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2000 Annual Report
PROFILE - AEROFLEX INCORPORATED IS A HIGH TECHNOLOGY COMPANY THAT DESIGNS, DEVELOPS, MANUFACTURES AND MARKETS AN EXTENSIVE, DIVERSE RANGE OF MICROELECTRONIC AND INSTRUMENT PRODUCTS FOR THE FIBER OPTIC AND WIRELESS COMMUNICATIONS MARKETS. AEROFLEX PRODUCTS ARE IN SERVICE WORLDWIDE, SUPPORTING ADVANCED FIBER OPTIC NETWORKS, AUTOMATIC TEST SYSTEMS AND WIRELESS COMMUNICATION DEVICES.
selected financial data
focusing on our markets
FIBER OPTICS
Aeroflex continues to focus on product and technology solutions that enhance and support the efficient transmission and delivery of information. Increasingly, these needs are being fulfilled by a global web of fiber optic systems and networks. The Internet, driven by increasing speed and bandwidth and its capacity to support all forms of content, from basic telephony to data-intensive video, is using the virtually limitless capabilities of fiber optic systems and their vast bandwidth potential to transform a vision of instantaneous connectivity into an everyday reality.
The fiber strands that carry digital information buried beneath the ground or on the ocean floor - are but a small segment of that network. Fiber is a transportation medium, an alternative to both copper wire and air waves. In the fiber optic network, it is ultimately electronic and photonic circuitry that does the work. In fact, new electro-photonic systems for short haul applications are being developed today that propel immense volumes of information wirelessly using light waves. Aeroflex products support the electro-photonic
WIRELESS
products and technology. The explosive growth forecasted for mobile information appliances coupled with user demand for bandwidth, convenience, reliability and access, put Aeroflex in a position to benefit significantly from the wireless infrastructure build-out over the coming years. Aeroflex is a leading manufacturer of both interconnect products and high-speed mixed signal test equipment - both of which are expected to participate in this rapidly expanding market.
Thin film advanced interconnects for electro-photonic circuits
Fiber optic network clock / data recovery module
Fiber optic components
Automatic Test System for mixed signal system on chip wireless devices
letter - to our shareholders
Backlog
(in millions)
Harvey R. Blau Chairman of the Board
Michael Gorin President
Leonard J. Borow Executive Vice President
fiber optics-telecommunications infrastructure
FIBER OPTIC BOOKINGS AND SALES
components. The dimensional precision and mechanical stability inherent in the technology allows for the maintenance of the alignment required by photonic elements as well as provides electrical characteristics that accommodate the extremely high speed
Bookings
(in millions)
Sales
(in millions)
already deployed in 10 Gbps fiber optic systems and a recently completed high-end module will soon be deployed in more advanced, faster systems. We are working toward being able to provide complete solutions which incorporate our enabling thin film technology and capitalize on our design and manufacturing expertise in ASICs, assemblies and modules in support of high bit-rate fiber optic systems. Our high-speed test technology is also contributing to the quality
of fiber optic systems. Our automatic testing and characterization of components and equipment that constitute synchronous optical networks, such as SONET, allows the deployment of networks that provide error free, efficient operation.
Wireless - Communications
communications systems while delivering greater miniaturization and cost-effectiveness. Today, while voice makes up the bulk of mobile
WIRELESS BOOKINGS AND SALES
communications traffic, we anticipate that sometime in the near future, mobile data communications, including voice services, will constitute the majority of all mobile communications traffic. In order to accommodate the demands of this anticipated surge in data traffic, mobile devices will need high bandwidth and concentrated signal
Bookings
(in millions)
systems. This system is at the forefront of high-speed testing technology. We have also received initial orders for our TRM1000 virtual transmit / receive module test system. A derivative of the STI1000, the TRM1000 features high speed testing at the module level. We are working to expand the market for this advanced technology by developing a next-generation virtual test instrument to serve the global wireless testing market.
