10-K405 1 a10-k405.txt 10-K405 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-14224 ------------------------ IFR SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 48-1197645 (State or other jurisdiction of (IRS Employer incorporation of organization) Identification No.) 10200 WEST YORK STREET, WICHITA, KANSAS 67215 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (316) 522-4981 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE (Title of class) ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 2, 2000 was approximately $48,981,986 (based on the June 2, 2000 closing price of $5.938 per share). As of June 2, 2000, there were 8,248,903 shares of Registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy statement for the 2000 Annual Meeting of Stockholders are incorporated by reference in Part III hereof. The Exhibit Index to this Form 10-K is located on pages 41 through 43. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE -------- PART I...................................................... 1 Item 1. Business....................................... 1 Item 2. Properties..................................... 6 Item 3. Legal Proceedings.............................. 7 Item 4. Submission of Matters to a Vote of Security Holders................................................. 7 PART II..................................................... 7 Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters............................. 7 Item 6. Selected Financial Data........................ 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 9 Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................................. 12 Item 8. Financial Statements and Supplementary Data.... 13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 40 PART III.................................................... 40 Item 10. Directors and Executive Officers of the Registrant.............................................. 40 Item 11. Executive Compensation......................... 40 Item 12. Security Ownership of Certain Beneficial Owners and Management.......................................... 40 Item 13. Certain Relationships and Related Transactions............................................ 40 PART IV..................................................... 40 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................... 40 Exhibit Index................................... 41 Signatures...................................... 44
PART I ITEM 1. BUSINESS GENERAL IFR Systems, Inc. ("IFR" or the "Company") is a Delaware corporation, incorporated in 1998 as a successor by merger to a corporation incorporated in 1985, with its principal offices in Wichita, Kansas. IFR's predecessor corporation was originally founded in 1968 as a supplier of specialized test solutions to the avionics industry. IFR expanded its activities in 1974 to apply its knowledge of radio frequency ("RF") and related technologies to the development of test solutions for the then emerging wireless communications market. Today, through its Electronics Test and Measurement Segment ("ETM"), IFR designs, manufactures, and markets communications, test and measurement, and avionics test instruments that are used to test a wide variety of radio products, aircraft and avionics systems. In the description of the Company's business, reference to IFR and to the Company includes all subsidiaries of the Company, unless otherwise stated. DISCONTINUED OPERATIONS--see NOTE 10 to the consolidated financial statements On June 25, 1999, the Board of Directors approved a formal plan to sell the Company's Optical Test and Measurement Division ("OTM Division"). The sale was completed on July 7, 1999 to GN Nettest, a company in the GN Great Nordic Group, Copenhagen, Denmark for $43,988,000 in cash. A net of tax gain of approximately $11,031,000 (approximately $1.34 per share) was recorded. The proceeds from the sale were used to reduce the Company's outstanding debt obligation in July 1999, with $31,740,000 applied to long-term debt and $11,260,000 used to reduce short-term debt. The results of operations for the OTM Division have been segregated and classified as discontinued operations in the consolidated statements of operations and prior periods have been restated. The consolidated balance sheets have been segregated to reflect the OTM Division as discontinued operations and prior periods have been restated. The consolidated statements of cash flows and the consolidated statements of shareholders' equity include operations of the OTM Division through the date of disposition. PRODUCTS While the Company makes a broad variety of products, substantially all of the Company's products are test instruments. Since the sale of the OTM Division, the Company has one segment, the ETM Segment. The following table sets forth the contribution to total net sales of each of the Company's three classes of test instruments for the periods ended (amounts in thousands of dollars):
TWELVE MONTHS NINE MONTHS TWELVE MONTHS ENDED ENDED ENDED JUNE 30, 1998 MARCH 31, 1999 MARCH 31, 2000 ------------------- ------------------- ------------------- AMOUNT % AMOUNT % AMOUNT % -------- -------- -------- -------- -------- -------- Communications................. $46,516 42.7 $31,654 29.8 $39,727 28.0 Test & Measurement............. 19,671 18.1 26,441 24.9 37,905 26.7 Avionics....................... 9,520 8.7 11,387 10.7 13,209 9.3 Other.......................... 33,184 30.5 36,677 34.6 51,050 36.0
Set forth below are discussions of each of the three classes of test instruments that are designed, manufactured, and sold by the Company: communications test equipment, test and measurement test equipment, and avionics test equipment. In addition, the Company sells software computer solutions to be used in connection with certain of the Company's test equipment products. 1 COMMUNICATIONS TEST EQUIPMENT. The Company's communications test equipment products are designed to test mobile radio products, such as mobile telephones and cellular telephones, as well as base station equipment. IFR products emulate the required system or parameters so the systems can be tested for proper frequency transmission, signal modulation, power levels, and other key performance parameters. The Company produces self-contained portable test sets for both the digital and analog communications markets. IFR's communications service monitors are used to test and maintain radio products, including pagers, scanners, military communication transceivers, and cellular, land mobile, marine and citizen band radios. Service monitors test mobile radio equipment for proper frequency transmission, signal modulation and power output. The principal end users of communications service monitors are original equipment manufacturers, service and repair companies, government agencies, and users of mobile radio equipment. The mobile radio product industry is undergoing a transformation as the result of the increased use of digital technology. Digital technology offers spectral efficiencies, better voice quality, and more data services. As a result, there is an increasing demand for products that use complex digital modulation schemes. Cellular telephone systems currently deployed use CDMA, GSM, and TDMA technologies. IFR provides a wide range of mobile radio test products for both GSM and TDMA technologies and has secured software licensing agreements with Qualcomm for marketing Qualcomm's production test software for CDMA technology. The professional mobile radio market, a traditionally strong market for IFR, is also beginning to move towards digital technology with a new worldwide terrestrial trunked radio access ("TETRA") protocol. IFR has been one of the contributing suppliers for the initial test equipment requirements for TETRA system design and production. IFR released its 2968 TETRA mobile radio test set in 1999. IFR is presently designing products for other new technologies, including the Project 25 ("P25") standard proposed by the Association of Public Safety Communications Officials, "iDEN", a Motorola technology used predominately by Nextel for general trunked radio access, and "EDACS Prism" developed by Ericsson. IFR continues to sell products to test mobile and professional analog telephones and systems. Analog telephone systems continue to be deployed in South America and a majority of the professional mobile radio market, which includes users such as police, ambulance, and other mission-critical environments, still relies on analog technology. TEST AND MEASUREMENT TEST EQUIPMENT. The Company's electronic test and measurement products are sophisticated instruments for the test and maintenance of digital and analog communication systems, laboratory and field measurement of electromagnetic signals and radio frequency test equipment for the aviation industry, and automated test equipment. Included in the Company's test and measurement equipment are spectrum analyzers, signal generators, counter power meters, and microwave and modulation analyzers. These products are primarily used to bench test equipment and are sold to original equipment manufacturers, service and repair companies, and educational institutions. The Company's spectrum analyzers, which display and measure the level of a signal across a swept range of frequencies, signal amplitude versus frequency, are used as a tool in the design of communications transmitting and receiving equipment. The Company does not have a significant share of the spectrum analyzer market. The Company's signal generators create time-varying waveforms with defined characteristics that simulate radio frequency signals under test. This product series is used in the design, manufacture, and test of electronic subassemblies, intermodulation distortion measurements and cordless telephone manufacturing. IFR manufactures microwave products and multifunction microwave test sets, which are used to measure the output and frequency of a device under test. The products are used in establishing the 2 microwave links that form the core infrastructure of a communication network. The Company does not have a significant share of the microwave test product market. Microwave and modulation analyzers are used to measure the characteristics of forward and reverse gain input and output impedance on radio frequency or microwave networks. AVIONICS TEST EQUIPMENT. The Company's avionics test instruments include portable and stationary precision simulators which duplicate airborne conditions to test the communications, weather radar, and instrument landing and navigational systems installed in aircraft and ground stations. Principal products tested by IFR equipment include transponder simulation systems, navigation systems, collision avoidance systems, weather radar systems, global positioning systems ("GPS") and military variants of such products. IFR's precision simulators are used to test the avionics systems in commercial, military, and general aviation aircraft. These products are primarily used by general aviation service and repair companies, commercial airlines, manufacturers, and the federal government. IFR navigation test products are designed for testing instrument landing systems, VHF omnidirectional radio range, marker beacons, automatic direction finders, and selective calling systems and microwave landing system angle receivers installed in aircraft. IFR traffic alert and collision avoidance ("TCAS") products simulate the airborne environment necessary to perform many of the required tests for supplemental type certification. IFR also has a weather radar simulation product, the RD-301A, that is designed to test weather radar and narrow-pulse marine radar systems. This fully integrated test set permits complete testing of routine radar functions and provides the capabilities to satisfy simulation requirements for new generation non-coherent radar systems. IFR's global positioning simulator provides accurate and repeatable testing of GPS receivers. It achieves this testing capability by simulating a GPS satellite and generating specific vehicle and navigational data patterns. OTHER PRODUCTS AND SERVICES. Within the ETM segment, IFR also offers calibration, repair, and onsite field services for most types and makes of electronic test equipment. IFR maintains major customer service facilities in the United States and the United Kingdom, which are ISO accredited facilities. Services performed include full maintenance and calibration, express calibration and facilities management, including in-house calibration, repair, asset management, and consultant services. The Company's line of high-volume automated test equipment ("ATE") includes products designed for the automotive, consumer electronics, and communications industries. Such products include manufacturing defect analyzers, in-circuit analyzers, and functional analyzers, all of which are used to test printed circuit boards. The following table sets forth the total sales of other products and services of the Company for the periods ended (amounts in thousands of dollars):
TWELVE MONTHS NINE MONTHS TWELVE MONTHS ENDED ENDED ENDED JUNE 30, 1998 MARCH 31, 1999 MARCH 31, 2000 ------------- -------------- -------------- Service............................. $ 14,218 $ 17,497 $ 26,233 Other............................... 10,421 8,311 10,669 ATE & Solutions..................... 8,545 10,869 14,148
