SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ______
Commission File No. 000-02324
Aeroflex Incorporated
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(Exact name of registrant as specified in its charter)
Delaware 11-1974412
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
35 South Service Road, Plainview, New York 11803
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 694-6700
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Class Which Registered
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None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10 par value
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(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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. (The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing). As of September 18, 2001 - approximately $520,157,000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date (applicable only to
corporate registrants). Common Stock, par value $.10 per share; outstanding as
of September 18, 2001 - 59,669,985 (excluding 4,388 shares held in treasury).
Documents incorporated by reference: Part III - Registrant's definitive
proxy statement to be filed pursuant to Regulation 14A of the Securities Act of
1934.
ITEM ONE - BUSINESS
Overview
We use our advanced design, engineering and manufacturing abilities to produce
microelectronic, integrated circuit, interconnect and testing solutions. Our
products are used in the fiber optic, broadband cable, wireless and satellite
communications markets. We also design and manufacture motion control systems
and shock and vibration isolation systems which are used for commercial,
industrial and defense applications.
Our operations are grouped into three segments:
o Microelectronic Solutions
o Test Solutions
o Isolator Products
These segments, their products and the markets they serve are described below.
Microelectronic Solutions
The table below lists some of our products.
Market Substrates Assemblies/Modules Proprietary Modules
and Integrated
Circuits
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Fiber Optics Laser Diodes Application Specific Clock and Data
(including PIN Pre-Amplifiers Carrier Assemblies Recovery
Cable) Transimpedance APD Receiver Bessel Filters
Amplifiers Sub-Assemblies Modulator Drivers
Pre-Amplifiers Clock Recovery Limiting Amplifiers
Post-Amplifiers Synthesizers Lithium Niobate
Lithium Niobate Laser Diode Assemblies Modulators
Terminations Transmitter Assemblies Optical Switches
Mach-Zender Modulators Modulator Assemblies
Clock Recovery
PIN Receivers
APD Receivers
1 Ghz Pre- and Post-
Amplifiers
Trunk Amplifiers
Line Extenders
Power Doublers
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Wireless Receivers Memory Modules Application Specific
(including Handset Diplexers Multiplexers Integrated Circuits
Satellite) Handset Triplexers Data Communication Controllers
S, L, Ka, Ku Band Modules Memories
Transmit and Receive Micro Controllers LVDS Interconnects
Modules DC to DC Converters Programmable Logic
Amplifiers Voltage Regulators
Filters IF Switches
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Thin Film Circuits and Interconnects
We design, develop, manufacture and market advanced integrated fiber optic and
wireless interconnect products based on thin film manufacturing technology.
Primary product requirements for this advanced technology include the following
attributes:
o miniaturization;
o ease of assembly;
o improved thermal management;
o reduced power consumption; and
o critical component (laser) alignment.
Due to the unique dimensional, thermal and electrical capabilities of our PIMIC
interconnect technology, our products have become an essential component in:
o fiber optic transmitters, receivers and amplifiers;
o cable trunk amplifiers, line extenders, pre-amplifiers and power
doublers; and
o point-to-point and point-to-multipoint microwave radios.
Thin film interconnect technology allows fiber optic module manufacturers, such
as Nortel Networks, Lucent Technologies and JDS Uniphase, to achieve maximum
performance with a low cost of ownership and a high level of quality. Exacting
laser, optical lens and diode placement requirements, coupled with stringent
thermal management needs, make our advanced optical interconnect technology a
market leading choice among the major fiber optic module manufacturers.
Continued migration from 2.5 gigabit, or Gbit, transmission rates to 10 Gbit and
40 Gbit transmission rates results in increased output power levels and
operating frequencies, further driving the need for our advanced optical
interconnect technology.
Our products also play an increasingly important role in the development and
expansion of the broadband cable and HFC architecture. Applications in trunk
amplifiers, line extenders, pre- amplifiers, post-amplifiers and power doublers
has enabled greater bandwidth, improved loss characteristics and increased
channel capability at the systems level. Additionally, in the wireless
marketplace, the advance of dual and tri-mode handsets has resulted in our
design of a series of miniaturized diplexers and triplexers for these
communications devices.
Microelectronic Modules
We design, develop and manufacture sub-assemblies and modules for fiber optic
networks. These products primarily support the 10 to 40 Gbit fiber optic
networks. Our manufacturing equipment, methods and processes are designed to
maintain the critical tolerances required for fiber optic components and high
Gigahertz RF and microwave signals. Our manufacturing methods are designed to
use automatic placement equipment and batch processing for maximum cost
efficiency and reliability.
We are one of the world's leading manufacturers of space hybrid microcircuits.
We hold several prime space contractor certifications. We offer numerous
application specific multi-function modules and hybrid designs that are highly
reliable, small and lightweight; attributes that are significant for space
components.
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As a result of two acquisitions in 2001, we extended our core technologies in
microelectronics. Our acquisitions of TriLink Communications Corp. and
Amplicomm, Inc., and their products, complement our proprietary broadband module
products. TriLink's specialty is the application of Lithium Niobate technology
in broadband modulators and switches, while Amplicomm specializes in broadband
amplifiers optimized for driving modulators.
Silicon Integrated Circuits
We have been a designer and supplier of silicon integrated circuits for more
than 20 years. Our products include both custom and standard integrated circuits
such as databuses, transceivers, microcontrollers, microprocessors and memories.
Many of these circuits are radiation tolerant for satellite and space
applications. Our products are on over 100 aerospace platforms. Our standard and
semicustom circuits are available in the latest 0.6 and 0.25 micron silicon
wafer technologies.
The standard circuits include the primary processor, memory and databus
functionality, and the semi-custom gate arrays are available with up to three
million usable gates. These gate arrays are available in both radiation tolerant
and non-radiation tolerant technologies and have been used frequently to replace
field programmable gate array implementations. We have pioneered the use of
commercial foundries to produce radiation tolerant components, known as
Commercial RadHard, for the commercial space marketplace.
Our subsidiary, UTMC has developed a Content Addressable Memory (CAM) Engine,
the UTCAM-Engine'TM', which is beneficial for network and internet address
processing, image processing, pattern recognition, artificial intelligence
learning systems and database applications. The UTCAM-Engine'TM' is based on
0.35'u'm technology, runs at 100 MHz and delivers association matches in as
little as 70ns when using fast SRAM.
The UTMC Circuit Card Assembly capability consists of full assembly, test and
coat in a high mix/low-to-medium volume operation. UTMC's processes and test
capabilities provide for state-of-the-art manufacturing. UTMC's SpaceCard'TM'
combines best commercial practices of the circuit card assembly with UTMC's
radiation-hardened integrated circuits to provide CCA solutions for the
commercial space industry. UTMC's CCA operation also assembles the UT131
Embedded Controller Card, a UTMC Standard Product Card. The UT131 ECC is ideal
for space applications.
Test Solutions
Instrumentation
Our high-speed test equipment provides product enhancements to communications
systems manufacturers. Our line of frequency synthesizers offers the best
combination of high-speed and low phase noise available, covering all
communications frequencies. Our FS1000/1200 family of synthesizers are microwave
frequency synthesizers that have been developed to support the requirements of
mixed signal test systems used in the semiconductor market. Our test systems are
designed to dramatically reduce test time for radio frequency semiconductors
which allows end users to increase throughput without increasing costs. These
benefits are derived from a design architecture that yields superior phase noise
and switching speed performance - technology for which we believe we are
well-known in the industry.
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Our test system products allow communication manufacturers to test communication
satellite payloads and transmit/receive modules faster and more economically
than ever before. Our digital signal processing equipment and proprietary
software algorithms allow users to simultaneously measure multiple functions,
eliminating the need for individual instruments. These testers are based on our
proprietary software, firmware, frequency conversion and high-speed data
acquisition technologies and allow for higher throughputs and increased
flexibility.
Our acquisitions of Altair Cybernetics Corp. and RDL Inc. extended our
capabilities in Test Solutions. Altair Cybernetics brought the power and
flexibility of a modern software development platform to provide control and
user interface solutions for complex test and control environments. RDL enlarged
and enhanced our product offerings in communication test equipment and allowed
us to extend our comprehensive solutions to high speed testing requirements.
Motion Control Systems
Motion control systems includes three divisions: stabilization and tracking
devices, magnetic motors and scanning devices. We design, develop and produce
stabilization tracking devices and systems. These products play an important
role in high altitude aircraft, as well as in other aircraft, ships and ground
vehicles which require precise, highly stable mounting for cameras, antennae and
lasers. Magnetic motors are utilized in our stabilization and tracking systems
and in other applications where precise movement is required, such as for
positioning antennae, optical systems, mechanical vanes and valves. We make
electro-optical scanning devices that are low cost, lightweight thermal imaging
devices that detect targets based on thermal radiation contrasts with the
background. These sights are intended for use on standard issue United States
Army assault rifles and crew served weapons.
Isolator Products
We design, develop, manufacture and sell shock and vibration isolation systems.
These devices include rubber, spring and steel wire rope shock and vibration and
noise control devices. Purchasers of isolators are manufacturers or users of
equipment sensitive to shock and vibration who need to reduce shock/vibration to
levels compatible with equipment fragility to extend the useful life of their
equipment. There are multiple markets for isolation systems including
commercial, industrial and defense.
Customers
We have hundreds of customers in the communications, satellite,
aerospace/defense, transportation and construction industries. Except for Agere
(10.8%) in fiscal 2001; Teradyne (10.9%) and Lockheed Martin (10.3%) in fiscal
2000; and Lockheed Martin (12.0%) and Lucent Technologies (11.1%) in fiscal
1999, no one customer accounted for more than 10% of our net sales.
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Marketing and Distribution
We use a team-based sales approach to assist our personnel to closely manage
relationships at multiple levels of the customer's organization, including
management, engineering and purchasing personnel. Our integrated sales approach
involves a team consisting of a senior executive, a business development
specialist and members of our engineering department. Our use of experienced
engineering personnel as part of the sales effort enables close technical
collaboration with our customers during the design and qualification phase of
new communications equipment. We believe that this is critical to the
integration of our product into our customers' equipment. Some of our executive
officers are also involved in all aspects of our relationships with our major
customers and work closely with their senior management. We also use
manufacturers' representatives and independent sales representatives as needed.
Research and Development
Our research and development efforts primarily involve engineering and design
relating to:
o developing new products
o improving existing products
o adapting such products to new applications
o developing prototype components to bid on specific programs
Certain product development and similar costs are recoverable under contractual
arrangements and those that are not recoverable are expensed in the year
incurred. The costs of our self-funded research activities were approximately
$18.9 million for fiscal 2001, $11.6 million for fiscal 2000 and $10.1 million
for fiscal 1999. The increases are primarily attributable to the addition of the
expenses of our newly acquired companies and increased costs for the further
development of frequency synthesizers and high speed automatic test systems.
Also, in connection with our acquisitions of RDL, Inc. and TriLink
Communications Corp. in fiscal 2001, we allocated $1.5 million (for RDL) and
$1.0 million (for TriLink) of the purchase prices to incomplete research and
development projects. In connection with our acquisition of UTMC Microelectronic
Systems in February 1999, we allocated $3.5 million of the purchase price to
incomplete research and development projects. Since the research and development
projects had not reached technological feasibility at the time of the
acquisition, these amounts were charged to expense in the respective years in
addition to the self-funded research and development costs, in accordance with
generally accepted accounting principles.
Backlog
We include in backlog firm purchase orders or contracts providing for delivery
of products and services. At June 30, 2001, our order backlog was approximately
$105.8 million, approximately 83% of which was scheduled to be delivered on or
before June 30, 2002. Approximately 67% of this backlog represents commercial
contracts and approximately 33% of this backlog represents defense contracts.
Generally, government contracts are cancelable with payment to us of amounts
which we have spent under the contract together with a reasonable profit, if
any, while commercial contracts are not cancelable.
At June 30, 2000, our backlog of orders was approximately $119.3 million.
Approximately 89% of this backlog was scheduled to be delivered before June 30,
2001. Approximately 24% of this backlog represented orders for military or
national defense purposes.
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Competition
In all phases of our operations, we compete in both performance and price. In
the manufacture of microelectronics, we believe our primary competitors are NTK,
Texas Instruments, ILC/Data Devices Corp., Honeywell International and Kyocera
International. In the manufacture of test products, we believe our primary
competitors are Agilent Technologies and Rhode & Schwartz. In the manufacture of
isolators, we believe our primary competitor is Barry Controls, Inc. We also
experience significant competition from the in-house capabilities of our current
and potential customers. We believe that in all of our operations we compete
favorably in the principal competitive areas of:
o technology
o performance
o reliability
o quality
o customer service
o price
We believe that to remain competitive in the future, we will need to invest
significant financial resources in research and development.
To the extent that we are engaged in government contracts, our success or
failure, to a large measure, is based upon our ability to compete successfully
for contracts and to complete them at a profit. Government business is
necessarily affected by many factors such as variations in the military
requirements of the government and defense budget allocations.
Government Sales
Approximately 29% of our sales for fiscal 2001, 33% of our sales for fiscal 2000
and 42% of our sales for fiscal 1999 were to agencies of the United States
Government or to prime defense contractors or subcontractors of the United
States Government. Our overall dependence on the military has been declining due
to a focusing of resources towards developing standard products for commercial
markets. Our defense contracts have been awarded either on a bid basis or after
negotiation. The contracts are primarily fixed price contracts, though we also
have or had defense contracts providing for cost plus fixed fee. Our defense
contracts contain customary provisions for termination at the convenience of the
government without cause. In the event of such termination, we are generally
entitled to reimbursement for our costs and to receive a reasonable profit, if
any, on the work done prior to termination.
Manufacturing
We assemble, test, package and ship products at our manufacturing facilities
located in:
o Baldwin Park, California,
o Colorado Springs, Colorado,
o Boca Raton, Florida,
o Bloomingdale, New Jersey,
o Farmingdale, New York,
o Pearl River, New York,
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o Plainview, New York,
o Powell, Ohio,
o Conshohocken, Pennsylvania,
o Richardson, Texas and
o Elancourt, France
We have been manufacturing products for defense programs for many years in
compliance with stringent military specifications. Our microelectronic module
manufacturing is certified to the status of Class "K," which means qualified for
space. We believe we have brought to the commercial market the manufacturing
quality and discipline we have demonstrated in the defense market. For example,
many of our manufacturing plants are ISO-9001 or 9002 certified, our Plainview
and Farmingdale plants are also certified to the more stringent Boeing D1-9000
standard, and our Colorado Springs plant is also a QML (Qualified Manufacturers
List) supplier at V, Q and T levels.
