<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 23, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AEROFLEX INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 11-1974412
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
------------------------
35 SOUTH SERVICE ROAD
PLAINVIEW, NEW YORK 11803
(516) 694-6700
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MICHAEL GORIN, PRESIDENT
AEROFLEX INCORPORATED
35 SOUTH SERVICE ROAD
PLAINVIEW, NEW YORK 11803
(516) 694-6700
(NAME, ADDRESS AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
DAVID H. LIEBERMAN, ESQ. RICHARD H. GILDEN, ESQ.
BLAU, KRAMER, WACTLAR & LIEBERMAN, P.C. FULBRIGHT & JAWORSKI L.L.P.
100 JERICHO QUADRANGLE 666 FIFTH AVENUE
JERICHO, NEW YORK 11753 NEW YORK, NEW YORK 10103
(516) 822-4820 (212) 318-3000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
- ------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================
PROPOSED
MAXIMUM OFFERING PROPOSED
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE PRICE PER MAXIMUM AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) SECURITY(2) OFFERING PRICE REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.10 par value........... 2,875,000 $10.97 $31,538,750 $9,304
===========================================================================================================
</TABLE>
(1) Includes 375,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Pursuant to Rule 457(c) under the Securities Act of 1933, the proposed
maximum offering price and the proposed maximum aggregate offering price
have been calculated on the basis of the average of the high and low sale
prices of the Common Stock as reported by the New York Stock Exchange on
February 17, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 23, 1998
2,500,000 SHARES
[AEROFLEX INCORPORATED LOGO]
COMMON STOCK
------------------------
Of the 2,500,000 shares of Common Stock offered hereby, 2,250,000 shares
are being sold by Aeroflex Incorporated (the "Company") and 250,000 shares are
being sold by certain Selling Stockholders. See "Principal and Selling
Stockholders." The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders.
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "ARX." On February 17, 1998, the last reported sale price of the
Company's Common Stock as reported by the New York Stock Exchange was $10.875
per share. See "Price Range of Common Stock."
THE COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===========================================================================================================
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS(3)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............................. $ $ $ $
Total(3)............................... $ $ $ $
===========================================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses of the offering payable by the Company estimated
at $450,000.
(3) The Company and certain Selling Stockholders have each granted options to
the Underwriters, exercisable within 30 days of the date hereof, to purchase
up to an aggregate of 375,000 additional shares of Common Stock for the
purpose of covering over-allotments, if any. If the Underwriters exercise
such over-allotment options in full, the total Price to Public, Underwriting
Discount, Proceeds to Company and Proceeds to Selling Stockholders will be
$ , $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are offered severally by the Underwriters when,
as and if delivered to and accepted by them, subject to their right to withdraw,
cancel or reject orders in whole or in part and subject to certain other
conditions. It is expected that delivery of the certificates representing the
shares will be made against payment on or about , 1998
at the office of CIBC Oppenheimer Corp., CIBC Oppenheimer Tower, World Financial
Center, New York, New York 10281.
------------------------
CIBC OPPENHEIMER
A.G. EDWARDS & SONS, INC.
SOUNDVIEW FINANCIAL GROUP, INC.
LADENBURG THALMANN & CO. INC.
The date of this Prospectus is , 1998
<PAGE> 3
"AEROFLEX" "THE FUTURE IN MICROELECTRONICS"
A PHOTOGRAPH APPEARS HERE OF A 4M BIT FLASH MCM
A PHOTOGRAPH APPEARS HERE OF A 16M BIT FLASH MCM
A PHOTOGRAPH APPEARS HERE OF A 16M BIT SRAM MCM
A PHOTOGRAPH APPEARS HERE OF A 64M BIT FLASH MCM
A PHOTOGRAPH APPEARS HERE OF A R4430SC MICROPROCESSOR MCM
A PHOTOGRAPH APPEARS HERE OF A CUSTOM HDMM SRAM MCM
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact included in this
Prospectus, including without limitation statements under "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," regarding the Company's financial position, business
strategy and plans and objectives of management of the Company for future
operations, are forward-looking statements. When used in this Prospectus, words
such as "anticipate," "believe," "estimate," "expect," "intend" and similar
expressions, as they relate to the Company or its management, identify
forward-looking statements. Such forward-looking statements are based on the
beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. Actual results
could differ materially from those contemplated by the forward-looking
statements as a result of certain factors such as those disclosed under "Risk
Factors," including but not limited to, competitive factors and pricing
pressures, changes in legal and regulatory requirements, technological change or
difficulties, product development risks, commercialization difficulties and
general economic conditions. Such statements reflect the current views of the
Company with respect to future events and are subject to these and other risks,
uncertainties and assumptions relating to the operations, results of operations,
growth strategy and liquidity of the Company.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION OF A PENALTY BID.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
INSIDE GATEFOLD
A DIAGRAM APPEARS HERE OF A PHOTO COLLAGE SHOWING A GENERIC CATV SET TOP BOX, A
GENERIC CELLULAR TELEPHONE HANDSET, A DIRECT TV ANTENNA, AND A SATELLITE.
BELOW THIS APPEARS A LINE OF PHOTOS OF PRODUCTS MANUFACTURED BY THE COMPANY.
A PHOTO APPEARS HERE OF A THIN FILM INTERCONNECT
A PHOTO APPEARS HERE OF A MULTICHIP SUBSTRATE
A PHOTO APPEARS HERE OF A HYBRID MULTICHIP MODULE
A PHOTO APPEARS HERE OF A PHASE NOISE TEST SET
A PHOTO APPEARS HERE OF A SATELLITE TEST SET
"AEROFLEX COMMUNICATION SOLUTIONS"
"GLOBAL -- FULL SPECTRUM -- FULL COVERAGE"
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Company's consolidated financial statements (including the
notes thereto) appearing elsewhere in this Prospectus. Unless otherwise
indicated, all financial information, share and per share data in this
Prospectus assumes that the over-allotment options granted to the Underwriters
are not exercised. As used herein, reference to a fiscal year means the twelve
month period ended June 30 of that year. Unless the context otherwise requires,
references in this Prospectus to the "Company" and "Aeroflex" are to Aeroflex
Incorporated and its consolidated subsidiaries. Certain statements set forth
below constitute "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The Company's actual results could differ
materially from those anticipated in such forward-looking statements as a result
of certain factors, including those set forth under "Risk Factors" and elsewhere
in this Prospectus.
THE COMPANY
Aeroflex utilizes its advanced design, engineering and manufacturing
capabilities to produce state-of-the-art microelectronic module, interconnect
and testing solutions used in communication applications for commercial and
defense markets. Its products are used in the satellite, wireless and wireline
communications, cable television ("CATV") and defense communications markets.
With the acquisition of MIC Technology in 1996 and the interconnect assets of
Lucent Technologies Inc. in 1997, the Company believes it is currently the
largest merchant supplier of thin film interconnect products. The Company also
designs and manufactures motion control systems, and shock and vibration
isolation systems used for commercial, industrial and defense applications. The
Company's major customers include Lockheed Martin Corporation, Hughes Electronic
Corporation, Motorola, Inc., Lucent Technologies, Raytheon Company and Northrop
Grumman Corporation. The Company currently acts as sole source supplier under
supply agreements with Lucent Technologies and Motorola's RF semiconductor
division for thin film interconnect products.
The Company develops and employs advanced interconnect technology in which
complex system components are built up from highly integrated or monolithic
components while preserving the attributes of small size, power and thermal
management, wide bandwidths, manufacturability and quality. The Company's
Passive Integrated Microelectronic Interconnect Circuitry ("PIMIC") thin film
technology is an efficient and cost effective interconnect and packaging medium
for high frequency, high density and high performance communications products.
Its thin film interconnects are used in a number of OEM products, including
wireless subscriber handsets, CATV amplifiers and telecommunications switches.
The Company also produces microelectronic modules, which are called "hybrids"
because they combine elements of integrated circuit and printed circuit board
technologies. Hybrids are multi-layered electronic circuits, containing very
small passive and active elements which are mounted and wired together on a
single multi-layered ceramic surface in patterns designed to perform specific
electronic functions, such as amplification, switching, signal conversion,
voltage regulation and decoding of microwave signals. The Company's
microelectronic modules are used in a number of applications, including
communications satellites and commercial avionics data communications.
Additionally, the Company has developed advanced technologies in high speed
stimulus/response measurement systems. The Company's high-speed frequency
synthesis technology is used as the stimulus for automatic test systems which
operate in radio frequency and microwave frequency. Its high speed automatic
test equipment is used in various applications, including satellite and antenna
testing.
Worldwide demand for voice, data and video communications has increased
dramatically as a result of a number of factors, including an increasingly
competitive global business environment, a heightened sophistication on the part
of private consumers, the emergence of new technologies, and the deregulation
and proliferation of communications networks. Service providers of both wireless
and wireline communications are responding to these changes by rapidly
incorporating new technologies into their networks which enables them to provide
greater functionality and to decrease costs. In addition, as communication
networks migrate toward higher frequencies and offer greater functionality,
systems have become more complex requiring greater performance and reliability.
The Company has responded to these needs by developing and producing components
that offer small size, high density and high performance at reduced cost.
Finally, manufacturers have increasingly focused on their core business
competencies, and as a result, have outsourced non-core production of
sub-systems, components and products to reduce their costs and benefit from the
Company's technological advances. The Company has capitalized on this
outsourcing trend by developing advanced design, engineering and low cost, high
volume manufacturing capabilities.
