
Discontinued operations 227 388 360 417
Net income (loss) 1,210 1,616 1,726 2,094
Earnings (loss) per share - basic:
Continuing operations $ 0.12 $ 0.15 $ 0.17 $ 0.21
Discontinued operations 0.03 0.05 0.04 0.05
Net income 0.15 0.20 0.21 0.26
Earnings (loss) per share - diluted:
Continuing operations $ 0.12 $ 0.15 $ 0.16 $ 0.20
Discontinued operations 0.02 0.04 0.04 0.05
Net income 0.14 0.19 0.20 0.25
Average common shares outstanding 8,189 8,037 8,164 8,130
Dilutive common shares outstanding 8,450 8,360 8,491 8,391
</TABLE>
Amounts differ from previously reported amounts since the results of the
OTM Division have been reflected as discontinued operations (see NOTE 12).
52
<PAGE>
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 August 26, 1999 annual meeting of shareholders
(the "1999 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 1999 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 1999
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by
reference from "Certain Relationships" contained in the 1999 Proxy Statement.
53
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a)(1) Financial Statements - See Index to Financial Statements at
Item 8 of this report.
(a)(2) Financial Statement Schedules
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) The following reports on Form 8-K were filed during the
third quarter of the fiscal year ended March 31, 1999:
1) Change in fiscal year filed on Form 8-K dated
January 21, 1999.
2) Common stock purchase rights filed on Form 8-K dated
February 19, 1999.
54
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
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 (Exhibit 3.2 to the Company's Amendment
No. 1 to Form 8-K, dated February 18, 1999, File No. 0-14224,
previously filed by Registrant).*
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, 1999 (Exhibit 4 to the
Company's registration statement on Form 8-A dated February
19, 1999, previously filed by Registrant).*
55
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
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).*
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).*
56
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
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).*
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).*
57
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
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).*
10.21 Amendment No. 1 to Credit Agreement, dated as of November 3,
1998, among IFR Systems, Inc., The First National Bank of
Chicago, and various lenders.
10.22 Amendment No. 2 to Credit Agreement, dated as of March 31,
1999, among IFR Systems, Inc., The First National Bank of
Chicago, and various lenders.
10.23 Amendment No. 3 to Credit Agreement, dated as of June 28,
1999, among IFR Systems, Inc., The First National Bank of
Chicago, and various lenders.
21.0 Subsidiaries of the Registrant
23.0 Consent of Ernst & Young LLP
27.0 Financial Data Schedule
- ------------------------
* Document has been previously filed with the Securities and Exchange
Commission and is incorporated by reference and made a part hereof.
58
<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 under signed, thereunto duly authorized.
IFR Systems, Inc.
June 28, 1999 By /s/ Iain M. Robertson
-------------------------------------------------
IAIN M. ROBERTSON
DIRECTOR, PRESIDENT AND CHIEF OPERATING OFFICER
(PRINCIPAL 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 TITLE SIGNATURE
---- ----- ---------
June 28, 1999 Chairman of the Board /s/ Alfred H. Hunt, III
of Directors and Chief --------------------------------
Technology Officer ALFRED H. HUNT
June 28, 1999 Director /s/ Wilton W. Cogswell, III
--------------------------------
WILTON W. COGSWELL, III
June 28, 1999 Director /s/ Donald L. Graf
--------------------------------
DONALD L. GRAF
June 28, 1999 Director /s/ John V. Grose
--------------------------------
JOHN V. GROSE
June 28, 1999 Director /s/ Oscar L. Tang
--------------------------------
OSCAR L. TANG
June 28, 1999 Director /s/ Ralph R. Whitney, Jr.
--------------------------------
RALPH R. WHITNEY, JR.
June 28, 1999 Executive Vice President, /s/ Jeffrey A. Bloomer
Treasurer and Chief --------------------------------
Financial Officer (Principal JEFFREY A. BLOOMER
Financial and Accounting
Officer)
59
<PAGE>
IFR SYSTEMS, INC
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 Describe (1) of Year
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended March 31,1999:
Allowance for doubtful accounts
(deducted in balance sheet from
accounts receivable) 773,173 122,000 -- 164,406 730,767
Year ended June 30,1998:
Allowance for doubtful accounts
(deducted in balance sheet from
accounts receivable) 368,773 180,000 303,000 78,600 773,173
Year ended June 30,1997:
Allowance for doubtful accounts
(deducted in balance sheet from
accounts receivable) 322,718 50,000 -- 3,945 368,773
</TABLE>
Note 1: Uncollectible accounts receivable charged off, less recoveries and
Discontinued Operations of OTM Division.
