-----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, QZQL/SJsZYj4q3n2aQ7fMaQkTx1z5DqQJ5yPiqaggeVYZjTq0xVhOM/sktzCgiCA O/0uCVcnKqmJdfgMIbNhnw== 0000008919-99-000005.txt : 19990402 0000008919-99-000005.hdr.sgml : 19990402 ACCESSION NUMBER: 0000008919-99-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AYDIN CORP CENTRAL INDEX KEY: 0000008919 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 231686808 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07203 FILM NUMBER: 99580721 BUSINESS ADDRESS: STREET 1: 700 DRESHER RD STREET 2: P O BOX 349 CITY: HORSHAM STATE: PA ZIP: 19044 BUSINESS PHONE: 2156577510 MAIL ADDRESS: STREET 1: 700 DRESHER RD STREET 2: P O BOX 349 CITY: HORSHAM STATE: PA ZIP: 19044 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) _X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended __December 31, 1998__. OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to ______________. Commission file number ____1-7203____. AYDIN CORPORATION _______________________________________________________ (Exact name of registrant as specified in its charter) Delaware 23-1686808 ________________________________ ___________________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 47 FRIENDS LANE NEWTOWN, PENNSYLVANIA 18940 _________________________________ __________________________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (215)497-8000 700 DRESHER ROAD,HORSHAM, PENNSYLVANIA 19044 ___________________________________________________________ (Former Name or Former address, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ______________________________ _________________________ Common Stock, $1 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. __X__ The aggregate market value of 4,539,006 shares of Common Stock held by non-affiliates, computed using the closing price as of March 1, 1999, was $58,439,702. Number of shares of Common Stock outstanding as of March 1, 1999 5,220,936. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference: The Registrant's Schedule 14D-9 filed with the Commission on March 5, 1999 (the "Schedule 14D-9"), including the Information Statement Pursuant to Section 14(F) of the Securities Exchange Act of 1934 and Rule 14F-1 Thereunder (the "Information Statement") filed as Annex A to the Schedule 14D-9 (Part III). INDEX TO FORM 10-K ---------------------------------------------------------- This index lists the requirements of Form 10-K and the page number in this Form 10-K where each item can be found. PART I Item 1 Business............................ 2-5 Item 2 Properties.......................... 6 Item 3 Legal Proceedings................... 6 Item 4 Submission of Matters to a Vote of Security Holders................ 6 PART II Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters............................ 7 Item 6 Selected Financial Data............. 8 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operation........... 9-12 Item 7A Quantitative and Qualitative Disclosures About Market Risk...... 12 Item 8 Financial Statements and Supplementary Data................. 13-27 Item 9 Changes In and Disagreements With Accountants on Accounting and Financial Disclosure............... 27 PART III Item 10 Directors and Executive Officers of the Registrant................. 28 Item 11 Executive Compensation............. 28 Item 12 Security Ownership of Certain Beneficial Owners and Management.. 28 Item 13 Certain Relationships and Related Transactions.............. 28 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K. 29-30 PART I ITEM 1. BUSINESS (a) General Development of Business Aydin Corporation (the "Company" or "Aydin") was incorporated under the laws of the State of Delaware in September, 1967. The Company consists domestically of two major operating and one smaller support division, and two foreign operating subsidiaries. The Company disposed of its 80% interest in its Argentine subsidiary on December 31, 1996 and now owns 19% of that company. The divisions and subsidiaries are profit centers each with engineering, manufacturing, marketing and accounting functions. In 1998, the Company sold three operating divisions and shut down a fourth. As of the end of the third fiscal quarter of 1998, the Company accounted for its Displays Division (which previously had been a major operating division) as a discontinued operation, and that division was sold in November 1998. Earlier in 1998, the Company shut down its Raytor Division and sold both its Molded Products and West Coast Microwave Components Divisions, all of which divisions had been smaller support divisions. Going forward, the Company has the following three major operating business segments: (1) the Telemetry Division; (2) the Communications Division, which includes a UK subsidiary, Aydin Europe Ltd., which provides overseas marketing, sales and customer service support for the Division; and (3) a wholly-owned Turkish subsidiary, Aydin Yazilim ve Elektronik Sanayi A.S., which together with a U.S. based program support office forms a Turkish Operations segment. In addition, the Company has a support division (Electro Fab) which produces printed circuit boards, and is part of the Other segment. (b) Financial Information About Industry Segments The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS 131") during the fourth quarter of 1998. Financial information regarding the Company's operating segments for the past three fiscal years is set forth under Note N in the Notes to Consolidated Financial Statements included under Item 8 in Part II of this Report on Form 10-K, and such information is incorporated herein by reference. (c) Narrative Description of Business The Company operates predominantly in the electronics manufacturing industry, and the information set forth below is with respect to the Company's three major business segments. The Company designs, manufactures, and sells products in the three major business segments as described below: Telemetry Segment Aydin Telemetry products are used by space agencies such as NASA and in defense and aerospace programs such as aircraft and weapons development. These products and systems serve aerospace, satellite and commercial aircraft markets in the United States and abroad. Aydin designs, manufactures and markets an extensive product line and provides turnkey systems integration for airborne and ground-based applications. These airborne and ground systems gather critical information from spacecraft, satellites, aircraft, guided weapons and ground vehicles. This equipment calibrates, processes and records or transmits information by radio or microwave links to a fixed or mobile ground station that receives, processes and analyzes the data. Communications Segment Aydin provides a wide range of data and voice communication systems and products for the commercial and military markets throughout the world in a variety of public and private networks. In addition, Aydin custom-designs complex mission- critical applications such as right-of-way communications for utility, railway and pipeline companies, and the establishment of vital links to offshore platforms and satellite earth stations. Aydin also provides complete air defense communications systems and commercial air traffic control solutions. (page 2) Aydin also manufactures and installs communications products used in satellite earth stations, providing both primary and back-up links such as Aydin's state-of-the-art Satellite TDMA Terminals used for commercial and government networks-- among them AT&T, Sprint and WorldCom, and national telecom operations in the UK, France, Germany, Canada, Singapore and Brazil. Aydin Communications has supplied turnkey telecommunications systems to Australia, Thailand, Turkey, Argentina, Zambia, Malaysia, Saudi Arabia, Finland and other countries, serving infrastructure needs with integrated systems that may include line-of-sight radios, satellite earth stations, multiplexers, switches, fiber-optic cables, and other technology. Turkish Operations Segment The Turkish Operations Segment produces, installs and supports a variety of military communications equipment and systems, including the Government of Turkey's critical Mobile Air Defense System. To date, nearly all of this segment's business comes from the Turkish government. The Company's products and systems are sold directly by Company sales personnel and manufacturers' representatives. Sales representatives for the Company are located in many cities across the United States as well as at key major military bases. With respect to exports, sales efforts are conducted by its international subsidiaries, its international sales network and manufacturers' representatives in many countries. The Company maintains standard product lines and systems sold by catalog, although it generally does not maintain an inventory of finished goods. A portion of current sales is attributable to such standard products, modifications thereof and turnkey communications systems using these products. Another portion of sales is attributable to special, made-to-order equipment based upon a customer's specific requirements. The Company's customers include U.S. and foreign communications and electronic and aerospace firms, electric utilities, regulated and unregulated telephone organizations, major transportation organizations, other industrial and financial concerns and process control companies, research laboratories, universities, large defense contractors, foreign governments, the U.S. Government through various agencies of the Department of Defense and the National Aeronautics and Space Administration. A breakdown of sales for the last three years including sales to major customers who accounted for 10% or more of sales is set forth below. Sales figures for prior years have been restated to eliminate sales of discontinued operations:
1998 1997 1996 U.S. Government Agencies (direct and indirect), principally Department of Defense (1) $ 26,567,000 $ 34,847,000 $ 38,728,000 Export and foreign sales including equipment sold to other U.S. companies for export(1)(2)(3) 30,471,000 45,539,000 41,242,000 U.S. commercial and industrial business 20,850,000 14,468,000 14,362,000 ____________ ____________ ____________ TOTAL NET SALES $ 77,888,000 $ 94,854,000 $ 94,332,000 ____________ ____________ ____________ ____________ ____________ ____________ (1) The U.S. Government and the Government of Turkey were the only customers to whom sales exceeded 10% of consolidated sales during any of the past three years. Sales to the Government of Turkey amounted to $ 9,575,000 in 1998, $21,496,000 in 1997, and $15,116,000 in 1996. (2) Includes foreign sales of $ 5,699,000 for 1998, $14,918,000 for 1997, and $18,653,000 for 1996. (3) A breakdown of total export and foreign sales by geographic area follows in section (d) below.
