FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-230
_____
For the thirteen weeks ended August 25, 1995
_______________
AEL INDUSTRIES, INC.
____________________________________________________________________
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1353403
____________________________________________________________________
(State or other jurisdiction of (IRS Employer
incorporation of organization) Identification No.)
305 Richardson Road, Lansdale, Pennsylvania
19446
____________________________________________________________________
(Address of principal executive offices and Zip Code)
(215) 822-2929
____________________________________________________________________
(Registrant's telephone number, including area code)
N/A
____________________________________________________________________
(Former name, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all re-
ports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
_______ _______
The number of shares outstanding of each class of common stock is as
follows:
Class Outstanding at September 29, 1995
__________________________________ _________________________________
Class A common stock, $1 par value 3,629,707
Class B common stock, $1 par value 407,927
Page 1 of 13
AEL INDUSTRIES, INC.
FORM 10-Q
TWENTY-SIX WEEKS ENDED AUGUST 25, 1995
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance 3
Sheets - August 25, 1995 and
February 24, 1995
Consolidated Statements of Oper- 4
ations Thirteen and Twenty-Six
Weeks Ended August 25, 1995 and
August 26, 1994
Consolidated Statements of Cash 5
Flows - Twenty-Six Weeks Ended
August 25, 1995 and August 26,
1994
Notes to Condensed Consolidated 6
Financial Statements
Management's Discussion and 8
Analysis of Results of Oper-
ations and Financial Condition
PART II. OTHER INFORMATION
Item 5 - Other Information 12
Item 6 - Exhibits and Reports
on Form 8-K 12
Signature 13
Page 2 of 13
PART I. FINANCIAL INFORMATION FORM 10-Q
AEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
August 25, February 24,
1995 1995
------------ ------------
ASSETS
Current assets:
Cash and equivalents $48 $3,140
Marketable securities 664 724
Receivables, including unbilled amounts
of $29,723 at August 25, 1995 and
$29,244 at February 24, 1995:
U. S. Government 41,709 40,695
Other 5,914 5,273
------------ ------------
47,623 45,968
Inventories 2,331 1,312
Deferred income taxes 1,709 1,928
Other current assets 1,291 208
------------ ------------
Total current assets 53,666 53,280
Property, plant and equipment (net of
accumulated depreciation and amorti-
zation of $59,894 at August 25, 1995
and $56,941 at February 24, 1995) 41,872 42,639
Other assets 5,288 5,499
------------ ------------
$100,826 $101,418
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $5,025
Accounts payable 4,559 $7,732
Accrued salaries, wages and employee benefits 5,466 5,062
Other current liabilities 6,330 7,039
Current portion of long-term debt 3,857 3,857
------------ ------------
Total current liabilities 25,437 23,690
Long-term debt, net of current portion 12,274 15,742
Other liabilities 1,795 1,764
Commitments and contingent liabilities -
Note 4
Shareholders' equity 61,320 60,222
------------ ------------
$100,826 $101,418
============ ============
See accompanying notes.
Page 3 of 13
AEL INDUSTRIES, INC. FORM 10-Q
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
August 25, 1995 August 26, 1994 August 25, 1995 August 26, 1994
-------------- -------------- -------------- --------------
Sales and service revenues $28,921 $30,911 $62,021 $61,485
Operating costs and expenses:
Cost of products and services 21,782 23,712 47,047 46,800
Administrative and selling expenses 4,045 4,177 8,503 8,686
Bid and proposal costs 1,303 1,600 2,485 3,215
Research and development costs 934 406 1,577 983
-------------- -------------- -------------- --------------
28,064 29,895 59,612 59,684
-------------- -------------- -------------- --------------
Operating income 857 1,016 2,409 1,801
Interest expense (296) (307) (623) (676)
Investment income 14 58 64 142
Other expense, net of other income (73) (261) (319) (281)
-------------- -------------- -------------- --------------
Income before income taxes 502 506 1,531 986
Income tax provision 175 152 535 296
-------------- -------------- -------------- --------------
Net income $327 $354 $996 $690
============== ============== ============== ==============
Earnings per common and common
equivalent share:
Primary $0.08 $0.09 $0.25 $0.18
============== ============== ============== ==============
Fully diluted $0.08 $0.09 $0.24 $0.18
============== ============== ============== ==============
Weighted average number of common and
and common equivalent shares:
Primary 3,930,000 3,820,000 3,924,000 3,818,000
============== ============== ============== ==============
Fully diluted 4,116,000 3,820,000 4,113,000 3,819,000
============== ============== ============== ==============
See accompanying notes.