Historically, our volume production requirements for the defense market did not
justify our widespread implementation of highly automated manufacturing
processes. Over the last several years, we have expanded our use of high-volume
manufacturing techniques for product assembly and testing. We believe that we
have the manufacturing capacity required to meet the growing demand for our
products.
The principal materials we use to manufacture and assemble our products are:
o ceramic,
o magnetic materials,
o gold,
o steel,
o aluminum,
o rubber,
o iron and
o copper.
Many of the component parts we use in our products are also purchased,
including:
o semiconductors,
o transformers and
o amplifiers.
Although we have several sole source arrangements, all the materials and
components we use, including those purchased from a sole source, are readily
available and are or can be purchased from time to time in the open market. We
have no long-term commitments for their purchase. No supplier provides more than
10% of our raw materials.
Patents and Trademarks
We own several patents, patent licenses and trademarks. In order to protect our
intellectual property rights, we rely on a combination of trade secret,
copyright, patent and trademark laws and employee and third-party nondisclosure
agreements. We also limit access to and distribution of our proprietary
information. While we believe that in the aggregate our patents and trademarks
are important to our operations, we do not believe that one or any group of them
is so important that its termination could materially affect us.
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Employees
As of June 30, 2001, we had approximately 1,250 employees, of whom 620 were
employed in a manufacturing capacity, and 630 were employed in engineering,
sales, administrative or clerical positions. Approximately 220 of our employees
are covered by two collective bargaining agreements. We believe that our
employee relations are satisfactory.
Regulation
Our operations are subject to various environmental, health and employee safety
laws. We have spent money and management has spent time complying with
environmental, health and worker safety laws which apply to our operations and
facilities and we expect that we will continue to do so. Our principal products
or services do not require any governmental approval. Compliance with
environmental laws has not historically materially affected our capital
expenditures, earnings or competitive position. We do not expect compliance with
environmental laws to have a material effect on us in the future.
Because we participate in the defense industry, we are subject to audit from
time to time for our compliance with government regulations by various agencies,
including (1) the Defense Contract Audit Agency, (2) the Defense Investigative
Service and (3) the Defense Logistics Agency. These and other governmental
agencies may also, from time to time, conduct inquiries or investigations
regarding a broad range of our activities. Responding to any audits, inquiries
or investigations may involve significant expense and divert management
attention. Also, an adverse finding in any audit, inquiry or investigation could
involve penalties that may have a material adverse effect on our business,
results of operation or financial condition.
We believe that we generally comply with all applicable environmental, health
and worker safety laws and governmental regulations. Nevertheless, we cannot
guarantee that in the future we will not incur additional costs for compliance
or that those costs will not be material.
Financial Information About Industry Segments
The sales and operating profits of each industry segment and the identifiable
assets attributable to each industry segment for each of the three years in the
period ended June 30, 2001 are set forth in Note 14 of Notes to Consolidated
Financial Statements.
ITEM TWO - PROPERTIES
Our executive offices and the manufacturing facilities of Aeroflex Laboratories
Incorporated, one of our subsidiaries, are an aggregate of approximately 69,000
square feet and are located in premises which we own in Plainview, Long Island,
New York.
Aeroflex Laboratories Incorporated also leases manufacturing facilities in
Farmingdale, Long Island, New York of approximately 20,000 square feet and Boca
Raton, Florida of approximately 11,000 square feet. The annual rental of these
properties is approximately $166,000 for Farmingdale and $164,000 for Boca
Raton.
Our subsidiary, Aeroflex MIC Technology Corporation, owns its manufacturing
facility in Pearl River, New York consisting of approximately 66,000 square
feet. MIC leases a manufacturing facility of approximately 29,000 square feet in
Richardson, Texas with an annual rent of approximately $185,000.
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Our subsidiary, Vibration Mountings and Controls, Inc., conducts manufacturing
operations at a plant located in Bloomingdale, New Jersey. The plant, which we
own, is approximately 72,000 square feet.
Our subsidiary, Aeroflex RDL, Inc., conducts manufacturing operations at a plant
located in Conshohocken, Pennsylvania. The plant, which we own, is approximately
50,000 square feet.
Our subsidiary, Aeroflex Lintek Corp., occupies approximately 20,000 square feet
of space in Powell, Ohio, with an annual rental of approximately $209,000.
Our subsidiary, Aeroflex UTMC Microelectronic Systems, Inc., conducts
manufacturing operations at a plant located in Colorado Springs, Colorado. The
plant, which we own, is approximately 102,000 square feet.
We believe that our facilities are adequate for our current and presently
foreseeable needs.
Legal Proceedings
Our former subsidiary Filtron Co. Inc.,was one of several defendants named in a
personal injury action initiated in 1994 by several plaintiffs in the Supreme
Court of the State of New York, County of Kings. Filtron's operations were
discontinued in October 1991.
The plaintiffs in the action are current or former employees of a company to
whom Filtron sold RFI filters/capacitors. According to the allegations of the
amended verified complaint, the plaintiffs and their dependents are seeking to
recover, respectively, directly and derivatively, on diverse theories of
negligence, strict liability and breach of warranty, for injuries allegedly
suffered from exposure to a liquid substance or material which Filtron
incorporated for a period of time in the RFI filters/capacitors which it
manufactured. The plaintiffs are seeking damages which cumulatively may exceed
$500 million. This action is in the discovery stage. We intend to defend against
this action vigorously. We believe that, considering our various defenses and
that we have product liability insurance, the outcome of this action will not
have a material adverse effect on us, however we cannot guarantee that will be
the case.
We are involved in various other routine legal matters. We believe the outcome
of these matters will not have a material adverse effect on us.
ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM FIVE -MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(a) Our common stock trades on the Nasdaq National Market under the symbol
"ARXX". Prior to March 21, 2000, our common stock was traded on the New York
Stock Exchange under the symbol "ARX". The following table sets forth, for the
calendar periods indicated, the high and low closing sales prices of our common
stock as reported by the Nasdaq National Market since March 21, 2000 and, prior
to March 21, 2000, the high and low closing sales prices of our common stock as
reported by the New York Stock Exchange. The prices have been adjusted to
reflect a five-for-four stock split that was paid on July 7, 2000 and a
two-for-one stock split that was paid on November 22, 2000.
Common Stock
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High Low
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1999
First Quarter............................... $ 7.35 $ 4.83
Second Quarter.............................. 7.90 5.20
Third Quarter............................... 8.63 4.88
Fourth Quarter.............................. 5.43 2.23
2000
First Quarter............................... 28.00 3.88
Second Quarter.............................. 19.88 10.40
Third Quarter............................... 24.31 12.84
Fourth Quarter.............................. 35.25 20.81
2001
First Quarter............................... 33.00 8.44
Second Quarter.............................. 15.60 7.53
Third Quarter (through September 18, 2001).. 12.09 7.00
(b) As of September 18, 2001, there were approximately 750 record holders
of our common stock.
(c) We have never declared or paid any cash dividends on our common stock.
There have been no stock dividends declared or paid on our common stock during
the past three years except for a five-for-four stock split, which was paid on
July 7, 2000 for record holders as of June 26, 2000 and a two-for-one stock
split, which was paid on November 22, 2000 for record holders as of November 16,
2000. We currently intend to retain any future earnings for use in the operation
and development of our business and for acquisitions and, therefore, do not
intend to declare or pay any cash dividends on our common stock in the
foreseeable future. In addition, our revolving credit, term loan and mortgage
agreement, as amended, prohibits us from paying cash dividends.
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ITEM SIX - SELECTED FINANCIAL DATA (Unaudited)
(In thousands, except percentages, footnotes and per share data)
(Restated, Note 2 to Consolidated Financial Statements)
Years ended June 30,
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2001 2000 1999 1998 1997
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Earnings Statement Data
Net Sales...................... $232,808 $188,750 $160,382 $121,959 $ 96,003
Net Income Before Cumulative
Effect of a Change in
Accounting................... 21,222(1) 14,379 9,765(2) 8,430 4,497
Net Income Before Cumulative
Effect of a Change in
Accounting Per Common Share
Basic...................... $0.37(1) $0.30 $0.22(2) $0.22 $0.14
Diluted.................... 0.35(1) 0.28 0.20(2) 0.20 0.13
Weighted Average Number of
Common Shares Outstanding
Basic...................... 58,124 48,189 45,011 37,555 31,664
Diluted.................... 61,041 51,474 48,371 41,867 37,100
June 30,
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2001 2000 1999 1998 1997
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Balance Sheet Data
Working Capital................ $152,374 $133,586 $ 50,060 $ 53,660 $ 25,568
Total Assets................... 310,252 249,495 165,672 124,762 81,298
Long-term Debt
(including current portion).. 13,333 15,085 31,371 11,481 28,938
Stockholders' Equity........... 255,121 201,644 101,826 86,761 34,740
Other Statistics
After Tax Profit Margin......... 9.1%(1) 7.6% 6.1%(2) 6.9% 4.7%
Return on Average Stockholders'
Equity....................... 9.3%(1) 9.5% 10.4%(2) 13.9% 13.9%
Stockholders' Equity
Per Share (3) $ 4.28 $ 3.59 $ 2.18 $ 1.97 $ 1.09
(1) Includes $1.5 million, or $990,000, net of tax, for the write-off of
in-process research and development acquired in connection with the
purchase of RDL, Inc. in October 2000 and $1.0 million for the write-off of
in-process research and development acquired in connection with the
purchase of TriLink Communications, Corp. in March 2001 (combined $.03 per
basic and diluted share).
(2) Includes $3.5 million ($.07 per diluted share and $.08 basic) for the
write-off of in-process research and development acquired in connection
with the purchase of UTMC Microelectronic Systems, Inc. in February 1999.
(3) Calculated by dividing stockholders' equity, at the end of the year, by the
number of shares outstanding at the end of the year.
Note: All share and per share amounts have been restated to reflect a
five-for-four stock split paid on July 7, 2000 and a two-for-one stock
split paid on November 22, 2000.
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ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We use our advanced design, engineering and manufacturing abilities to
produce microelectronic, integrated circuit, interconnect and testing solutions.
Our products are used in the fiber optic, broadband cable, wireless and
satellite communications markets. We also design and manufacture motion control
systems and shock and vibration isolation systems which are used for commercial,
industrial and defense applications. Our operations are grouped into three
segments:
o microelectronic solutions
o test solutions
o isolator products
Our consolidated financial statements include the accounts of Aeroflex
Incorporated and all of our subsidiaries. In October 2000, we merged with Altair
Aerospace Corporation. This transaction was accounted for as a
pooling-of-interests and, accordingly, for all periods prior to the business
combination, our historical consolidated financial statements have been restated
to include the accounts and results of operations of Altair. All of our
subsidiaries are wholly-owned except for Europtest, S.A., of which we own 96.8%,
and Aeroflex Amplicomm, Inc., of which we own 75%.
Our microelectronic solutions segment has been designing, manufacturing and
selling state-of-the-art microelectronics for the electronics industry since
1974. In January 1994, we acquired substantially all of the net operating assets
of the microelectronics division of Marconi Circuit Technology Corporation,
which manufactures a wide variety of microelectronic assemblies. In March 1996,
we acquired MIC Technology Corporation which designs, develops, manufactures and
markets microelectronics products in the form of passive thin film circuits and
interconnects. Effective July 1, 1997, MIC Technology acquired certain
equipment, inventory, licenses for technology and patents of two of Lucent
Technologies' telecommunications component units - multi-chip modules and film
integrated circuits. These units manufacture microelectronic modules and
interconnect products. In February 1999, we acquired all of the outstanding
stock of UTMC Microelectronic Systems, Inc., consisting of UTMC's integrated
circuit business. In September 2000, we acquired all of the operating assets of
AmpliComm, Inc., which designs and develops fiber optic amplifiers and modulator
drivers used by manufacturers of advanced fiber optic systems. In March 2001, we
acquired TriLink Communications Corp. which designs, develops, manufactures and
markets fiber optic components for the communications industry, including
Lithium Niobate modulators and optical switches.
Our test solutions segment consists of two divisions: (1) instruments and
(2) motion control products, including the following product lines:
o Comstron, a leader in radio frequency and microwave technology used in
the manufacture of fast switching frequency signal generators and
components, which we acquired in November 1989. Comstron is currently
an operating division of Aeroflex Laboratories Incorporated, one of
our wholly-owned subsidiaries.
o Lintek, a leader in high speed instrumentation antenna measurement
systems, radar systems and satellite test systems, which we acquired
in January 1995.
-13-
o Europtest, S.A. (France), of which we acquired 90% effective September
1, 1998, under a purchase agreement which requires us to purchase the
remaining 10% of Europtest pro rata over a three-year period at prices
determined based upon net sales of Europtest products. In each of
March 2001 and October 1999, we purchased an additional 3.4%.
Europtest develops and sells specialized software-driven test
equipment used primarily in cellular, satellite and other
communications applications.
o Altair, which we merged with in October 2000 in a pooling-of-interests
business combination. Altair designs and develops advanced
object-oriented control systems software based upon a proprietary
software engine.
o RDL, which we acquired in October 2000. RDL designs, develops and
manufactures advanced commercial communications test and measurement
products and defense subsystems.
o Our motion control products division has been engaged in the
development and manufacture of electro-optical scanning devices used
in infra-red night vision systems since 1975. Additionally, it is
engaged in the design, development and production of stabilization
tracking devices and systems and magnetic motors used in satellites
and other high reliability applications.
Our isolator products segment has been designing, developing, manufacturing
and selling severe service shock and vibration isolation systems since 1961.
These devices are primarily used in defense applications. In October 1983, we
acquired Vibration Mountings & Controls, Inc., which manufactures a line of
off-the-shelf rubber and spring shock, vibration and structure borne noise
control devices used in commercial and industrial applications. In December
1986, we acquired the operating assets of Korfund Dynamics Corporation, a
manufacturer of an industrial line of heavy duty spring and rubber shock mounts.
Our revenue is generally recognized based upon shipments. Revenues
associated with certain long term contracts are recognized under the
units-of-delivery method which includes shipments and progress billings, in
accordance with Statement of Position 81-1 "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts." We record costs on our
long-term contracts using percentage-of-completion accounting. Under percentage
of completion accounting, costs are recognized on revenues in the same relation
that total estimated manufacturing costs bear to total contract value. Estimated
costs at completion are based upon engineering and production estimates.
Provisions for estimated losses or revisions in estimated profits on
contracts-in-process are recorded in the period in which such losses or
revisions are first determined.