(page 3) Raw materials for the Company's business consist of manufactured components and parts. The Company's raw materials are presently available in adequate supply on the open market. The Company holds no material patents, trademarks, licenses, franchises or concessions. The Company's operations are not seasonal to any material extent. As stated above, although the Company maintains standard product lines and systems sold by catalog, it generally does not maintain a significant level of finished goods inventory. However, the Company maintains an adequate level of raw materials inventory so that it will be able to meet initial delivery requirements of customers. The Company has had no material difficulty in obtaining goods from suppliers. The Company does not provide rights to return its products, and generally does not provide extended payment terms to customers. The backlog of unfilled orders at December 31, 1998 was $42 million as compared to $64 million at December 31, 1997. Approximately 20% of the 1998 backlog is not reasonably expected to be filled within the current year. The backlog includes approximately $9 million for a command, control and communications project for the Government of Turkey for which the work is expected to be completed in 1999. This contract became effective in October, 1990. All contracts with the U.S. Government and some of the foreign governments are subject to cancellation at the convenience of the government. In the event a contract with the U.S. Government is so terminated, the Armed Services Procurement Regulations provide that the Company shall be reimbursed for expenses incurred and shall be entitled to reasonable profits. The greater portion of the Company's business is obtained by competitive bidding, while some is obtained through sole source negotiation. In the domestic marketplace, the Company competes with some major U.S. companies from time to time; however, some of the competition in the U.S. comes from companies which are similar in size or smaller than Aydin. In the international marketplace, Aydin competes with major companies in addition to U.S. firms. A number of such competitors are larger than Aydin with greater financial resources, while some are similar to or smaller than Aydin. Technical capability, reputation, price, ability to meet delivery schedules and reliability are the principal competitive factors. Depending on the particular product and the requirements of the contract documents, the number of firms competing with Aydin generally ranges from one to ten. Estimated amounts spent during 1998, 1997, and 1996 on Company- sponsored research and development activities, and customer- sponsored research activities relating to the development of new products, services or techniques or the improvement of existing products, services or techniques are as follows:
1998 1997 1996 Company-sponsored research and development on direct cost basis $1,502,000 $2,829,000 $8,096,000 Customer-sponsored research and development activities $1,252,000 $2,747,000 $2,081,000
The Company, along with others, was responsible for the costs of cleanup under an order of the State of California at a site leased by the Company prior to 1984. Cleanup of the site was completed during 1996 and site monitoring over a 30-year period commenced in 1997. The estimated site monitoring costs to be expended over the remaining 28-year period are $2.9 million, or approximately $105,000 per year. The amount to be paid has been included in the accompanying consolidated balance sheet as an other (non current) liability discounted at 7% to the expected payment dates. (page 4) The Company, along with others, has been notified by the EPA that it may be a potentially responsible party for the costs of cleanup of a waste disposal site. The Company estimates that its ultimate liability in this matter could be approximately $153,000 and has recorded this liability as of December 31, 1998. As of year-end 1998, the Company employed approximately 800 persons, with domestic operations concentrated principally in the Philadelphia, Pennsylvania metropolitan area, and most of the Company's foreign employees located in Ankara, Turkey. Employer- employee relations are considered to be satisfactory. (d) Financial Information About Foreign and Domestic Operations and Export Sales The Company had no significant foreign operations prior to 1991 although a $210 million contract from the Government of Turkey became effective in October 1990 with approximately 35% of this contract being performed by the Company's Turkish subsidiary. The remaining backlog on this contract at December 31, 1998 was approximately $9 million. Foreign assets included in the consolidated balance sheet amounted to $10.9 million, $18.6 million, and $17.9 million at December 31, 1998, 1997, and 1996, respectively. Of these amounts, $2.8 million, $5.1 million, and $2.5 million at December 31, 1998, 1997, and 1996, respectively, are cash and short-term investments of the Company's Turkish subsidiary consisting mainly of U.S. dollar denominated interest- bearing time deposits and Eurobonds. Foreign sales and pretax loss for 1998 were $5.7 million and $7.4 million respectively. Most of the loss was from increases in estimated costs at completion on the TMRC contract with the Government of Turkey at the Turkish subsidiary. Foreign sales and pretax income for 1997 amounted to $14.9 million and $2.5 million respectively. Foreign sales and pretax income for 1996 amounted to $18.7 million and $.9 million, respectively. The Company's domestic operations include sales derived from customers or projects located in areas of the world outside the United States. Export and foreign sales for 1998, 1997, and 1996 by geographic area are set forth below:
1998 1997 1996 Asia $ 3,075,000 $ 2,507,000 $ 3,817,000 Africa 3,235,000 1,785,000 3,203,000 Europe 21,024,000 38,019,000 23,507,000 North America 1,982,000 1,172,000 640,000 South America 1,116,000 1,821,000 9,733,000 Other 39,000 235,000 342,000 Total export and foreign sales $30,471,000 $45,539,000 $41,242,000
On a percentage basis, export and foreign sales (direct and indirect) accounted for approximately 39% of total sales in 1998, 48% of total sales in 1997, and 44% of total sales in 1996. A majority of such export and foreign sales were in the telecommunications field. Licenses are required from U.S. Government agencies for most of the Company's export products. The Company and its foreign subsidiaries may be adversely affected by certain risks generally associated with foreign contracts and operations, including ownership and control limitations, currency fluctuations, restrictions on repatriation of profits, difficulty in the enforcement of judgments, late delivery penalties, potential political or labor instability and general worldwide economic conditions. However, such factors have not had a material effect on the Company's operations to date, and management believes that the risks involved in such foreign business are no greater than the normal risks of any other portion of the Company's sales. The Company has generally been able to protect itself against foreign credit risks through contract provisions, advance payments and irrevocable letters of credit in its favor. However, it should be noted that foreign contracts are sometimes subject to foreign laws. (page 5) ITEM 2. PROPERTIES The Company's total plant capacity at December 31, 1998 is approximately 298,000 square feet of administrative and production facilities, 237,000 of which it owns and the balance of which it leases. Most of the Company's Telemetry Division operations and all of its Electro Fab Division operations are housed in owned properties. All foreign facilities are leased. The Company currently plans to sell two buildings containing approximately 143,000 square feet. In one of these buildings, the Company's 109,000 square foot former headquarters building in Horsham, Pennsylvania, the Company will lease back approximately 13,000 square feet for use by the Communications Division. All leased properties are held under leases expiring between 1998 and 2003. As part of the 1997 restructuring and consolidation, three Company-owned buildings (258,000 square feet) were sold during 1997. The Company recently moved its corporate headquarters to Newtown, Pennsylvania, and has sales offices within and outside the U.S. The administrative and production facilities occupied by the Company are well maintained and suitable for its operations, and include plant area, warehouse space, and management, engineering and clerical offices. The plants of each of the manufacturing operations generally contain machine shops, assembly areas, testing facilities and packing and shipping departments in addition to the engineering and laboratory areas. ITEM 3. LEGAL PROCEEDINGS As reported in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997, during 1995 a subcontractor to the Company in the TMRC program with the Government of Turkey filed a demand for arbitration alleging a breach of contract and equitable adjustment of $12.4 million. This claim was subsequently amended and at December 31, 1997 amounted to $27.8 million. The Company had filed a claim against this subcontractor, Loral Defense Systems - - Eagan (now Lockheed Martin Tactical Systems, Inc.), for an amount in excess of the subcontractor's claim. The arbitration hearing was concluded and post-hearing briefs were filed in December 1997. On April 10, 1998, the arbitration panel in that binding arbitration proceeding awarded Lockheed Martin approximately $17.2 million. On June 8, 1998 the Registrant announced that it had reached agreement with Lockheed Martin Corporation regarding payment of the arbitration award. In accordance with that agreement, the Registrant made payments to Lockheed Martin over the next six months, and in November 1998 paid Lockheed Martin the full remaining balance of the arbitration award and accrued interest thereon. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the Fourth Quarter of 1998. (page 6) PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company has no present plans to pay any cash dividends. Due to the anticipated acquisition of the Company by L-3 Communications Corporation as described below under Management's Discussion And Analysis Of Financial Condition And Results Of Operations, it is not expected that the Company will continue to be publicly held in the future. The Company has contractually agreed with L-3 Communications Corporation that no dividends would be declared or paid by the Company pending the anticipated consummation of the acquisition. In addition, certain covenants of a Credit Agreement for the funding of a standby Letter of Credit currently prohibit the payment of a dividend or other distribution on account of the Company's capital stock. Set forth below are the high and low trading prices for the Company's Common Stock for each calendar quarter for 1998 and 1997. 1998 High Low Fourth Quarter $ 10.250 $ 7.750 Third Quarter 8.875 7.250 Second Quarter 13.375 8.6875 First Quarter 12.500 10.25 1997 High Low Fourth Quarter $ 14.125 $11.125 Third Quarter 12.625 11.0625 Second Quarter 12.500 10.500 First Quarter 11.625 9.250 As of March 1, 1999, there were approximately 1880 holders of record of the Company's Common Stock, and approximately 3,700 beneficial owners of the Common Stock. (page 7) ITEM 6. SELECTED FINANCIAL DATA ($000 omitted except for per share amounts)
1998 1997 1996* 1995 1994 For the Year Net sales $77,888 $ 94,854 $ 94,332 $113,127 $118,453 Cost of sales 79,538 68,106 74,796 80,015 85,518 Income (loss) before income taxes (20,398) 2,924 (16,620) 6,649 8,189 Income (loss) after taxes-continuing operations (19,648) 1,806 (12,073) 4,678 6,234 Income (loss) from discontinued operation (6,659) (3,498) (2,707) (748) (1,187) Net income (loss) (26,307) (1,692) (14,780) 3,930 5,047 Earnings (loss) per share Income (loss) from continuing operations (3.77) 0.34 (2.36) 0.91 1.25 Net income (loss) (5.05) (0.34) (2.88) 0.77 1.01 Cash dividend per share - - - - - Return on average stockholders' equity (34%) (2%) (15%) 4% 5% At Year End Total assets $82,125 $111,081 $122,803 $164,337 $164,495 Working capital 52,584 76,601 71,158 88,460 85,116 Long-term debt - - - 770 1,549 Stockholders' equity 63,568 89,761 90,672 105,183 99,730 Stockholders' equity per share 12.18 17.23 17.66 20.58 19.98 * Income (loss) before income taxes and minority interest includes a $3,730,000 restructuring charge in the third quarter of 1996.
(page 8) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations 1998 versus 1997 For 1998, the Company reported a net loss of $26.3 million, or $5.05 per share, compared to a net loss of $1.7 million, or $.34 per share, for 1997. The 1998 loss primarily reflects the first quarter loss of $24.1 million, or $4.64 per share, driven largely by an arbitration award in April 1998 to Lockheed Martin Corporation, and a $6.7 million loss from discontinued operations related to the Displays Division which was sold in the fourth quarter, partly offset by a $5.6 million gain on the sale of the West Coast Microwave Components Division which was also sold in the fourth quarter. The 1998 loss from continuing operations was $19.6 million, or $3.77 per share, compared to 1997 income from continuing operations of $1.8 million, or $.34 per share. 1997 figures have been restated to reflect the Displays Division as a discontinued operation. Net sales from continuing operations for the full year were $77.9 million compared to $94.9 million for 1997, a decline of $17.0 million or 18%. The decrease year to year relates primarily to a $12.4 million decrease in sales of the Company's Turkish operations segment, most of which relates to the TMRC contract with the government of Turkey, and a $3.4 million decrease in Telemetry Division sales for the year. The 1997 sales reflected significant activity on a subcontract which was completed in that year, and the TMRC contract is winding down as it approaches completion. The Company believes that the decrease in Telemetry Division sales is reflective of the impact on the Company's business from the April arbitration award to Lockheed Martin and management turnover which took place in 1998. With the satisfaction of the Company's obligations to Lockheed Martin in November, the disruption caused by this award has been resolved, and the Company is now working aggressively to rebuild its backlog. Cost of sales for 1998 includes a $19.8 million charge representing the April 1998 arbitration award to Lockheed Martin, related interest, and an increase in other estimated completion costs on the TMRC contract. Cost of sales as a percentage of sales, without this $19.8 million charge, was 77% for 1998 compared to 72% for 1997. The increased cost of sales percentage was primarily the result of: (a) the Company's decision to relinquish its position regarding collectible revenues under a contract with the U.S. Government ($1.6 million); (b) an increase in litigation contingency reserves related to several outstanding claims against the Company ($.9 million); and (c) the write-off of certain West Coast Microwave Components Division assets not included with the sale of that Division which had negligible value after the sale ($.6 million). Backlog at December 31, 1998 amounted to $42 million compared to $71 million at December 31, 1997 (before restatement for the discontinued operation). Of this $29 million decrease, approximately $13 million is the result of the disposition in 1998 of four Divisions included in the year end 1997 backlog. The Company believes that a significant factor in the remainder of the backlog decline was the impact of the April 1998 arbitration award to Lockheed Martin. With the satisfaction of the obligations to Lockheed Martin in November 1998, the disruption caused by this award has been