<PAGE>
Exhibit 10.21
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:
-1-
<PAGE>
"REVOLVING CREDIT AVAILABILITY" means, at any particular time, the
amount by which (i) the Aggregate Revolving Loan Commitment at such time
exceeds (ii) the 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
<PAGE>
respect to all Tranche A Term Loans and Revolving Loans and
(ii) 3.25% with respect to all Tranche B Term Loans."
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.
<PAGE>
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 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.
<PAGE>
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 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.
<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
<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
<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:
SIGNATURE PAGE TO REAFFIRMATION
<PAGE>
Exhibit 10.22
AMENDMENT NO. 2
Dated as of March 31, 1999
to
AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of March 19, 1998
THIS AMENDMENT NO. 2 ("Amendment") is made as of March 31, 1999 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 by an Amendment No. 1 and
Waiver dated as of November 3, 1998 (as amended and as the same may be
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 requested that the Agent and the Required
Lenders amend the Credit Agreement in certain respects, and the Required
Lenders and the Agent are willing to amend the Credit Agreement on the terms
and conditions set forth herein, it being expressly understood that the
modifications set forth herein shall in no event constitute a waiver by the
Lenders or the Agent of any 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 2 below, the Credit Agreement is hereby
amended as follows:
1.1 SECTION 1.1 of the Credit Agreement is amended (i) to delete
the phrase "$30,000,000" now appearing in the definition of "AGGREGATE
REVOLVING LOAN COMMITMENT" and to substitute the following therefor:
"$25,000,000"; and (ii) to insert the following immediately prior to the
period (".") now appearing at the end of the definition of "EBITDA":
", PLUS (ix) any non-recurring expenses related to the reorganization,
restructuring and rationalization of the Borrower and its Subsidiaries
which are charged as operating expenses when and as charged (a) during the
fiscal quarter ending March 31, 1999 up to amounts not to be in excess of
$1,000,000, on a pre-tax basis, in the
<PAGE>
aggregate, and (b) during the two fiscal quarter period ending on
September 30, 1999 up to amounts not to be in excess of $500,000, on a
pre-tax basis, in the aggregate, in each case, to the extent such
charges are deducted in computing Net Income".
1.2 SECTION 2.5(B)(i) of the Credit Agreement is hereby amended
to realphabetize the second CLAUSE (e) and CLAUSE (f) thereof as CLAUSES (f)
and (g), respectively.
1.3 SECTION 2.5(B)(ii) of the Credit Agreement is hereby amended
to delete the phrase "SECTION 2.5(B)(i)(d)(II)" now appearing therein and to
substitute the following therefor: "SECTION 2.5(B)(i)(e)(II)".
1.4 SECTION 2.15(D)(ii) of the Credit Agreement is amended to
delete the chart now appearing therein and to substitute the following
therefor:
@@
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
APPLICABLE
APPLICABLE FLOATING APPLICABLE EUROCURRENCY COMMITMENT
RATE MARGINS MARGINS FEE PERCENTAGE
------------------------------------------------------------------------------------
TRANCHE A TERM TRANCHE B TERM LOANS TRANCHE A TERM TRANCHE B TERM
LOANS AND REVOLVING LOANS AND REVOLVING LOANS
LOANS LOANS
LEVERAGE RATIO
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Greater than 4.5 to 1.0 2.00% 2.50% 3.00% 3.50% 0.50%
- ---------------------------------------------------------------------------------------------------------------------------------
Greater than 3.5 to 1.0
and less than or equal 1.75% 2.25% 2.75% 3.25% 0.50%
to 4.5 to 1.0
- ---------------------------------------------------------------------------------------------------------------------------------
Greater than 3.0 to
1.0 and less than or 1.50% 2.00% 2.50% 3.00% 0.50%
equal to 3.5 to 1.0
- ---------------------------------------------------------------------------------------------------------------------------------
Greater than 2.5 to 1.0
and less than or equal 1.25% 1.75% 2.25% 2.75% 0.50%
to 3.0 to 1.0
- ---------------------------------------------------------------------------------------------------------------------------------
Greater than 2.0 to 1.0
and less
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
APPLICABLE
APPLICABLE FLOATING APPLICABLE EUROCURRENCY COMMITMENT
RATE MARGINS MARGINS FEE PERCENTAGE
------------------------------------------------------------------------------------
TRANCHE A TERM TRANCHE B TERM LOANS TRANCHE A TERM TRANCHE B TERM
LOANS AND REVOLVING LOANS AND REVOLVING LOANS
LOANS LOANS
LEVERAGE RATIO
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
than or equal 1.00% 1.50% 2.00% 2.75% 0.50%
to 2.5 to 1.0
- ---------------------------------------------------------------------------------------------------------------------------------
Less than or equal to
2.0 to 1.0 1.00% 1.50% 1.75% 2.75% 0.375%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
@@
1.5 SECTION 7.1(A)(i) of the Credit Agreement is hereby amended
to insert immediately after the phrase "forty-five (45) days after the end of
each fiscal quarter in each fiscal year", the following: "and not later than
July 31, 1999 for the fiscal quarter ending on June 30, 1999".