COMPETITION IFR competes with numerous companies, foreign and domestic, many of which have greater financial, marketing, and technical resources than IFR. According to Prime Data, the test instrument global market 3 is estimated at approximately $8.0 billion. IFR's market share is estimated as approximately two percent. Two suppliers control over 40% of the test instrument market. Competition is based primarily on product quality, technological innovation, product features and customer service. IFR believes it is an effective competitor in all these areas. MARKETING AND DISTRIBUTION IFR products and services are marketed and sold throughout the world by a combination of IFR sales persons and distributors. The Company employs approximately 156 salespersons located in the United States, the United Kingdom, Hong Kong, France, Germany, Spain, and China, who call on various "house" accounts as well as call on and assist independent distributors in selling IFR products. The Company has been reducing the number of its nonexclusive independent distributors to reflect its increasing emphasis on direct sales. IFR's sales personnel and distributors are supported by an internal marketing staff that performs market research and creates brochures and other marketing materials. SOURCES AND AVAILABILITY OF RAW MATERIALS The Company's products require a wide variety of electronic and mechanical components, most of which are purchased. The Company has multiple sources for the vast majority of the components and materials it uses; however, there are some instances where the components are obtained from a sole-source supplier. If a sole-source supplier ceased to deliver, the Company could experience a temporary adverse impact on its operations; however, management believes alternative sources could be identified quickly. With occasional exceptions, purchased materials and components have generally been available to the Company as needed with acceptable lead times. PATENTS, TRADEMARKS, LICENSES, FRANCHISES, AND CONCESSIONS The Company owns a number of patents in the United States and various foreign countries and is licensed to use patents owned by others. IFR has granted licenses to use certain of its patents, but does not anticipate revenues from licensing activities will be material. There can be no assurances that any of the Company's current patents will provide the Company with adequate protection. IFR has registered its "IFR" trademark. While the Company considers its patents and trademark registrations to be valuable in the aggregate, it does not consider that the loss of any single patent or trademark registration would have a material effect on the Company or its operations. Likewise, while the Company believes its products do not infringe the patent or other intellectual property rights of third parties, there can be no assurance that third parties will not assert infringement claims against the Company or that the Company will prevail on any such claim or that a license, if needed, would be available on acceptable terms. SEASONALITY The Company's business is not seasonal in nature. WORKING CAPITAL ITEMS IFR is typically able to meet its delivery schedules without maintaining large inventories of completed goods and its customers generally do not require extended payment terms. Accordingly, the ability to fund working capital requirements for inventory and receivables financing is not a significant factor and the Company does not consider itself to have any unusual working capital needs. 4 CUSTOMERS IFR's products are marketed to a diverse customer base and no single product line is a predominant factor in determining revenues or profits. IFR does not have a single customer or a few customers, the loss of any one or more of which would have a significant adverse effect. BACKLOG Backlog is not a significant factor in the Company's business because most orders are in smaller quantities or on terms that allow the customer to cancel or delay delivery without significant penalty. The Company's backlog of firm orders was approximately $37,500,000 at March 31, 1999, and $26,056,000 at March 31, 2000. It is anticipated that all of the backlog orders will be filled during the current fiscal year unless canceled or deferred by customers. GOVERNMENT AND MILITARY CONTRACTS During the past fiscal year, approximately 4.3% of the Company's revenues were derived from sales to the United States and its various agencies including the armed services. All contracts with the United States Government and its agencies are subject to termination at the convenience of the government. IFR has maintained a portion of its business in military contracting. Over the past five fiscal years, the percentage of total revenues from sales to the military has ranged from a high of 21.6% in 1995 to a low of 3.1% in fiscal 1999. Military contracts generally provide an opportunity to diversify the customer base, but typically involve lower margins than commercial sales to private industry. IFR anticipates continuing to make military sales on a selective basis but has no present plan to significantly increase its military contracting. RESEARCH AND DEVELOPMENT The test equipment industry is characterized by continuous technology changes that require an ongoing effort to enhance existing products and to develop new products. IFR relies primarily on its internal research and development programs for the development of new products and for improvement of existing products. The Company does not perform basic research but uses new component and software technologies in the development of new products. The Company's research and development expenditures excluding discontinued operations were approximately $14,077,000 in fiscal 2000, $11,816,000 in fiscal 1999, and $9,208,000 in fiscal 1998. As of May 31, 2000, the Company had approximately 160 professional employees engaged in research and development activities. GOVERNMENTAL REGULATION IFR is subject to laws and regulations affecting manufacturers and employers generally and to certain Federal Communications Commission regulations that affect equally all suppliers of similar products and are not considered a significant factor in the Company's competitive position. Compliance with federal, state, and local provisions which have been enacted or adopted regulating the discharge of materials into the environment or otherwise relating to the protection of the environment have not had and are not expected to have a material effect upon IFR's capital expenditures, earnings, or competitive position. EMPLOYEES At May 31, 2000, the Company had approximately 1,200 full-time employees. None of the Company's employees is covered by a collective bargaining agreement or is represented by a labor union. The Company considers its relationship with its employees to be satisfactory. The design and manufacture of the Company's products require technical capabilities in many disciplines. While the Company believes that the capability and experience of its employees compare 5 favorably with other similar manufacturers, there can be no assurance that it can retain existing employees or attract and hire a sufficient number of the highly capable employees it may need in the future on satisfactory terms. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES For information concerning the Company's export sales, see NOTE 7 of the "Notes to Consolidated Financial Statements" for the year ended March 31, 2000. More than half of the Company's revenues are to customers located outside the United States which, as a consequence, the Company's results are affected by economic conditions in other countries and by changes in various foreign currency exchange rates. The Company believes that its foreign subsidiaries and other larger international markets are in countries where the economic and political climate is generally stable. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995--FORWARD-LOOKING STATEMENTS In addition to historical information, this report contains forward-looking statements and information that are based on management's beliefs and assumptions, as well as information currently available to management. Forward-looking statements are all statements other than statements of historical fact included in this report. When used in this document, the words "anticipate", "estimate", "expect", "intend", "believe", and similar expressions are intended to identify forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable and are based on reasonable assumptions within the bounds of its knowledge of its business and operations, it can give no assurance that such expectations will prove to be correct and that actual results will not differ materially from the Company's expectations. Such forward-looking statements speak only as of the date of this report, and the Company cautions readers not to place undue reliance on such statements. Factors that could cause actual results to differ from expectations include: (1) the degree and nature of competition, including pricing pressure and the development of new products or discoveries of new technologies by competitors, (2) fluctuations in the global economy and various foreign countries including recent developments adversely affecting the economies of various Asian countries, (3) demand for the Company's products, (4) loss of significant customers, (5) the Company experiencing delays in developing new products and technologies, (6) the ability of the Company to continue the transition to digital technologies in the communications test equipment products, (7) the failure of such technologies or products to perform according to expectations, (8) difficulties in manufacturing new products so they may be profitably priced on a competitive basis, (9) lack of adequate market acceptance of new products or technologies, (10) changes in products or sales mix and the related effects on gross margins, (11) availability of components, parts, and supplies from third party suppliers on a timely basis and at reasonable prices, (12) currency fluctuations, (13) inventory risks due to changes in market demand or the Company's business strategies, (14) inability to hire sufficient personnel at reasonable levels of compensation and other labor problems, (15) inability to realize anticipated efficiencies and savings from the Company's acquisition of Marconi Instruments, Limited and (16) other risks described herein. ITEM 2. PROPERTIES IFR's principal executive offices and principal manufacturing facilities are located at 10200 West York Street, Wichita, Kansas, 67215. IFR also operates manufacturing facilities and sales offices in the United Kingdom and has sales offices in four other countries. IFR generally considers the productive capacity of its plants adequate and suitable for the requirements of the company. The extent of utilization of such manufacturing facilities varies from plant to plant and from time to time during the year. 6 The following table describes the Company's principal facilities.
(1) SQUARE LEASE LOCATION FOOTAGE LEASE/OWNED EXPIRES DESCRIPTION -------- -------- ---------------- -------- --------------------------- Wichita, Kansas................ 156,000 Capital lease(2) 2017 Mfg., Eng., Admin., Sales Stevenage,Hertfordshire, England Longacres House.............. 46,000 Operating lease 2020 Admin., Sales Six Hills Way Bldg........... 81,000 Owned N/A Mfg., Eng. Gunnelswood Road Bldg........ 34,000 Owned N/A Manufacturing Sanders Bldg................. 27,000 Owned N/A Inventory, Customer Service Chelmsford, England............ 3,000 Leased 2001 Customer Service Portsmouth, England............ 5,000 Leased 2002 Customer Service Donibristle, Scotland.......... 20,000 Leased 2020 Customer Service, Eng.
------------------------ (1) Includes renewal option periods where appropriate. (2) Industrial revenue bond financing in which the Company has an option to purchase for a nominal price. ITEM 3. LEGAL PROCEEDINGS IFR is not a party to any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of IFR's security holders during the fiscal quarter ended March 31, 2000. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's common stock is traded on the national over-the-counter market under the NASDAQ symbol IFRS. The approximate number of shareholders of record as of June 26, 2000, was 1,100. The high and low sales prices of the Company's common stock for the fiscal quarters for the periods ended are set forth below (in dollars).
TWELVE MONTHS NINE MONTHS TWELVE MONTHS ENDED ENDED ENDED MARCH 31, 2000 MARCH 31, 1999 JUNE 30, 1998 ------------------- ------------------- ------------------- QUARTERS HIGH LOW HIGH LOW HIGH LOW -------- -------- -------- -------- -------- -------- -------- First.......................................... 5 3 7/8 23 1/4 4 1/8 22 11 1/2 Second......................................... 6 1/2 2 15/16 6 1/2 3 1/8 23 1/2 15 1/8 Third.......................................... 13 3 7 4 5/8 25 1/2 14 1/8 Fourth......................................... 11 7/8 5 1/8 -- -- 22 1/2 17 1/2
No cash dividends were paid during the fiscal periods ended March 31, 2000 and March 31, 1999. The Company paid cash dividends in the fiscal year ended June 30, 1998 of $0.033 per share. The Company's credit agreement with Bank One and other lenders precludes the payment of cash dividends by the Company. 7 ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)
(NINE MONTHS) 2000 1999 1998 1997 1996 -------- ------------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA Sales.................................. $141,891 $106,159 $108,891 $67,710 $57,234 Research & development expense......... 14,077 11,816 9,208 6,223 4,153 Operating income (loss)................ 1,829 3,468 (16,137) 8,417 7,112 Operating income--excluding non-recurring charges(1)............. 1,829 3,468 11,407 8,417 7,112 Continuing operations: Income (loss)........................ (4,098) (2,149) (18,078) 5,254 4,516 Income (loss) excluding non-recurring charges(1)......................... (4,098) (2,149) 5,797 5,254 4,516 -------- -------- -------- ------- ------- BALANCE SHEET DATA Total assets........................... $151,146 $187,043 $190,757 $65,830 $60,713 Working capital........................ 29,924 46,163 49,692 33,515 27,273 Shareholders' equity................... 34,818 28,228 32,081 48,154 43,368 Long-term debt and capital lease obligations.......................... 59,383 96,567 100,080 3,765 2,110 -------- -------- -------- ------- ------- PROFITABILITY RATIOS Gross profit........................... 41.3% 44.6% 32.7% 39.4% 36.7% Gross profit--excluding non-recurring charges(1)........................... 41.3 44.6 43.6 39.4 36.7 Continuing operations: Income (loss)........................ (2.9) (2.0) (16.6) 7.8 7.9 Income (loss) excluding non-recurring charges(1)......................... (2.9) (2.0) 5.3 7.8 7.9 Effective income tax rate(1)......... 36.1 41.3 34.3 37.0 37.9 Return on assets(2).................... (2.4) (1.5) (14.1) 8.3 7.6 Return on equity(2).................... (13.0) (9.5) (45.1) 11.5 11.0 -------- -------- -------- ------- ------- EARNINGS PER SHARE--DILUTED Continuing operations: Income (loss)........................ $ (0.50) $ (0.26) $ (2.21) $ 0.62 $ 0.53 Income (loss) excluding non-recurring charges(1)......................... (0.50) (0.26) 0.66 0.62 0.53 Book value............................. 3.83 3.67 4.90 5.43 4.84 Dividends.............................. -- -- 0.07 -- -- -------- -------- -------- ------- -------