resolved. The Company is working aggressively to rebuild its backlog and in this regard booked two contracts amounting to $18 million in January 1999. The Company's Turkish operations segment operates in a highly inflationary economy with corresponding declines in the Turkish currency versus the U.S. dollar. The Company protected itself against these conditions by including clauses in its TMRC contract that escalate contract values from a predetermined base price by the percentage increase in Turkish inflation. This does not protect the Company from the contractual consequences of performance delays, however. To date, the TMRC contract has represented the vast majority of revenues of this segment. Selling, general and administrative, and research and development costs decreased in 1998 by $.9 million to $23.0 million from $23.9 million in 1997. The 1998 costs included $1.8 million of additions to reserves with respect to various employee claims against the Company. (page 9) The 1998 restructuring charge of $1.5 million was the result of decisions in the first quarter of 1998 to close the Raytor Division ($.9 million) and downsize the Corporate staff ($.6 million) in line with expected declines in backlog and sales levels. The restructuring was completed in the third quarter. Of the total charge of $1.5 million, approximately $.6 million was for cash outlays and $.9 million was for non-cash asset write- offs. The major charges consisted of: severance benefits for 60 employees ($.6 million); facility exit costs ($.2 million); and write-offs of inventory, equipment and receivables ($.7 million). Environmental remediation costs amounted to $.5 million for 1998 compared to $2.6 million for 1997. The 1997 cost represented the write-off in 1997 of an expected insurance recovery of cleanup costs under an order of the State of California at a site leased by the Company prior to 1984. The write-off was caused by the reversal by a California appellate court in April 1997 of the lower court's previous declaratory judgment decision against the Company's insurer. The 1998 cost represents an increase to the accrual for estimated site monitoring costs over a 30-year period at this site. Site cleanup was completed in 1996 and site monitoring commenced in 1997. Gains on sale of facilities/divisions relate to two company-owned buildings sold in 1997 and two divisions (West Coast Microwave Components and Molded Devices) sold in 1998. A third division (Displays) was sold in 1998 and is accounted for in the discontinued operations categories of the financial statements. The income tax recovery for 1998 resulted primarily from federal refund claims for prior year taxes and a 1998 decrease in deferred taxes partially offset by foreign taxes. The net recovery of $750,000 was limited compared to the $20.4 million pre-tax loss from continuing operations because net operating loss carrybacks have been exhausted. The 1997 tax provision of $1.1 million resulted from the effects of foreign income taxes in excess of tax benefits on U.S. losses. The loss from operations of the discontinued division (Displays) was $4.1 million for 1998 and $4.6 million for 1997. The 1998 loss covers the first nine months of 1998. The loss from the sale of the division ($2.6 million) includes $1.2 million of operating losses during the fourth quarter phase-out period and a $1.4 million loss on the sale of the division in November 1998. The loss on the sale of the division includes accruals of $570,000 at December 31, 1998 for estimated costs in connection with the sale. 1997 versus 1996 Net sales for 1997 of $94.9 million were essentially flat compared to 1996 sales of $94.3 million. Sales related to the Turkish subsidiary were up $7.9 million from 1996 primarily because of significant activity on a subcontract completed in 1997, partially offset by delays on the TMRC program. There were no 1997 sales from the Argentine subsidiary, which was sold on December 31, 1996, compared to 1996 sales of $9.3 million. Sales from all other business areas were essentially unchanged from 1996. Backlog at December 31, 1997 amounted to $71 million compared to $84 million at December 31, 1996. Most of the decrease was from the TMRC contract, which was nearing completion. Backlog from other business was essentially flat. Cost of sales as a percentage of sales was 71.8% in 1997 compared to 79.3% in 1996. The improvement resulted from 1996 delays on the TMRC program and another large program which was corrected during 1997, and cost savings achieved as a result of the 1996 restructuring plan. Selling, general, and administrative and research and development costs decreased by $7.9 million from 1996. Of this decrease, $2.4 million was for 1996 expenses of the Argentine subsidiary, which was sold on December 31, 1996. Approximately $900,000 of this decrease was from lower bad debt expense compared to 1996 when there was $1 million of bad debt write-offs involving mostly foreign receivables. The 1996 level of write-offs was abnormally high compared to prior experience and consisted mostly of three well known foreign government related enterprises including one for approximately $400,000 which was a customer of the Argentine subsidiary. The balance of the decrease reflected cost reductions pursuant to the Company's 1996 restructuring plan including pruning of certain product lines and a more focused targeting in 1997 of research and development projects to the Company's core businesses. A significant amount was spent in 1996 on wireless local loop development projects. A significant amount was also spent in 1996 on automatic vehicle location development projects, which have been discontinued. Interest income (net of interest expense) for 1997 amounted to $918,000 compared to net interest expense of $189,000 in 1996. This favorable swing of $1.1 million resulted from IRS interest income in 1997 on income tax refunds compared (page 10) to IRS interest expense in 1996 on taxes owed. The favorable swing also reflects the lower level of short-term bank debt during 1997 compared to 1996. The 1997 income tax provision of $1.1 million on the pre-tax loss of $574,000 resulted from the effects of foreign income taxes in excess of tax benefits on U.S. losses. Financial Condition, Liquidity and Capital Resources On March 1, 1999 the Company announced that it had entered into a definitive merger agreement with L-3 Communications Corporation ("L-3") providing for the acquisition by L-3 of all of the outstanding common shares of the Company at $13.50 per share in cash. The transaction was unanimously approved by the Company's Board of Directors. The merger agreement with L-3 provides for a wholly owned subsidiary of L-3 to commence a cash tender offer to acquire all of the Company's outstanding shares at $13.50 per share, which tender offer was commenced on March 5, 1999. Consummation of the tender offer is conditioned on, among other things, the valid tender of such number of shares as would represent at least a majority of the Company's outstanding shares on a fully diluted basis, and receipt of regulatory approvals. The tender offer is not subject to financing. Following completion of the tender offer, L-3 will be entitled to designate a majority of the Board of Directors of the Company. The parties will complete a second-step cash merger at $13.50 per share as promptly as practicable following completion of the tender offer. Upon consummation of the merger, the Company will cease to be a publicly held company. Liquidity at year-end 1998 has improved since December 31, 1997, despite the Company paying off the full $17.2 million arbitration award won by Lockheed Martin Corporation in April 1998, plus approximately $.6 million of related interest. The funds used to pay Lockheed Martin were generated in part from the sale of three divisions during 1998 for a total of $15.6 million. The Company had no long-term debt at December 31, 1998 or 1997, and only $133,000 of short-term debt at the end of 1998 which has been subsequently paid off. The total cash balance at December 31, 1998 was $9.5 million, of which $5.9 million was unrestricted cash, compared to $3.9 million of unrestricted cash at December 31, 1997. Subsequent to December 31, 1998 the cash balance had grown to approximately $16 million as of March 26, 1999. At December 31, 1998 the Company had outstanding approximately $14.2 million of letters of credit (issued by banks to the Company's customers) with no currently available credit line for increasing this balance. These letters of credit are liquidated in the ordinary course of business as customer collections are made or contract milestones achieved against the contracts to which the letters of credit pertain. New letter of credit collateral requirements will be funded with cash payments by the Company for the near term. The Company currently has no bank borrowing lines available to it. The Company believes that cash provided by operations will be sufficient for the Company's cash requirements in 1999. Sources of cash from operations during 1998 included a $12.5 million decline in unbilled revenue resulting from improved performance in meeting target shipping dates. This was the primary reason that cash used by operating activities was $8.3 million for 1998 while the net loss for the year was $26.3 million. Other sources of cash from operations included $1.8 million of net income tax refunds (U.S. refunds less foreign payments). The decrease in unbilled revenue reflects shipment delays from year-end 1997 on a few programs which moved deliveries and billings into 1998, improved performance in 1998 in meeting shipment targets, and a lower level of sales and backlog in 1998 versus 1997. Other significant changes in balance sheet accounts from a year ago are: (1) a $2.8 million decrease in inventories of which $1.3 million relates to the divisions disposed of during 1998 and $1.5 million relates to improved inventory control and a lower volume of business in the remaining operations; (2) prepaid expenses and other declined by $4.1 million primarily because of the refund of U.S. income taxes which were included in prepaid expenses at year end 1997; (3) accounts payable declined by $2.8 million primarily because of a lower level of purchases in 1998, more current vendor payments and $.4 million of payables pertaining to the divisions disposed of in 1998; (4) accrued liabilities-other increased by $3.5 million primarily because of $1.3 million of increases in reserves for potential contract price adjustments and litigation matters and $1.2 million of liabilities at year end 1998 related to the disposition of divisions during 1998; and (5) accrued and deferred income taxes (current and non-current) decreased by $3.0 million primarily because of foreign tax payments and exchange gains and a recovery of U.S. taxes. The balance sheet at December 31, 1997 has been restated to reclassify $8.0 million of net assets (current plus non-current) of the Displays Division at that time into a discontinued operations classification. The Division was sold in November 1998 for approximately $6.4 million. The operating results and balance sheet items of the Division for the (page 11) current and prior periods are shown in the financial statements in the discontinued operations classification. The Company's U.S. Government contracts are subject to audit by the government and price adjustment under certain circumstances. The Company also has receivables due from the U.S. Government on certain contracts whose collectability is dependent on the Company prevailing in its positions. Management believes it has sufficient reserves to cover such matters. However, unfavorable outcomes could have a material impact on future results of operations. The Company is currently in the process of evaluating the impact of the "Year 2000" issue on the Company's operations, suppliers and customers in preparation for its intended issuance of "Year 2000 Compliance Statements" to its customers. The Company's various Divisions are testing their respective systems (both information technology and non-information technology systems) and products, and they are communicating with their key suppliers to obtain appropriate assurances and/or Compliance Statements, as may apply, with respect to the suppliers being Year 2000 prepared and their products being Year 2000 compliant. To date, nothing has come to the attention of the Company that would materially impact the results of operations of the Company. The costs of addressing the Year 2000 issue have not been material to date, and at present the Company does not anticipate that they will be material. The Company has not yet developed a contingency plan with respect to possible Year 2000 problems and has not yet determined whether such a contingency plan is necessary. Based on present backlog and projected cash flows, the Company anticipates financing its near-term capital needs from internal sources. In 1997, cash used by operating activities amounted to $7.0 million. In addition to the $1.7 million net loss, other primary reasons included a $5.5 million decrease in accounts payable which became more current at year end 1997 than at year end 1996 and a $4.5 million increase in inventories and unbilled revenue caused mainly by delays in shipments on several large programs in 1997. Also during 1997, three company-owned facilities were sold for proceeds of $11.5 million. Other significant changes in balance sheet accounts at year end 1997 compared to year end 1996 included: (1) a $6.8 million decline in the net book value of property, plant and equipment from the sale of facilities as noted above, including the sale of former Displays Division facilities which have been classified in the discontinued operations category in the financial statements; (2) a $2.5 million decrease in other assets resulting from the write-off of an anticipated insurance recovery as explained above in the discussion of 1998 results of operations; and (3) a $2.2 million decrease in deferred income taxes (non-current portion) because of book versus tax timing differences in connection with the sale of facilities in 1997. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. (page 12) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENTS OF OPERATIONS _____________________________________________________________
Year Ended December 31, 1998 1997 1996 Net sales $ 77,888,000 $ 94,854,000 $ 94,332,000 Costs and expenses Cost of sales Contract arbitration and related 19,814,000 - - Other 59,724,000 68,106,000 74,796,000 Selling, general and administrative 21,496,000 21,101,000 24,141,000 Research and development 1,502,000 2,829,000 8,096,000 Interest expense (income), net (701,000) (918,000) 189,000 Restructuring costs 1,548,000 - 3,730,000 Environmental remediation costs 511,000 2,612,000 - Gain on sale of facilities - (1,800,000) - Gain on sale of divisions (5,608,000) - - __________________________________________ Total costs and expenses 98,286,000 91,930,000 110,952,000 Income (loss) from continuing operations before income taxes (20,398,000) 2,924,000 (16,620,000) Income tax provision (recovery) (750,000) 1,118,000 (4,547,000) __________________________________________ Income (loss) from continuing operations (19,648,000) 1,806,000 (12,073,000) Discontinued operations Loss from operations of discontinued division (4,069,000) (4,572,000) (2,707,000) Gain (loss) on disposal of discontinued division (2,590,000) 1,074,000 - __________________________________________ Total loss from discontinued operation (6,659,000) (3,498,000) (2,707,000) Net loss $(26,307,000) $(1,692,000) $(14,780,000) __________________________________________ __________________________________________ Earnings (loss) per common and common equivalent share- Continuing operations- Basic $ (3.77) $ 0.35 $ (2.36) Fully diluted $ (3.77) $ 0.34 $ (2.36) __________________________________________ __________________________________________ Discontinued operation- Basic $ (1.28) $ (0.68) $ (0.52) Fully diluted $ (1.28) $ (0.68) $ (0.52) __________________________________________ __________________________________________ Net income (loss) Basic $ (5.05) $ (0.33) $ (2.88) Fully diluted $ (5.05) $ (0.34) $ (2.88) __________________________________________ __________________________________________
