-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PUJePVCfFxfXXu92Xtu4bb1GmMx3W333U2FGW2skslJbPcu0f95XPkNOopFsEoGR /v6XBCdX8cOaYs9sKhHfIQ== 0000002601-96-000012.txt : 19960923 0000002601-96-000012.hdr.sgml : 19960923 ACCESSION NUMBER: 0000002601-96-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960920 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AEROFLEX INC CENTRAL INDEX KEY: 0000002601 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 111974412 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08037 FILM NUMBER: 96632478 BUSINESS ADDRESS: STREET 1: 35 S SERVICE RD CITY: PLAINVIEW STATE: NY ZIP: 11803 BUSINESS PHONE: 516-752-23 MAIL ADDRESS: STREET 1: 35 S SERVICE ROAD CITY: PLAINVIEW STATE: NY ZIP: 11803 FORMER COMPANY: FORMER CONFORMED NAME: ARX INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: AEROFLEX LABORATORIES INC DATE OF NAME CHANGE: 19851119 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1996 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 1-8037 Aeroflex Incorporated (Exact name of registrant as specified in its charter) Delaware 11-1974412 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 35 South Service Road, Plainview, New York 11803 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (516) 694-6700 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Class Which Registered -------------- -------------------------- Common Stock, $.10 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ----------------- (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 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. State the aggregate market value of the voting stock held by non-affiliates of the registrant. (The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing). As of September 3, 1996 approximately $59,582,035. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date (applicable only to corporate registrants). Common Stock, par value $.10 per share; outstanding as of September 3, 1996 - 12,420,986 (excluding 129,456 shares held in treasury). Documents incorporated by reference: Parts II and IV - The Annual Report to Stockholders for the fiscal year ended June 30, 1996 to the extent specifically identified or incorporated herein. Part III - Registrant's definitive proxy statement to be filed pursuant to Regulation 14A of the Securities Act of 1934. PART I ITEM ONE - BUSINESS Aeroflex Incorporated, through its subsidiaries (collectively, unless the context requires otherwise, referred to as the "Company" or "Aeroflex") designs and manufactures advanced electronic systems and components, including microelectronic circuits and interconnect products, instrument products and motion control systems, for both the commercial and defense markets. It also designs and manufactures shock and vibration stabilizing systems used for commercial, industrial and defense applications. Aeroflex also provides defense consulting services involving systems analysis, design and engineering primarily to government contractors and the U.S. Armed Forces. Operations are grouped into two segments: electronics and isolator products. These segments, their products and the markets they serve are described below. In March 1995, the Company adopted a plan to consolidate its Puerto Rican manufacturing operations into its existing facilities in New York and New Jersey. The Company has ceased manufacturing operations in Puerto Rico. As of June 30, 1996, the Company has accounted for certain segments, namely commercial and custom envelopes (Huxley Envelope Corp.) and telecommunication systems services (T-CAS Corp.) as discontinued operations. The following description of the Company's business does not include these discontinued operations. These segments are described under the caption "Discontinued Operations". Electronics Microelectronics - ("Circuit Technology" and "MIC Technology") Since 1974, the Company has been engaged in the design, manufacture and sale of state-of-the-art microelectronic assemblies for the electronics industry. In January 1994, the Company acquired substantially all of the net operating assets of the microelectronics division of Marconi Circuit Technology Corporation, which manufactures a wide variety of microelectronic assemblies. This acquisition increased the range of products offered and enhanced the Company's engineering capability. The Company's microelectronic assemblies are called "Hybrids" because they combine elements of integrated circuit and printed circuit board technologies. They provide many of the advantages of integrated circuits relative to printed circuit boards, such as miniaturization, increased capability and greater reliability and environmental stability. However, unlike integrated circuits, they can be economically manufactured in quantities of hundreds to several thousands. Hybrids are multi-layered electronic circuits, containing very small and barely visible passive and active elements (those that carry, transmit, receive, generate or amplify signals) which are mounted and wired together on a single multi-layered ceramic surface in patterns designed to perform specific electronic functions. These functions include amplification, switching, signal conversion, voltage regulation and decoding of microwave signals. They are especially suited to aircraft, spacecraft, missile and industrial applications where space is limited, such as in navigation equipment, airborne computers, sonar systems, medical diagnostic instrumentation, satellite/telecom systems and computer instrumentation. One such Hybrid Microcircuit product family, the MIL-STD-1553 Data Bus product line, has a particularly broad range of applications. These microcircuits, which have been adopted by the Tri-services (Army, Navy, and Air Force) as a standard interface, act as a digital data communication link between various computer-based equipment. A series of Monolithic Data-bus Transceivers and Remote Terminals, has been transitioned to production by the Company, many of which are described by "Standard Military Devices" (SMD) drawings, thereby facilitating their use in current and future avionic systems. The Company's Microcircuits are used on numerous avionic systems including the F-14, F-15, F-16 and F-18 aircraft and the AMRAAM and Tomahawk-cruise missiles. They are also qualified for possible further use on the updates to older platforms. The Data-bus microcircuits are used in a wide variety of aerospace and seaboard navigation and communication systems. A Motor Drive Hybrid microcircuit is in production for the AN/PVS-6, a miniature, eyesafe, laser rangefinder. The Company has production contracts for the Serial Interface Module and Current Mode Coupler Module used on the ARINC 629 Data-bus which is the commercial equivalent of MIL-STD-1553. This commercial data communications interface is used on the Boeing 777. Multichip Modules ("MCM's") are a further advancement of the hybrid microcircuit technology, in which large digital devices such as microprocessors, SRAM and EEPROM memories are combined with multilayer ceramic packages to form complex digital systems or subsystems. Multichip modules perform functions similar to hybrids, except the emphasis is on miniaturizing and synthesizing digital functions such as microprocessor systems and mass memories. The Company has been qualified on several MCM designs on both the F-16 and new F-22 Advanced Tactical Fighter (ATF) and is participating in pre-production contracts. Application specific multi-chip modules have significant market potential in avionics, workstations, telecommunications and satellites. The Company has expanded its standard memory module product line with the addition of twenty-five new memory modules in the past two years. These products, which consist of SRAM and Flash memory modules, take advantage of the Company's multichip module expertise. They are designed to be used for a wide range of computer and general purpose circuit board applications. The Company continues to expand the market for the R4400 microprocessor modules with the sale of production units utilized in several new avionics/missile applications. The Intel I486 dual microprocessor module is being increasingly ordered for avionics and missile applications, in production quantities. In March 1996, the Company acquired MIC Technology Corporation which designs, develops, manufactures and markets microelectronics products in the form of passive thin film circuits and interconnects. Its advanced circuit and interconnect technology is emerging as a key enabling technology for miniaturized, high frequency, high performance electronic products for rapidly growing markets like cellular telephones, personal communication service devices (PCS) and microwave data links. It continues to be an essential technology in satellite based communication hardware and leading edge military electronic products. Instrument Products - ("Comstron" and "Lintek") Frequency Synthesizers and Components In November 1989, the Company acquired Comstron Corporation which is now an operating division of Aeroflex Laboratories Incorporated, a wholly-owned subsidiary of Aeroflex. Comstron is a leader in radio frequency and microwave technology used in the manufacture of fast switching frequency synthesizers and components. A frequency synthesizer is a device or circuit that synthetically produces a large number of frequencies based upon a single reference frequency. The best way to tune a radio or receiver is with a crystal frequency reference. When multiple frequencies are necessary, multiple crystals and switches are required. Eventually it becomes first impractical, and then impossible, to use a large number of crystals due to size constraints. A frequency synthesizer replaces millions or billions of crystals. The Company's synthesizers operate in a broad frequency range of 10 MHz to 40GHz with excellent spectral purity. Their small size and modular construction allow for easy systems configuration and facilitation of repair. The Company, together with Hewlett Packard, helped develop the Modular Measurement System (MMS) standard which has been selected as the architecture underlying the RF and microwave sections of a number of automated test equipment (ATE) systems, including CASS, the U.S. Navy's next generation automated test system. The synthesizers also significantly improve the performance and reliability of existing radars. The Company's synthesizers have been selected by Westinghouse to upgrade its TPS 63 and 70 series radars. Additionally, the synthesizers improve the performance of threat simulators as well as radar cross section and antenna measurement systems. With the 1993 introduction of the new model FS-5000 synthesizer series, the Company strengthened its leadership position in the Ultra-Fast Switching Frequency Synthesizer market. The FS-5000 series is ten times faster, less than half the size and offers superior performance to the Company's previous synthesizers. In 1995, the Company introduced a phase-coherent version of the FS-5000 which expands its application into numerous radar systems. Component technology, which contributes to the synthesizer's exceptional performance, includes custom microwave and RF hybrids and filters manufactured by the Company. Radar Cross-Section and Antenna Pattern Measurement In January 1995, the Company acquired Lintek Inc. as a wholly owned subsidiary of Aeroflex. Aeroflex Lintek Corp. is a leader in high speed instrumentation radar systems and antenna measurement systems. These systems are used by the Department of Defense and by industry. Lintek Inc. was incorporated in 1988 for the purpose of developing and selling instrumentation radar systems, and currently has systems in place with many of the large aerospace companies and with major government laboratories. The instrumentation radar systems are used to measure the radar reflectivity or Radar Cross Section (RCS), both scale models and actual examples, of aircraft and other objects. These measurements are made in many diverse environments from factory floor, to laboratory, to flight lines or aircraft carriers. These radar systems operate in the frequency range of 100MHz to 100GHz. In addition to the radar system hardware, Aeroflex Lintek Corp. has developed various analytical processing and display algorithms to assist in the interpretation of the radar data. Aeroflex Lintek has three lines of radar systems: the Elan series, the Model 5000, and the Model 4000. These systems vary in price and performance. The Company believes that the Elan series radar system is the highest performance system in the industry, the Model 5000 is the price performance leader, and the Model 4000 is the low cost entry level system. The antenna measurement systems are used in the design and manufacturing of all types of antennas. This product line is derived from the expertise gained in high speed data acquisition and display techniques used in instrumentation radar products. These products comprise a growing portion of Aeroflex Lintek's sales due to the growth in personal communications and the demand for these systems abroad. Electronic Systems Building on technology acquired from Comstron, Aeroflex develops and manufactures complex communications and guidance systems and subsystems including HF, VHF and UHF receivers, communications jammer emulators, weather radar receivers, up/down converters, frequency agile radar local oscillators and low phase noise frequency sources. It has developed a phase shifter for the U.S. Air Force's mid-life upgrade F-16 Identification Friend or Foe (IFF) system and a tunable solid state local oscillator for the U.S. Navy MK-92 fire control radar. The Company has developed a radar frequency identification (RFID) transmitter/receiver sub-system. RFID is a new wireless sensing technology that interrogates special tags containing sealed semi-conductor memories. Applications include access control badges, electronic collection and inventory counting systems. Recently, the Company introduced its latest version of a receiver for the NOAA wind-profiler system which is used to detect clean air turbulence around airports. The wind-profiler system has made major improvements in the accuracy of operational weather forecasts. Since 1980, through its wholly-owned subsidiary, Aeroflex Systems Corp. ("Aeroflex Systems"), the Company has been supplying analytical, design and engineering, and specialized computer software support services to military contractors involved in major weapon systems programs and to the U.S. Armed Forces. These services include providing personnel and specialized expertise at all stages of a project's design and production related to: system reliability and maintainability; the development and operation of systems to track differences in the component configuration of each unit built in a program; the analysis and interpretation, by means of specialized computer software, of test data to assist in modifying a system's design; the design and operation, throughout the life of a system, of strategies and programs for maintaining appropriate spare parts inventories, planning repair schedules and managing other logistical matters; and the training of contractor or military personnel with regard to all these applications. Motion Control Systems - ("Aeroflex Laboratories") Scanning Devices Since 1975, the Company has been engaged in the development and manufacture of electro-optical scanning devices used in infra-red night vision systems. These systems detect temperature differences in the infra-red radiation emanating from objects in target areas. The differences are then electronically amplified and converted to visible light to create a visual image of the zone being scanned, enabling accurate observation and weapon firing control through smoke, darkness and battlefield haze. The common module device manufactured by the Company consists of a metal framed module containing a two-sided mirror which, on one side, receives the infra-red radiation and reflects it onto cryogenically cooled electronic receptors and, on the other side, reflects the amplified visible image to the viewer. The mirror is driven by small torque motors in a repetitive motion to provide a wider scan of the target area. The Company has shipped more than 30,000 common module scanner units to date. Applications include the TOW anti-tank missile systems of the M-1 Abrams tank, the M2/M3 Bradley Fighting Vehicle and the AH-1 Super Cobra helicopter, the Hellfire and the Stinger target acquisition systems of the OH-58D AHIP helicopter, the TADS/PNVS system of the AH64 Apache attack helicopter, and the LANTIRN system which directs firing of Maverick missiles from various fighter aircraft. The Company has completed development and has received a production order for the next generation polygon rotary scanner for the U.S. Army's thermal weapons sight (TWS), under contract to Hughes Electro-Optical Data Systems Group. TWS is a low cost, lightweight thermal imaging device that detects targets based on thermal radiation contrasts with background and utilizes a solid state thermal cooling system. This scanner is intended for use on standard issue U.S. Army assault rifles and crew served weapons. The polygon scanner assembly consists of a polygon mirror, a brushless DC motor and a magnetic encoder. Unlike scanners that oscillate a mirror, the TWS assembly scans a scene by rotating a polygon with twelve-mirrored sides ten revolutions per second. As each side of the polygon sweeps by, it produces a continuous succession of scans. Constant rotational speed, synchronized to the system's clock reference, is maintained by a phase lock servo-control loop. Stabilization and Tracking Devices Since 1961, the Company has been engaged in the design, development and production of stabilization tracking devices and systems. These are dynamically positioned pedestals on or in moving vehicles such as trucks, ships and aircraft, upon which tracking equipment, such as a radar antenna, is mounted. The pedestal, through the continuous balancing action of gyroscopes and servo-mechanical stabilizers operating in all three dimensions, enables the mounted equipment to remain almost perfectly balanced and motionless. The equipment can then automatically track or focus on a target as accurately as if it were on solid ground despite the motion of the vehicle. The Company's stabilization and tracking devices are a part of major surveillance, reconnaissance and weapon firing control systems and play an important role in high altitude aircraft as well as in other aircraft, ships and ground vehicles which require precise, highly stable mounting for cameras, antennae and lasers. Specific applications include the precise mirror pointing system for the LACE satellite UVPI experiment and the antenna pedestal assembly for the AC130H gunship aircraft. In addition to military and aerospace markets, the Company has recently delivered commercial units used to stabilize airborne spectroscopy equipment for terrestrial mapping. Magnetic Motors Magnetic motor products consist of electronically commutated brushless DC motors, stepping motors, segment and arc motors, actuators, limited angle torque motors and solid state magnetic sensors. Brushless DC motors differ from conventional DC motors in that the current which produces mechanical