Page 4 of 13
AEL INDUSTRIES, INC. FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Twenty-Six Twenty-Six
Weeks Weeks
Ended Ended
August 25, 1995 August 26, 1994
------------------ ------------------
Cash flows from operating activities:
Net income $996 $690
Adjustments to reconcile net income
to net cash (absorbed) provided by operating activities:
Depreciation 3,145 3,188
Amortization of other assets 220 206
Deferred income taxes 143 67
Other 88 (150)
(Increase) decrease in receivables (1,655) 2,658
(Increase) decrease in inventories and other
current assets (2,102) 1,928
Decrease in accounts payable, accrued
liabilities and other current liabilities (3,278) (5,441)
------------------ ------------------
Net cash (absorbed) provided by operating activities (2,443) 3,146
------------------ ------------------
Cash flows from investing activities:
Additions to property, plant and equipment (2,400) (2,352)
Liquidations of marketable securities 88 894
Other 22 45
------------------ ------------------
Net cash absorbed by investing activities (2,290) (1,413)
------------------ ------------------
Cash flows from financing activities:
Short-term borrowings, net of repayments 5,025
Reductions in long-term debt (3,468) (5,168)
Other 84 44
------------------ ------------------
Net cash provided (absorbed) by financing activities 1,641 (5,124)
------------------ ------------------
Decrease in cash and equivalents (3,092) (3,391)
Cash and equivalents at beginning of period 3,140 10,414
------------------ ------------------
Cash and equivalents at end of period $48 $7,023
================== ==================
See accompanying notes.
Page 5 of 13
FORM 10-Q
AEL INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and,
therefore, do not include all information necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. In the opinion of management, all
adjustments necessary for a fair presentation of the results of the interim
periods have been made and are of a normal, recurring nature.
The condensed consolidated financial statements should be read in
conjunction with the Registrant's Annual Report on Form 10-K for the fiscal
year ended February 24, 1995.
2. The Company announced on October 2, 1995 that it had signed a definitive
agreement providing for the purchase by Tracor, Inc. of all of the Company's
outstanding shares and share equivalents at a price of $28 per share, subject
to customary terms and conditions, review by government regulatory agencies
and approval by the Company's shareholders. In addition to the acquisition
agreement, the Company's shareholders must also approve agreements, announced
on February 28, 1995 and described below, between the Company and its
controlling shareholders, Dr. and Mrs. Leon Riebman. Approval of the
acquisition agreement and the agreements with the Riebmans must be voted upon
by the shareholders as a single proposition. The acquisition is expected to
be completed during the Company's fourth quarter of fiscal year 1996.
On February 28, 1995, the Riebmans transferred all of their class A
nonvoting and class B voting common stock into a voting trust controlled by
four independent directors of the Company to provide the Company's Board of
Directors with the flexibility it needed to pursue the sale of the Company.
The voting trust has an initial term of nine months with an extension period
of up to one additional year, subject to certain conditions. The voting
trustees have full power to vote the Riebmans' stock with regard to any
proposed transaction for the sale of the Company. At August 25, 1995, such
stock constitutes approximately 7% of all outstanding shares, excluding the
180,947 class A shares described below, and 55% of all outstanding class B
shares.
In consideration of the Riebmans entering the voting trust agreement,
transferring their shares to the voting trust, and agreeing to accept the same
per share price for their voting stock as other shareholders receive for their
stock in the event of a sale of the Company, the Company issued 180,947 shares
of class A nonvoting stock to the Riebmans on February 28, 1995. These shares
have also been transferred into the voting trust and will be returned to the
Company for cancellation without any payment to the Riebmans if a sale of the
Company does not occur while the voting trust is in effect. If a sale does
occur, the issuance of 180,947 shares will result in a charge against income
for an amount equal to market value of the shares at the time the sale of the
Company is final.
