I F R S Y S T E M S , I N C .
- -------------------------------------------------------------------------------
PERFORMANCE HIGHLIGHTS
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Sales $75,994 $65,073 $60,791 $39,710 $48,705
Operating Income 3,683 2,002 1,851 2,163 5,632
Research & Development Expense 7,892 7,505 6,107 5,968 5,269
Net Income 2,251 987 877 1,612 3,930
- -------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total Assets $58,402 $51,232 $49,047 $43,326 $42,136
Working Capital 22,948 21,498 20,148 19,886 27,913
Shareholders' Equity 38,636 34,802 33,578 33,110 32,123
Long-term Debt and
Capital Lease Obligations 4,981 3,419 4,058 4,269 3,065
- -------------------------------------------------------------------------------------------------------------------
PROFITABILITY RATIOS
Gross Margin 37.5% 36.3% 34.4% 39.6% 37.3%
Net Income 3.0 1.5 1.4 4.1 8.1
Effective Income Tax Rate 35.6 41.6 50.5 39.9 38.4
Return on Assets 4.1 2.0 1.9 3.8 9.5
Return on Equity 6.1 2.9 2.6 4.9 12.3
- -------------------------------------------------------------------------------------------------------------------
PER SHARE
Net Income $ 0.41 $ 0.19 $ 0.17 $ 0.30 $ 0.71
Book Value 7.08 6.65 6.43 6.19 5.87
Dividends -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
1995 SALES
BY PRINCIPAL MARKETS
(IN THOUSANDS)
U.S. Government - $16,400
U.S. Domestic - $28,962
Export - $25,681
Parts and Service - $4,951
1
I F R S Y S T E M S , I N C .
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FINANCIAL REVIEW
- -------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA
The following quarterly financial data summarizes the unaudited quarterly
results for the years ended June 30, 1995 and 1994. (DOLLARS IN THOUSANDS EXCEPT
NET INCOME PER SHARE.)
Quarters Ended
- ----------------------------------------------------------------------------------------------------
Fiscal 1995 September 30, December 31, March 31, June 30,
1994 1994 1995 1995
- ----------------------------------------------------------------------------------------------------
Sales $17,196 $21,220 $19,384 $18,194
Gross Profit 5,969 8,263 7,238 6,997
Net Income 184 878 655 534
Net Income Per Share $ 0.03 $ 0.17 $ 0.12 $ 0.09
- ----------------------------------------------------------------------------------------------------
Fiscal 1994 September 30, December 31, March 31, June 30,
1993 1993 1994 1994
- ----------------------------------------------------------------------------------------------------
Sales $15,153 $16,973 $15,629 $17,318
Gross Profit 5,513 6,360 5,983 5,750
Net Income 171 355 200 261
Net Income Per Share $ 0.03 $ 0.07 $ 0.04 $ 0.05
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FISCAL 1995 VS. 1994
Sales for fiscal 1995 were $75,994,000 compared to $65,073,000 in fiscal
1994, an increase of 17 percent. Sales of communications service monitors to
the U.S. Government increased $7,000,000, or 131 percent over the prior year.
Sales of fiber optics test equipment increased 12 percent, while commercial
communications test equipment sales remained flat and avionics and test and
measurement sales were down slightly compared to the previous year.
International sales increased from $16,877,000, or 26 percent of total sales
in fiscal 1994 to $25,681,000, or 34 percent of total sales in fiscal 1995.
Gross Margin improved from 36 percent in fiscal 1994 to 37 percent in
fiscal 1995. This increase was due to a higher mix of fiber optics sales and
reduced production costs related to the manufacturing of the FM-1600 family for
the U.S. Army AN/GRM-114B test sets.
Operating expenses increased 15 percent over the prior year. Current year
operating expenses represented 32 percent of fiscal 1995 sales, while fiscal
1994 operating expenses were 33 percent of fiscal 1994 sales. Selling expenses
increased 17 percent due primarily to higher sales commissions expense from the
increase in sales. Administrative expenses increased 17 percent as a result of
increased pension expense.
Engineering expenses increased 12 percent. This is related primarily to the
introduction of two new products. The mini-OTDR and MicroCell-100.
Interest expense decreased 22 percent compared to the previous year.
Improved collection of accounts receivable reduced the Company's average
borrowings from the bank. The conversion of notes related to the Photon Kinetics
("Photon") acquisition also contributed to the decrease.
The Company has recorded, for financial reporting purposes, deferred tax
assets aggregating $1,170,000, for net operating loss carryforwards and tax
credit carryforwards related to the acquisition of Photon. Realization of the
deferred tax assets is dependent upon Photon's ability to generate taxable
income in the future. Based on an analysis of Photon's existing taxable
temporary differences, the presence of significant non-deductible acquisition
costs and historical pretax operating results, a valuation
9
I F R S Y S T E M S , I N C .
- -------------------------------------------------------------------------------
FINANCIAL REVIEW
- -------------------------------------------------------------------------------
allowance of $1,077,000 was recognized during fiscal 1995 to offset the deferred
tax assets. The Company evaluates the realizability of the deferred tax assets
quarterly. See Note 4 of the Notes to Consolidated Financial Statements for
further discussion.
The effective income tax rate was 36 percent for fiscal 1995 compared to 42
percent for fiscal 1994. The decrease in the rate is due primarily to an
increase in the pre-tax income relative to the amount of nondeductible goodwill
amortization. Consistent with fiscal 1994, use of research and development
credits resulted in a reduction in the effective tax rate.