1.6 EXHIBIT A of the Credit Agreement is hereby restated in the
form of ATTACHMENT A hereto.
2. 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) duly executed originals of the Fee Letter, dated as of March
31, 1999, from the Borrower, together with all fees and
expenses in the amount separately agreed between the Borrower
and the Agent thereunder; and
(iv) such other documents, instruments and agreements as the Agent
may reasonably request.
-3-
<PAGE>
Upon the satisfaction of the foregoing conditions precedent, this Amendment
shall be deemed effective as of March 31, 1999 for CLAUSE (ii) of Section 1.1
hereof and as of June 1, 1999 for all other purposes (as applicable, the
"Effective Date").
3. AMENDMENT FEE. Each Lender that delivers a duly executed
signature page to this Amendment and Amendment No. 3 to the Credit Agreement
to Robert J. Lewis, Sidley & Austin (fax: 312-853-7036) by 5:00 p.m.
(Chicago time) on Friday, May 28, 1999, shall be entitled to an Amendment Fee
of 0.15% of such Lender's Commitment (as defined in the Credit Agreement
after giving effect to the reduction of the Aggregate Revolving Loan
Commitment contemplated in this Amendment), PROVIDED this Amendment is
approved by the Required Lenders (including the Agent). The Amendment Fee
shall be due and payable by the Borrower on the date the Borrower executes
this Amendment.
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 operate as a waiver 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.
-4-
<PAGE>
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:
<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:
<PAGE>
REAFFIRMATION
Each of the undersigned hereby acknowledges receipt of a copy of
the foregoing Amendment No. 2 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 by an
Amendment No. 1 and Waiver dated as of November 3, 1998 (as amended and as
the same may be amended, restated, supplemented or otherwise modified from
time to time, the "CREDIT AGREEMENT") which Amendment No. 2 is dated as of
March 31, 1999 (the "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 Amendment and as the same may from time to time
hereafter be amended, modified or restated.
Dated as of March 31, 1999 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:
<PAGE>
ATTACHMENT A
TO AMENDMENT NO. 2 TO
AMENDED AND RESTATED CREDIT AGREEMENT
DATED MARCH 19, 1998
[ATTACHED]
<PAGE>
EXHIBIT A
TO
AMENDED AND RESTATED CREDIT AGREEMENT
Commitments
-----------
@@
REVOLVING LOAN COMMITMENTS
<TABLE>
<CAPTION>
LENDER AMOUNT OF REVOLVING LOAN % OF AGGREGATE REVOLVING
COMMITMENT LOAN COMMITMENT
------ ------------------------ ------------------------
<S> <C> <C>
THE FIRST NATIONAL BANK $5,769,230.77 23.076923078
OF CHICAGO
INTRUST BANK $2,884,615.38 11.538461538
THE BANK OF NOVA SCOTIA $3,846,153.85 15.384615385
HARRIS TRUST AND SAVINGS $3,846,153.85 15.384615385
BANK
NATIONAL WESTMINSTER $2,884,615.38 11.538461538
BANK PLC
UNION BANK OF $2,884,615.38 11.538461538
CALIFORNIA, N.A.