Amounts differ from previously reported amounts since the results of the OTM Division have been reflected as discontinued operations (see NOTE 10 to the consolidated financial statements). (1) In 1998, excludes pre-tax acquisition related charges of $11,844,000 in cost of products sold and $15,700,000 in operating expenses. The effective income tax rate excludes the effect of the acquisition adjustments. (2) In 1999, annualized the nine month loss from continuing operations ($2,149,000) to calculate these returns. 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995--FORWARD-LOOKING STATEMENTS In addition to historical information, this report contains forward-looking statements and information that are based on management's beliefs and assumptions, as well as information currently available to management. Forward-looking statements are all statements other than statements of historical fact included in this report. When used in this document, the words "anticipate", "estimate", "expect", "intend", "believe", and similar expressions are intended to identify forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable and are based on reasonable assumptions within the bounds of its knowledge of its business and operations, it can give no assurance that such expectations will prove to be correct and that actual results will not differ materially from the Company's expectations. Such forward-looking statements speak only as of the date of this report, and the Company cautions readers not to place undue reliance on such statements. Factors that could cause actual results to differ from expectations include: (1) the degree and nature of competition, including pricing pressure and the development of new products or discoveries of new technologies by competitors, (2) fluctuations in the global economy and various foreign countries including recent developments adversely affecting the economies of various Asian countries, (3) demand for the Company's products, (4) loss of significant customers, (5) the Company experiencing delays in developing new products and technologies, (6) the ability of the Company to continue the transition to digital technologies in the communications test equipment products, (7) the failure of such technologies or products to perform according to expectations, (8) difficulties in manufacturing new products so they may be profitably priced on a competitive basis, (9) lack of adequate market acceptance of new products or technologies, (10) changes in products or sales mix and the related effects on gross margins, (11) availability of components, parts, and supplies from third party suppliers on a timely basis and at reasonable prices, (12) currency fluctuations, (13) inventory risks due to changes in market demand or the Company's business strategies, (14) inability to hire sufficient personnel at reasonable levels of compensation and other labor problems, (15) inability to realize anticipated efficiencies and savings from the Company's acquisition of Marconi Instruments, Limited and (16) other risks described herein. SALE OF THE OTM DIVISION On June 25, 1999, the Board of Directors approved a formal plan to sell the Company's Optical Test and Measurement (OTM) Division. The sale was completed on July 7, 1999 to GN Nettest, a company in the GN Great Nordic Group, Copenhagen, Denmark for $43,988,000 in cash. A net of tax gain of approximately $11,031,000 (approximately $1.34 per share) was recorded. The proceeds from the sale were used to reduce the Company's outstanding debt obligation in July 1999, with $31,740,000 applied to long-term debt and $11,260,000 used to reduce short-term debt. As a consequence of the divestiture, the results of operations for the OTM Division have been segregated and classified as discontinued operations in the consolidated statements of operations and prior periods have been restated. The consolidated balance sheets have been segregated to reflect the OTM Division as discontinued operations and prior periods have been restated. The consolidated statements of cash flows and consolidated statements of shareholders' equity include the OTM Division through the date of divestiture. The net gain on disposal was recognized in the period the sale was completed. See NOTE 10 to the consolidated financial statements for further discussion. COMPARISON OF FISCAL 2000 (12 MONTHS) VS. 1999 (9 MONTHS) Sales for the fiscal year ended March 31, 2000 were $141,891,000 compared to $106,159,000 for the nine-month fiscal period ended March 31, 1999. This represents an increase of 33.7%. Sales increased by 9 $35,732,000 or 33.7% due mainly to one more quarter in the current fiscal year. International sales were $79,867,000 (56.3% of sales) in fiscal year 2000 compared to $67,776,000 (63.8% of sales) in the nine-month fiscal period ended in 1999. The increase in foreign sales dollars is due to one more quarter in fiscal year 2000. The decrease in foreign sales percentage is due to the increased demand in the US market. The majority of the increase in international sales took place in the Americas and the Pacific Rim. Gross profit as a percent of sales decreased from 44.6% in the nine months ended in 1999 to 41.3% in fiscal year 2000. The current year includes $667,000 (0.5% of sales) of non-recurring charges due to the recording of cost reduction charges (termination and severance benefits) in the third quarter. Excluding the cost reduction charges, the normalized gross profit percentage for 2000 was 41.7% or 2.9% lower than the prior year. The decrease is due to the product mix. Operating expenses decreased 1.3% to 40.0% of sales. The current year includes non-recurring cost reduction charges of $2,213,000 or 1.6% of sales in fiscal year 2000, which are excluded for comparison purposes. Excluding the effect of the cost reduction charges, operating expenses decreased to 38.4% compared to 41.3% in the nine months ended in 1999. Engineering expenses decreased 1.5% as a percentage of sales from 12.9% in the nine months ended in 1999 to 11.4% for fiscal year 2000. Selling expenses decreased 0.6% as a percentage of sales from 17.3% in the nine months ended in 1999 to 16.7% for fiscal year 2000. Administrative expenses decreased as a percentage of sales from 11.1% in the nine months ended in 1999 to 10.2% for fiscal year 2000. Operating income as a percent of sales decreased from 3.3% for the nine months ended in 1999 to 1.3% for fiscal year 2000. Excluding the non-recurring cost reduction charges in fiscal year 2000 noted above, normalized operating income was $4,709,000 or 3.3% of sales compared to 3.3% in the nine months ended in 1999. Interest expense for fiscal year 2000 was $8,121,000 compared to interest expense for the nine months ended in March 1999 of $7,685,000. Interest income decreased $407,000 from the prior year. Other expense was $293,000 compared to $22,000 in the prior year. The effective income tax rate from continuing operations was 41.3% for the nine months ended in 1999 compared to 36.1% for fiscal year 2000. The decrease in rate results from a prior period increase in valuation allowances not repeated in the current year. The loss from continuing operations including the cost reduction charges, as a percent of revenue, was 2.9% in fiscal year 2000 compared to 2.0% in the prior period. COMPARISON OF FISCAL 1999 (9 MONTHS) VS. 1998 (12 MONTHS) The Company completed the purchase of Marconi Instruments Limited on February 6, 1998, resulting in fiscal 1998 purchase accounting related adjustments, specifically the $15,700,000 write off of in-process research and development and $11,844,000 of inventory valuation expenses, increasing cost of products sold, which were recorded in the third and fourth quarter of fiscal 1998. Sales for the nine month fiscal year ended March 31, 1999 were $106,159,000 compared to $108,891,000 for the twelve month fiscal year ended June 30, 1998. This represents a decrease of 2.5%. The prior fiscal year includes approximately five months sales of $46,822,000 from the Marconi acquisition compared to nine months sales of $67,916,000 in fiscal period 1999. Excluding the acquisition, sales declined by $23,826,000 or 38.4%, due mainly to one less quarter in the fiscal period 1999. International sales were $67,776,000 (63.8% of sales) in the nine months ended in 1999 compared to $52,630,000 (48.3% of sales) in fiscal year 1998. The increase in foreign sales was due to the purchase of Marconi and its presence in the foreign markets. The majority of the increase in international sales took place in Europe and the Pacific Rim. Gross profit as a percent of sales increased from 32.7% in fiscal year 1998 to 44.6% in the nine months ended in 1999. The prior year includes $11,844,000 (10.9% of sales) of non-recurring charges due to the 10 recording of inventory valuations related to the Marconi acquisition. Excluding the acquisition related charges; the normalized gross profit percentage for 1998 was 43.6% or 1.0% lower than the current year. Operating expenses decreased 6.2% to 41.3% of sales in the nine months ended in 1999. The prior year includes a non-recurring write-off ($15,700,000) of in-process research and development technology related to the Marconi acquisition. Excluding the effect of the acquisition adjustment, operating expenses increased to 41.3% compared to 33.1% in fiscal year 1998. Significant cost reductions were made in the latter part of the fiscal period ended in 1999. Engineering expenses increased as a percentage of sales from 10.4% in fiscal year 1998 to 12.9% for the nine months ended in 1999. This was due to the increased focus on the development of new test instruments for the emerging wireless digital telecommunications markets. Selling expenses increased as a percentage of sales from 14.5% in fiscal year 1998 to 17.3% for the nine months ended in 1999. The 2.8% increase was due to the redirection of the Company to a direct sales force after the purchase of Marconi and the increased cost of marketing communications due to the purchase. Administrative expenses increased as a percentage of sales from 8.2% in fiscal year 1998 to 11.1% for the nine months ended in 1999. The 2.9% increase was due to higher amortization costs related to the acquisition. Operating income as a percent of sales increased from a negative 14.8% for fiscal year 1998 to a positive 3.3% for the nine months ended in 1999. Excluding the non-recurring acquisition adjustments in fiscal year 1998 noted above, the $15,700,000 in process research and development and the $11,844,000 inventory valuation, normalized operating income was $11,407,000 or 10.5% of sales compared to 3.3% in the nine months ended in 1999. The 7.2% decrease was due to higher operating expenses. Interest expense in the nine months ended in 1999 increased by $3,805,000 compared to the prior year due to higher interest expense related to the Marconi acquisition (nine months expense compared to five months in the prior year) and higher short-term bank borrowings ($6,700,000). Interest income decreased $64,000 from the prior year. Other expense in the nine months ended in 1999 was $22,000 compared to $0 in the prior year. Excluding the effect of the acquisition adjustments, the effective income tax rate from continuing operations was 34.3% for fiscal year 1998 compared to 41.3% for the nine months ended in 1999. The loss from continuing operations, as a percent of revenue was 2.0% in the nine months ended in 1999 compared to 16.6% in the prior year. In fiscal year 1998, the components include the $15,700,000 in process research and development, the $11,844,000 before tax inventory valuation and the increased interest incurred in the purchase of Marconi. Income from continuing operations is 5.3% after normalization of these components compared to negative 2.0% in the nine months ended in 1999. The 7.3% decrease is mainly due to higher operating expenses. EURO CONVERSION Effective January 1, 1999, the European Economic and Monetary Union created a single Eurocurrency (the euro) for its member countries. A transition period is in effect that began January 1, 1999, and goes through December 31, 2001, during which time transactions will be executed in both the euro and the member country currencies. Effective January 1, 2002 the euro will be the sole legal tender of the European Economic and Monetary Union countries. In general, the adoption of a single currency for the participating countries is expected to result in greater transparency of pricing, making Europe a more competitive environment for businesses. In addition, conversion to the euro is expected to affect many financial systems and business applications. At the time IFR switches to using the euro as a functional currency for certain of its affiliates, information system modifications will be required. It is not anticipated, at this time, that the euro will have a material impact on the competitive environment in which IFR operates or a significant impact on IFR's fundamental risk management philosophy. Any costs incurred associated with the adoption of the euro will 11 be expensed as incurred, and are not anticipated to be material to IFR's results of operations, financial condition, or liquidity. YEAR 2000 IFR successfully completed its Year 2000 readiness project. The January 1, 2000 rollover went smoothly, as expected. The Company's facilities and operational systems were successfully made Year 2000 ready and are functioning effectively. The expenses associated with Year 2000 readiness effort were not significant. LIQUIDITY AND CAPITAL RESOURCES The Company maintains an adequate financial position with working capital of $29,924,000 at March 31, 2000. The Company used cash in operations of $3,719,000 in fiscal year 2000 and generated cash from operations of $5,059,000 in the nine months ended in 1999. Cash flows used in investing activities and cash flows provided in financing activities reflect primarily the proceeds from the sale of the OTM Division, acquisition payment and resulting loans, subsequent debt payments and capital expenditures. No cash dividends were paid in fiscal year 2000 and 1999. The Company's credit agreement with Bank One and other lenders precludes the payment of cash dividends by the Company. At March 31, 2000, the Company had no significant commitments for capital expenditures. The Company anticipates that the available line of credit and funds generated from operations will be adequate to meet capital asset expenditures, interest and working capital needs for the next twelve months. In June 2000, the Company signed an amendment to its credit agreement. The amendment restated certain financial ratio covenants, waived violations of its minimum fixed charge coverage and maximum leverage ratio covenants, which occurred during fiscal 2000, as well as modified the repayment schedule of the loans. See NOTE 2 to the consolidated financial statements. INFLATION Changes in product mix from year to year and highly competitive markets make it very difficult to define accurately the impact of inflation on profit margins. The Company believes that during the recent period of moderate inflation it has been able to reduce inflationary effects by vendor partnering arrangements and continuing expense control. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to various market risks, including changes in foreign currency exchange rates and interest rates. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The Company is exposed to interest rate risk primarily from its Credit Agreement (Agreement) in which floating rates are based upon the relationship between earnings before interest, depreciation and taxes (EBITDA) and total debt. To mitigate the impact of fluctuations in interest rates, the Company has entered into interest rate swap agreements on $50,000,000 of the associated debt. Because of the Company's interest rate swap agreements a hypothetical 10% movement in interest rates would not have a material impact on net income. Due to the global nature of its operations, the Company conducts its business in various foreign currencies (primarily the currencies of Western Europe) and as a result, is subject to the exposures that arise from foreign exchange rate movements. Such exposures arise primarily from the translation of results of operations from outside the United States. Because the Company intends to maintain its international operations and not repatriate earnings from those operations, IFR does not hedge its net investment exposure. 12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA IFR SYSTEMS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Responsibility for Financial Statements..................... 14 Report of Independent Auditors.............................. 15 Consolidated Balance Sheets as of March 31, 2000 and March 31, 1999............................................ 16 Consolidated Statements of Operations for the year ended March 31, 2000, nine months ended March 31, 1999, and year ended June 30, 1998....................................... 18 Consolidated Statements of Shareholders' Equity for the year ended March 31, 2000, nine months ended March 31, 1999, and year ended June 30, 1998.............................. 19 Consolidated Statements of Cash Flows for the year ended March 31, 2000, nine months ended June 30, 1999, and year ended June 30, 1998....................................... 20 Notes to Consolidated Financial Statements.................. 21 Quarterly Results of Operations (unaudited)................. 37