Approximately 29% of our sales for fiscal 2001, 33% of our sales for fiscal
2000 and 42% of our sales for fiscal 1999 were to agencies of the United States
government or to prime defense contractors or subcontractors of the United
States government. Our overall dependence on the military has been declining due
to a focusing of resources towards developing standard products for the
commercial markets. Our government contracts have been awarded either on a bid
basis or after negotiation. Our government contracts are primarily fixed price
contracts, although we also have or had government contracts providing for cost
plus fixed fee. Our defense contracts have customary provisions for termination
at the convenience of the government without cause. In the event of such
termination, we are entitled to reimbursement for our costs and to receive a
reasonable profit, if any, on the work done prior to termination.
-14-
Our product development efforts primarily involve engineering and design
relating to:
o developing new products
o improving existing products
o adapting existing products to new applications
o developing prototype components to bid on specific programs
Some of our development efforts are reimbursed under contractual arrangements.
Product development and similar costs which we cannot recover under contractual
arrangements are expensed in the period incurred.
-15-
Statement of Operations
The following table sets forth our net sales and operating income by
business segment for the periods indicated. The special charges represent the
write-offs of in-process research and development acquired in connection with
the purchases of businesses.
Years Ended June 30,
---------------------------------
2001 2000 1999
---- ---- ----
(In thousands)
Net Sales:
Microelectronic Solutions $144,901 $110,253 $ 96,846
Test Solutions 68,394 58,744 44,793
Isolator Products 19,513 19,753 18,743
--------- --------- ---------
Net Sales $232,808 $188,750 $160,382
========= ========= =========
Operating Income:
Microelectronic Solutions $ 35,959 $ 22,734 $ 20,104
Test Solutions 1,971 2,438 3,181
Isolator Products 2,326 2,692 2,108
General Corporate
Expenses (7,293) (5,397) (4,262)
--------- --------- ---------
32,963 22,467 21,131
Special Charges (2,500) - (3,500)
--------- --------- ---------
Operating Income $ 30,463 $ 22,467 $ 17,631
========= ========= =========
The following table sets forth certain items from our statement of earnings
as a percentage of net sales for the periods indicated. The special charges
represent the write-offs of in-process research and development acquired in
connection with the purchases of businesses.
Years Ended June 30,
-------------------------------
2001 2000 1999
------ ------ ------
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 58.7 63.7 62.9
------- ------- -------
Gross Profit 41.3 36.3 37.1
------- ------- -------
Operating Expenses:
Selling, General and
Administrative Costs 19.0 18.3 17.6
Research and Development Costs 8.1 6.1 6.3
Special Charges 1.1 - 2.2
------- ------- -------
Total Operating Expenses 28.2 24.4 26.1
------- ------- -------
Operating Income 13.1 11.9 11.0
Other Expense (Income), Net (0.9) 1.0 0.5
------- ------- -------
Income Before Income Taxes 14.0 10.9 10.5
Provision For Income Taxes 4.9 3.3 4.4
------- ------- -------
Income Before Cumulative
Effect of a Change in
Accounting 9.1 7.6 6.1
Cumulative Effect of a Change
in Accounting 0.1 - -
------- ------- -------
Net Income 9.2% 7.6% 6.1%
======= ======= =======
-16-
Fiscal Year Ended June 30, 2001 Compared to Fiscal Year Ended June 30, 2000
Net Sales. Net sales increased 23.3% to $232.8 million in fiscal 2001
from $188.8 million in fiscal 2000. Net sales in the microelectronic solutions
segment increased 31.4% to $144.9 million in fiscal 2001 from $110.3 million in
fiscal 2000 due primarily to increased sales volume in microelectronic modules
and thin film interconnects. Net sales in the test solutions segment increased
16.4% to $68.4 million in fiscal 2001 from $58.7 million in fiscal 2000
primarily due to the acquisition of RDL, Inc. in October 2000. Net sales in the
isolator products segment were $19.5 million in fiscal 2001 and $19.8 million in
fiscal 2000.
Gross Profit. Cost of sales includes materials, direct labor and
overhead expenses such as engineering labor, fringe benefits, allocable
occupancy costs, depreciation and manufacturing supplies. Gross profit increased
40.3% to $96.1 million in fiscal 2001 from $68.6 million in fiscal 2000. Gross
margin increased to 41.3% in fiscal 2001 from 36.3% in fiscal 2000. The
increases were primarily a result of the increased sales volume and improvements
in gross margins due to a favorable change in the product mix in both the
microelectronic solutions and test solutions segments.
Selling, General and Administrative Costs. Selling, general and
administrative costs include office and management salaries, fringe benefits and
commissions. Selling, general and administrative costs increased 28.4% to $44.3
million (19.0% of net sales) in fiscal 2001 from $34.5 million (18.3% of net
sales) in fiscal 2000. The increase was primarily due to higher corporate
expenses, increased expenses in the microelectronic solutions segment as a
result of this segment's increased growth, and the addition of the expenses of
RDL.
Research and Development Costs. Research and development costs include
material, engineering labor and allocated overhead. Our self-funded research and
development costs increased 63.1% to $18.9 million (8.1% of net sales) in fiscal
2001 from $11.6 million (6.1% of net sales) in fiscal 2000. The increase was
primarily due to the addition of the expenses of RDL and increased development
efforts in frequency synthesizers and high speed automatic test systems.
Acquired In-Process Research and Development. In connection with the
acquisition of RDL, Inc., we allocated $1.5 million of the purchase price to
incomplete research and development projects. In connection with the acquisition
of TriLink Communications Corp., we allocated $1.0 million of the purchase price
to incomplete research and development projects. These allocations represent the
estimated fair value based on future cash flows that have been adjusted by the
respective project's completion percentage. At the respective acquisition dates,
the development of these projects had not yet reached technological feasibility
and the research and development in progress had no alternative future uses.
Accordingly, we expensed these costs as of the respective acquisition dates.
The values assigned to these assets were determined by identifying
significant research projects for which technological feasibility had not been
established. At the acquisition date, RDL was conducting design, development,
engineering and testing activities associated with the completion of its defense
and commercial product lines. The projects under development at the valuation
date represent next-generation technologies which are expected to address
emerging market demands in the equipment testing and measuring industry. At the
acquisition date, TriLink was conducting design, development, engineering and
testing activities associated with its completion of its 10 GB modulator for
fiber optic systems. We intend to continue with these development efforts and,
once complete, release the products to market.
At its acquisition date, RDL expected to spend approximately $1.3
million to complete all phases of the research and development, with anticipated
completion dates ranging from 13 to 17 months from that date. At its acquisition
date, TriLink expected to spend approximately $200,000 to complete the research
and development, with an anticipated completion date between 6 and 9 months from
that date.
-17-
We determined the value assigned to purchased in-process technology by
estimating the contribution of the purchased in-process technology in developing
a commercially viable product, estimating the resulting net cash flows from the
expected sales of such a product, and discounting the net cash flows to their
present value using an appropriate discount rate.
Revenue growth rates for the acquired companies were estimated based on
a detailed forecast, as well as discussions with the finance, marketing and
engineering personnel of the acquired companies. Allocation of total projected
revenues to in-process research and development was based on discussions with
the acquired companies' management. Selling, general and administrative expenses
and profitability estimates were determined based on forecasts as well as an
analysis of comparable companies' margin expectations.
The projections utilized in the transaction pricing and purchase price
allocation exclude the potential synergetic benefits related specifically to our
ownership. Due to the relatively early stage of the development and reliance on
future, unproven products and technologies, the cost of capital (discount rate)
for the acquired companies was estimated using venture capital rates of return.
Due to the nature of the forecast and the risks associated with the projected
growth and profitability of the development projects, a discount rate of 25% for
RDL and 45% for TriLink was used to discount cash flows from the in-process
technology. Each discount rate was commensurate with the acquired company's
market position, the uncertainties in the economic estimates described above,
the inherent uncertainty surrounding the successful development of the purchased
in-process technology, the useful life of such technology, the profitability
levels of such technology, and the uncertainty related to technological advances
that could render development stage technologies obsolete.
We believe that the foregoing assumptions used in the forecasts were
reasonable at the time of the acquisition. No assurance can be given, however,
that the underlying assumptions used to estimate sales, development costs or
profitability, or the events associated with such projects will transpire as
estimated. For these reasons, actual results may vary from projected results.
Remaining development efforts for the acquired companies' research and
development included various phases of design, development and testing. Funding
for such projects is expected to come from internally generated sources.
As evidenced by the continued support of the development of the
acquired companies' projects, we believe we have a reasonable chance of
successfully completing the research and development programs. However, as with
all of our technology development, there is risk associated with the completion
of the research and development projects, and there is no assurance that
technological or commercial success will be achieved.
If the development of these in-process research and development
projects is unsuccessful, our sales and profitability may be adversely affected
in future periods. Commercial results are also subject to certain market events
and risks, which are beyond our control, such as trends in technology, changes
in government regulation, market size and growth, and product introduction or
other actions by competitors.
Other Expense (Income). Interest expense decreased to $1.4 million in
fiscal 2001 from $2.4 million in fiscal 2000, primarily due to reduced levels of
borrowings. Other income of $3.6 million in fiscal 2001 consists primarily of
$3.9 million of interest income offset by a $229,000 decrease in the fair value
of our interest rate swap agreements. Other income of $554,000 in fiscal 2000
consisted primarily of $650,000 of interest income and a $193,000 gain on the
sale of securities offset, in part, by a $300,000 expense for the settlement of
a lawsuit. Interest income increased due to increased levels of cash equivalents
and marketable securities. The decreased levels of borrowings and the increased
levels of cash equivalents and marketable securities resulted from the net
proceeds of $68.5 million from stock issued in a public offering completed in
May 2000, as well as cash generated from operations during fiscal 2001.
-18-
Provision for Income Taxes. Income taxes increased 84.7% to $11.5
million (an effective income tax rate of 34.0%, exclusive of the non-deductible
$1.0 million charge for the acquired in-process R&D for TriLink) in fiscal 2001
from $7.2 million (an effective income tax rate of 35.0%), excluding a $1.0
million benefit from the utilization of a capital loss carryforward, in fiscal
2000. The income tax provisions for the two periods differed from the amount
computed by applying the U.S. Federal income tax rate to income before income
taxes primarily due to state and local income taxes and research and development
credits.
Cumulative Effect of a Change in Accounting. Effective July 1, 2000,
the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended. This statement requires companies to record
derivatives on the balance sheet as assets or liabilities at their fair value.
In certain circumstances changes in the value of such derivatives may be
required to be recorded as gains or losses. The impact of this statement did not
have a material effect on our consolidated financial statements. The cumulative
effect of the adoption of this accounting policy was a $132,000, net of tax,
credit in the quarter ended September 30, 2000 which represented the net of tax
fair value of certain interest rate swap agreements at July 1, 2000.
Fiscal Year Ended June 30, 2000 Compared to Fiscal Year Ended June 30, 1999
Net Sales. Net sales increased 17.7% to $188.8 million in fiscal 2000
from $160.4 million in fiscal 1999. Net sales in our microelectronic solutions
segment increased 13.8% to $110.3 million in fiscal 2000 from $96.8 million in
fiscal 1999 due to the acquisition of UTMC Microelectronic Systems in 1999
partially offset by reductions in sales in microelectronic modules due to
temporary slowdowns in the satellite market. Net sales in our test solutions
segment increased 31.1% to $58.7 million in fiscal 2000 from $44.8 million in
fiscal 1999 primarily due to increased sales volume in frequency synthesizers
(primarily shipments of the FS-1000 for use in commercial communications test
systems). Net sales in our isolator products segment increased 5.4% to $19.8
million in fiscal 2000 from $18.7 million in fiscal 1999.
Gross Profit. Gross profit increased 15.2% to $68.6 million in fiscal
2000 from $59.5 million in fiscal 1999. Gross margin decreased to 36.3% in
fiscal 2000 from 37.1% in fiscal 1999. This increase in gross profit was
primarily a result of increased sales. The decrease in gross margin was due
primarily to low margins in both the satellite test system development program
and the start up of the FS-1000, a low-cost, high speed, high performance
frequency synthesizer.
Selling, General and Administrative Costs. Selling, general and
administrative costs increased 21.9% to $34.5 million (18.3% of net sales) in
fiscal 2000 from $28.3 million (17.6% of net sales) in fiscal 1999. The increase
was primarily due to labor related expenses, including salaries for additional
personnel, in connection with our growth and the addition of the expenses of
UTMC Microelectronic Systems.
Research and Development Costs. Our self-funded research and
development costs increased 15.3% to $11.6 million (6.1% of net sales) in fiscal
2000 from $10.1 million (6.3% of net sales) in fiscal 1999. This increase was
primarily attributable to the additional costs of UTMC Microelectronic Systems,
partially offset by reduced costs, relative to the prior year, related to the
development of the FS-1000, a low-cost, high speed, high performance frequency
synthesizer intended for commercial communication test systems, which was
completed in early fiscal 2000.
Acquired In-Process Research and Development. In connection with the
acquisition of UTMC, we allocated $3.5 million of the purchase price to
incomplete research and development projects and expensed these costs in fiscal
1999.
-19-
Other Expense (Income). Interest expense increased to $2.4 million in
fiscal 2000 from $1.5 million in fiscal 1999, primarily due to higher average
levels of borrowings throughout most of fiscal 2000. Other income of $554,000
for the year ended June 30, 2000 consists primarily of $650,000 of interest
income, $193,000 gain on the sale of securities and a $300,000 expense for the
settlement of a lawsuit. Other income of $777,000 for the year ended June 30,
1999 consists primarily of interest income. Interest income decreased due to
lower average levels of cash and cash equivalents throughout most of fiscal
2000. The increased average levels of borrowings and the decreased average
levels of cash and cash equivalents resulted from the acquisition of UTMC
Microelectronic Systems in February 1999. In connection with this acquisition,
we used most of our cash and cash equivalents and increased our borrowings by
$20.0 million.
Provision for Income Taxes. Income taxes were $7.2 million (an
effective income tax rate of 35.0%), excluding a $1.0 million benefit from the
utilization of a capital loss carryforward, in fiscal 2000, and $7.2 million (an
effective income tax rate of 35.0%, exclusive of the non-deductible $3.5 million
charge for the acquired in-process R&D for UTMC) in fiscal 1999. The income tax
provisions in fiscal 2000 and 1999 were different from the amounts computed by
applying the U.S. Federal income tax rate to income before income taxes
primarily due to state and local income taxes and research and development
credits.