(page 13) CONSOLIDATED BALANCE SHEETS _____________________________________________________________
December 31, __________________________ 1998 1997 Assets Current assets Cash and cash equivalents $ 5,861,000 $ 3,883,000 Restricted cash and investment securities 3,589,000 6,102,000 Accounts receivable, net of allowances for doubtful accounts of $681,000 (1998) and $616,000 (1997) 21,738,000 21,511,000 Unbilled revenue 26,128,000 39,079,000 Inventories, net of obsolesence allowances of $176,000 (1998) and $566,000 (1997) 10,361,000 13,121,000 Prepaid expenses and other 1,378,000 5,472,000 Net current assets of discontinued operation - 7,344,000 __________________________ Total Current Assets 69,055,000 96,512,000 Property, Plant and Equipment, at cost, net of accumulated depreciation and amortization of $20,903,000 (1998) and $42,099,000 (1997) 12,587,000 13,857,000 Other assets 483,000 89,000 Net equipment of discontinued operation 0 623,000 Total Assets $82,125,000 $111,081,000 __________________________ __________________________ Liabilities and Stockholders' Equity Current Liabilities Short-term bank debt $ 133,000 $ 200,000 Accounts payable 4,859,000 7,662,000 Accrued liabilities: Compensation 3,370,000 3,746,000 Other 5,448,000 1,972,000 Contract billings in excess of recognized revenues 2,279,000 2,462,000 Accrued and deferred income taxes 382,000 3,869,000 __________________________ Total Current Liabilities 16,471,000 19,911,000 Deferred Income Taxes 905,000 461,000 Other Liabilities 1,181,000 948,000 Stockholders' Equity: Common stock, par value$1--authorized, 7,500,000 shares; issued and outstanding, 1998-5,220,900 shares; 1997-5,208,800 shares 5,221,000 5,209,000 Additional paid-in capital 3,243,000 3,141,000 Retained earnings 55,104,000 81,411,000 __________________________ Total Stockholders' Equity 63,568,000 89,761,000 __________________________ Total Liabilities and Stockholders' Equity $82,125,000 $111,081,000 __________________________ __________________________
(page 14) CONSOLIDATED STATEMENTS OF CASH FLOWS _____________________________________________________________
Year Ended December 31, ______________________________________ 1998 1997 1996 ______________________________________ Operating Activities Net loss $(26,307,000) $(1,692,000) $(14,780,000) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Loss from discontinued operation 4,069,000 4,572,000 2,707,000 Loss (gain) from disposal of discontinued operation 2,590,000 (1,074,000) - Gain on sale of divisions (5,608,000) Depreciation and amortization 1,985,000 2,873,000 3,008,000 Deferred income taxes 573,000 4,116,000 (3,891,000) Gain on sale of facilities - (1,800,000) (216,000) Environmental remediation costs - 2,612,000 (2,612,000) Changes in other operating assets and liabilities, net: Accounts receivable (1,506,000) 641,000 25,937,000 Unbilled revenue 12,490,000 (1,086,000) 8,872,000 Contract billings in excess of recognized revenues (183,000) 184,000 (565,000) Inventories 1,503,000 (3,417,000) 5,837,000 Prepaid expenses and other 3,983,000 701,000 (4,807,000) Accounts payable (2,412,000) (5,549,000) (13,176,000) Accrued liabilities 3,730,000 142,000 (1,496,000) Other long-term liabilities 233,000 (186,000) 1,134,000 Accrued income taxes (3,616,000) (6,918,000) (5,141,000) Other (547,000) (81,000) 327,000 ______________________________________ Net cash provided (used) by continuing operations (9,023,000) (5,962,000) 1,138,000 Net cash provided (used) by discontinued operations 685,000 (996,000) (945,000) ______________________________________ Cash provided (used) by operating activities (8,338,000) (6,958,000) 193,000 Investing Activities Proceeds from sale of facilities - 8,896,000 1,159,000 Proceeds from sale of divisions 9,202,000 - - Purchase of property, plant, and equipment (1,410,000) (3,133,000) (880,000) Equipment purchases of discontinued operation (36,000) (67,000) (187,000) ______________________________________ Cash provided by investing activities 7,756,000 5,696,000 92,000 Financing Activities Principal payments on long-term debt - - (1,112,000) Proceeds from exercise of stock options 114,000 781,000 269,000 Net short-term borrowings (67,000) (2,600,000) (2,686,000) ______________________________________ Cash provided (used) by financing activities 47,000 (1,819,000) (3,529,000) Decrease in cash and cash equivalents (535,000) (3,081,000) (3,244,000) Cash and cash equivalents at beginning of year 9,985,000 13,066,000 16,310,000 ______________________________________ Cash and cash equivalents at end of year $ 9,450,000 $ 9,985,000 $13,066,000 ______________________________________ ______________________________________
(page 15) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS _____________________________________________________________ Note A--- Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter- company transactions and balances are eliminated in consolidation. Contract Accounting Revenue on long-term type contracts which are greater than $100,000 is generally recorded on the percentage-of-completion method. For such contracts, a portion of the total contract price is included in sales in the proportion that costs incurred to date bear to total estimated costs at completion. The impact of periodic revisions in costs and estimated profit is reflected in the accounting period in which the facts become known. For all other contracts, revenue is recognized upon completion of the contract or upon shipment of identifiable units. The entire amount of ultimate losses estimated to be incurred upon completion of contracts is charged to income when such losses become known. Contract progress billings are based upon contract provisions for customer advance payments, contract costs incurred, and completion of specified contract objectives. Progress billing balances at December 31, 1998 and 1997 amounted to $2,092,000 and $3,096,000, respectively. Progress billings are netted against unbilled revenue on the consolidated balance sheet. Contracts may provide for customer retainage of a portion of amounts billed until contract completion. All contract retainage of $370,000 at December 31, 1998 matures in 1999. Contract retainage is included on the consolidated balance sheet as part of accounts receivable. Substantially all of the accounts receivable and unbilled revenue balances at December 31, 1998 are expected to be collected during 1999, although collection of the unbilled revenue is dependent upon the Company meeting performance milestones. Use of Estimates In preparing its financial statements in accordance with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expense during the reported periods. Actual results could differ from those estimates. One such area where the use of estimates could have a significant impact on future results is estimated costs at completion and, in some cases, contract value on the Company's larger long-term type contracts. During 1998 and 1997, changes to these estimates on the Company's larger long- term type contracts had no negative significant aggregate impact, except for the TMRC contract with the Government of Turkey. For TMRC, there was a negative impact in 1998 of approximately $21.5 million pre-tax resulting from increases of estimates of costs to complete the contract. Of this amount, approximately $19.8 million resulted from the arbitration award to Lockheed Martin and other contract costs (described in Note B) booked in the first quarter and $1.7 million related to subsequent increases to estimated costs at completion. Other areas where use of estimates could have a significant impact on future results are inventory obsolescence, accounts receivable bad debts, warranties, claims and litigation. Cash and Cash Equivalents The Company considers all highly-liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalent balances at December 31, 1998 and 1997 amounted to $5,861,000 and $3,883,000, respectively. All of this cash and cash equivalents is in high quality banks. Restricted cash and investment securities at December 31, 1998 and 1997 represents interest bearing cash collateral required to be maintained against letters of credit. Approximately $2.8 million of the Company's total cash (restricted and non-restricted) balances at December 31, 1998 were in foreign banks in Turkey. Almost all of this cash in Turkey is in dollar denominated instruments. As a result, there is no material effect of exchange rate changes on cash balances. At December 31. 1997 restricted cash and investment securities included $4 million of foreign corporate bonds which were sold in 1998 at no material gain or loss. Inventories Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) and average cost method which approximates FIFO. (page 16) Fair Value of Financial Instruments The Company's financial instruments include cash equivalents and receivables. The carrying amounts of these instruments approximate their market value. Depreciation and Amortization Depreciation is provided by the straight-line method over the estimated useful lives of the depreciable assets. Amortization of leasehold improvements under operating leases is provided over the terms of the related leases or the asset lives, if shorter. Buildings are depreciated over lives ranging up to 35 years. Machinery and equipment is depreciated over useful lives ranging from 3 to 5 years. Accelerated methods are used for tax purposes. Advertising, Research and Development Costs and Interest Expense The Company expenses advertising costs and research and development costs as incurred. Advertising costs were $333,000, $489,000 and $441,000 for 1998, 1997 and 1996, respectively. Interest expense for the years 1998, 1997 and 1996 amounted to $380,000, $114,000 and $988,000, respectively. Interest paid for the years 1998, 1997 and 1996 amounted to $1,079,000, $164,000 and $1,417,000, respectively. Income Taxes The Company accounts for income taxes on the liability method in accordance with Statement of Financial Accounting Standards (SAS) No. 109, "Accounting for Income Taxes." Foreign Currency Translation Balance sheet accounts of the Company's United Kingdom subsidiary (most of which business was sold during 1998 as part of the discontinued Displays Division described in Note C) were translated from the local currency into U.S. dollars at year-end rates while income and expenses were translated at the weighted average exchange rate for the year. The resulting unrealized net translation losses were shown as a separate component of stockholders' equity in years prior to 1998. These translation losses became realized in 1998 and were written off as part of the loss on the sale of the discontinued operation. The translation effects of the Turkish subsidiary are reflected in the statements of operations because of the high inflation in the Turkish economy. Pretax income includes foreign currency translation losses relating to the Turkish subsidiary of $148,000 for 1998 and $428,000 for 1997, and a foreign currency gain of $274,000 for 1996. Earnings (Loss) Per Common and Common Equivalent Share The Company has adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted- average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Weighted average shares outstanding for 1998, 1997 and 1996 were 5,215,331, 5,151,600 and 5,123,622, respectively. The number of shares to be purchased from outstanding stock options were not included in the computation of 1998, 1997 or 1996 diluted loss per share. The number of shares and the corresponding weighted average exercise prices for each period are shown in Note I. Also, warrants for 200,000 shares at a weighted exercise price of $12.65 were not included in the computation of loss per share for these periods. Warranty Costs The usual warranty period on the Company's contracts and products is one year, which is provided for in warranty accruals. Long-Lived Assets The Company continually reviews long-lived assets to assess recoverability from future operations using undiscounted cash flows. Impairments would be recognized in operating results if a permanent dimunition in value had occurred. New Accounting Standards The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income" which the Company adopted in 1998 with no resulting material impact on the financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which was adopted in 1998. See note N for this disclosure. (page 17) Reclassifications Certain reclassifications, none of which affected net income, have been made to prior years' amounts in order to conform to the current year's presentation. NOTE B---CONTRACT ARBITRATION As previously reported, the Company previously submitted to arbitration its dispute with a subcontractor (Lockheed Martin Tactical Systems, Inc.) on the TMRC contract with the Government of Turkey. On April 10, 1998, the arbitration panel awarded Lockheed $17,162,000 plus interest. As of December 31, 1998, the award and interest was paid in full. The consolidated statement of operations caption "Cost of sales-contract arbitration and related" includes this charge as well as other related costs on the TMRC contract. NOTE C---SALE OF DIVISIONS In November 1998, the Company sold its Displays Division business segment pursuant to a plan adopted in the third quarter 1998. The current and prior period results of the Division are reported in the accompanying financial statements in the discontinued operations categories. Prior period operations have been reclassified as discontinued operations. The Division was sold for a cash payment of approximately $6.4 million. The sale resulted in a loss of $1,390,000, and an operating loss of $1,200,000 (pre-tax and after tax) was incurred during the fourth quarter phase out period. These losses included accruals of $570,000 at December 31, 1998 for estimated costs in connection with the sale, including severance, employee incentives and legal fees. The net assets sold consisted primarily of inventories and accounts receivable. Summarized results of the Displays Division for the three year period ended December 31, 1998 were as follows:
1998 1997 1996 _______________________________________ Net sales $13,326,000 $20,517,000 $22,246,000 Costs and expenses 17,395,000 24,015,000 25,385,000 _______________________________________ Loss before income taxes (4,069,000) (3,498,000) (3,139,000) Provision (benefit) for income taxes - - (432,000) _______________________________________ Net loss from discontinued operations (4,069,000) (3,498,000) (2,707,000) Loss from sale of discontinued operations (2,590,000) - - _______________________________________ Total loss related to discontinued operations $(6,659,000) $(3,498,000) $(2,707,000) _______________________________________ _______________________________________
In October 1998, the Company sold the West Coast Microwave Division component of its Communications segment for a cash payment of approximately $8.8 million. The sale resulted in a gain of $5.6 million (pre-tax and after tax) which is reported in the accompanying statement of operations. NOTE D-INVENTORIES Inventories consist of:
1998 1997 Raw materials $ 4,810,000 $ 6,711,000 Work in process 4,593,000 5,716,000 Finished product 958,000 694,000 ____________________________ $10,361,000 $13,121,000 ____________________________ ____________________________
(page 18) NOTE E-PROPERTY, PLANT, AND EQUIPMENT The Company's investment in property, plant, and equipment is shown below.
