ITEM 1. BUSINESS (a) General Development of Business
Aydin Corporation (the "Company" or "Aydin") was incorporated under the laws of the State of Delaware in September, 1967.
The Company consists domestically of three major operating and four smaller support divisions, and two foreign operating subsidiaries. The Company disposed of its 80% interest in its Argentine subsidiary on December 31, 1996 and now owns 19% of that company. The divisions and subsidiaries are profit centers each with engineering, manufacturing, marketing and accounting functions.
(b) Financial Information About Industry Segments
The Company operates predominantly in the electronics manufacturing industry. Therefore, no segment information is reported.
(c) Narrative Description of Business
The following table sets forth the percentage of the Company's total revenue contributed by each of its primary classes of products (among which overlapping does occur) for each of the last three years:
As stated above, the Company operates predominantly in the electronics manufacturing industry, and all information set forth below is with respect to the Company's business as a whole. The Company designs, manufactures, and sells three main classes of products as set forth above and as described below:
(1) Communications Aydin provides a wide range of data and voice communication systems and products for the commercial and military markets throughout the world in a variety of public and private networks. In addition, Aydin custom-designs complex mission-critical applications such as right-of-way communications for utility, railway and pipeline companies, and the establishment of vital links to offshore platforms and satellite earth stations. Aydin also provides complete air defense communications systems and commercial air traffic control solutions.
Aydin also manufactures and installs communications products used in satellite earth stations, providing both primary and back-up links such as Aydin's state- of-the-art Satellite TDMA Terminals used for commercial and government networks--among them AT&T, Sprint and WorldCom, and national telecom operations in the UK, France, Germany, Canada, Singapore and Brazil.
Aydin Communications has supplied turnkey telecommunications systems to Australia, Thailand, Turkey, Argentina, Zambia, Malaysia, Saudi Arabia, Finland and other countries, serving infrastructure needs with integrated systems that may include line- of-sight radios, satellite earth stations, multiplexers, switches, fiber-optic cables, and other technology.
(2) Telemetry Aydin Telemetry products are used by space agencies such as NASA and in defense and aerospace programs such as aircraft and weapons development. These products and systems serve aerospace, satellite and commercial aircraft markets in the United States and abroad. Aydin
(page 2)
designs, manufactures and markets an extensive product line and provides turnkey systems integration for airborne and ground-based applications. These airborne and ground systems gather critical information from spacecraft, satellites, aircraft, guided weapons and ground vehicles. This equipment calibrates, processes and records or transmits information by radio or microwave links to a fixed or mobile ground station that receives, processes and analyzes the data.
(3) Displays Aydin designs, manufactures and markets in the United States and abroad a complete line of of high- resolution CRT monitors, flat panel displays and monitors used by public and private sector industries that require high performance and durability. These include process control factories, shipboard information centers, stock exchange trading floors and financial service companies, medical diagnostic or treatment centers, utility companies and other unique installations. Aydin also offers ruggedized and "TEMPEST"-qualified versions of its monitor products for military applications.
The Company's products and systems are sold directly by Company sales personnel and manufacturers' representatives. Sales personnel for the Company are located in many cities across the United States as well as at key major military bases, with corporate marketing located in Horsham, PA. With respect to exports, sales efforts are conducted by its international subsidiaries, its international sales network and manufacturers' representatives in many countries.
The Company maintains standard product lines and systems sold by catalog, although it generally does not maintain an inventory of finished goods. A portion of current sales is attributable to such standard products, modifications thereof and turnkey communications systems using these products. Another portion of sales is attributable to special, made-to-order equipment based upon a customer's specific requirements.
The Company's customers include U.S. and foreign communications and electronic and aerospace firms, electric utilities, regulated and unregulated telephone organizations, major transportation organizations, other industrial and financial concerns and process control companies, research laboratories, universities, large defense contractors, foreign governments, the U.S. Government through various agencies of the Department of Defense and the National Aeronautics and Space Administration.
A breakdown of sales for the last three years including sales to major customers who accounted for 10% or more of sales is as follows:
(page 3)
Raw materials for the Company's business consist of manufactured components and parts. The Company's raw materials are presently available in adequate supply on the open market.
The Company holds no material patents, trademarks, licenses, franchises or concessions.
The Company's operations are not seasonal to any material extent.
As stated above, although the Company maintains standard product lines and systems sold by catalog, it generally does not maintain a significant level of finished goods inventory. However, the Company maintains an adequate level of raw materials inventory so that it will be able to meet initial delivery requirements of customers. The Company has had no material difficulty in obtaining goods from suppliers. The Company does not provide rights to return its products, and generally does not provide extended payment terms to customers.
The backlog of unfilled orders at December 31, 1997 was $71 million as compared to $84 million at December 31, 1996. Approximately 20% of the 1997 backlog is not reasonably expected to be filled within the current year.
The backlog includes approximately $10 million for a command, control and communications project for the Government of Turkey for which the work is expected to be completed over the next two years. This contract became effective in October 1990.
All contracts with the U.S. Government and some of the foreign governments are subject to cancellation at the convenience of the government. In the event a contract with the U.S. Government is so terminated, the Armed Services Procurement Regulations provide that the Company shall be reimbursed for expenses incurred and shall be entitled to reasonable profits.
The greater portion of the Company's business is obtained by competitive bidding, while some is obtained through sole source negotiation. In the domestic marketplace, the Company competes with some major U.S. companies from time to time; however, some of the competition in the U.S. comes from companies which are similar in size or smaller than Aydin. In the international marketplace, Aydin competes with major companies in addition to U.S. firms. A number of such competitors are larger than Aydin with greater financial resources, while some are similar to or smaller than Aydin.
Technical capability, reputation, price, ability to meet delivery schedules and reliability are the principal competitive factors. Depending on the particular product itself and the requirements of the contract documents, the number of firms competing with Aydin generally ranges from one to ten.
Estimated amounts spent during 1997, 1996, and 1995 on Company-sponsored research and development activities, and customer-sponsored research activities relating to the development of new products, services or techniques or the improvement of existing products, services or techniques are as follows:
The Company, along with others, was responsible for the costs of cleanup under an order of the State of California at a site leased by the Company prior to 1984. Cleanup of the site was completed during 1996 and site monitoring over a 30-year period commenced in 1997. The estimated site monitoring costs to be expended over the 30-year period is $3.1 million, of which $126,000 was expended during 1997. The amount to be paid has been included in the accompanying consolidated balance sheet as an other liability discounted at 7% to the expected payment dates. Expected payments are approximately $100,000 annually. The December 31, 1996 balance sheet included an other (non current) asset of $2.6 million representing an expected insurance recovery based on a declaratory judgment in favor of the Company by the State of (page 4)
California. The declaratory judgment was reversed in April 1997, resulting in a $2.6 million write off. The California Supreme Court has agreed to review this reversal and briefs have been filed. In addition to the above matter, the Company, along with others, have been notified by the EPA that it may be a potentially responsible party for the costs of cleanup of a waste disposal site. The Comany estimates that its ultimate liability in this matter could be approximately $100,000 and has recorded this liability as of December 31, 1997.
The Company employs approximately 1,200 persons, with operations concentrated principally in the Philadelphia area. Employer-employee relations are considered to be satisfactory.
(d) Financial Information About Foreign and Domestic Operations and Export Sales The Company had no significant foreign operations prior to 1991 although a $210 million contract from the Government of Turkey became effective in October 1990 with approximately 35% of this contract being performed by the Company's Turkish subsidiary. The remaining backlog on this contract at December 31, 1997 was approximately $10 million. Foreign assets included in the consolidated balance sheet amounted to $21.0 million, $21.7 million, and $25.6 million, at December 31, 1997, 1996, and 1995, respectively. Of these amounts, $5.1 million, $2.5 million, and $.4 million at December 31, 1997, 1996, and 1995, respectively, are cash and short- term investments of the Company's Turkish subsidiary consisting mainly of U.S. dollar denominated interest- bearing time deposits and Eurobonds. Foreign sales and pretax income for 1997 amounted to $21.2 million and $1.8 million respectively. Foreign sales and pretax income for 1996 amounted to $27.0 million and $.9 million, respectively. Foreign sales and pretax income for 1995 amounted to $28.9 million and $5.4 million, respectively. The Company's domestic operations include sales derived from customers or projects located in areas of the world outside the United States. Export and foreign sales for 1997, 1996, and 1995 by geographic area are set forth below:
On a percentage basis, export and foreign sales (direct and indirect) accounted for approximately 43% of total sales in 1997, 41% of total sales in 1996, and 41% in 1995. A majority of such export and foreign sales were in the telecommunications field. Licenses are required from U.S. Government agencies for most of the Company's export products. The Company and its foreign subsidiaries may be adversely affected by certain risks generally associated with foreign contracts and operations, including ownership and control limitations, currency fluctuations, restrictions on repatriation of profits, difficulty in the enforcement of judgments, late delivery penalties, potential political or labor instability and general worldwide economic conditions. However, such factors have not had a material effect on the Company's operations to date, and management believes that the risks involved in such foreign business are no greater than the normal risks of any other portion of the Company's sales. The Company has generally been able to protect itself against foreign credit risks through contract provisions, advance payments and irrevocable letters of credit in its favor. However, it should be noted that foreign contracts are sometimes subject to foreign laws.
ITEM 2.
ITEM 2. PROPERTIES The Company's total plant capacity at December 31, 1997 is approximately 400,000 square feet of administrative and production facilities, 237,000 of which it owns and the balance of which it leases. All major leased properties are held under leases expiring between 1998 and 2002, most with renewal options. As part of the restructuring and consolidation, three Company-owned buildings (258,000 square feet) were sold during 1997. The Company maintains its corporate headquarters in Horsham, Pennsylvania, and has sales offices within and outside the U.S.
(page 5)
The administrative and production facilities occupied by the Company are well maintained and suitable for its operations, and include plant area, warehouse space, and management, engineering and clerical offices. The plants of each of the manufacturing operations generally contain machine shops, assembly areas, testing facilities and packing and shipping departments in addition to the engineering and laboratory areas.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS During 1995 a subcontractor to the Company in the TMRC program with the Government of Turkey filed a demand for arbitration alleging a breach of contract and equitable adjustment of $12.4 million. This claim was subsequently amended and at December 31, 1997 amounts to $27.8 million. The Company has filed a claim against the subcontractor for an amount in excess of the subcontractor s claim. The arbitration hearing was concluded and post-hearing briefs were filed in December 1997. A decision is expected April 10, 1998. Based on discussions with its outside counsel, management believes that it has meritorious defenses and counterclaims and expects the Company to be successful in its defenses. However, if the outcome is unfavorable, it could have a material adverse impact on the Company s financial position and results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the Fourth Quarter of 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages, year first elected as officer or appointed as general manager, positions and recent prior experience of all current executive officers of the Company as of March 25, 1998, are as follows:
I. GARY BARD, CHAIRMAN AND C.E.O. 60. 1996. Chairman of the Board of Directors and Chief Executive Officer since May 6, 1996. President of the Company from October 8, 1996 through October 23, 1997. Prior to that, Vice President and General Manager, Federal Systems Solutions Integration Division of Unisys Corporation, providing integration solutions to the federal, state and local government marketplace, since October 1995. Consultant on software development from February 1993 to October 1995. Chief Operating Officer of Open Software Foundation, from November 1992 to February 1993, and President of Integrated Systems Division of Computer Sciences Corporation, from July 1984 to November 1992.
JOHN F. VANDERSLICE, PRESIDENT AND C.O.O. 57. 1983. President and Chief Operating Officer of the Company since October 23, 1997. President of the Telemetry Division (formerly the Vector Division) (manufactures airborne data communications products) since November 1982. Previously, he was Manager of Engineering (1969-1972), Operations Manager (1972-1973), and Vice President of Operations (1973-1982) of the Vector Division.
JAMES R. HENDERSON, VICE PRESIDENT 40. 1996. Vice President, Treasurer and Chief Financial Officer of the Company since July 1996. Prior to joining the Company, he held various accounting and financial positions with Unisys Corporation (services and computer manufacturing): Director of Financial Planning and Accounting (1989-1991), Controller of Defense Operations (1991-1993), Executive Assistance to the President of the Defense Group (1993-1994), Director of Operations for Unisys Services Division (1994-1995), and Controller of Unisys Outsourcing Division (1995-1996).
H. BARRY MASER, VICE PRESIDENT 61. 1996. Vice President of Business Development of the Company since November 1996. Prior to joining the Company, he was President of Lynbar Group, Inc., a manufacturing representative, business planning and market planning company (1981-1996).
DEMIRHAN HAKIMOGLU, VICE PRESIDENT 59. 1992. Vice President of the Company. Mr. Hakimoglu was first elected Vice President in February 1991, and resigned that position in July 1991. He was re-elected Vice President in February 1992. He also served as Chairman of the Board and CEO of the Company's Turkish subsidiary, Aydin Yazilim ve Elektronik Sanayi A.S. (software design, manufactures digital microwave radios, telcom equipment and systems), from
(page 6)
July 1990 through January 1998. Prior to that, he served in various engineering and management positions with various divisions of the Company since 1968 (except for a two year period, 1978-1980).
HERBERT WELBER, CONTROLLER AND ASSISTANT TREASURER 62. 1986. Controller and Assistant Treasurer of the Company since August 1986. Previously, he was Controller and Vice President of Displays Division (formerly the Controls Division) (manufactures display terminals) since August 1981.