No cash dividends were paid in fiscal 1995 or fiscal 1994. The Board of
Directors periodically reviews the appropriateness of dividend payments taking
into consideration numerous factors including the Company's cash requirements
and performance.
FISCAL 1994 VS. 1993
Fiscal 1994 sales were $65,073,000 compared to $60,791,000 in fiscal 1993,
representing an increase of 7 percent. Sales, excluding the U.S. Army Contract,
were $59,070,000 for fiscal 1994, compared to $52,000,000 for fiscal 1993, or an
increase of 14 percent. As discussed further below, fiscal 1994 U.S. Army
contract shipments were temporarily suspended in early August 1993 and resumed
in March 1994, resulting in lower sales under this contract in fiscal 1994.
This decrease was from $8,791,000 in fiscal 1993 to $6,003,000 in fiscal 1994.
Sales to the U.S. Government represented 13 percent of fiscal 1994 sales
compared to 17 percent in fiscal 1993. International sales declined from
$18,055,000, or 30 percent of total sales in fiscal 1993, to $16,877,000, or 26
percent of total sales in fiscal 1994.
Gross margin improved from 34 percent in fiscal 1993 to 36 percent in
fiscal 1994. This increase was attributable to improved efficiencies in
manufacturing new products. A favorable product mix further enhanced the gross
margin. Partially offsetting these cost improvements was a warranty reserve of
$660,000 established in the fourth quarter of fiscal 1994 to refurbish the units
delivered in fiscal 1992, 1993 and August of 1994 under the Army contract. In
the lengthy corrective action program related to the temporary suspension of
shipments noted above, we identified the problems and reached an agreement with
the U.S. Army on the corrections needed in June of fiscal 1994, thus enabling us
to estimate the amount of reserve required.
Operating expenses increased 13 percent over fiscal 1993. Fiscal 1994
operating expenses represented 33 percent of 1994 sales, while fiscal 1993
operating expenses were 31 percent of 1993 sales. Selling expenses increased 20
percent, administrative expenses increased 9 percent and engineering expenses
increased 10 percent. Sales commissions were up 13 percent, due mainly to new
communications and spectrum analyzer products using sales representatives rather
than stocking distributors. Sales promotional and advertising expenses were also
up 13 percent. The remainder of the selling expense increase was attributable to
the addition of a direct sales force to replace and/or supplement former sales
representative firms. Administrative expenses increased based on a combination
of several factors, most significant of which was higher depreciation and
intangibles amortization related to the implementation of FASB Statement No.109
"Accounting for Income Taxes" as of July 1, 1993. Engineering expenses increased
primarily in research and development for the cellular products, the remote
FiberCheck-Registered Trademark- 5000 product and mini-OTDR.
The increase in interest expense was attributable to inventory build-up for
the U.S. Army contract and anticipated large orders for the FiberCheck-
Registered Trademark- 5000 system expected in the fourth quarter of fiscal 1994
and early fiscal 1995.
The Company's fiscal 1994 effective income tax rate was 42 percent compared
to 51 percent for fiscal 1993. The improvement is partially attributable to the
treatment of the amortization of intangible assets in fiscal 1994 as a result
of the implementation of FASB Statement No.109. A larger than anticipated
research and development tax credit also reduced the effective tax rate by 8.3
percent as reported in Note 4 of the Notes to the Consolidated Financial
Statements. As a result of this increase in the research and development tax
credit, the effective income tax rate of 51 percent used to estimate tax expense
for the nine months ended March 31, 1994, was significantly higher than the
effective income tax rate for all of fiscal 1994. The adjustment to income tax
expense for this change in estimate was recorded in the fourth quarter.
No cash dividends were paid in fiscal 1994 or fiscal 1993. The Board of
Directors periodically reviews the appropriateness of dividend payments taking
into consideration numerous factors including the Company's cash requirements
and performance.
10
I F R S Y S T E M S , I N C .
- -------------------------------------------------------------------------------
FINANCIAL REVIEW
- -------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a strong financial position, with working capital of
$22,948,000 at June 30, 1995. During fiscal 1995 and 1994, the Company generated
$3,900,000 and $2,100,000, respectively, of cash from operations. The increase
in fiscal 1995 was primarily due to a combination of an increase in net income
together with a reduction in accounts receivable. Cash generated from operations
in both 1995 and 1994 was more than sufficient to fund the increases in
inventories necessary to support the Companies increase in sales. Net property
and equipment additions were $1,300,000, $2,600,000 and $2,400,000 for fiscal
1995, 1994 and 1993, respectively. These additions were funded through a
combination of cash flow from operations and borrowings on the lines of credit.
It is anticipated that fiscal 1996 additions, estimated to be $2.9 million,
will be funded from operations.
Effective June 21, 1995 the Company acquired the assets of York Technology
Companies. The total purchase price of approximately $6,900,000 consisted of
cash consideration of approximately $4,728,000, issuance of a non-interest
bearing term note in the amount of $1,872,000 due December 31, 1996 and related
transaction costs. See Note 2 of the Notes to Consolidated Financial Statements
for further information concerning this acquisition.