Sales
(in millions)
Aeroflex is also a leading supplier of RF and microwave frequency synthesizers designed to test and verify the performance of the latest system on chip (SOC) devices that are at the heart of mobile appliances. We have ramped up production on our FS1000 dual frequency synthesizer to support the accelerating demand for automatic test systems capable of high-speed RF / microwave testing. Enhancements to these products are intended to support third generation mobile devices, soon to be introduced. These products also support high-speed automatic testing of mobile network devices, as well as Bluetooth enabled mobile devices.
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
See notes to consolidated financial statements.
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
Balance, July 1, 1997 Stock issued in public offering Stock issued upon exercise of stock options and warrants Stock issued upon conversion of debentures Net income Balance, June 30, 1998 Stock issued upon exercise of stock options and warrants Purchase of treasury stock Deferred compensation Net income Balance, June 30, 1999
Comprehensive Income
See notes to consolidated financial statements.
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
See notes to consolidated financial statements.
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Principles and Policies Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation computed on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the life of the lease or the estimated life of the asset, whichever is shorter.
Principles of Consolidation
Research and Development Costs
All research and development costs are charged to expense as incurred. See Note 2 for a discussion of acquired in-process research and development.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires that management of the Company make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities. Among the more significant estimates included in the consolidated financial statements are the estimated costs to complete contracts in process. Actual results could differ from those estimates.
Intangible Assets
Intangible assets are recorded at cost less accumulated amortization.The excess of purchase price over the fair value of tangible assets acquired is being amortized on a straight-line basis over periods ranging from 15 to 40 years except for certain costs allocated to identifiable intangible assets including existing technology, assembled workforce, customer relationships and patents which are amortized over 6 to 15 years, the estimated remaining lives of the intangibles at the time they were acquired by the Company. The Company periodically evaluates the recoverability of the carrying value of its intangible assets and the related amortization periods. The Company assesses the recoverability of unamortized goodwill based on the undiscounted projected future earnings of the related businesses.
Cash and Cash Equivalents
The Company considers all highly liquid investments having maturities of three months or less at the date of acquisition to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories related to long-term contracts are recorded at cost less amounts expensed under percentage-ofcompletion accounting.
Income Per Common Share
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share, " income per common share ("Basic EPS") is computed by dividing net income by the weighted average common shares outstanding. Income per common share assuming dilution ("Diluted EPS") is computed by dividing net income plus a pro forma addback of debenture interest by weighted average common shares outstanding plus potential dilution from the conversion of debentures and the exercise of stock options and warrants.
Financial Instruments
The fair values of all on-balance sheet financial instruments, other than long-term debt (see Note 8), approximate book values because of the short maturity of these instruments. Amounts receivable or payable under interest rate swap agreements are accounted for as adjustments to interest expense.
Revenue and Cost Recognition on Contracts
Revenue is recognized based upon shipments or billings. The Company records gross profit on its long-term contracts using percentage-of-completion accounting under which costs are recognized on revenues in the same relation that total estimated manufacturing costs bear to total contract value. Estimated costs at completion are based upon engineering and production estimates. Provisions for estimated losses or revisions in estimated profits on contracts-in-process are recorded in the period in which such losses or revisions are first determined.
Accounting for Stock-Based Compensation
The Company records compensation expense for employee and director stock options only if the current market price of the underlying stock exceeds the exercise price on the date of the grant. Effective July 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has elected not to implement the fair value based accounting method for employee and director stock options, but instead has elected to disclose the pro forma net income and pro forma net
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
In accordance with SFAS No. 109, "Accounting for Income Taxes, " the Company measures deferred tax assets and liabilities based upon the differences between the financial accounting and tax bases of assets and liabilities.
Comprehensive Income
Reclassifications
Reclassifications have been made to the 1998 and 1999 consolidated financial statements to conform to the 2000 presentation.
Recent Accounting Pronouncements
Acquisition of Businesses
Effective February 25, 1999, the Company acquired all of the outstanding stock of UTMC Microelectronic Systems, Inc.
The pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisition taken place at the beginning of the periods presented or of future operating results of the combined companies.