1998 1997 Land $ 1,456,000 $ 1,456,000 Buildings 9,511,000 10,641,000 Machinery and equipment 22,523,000 43,859,000 _____________________________ 33,490,000 55,956,000 Less accumulated depreciation and amortization 20,903,000 42,099,000 _____________________________ $12,587,000 $ 13,857,000 _____________________________ _____________________________ Note F-CREDIT ARRANGEMENTS At December 31, 1998, $7.2 million of letters of credit were outstanding for various foreign contracts under a credit line which is renewable annually. The letters of credit have been issued to foreign entities principally to guarantee performance under contracts or the return of advance payments. The Company's real estate has been pledged as security against these letters of credit which carry a commission rate of 1.5% annually. The Company is in default of certain financial covenants against this agreement. The bank has placed a prospective $5 million limit on this credit line. As a result, new letters of credit cannot be issued until existing ones are liquidated to bring the current balance under $5 million. Also at December 31, 1998 there was a $7 million of letter of credit balance open with a foreign bank for the completion of the company's TMRC contract with the government of turkey. Cash collateral of $2.5 million was on deposit with this bank at December 31, 1998 as security for this letter of credit which carries a commission rate of .8%. This letter of credit was originally $49 million in 1990. The letter of credit has been liquidated in the past based on collections against the contract. The customer is currently requesting that further liquidation of the balance ($7 million) be based on progress by the Company in satisfying certain remaining contractual obligations rather than collections against the contract. The Company is currently seeking an appropriate source to establish a replacement letter of credit along the lines requested by the customer. In addition, there was an outstanding letter of credit against a foreign contract at December 31, 1998 for approximately $1 million which was 100% secured with cash collateral. The weighted average interest rates on short-term borrowings outstanding at December 31, 1998 and 1997 were 10% and 10.5%, respectively. Subsequent to year end, all short-term borrowings were paid off. Note G-ENVIRONMENTAL REMEDIATION The Company, along with others, was responsible for the costs of cleanup under an order of the State of California at a site leased by the Company prior to 1984. Cleanup of the site was completed during 1996 and site monitoring over a thirty (30) year period commenced in 1997. The estimated site monitoring costs to be expended over the remaining 28 year period are $2.9 million, or approximately $105,000 per year. The amount to be paid has been included in the accompanying consolidated balance sheet as an other (non current) liability discounted at 7% to the expected payment dates. The December 31, 1996 balance sheet included an other (non current) asset of $2.6 million representing an expected insurance recovery based on a declaratory judgment in favor of the Company by the State of California. The declaratory judgment was reversed in April 1997 resulting in a $2.6 million write-off in 1997. (page 19) NOTE H-STOCKHOLDERS' EQUITY The changes in common stock, additional paid-in capital, and retained earnings during the years 1996, 1997, and 1998 were as follows:
Common Additional Stock Paid-In Retained Par $1 Capital Earnings Balance, January 1, 1996 (5,112,127 common shares) $5,112,000 $2,188,000 $97,883,000 Issuance of 21,273 shares on exercise of stock options 21,000 237,000 - Tax benefit related to shares acquired by employees under stock options - 11,000 - Net loss - - (14,780,000) ______________________________________________ Balance, December 31, 1996 (5,133,400 common shares) 5,133,000 2,436,000 83,103,000 Issuance of 75,400 shares on exercise of stock options 76,000 699,000 - Tax benefit related to shares acquired by employees under stock options - 6,000 - Net loss - - (1,692,000) ______________________________________________ Balance, December 31, 1997 (5,208,800 common shares) 5,209,000 3,141,000 81,411,000 Issuance of 1,136 shares pursuant to a stock grant 1,000 18,000 - Issuance of 11,000 shares in payment of employee bonuses 11,000 84,000 - Net loss - - (26,307,000) ______________________________________________ Balance, December 31, 1998 (5,220,936 common shares) $5,221,000 $3,243,000 $55,104,000 ______________________________________________ ______________________________________________
NOTE I-STOCK OPTIONS AND WARRANTS Pursuant to stock option plans, the Company has granted certain officers, directors, and key employees options to purchase shares of its common stock. Options granted under the plans must have an option price determined by the Board of Directors, but in any event, not less than the fair market value of the stock on the date of grant. Generally, options become exercisable one-fourth annually beginning one year after grant, on a cumulative basis, and expire ten years after grant. Prior to April 1997, the expiration was five years after grant. There is no charge to income with respect to stock options under the plans. A summary of the changes in options during 1996, 1997, and 1998 follows:
Shares Under Weighted Average Shares Available Option Exercise Price for Option ________________________________________ At January 1, 1996 258,663 $ 12.02 91,022 Options granted: Option plan 378,000 $ 10.39 (378,000) Options exercised (10,275) $ 12.69 - Options cancelled (113,300) $ 9.89 113,300 Authorization of 1996 options - $ - 500,000 Cancellations of authorizations - $ - (70,000) ________________________________________ At December 31, 1996 513,088 $ 10.81 256,322 Options granted: Option plan 124,450 $ 11.73 (124,450) Options exercised (17,500) $ 10.31 - Options cancelled (123,925) $ 11.46 123,925 Cancellations of authorizations - (10,000) ________________________________________ At December 31, 1997 496,113 $ 10.89 245,797 Options granted: Option plan 325,400 $ 9.25 (325,400) Options cancelled (396,963) $ 10.85 396,963 Cancellations of authorizations (9,322) ________________________________________ At December 31, 1998 424,550 $ 9.67 308,038 ________________________________________ ________________________________________
The following table summarizes information concerning currently outstanding and exercisable stock options:
Total Shares Under Option Shares Exercisable - --------------------------------------------------------------------------------- Weighted-Average Weighted- Weighted- Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Outstanding Life (Years) Price Exercisable Price - --------------------------------------------------------------------------------- $8.00-$12.00 411,300 9.2 $ 9.54 30,431 $10.30 - --------------------------------------------------------------------------------- $12.01-$16.75 13,250 8.7 $13.59 8,770 $13.30 ----------- ---------- 424,550 39,201 - ---------------------------------------------------------------------------------
The Company has adopted only the disclosure provisions of Financial Accounting Standard No. 123, "Accounting for Stock - Based Compensation" (FAS 123). It applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plans and does not recognize compensation expense for its stock-based compensation plans other than restricted stock. If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed by FAS 123, the Company's net income and earnings per share would be reduced to the pro forma amounts indicated below:
1998 1997 1996 NET LOSS As reported $(26,307,000) $(1,692,000) $(14,780,000) Pro-forma $(27,366,000) $(2,452,000) $(15,128,000) LOSS PER SHARE As reported $ ( 5.05) $ ( 0.34) $ (2.88) Pro-forma $ (5.25) $ (0.48) $ (2.95)
These pro forma amounts may not be representative of future disclosures because they do not take into effect pro forma compensation expense related to grants made before 1995. The fair value of each option grant is estimated on the date of grant using the Black-Sholes options-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yield of 0 percent for all years; expected volatility of 27.9, 27.9 and 27.3 percent; risk-free interest rates of 5.36, 6.08 and 6.23 percent; and expected lives of 5 to 10 years. In May 1997, the Company issued warrants with three year expiration dates for 200,000 shares of its common stock at exercise prices of $12.10 and $13.20 per share. These warrants remain outstanding and have had no impact on the Company's earnings per share calculations. (page 21) Note J-Taxes on Income The provision (recovery) for income taxes is shown below. The recoveries shown on the current lines for each year represent tax loss carrybacks to earlier years, utilization of foreign tax credits, and other items.
Federal State Foreign Total 1998 Current $ (693,000) 0 $ 516,000 $ (177,000) Deferred (573,000) 0 0 (573,000) ____________________________________________________ $(1,266,000) 0 $ 516,000 $ (750,000) ____________________________________________________ ____________________________________________________ 1997 Current $(4,466,000) $ (622,000) $2,417,000 $(2,671,000) Deferred 3,161,000 622,000 - 3,783,000 Charge equivalent to tax benefit related to shares acquired under stock options 6,000 - - 6,000 ____________________________________________________ $(1,299,000) $ - $2,417,000 $ 1,118,000 ____________________________________________________ ____________________________________________________ 1996 Current $(4,587,000) $ (3,000) $3,923,000 $ (667,000) Deferred 21,000 (344,000) (3,568,000) (3,891,000) Charge equivalent to tax benefit related to shares acquired under stock options 11,000 11,000 ____________________________________________________ $(4,555,000) $ (347,000) $ 355,000 $(4,547,000) ____________________________________________________ ____________________________________________________
The components of deferred income tax balances follow.