The Company has unsecured lines of credit for $10,000,000 which expire on
June 30, 1996. At June 30, l995, available credit under these lines aggregated
$4,455,000. In the Company's opinion, these lines together with cash generated
from operations will be sufficient to meet the Company's working capital needs
in fiscal 1996.
INFLATION
Changes in product mix from year to year and highly competitive markets
make it very difficult to accurately define the impact of inflation on profit
margins. The Company believes that during the recent period of moderate
inflation it has been able to reduce inflationary effects by vendor partnering
arrangements and continuing expense control.
MARKET PRICE DATA
The Company's common stock is traded on the national over-the-counter
market under the NASDAQ symbol IFRS. The approximate number of shareholders of
record as of September 11, 1995, was 1,533. The high and low sales prices of the
Company's common shares for the fiscal quarters for the past two years are set
forth below.
STOCK PRICE PER SHARE
1995 1994
- ---------------------------------------------------
Quarters High Low High Low
First 7 3/4 6 1/2 9 3/4 6 3/4
Second 10 3/4 7 9 1/2 6 1/2
Third 13 3/4 9 5/16 9 6 1/2
Fourth 14 1/2 9 3/4 9 1/4 7
11
I F R S Y S T E M S , I N C .
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
JUNE 30 1995 1994
- --------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 661,818 $ 63,871
Accounts receivable, less
allowance for doubtful accounts of
$472,381 in 1995 and $240,722 in 1994 11,819,073 13,758,528
Inventories:
Finished products 8,579,212 6,308,476
Work in process 8,692,138 7,824,314
Materials 6,789,556 4,999,696
- --------------------------------------------------------------------------------------------------
24,060,906 19,132,486
Prepaid expenses and sundry 296,294 252,698
Deferred income taxes (NOTE 4) 822,000 851,000
- --------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 37,660,091 34,058,583
PROPERTY AND EQUIPMENT
Land 182,159 182,159
Buildings 3,938,003 2,802,681
Machinery 9,559,595 8,604,187
Allowances for depreciation (deduction) (6,203,766) (4,906,053)
- --------------------------------------------------------------------------------------------------
7,475,991 6,682,974
PROPERTY UNDER CAPITAL LEASE (NOTE 3)
Building 2,545,272 2,545,272
Machinery 890,387 910,944
Amortization (deduction) (1,123,591) (933,307)
- --------------------------------------------------------------------------------------------------
2,312,068 2,522,909
OTHER ASSETS (NOTES 2 AND 4)
Cost in excess of net assets acquired, less
accumulated amortization of $1,271,289 in
1995 and $907,640 in 1994 9,843,303 6,454,683
Patents, trademarks and other intangibles,
less accumulated amortization of $1,202,439
in 1995 and $774,208 in 1994 604,561 1,032,792
Loan proceeds appropriated for debt service (NOTE 3) 350,000 350,000
Other 156,374 130,287
- --------------------------------------------------------------------------------------------------
10,954,238 7,967,762
- --------------------------------------------------------------------------------------------------
TOTAL ASSETS $58,402,388 $51,232,228
- --------------------------------------------------------------------------------------------------
-----------------------------
12
I F R S Y S T E M S , I N C .
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
JUNE 30 1995 1994
- --------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank borrowings (NOTE 3) $ 5,545,000 $ 3,720,000
Accounts payable 3,500,011 4,291,122
Accrued compensation and payroll taxes 2,187,000 1,703,306
Other liabilities and accrued expenses 2,807,586 1,547,847
Current maturity of capital lease obligations 250,865 230,217
Current maturity of long-term debt 87,670 408,395
State and local taxes 134,825 157,488
Federal income taxes 198,997 501,858
- --------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 14,711,954 12,560,233
CAPITAL LEASE OBLIGATIONS (NOTE 3) 2,346,224 2,602,206
LONG-TERM DEBT (NOTE 3) 2,634,794 816,790
DEFERRED INCOME TAXES (NOTE 4) 73,000 451,000
SHAREHOLDERS' EQUITY (NOTE 6)
Preferred Stock, $.01 par value:
Authorized shares -- 1,000,000, none issued -- --
Common Stock, $.01 par value:
Authorized shares -- 50,000,000
Issued shares -- 6,177,500 61,775 61,775
Additional paid-in capital 6,187,357 6,573,937
Cost of common stock in treasury -- 689,784
shares in 1995 and 920,947 shares in 1994
(deduction) (5,879,786) (7,849,294)
Retained earnings 38,267,070 36,015,581
- --------------------------------------------------------------------------------------------------
Total shareholders' equity 38,636,416 34,801,999
- --------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $58,402,388 $51,232,228
- --------------------------------------------------------------------------------------------------
-----------------------------
SEE ACCOMPANYING NOTES.
13
I F R S Y S T E M S , I N C .