LLOYDS BANK PLC $2,884,615.38 11.538461538
TOTAL $25,000,000 100.00%
</TABLE>
TRANCHE A TERM LOAN COMMITMENTS
<TABLE>
<CAPTION>
LENDER AMOUNT OF TRANCHE A % OF AGGREGATE TRANCHE A
TERM LOAN COMMITMENT TERM LOAN COMMITMENT
------ -------------------- ------------------------
<S> <C> <C>
THE FIRST NATIONAL BANK $11,538,461.54 23.076923078
OF CHICAGO
INTRUST BANK $5,769,230.77 11.538461538
THE BANK OF NOVA SCOTIA $7,692,307.69 15.384615385
HARRIS TRUST AND SAVINGS $7,692,307.69 15.384615385
BANK
NATIONAL WESTMINSTER $5,769,230.77 11.538461538
BANK PLC
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
UNION BANK OF $5,769,230.77 11.538461538
CALIFORNIA, N.A.
LLOYDS BANK PLC $5,769,230.77 11.538461538
TOTAL $50,000,000 100.00%
</TABLE>
TRANCHE B TERM LOAN COMMITMENTS
<TABLE>
<CAPTION>
LENDER AMOUNT OF TRANCHE B % OF AGGREGATE TRANCHE B
TERM LOAN COMMITMENT TERM LOAN COMMITMENT
------ -------------------- ------------------------
<S> <C> <C>
THE FIRST NATIONAL BANK $11,538,461.54 23.076923078
OF CHICAGO
INTRUST BANK $5,769,230.77 11.538461538
THE BANK OF NOVA SCOTIA $7,692,307.69 15.384615385
HARRIS TRUST AND SAVINGS $7,692,307.69 15.384615385
BANK
NATIONAL WESTMINSTER $5,769,230.77 11.538461538
BANK PLC
UNION BANK OF $5,769,230.77 11.538461538
CALIFORNIA, N.A.
LLOYDS BANK PLC $5,769,230.77 11.538461538
TOTAL $50,000,000 100.00%
</TABLE>
@@
<PAGE>
Exhibit 10.23
AMENDMENT NO. 3
Dated as of June 25, 1999
to
AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of March 19, 1998
THIS AMENDMENT NO. 3 ("Amendment") is made as of June 25, 1999 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 by an Amendment No. 1 and Waiver dated as of
November 3, 1998 and an Amendment No. 2 dated as of March 31, 1999 (as amended
and as the same may be 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 requested that the Agent and the Required
Lenders amend the Credit Agreement in certain respects, and the Required Lenders
and the Agent are willing to amend the Credit Agreement on the terms and
conditions set forth herein, it being expressly understood that the
modifications set forth herein shall in no event constitute a waiver by the
Lenders or the Agent of any 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 2 below, the Credit Agreement is hereby amended as follows:
1.1 SECTION 1.1 of the Credit Agreement is amended (i) to insert the
following immediately prior to the period (".") now appearing at the end of the
definition of "EBITDA":
", MINUS (x) the net gain on the sale of the OTM Division to the extent
added in computing Net Income; PROVIDED, that EBITDA attributable to the
OTM Division shall be included in the calculation of EBITDA to but not
including the date of the sale of the OTM Division".
; and (ii) to insert alphabetically the following new definition:
- 1 -
<PAGE>
"OTM DIVISION" means substantially all of the assets of the Borrower
comprising the optical test and measurement business of the Borrower."
1.2 SECTION 2.5(B)(I) of the Credit Agreement is hereby amended to
insert immediately after the phrase "Asset Sale" now appearing in CLAUSE (F) of
SECTION 2.5(B)(I), the following: "(other than the sale of the OTM Division)".
1.3 SECTION 7.4(A) of the Credit Agreement is hereby amended to
delete the phrase "1.35 to 1.00" now appearing therein and to substitute the
following therefor: "1.15 to 1.00".
1.4 SECTION 7.4(B) of the Credit Agreement is hereby deleted in its
entirety and the following is substituted therefor:
" (B) MAXIMUM LEVERAGE RATIO. The Borrower shall not permit the ratio
(the "LEVERAGE RATIO") of (i) the sum of (a) Indebtedness for borrowed
money and (b) Capitalized Lease Obligations to (ii) EBITDA to be greater
than:
(i) 5.75 to 1.00 for each fiscal quarter for the period
commencing with the fiscal quarter ending June 30, 1999 through the
fiscal quarter ending September 30, 1999; and
(ii) 5.50 to 1.00 for the fiscal quarter ending December 31,
1999; and
(iii) 5.25 to 1.00 for each fiscal quarter for the period
commencing with the fiscal quarter ending March 31, 2000 through the
fiscal quarter ending June 30, 2000; and
(iv) 5.00 to 1.00 for the fiscal quarter ending September
30, 2000; and
(v) 4.00 to 1.00 for each fiscal quarter for the period
commencing with the fiscal quarter ending December 31, 2000 through
the fiscal quarter ending December 31, 2001; and
(vi) 3.25 to 1.00 for each fiscal quarter for the period
commencing with the fiscal quarter ending March 31, 2002 through the
fiscal quarter ending December 31, 2002; and
(vii) 2.50 to 1.00 for each fiscal quarter for the period
commencing with the fiscal quarter ending March 31, 2003 through the
fiscal quarter ending December 31, 2003; and
(viii) 2.00 to 1.00 for each fiscal quarter thereafter until
the Termination Date.