Each of the above officers was elected at the Annual Meeting of the Board of Directors on April 25, 1997. Officers are elected each year after the Annual Meeting of Stockholders. Each serves subject to the discretion of the Board of Directors until his successor shall be elected or until his death, disqualification, resignation or removal in the manner provided in the Company's By-Laws. There are no family relationships among any executive officers of Aydin.
(page 7)
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated by reference is the information under the heading, "Common Stock Prices" and "Stockholder and Dividend Information" on page 30 of the Annual Report. The Company has no present plans to pay any cash dividends. Future cash dividends, if any, will depend on business conditions. There are no restrictions that prevent the Company from paying future cash dividends, except that the Company's Board of Directors had determined in December 1992 that no cash dividend will be declared or paid for the foreseeable future, and except for maintaining compliance with certain covenants of a Credit Agreement for the funding of a standby Letter of Credit that prohibit the payment of a dividend or other distributions on account of the Company's capital stock if any Event of Default has occurred under the Credit Agreement.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference is the information under the heading, "Selected Financial Data" on page 30 of the Annual Report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference is the information under the heading, "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 25-28 of the Annual Report.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated by reference are the Consolidated Financial Statements of Aydin Corporation and the related Notes to Consolidated Financial Statements, and Report of Independent Auditors on pages 14 to 24 and 29, and the data under the heading, "Quarterly Financial Data" on page 30, of the Annual Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference is the information under the heading, "Election of Directors" on pages 3-5 of the Proxy Statement, the information under the heading, "Section 16(a) Beneficial Ownership Reporting Compliance" on page 10 of the Proxy Statement, and the information under the heading, "Executive Officers of the Registrant" on pages 6 and 7, Part I of this 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference is the information under the heading, "Compensation of Executive Officers", "Option Grants in Last Fiscal, "Aggregated Option Exercises and Fiscal Year-End Option Values", "Employment Contracts and Termination of Employment Arrangements", and "Compensation Committee Interlocks and Insider Participation" on pages 5 to 7 and 8 and 9 of the Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference is the information under the headings, "Beneficial Ownership of Common Stock" and "Beneficial Ownership by Management" on pages 2 and 3 of the Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None.
(page 8)
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The Company files as part of this report the following documents:
(a) 1. Financial Statements The following is a list of the Consolidated Financial Statements of Aydin Corporation and Subsidiaries which have been incorporated by reference from the Annual Report as set forth in Item 8 - "Financial Statements and Supplementary Data":
Consolidated Balance Sheets, as of December 31, 1997 and 1996. Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995. Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995. Notes to Consolidated Financial Statements. Report of Independent Auditors.
2. Schedules The following is a list of the Schedules of Aydin Corporation and Subsidiaries filed as part of this report:
Schedule II - Valuation and Qualifying Accounts
Report of Independent Auditors
All other schedules not listed above are omitted because they are inapplicable or are not required.
3. Exhibits The following is a list of Exhibits filed as part of this report:
3(i) Restated Certificate of Incorporation (filed as Exhibit No. 3(i) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference).
3(ii) By-laws (filed as Exhibit 3(ii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
10.1 Employment Agreement, I. Gary Bard (filed as Exhibit No. 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 28, 1996 and incorporated herein by reference).
10.2 Employment Agreement, H. Barry Maser (filed as Exhibit No. 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 28, 1996 and incorporated herein by reference).
10.3 Employment Agreement, James R. Henderson (filed as Exhibit No. 10.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 28, 1996 and incorporated herein by reference).
10.4 The 1994 Incentive Stock Option Plan, as amended (filed as Exhibit No. 10.5 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
10.5 The 1996 Equity Incentive Plan, as amended.
10.6 Restricted Stock Agreement, H. Barry Maser, dated December 16, 1996 (filed as Exhibit No. 10.8 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
10.7 Amended and Restated Warrant of Registrant issued to I. Gary Bard to purchase up to 133,334 shares of Common Stock.
(page 9)
10.8 Amended and Restated Warrant of Registrant issued to John F. Vanderslice to purchase up to 66,666 shares of Common Stock.
13 Annual Report to Security Holders (only those parts incorporated by reference)
21 Subsidiaries of Registrant
23 Consent of Independent Auditors
27.1 Financial Data Schedule (electronic filing only)
27.2 Restated Financial Data Schedule for December 31, 1995 (electronic filing only)
99 Independent Auditors' Report
All other exhibits not listed above are omitted because they are inapplicable.
(b) Reports on Form 8-K No reports on Form 8-K were filed during the Fourth Quarter of 1997.
(page 10)
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 undersigned, thereunto duly authorized.
Aydin Corporation
Dated: __March 30, 1998__ By: ____/s/ Robert A. Clancy_____ Robert A. Clancy Secretary
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.
By: ___/s/ I. Gary Bard _______ Dated: __March 30, 1998__ I. Gary Bard Chief Executive Officer and Chairman of the Board of Directors
By: __/s/ John F. Vanderslice__ Dated: __March 30, 1998__ John F. Vanderslice President, Chief Operating Officer and Director
By: __/s/ James R. Henderson___ Dated: __March 30, 1998__ James R. Henderson Vice President, Treasurer and Chief Financial Officer
By: __/s/ Herbert Welber_______ Dated: __March 30, 1998__ Herbert Welber Controller and Assistant Treasurer Principal Accounting Officer
By: __/s/ Ira Brind____________ Dated: __March 30, 1998__ Ira Brind Director
By: __/s/ Nev A. Gokcen________ Dated: __March 30, 1998__ Nev A. Gokcen Director
By: __/s/ Gary Mozenter________ Dated: __March 30, 1998__ Gary Mozenter Director
By: __/s/ Harry D. Train_______ Dated: __March 30, 1998__ Harry D. Train, II Director
EXHIBIT INDEX Exhibit No. Description of Exhibit
3(i) Restated Certificate of Incorporation (filed as Exhibit No. 3(i) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference).
3(ii) By-laws (filed as Exhibit 3(ii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
10.1 Employment Agreement, I. Gary Bard (filed as Exhibit No. 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 28, 1996 and incorporated herein by reference).
10.2 Employment Agreement, H. Barry Maser (filed as Exhibit No. 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 28, 1996 and incorporated herein by reference).
10.3 Employment Agreement, James R. Henderson (filed as Exhibit No. 10.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 28, 1996 and incorporated herein by reference).
10.4 The 1994 Incentive Stock Option Plan, as amended (filed as Exhibit No. 10.5 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
10.5 The 1996 Equity Incentive Plan, as amended.
10.6 Restricted Stock Agreement, H. Barry Maser, dated December 16, 1996 (filed as Exhibit No. 10.8 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
10.7 Amended and Restated Warrant of Registrant issued to I. Gary Bard to purchase up to 133,334 shares of Common Stock.
10.8 Amended and Restated Warrant of Registrant issued to John F. Vanderslice to purchase up to 66,666 shares of Common Stock.
13 Annual Report to Security Holders (only those parts incorporated by reference)
21 Subsidiaries of Registrant
23 Consent of Independent Auditors
27.1 Financial Data Schedule (electronic filing only)
27.2 Restated Financial Data Schedule for December 31, 1995 (electronic filing only)
99 Independent Auditors' Report
Exhibit 10.5
THE 1996 EQUITY INCENTIVE PLAN OF AYDIN CORPORATION
600,000 Shares (Last Amended February 5, 1998)
1. Purpose. The purpose of the Aydin Corporation 1996 Equity Incentive Plan (the "Plan") is to further the growth, development and financial success of Aydin Corporation and its subsidiaries by providing additional incentives to those officers and key employees who are responsible for the management of the business affairs of the Company, or its subsidiaries, which will enable them to participate directly in the growth of the capital stock of the Company. The Company intends that the Plan will facilitate securing, retaining and motivating management employees of high caliber and potential. To accomplish these purposes, the Plan provides a means whereby management employees may receive stock options ("Options") to purchase the Company's Common Stock.
2. Definitions. As used in this plan, "Corporation" or the "Company" means Aydin Corporation; "Board of Directors" means the Board of Directors of Aydin Corporation; "employee" includes directors, officers and other key employees of the Corporation and its subsidiaries; "Stock Option Committee" (the "Committee") means the Board of Directors; "Common Stock" means the Corporation's Common Stock of the par value of $1.00 per share; "Code" means the Internal Revenue Code of 1986, as amended from time to time.
3. Administration. The Plan shall be administered by the Committee who shall have full and final authority, in its sole discretion, to interpret the provisions of the Plan and to decide all questions of fact arising in its application; to determine the employees to whom Options shall be granted and the type, amount, size and terms of each such grant; to determine the time when Options shall be granted; and to make all other determinations necessary or advisable for the administration of the Plan. All decisions, determinations and interpretations of the Committee shall be final and binding on all optionees and all other holders of Options granted under the Plan.
4. Stock Subject to the Plan. Subject to Section 17 hereof, the shares that may be issued under the Plan shall not exceed in the aggregate 600,000 shares of Common Stock. Such shares may be authorized and unissued shares or shares issued and subsequently reacquired by the Company. Except as otherwise provided herein, any shares subject to an Option that for any reason expires or are terminated unexercised as to such shares shall again be available under the Plan.
5. Eligibility To Receive Options. Persons eligible to receive Options under the Plan shall be limited to those officers and other key employees of the Company, or any subsidiary of the Company (as defined in Section 425 of the Code), who are in positions in which their decisions, actions and counsel significantly impact upon the profitability and success of the Company, or any subsidiary of the Company. Directors of the Company who are not also officers or employees of the Company, or any subsidiary of the Company shall be eligible to participate in the Plan, provided that such persons shall not be eligible to receive grants of Incentive Stock Options, as such term is defined in Section 6 hereof.
6. Types of Options. Grants may be made at any time and from time to time by the Committee in the form of stock options to purchase shares of Common Stock. Options granted hereunder may be Options that are intended to qualify as incentive stock options within the meaning of Section 422 of the Code or any amendment or substitute thereto ("Incentive Stock Options") or Options that are not intended to so qualify ("Nonqualified Stock Options").
7. Option Agreements. Options for the purchase of Common Stock shall be evidenced by written agreements in such form not inconsistent with the Plan as the Committee shall approve from time to time. The Options granted hereunder may be evidenced by a single agreement or by multiple agreements, as determined by the Committee in its sole discretion. Each option agreement shall contain in substance the following terms and conditions:
(a) Type of Option. Each option agreement shall identify the Options represented thereby either as Incentive Stock Options or Nonqualified Stock Options, as the case may be.
(b) Option Price. Each option agreement shall set forth the purchase price of the Common Stock purchasable upon the exercise of the Option evidenced thereby. Subject to the limitation set forth in Section 7(d)(ii) off the Plan, the purchase price of the Common Stock subject to an Incentive Stock Option shall be not less than 100% of the fair market value of such stock on the date the Option is granted, as determined by the Committee, but in no event less than the par value of such stock. The purchase price of the Common Stock subject to a Nonqualified Stock Option shall be not less than 100% of the fair market value of such stock on the date the Option is granted, as determined by the Committee. For this purpose, fair market value on any date shall be the mean between the highest and the lowest quoted selling prices of the stock on an exchange, or if the stock is not traded that day, the fair market value shall be as determined by the Committee pursuant to Section 422 of the Code.
(c) Exercise Term. No option may be exercised after ten years from the date of its grant. Unless the option Agreement provides otherwise, any time after one year from the date of grant the employee may exercise his option in accordance with the following schedule:
After: The optionee may purchase:
One year from date of grant..................25% of the total. Two years from date of grant...An additional 25% of the total. Three years from date of grant.An additional 25% of the total. Four years from date of grant..An additional 25% of the total.
The Committee shall have the power to permit an acceleration of previously established exercise terms, subject to the requirements set forth herein, upon such circumstances and subject to such terms and conditions as the Committee deems appropriate.
(d) Incentive Stock Options. In the case of an Incentive Stock Option, each option agreement shall contain such other terms, conditions and provisions as the Committee determines to be necessary or desirable in order to qualify such Option as a tax-favored Option (within the meaning of Section 422 of the Code or any amendment or substitute thereto or regulation thereunder) including without limitation, each of the following except that any of these provisions may be omitted or modified if it is no longer required in order to have an Option qualify as a tax-favored Option within the meaning of Section 422 of the Code or any substitute therefor:
(i) The aggregate fair market value (determined as of the date the Option is granted) of the Common Stock with respect to which Incentive Stock Options are first exercisable by any employee during any calendar year (under all plans of the Company) shall not exceed $100,000.
(ii) No Incentive Stock Options shall be granted to any employee if at the time the Option is granted to the individual who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or its subsidiaries unless at the time such Option is granted the Option price is at least 110% of the fair market value of the stock subject to the Option and, by its terms, the Option is not exercisable after the expiration of five years from the date of grant.
(iii) No Incentive Stock Options shall be exercisable more than 30 days (or three months, in the case where the employee is placed on layoff, or one year, in the case of an employee who dies or becomes disabled within the meaning of Section 22(e)(3) of the Code or any substitute therefor) after termination of employment.