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
YEARS ENDED JUNE 30 1995 1994 1993
- -------------------------------------------------------------------------------------
SALES $75,994,210 $65,073,019 $60,791,203
COST OF PRODUCTS SOLD 47,527,681 41,466,589 39,858,884
- -------------------------------------------------------------------------------------
GROSS PROFIT 28,466,529 23,606,430 20,932,319
OPERATING EXPENSES
Selling 9,173,781 7,867,046 6,580,854
Administrative 5,580,435 4,757,356 4,344,761
Engineering 10,028,918 8,980,361 8,155,392
- -------------------------------------------------------------------------------------
24,783,134 21,604,763 19,081,007
- -------------------------------------------------------------------------------------
OPERATING INCOME 3,683,395 2,001,667 1,851,312
OTHER INCOME (EXPENSE)
Interest income 61,886 72,531 115,393
Interest expense (484,320) (619,527) (413,392)
Other, net 233,528 236,539 218,577
- -------------------------------------------------------------------------------------
(188,906) (310,457) (79,422)
- -------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 3,494,489 1,691,210 1,771,890
INCOME TAXES (NOTE 4) 1,243,000 704,000 895,000
- -------------------------------------------------------------------------------------
NET INCOME $ 2,251,489 $ 987,210 $ 876,890
- -------------------------------------------------------------------------------------
------------------------------------------
NET INCOME PER COMMON SHARE $0.41 $0.19 $0.17
- -------------------------------------------------------------------------------------
------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING 5,456,162 5,237,271 5,220,304
- -------------------------------------------------------------------------------------
------------------------------------------
SEE ACCOMPANYING NOTES.
14
I F R S Y S T E M S , I N C .
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL TREASURY STOCK UNAMORTIZED
-------------------- PAID-IN -------------------- RESTRICTED STOCK RETAINED
SHARES AMOUNT CAPITAL SHARES AMOUNT COMPENSATION EARNINGS
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1992 6,177,500 $61,775 $6,566,382 825,906 $7,592,695 $77,067 $34,151,481
Net income -- -- -- -- -- -- 876,890
Purchase for treasury -- -- -- 154,950 768,102 -- --
Incentive stock options exercised -- -- (58,329) (18,022) (154,492) -- --
Restricted stock grants (NOTE 6):
Stock grant terminations -- -- 26,311 3,522 36,981 (10,016) --
Amortization -- -- -- -- -- (35,262) --
Change in market value of shares -- -- 218,292 -- -- (10,436) --
Stock granted -- -- (110,078) (12,100) (110,199) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1993 6,177,500 61,775 6,642,578 954,256 8,133,087 21,353 35,028,371
Net income -- -- -- -- -- -- 987,210
Incentive stock options exercised -- -- (58,514) (23,709) (202,001) -- --
Restricted stock grants (NOTE 6):
Amortization -- -- -- -- -- (21,353) --
Change in market value of shares -- -- (12,431) -- -- -- --
Stock granted -- -- 2,304 (9,600) (81,792) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1994 6,177,500 61,775 6,573,937 920,947 7,849,294 -- 36,015,581
Net income -- -- -- -- -- -- 2,251,489
Incentive stock options exercised -- -- (382,064) (92,878) (791,320) -- --
Conversion of Photon notes -- -- (66,916) (128,685) (1,096,396) -- --
Restricted stock grants (NOTE 6):
Stock granted -- -- 62,400 (9,600) (81,792) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1995 6,177,500 $61,775 $6,187,357 689,784 $5,879,786 $ -- $38,267,070
- -----------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
15
I F R S Y S T E M S , I N C .
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
YEARS ENDED JUNE 30 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 2,251,489 $ 987,210 $ 876,890
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation of property and equipment 1,830,371 1,698,109 1,492,295
Amortization of intangibles 791,880 796,728 713,285
Amortization of property under capital lease 190,284 233,081 251,018
Deferred income taxes (460,000) (370,000) (80,796)
Deferred compensation expense 62,400 93,025 263,457
Utilization of acquired tax loss carryforwards 111,000 351,000 340,913
Changes in operating assets and liabilities
(net of effects of acquired businesses):
Accounts receivable 1,939,455 (492,368) (5,883,421)
Inventories (3,137,089) (2,299,311) (1,945,901)
Other current assets (43,596) 40,832 (28,976)
Accounts payable and accrued liabilities 651,853 540,266 1,485,392
Other current liabilities (325,524) 483,968 522,514
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,862,523 2,062,540 (1,993,330)
INVESTING ACTIVITIES
Payments for acquired businesses (4,728,000) -- --
Purchases of property and equipment, net (1,253,097) (2,565,147) (2,366,167)
Sundry (18,952) 332,954 (359,355)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (6,000,049) (2,232,193) (2,725,522)
FINANCING ACTIVITIES
Purchases of capital stock for treasury -- -- (768,102)
Proceeds from bank term loan 720,000 -- --
Principal payment on convertible securities (65,242) -- --
Principal payment on capital lease obligations (235,334) (234,489) (248,855)
Proceeds from exercise of Common Stock options 491,049 143,487 96,163
Proceeds from short-term bank borrowings 29,905,000 22,355,000 19,430,000
Principal payments on short-term bank borrowings (28,080,000) (22,095,000) (15,970,000)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,735,473 168,998 2,539,206
- -----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 597,947 (655) (2,179,646)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 63,871 64,526 2,244,172
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 661,818 $ 63,871 $ 64,526
- -----------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------
SEE ACCOMPANYING NOTES.
16
I F R S Y S T E M S , I N C .
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of all subsidiaries after elimination of intercompany accounts and
transactions.
INVENTORIES: Inventories are valued at the lower of cost (first-in, first-out
method) or market.
INTANGIBLE ASSETS: The cost in excess of net assets acquired (goodwill) and the
cost of patents, trademarks and other intangible assets are amortized by the
straight-line method over periods ranging from 3 to 20 years. The carrying value
of goodwill is reviewed if the facts and circumstances suggest that it may be
impaired. If this review indicates that goodwill will not be recoverable, as
determined based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the Company's carrying value of the goodwill is
reduced to fair value.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost. Depreciation
is computed by straight-line and double-declining methods.