The Company intends to become a market leader in advanced microelectronic
module, interconnect and testing solutions for the communications market. The
key elements of the Company's strategy are to: (i) continue expansion into
commercial markets; (ii) capitalize on the trend toward technology outsourcing;
(iii) increase value added content (for its own product and that of its OEM
customers); (iv) maintain and enhance technological leadership; and (v) continue
to pursue strategic acquisitions.
The Company's executive offices are located at 35 South Service Road,
Plainview, New York 11803, and its telephone number is (516) 694-6700.
3
<PAGE> 6
THE OFFERING
Common Stock offered by the Company......... 2,250,000 shares
Common Stock offered by the Selling
Stockholders................................ 250,000 shares
Common Stock to be outstanding after the
offering(1)................................. 16,884,798 shares
Use of proceeds............................. Repayment of $10.0 million of
indebtedness and for working
capital and general corporate
purposes, including facilities
expansion and potential
acquisitions. See "Use of
Proceeds."
New York Stock Exchange symbol.............. ARX
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
------------------------------ ------------------
1995(2) 1996 1997 1996 1997
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................. $71,113 $ 74,367 $94,299 $41,975 $53,210
Gross profit.......................................... 23,571 23,297 31,190 13,535 18,131
Special charge(3)..................................... -- 23,200 -- -- --
Restructuring charge(4)............................... 1,669 -- -- -- --
Operating income (loss)............................... 6,150 (15,282) 9,736 3,959 5,737
Net income (loss)..................................... $ 7,049 $(17,420) $ 4,420 $ 1,544 $ 2,838
======== ========= ======== ======== ========
Net income (loss) per common share and common share
equivalent:
Basic............................................. $ 0.60 $ (1.46) $ 0.36 $ 0.12 $ 0.21
======== ========= ======== ======== ========
Diluted(5)........................................ $ 0.56 -- $ 0.34 $ 0.12 $ 0.19
======== ======== ======== ========
Weighted average number of common shares and common
share equivalents outstanding:
Basic............................................. 11,733 11,971 12,446 12,387 13,547
Diluted(5)........................................ 14,052 -- 14,620 14,744 15,557
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
ACTUAL AS ADJUSTED(6)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................... $ 675 $ 13,256
Working capital.............................................................. 26,588 39,169
Total assets................................................................. 92,064 104,645
Total debt................................................................... 21,728 11,728
Stockholders' equity......................................................... 47,846 70,427
</TABLE>
- ---------------
(1) Excludes 4.2 million shares of Common Stock reserved for issuance upon
exercise of outstanding stock options and warrants with a weighted average
exercise price of $5.03 per share.
(2) Includes $2.0 million ($0.14 per share diluted and $0.17 basic) of insurance
proceeds received on the death of the Company's former Chairman.
(3) Includes a $23.2 million charge ($1.94 per share) for the write-off of
in-process research and development acquired in connection with the purchase
of MIC Technology Corporation in March 1996.
(4) Includes a $1.7 million restructuring charge ($0.11 per share diluted and
$0.13 basic net of tax) for the consolidation of the Company's Puerto Rico
operations into its domestic facilities.
(5) As a result of the loss in fiscal 1996, all options, warrants and
convertible debentures are anti-dilutive.
(6) Reflects the sale of 2,250,000 shares of the Company's Common Stock by the
Company at an assumed offering price of $10.875 per share after deducting
the underwriting discount, estimated offering expenses and the application
of the net proceeds as described in "Use of Proceeds." Does not reflect the
repayment of $500,000 under the credit line portion of the Company's
revolving credit and term loan agreement subsequent to December 31, 1997 and
through February 18, 1998. See "Use of Proceeds."
4
<PAGE> 7
RISK FACTORS
The statements in this Prospectus that relate to future plans, events or
performance are forward-looking statements. The Company's future operations,
financial performance, business and share price may be affected by a number of
factors, including the factors listed below, any of which could cause actual
results to vary materially from anticipated results. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to publicly release the
result on any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Rapid Technological Change. The markets for most of the Company's products
are characterized by rapidly changing technology, evolving industry standards
and new product introductions and enhancements. Sales of the Company's products
depend in part on the continuing development and use of emerging microelectronic
modules, interconnect and testing products. There can be no assurance that new
developments in the satellite, wireless, CATV and defense communications markets
will not reduce the demand for the Company's products. The Company is dependent
to a significant extent upon its ability to enhance its existing products and to
develop and introduce innovative new products on a timely basis that gain market
acceptance. There can be no assurance that other companies' products
incorporating new technology, if and when available, will not be commercially
successful and materially adversely affect the Company's business, results of
operations and financial condition.
Risks Associated with Entering New Markets. A significant amount of the
Company's net sales historically has been related to the defense industry. In
addition to continuing to pursue this major market area, the Company is pursuing
a strategy that leverages the technical capabilities and expertise the Company
has derived from its defense business to expand further into related commercial
markets. The Company believes that, while the technologies used in the defense
and commercial industries are very similar, the two industries differ
significantly in terms of the customer base, manufacturing requirements and lead
times, support for research and development and credit risks with customers. As
a result, the Company is subject to risks inherent in the operation of a new
business enterprise. For example, the Company believes that RF (radio frequency)
and microwave engineers with the skills necessary to develop products for the
wireless telecommunications market currently are in high demand and that the
Company may not be able to attract and retain sufficient engineering expertise.
In addition, the Company's commercial customers are under continuous pressure to
reduce prices and, therefore, the Company expects to experience downward pricing
pressure on its commercial products. There can be no assurance that the Company
will be successful in addressing these risks or in further developing these
commercial business opportunities. See "Business -- Strategy."
Risks Associated with Defense Market. The Company's sales to the defense
market have declined from 74% in fiscal 1995 to 50% in fiscal 1997.
Nevertheless, the Company's sales could be materially adversely impacted by a
decrease in defense spending by the United States government because of defense
budget cuts, general budgetary constraints or otherwise. The United States
defense budget has recently been reduced and may be further reduced. Fewer
available defense industry production programs, coupled with continued pricing
pressure on follow-on orders for programs on which the Company participates, may
cause sales of the Company's defense products to decline from current levels.
The Company expects to continue to derive a substantial portion of its revenues
from this business area and to develop new products for defense applications.
Failure of the Company to replace sales attributable to a significant defense
program or contract at the end of that program or contract, whether due to
completion, cancellation, spending cuts, budgetary constraints or otherwise,
could have a material adverse effect upon the Company's business, results of
operations and financial condition in subsequent periods. In addition, a large
portion of the Company's expenses are fixed and difficult to reduce, thus
magnifying the material adverse effect of any revenue shortfall. Also, defense
contracts frequently contain provisions that are not standard in commercial
transactions, such as provisions permitting the cancellation of a contract if
funding for a program is reduced or canceled. See "Business -- Backlog" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
5
<PAGE> 8
Risks of Fixed-Price Contracts; Loss of Investment in Design and
Engineering. The Company's customers establish demanding specifications for
product performance, reliability and cost. Substantially all of the Company's
contracts are firm fixed-price ("FFP") contracts that provide for a
predetermined fixed price for stipulated performance or products, regardless of
the costs incurred. The Company faces the risk of experiencing cost overruns or
order cancellation if it fails to achieve forecasted product design and
manufacturing efficiencies or if products cost more to produce because of the
increased cost of materials, components, labor or otherwise. The Company has in
the past experienced cost overruns on some of its FFP contracts. There can be no
assurance that cost overruns will not occur in the future. Any such cost
overruns may have a material adverse effect on the Company's business, results
of operations and financial condition. In addition, the Company makes
significant investments in design and engineering of new products for customers
without any commitment by the customer for the future purchase of such products.
Failure to receive initial or follow-on orders may have a material adverse
effect on the Company's business, results of operations and financial condition.
Product Liability; Risk of Product Defects. The sale of products and
systems by the Company may entail the risk of product liability and related
claims. A product liability claim brought against the Company could have a
material adverse effect upon the Company's business, results of operations and
financial condition. Complex products, such as those offered by the Company, may
contain defects or failures. There can be no assurance that, despite testing by
the Company, errors will not be found in products after shipment, resulting in
loss of market share, failure to achieve market acceptance or product liability
claims. The Company maintains product liability insurance, although there can be
no assurance that such coverage will be applicable to a particular claim or that
the amount of such insurance will be adequate if the Company experiences a
significant claim. See "Business -- Legal Proceedings."
Fluctuations in Quarterly Results. The Company's quarterly results have in
the past been, and will continue to be, subject to significant variations due to
a number of factors, any one of which could substantially affect the Company's
results of operations for any particular fiscal quarter. In particular,
quarterly results of operations can vary due to the timing, cancellation or
rescheduling of customer orders and shipments, the pricing and mix of products
sold, new product introductions by the Company, the Company's ability to obtain
components and subassemblies from contract manufacturers and suppliers, and
variations in manufacturing efficiencies. Historically, the fourth quarter of
the Company's fiscal year has been its strongest. The Company's performance in
any one fiscal quarter is not necessarily indicative of financial trends or
future performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quarterly Results of Operations."
Backlog. The Company's order backlog as of December 31, 1997 was
approximately $66.1 million. The Company's order backlog is subject to
fluctuations and is not necessarily indicative of future sales. Cancellations of
purchase orders or reductions of purchase orders in progress from customers of
the Company could have a material adverse effect on the Company's business,
results of operations and financial condition. At June 30, 1997, the Company's
order backlog was approximately $53.3 million, approximately 90% of which was
scheduled to be delivered on or before June 30, 1998. Approximately 65% and 35%
of this backlog represents government and commercial contracts, respectively.
Generally, government contracts are cancellable with payment to the Company of
amounts expended under the contract together with a reasonable profit, while
commercial contracts are not cancellable. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- Backlog."