13 RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of IFR Systems, Inc. is responsible for the preparation of the financial statements and financial statement schedule, the Annual Report and for the integrity and objectivity of the information presented. The financial statements and financial statement schedule have been prepared in conformity with accounting principles generally accepted in the United States and necessarily include amounts which are estimates and judgments. The fairness of the presentation in these statements of the Company's financial position, results of operations and cash flows is reported on by the independent auditors. To assist in carrying out the above responsibility, the Company has internal systems which provide for selection of personnel, segregation of duties and the maintenance of accounting policies, systems, procedures and related controls. Although no cost effective system can ensure the elimination of errors, the Company's systems have been designed to provide reasonable but not absolute assurances that assets are safeguarded, that policies and procedures are followed, and that the financial records are adequate to permit the production of reliable financial statements. The Audit Committee of the Board of Directors, which is composed of Directors who are not employees of the Company, meets regularly with Company officers and independent auditors in connection with the adequacy and integrity of the Company's financial reporting and internal controls. /s/ Dennis H. Coley Dennis H. Coley CHIEF FINANCIAL OFFICER AND TREASURER 14 REPORT OF INDEPENDENT AUDITORS Board of Directors IFR Systems, Inc. We have audited the accompanying consolidated balance sheets of IFR Systems, Inc. as of March 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for the year ended March 31, 2000, nine months ended March 31, 1999 and year ended June 30, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of IFR Systems, Inc. at March 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for the year ended March 31, 2000, nine months ended March 31, 1999 and year ended June 30, 1998, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Indianapolis, Indiana May 5, 2000 except for Note 2, as to which that date is June 15, 2000 15 IFR SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS
MARCH 31, --------------------- 2000 1999 --------- --------- (IN THOUSANDS, EXCEPT SHARE INFORMATION) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 3,169 $ 5,086 Accounts receivable, less allowance for doubtful accounts of $600 in 2000 and $731 in 1999........................ 29,267 27,306 Inventories: Finished products....................................... 13,278 15,568 Work in process......................................... 9,174 8,811 Materials............................................... 14,537 13,650 -------- -------- 36,989 38,029 Prepaid expenses and sundry............................... 4,301 6,042 Deferred income taxes (NOTE 3)............................ 2,248 2,492 Current assets of discontinued operations................. -- 17,460 -------- -------- TOTAL CURRENT ASSETS........................................ 75,974 96,415 PROPERTY AND EQUIPMENT: Land...................................................... 4,650 4,670 Buildings................................................. 8,223 8,183 Machinery................................................. 26,299 23,226 Allowances for depreciation (deduction)................... (17,976) (13,835) -------- -------- 21,196 22,244 PROPERTY UNDER CAPITAL LEASE (NOTE 2): Building.................................................. 2,757 2,757 Machinery................................................. 2,444 2,444 Allowances for depreciation (deduction)................... (2,414) (1,962) -------- -------- 2,787 3,239 PROPERTY AND EQUIPMENT PENDING DISPOSITION, NET OF ALLOWANCES FOR DEPRECIATION OF $4,380 IN 1999............. -- 3,058 OTHER ASSETS (NOTE 11): Cost in excess of net assets acquired, less accumulated amortization of $1,556 in 2000 and $812 in 1999......... 20,125 21,485 Developed technology, less accumulated amortization of $2,028 in 2000 and $1,092 in 1999....................... 16,772 17,708 Other intangibles, less accumulated amortization of $2,446 in 2000 and $1,594 in 1999.............................. 12,320 13,172 Other..................................................... 1,972 2,090 Other assets related to discontinued operations--net...... -- 7,632 -------- -------- 51,189 62,087 -------- -------- TOTAL ASSETS................................................ $151,146 $187,043 ======== ========
16 IFR SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS
MARCH 31, --------------------- 2000 1999 --------- --------- (IN THOUSANDS, EXCEPT SHARE INFORMATION) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term bank borrowings (NOTE 2)....................... $ 15,700 $ 17,700 Accounts payable.......................................... 12,493 9,883 Accrued compensation and payroll taxes.................... 4,262 4,401 Other liabilities and accrued expenses (NOTE 8)........... 6,355 8,890 State and local taxes..................................... 887 564 Federal income taxes...................................... 913 556 Current maturity of capital lease obligations............. 190 185 Current maturity of long-term debt........................ 5,250 4,250 Current liabilities of discontinued operations............ -- 3,823 -------- -------- TOTAL CURRENT LIABILITIES................................... 46,050 50,252 CAPITAL LEASE OBLIGATIONS (NOTE 2).......................... 3,248 3,442 LONG-TERM DEBT (NOTE 2)..................................... 56,135 93,125 DEFERRED INCOME TAXES (NOTE 3).............................. 10,895 11,828 DEFERRED INCOME TAXES OF DISCONTINUED OPERATIONS............ -- 168 SHAREHOLDERS' EQUITY (NOTE 5): Preferred Stock, $.01 par value: Authorized shares--1,000,000, none issued............... -- -- Common Stock, $.01 par value: Authorized shares--50,000,000 Issued shares--9,266,250................................ 93 93 Additional paid-in capital................................ 7,330 7,368 Cost of common stock in treasury--1,025,722 shares in 2000 and 1,056,985 shares in 1999............. (8,357) (8,611) Accumulated other comprehensive loss...................... (2,072) (1,187) Retained earnings......................................... 37,824 30,565 -------- -------- Total shareholders' equity.................................. 34,818 28,228 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $151,146 $187,043 ======== ========
SEE ACCOMPANYING NOTES. 17 IFR SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS YEAR ENDED ENDED YEAR ENDED MARCH 31, MARCH 31, JUNE 30, 2000 1999 1998 ---------- ----------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) SALES....................................................... $141,891 $106,159 $108,891 COST OF PRODUCTS SOLD....................................... 83,350 58,858 73,257 -------- -------- -------- GROSS PROFIT................................................ 58,541 47,301 35,634 OPERATING EXPENSES: Selling................................................... 24,035 18,329 15,810 Administrative............................................ 16,152 11,799 8,942 Engineering............................................... 16,525 13,705 11,319 Acquired research and development (NOTE 11)............... -- -- 15,700 -------- -------- -------- 56,712 43,833 51,771 -------- -------- -------- OPERATING INCOME (LOSS)..................................... 1,829 3,468 (16,137) OTHER EXPENSE: Interest income........................................... 171 578 642 Interest expense.......................................... (8,121) (7,685) (3,880) Other, net................................................ (293) (22) -- -------- -------- -------- (8,243) (7,129) (3,238) -------- -------- -------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (BENEFIT)................................................. (6,414) (3,661) (19,375) INCOME TAX BENEFIT (NOTE 3)................................. (2,316) (1,512) (1,297) -------- -------- -------- LOSS FROM CONTINUING OPERATIONS............................. (4,098) (2,149) (18,078) INCOME (LOSS) FROM DISCONTINUED OPERATIONS LESS APPLICABLE INCOME TAXES (NOTE 10).................................... 11,357 (446) 2,141 -------- -------- -------- NET INCOME (LOSS)........................................... $ 7,259 $ (2,595) $(15,937) ======== ======== ======== EARNINGS (LOSS) PER SHARE--BASIC: Loss from continuing operations........................... $ (0.50) $ (0.26) $ (2.21) Income (loss) from discontinued operations................ 1.38 (0.06) 0.26 -------- -------- -------- Net income (loss)......................................... $ 0.88 $ (0.32) $ (1.95) ======== ======== ======== EARNINGS (LOSS) PER SHARE--DILUTED: Loss from continuing operations........................... $ (0.50) $ (0.26) $ (2.21) Income (loss) from discontinued operations................ 1.38 (0.06) 0.26 -------- -------- -------- Net income (loss)......................................... $ 0.88 $ (0.32) $ (1.95) ======== ======== ======== AVERAGE COMMON SHARES OUTSTANDING........................... 8,233 8,207 8,191 ======== ======== ======== DILUTIVE COMMON SHARES OUTSTANDING.......................... 8,233 8,207 8,191 ======== ======== ========
SEE ACCOMPANYING NOTES. 18 IFR SYSTEMS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL TREASURY STOCK OTHER ------------------- PAID-IN ------------------- COMPREHENSIVE RETAINED SHARES AMOUNT CAPITAL SHARES AMOUNT INCOME (LOSS) EARNINGS TOTAL -------- -------- ---------- -------- -------- ------------- -------- -------- (IN THOUSANDS) BALANCE AT JUNE 30, 1997.... 9,266 $62 $6,400 (1,130) $(8,040) $ 58 $ 49,674 $ 48,154 Net loss.................... -- -- -- -- -- -- (15,937) (15,937) Translation adjustments..... -- -- -- -- -- 328 -- 328 -------- Comprehensive loss.......... (15,609) Purchases for treasury...... -- -- -- (128) (2,057) -- -- (2,057) Incentive stock options exercised................. -- -- (237) 193 1,418 -- -- 1,181 Stock split effected in the form of a dividend........ -- 31 -- -- -- -- (31) -- Dividends--$.067 per share..................... -- -- -- -- -- -- (546) (546) Tax benefit from exercise of stock options............. -- -- 958 -- -- -- -- 958 ----- --- ------ ------ ------- ------- -------- -------- BALANCE AT JUNE 30, 1998.... 9,266 $93 $7,121 (1,065) $(8,679) $ 386 $ 33,160 $ 32,081 Net loss.................... -- -- -- -- -- -- (2,595) (2,595) Translation adjustments..... -- -- -- -- -- (1,573) -- (1,573) -------- Comprehensive loss.......... (4,168) Incentive stock options exercised................. -- -- (17) 5 44 -- -- 27 Tax benefit from exercise of stock options............. -- -- 288 -- -- -- -- 288 Restricted stock grants (NOTE 5).................. -- -- (24) 3 24 -- -- -- ----- --- ------ ------ ------- ------- -------- -------- BALANCE AT MARCH 31, 1999... 9,266 $93 $7,368 (1,057) $(8,611) $(1,187) $ 30,565 $ 28,228 Net Income.................. -- -- -- -- -- -- 7,259 7,259 Translation adjustments..... -- -- -- -- -- (885) -- (885) -------- Comprehensive income........ 6,374 Incentive stock options exercised................. -- -- (37) 9 79 -- -- 42 Issuance of stock options... -- -- 20 -- -- -- -- 20 Restricted stock grants (NOTE 5).................. -- -- (21) 22 175 -- -- 154 ----- --- ------ ------ ------- ------- -------- -------- BALANCE AT MARCH 31, 2000... 9,266 $93 $7,330 (1,026) $(8,357) $(2,072) $ 37,824 $ 34,818 ===== === ====== ====== ======= ======= ======== ========
SEE ACCOMPANYING NOTES. 19 IFR SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS YEAR ENDED ENDED YEAR ENDED MARCH 31, MARCH 31, JUNE 30, 2000 1999 1998 ---------- ----------- ---------- (IN THOUSANDS) OPERATING ACTIVITIES Net income (loss)........................................... $ 7,259 $(2,595) $(15,937) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation of property and equipment.................... 4,545 4,422 4,234 Amortization of intangibles............................... 2,532 2,276 2,207 Amortization of loan origination fees..................... 403 -- -- Gain on sale of discontinued operations................... (17,207) -- -- Write off of acquired research and development............ -- -- 15,700 Deferred income taxes..................................... (689) 910 (3,622) Deferred compensation expense............................. 135 -- -- Utilization of acquired tax loss carryforwards............ -- -- 416 Changes in operating assets and liabilities (net of effects of acquired businesses): Accounts receivable..................................... (1,961) 8,971 (3,081) Inventories............................................. 1,040 (494) 13,810 Other current assets.................................... 233 (2,974) 1,320 Accounts payable and accrued liabilities................ 552 (6,549) (7,044) Other current liabilities............................... (561) 1,092 (4,320) -------- ------- -------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES......... (3,719) 5,059 3,683 INVESTING ACTIVITIES Proceeds from sale of discontinued operations............... 43,988 -- -- Payments for acquired businesses............................ -- -- (108,851) Purchases of property and equipment......................... (3,358) (3,239) (4,543) Proceeds from sale of equipment............................. 70 -- 1,071 Sundry...................................................... (293) (525) (1,832) -------- ------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......... 40,407 (3,764) (114,155) FINANCING ACTIVITIES Purchases of capital stock for treasury..................... -- -- (2,057) Principal payments on capital lease obligations............. (189) (138) (175) Principal payments on long-term debt........................ (35,990) (2,625) -- Principal payments on short-term bank borrowings............ (36,660) (8,100) (3,535) Proceeds from short-term bank borrowings.................... 34,660 14,800 12,150 Proceeds from acquisition loan.............................. -- -- 100,000 Proceeds from exercise of common stock options.............. 216 315 2,139 Payment of dividends........................................ -- -- (546) -------- ------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... (37,963) 4,252 107,976 Effect of exchange rate changes on cash..................... (642) (620) 276 -------- ------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (1,917) 4,927 (2,220) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 5,086 159 2,379 -------- ------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 3,169 $ 5,086 $ 159 ======== ======= ========