energy is applied to stationary coils via electronic switches, without physical contact, rather than by stationary rods brushing against the rotating coil. By avoiding friction, sparks and the wearing and fragmenting of the brush rods, brushless DC motors provide cleaner operation and longer maintenance-free life than conventional motors. These characteristics make brushless DC motors well-suited for use in vacuum situations such as outer space where lubricants needed to slow brushwear dissipate rapidly, in environments containing volatile or explosive materials and gases, and in applications where clean operation is critical. The users of these motors include major contractors engaged in military and aerospace technology and companies manufacturing jet engines, aircraft windshield wipers, medical and lab equipment, as well as cryogenic super-cooling pumps. Platforms using the motors include military and commercial satellites, numerous missile applications (e.g. Maverick Missile), Space Shuttle, M-1 Abrams tank, Galileo spacecraft, and a host of other high reliability high performance applications. Actuators operate various mechanisms on spacecraft, satellites and aircraft, including the forward wing mechanism of the Beech Starship. Torque motors are DC motors which convert electrical current to mechanical force for precisely controlled, usually repetitive movement, over limited distances and arcs less than 180 degrees. These motors are utilized in the Company's stabilization systems and infra-red scanner modules, as well as other applications where precise movement is required, such as for positioning antennae, optical systems, mechanical vanes and valves. The Company's solid state magnetic sensors provide precise positioning and precise measurement and control of speed in a variety of products including tachometers, computer peripheral equipment and heavy industrial machines. The Company also manufactures various types of AC electrical mechanisms sold either separately or as part of assemblies such as industrial and military fans, blowers, gear motors, induction motors, generators and tachometers. Electronic Control Systems Electronic control systems are microprocessor-based systems that precisely control the coordinated motion of multiple axis movement. Designed for the ruggedized military environment, these flexible software-configured controllers provide reduced weight, adaptability and high reliability in a variety of aircraft, space and terrestrial applications. The Company manufactures custom servo-amplifiers in a wide range of power levels for military, space and demanding commercial systems. Isolator Products Group Since 1961, the Company has been engaged in the design, development, manufacture and sale of severe service shock and vibration isolation systems. These devices consist of helically-wound steel wire rope contained between rugged metal retainer bars, and are used to store and dissipate potentially destructive vibration and shock. The purchasers of helical isolators are manufacturers or users of equipment sensitive to shock and vibration who need to reduce shock/vibration to levels compatible with equipment fragility to extend the useful life of this equipment. Isolators are also used to prevent vibrations in equipment from causing disturbances to surrounding equipment, structures and configurations. They are manufactured in a variety of materials and with special anti-corrosion coatings according to each customer's specifications. In addition, a line of isolated systems evolved in response to the custom requirements of customers. Systems capability includes integrated avionics trays and bases, skids and pallets. Markets for helical isolation systems include the military, aerospace, geophysical exploration, aircraft, communications, transportation and power plants. Specific applications include sensitive mobile equipment, reusable shipping containers, shipboard electronics and navigational equipment, avionics and other airborne gear, nuclear and seismic construction, power generation equipment, and heavy duty rotating and reciprocating machines. In October 1983, the Company acquired Vibration Mountings and Controls, Inc. ("VMC"), which manufactures a line of off-the-shelf noise, shock, vibration and structureborne noise control devices including a version of the elastomeric cupmount isolator referred to below. These rubber and spring isolators, which are manufactured in a wide variety of sizes, load ratings and configurations, are used primarily in commercial applications to protect heavy rotating equipment, heating, ventilating and air conditioning equipment, and diesel engines. In December 1986, the Company acquired the operating assets of Korfund Dynamics Corporation ("KDC"), a manufacturer of an industrial line of heavy duty spring and rubber shock mounts. A complementary line of off-the-shelf elastomeric cupmounts was introduced in fiscal 1991. The cupmount is a lightweight, low profile isolator which is available in two sizes and two types of elastomer-silicone for high temperature applications and neoprene where extreme high temperature is not a factor. The elastomer-in-compression design is particularly effective in interrupting structure borne noise transmission. Cupmount isolators are produced and sold in large quantities for military electronics and industrial equipment, where high levels of shock are encountered. During fiscal 1992, the Company introduced two new series of wire rope isolators, the arch and the circular arch. The arch isolator offers greater stability than the helical isolator for severe shock applications such as Navy shipboard electronic equipment. The circular arch was developed in a compact, circular configuration to fit into smaller space envelopes and compete on a performance and cost basis with existing competitive proprietary designs. In fiscal 1995, the Company successfully introduced the circular arch to the industrial market as an improved solution to shock and vibration problems encountered with data processing and electronic equipment in the mobile and aerospace markets. During the last several years, the Company has developed and introduced a series of new products to the marketplace to broaden the VMC and KDC product lines. These new complementary products have enabled the Company to enter new markets, namely, the off-highway market, portable power market, truck and bus market and the seismic marketplace. Competition In all phases of its continuing operations, the Company competes in both performance and price with companies considerably larger than itself in financial resources and sales, and which are more diversified than the Company. In the manufacturing of stabilization and tracking devices, scanning devices, frequency synthesizers, radar cross-section and antenna pattern measurement instrumentation and isolators, there are several major competitors manufacturing similar or comparable products. In the manufacture of microelectronics, magnetic motors and electronic systems, there are numerous nationwide, regional and local competitors manufacturing and distributing similar or comparable products. The Company believes that in all of its operations it competes favorably in the principal competitive factors of technology, performance, reliability, quality, customer service and price. To the extent that the Company is engaged in government contracts, its success or failure, to a large measure, is based upon its ability to compete successfully for contracts and to complete them at a profit. Such government business is necessarily affected by many factors such as variations in the military requirements of the government and defense budget allocations. Government Sales Approximately 65% and 74% of the Company's sales from continuing operations for fiscal 1996 and 1995, respectively, were to agencies of the United States Government or to prime defense contractors or subcontractors of the United States Government. The Company's government contracts have been awarded either on a bid basis or after negotiation. The contracts are primarily fixed price contracts, though the Company also has government contracts providing for cost plus fixed fee. The contracts of the Company with the United States Government and prime defense contractors or subcontractors contain customary provisions for termination at the convenience of the government without cause. In the event of such termination, the Company is entitled to reimbursement for its costs and to receive a reasonable profit, if any, on the work done prior to termination. Revenues and costs on government contracts are recognized based upon shipments or billings on manufacturing contracts. Revenues and costs on certain consulting contracts are recognized based upon costs incurred. In certain product areas, the Company has suffered reductions in sales volume due to cutbacks in the military budget. In other product areas, the Company has experienced increased sales volume due to a realignment of government spending towards upgrading existing systems instead of purchasing completely new systems. The overall effect of the cutbacks and realignment has not been material to the Company. Marketing and Distribution The Company markets its products through an internal sales force of 26 persons and over 150 sales representative organizations located nationwide and worldwide. The Company's engineers and marketing personnel, many of whom have technical backgrounds, advise prospective purchasers regarding the Company's products and how such products can be custom designed to be incorporated into specific government programs and other applications. These efforts are supported by product brochures and by published articles and advertisements in trade journals. Product Research and Development The Company's product development efforts primarily involve engineering and design relating to the improvement of existing products or the adaptation of such products to new applications. The Company's efforts also include developing prototype components to bid on specific programs. Several of the Company's officers and almost all of its engineers have been involved at various times and to varying degrees in these activities. Product development and similar costs not recoverable under contractual arrangements are expensed in the year incurred. These costs were approximately $1,260,000 and $2,389,000 for fiscal 1996 and 1995, respectively. In connection with the Company's purchase of MIC Technology Corporation in March 1996, the Company allocated $23,200,000 of the purchase price to in-process research and development. Since the research and development projects have not reached technological feasibility, the $23,200,000 was charged to expense in fiscal 1996 in accordance with generally accepted accounting principles. Backlog At June 30, 1996, the Company's backlog of orders was approximately $37,457,000. Approximately 90% was scheduled to be delivered on or before June 30, 1997. Approximately 79% of this backlog represents orders for military or national defense purposes. At June 30, 1995, the Company's backlog of orders was approximately $34,681,000. Approximately 75% was scheduled to be delivered before June 30, 1996. Approximately 85% of this backlog represented orders for military or national defense purposes. Principal Materials The principal materials used by the Company in manufacturing and assembling its products are steel, aluminum, rubber, gold, ceramic, magnetic materials, iron and copper. Many of the component parts used by the Company in its products are also purchased, including semiconductors, transformers, amplifiers and bearings. These materials and components, none of which are presently in short supply, are purchased from time to time on the open market. The Company has no long-term commitments for their purchase. Patents and Trademarks The Company owns several patents, patent licenses and trademarks. While the Company considers that in the aggregate its patents and trademarks are important in its operations, it does not consider that one or any group of them is of such importance that termination could materially affect its business. Employees As of June 30, 1996 the Company had approximately 730 employees, of whom approximately 390 were engaged in a manufacturing capacity, and approximately 340 in clerical, administrative, engineering or sales positions. Approximately 250 employees of the Company are covered by various collective bargaining agreements. The Company considers its employee relations to be satisfactory. Financial Information About Industry Segments The sales and operating profits of each industry segment and the identifiable assets attributable to each industry segment for each of the three years in the period ended June 30, 1996 are set forth in Note 16 of Notes to Consolidated Financial Statements. Discontinued Operations The Company has accounted for certain segments as discontinued operations. A description of these operations is as follows: Commercial and Custom Envelopes In November 1993, the Company sold substantially all of the net operating assets of its wholly-owned subsidiary, Huxley Envelope Corp. ("Huxley"), for $5,550,000. Huxley is a manufacturer of specialized envelopes for high-volume direct-mail users. The loss on disposal of $2,108,000 in fiscal 1994 represents a loss from Huxley's operations of $187,000 and a loss on its disposal of $1,921,000. The sale did not include Huxley's New York City manufacturing facility which was sold in the fourth quarter of fiscal 1995 for approximately $2,400,000. The sale of the facility, along with the resolution of certain other contingencies, resulted in a net of tax gain of $240,000. Telecommunication Systems Services Through T-CAS Corp. ("T-CAS"), a wholly-owned subsidiary which was acquired in 1988, the Company also specialized in the design and implementation of telecommunications and electronic systems for government, industrial and commercial customers nationwide and abroad. T-CAS' services included systems concepts and operational criteria, detailed engineering designs, equipment specifications, site preparation, construction, field engineering, installations, on-site training and technical assistance. The Company's plan to discontinue this operation included the completion of existing contracts (which were completed at June 30, 1993) and an orderly dissolution. In September 1993, the Company entered into an agreement with the U.S. Air Force in full settlement of claims against the U.S. Air Force on two telecommunication contracts. The settlement represents a final mutual release of all claims between the parties relative to these two contracts. In May 1995, the Company received $170,000 in settlement of another claim against a former customer. These settlements, together with other unrelated settlements of claims and adjustments of previously recorded loss reserves, resulted in after tax gains of $2,295,000 and $222,000, which were included in discontinued operations in the first quarter of fiscal 1994 and fourth quarter of fiscal 1995, respectively. ITEM TWO - PROPERTIES The executive offices of the Company and the manufacturing facilities of Aeroflex Laboratories Incorporated, a subsidiary of the Company, occupying an aggregate of approximately 69,000 square feet, are located in premises which the Company owns in Plainview, Long Island, New York. An industrial development agency loan is secured by the premises, with an outstanding balance of approximately $146,000 at June 30, 1996. Aeroflex Laboratories Incorporated also leases manufacturing facilities in Farmingdale, Long Island, New York and Boca Raton, Florida of approximately 20,000 and 11,000 square feet, respectively. The annual rental of these properties is approximately $156,000 and $75,000 respectively. The Company's subsidiary, Aeroflex Lintek Corp., occupies approximately 8,500 square feet of space in Powell, Ohio. This property contains an annual rental of $43,000. The Company's subsidiary, MIC Technology Corporation, leases manufacturing facilities in Richardson, Texas and Pearl River, New York of approximately 29,000 and 38,000 square feet, respectively. The annual rental of these properties is approximately $164,000 and $148,000, respectively. The Company's subsidiary, Vibration Mountings and Controls, Inc., conducts manufacturing operations at a plant located in Bloomingdale, New Jersey. The plant, which the Company owns, consists of approximately 72,000 square feet. The Company believes that its facilities are adequate for its current and presently foreseeable needs. ITEM THREE - LEGAL PROCEEDINGS Filtron Co. Inc., ("Filtron") a subsidiary of the Company whose operations were discontinued in October 1991, was one of several defendants named in a personal injury action initiated in 1994 by several plaintiffs in the Supreme Court of the State of New York, County of Kings. According to the allegations of the Amended Verified Complaint, the plaintiffs, who are current or former employees of a company to whom Filtron sold RFI filters/capacitors, and their wives, are seeking to recover, respectively, directly and derivatively, on diverse theories of negligence, strict liability and breach of warranty, for injuries allegedly suffered from exposure to a liquid substance or material which Filtron incorporated for a period of time in the RFI filters/capacitors which it manufactured. The plaintiffs are seeking damages which cumulatively may exceed $500 million. Considering its various defenses, together with its product liability insurance, in the opinion of management of the Company, the outcome of the action against its subsidiary will not have a materially adverse effect on the Company's consolidated financial statements. In late November 1995, the Company and certain of its officers were named as defendants in an action in the Supreme Court of the State of New York, County of Nassau. This action was brought by an individual formerly employed by Aeroflex Laboratories, Inc. ("Aeroflex"), who seeks to recover damages in the amount of $3,000,000 that allegedly resulted from the termination of his employment in 1994. Although plaintiff alleges that he was promised future "indefinite" and "permanent" employment by Aeroflex, the written Employment Agreement which the plaintiff actually entered into with Aeroflex provided only for a definite term (the "Term") from January, 1994 through June 30, 1994, with either party having the right thereafter to terminate the contract on five business days prior written notice. Plaintiff's employment was terminated prior to June 30, 1994, but he was paid in full the amount he otherwise would have earned during the Term of the contract. Considering its various defenses and the nature of the damages being claimed, in the opinion of the management of the Company, the outcome of this action will not have a material adverse effect on the Company's consolidated financial statements. ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM FIVE - MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) The Common Stock trades on the New York Stock Exchange under the symbol ARX. The following table shows the quarterly range of the high and low closing prices for the Common Stock, as reported by the National Quotation Bureau Incorporated, for the calendar periods indicated.