(e) Substitution of Options. Options may be granted under the Plan from time to time in substitution for stock options held by employees of other corporations who are about to become, and who do concurrently with the grant of such options become, employees of the Company, or a subsidiary of the Company as a result of a merger or consolidation of the employing corporation with the Company, or a subsidiary of the Company, or the acquisition by the Company, or a subsidiary of the Company of the assets of the employing corporation, or the acquisition by the Company, or a subsidiary of the Company of stock of the employing corporation. The terms and conditions of the substitute options so granted may vary from the terms and conditions set forth in this Section 7 to such extent as the Committee at the time of grant may deem appropriate to conform, in whole or in part, to the provisions of the stock options in substitution for which they are granted.
8. Date of Grant. The date on which an Option shall be deemed to have been granted under the Plan shall be the date of the Committee's authorization of the Option or such later date as may be determined by the Committee at the time the Option is authorized. Notice of the determination shall be given to each individual to whom an Option is so granted within a reasonable time after the date of such grant.
9. Exercise and Payment for Shares. Options may be exercised in whole or in part, from time to time, by giving written notice of exercise to the Secretary of the Company, specifying the number of shares to be purchased, except that no Option may be exercised in whole or in part during the first twelve months after such Option is granted. The purchase price of the shares with respect to which an Option is exercised shall be payable in full with the notice of exercise in cash, Common Stock at fair market value, or a combination thereof. The fair market value of Stock so delivered shall be the mean of the high and the low prices on the principal exchange upon which the Stock is traded on the trading day immediately preceding the date of exercise.
10. Rights upon Termination of Employment. In the event that an optionee ceases to be an employee of the Company, or any subsidiary of the Company for any reason other than lay-off, death, or disability (within the meaning of Section 22(e)(3) of the Code or any substitute therefore), the optionee shall have the right to exercise the Option during its term within a period of 30 days (three months in the event of a lay-off) after such termination to the extent that the Option was exercisable at the time of termination. In the event that an optionee dies or becomes disabled prior to the expiration of his Option and without having fully exercised his Option, the optionee or his successor shall have the right to exercise the Option during its term within a period of one year after termination of employment due to death or disability to the extent that the Option was exercisable at the time of termination unless, by its terms, it expires sooner.
11. General Restrictions. Each Option granted under the Plan shall be subject to the requirement that if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the recipient of an Option with respect to the disposition of shares of Common Stock is necessary or desirable as a condition of or in connection with the granting of such Option or the issuance or purchase of shares of Common Stock thereunder, such Option shall not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee.
12. Rights of a Stockholder. The recipient of any Option under the Plan, unless otherwise provided by the Plan, shall have no rights as a stockholder unless and until certificates for shares of Common Stock are issued and delivered to him.
13. Right to Terminate Employment. Nothing contained in the Plan or in any option agreement entered into pursuant to the Plan shall confer upon any optionee the right to continue in the employment of the Company or any subsidiary of the Company or affect any right that the Company or any subsidiary of the Company may have to terminate the employment of such optionee.
14. Withholding. Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. If and to the extent authorized by the Committee in its sole discretion, an optionee may make an election, by means of a form of election to be prescribed by the Committee, to have shares of Common Stock that are acquired upon exercise of an Option withheld by the Company or to tender other shares of Common Stock or other securities of the Company owned by the optionee to the Company at the time of exercise of an Option to pay the amount of tax that would otherwise be required by law to be withheld by the Company as a result of any exercise of an Option. Any such election shall be irrevocable and shall be subject to termination by the Committee, in its sole discretion, at any time. Any securities so withheld or tendered will be valued by the Committee at the mean of the high and the low prices the Common Stock traded on the trading day immediately preceding the date exercised.
15. Non-Assignability. No Option under the Plan shall be assignable or transferable by the recipient thereof except by will or by the laws of descent and distribution. During the life of the recipient, such Option shall be exercisable only by such person or by such person's guardian or legal representative.
16. Non-Uniform Determinations. The Committee's determination under the Plan (including without limitation determinations of the persons to receive Options, the form, amount and timing of such grants, the terms and provisions of Options, and the agreements evidencing same) need not be uniform and may be made selectively among persons who receive, or are eligible to receive, grants of Options under the Plan whether or not such persons are similarly situated.
17. Adjustments.
(a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option and the number of shares of Common Stock that have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. The Committee may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Committee and give each Option holder the right to exercise his Option as to all or any part of the shares of Common Stock covered by the Option, including shares as to which the Option would not otherwise be exercisable.
(c) Sale or Merger. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, the Committee, in the exercise of its sole discretion, may take such action as it deems desirable, including, but not limited to (i) causing an Option to be assumed or an equivalent option to be substituted by such successor corporation or a parent or subsidiary of such successor corporation, (ii) providing that each Option holder shall have the right to exercise his Option as to all of the shares of Common Stock covered by the Option, including shares as to which the Option would not otherwise be exercisable, or (iii) declare that an Option shall terminate at a date fixed by the Committee provided that the Option holder is given notice and opportunity to exercise his Option prior to such date.
18. Amendment. The Committee may terminate or amend the Plan at any time. The termination or any modification or amendment of the Plan shall not, without the consent of a participant, affect his rights under an Option previously granted.
19. Reservation of Shares. The Company, during the term of the Plan, will at all times reserve and keep available such number of shares as shall be sufficient to satisfy the requirement of the Plan. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares hereunder, shall relieve the Company of any liability for the failure to issue or sell such shares as to which such requisite authority shall not have been obtained.
20. Effect on Other Plans. Participation in the Plan shall not affect an employee's eligibility to participate in any other benefit or incentive plan of the Company or any subsidiary of the Company. Any Options granted pursuant to the Plan shall not be used in determining the benefits provided under any other plan of the Company or any subsidiary of the Company unless specifically provided.
21. Duration of the Plan. The Plan shall remain in effect until all Options granted under the Plan have been satisfied by the issuance of shares, but no Option shall be granted more than ten years after the date the Plan is adopted by the Company's Board of Directors.
22. Forfeiture for Dishonesty. Notwithstanding anything to the contrary in the Plan, if the Committee finds, by a majority vote, after full consideration of the facts presented on behalf of both the Company and any optionee, that the optionee has been engaged in fraud, embezzlement, theft, commission of a felony or dishonest conduct in the course of his employment or retention by the Company or any subsidiary of the Company that damaged the Company, or any subsidiary of the Company or that the optionee has disclosed confidential information of the Company or any subsidiary of the Company, the optionee shall forfeit all unexercised Options and all exercised Options under which the Company has not yet delivered the certificates. The decision of the Committee in interpreting and applying the provisions of this Section 22 shall be final. No decision of the Committee however, shall affect the finality of the discharge or termination of such optionee by the Company or any subsidiary of the Company in any manner.
23. No Prohibition on Corporate Action. No provision of the Plan shall be construed to prevent the Company or any officer or director thereof from taking any action deemed by the Company or such officer or director to be appropriate or in the Company's best interests whether or not such action could have an adverse effect on the Plan or any Options granted hereunder, and no optionee or optionee's estate, personal representative or beneficiary shall have any claim against the Company or any officer or director thereof as a result of the taking of such action.
24. Indemnification. With respect to the administration of the Plan, the Company shall indemnify each present and future member of the Committee and the Board of Directors against, and each member of the Committee and the Board of Directors shall be entitled without further action on their part to indemnity from the Company for, all expenses (including the amount of judgments and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself) reasonably incurred by them in connection with or arising out of, any action, suit or proceeding in which they may be involved by reason of they being or having been a member of the Committee or the Board of Directors, whether or not they continue to be such member at the time of incurring such expenses; provided, however, that such indemnity shall not include any expenses incurred by any such member of the Committee or the Board of Directors (i) in respect of matters as to which they shall be finally adjudged in any such action, suit or proceeding to have been guilty of gross negligence or willful misconduct in the performance of their duty as such member of the Committee or the Board of Directors: or (ii) in respect of any matter in which any settlement is affected for an amount in excess of the amount approved by the Company on the advice of its legal counsel; and provided further that no right of indemnification under the provisions set forth herein shall be available to or enforceable by any such member of the Committee or the Board of Directors unless, within 60 days after institution of any such action, suit or proceeding, they shall have offered the Company in writing the opportunity to handle and defend same at its own expense. The foregoing right of indemnification shall inure to the benefit of the heirs, executors or administrators of each such member of the Committee or the Board of Directors and shall be in addition to all other rights to which such member may be entitled as a matter of law, contract or otherwise.
25. Miscellaneous Provisions.
(a) Compliance with Plan Provisions. No optionee or other person shall have any right with respect to the Plan, the Common Stock reserved for issuance under the Plan or in any Option until a written option agreement shall have been executed by the Company and the optionee and all the terms, conditions and provisions of the Plan and the Option applicable to such optionee (and each person claiming under or through him) have been met.
(b) Approval of Counsel. In the discretion of the Committee, no shares of Common Stock, other securities or property of the Company or other forms of payment shall be issued hereunder with respect to any Option unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable federal, state, local and foreign legal, securities exchange and other applicable requirements.
(c) Compliance with Rule 16b-3. To the extent that Rule 16b-3 under the Exchange Act applies to Options granted under the Plan, it is the intent of the Company that the Plan comply in all respects with the requirements of Rule 16b-3, that any ambiguities or inconsistencies in construction of the Plan be interpreted to give effect to such intention and that if the Plan shall not so comply, whether on the date of adoption or by reason of any later amendment to or interpretation of Rule 16b-3, the provisions of the Plan shall be deemed to be automatically amended so as to bring them into full compliance with such rule.
(d) Effects of Acceptance of Option. By accepting any Option or other benefit under the Plan, each optionee and each person claiming under or through him shall be conclusively deemed to have indicated his acceptance and ratification of, and consent to, any action taken under the Plan by the Company, the Board of Directors, the Committee or its delegates.
(e) Construction. The masculine pronoun shall include the feminine and neuter, and the singular shall include the plural, where the context so indicates.
26. Stockholder Approval. The exercise of any Option granted under the Plan shall be subject to the approval of the Plan by the affirmative vote of the holders of a majority of the outstanding shares of the Common Stock present, or represented, and entitled to vote at a meeting duly held.
Exhibit 10.7
THE SECURITIES ISSUABLE UPON EXERCISE HEREOF (THE "SECURITIES") WILL BE ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY OTHER SECURITIES LAWS, AND MAY NOT BE OFFERED, SOLD, PLEDGED OR HYPOTHECATED UNTIL SUCH SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND OTHER APPLICABLE SECURITIES LAWS, OR IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
AMENDED AND RESTATED WARRANT
For the Purchase of up to 133,334 Shares of Common Stock, 1.00 Par Value, of Aydin Corporation
1. Issuance and Exercise of Warrant.
1.1. Issuance of Warrant. For value received, I. Gary Bard, an individual, or registered assigns, (the "Warrant Holder"), is entitled to purchase from Aydin Corporation, (the "Company"), a Delaware corporation, up to 133,334 shares (the "Shares") of Common Stock, par value $1.00 per share, of the Company, upon surrender of this Warrant to the Company and upon payment of the Exercise Price (as hereinafter defined), subject to the terms and conditions set forth herein.
1.2. Exercise of Warrant; Expiration.
(a) Exercisability. This Warrant is exercisable in whole or in part commencing on and after its date of issuance and shall expire at 5:00 p.m., Philadelphia Time on May 14, 2000 (the "Expiration Date"); provided, however, that the initial exercise of this Warrant shall be for the purchase of at least 66,667 Shares, as such amount may be adjusted from time to time pursuant to the provisions of Section 2 hereof.
(b) Exercise Price. The price for which the Shares may be purchased upon the exercise of this warrant shall be as follows: (i) 66,667 of the Shares shall be exercisable for $12.10 per Share and (ii) 66,667 of the Shares shall be exercisable for $13.20 per Share (each such price being hereinafter referred to as the "Exercise Price").
2. Adjustments; Anti-Dilution Provisions.
2.1. Stock Split, Subdivision or Combination. If the Company, at any time while this Warrant is outstanding, shall split, subdivide or combine its Common Stock (by reclassification or otherwise than by payment of a dividend in the respective class), an appropriate and equitable adjustment shall be made as of the effective date of such action in the number of Shares as to which this Warrant, or portion thereof then unexercised, shall be exercisable and in the Exercise Price of such Shares in order to reflect such stock split, subdivision or combination.
2.2. Asset or Capital Dividend. If the Company, at any time while this Warrant is outstanding, shall make a distribution of its assets to the holders of its Common Stock and/or any class of stock convertible into or exchangeable for its Common Stock as a dividend in liquidation or partial liquidation or as a return of capital other than as a dividend payable out of funds legally available for dividends under the laws of the Commonwealth of Pennsylvania, the Warrant Holder shall, upon exercise and payment of the Exercise Price for each Share purchased hereunder within 14 business days after notification of such distribution pursuant to Section 12 below, be entitled to receive, in addition to the number of shares receivable thereupon, and without payment of any additional consideration thereof, a sum equal to the amount of such assets as would have been payable to such Warrant Holder had such Warrant Holder been the holder of record of such shares on the record date for such distribution; and an appropriate provision therefor shall be made for the Warrant Holder to be made a party to any such distribution.