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Europtest
The marketable securities at June 30, 2000 were virtually all U.S. corporate debt securities with scheduled maturities within one year.
Inventories
Inventories consist of the following:
Raw materials Work-in-process Finished goods
Acquisition of Assets From Lucent Technologies
Property, Plant and Equipment
Property, plant and equipment consists of the following:
Marketable Securities
Land Building and leasehold improvements Machinery, equipment, tools and dies Furniture and fixtures Assets recorded under capital leases Less accumulated depreciation and amortization
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accrued Expenses and Other Current Liabilities
Long-Term Debt and Credit Arrangements
Long-term debt consists of the following:
June 30, 2000 1999 (In thousands)
Aggregate long-term debt as of June 30, 2000 matures in each fiscal year as follows:
Senior Subordinated Convertible Debentures
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
Common Stock Split
Stock Options and Warrants
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted Average Remaining Life 5.8 years 7.8 8.7 9.7
Accounting for Stock-Based Compensation
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes
The provision (benefit) for income taxes consists of the following:
Net Income Per Share
A reconciliation of the numerators and denominators of the Basic EPS and Diluted EPS calculations is as follows:
The provision for income taxes varies from the amount computed by applying the U.S. Federal income tax rate to income before income taxes as a result of the following:
Tax at statutory rate Utilization of capital loss carryforward Non-deductible acquired in-process research and development charge State and local income tax Research and development credit Other, net
Deferred tax assets and liabilities consist of:
Accounts receivable Inventories Accrued expenses and other current liabilities Current assets Capital lease obligation Other long-term liabilities Capital loss carryforwards Tax loss carryforwards Tax credit carryforwards Less: valuation allowance Non-current assets Property, plant and equipment Intangibles Other Long-term liabilities Net non-current assets (liabilities) Total
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Commitments and Contingencies Operating Leases
12. Employment Contracts
13. Employee Benefit Plans
Legal Matters
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Business Segment Data: Net sales: Microelectronics Test, Measurement and Other Electronics Isolator Products Net sales Operating income: Microelectronics Test, Measurement and Other Electronics Isolator Products General corporate expenses Acquired in-process research and development(1) Interest expense Other income (expense), net Income before income taxes Total assets: Microelectronics Test, Measurement and Other Electronics Isolator Products Corporate Total assets Capital expenditures: Microelectronics Test, Measurement and Other Electronics Isolator Products Corporate Total capital expenditures Depreciation and amortization expense: Microelectronics Test, Measurement and Other Electronics Isolator Products Corporate Total depreciation and amortization expense
15. Business Segments
The special charge for the write-off of in-process research and development acquired in the purchase of UTMC is allocable fully to the Microelectronics segment.
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
Melville, New York August 15, 2000
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
QUARTERLY FINANCIAL DATA (Unaudited):
Since per share information is computed independently for each quarter and the full year, based on the respective average number of common and common equivalent shares outstanding, the sum of the quarterly per share amounts does not necessarily equal the per share amounts for each year. All share and per share amounts have been restated to reflect a five-for-four stock split.
(a) Our common stock trades on the Nasdaq National Market under the symbol "ARXX". Prior to March 21, 2000, our common stock was traded on the New York Stock Exchange under the symbol "ARX". The following table sets forth, for the calendar periods indicated, the high and low closing sales prices of our common stock as reported by the Nasdaq National Market since March 21, 2000 and, prior to March 21, 2000, the high and low closing sales prices of our common stock as reported by the New York Stock Exchange. The prices have been adjusted to reflect a five-for-four stock split that was payable July 7, 2000.
(b) As of September 18, 2000, there were approximately 750 record holders of our common stock. (c) We have never declared or paid any cash dividends on our common stock. There have been no stock dividends declared or paid on our common stock during the past three years except for a five-for-four stock split, which was payable on July 7, 2000 for record holders as of June 26, 2000. We currently intend to retain any future earnings for use in the operation and development of our business and for acquisitions and, therefore, do not intend to declare or pay any cash dividends on our common stock in the foreseeable future. In addition, our revolving credit, term loan and mortgage agreement, as amended, prohibits us from paying cash dividends.