Management of Growth. The Company develops, manufactures and markets
diverse products. The growth in size and complexity of the Company's business
and expansion of its product lines and customer base have placed, and are
expected to continue to place, significant demands on the Company's management
and operations. The Company's ability to compete effectively and to manage
future growth will depend on its ability to continue to implement and improve
operational and financial systems on a timely basis. There can be no assurance
that the Company will be able to manage its future growth, and the failure to do
so could have a material adverse effect on the Company's business, results of
operations and financial condition.
6
<PAGE> 9
Competition. In all phases of its operations, the Company competes in both
performance and price with companies, some of which are considerably larger,
more diversified and have greater financial resources and sales than the
Company. In the manufacture of microelectronics, the Company believes its
primary competitors are NTK, Texas Instruments and ILC/Data Devices Corp. In the
manufacture of instrument products, the Company believes its primary competitors
are Hewlett Packard and Scientific Atlanta. In the manufacture of motion control
products, the Company believes its primary competitors are MPC Products Corp.
and Schaeffer Magnetics Inc. In the manufacture of isolators, the Company
believes its primary competitors are Barry Controls, Inc., Lord Kinematics and
Mason Industries. The Company also experiences significant competition from the
in-house capabilities of its current and potential customers. The Company
believes that in all of its operations it competes favorably in the principal
competitive areas of technology, performance, reliability, quality, customer
service and price. The Company believes that to remain competitive in the future
it will need to invest significant financial resources in research and
development. See "Business -- Competition."
Limitation on Protection of Proprietary Technology; Risk of Third Party
Claims. The Company owns several patents, patent licenses and trademarks. In
order to protect its intellectual property rights, the Company relies on a
combination of trade secret, patent, copyright and trademark laws and employee
and third-party nondisclosure agreements, as well as limiting access to and
distribution of proprietary information. There can be no assurance that the
steps taken by the Company to protect its intellectual property rights will be
adequate to prevent misappropriation of the Company's technology or to preclude
competitors from independently developing such technology. Furthermore, there
can be no assurance that in the future, third parties will not assert
infringement claims against the Company with respect to its products. Asserting
the Company's rights or defending against third party claims could involve
substantial costs and diversion of resources, thus materially and adversely
affecting the Company's business, results of operations and financial condition.
In the event a third party was successful in a claim that one of the Company's
products infringed such party's proprietary rights, the Company may have to pay
substantial royalties or damages, remove that product from the marketplace or
expend substantial amounts in order to modify the product so that it no longer
infringes such proprietary rights. See "Business -- Patents and Trademarks."
Customer Concentration. In fiscal 1997, two customers, Hughes and Lockheed
Martin, each accounted for in excess of 10% of the Company's net sales. In
addition to Hughes and Lockheed Martin, the Company derives significant sales
from a limited group of customers, including contractors of the United States
Department of Defense, Motorola, Lucent, Raytheon and Northrop Grumman. The
Company anticipates that it will continue to sell products to a relatively small
group of customers. As a result, any cancellation, reduction or delay in orders
by or shipments to Hughes, Lockheed Martin or any other significant customer, as
a result of manufacturing or supply difficulties or otherwise, or the inability
of any customer to finance its purchases of the Company's products would
materially adversely affect the Company's business, results of operations and
financial condition. See "Business -- Customers."
Dependence on Key Personnel. The Company is highly dependent on the
continued service of, and on its ability to attract and retain, qualified
engineering, management, manufacturing, quality assurance, marketing and support
personnel. Although the Company has employment agreements with its most senior
executive officers, the loss of the services of any of such officers could have
an adverse effect on the Company's business and prospects. The Company does not
maintain key man life insurance on any of its executive officers. See
"Management."
Risks Associated with Acquisitions. The Company often evaluates potential
acquisitions that would complement or expand its business. In attempting to make
acquisitions, the Company often competes with other potential acquirors, many of
which have greater financial and operational resources. Furthermore, the process
of evaluating, negotiating, financing and integrating acquisitions may divert
management time and resources. There can be no assurance that the Company will
be able to successfully integrate the business and operations of any business
acquired in the future. There can be no assurance that the Company will not
incur disruptions and unexpected expenses in integrating such acquisitions.
There can be no assurance that any acquisition, when consummated, will not
materially adversely affect the Company's business, results of
7
<PAGE> 10
operations or financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview" and
"Business -- Strategy."
Regulation. The Company's activities are subject to various environmental,
health and employee safety laws. The Company has expended resources, both
financial and managerial, to comply with applicable environmental, health and
worker safety laws in its operations and at its facilities and anticipates that
it will continue to do so in the future. The Company does not require any
governmental approval of its principal products or services. Compliance with
environmental laws has not historically had a material effect on the Company's
capital expenditures, earnings or competitive position, and the Company does not
anticipate that such compliance will have a material effect on the Company in
the future. Although the Company believes that it is generally in compliance
with all applicable environmental, health and worker safety laws, there can be
no assurance that additional costs for compliance will not be incurred in the
future or that such costs will not be material. See "Business -- Regulation."
Dependence on Suppliers and Contract Manufacturers. The Company relies on
contract manufacturers and suppliers (in some cases sole suppliers or limited
groups of suppliers) to provide it with services and materials necessary for the
manufacture of products. Certain ceramic substrates (supplied by Coors Ceramics
Co.) used by the Company are sole source items. The Company's reliance on
contract manufacturers and on sole suppliers involves several risks, including a
potential inability to obtain critical materials or services and reduced control
over production costs, delivery schedules, reliability and quality of components
or assemblies. Any inability to obtain timely deliveries of acceptable quality,
or any other circumstance that would require the Company to seek alternative
contract manufacturers or suppliers, could affect the Company's ability to
timely deliver products to customers, which in turn would have a material
adverse affect on the Company's business, results of operations and financial
condition. In addition, in the event that costs for the Company's contract
manufacturers or suppliers increase, the Company may suffer losses due to an
inability to recover such cost increases under fixed price production
commitments to its customers. See "Business -- Manufacturing."
Volatility of Stock Price. The market price of the shares of Common Stock,
like the stock prices of many technology companies, is subject to wide
fluctuations in response to such factors as actual or anticipated operating
results, announcements of technological innovations, new products or new
contracts by the Company, its competitors or their customers, government
regulatory action, developments with respect to wireless telecommunications,
changes in analysts' assessments, general market conditions and other factors.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market prices
for the stocks of technology companies and that have often been unrelated to the
operating performance of particular companies. See "Price Range of Common
Stock."
Broad Discretion Over Use of Proceeds. The Company expects to use
approximately $10.0 million of the net proceeds from this offering to repay the
outstanding principal and interest on its outstanding credit facility. The
Company's management will have broad discretion to allocate the remaining
proceeds of the offering, and the amounts actually expended for working capital
or capital expenditures may vary significantly depending on a number of factors,
including the amount of future sales, the amount of cash generated or used by
the Company's operations and the availability of suitable acquisitions. See "Use
of Proceeds."
Possible Dilutive Effect of the Issuance of Substantial Additional
Shares. After this offering, the Company will have an aggregate of
approximately 3.9 million shares of Common Stock authorized but unissued and not
reserved for specific purposes and 4.2 million shares of Common Stock unissued
but reserved for issuance pursuant to the Company's stock option plans and
certain warrants and options otherwise outstanding. Any shares issued would
further dilute the percentage ownership of the Company held by the investors in
this offering. See "Shares Eligible for Future Sale."
Anti-Takeover Provisions. Pursuant to its Certificate of Incorporation, as
amended, the Company has an authorized class of 1,000,000 shares of Preferred
Stock, 150,000 of which have been reserved for issuance pursuant to the
Company's Shareholders' Rights Plan and the remaining 850,000 of which may be
issued by the Board of Directors with such terms and such rights, preferences
and designations as the Board may determine and without any vote of the
stockholders, unless otherwise required by law. In August 1988, the
8
<PAGE> 11
Board of Directors approved the Shareholders' Rights Plan which provided for a
dividend distribution of one right for each share to holders of record of Common
Stock on August 31, 1988. The rights become exercisable in the event any person
or group accumulates 20% or more of the Common Stock, or if any person or group
announces an offer which would result in it owning 20% or more of the Common
Stock and management does not approve of such proposed ownership. The rights
will expire on August 30, 1998. Further, certain "anti-takeover" provisions of
the Delaware General Corporation Law (the "DGCL") among other things, may
restrict the ability of the stockholders to approve a merger or business
combination or obtain control of the Company.
The Company's Certificate of Incorporation, as amended, also provides for a
Board of Directors with staggered terms which may discourage or prevent certain
types of transactions involving an actual or potential change in control of the
Company, including transactions in which the stockholders might otherwise
receive a premium for their shares over then current market prices. Further, the
employment agreements of each of Messrs. Harvey R. Blau, Michael Gorin, Leonard
Borow and Carl Caruso provide that in the event there is a change in control of
the Company, as defined therein, the employee has the option, exercisable within
six months of becoming aware of such event, to terminate his employment
agreement and upon such termination, each of Messrs. Blau, Gorin and Borow has
the right to receive a lump sum payment equal to three times his salary and
incentive payment last previously awarded and Mr. Caruso has the right to
receive a lump sum payment equal to his base salary for the remainder of the
term of the contract. It is possible that the undesignated Preferred Stock, the
Shareholders' Rights Plan, the Company's staggered Board of Directors and the
DGCL may have the effect of delaying or preventing a change in control of the
Company, may discourage bids for the Company's Common Stock at a premium over
the market price of the Common Stock and may adversely affect the market price
of the Common Stock.