2.3. Adjustments for Consolidation, Merger, Sale of Assets, Reorganization or Reclassification. In the event the Company, at any time or from time to time while this Warrant is outstanding, (a) shall consolidate with or merge into any other entity and shall not be the continuing or surviving corporation of such consolidation or merger, or (b) shall permit any other entity to consolidate with or merge into the Company and the Company shall be the continuing or surviving entity but, in connection with such consolidation or merger, the Common Stock shall be changed into or exchanged for capital stock or other securities or property of any other equity, or (c) shall transfer all or substantially all of its properties and assets to any other entity, or (d) shall effect a capital reorganization or reclassification of the Common Stock (other than one deemed to result in the issue of additional shares of such class), then, and in each such event, lawful provision shall be made so that the Warrant Holder shall be entitled to receive upon the exercise hereof at anytime after the consummation of such consolidation, merger, transfer, reorganization or reclassification, in lieu of the Shares issuable upon exercise of this Warrant prior to such consummation, the capital stock and other securities and property to which the Warrant Holder would have been entitled upon such consummation if the Warrant Holder had exercised this Warrant immediately prior thereto.
2.4. Certificate of Adjustment. The Company shall promptly furnish or cause to be furnished to the Warrant Holder a certificate setting forth each adjustment made pursuant to this Section 2.
3. No Fractional Shares. No fractional Shares shall be issued in connection with any exercise hereof, and if the total number of Shares that remains unexercisable would result in a fraction, such number of Shares shall be rounded to the nearest whole Share.
4. No Shareholder Rights. This Warrant shall not entitle the Warrant Holder to any of the rights of a stockholder of the Company.
5. Reservation of Shares. The Company covenants that the Shares issuable upon the exercise of this Warrant have been duly authorized and reserved and, when issued and paid for, will be validly issued, fully paid and non-assessable. The issuance of this Warrant shall constitute full authority to those officers of the Company who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for Shares upon the exercise of this Warrant.
6. Exercise of Warrant.
6.1. Manner of Exercise. To exercise this Warrant, in whole or in part, the Warrant Holder shall deliver to the Company, at its address specified in Section 12 below: (a) a written notice in the form of Annex A hereto of such Warrant Holder's election to exercise this Warrant, specifying the number of Shares to be purchased and whether the purchase is pursuant to clause (i) or clause (ii) of Section 1.2(b),(b) a wire transfer or a certified or official bank check or checks payable to the order of the Company in an amount equal to the product of the applicable Exercise Price per Share and the number of Shares to be purchased at such time pursuant to the Warrant and such notice, and (c) the original copy of this Warrant. Upon receipt of such items, the Company shall, as promptly as practicable, and in any event within 20 days thereafter, issue or cause to be issued and delivered to such Warrant Holder a certificate or, if requested by the Warrant Holder, multiple certificates representing the aggregate number of full Shares issuable upon such exercise. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and such Warrant Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date that said notice, together with said cash or check or checks and this Warrant, are received by the Company as aforesaid. If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of said certificate or certificates, deliver to such Warrant Holder a new Warrant evidencing the rights of such Warrant Holder to purchase the unpurchased Shares, which new Warrant shall in all other respects be identical to this Warrant.
6.2. Payment of Taxes and Expenses. All Shares issuable upon the exercise of this Warrant shall be validly issued, fully paid and non-assessable, and the Company shall pay all expenses in connection with, and all taxes and other governmental charges that may be imposed in respect of, the issue or delivery thereof, other than any federal, state or local income tax or other tax based upon gross or net income, owned by the Warrant Holder on account of such issuance or delivery. The Company shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for shares in any name other than that of the registered Warrant Holder, and in such case the Company shall not be required to issue or deliver any stock certificate until such tax or other charge has been paid or it has been established to the Company's reasonable satisfaction that no such tax or other charge is due.
7. Registration Rights. The Shares issued upon exercise of this Warrant shall be subject to the Amended and Restated Registration Rights Agreement dated as of May 14, 1997 between the Company and the Warrant Holder.
8. Agreement to Vote Shares. For as long as the Warrant Holder and/or any of its affiliates remain the beneficial owner of the Shares issued upon exercise of the Warrant, at any meeting of stockholders of the Company at which directors of the Company are to be elected, the Warrant Holder and each such affiliate agree to vote any and all such Shares for the election to the Board of those persons nominated by the Company's Board of Directors. The Warrant Holder further agrees that the Shares may not be transferred in a privately negotiated transaction that has not been registered under the Securities Act of 1933, unless the transferee shall have agreed to be bound by the terms of this Section 8. The Warrant Holder agrees to the placement of a restrictive legend on the certificate(s) representing the Shares relating to this restriction.
9. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company, at the expense of the Warrant Holder, will execute and deliver, in lieu thereof, a new Warrant.
10. Transfer of Warrant. This Warrant may be transferred by the Warrant Holder subject to compliance with applicable federal and state securities laws; provided, however, that any transferee of this Warrant shall have agreed in writing to assume and be bound by the obligations of the Warrant Holder and/or its affiliates under the terms and provisions of Section 8 of this Warrant.
11. Miscellaneous. This Warrant shall be governed by the internal law, but not the law of conflicts, of the State of Delaware. The headings in this Warrant are for purposes of convenience and reference only and shall not be deemed to constitute a part hereof. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally except by an instrument in writing signed by the Company and the registered Warrant Holder. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision.
12. Notice Generally. Any notice, demand or delivery pursuant to the provisions hereof shall be sufficiently given or made if sent by registered or certified mail, postage prepaid, or overnight delivery service, addressed to the Warrant Holder at such Warrant Holder's last known address appearing on the books of the Company, or, except as herein otherwise expressly provided, to the Company at Aydin Corporation, 700 Dresher Road, P.O. Box 349, Horsham, PA 19044, Attention: President, or such other address as shall have been furnished to the party giving or making such notice, demand or delivery.
13. Replacement of Warrant. This Warrant is one of two Warrants issued as of this date for the purchase of an aggregate of 200,000 shares of Common Stock of the Company in connection with the transfer and cancellation of the Amended and Restated Warrant dated as of May 14, 1997 issued by the Company to EA Industries, Inc. pursuant to the Warrant Transfer Agreement dated as of this date between EA Industries, Inc. and I. Gary Bard and John F. Vanderslice.
ISSUED AS OF THIS 11th day of February, 1998.
AYDIN CORPORATION Attest:
__/s/ Robert A. Clancy___ By:__/s/ James R. Henderson__ Secretary James R. Henderson, V.P. & CFO
ANNEX A NOTICE OF EXERCISE
(To be Executed by the Registered Warrant Holder in Order to Exercise the Warrant)
The undersigned hereby irrevocably elects to exercise the right to purchase from Aydin Corporation _________(_______) Shares covered by the Warrant dated ________, 1998 and issued to I. Gary Bard, according to the conditions thereof.
Check one:
___ Such exercise is being made pursuant to clause (i) of Section 1.2(b), and the undersigned herewith makes payment of the Exercise Price of such Shares in full. Such payment is hereby tendered in the form of $___________ by wire transfer or by certified or bank check.
___ Such exercise is made pursuant to clause (ii) of Section 1.2(b), and the undersigned herewith makes payment of the Exercise Price of such Shares in full. Such payment is hereby tendered in the form of $___________ by wire transfer or by certified or bank check.
The undersigned understands that the Shares being issued hereunder have not been registered under the Securities Act of 1933 (the "Act") or any state securities laws and that such Shares may not be sold, transferred, or assigned except: (i) pursuant to an effective registration thereof under the Act; or (ii) if in the opinion of counsel for the registered owner thereof, which opinion is reasonably satisfactory to the Company, the proposed sale, transfer or assignment may be effected without such registration under the Act and will not be in violation of applicable state securities laws.
Printed Name of Registered Dated: _______ Warrant Holder:________________________
Signature: ________________________
Address: ________________________
Exhibit 10.8
THE SECURITIES ISSUABLE UPON EXERCISE HEREOF (THE "SECURITIES") WILL BE ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY OTHER SECURITIES LAWS, AND MAY NOT BE OFFERED, SOLD, PLEDGED OR HYPOTHECATED UNTIL SUCH SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND OTHER APPLICABLE SECURITIES LAWS, OR IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
AMENDED AND RESTATED WARRANT
For the Purchase of up to 66,666 Shares of Common Stock, 1.00 Par Value, of Aydin Corporation
1. Issuance and Exercise of Warrant.
1.1. Issuance of Warrant. For value received, John F. Vanderslice, an individual, or registered assigns, (the "Warrant Holder"), is entitled to purchase from Aydin Corporation, (the "Company"), a Delaware corporation, up to 66,666 shares (the "Shares") of Common Stock, par value $1.00 per share, of the Company, upon surrender of this Warrant to the Company and upon payment of the Exercise Price (as hereinafter defined), subject to the terms and conditions set forth herein.
1.2. Exercise of Warrant; Expiration.
(a) Exercisability. This Warrant is exercisable in whole or in part commencing on and after its date of issuance and shall expire at 5:00 p.m., Philadelphia Time on May 14, 2000 (the "Expiration Date"); provided, however, that the initial exercise of this Warrant shall be for the purchase of at least 33,333 Shares, as such amount may be adjusted from time to time pursuant to the provisions of Section 2 hereof.
(b) Exercise Price. The price for which the Shares may be purchased upon the exercise of this warrant shall be as follows: (i) 33,333 of the Shares shall be exercisable for $12.10 per Share and (ii) 33,333 of the Shares shall be exercisable for $13.20 per Share (each such price being hereinafter referred to as the "Exercise Price").
2. Adjustments; Anti-Dilution Provisions.
2.1. Stock Split, Subdivision or Combination. If the Company, at any time while this Warrant is outstanding, shall split, subdivide or combine its Common Stock (by reclassification or otherwise than by payment of a dividend in the respective class), an appropriate and equitable adjustment shall be made as of the effective date of such action in the number of Shares as to which this Warrant, or portion thereof then unexercised, shall be exercisable and in the Exercise Price of such Shares in order to reflect such stock split, subdivision or combination.
2.2. Asset or Capital Dividend. If the Company, at any time while this Warrant is outstanding, shall make a distribution of its assets to the holders of its Common Stock and/or any class of stock convertible into or exchangeable for its Common Stock as a dividend in liquidation or partial liquidation or as a return of capital other than as a dividend payable out of funds legally available for dividends under the laws of the Commonwealth of Pennsylvania, the Warrant Holder shall, upon exercise and payment of the Exercise Price for each Share purchased hereunder within 14 business days after notification of such distribution pursuant to Section 12 below, be entitled to receive, in addition to the number of shares receivable thereupon, and without payment of any additional consideration thereof, a sum equal to the amount of such assets as would have been payable to such Warrant Holder had such Warrant Holder been the holder of record of such shares on the record date for such distribution; and an appropriate provision therefor shall be made for the Warrant Holder to be made a party to any such distribution.
2.3. Adjustments for Consolidation, Merger, Sale of Assets, Reorganization or Reclassification. In the event the Company, at any time or from time to time while this Warrant is outstanding, (a) shall consolidate with or merge into any other entity and shall not be the continuing or surviving corporation of such consolidation or merger, or (b) shall permit any other entity to consolidate with or merge into the Company and the Company shall be the continuing or surviving entity but, in connection with such consolidation or merger, the Common Stock shall be changed into or exchanged for capital stock or other securities or property of any other equity, or (c) shall transfer all or substantially all of its properties and assets to any other entity, or (d) shall effect a capital reorganization or reclassification of the Common Stock (other than one deemed to result in the issue of additional shares of such class), then, and in each such event, lawful provision shall be made so that the Warrant Holder shall be entitled to receive upon the exercise hereof at anytime after the consummation of such consolidation, merger, transfer, reorganization or reclassification, in lieu of the Shares issuable upon exercise of this Warrant prior to such consummation, the capital stock and other securities and property to which the Warrant Holder would have been entitled upon such consummation if the Warrant Holder had exercised this Warrant immediately prior thereto.
2.4. Certificate of Adjustment. The Company shall promptly furnish or cause to be furnished to the Warrant Holder a certificate setting forth each adjustment made pursuant to this Section 2.
3. No Fractional Shares. No fractional Shares shall be issued in connection with any exercise hereof, and if the total number of Shares that remains unexercisable would result in a fraction, such number of Shares shall be rounded to the nearest whole Share.
4. No Shareholder Rights. This Warrant shall not entitle the Warrant Holder to any of the rights of a stockholder of the Company.
5. Reservation of Shares. The Company covenants that the Shares issuable upon the exercise of this Warrant have been duly authorized and reserved and, when issued and paid for, will be validly issued, fully paid and non-assessable. The issuance of this Warrant shall constitute full authority to those officers of the Company who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for Shares upon the exercise of this Warrant.
6. Exercise of Warrant.
6.1. Manner of Exercise. To exercise this Warrant, in whole or in part, the Warrant Holder shall deliver to the Company, at its address specified in Section 12 below: (a) a written notice in the form of Annex A hereto of such Warrant Holder's election to exercise this Warrant, specifying the number of Shares to be purchased and whether the purchase is pursuant to clause (i) or clause (ii) of Section 1.2(b),(b) a wire transfer or a certified or official bank check or checks payable to the order of the Company in an amount equal to the product of the applicable Exercise Price per Share and the number of Shares to be purchased at such time pursuant to the Warrant and such notice, and (c) the original copy of this Warrant. Upon receipt of such items, the Company shall, as promptly as practicable, and in any event within 20 days thereafter, issue or cause to be issued and delivered to such Warrant Holder a certificate or, if requested by the Warrant Holder, multiple certificates representing the aggregate number of full Shares issuable upon such exercise. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and such Warrant Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date that said notice, together with said cash or check or checks and this Warrant, are received by the Company as aforesaid. If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of said certificate or certificates, deliver to such Warrant Holder a new Warrant evidencing the rights of such Warrant Holder to purchase the unpurchased Shares, which new Warrant shall in all other respects be identical to this Warrant.