<PAGE>
The Leverage Ratio shall be calculated, in each case, determined as of the
last day of each fiscal quarter based upon (a) for Indebtedness for
borrowed money and Capitalized Lease Obligations, Indebtedness for borrowed
money and Capitalized Lease Obligations as of the last day of each such
fiscal quarter; and (b) for EBITDA, the actual amount for the four-quarter
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; PROVIDED, HOWEVER,
that for purposes of calculating Indebtedness for each fiscal quarter
through and including the fiscal quarter ending December 31, 1997,
Indebtedness shall exclude all liabilities in connection with the overdraft
facilities maintained by the Borrower and its Subsidiaries in the United
Kingdom."
1.5 SECTION 7.4(D) of the Credit Agreement is hereby amended to
delete the phrase "$9,500,000" now appearing in CLAUSE (III) thereof, and to
substitute the following therefor: "$7,000,000".
2. 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; and
(iii) such other documents, instruments and agreements as the
Agent may reasonably request.
Upon the satisfaction of the foregoing conditions precedent, this Amendment
shall be deemed effective as of June __, 1999 (the "Effective Date").
3. 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.
<PAGE>
4. 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 operate as a waiver 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.
5. 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.
6. 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.
7. 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.
<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. 3
TO AMENDED AND RESTATED CREDIT AGREEMENT
<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. 3
TO AMENDED AND RESTATED CREDIT AGREEMENT
<PAGE>
REAFFIRMATION
Each of the undersigned hereby acknowledges receipt of a copy of the
foregoing Amendment No. 3 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 by an Amendment No. 1 and Waiver and an Amendment
No. 2 dated as of November 3, 1998 and March 31, 1999, respectively (as amended
and as the same may be amended, restated, supplemented or otherwise modified
from time to time, the "CREDIT AGREEMENT") which Amendment No. 3 is dated as of
June __, 1999 (the "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 Amendment and as the same may from time to time hereafter be
amended, modified or restated.
Dated: June __, 1999
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:
SIGNATURE PAGE TO REAFFIRMATION
<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. (see NOTE 12) Oregon
IFR Finance, Inc. Kansas
IFR International, Inc. Barbados
IFR Systems Ltd. United Kingdom
IFR Finance Limited Partnership United Kingdom
Subsidiaries of IFR Systems Ltd.
--------------------------------
PK Technology Ltd. (see NOTE 12) United Kingdom
York Sensors Ltd. (see NOTE 12) 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 the IFR Systems Inc.
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 June 25, 1999 (except for Note 12, as to which the
date is June 29, 1999) with respect to the consolidated financial statements
and schedule of IFR Systems, Inc. included in the Annual Report on Form 10-K
for the transition period from July 1, 1998 to March 31, 1999.
/s/ Ernst & Young LLP
Indianapolis, Indiana
June 29, 1999
<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 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 5,086
<SECURITIES> 0
<RECEIVABLES> 28,037
<ALLOWANCES> 731
<INVENTORY> 38,029
<CURRENT-ASSETS> 96,415
<PP&E> 41,280
<DEPRECIATION> 15,797
<TOTAL-ASSETS> 187,043
<CURRENT-LIABILITIES> 50,252
<BONDS> 96,567
0
0
<COMMON> 93
<OTHER-SE> 28,135
<TOTAL-LIABILITY-AND-EQUITY> 187,043
<SALES> 106,159
<TOTAL-REVENUES> 106,159
<CGS> 58,858
<TOTAL-COSTS> 58,858
<OTHER-EXPENSES> 43,833
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,685
<INCOME-PRETAX> (3,661)
<INCOME-TAX> (1,512)
<INCOME-CONTINUING> (2,149)
<DISCONTINUED> (446)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,595)
<EPS-BASIC> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