Common Stock High Low ---- --- 1994 First Quarter..................................... $5.00 $3.75 Second Quarter.................................... 4.75 3.63 Third Quarter..................................... 4.13 3.63 Fourth Quarter.................................... 4.00 3.50 1995 First Quarter...................................... 4.38 3.50 Second Quarter..................................... 4.88 3.63 Third Quarter ..................................... 5.63 4.25 Fourth Quarter..................................... 5.00 3.88 1996 First Quarter...................................... 5.13 3.50 Second Quarter..................................... 6.63 4.38 Third Quarter (through August 30).................. 6.13 4.63
(b) As of August 30, 1996, there were approximately 1,300 record holders of the Company's Common Stock. (c) The Company has never paid any cash dividends on its Common Stock. There have been no stock dividends declared or paid by the Company on its Common Stock during the past three years. Future dividends, if any, will be dependent upon the earnings and financial position of the Company and such other factors as the Board of Directors shall deem appropriate. In addition, the Company's Revolving Credit and Term Loan Agreement, as amended, prohibits, and its 7-1/2% Senior Subordinated Convertible Debenture Indenture Agreement limits, it from paying cash dividends. ITEM SIX - SELECTED FINANCIAL DATA (In thousands except ratios and per share data)
Year ended June 30, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Earnings Statement Data(4)(5) Net Sales............................. $ 74,367 $ 71,113 $ 65,602 $ 52,031 $ 48,109 Income from Continuing Operations............... (17,420)(1)(2) 6,587(4)(5) 5,850(6) 1,736 227 Income from Discontinued Operations............. - 462 187 500 635 Extraordinary Item-Tax Benefit of Loss Carryovers (8).............. - - - - 143 Net Income (Loss)..................... (17,420) 7,049 6,037(6) 2,236 1,005 Income (Loss) from Continuing Operations Per Common Share and Common Share Equivalent Primary........................... $ (1.46)(1)(2) $ .53(4)(5) $ .55(6) $ .20 $ .03 Fully Diluted..................... (3) .52(4)(5) .50(6) .19 .03 Net Income (Loss) Per Common Share and Common Share Equivalent Primary............................ (1.46) .57 .57 .26 .12 Fully Diluted...................... (3) .55 .51 .24 .12 Weighted Average Number of Common Shares and Common Share Equivalents Outstanding Primary............................ 11,971 12,352 10,526 8,757 8,661 Fully Diluted...................... (3) 14,249 12,401 10,920 8,661
June 30, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Balance Sheet Data Working Capital........................ $ 24,736 $ 31,533 $ 28,572 $14,982 $ 15,751 Total Assets........................... 81,169 71,936 71,016 60,185 62,473 Long-term Debt (including current portion).......... 34,577 13,787 18,408 21,871 28,098 Stockholders' Equity................... 30,472 46,344 39,571 27,208 25,025 Other Statistics (8) After Tax Profit Margin (Loss) (from continuing operations)......... (23.4)%(1)(2) 9.3%(4)(5) 8.9%(6) 3.3% 0.5% Return on Average Stockholders' Equity (from continuing operations).......................... (45.4)%(1)(2) 15.3%(4)(5) 17.5%(6) 6.6% 0.9% Stockholders' Equity Per Share (9) $ 2.49 $ 3.95 $ 3.37 $ 3.14 $ 2.87 (1) Includes $23,200,000 ($1.94 per share) for the year ended June 30, 1996, for the write-off of in-process research and development acquired in connection with the purchase of MIC Technology Corporation in March 1996. (2) Includes a $437,000 net of tax, or $.04 per share gain on the sale of securities for the year ended June 30, 1996. (3) As a result of the loss, all options, warrants and convertible debentures are anti-dilutive. (4) Includes $2,000,000 ($.14 per share fully diluted and $.16 primary) of insurance proceeds received on the death of the former chairman. (5) Includes a $1,494,000 net of tax restructuring charge ($.10 per share fully diluted and $.12 primary) for the consolidation of the Company's Puerto Rican operations into its domestic facilities. (6) Includes income tax benefit of $1,716,000, or $.14 per share ($.16 per share primary), relating to the recognition of a portion of the Company's unrealized net operating loss carryforward in accordance with Statement of Financial Accounting Standards No. 109. (7) See Note 4 to the Consolidated Financial Statements for a discussion of discontinued operations. (8) In fiscal 1996, 1995, 1994, and 1993 the tax benefit from prior years' loss carryforwards was presented as a part of the provision for income taxes; in 1992 it was presented as an extraordinary item. (9) Calculated by dividing stockholders' equity, at the end of the year, by the number of shares outstanding at the end of the year.
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Fiscal 1996 Compared to Fiscal 1995 Net sales increased to $74,367,000 in fiscal 1996 from $71,113,000 in fiscal 1995. The net loss was $(17,420,000) in fiscal 1996 including a one-time write-off of $23,200,000 for in-process research and development related to the purchase of MIC Technology Corporation ("MIC") and a net of tax gain of $437,000 on the sale of securities. Income from continuing operations for fiscal 1995 was $6,587,000 including $2,000,000 of insurance proceeds received on the death of the former chairman and a net of tax restructuring charge of $1,494,000 for the consolidation of the Company's Puerto Rico operations into its existing domestic facilities. Net sales in the electronics segment increased to $58,523,000 for the year ended June 30, 1996 from $55,607,000 for the year ended June 30, 1995 primarily as a result of the acquisitions of MIC in March 1996 and Lintek, Inc. in January 1995 partially offset by reduced sales volume of scanning devices. MIC sales, since its acquisition, were approximately $6,200,000. Operating profits, exclusive of the special write-off of $23,200,000 in 1996 and the restructuring charge in 1995, were $8,112,000 and $8,103,000 for the years ended June 30, 1996 and 1995, respectively. The increase in sales was offset by lower profit margins, primarily in instrument products and magnetic motors, and increased selling, general and administrative costs. Net sales in the isolator products segment increased to $15,844,000 for the year ended June 30, 1996 from $15,506,000 for the year ended June 30, 1995. The increase reflects higher sales volume of industrial and commercial isolators partially offset by decreased sales volume of military isolators. Operating profits decreased by $227,000 as a result of lower profit margins, as discussed below, partially offset by the increased sales volume and reduced selling, general and administrative costs as a result of the consolidation of facilities. Cost of sales as a percentage of sales increased to 68.7% from 66.9% between the two years primarily as a result of inefficiencies in the final production runs of military isolators in the Company's Puerto Rican facility and start-up costs of the transition to the New Jersey facility. Selling, general and administrative costs (exclusive of the respective special charges) decreased to $15,379,000 from $15,752,000 as a result of cost savings from the consolidation of certain operations of the Company's Puerto Rican facility into the Company's other facilities. Interest expense increased to $1,939,000 from $1,464,000 due to increased levels of borrowings required to purchase MIC. Interest and other income increased to $1,075,000 from $751,000 due to a securities related gain partially offset by lower interest income on reduced cash amounts which were used to acquire MIC. The income tax provisions for the years ended June 30, 1996 and 1995 were different from the amounts computed by applying the U.S. Federal income tax rate to income before income taxes primarily as a result of the tax benefits of loss carryforwards (both unrealized and realized) and, for the year ended June 30, 1996, because of the non-deductibility of the $23,200,000 special charge, and for the year ended June 30, 1995, because of the non-taxable life insurance proceeds of $2,000,000. Management believes that potential reductions in military spending will not materially affect its operations. In certain product areas, the Company has suffered reductions in sales volume due to cutbacks in the military budget. In other product areas, the Company has experienced increased sales volume due to a realignment of government spending towards upgrading existing systems instead of purchasing completely new systems. The overall effect of the cutbacks and realignment has not been material to the Company. Fiscal 1995 Compared to Fiscal 1994 Net sales increased to $71,113,000 in fiscal 1995 from $65,602,000 in fiscal 1994. Income from continuing operations for fiscal 1995 improved to $6,587,000 including $2,000,000 of insurance proceeds received on the death of the former chairman and a net of tax restructuring charge of $1,494,000 for the consolidation of the Company's Puerto Rican operations into its existing domestic facilities. Fiscal 1994 income from continuing operations was $5,850,000 including an income tax benefit of $1,716,000 for the recognition of a portion of the Company's unrealized net operating loss carryforward. Net sales in the electronics segment increased to $55,607,000 for the year ended June 30, 1995 from $51,585,000 for the year ended June 30, 1994 primarily as a result of the acquisition of the microelectronics division of Marconi Circuit Technology Corporation in January 1994, the acquisition of Lintek, Inc. in January 1995 and increased sales volume of electronic systems. Operating profits, exclusive of the restructuring charge, improved by $1,788,000 as a result of the higher sales and improved margins, partially offset by increased research and development costs primarily in the microelectronics division. Net sales in the isolator products segment increased to $15,506,000 for the year ended June 30, 1995 from $14,017,000 for the year ended June 30, 1994. The increase is attributable to higher sales volumes in all product areas within the segment - commercial, industrial and military. Operating profits, exclusive of the restructuring charge, increased by $220,000. The increase in volume was partially offset by an unfavorable change in the product mix and lower margins in the military isolator division. Cost of sales as a percentage of sales decreased to 66.9% from 68.9% between the two years as a result of improved profit margins primarily in the instrument products division. Selling, general and administrative costs increased to $15,752,000 from $14,214,000 primarily due to a $1,695,000 increase in research and development costs. Interest expense increased to $1,464,000 from $1,440,000. Decreased levels of borrowings were offset by increased interest rates. Interest and other income increased by $487,000 as a result of the short-term investments made with the proceeds from the 7-1/2% debentures. The income tax provisions for the years ended June 30, 1995 and 1994 differed from the amounts computed by applying the U.S. Federal income tax rate to income from continuing operations before income taxes primarily as a result of the tax benefits of loss carryforwards (both realized and unrealized). In addition, the income tax provision for the year ended June 30, 1995 was further impacted by the non-taxable life insurance proceeds of $2,000,000. Income from discontinued operations for the year ended June 30, 1995 includes a gain related to the sale of the former Huxley Envelope Corp. ("Huxley") building of $240,000 and a gain related to T-CAS Corp. ("T-CAS") of $222,000. Income from discontinued operations for the year ended June 30, 1994 was comprised of a loss related to Huxley of $2,108,000 and a gain related to T-CAS of $2,295,000. In November 1993, the Company sold substantially all of the net operating assets of its Huxley subsidiary. The disposal is being accounted for as a discontinued operation, and, accordingly, Huxley's operations have been reported separately from continuing operations. The loss of $2,108,000 in fiscal 1994 represents a loss from Huxley's operations of $187,000 and a loss on the disposal of $1,921,000. The gain of $240,000 in fiscal 1995, is due primarily to a gain from the sale of the former Huxley building. In September 1993, the Company entered into an agreement with the U.S. Air Force in full settlement of claims against the U.S. Air Force for extra work, delays and other out-of-scope costs on two telecommunication contracts which were the primary reasons for T-CAS' loss in 1991. The settlement represents a final mutual release of all claims between the parties relative to these two contracts. The settlement, together with other unrelated settlements of claims and adjustments of previously recorded loss reserves, resulted in an after tax gain of $2,295,000 which was included in discontinued operations in the first quarter of fiscal 1994. The gain of $222,000 in fiscal 1995, is due primarily to a settlement of another claim against a former customer. Liquidity and Capital Resources June 30, 1996 Compared To June 30, 1995 The Company's working capital at June 30, 1996 was $24,736,000 as compared to $31,533,000 at June 30, 1995. The current ratio decreased to 2.3 to 1 at June 30, 1996 from 3.5 to 1 at June 30, 1995. The decreases were primarily due to the decrease in cash and cash equivalent balances to $661,000 from $11,330,000, as a result of the MIC acquisition. Cash provided from operating activities was $4,508,000 for the year ended June 30, 1996 and $8,300,000 for the year ended June 30, 1995 (including $2,000,000 of life insurance proceeds). Cash used by investing activities of $33,317,000 in 1996 was primarily for the acquisition of MIC Technology Corporation. Effective March 19, 1996, the Company acquired all of the outstanding stock of MIC Technology Corporation ("MIC") for approximately $36,000,000 of cash, 300,000 shares of common stock and warrants to purchase 400,000 shares of common stock (at exercise prices ranging from $7.05 to $7.50 per share). The purchase price was paid with available cash of $9,000,000 and borrowings under the Company's bank loan agreement of $27,000,000. The purchase agreement also provides for a contingent payment of $4,000,000 based upon certain operating results. MIC manufactures high frequency thin film circuits and interconnects for miniaturized, high frequency, high performance electronic products for growing commercial markets such as wireless communications, satellite based communications hardware and high technology military electronics. The acquired company's net sales were approximately $25,000,000 for its fiscal year ended October 31, 1995. In March 1995, the Company adopted a plan to consolidate its Puerto Rican manufacturing operations into its existing facilities in New York and New Jersey. The Company has ceased manufacturing operations in Puerto Rico. In connection with this restructuring, the Company recorded a charge to earnings of $1,150,000 and $519,000 in the third and fourth