Under separate agreements also entered into on February 28, 1995, the
Company has agreed to make the following payments to Dr.Riebman if the Company
is sold while the voting trust is in effect: payments totalling $675,000 for
consulting services to be provided by Dr. Riebman for a three-year period
commencing with his employment termination; a change-in-control payment of
$500,000 if Dr. Riebman's employment terminates after the sale of the Company;
and a noncompetition payment of up to $1,900,000.
Page 6 of 13
FORM 10-Q
AEL INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company also has agreements with eight other officers which could
result in severance payments to those officers if their employment were to
terminate during a period up to two years following a change in control of the
Company. Aggregate severance payments under such agreements could range up to
approximately $2,800,000 depending on the number of officers terminated and
the timing of the terminations.
3. Under fixed price contracts, the Company may encounter, and on certain
programs from time to time has encountered, cost overruns caused by increased
material, labor, or overhead costs, design or production difficulties and
various other factors such as technical and manufacturing complexity, which
must be, and in such cases have been, borne by the Company. Adjustments to
contract cost estimates are made in the periods in which the facts requiring
such revisions become known. When the revised estimate indicates a loss, such
loss is provided for currently in its entirety. In addition, the Company from
time to time commits to invest its own funds, particularly in the case of
high-technology seed programs. The estimated costs of such investments in
excess of the related contract values are provided for currently in their
entirety upon receipt of such contracts by the Company. During the quarter
and six months ended August 25, 1995, contract cost estimates and
profitability adjustments resulted in net charges to income of $200,000 and
$1,200,000, respectively, compared with net charges of $1,200,000 and
$3,300,000 for adjustments of the same nature during the comparable periods
ended August 26, 1994.
Other current liabilities at August 25, 1995 and February 24, 1995
include allowances for contract losses and other contract allowances
aggregating $3,000,000 and $3,600,000, respectively. In addition, receivables
at August 25, 1995 include unbilled amounts of $3,100,000 for costs subject to
future negotiations with the U.S. Government which may not be billed within
one year.
4. From time to time, the Company may be involved in lawsuits,
investigations and other legal proceedings arising from the ordinary conduct
of its business with the U.S. Government and others. One such action relates
to the U.S. Environmental Protection Agency (EPA) which, in 1989, placed a
site that includes the Company's Richardson Road property on the National
Priorities List for detailed study and cleanup of alleged environmental
contamination. The Company continues to cooperate with the EPA in the study
of this site. In the opinion of management, except for the matter described
below, these legal proceedings will not have a material adverse effect on
consolidated financial position.
The Company continues to cooperate with the Department of Defense in an
investigation which commenced in 1992 regarding the AN/MLQ-T4 Ground Jammer
program. At this time, management is unable to determine when the Government
will complete its inquiry or whether it will seek any remedies.
Page 7 of 13
FORM 10-Q
AEL INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's consolidated results of operations for the thirteen weeks (quarter)
and twenty-six weeks (six months) ended August 25, 1995, as compared with the
thirteen weeks (quarter) and twenty-six weeks (six months) ended August 26,
1994, and its consolidated financial condition at August 25, 1995. The
discussion should be read in conjunction with the condensed consolidated
financial statements and notes thereto which appear elsewhere in this Form 10-
Q.
Results of Operations
Sales and service revenues for the quarter ended August 25, 1995 were
$28,921,000, down 6% from the revenues reported for the quarter ended August
26, 1994. The decline was primarily due to a drop in revenues from electronic
countermeasures programs, partially offset by an increase in revenues from
radar warning receiver programs. Electronic countermeasures programs provided
15% of total revenues in the current year's quarter, down from 25% of total
revenues in the prior year's quarter. Individually, the TACJAM-A electronic
countermeasures program generated 10% and 16% of revenues for the quarters
ended August 25, 1995 and August 26, 1994, respectively. While revenues from
avionics programs in the aggregate for the quarter ended August 25, 1995 were
consistent with the prior year's quarter, 35% of total revenues in each year,
two individual avionics programs had significant offsetting fluctuations. The
ANVIS/HUD avionics program provided 21% of total revenues for the quarter
ended August 25, 1995, up from 8% in the prior year, and an avionics program
with a foreign government provided only 1% of total revenues in the current
year quarter, down from 9% in the prior year. Sales and service revenues for
the six months ended August 25, 1995 were $62,021,000, essentially the same as
the amount reported for the comparable period of the prior year. An increase
in revenues from radar warning receiver programs, 17% of total revenues in the
current year and 12% in the prior year, was offset by a decrease in revenues
from avionics programs, 30% of total revenues in the current year and 35% in
the prior year. With regard to the impact of significant individual programs
during the six month periods, the TACJAM-A electronic countermeasures program
and the ANVIS/HUD avionics program provided 16% and 14%, respectively, of the
revenues for the six months ended August 25, 1995 and 15% and 7%,
respectively, of the revenues for the six months ended August 26, 1994.