PROPERTY UNDER CAPITAL LEASE: Property under capital lease is recorded at the
lower of the fair market value of the leased property or the present value of
the minimum lease payments. Amortization of leased property is computed by the
straight-line method over the useful life of the asset.
LONG-TERM CONTRACTS: Sales and cost of sales on long-term contracts are
recorded as deliveries are made. Estimates of cost to complete are revised
periodically throughout the lives of the contracts, and any estimated losses on
contracts are recorded in the accounting period in which the revisions are
made.
NET INCOME PER COMMON SHARE: Net income per common share is computed on the
basis of the weighted average number of shares outstanding during each year plus
the dilutive effect, if any, of outstanding common stock equivalents.
CASH EQUIVALENTS: The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
NOTE 2 -- ACQUISITION
On June 21, 1995, the Company consummated the acquisition of substantially
all of the assets of York Technology Limited, a company incorporated in England
("York Tech Ltd."), and York Technology Inc., a New Jersey corporation, as well
as the real estate and building previously leased by York Tech Ltd. The acquired
businesses are involved in the research, development, design, manufacture and
sale of quality assurance testing equipment for optical fibers. The total
purchase price, including estimated direct costs of acquisition, was
approximately $6,900,000 and consisted of cash consideration of approximately
$4,728,000, the issuance of a non-interest bearing term note in the amount of
$1,872,000 due December 31, 1996, and related transaction costs. The purchase
agreement specifies that the purchase price may be increased or decreased by an
amount not to exceed $425,000, based on the level of sales achieved by the
acquired businesses in fiscal 1996. Any such change in purchase price will be
reflected as an adjustment to cost in excess of net assets acquired. The
$1,872,000 term note may be satisfied, at the option of the Company, by the
issuance of the Company's common stock. In connection with the purchase of the
real estate and building, the Company obtained a term loan with a bank in the
amount of $720,000.
The acquisition has been accounted for as a purchase, and accordingly, the
net assets and results of operations are included in the consolidated financial
statements from the effective date of acquisition. The purchase price has been
allocated to the assets based on their estimated fair values at the date of
acquisition.
Allocation of the purchase price was as follows
(IN THOUSANDS):
- ----------------------------------------
Inventories $1,791
Intangibles 3,752
Property and equipment 1,357
- ----------------------------------------
$6,900
- ----------------------------------------
-------
On an unaudited pro forma basis, sales, net income and net income per share
for the year ended June 30, 1995, were $82,991,000, $1,663,000 and $.30
respectively, and for the year ended June 30, 1994, were $73,778,000, $1,192,000
and $.23, respectively. This pro forma data presents the consolidated results of
operations as if the acquisition had occurred on July 1, 1993, after giving
effect to certain adjustments, including amortization of intangibles, increased
interest expense and related income tax effects. The pro forma results have been
prepared for comparative purposes only and do not purport to indicate the
results of operations which would actually have occurred had the acquisition
been in effect on the date indicated, or which may occur in the future.
17
I F R S Y S T E M S , I N C .
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 3 -- DEBT AND LEASE ARRANGEMENTS
Long-term debt consisted of the following:
1995 1994
- ---------------------------------------------------------------------------
Term note payable to shareholders
of York Tech Ltd. (NOTE 2) $1,872,000 $ --
Term loan payable to bank, due
in 180 monthly installments of
principal and interest of $7,598,
interest at the bank's base rate
plus 3% (NOTE 2) 720,000 --
Convertible securities 130,464 1,225,185
- ---------------------------------------------------------------------------
2,722,464 1,225,185
Less current maturitites 87,670 408,395
- ---------------------------------------------------------------------------
$2,634,794 $ 816,790
- ---------------------------------------------------------------------------
--------------------------------
CONVERTIBLE SECURITIES: In connection with the 1992 acquisition of Photon
Kinetics, Inc., a wholly-owned subsidiary (PK), the Company issued $1,225,185 in
five year, 10 percent unsecured notes convertible into IFR Systems common stock
at a conversion rate of $8.00 per share. The notes may be converted in whole or
in part, at the option of the holder, before April 1, 1997. During 1995, certain
note holders exercised their right to convert notes into stock. Total shares
exercised were 128,685 at a conversion value of $1,029,480. Of the remaining
outstanding balance of $130,464, $65,232 matures in both 1996 and 1997.
CAPITAL LEASES: In May 1989, the Company entered into a capital lease to
finance an addition to its office and manufacturing facility. This lease was
entered into in connection with an issuance of industrial revenue bonds (the
Bonds) by the City of Goddard, Kansas (the City). The Company has guaranteed
the future repayment of all amounts due relating to the Bonds. The City has
retained title to the new facilities and related equipment; however, the Company
has the option to purchase the facilities and equipment for a nominal amount
after repayment in full of all amounts due relating to the Bonds. Under the
terms of the lease, the Company is required to make quarterly payments in an
amount sufficient to pay the principal and interest installments of the Bonds
when due. The Bonds mature serially over a 15 year period which commenced
May 1, 1990, and are callable for early redemption by the Company after eight
years. Upon the occurrence of certain events, the Bonds are subject to
immediate redemption at the option of each Bond holder. These events include the
acquisition or right to acquire beneficial ownership of 25% of the outstanding
Common Stock (unless waived by the Board of Directors), the subsequent
determination that the Bonds are taxable or other specified events.