9
<PAGE> 12
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,250,000 shares of
Common Stock offered by the Company hereby at the assumed offering price of
$10.875 per share are estimated to be approximately $22.6 million ($26.1 million
if the Underwriters' over-allotment options are exercised in full), after
deducting the underwriting discount and estimated offering expenses. The Company
will not receive any of the proceeds from the sale of Common Stock by the
Selling Stockholders.
The Company intends to use approximately $8.6 million of the net proceeds
to repay the outstanding principal and accrued interest on the credit line
portion of the Revolving Credit and Term Loan Agreement (the "Bank Agreement")
which currently accrues interest at the rate of 8.75% per annum and matures in
March 1999 and $1.4 million to repay a portion of the outstanding principal and
accrued interest on the term loan portion of the Bank Agreement which bears
interest at the rate of 9.0% per annum and matures in September 2000. The
Company expects to use the remaining net proceeds of this offering for general
corporate purposes, including working capital, capital expenditures and
facilities expansion. From time to time, the Company may use a portion of the
net proceeds to acquire businesses, products or technologies complementary to
the Company's current businesses. The Company currently has no understanding,
commitment, agreement or specific intentions with respect to any acquisition.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Strategy."
Pending such uses, the Company intends to invest in the remaining net
proceeds of this offering in short-term, investment grade interest-bearing
securities.
10
<PAGE> 13
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. There have been no stock dividends declared or paid by the Company on its
Common Stock during the past three years. The Company currently intends to
retain any future earnings for use in the operation and development of its
business and for acquisitions and, therefore, does not intend to declare or pay
any cash dividends on its Common Stock in the foreseeable future. In addition,
the Company's Revolving Credit and Term Loan Agreement, as amended, prohibits it
from paying cash dividends.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "ARX." The following table sets forth the high and low closing sales
prices of the Company's Common Stock as reported by the New York Stock Exchange
for the calendar periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
1996
First Quarter........................................... $ 5.13 $3.50
Second Quarter.......................................... 6.63 4.38
Third Quarter........................................... 6.13 4.63
Fourth Quarter.......................................... 4.75 4.13
1997
First Quarter........................................... $ 4.88 $3.50
Second Quarter.......................................... 5.13 3.25
Third Quarter........................................... 11.25 4.44
Fourth Quarter.......................................... 12.06 7.13
1998
First Quarter (through February 17)..................... $11.81 $7.88
</TABLE>
The last reported sales price of the Company's Common Stock, as reported by
the New York Stock Exchange on February 17, 1998, was $10.875 per share. As of
February 17, 1998, there were approximately 1,210 holders of record of the
Company's Common Stock.
11
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 and as adjusted to reflect the sale of 2,250,000 shares of
Common Stock offered by the Company hereby, at an assumed public offering price
of $10.875 per share, after deducting the estimated underwriting discount and
the estimated offering expenses payable by the Company and the application of
the net proceeds. See "Use of Proceeds."
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt.................................. $ 4,928 $ 4,928
======== ========
Long-term debt, net of current portion:
Revolving credit and term loan agreement......................... $ 10,759 $ 759
Capitalized lease obligations.................................... 707 707
Bank loans....................................................... 5,334 5,334
-------- --------
Total long-term debt..................................... 16,800 6,800
-------- --------
Stockholders' equity:
Preferred Stock, par value $.10 per share, authorized 1,000,000
shares -- Series A Junior Participating Preferred Stock, par
value $.10 per share, authorized 150,000 shares, none
issued........................................................ -- --
Common Stock, par value $.10 per share, authorized 25,000,000
shares, issued actual 14,481,000 shares; and as adjusted,
16,731,000 shares............................................. 1,448 1,673
Additional paid-in capital....................................... 67,639 89,995
Accumulated deficit.............................................. (20,746) (20,746)
-------- --------
48,341 70,922
Less:
Treasury stock, 111,000 shares, at cost.......................... 495 495
-------- --------
Total stockholders' equity....................................... 47,846 70,427
-------- --------
Total capitalization............................................. $ 64,646 $ 77,227
======== ========
</TABLE>
- ---------------
(1) Excludes: (i) 230,047 shares of Common Stock issued pursuant to the exercise
of stock options subsequent to December 31, 1997 and through February 18,
1998; (ii) 35,000 shares of Common Stock to be issued to certain Selling
Stockholders upon their exercise of stock options; and (iii) the related tax
benefit to the Company. Such 35,000 shares of Common Stock will be sold by
certain Selling Stockholders in this offering. Does not reflect the
repayment of $500,000 under the credit line portion of the Bank Agreement
subsequent to December 31, 1997 and through February 18, 1998. See "Use of
Proceeds" and "Principal and Selling Stockholders."
12
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified by reference
to, and should be read in conjunction with, the consolidated financial
statements, related notes thereto and other financial information included
herein. The selected consolidated financial data for each of the five years
ended June 30, 1997 has been derived from the Company's audited consolidated
financial statements. The financial data as of December 31, 1997 and for the six
months ended December 31, 1996 and 1997 has been derived from the Company's
unaudited interim consolidated financial statements included elsewhere herein.
In the opinion of management, such unaudited consolidated financial statements
have been prepared on the same basis as the audited consolidated financial
statements and include all adjustments, consisting only of normal recurring
adjustments, which the Company considers necessary for a fair presentation of
the financial position and results of operations for each period. The operating
results for the six months ended December 31, 1997 are not necessarily
indicative of the results that may be expected for the year ending June 30, 1998
or for future periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
---------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................... $52,031 $65,602 $71,113 $ 74,367 $94,299 $41,975 $53,210
Cost of sales....................................... 36,320 45,168 47,542 51,070 63,109 28,440 35,079
------- ------- ------- -------- ------- ------- -------
Gross profit...................................... 15,711 20,434 23,571 23,297 31,190 13,535 18,131
------- ------- ------- -------- ------- ------- -------
Operating costs:
Selling, general and administrative costs......... 10,470 13,520 13,363 14,119 18,175 8,154 10,365
Research and development costs.................... 1,225 694 2,389 1,260 3,279 1,422 2,029
Special charge(1)................................. -- -- -- 23,200 -- -- --
Restructuring charge(2)........................... -- -- 1,669 -- -- -- --
------- ------- ------- -------- ------- ------- -------
Total operating costs...................... 11,695 14,214 17,421 38,579 21,454 9,576 12,394
------- ------- ------- -------- ------- ------- -------
Operating income (loss)............................. 4,016 6,220 6,150 (15,282) 9,736 3,959 5,737
------- ------- ------- -------- ------- ------- -------
Other expense (income):
Life insurance proceeds(3)........................ -- -- (2,000) -- -- -- --
Interest expense.................................. 1,828 1,440 1,464 1,939 2,974 1,551 1,250
Other expense (income)(4)......................... (359) (264) (751) (1,075) (93) (61) 74
------- ------- ------- -------- ------- ------- -------
Total other expense (income)............... 1,469 1,176 (1,287) 864 2,881 1,490 1,324
------- ------- ------- -------- ------- ------- -------
Income (loss) from continuing operations before
income taxes...................................... 2,547 5,044 7,437 (16,146) 6,855 2,469 4,413
Provision (benefit) for income taxes(5)............. 811 (806) 850 1,274 2,435 925 1,575
------- ------- ------- -------- ------- ------- -------
Income (loss) from continuing operations(6)......... 1,736 5,850 6,587 (17,420) 4,420 1,544 2,838
Income from discontinued operations................. 500 187 462 -- -- -- --
------- ------- ------- -------- ------- ------- -------
Net income (loss)................................... $ 2,236 $ 6,037 $ 7,049 $(17,420) $ 4,420 $ 1,544 $ 2,838
======= ======= ======= ======== ======= ======= =======
Net income (loss) per common share:
Basic:
Continuing operations........................... $ 0.20 $ 0.59 $ 0.56 $ (1.46) $ 0.36 $ 0.12 $ 0.21
Discontinued operations......................... 0.06 0.02 0.04 -- -- -- --
------- ------- ------- -------- ------- ------- -------
Net income (loss)............................. $ 0.26 $ 0.61 $ 0.60 $ (1.46) $ 0.36 $ 0.12 $ 0.21
======= ======= ======= ======== ======= ======= =======
Diluted:
Continuing operations(7)........................ $ 0.19 $ 0.50 $ 0.52 $ -- $ 0.34 $ 0.12 $ 0.19
Discontinued operations......................... 0.05 0.02 0.04 -- -- -- --
------- ------- ------- -------- ------- ------- -------
Net income (loss)(7).......................... $ 0.24 $ 0.52 $ 0.56 $ -- $ 0.34 $ 0.12 $ 0.19
======= ======= ======= ======== ======= ======= =======
Weighted average number of common shares and common
share equivalents outstanding:
Basic........................................... 8,719 9,962 11,733 11,971 12,446 12,387 13,547
Diluted(7)...................................... 10,879 12,235 14,052 -- 14,620 14,744 15,557
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997
------- ------- ------- -------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 360 $ 8,238 $11,330 $ 661 $ 600 $ 675
Working capital................................... 14,982 28,572 31,721 25,300 25,872 26,588
Total assets...................................... 60,185 71,016 71,936 81,169 81,047 92,064
Total debt........................................ 21,871 18,408 13,787 34,577 28,916 21,728
Stockholders' equity.............................. 27,208 39,571 46,344 30,472 35,040 47,846
</TABLE>
- ---------------
(1) Includes a $23.2 million charge ($1.94 per share) for the write-off of
in-process research and development acquired in connection with the purchase
of MIC Technology Corporation in March 1996.
(2) Includes a $1.7 million restructuring charge ($0.11 per share diluted and
$0.13 basic, net of tax) for the consolidation of the Company's Puerto Rico
operations into its domestic facilities.