SEE ACCOMPANYING NOTES. 20 IFR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of IFR Systems, Inc. (Company or IFR) include the accounts of all subsidiaries after elimination of intercompany accounts and transactions. STOCK SPLIT On November 7, 1997, the Company's Board of Directors approved a three-for-two stock split to be effected in the form of a 50% stock dividend. The additional stock was distributed on December 5, 1997 to shareholders of record on November 21, 1997. All references to number of shares, share prices and per share amounts reflect the stock split. USE OF ESTIMATES Preparation of the financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATION The functional currency for the Company's foreign operations is the applicable local currency. The translation from the applicable foreign currencies to U.S. dollars is performed for balance sheet accounts using the exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. The gains or losses resulting from such translation are included in other comprehensive income. Gains or losses resulting from foreign currency transactions are included in other income. CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is computed by straight-line and declining balance methods at rates based on the estimated useful lives of the assets from 3 to 30 years. PROPERTY UNDER CAPITAL LEASE Property under capital lease is recorded at the lower of the fair market value of the leased property or the present value of the minimum lease payments. Depreciation of leased property is computed by the straight-line method over the useful life of the asset. 21 IFR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INTANGIBLE ASSETS The cost in excess of net assets acquired (goodwill), developed technology and other intangibles are being amortized by the straight-line method over periods ranging from 10 to 30 years. Goodwill, developed technology and other intangibles are reviewed to assess recoverability when impairment indicators are present. Assets are considered to be impaired and are written down to fair value if expected future operating cash flows of the related assets are less than their carrying amounts. Fair value is the present value of the expected future cash flows of the related assets using a discount rate commensurate with the risk involved. Assets are grouped at the lowest level for which there are identifiable cash flows for purposes of impairment testing. INTEREST SWAP AGREEMENTS The Company is required by its bank syndicate to enter into interest rate swaps to manage interest rate exposures. The Company designates the interest rate swaps as hedges of the underlying debt. Interest expense on the debt is adjusted to include the payments made or received under the swap agreements. INCOME TAXES Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. Federal income taxes are provided on the portion of the income of foreign subsidiaries that is expected to be remitted to the United States and be taxable. REVENUE RECOGNITION Revenue from the sale of products is recognized at the time products are shipped or when services have been rendered to the customer. Sales and cost of sales on long-term contracts are recorded as deliveries are made. Estimates of cost to complete are revised periodically throughout the lives of the contracts, and any estimated losses on contracts are recorded in the accounting period in which the revisions are made. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is calculated based on the weighted-average number of outstanding common shares. Diluted earnings (loss) per share is calculated based on the weighted-average number of outstanding common shares, plus the effect of dilutive stock options. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. A recent amendment to this statement extended the required implementation date to fiscal years beginning after June 15, 2000. The statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Company expects to adopt the new statement effective April 1, 2001. The statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through 22 IFR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company has not yet determined what the effect of Statement 133 will be on the earnings and financial position of the Company. CHANGE IN FISCAL YEAR In January 1999, the Company's Board of Directors approved an amendment of the Bylaws to change the fiscal year end from June 30 to March 31. The change in year end was done to allow more efficient alignment of the planning and accounting functions of the business which has changed significantly with the increase in the Company's international presence. 2. DEBT AND LEASE ARRANGEMENTS Long-term debt consisted of the following (IN THOUSANDS):
MARCH 31, ------------------- 2000 1999 -------- -------- Term Loan A............................................... $44,000 $47,750 Term Loan B (see Note 10)................................. 17,385 49,625 ------- ------- 61,385 97,375 Less current maturities................................... 5,250 4,250 ------- ------- Total long-term debt...................................... $56,135 $93,125 ======= =======
TERM LOANS PAYABLE TO BANK: In June 2000, the Company entered into an amendment of its Credit Agreement with the bank syndication (the Agreement). The amendment restated certain financial ratio covenants, waived violations of its minimum fixed charge coverage and maximum leverage ratio covenants which occurred during fiscal 2000 as well as modified the repayment schedule of the loans. Both of the term loans are payable in quarterly installments of principal pursuant to a schedule contained in the Agreement which calls for such payments to increase over the term of the loan. Term Loan A and Term Loan B are due June 30, 2002. Under certain conditions, the Company has the ability to extend the term to June 30, 2003. Summary payments by year are as follows (IN THOUSANDS): 2001........................................................ $ 5,250 2002........................................................ 9,250 2003........................................................ 46,885 Thereafter.................................................. -- ------- Total....................................................... $61,385 =======
23 IFR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 2. DEBT AND LEASE ARRANGEMENTS (CONTINUED) Under the terms of the Agreement, borrowings bear interest at a spread up to 3.75% per annum over the London Interbank Offered Rate (LIBOR) which varies depending on the Term Loan and the current leverage ratio as defined in the Agreement. At March 31, 2000, the spread was 3.0% on Term Loan A and 3.5% on Term Loan B. The interest rate on the loans at March 31, 2000 was 9.01% on Term Loan A and 9.58% on Term Loan B. The fair value of the Company's long-term debt approximates carrying value since the facilities bear a current market rate of interest. In July 1999 Term Loan B was paid down $31,740,000 from the proceeds of the sale of the OTM Division (SEE NOTE 10). LINES OF CREDIT: The Company also has available lines of credit with the bank syndicate aggregating $23,000,000. The Credit Agreement expires on June 30, 2002. Under the terms of the Agreement, borrowings bear interest at a spread over LIBOR based on certain financial criteria. At March 31, 2000, this spread was 3.0%. The total interest rate on the outstanding portion of the lines of credit was 9.88% at March 31, 2000. As of March 31, 2000, the Company has unused available lines of credit aggregating $7,300,000. SWING LINE NOTE: The Agreement allows for swing line loans for an amount not to exceed $5,000,000. At March 31, 2000, the Company had available funds aggregating $5,000,000 at an interest rate of 11.0%. INTEREST SWAP AGREEMENT: In February 1998, the Company entered into two separate interest swap agreements for $25,000,000 each. The first swap agreement is for a fixed interest rate of 5.8% and expires on March 30, 2001 with an option to extend an additional two years. The second swap agreement is for a fixed interest rate of 5.76% and expires on March 30, 2001. The swap agreements limit the exposure to increased LIBOR rates on the Term Loans. The fair value of the swap is approximately $370,000 and is determined using the current market rate of the instrument. CAPITAL LEASES: In March 1997, the Company entered into a capital lease to refund and redeem the industrial revenue bonds dated May 1, 1989 which were issued in the original principal amount of $3,500,000 of which $2,330,000 were outstanding; and to finance manufacturing support equipment and building improvements to the existing facility. This lease was entered into in connection with an issuance of industrial revenue bonds dated March 15, 1997 (the 97 Bonds) by the City of Goddard, Kansas (the City). The transaction for the 97 Bonds totaled $3,940,000. The Company has guaranteed the future repayment of all amounts due relating to the 97 Bonds. The City has retained title to the facilities and related equipment. The Company has the option to purchase the facilities and equipment for a nominal amount after repayment in full of all amounts due relating to the 97 Bonds. Under the terms of the lease, the Company is required to make quarterly payments in an amount sufficient to pay the principal and interest installments of the 97 Bonds when due. The 97 Bonds mature serially over a 15 year period which commenced May 1, 1997, and are callable for early redemption by the Company on or after May 1, 2004. Upon the occurrence of certain events, the 97 Bonds are subject to immediate redemption at the option of each Bond holder. These events include the acquisition or right to acquire beneficial ownership of 25% of the outstanding Common Stock (unless waived by the Board of Directors), the subsequent determination that the Bonds are taxable or other specified events. Amortization of the building and equipment pledged for the 97 Bonds is included in depreciation expense. 24 IFR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 2. DEBT AND LEASE ARRANGEMENTS (CONTINUED) Future minimum lease payments, based upon scheduled redemptions of the Bonds as of March 31, 2000, are as follows (IN THOUSANDS): 2001........................................................ $ 399 2002........................................................ 404 2003........................................................ 402 2004........................................................ 404 2005........................................................ 402 Thereafter.................................................. 2,930 ------ Total minimum lease payments................................ 4,941 Amounts representing interest............................... 1,503 ------ Present value of minimum lease payments..................... 3,438 Current maturities.......................................... 190 ------ Long-term portion........................................... $3,248 ======
OPERATING LEASES: The Company also leases certain facilities and equipment under operating leases that expire at various dates. The equipment leases provide the Company with the option after the initial lease term to purchase the property at the then fair value, renew its lease at the then fair rental value for a period of one year or return the equipment to the lessor. Generally, management expects that, after the initial lease term, the equipment will be purchased for the then fair value. Minimum payments for operating leases having initial or remaining noncancelable terms in excess of one year are as follows (IN THOUSANDS): 2001........................................................ $ 2,543 2002........................................................ 2,099 2003........................................................ 1,453 2004........................................................ 1,014 2005........................................................ 950 Thereafter.................................................. 9,728 ------- Total minimum lease payments................................ $17,787 =======
Minimum lease payments have not been reduced by sublease rentals of $812,000 due in the future under noncancelable subleases. Total rent expense for all operating leases amounted to approximately $1,976,000, $1,776,000, and $691,000 for 2000, 1999 and 1998, respectively. INTEREST PAID: Interest paid during 2000, 1999 and 1998 was approximately $7,828,000, $7,257,000, and, $3,681,000, respectively. 25 IFR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 3. INCOME TAXES The Company files a consolidated federal income tax return for all U.S. subsidiaries and files group relief or separate returns for foreign subsidiaries. Income reported for federal and foreign tax purposes differs from pre-tax accounting income due to variations between the requirements of the jurisdictional tax codes and the Company's accounting practices. For financial reporting purposes, loss from continuing operations before income taxes is as follows (IN THOUSANDS):
YEAR ENDED NINE MONTHS ENDED YEAR ENDED MARCH 31, MARCH 31, JUNE 30, 2000 1999 1998 ---------- ----------------- ---------- U.S.................................... $(5,699) $(2,672) $ 6,812 Foreign................................ (715) (989) (26,187) ------- ------- -------- Total.................................. $(6,414) $(3,661) $(19,375) ======= ======= ========