Loan proceeds appropriated for debt service consist of Bond proceeds held
in restricted trust funds. The Company is required to maintain a minimum of
$350,000 on deposit in the trust accounts until the Bonds are paid in full.
The Company has other capital lease arrangements to finance the acquisition
of equipment. Future minimum lease payments, based upon scheduled redemptions of
the Bonds and payments under other lease arrangements, as of June 30, 1995, are
as follows:
- -------------------------------------------------------------------------------
1996 $ 465,450
1997 430,726
1998 411,021
1999 410,763
2000 408,804
Thereafter 1,622,596
- -------------------------------------------------------------------------------
Total minimum lease payments 3,749,360
Amounts representing interest 1,152,271
- -------------------------------------------------------------------------------
Present value of minimum lease payments 2,597,089
Current maturities 250,865
- -------------------------------------------------------------------------------
Long-term portion $ 2,346,224
- -------------------------------------------------------------------------------
-------------------
OPERATING LEASES: The Company also leases certain facilities and equipment
under operating leases which expire over the next one to five years. The
equipment leases provide the Company with the option after the initial lease
term to purchase the property at the then fair value, renew its lease at the
then fair rental value for a period of one year or return the equipment to the
lessor. Generally, management expects that after the initial lease term the
equipment will be purchased for the then fair value.
Minimum payments for operating leases having initial or remaining
noncancelable terms in excess of one year are as follows:
- -------------------------------------------------------------------------------
1996 $ 642,209
1997 566,674
1998 535,529
1999 522,532
2000 265,393
- -------------------------------------------------------------------------------
Total minimum lease payments $ 2,532,337
- -------------------------------------------------------------------------------
-------------------
Total rent expense for all operating leases amounted to appproximately
$466,000, $679,000 and $1,250,000 for 1995, 1994 and 1993, respectively.
18
I F R S Y S T E M S , I N C .
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
LINES OF CREDIT: The Company has available unsecured lines of credit
aggregating $10,000,000 which expire on June 30, 1996. As of June 30, 1995,
the Company has unused lines of credit aggregating $4,455,000. The interest rate
on the outstanding portion of the lines of credit is 1/2% below prime (8.5% at
June 30, 1995, and 6.75% at June 30, 1994).
INTEREST PAID: Interest paid during 1995, 1994 and 1993 was approximately
$495,000, $547,000 and $484,000, respectively.
NOTE 4 -- INCOME TAXES
Effective July 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes." As permitted under the new rules, prior
years' financial statements were not restated.
The cumulative effect of adopting Statment No. 109 was not material. For
the year ended June 30, 1994, application of the new income tax rules decreased
income before income taxes by $117,000 because of increased depreciation and
amortization expense as a result of Statment No. 109's requirement to report
assets acquired in prior business combinations at their pretax amounts. The
significant components of the changes in the balance sheet resulting from the
adoption of Statment No. 109 were as follows: cost in excess of net assets
acquired decreased by $837,000, patents, trademarks, and other intangibles
increased by $497,000 and the deferred tax assets increased by $194,000.
At June 30, 1995, the Company had net operating loss carryforwards of
$1,393,000 for income tax purposes that expire in years 2001 and 2002, and
unused research and development and investment tax credits of $645,000 and
$51,000, respectively, that expire in years 1995 through 2005. The
carryforwards resulted from the Company's March 31, 1992, acquisition of Photon
Kinetics. For financial reporting purposes, a valuation allowance of $925,000
has been recognized to offset the deferred tax assets related to those
carryforwards. When realized through a reduction in the valuation allowance, the
tax benefit from the carryforwards will be applied to reduce goodwill related to
the acquisition.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets for the years ended as of
June 30 are as follows (IN THOUSANDS):
1995 1994
- --------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Tax over book depreciation $ 632 $ 639
Amortization of intangibles 205 430
- --------------------------------------------------------------------
Total deferred tax liabilities $ 837 $1,069
- --------------------------------------------------------------------
DEFERRED TAX ASSETS:
Tax credit carryforwards $ 696 $ 699
Net operating loss carryforwards 474 585
Inventory reserve 460 354
Warranty reserve 290 224
Other-net 743 607
- --------------------------------------------------------------------
Total deferred tax assets 2,663 2,469
Valuation allowance for deferred tax assets (1,077) (1,000)
- --------------------------------------------------------------------
Net deferred tax assets 1,586 1,469
- --------------------------------------------------------------------
Net total deferred tax assets $ 749 $ 400
- --------------------------------------------------------------------
--------------------
The composition of the provision for income taxes is as follows (IN
THOUSANDS):
Deferred
Liability Method Method
----------------- --------
1995 1994 1993
- ---------------------------------------------------------
CURRENT:
Federal $1,271 $ 618 $ 487
State 321 105 148
- ---------------------------------------------------------
Total current 1,592 723 635
Benefit of net operating
loss carryforward 111 351 341
Deferred federal (460) (370) (81)
- ---------------------------------------------------------
$1,243 $ 704 $ 895
- ---------------------------------------------------------
----------------------------
The effective income tax rate varied from the statutory federal income tax
rate as follows for the years ended June 30:
Deferred
Liability Method Method
---------------- ---------
1995 1994 1993
- ----------------------------------------------------------------
Statutory federal income
tax rate 34.0% 34.0% 34.0%
Increases (decreases):
State income taxes,
net of federal tax benefit 6.1 4.1 5.5
Amortization of goodwill
and intangibles 3.5 9.9 16.8
Research and development
tax credits (7.5) (8.3) --
Other (.5) 1.9 (5.8)
- ----------------------------------------------------------------
35.6% 41.6% 50.5%
- ----------------------------------------------------------------
--------------------------
Income tax payments for 1995, 1994 and 1993 were approximately $1,463,000,
$571,000 and $0, respectively.