(3) Includes $2.0 million ($0.14 per share diluted and $0.17 basic) of insurance
proceeds received on the death of the Company's former Chairman.
(4) Includes a $533,000 gain ($0.04 per share net of tax) on the sale of
securities for the year ended June 30, 1996.
(5) Includes income tax benefit of $1.7 million ($0.14 per share diluted and
$0.17 basic) relating to the recognition of a portion of the Company's
unrealized net operating loss carryforward in accordance with Statement of
Financial Accounting Standards No. 109 for the year ended June 30, 1994.
(6) See Note 4 of the Notes to the Consolidated Financial Statements for a
discussion of discontinued operations.
(7) As a result of the loss in fiscal 1996, all options, warrants and
convertible debentures are anti-dilutive.
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in such forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Consolidated Financial Statements
and notes thereto included elsewhere in this Prospectus.
OVERVIEW
Aeroflex, founded in 1937, utilizes its advanced design, engineering and
manufacturing capabilities to produce state-of-the-art microelectronic module,
interconnect and testing solutions used in communication applications for
commercial and defense markets. Its products are used in satellite, wireless and
wireline communications, cable television ("CATV") and defense communications
markets. The Company also designs and manufactures motion control systems and
shock and vibration isolation systems used for commercial, industrial and
defense applications. Historically, the Company has expanded through internal
growth and acquisitions of other businesses, the most recent of which were MIC
Technology Corporation ("MIC") in March 1996, Lintek Inc. (now Aeroflex Lintek
Corp.) in January 1995 and Marconi Circuit Technology Corporation (now Aeroflex
Circuit Technology) in January 1994. The Company's operations are grouped into
three segments: Microelectronics; Test, Measurement and Other Electronics; and
Isolator Products. The Company's consolidated financial statements include the
accounts of Aeroflex and its subsidiaries, all of which are wholly-owned.
The Microelectronics segment has been engaged in the design, manufacture
and sale of state-of-the-art microelectronic products for the electronics
industry since 1974. In January 1994, the Company acquired substantially all of
the net operating assets of the microelectronics division of Marconi Circuit
Technology Corporation, which manufactures a wide variety of microelectronic
modules. In March 1996, the Company acquired MIC, which designs, develops,
manufactures and markets passive thin film circuits and interconnects, for
approximately $36.0 million in cash, 300,000 shares of the Company's Common
Stock and warrants to purchase 400,000 shares of the Company's Common Stock (at
exercise prices ranging from $7.05 to $7.50 per share). Effective July 1, 1997,
MIC acquired certain equipment, inventory, licenses for technology and patents
of two of Lucent Technologies' microelectronics component units, multi-chip
modules and film integrated circuits. These units manufacture microelectronic
modules and interconnect products. The Company has also signed a multi-year
supply agreement to provide Lucent with film integrated circuits for use in the
telecommunications industry.
The Test, Measurement and Other Electronics segment consists of two
divisions: Instruments and Motion Control Products. The Instruments division
consists of: (i) Comstron, a leader in radio frequency and microwave technology
used in the manufacture of fast switching frequency synthesizers, signal
generators and components, which was acquired in November 1989 and is now an
operating division of Aeroflex Laboratories Incorporated; and (ii) Lintek, a
leader in high speed instrumentation antenna measurement systems and radar
systems. The Motion Control Products division has been engaged in the
development and manufacture of electro-optical scanning devices used in
infra-red night vision systems since 1975. Additionally, it has been engaged in
the design, development and production of stabilization tracking devices and
systems and magnetic motors since 1961.
The Isolator Products segment has been engaged in the design, development,
manufacture and sale of severe service shock and vibration isolation systems
since 1961. These devices include a product line of helically wound steel wire
rope contained between rugged metal retainer bars, which are used to store and
dissipate potentially destructive vibration and shock and are primarily used in
defense applications. In October 1983, the Company acquired Vibration Mountings
& Controls, Inc., which manufactures a line of off-the-shelf rubber and spring
shock, vibration and structure borne noise control devices used in commercial
applications. In December 1986, the Company acquired the operating assets of
Korfund Dynamics Corporation, a manufacturer of an industrial line of heavy duty
spring and rubber shock mounts.
14
<PAGE> 17
Revenue is recognized based upon shipments or billings. The Company records
gross profit on its long-term contracts using percentage-of-completion
accounting under which costs are recognized on revenues in the same relation
that total estimated manufacturing costs bear to total contract value. Estimated
costs at completion are based upon engineering and production estimates.
Provisions for estimated losses or revisions in estimated profits on
contracts-in-process are recorded in the period in which such losses or
revisions are first determined.
Approximately 50% and 65% of the Company's sales for fiscal 1997 and 1996,
respectively, were to agencies of the United States Government or to prime
defense contractors or subcontractors of the United States Government. The
Company's overall dependence on the defense market has been declining as a
result of the acquisition of MIC, which is more commercially oriented, and a
focusing of resources towards developing standard products for the commercial
market. The Company's defense contracts have been awarded either on a bid basis
or after negotiation. The contracts are primarily FFP contracts, though the
Company also has defense contracts providing for cost plus fixed fee. The
Company's defense contracts contain customary provisions for termination at the
convenience of the government without cause. In the event of such termination,
the Company is entitled to reimbursement for its costs and to receive a
reasonable profit, if any, on the work done prior to termination.
Management believes that potential reductions in defense spending will not
materially affect its operations. In certain product areas, the Company has
suffered reductions in sales volume due to cutbacks in the military budget. In
other product areas, the Company has experienced increased sales volume due to a
realignment of government spending towards upgrading existing systems instead of
purchasing completely new systems. The overall effect of the cutbacks and
realignment has not been material to the Company.
The Company's product development efforts primarily involve engineering and
design relating to the development of new products, the improvement of existing
products or the adaptation of such products to new applications. The Company's
efforts also include developing prototype components to bid on specific
programs. Some of the Company's development efforts are reimbursed under
contractual arrangements. Product development and similar costs not recoverable
under contractual arrangements are expensed in the period incurred.
In March 1995, the Company adopted a plan to consolidate its Puerto Rico
manufacturing operations into its existing facilities in New York and New
Jersey. The Company has ceased manufacturing operations in Puerto Rico.
The Company has accounted for certain segments, namely commercial and
custom envelopes (Huxley Envelope Corp.) and telecommunication systems services
(T-CAS Corp.) as discontinued operations as of fiscal 1994 and 1991,
respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information", which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for
reporting information about operating segments and related disclosures about
products and services, geographic areas and major customers. The Company has not
determined the impact that the adoption of this new accounting standard will
have on its consolidated financial statement disclosures. The Company will adopt
this standard effective July 1, 1998, as required.
15
<PAGE> 18
STATEMENT OF OPERATIONS
The following table sets forth the Company's net sales and operating income
(loss) by business segment for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED JUNE 30, ENDED DECEMBER 31,
-------------------------------- -------------------
1995 1996 1997 1996 1997
------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales:
Microelectronics........................ $24,250 $ 28,414 $48,462 $20,147 $33,046
Test, Measurement and Other
Electronics.......................... 31,357 30,109 28,144 13,895 11,317
Isolator Products....................... 15,506 15,844 17,693 7,933 8,847
------- -------- ------- ------- -------
$71,113 $ 74,367 $94,299 $41,975 $53,210
======= ======== ======= ======= =======
Operating income (loss):
Microelectronics........................ $ 2,075 $ 3,282 $ 6,644 $ 2,301 $ 5,602
Test, Measurement and Other
Electronics.......................... 6,028 4,830 2,762 1,420 491
Isolator Products....................... 2,377 2,150 2,844 1,308 1,275
General corporate expenses.............. (2,661) (2,344) (2,514) (1,070) (1,631)
------- -------- ------- ------- -------
7,819 7,918 9,736 3,959 5,737
Special charge(1)....................... -- (23,200) -- -- --
Restructuring charge(2)................. (1,669) -- -- -- --
------- -------- ------- ------- -------
Operating income (loss)............ $ 6,150 $(15,282) $ 9,736 $ 3,959 $ 5,737
======= ======== ======= ======= =======
</TABLE>
The following table sets forth certain statement of operations data as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
------------------------- ---------------
1995 1996 1997 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales......................................... 66.8 68.7 66.9 67.8 65.9
----- ----- ----- ----- -----
Gross profit.......................................... 33.2 31.3 33.1 32.2 34.1
----- ----- ----- ----- -----
Operating costs:
Selling, general and administrative costs........... 18.8 19.0 19.3 19.4 19.5
Research and development costs...................... 3.4 1.6 3.5 3.4 3.8
Special charge(1)................................... -- 31.2 -- -- --
Restructuring charge(2)............................. 2.3 -- -- -- --
----- ----- ----- ----- -----
Total operating costs............................. 24.5 51.8 22.8 22.8 23.3
----- ----- ----- ----- -----
Operating income (loss)............................... 8.7 (20.5) 10.3 9.4 10.8
----- ----- ----- ----- -----
Other expense (income):
Life insurance proceeds(3).......................... (2.8) -- -- -- --
Interest expense.................................... 2.1 2.6 3.1 3.7 2.4
Other expense (income).............................. (1.1) (1.4) (0.1) (0.2) 0.1
----- ----- ----- ----- -----
Total other expense (income)...................... (1.8) 1.2 3.0 3.5 2.5
----- ----- ----- ----- -----
Income (loss) from continuing operations before income
taxes............................................... 10.5 (21.7) 7.3 5.9 8.3
Provision for income taxes............................ 1.2 1.7 2.6 2.2 3.0
----- ----- ----- ----- -----
Income (loss) from continuing operations.............. 9.3 (23.4) 4.7 3.7 5.3
Income from discontinued operations................... 0.6 -- -- -- --
----- ----- ----- ----- -----
Net income (loss)..................................... 9.9% (23.4)% 4.7% 3.7% 5.3%
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Includes a $23.2 million charge for the write-off of in-process research and
development acquired in connection with the purchase of MIC in March 1996.