Liquidity and Capital Resources
As of June 30, 2001, we had $152.4 million in working capital. Our
current ratio was 5.1 to 1 at June 30, 2001. As of February 25, 1999, we
replaced a previous agreement with a revised revolving credit, term loan and
mortgage agreement with two banks which is secured by substantially all of our
assets not otherwise encumbered. The agreement provided for a revolving credit
line of $23.0 million, a term loan of $20.0 million and a mortgage on our
Plainview property for $4.5 million. The revolving credit loan facility expires
in December 2002. The term loan was fully paid in May 2000 with the proceeds
from the sale of our common stock, described below. The interest rate on
borrowings under this agreement is at various rates depending upon certain
financial ratios, with the current rate substantially equivalent to prime
(approximately 6.75% at June 30, 2001) on the revolving credit borrowings. The
mortgage is payable in monthly installments of approximately $26,000 through
March 2008 and a balloon payment of $1.6 million in April 2008. We have entered
into an interest rate swap agreement for the outstanding amount under the
mortgage agreement at approximately 7.6% in order to reduce the interest rate
risk associated with these borrowings.
The terms of the agreement require compliance with certain covenants
including minimum consolidated tangible net worth and pretax earnings,
maintenance of certain financial ratios, limitations on capital expenditures and
indebtedness and prohibition of the payment of cash dividends. In connection
with the purchase of certain materials for use in manufacturing, we have a
letter of credit of $2.0 million.
In December 1998, we financed the acquisition and renovation of the
land and building of our Pearl River, NY facility and received proceeds
amounting to $4.2 million. The debt requires a balloon payment of $3.8 million
in 2019.
Effective February 25, 1999, we acquired all of the outstanding stock
of UTMC Microelectronic Systems, Inc. for $42.5 million of cash. Prior to the
acquisition, UTMC Microelectronic Systems distributed by dividend to its
then-parent, United Technologies Corporation, the assets and United Technologies
assumed the liabilities of the circuit card assembly portion of UTMC
Microelectronic Systems' business. The purchase price was paid with available
cash of $22.5 million and borrowings
-20-
under our bank loan agreement of $20.0 million. UTMC Microelectronic Systems is
a leader in supplying radiation-tolerant integrated circuits for satellite
communications. The acquired company's net sales, excluding the circuit card
assembly business, were approximately $33.4 million for the year ended December
31, 1998.
In May 2000, we sold 6.3 million shares (adjusted for a five-for-four
stock split and a two-for-one stock split) of our common stock in a public
offering for $68.5 million, net of an underwriting discount of $3.5 million and
issuance costs of $500,000. Of these net proceeds, $13.0 million was used to
repay the term loan. The balance of the net proceeds is invested in short-term
marketable securities and is intended to be used ultimately for additional
working capital, including research and development, for expansion of our
facilities, and for general corporate purposes, including possible acquisitions
of technologies, product lines or businesses.
In fiscal 2001, our operations provided cash of $47.2 million primarily
from our continued profitability and the tax benefit of stock option exercises.
In fiscal 2001, our investing activities used cash of $28.4 million including
$14.6 million for purchases of businesses (primarily $14.0 million for RDL),
$30.8 million for the purchase of available-for-sale securities and $13.3
million for capital expenditures offset, in part, by $30.1 million of proceeds
from the sale of available-for-sale marketable securities. In fiscal 2001, our
financing activities used cash of $3.7 million including $22.2 million for
amounts paid for withholding taxes on stock option exercises and $3.9 million
for debt payments partially offset by $18.0 million of withholding taxes
collected for stock option exercises and $3.8 million of proceeds from the
exercise of stock options and warrants.
We believe that existing cash, cash equivalents and marketable
securities coupled with internally generated funds and available lines of credit
will be sufficient for our working capital requirements, capital expenditure
needs and the servicing of our debt for the foreseeable future. Our cash, cash
equivalents and marketable securities are available to fund acquisitions and
other potential large cash needs that may arise. At June 30, 2001, our available
unused line of credit was $21.0 million after consideration of the letter of
credit.
Legal Proceedings
One of our subsidiaries whose operations were discontinued in 1991, is
one of several defendants named in a personal injury action initiated in August
1994 by a group of plaintiffs. The plaintiffs are seeking damages which
cumulatively may exceed $500 million. The complaint alleges, among other things,
that the plaintiffs suffered injuries from exposure to substances contained in
products sold by our subsidiary to one of its customers. This action is in the
discovery stage. Based upon available information and considering our various
defenses, together with our product liability insurance, in our opinion, the
outcome of the action against our subsidiary will not have a materially adverse
effect on our consolidated financial statements.
We are involved in various other routine legal matters. We believe the
outcome of these matters will not have a materially adverse effect on our
consolidated financial statements.
We are undergoing routine audits by various taxing authorities of our
state and local income tax returns covering periods from 1997 to 1999. We
believe that the probable outcome of these various audits should not materially
affect our consolidated financial statements.
-21-
Backlog
Our backlog of orders was $105.8 million at June 30, 2001 and $120.0
million at June 30, 2000.
Market Risk
We are exposed to market risk related to changes in interest rates and,
to an immaterial extent, to foreign currency exchange rates. Most of our debt is
at fixed rates of interest or at a variable rate with an interest rate swap
agreement which effectively converts the variable rate debt into fixed rate
debt. Therefore, if market interest rates increase by 10 percent from levels at
June 30, 2001, the effect on our net income would not be material. Most of our
invested cash and marketable securities are at variable rates of interest. If
market interest rates decrease by 10 percent from levels at June 30, 2001, the
effect on our net income would be approximately $205,000.
Seasonality
Although our business is not affected by seasonality, historically our
revenues and earnings increase sequentially from quarter to quarter within a
fiscal year, but the first quarter is less than the previous year's fourth
quarter.
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations",
and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires
that the purchase method of accounting be used for all future business
combinations and specifies criteria that intangible assets acquired in a
business combination must meet to be recognized and reported apart from
goodwill. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
Amortization expense related to goodwill was $1.2 million, $640,000 and $437,000
for the years ended June 30, 2001, 2000 and 1999, respectively. SFAS No. 142
will also require that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives, and reviewed for
impairment in accordance with SFAS No. 121, "Accounting for the Impairment of
Long- Lived Assets and for Long-Lived Assets to be Disposed Of." We will adopt
the provisions of SFAS 141 and SFAS 142 as of July 1, 2001.
We will evaluate our existing intangible assets and goodwill that were
acquired in prior purchase business combinations, and make any necessary
reclassifications in order to conform with the new criteria in SFAS No. 141 for
recognition apart from goodwill. We will be required to reassess the useful
lives and residual values of all intangible assets acquired, and make any
necessary amortization period adjustments by September 30, 2001. In addition, we
will be required to test goodwill and, to the extent an intangible asset is
identified as having an indefinite useful life, the intangible asset, for
impairment in accordance with the provisions of SFAS No. 142 by June 30, 2002
and September 30, 2001, respectively. Any impairment loss will be measured as of
the date of adoption and recognized as the cumulative effect of a change in
accounting principle as of July 1, 2001.
Because of the extensive effort needed to comply with adopting SFAS 141
and SFAS 142, it is not practicable to reasonably estimate the impact of
adopting these statements on our consolidated financial statements at the date
of this report, including whether we will be required to recognize any
transitional impairment losses as the cumulative effect of a change in
accounting principle.
-22-
Forward-Looking Statements
All statements other than statements of historical fact included in
this Annual Report, including without limitation statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding our financial position, business strategy and plans and objectives of
our management for future operations, are forward-looking statements. When used
in this Annual Report, words such as "anticipate," "believe," "estimate,"
"expect," "intend" and similar expressions, as they relate to us or our
management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of our management, as well as assumptions made by and
information currently available to our management. Actual results could differ
materially from those contemplated by the forward-looking statements as a result
of certain factors, including but not limited to, competitive factors and
pricing pressures, changes in legal and regulatory requirements, technological
change or difficulties, product development risks, commercialization
difficulties and general economic conditions. Such statements reflect our
current views with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to our operations, results of
operations, growth strategy and liquidity.
ITEM EIGHT - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data listed in the accompanying Index
to Financial Statements and Schedules are attached as part of this report.
ITEM NINE - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information required by Part III is incorporated by reference to our
definitive proxy statement in connection with our Annual Meeting of Stockholders
scheduled to be held in November 2001. The proxy statement is to be filed with
the Securities and Exchange Commission within 120 days following the end of our
fiscal year ended June 30, 2001.
-23-
PART IV
ITEM FOURTEEN - EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) See Index to Financial Statements at beginning of attached
financial statements.
(b) Reports on Form 8-K:
None
(c) Exhibits
3.1 Certificate of Incorporation, as amended. (Exhibit 3.1 to Form
10-Q for the quarter ended September 30, 2000).
3.2 By-Laws, as amended (Exhibit 3 to Form 10-Q for the quarter
ended March 31, 1998).
4.1 Fourth Amended and Restated Loan and Security Agreement dated
as of February 25, 1999 among the Registrant, certain of its
subsidiaries, The Chase Manhattan Bank (as successor to
Chemical Bank) and Fleet Bank, N.A. (as successor to NatWest
Bank, N.A.) (Exhibit 10.5 to Form 8-K dated February 25,
1999).
10.1 1989 Non-Qualified Stock Option Plan, as amended (Exhibit 10.8
to Form 10-K for the year ended June 30, 1990).
10.2 1994 Non-Qualified Stock Option Plan. (Exhibit 10.2 to Form
10-K for the year ended June 30, 1994).
10.3 1994 Outside Directors Stock Option Plan. (Exhibit 10.3 to
Form 10-K for the year ended June 30, 1994).
10.4 Employment Agreement between Aeroflex Incorporated and Harvey
R. Blau (Exhibit 10.1 to Form 10-Q for the quarter ended March
31, 1999).
10.5 Employment Agreement between Aeroflex Incorporated and Michael
Gorin (Exhibit 10.2 to Form 10-Q for the quarter ended March
31, 1999).
10.6 Employment Agreement between Aeroflex Incorporated and Leonard
Borow (Exhibit 10.3 to Form 10-Q for the quarter ended March
31, 1999).
10.7 Deferred Compensation Agreement between Aeroflex Incorporated
and Harvey R. Blau (Exhibit 10.4 to Form 8-K dated May 17,
1997).
10.8 Employment Agreement between Aeroflex Incorporated and Carl
Caruso (Exhibit 10.5 to Form 8-K dated May 17, 1997).
10.9 1996 Stock Option Plan (Exhibit A to Definitive Schedule 14A
filed September 30, 1996).
10.10 1998 Stock Option Plan (Exhibit 10 to Form 10-Q for the
quarter ended March 31, 1998).
-24-
10.11 1999 Stock Option Plan (Exhibit A to Definitive Schedule 14A
filed December 3, 1999).
10.12 2000 Stock Option Plan, as amended.
10.13 Amendment No. 1 to Employment Agreement between Aeroflex
Incorporated and Harvey R. Blau, effective September 1, 1999
(Exhibit 10.17 to Form 10-K for the year ended June 30, 2000).
10.14 Amendment No. 1 to Employment Agreement between Aeroflex
Incorporated and Michael Gorin, effective September 1, 1999
(Exhibit 10.18 to Form 10-K for the year ended June 30, 2000).
10.15 Amendment No. 1 to Employment Agreement between Aeroflex
Incorporated and Leonard Borow, effective September 1, 1999
(Exhibit 10.19 to Form 10-K for the year ended June 30, 2000).
10.16 Amendment No. 2 to Employment Agreement between Aeroflex
Incorporated and Harvey R. Blau, effective August 13, 2001.
10.17 Amendment No. 2 to Employment Agreement between Aeroflex
Incorporated and Michael Gorin, effective August 13, 2001.
10.18 Amendment No. 2 to Employment Agreement between Aeroflex
Incorporated and Leonard Borow, effective August 13, 2001.
10.19 Aeroflex Incorporated Key Employee Deferred Compensation Plan.
10.20 Trust Under Deferred Compensation Plan, dated August 22, 2001.
10.21 Key Employee Stock Option Plan (Exhibit A to Definitive
Schedule 14A filed October 2, 2000).
22 The following is a list of the Company's subsidiaries:
Jurisdiction of
Name Incorporation
------------ -------------
Aeroflex Altair Cybernetics Corp. Maryland
Aeroflex Amplicomm, Inc. Delaware
Aeroflex Laboratories Incorporated Delaware
Aeroflex Lintek Corp. Ohio
Aeroflex MIC Technology Corporation Texas
Aeroflex RDL, Inc. Delaware
Aeroflex Systems Corp. Delaware
Aeroflex TriLink Communications Corp. California
Aeroflex UTMC Microelectronic Systems, Inc. Delaware
Europtest, S.A. France
Vibration Mountings and Controls, Inc. New York
23 Consent of Independent Auditors
-25-
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 28th day of
September 2001.
Aeroflex Incorporated
By: /s/ Harvey R. Blau
------------------------------
Harvey R. Blau, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on September 28th, 2001 by the following
persons in the capacities indicated:
/s/ Harvey R. Blau Chairman of the Board
----------------------------------- (Chief Executive Officer)
Harvey R. Blau
/s/ Michael Gorin President and Director
----------------------------------- (Chief Financial Officer and Principal Accounting Officer)
Michael Gorin
/s/ Leonard Borow Executive Vice President, Secretary and Director
---------------------------------- (Chief Operating Officer)
Leonard Borow
/s/ Paul Abecassis Director
-----------------------------------
Paul Abecassis
/s/ Milton Brenner Director
-----------------------------------
Milton Brenner
/s/ Ernest E. Courchene, Jr. Director
-----------------------------------
Ernest E. Courchene, Jr.
/s/ Donald S. Jones Director
-----------------------------------
Donald S. Jones
/s/ Eugene Novikoff Director
-----------------------------------
Eugene Novikoff
/s/ John S. Patton Director
-----------------------------------
John S. Patton
-26-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
------------------
FINANCIAL STATEMENTS AND SCHEDULES
COMPRISING ITEM 8 OF ANNUAL REPORT ON FORM 10-K
TO SECURITIES AND EXCHANGE COMMISSION
AS OF JUNE 30, 2001 AND 2000
AND FOR THE YEARS
ENDED JUNE 30, 2001, 2000 AND 1999
FINANCIAL STATEMENTS AND SCHEDULES
I N D E X PAGE
------------- ----
ITEM FOURTEEN (a)
1. FINANCIAL STATEMENTS:
Independent auditors' report S-1
Consolidated financial statements:
Balance sheets - June 30, 2001 and 2000 S-2-3
Statements of earnings - each of the three years
in the period ended June 30, 2001 S-4
Statements of stockholders' equity and comprehensive income -
each of the three years in the period ended June 30, 2001 S-5
Statements of cash flows - each of the three years
in the period ended June 30, 2001 S-6
Notes (1-14) S-7-25
Quarterly financial data (unaudited) S-26
2. FINANCIAL STATEMENT SCHEDULES:
II - Valuation and qualifying accounts S-27
All other schedules have been omitted because they are inapplicable, not
required, or the information is included elsewhere in the financial statements
or notes thereto.