quarters of fiscal 1995, respectively, representing costs for abandonment of leasehold improvements, severance costs for approximately 100 employees, lease termination costs, write-down of excess equipment and other related costs. Approximately $597,000 of this amount were non-cash costs and approximately $100,000 remains unpaid at June 30, 1996. As of March 15, 1996 the Company replaced a previous agreement with a revised revolving credit and term loan agreement with two banks which is secured by substantially all of the Company's assets not otherwise encumbered. The agreement provides for a revolving credit line of $22,000,000 and a term loan of $16,000,000. The revolving credit line expires in March 1999. The term loan is payable in quarterly installments of $900,000 with final payment on September 30, 2000. The interest rate on borrowings under this agreement is at various rates depending upon certain financial ratios, with the present rate substantially equivalent to the prime rate (8.25% at June 30, 1996) plus 3/4% on the revolving credit borrowings and 1% on the term loan borrowings. The terms of the agreement require compliance with certain covenants including minimum consolidated tangible net worth and pre-tax earnings, maintenance of certain financial ratios, limitations on capital expenditures and indebtedness and prohibition of the payment of cash dividends. During June 1994, the Company completed a sale of $10,000,000 principal amount of 7-1/2% Senior Subordinated Convertible Debentures to non-U.S. persons. The debentures are due June 15, 2004 subject to prior sinking fund payments of 10%, 10%, 15% and 15% of the principal amount on September 15, 2000, 2001, 2002 and 2003, respectively. The debentures are convertible into the Company's common stock at a price of $5-5/8 per share. During the fiscal year 1996, $19,000 principal amount of debentures was converted. Management of the Company believes that internally generated funds and available lines of credit will be sufficient for its working capital requirements, capital expenditure needs and the servicing of its debt for the fiscal year ending June 30, 1997. At June 30, 1996, the Company's available unused line of credit was $12,150,000. A subsidiary of the Company whose operations were discontinued in 1991, is one of several defendants named in a personal injury action initiated in August, 1994, by a group of plaintiffs. The plaintiffs are seeking damages which cumulatively may exceed $500 million. The complaint alleges, among other things, that the plaintiffs suffered injuries from exposure to substances contained in products sold by the subsidiary to one of its customers. Considering its various defenses, together with its product liability insurance, in the opinion of management of the Company, the outcome of the action against its subsidiary will not have a materially adverse effect on the Company's consolidated financial statements. The Company is involved in various other routine legal matters. Management believes the outcome of these matters will not have a materially adverse effect on the Company's consolidated financial statements. The Company's backlog of orders at June 30, 1996 and 1995 was $37,457,000 and $34,681,000, respectively. At June 30, 1996, the Company had net operating loss carryforwards of approximately $8,000,000 for Federal income tax purposes. The Company is undergoing routine audits by various taxing authorities of several of its state and local income tax returns covering different periods from 1993 to 1995. Management believes that the probable outcome of these various audits should not materially affect the consolidated financial statements of the Company. FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", must be adopted by the Company in fiscal 1997. Statement No. 121 requires, among other things, that long-lived assets held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management does not believe that the implementation of Statement No. 121 will have a material impact on the Company's consolidated financial statements. ITEM EIGHT - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data listed in the accompanying Index to Financial Statements and Schedules is attached as part of this report. ITEM NINE - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III The information required by Part III is incorporated by reference to the Company's definitive proxy statement in connection with its Annual Meeting of Stockholders scheduled to be held in November 1996, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year ended June 30, 1996. PART IV ITEM FOURTEEN - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) See Index to Financial Statements at beginning of attached financial statements. (b) Reports on Form 8-K: None. (c) Exhibits 3.1 Certificate of Incorporation, as amended (Exhibit 3.1 of Annual Report on Form 10-K for the year ended June 30, 1987). 3.2 By-Laws, as amended (Exhibit 3.2 of Annual Report on Form 10-K for the year ended June 30, 1987). 4.1 Third Amended and Restated Loan and Security Agreement dated as of March 15, 1996 among the Registrant, certain of its subsidiaries, Chemical Bank and NatWest Bank, N.A. (Exhibit 10 of Report on Form 8-K dated March 19, 1996). 4.2 Indenture Agreement between Registrant and American Stock Transfer & Trust Company dated as of June 23, 1994 (Exhibit 4.2 of Annual Report on Form 10-K for the year ended June 30, 1994). 10.1 1989 Non-Qualified Stock Option Plan, as amended (Exhibit 10.8 of Annual Report on Form 10-K for the year ended June 30, 1990). 10.2 1994 Non-Qualified Stock Option Plan (Exhibit 10.2 of Annual Report on Form 10-K for the year ended June 30, 1994). 10.3 1994 Outside Directors Stock Option Plan (Exhibit 10.3 of Annual Report on Form 10-K for the year ended June 30, 1994). 10.4 Asset Purchase Agreement dated as of January 14, 1994 between Aeroflex Laboratories Incorporated and Marconi Circuit Technology Corporation (Exhibit 2 of Report on Form 8-K dated January 14, 1994). 10.5 Common Stock Purchase Agreement dated as of February 13, 1996 and closed on March 19, 1996 among Aeroflex Acquisition Corp. (as assignee of the Registrant), MIC Technology Corporation and the stockholders of MIC Technology Corporation (Exhibit 2 of Report on Form 8-K dated March 19, 1996). 11 Computation of Earnings Per Common Share 22 The following is a list of the Company's subsidiaries: State of Name Incorporation ---- ------------- Aeroflex International Inc. Delaware Aeroflex Laboratories Incorporated Delaware Aeroflex Lintek Corp. Ohio Aeroflex Systems Corp. Delaware MIC Technology Corporation Texas Vibration Mountings and Controls, Inc. New York 24 Consents of Independent Auditors The following undertakings are incorporated by reference into the Company's Registration Statements on Form S-8 (Registration Nos. 33-75496, 33-88868, and 33-88878). (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan or distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-3 or Form S-8, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) For the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (f) (1) The undersigned registrant hereby undertakes to deliver or cause to be delivered with the prospectus to each employee to whom the prospectus is sent or given a copy of the registrant's annual report to stockholders for its last fiscal year, unless such employee otherwise has received a copy of such report, in which case the registrant shall state in the prospectus that it will promptly furnish, without charge, a copy of such report on written request of the employee. If the last fiscal year of the registrant has ended within 120 days prior to the use of the prospectus, the annual report of the registrant for the preceding fiscal year may be so delivered, but within such 120 day period the annual report for the last fiscal year will be furnished to each such employee. (2) The undersigned registrant hereby undertakes to transmit or cause to be transmitted to all employees participating in the plan who do not otherwise receive such material as stockholders of the registrant, at the time and in the manner such material is sent to its stockholders, copies of all reports, proxy statements and other communications distributed to its stockholders generally. (3) Where interests in a plan are registered herewith, the undersigned registrant and plan hereby undertake to transmit or cause to be transmitted without charge, to any participant in the plan who makes a written request, a copy of the then latest annual report of the plan who makes a written request, a copy of the then latest annual report of the plan filed pursuant to Section 15 (d) of the Securities Exchange Act of 1934 (Form 11-K). If such report is filed separately on Form 11-K, such form shall be delivered upon written request. If such report is filed as a part of the registrant's annual report on Form 10-K, that entire report (excluding exhibits) shall be delivered upon written request. If such report is filed as a part of the registrant's annual report to stockholders delivered pursuant to paragraph (1) or (2) of this undertaking, additional delivery shall not be required. (4) If the registrant is a foreign private issuer, eligible to use Form 20-F, then the registrant shall undertake to deliver or cause to be delivered with the prospectus to each employee to whom the prospectus is sent or given, a copy of the registrant's latest filing on Form 20-F in lieu of the annual report to stockholders. (i) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 20th day of September 1996. Aeroflex Incorporated By: /s/ Harvey R. Blau Harvey R. Blau, Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on September 20, 1996 by the following persons in the capacities indicated: /s/ Harvey R. Blau Chairman of the Board - --------------------------- (Chief Executive Officer) Harvey R. Blau /s/ Michael Gorin President and Director - --------------------------- (Chief Financial Officer) Michael Gorin /s/ Leonard Borow Executive Vice President, - --------------------------- Secretary and Director Leonard Borow (Chief Operating Officer) /s/ Robert Bradley, Sr. Director - --------------------------- Robert Bradley, Sr. /s/ Milton Brenner Director - ---------------------------- Milton Brenner /s/ Ernest E. Courchene, Jr. Director - ---------------------------- Ernest E. Courchene, Jr. /s/ Jerome Fox Director - ---------------------------- Jerome Fox /s/ Donald S. Jones Director - ---------------------------- Donald S. Jones /s/ Eugene Novikoff Director - ---------------------------- Eugene Novikoff /s/ John S. Patton Director - ---------------------------- John S. Patton AEROFLEX INCORPORATED AND SUBSIDIARIES FINANCIAL STATEMENTS AND SCHEDULES COMPRISING ITEM 8 OF ANNUAL REPORT ON FORM 10-K TO SECURITIES AND EXCHANGE COMMISSION AS OF JUNE 30, 1996 AND 1995 AND FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994 FINANCIAL STATEMENTS AND SCHEDULES I N D E X PAGE ITEM FOURTEEN (a) 1. FINANCIAL STATEMENTS: Independent auditors' reports S-1-2 Consolidated financial statements: Balance sheets - June 30, 1996 and 1995 S-3-4 Statements of operations - each of the three years in the period ended June 30, 1996 S-5 Statements of stockholders' equity - each of the three years in the period ended June 30, 1996 S-6 Statements of cash flows - each of the three years in the period ended June 30, 1996 S-7 Notes (1-16) S-8-20 Quarterly financial data (unaudited) S-21 2. FINANCIAL STATEMENT SCHEDULES: II - Valuation and qualifying accounts S-22 All other schedules have been omitted because they are inapplicable, not required, or the information is included elsewhere in the financial statements or notes thereto. Independent Auditors' Report The Board of Directors and Stockholders of Aeroflex Incorporated Plainview, New York We have audited the accompanying consolidated balance sheets of Aeroflex Incorporated and subsidiaries as of June 30, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index at item 14(a)2. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aeroflex Incorporated and subsidiaries as of June 30, 1996 and 1995 and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP August 12, 1996 Jericho, New York Independent Auditors' Report To the Board of Directors and Stockholders of Aeroflex Incorporated Plainview, New York We have audited the accompanying consolidated statements of operations, stockholders' equity, and cash flows of Aeroflex Incorporated (formerly ARX, Inc.) and its subsidiaries for the year ended June 30, 1994. Our audit also included the financial statement schedule listed in the Index at item 14(a)2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects the results of operations and cash flows of Aeroflex Incorporated and subsidiaries for the year ended June 30, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP August 12, 1994 Jericho, New York AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS June 30, 1996 1995 ---- ---- Current Assets: Cash and cash equivalents $ 661,000 $ 11,330,000 Current portion of invested cash - 635,000 Accounts receivable, less allowance for doubtful accounts of $354,000 and $437,000 at June 30, 1996 and 1995, respectively 23,336,000 18,898,000 Income tax refund receivable 926,000 - Inventories 16,916,000 12,330,000 Deferred income taxes 1,871,000 467,000 Prepaid expenses and other current assets 554,000 605,000 ------------ ------------ Total Current Assets 44,264,000 44,265,000 Invested Cash 603,000 677,000 Property, Plant and Equipment, net 14,854,000 13,859,000 Intangible Assets Acquired in Connection with the Purchase of Businesses, net of accumulated amortization of $516,000 and $299,000 at June 30, 1996 and 1995, respectively 8,707,000 518,000 Cost in Excess of Fair Value of Net Assets of Businesses Acquired, net of accumulated amortization of $2,086,000 and $1,780,000 at June 30, 1996 and 1995, respectively 10,054,000 10,297,000 Deferred Income Taxes - 589,000 Other Assets 2,687,000 1,731,000 ------------ ------------ Total Assets $ 81,169,000 $ 71,936,000 ============ ============ See notes to consolidated financial statements
AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, 1996 1995 ---- ---- Current Liabilities: Current portion of long-term debt $ 4,259,000 $ 1,936,000 Accounts payable 5,243,000 3,343,000 Accrued expenses and other current liabilities 8,256,000 6,916,000 Income taxes payable 1,770,000 537,000 ------------ ------------ Total Current Liabilities 19,528,000 12,732,000 ------------ ------------ Long-Term Debt 20,337,000 1,851,000 ------------ ------------ Deferred Income Taxes 172,000 - ------------ ------------ Other Long-Term Liabilities 679,000 1,009,000 ------------ ------------ Senior Subordinated Convertible Debentures 9,981,000 10,000,000 ------------ ------------ Commitments and Contingencies Stockholders' Equity: Preferred stock, par value $.10 per share; authorized 1,000,000 shares: Series A Junior Participating Preferred stock, par value $.10 per share; authorized 150,000 shares - - Common stock, par value $.10 per share; authorized 25,000,000 shares; issued 12,380,000 and 11,818,000 shares at June 30, 1996 and 1995, respectively 1,238,000 1,182,000 Additional paid-in capital 57,820,000 56,101,000 Accumulated deficit (28,004,000) (10,584,000) ------------ ------------ 31,054,000 46,699,000 Less: Treasury stock, at cost (129,000 and 92,000 shares at June 30, 1996 and 1995, respectively) 582,000 355,000 ------------ ------------ 30,472,000 46,344,000 ------------ ------------ Total Liabilities and Stockholders' Equity $ 81,169,000 $ 71,936,000 ============ ============ See notes to consolidated financial statements
AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30, 1996 1995 1994 ---- ---- ---- Net Sales $ 74,367,000 $ 71,113,000 $ 65,602,000 Cost of Sales 51,070,000 47,542,000 45,168,000 ------------- ------------ ------------ Gross Profit 23,297,000 23,571,000 20,434,000 Selling, General and Administrative Costs 15,379,000 15,752,000 14,214,000 Special Charge (Note 2) 23,200,000 - - Restructuring Charge (Note 3) - 1,669,000 - ------------- ------------ ------------ Operating Income (Loss) (15,282,000) 6,150,000 6,220,000 ------------- ------------ ------------ Other Income (Expense) Life Insurance Proceeds (Note 13) - 2,000,000 - Interest Expense (1,939,000) (1,464,000) (1,440,000) Other Income (including interest and dividends of $496,000, $669,000 and $163,000) 1,075,000 751,000 264,000 ------------- ------------ ------------ Total Other Income (Expense) (864,000) 1,287,000 (1,176,000) ------------- ------------ ------------ Income (Loss) From Continuing Operations Before Income Taxes (16,146,000) 7,437,000 5,044,000 Provision (Benefit) For Income Taxes 1,274,000 850,000 (806,000)** ------------- ------------ ------------ Income (Loss) From Continuing Operations (17,420,000) 6,587,000 5,850,000 ------------- ------------ ------------ Discontinued Operations (Note 4): Loss from operations of discontinued subsidiaries, net of income taxes - - (187,000) Gain on disposal of subsidiaries, net of income taxes - 462,000 374,000 ------------- ------------ ------------ Income From Discontinued Operations - 462,000 187,000 ------------- ------------ ------------ Net Income (Loss) $(17,420,000) $ 7,049,000 $ 6,037,000 ============= ============ ============ Income (Loss) Per Common Share: Primary Continuing Operations $(1.46) $ .53 $ .55** Discontinued Operations - .04 .02 ------------- ------------ ------------ Net Income (Loss) $(1.46) $ .57 $ .57 ============= ============ ============ Fully Diluted Continuing Operations * $ .52 $ .50** Discontinued Operations * .03 .01 ------------- ------------ ------------ Net Income * $ .55 $ .51 ============= ============ ============ Weighted Average Number of Common Shares Outstanding Primary 11,971,000 12,352,000 10,526,000 ============= ============ ============ Fully Diluted * 14,249,000 12,401,000 ============= ============ ============ * As a result of the loss, all options, warrants and convertible debentures are anti-dilutive. ** Includes income tax benefit of $1,716,000 relating to the recognition of a portion of the Company's unrealized net operating loss carryforward in accordance with Statement of Financial Accounting Standards No. 109. See notes to consolidated financial statements
AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended June 30, 1996, 1995 and 1994
Retained Additional Earnings Common Stock Paid-in (Accumulated Treasury Stock Total Shares Par Value Capital Deficit) Shares Cost ----- ------ --------- ---------- ----------- ------ ---- Balance, July 1, 1993 $ 27,208,000 8,724,000 $ 872,000 $ 50,098,000 $ (23,670,000) 58,000 $ (92,000) Stock Issued Upon Conversion of Debentures 6,131,000 3,050,000 305,000 5,826,000 - - - Stock Issued Upon Exercise of Stock Options 64,000 25,000 3,000 61,000 - - - Warrants Issued to Placement Agent 131,000 - - 131,000 - - - Net Income 6,037,000 - - - 6,037,000 - - ----------- ----------- ----------- ----------- ----------- ------- -------- Balance, June 30, 1994 39,571,000 11,799,000 1,180,000 56,116,000 (17,633,000) 58,000 (92,000) Treasury Stock Received from the Employee Stock Ownership Plan (28,000) - - - - 7,000 (28,000) Retirement of Treasury Stock - (65,000) (6,000) (114,000) - (65,000) 120,000 Purchase of Treasury Stock (355,000) - - - - 92,000 (355,000) Stock Issued Upon Exercise of Stock Options 107,000 84,000 8,000 99,000 - - - Net Income 7,049,000 - - - 7,049,000 - - ----------- ----------- ----------- ----------- ----------- ------- -------- Balance, June 30, 1995 46,344,000 11,818,000 1,182,000 56,101,000 (10,584,000) 92,000 (355,000) Stock Issued Upon Conversion of Debentures 19,000 3,000 - 19,000 - - - Treasury Stock Received from the Employee Stock Ownership Plan (285,000) - - - - 56,000 (285,000) Stock Issued Upon Exercise of Stock Options 440,000 159,000 16,000 366,000 - (19,000) 58,000 Stock and Warrants Issued to Acquire Business 1,074,000 300,000 30,000 1,044,000 - - - Stock Issued in Connection with Bank Refinancing 300,000 100,000 10,000 290,000 - - - Net Loss (17,420,000) - - - (17,420,000) - - ----------- ----------- ----------- ------------ ------------- ------- ----------- Balance, June 30, 1996 $ 30,472,000 12,380,000 $ 1,238,000 $ 57,820,000 $ (28,004,000) 129,000 $ (582,000) =========== =========== =========== ============ ============= ======= =========== See notes to consolidated financial statements
AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30, 1996 1995 1994 ---- ---- ---- Cash Flows From Operating Activities: Net income (loss) $(17,420,000) $ 7,049,000 $ 6,037,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Special charge 23,200,000 - - Gain from discontinued operations - (462,000) (187,000) Depreciation and amortization 3,091,000 3,133,000 2,931,000 Gain on sale of securities (533,000) - - Deferred income taxes (461,000) (13,000) (1,450,000) Other (112,000) (69,000) 186,000 Change in operating assets and liabilities net of effects from purchase of businesses: Decrease (increase) in accounts receivable (2,220,000) (1,965,000) (2,091,000) Decrease (increase) in inventories (2,654,000) 2,263,000 565,000 Decrease (increase) in prepaid expenses and other assets (6,000) (279,000) (459,000) Increase (decrease) in accounts payable, accrued expenses and other long-term liabilities 434,000 (1,232,000) 949,000 Increase (decrease) in income taxes payable 1,189,000 (125,000) (774,000) ----------- ----------- ----------- Net Cash Provided By Operating Activities 4,508,000 8,300,000 5,707,000 ----------- ----------- ----------- Cash Flows From Investing Activities: Payment for purchase of businesses, net of cash acquired (35,190,000) (536,000) (5,650,000) Net cash provided by discontinued operations - 3,058,000 5,643,000 Capital expenditures (1,687,000) (2,919,000) (2,205,000) Proceeds from sale of property, plant and equipment 2,318,000 182,000 27,000 Net proceeds from sale of securities 533,000 - - Decrease in invested cash 709,000 194,000 1,904,000 ----------- ----------- ----------- Net Cash Used In Investing Activities (33,317,000) (21,000) (281,000) ----------- ----------- ----------- Cash Flows From Financing Activities: Net proceeds from debenture offering - - 9,220,000 Borrowings under debt agreements 27,250,000 293,000 1,991,000 Net debt repayments (9,210,000) (5,232,000) (8,593,000) Bank debt financing costs (403,000) - (230,000) Purchase of treasury stock - (355,000) - Proceeds from the exercise of stock options 503,000 107,000 64,000 ----------- ----------- ----------- Net Cash Provided By (Used In) Financing Activities 18,140,000 (5,187,000) 2,452,000 ----------- ----------- ----------- Net Increase (Decrease) In Cash and Cash Equivalents (10,669,000) 3,092,000 7,878,000 Cash and Cash Equivalents At Beginning Of Year 11,330,000 8,238,000 360,000 ----------- ----------- ----------- Cash and Cash Equivalents At End Of Year $ 661,000 $11,330,000 $ 8,238,000 =========== =========== =========== See notes to consolidated financial statements
AEROFLEX INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 1996, 1995 and 1994 1. Summary of Significant Accounting Principles and Policies --------------------------------------------------------- Principles of Consolidation --------------------------- The accompanying consolidated financial statements include the accounts of Aeroflex Incorporated and its subsidiaries ("the Company"), all of which are wholly-owned. The Company has accounted for certain subsidiaries, namely telecommunication systems services (T-CAS Corp.) and commercial and custom envelopes (Huxley Envelope Corp.), as discontinued operations. These subsidiaries have not been consolidated as part of the Company's continuing operations (Note 4). All significant intercompany balances and transactions have been eliminated. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires that management of the Company make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities. Among the more significant estimates included in the financial statements are the estimated costs to complete contracts in process. Actual results could differ from those estimates. Cash and Cash Equivalents ------------------------- The Company considers all highly liquid investments having maturities of three months or less at the date of acquisition to be cash equivalents. Inventories ----------- Inventories are stated at the lower of cost (first-in, first-out) or market. Financial Instruments --------------------- The fair values of all financial instruments, other than long-term debt and the convertible debentures (see Notes 9 and 10), approximate book values because of the short maturity of these instruments. Revenue and Cost Recognition on Contracts ----------------------------------------- Revenue and costs on contracts are recognized based upon shipments or billings for manufacturing contracts and upon costs incurred for certain engineering and support services contracts. Estimated costs at completion are based upon engineering and production estimates. Provisions for estimated losses on contracts-in-process are recorded in the period in which such losses are first determined. Property, Plant and Equipment ----------------------------- Property, plant and equipment are stated at cost less accumulated depreciation computed on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the life of the lease or the estimated life of the asset, whichever is shorter. Research and Development Costs ------------------------------ All research and development costs are charged to expense as incurred and are classified as selling, general and administrative costs. Research and development expenses were approximately $1,260,000, $2,389,000, and $694,000 during the fiscal years 1996, 1995 and 1994, respectively. See Note 2 for a discussion of purchased in-process research and development. Intangible Assets ----------------- Intangible assets are recorded at cost, less accumulated amortization. The excess of purchase price over the fair value of tangible assets acquired is being amortized on a straight-line basis over a period of 40 years except for certain costs allocated to existing technology, workforce in-place, customer relationships and patents which are amortized over 13 to 15 years, the estimated remaining lives of the intangibles at the time they were acquired by the Company. The Company periodically evaluates the recoverability of the carrying value of its intangible assets and the related amortization periods. The Company assesses the recoverability of unamortized goodwill based on the undiscounted projected future earnings of the related businesses. As of June 30, 1996, the cost in excess of fair value of net assets of businesses acquired consists substantially of $8,934,000 related to the 1989 acquisition of Comstron Corporation, a manufacturer of frequency synthesizers, subsystems and components. Invested Cash ------------- Invested cash consists of government securities and certificates of deposit, having original maturities of greater than three months, and is carried at cost, which approximates market. Income (Loss) Per Share ----------------------- Income per share is computed based upon the weighted average number of common shares outstanding after giving effect to the assumed exercise of dilutive stock options and warrants and, for fully diluted purposes, the assumed conversion of debentures. Loss per share is computed based upon only the weighted average number of common shares outstanding. Income Taxes ------------ The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", in fiscal 1993. Under SFAS No. 109, deferred tax assets and liabilities are measured based upon the differences between the financial accounting and tax bases of assets and liabilities. Reclassifications ----------------- Reclassifications have been made to the 1995 and 1994 consolidated financial statements to conform to the 1996 presentation. 2. Acquisition of Businesses ------------------------- MIC --- Effective March 19, 1996, the Company acquired all of the outstanding stock of MIC Technology Corporation ("MIC") for approximately $36,000,000 of cash, 300,000 shares of common stock and warrants to purchase 400,000 shares of common stock (at exercise prices ranging from $7.05 to $7.50 per share). The purchase price was paid with available cash of approximately $9,000,000 and borrowings under the Company's bank loan agreement of approximately $27,000,000. The purchase agreement also provides for a contingent payment of $4,000,000 due in November 1997 based upon certain operating results over an eighteen month period ending August 1997. MIC manufactures high frequency thin film circuits and interconnects for miniaturized, high frequency, high performance electronic products for growing commercial markets such as wireless communications, satellite based communications hardware and high technology military electronics. The acquired company's net sales were approximately $25,000,000 for its fiscal year ended October 31, 1995. The Company commissioned an independent asset valuation study of acquired tangible and identifiable intangible assets to serve as a basis for allocation of the purchase price. Based on this study, the Company allocated the purchase price as follows: Net tangible assets $ 6,237,000 Identifiable intangible assets 8,406,000 In-process research and developme 23,200,000 ------------ $ 37,843,000 ============
The identifiable intangible assets which include existing technology, customer relationships and assembled work force will be amortized on a straight-line basis over thirteen years based on the study described above. The acquired in-process research and development is not considered to have reached technological feasibility and, in accordance with generally accepted accounting principles, the value of such has been expensed in the third quarter of fiscal 1996. Summarized below are the unaudited pro forma results of operations of the Company as if MIC had been acquired at the beginning of the fiscal periods presented. The $23,200,000 write-off has been included in the June 30, 1996 pro forma loss but not the June 30, 1995 pro forma income in order to provide comparability to the respective historical periods.