6.2. Payment of Taxes and Expenses. All Shares issuable upon the exercise of this Warrant shall be validly issued, fully paid and non-assessable, and the Company shall pay all expenses in connection with, and all taxes and other governmental charges that may be imposed in respect of, the issue or delivery thereof, other than any federal, state or local income tax or other tax based upon gross or net income, owned by the Warrant Holder on account of such issuance or delivery. The Company shall not be required, however, to pay any tax or other charge imposed in connection with any ransfer involved in the issue of any certificate for shares in any name other than that of the registered Warrant Holder, and in such case the Company shall not be required to issue or deliver any stock certificate until such tax or other charge has been paid or it has been established to the Company's reasonable satisfaction that no such tax or other charge is due.
7. Registration Rights. The Shares issued upon exercise of this Warrant shall be subject to the Amended and Restated Registration Rights Agreement dated as of May 14, 1997 between the Company and the Warrant Holder.
8. Agreement to Vote Shares. For as long as the Warrant Holder and/or any of its affiliates remain the beneficial owner of the Shares issued upon exercise of the Warrant, at any meeting of stockholders of the Company at which directors of the Company are to be elected, the Warrant Holder and each such affiliate agree to vote any and all such Shares for the election to the Board of those persons nominated by the Company's Board of Directors. The Warrant Holder further agrees that the Shares may not be transferred in a privately negotiated transaction that has not been registered under the Securities Act of 1933, unless the transferee shall have agreed to be bound by the terms of this Section 8. The Warrant Holder agrees to the placement of a restrictive legend on the certificate(s) representing the Shares relating to this restriction.
9. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company, at the expense of the Warrant Holder, will execute and deliver, in lieu thereof, a new Warrant.
10. Transfer of Warrant. This Warrant may be transferred by the Warrant Holder subject to compliance with applicable federal and state securities laws; provided, however, that any transferee of this Warrant shall have agreed in writing to assume and be bound by the obligations of the Warrant Holder and/or its affiliates under the terms and provisions of Section 8 of this Warrant.
11. Miscellaneous. This Warrant shall be governed by the internal law, but not the law of conflicts, of the State of Delaware. The headings in this Warrant are for purposes of convenience and reference only and shall not be deemed to constitute a part hereof. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally except by an instrument in writing signed by the Company and the registered Warrant Holder. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision.
12. Notice Generally. Any notice, demand or delivery pursuant to the provisions hereof shall be sufficiently given or made if sent by registered or certified mail, postage prepaid, or overnight delivery service, addressed to the Warrant Holder at such Warrant Holder's last known address appearing on the books of the Company, or, except as herein otherwise expressly provided, to the Company at Aydin Corporation, 700 Dresher Road, P.O. Box 349, Horsham, PA 19044, Attention: President, or such other address as shall have been furnished to the party giving or making such notice, demand or delivery.
13. Replacement of Warrant. This Warrant is one of two Warrants issued as of this date for the purchase of an aggregate of 200,000 shares of Common Stock of the Company in connection with the transfer and cancellation of the Amended and Restated Warrant dated as of May 14, 1997 issued by the Company to EA Industries, Inc. pursuant to the Warrant Transfer Agreement dated as of this date between EA Industries, Inc. and I. Gary Bard and John F. Vanderslice.
ISSUED AS OF THIS 11th day of February, 1998.
AYDIN CORPORATION Attest:
__/s/ Robert A. Clancy___ By:__/s/ James R. Henderson__ Secretary James R. Henderson, V.P. & CFO
ANNEX A NOTICE OF EXERCISE
(To be Executed by the Registered Warrant Holder in Order to Exercise the Warrant)
The undersigned hereby irrevocably elects to exercise the right to purchase from Aydin Corporation _________(_______) Shares covered by the Warrant dated ________, 1998 and issued to John F. Vanderslice, according to the conditions thereof.
Check one:
___ Such exercise is being made pursuant to clause (i) of Section 1.2(b), and the undersigned herewith makes payment of the Exercise Price of such Shares in full. Such payment is hereby tendered in the form of $___________ by wire transfer or by certified or bank check.
___ Such exercise is made pursuant to clause (ii) of Section 1.2(b), and the undersigned herewith makes payment of the Exercise Price of such Shares in full. Such payment is hereby tendered in the form of $___________ by wire transfer or by certified or bank check.
The undersigned understands that the Shares being issued hereunder have not been registered under the Securities Act of 1933 (the "Act") or any state securities laws and that such Shares may not be sold, transferred, or assigned except: (i) pursuant to an effective registration thereof under the Act; or (ii) if in the opinion of counsel for the registered owner thereof, which opinion is reasonably satisfactory to the Company, the proposed sale, transfer or assignment may be effected without such registration under the Act and will not be in violation of applicable state securities laws.
Printed Name of Registered Dated: _______ Warrant Holder:________________________
Signature: ________________________
Address: ________________________
Exhibit 13
(FRONT COVER)
Global Communications Solutions
Making the Connection, Worldwide
AYDIN 1997 Annual Report
MISSION STATEMENT
AYDIN's business mission is to add value to our customers, our shareholders and our employees, as a world class provider of products and systems for the acquisition and distribution of information over electronics communications media.
The Company designs, engineers, manufactures, markets, distributes and installs technologically advanced communications products and systems.
AYDIN's direct customers are industrial, commercial, space, government and defense organizations around the world.
AYDIN's products and systems include communications infrastructure equipment and systems, airborne and ground telemetry products, C3 systems (command, control and communications), radar automation and integration systems, military communications systems, radios, microwave components and displays.
AYDIN's communications solutions range from supplying basic components to providing turnkey systems.
The Company has facilities in the US, the UK and Turkey, and supports communications systems installations worldwide.
(page one)
TO OUR SHAREHOLDERS
Letter from: Chairman and CEO, I. Gary Bard
Financial Results Our results in 1997 were consistent with management's continuing objective to make AYDIN a growing, profitable global communications company. Share price at year end showed a 26% increase in comparison to the previous year, beginning the process of adding intrinsic value for our customers, our shareholders and our employees.
Consistent with our plan, AYDIN achieved profitability in the second half of the year. Although net income for the year still reflected a loss, significant improvements were made in lowering our cost structure in 1997. AYDIN's sales in 1997 were $115,371,000 versus $116,578,000 in 1996, a decrease of 1%. Our net loss was $1,692,000 versus a net loss of $14,780,000 in 1996. We incurred a disappointing $2.6 million non-cash litigation expense resulting from the unexpected overturn, by the California Superior Court, of a ruling previously favoring AYDIN. Loss per share in 1997 was $0.34 versus a $2.88 loss per share in 1996.
In the second half of 1997, AYDIN showed a net income of $517,000 excluding a $1,800,000 one-time sale of real estate, achieving our planned turnaround objective on target in just over twelve months. In 1997, internal growth and diversification contributed to our success. Moving forward, we will continue to enhance our core businesses in communications and telemetry through internal growth and potential strategic acquisition.
AYDIN-solutions to satisfy enormous global demand for efficient communications
As Chief Executive Officer of AYDIN, I lead a management team committed to constantly adding shareholder value.
Building from our core telemetry business where AYDIN is the preeminent supplier worldwide, we will capitalize on the growth in commercial communications markets, characterized by a broad customer base with significant potential.
We believe AYDIN's growth will accelerate over the coming years as a direct result of successful efforts by our management team to fully satisfy these customer needs.
(page two)
AYDIN: reforming, refocusing and returning shareholder value
When I was appointed Chief Executive Officer in May of 1996, I initiated the migration of AYDIN from an engineering-focused organization to an organization focused on customer satisfaction and fulfilling market demand.
Throughout 1997, we continued to energize AYDIN's migration by consolidating key business operations, which enables us to focus our energy on strategic business objectives for Communications, Telemetry and Displays-our three core markets.
The AYDIN principle-to add value for our customers, our shareholders, and our employees
Perhaps most important, we are continuing to add long-term value by developing a highly skilled, proactive team: Our singular mission is to improve our customers' productivity with communications products and services that add value by satisfying their users' needs in a highly reliable, cost-effective manner.
(page three)
Communications is the capturing, transmittal, processing and display of information, via electronic media, from one or many sources to one or many destinations.
In the highly competitive communications industry, AYDIN offers added value:
- - Through our resident skills in applied technology, providing a wide range of technologically sophisticated communications solutions that fully satisfy user needs, including interoperability requirements and capacity for cost-effective future enhancement
- - Through our local understanding of domestic and overseas markets, where demand is increasing exponentially
- - Through strategic partnering and cooperative support with other communications providers who already engage AYDIN based on our technological expertise and on the flexibility and shorter decision-making cycles that a mid-sized organization like ours can provide
- - Through continuous management of customer-focused service, supported structurally by divisional responsibility for manufacturing, marketing and sales operations
- - Through our ability to access new markets where our current customers and partners have significant reach
AYDIN defines communications
Communications is a vital, evolving marketplace where demand is increasing exponentially. In a recently televised feature of Edwin Newman's Executive Forum, I offered this updated definition:
Communications is the capturing, transmittal, processing and display of information, via electronic media, from one or many sources to one or many destinations. Display reception may be audio, visual or a combination of formats.
In the past, communications chiefly implied telephony and wire transmission. Technological advances-and market demand-have changed this. Now, communications encompasses data, voice, graphics, animation and video, transmitted by telephone, cable, satellite, radio and other means.
AYDIN brings depth and breadth of experience to the world's communications marketplaces, with our offerings of turnkey systems and components for traditional and non-traditional technologies.
(page four)
AYDIN brings depth and breadth of experience to the world's communications marketplaces, with our offerings of turnkey systems and components for traditional and non-traditional technologies.
AYDIN-known for efficient communications solutions
AYDIN's technological expertise serving strategic military needs and commercial organizations makes us very attractive to investors who recognize the enormous global demand for efficiency in communications.
As a result of our experience in the US and overseas markets, AYDIN provides a broad range of communications solutions that are locally appropriate in terms of resources, market demand and potential, planned usage, cost and efficiency for current and future interoperability.
Moving forward, AYDIN's demonstrated capacity to serve world markets efficiently, through a variety of technological alternatives, will differentiate us as a leading provider of communications solutions.
AYDIN's mission is to add value for our customers, our shareholders and our employees. We will accomplish this by continuing to supply and support communications solutions that measurably improve productivity, worldwide.
/s/ I. Gary Bard
I. Gary Bard Chairman of the Board and Chief Executive Officer
During 1997 AYDIN narrowed its focus to three core markets: Communications, Telemetry and Displays
Communications AYDIN's Satellite TDMA Terminal provides high reliability, cost-competitive communications for INTELSAT users (telephone companies) around the world. Our transcoders, microwave radios and network access devices are used to support telephony, data communications and cable TV applications.
Telemetry AYDIN is a world leader in distributed data acquisition systems used for flight testing in commercial and military aircraft.
Displays AYDIN, an industry leader in displays, offers state-of-the-art CRT and flat panel displays packaged for military, industrial process control, factory floor, automation, financial and medical markets.
(page five)
COMMUNICATIONS
Wireless systems are capable of serving millions of people globally, at a fraction of the cost of traditional wired installations.
AYDIN Communications
AYDIN Communications provides a wide range of data and voice communication systems and products for the commercial and military markets. Our standard offerings are currently deployed throughout the world in a variety of public and private networks. In addition, AYDIN custom designs complex mission critical applications such as right-of-way communications for utility, railway and pipeline companies, and the establishment of vital links to offshore platforms and satellite earth stations. AYDIN also provides complete air defense communications systems and commercial air traffic control solutions.
AYDIN is well recognized by commercial, governmental and military organizations as a leading provider of technologically sophisticated solutions for efficient communications in a broad range of operating environments, worldwide.
(page six)
AYDIN manufactures and installs communications products used in satellite earth stations, providing both primary and back up links such as AYDIN's state-of-the-art Satellite TDMA Terminals used for commercial and government networks-among them, AT&T, Sprint and WorldCom, and national telecom operations in the UK,
France, Germany, Canada, Singapore and Brazil.
AYDIN Communications has supplied turnkey telecommunications systems to Australia, Thailand, Turkey, Argentina, Zambia, Malaysia, Saudi Arabia, Finland and other countries, serving infrastructure needs with integrated systems that may include line-of-sight-radios, satellite earth stations, multiplexers, switches, fiber-optic cables and other technology.
In the Middle East, our AYDIN Yazilim subsidiary produces, installs and supports a variety of communications equipment and systems, including the Government of Turkey's critical Mobile Air Defense System. Licensed to produce all products of AYDIN Corporation, AYDIN Yazilim has a core staff of approximately 300 engineers and production workers.
AYDIN Communications highlights, 1997
AYDIN installs advanced TDMA satellite terminals--8 countries in 8 months: AYDIN is the leading supplier of next-generation TDMA terminals, worldwide. These TDMA terminals provide 3:1 cost savings and double the efficiency of earlier systems, permitting twice as many users per satellite. Between May and December 1997, AYDIN installed advanced TDMA terminals in 8 nations: the US, Canada, Sweden, Switzerland, Germany, Argentina, Israel and Singapore. At the date of this Report, over 20 nations have ordered their next-generation TDMA terminals from AYDIN.