(2) Includes a $1.7 million restructuring charge ($1.5 million, net of tax) for
the consolidation of the Company's Puerto Rico operations into its domestic
facilities.
(3) Includes $2.0 million of insurance proceeds received on the death of the
Company's former Chairman.
16
<PAGE> 19
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1996
Net Sales. Net sales increased 26.8% to $53.2 million for the six months
ended December 31, 1997 from $42.0 million for the six months ended December 31,
1996. Net sales in the Microelectronics segment increased 64.0% to $33.1 million
for the six months ended December 31, 1997 from $20.2 million for the six months
ended December 31, 1996 due to increased sales volume in both thin film
interconnects and microelectronic modules. Sales of thin film interconnects
increased primarily due to the commencement of a strategic supply contract with
Lucent Technologies effective July 1, 1997. Net sales in the Test, Measurement
and Other Electronics segment decreased 18.6% to $11.3 million for the six
months ended December 31, 1997 from $13.9 million for the six months ended
December 31, 1996 primarily as a result of reduced sales volume of frequency
synthesizers which was partially offset by increased sales of stabilization and
tracking devices and of high speed instrumentation test systems. The decrease in
frequency synthesizer sales was due to the early completion of the current
Consolidated Automated Support System ("CASS") contract. Net sales in the
Isolator Products segment increased 11.5% to $8.8 million for the six months
ended December 31, 1997 from $7.9 million for the six months ended December 31,
1996 due to increased sales volume in each of the commercial, industrial and
military isolator product lines.
Gross Profit. Cost of sales includes materials, direct labor and overhead
expenses such as engineering labor, fringe benefits, allocable occupancy costs,
depreciation and manufacturing supplies. Gross profit increased 34.0% to $18.1
million for the six months ended December 31, 1997 from $13.5 million for the
six months ended December 31, 1996. Gross margin increased to 34.1% for the six
months ended December 31, 1997 from 32.2% for the six months ended December 31,
1996. The increase was primarily a result of increased margins in the
Microelectronics segment reflecting the greater efficiencies of higher volume.
Selling, General and Administrative Costs. Selling, general and
administrative costs include office and management salaries, fringe benefits,
commissions and advertising costs. Selling, general and administrative costs
increased 27.1% to $10.4 million (19.5% of net sales) for the six months ended
December 31, 1997 from $8.2 million (19.4% of net sales) for the six months
ended December 31, 1996. The increase was primarily due to labor related
expenses including additional hires, recruitment and relocation costs in
connection with the Company's growth.
Research and Development Costs. Research and development costs consist of
material, engineering labor and allocated overhead. Company sponsored research
and development costs increased 42.7% to $2.0 million (3.8% of net sales) for
the six months ended December 31, 1997 from $1.4 million (3.4% of net sales) for
the six months ended December 31, 1996. The increase was primarily attributable
to the development of a new low-cost, high speed, high performance frequency
synthesizer intended for commercial communication test systems.
Other Expense (Income). Other expense decreased by 11.1% to $1.3 million
for the six months ended December 31, 1997 from $1.5 million for the six months
ended December 31, 1996. Interest expense decreased 19.4% to $1.3 million for
the six months ended December 31, 1997 from $1.6 million for the six months
ended December 31, 1996. The decrease was primarily due to a reduction of
outstanding debt paid from operating cash flow and the conversion of $10.0
million of debentures. Other expense included $102,000 of debenture redemption
costs for the six months ended December 31, 1997.
Provision for Income Taxes. Income taxes recorded by the Company increased
70.3% to $1.6 million (an effective income tax rate of 35.7%) for the six months
ended December 31, 1997 from $925,000 (an effective income tax rate of 37.5%)
for the six months ended December 31, 1996. The income tax provisions for the
two periods differed from the amount computed by applying the U.S. Federal
income tax rate to income before income taxes primarily due to state and local
income taxes.
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996
Net Sales. Net sales increased 26.8% to $94.3 million for fiscal 1997 from
$74.4 million in fiscal 1996. Net sales in the Microelectronics segment
increased 70.6% to $48.5 million for fiscal 1997 from $28.4 million for fiscal
1996 due to the acquisition of MIC in March 1996 and increased sales in the
existing product lines. MIC sales for fiscal 1997 and from acquisition until
June 30, 1996 were approximately $21.9 million and $6.2 million, respectively.
Net sales in the Test, Measurement and Other Electronics segment decreased 6.5%
17
<PAGE> 20
to $28.1 million for fiscal 1997 from $30.1 million for fiscal 1996 primarily as
a result of reduced frequency synthesizer sales which were partially offset by
increased sales of stabilization and tracking devices. The reduction in
frequency synthesizer sales was due to the early completion of the current CASS
contract and the transition from custom to commercial markets. Net sales in the
Isolator Products segment increased 11.7% to $17.7 million for fiscal 1997 from
$15.8 million for fiscal 1996. The increase reflects higher sales volume of
industrial and commercial isolators partially offset by decreased sales volume
of military isolators.
Gross Profit. Gross profit increased 33.9% to $31.2 million in fiscal 1997
from $23.3 million in fiscal 1996. Gross margin increased to 33.1% in fiscal
1997 from 31.3% in fiscal 1996. The increase was primarily as a result of
increased margins in the Microelectronics and Isolator Products segments
reflecting the greater efficiencies of higher volumes and the incorporation of
the results of operations of MIC for a full fiscal year.
Selling, General and Administrative Costs. Selling, general and
administrative costs increased 28.7% to $18.2 million (19.3% of net sales) in
fiscal 1997 from $14.1 million (19.0% of net sales) in fiscal 1996. The increase
was primarily as a result of the incorporation of the results of operations of
MIC for a full fiscal year.
Research and Development Costs. Company sponsored research and development
costs increased 160.2% to $3.3 million (3.5% of net sales) in fiscal 1997 from
$1.3 million (1.6% of net sales) in fiscal 1996. The increase was primarily
attributable to the incorporation of the results of operations of MIC for a full
fiscal year.
Special Charge. In connection with the Company's purchase of MIC, the
Company allocated $23.2 million of the purchase price to in-process research and
development. Since the research and development projects had not reached
technological feasibility, the $23.2 million was charged to expense in fiscal
1996 in accordance with generally accepted accounting principles.
Other Expense (Income). Other expense increased 233.4% to $2.9 million in
fiscal 1997 from $864,000 in fiscal 1996. Net interest expense increased 100.3%
to $2.9 million in fiscal 1997 from $1.4 million in fiscal 1996. The increase in
net interest expense was primarily due to the increased level of borrowings and
lower interest income on reduced cash amounts due to the purchase of MIC. Other
income decreased in fiscal 1997 due to a securities related gain in fiscal 1996.
Provision for Income Taxes. Income taxes recorded by the Company increased
91.1% to $2.4 million (an effective income tax rate of 35.5%) in fiscal 1997
from $1.3 million on a loss from continuing operations of $16.1 million in
fiscal 1996. The income tax provisions for the fiscal years 1997 and 1996 were
different from amounts computed by applying the U.S. Federal income tax rate to
income from continuing operations before income taxes primarily as a result of
the tax benefits of loss carryforwards (both unrealized and realized), state and
local income taxes, and in fiscal 1996, because of the non-deductibility of the
$23.2 million special charge.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
Net Sales. Net sales increased 4.6% to $74.4 million in fiscal 1996 from
$71.1 million in fiscal 1995. Net sales in the Microelectronics segment
increased 17.2% to $28.4 million for fiscal 1996 from $24.2 million for fiscal
1995 primarily as a result of the acquisition of MIC in March 1996. MIC sales,
from its acquisition until June 30, 1996, were approximately $6.2 million. Net
sales in the Test, Measurement and Other Electronics segment decreased 4.0% to
$30.1 million in fiscal 1996 from $31.4 million for fiscal 1995 primarily as a
result of reduced sales volume of scanning devices which were partially offset
by additional sales resulting from the acquisition of Lintek, Inc. in January
1995. Net sales in the Isolator Products segment increased 2.2% to $15.8 million
for fiscal 1996 from $15.5 million for fiscal 1995. The increase reflects higher
sales volume of industrial and commercial isolators partially offset by
decreased sales volume of military isolators.
Gross Profit. Gross profit decreased 1.2% to $23.3 million in fiscal 1996
from $23.6 million in fiscal 1995. Gross margin decreased to 31.3% in fiscal
1996 from 33.2% in fiscal 1995. The decrease was primarily as a result of
inefficiencies in the final production runs of military isolators in the
Company's Puerto Rico facility and the start-up costs of the transition to the
Bloomingdale, New Jersey facility.
18
<PAGE> 21
Selling, General and Administrative Costs. Selling, general and
administrative costs increased 5.7% to $14.1 million (19.0% of net sales) in
fiscal 1996 from $13.4 million (18.8% of net sales) in fiscal 1995. The increase
was primarily as a result of the acquisition of MIC in March 1996, partially
offset by cost savings from the consolidation of the Company's Puerto Rico
facility into the Company's other facilities.
Research and Development Costs. Company sponsored research and development
costs decreased 47.3% to $1.3 million (1.6% of net sales) in fiscal 1996 from
$2.4 million (3.4% of net sales) in fiscal 1995. The decrease was primarily
attributable to the completion of the development of the FS-5000 frequency
synthesizer in the first quarter of fiscal 1996 and of certain multi-chip
modules in fiscal 1995.