Operating income for the quarter ended August 25, 1995 was $857,000,
approximately 15% lower than operating income for the quarter ended August 26,
1994. Although the adverse contract cost estimates and profitability
adjustments were approximately $1,000,000 less and bid and proposal spending
was approximately $300,000 less in the current year than in the prior year,
the combination of lower quarterly revenues as described above, increased
research and development spending, and generally lower gross margins has
resulted in a decrease in operating profit for the quarter ended August 25,
1995 when compared with the comparable quarter of the prior year. In comparing
the six months ended August 25, 1995 with the six months ended August 26,
1994, operating profit increased approximately $600,000, or 33%, in the
current year. The increase was primarily due to a reduction of $2,100,000 in
adverse contract cost estimates and profitability adjustments and a decrease
of $730,000 in bid and proposal spending, partially offset by an increase of
Page 8 of 13
FORM 10-Q
AEL INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
$594,000 in research and development spending and generally lower gross
margins in the first six months of the current year.
Interest expense for the quarter and six months ended August 25, 1995
decreased slightly from the comparable periods of the prior year due to lower
average debt levels. In the first quarters of fiscal years 1996 and 1995, the
Company repaid $3,300,000 and $5,000,000, respectively, of its 10.03%
unsecured note payable. Other income for the quarter ended August 25, 1995
included $196,000 for royalties received under a license agreement with a
foreign vendor. The comparable royalties payment for the prior year was
received in the first quarter of fiscal year 1995.
The income tax provision for the quarter ended August 25, 1995 is based
on an annual effective tax rate of 35% compared with an annual effective tax
rate of 30% in fiscal year 1995. The higher rate in the current year is due
primarily to an anticipated decrease in available tax credits.
The Company had a firm orders backlog of approximately $82,000,000, (13%
unfunded) at August 25, 1995 compared to $106,600,000 (7% unfunded) at
February 24, 1995. The firm orders backlog is expected to increase throughout
the remainder of the current fiscal year.
As described in Note 2 to the consolidated financial statements, the
Company announced on October 2, 1995 that it had signed a definitive agreement
providing for the purchase by Tracor, Inc. of all of the Company's outstanding
shares and share equivalents at a price of $28 per share, subject to customary
terms and conditions, review by government regulatory agencies and approval by
the Company's shareholders. Tracor, Inc. provides a broad range of electronic
products, systems, and services for numerous U.S. government agencies
primarily within the Department of Defense, other governments and commercial
customers. The acquisition is expected to be completed during the Company's
fourth quarter of fiscal year 1996.
Besides the potential impact on future operations resulting from the
sale of the Company, fiscal year 1996 operating results will be influenced by
various other internal and external factors. The Company continues to be
engaged in programs involving complicated engineering development efforts and,
as is the case with most development efforts, technical and other complexities
are often encountered. These complexities have resulted in increased contract
cost estimates in the past and could have the same result in the future. The
Company could also encounter similar risks on other long-term contracts and
such factors could impact future operating results. The Company presently has
a program for which certain unanticipated costs are subject to negotiations
with the U.S. Government, and the outcome of those negotiations could impact
future operating results. At August 25, 1995, the Company had recorded an
unbilled receivable of $3,100,000 relating to such costs. In addition, the
Company in the past has sought high-technology seed programs and may do so
again in the future. Such programs, which are intended to provide a base for
the Company's future operations, may require contract investment provisions or
significant Company-sponsored research and development expenditures, both
reflecting the Company's commitment of its own funds.