Independent Auditors' Report
The Board of Directors and Stockholders of Aeroflex Incorporated
We have audited the accompanying consolidated balance sheets of Aeroflex
Incorporated and subsidiaries as of June 30, 2001 and 2000 and the related
consolidated statements of earnings, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended June
30, 2001. Our audits also included the financial statement schedule listed in
the Index at item 14(a)2. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aeroflex
Incorporated and subsidiaries as of June 30, 2001 and 2000 and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 2001, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Melville, New York
August 10, 2001
S-1
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30,
------------------------
ASSETS 2001 2000
---------- --------
(Restated, Note 2)
Current assets:
Cash and cash equivalents................... $ 69,896 $ 54,732
Marketable securities....................... 12,012 11,512
Accounts receivable, less allowance for
doubtful accounts of $459 and $509
at June 30, 2001 and 2000, respectively... 49,409 51,777
Inventories, net............................ 48,423 37,367
Deferred income taxes....................... 7,148 5,317
Prepaid expenses and other current assets... 2,583 2,859
-------- --------
Total current assets................... 189,471 163,564
Property, plant and equipment, net............ 62,137 52,251
Intangible assets acquired in connection with
the purchase of businesses, net of
accumulated amortization of $6,917 and $4,689
at June 30, 2001 and 2000, respectively..... 20,286 12,839
Cost in excess of fair value of net assets of
businesses acquired, net of accumulated
amortization of $4,957 and $3,800 at June 30,
2001 and 2000, respectively................. 21,006 13,380
Deferred income taxes......................... 8,538 3,093
Other assets.................................. 8,814 4,368
-------- --------
Total assets........................... $310,252 $249,495
======== ========
See notes to consolidated financial statements.
S-2
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(In thousands, except per share amounts)
June 30,
-----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
--------- ---------
(Restated, Note 2)
Current liabilities:
Current portion of long-term debt.............. $ 1,905 $ 2,102
Accounts payable............................... 16,794 12,629
Accrued expenses and other current
liabilities.................................. 18,398 15,247
--------- ---------
Total current liabilities................. 37,097 29,978
Long-term debt................................... 11,428 12,983
Other long-term liabilities...................... 6,606 4,890
--------- ---------
Total liabilities......................... 55,131 47,851
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, par value $.10 per share;
authorized 1,000 shares:
Series A Junior Participating Preferred
Stock, par value $.10 per share; authorized
80 shares; none issued....................... - -
Common Stock, par value $.10 per share;
authorized 80,000 shares; issued 59,674 and
28,110 at June 30, 2001 and 2000,
respectively................................. 5,967 2,811
Additional paid-in capital..................... 219,278 190,141
Accumulated other comprehensive income (loss).. (154) 82
Retained earnings.............................. 30,044 8,690
--------- ---------
255,135 201,724
Less: Treasury stock, at cost (4 and 13
shares at June 30, 2001 and 2000,
respectively)................................. 14 80
--------- ---------
Total stockholders' equity................ 255,121 201,644
--------- ---------
Total liabilities and stockholders'
equity.................................. $310,252 $249,495
========= =========
See notes to consolidated financial statements.
S-3
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
Years Ended June 30,
---------------------------------
2001 2000 1999
---- ---- ----
(Restated, Note 2)
Net sales............................. $232,808 $188,750 $160,382
Cost of sales......................... 136,659 120,200 100,892
--------- --------- ---------
Gross profit........................ 96,149 68,550 59,490
--------- --------- ---------
Operating costs:
Selling, general and
administrative costs.............. 44,277 34,491 28,306
Research and development
costs............................. 18,909 11,592 10,053
Acquired in-process research
and development costs (note 2).... 2,500 - 3,500
--------- --------- ---------
Total operating costs........... 65,686 46,083 41,859
--------- --------- ---------
Operating income ..................... 30,463 22,467 17,631
--------- --------- ---------
Other expense (income):
Interest expense.................... 1,397 2,442 1,493
Other income, net
(including interest income
and dividends of $3,854,
$650 and $781).................... (3,606) (554) (777)
--------- --------- ---------
Total other expense
(income)...................... (2,209) 1,888 716
--------- --------- ---------
Income before income taxes............ 32,672 20,579 16,915
Provision for income taxes............ 11,450 6,200 7,150
--------- --------- ---------
Income before cumulative effect
of a change in accounting............ 21,222 14,379 9,765
Cumulative effect of a change in
accounting, net of tax (Note 1)...... 132 - -
--------- --------- ---------
Net income ........................... $ 21,354 $ 14,379 $ 9,765
========= ========= =========
Net income per common share:
Basic
Income before cumulative effect.. $0.37 $0.30 $0.22
Cumulative effect of a change
in accounting.................. - - -
------ ------ ------
Net income....................... $0.37 $0.30 $0.22
====== ====== ======
Diluted
Income before cumulative effect.. $0.35 $0.28 $0.20
Cumulative effect of a change
in accounting.................. - - -
------ ------ ------
Net income....................... $0.35 $0.28 $0.20
====== ====== ======
Weighted average number of common
shares outstanding:
Basic.............................. 58,124 48,189 45,011
Diluted............................ 61,041 51,474 48,371
See notes to consolidated financial statements.
S-4
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Years Ended June 30, 2001, 2000 and 1999
(In thousands)
(Restated, Note 2)
Accumulated
Other Comp- Retained
Common Stock Additional rehensive Earnings
---------------------- Paid-in Income (Accumulated
Total Shares Par Value Capital (Loss) Deficit)
---------- --------- ------------ ----------- ----------- -----------
Balance, July 1, 1998...... $ 86,761 17,598 $ 1,760 $100,460 $ - $ (15,454)
Stock issued upon
exercise of stock
options and warrants...... 4,967 1,051 105 4,563 - -
Purchase of treasury
stock..................... (343) - - - - -
Deferred compensation...... 676 - - 676 - -
Net income................. 9,765 - - - - 9,765
---------- --------- --------- ---------- ---------- -----------
Balance, June 30, 1999..... 101,826 18,649 1,865 105,699 - (5,689)
Stock issued in
public offering........... 68,500 2,500 250 68,250 - -
Stock issued upon
exercise of stock
options and warrants...... 18,457 1,339 133 16,365 - -
Purchase of treasury
stock..................... (1,990) - - - - -
Deferred compensation...... 401 - - 401 -
Five-for-four
stock split............... (11) 5,622 563 (574) - -
Other comprehensive
income.................... 82 - - 82 -
Net income................. 14,379 - - - - 14,379
---------- --------- --------- ---------- ---------- -----------
Balance, June 30, 2000..... 201,644 28,110 2,811 190,141 82 8,690
Stock and options issued for
acquisition of businesses. 11,766 1,153 115 11,651 - -
Stock issued upon
exercise of stock
options and warrants...... 20,390 1,450 145 20,179 - -
Deferred compensation...... 203 - - 203 - -
Two-for-one stock split.... - 28,961 2,896 (2,896) - -
Other comprehensive loss... (236) - - - (236) -
Net income................. 21,354 - - - - 21,354
---------- --------- --------- ---------- ---------- ----------
Balance, June 30, 2001..... $ 255,121 59,674 $ 5,967 $ 219,278 $ (154) $ 30,044
========== ========= ========= ========== ========== ==========
Treasury Stock
-------------------- Comprehensive
Shares Cost Income (Loss)
-------- --------- ---------------
Balance, July 1, 1998...... 1 $ (5)
Stock issued upon
exercise of stock
options and warrants...... (34) 299
Purchase of treasury
stock..................... 39 (343)
Deferred compensation...... - -
Net income................. - - $ 9,765
------- --------- ----------
Balance, June 30, 1999..... 6 (49) $ 9,765
==========
Stock issued in
public offering........... - -
Stock issued upon
exercise of stock
options and warrants...... (296) 1,959
Purchase of treasury
stock..................... 300 (1,990)
Deferred compensation...... - -
Five-for-four
stock split............... 3 -
Other comprehensive
income.................... - - $ 82
Net income................. - - 14,379
------- --------- ----------
Balance, June 30, 2000..... 13 (80) $ 14,461
==========
Stock and options issued for
acquisition of businesses. - -
Stock issued upon
exercise of stock
options and warrants...... (11) 66
Deferred compensation...... - -
Two-for-one stock split.... 2 -
Other comprehensive loss... - - $ (236)
Net income................. - - 21,354
------- --------- ----------
Balance, June 30, 2001..... 4 $ (14) $ 21,118
======= ========== ==========
See notes to consolidated financial statements.
S-5
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended June 30,
---------------------------------
2001 2000 1999
---- ---- ----
(Restated, Note 2)
Cash flows from operating activities:
Net income .............................. $ 21,354 $ 14,379 $ 9,765
Adjustments to reconcile net income to
net cash provided by operating
activities:
Acquired in-process research
and development.................... 2,500 - 3,500
Depreciation and amortization........ 11,600 9,004 6,569
Amortization of deferred gain........ (823) (596) (588)
Tax benefit from stock option
exercises (Note 10)................ 8,962 5,114 3,203
Deferred income taxes................ 2,488 1,086 1,812
Other................................ 365 390 292
Change in operating assets and
liabilities, net of effects from
purchase of businesses:
Decrease (increase) in accounts
receivable.......................... 4,330 (11,481) (16,445)
Decrease (increase) in inventories.... (6,177) (4,232) 3,825
Decrease (increase) in prepaid
expenses and other assets........... (3,170) (1,069) (2,231)
Increase (decrease) in accounts
payable, accrued expenses and
other long-term liabilities......... 5,779 2,462 2,272
Increase (decrease) in income
taxes payable....................... - (698) (1,113)
--------- --------- ----------
Net cash provided by operating
activities................................ 47,208 14,359 10,861
--------- --------- ----------
Cash flows from investing activities:
Payment for purchase of businesses,
net of cash acquired.................... (14,580) (566) (43,656)
Capital expenditures...................... (13,292) (7,226) (9,127)
Proceeds from sale of property,
plant and equipment..................... 168 1,686 967
Purchase of marketable securities......... (30,767) (11,430) -
Proceeds from sale of marketable
securities.............................. 30,121 193 198
--------- --------- ----------
Net cash used in investing activities....... (28,350) (17,343) (51,618)
--------- --------- ----------
Cash flows from financing activities:
Proceeds from issuance of
common shares in public
offering................................. - 69,000 -
Costs in connection with
public offering.......................... - (500) -
Borrowings under debt agreements........... 635 6,474 24,444
Debt repayments............................ (3,919) (23,182) (4,663)
Bank debt financing costs.................. - - (438)
Purchase of treasury stock................. - (1,990) (343)
Proceeds from the exercise of stock
options and warrants..................... 3,800 5,170 2,539
Amounts paid for withholding taxes on
stock option exercises................... (22,193) (11,169) (5,434)
Withholding taxes collected for stock
option exercises......................... 17,983 11,166 2,671
--------- --------- ---------
Net cash provided by (used in) financing
activities................................. (3,694) 54,969 18,776
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents........................... 15,164 51,985 (21,981)
Cash and cash equivalents at beginning of
year........................................ 54,732 2,747 24,728
--------- --------- ---------
Cash and cash equivalents at end of year..... $ 69,896 $ 54,732 $ 2,747
========= ========= =========
See notes to consolidated financial statements.
S-6
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Principles and Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Aeroflex Incorporated and its subsidiaries (the "Company"), all of
which are wholly-owned with the exception of Europtest which is 96.8%
owned and Amplicomm which is 75% owned as of June 30, 2001 (see Note 2).
All intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management of the Company
make a number of estimates and assumptions relating to the reporting of
assets and liabilities and the disclosure of contingent assets and
liabilities. Among the more significant estimates included in the
consolidated financial statements are the estimated costs to complete
contracts in process. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments having maturities of
three months or less at the date of acquisition to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories related to long-term contracts are recorded at cost
less amounts expensed under percentage-of-completion accounting.
Financial Instruments
The fair values of all on-balance sheet financial instruments, other than
long-term debt (see Note 7), approximate book values because of the short
maturity of these instruments. Amounts receivable or payable under
interest rate swap agreements are accounted for as adjustments to
interest expense.
Revenue Recognition
The Company's revenue is generally recognized based upon shipments.
Revenues associated with certain long term contracts are recognized under
the units-of-delivery method which includes shipments and progress
billings, in accordance with Statement of Position 81-1 "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts."
The Company records costs on its long-term contracts using
percentage-of-completion accounting. Under percentage of completion
accounting, costs are recognized on revenues in the same relation that
total estimated manufacturing costs bear to total contract value.
Estimated costs at completion are based upon engineering and production
estimates. Provisions for estimated losses or revisions in estimated
profits on contracts-in-process are recorded in the period in which such
losses or revisions are first determined.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation computed on a straight-line basis over the estimated useful
lives of the related assets. Leasehold improvements are amortized over
the life of the lease or the estimated life of the asset, whichever is
shorter.
Research and Development Costs
All research and development costs are charged to expense as incurred.
See Note 2 for a discussion of acquired in-process research and
development.
S-7
Intangible Assets
Intangible assets are recorded at cost less accumulated amortization. The
excess of purchase price over the fair value of tangible assets acquired
is being amortized on a straight-line basis over periods ranging from 6
to 40 years except for certain costs allocated to identifiable intangible
assets including existing technology, assembled workforce, customer
relationships and patents which are amortized over 6 to 15 years, the
estimated remaining lives of the intangibles at the time they were
acquired by the Company. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the
Company periodically, and whenever events or changes in circumstances
indicate that the carrying value of its intangible assets may be
impaired, evaluates the recoverability of such asset by estimating the
future cash flows. If the sum of the expected undiscounted cash flows
expected to result from the use of the asset, and its eventual
disposition, is less than the carrying amount of the asset, the Company
will recognize an impairment loss to the extent of this shortfall. The
Company assesses the recoverability of unamortized goodwill based on the
undiscounted projected future earnings of the related businesses.
Income Per Common Share
In accordance with SFAS No. 128 "Earnings Per Share," income per common
share ("Basic EPS") is computed by dividing net income by the weighted
average common shares outstanding. Income per common share assuming
dilution ("Diluted EPS") is computed by dividing net income by weighted
average common shares outstanding plus potential dilution from the
exercise of stock options and warrants.