Special Charges. Fiscal 1996 results included a one-time write-off of
$23.2 million for in-process research and development related to the purchase of
MIC. Fiscal 1995 results included a $1.7 million restructuring charge for the
consolidation of the Company's Puerto Rico operations.
Other Expense (Income). Other expense was $864,000 in fiscal 1996 compared
to other income of $1.3 million in fiscal 1995. Net interest expense increased
81.5% to $1.4 million in fiscal 1996 from $795,000 in fiscal 1995. The increase
in net interest expense was primarily due to the increased level of borrowings
and lower interest income on reduced cash amounts due to the purchase of MIC.
Other income included a securities related gain in fiscal 1996 and $2.0 million
of life insurance proceeds received on the death of the former Chairman in
fiscal 1995.
Provision for Income Taxes. Income taxes recorded by the Company increased
49.9% to $1.3 million on a pretax loss of $16.1 million in fiscal 1996 from
$850,000 (an effective income tax rate of 11.4%) in fiscal 1995. The income tax
provisions for the fiscal years 1996 and 1995 were different from the amounts
computed by applying the U.S. Federal income tax rate to income from continuing
operations before income taxes primarily as a result of the tax benefits of loss
carryforwards (both unrealized and realized) and, in fiscal 1996, because of the
non-deductibility of the $23.2 million special charge, and in fiscal 1995,
because of the non-taxable life insurance proceeds of $2.0 million.
Income from Discontinued Operations. Income from discontinued operations
in fiscal 1995 included a gain related to the sale of the former Huxley Envelope
Corp. building of $240,000 and a gain related to T-CAS Corp. of $222,000. The
gain of $222,000 is due primarily to a settlement of a claim against a former
customer.
19
<PAGE> 22
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly financial data
for each of the Company's last ten quarters in the period ended December 31,
1997 and such data expressed as a percentage of net sales for each quarter. In
the opinion of management, such unaudited consolidated financial statements have
been prepared on the same basis as the audited consolidated financial statements
included elsewhere in this Prospectus and include all necessary adjustments,
consisting only of normal recurring adjustments, which the Company considers
necessary for a fair presentation of the financial position and results of
operations for each period. This information should be read in conjunction with
the consolidated financial statements and the notes thereto included elsewhere
in this Prospectus. The operating results for any quarter are not necessarily
indicative of results for any future period. See "Risk Factors -- Fluctuations
in Quarterly Results."
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....... $13,149 $15,195 $ 15,956 $30,067 $19,061 $22,914 $22,937 $29,387 $23,885 $29,325
Cost of sales... 9,080 10,635 10,940 20,415 12,783 15,657 15,178 19,491 15,673 19,406
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit.... 4,069 4,560 5,016 9,652 6,278 7,257 7,759 9,896 8,212 9,919
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Operating costs:
Selling,
general and
administrative
costs........ 2,976 2,936 3,313 4,894 3,797 4,357 4,744 5,277 4,606 5,759
Research and
development
costs........ 202 227 249 582 683 739 871 986 998 1,031
Special
charge(1).... -- -- 23,200 -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
operating
costs...... 3,178 3,163 26,762 5,476 4,480 5,096 5,615 6,263 5,604 6,790
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Operating income
(loss)......... 891 1,397 (21,746) 4,176 1,798 2,161 2,144 3,633 2,608 3,129
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Other expense
(income):
Interest
expense...... 303 313 320 1,003 810 741 712 711 723 527
Other expense
(income)..... (170) (163) (262) (480) (46) (15) (10) (22) 83 (9)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total other
expense
(income)... 133 150 58 523 764 726 702 689 806 518
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss)
before income
taxes.......... 758 1,247 (21,804) 3,653 1,034 1,435 1,442 2,944 1,802 2,611
Provision for
income taxes... 151 249 280 594 383 542 525 985 650 925
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income
(loss)......... $ 607 $ 998 $(22,084) $ 3,059 $ 651 $ 893 $ 917 $ 1,959 $ 1,152 $ 1,686
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Net income
(loss) per
common share
and common
share
equivalent:
Basic........ $ 0.05 $ 0.08 $ (1.85) $ 0.25 $ 0.05 $ 0.07 $ 0.07 $ 0.16 $ 0.09 $ 0.12
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Diluted...... $ 0.05 $ 0.08 -- $ 0.21 $ 0.05 $ 0.07 $ 0.07 $ 0.15 $ 0.08 $ 0.11
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....... 100.0% 100.0 % 100.0 % 100.0 % 100.0% 100.0 % 100.0% 100.0 % 100.0% 100.0%
Cost of sales... 69.1 70.0 68.6 67.9 67.1 68.3 66.2 66.3 65.6 66.2
---- ---- ------- ---- ---- ---- ---- ---- ---- ----
Gross profit.... 30.9 30.0 31.4 32.1 32.9 31.7 33.8 33.7 34.4 33.8
---- ---- ------- ---- ---- ---- ---- ---- ---- ----
Operating costs:
Selling,
general and
administrative
costs........ 22.6 19.3 20.8 16.3 19.9 19.0 20.7 18.0 19.3 19.6
Research and
development
costs........ 1.5 1.5 1.5 1.9 3.6 3.2 3.8 3.3 4.2 3.5
Special
charge(1).... -- -- 145.4 -- -- -- -- -- -- --
---- ---- ------- ---- ---- ---- ---- ---- ---- ----
Total
operating
costs...... 24.1 20.8 167.7 18.2 23.5 22.2 24.5 21.3 23.5 23.1
---- ---- ------- ---- ---- ---- ---- ---- ---- ----
Operating income
(loss)......... 6.8 9.2 (136.3) 13.9 9.4 9.5 9.3 12.4 10.9 10.7
---- ---- ------- ---- ---- ---- ---- ---- ---- ----
Other expense
(income):
Interest
expense...... 2.3 2.1 2.0 3.3 4.2 3.2 3.0 2.5 3.0 1.8
Other expense
(income)..... (1.3) (1.1) (1.7) (1.6) (0.2) -- -- (0.1) 0.4 --
---- ---- ------- ---- ---- ---- ---- ---- ---- ----
Total other
expense
(income)... 1.0 1.0 0.3 1.7 4.0 3.2 3.0 2.4 3.4 1.8
---- ---- ------- ---- ---- ---- ---- ---- ---- ----
Income (loss)
before income
taxes.......... 5.8 8.2 (136.6) 12.2 5.4 6.3 6.3 10.0 7.5 8.9
Provision for
income taxes... 1.2 1.6 1.8 2.0 2.0 2.4 2.3 3.3 2.7 3.2
---- ---- ------- ---- ---- ---- ---- ---- ---- ----
Net income
(loss)......... 4.6% 6.6 % (138.4)% 10.2 % 3.4% 3.9 % 4.0% 6.7 % 4.8% 5.7%
==== ==== ======= ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(1) Includes a $23.2 million charge ($1.94 per share) for the write-off of
in-process research and development acquired in connection with the purchase
of MIC in March 1996.
20
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had $26.6 million in working capital.
As of March 15, 1996, the Company replaced a previous agreement with a revised
revolving credit and term loan agreement with two banks which is secured by
substantially all of the Company's assets not otherwise encumbered. The
agreement provides for a revolving credit line of $22.0 million and a term loan
of $16.0 million. The revolving credit line expires in March 1999. The term loan
is payable in quarterly installments of $900,000 with final payment on September
30, 2000. The interest rate on borrowings under this agreement is at various
rates depending upon certain financial ratios, with the current rate
substantially equivalent to the prime rate plus 0.25% (8.75% at December 31,
1997) on the revolving credit borrowings and prime plus 0.5% (9.0% at December
31, 1997) on the term loan borrowings. The terms of the agreement require
compliance with certain covenants including minimum consolidated tangible net
worth and pre-tax earnings, maintenance of certain financial ratios, limitations
on capital expenditures and indebtedness and prohibition of the payment of cash
dividends. At December 31, 1997, the outstanding borrowings under the revolving
credit line and term loan were $9.1 million and $5.3 million, respectively, and
at February 18, 1998, were $8.6 million and $5.3 million, respectively.
During June 1994, the Company completed a sale of $10.0 million principal
amount of 7 1/2% Senior Subordinated Convertible Debentures ("Debentures"). On
September 8, 1997, the Company called for redemption all of its outstanding
Debentures at 104.5% of the principal amount. The Debentures were convertible
into the Company's Common Stock at a price of $5.625 per share through October
6, 1997. As of October 1997, all of the principal amount outstanding was
converted. In connection with the conversions, $599,000 of deferred bond
issuance costs were charged to additional paid-in capital.
At June 30, 1997, the Company had net operating loss carryforwards of
approximately $4.0 million for Federal income tax purposes.
The Company's net cash provided by operating activities was $4.5 million,
$8.7 million and $2.8 million for fiscal 1996, fiscal 1997 and the six months
ended December 31, 1997, respectively. Net cash used in investing activities was
$33.3 million, $3.0 million and $5.9 million for fiscal 1996, fiscal 1997 and
the six months ended December 31, 1997, respectively. In fiscal 1996, the
Company used $35.2 million of cash to acquire all of the outstanding stock of
MIC. For the six months ended December 31, 1997, the Company used $4.4 million
of cash to purchase equipment, inventory and technology from Lucent
Technologies. Net cash provided by (used in) financing activities was $18.1
million, $(5.8) million and $3.2 million for fiscal 1996, fiscal 1997 and the
six months ended December 31, 1997, respectively. In fiscal 1996, the Company
borrowed $27.0 million to purchase MIC. For the six months ended December 31,
1997, the Company borrowed $6.2 million under two equipment loans.