AYDIN awarded NATO contracts for Radar Integration Systems (RIS) program: In follow-on contracts, AYDIN will provide a third RIS program control center for Denmark and components for fielded sites in Denmark, Greece, Turkey, Belgium and Italy. The RIS program integrates various NATO radars, providing greater operational flexibility to NATO Control & Reporting Centers.
(graphic) AYDIN's next-generation TDMA provides 3:1 cost savings over earlier technology
Focus on the future: AYDIN Communications
Communications and telemetry combined represent approximately 77% of AYDIN's current business and its greatest opportunity for growth. In 1998, we will focus on additional applications for high-volume communications providers, a segment that presents immediate potential due to substantial lack of current worldwide communications capacity. The long-term potential is equally attractive to AYDIN shareholders. It has been shown that business and personal productivity increases as communications systems are installed, thus demand will continue to grow.
AYDIN's newest product, the DigiCall Wireless Local Loop system, successfully passed its first factory test milestone in 1997. This exciting new product family uses the GSM standard adopted by 135 nations, enhancing its acceptance worldwide. Our DigiCall wireless system can bring telephone service to millions of people globally, at a fraction of the cost of wired installations.
(page seven)
TELEMETRY
AYDIN Telemetry
AYDIN Telemetry products and systems are used by space agencies such as NASA and in defense and aerospace programs such as aircraft and weapons development. AYDIN is a world leader in the design, manufacture and systems integration for flight testing and flight certification instrumentation for commercial and military applications.
AYDIN Telemetry serves aerospace, satellite and commercial aircraft markets. We design, manufacture and market an extensive product line and provide turnkey systems integration for airborne and ground-based applications.
(page eight)
AYDIN airborne and ground systems gather critical information from spacecraft, satellites, aircraft, guided weapons and ground vehicles. Our equipment calibrates, processes and records or transmits information, by radio or microwave links, to a fixed or mobile ground station that receives, processes and analyzes the data.
AYDIN airborne systems are compact, rugged and uniquely designed for use in harsh environments or where space is limited. Our ground systems employ data-driven architecture, the latest computer and microcircuit technology, and advanced software management techniques to provide superior data management and analytical capacity.
AYDIN Telemetry highlights, 1997
AYDIN to supply instrumentation kits for UK SKYFASH and SIDEWINDER missiles: The United Kingdom Ministry of Defense has awarded AYDIN Telemetry two multimillion-dollar contracts to deliver Service Practice Instrumentation (SPI) kits used in SKYFASH and SIDEWINDER air-to-air missiles. AYDIN digital and RF product-based instrumentation are used extensively worldwide for pilot training, missile development and performance testing.
AYDIN supplies Lockheed Martin aircraft flight test instrumentation: Lockheed Martin will use AYDIN Flight Test Instrumentation for the Joint Strike Fighter (JSF) testing program meeting US Navy, Marine, Air Force and UK Royal Navy requirements. In this multimillion-dollar engagement, AYDIN will manufacture a majority of the flight test instrumentation equipment and integrate the AYDIN data acquisition system and other subcontracted equipment for two next-generation, multi-role strike fighter aircraft. AYDIN is a leading supplier of the Department of Defense standard Common Airborne Instrumentation System (CAIS).
AYDIN supplies NASA/BOEING USA with Space Shuttle instrumentation: AYDIN provides NASA Space Shuttle Orbiter with the critical fuel cell measurement system, which monitors and measures all 96 fuel cells that power the Shuttle. AYDIN has been a prime contractor and subcontractor to NASA and Rockwell (Boeing), since the early 70s, in the Space Shuttle programs.
Focus on the future: AYDIN Telemetry
AYDIN Telemetry advanced technology products continue to be a standard in the industry. For Telemetry, 1998 will be a year of continuous sales growth, including these key areas: - - Boeing has selected AYDIN to provide data acquisition systems for the JSF program - - Demand is high for AYDIN transmission, reception and processing equipment used in commercial satellite communications and for space data information needs - - The Pacific Rim presents substantial opportunity for market expansion, capitalizing on AYDIN product capabilities
(page nine)
DISPLAYS
High-resolution displays are a $2 billion, growing market...and flat panels are taking the lead.
AYDIN Displays
AYDIN Displays is an industry leader offering a complete line of high-resolution CRT monitors, flat panel displays and monitors used by public and private sector industries that require superior performance and durability. These include process control factories, shipboard information centers, Stock Exchange trading floors and financial service companies, medical diagnostic or treatment centers, utility companies and other unique installations.
For more than a quarter century, AYDIN has been a key supplier of CRT displays to military and industrial markets. Now, to meet demand in both traditional and new markets, we are expanding our flat panel product line to include a full range of displays that provide high quality resolution combined with lower life-cycle costs, reduced power usage and lightweight portability for ease of use.
(page ten)
AYDIN Displays highlights, 1997
Raytheon selects AYDIN: Raytheon's Marine Division selected AYDIN to design and manufacture high-resolution displays used in integrated bridge navigation on commercial vessels. Both Raytheon and Sperry Marine, market leaders in commercial shipping, use AYDIN displays for bridge navigation systems in virtually all non-military ships, ranging from passenger ferries to merchant marine vessels and commercial oil tankers. These large-screen, high-resolution displays are shielded against the earth's magnetic field, which is essential to navigational accuracy and safety.
US Navy uses AYDIN C2P communications datalink for surface ships: AYDIN's Command and Control Processor (C2P), a rehost human/machine interface, is used by the US Navy Tactical Datalink Program Office to support message handling and monitoring. AYDIN's C2P technology conforms to worldwide standards used by the Navy's AEGIS surface ships.
AYDIN equips Trident Submarines: Trident submarines use AYDIN's ruggedized environmental computer workstations with flat panel displays for message handling and monitoring of tactical, non-weapons communications. AYDIN's high-resolution, color liquid crystal displays provide undistorted visibility, inherent magnetic immunity and greater efficiencies in terms of weight and power usage.
Focus on the future: AYDIN Displays
AYDIN Displays is a leading supplier of high quality display solutions for specialized use, providing a comprehensive and integrated product offering that includes the broadest range of high resolution screen sizes, packaging schemes and configurable features. The high-resolution display business is a $2 billion market, providing us substantial opportunity for growth in sales.
To accomplish this, we aligned our organization to: - - Focus on our core strengths of packaging and feature-rich product configurations to improve sales - - Provide a comprehensive range of both CRT and flat panel configurations, with CRT displays sized from 14 to 29 inches and flat panel displays sized from 14 to 20 or more inches - - Continue to differentiate our products by adding value with unique packaging such as touch screen, EMI and magnetic field shielding, ruggedized housing and custom user configurations - - Increase our marketing, distribution and service functions to add value to our products and enhance customer satisfaction with superior quality and delivery - - Leverage our leadership and expertise in military and process control markets to achieve greater share in high-growth segments of non-consumer graphic displays, such as financial services and medical equipment
(page eleven)
COMMUNICATIONS TELEMETRY DISPLAYS
14 Consolidated Data 17 Notes to Consolidated Financial Statements 25 Management's Discussion and Analysis of Financial Condition and Results of Operation 29 Report of Independent Auditors 30 Selected Financial Data
CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements (page 14)
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements (page 15)
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements (page 16)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A-Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company transactions and balances are eliminated in consolidation. At December 31, 1996, the Company disposed of all but 19% of its prior 80% ownership in AYDIN S.A. (Argentina).
Accordingly, the assets and liabilities of AYDIN S.A. were no longer included in the consolidated balance sheet as of December 31, 1997 and 1996, but 80% of the operating results (a $600,000 net loss) and an additional $535,000 loss on disposition of its ownership was included in the 1996 consolidated statement of operations. The remaining 19% investment in AYDIN S.A. is carried at a zero value at December 31, 1997 and 1996.
Contract Accounting
Revenue on long-term contracts that are greater than $100,000 are generally recorded on the percentage-of-completion method. For such contracts, a portion of the total contract price is included in sales in the proportion that costs incurred to date bear to total estimated costs at completion. The impact of periodic revisions in costs and estimated profit is reflected in the accounting period in which the facts become known.
For all other contracts, revenue is recognized upon completion of the contract or upon shipment of identifiable units.
The entire amount of ultimate losses estimated to be incurred upon completion of contracts is charged to income when such losses become known.
Contract progress billings are based upon contract provisions for customer advance payments, contract costs incurred and completion of specified contract objectives. Progress billing balances at December 31, 1997 and 1996 amounted to $3,096,000 and $4,649,000, respectively. Progress billings are netted against unbilled revenue on the consolidated balance sheet. Contracts may provide for customer retainage of a portion of amounts billed until contract completion. All contract retainage of $397,000 at December 31, 1997 matures in 1998. Contract retainage is included on the consolidated balance sheet as part of accounts receivable. Substantially all of the accounts receivable and unbilled revenue balances at December 31, 1997 are expected to be collected during 1998, although collection of the unbilled revenue is dependent upon the Company meeting performance milestones.
Use of Estimates
In preparing its financial statements in accordance with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported periods. Actual results could differ from those estimates. One such area where the use of estimates could have a significant impact on future results is estimated costs at completion and, in some cases, contract value on the Company's larger long-term contracts. During 1997 and 1996, changes to these estimates on the Company's larger long-term contracts had no significant aggregate negative impact, except for the TMRC contract with the Government of Turkey. For TMRC, there was a negative impact in 1996 of approximately $5.7 million pre-tax resulting from revisions of contract values and estimates of costs to complete, of which $2.6 million represented negotiations with the customer that extended performance milestones. Other areas where use of estimates could have a significant impact on future results are inventory obsolescence, accounts receivable bad debts, warranties, claims and litigation.
Cash and Cash Equivalents and Investment Securities
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalent balances at December 31, 1997 and 1996 amounted to $4,059,000 and $1,584,000, respectively. All of this cash and cash equivalents are in high quality banks.
Restricted cash and investment securities at December 31, 1997 and 1996 represents interest bearing collateral required to be maintained against letters of credit. Of the total of $6,102,000 of restricted cash and investment securities, $4 million consists of foreign corporate bonds, which are classified as available for sale. Realized gains and losses on the sales of investment securities will be included in consolidated results of operations. At December 31, 1997, the fair market value of the foreign corporate bonds approximated cost. The contractual maturity date is 2002. Actual maturities may differ from the contractual maturity because the Company or the issuers have the right to sell or prepay obligations.
Approximately $5.3 million of the Company's total cash and investment securities (restricted and non-restricted) balances at December 31, 1997 were
(page 17)
in foreign banks, including $5.1 million in Turkey. Almost all of the cash and investment securities in Turkey are in dollar denominated instruments. As a result, there is no material effect of exchange rate changes on cash balances.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined using first-in, first-out (FIFO) and the average cost method which approximates FIFO.
Fair Value of Financial Instruments
The Company's financial instruments include cash equivalents, investment securities and receivables. The carrying amounts of these instruments approximate their market value.
Depreciation and Amortization
Depreciation is provided by the straight-line method over the estimated useful lives of the depreciable assets. Amortization of leasehold improvements under operating leases is provided over the terms of the related leases or the asset lives, if shorter. Buildings are depreciated over lives up to 35 years. Machinery and equipment is depreciated over useful lives ranging from 3 to 5 years. Accelerated methods are used for tax purposes.
Advertising, Research and Development Costs and Interest Expense
The Company expenses advertising costs and research and development costs as incurred. Advertising costs were $489,000, $441,000 and $371,000 for 1997, 1996 and 1995, respectively. Interest expense for the years 1997, 1996 and 1995 amounted to $114,000, $988,000 and $1,243,000, respectively. Interest paid for the years 1997, 1996 and 1995 amounted to $164,000, $1,417,000 and $832,000, respectively.
Income Taxes
The Company accounts for income taxes on the liability method in accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Foreign Currency Translation
Balance sheet accounts of the Company's United Kingdom subsidiary are translated from the local currency into US dollars at year-end rates, while income and expenses are translated at the weighted-average exchange rate for the year. The resulting translation gains or losses are shown as a separate component of stockholders' equity. The translation effects of the Turkish subsidiary are reflected in the statements of operations because of the high inflation in the Turkish economy. Pretax income includes foreign currency translation losses relating to the Turkish subsidiary of $428,000 for 1997 and a gain of $274,000 for 1996.
Earnings (Loss) Per Common Share
During 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share (SFAS 128)." SFAS 128 eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Prior periods' earnings per share calculations have been restated to reflect the adoption of SFAS No. 128. Weighted average shares outstanding for 1997, 1996 and 1995 were 5,151,600, 5,123,622 and 5,043,824, respectively.
Options to purchase 496,113 shares at a weighted average exercise price of $10.89 per share and warrants for 200,000 shares at a weighted exercise price of $12.65 were not included in the computation of 1997 diluted loss per share.
Warranty Costs
The usual warranty period on the Company's contracts and products is one year, which is provided for in warranty accruals.
Long-Lived Assets
The Company continually reviews long-lived assets to assess recoverability from future operations using undiscounted cash flows. Impairments would be recognized in operating results if a permanent diminution in value had occurred.