Accounting for Stock-Based Compensation
The Company records compensation expense for employee and director stock
options only if the current market price of the underlying stock exceeds
the exercise price on the date of the grant. Effective July 1, 1996, the
Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation."
The Company has elected not to implement the fair value based accounting
method for employee and director stock options, but instead has elected
to disclose the pro forma net income and pro forma net income per share
for employee and director stock option grants made beginning in fiscal
1996 as if such method had been used to account for stock-based
compensation cost as described in SFAS No. 123.
Income Taxes
In accordance with SFAS No. 109, "Accounting for Income Taxes," the
Company measures deferred tax assets and liabilities based upon the
differences between the financial accounting and tax bases of assets and
liabilities.
Foreign Currency Translations
The financial statements of the Company's subsidiary in France are
measured in the local currency and then translated into U.S. dollars
using the current rate method. Under the current rate method, assets and
liabilities are translated using the exchange rate at the balance sheet
date. Revenues and expenses are translated at average rates prevailing
throughout the year. Gains and losses resulting from the translation of
financial statements of the foreign susidiary are accumulated in other
comprehensive income (loss) and presented as part of stockholders'
equity. Exchange gains or losses from the settlement of foreign currency
transactions are reflected in the consolidated statement of earnings.
Comprehensive Income
On July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income consists of net income and
equity adjustments relating to foreign currency translation, fair value
of derivatives and available-for-sale securities and is presented in the
Consolidated Statements of Stockholders' Equity and Comprehensive Income.
The statement requires only additional disclosures in the consolidated
financial statements; it does not effect the Company's results of
operations.
S-8
Accounting for Derivative Instruments and Hedging Activities
Effective July 1, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. This
statement requires companies to record derivatives on the balance sheet
as assets or liabilities at their fair value. In certain circumstances,
changes in the value of such derivatives may be required to be recorded
as gains or losses. The impact of this statement did not have a material
effect on the Company's consolidated financial statements. The cumulative
effect of the adoption of this accounting policy was a $132,000, net of
tax, credit in the quarter ended September 30, 2000 which represented the
net of tax fair value of certain interest rate swap agreements at July 1,
2000.
Reclassifications
Reclassifications have been made to the 1999 and 2000 consolidated
financial statements to conform to the 2001 presentation.
Recent Accounting Pronouncements
Effective July 1, 2000, the Company adopted the SEC's Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," ("SAB
101") and the Emerging Issues Task Force Issue 00-10, "Accounting for
Shipping and Handling Fees and Costs," ("EITF 00-10"). SAB 101 provides
guidance related to revenue recognition. EITF 00-10 requires companies to
recognize revenue for amounts billed to customers for shipping and
handling charges. The adoption of these two pronouncements did not have a
material impact on the Company's consolidated statements of earnings.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires that the purchase method of accounting be used for all future
business combinations and specifies criteria that intangible assets
acquired in a business combination must meet to be recognized and
reported apart from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized,
but instead tested for impairment at least annually in accordance with
the provisions of SFAS No. 142. Amortization expense related to goodwill
was $1.2 million, $640,000 and $437,000 for the years ended June 30,
2001, 2000 and 1999, respectively. SFAS No. 142 will also require that
intangible assets with estimable useful lives be amortized over their
respective estimated useful lives, and reviewed for impairment in
accordance with SFAS No. 121. The Company will adopt the provisions of
SFAS 141 and SFAS 142 as of July 1, 2001.
The Company will evaluate its existing intangible assets and goodwill
that were acquired in prior purchase business combinations, and make any
necessary reclassifications in order to conform with the new criteria in
SFAS No. 141 for recognition apart from goodwill. The Company will be
required to reassess the useful lives and residual values of all
intangible assets acquired, and make any necessary amortization period
adjustments by September 30, 2001. In addition, the Company will be
required to test goodwill and, to the extent an intangible asset is
identified as having an indefinite useful life, the intangible asset, for
impairment in accordance with the provisions of SFAS No. 142 by June 30,
2002 and September 30, 2001, respectively. Any impairment loss will be
measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle as of July 1, 2001.
Because of the extensive effort needed to comply with adopting SFAS 141
and SFAS 142, it is not practicable to reasonably estimate the impact of
adopting these statements on the Company's consolidated financial
statements at the date of this report, including whether it will be
required to recognize any transitional impairment losses as the
cumulative effect of a change in accounting principle.
S-9
2. Acquisition of Businesses
TriLink
Effective March 23, 2001, the Company acquired all of the outstanding
stock of TriLink Communications Corp. ("TriLink") for 1.1 million shares
of Aeroflex common stock. TriLink designs, develops, manufactures and
markets fiber optic components for the communications industry, including
Lithium Niobate modulators and optical switches.
The Company evaluated the acquired tangible and identifiable intangible
assets to serve as a basis for allocation of the purchase price. The
Company allocated the purchase price, including acquisition costs of
approximately $300,000, as follows:
(In thousands)
Net tangible assets $ 1,171
Identifiable intangible assets - existing technology 6,000
- assembled workforce 430
Deferred income taxes on identifiable
intangible assets (2,572)
Excess costs over fair value of net assets
acquired 5,668
In-process research and development 1,000
-------
$11,697
=======
The existing technology, assembled workforce and costs in excess of fair
value of net assets acquired are being amortized on a straight-line basis
over 6 years. The acquired in-process research and development was not
considered to have reached technological feasibility and, in accordance
with accounting principles generally accepted in the United States of
America, the value of such has been expensed in the quarter ended March
31, 2001. At the acquisition date, TriLink was conducting design,
development, engineering and testing activities associated with the
completion of its 10 GB modulator.
Summarized below are the unaudited pro forma results of operations of the
Company as if TriLink had been acquired at the beginning of the fiscal
periods presented. The $1.0 million write-off has been included in the
June 30, 2001 pro forma income but not the June 30, 2000 pro forma income
in order to provide comparability to the respective historical periods.
Pro Forma
Years Ended
June 30,
--------------------------
2001 2000
---- ----
(In thousands, except per share data)
Net Sales $ 233,168 $ 188,790
Income before
cumulative effect
of a change in
accounting 19,870 12,721
Income before
cumulative effect
of a change in
accounting per share:
Basic $.34 $.26
Diluted .32 .24
S-10
The pro forma financial information presented above is not necessarily
indicative of either the results of operations that would have occurred
had the acquisition taken place at the beginning of the periods presented
or of future operating results of the combined companies.
RDL
On October 23, 2000, the Company acquired all of the outstanding stock of
RDL, Inc. ("RDL") for $14.0 million of available cash. RDL designs,
develops and manufactures advanced commercial communications test and
measurement products and defense subsystems. The acquired company's net
sales were approximately $15.0 million for the year ended March 31, 2000.
The Company evaluated the acquired tangible and identifiable intangible
assets to serve as a basis for allocation of the purchase price. The
Company allocated the purchase price, including acquisition costs of
approximately $100,000, as follows:
(In thousands)
Net tangible assets $ 6,774
Existing technology 2,970
Excess costs over fair value of net assets
acquired 2,856
In-process research and development 1,500
-------
$14,100
=======
The existing technology and costs in excess of fair value of net assets
acquired are being amortized on a straight-line basis over 7 years. The
acquired in-process research and development was not considered to have
reached technological feasibility and, in accordance with accounting
principles generally accepted in the United States of America, the value
of such has been expensed in the quarter ended December 31, 2000. At the
acquisition date, RDL was conducting design, development, engineering and
testing activities associated with the completion of its defense and
commercial product lines representing next-generation technologies.
Summarized below are the unaudited pro forma results of operations of the
Company as if RDL had been acquired at the beginning of the fiscal periods
presented. The $1.5 million write-off has been included in the June 30,
2001 pro forma income but not the June 30, 2000 pro forma income in order
to provide comparability to the respective historical periods.
Pro Forma
Years Ended
June 30,
-------------------------
2001 2000
---- ----
(In thousands, except per share data)
Net sales $ 237,690 $ 204,586
Income before
cumulative effect
of a change in
accounting 20,799 13,163
Income before
cumulative effect
of a change in
accounting per share:
Basic $.36 $.27
Diluted .34 .26
S-11
The pro forma financial information presented above is not necessarily
indicative of either the results of operations that would have occurred
had the acquisition taken place at the beginning of the periods presented
or of future operating results of the combined companies.
Altair
On October 16, 2000, the Company issued 550,000 shares(after adjustment
for the 2- for-1 stock split effective in November 2000) of its common
stock for all the outstanding common stock of Altair Aerospace Corporation
("Altair"). Altair designs and develops advanced object-oriented control
systems software based upon a proprietary software engine. This business
combination has been accounted for as a pooling-of-interests and,
accordingly, for all periods prior to the business combination, the
Company's historical consolidated financial statements have been restated
to include the accounts and results of operations of Altair. Altair's net
sales were approximately $2.8 million and $3.3 million for the years ended
June 30, 2000 and 1999, respectively, and its net income (loss) was
$(21,000) and $8,000, respectively. As of June 30, 2000, Altair's total
assets were $788,000 and its total liabilities were $1.1 million.
For periods preceding the combination, there were no intercompany
transactions which required elimination from the combined consolidated
results of operations and there were no adjustments necessary to conform
the accounting practices of the two companies.
Amplicomm
Effective September 7, 2000, Aeroflex Amplicomm, Inc. ("Amplicomm") was
formed as a wholly-owned subsidiary of the Company. On September 20, 2000,
Amplicomm acquired certain equipment and intellectual property from a
third party for approximately $300,000, entered into employment agreements
with this third party's former owners and issued 25% of the stock of
Amplicomm to them. Amplicomm designs and develops fiber optic amplifiers
and modulator drivers used by manufacturers of advanced fiber optic
systems. On a pro forma basis, had the Amplicomm acquisition taken place
as of the beginning of the periods presented, results of operations for
those periods would not have been materially affected.
UTMC
Effective February 25, 1999, the Company acquired all of the outstanding
stock of UTMC Microelectronic Systems, Inc. ("UTMC") for $42.5 million of
cash. The purchase price was paid with available cash of $22.5 million and
borrowings under the Company's bank loan agreement of $20.0 million. UTMC
is a supplier of radiation-tolerant integrated circuits for satellite
communications. The acquired company's net sales were approximately $33.4
million for the year ended December 31, 1998.
The Company evaluated the acquired tangible and identifiable intangible
assets to serve as a basis for allocation of the purchase price. The
Company allocated the purchase price, including acquisition costs of
approximately $500,000, as follows:
(In thousands)
Net tangible assets $28,771
Identifiable intangible assets - existing technology 4,700
- tradename 1,000
- assembled workforce 600
Costs in excess of fair value of
net assets acquired 4,429
In-process research and development 3,500
-------
$43,000
=======
S-12
The identifiable intangibles and costs in excess of fair value of net
assets are being amortized on a straight-line basis over 6 to 15 years.
The acquired in-process research and development was not considered to
have reached technological feasibility and, in accordance with accounting
principles generally accepted in the United States of America, the value
of such was expensed in the third quarter of fiscal 1999.
Summarized below are the unaudited pro forma results of operations of the
Company as if UTMC had been acquired as of July 1, 1998. The $3.5 million
write-off has been included in the June 30, 1999 pro forma income in order
to provide comparability to the actual results.
Pro Forma Year Ended
June 30,
--------------------
1999
----
(In thousands, except per share data)
Net sales $ 180,427
Net income 9,477
Net income per share
Basic $ .21
Diluted .20
The pro forma financial information presented above is not necessarily
indicative of either the results of operations that would have occurred
had the acquisition taken place at the beginning of the period presented
or of future operating results of the combined companies.
Europtest
Effective September 1, 1998, the Company acquired 90% of the stock of
Europtest, S.A. (France) for approximately $1.1 million. The purchase
agreement also requires that the Company purchase the remaining 10% of
Europtest pro rata over a three-year period at prices determined based
upon net sales of Europtest products. In each of March 2001 and October
1999, the Company purchased an additional 3.4% of Europtest's stock for
approximately $47,000 and $54,000, respectively. Europtest develops and
sells specialized software-driven test equipment used primarily in
cellular, satellite and other communications applications. The acquired
company's net sales were approximately $1.9 million for the year ended
March 31, 1998. On a pro forma basis, had the Europtest acquisition taken
place as of the beginning of the periods presented, results of operations
for those periods would not have been materially affected. The purchase
price has been allocated to the assets acquired and liabilities assumed
based on their fair values.
The acquisitions (except for Altair, as discussed above) have been
accounted for as purchases and, accordingly, the acquired assets and
liabilities assumed have been recorded at their estimated fair values at
the respective dates of acquisition. The operating results of each
acquired company are included in the consolidated statements of earnings
from the respective acquisition dates. Further, with respect to Altair,
the Company's historical consolidated financial statements have been
restated for all periods prior to the business combination.
S-13
3. Marketable Securities
All of the Company's marketable securities are deemed by management to be
available-for-sale and are reported at fair value with net unrealized
gains or losses reported within stockholders' equity. Realized gains and
losses are recorded based on the specific identification method. For
fiscal years 2001, 2000 and 1999, gross realized gains and (losses) were
$0, $193,000 and $0, respectively. The carrying amount of the Company's
investments is shown in the table below:
June 30,
-------------------
2001 2000
-------- -------
(In thousands)
Amortized cost $12,075 $11,430
Gross unrealized gains 6 85
Gross unrealized losses (69) (3)
------- -------
Estimated fair value $12,012 $11,512
======= =======
The marketable securities at June 30, 2001 were virtually all U.S.
government agency debt securities with scheduled maturities within one
year.
4. Inventories
Inventories consist of the following:
June 30,
--------------------------
2001 2000
-------- --------
(In thousands)
Raw materials......... $28,999 20,392
Work-in-process....... 13,071 12,783
Finished goods........ 6,353 4,192
------- -------
$48,423 $37,367
======= =======
Inventories include contracts-in-process of $15.3 million and $9.3
million at June 30, 2001 and 2000, respectively, which consist
substantially of unbilled material, labor and overhead costs that are or
were expected to be billed during the succeeding fiscal year.
5. Property, Plant and Equipment
Property, plant and equipment consists of the following:
June 30,
-----------------------------
2001 2000 Estimated
------------- ------------- Useful Life
(In thousands) In Years
-----------
Land......................... $ 5,024 $ 4,725
Building and leasehold
improvements................ 37,266 33,061 2 to 40
Machinery, equipment, tools
and dies.................... 48,087 38,411 3 to 10
Furniture and fixtures....... 9,536 8,270 5 to 10
Assets recorded under
capital leases.............. 6,711 6,769 5 to 10
--------- ---------
106,624 91,236
Less accumulated depreciation
and amortization............ 44,487 38,985
--------- ---------
$ 62,137 $ 52,251
========= =========
Repairs and maintenance expense on property, plant and equipment was $2.6
million, $2.5 million and $2.3 million for the years ended June 30, 2001,
2000 and 1999, respectively.