Income tax benefit from continuing operations is summarized as follows (IN THOUSANDS):
YEAR ENDED NINE MONTHS ENDED YEAR ENDED MARCH 31, MARCH 31, JUNE 30, 2000 1999 1998 ---------- ----------------- ---------- Federal: Current.............................. $(2,197) $(1,308) $ 1,425 Deferred............................. 533 343 619 Foreign: Current.............................. (1,338) 1,369 343 Deferred............................. 1,140 (1,633) (4,202) State.................................. (454) (283) 518 ------- ------- ------- Income tax benefit..................... $(2,316) $(1,512) $(1,297) ------- ------- -------
26 IFR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 3. INCOME TAXES (CONTINUED) Significant components of the Company's deferred tax liabilities and assets are as follows (IN THOUSANDS):
MARCH 31, ------------------- 2000 1999 -------- -------- Deferred tax liabilities: Tax over book depreciation.............................. $ 599 $ 822 Purchased intangibles................................... 9,915 10,468 Other................................................... 381 538 ------- ------- Total deferred tax liabilities............................ 10,895 11,828 Deferred tax assets: Net operating loss carryforwards........................ 627 1,242 Capital loss carryforward............................... -- 170 Inventory reserve....................................... 434 594 Accrued vacation........................................ 477 395 Warranty reserve........................................ 375 303 Allowance for bad debts................................. 132 154 Foreign interest deduction.............................. -- 614 Other--net.............................................. 599 563 ------- ------- Total deferred tax assets................................. 2,644 4,035 Valuation allowance for deferred tax assets............... (396) (1,543) ------- ------- Net deferred tax assets................................... 2,248 2,492 ------- ------- Net total deferred tax liabilities........................ $(8,647) $(9,336) ======= =======
At March 31, 1999, the Company had loss carryforwards and foreign interest deductions, the utilization of which was dependent upon future income and gains. For financial reporting purposes, a valuation allowance has been recognized to offset the deferred tax assets related to a portion of these assets. In fiscal 2000, the Company was able to utilize the foreign interest deductions and certain net operating losses due to a recognized gain on the sale of discontinued operations. Thus, at March 31, 2000, the valuation allowance related to these interest deductions and certain net operating losses was no longer necessary. Because the Company's ability to utilize these assets is a direct result of the gain on the segment disposal as well as certain other actions occurring in the fourth quarter of 2000, the reduction of the valuation allowance is displayed as a reduction of the tax expense related to the gain from discontinued operations. Deferred taxes have not been provided on undistributed earnings of foreign subsidiaries since substantially all of these earnings are expected to be permanently reinvested in foreign operations. Determination of the amount of unrecognized deferred U.S. income tax liabilities and potential foreign tax credits is not practical to calculate because of the complexity related with this hypothetical calculation. 27 IFR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 3. INCOME TAXES (CONTINUED) The effective income tax rate from continuing operations varied from the statutory federal income tax rate as follows for the periods ended:
NINE MONTHS YEAR ENDED ENDED YEAR ENDED MARCH 31, MARCH 31, JUNE 30, 2000 1999 1998 ---------- ----------- ---------- Statutory federal income tax rate........... 34.0% 34.0% 34.0% Increases (decreases): State income taxes, net of federal tax benefit................................. 3.8 3.4 (1.9) Amortization of goodwill and intangibles............................. (3.1) (7.5) (0.2) Valuation allowance....................... -- 7.2 -- Change in tax rate........................ 0.8 4.5 -- Acquired Research and Development......... -- -- (27.6) Foreign Rate Differential................. (4.4) (4.6) (0.6) Research and development tax credits...... -- -- 0.7 Other..................................... 5.0 4.3 2.3 ---- ---- ----- 36.1% 41.3% 6.7% ==== ==== =====
Income taxes paid during 2000, 1999 and 1998 were approximately $1,367,000, $2,732,000, and $4,001,000, respectively. 4. RESEARCH AND DEVELOPMENT COSTS Research and development costs, excluding the acquired research and development, were approximately $14,077,000, $11,816,000, and $9,208,000 for 2000, 1999 and 1998, respectively. 5. SHAREHOLDERS' EQUITY INCENTIVE STOCK OPTION PLAN: The Company has an incentive stock option plan--the 1996 Plan (the Plan). At March 31, 2000, under the 1996 Plan, 600,000 shares of Common Stock have been reserved for issuance. The Company grants qualified stock options to officers and key employees. The option price per share under the Plan is not to be less than the fair market value of a share of Common Stock on the date of grant. Generally options vest over 3 years and have a term of 10 years. All grants are made by the Compensation Committee. NONQUALIFIED STOCK OPTION PLAN: In November 1992, shareholders of the Company approved the 1992 Nonqualified Stock Option Plan whereby all employees of the Company are eligible to be granted nonqualified stock options. A total of 750,000 authorized but unissued or treasury shares of the Company's Common Stock were reserved for grant under the plan. The Compensation Committee determines the time or times at which options will be granted, selects the employees to whom options will be granted, and determines the number of shares covered by each option, purchase price, vesting periods and other terms. 28 IFR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 5. SHAREHOLDERS' EQUITY (CONTINUED) OUTSIDE DIRECTOR PLAN: In August 1999, an Amended Outside Director Compensation, Stock Option and Retirement Plan (Outside Director Plan) was approved by the shareholders. The Outside Director Plan provides that each director who is not an employee of the Company will be granted an option to purchase 1,500 shares of the Company's Common Stock on the third business day after the annual meeting of the shareholders in each of the next ten years, commencing in fiscal 2000. The option price under the Outside Director Plan is the fair market value of a share of Common Stock on the date of grant. The following table summarizes information concerning options outstanding and exercisable at March 31, 2000 for all plans:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------------------------------- ---------------------------- WEIGHTED- AVERAGE REMAINING WEIGHTED- NUMBER CONTRACTUAL WEIGHTED-AVERAGE NUMBER AVERAGE RANGE OF EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE ------------------------ ----------- ----------- ---------------- ----------- -------------- $ 1-$ 5....................... 491,700 7.49 $ 4.25 115,700 $ 4.57 $ 6-$ 8....................... 125,500 5.84 $ 7.44 93,000 $ 7.39 $ 9-$11....................... 100,500 6.47 $10.48 83,625 $10.46 $12-$18....................... 123,250 7.39 $14.24 62,662 $14.23 $19-$22....................... 99,500 8.03 $19.98 35,000 $20.02
Stock option activity during 1998-2000 is summarized below:
NUMBER OF WEIGHTED- NUMBER OF SHARES AVERAGE SHARES WEIGHTED-AVERAGE OUTSTANDING EXERCISE PRICE EXERCISABLE EXERCISE PRICE ----------- -------------- ----------- ---------------- July 1, 1997............................... 740,148 $ 7.09 392,583 $6.08 Granted.................................... 484,250 17.02 Exercised.................................. (193,194) 6.03 Canceled or expired........................ (60,949) 17.86 -------- ------ ------- ----- June 30, 1998.............................. 970,255 11.58 352,821 6.62 Granted.................................... 25,500 5.47 Exercised.................................. (5,400) 5.11 Canceled or expired........................ (17,000) 19.75 -------- ------ ------- ----- March 31, 1999............................. 973,355 11.31 455,638 8.16 Granted.................................... 488,000 4.31 Exercised.................................. (9,769) 4.39 Canceled or expired........................ (511,136) 10.27 -------- ------ ------- ----- March 31, 2000............................. 940,450 $ 8.31 389,987 $9.44 ======== ====== ======= =====
The Company accounts for stock option awards as prescribed by Accounting Principles Board Opinion No. 25. Accordingly, no compensation cost has been recognized in the Consolidated Statements of Operations. Had the Company recorded compensation expense for the fair value of the options granted, 29 IFR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 5. SHAREHOLDERS' EQUITY (CONTINUED) as provided by SFAS No. 123, the Company's net loss and net loss per common share would have been as follows:
NINE MONTHS YEAR ENDED ENDED YEAR ENDED MARCH 31, MARCH 31, JUNE 30, 2000 1999 1998 ---------- ----------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Loss from continuing operations: As reported............................................... $(4,098) $(2,149) $(18,078) Pro forma................................................. (4,172) (2,927) (18,777) Loss from continuing operations per share--diluted: As reported............................................... $ (0.50) $ (0.26) $ (2.21) Pro forma................................................. (0.51) (0.36) (2.29)
The fair values of the options were determined by using a Black-Scholes option-pricing model with the following assumptions:
NINE MONTHS YEAR ENDED ENDED YEAR ENDED MARCH 31, 2000 MARCH 31, 1999 JUNE 30, 1998 --------------- --------------- -------------- Dividend yield....................... 0% 0% 0% Volatility........................... 71% 61% 46% Risk-free interest rate.............. 6% 6% 6% Expected life........................ 6 years 6 years 6 years
The weighted average fair value of options granted at the market price for 2000, 1999 and 1998 was $2.88, $3.42, and $8.06, respectively. The weighted average fair value and weighted average exercise price of nonqualified options granted below the market price for 1998 was $11.98 and $19.75, respectively. RESTRICTED STOCK GRANT PLAN: On February 27, 1989, the shareholders of the Company approved a restricted stock grant plan whereby officers and key employees may be granted restricted shares of the Company's Common Stock. The restrictions lapse over various vesting periods not to exceed ten years. A total of 450,000 authorized but unissued or treasury shares of the Company's Common Stock were reserved for grant under the plan. These restricted shares may be granted at a price equal to par value. In 2000, 1999, and 1998 the Company made grants of 21,500, 3,000, and 4,000 shares, respectively. The market value of restricted shares granted is being amortized as compensation expense over the vesting period. Total expense of $153,816, $15,000, and $0 was recognized in 2000, 1999, and 1998 in connection with the restricted stock grant plan respectively. The shares reserved for future grants are 102,541 as of March 31, 2000. SHAREHOLDER RIGHTS PLAN: The Board of Directors of the Company amended its Shareholder Rights Plan on January 21, 1999, whereby common stock purchase rights (the Rights) were distributed as a dividend at the rate of one Right for each share of the Company's Common Stock held as of the close of business on January 25, 1999. The Rights will expire on January 20, 2009. Each Right entitles shareholders to buy one share of common stock of the Company at an exercise price of $65 per share. The Rights are exercisable only if a person or group acquires beneficial ownership of 20% or more of the Company's 30 IFR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 5. SHAREHOLDERS' EQUITY (CONTINUED) Common Stock or announces a tender or exchange offer upon consummation of which such person or group would beneficially own 20% or more of the Common Stock. Following the acquisition of 20% or more, but less than 50%, of the Company's Common Stock by a person or group, the Board of Directors may authorize the exchange of the Rights (except those owned by the acquirer), in whole or in part, for shares of the Company's Common Stock at an exchange ratio of one share for each Right. The Board of Directors of IFR will generally be able to redeem the Rights at $.01 per Right at any time prior to the time that a 20% position in the Company has been acquired. If a bidder who owns less than 5% of the Common Stock offers to buy all of the Common Stock at a price which a nationally recognized investment banker states in writing is fair and if the bidder has full financing for the bid, the shareholders of the Company may cause the Rights to be automatically redeemed immediately prior to the consummation of the offer, provided that such offer or another offer is consummated within 60 days at a price per share that is not less than the price approved by the shareholders. 6. EARNINGS PER SHARE The following is a reconciliation of the numerator and denominators used in computing basic and diluted earnings per share from continuing operations:
YEAR NINE MONTHS YEAR ENDED ENDED ENDED MARCH 31, MARCH 31, JUNE 30, 2000 1999 1998 ----------- ------------ ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) NUMERATOR Loss from continuing operations available to common shareholders............................................ $(4,098) $(2,149) $(18,078) ======= ======= ======== DENOMINATORS Basic loss per share: Weighted-average common shares Outstanding.............. 8,233 8,207 8,191 ======= ======= ======== Basic loss per share from continuing operations......... $ (0.50) $ (0.26) $ (2.21) ======= ======= ======== Diluted loss per share: Weighted-average common shares Outstanding.............. 8,233 8,207 8,191 Effect of stock options................................. 57 47 570 ------- ------- -------- Weighted-average common shares outstanding--diluted..... 8,290 8,254 8,761 ======= ======= ======== Diluted loss per share from continuing operations....... $ (0.49) $ (0.26) $ (2.06) ======= ======= ========
Note--Since the effect of stock options for 2000, 1999, and 1998 is antidilutive, the statements of operations reflect diluted per share amounts equal to the basic per share amounts. 31 IFR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 7. SEGMENTS DESCRIPTION OF THE TYPES OF PRODUCTS AND SERVICES On July 7, 1999, the Company sold its Optical Test and Measurement Division (SEE NOTE 10). The Company now has one segment: Electronic Test and Measurement Equipment (ETM). The Company manufactures and markets a broad array of test equipment as well as offers service and repair for these products.