New Accounting Standards
In June, 1997 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which is effective in 1998 and thereafter. SFAS No. 130 requires entities presenting a complete set of financial statements to include details of comprehensive income. Comprehensive income consists of net income or loss for the current period and also includes income, expenses, gains, and losses that bypass the income statement and are reported directly in a separate component of equity. The effect of adopting SFAS No. 130 is not
(page 18)
expected to be material to the Company's financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective in 1998 and thereafter. SFAS No. 131 requires that public business enterprises report certain information about operating segments in complete sets of financial statements (and in condensed financial statements of interim periods issued to shareholders beginning no later than in 1999). It also requires that public business enterprises report certain information about their products and services, the geographic areas in which they operate and their major customers. Management is currently evaluating the disclosure impact of SFAS No. 131 on its financial statements.
Reclassifications
Certain reclassifications, none of which affected net income, have been made to prior years' amounts in order to conform to the current year's presentation.
Note B-Inventories
Inventories consist of:
Note C-Property, Plant and Equipment
The Company's investment in property, plant and equipment is shown below:
Note D-Credit Arrangements
On January 8, 1998 the Company signed a three-year $10 million revolving credit facility with AT&T Capital which can be used for cash borrowing and/or letters of credit. A maximum of $7 million can be used for letters of credit, in addition to existing letter of credit arrangements. The amount of cash borrowing on the revolver will be based on eligible accounts receivable and inventory. This arrangement also provides for a term loan of $2 million secured by machinery and equipment. Interest rates on cash borrowings will be at the prime rate plus 1% and a commission rate of 1.25% will be charged on letters of credit. The collateral for this credit arrangement is a preferred first priority lien and security interest on all domestic assets of the Company, except real estate, plus $1.7 million of cash. This secured cash is expected to be released starting in the first quarter of 1998 based on the Company achieving specified earnings levels and maintaining certain working capital levels.
At December 31, 1997, $8.6 million of letters of credit were outstanding for various foreign contracts under a $9.1 million credit facility with a bank, which is renewable annually in June. The letters of credit have been issued to foreign entities principally to guarantee performance under contracts or the return of advance payments. The Company's real estate has been pledged as security against these letters of credit, which carry a commission rate of 1.6%.
Also at December 31, 1997, an $8.3 million of letter of credit remained open with a foreign bank for the duration of the Company's TMRC contract with the Government of Turkey. Cash collateral of $4.5 million was on deposit with the bank at December 31, 1997 against this letter of credit, which carries a commission rate of 1.0%. After the letter of credit balance decreases to an amount below $8 million, the cash collateral requirement will be reduced to 50% of the outstanding balance of the letter of credit. This letter of credit balance is expected to be liquidated during the first half of 1999, when the contract is scheduled to be completed.
The weighted average interest rates on short-term borrowings outstanding at December 31, 1997 and 1996 were 10.5% and 9.9%, respectively.
Note E-Environmental Remediation
The Company, along with others, was responsible for the costs of cleanup under an order of the State of California at a site leased by the Company prior to 1984. Cleanup of the site was completed during 1996 and site monitoring over a 30-year period commenced in 1997. The estimated site monitoring costs to be expended over the 30-year period are $3.1 million, of which $126,000 was expended during 1997. The amount to be paid has been included in the accompanying consolidated balance sheet as an other liability discounted at 7% to the expected payment dates. Expected payments are approximately $100,000 annually.
(page 19)
The December 31, 1996 balance sheet included an other (non-current) asset of $2.6 million representing an expected insurance recovery based on a declaratory judgment in favor of the Company by the State of California. The declaratory judgment was reversed in April 1997, resulting in a $2.6 million write-off. The California Supreme Court has agreed to review this reversal and briefs have been filed.
Note F-Stockholders' Equity
The changes in common stock, additional paid-in capital, treasury stock, retained earnings and foreign currency translation effects during the years 1995, 1996 and 1997 were as follows:
(page 20)
Note G-Stock Options and Warrants
Pursuant to stock option plans, the Company has granted certain officers, directors and key employees options to purchase shares of its common stock. Options granted under the plans must have an option price determined by the Board of Directors, but in any event, not less than the fair market value of the stock on the date of grant. Generally, options become exercisable one-fourth annually beginning one year after grant, on a cumulative basis, and expire ten years after grant. Prior to April 1997, the expiration was five years after grant.
There is no charge to income with respect to stock options under the plans. A summary of the changes in options during 1995, 1996 and 1997 follows:
The following table summarizes information concerning currently outstanding and exercisable stock options:
(page 21)
The Company has adopted only the disclosure provisions of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (FAS 123). It applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans and does not recognize compensation expense for its stock-based compensation plans other than restricted stock. If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed by FAS 123, the Company's net income and earnings per share would be reduced to the pro forma amounts indicated below:
These pro forma amounts may not be representative of future disclosures because they do not take into effect pro forma compensation expense related to grants made before 1995. The fair value of each option grant is estimated on the date of grant using the Black-Sholes options-pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995, respectively: dividend yield of 0 percent for all years; expected volatility of 27.9, 27.3 and 29.9 percent; risk-free interest rates of 6.08, 6.23 and 7.60 percent; and expected lives of 5 to 10 years.
In May 1997, the Company issued warrants with three-year expiration dates for 200,000 shares of its common stock to a former shareholder at exercise prices of $12.10 and $13.50 per share. These warrants remain outstanding and have had no impact on the Company's earnings per share calculations. After year end these warrants were purchased by two executives of the Company.
Note H-Taxes on Income
The provision (recovery) for income taxes is shown below. The recoveries shown on the current lines for each year represent tax loss carrybacks to earlier years, utilization of foreign tax credits, and other items.
(page 22)
The components of deferred income tax balances follow. No valuation allowances were required.
A reconciliation between the federal statutory rate and the effective income tax rate (computed by dividing income taxes by income before income taxes and minority interest) is as follows:
Income tax payments, net of refunds, amounted to $1,614,000 in 1995, $6,989,000 in 1996 and $383,000 in 1997. As of December 31, 1997, the Company expects to receive approximately $3.9 million of refundable income taxes (net of payments) from the IRS. These refundable taxes are included in the December 31, 1997 balance sheet under the "prepaid expenses and other" caption.
The Company has not provided deferred income taxes on cumulative unremitted earnings of foreign subsidiaries amounting to approximately $4 million because of the availability of approximately $1.6 million of foreign tax credits that expire in 2002. These foreign tax credits would eliminate the US tax liability related to the inclusion of the foreign earnings. During 1997, $2.9 million of dividends was received from the Company's Turkish subsidiary.
Pre-tax income from foreign operations is shown under Note I.
Note I-Nature of Operations, Export Sales, Major Customers and Foreign Operations
The Company designs, engineers, manufactures, markets, distributes and installs technologically advanced communications products and systems, which are sold worldwide. AYDIN generates approximately 40% of its sales from standard products and systems and the balance of its sales from custom-designed systems and equipment based on customers' specific requirements. AYDIN offers a broad range of products due to its ability to combine analog microwave engineering methods with digital techniques and software.
Export sales by geographic area are as follows:
(page 23)
The US Government and the Government of Turkey were the only customers to whom sales exceeded 10% of consolidated sales during any of the past three years.
Sales to US Government agencies, principally the Department of Defense, amounted to $37,596,000, $38,728,000, and $44,309,000 in 1997, 1996 and 1995, respectively. Sales to the Government of Turkey amounted to $21,496,000, $15,116,000 and $16,549,000 in 1997, 1996 and 1995, respectively.
Foreign assets included in the consolidated balance sheet amounted to $21.0 million and $21.7 million at December 31, 1997 and 1996, respectively. Of these amounts, $5.1 million and $2.5 million, at December 31, 1997 and 1996, respectively, are cash and short-term investments of the Company's Turkish subsidiary consisting primarily of US dollar denominated interest-bearing time deposits and Euro bonds. Foreign sales and pretax income for 1997 was $21.2 million and $1.8 million, respectively, of which substantially all of the income comes from the Company's Turkish subsidiary. Foreign sales and pretax income for 1996 amounted to $27.0 million and $0.9 million, respectively, of which substantially all of the income was from the Turkish subsidiary. Foreign sales and pretax income for 1995 amounted to $28.9 million and $5.4 million, respectively, of which substantially all of the income was from the Turkish subsidiary. The 1997 results exclude the Argentine subsidiary, which was disposed of on December 31, 1996.
Note J-Restructuring Costs
During the third quarter of 1996 the Company announced a plan to consolidate and restructure its domestic operations. The Company recorded a charge of $3.7 million in the third quarter for the restructuring, of which approximately $1.5 million was for cash outlays and $2.2 million was for non-cash asset write- offs. The major charges consisted of: severance benefits for 150 terminated employees ($600,000); loss on sale of a product line ($500,000); inventory write-offs ($1,000,000) and capital equipment write-offs ($300,000) in connection with the cutback of product lines; and write-off of goodwill in connection with the sale of a product line ($400,000). The restructuring was completed during the third quarter of 1997.
Note K-Commitments and Contingencies
During 1995, a subcontractor to the Company in the TMRC program with the Government of Turkey filed a demand for arbitration alleging a breach of contract and equitable adjustment of $12.4 million. This claim was subsequently amended and at December 31, 1997 amounts to $27.8 million. The Company has filed a claim against the subcontractor for an amount in excess of the subcontractor's claim. The arbitration hearing was concluded and post-hearing briefs were filed in December 1997. A decision is expected before the third quarter of 1998. Based on discussions with its outside counsel, management believes that it has meritorious defenses and counterclaims and expects the Company to be successful in its defenses. However, if the outcome is unfavorable, it could have a material adverse impact on the Company's financial position and results of operations.
The Company's US Government contracts are subject to audit by the government and price adjustment under certain circumstances. The Company also has receivables due from the US Government on certain contracts whose collectability is dependent on the Company prevailing in its positions. Management believes it has sufficient reserves to cover these matters. However, unfavorable outcomes could have a material impact on future results of operations.
Future annual minimum rental payments required under operating leases that have lease terms in excess of one year at December 31, 1997 are as follows: 1998-$450,000; 1999-$463,000; 2000-$367,000; 2001-$382,000; 2002-$195,000.
(page 24)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section represents a review of the Company's consolidated financial condition and results of operations. In addition to historical information, this discussion and analysis contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances that arise after the date hereof.
Liquidity and Sources of Capital
The Company has significantly improved its available sources of capital since December 31, 1996. In January 1998, the Company successfully negotiated a $10 million asset-based credit facility and a $2 million term loan. This facility can be used for cash borrowings or letters of credit issuance. In the second quarter 1997, the Company also negotiated more favorable letter of credit terms with a Turkish bank on the TMRC contract with the Government of Turkey. The new terms extended the letter of credit expiration date until completion of the TMRC contract, whereas the prior letter of credit required renewal every four months. In addition, the new terms reduced the required cash collateral by approximately $1.5 million.
Liquidity has also been significantly improved. Pursuant to the 1996 restructuring plan, the sale of three company-owned facilities during 1997 generated $11.5 million of cash of which $1.4 million was used to upgrade existing facilities to accommodate the resulting relocation of operations from the sold facilities. Short-term bank debt was reduced to $200,000 at December 31, 1997 from $2.8 million a year ago. The Company is generally current with its vendors as evidenced by the decline in accounts payable to $8.7 million at December 31, 1997 compared to $14.9 million a year ago.
Uses of cash during 1997 included a $1.7 million increase in unbilled revenue and a $1.5 million increase in inventories. The increase in unbilled revenue reflects delays in shipments on a couple of programs resulting in an excess of costs incurred in 1997 (and resulting revenues recognized) compared to billings rendered. These billings have been shifted into 1998. The increase in inventories was primarily a result of the ramp-up, during 1997, of a new product line.
Primarily as a result of the aforementioned decrease in accounts payable and the increases in unbilled revenue and inventory, $9.3 million of cash was used in operating activities during 1997.
Other significant changes in balance sheet accounts from a year ago are: (1) the $8.2 million decline in the net book value of property, plant and equipment primarily from the sale of facilities as noted above; (2) the $2.5 million decrease in other assets resulting from the write-off of an anticipated insurance recovery of money previously spent ($1.4 million) and to be spent ($1.1 million) over a 30-year period on an environmental clean-up at a site leased by the Company prior to 1984. The write-off resulted from an unfavorable court ruling in April 1997 involving the future collection of the insurance recovery. The Company has appealed this ruling to the California Supreme Court; (3) the $2.2 million decrease in deferred income taxes (non-current portion) because of the book versus tax depreciation timing differences in connection with the sale of facilities in 1997.
The restructuring plan to consolidate and restructure domestic operations announced during third quarter 1996 was completed during third quarter 1997. The Company recorded a charge of $3.7 million in 1996 for the restructuring, of which approximately $1.5 million was for cash outlays and $2.2 million was for non-cash asset write-offs. At December 31, 1996, a restructuring accrual of $586,000 remained. This accrual balance was sufficient to absorb 1997 restructuring costs with no material adjustment.
As is discussed in Note K to the financial statements, a subcontractor to the Company on the TMRC program has alleged a breach of contract and filed for damages of $27.8 million in a recently concluded arbitration hearing. The Company has filed a claim in excess of the subcontractor's claim. An arbitration decision is expected before the third quarter 1998. Based on discussions with its outside counsel, management expects the Company to be successful in its defenses. However, if the outcome is unfavorable, it could have a material adverse impact on the Company's financial position and results of operations.