S-14
6. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities include accrued salaries,
wages and other compensation of $7.4 million and $6.9 million at June 30,
2001 and 2000, respectively.
7. Long-Term Debt and Credit Arrangements
Long-term debt consists of the following:
June 30,
-----------------------
2001 2000
------ ------
(In thousands)
Revolving credit, term loan
and mortgage agreement (a)... $ 3,724 $ 4,038
Building mortgage (b)......... 3,765 3,965
Capitalized lease
obligations (c).............. 5,152 6,026
Other......................... 692 1,056
--------- ---------
13,333 15,085
Less current maturities....... 1,905 2,102
--------- ---------
$ 11,428 $ 12,983
========= =========
Aggregate long-term debt as of June 30, 2001 matures in each fiscal year
as follows:
(In thousands)
2002............... $ 1,905
2003............... 1,331
2004............... 1,433
2005............... 1,615
2006............... 1,063
Thereafter......... 5,986
-------
$13,333
=======
Interest paid was $1.4 million, $2.5 million and $1.6 million during the
years ended June 30, 2001, 2000 and 1999, respectively.
(a) As of February 25, 1999, the Company replaced a previous agreement
with a revised revolving credit, term loan and mortgage agreement with
two banks which is secured by substantially all of the Company's assets
not otherwise encumbered. The agreement provided for a revolving credit
line of $23.0 million, a term loan of $20.0 million and a mortgage on the
Company's Plainview property for $4.5 million. The revolving credit loan
facility expires in December 2002. The outstanding balance of the term
loan was fully paid with the proceeds from the Company's sale of its
Common Stock in May 2000. The interest rate on borrowings under this
agreement is at various rates depending upon certain financial ratios,
with the current rate substantially equivalent to prime (approximately
6.75% at June 30, 2001) on the revolving credit borrowings. The Company
paid a facility fee of $100,000 and is required to pay a commitment fee
of .25% per annum of the average unused portion of the credit line. The
mortgage is payable in monthly installments of approximately $26,000
through March 2008 and a balloon payment of $1.6 million in April 2008.
The Company has entered into an interest rate swap agreement for the
outstanding amount under the mortgage agreement at approximately 7.6% in
order to reduce the interest rate risk associated with these borrowings.
The fair market value of the interest rate swap agreement was $66,000 as
of June 30, 2001 in favor of the banks.
S-15
The terms of the agreement require compliance with certain covenants
including minimum consolidated tangible net worth and pretax earnings,
maintenance of certain financial ratios, limitations on capital
expenditures and indebtedness and prohibition of the payment of cash
dividends. In connection with the purchase of certain materials for use
in manufacturing, the Company has a letter of credit of $2.0 million. At
June 30, 2001, the Company's available unused line of credit was $21.0
million after consideration of the letter of credit.
(b) In December 1998, the Company financed the acquisition and renovation
of the land and building of its Pearl River, NY facility and received
proceeds amounting to $4.2 million. This debt requires a balloon payment
of $3.8 million in 2019.
(c) During the year ended June 30, 1998, the Company entered into
equipment loans with two banks totaling $6.2 million. In June 2000, the
remaining balance of these loans of $4.1 million was refinanced under two
sale and capital leaseback agreements for approximately $6.0 million. For
purposes of the Consolidated Statements of Cash Flows, the $4.1 million
refinancing was considered a non-cash transaction. These agreements
expire through June 2006 and bear interest at approximately 7.9%.
8. Stockholders' Equity
Common Stock Offering
In May 2000, the Company sold 6.3 million shares (adjusted for the stock
splits) of its Common Stock in a public offering for $68.5 million, net
of an underwriting discount of $3.5 million and issuance costs of
$500,000. Of these net proceeds, $13.0 million was used to repay the term
loan. The balance of the net proceeds is invested in short-term
marketable securities and is intended to ultimately be used for
additional working capital, including research and development, for
expansion of our facilities, and for general corporate purposes,
including possible acquisitions of technologies, product lines or
businesses.
Common Stock Splits
On June 12, 2000, the Company's Board of Directors authorized a
five-for-four stock split on its Common Stock, effective June 26, 2000.
On November 2, 2000, the Company's Board of Directors authorized a
two-for-one stock split of its Common Stock, effective November 16, 2000.
The share and per share amounts in the consolidated financial statements
give effect to the stock splits.
Stock Options and Warrants
Under the Company's stock option plans, options may be granted to
purchase shares of the Company's Common Stock exercisable at prices equal
to the fair market value on the date of grant. During 1990, the Company's
shareholders approved the Non-Qualified Stock Option Plan (the "NQSOP").
In December 1993, the Board of Directors adopted the Outside Director
Stock Option Plan (the "Directors' Plan") which provides for options to
non-employee directors, which become exercisable in three installments
and expire ten years from the date of grant. The Directors' Plan, as
amended, covers 1.3 million shares of the Company's Common Stock. In
November 1994, the shareholders approved the Directors' Plan and the 1994
Non-Qualified Stock Option Plan (the "1994 Plan"). In November 1996, the
shareholders approved the 1996 Stock Option Plan (the "1996 Plan"). In
April 1998, the Board of Directors adopted the 1998 Stock Option Plan
(the "1998 Plan"). In January 2000, the shareholders approved the 1999
Stock Option Plan (the "1999 Plan"). In March 2000, the Board of
Directors adopted the 2000 Stock Option Plan ("the 2000 Plan"). In
November 2000, the shareholders approved the Key Employee Stock Option
Plan ("the Key Employee Plan"). The NQSOP, the 1994 Plan, the 1996 Plan,
the 1998 Plan, the 1999 Plan, the 2000 Plan and the Key Employee Plan
provide for options which become exercisable in one or more installments
and each covers 3.8 million shares of the Company's Common Stock except
for the 1999 Plan which covers 2.3 million
S-16
shares, the 2000 Plan which covers 4.6 million shares and the Key
Employee Plan which covers 4.0 million shares. Options under the NQSOP
and the 1994 Plan expire five years from the date of grant. Options under
the 1996 Plan, the 1998 Plan, the 1999 Plan, the 2000 Plan and the Key
Employee Plan shall expire not later than ten years from the date of
grant.
The Company has also issued to employees, who are not executive officers,
options to purchase 1.4 million shares of Common Stock which were not
covered by one of the above plans.
Additional information with respect to the Company's stock options is as
follows:
Weighted Shares
Average Under
Exercise Outstanding
Prices Options
-------- ------------
(In thousands)
Balance, July 1,
1998......... $ 2.22 9,729
Granted....... 4.73 2,889
Forfeited..... 1.80 (8)
Exercised..... 1.50 (3,650)
---------
Balance, June 30,
1999......... 3.32 8,960
Granted....... 14.01 4,395
Forfeited..... 4.82 (56)
Exercised..... 2.23 (3,733)
---------
Balance, June 30,
2000......... 8.65 9,566
Granted....... 21.22 7,128
Forfeited..... 9.22 (148)
Exercised..... 4.02 (2,702)
---------
Balance, June 30,
2001......... 16.02 13,844
=========
The Company's stock option plans allow employees to use shares received
from the exercise of the option to satisfy the tax withholding
requirements. During fiscal years 2001, 2000 and 1999, payroll tax on
stock option exercises were withheld from employees in shares of the
Company's Common Stock amounting to $4.2 million, $0 and $2.6 million,
respectively.
Options to purchase 4.4 million, 3.3 million and 3.8 million shares were
exercisable at weighted average exercise prices of $10.21, $6.80 and
$2.03 as of June 30, 2001, 2000 and 1999, respectively.
S-17
The options outstanding as of June 30, 2001 are summarized in ranges as
follows:
Options Outstanding
----------------------------------------------
Weighted Weighted
Range of Average Average
Exercise Exercise Options Remaining
Prices Price Outstanding Life
----------- -------- ----------- ---------
(In thousands)
$ 1.67-$ 2.50 $ 1.89 328 5.6 years
$ 3.28-$ 4.65 4.13 1,697 6.9
$ 5.38-$ 7.03 6.36 2,231 7.7
$10.13-$13.56 12.93 1,775 9.2
$15.34-$22.53 17.88 4,685 9.2
$26.00-$34.41 29.82 3,128 7.4
---------
13,844
=========
Options Exercisable
----------------------------------
Weighted
Range of Average
Exercise Exercise Options
Prices Price Exercisable
----------- -------- -----------
(In thousands)
$ 1.67-$ 2.50 $ 1.89 328
$ 3.28-$ 4.65 4.15 1,218
$ 5.38-$ 7.03 6.18 1,021
$10.13-$13.56 13.56 474
$15.34-$22.53 19.22 1,400
--------
4,441
========
As of June 30, 2000, the Company had outstanding warrants to purchase
132,000 shares of its Common Stock exercisable between $2.70 and $3.00
per share. All of these warrants were exercised or expired during fiscal
year 2001.
Accounting for Stock-Based Compensation
In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." The Company has chosen not to implement the
fair value based accounting method for employee and director stock
options, but has elected to disclose the pro forma net income and net
income per share as if such method had been used to account for
stock-based compensation cost as described in SFAS No. 123.
The per share weighted average fair value of stock options granted during
fiscal 2001, 2000 and 1999 was $18.68, $10.60 and $3.00, respectively, on
the date of grant using the Black Scholes option-pricing model with the
following weighted average assumptions: 2001 - expected dividend yield of
0%, risk free interest rate of 5.6%, expected stock volatility of 137%,
and an expected option life of 5.1 years; 2000 - expected dividend yield
of 0%, risk free interest rate of 6.0%, expected stock volatility of 94%,
and an expected option life of 5.3 years; 1999 - expected dividend yield
of 0%, risk free interest rate of 5.3%, expected stock volatility of 77%,
and an expected option life of 5.1 years. The pro forma compensation cost
before income taxes was $66.3 million, $14.0 million and $4.8 million for
the years ended June 30, 2001, 2000 and 1999, respectively, based on the
aforementioned fair value at the grant date only for options granted
after fiscal year 1995. The Company's net income and net income per share
using this pro forma compensation cost would have been:
S-18
Years Ended June 30,
----------------------------
(In thousands, except per share data)
2001
----------------------------
As Reported Pro Forma
----------- ---------
Net income (loss) before
cumulative effect of
a change in
accounting................. $ 21,222 $(22,513)
Net income (loss) before
cumulative effect of
a change in
accounting per share
Basic................$ 0.37 $ (0.39)
Diluted.............. 0.35 *
* As a result of the loss, all options are anti-dilutive.
2000
----------------------------
As Reported Pro Forma
----------- ---------
Net income................... $ 14,379 $ 5,284
Net income per share
Basic................. $ 0.30 $ 0.11
Diluted............... 0.28 0.11
1999
----------------------------
As Reported Pro Forma
----------- ---------
Net income............... $ 9,765 $ 6,617
Net income per share
Basic............. $ 0.22 $ 0.15
Diluted........... 0.20 0.14
Since the pro forma compensation cost reflects only options granted after
fiscal year 1995, the full impact of calculating stock-based compensation
costs under SFAS No. 123 is not reflected in the pro forma net income
because compensation cost is recognized over the respective vesting
period and compensation cost for options granted prior to fiscal year
1996 was not reflected.
Shareholders' Rights Plan
On August 13, 1998, the Company's Board of Directors approved a
Shareholders' Rights Plan which provides for a dividend distribution of
one right for each share to holders of record of the Company's Common
Stock on August 31, 1998 and the issuance of one right for each share of
Common Stock that shall be subsequently issued. The rights become
exercisable only in the event a person or group ("Acquiring Person")
accumulates 15% or more of the Company's Common Stock, or if an Acquiring
Person announces an offer which would result in it owning 15% or more of
the Common Stock. The rights expire on August 31, 2008. Each right will
entitle the holder to buy 1/2500 of a share of Series A Junior
Participating Preferred Stock, as amended, of the Company at a price of
$65. In addition, upon
S-19
the occurrence of a merger or other business combination, or the
acquisition by an Acquiring Person of 50% or more of the Common Stock,
holders of the rights, other than the Acquiring Person, will be entitled
to purchase either Common Stock of the Company or common stock of the
Acquiring Person at half their respective market values. The Company will
be entitled to redeem the rights for $.01 per right at any time prior to
a person becoming an Acquiring Person.
Net Income Per Share
A reconciliation of the numerators and denominators of the Basic EPS and
Diluted EPS calculations is as follows:
Years Ended June 30,
------------------------------------
2001 2000 1999
------ ------ ------
(In thousands, except per share data)
Computation of Adjusted Net Income:
Income before cumulative
effect of a change in
accounting..................... $ 21,222 $ 14,379 $ 9,765
Cumulative effect of a
change in accounting, net
of tax......................... 132 - -
-------- -------- --------
Net income....................... $ 21,354 $ 14,379 $ 9,765
======== ======== ========
Computation of Adjusted
Weighted Average Shares
Outstanding:
Weighted average shares
outstanding.................... 58,124 48,189 45,011
Add: Effect of dilutive
options and warrants
outstanding.................... 2,917 3,285 3,360
-------- -------- --------
Weighted average shares and
common share equivalents used
for computation of diluted
earnings per common share...... 61,041 51,474 48,371
======== ======== ========
Income Per Share - Basic:
Income before cumulative
effect....................... $0.37 $0.30 $0.22
Cumulative effect of a change
in accounting................ - - -
----- ----- -----
Net income..................... $0.37 $0.30 $0.22
===== ===== =====
Income Per Share - Diluted:
Income before cumulative
effect....................... $0.35 $0.28 $0.20
Cumulative effect of a change
in accounting................ - - -
----- ----- -----
Net income..................... $0.35 $0.28 $0.20
===== ===== =====
Options to purchase 9.3 million shares at exercise prices ranging between
$13.56 and $34.41 per share were outstanding as of June 30, 2001 but were
not included in the computation of Diluted EPS because the exercise
prices of these options were greater than the average market price of the
common shares.