NOTE 5 -- RESEARCH AND DEVELOPMENT COSTS
Research and development costs were $7,892,000, $7,505,000 and $6,107,000,
for 1995, 1994 and 1993, respectively.
19
I F R S Y S T E M S , I N C .
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 6 -- SHAREHOLDERS' EQUITY
INCENTIVE STOCK OPTION PLANS: The Company has two incentive stock option plans
- -- the 1985 and 1988 Plans (the Plans). Under the 1985 and 1988 Plans, 100,000
shares and 300,000 shares, respectively, of Common Stock have been reserved for
issuance. The Plans permit the granting of qualified stock options to officers
and key employees. The option price per share under the Plans is not to be less
than the fair market value of a share of Common Stock on the date of grant.
Incentive stock options exercised amounted to 62,678 shares in 1995, 21,309
shares in 1994 and 18,022 shares in 1993. The purchase price per share averaged
$6.81, $6.08 and $5.34 in 1995, 1994 and 1993, respectively.
NONQUALIFIED STOCK OPTION PLAN: In November 1992, shareholders of the Company
approved the 1992 Nonqualified Stock Option Plan whereby all employees of the
Company are eligible to be granted nonqualified stock options. A total of
500,000 authorized but unissued or treasury shares of the Company's Common Stock
were reserved for grant under the plan. The Board of Directors determines the
time or times at which options will be granted, selects the employees to whom
options will be granted, and determines the number of shares covered by each
option, purchase price, time of exercise and other terms. Nonqualified stock
options exercised amounted to 30,200 shares in 1995 and 2,400 shares in 1994.
The purchase price per share averaged $6.87 and $6.88 in 1995 and 1994,
respectively.
The following presents information regarding options granted through June
30, 1995:
Options
Outstanding
Available and Option Price
for Grant Exercisable Per Share
- -----------------------------------------------------------------
The 1985 Plan 2,625 43,150 $6.125 to $11.25
The 1988 Plan 3,838 170,058 2.97 to 12.50
The 1992 Plan 86,400 75,000 6.75 to 11.375
RESTRICTED STOCK GRANT PLAN: On February 27, 1989, the shareholders of the
Company approved a restricted stock grant plan whereby officers and key
employees may be granted restricted shares of the Company's Common Stock. The
restrictions lapse over various vesting periods not to exceed ten years. A
total of 300,000 authorized but unissued or treasury shares of the Company's
Common Stock were reserved for grant under the plan. These restricted shares may
be granted during the next ten years at a price equal to par value. In 1989 the
Company made initial grants of 199,933 shares and certain cash benefits with the
restrictions lapsing over a five year vesting period which commenced July 1,
1989. In 1990 the Company made additional grants of 4,000 shares and certain
cash benefits with the restrictions lapsing over a five year vesting period
which commenced June 30, 1990. In 1993 the Company made additional grants of
12,100 shares and certain cash benefits with restrictions lapsing on June 30,
1993. In 1995 and 1994, the Company made additional grants of 9,600 shares
with restrictions lapsing June 30, 1995 and 1994, respectively.
The market value of restricted shares granted is being amortized as
compensation expense over the vesting period. Total expense of $62,400,
$104,000 and $367,000 was recognized in 1995, 1994 and 1993, respectively, in
connection with the restricted stock grant plan. The shares reserved for future
grants are 85,694 as of June 30, 1995.
SHAREHOLDER RIGHTS PLAN: The Board of Directors of the Company adopted a
Shareholder Rights Plan on February 28, 1989, whereby common stock purchase
rights (the Rights) were distributed as a dividend at the rate of one Right for
each share of the Company's Common Stock held as of the close of business on
March 10, 1989. The Rights will expire on February 27, 1999. Each Right
entitles shareholders to buy one share of common stock of the Company at an
exercise price of $50 per share. The Rights are exercisable only if a person or
group acquires beneficial ownership of 20% or more of the Company's Common Stock
or announces a tender or exchange offer upon consummation of which such person
or group would beneficially own 20% or more of the Common Stock.
Following the acquisition of 20% or more, but less than 50%, of the
Company's Common Stock by a person or group, the Board of Directors may
authorize the exchange of the Rights (except those owned by the acquirer), in
whole or in part, for shares of the Company's Common Stock at an exchange ratio
of one share for each Right.
The Board of Directors of IFR will generally be able to redeem the Rights
at $.01 per Right at any time prior to the time that a 20% position in the
Company has been acquired. If a bidder who owns less than 5% of the Common
Stock offers to buy all of the Common Stock at a price which a nationally
recognized investment banker states in writing is fair and if the bidder has
full financing for the bid, the shareholders of the Company may cause the Rights
to be automatically redeemed immediately prior to the consummation of the offer,
provided that such offer or another offer is consummated within 60 days at a
price per share that is not less than the price approved by the shareholders.