Pro Forma Year Ended June 30, 1996 1995 ---- ---- (in thousands, except per share data) Net Sales $ 90,097 $ 95,300 Income (Loss) From Continuing Operations (19,392) 6,729 Net Income (Loss) (19,392) 7,191 Earnings (Loss) Per Share Primary Continuing Operations $ (1.62) $ .53 Net Income (Loss) (1.62) .56 Fully Diluted Continuing Operations * .51 Net Income * .54 * Due to the loss, all options, warrants and convertible debentures are anti-dilutive.
Lintek ------ In January 1995, the Company acquired substantially all of the net operating assets of Lintek, Inc. ("Lintek") for $537,000 plus contingent consideration based on the next five years' earnings to a maximum of an additional $675,000. An additional $63,000 of consideration was earned as of December 31, 1995 and paid in February 1996. Such amount, and any further contingent consideration earned, will be treated as cost in excess of fair value of net assets acquired. Lintek designs, develops and manufactures radar cross section and antenna pattern measurement systems for commercial and military applications, as well as surface penetrating radars. The acquired company's net sales were approximately $2,600,000 for the year ended December 31, 1994. On a pro forma basis, had the Lintek acquisition taken place as of the beginning of the periods presented, results of operations for those periods would not have been materially affected. Circuit Tech ------------ Effective January 1, 1994, the Company acquired substantially all of the net operating assets of the microelectronics division of Marconi Circuit Technology Corporation ("Circuit Tech") for $5,650,000 and assumed liabilities of $3,115,000. The purchase was financed through borrowings under the Company's revolving line of credit agreement. The acquired division's net sales of microelectronic products were approximately $17,500,000 for the twelve months ended December 31, 1993. Summarized below are the unaudited pro forma results of operations of the Company as if Circuit Tech had been acquired at the beginning of the fiscal period presented:
Pro Forma Year Ended June 30, --------------------- 1994 ---- (in thousands, except per share data) Net Sales $ 73,757 Income From Continuing Operations 5,703 Net Income 5,890 Earnings Per Share Primary Income From Continuing Operations $ .54 Net Income .56 Fully Diluted Income From Continuing Operations .48 Net Income .50
The pro forma financial information presented above for the MIC and Circuit Tech acquisitions is not necessarily indicative of either the results of operations that would have occurred had the acquisitions taken place at the beginning of the periods presented or of future operating results of the combined companies. The acquisitions have been accounted for as purchases and, accordingly, the acquired assets and liabilities assumed have been recorded at their estimated fair values at the respective dates of acquisition. The operating results of MIC, Lintek and Circuit Tech are included in the consolidated statements of operations from the respective acquisition dates. 3. Restructuring Charge -------------------- In March 1995, the Company adopted a plan to consolidate its Puerto Rican manufacturing operations into its existing facilities in New York and New Jersey. The Company has ceased manufacturing operations in Puerto Rico. In connection with this restructuring, the Company recorded a charge to earnings of $1,669,000 in fiscal 1995, representing costs of abandonment of leasehold improvements, severance costs for approximately 100 employees, lease termination costs, write-down of excess equipment and other related costs. Approximately $597,000 of this amount were non-cash costs and approximately $100,000 remains unpaid. Expenditures related to the restructuring have been consistent in all material respects with the original charges taken. 4. Discontinued Operations ----------------------- In November 1993, the Company sold substantially all of the net operating assets of its wholly-owned subsidiary, Huxley Envelope Corp. ("Huxley"), for $5,550,000. Huxley is a manufacturer of specialized envelopes for high-volume direct-mail users. The sale did not include Huxley's New York City manufacturing facility which was sold in the fourth quarter of fiscal 1995 for approximately $2,400,000. The sale of the facility, along with the resolution of certain other contingencies, resulted in a net of tax gain of $240,000. Effective June 30, 1991, the Board of Directors of the Company approved a formal plan to discontinue the operations of its wholly-owned subsidiary, T-CAS Corp. ("T-CAS"), which was involved in the design and implementation of telecommunication and electronic systems. The plan called for completion of existing contracts and an orderly dissolution. As of June 30, 1993, all contracts were completed. In September 1993, the Company entered into an agreement with the U.S. Air Force in full settlement of claims against the U.S. Air Force on two T-CAS telecommunication contracts. The settlement represents a final mutual release of all claims between the parties relative to these two contracts. In May 1995, the Company received $170,000 in settlement of another claim against a former customer. These settlements, together with other unrelated settlements of claims and adjustments of previously recorded loss reserves, resulted in after tax gains of $2,295,000 and $222,000, which were included in discontinued operations in the first quarter of fiscal 1994 and fourth quarter of fiscal 1995, respectively. Huxley and T-CAS have been reported as discontinued operations and, accordingly, the Company's equity earnings (loss) from these subsidiaries and the estimated gain (loss) on disposal, sale or discontinuance have been reported separately from continuing operations. The income from discontinued operations is as follows:
Year Ended June 30, 1995 1994 ---- ---- Operating Revenues: Huxley $ - $ 4,868,000 T-CAS - 2,195,000 ------------ ------------ $ - $ 7,063,000 ============ ============ Income (loss) from operations (net of taxes): Huxley $ - $ (187,000) ------------ ------------ Estimated gain (loss) on disposition (net of tax): Huxley 240,000 (1,921,000) T-CAS 222,000 2,295,000 ------------ ------------ 462,000 374,000 ------------ ------------ Income from discontinued operations $ 462,000 $ 187,000 ============ ============
Intercompany interest expense has been allocated to the loss from discontinued operations based upon the net assets of discontinued operations. 5. Invested Cash ------------- Invested cash represents funds held in qualified Puerto Rican investments which enabled the Company to take advantage of reduced withholding taxes when the earnings from its subsidiary in Puerto Rico were repatriated. These funds are currently invested in government securities and certificates of deposit. Despite the cessation of operations in Puerto Rico, the funds will be maintained in such investments for the required statutory periods through the year 1999. 6. Inventories ----------- Inventories consist of the following:
June 30, 1996 1995 ---- ---- Raw materials $ 9,352,000 $ 5,509,000 Work-in-process 5,301,000 3,398,000 Finished goods 2,263,000 3,423,000 ------------ ------------ $ 16,916,000 $ 12,330,000 ============ ============
Inventories include contracts-in-process of $2,269,000 and $1,076,000 at June 30, 1996 and 1995, respectively, which consist substantially of unbilled material, labor and overhead costs that are or were expected to be billed during the succeeding fiscal year. 7. Property, Plant and Equipment ----------------------------- Property, plant and equipment consists of the following:
June 30, 1996 1995 ---- ---- Land $ 725,000 $ 725,000 Building and leasehold improvements 11,370,000 11,141,000 Machinery, equipment, tools and dies 17,293,000 18,494,000 Furniture and fixtures 5,070,000 5,339,000 Assets recorded under capital leases 2,707,000 2,160,000 Transportation equipment 63,000 59,000 ------------ ------------ 37,228,000 37,918,000 Less accumulated depreciation and amortization 22,374,000 24,059,000 ------------ ------------ $ 14,854,000 $ 13,859,000 ============ ============
At June 30, 1996, the Company had a commitment of approximately $1,700,000 for the acquisition of machinery and equipment. 8. Accrued Expenses and Other Current Liabilities ---------------------------------------------- Accrued expenses and other current liabilities include accrued salaries, wages and other compensation of $2,789,000 and $2,380,000 at June 30, 1996 and 1995, respectively. 9. Long-Term Debt and Credit Arrangements -------------------------------------- Long-term debt consists of the following:
June 30, 1996 1995 ---- ---- Revolving credit and term loan agreement (a) $ 22,200,000 $ - Capitalized lease obligations (b) 2,047,000 1,795,000 Bank loans (c) 187,000 822,000 Equipment loan (d) - 900,000 Other 162,000 270,000 ------------ ------------ 24,596,000 3,787,000 Less current maturities 4,259,000 1,936,000 ------------ ------------ $ 20,337,000 $ 1,851,000 ============ ============
(a) As of March 15, 1996, the Company replaced a previous agreement with a revised revolving credit and term loan agreement with two banks which is secured by substantially all of the Company's assets. The agreement provides for a revolving credit line of $22,000,000, which expires on March 31, 1999, and a term loan of $16,000,000. The term loan is payable in quarterly principal installments of $900,000 with final payment on September 30, 2000. The interest rate on borrowings under this agreement is at various rates depending upon certain financial ratios, with the present rate substantially equivalent to the prime rate (8.25% at June 30, 1996) plus 3/4% on the revolving credit borrowings and 1% on the term loan outstandings. The Company paid a facility fee of $200,000 and 100,000 shares of common stock, and is required to pay a commitment fee of 1/2% per annum of the average unused portion of the revolving credit line. An additional payment of $125,000 is payable if the term loan is greater than $5,000,000 at December 31, 1997. The terms of the agreement require compliance with certain covenants including minimum consolidated tangible net worth and pretax earnings, maintenance of certain financial ratios, limitations on capital expenditures and indebtedness and prohibition of the payment of cash dividends. In connection with the purchase of commodities for use in manufacturing, the Company has a letter of credit facility of $1,600,000. At June 30, 1996, the Company's available unused line of credit was $12,150,000 after consideration of the letter of credit. The Company believes that the carrying amount of this debt approximates fair value since the interest rate is variable and the margins are consistent with those available to the Company under similar terms. (b) The Company has various capitalized lease obligations with financial institutions which have various terms through 2000 and interest rates ranging from 7.06% to 9.25%. (c) The Company has loans with a bank bearing interest at rates ranging from 6.13% to 6.38%. These loans mature at various dates through 1999 and are fully collateralized by the invested cash. (d) The Company had a loan with a financial institution bearing interest at a floating rate of 5/8% over the prime rate which was secured by certain machinery and equipment. The loan was fully repaid in July 1995. Aggregate long-term debt as of June 30, 1996 matures in each fiscal year as follows: 1997...............$ 4,259,000 1998............... 4,195,000 1999............... 12,861,000 2000............... 3,281,000 ----------- 2001............... - Thereafter......... - ----------- $24,596,000 ===========
Interest paid was $1,584,000, $1,333,000 and $1,435,000 during the years ended June 30, 1996, 1995 and 1994, respectively. 10. Senior Subordinated Convertible Debentures ------------------------------------------ During June 1994, the Company completed a sale of $10,000,000 principal amount of 7-1/2% Senior Subordinated Convertible Debentures to non-U.S. persons. The debentures are due June 15, 2004 subject to prior sinking fund payments of 10%, 10%, 15%, and 15% of the principal amount on September 15, 2000, 2001, 2002 and 2003, respectively. The debentures are convertible into the Company's common stock at a price of $5-5/8 per share. The Company may redeem the debentures at a price of 106% of the principal amount, declining by 1.5 points per year beginning June 15, 1997 to 100% at June 15, 2000 and thereafter. The net proceeds from the offering were used initially to retire certain bank indebtedness and for general working capital with excess proceeds placed in temporary short term bank related investments until ultimately used for the purchase of MIC. The cost of issuing these debentures, $947,000, included a 6% fee paid and 100,000 warrants, exercisable at $6.75 per share, issued to the placement agent. This amount is included in the Consolidated Balance Sheet under the caption "Other Assets" and is being amortized over the term of the debentures as interest expense. As of June 30, 1996, $19,000 principal amount of bonds has been converted into common stock. The Company estimates the fair value of the debentures as of June 30, 1996 to be approximately $11,229,000 based on quoted market prices. During fiscal 1993, the Company completed a sale of $6,870,000 of principal amount of 7% Convertible Senior Subordinated Debentures. During fiscal 1994, the Company called for redemption all of the outstanding debentures at 109% of the principal amount. The debentures were convertible into the Company's common stock at a price of $2.25 per share. All but $8,000 of the principal amount of debentures had been presented for conversion, resulting in the issuance of approximately 3,050,000 shares of common stock. The $8,000 was redeemed and the issue was retired. 11. Stockholders' Equity -------------------- (a) Stock Option Plans ------------------ Under stock option plans approved by the Company's shareholders, options may be granted to purchase shares of the Company's common stock exercisable at prices equal to the fair market value on the date of grant. The Incentive Stock Option Plan, which expired in September 1991, provided for options which became exercisable in two or three equal annual installments beginning one year from the date of grant and expired five years from the date of grant. During 1990, the Company's shareholders approved the Non-Qualified Stock Option Plan which provides for options which become exercisable in one or more installments and expire five years from the date of grant. In December 1993, the Board of Directors adopted the Outside Director Stock Option Plan which provides for options to non-employee directors, which become exercisable in three installments and expire ten years from the date of grant. In November 1994, the shareholders approved this plan and the 1994 Non-Qualified Stock Option Plan which provides for options which become exercisable in one or more installments and expire five years from the date of grant. Additional information with respect to the Company's stock option plans is as follows:
Shares Shares Range of Under Available Exercise Outstanding for Future Prices Options Options -------- ----------- ----------- Balance, July 1, 1993 $1.50-$4.25 1,370,000 377,000 Authorized - - 250,000 Granted $2.38-$4.70 440,000 (440,000) Canceled $4.50 (60,000) 60,000 Exercised $2.25-$2.63 (25,000) - ----------- ---------- -------- Balance, June 30, 1994 $1.50-$4.70 1,725,000 247,000 Authorized - - 1,500,000 Granted $3.88-$4.18 1,160,000 (1,160,000) Canceled $2.63-$3.88 (209,000) 100,000 Exercised $2.25-$3.63 (84,000) - ----------- ---------- -------- Balance, June 30, 1995 $1.50-$4.70 2,592,000 687,000 Granted $3.75-$5.38 685,000 (685,000) Canceled $2.63-$3.88 (68,000) 68,000 Exercised $2.25-$3.88 (191,000) - ----------- ---------- -------- Balance, June 30, 1996 $1.50-$5.38 3,018,000 70,000 =========== ========== ========
At June 30, 1996 options to purchase approximately 2,092,000 shares were exercisable at prices ranging from $1.50 to $4.95. The Company has also issued to employees, who are not executive officers, options to purchase 275,000 shares of common stock exercisable at $4.00 per share that are not under an approved plan. In October 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 123, "Accounting for Stock-Based Compensation," which must be adopted by the Company in fiscal 1997. The Company has chosen not to implement the fair value based accounting method for employee stock options, but has elected to disclose, commencing with the fiscal 1997 Annual Report, the pro forma net income and earnings per share as if such method had been used to account for stock-based compensation cost as described in Statement No. 123. (b) Shareholders' Rights Plan ------------------------- In August 1988, the Company's Board of Directors approved a Shareholders' Rights Plan which provided for a dividend distribution of one right for each share to holders of record of the Company's common shares on August 31, 1988. The rights will become exercisable only in the event a person or group accumulates 20 percent or more of the Company's common shares, or if any person or group announces an offer which would result in it owning 20 percent or more of the common shares. The rights will expire August 30, 1998. Each right will entitle the holder to buy one one-hundredth of a share of a new series of Series A Junior Participating Preferred Stock of the Company at the price of $25. In addition, upon the occurrence of a merger or other business combination, or the acquisition by a person or group ("Acquiring Person") of 25 percent or more of the common shares, holders of the rights, other than the Acquiring Person, will be entitled to purchase either common shares of the Company or common shares of the Acquiring Person at half their market value. The Company will be entitled to redeem the rights for $0.01 per right at any time until the tenth day following a public announcement of the acquisition of a 20 percent position in its common shares. 12. Income Taxes ------------- The provision (benefit) for income taxes consists of the following:
Year Ended June 30, 1996 1995 1994 ---- ---- ---- Current: Federal $ 1,166,000 $ 307,000 $ 229,000 State and local 569,000 454,000 379,000 U.S. Territory - 102,000 36,000 ----------- ----------- ----------- 1,735,000 863,000 644,000 ----------- ----------- ----------- Deferred: Federal (776,000) 43,000 (1,238,000) State and local 201,000 (54,000) (275,000) U.S. Territory 114,000 (2,000) 63,000 ----------- ----------- ----------- (461,000) (13,000) (1,450,000) ----------- ----------- ----------- $ 1,274,000 $ 850,000 $ (806,000) =========== =========== ===========
The provision (benefit) for income taxes varies from the amount computed by applying the U.S. Federal income tax rate to income (loss) from continuing operations before income taxes as a result of the following:
Year Ended June 30, 1996 1995 1994 ---- ---- ---- Tax at statutory rate $(5,490,000) $ 2,529,000 $ 1,715,000 Non-deductible special charge (Note 2) 7,888,000 - - Utilization of net operating loss carryforwards (1,437,000) (1,702,000) (1,105,000) Reassessment of valuation allowance - - (1,716,000) State, local and U.S. Territory income tax 376,000 392,000 318,000 Exemption of Puerto Rican subsidiary's earnings from U.S. Federal income tax - (17,000) (540,000) Withholding tax on repatriation of Puerto Rican source earnings - 33,000 209,000 Alternative minimum tax - 97,000 156,000 Utilization of capital loss carryforwards (181,000) - - Amortization of goodwill 104,000 104,000 104,000 Officers' life insurance premiums and (proceeds) 21,000 (658,000) 46,000 Other (7,000) 72,000 7,000 ---------- ----------- ----------- $1,274,000 $ 850,000 $ (806,000) ========== =========== ===========
At June 30, 1996 and 1995 the deferred tax assets and liabilities consisted of:
June 30, 1996 1995 ---- ---- Accounts receivable $ 139,000 $ 154,000 Inventories 1,604,000 2,239,000 Accrued expenses 128,000 169,000 Less valuation allowance - (1,371,000) ------------ ------------ Current assets 1,871,000 1,191,000 Tollgate taxes - (724,000) ------------ ------------ Net current assets 1,871,000 467,000 ------------ ------------ Other long-term liabilities 155,000 358,000 Unrealized capital loss 1,315,000 1,598,000 Tax loss carryforwards 2,972,000 5,319,000 Tax credit carryforwards 2,449,000 1,530,000 Capital loss carryforwards 1,670,000 2,768,000 Less valuation allowance (3,884,000) (9,588,000) ------------ ------------ Non-current assets 4,677,000 1,985,000 ------------ ------------ Property, plant and equipment (966,000) (1,169,000) Intangibles (3,838,000) (215,000) Other (45,000) (12,000) ------------ ------------ Long-term liabilities (4,849,000) (1,396,000) ------------ ------------ Net non-current assets (liabilities) (172,000) 589,000 ------------ ------------ Total $ 1,699,000 $ 1,056,000 ============ ============
In accordance with SFAS No. 109, the Company records a valuation allowance against deferred tax assets if it is more likely than not that some or all of the deferred tax asset will not be realized. The income tax benefit for the year ended June 30, 1994 included $1,716,000 related to a decrease in the valuation allowance against unrealized tax loss carryforwards, since it was considered more likely than not that such assets would be realized. The valuation allowance decreased by $7,075,000 during fiscal 1996 primarily as a result of the acquisition of MIC and the utilization of net operating loss carryforwards. In connection with the acquisition of MIC (Note 2), the Company recorded approximately $3,800,000 of deferred tax liabilities related to identifiable intangible assets which are not deductible for tax purposes. Concurrently, the Company reduced its valuation allowance against its deferred tax assets by the same amount to recognize the net operating loss carryforwards that can offset these deferred tax liabilities. At June 30, 1996, the Company had net operating loss carryforwards of approximately $8,000,000 for Federal income tax purposes which expire through 2006. For fiscal 1995 and prior years, the earnings of Aeroflex International, Inc. (the Company's Puerto Rican subsidiary) were substantially exempt from United States income taxes. These earnings were also partially exempt from Puerto Rican income taxes. As a result of the consolidation of the Company's Puerto Rican operations into its domestic facilities (Note 3), the Company no longer has this partial exemption from income taxes. The Company is undergoing routine audits by various taxing authorities of several of its state and local income tax returns covering different periods from 1993 to 1995. Management believes that the probable outcome of these various audits should not materially affect the consolidated financial statements of the Company. The Company made income tax payments of $588,000, $1,004,000 and $1,432,000 and received refunds of $268,000, $16,000 and $9,000 during the years ended June 30, 1996, 1995 and 1994, respectively. 13. Employment Contracts and Life Insurance Proceeds ------------------------------------------------ In July 1994, the Company entered into employment agreements with certain of its officers for the period July 1, 1994 through June 30, 1999 with annual remuneration ranging from $200,000 to $250,000, plus cost of living adjustments and additional compensation based upon earnings of the Company. Future aggregate minimum payments under these contracts are $739,000 per year. In addition, these officers have the option to terminate their employment agreements upon change in the present control of the Company, as defined, and receive lump sum payments equal to three times annual compensation, as defined. During fiscal 1995, the Company received $2,000,000 of insurance proceeds on the death of the Company's former chairman. 14. Employee Benefit Plans ---------------------- The Company had established an Employee Stock Ownership Plan ("the ESOP") which covered substantially all employees not covered by collective bargaining agreements and who meet certain service requirements. The annual contribution to the ESOP was determined by the Company's Board of Directors. For the plan years ended December 31, 1995, 1994 and 1993 the Board of Directors did not elect to make a contribution to the ESOP. During 1995, the Company received a favorable determination letter from the Internal Revenue Service for the termination of the ESOP and completed the formal termination of the ESOP in December 1995. The Aeroflex Incorporated Employees' 401(k) Plan ("the ARX 401(k)") was established pursuant to Section 401(k) of the Internal Revenue Code. All employees of the Company and certain subsidiaries who are not members of a collective bargaining agreement may participate in the ARX 401(k). Each participant has the option to contribute a portion of his or her compensation. For each of the 1996, 1995 and 1994 calendar years, the Board of Directors has elected to provide an employer contribution, which vests immediately, equal to 30% of employee contributions subject to certain limitations. The ARX 401(k) expense for the fiscal years ended June 30, 1996, 1995 and 1994 was $230,000, $219,000, and $160,000, respectively. Employees of MIC Technology, who are excluded from the ARX 401(k), are eligible to participate in the MIC 401(k) Plan and MIC Profit Sharing Plan ("the MIC Plans"). In addition to contributing a portion of his or her compensation and receiving an employer contribution, eligible employees also receive an allocation of a discretionary share of the MIC Technology profits. The MIC Plans' expense was $76,000 for the period from acquisition to June 30, 1996. Effective January 1, 1994, the Company established a Supplemental Executive Retirement Plan ("the SERP") which provides retirement, death and disability benefits to certain of its officers. The SERP expense for the fiscal years ended June 30, 1996 and 1995 was $217,000 and $347,000, respectively. 15. Commitments and Contingencies ----------------------------- a. Operating Leases ---------------- Several of the Company's operating facilities and certain machinery and equipment are leased under agreements expiring through 2003. The leases for machinery and equipment generally contain options to purchase at the then fair market value of the related leased assets. Future minimum payments under operating leases as of June 30, 1996 are as follows for the fiscal years: 1997...............$ 1,232,000 1998............... 975,000 1999............... 603,000 2000............... 500,000 2001............... 481,000 Thereafter......... 908,000 ----------- $ 4,699,000 ===========
Rental expense was $790,000, $837,000 and $647,000 during the fiscal years 1996, 1995 and 1994, respectively. b. Legal Matters ------------- A subsidiary of the Company whose operations were discontinued in 1991, is one of several defendants named in a personal injury action initiated in August, 1994, by a group of plaintiffs. The plaintiffs are seeking damages which cumulatively may exceed $500 million. The complaint alleges, among other things, that the plaintiffs suffered injuries from exposure to substances contained in products sold by the subsidiary to one of its customers. Considering its various defenses, together with its product liability insurance, in the opinion of management of the Company the outcome of the action against its subsidiary will not have a materially adverse effect on the Company's consolidated financial statements. The Company is involved in various other routine legal matters. Management believes the outcome of these matters will not have a materially adverse effect on the Company's consolidated financial statements. 16. Business Segments ----------------- The Company's business segments of continuing operations and major products included in each segment, are as follows: Electronics: Isolator Products: ------------ ----------------- a) Microelectronics (Circuit a) Commercial spring and rubber Technology and MIC Technology) isolators (VMC) b) Instrument products b) Industrial spring and rubber (Comstron and Lintek) isolators (Korfund) c) Motion Control Systems c) Military wire-rope isolators - Scanning devices (Aeroflex International) - Stabilization and tracking devices - Magnetic devices - Electronic control systems The Company is a manufacturer of advanced technology systems and components primarily for government and defense contractors. Approximately 65%, 74% and 72% of the Company's sales for the fiscal years 1996, 1995 and 1994, respectively, were to agencies of the United States government or to prime defense contractors or subcontractors of the United States government.