The Company's US Government contracts are subject to audit by the government and price adjustment under certain circumstances. The Company also has receivables due from the US Government on certain contracts whose
(page 25)
collectability is dependent on the Company prevailing in its positions. Management believes it has sufficient reserves to cover these matters. However, unfavorable outcomes could have a material impact on future results of operations.
The Company is aware of the issues associated with programming changes required in its existing computer systems as the year 2000 approaches. This issue is pervasive and complex, as virtually every computer operation will be affected by the rollover of the two-digit year value to 00. Unrelated to this Year 2000 issue, the Company is planning to acquire new computer systems, including new operating and applications software. Issues not addressed by new systems will be addressed by the Company's internal MIS organization. Management has not yet assessed the Year 2000 compliance expense and related potential effect on the Company's earnings, but the Company does not believe the expense will be materially above the planned expenses.
Based on present backlog and projected cash flows, the Company anticipates financing its capital needs from internal sources and future borrowings against its existing credit line.
In 1996, cash provided by operations was $189,000 compared to a negative cash flow from operations of $8.0 million in 1995. Cash collected during 1996 was approximately $153 million compared to net sales of $117 million. The excess of collections versus sales is reflected as a $37 million reduction in accounts receivable and unbilled revenue on the consolidated balance sheet at December 31, 1996 compared to 1995. Most of these decreases related to two large contracts (TMRC and RIS). The year 1996 included two significant uses of cash--IRS payments of approximately $7 million and a $9 million payment to a TMRC software subcontractor.
Results of Operations
1997 versus 1996
Net sales for 1997 of $115.4 million were essentially flat compared to 1996 sales of $116.6 million. Sales related to the Turkish subsidiary were up $7.9 million from 1996. The subsidiary's sales were negatively impacted in 1996 because of delays in the TMRC program with the Government of Turkey, which reduced 1996 sales by $5.7 million. This condition was corrected by 1997. There were no 1997 sales from the Argentine subsidiary, which was sold on December 31, 1996, compared to 1996 sales of $9.3 million. Sales from all other business areas were essentially unchanged from 1996.
The Company's Turkish subsidiary operates in a highly inflationary economy with corresponding declines in the Turkish currency versus the US dollar. The Company protected itself against these conditions by including clauses in its TMRC contract that escalate contract values from a predetermined base price by the percentage increase in Turkish inflation. This does not protect the Company from performance delays, however. The contract represents the vast majority of revenue and profit of the Turkish subsidiary.
US Government sales amounted to 33% of total sales in 1997 and 1996. Export and foreign sales increased to 43% of total sales from 41% in 1996. Domestic industrial (commercial) sales decreased to 24% of total sales from 26% last year.
Backlog at December 31, 1997 amounted to $71 million compared to $84 million at December 31, 1996. All of the decrease was from the TMRC contract, which is nearing completion. Backlog from other business was essentially flat. Probable production options are not included in these backlog numbers.
Cost of sales as a percentage of sales was 75.3% in 1997 compared to 80.9% in 1996. The improvement resulted from 1996 delays on the TMRC and another large program which was corrected during 1997, and cost savings achieved as a result of the 1996 restructuring plan.
Selling, general, and administrative and research and development costs decreased by $7.9 million from 1996. Of this decrease, $2.4 million was for 1996 expenses of the Argentine subsidiary, which was sold on December 31, 1996. Approximately $900,000 of this decrease was from lower bad debts expense compared to 1996 when there was $1 million of bad debts write-offs involving mostly foreign receivables. The 1996 level of write-offs was abnormally high compared to prior experience and consisted mostly of three well known foreign government related enterprises including one for approximately $400,000 which was a customer of the Argentine subsidiary. The 1996 level of write-offs is not expected to continue. The balance of the decrease reflects cost reductions pursuant to the Company's 1996 restructuring plan including pruning of certain product lines and a more focused targeting in 1997 of
(page 26)
research and development projects to the Company's core businesses. A significant amount was spent in 1996 on wireless local loop development projects for which the Company is now seeking partners to share the high cost of development. A significant amount was also spent in 1996 on automatic vehicle location development projects, which have been discontinued.
Interest income (net of interest expense) for 1997 amounted to $918,000 compared to net interest expense of $189,000 in 1996. This favorable swing of $1.1 million resulted from IRS interest income in 1997 on income tax refunds compared to IRS interest expense in 1996 on taxes owed. The favorable swing also reflects the lower level of short-term bank debt during 1997 compared to 1996.
Restructuring costs, environmental remediation costs and gain on sale of facilities are explained above in the Liquidity and Sources of Capital section.
The 1997 income tax provision of $1.1 million on the pre-tax loss of $574,000 resulted from the effects of foreign income taxes in excess of tax benefits on US losses.
1996 versus 1995
Net sales for 1996 of $117 million declined by 17% from 1995 sales of $141 million. Approximately $10 million of this decline was in the company's non-TMRC systems business where no new large contracts were won during 1996. In addition, sales (and pre-tax profits) on the TMRC contract for 1996 were negatively impacted by $5.7 million because of prior years' delays in reaching contract performance milestones, which required increases in estimated costs at completion during 1996 and resulted in the customer imposing liquidated damages. Negotiations with the customer concluded in third quarter 1996 resulted in contract modifications, which extended performance milestones and had a positive effect on maintaining contract profitability.
US Government sales increased slightly to 33% of total sales from 32% in 1995. Export and foreign sales were 41% of total sales in both 1996 and 1995. Domestic industrial (commercial) sales were 26% of total sales compared to 27% in 1995.
Backlog at December 31, 1996 was approximately $84 million as compared to $106 million a year ago, a decline of $22 million. Most of this decline was from the TMRC backlog, which declined by $14 million, from $41 million to $27 million. Probable production options are not included in these backlog numbers.
Cost of sales as a percentage of sales was 80.9% in 1996 compared to 72.8% in 1995. Approximately 50% of the increase resulted from the 1996 negative TMRC sales impact referred to above. The balance of the increase resulted from inventory write-offs caused by discontinued or de-emphasized product lines and a higher proportion of fixed overhead costs in relationship to the reduced 1996 sales.
Selling, general and administrative (SG&A) expenses increased by $4,173,000 (16%) in 1996 to $29,833,000 because of certain unusual operating expenses incurred in 1996 that are part of SG&A. These included: (1) $1.3 million of costs related to the Argentine subsidiary for which the Company disposed of its majority interest during 1996; (2) $750,000 of proposal costs; and (3) $1 million of bad debts write-offs involving mostly foreign receivables. The balance of the increase was from increased selling costs in the telecommunications area, added corporate infrastructure costs and costs related to a potential business combination that was abandoned.
(page 27)
Research and development costs increased by $1.7 million (26%) during 1996 because of expanded developments in telecommunications systems.
During the third quarter of 1996, the Company announced a plan to consolidate and restructure its domestic operations. The Company recorded a charge of $3.7 million in the third quarter for expected restructuring costs consisting of approximately $1.5 million for cash outlays and $2.2 million for non-cash asset write-offs. The major components of the charge were: (1) severance benefits for 150 terminated employees ($600,000); (2) loss on sale of a product line ($500,000); (3) inventory write-offs ($1,000,000) and capital equipment write-offs ($300,000) in connection with the discontinuation of product lines; and (4) write-off of goodwill associated with the sale of a product line ($400,000). The restructuring proceeded through 1996 as planned with no significant changes from the original plan. The Company anticipated annual cash savings of approximately $4.3 million as a result of lower labor and facility costs emanating from the restructuring.
The original restructuring plan anticipated the termination of 150 employees. At December 31, 1996, 90 of these terminations had occurred and termination benefits were paid to those individuals. The remainder of the terminations and payment of the related termination benefits of $331,000 occured during the first half of 1997.
Restructuring charges and their application during 1996 and 1997 were as follows:
The effective income tax rate decreased to 25.1% for 1996 compared to 33.4% for 1995 primarily because the effects of higher foreign income taxes and dividends from a foreign subsidiary reduced the tax benefit from the US losses.
(page 28)
REPORT OF INDEPENDENT AUDITORS
Report of Grant Thornton LLP Independent Auditors Stockholders and Board of Directors AYDIN Corporation
We have audited the consolidated balance sheets of AYDIN Corporation and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of AYDIN Corporation and subsidiaries as of December 31, 1997 and 1996 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania February 2, 1998
(page 29)
SELECTED FINANCIAL DATA
($000 omitted except for per share amounts)
Quarterly Financial Data ($000 omitted except for per share amounts)
Common Stock Prices
Stockholder and Dividend Information AYDIN has approximately 6,000 stockholders of record and individual participants in security position listings. AYDIN has no present plans to pay any special cash dividends.
(page 30)
[graphic]
(page 31)
AYDIN CORPORATE HEADQUARTERS Horsham, PA
AYDIN COMMUNICATIONS Horsham, PA System Integration; Command, Control & Communications (C3); Air Traffic Control; Modernization & Integration of Radars; Turnkey Communications Systems; Digital Wireless Telephony Equipment & Systems; Cell Extender; Network Access Equipment; Transcoders; Multiplexers; Telecom Systems; Microcell; DACS; Satellite Modems; Satellite TDMA Next-Generation Equipment; Digital & Analog Microwave Radios.
San Jose, CA Thin Film Solid State Amplifiers & Microwave Integrated Circuit Components for Wireless Telecommunications.
Turkey AYDIN Yazilim ve Elektronik Sanayi A.S. Software; Command, Control & Communications Systems (C3); Air Defense; Digital Microwave Radios; Air-to-Ground VHF & UHF Radios; Telecom Equipment & Systems; Computer Equipment & Systems; Display Terminals.
AYDIN TELEMETRY Newtown, PA Airborne Data Acquisition Equipment & Systems (Telemetry); Ground Data Receiving & Processing; Transmitters; Transponders; Receivers; Power Amplifiers; Digital Recorders; Data Links; Avionics; Bus Products; Ground-to-Air UHF/VHF Transceivers & Multiplexers; Special Microcircuits.
AYDIN DISPLAYS Horsham, PA High Resolution Color Monitors; Flat Panels & Workstation Products; Military Display Processors; Ruggedized Monitors & Workstations; SPECTRUM AUTOSYNC Color Monitors; Color Display Terminals; Workstations; X-Terminals.
United Kingdom AYDIN Europe Limited European Operations (all products, systems & support).
OTHER Croyden, PA AYDIN Electro Fab Single-sided, Double-sided & Multilayer Printed Circuit Boards.
Montgomeryville, PA AYDIN Raytor Precision Metal Fabrications.
Rancho Dominguez, CA AYDIN Molded Devices Vinyl Components.
(inside flyleaf)
CORPORATE INFORMATION AND DIRECTORY
Board of Directors
I. Gary Bard Chairman of the Board and Chief Executive Officer AYDIN
John F. Vanderslice President and Chief Operating Officer AYDIN
Dr. Nev A. Gokcen Thermodynamicist, Department of the Interior Bureau of Mines (Retired)
Admiral Harry D. Train, II United States Navy (Retired) Former Commander-In-Chief, US Atlantic Command Manager, Hampton Roads Operations, Science Applications International Corporation
Ira Brind President and co-founder, of Brind-Lindsay & Co., Inc. President of the Board of Managers, of The Wistar Institute Chairman of the Board of Trustees, of Thomas Jefferson University Hospital
Gary Mozenter Former Partner, Vice-Chairman and Executive Committee Member, at Coopers & Lybrand LLP
Corporate Officers
I. Gary Bard* Chairman and Chief Executive Officer
John F. Vanderslice* President and Chief Operating Officer
James R. Henderson* Vice President, Treasurer and Chief Financial Officer
H. Barry Maser* Vice President of Business Development and International Sales
Demirhan Hakimoglu* Vice President
Robert A. Clancy Secretary and Corporate Counsel
Herbert Welber* Controller and Assistant Treasurer
AYDIN Corporate Headquarters AYDIN Corporation 700 Dresher Road Horsham, PA 19044
Telephone: 215-657-7510 Fax: 215-657-3830 Internet address: www.aydin.com
Independent Auditors Grant Thornton LLP Two Commerce Square Philadelphia, Pennsylvania 19103
General Counsel Duane, Morris & Heckscher LLP One Liberty Place Philadelphia, Pennsylvania 19103
Registrar & Transfer Agent ChaseMellon Shareholders Services, L.L.C. Overpeck Centre 85 Challenger Road Ridgefield Park, New Jersey 07660
Stock Data AYDIN shares (ticker symbol AYD) are traded on the New York Stock Exchange
Form 10-K A copy of the AYDIN Annual Report on Form 10-K to the Securities and Exchange Commission is available without charge upon written request to:
Investor Relations AYDIN 700 Dresher Road Horsham, Pennsylvania 19044 (215) 657-7510
Annual Meeting Shareholders are invited to attend our annual meeting: Friday, May 1, 1998 at 3:00 pm AYDIN Corporate Headquarters 700 Dresher Road Horsham, Pennsylvania 19044
* Executive Officer
Get More Information Online. Chat with the CEO and learn more about AYDIN on the Internet at http://www.aydin.com
(inside cover)
AYDIN Corporation 700 Dresher Road Horcham, PA 19044 www.aydin.com
(back cover)
Exhibit 21
SUBSIDIARIES OF REGISTRANT