Year Ended December 31, _______________________________________ 1998 1997 1996 Federal net operating loss carryforward $ 4,984,000 $ - $ - Valuation reserve against net operating loss (4,984,000) - - Contract accounting 835,000 1,350,000 2,271,000 Excess of tax over book depreciation 1,306,000 1,357,000 2,755,000 Inventory valuation (163,000) (613,000) (829,000) State deferred taxes - - (211,000) Environmental clean-up (402,000) (322,000) 503,000 Other, net (1,099,000) (722,000) 344,000 _______________________________________ Total deferred liability $ 477,000 $ 1,050,000 $ 4,833,000 _______________________________________ _______________________________________
A reconciliation between the federal statutory rate and the effective income tax rate (computed by dividing income taxes by income before income taxes) is as follows:
Year Ended December 31, 1998 1997 1996 Federal statutory rate (34.0%) (34.0%) (34.0%) State income taxes net of federal tax benefit 0 (32.8) (0.50) Benefit from non-taxable FSC income 0 (29.2) (1.00) Effects of higher foreign income taxes, including dividends of a foreign subsidiary and foreign tax credits 13.6 286.8 6.1 Valuation allowance due to net operating loss 18.4 - - Other, net ( .8) 4.0 2.0 ___________________________ Effective income tax rate (2.8%) 194.8% (27.40%) ___________________________ ___________________________
Income tax refunds, net of payments, amounted to $1,802,000 in 1998. Income tax payments, net of refunds, amounted to $6,989,000 in 1996 and $383,000 in 1997. At December 31, 1998 the Company had available approximately $14.7 million of unused net operating losses which expire in 20 years and approximately $2.1 million of unused foreign tax credits which expire in 2002. Pre-tax income from foreign operations is shown under Note K below. (page 23) NOTE K-NATURE OF OPERATIONS, EXPORT SALES, MAJOR CUSTOMERS, AND FOREIGN OPERATIONS The Company designs, engineers, manufactures, markets, distributes, and installs technologically advanced communications products and systems which are sold worldwide. Aydin generates approximately 30% of its sales from standard products and systems and the balance of its sales from custom-designed systems and equipment based on customers' specific requirements. Aydin offers a broad range of products due to its ability to combine analog microwave engineering methods with digital techniques and software. Export sales by geographic area are as follows:
1998 1997 1996 Asia $ 3,075,000 $ 2,507,000 $ 3,817,000 Africa 3,235,000 1,785,000 3,203,000 Europe 15,425,000 18,992,000 8,588,000 North America 1,982,000 1,172,000 640,000 South America 1,116,000 1,821,000 433,000 Other 39,000 235,000 342,000 _____________________________________ Total export sales $24,872,000 $26,512,000 $17,023,000 _____________________________________ _____________________________________
The U.S. Government and the Government of Turkey were the only customers to whom sales exceeded 10% of consolidated sales during any of the past three years. Sales to U.S. Government agencies, principally the Department of Defense, amounted to $26,567,000, $34,847,000, and $38,728,000 in 1998, 1997 and 1996, respectively. Sales to the Government of Turkey amounted to $9,575,000, $21,496,000 and $15,116,000 in 1998, 1997 and 1996, respectively. Foreign assets included in the consolidated balance sheet amounted to $10.9 million and $18.6 million at December 31, 1998 and 1997, respectively. Of these amounts, $2.8 million and $5.1 million, at December 31, 1998 and 1997, respectively, are cash and short-term investments of the Company's Turkish subsidiary consisting primarily of U.S. dollar denominated interest-bearing time deposits. Foreign sales and pretax loss for 1998 were $5.7 million and $7.4 million, respectively. Most of the loss was from increases in estimated costs at completion on the TMRC contract with the Government of Turkey at the Turkish subsidiary. Foreign sales and pretax income for 1997 amounted to $14.9 million and $2.5 million, respectively, of which substantially all of the income was from the Turkish subsidiary. Foreign sales and pretax income for 1996 amounted to $18.7 million and $.9 million, respectively, of which substantially all of the income was from the Turkish subsidiary. The 1996 results included an Argentine subsidiary in which a majority interest was disposed of on December 31, 1996. NOTE L-RESTRUCTURING COSTS During the first quarter of 1998 the Company recorded a restructuring charge of $1.5 million as a result of a decision to close the Raytor Division ($961,000) and downsize the corporate staff ($587,000) in line with expected declines in backlog and sales levels. The restructuring was completed during the third quarter. Of the total charge of $1.5 million, approximately $.6 million was for cash outlays and $.9 million was for non-cash asset write-offs. The major charges consisted of: severance benefits for 60 employees ($.6 million); facility exit costs ($.2 million); and write-offs of inventory, equipment, and receivables ($.7 million). During the third quarter of 1996, the Company recorded a charge of $3.7 million to consolidate and restructure its domestic operations. Approximately $1.5 million of this charge was for cash outlays and $2.2 million was for non-cash asset write-offs. The restructuring was completed during the third quarter of 1997. The major charges consisted of: severance benefits for 150 terminated employees ($.6 million); loss on sale of a product line ($.5 million); inventory write-offs ($1 million) and capital equipment write-offs ($.3 million); and write-off of goodwill in connection with the sale of a product line ($.4 million). Note M-COMMITMENTS AND CONTINGENCIES The Company's U.S. Government contracts are subject to audit by the government and price adjustment under certain circumstances. The Company also has receivables due from the US Government on certain contracts whose collectability is dependent on the Company prevailing in its positions. Management believes it has sufficient reserves to cover such matters. However, unfavorable outcomes could have a material impact on future results of operations. Future annual minimum rental payments required under operating leases that have lease terms in excess of one year at December 31, 1998 are $45,000 for each of the years 1999 through 2003. (page 24) NOTE N-SEGMENT REPORTING Aydin adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, during the fourth quarter of 1998. SFAS No. 131 established standards for reporting information about the operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's current chief operating decision maker is the President and Chief Operating Officer, formerly it was the Chief Executive Officer. The operating segments are managed separately by operating unit heads reporting to the chief operating decision maker. The Company's reportable operating segments include the Telemetry Division, the Communications Division and the Turkish Operations. The Telemetry segment designs, manufactures and markets components and systems worldwide for flight and ground testing for military and commercial applications. The Communications segment designs, manufactures and markets data and voice communication systems and products worldwide for commercial and military markets. The Turkish segment consists of the 100% owned Turkish subsidiary (Aydin Yazilim) and includes a US support program office. This segment designs, manufactures and markets a range of communications products. This segments main area of business is the design and manufacture of a command, control and communications system (the TMRC program) for the Turkish military. The other segment manufactures and markets printed circuit boards used in commercial products. The accounting policies used for the operating segments are the same as those described in the summary of significant accounting policies in Note A.
Communi- Turkish Telemetry cations Operations Other Total 1998 Net sales from external Customers $43,818,000 $16,434,000 $ 9,575,000 $3,013,000 $72,840,000 Net sales-intersegment 69,000 1,014,000 Depreciation 572,000 468,000 383,000 124,000 1,547,000 Interest income 577,000 577,000 Interest expense 0 Pre-tax income (loss) 1,460,000 (134,000) (22,122,000) 436,000 (20,360,000) Segment assets 33,531,000 20,003,000 19,252,000 2,018,000 74,804,000 Capital expenditures 335,000 368,000 392,000 306,000 1,401,000 1997 Net sales from external Customers $47,249,000 $13,073,000 $21,966,000 $3,113,000 $85,401,000 Net sales-intersegment - - - 1,644,000 Depreciation 633,000 844,000 433,000 70,000 1,980,000 Interest income 4,000 - 232,000 - 236,000 Interest expense - - - - - Pre-tax income (loss) 3,223,000 (4,289,000) 3,258,000 847,000 3,039,000 Segment assets 36,860,000 22,188,000 26,866,000 1,798,000 87,712,000 Capital expenditures $ 920,000 $ 1,059,000 $ 250,000 $ 149,000 $ 2,378,000 1996 Net sales from external Customers $41,002,000 $11,786,000 $16,055,000 $2,851,000 $71,694,000 Net sales-intersegment 32,000 110,000 1,475,000 Depreciation 580,000 674,000 389,000 62,000 1,705,000 Interest income 1,000 - 264,000 - 265,000 Interest expense - - - - - Pre-tax income (loss) 6,886,000 (13,982,000) 1,211,000 596,000 (5,289,000) Segment assets 24,572,000 19,608,000 27,595,000 1,511,000 73,286,000 Capital expenditures $ 486,000 $ 917,000 $ 482,000 $ 112,000 $ 1,997,000
A reconciliation of the totals reported for the operating segments to the applicable lines in the consolidated financial statements is as follows: (page 25)
Disposed Divisions ___________________________ Reportable Accounted for Segment as Discontinued Eliminations Consolidated Total Total Operation & Corporate Total (A) 1998 Net sales from external customers $72,840,000 $20,345,000 $(13,326,000) $(1,971,000) $ 77,888,000 Depreciation 1,547,000 407,000 (174,000) 31,000 1,811,000 Interest income 577,000 504,000 1,081,000 Interest expense 0 380,000 380,000 Pre-tax income (loss) (20,360,000) (6,718,000) 6,659,000 21,000 (20,398,000) Segment assets 74,804,000 846,000 6,475,000 82,125,000 Capital expenditures 1,401,000 135,000 ( 36,000) (90,000) 1,410,000 1997 Net sales from external customers $85,401,000 $30,270,000 $(20,517,000) $ (300,000) $ 94,854,000 Depreciation 1,980,000 861,000 (464,000) 32,000 2,409,000 Interest income 236,000 - - 796,000 1,032,000 Interest expense - - - 114,000 114,000 Pre-tax income (loss) 3,039,000 (4,772,000) 3,498,000 1,159,000 2,924,000 Segment assets 87,712,000 15,231,000 (8,940,000) 17,078,000 111,081,000 Capital expenditures 2,378,000 668,000 (67,0000 154,000 3,133,000 1996 Net sales from external customers $71,694,000 $46,906,000 $(22,246,000) $(2,022,000) $ 94,332,000 Depreciation 1,705,000 1,283,000 (512,000) 20,000 2,496,000 Interest income 265,000 17,000 - 517,000 799,000 Interest expense - - - 988,000 988,000 Pre-tax income (loss) (5,289,000) (12,245,000) 3,139,000 (2,225,000) (16,620,000) Segment assets 73,286,000 36,676,000 (11,961,000) 24,802,000 122,803,000 Capital expenditures 1,997,000 359,000 (187,000) (1,289,000) 880,000
(A) Represents amount pertaining to the Displays Division sold in November 1998. These amounts have been included in the discontinued operations classifications in the financial statements. (page 25) Report of Independent Certified Public Accountants Board of Directors Aydin Corporation We have audited the consolidated balance sheets of Aydin Corporation and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aydin Corporation and subsidiaries as of December 31, 1998 and 1997 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Grant Thornton LLP Philadelphia, Pennsylvania February 19, 1999 (page 26) Quarterly Financial Data ($000 omitted except for per share amounts)
1st 2nd 3rd 4th Year 1998 Net sales $ 20,839 $ 23,569 $ 20,803 $ 12,677 $ 77,888 Cost of sales 37,813 15,949 14,596 11,180 79,538 Income (loss) before income taxes (23,948) 1,937 1,470 143 (20,398) Income (loss) after taxes- continuing operations (23,168) 1,907 1,470 143 (19,648) Income (loss) from discontinued operation (978) (1,691) (3,990) - (6,659) Net income (loss) $(24,146) $ 216 $ (2,520) $ 143 $(26,307) Earnings (loss) per share: Income (loss) from continuing operations $ (4.45) $ 0.37 $ 0.28 $ 0.03 $ (3.77) Net income (loss) $ (4.64) $ 0.04 $ (0.48) $ 0.03 $ (5.05) 1997 Net sales $ 22,896 $ 25,738 $ 21,006 $ 25,214 $ 94,854 Cost of sales 16,500 18,937 14,910 17,759 68,106 Income (loss) before income taxes (2,376) 2,285 1,781 1,234 2,924 Income (loss) after taxes- continuing operations (3,127) 1,868 1,634 1,431 1,806 Income (loss) from discontinued operation (1,142) (1,608) 260 (1,008) (3,498) Net income (loss) $ (4,269) $ 260 $ 1,894 $ 423 $ (1,692) Earnings (loss) per share: Income (loss) from continuing operations $ (0.61) $ 0.36 $ 0.31 $ 0.28 $ 0.34 Net income (loss) $ (0.83) $ 0.05 $ 0.36 $ 0.08 $ (0.34) Note-the first two quarters of 1998 and all of the 1997 quarters have been restated to reflect the discontinued operation treatment in the third quarter of 1998 of the sale of the Displays Division. First quarter 1998 reflects a $20.3 million charge included in cost of sales from an arbitration award related to the TMRC contract. Fourth quarter 1998 reflects a gain of $5.6 million relating to the sale of a division.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. (page 27) PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference is the information under the heading, "Right to Designate Directors; the Parent Designees" on pages A-1 to A-2 of the Information Statement, the information under the heading, "Directors and Executive Officers of the Company" on pages A-2 to A-3 of the Information Statement, the information under the heading, "Directors and Executive Officers of Parent, Purchaser and Holdings" on pages A-11 to A-13 of the Information Statement, and the information under the heading, "Compliance With Section 16(A) of the Exchange Act" on page A-10 of the Information Statement. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference is the information under the heading "Compensation of Directors" on page A-4 of the Information Statement, and under the headings "Summary Compensation Table," "Stock Option Grants 1998," "Aggregated Option/SAR Exercises in Last Fiscal Year and For Year-End Option/SAR Values," "Employment Contracts and Termination of Employment and Change in Control Agreements," and "Common Stock Performance" on pages A-7 to A-11 of the Information Statement. Compensation Committee Interlocks and Insider Participation Mr. I. Gary Bard, a director of the Company, was Chairman and Chief Executive Officer of the Company until October 19, 1998, and while serving as such officer also served as a member of the Executive Compensation Committee and voted on the compensation recommendations of such Committee for other executive officers of the Company. Pursuant to his employment agreement with the Company, Mr. Bard had received a bonus of 20,000 shares of the Company's Common Stock in consideration of his execution of such agreement, and a loan sufficient to pay all income taxes payable with respect to the issuance to him of such stock. The loan carries interest at the lesser of 10% or the prime rate. The largest amount of such indebtedness outstanding at any time during 1998 was $87,614; the loan was repaid in full after December 31, 1998. Mr. John Vanderslice was a director and the President and Chief Operating Officer of the Company until his resignation from all such positions in September 1998. While serving as such officer Mr. Vanderslice voted, as a director, on the compensation recommendations of the Executive Compensation Committee for other executive officers of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference is the information under the headings, "Agreements with Parent or the Purchaser" and "Agreements with Executive Officers, Directors or Affiliates of the Company" on pages 1-12 of the Schedule 14D-9, information under the heading "Right to Designate Directors; the Parent Designees" on pages A-1 to A-2 of the Information Statement, and information under the headings "Stock Ownership of Certain Beneficial Holders" and "Security Ownership of Management" on pages A-5 to A-6 of the Information Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth in the second paragraph under Item 11 of this Report on Form 10-K is incorporated herein by reference. (page 28) PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The Company files as part of this report the following documents: (a) 1. Financial Statements The following is a list of the Consolidated Financial Statements of Aydin Corporation and Subsidiaries which are set forth in Item 8 - "Financial Statements and Supplementary Data": Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996. Consolidated Balance Sheets, as of December 31, 1998 and 1997. Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996. Notes to Consolidated Financial Statements. Report of Independent Certified Public Accountants. 2. Schedules The following is a list of the Schedules of Aydin Corporation and Subsidiaries filed as part of this report: Schedule II - Valuation and Qualifying Accounts Report of Independent Auditors All other schedules not listed above are omitted because they are inapplicable or are not required. 3. Exhibits The following is a list of Exhibits filed as part of this report: 2(i) Agreement and Plan of Merger, dated as of March 1, 1999, by and among L-3 Communications Corporation, Angel Acquisition Corporation, and the Company (filed as Exhibit 99.2 to Registrant's Schedule 14D- 9 on March 5, 1999 and incorporated herein by reference) 3(i) Restated Certificate of Incorporation (filed as Exhibit No. 3(i) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 3(ii) By-laws, as amended (i) on October 19, 1998 to eliminate that provision of Article V, Section 6 which required that the Chairman of the Board serve as the Company's Chief Executive Officer, and (ii) on December 30, 1998 to modify Article III, Section 1 to reduce the number of Directors which shall constitute the whole Board from six to five. 10.1 Employment Agreement, I. Gary Bard (filed as Exhibit No. 10.1 to Registrant's Quarterly Report on Form 10- Q for the quarter ended September 28, 1996 and incorporated herein by reference). 10.2 Form of Retention Agreement between the Company and certain key employees, including James R. Henderson and Gene S. Schneyer (filed as Exhibit 99.4 to Registrant's Schedule 14D-9 on March 5, 1999 and incorporated herein by reference). 10.3 The 1994 Incentive Stock Option Plan, as amended (filed as Exhibit No. 10.5 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10.4 The 1996 Equity Incentive Plan, as amended (filed as Exhibit No. 10.5 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). 10.5 Amended and Restated Warrant of Registrant issued to I. Gary Bard to purchase up to 133,334 shares of Common Stock (filed as Exhibit No. 10.7 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). (page 29) 10.6 Amended and Restated Warrant of Registrant issued to John F. Vanderslice to purchase up to 66,666 shares of Common Stock (filed as Exhibit No. 10.8 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). 21 Subsidiaries of Registrant 23 Consent of Independent Auditors 27 Financial Data Schedule (electronic filing only) 99 Independent Auditors' Report All other exhibits not listed above are omitted because they are inapplicable. (b) Reports on Form 8-K No reports on Form 8-K were filed during the Fourth Quarter of 1998. (page 30)
AYDIN CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS 1998, 1997, AND 1996 COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E DESCRIPTION Balance at ADDITIONS Deductions- Balance at Beginning Charged to Charged to Describe End of Period of Period Costs and Other Accounts Expenses - Describe Year 1998 _________ Deducted from asset accounts: Allowance for doubtful accounts $ 616,000 $ 541,000 $ 476,000(1) $ 681,000 Raw materials inventory reserve 566,000 0 390,000(2) 176,000 __________ __________ __________ __________ Totals $1,182,000 $ 541,000 $ 572,000 $ 616,000 Year 1997 _________ Deducted from asset accounts: Allowance for doubtful accounts $ 942,000 $ 246,000 $ 572,000(1) $ 616,000 Raw materials inventory reserve 1,514,000 445,000 1,393,000(2) 566,000 __________ __________ __________ __________ Totals $2,456,000 $ 691,000 $1,965,000 $1,182,000 Year 1996 _________ Deducted from asset accounts: Allowance for doubtful accounts $ 259,000 $1,037,000 $ 354,000(1) $ 942,000 Raw materials inventory reserve 1,062,000 3,542,000 3,090,000(2) 1,514,000 __________ __________ ____________ __________ Totals $1,321,000 $4,579,000 $3,444,000 $2,456,000 (1) Uncollectible accounts written off, net of recoveries. The increase in 1997 write-offs reflects primarily foreign receivables provided for in 1996. (2) Obsolete inventory written off.
(page 31) SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Aydin Corporation Dated: __March 29, 1999__ By: ____/s/ Gene S. Schneyer_____ Gene S. Schneyer Vice President, Secretary And General Counsel Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: ___/s/ James R. Henderson____ Dated: __March 29, 1999__ James R. Henderson President, Chief Operating Officer, Treasurer and Chief Financial Officer By: __/s/ Herbert Welber_________ Dated: __March 29, 1999__ Herbert Welber Controller and Assistant Treasurer Principal Accounting Officer By: _/s/ Warren G. Lichtenstein__ Dated: __March 29, 1999__ Warren G. Lichtenstein Chairman of the Board and Director By: __/s/ I. Gary Bard___________ Dated: __March 29, 1999__ I. Gary Bard Director By: __/s/ Keith Lane-Zucker______ Dated: __March 29, 1999__ Keith Lane-Zucker Director By: __/s/ Mark Schwarz____________ Dated: __March 29, 1999__ Mark Schwarz Director By: __/s/ Harry D. Train, II______ Dated: __March 29, 1999__ Harry D. Train, II Director EXHIBIT INDEX Exhibit No. Description of Exhibit 2(i) Agreement and Plan of Merger, dated as of March 1, 1999, by and among L-3 Communications Corporation, Angel Acquisition Corporation, and the Company (filed as Exhibit 99.2 to Registrant's Schedule 14D-9 on March 5, 1999 and incorporated herein by reference) 3(i) Restated Certificate of Incorporation (filed as Exhibit No. 3(i) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 3(ii) By-laws, as amended (i) on October 19, 1998 to eliminate that provision of Article V, Section 6 which required that the Chairman of the Board serve as the Company's Chief Executive Officer, and (ii) on December 30, 1998 to modify Article III, Section 1 to reduce the number of Directors which shall constitute the whole Board from six to five. 10.1 Employment Agreement, I. Gary Bard (filed as Exhibit No. 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 28, 1996 and incorporated herein by reference). 10.2 Form of Retention Agreement between the Company and certain key employees, including James R. Henderson and Gene S. Schneyer (filed as Exhibit 99.4 to Registrant's Schedule 14D-9 on March 5, 1999 and incorporated herein by reference). 10.3 The 1994 Incentive Stock Option Plan, as amended (filed as Exhibit No. 10.5 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10.4 The 1996 Equity Incentive Plan, as amended (filed as Exhibit No. 10.5 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). 10.5 Amended and Restated Warrant of Registrant issued to I. Gary Bard to purchase up to 133,334 shares of Common Stock (filed as Exhibit No. 10.7 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). 10.6 Amended and Restated Warrant of Registrant issued to John F. Vanderslice to purchase up to 66,666 shares of Common Stock (filed as Exhibit No. 10.8 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). 21 Subsidiaries of Registrant 23 Consent of Independent Auditors 27 Financial Data Schedule (electronic filing only) 99 Independent Auditors' Report Exhibit 3(ii) AYDIN CORPORATION BY-LAWS (Last Amended December 30, 1998) ******* ARTICLE I OFFICERS Section 1. The registered office shall be in the City of Dover, County of Kent, State of Delaware. Section 2. The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. All meetings of the stockholders for the election of Directors shall be held in the City of Fort Washington, State of Pennsylvania, at such place as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of Delaware as shall be designed from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual meetings of stockholders shall be held on the third Thursday of April if not a legal holiday, and if a legal holiday, then on the next secular day following at 3:00 P.M. or at such other date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which they shall elect by a plurality vote a board of Directors, and transact such other business as may properly be brought before this meeting. Section 3. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than fifty days before the date of the meeting. Section 4. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 5. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the Chairman of the Board and shall be called by the Chairman of the Board or Secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Section 6. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than fifty days before the date of the meeting, to each stockholder entitled to vote at such meeting. Section 7. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 8. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meeting of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholder, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transaction which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 9. When a quorum is present at any meeting, the vote of the holder of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the certificate of incorporation, a different vote is required in which case such express provision shall govern and control the decision of such question. Section 10. Each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. Section 11. Whenever the vote of stockholders at a meeting thereof is required or permitted to be taken for or in connection with any corporate action, by any provision of the statutes, the meeting and vote of stockholders may be dispensed with if all of the stockholder who would have been entitled to vote upon the action if such meeting were held shall consent in writing to such corporate action being taken; or if the certificate of incorporation authorizes the action to be taken with the written consent of the holders of less than all of the stock who would have been entitled to vote upon the action if a meeting were held, then on the written consent of the stockholders having not less than such percentage of the total number of votes as may be authorized in the certificate of incorporation; provided that in no case shall the written consent be by the holders of stock having less than the minimum percentage of the total vote required by statute for the proposed corporate action, and provided that prompt notice must be given to all stockholders of the taking of corporate action without a meeting and by less than unanimous written consent. ARTICLE III DIRECTORS Section 1. The number of Directors which shall constitute the whole Board shall be five (5). The Directors shall be elected at the annual meeting of the stockholders, except as provided in Section 2 of this Article, and each Director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders. Section 2. Vacancies and newly created directorships resulting from any increase in the authorized number of Directors may be filled by a majority of the Directors then in office, though less than a quorum, or by a sole remaining director, and the Directors so chosen shall held office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If their are no Directors in office, then an election of Directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the Directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such Directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the Directors chosen by the Directors then in office. Section 3. The business of the corporation shall be managed by its Board of Directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these by-laws directed or required to be exercised or done by the stockholders. MEETING OF THE BOARD OF DIRECTORS Section 4. The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. Section 5. The first meeting of each newly elected Board of Directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected Directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected Board of Directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the Directors. Section 6. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board. Section 7. Special meetings of the Board may be called by the Chairman of the Board on one day's notice to each director, either personally, by telephone, by mail or by telegram; special meetings shall be called by the Chairman of the Board or Secretary in like manner and on like notice on the written request of two directors. Section 8. At all meetings of the Board, a majority of the directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the Board of Directors the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 9. Unless otherwise restricted by the certificate of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. COMMITTEES OF DIRECTORS Section 10. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of two or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; provided, however, that in the absence or disqualification of any member of such committee or committees, the member of members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Section 11. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. COMPENSATION OF DIRECTORS Section 12. The Directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as Director. No such payment shall preclude any Director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. ARTICLE IV NOTICES Section 1. Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these by-laws, notice is required to be given to any Director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such Director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to Directors may also be given by telegram, or by telephone. Section 2. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these by-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V OFFICERS Section 1. The officers of the corporation shall be chosen by the Board of Directors and shall be a Chairman of the Board, a President, an Executive Vice President, a Secretary and a Treasurer. The Board of Directors may also choose additional Vice Presidents, and one or more Assistant Secretaries and Assistant Treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation of these by-laws otherwise provide. Section 2. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a Chairman of the Board, a President, an Executive Vice President, a Secretary and a Treasurer, and may choose additional Vice Presidents, and one or more Assistant Secretaries and Assistant Treasurers. Section 3. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. Section 4. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. Section 5. The officers of the corporation shall hold office until their successors are chosen and qualified. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. CHAIRMAN OF THE BOARD Section 6. The Chairman of the Board, subject to the control of the Board of Directors, shall have the general direction and supervision over the business and affairs of the corporation. He shall preside at all meetings of the stockholders and of the Board of Directors and shall be an ex officio member of all committees and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall participate in determining the policies to be followed by the corporation and shall perform such other duties as the Board of Directors shall from time to time request. THE PRESIDENT Section 7. The President shall undertake such duties as may be delegated to him by the Chairman of the Board and shall also have such other powers and duties as the Board of Directors may from time to time determine. In the absence of the Chairman of the Board or in the event of his inability or refusal to act, the President shall perform the duties of the Chairman of the Board, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Chairman of the Board. THE VICE PRESIDENTS Section 8. In the absence of the President or in the event of his inability or refusal to act, the Executive Vice President, (or in the event of the absence or inability of or refusal to act by the Executive Vice President and in the further event there be more than one Vice President, the Vice Presidents in the order designated, or in the absence of any designation, then in the order of their election) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Such powers of and restrictions upon the President shall include the performance of the duties of the Chairman of the Board in the further event that the Chairman is absent or is unable or refuses to act. Vice Presidents shall perform such other duties and have such other powers as the Board or Directors may from time to time prescribe. THE SECRETARY AND ASSISTANT SECRETARY Section 9. The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or Chairman of the Board, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. Section 10. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors (or if there is no such determination, then in the order of their election), shall, in the absence of the Secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. THE TREASURER AND ASSISTANT TREASURERS Section 11. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts if receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. Section 12. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Chairman of the Board and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial conditions of the corporation. Section 13. If required by the Board of Directors, he shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal form office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. Section 14. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. ARTICLE VI CERTIFICATES OF STOCK Section 1. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the Chairman or Vice Chairman of the Board of Directors, the President or a Vice President and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the corporation, certifying the number of shares owned by him in the corporation. Section 2. Where a certificate is countersigned (1) by a transfer agent other than the corporation or its employee, or, (2) by a registrar other than the corporation or its employee, the signatures of the officers of the corporation may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the date of issue. LOST CERTIFICATES Section 3. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. TRANSFERS OF STOCK Section 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. FIXING RECORD DATE Section 5. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. REGISTERED STOCKHOLDERS Section 6. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII GENERAL PROVISIONS DIVIDENDS Section 1. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. Section 2. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Directors shall think conducive to the interest of the corporation, and the Directors may notify or abolish any such reserve in the manner in which it was created. ANNUAL REPORT Section 3. (a) The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. (b) On or before 120 days from the close of each fiscal year, the Board of Directors shall cause to be delivered to each stockholder of record an audited statement of financial condition of the corporation as at the close of such fiscal year, together with a statement of operations, including profit and loss for such fiscal year. For the purposes of subsection (b), it will be sufficient if such report is mailed in the ordinary course of business to those shareholder of record as at the date on which the record of shareholders has been taken for the purpose of the annual meeting, pursuant to Section 5 of ARTICLE VI of these by-laws. CHECKS Section 4. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. FISCAL YEAR Section 5. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. SEAL Section 6. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. INDEMNIFICATION Section 7. (a) Directors, Officers and Employees of the Corporation. Every person now or hereafter serving as a Director, Officer or Employee of the Corporation shall be indemnified and held harmless by the corporation from and against any and all loss, cost, liability and expense that may be imposed upon or incurred by him in connection with or resulting from any claim, action, suit, or proceeding, civil or criminal, in which he may become involved, as a party or otherwise, by reason of his being or having been a director, officer or employee of the corporation, whether or not he continues to be such at the time such loss, cost, liability or expense shall have been imposed or incurred. As used herein, the term "loss, cost, liability and expense" shall include, but shall not be limited to, counsel fees and disbursements and amounts of judgments, fines or penalties against, and amounts paid in settlement by, any such director, officer or employee; provided, however that no such director, officer or employee shall be entitled to claim such indemnity: (1) with respect to any matter as to which there shall have been a final adjudication that he has committed or allowed some act or omission, (a) otherwise than in good faith in what he considers to be the best interests of the corporation, and (b) without reasonable cause to believe that such act or omission was proper and legal; or (2) in the event of a settlement of such claim, action, suit, or proceeding unless (a) the court having jurisdiction thereof shall have approved of such settlement with knowledge of the indemnity provided herein, or (b) a written opinion of independent legal counsel, selected by or in manner determined by the Board of Directors, shall have been rendered substantially concurrently with such settlement, to the effect that it was not probable that the matter as to which indemnification is being made would have resulted in a final adjudication as specified in clause (1) above and that the said loss, cost, liability or expense may properly be borne by the corporation. A conviction or judgment (whether based on a plea of guilty or nolo contendere or its equivalent, or after trial) in a criminal action, suit or proceeding shall not be deemed an adjudication that such director, officer or employee has committed or allowed some act or omission as hereinabove provided if independent legal counsel, selected as hereinabove set forth, shall substantially concurrently with such conviction or judgement give to the corporation a written opinion that such director, officer or employee was acting in good faith in what he considered to be the best interests of the corporation or was not without reasonable cause to believe that such act or omission was proper and legal. (b) Directors, Officers and Employees of Subsidiaries. Every person (including a director, officer or employee of the corporation) who at the request of the corporation acts as a director, officer or employee of any other corporation in which the corporation owns shares of stock or of which it is a creditor shall be indemnified to the same extent and subject to the same conditions that the directors, officers, and employees of the corporation are indemnified under the preceding paragraph, except that the amount of such loss, cost, liability or expense paid to any such director, officer or employee shall be reduced by and to the extent of any amounts which may be collected by him from such other corporation. (c) Miscellaneous. The provisions of this section shall cover claims, actions, suits and proceedings, civil or criminal, whether now pending or hereafter commenced and shall be retroactive to cover acts or omissions or alleged acts or omissions which heretofore have taken place. In the event of death of any person having a right of indemnification under the provisions of this section, such right shall inure to the benefit of his heirs, executors, administrators and personal representatives. If any part of this section should be found to be invalid or ineffective in any proceeding, the validity and effect of the remaining provisions shall not be affected. (d) Indemnification Not Exclusive. The foregoing right of indemnification shall not be deemed exclusive of any other right to which those indemnified may be entitled, and the corporation may provide additional indemnity and rights to its directors, officers or employees. ARTICLE VIII AMENDMENTS Section 1. These by-laws may be altered or repealed at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration or repeal be contained in the notice of such special meeting. Exhibit 21 SUBSIDIARIES OF REGISTRANT
NAME (and name under which JURISDICTION PERCENTAGE they do business-same) OF INCORPORATION OWNED - -------------------------- ----------------- ---------- Aydin Europe Limited United Kingdom 100% Aydin, S.A. Argentina 19% Aydin Foreign Sales Limited Guam 100% Aydin Investments, Inc. Delaware 100% Aydin Yazilim ve Elektronik Sanayi A.S. Turkey 100% (1) - -------------- (1) Ninety nine (99%) percent of the 100% is owned by registrant's wholly owned subsidiary, Aydin Investments, Inc.
Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We have issued our reports dated February 19, 1999, accompanying the consolidated financial statements and schedules in the Annual Report of Aydin Corporation and Subsidiaries on Form 10-K for the year ended December 31, 1998. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Aydin Corporation and Subsidiaries on Forms S-8 Registration Statement Numbers 333-31263, 33-61537, 33-53549, 33- 34863, 33-22016, 33-14284, 2-97645, 2-93603, 2-77623 and 2-64093. /s/ Grant Thornton LLP Philadelphia, Pennsylvania March 26, 1999 Exhibit 99 Report of Auditors on Schedules Board of Directors Aydin Corporation In connection with our audit of the consolidated financial statements of Aydin Corporation and Subsidiaries referred to in our report dated February 19, 1999, which is included in Part II of this form, we have also audited Schedule II for each of the three years in the period ended December 31, 1998. In our opinion, this schedule presents fairly, in all material respects, theinformation required to be set forth therein. /s/ Grant Thornton LLP Philadelphia, Pennsylvania February 19, 1999 EX-27 2 ARTICLE 5 FDS FOR 1998 10-K
5 1,000 YEAR DEC-31-1998 DEC-31-1998 5,861 3,589 21,738 0 10,361 69,055 33,490 20,903 82,125 16,471 0 5,221 0 0 58,347 82,125 77,888 77,888 79,538 104,595 0 0 (701) (20,398) (750) (19,648) (6,659) 0 0 (26,307) (5.05) (5.05)
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