NINE MONTHS YEAR ENDED ENDED YEAR ENDED MARCH 31, MARCH 31, JUNE 30, 2000 1999 1998 ---------- ----------- ---------- (IN THOUSANDS) GEOGRAPHIC AREA SALES United States............................. $ 62,024 $ 38,383 $ 56,261 South America and Canada.................. 5,829 7,325 4,127 -------- -------- -------- Total Americas.......................... 67,853 45,708 60,388 -------- -------- -------- United Kingdom............................ 23,481 23,361 17,891 France.................................... 10,437 8,582 5,721 Germany................................... 5,655 5,045 3,664 Other..................................... 13,963 9,190 7,234 -------- -------- -------- Total Europe............................ 53,536 46,178 34,510 -------- -------- -------- Pacific Rim............................... 16,137 10,090 9,359 Rest Of World............................. 4,365 4,183 4,634 -------- -------- -------- Total................................... $141,891 $106,159 $108,891 ======== ======== ========
32 IFR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 7. SEGMENTS (CONTINUED) Sales are attributed to geographic areas based on the location of the customers. GEOGRAPHIC AREA LONG-LIVED ASSETS United States--Total Americas............... $ 9,882 $ 10,382 $ 10,282 -------- -------- -------- United Kingdom.............................. 65,511 69,145 70,634 France...................................... 154 210 399 Germany..................................... 51 71 129 Other....................................... 2 57 115 -------- -------- -------- Total Europe............................ 65,718 69,483 71,277 -------- -------- -------- Pacific Rim................................. 48 73 80 -------- -------- -------- Total..................................... $ 75,648 $ 79,938 $ 81,639 ======== ======== ======== SALES BY MARKET SECTOR Communications.............................. $ 39,727 $ 31,654 $ 46,616 Test & Measurement.......................... 37,905 26,441 20,836 Avionics.................................... 13,209 11,387 9,520 ATE & Solutions............................. 14,148 10,869 8,545 Service..................................... 26,233 17,497 15,083 Other....................................... 10,669 8,311 8,291 -------- -------- -------- Total..................................... $141,891 $106,159 $108,891 ======== ======== ========
8. BENEFIT PLANS RETIREMENT PLAN: The Company has a trusteed, defined contribution retirement plan for all U.S. employees. Company contributions are discretionary with respect to the plan. Employee benefits are based on amounts accumulated from contributions and investment gains or losses. The Company has established a defined contribution plan for substantially all U.K. employees. Total retirement plan expenses for 2000, 1999 and 1998 were approximately $2,375,000, $1,736,000, and $1,229,000, respectively. DIRECTORS RETIREMENT PLAN: The Company maintains an unfunded retirement plan for nonemployee directors of the Company. Benefits will not accrue for periods in excess of 10 years of service and are payable when the Plan's requirements are satisfied. In August 1999, an Amended Outside Director Compensation, Stock Option and Retirement Plan (Outside Director Plan) was approved by the shareholders. No additional benefits will be earned under the Plan after fiscal year 2000. The estimated liability at March 31, 2000 and March 31, 1999 was $454,000 and $345,000, respectively, and is included in the balance sheet caption Other Liabilities and Accrued Expenses. SAVINGS AND INVESTMENT PLAN: The Company has a savings and investment plan for substantially all U.S. employees under Section 401(k) of the Internal Revenue Code. Employees may contribute to the plan up to 12% of their salary. Matching Company contributions are discretionary with respect to the plan. During 2000, 1999 and 1998, the Company matched 50% of each employee's contribution up to 4% of their salary. 33 IFR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 8. BENEFIT PLANS (CONTINUED) Company contributions charged to expense in 2000, 1999 and 1998, were approximately $300,000, $218,000, and $260,000, respectively. INCENTIVE BONUS PLAN: The Company has established a bonus plan payable to selected employees based on pre-established operating income goals approved by the Board of Directors. Total bonus plan expenses for 2000, 1999 and 1998 were approximately $0, $0, and $116,000, respectively. VEBA TRUST: The Company has a voluntary employees' beneficiary association (VEBA), which funds certain employee welfare plan benefits. The Company is obligated to fund a trust as needed to provide for actual claims and trust expenses incurred. Total VEBA expenses for 2000, 1999 and 1998 were approximately $1,710,000, $1,034,000, and $1,163,000, respectively. 9. SPECIFIED FINANCIAL INFORMATION As a result of the change in the Company's year end in 1999, the following comparative information is presented for the years ending March 31, 2000 and March 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA):
2000 1999 -------- ----------- (UNAUDITED) Sales.................................................. $141,891 $145,974 Gross profit........................................... 58,541 59,538 Income tax benefit..................................... (2,316) (3,907) Continuing operations: Net Loss............................................. (4,098) (5,188) Basic and Diluted loss per share..................... (0.50) (0.63)
Since the per share amounts for 2000 and 1999 are antidilutive, the diluted per share amounts equal the basic per share amounts. 10. DISCONTINUED OPERATIONS On June 25, 1999, the Board of Directors approved a formal plan to sell the Company's Optical Test and Measurement (OTM) Division. The sale was completed on July 7, 1999 to GN Nettest, a company in the GN Great Nordic Group, Copenhagen, Denmark for $43,988,000 in cash. A net of tax gain of approximately $11,031,000 (approximately $1.34 per share) was recorded. The proceeds from the sale were used to reduce the Company's outstanding debt obligation in July 1999, with $31,740,000 applied to long-term debt and $11,260,000 used to reduce short-term debt (SEE NOTE 2). The results of operations for the OTM Division have been classified as discontinued operations in the consolidated statements of operations and prior periods have been restated. The consolidated balance sheet at March 31, 1999 has been segregated to reflect the OTM Division as discontinued operations. The consolidated statements of cash flows and consolidated statements of shareholders' equity include the 34 IFR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 10. DISCONTINUED OPERATIONS (CONTINUED) OTM Division through the date of divestiture. Selected results of operations for the OTM Division follows (IN THOUSANDS):
YEAR NINE MONTHS YEAR ENDED ENDED ENDED MARCH 31, MARCH 31, JUNE 30, 2000 1999 1998 --------- ----------- -------- Sales......................................... $8,335 $23,358 $39,178 Income tax expense (benefit).................. 7,184 (6) 1,744 Income (loss) from discontinued operations.... 326 (446) 2,141 Net gain on sale of OTM Division.............. 11,031 -- --
11. ACQUISITIONS MARCONI INSTRUMENTS On February 6, 1998, IFR acquired for cash all of the issued and outstanding capital stock of Marconi Instruments Limited, Hertfordshire, U.K. (Marconi). The purchase price for Marconi was approximately $109,000,000, paid in cash funded primarily by debt (SEE NOTE 2). The acquired business is engaged in the design, manufacture, distribution and sale of test and measurement equipment for the telecommunications and electronics industries. The acquisition has been accounted for as a purchase and, accordingly, the net assets and results of operations are included in the consolidated financial statements from the effective date of acquisition. The purchase price, as adjusted during fiscal 1999, has been allocated to the assets and liabilities based on their estimated fair values at the date of acquisition as follows (IN THOUSANDS): Purchase price per agreement................................ $106,939 Direct acquisition costs.................................... 2,459 -------- Total purchase price........................................ $109,398 ======== Total current assets........................................ $ 61,737 Property and equipment--net................................. 20,850 Developed technology (amortized over 20 years).............. 18,800 Goodwill (amortized over 30 years).......................... 22,297 Other intangible assets (amortized over 1-20 years)......... 14,766 Acquired research and development........................... 15,700 -------- Total assets.............................................. 154,150 Total current liabilities assumed........................... (32,181) Deferred income taxes....................................... (12,571) -------- Total net assets............................................ $109,398 ========
35 IFR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 11. ACQUISITIONS (CONTINUED) The amounts allocated to acquired research and development were determined through established valuation techniques. Since technological feasibility had not been established and no future alternative uses existed, these amounts were expensed upon acquisition. Restructuring liabilities related to the Marconi acquisition of approximately $7,700,000 were recorded in connection with the acquisition for severance and related costs associated with the shutdown of certain acquired facilities. Payments of $6,830,000 have been charged against the liability through March 31, 2000. In addition, the original estimate of the liability was reduced in fiscal 2000 by $796,000 primarily due to the execution of a long-term sublease of the Fort Worth Texas facility to a third party. The impact of the reversal resulted in a reduction of goodwill of $616,000, net of tax of $180,000. The remaining balance of $121,000 covers remaining costs under the lease and miscellaneous severance payments. YORK SENSORS On December 22, 1997, the Company acquired York Sensors Ltd. in Hampshire, U.K. The acquired business was involved in the design and manufacture of distributed temperature sensing (DTS) equipment based on optical time domain reflectometer (OTDR) technology for the electric utility, oil exploration and other industries. The Company acquired assets of approximately $930,000 and assumed liabilities of approximately $1,902,000 for a nominal purchase price. This resulted in goodwill of approximately $972,000 which was being amortized over 10 years. The acquisition was accounted for as a purchase. The purchase price was allocated to the assets and liabilities based on their estimated fair values at the date of acquisition. York Sensors is part of the Optical Test and Measurement (OTM) Division which has been segregated and classified as discontinued operations. PRO FORMA INFORMATION The following pro forma data presents the consolidated results of operations as if the Marconi acquisition had occurred on July 1, 1996, after giving effect to certain adjustments including amortization of intangibles, increased interest expense and related income tax effects. The pro forma data for both years does not include non-recurring charges related to acquired research and development ($15,700,000) and inventory valuations ($11,844,000). The pro forma results have been prepared for comparative purposes only and do not purport to indicate the results of operations which would actually have occurred had the acquisitions been in effect on the date indicated or which may occur in the future.