Year Ended June 30, Business Segment Data: 1996 1995 1994 ---- ---- ---- Net sales: Electronics $ 58,523,000 $ 55,607,000 $ 51,585,000 Isolator Products 15,844,000 15,506,000 14,017,000 ------------ ------------ ------------ Net sales $ 74,367,000 $ 71,113,000 $ 65,602,000 ============ ============ ============ Operating profit (loss): Electronics $ 8,112,000 $ 8,103,000 $ 6,315,000 Isolator Products 2,150,000 2,377,000 2,157,000 General corporate expenses (2,344,000) (2,661,000) (2,252,000) ------------ ------------ ------------ 7,918,000 7,819,000 6,220,000 Special Charge (1) (23,200,000) - - Restructuring costs (2) - (1,669,000) - Interest expense (1,939,000) (1,464,000) (1,440,000) Interest and other income 1,075,000 2,751,000 264,000 ------------ ------------ ------------ Income (loss) from continuing operations before income taxes $(16,146,000) $ 7,437,000 $ 5,044,000 ============ ============ ============ Identifiable assets: Electronics $ 66,799,000 $ 48,055,000 $ 45,068,000 Isolator Products 9,752,000 10,159,000 11,244,000 Corporate 4,618,000 13,722,000 14,704,000 ------------ ------------ ------------ Total assets $ 81,169,000 $ 71,936,000 $ 71,016,000 ============ ============ ============ Capital expenditures: Electronics $ 1,363,000 $ 2,348,000 $ 1,914,000 Isolator Products 315,000 554,000 289,000 Corporate 9,000 17,000 2,000 ------------ ------------ ------------ Total capital expenditures $ 1,687,000 $ 2,919,000 $ 2,205,000 ============ ============ ============ Depreciation and amortization expense: Electronics $ 2,447,000 $ 2,388,000 $ 2,064,000 Isolator Products 535,000 717,000 840,000 Corporate 109,000 28,000 27,000 ------------ ------------ ------------ Total depreciation and amortization $ 3,091,000 $ 3,133,000 $ 2,931,000 ============ ============ ============ (1) The special charge for the write-off of in-process research and development acquired in the purchase of MIC Technology is allocable fully to the electronics segments. (2) Approximately 35% and 65% of the restructuring charge is allocable to the electronics and isolator products segments, respectively.
Quarterly Financial Data (Unaudited): - ------------------------------------ (In thousands except per share data and footnotes)
Quarter Year Ended 1996 First Second Third Fourth June 30 - ---- ----- ------ ----- ------ ----------- Net Sales $ 13,149 $ 15,195 $ 15,956 $ 30,067 $ 74,367 Gross Profit 4,069 4,560 5,016 9,652 23,297 Net Income (Loss) (1)(2) $ 607 $ 998 $(22,084) $ 3,059 $(17,420) ======== ======== ======== ======== ======== Income (Loss) Per Share: Primary (1)(2) $ .05 $ .08 $(1.85) $ .23 $(1.46) ======== ======== ======== ======== ======== Fully Diluted (2) $ .05 $ .08 (3) $ .21 (3) ======== ======== ========
Quarter Year Ended 1995 First Second Third Fourth June 30 - ---- ----- ------ ----- ------ ----------- Net Sales $ 14,027 $ 15,821 $ 19,750 $ 21,515 $ 71,113 Gross Profit 4,385 5,052 6,762 7,372 23,571 Income From Continuing Operations $ 715 $ 3,084 $ 683 $ 2,105 $ 6,587 (4)(5) Income From Discontinued Operations - - - 462 462 -------- -------- -------- -------- -------- Net Income $ 715 $ 3,084 $ 683 $ 2,567 $ 7,049 ======== ======== ======== ======== ======== Income Per Share: Primary: Continuing Operations $ .06 $ .25 $ .06 $ .17 $ .53 (4)(5) Discontinued Operations - - - .04 .04 -------- -------- -------- -------- -------- Net Income $ .06 $ .25 $ .06 $ .21 $ .57 ======== ======== ======== ======== ======== Fully Diluted: Continuing Operations $ .06 $ .23 $ .06 $ .16 $ .52 (4)(5) Discontinued Operations - - - .03 .03 -------- -------- -------- -------- -------- Net Income $ .06 $ .23 $ .06 $ .19 $ .55 ======== ======== ======== ======== ======== (1) Includes $23,200,000 ($1.94 per share) for the year and quarter ended March 31, 1996, for the write-off of in-process research and development acquired in connection with the purchase of MIC Technology Corporation. (2) Includes a $437,000 net of tax, or $.04 per share, gain on the sale of securities for the year ended June 30, 1996 and $339,000 net of tax, or $.02 primary and fully diluted, for the quarter ended June 30, 1996. (3) As a result of the loss, all options, warrants and convertible debentures are anti-dilutive. (4) Includes $2,000,000 ($.14 per share fully diluted and $.16 primary) for the quarter ended December 31, 1994 and year ended June 30, 1995 of insurance proceeds received on the death of the former chairman. (5) Includes a $1,494,000 net of tax restructuring charge ($.10 per share fully diluted and $.12 primary) for the year ended June 30, 1995 for the consolidation of the Company's Puerto Rican operation into its domestic facilities. The net of tax charge was $1,035,000 ($.07 per share fully diluted and $.08 primary) and $459,000 ($.03 per share fully diluted and $.04 primary) for the quarters ended March 31, 1995 and June 30, 1995, respectively.
Since per share information is computed independently for each quarter and the full year, based on the respective average number of common and common equivalent shares outstanding, the sum of the quarterly per share amounts does not necessarily equal the per share amounts for each year. AEROFLEX INCORPORATED AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E Additions --------------------- Charged Balance at Charged to to other Balance at beginning costs and accounts Deductions end of Description of period expenses -describe -describe period - ----------- ---------- ---------- ---------- ---------- ---------- YEAR ENDED JUNE 30, 1996: Allowance for doubtful accounts $ 437,000 $ (55,000) $ - $ 28,000(A) $ 354,000 ========== ========== ========== ========== ========== Reserve for inventory obsolescence $4,380,000 $ 497,000 $ - $ 617,000(B) $4,260,000 ========== ========== ========== ========== ========== YEAR ENDED JUNE 30, 1995: Allowance for doubtful accounts $ 434,000 $ 10,000 $ - $ 7,000(A) $ 437,000 ========== ========== ========== ========== ========== Reserve for inventory obsolescence $3,478,000 $ 968,000 $ - $ 66,000(B) $4,380,000 ========== ========== ========== ========== ========== YEAR ENDED JUNE 30, 1994: Allowance for doubtful accounts $ 283,000 $ 173,000 $ - $ 22,000(A)$ 434,000 ========== ========== ========== ========== ========== Reserve for inventory obsolescence $2,467,000 $1,069,000 $ - $ 58,000(B) $3,478,000 ========== ========== ========== ========== ========== Note: (A) - Net write-offs of uncollectible amounts. (B) - Write-off of inventory.
EX-11 2 Exhibit 11 AEROFLEX INCORPORATED AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
Year Ended June 30, 1996 1995 1994 ---- ---- ---- COMPUTATION OF ADJUSTED NET INCOME (LOSS): Income (loss) from continuing operations $(17,420,000) $ 6,587,000 $ 5,850,000 Discontinued operations - 462,000 187,000 ------------ ----------- ----------- Net income (loss) for primary earnings per common share $(17,420,000) 7,049,000 6,037,000 ============ Add: debenture interest and amortization expense, net of income taxes 757,000 293,000 ----------- ----------- Adjusted net income (loss) for fully diluted earnings per common share $ 7,806,000 $ 6,330,000 =========== =========== COMPUTATION OF ADJUSTED WEIGHTED AVERAGE SHARES OUTSTANDING: Weighted average shares outstanding 11,971,000 11,733,000 9,962,000 =========== Add: Effect of options and warrants outstanding 619,000 564,000 ----------- ----------- Weighted average shares and common share equivalents used for computation of primary earnings per common share 12,352,000 10,526,000 Add: Effect of additional options and warrants outstanding for fully diluted computation 119,000 74,000 Add: Shares assumed to be issued upon conversion of debentures 1,778,000 1,801,000 ----------- ----------- Weighted average shares and common share equivalents used for computation of fully diluted earnings per common share 14,249,000 12,401,000 =========== =========== EARNINGS (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENT: Primary: Income (loss) from continuing operations $(1.46) $ .53 $ .55 Discontinued operations - .04 .02 ------ ------ ------ Net income (loss) $(1.46) $ .57 $ .57 ====== ====== ====== Fully Diluted: Income (loss) from continuing operations $ .52 $ .50 Discontinued operations Note 1 .03 .01 ------ ------ Net income (loss) $ .55 $ .51 ====== ====== Note 1 - As a result the loss, all options, warrants and convertible debentures are anti-dilutive.
EX-24 3 Independent Auditors' Consent Board of Directors Aeroflex Incorporated We consent to incorporation by reference in the registration statements (Nos. 33-75496, 33-88868 and 33-88878) on Form S-8 of Aeroflex Incorporated of our report dated August 12, 1996, relating to the consolidated balance sheets of Aeroflex Incorporated and subsidiaries as of June 30, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows and related schedule for the years then ended which report appears in the June 30, 1996 annual report on Form 10-K of Aeroflex Incorporated. KPMG PEAT MARWICK LLP Jericho, New York September 18, 1996 Independent Auditors' Consent We consent to the incorporation by reference in Registration Statement Nos. 33-75496, 33-88868 and 33-88878 of Aeroflex Incorporated (formerly ARX, Inc.), each on Form S-8 of our report dated August 12, 1994, on the consolidated financial statements for the year ended June 30, 1994 appearing in this Annual Report on Form 10-K of Aeroflex Incorporated for the year ended June 30, 1996. DELOITTE & TOUCHE LLP Jericho New York September 18, 1996 EX-27 4
5 The schedule contains summary financial information extracted from the consolidated financial statements for the year ended June 30, 1996 and is qualified in its entirety by reference to such statements. 12-MOS JUN-30-1996 JUN-30-1996 661,000 0 23,690,000 354,000 16,916,000 44,264,000 37,228,000 22,374,000 81,169,000 19,528,000 9,981,000 0 0 1,238,000 29,234,000 81,169,000 74,367,000 74,367,000 51,070,000 89,649,000 0 0 1,939,000 (16,146,000) 1,274,000 (17,420,000) 0 0 0 (17,420,000) (1.46) (1.46)
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