Page 9 of 13
FORM 10-Q
AEL INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Management is continuing its strategic planning efforts in order to
enhance the Company's ability to be responsive to the Government's changing
national defense requirements and to select products and business areas which
will enable the Company to effectively compete and perform in a very demanding
marketplace. Although the uncertainties of future world events and changes in
national defense spending hang over the defense industry, the Company's
products, heavily concentrated in the field of defense electronics, and
management's constant thrust to improve its design, manufacturing and quality
systems, provide the Company with the prerequisites to be competitive. The
U.S. Government and its suppliers continue to be the most significant
customers of the Company, and a significant reduction in one or more of the
Company's major defense programs, existing or anticipated, could adversely
effect the Company's future operating results. In addition to its business
with the U.S. Government, the Company continues to seek commercial
applications for its products and services, including the development of wide
dynamic range fiber optic links for use in CATV and cellular communications
systems, and the expansion of its aircraft modification business into
commercial aviation.
The Company from time to time is subject to claims and investigations
arising from the conduct of its business with the U.S. Government. In one
such instance, the Company continues to cooperate with the Department of
Defense in an investigation which commenced in 1992 regarding the AN/MLQ-T4
Ground Jammer program. At this time, management is unable to determine when
the Government will complete its inquiry or whether it will seek any remedies.
This matter and other ongoing legal matters which may impact future operating
results are described in Note 4 to the consolidated financial statements.
Liquidity and Capital Resources
The Company's primary source of short-term financing is cost
reimbursements under contracts with the U.S. Government and its suppliers.
That financing is supplemented, when necessary, through borrowings under a
line of credit agreement. The absorption of cash flows for the twenty-six
weeks ended August 25, 1995 was primarily to fund operating activities, repay
long-term debt and fund capital expenditures. At August 25, 1995, the Company
has available cash and equivalents of approximately $700,000 and a line of
credit agreement, which expires August 15, 1998, providing for borrowings up
to $10,000,000. Borrowings under the line of credit agreement totalled
$5,025,000 at August 25, 1995.
Page 10 of 13
FORM 10-Q
AEL INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The ratio of current assets to current liabilities was 2.1 to 1 at
August 25, 1995 compared with 2.2 to 1 at February 24, 1995. The long-term
debt to equity ratio was reduced from .3 to 1 at February 24, 1995 to .2 to 1
at August 25, 1995 due to an April 1995 repayment of $3,300,000 on the
Company's 10.03% unsecured note obligation. The Company's next installment
repayment of $3,300,000 on its 10.03% unsecured note obligation is due April
1996.
In June 1995, the Company began construction of a building addition at
its Richardson Road facility. The building addition is expected to be
completed by the end of fiscal year 1996 at an estimated cost, including
related expenditures, of approximately $1,300,000. Expenditures for the
addition will be funded through cash provided from operations and short-term
borrowings.
Management believes that the Company's current working capital position
and available borrowing capacity should provide sufficient capital resources
to meet the Company's operating needs, capital improvements and debt
maturities for the foreseeable future.
Page 11 of 13
FORM 10-Q
PART II. OTHER INFORMATION
AEL INDUSTRIES, INC.
ITEM 5 - OTHER INFORMATION
The Company announced on October 2, 1995 that it had signed a
definitive agreement providing for the purchase by Tracor, Inc. of
all of the Company's outstanding shares and share equivalents at a
price of $28 per share, subject to customary terms and conditions,
review by government regulatory agencies and approval by the
Company's shareholders. A Form 8-K providing additional information
regarding the proposed sale of the Company will be filed with the
Securities and Exchange Commission within the required reporting
period.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
27 Financial Data Schedule *
* Schedule submitted in electronic format only.
(b) Reports on Form 8-K
None.
Page 12 of 13
FORM 10-Q
AEL INDUSTRIES, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AEL INDUSTRIES, INC.
____________________________________________________________________
(Registrant)
Date: October 6, 1995 /S/ John F. Sharkey
_______________ _______________________
John F. Sharkey
Vice President, Finance
Page 13 of 13