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
acquired the operating assets of Korfund Dynamics Corporation, a manufacturer of an industrial line of heavy duty spring and rubber shock mounts. · developing new products Our revenue is based upon shipments or billings. We record costs on our long-term contracts using percentage-of-completion accounting. Under percentage-of-completion accounting, costs are recognized on revenues in the same relation that total estimated manufacturing costs bear to total contract value. Estimated costs at completion are based upon engineering and production estimates. Provisions for estimated losses or revisions in estimated profits on contracts-in-process are recorded in the period in which such losses or revisions are first determined. Some of our development efforts are reimbursed under contractual arrangements. Product development and similar costs which we cannot recover under contractual arrangements are expensed in the period incurred. · improving existing products · adapting existing products to new applications · developing prototype components to bid on specific programs Our product development efforts primarily involve engineering and design relating to:
Statement of Operations
Years Ended June 30, 1999 (In thousands) 1998
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
Gross Profit
Selling, General and Administrative Costs
Fiscal Year Ended June 30, 2000 Compared to Fiscal Year Ended June 30, 1999 Net Sales
Research and Development Costs
Other Expense (Income)
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
Gross Profit
Provision for Income Taxes
Selling, General and Administrative Costs
Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 1998 Net Sales
Research and Development Costs
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
Provision for Income Taxes
Market Risk
Other Expense (Income)
Seasonality
Recent Accounting Pronouncements
Effective July 1, 2000, the Company will adopt SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities, " as amended.This statement requires companies to record derivatives on the balance sheet as assets or liabilities at their fair
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
Liquidity and Capital Resources
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
Forward-Looking Statements
Aeroflex Incorporated and Subsidiaries
2000 Annual Report
CORPORATE INFORMATION
Board of Directors
Harvey R. Blau
Chairman of the Board
Subsidiaries
Aeroflex Laboratories Incorporated
Plainview, New York Leonard Borow
President
Michael Gorin
President
Aeroflex Lintek Corp.
Powell, Ohio R. Jerry Jost, Ph.D.
President
Leonard Borow
Executive Vice President
Aeroflex MIC Technology Corporation
Paul Abecassis
Investment Banker
North Andover, Massachusetts Brian Mitchell
President
Milton Brenner
Retired Engineer
Aeroflex Systems Corporation
St. Leonard, Maryland Michael Gorin
President
Ernest E. Courchene, Jr.
Business Consultant
Aeroflex UTMC Microelectonic Systems, Inc.
Colorado Springs, Colorado Charles Gregory
President
Donald S. Jones
Vice Admiral USN (Ret.) Independent Consultant
Europtest, S.A. (France)
Elancourt, France Leonard Borow
President
Eugene Novikoff
Consulting Engineer
John S. Patton, Ph.D.
Major General USAF (Ret.) Technical Consultant
Vibration Mountings & Controls, Inc.
Bloomingdale, New Jersey Keith Larson
President
Corporate Officers
Harvey R. Blau
Chairman of the Board Chief Executive Officer
General Information
Auditors KPMG LLP Transfer Agent and Registrar American Stock Transfer & Trust Company 40 Wall St., New York, New York 10005 Copies of our Annual Report on Form 10-K for the fiscal year ended June 30, 2000 including schedules thereto filed with the Securities and Exchange Commission are available without charge upon written request to Office of the Secretary, Aeroflex Incorporated, 35 South Service Road, Plainview, New York 11803. 516-694-6700, Fax: 516-694-4823 We are an equal opportunity employer and, through the use of our affirmative action program, are in full compliance with Executive Order 11246. Our Common Stock is quoted on the Nasdaq National Market under the symbol ARXX.
Michael Gorin
President Chief Financial Officer
Leonard Borow
Executive Vice President Chief Operating Officer
Carl Caruso
Vice President-Manufacturing
Charles Badlato
Treasurer
35 South Service Road Plainview, New York 11803 (516) 694-6700 Fax (516) 694-4823 www.aeroflex.com