YEAR ENDED JUNE 30, 1998 -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Sales....................................................... $174,688 Income from continuing operations........................... $ 4,916 Income from continuing operations per common share.......... $ 0.60 Income from continuing operations per share assuming dilution.................................................. $ 0.56
36 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
QUARTERS ENDED --------------------------------------------- JUN. 30, SEP. 30, DEC. 31, MAR. 31, FISCAL 2000 1999 1999 2000 2000 ----------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Sales from continuing operations........................ $33,991 $34,705 $35,265 $37,930 Sales from discontinued operations...................... 8,335 -- -- -- Gross profit from continuing operations................. 14,930 13,751 13,393 16,467 Income (loss) from: Continuing operations................................. (1,101) (993) (2,632) 628 Discontinued operations............................... 326 10,134 -- 897 Net income (loss)....................................... (775) 9,141 (2,632) 1,525 Earnings (loss) per share--basic: Continuing operations................................. $ (0.13) $ (0.12) $ (0.32) $ 0.08 Discontinued operations............................... 0.04 1.23 -- 0.11 Net income............................................ (0.09) 1.11 (0.32) 0.19 Earnings (loss) per share--diluted: Continuing operations................................. $ (0.13) $ (0.12) $ (0.32) $ 0.07 Discontinued operations............................... 0.04 1.23 -- 0.11 Net income............................................ (0.09) 1.11 (0.32) 0.18 Average common shares outstanding....................... 8,223 8,231 8,236 8,240 Dilutive common shares outstanding...................... 8,223 8,231 8,236 8,481
Amounts differ from previously reported amounts since the results of the OTM Division have been reflected as discontinued operations (see NOTE 10). The effect of stock options for the first, second, and third quarters in fiscal year 2000 is antidilutive because of the net loss. In these cases, the diluted per share amounts equal the basic per share amounts. 37 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
QUARTERS ENDED ---------------------------------------------- SEPT. 30, DEC. 31, MAR. 31, JUN. 30, FISCAL 1999 1998 1998 1999 1999 ----------- ---------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Sales from continuing operations......................... $33,157 $36,072 $36,930 N/A Sales from discontinued operations....................... 7,743 8,046 7,569 N/A Gross profit from continuing operations.................. 15,005 15,773 16,523 N/A Income (loss) from: Continuing operations.................................. (1,549) (534) (66) N/A Discontinued operations................................ (91) 133 (488) N/A Net income (loss)........................................ (1,640) (401) (554) N/A Earnings (loss) per share--basic: Continuing operations.................................. $ (0.19) $ (0.07) $ (0.01) N/A Discontinued operations................................ (0.01) 0.02 (0.06) N/A Net income............................................. (0.20) (0.05) (0.07) N/A Earnings (loss) per share--diluted: Continuing operations.................................. $ (0.19) $ (0.07) $ (0.01) N/A Discontinued operations................................ (0.01) 0.02 (0.06) N/A Net income............................................. (0.20) (0.05) (0.07) N/A Average common shares outstanding........................ 8,205 8,208 8,208 N/A Dilutive common shares outstanding....................... 8,205 8,208 8,208 N/A
Amounts differ from previously reported amounts since the results of the OTM Division have been reflected as discontinued operations (see NOTE 10). The effect of stock options for fiscal year 1999 is antidilutive because of the net loss. In these cases, the diluted per share amounts equal the basic per share amounts. 38 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
QUARTERS ENDED ---------------------------------------------- SEPT. 30, DEC. 31, MAR. 31, JUN. 30, FISCAL 1998 1997 1997 1998 1998 ----------- ---------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Sales from continuing operations........................ $15,692 $17,230 $36,154 $39,815 Sales from discontinued operations...................... 9,829 10,309 9,624 9,416 Gross profit from continuing operations................. 6,178 7,275 9,944 12,237 Income (loss) from: Continuing operations................................. 1,013 1,386 (17,438) (3,039) Discontinued operations............................... 862 905 454 (80) Net income (loss)....................................... 1,875 2,291 (16,984) (3,119) Earnings (loss) per share--basic: Continuing operations................................. $ 0.12 $ 0.17 $ (2.13) $ (0.37) Discontinued operations............................... 0.11 0.11 0.05 (0.01) Net income............................................ 0.23 0.28 (2.08) (0.38) Earnings (loss) per share--diluted: Continuing operations................................. $ 0.12 $ 0.16 $ (2.13) $ (0.37) Discontinued operations............................... 0.10 0.10 0.05 (0.01) Net income............................................ 0.22 0.26 (2.08) (0.38) Average common shares outstanding....................... 8,168 8,228 8,173 8,196 Dilutive common shares outstanding...................... 8,562 8,711 8,173 8,196
Amounts differ from previously reported amounts since the results of the OTM Division have been reflected as discontinued operations (see NOTE 10). The quarter ending March 31, 1998 reflects acquisition-related charges of $15,700,000 for the write-off of in-process research and development and $4,738,000 before taxes for inventory related charges included in cost of goods sold. The quarter ending June 30, 1998 includes an additional write-off of $7,106,000 before taxes for acquisition-related inventory. The effect of stock options for the third and fourth quarter of fiscal year 1998 is antidilutive because of the net loss. In these cases, the diluted per share amounts equal the basic per share amounts. 39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 concerning directors of IFR is incorporated herein by reference from "Election of Directors" contained in IFR's Proxy Statement for its August 25, 2000 annual meeting of shareholders (the "2000 Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference from "Election of Directors" and "Compensation of Directors", "Executive Compensation", and "Compensation Committee Report on Executive Compensation" contained in the 2000 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference from "Outstanding Shares" and "Election of Directors" contained in the 2000 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference from "Certain Relationships" contained in the 2000 Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a)(1) Financial Statements--See Index to Financial Statements at Item 8 of this report. (a)(2) Financial Statement Schedule The following financial statement schedule of IFR is included in this report in response to Item 14(d): Schedule II--Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the instructions or are inapplicable, and therefore have been omitted. (a)(3) See Exhibit Index (b) No reports on Form 8-K were filed during the fourth quarter of the fiscal year ended March 31, 2000: 40 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT --------------------- ---------------------- 2.1 Share Sale and Purchase Agreement, dated February 6, 1998, among IFR Systems, Inc., IFR Systems Limited, and The General Electric Company p.l.c. (Exhibit 2.01 to Form 8-K, dated February 6, 1998, previously filed by Registrant).* 2.2 Deed of Tax Covenant, dated February 6, 1998, between The General Electric Company p.l.c., as Covenantor, and IFR Systems Limited, as Purchaser (Exhibit 2.02 to Form 8-K, dated February 6, 1998, previously filed by Registrant).* 2.3 Agreement and Plan of Merger of IFR Systems, Inc., with IFR Merger Corporation, dated as of January 20, 1998 (Exhibit 2 to Form 8-K, dated January 30, 1998, previously filed by Registrant).* 3.1 Amended and Restated Certificate of Incorporation of IFR Systems, Inc. (the "Company"), dated January 30, 1998 (Exhibit 3.01 to Form 8-K, dated January 30, 1998, previously filed by Registrant).* 3.2 Bylaws of the Company (Exhibit 3.2 to the Company's Amendment No. 1 to Form 8-K, dated February 18, 1999, File No. 0-14224, previously filed by Registrant).* 4.1 Specimen certificate representing common stock of the Company (Exhibit 4.1 to Amendment No. 2 to the Company's Registration Statement on Form S-1 filed January 17, 1986, Reg. No. 33-2122, as previously filed by Registrant).* 4.2 Article II of the Amended and Restated Certificate of Incorporation of the Company, (Included in Exhibit 3.1).* 4.3 Articles I, III, and VII of the Amended and Restated Certificate of Incorporation of the Company, (Included in Exhibit 3.1).* 4.4 Articles 2, 3, and 5 of the By-laws of the Company. (Included in Exhibit 3.2).* 4.5 Rights Agreement between the Company and Harris Trust & Savings Bank dated as of February 28, 1999 (Exhibit 4 to the Company's registration statement on Form 8-A dated February 19, 1999, previously filed by Registrant).* 4.6 Form of Rights Certificate of the Company. (Included in Exhibit 4.5).* 4.7 IFR Systems, Inc., 1992 Nonqualified Stock Option Plan (Exhibit 4(a) to the Company's Registration Statement on Form S-8 filed January 8, 1993, Reg. No. 33-56862, previously filed by Registrant).* 4.8 Form of Option Agreement for IFR Systems, Inc., 1992 Nonqualified Stock Option Plan (Exhibit 4(b) to the Company's Registration Statement on Form S-8 filed January 8, 1993, Reg. No. 33-56862, previously filed by Registrant).* 10.1 Description of Incentive Bonus Plan for Management of the Company. (Incorporated by reference from page 8 of the 1996 Proxy Statement as filed on September 23, 1996, File No. 0-14224).* 10.2 Stock Purchase Agreement, dated as of June 28, 1999, between GN Nettest A/S, GN Nettest (New York)Inc, and GN Great Britain Limited and IFR Systems, Inc. (Exhibit 1 to Form 8-K, dated July 8, 1999, previously filed by Registrant).* 10.4 Termination Agreement between the Company and Jeffrey A. Bloomer (Exhibit 10.0 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, previously filed by Registrant).* 10.5 Termination Agreement between the Company and Dennis H. Coley
41
EXHIBIT NO. DESCRIPTION OF EXHIBIT --------------------- ---------------------- 10.6 IFR Systems, Inc. Employees' Profit Sharing Plan (Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990, File No. 0-14224, previously filed by Registrant).* 10.7 Restricted Stock Grant Plan of the Company (Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended June 30, 1989, File No. 0-14224, previously filed by Registrant).* 10.9 1996 Incentive Stock Option Plan of the Company (Exhibit A of the 1996 Proxy Statement as filed on September 23, 1996, File No. 0-14224, previously filed by Registrant).* 10.10 Form of Indemnity Agreement entered into between the Company and its directors and certain of its officers as of February 27, 1989 (Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended June 30, 1989, File No. 0-14224, previously filed by Registrant).* 10.11 IFR Systems, Inc., Outside Director Compensation, Stock Option, and Retirement Plan (Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended March 31, 2000, File No. 0-14224, previously filed by Registrant).* 10.12 Lease between the Company and the City of Goddard, Kansas, dated as of March 15, 1997 (Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, previously filed by Registrant)* 10.13 Credit Agreement, dated as of February 5, 1998, among IFR Systems, Inc., The First National Bank of Chicago, and various lenders (Exhibit 10.01 to the Form 8-K, dated February 6, 1998, previously filed by Registrant).* 10.14 Form of Security Agreement executed by Registrants and its United States subsidiaries (Exhibit 10.02 to Form 8-K, dated February 6, 1998, previously filed by Registrant).* 10.15 Form of Guaranty executed by each of Registrants United States subsidiaries (Exhibit 10.03 to Form 8-K, dated February 6, 1998, previously filed by Registrant).* 10.16 Pledge Agreement between Registrant and First National Bank of Chicago (Exhibit 10.04 to Form 8-K, dated February 6, 1998, previously filed by Registrant).* 10.17 Equitable Share Change by Registrant to First National Bank of Chicago (Exhibit 10.05 to Form 8-K, dated February 6, 1998, previously filed by Registrant).* 10.18 Form of Copyright Security Agreement executed by Registrant and each of its United States subsidiaries (Exhibit 10.06 to Form 8-K, dated February 6, 1998, previously filed by Registrant).* 10.19 Form of Patent Security Agreement executed by Registrant and each of its United States subsidiaries (Exhibit 10.07 to Form 8-K, dated February 6, 1998, previously filed by Registrant).* 10.20 Form of Trademark Security Agreement Security Agreement executed by Registrant and each of its United States subsidiaries (Exhibit 10.08 to Form 8-K, dated February 6, 1998, previously filed by Registrant).* 10.21 Amendment No. 1 to Credit Agreement, dated as of November 3, 1998, among IFR Systems, Inc., The First National Bank of Chicago, and various lenders. (Exhibit 10.0 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, previously filed by Registrant).*
42
EXHIBIT NO. DESCRIPTION OF EXHIBIT --------------------- ---------------------- 10.22 Amendment No. 2 to Credit Agreement, dated as of March 31, 1999, among IFR Systems, Inc., The First National Bank of Chicago, and various lenders. (Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, previously filed by Registrant).* 10.23 Amendment No. 3 to Credit Agreement, dated as of June 28, 1999, among IFR Systems, Inc., The First National Bank of Chicago, and various lenders. (Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999, previously filed by Registrant).* 10.24 Amendment No. 4 to Credit Agreement, dated as of October 15, 1999, among IFR Systems, Inc., The First National Bank of Chicago, and various lenders. 10.25 Amendment No. 5 to Credit Agreement, dated as of June 15, 2000, among IFR Systems, Inc., The First National Bank of Chicago, and various lenders. 21.0 Subsidiaries of the Registrant 23.0 Consent of Ernst & Young LLP 27.0 Financial Data Schedule
------------------------ * Document has been previously filed with the Securities and Exchange Commission and is incorporated by reference and made a part hereof. 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the under signed, thereunto duly authorized. IFR SYSTEMS, INC. June 28, 2000 By /s/ JEFFREY A. BLOOMER ------------------------------------------ Jeffrey A. Bloomer PRESIDENT AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
DATE TITLE SIGNATURE ---- ----- --------- June 28, 2000 Chairman of the Board of Directors /s/ ALFRED H. HUNT, III And Chief Technology Officer -------------------------------------- Alfred H. Hunt, III June 28, 2000 President and Chief Executive Officer /s/ JEFFREY A. BLOOMER (Principal Executive Officer) -------------------------------------- Director Jeffrey A. Bloomer June 28, 2000 Director /s/ WILTON W. COGSWELL, III -------------------------------------- Wilton W. Cogswell, III June 28, 2000 Director /s/ DONALD L. GRAF -------------------------------------- Donald L. Graf June 28, 2000 Director /s/ JOHN V. GROSE -------------------------------------- John V. Grose June 28, 2000 Director /s/ OSCAR L. TANG -------------------------------------- Oscar L. Tang June 28, 2000 Director /s/ RALPH R. WHITNEY, JR. -------------------------------------- Ralph R. Whitney, Jr. June 28, 2000 Treasurer And Chief Financial Officer /s/ DENNIS H. COLEY (Principal Accounting Officer) -------------------------------------- Dennis H. Coley
44 IFR SYSTEMS, INC SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL C. COL. D COL. E ---------------------------- ------------------- ------------------------------------- ------------ ----------- ADDITIONS ------------------------------------- BALANCE AT CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS-- BALANCE AT DESCRIPTION BEGINNING OF PERIOD AND EXPENSES ACCOUNTS--DESCRIBE DESCRIBE(1) END OF YEAR ---------------------------- ------------------- ---------------- ------------------ ------------ ----------- Year ended March 31,2000: Allowance for doubtful accounts (deducted in balance sheet from accounts receivable).... 730,767 91,000 -- 222,123 599,644 Year ended March 31,1999: Allowance for doubtful accounts (deducted in balance sheet from accounts receivable).... 773,173 122,000 -- 164,406 730,767 Year ended June 30,1998: Allowance for doubtful accounts (deducted in balance sheet from accounts receivable).... 368,773 180,000 303,000 78,600 773,173
Note 1: Uncollectible accounts receivable charged off, less recoveries and Discontinued Operations of OTM Division.