20
I F R S Y S T E M S , I N C .
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
OUTSIDE DIRECTOR PLAN: In November 1989, an Outside Director Compensation,
Stock Option and Retirement Plan (Outside Director Plan) was approved by the
shareholders. The Outside Director Plan provides that each director who is not
an employee of the Company will be granted an option to purchase 1,000 shares of
the Company's Common Stock on the third business day after the annual meeting of
the shareholders in each of the next ten years, commencing in 1989. The total
number of shares to be issued under the Outside Director Plan cannot exceed
60,000 shares. The option price under the Outside Director Plan is not to be
less than the fair market value of a share of Common Stock on the date of grant.
At June 30, 1995, 27,000 options were outstanding, 22,000 of which are
currently exercisable, 4,000 at an option price of $12.50 per share, 4,000 at an
option price of $6.25 per share, 9,000 at an option price of $6.75 per share,
and 5,000 at an option price of $8.75 per share, with the remaining 5,000
options becoming exercisable in November 1995, at an option price of $10.25 per
share. No options have been exercised under the Outside Director Plan.
NOTE 7 -- INDUSTRY SEGMENTS
The Company operates exclusively in one dominant industry segment, the
electronic test and measurement equipment industry. The primary use of its
products is for receiving, analyzing and transceiving video, voice and data
information.
Sales include $16,400,000, $8,500,000, and 10,200,000 in 1995, 1994 and
1993, respectively, to the United States government.
Export sales to unaffiliated customers by destination of sales are
summarized as follows (IN THOUSANDS):
YEARS ENDED JUNE 30
------------------------------
1995 1994 1993
- -------------------------------------------------------------
Europe $ 5,184 $ 4,400 $ 5,842
Western Hemisphere 4,884 2,719 2,491
Pacific Rim 10,090 3,488 4,447
Other 5,523 6,270 5,275
- -------------------------------------------------------------
$25,681 $16,877 $18,055
- -------------------------------------------------------------
---------------------------------
NOTE 8 -- EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS: The Company has a trusteed defined contribution retirement
plan for substantially all employees. Company contributions are discretionary
with respect to the plan. Employee benefits are based on amounts accumulated
from contributions and investment gains or losses. Because it is a defined
contribution plan, there are no unfunded past service costs. Total retirement
plan expenses for 1995, 1994 and 1993 were $1,036,000, $0 and $383,000,
respectively. These amounts were accrued at year end and are included in the
balance sheet caption Other Liabilities and Accrued Expenses.
In January 1993, the Company established a savings and investment plan for
substantially all employees under Section 401(k) of the Internal Revenue Code.
Employees may contribute to the plan up to 12% of their salary. Matching
Company contributions are discretionary with respect to the plan. During 1995,
1994 and 1993, the Company matched 50% of each employee's contribution up to 4%
of their salary. Company contributions charged to expense in 1995, 1994 and
1993, were $254,000, $255,000 and $123,000, respectively.
VEBA TRUST: The Company has a voluntary employees' beneficiary association
(VEBA), which funds certain employee welfare plan benefits. The Company is
obligated to fund a trust as needed to provide for actual claims and trust
expenses incurred. Total VEBA expenses for 1995, 1994 and 1993 were $1,206,000,
$1,005,000 and $795,000, respectively.
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
The Company has a contract with the United States Army (the Army) under
which the Army had the option to purchase up to $50,000,000 of test instruments,
technical manuals, and other services at a fixed sales price during a five-year
period which ended December 1993. At June 30, 1995, the Company had received
orders totaling $46.5 million, of which $28.3 million had been shipped.
21
I F R S Y S T E M S , I N C .
- -------------------------------------------------------------------------------
RESPONSIBILITY FOR FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The management of IFR Systems, Inc. is responsible for the preparation of
the financial statements, the Annual Report and for the integrity and
objectivity of the information presented. The financial statements have been
prepared in conformity with generally accepted accounting principles and
necessarily include amounts which are estimates and judgments. The fairness of
the presentation in these statements of the Company's financial position,
results of operations and cash flows is reported on by the independent auditors.
To assist in carrying out the above responsibility, the Company has
internal systems which provide for selection of personnel, segregation of duties
and the maintenance of accounting policies, systems, procedures and related
controls.
Although no cost effective system can insure the elimination of errors, the
Company's systems have been designed to provide reasonable but not absolute
assurances that assets are safeguarded, that policies and procedures are
followed, and that the financial records are adequate to permit the production
of reliable financial statements.
The Audit Committee of the Board of Directors, which is composed of
directors who are not employees of the Company, meets regularly with Company
officers and independent auditors in connection with the adequacy and integrity
of the Company's financial reporting and internal controls.
/s/ Bruce C. Bingham
Bruce C. Bingham
TREASURER AND
CHIEF FINANCIAL OFFICER
22
I F R S Y S T E M S , I N C .
- -------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
- -------------------------------------------------------------------------------
Board of Directors
IFR Systems, Inc.
We have audited the accompanying consolidated balance sheets of IFR
Systems, Inc. as of June 30, 1995 and 1994, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended June 30, 1995. These 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of IFR Systems,
Inc. at June 30, 1995 and 1994, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended June 30,
1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Indianapolis, Indiana
August 1, 1995
23