S-20
9. Comprehensive Income
The components of comprehensive income are as follows:
Years Ended June 30,
---------------------------------
2001 2000 1999
------- ------- ------
(In thousands)
Net income $21,354 $14,379 $9,765
Unrealized gain (loss) on
interest rate swap
agreement, net of tax (43) - -
Unrealized investment
gain (loss), net of tax (124) 82 -
Foreign currency
translation adjustment (69) - -
------- ------- ------
Total comprehensive income $21,118 $14,461 $9,765
======= ======= ======
10. Income Taxes
The provision (benefit) for income taxes consists of the following:
Years Ended June 30,
----------------------------------
2001 2000 1999
------- ------ ------
(In thousands)
Current:
Federal............... $ 8,412 $4,656 $4,465
State and local....... 550 458 873
------- ------ ------
8,962 5,114 5,338
------- ------ ------
Deferred:
Federal............... 2,559 990 1,989
State and local....... (71) 96 (177)
------- ------ ------
2,488 1,086 1,812
------- ------ ------
$11,450 $6,200 $7,150
======= ====== ======
The provision for income taxes varies from the amount computed by
applying the U.S. Federal income tax rate to income before income taxes
as a result of the following:
Years Ended June 30,
----------------------------------
2001 2000 1999
------- ------ ------
(In thousands)
Tax at statutory rate.... $11,435 $ 7,203 $5,920
Utilization of capital
loss carryforward....... - (1,017) -
Non-deductible acquired
in-process research
and development charge.. 350 - 1,225
State and local
income tax.............. 311 360 452
Research and development
credit.................. (675) (300) (500)
Other, net............... 29 (46) 53
------- ------- ------
$11,450 $ 6,200 $7,150
======= ======= ======
S-21
Deferred tax assets and liabilities consist of:
June 30,
----------------------
2001 2000
-------- --------
(In thousands)
Accounts receivable....................... $ 206 $ 210
Inventories............................... 6,376 4,891
Accrued expenses and other current
liabilities............................. 566 216
-------- --------
Current assets.......................... 7,148 5,317
-------- --------
Capital lease obligation.................. 1,574 1,955
Other long-term liabilities............... 1,811 1,793
Capital loss carryforwards................ 684 1,262
Tax loss carryforwards.................... 11,268 6,189
Tax credit carryforwards.................. 5,016 4,164
Less: valuation allowance................. (1,088) (2,165)
-------- --------
Non-current assets...................... 19,265 13,198
-------- --------
Property, plant and equipment............. (4,688) (5,698)
Intangibles............................... (6,039) (4,407)
-------- --------
Long-term liabilities................... (10,727) (10,105)
-------- --------
Net non-current assets (liabilities).... 8,538 3,093
-------- --------
Total................................. $ 15,686 $ 8,410
======== ========
The Company recorded credits of $20.8 million, $13.3 million and $5.2
million to additional paid-in capital during the years ended June 30,
2001, 2000 and 1999, respectively, in connection with the tax benefit
related to compensation deductions on the exercise of stock options and
warrants. The deduction in fiscal 2001 and 2000, has created a net
operating loss carryforward for tax purposes which has resulted in an
increase in the Company's deferred tax assets. The tax loss carryforwards
and tax credit carryforwards expire through 2021.
In accordance with SFAS No. 109, the Company records a valuation
allowance against deferred tax assets if it is more likely than not that
some or all of the deferred tax assets will not be realized. The Company
has recorded a valuation allowance primarily against capital loss
carryforwards and certain other tax loss and credit carryforwards which
may expire before they can be utilized. The reduction of the valuation
allowance in fiscal 2001, was primarily due to the expiration of capital
loss carryforwards.
The Company is undergoing routine audits by various taxing authorities of
its state and local income tax returns covering periods from 1997 to
1999. Management believes that the probable outcome of these various
audits should not materially affect the consolidated financial statements
of the Company.
The Company made income tax payments of $227,000, $2.0 million and $3.3
million and received refunds of $2.3 million, $940,000 and $75,000 during
the years ended June 30, 2001, 2000 and 1999, respectively.
11. Employment Contracts
As of June 30, 2001, the Company has employment agreements with certain
of its officers for periods through June 30, 2004 with annual
remuneration ranging from $228,000 to $381,000, plus cost of living
adjustments and, in some cases, additional compensation based upon
earnings of the Company. Future aggregate minimum payments under these
contracts are $1.3 million per year. Certain of the contracts provide for
a three-year consulting period at the expiration of the employment term
at two-thirds of salary. In addition, these officers have the option to
terminate their employment agreements upon change in control of the
Company, as defined, and receive lump sum payments equal to the salary
and bonus, if any, for the remainder of the term.
S-22
12. Employee Benefit Plans
All employees of the Company and certain subsidiaries who are not members
of a collective bargaining agreement are eligible to participate in one
of three company sponsored 401(k) plans. Each participant has the option
to contribute a portion of his or her compensation and receive a
discretionary employer matching contribution. Furthermore, employees of
certain subsidiaries are eligible to participate in qualified profit
sharing plans and receive an allocation of a discretionary share of their
respective subsidiary's profits. For fiscal years ended June 30, 2001,
2000 and 1999, these 401(k) and profit sharing plans had an aggregate
expense of $2.3 million, $1.7 million and $1.0 million, respectively.
Effective January 1, 1994, the Company established a Supplemental
Executive Retirement Plan (the "SERP") which provides retirement, death
and disability benefits to certain of its officers. The SERP expense for
the fiscal years ended June 30, 2001, 2000 and 1999 was $625,000,
$454,000 and $384,000, respectively. The assets of the SERP are held in a
Rabbi Trust and amounted to $2.4 million and $1.8 million at June 30,
2001 and 2000, respectively. The accumulated benefit obligation was $3.0
million and $2.6 million at June 30, 2001 and 2000, respectively. The
projected benefit obligation was $4.8 million and $3.3 million at June
30, 2001 and 2000, respectively. The intangible asset related to the SERP
was $366,000 and $586,000 at June 30, 2001 and 2000, respectively. A
discount rate of 7.0% and 7.5% was assumed in the above calculations as
of June 30, 2001 and 2000, respectively, and a rate of compensation
increase of 3.0% was assumed for both years. No participants are
currently receiving benefits.
13. Commitments and Contingencies
Operating Leases
Several of the Company's operating facilities and certain machinery and
equipment are leased under agreements expiring through 2007. The leases
for machinery and equipment generally contain options to purchase at the
then fair market value of the related leased assets.
Future minimum payments under operating leases as of June 30, 2001 are as
follows for the fiscal years:
(In thousands)
--------------
2002................... $ 4,027
2003................... 3,442
2004................... 2,223
2005................... 1,384
2006................... 773
Thereafter............. 416
-------
$12,265
=======
Rental expense was $3.7 million, $3.0 million and $2.7 million during the
fiscal years 2001, 2000 and 1999, respectively.
Legal Matters
A subsidiary of the Company whose operations were discontinued in 1991,
is one of several defendants named in a personal injury action initiated
in August 1994 by a group of plaintiffs. The plaintiffs are seeking
damages which cumulatively exceed $500 million. The complaint alleges,
among other things, that the plaintiffs suffered injuries from exposure
to substances contained in products sold by the subsidiary to one of its
customers. This action is in the discovery stage. Based upon available
information and considering its various defenses, together with its
product liability insurance, in the opinion of management of the Company
the outcome of the action against its subsidiary will not have a
materially adverse effect on the Company's consolidated financial
statements.
S-23
The Company is involved in various other routine legal matters.
Management believes the outcome of these matters will not have a
materially adverse effect on the Company's consolidated financial
statements.
14. Business Segments
The Company's business segments and major products included in each
segment, are as follows:
Microelectronic Solutions:
a) Microelectronic Modules
b) Thin Film Interconnects
c) Integrated Circuits
Test Solutions:
a) Instrument Products
b) Motion Control Systems
Isolator Products:
a) Commercial Spring and Rubber Isolators
b) Industrial Spring and Rubber Isolators
c) Military Wire-rope Isolators
The Company is a manufacturer of advanced technology systems and
components for commercial industry, government and defense contractors.
Approximately 29%, 33% and 42% of the Company's sales for the fiscal
years 2001, 2000 and 1999, respectively, were to agencies of the United
States government or to prime defense contractors or subcontractors of
the United States government. The only customers which constituted more
than 10% of the Company's sales during any year in the period presented
were Agere which comprised 10.8% of sales in fiscal year 2001, Teradyne
and Lockheed Martin which comprised 10.9% and 10.3% of sales in fiscal
year 2000, respectively, and Lockheed Martin and Lucent Technologies
which comprised 12.0% and 11.1% of sales in fiscal year 1999,
respectively. The Company's customers are located primarily in the United
States, but export sales accounted for 14.7%, 11.6% and 7.6% of sales in
fiscal years 2001, 2000 and 1999, respectively.
S-24
Years Ended June 30,
------------------------------
2001 2000 1999
------ ------ ------
Business Segment Data:
(In thousands)
Net sales:
Microelectronic Solutions... $144,901 $110,253 $ 96,846
Test Solutions.............. 68,394 58,744 44,793
Isolator Products........... 19,513 19,753 18,743
--------- --------- ---------
Net sales................. $232,808 $188,750 $160,382
========= ========= =========
Operating income:
Microelectronic Solutions... $ 35,959 $ 22,734 $ 20,104
Test Solutions.............. 1,971 2,438 3,181
Isolator Products........... 2,326 2,692 2,108
General corporate expenses.. (7,293) (5,397) (4,262)
--------- --------- ---------
32,963 22,467 21,131
Acquired in-process research
and development(1)(2)..... (2,500) - (3,500)
Interest expense............ (1,397) (2,442) (1,493)
Other income (expense), net. 3,606 554 777
--------- --------- ---------
Income before income
taxes..................... $ 32,672 $ 20,579 $ 16,915
========= ========= =========
Total assets:
Microelectronic Solutions... $130,119 $112,183 $104,222
Test Solutions.............. 74,308 53,189 44,414
Isolator Products........... 9,445 9,567 10,020
Corporate................... 96,380 74,556 7,016
--------- --------- ---------
Total assets.............. $310,252 $249,495 $165,672
========= ========= =========
Capital expenditures:
Microelectronic Solutions... $ 8,057 $ 4,777 $ 6,955
Test Solutions.............. 4,878 2,297 1,582
Isolator Products........... 341 152 586
Corporate................... 16 - 4
--------- --------- ---------
Total capital
expenditures.............. $ 13,292 $ 7,226 $ 9,127
========= ========= =========
Depreciation and amortization
expense:
Microelectronic Solutions... $ 8,010 $ 6,657 $ 4,112
Test Solutions.............. 3,042 1,765 1,864
Isolator Products........... 522 554 563
Corporate................... 26 28 30
--------- --------- ---------
Total depreciation and
amortization expense..... $ 11,600 $ 9,004 $ 6,569
========= ========= =========
(1) The fiscal year 2001 special charges for the write-off of
in-process research and development acquired in the purchase of
RDL ($1.5 million) and TriLink ($1.0 million) are allocable fully
the Test Solutions and Microelectronic Solutions segments,
respectively.
(2) The fiscal year 1999 special charge for the write-off of
in-process research and development acquired in the purchase of
UTMC ($3.5 million) is allocable fully to the Microelectronic
Solutions segment.
S-25
Quarterly Financial Data (Unaudited):
(In thousands, except per share data and footnotes)
Quarter
------------------------------------------ Year Ended
2001 First Second Third Fourth June 30,
----------------------------------------------------------------------------------
Net Sales $ 51,127 $ 58,448 $ 64,026 $ 59,207 $232,808
Gross Profit 19,465 24,827 28,129 23,728 96,149
Income before cumulative
effect of a change in
accounting (1) $ 5,089 $ 5,625 $ 6,334 $ 4,174 $ 21,222
========= ========= ========= ========= =========
Net income before
cumulative effect of a
change in accounting
per share:
Basic (1) $ 0.09 $ 0.10 $ 0.11 $ 0.07 $ 0.37
======= ======= ======= ======= =======
Diluted (1) $ 0.09 $ 0.09 $ 0.10 $ 0.07 $ 0.35
======= ======= ======= ======= =======
Quarter
------------------------------------------ Year Ended
2000 (Restated, Note 2) First Second Third Fourth June 30,
----------------------------------------------------------------------------------
Net Sales $ 42,634 $ 41,912 $ 47,054 $ 57,150 $188,750
Gross Profit 15,247 13,535 17,213 22,555 68,550
Net Income $ 2,779 $ 1,025 $ 3,105 $ 7,470 $ 14,379
========= ========= ========= ========= =========
Net income per share:
Basic $ 0.06 $ 0.02 $ 0.07 $ 0.14 $ 0.30
======= ======= ======= ======= =======
Diluted $ 0.06 $ 0.02 $ 0.06 $ 0.13 $ 0.28
======= ======= ======= ======= =======
(1) Includes $1.5 million, or $990,000, net of tax, for the year ended June
30, 2001 and quarter ended December 31, 2000, for the write-off of the
in-process research and development acquired in connection with the
purchase of RDL, Inc. and $1.0 million for the year ended June 30, 2001
and the quarter ended March 31, 2001, for the write-off of the
in-process research and development acquired in connection with the
purchase of TriLink Communications Corp. (combined $.03 per basic and
diluted share).
Since per share information is computed independently for each quarter and the
full year, based on the respective average number of common and common
equivalent shares outstanding, the sum of the quarterly per share amounts does
not necessarily equal the per share amounts for each year.
All per share amounts have been restated to reflect a five-for-four stock split
that was paid on July 7, 2000 and a two-for-one stock split that was paid on
November 22, 2000.
S-26
AEROFLEX INCORPORATED
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
-----------------------------
Charged
Balance at Charged to to other Balance at
beginning costs and accounts Deductions end of
Description of period expenses - describe - describe period
----------- ---------- ---------- ---------- ---------- ----------
YEAR ENDED JUNE 30, 2001:
------------------------
Allowance for doubtful
accounts $ 509 $ 58 $ - $ 108 (A) $ 459
======= ======= ======== ======= =======
Reserve for inventory
obsolescence $2,830 $2,032 $ - $ 796 (B) $4,066
======= ======= ======== ======= =======
YEAR ENDED JUNE 30, 2000:
------------------------
Allowance for doubtful
accounts $ 381 $ 183 $ - $ 55 (A) $ 509
======= ======= ======== ======= =======
Reserve for inventory
obsolescence $2,764 $ 640 $ - $ 574 (B) $2,830
======= ======= ======== ======= =======
YEAR ENDED JUNE 30, 1999:
------------------------
Allowance for doubtful
accounts $ 317 $ 152 $ - $ 88 (A) $ 381
======= ======= ======== ======= =======
Reserve for inventory
obsolescence $2,357 $ 450 $ - $ 43 (B) $2,764
======= ======= ======== ======= =======
Note: (A) - Net write-offs of uncollectible amounts.
(B) - Write-off of inventory.
S-27
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as........................... 'TM'
The Greek letter mu shall be expressed as............................ 'u'