Management has initiated a Company-wide program to prepare it for the Year
2000 issue. The Company expects to incur internal staff costs as well as
consulting and other expenses related to Year 2000 compliance. The Company
believes the total costs to be incurred for all Year 2000 related projects will
not have a material impact on the Company's business, results of operations and
financial condition.
Management of the Company believes that internally generated funds and
available lines of credit will be sufficient for its working capital
requirements, capital expenditure needs and the servicing of its debt for at
least the next twelve months. The Company intends to use approximately $10.0
million of the net proceeds of this offering to repay certain indebtedness under
the Bank Agreement. At December 31, 1997 and February 18, 1998, the Company's
available unused line of credit was approximately $10.9 and $11.4 million,
respectively. See "Use of Proceeds."
21
<PAGE> 24
BUSINESS
GENERAL
Aeroflex utilizes its advanced design, engineering and manufacturing
capabilities to produce state-of-the-art microelectronic module, interconnect
and testing solutions used in communication applications for commercial and
defense markets. Its products are used in the satellite, wireless and wireline
communications, cable television ("CATV") and defense communications markets.
With the acquisition of MIC Technology in 1996 and the interconnect assets of
Lucent Technologies Inc. in 1997, the Company believes it is currently the
largest merchant supplier of thin film interconnect products. The Company also
designs and manufactures motion control systems, and shock and vibration
isolation systems used for commercial, industrial and defense applications. The
Company's major customers include Lockheed Martin Corporation, Hughes
Electronics Corporation, Motorola, Inc., Lucent Technologies, Raytheon Company
and Northrop Grumman Corporation. The Company currently acts as sole source
supplier under supply agreements with Lucent Technologies and Motorola's RF
semiconductor division for thin film interconnect products.
The Company develops and employs advanced interconnect technology in which
complex system components are built up from highly integrated or monolithic
components while preserving the attributes of small size, power and thermal
management, wide bandwidths, manufacturability and quality. The Company's
Passive Integrated Microelectronic Interconnect Circuitry ("PIMIC") thin film
technology is an efficient and cost effective interconnect and packaging medium
for high frequency, high density and high performance communications products.
Its thin film interconnects are used in a number of OEM products, including
wireless subscriber handsets, CATV amplifiers and telecommunications switches.
The Company also produces microelectronic modules, which are called "hybrids"
because they combine elements of integrated circuit and printed circuit board
technologies. Hybrids are multi-layered electronic circuits, containing very
small passive and active elements which are mounted and wired together on a
single multi-layered ceramic surface in patterns designed to perform specific
electronic functions, such as amplification, switching, signal conversion,
voltage regulation and decoding of microwave signals. The Company's
microelectronic modules are used in a number of applications, including
communications satellites and commercial avionics data communications.
Additionally, the Company has developed advanced technologies in high speed
stimulus/response measurement systems. The Company's high-speed frequency
synthesis technology is used as the stimulus for automatic test systems which
operate in radio frequency and microwave frequency. Its high speed automatic
test equipment is used in various applications, including satellite and antenna
testing.
INDUSTRY BACKGROUND
Worldwide demand for voice, data and video communication has increased
dramatically as a result of a number of factors, including an increasingly
competitive global business environment, a heightened sophistication on the part
of private consumers, the emergence of new technologies, and the deregulation
and proliferation of communications networks. Traditional wireline, CATV,
cellular/PCS and satellite communications are among the diverse forms of
competing delivery mechanisms now available to meet this demand. Service
providers of both wireless and wireline communications are responding to these
changes by rapidly incorporating new technologies into their networks to provide
greater functionality and to decrease costs. In addition, as communications
networks are migrating towards higher frequencies, systems have become more
complex requiring greater performance and reliability. Manufacturers have
responded to this need by producing systems with increased functionality at
reduced costs. To further reduce costs manufacturers have begun to focus on
their core competencies and have increasingly outsourced non-core production of
subsystems, components and products.
WIRELESS COMMUNICATIONS
Cellular/PCS
Demand for cellular/PCS communications systems is being driven by the
increased number of subscribers worldwide, the allocation of additional higher
frequencies, new standards and technological
22
<PAGE> 25
advances. Industry sources estimate that the number of cellular and PCS
subscribers in the United States will increase from approximately 44 million in
1996 to approximately 107 million by 2001 and project that the number of such
subscribers worldwide will grow from 144 million in 1996 to 456 million by 2001.
Cellular/PCS communications systems offer the functional advantages of wired
systems without the costly, time consuming development of an extensive wired
infrastructure. Emerging digital telecommunications standards and technologies
are providing both the performance improvements necessary to address the
overcrowding of existing cellular systems and increased functionality. To
further address the overcrowding problem, regulatory agencies have allocated new
blocks of spectrum at higher frequencies and have more stringently regulated
allowable signal bandwidths. Systems operating at these higher frequencies
require advanced components and interconnects to simplify the overall system
architecture, thereby reducing cost, complexity and power consumption. To make
more efficient use of the crowded frequency bands, the spacing between adjacent
signal channels must be reduced, placing the desired signal very close to
unwanted interfering signals. Highly selective equipment is required to process
the desired signal without distortion, while rejecting interfering signals from
adjacent channels and other sources.
Satellite
Satellites provide a number of advantages over terrestrial facilities for
many high-speed communications service applications. First, satellites enable
high-speed communications service where there is no terrestrial alternative
available or where the terrestrial alternative is inadequate. Second, unlike the
cost of terrestrial networks, the cost to provide services via satellite does
not increase with the distance between sending and receiving stations. Finally,
in contrast to the installation of fiber optic cable which is expensive, time
consuming and requires obtaining rights-of-way, satellite networks can be
rapidly installed, upgraded and reconfigured.
Demand for commercial satellites is determined by several factors,
including: growth in demand for new satellite-based applications, such as mobile
telephone services, business networking, direct-to-home television and related
voice, video and data services; development of new satellite-based
communications architectures to provide basic telephone and television services
in developing regions of the world; and replenishment of orbiting satellite
constellations nearing the end of their useful lives. During the ten year period
from 1997 to 2006, substantial launch activity for commercial satellites is
expected. Industry sources estimate that during such ten year period 1,062
commercial satellites will be launched into either low Earth or medium Earth
orbits, and 273 commercial satellites will be launched into geostationary Earth
orbit. There are at least three large-scale telecommunications projects
(Iridium, Global Star and Teledesic) in various stages of development and
implementation that are contributing to the demand for commercial satellites. To
enhance the reliability and performance of these satellites at a reduced cost,
an extensive array of microelectronic modules, including multi-chip modules
("MCMs") and thin film interconnects will be used.
WIRELINE COMMUNICATIONS
Telecommunications
The wireline sector of the telecommunications market is growing as
operators expand their networks in order to meet the growing demand for
telecommunications services. Increased demand for new services and government
deregulation have encouraged the development of expanded networks, particularly
in the local exchange and long distance markets. The wireline sector currently
consists of numerous networks which are connected by switches that provide a
transferring mechanism to route transmissions to their ultimate destinations. A
significant number of these switches use thin film substrates.
CATV
Cable television is evolving from an industry that has traditionally
delivered multichannel one-way analog television programming over a coaxial
cable system to a multimedia industry delivering many channels of interactive
video and other services such as telephony, games, shopping and on-line
information in both analog and digital form over a hybrid fiber optic and
coaxial cable system. A cable system receives signals from
23
<PAGE> 26
satellites and other sources and then retransmits them to subscribers through a
distribution network composed of coaxial and fiber optic cable and distribution
electronics which boost the signal level through the use of amplifiers. These
amplifiers incorporate thin film substrates due to their small size, high
reliability and thermal attributes.
DEFENSE COMMUNICATIONS
Many of the technological advances in communications initiated by the
United States Department of Defense ("DOD") now form the basis of modern
commercial communication systems and products, including wireless
communications, satellite communications and computer networks. Governments
worldwide have funded the development of microwave transmission technologies for
defense purposes including missile guidance, electronic warfare, communications,
radar, radar jamming, navigation and identification of other aircraft. Higher
frequency transmissions have been desirable for defense applications because the
frequencies used have traditionally been less congested and allow for the use of
smaller equipment, important characteristics in satellites, aircraft and
missiles.
The defense industry has undergone significant changes precipitated by
ongoing federal budget pressures and new roles and missions to reflect changing
strategic and tactical threats. Since the mid-1980s, the overall United States
defense budget has declined in real dollars. The defense industry has also
undergone dramatic consolidation resulting in the emergence of only a few
dominant prime system contractors. There are numerous essential but
non-strategic products, components and systems that are not economical for the
major prime contractors to design, develop or manufacture for their own internal
use. As the prime contractors continue to evaluate their core competencies and
competitive position and focus their resources on larger programs and platforms,
prime contractors are expected to exit non-strategic business areas and to
procure these needed wireless components and subsystems from independent,
commercially oriented merchant suppliers.
AEROFLEX'S TECHNOLOGIES
Aeroflex's technology base stems from its development of advanced
technologies in support of communication and instrumentation systems for the
DOD. The Company's technology base supports customers' requirements for small
size, high-density, reduced cost and high reliability. Utilizing its core
technologies, the Company produces: (i) thin film interconnects; (ii)
microelectronic modules; and (iii) high-speed test and measurement systems.
The Company develops and employs advanced interconnect technology in which
complex system components are built up from highly integrated or monolithic
components while preserving the attributes of small size, power and thermal
management, wide bandwidths, manufacturability and quality. The Company's
Passive Integrated Microelectronic Interconnect Circuitry ("PIMIC(TM)") thin
film technology is an efficient and cost effective interconnect and packaging
medium for high frequency, high density and high performance products. The
PIMIC(TM) technology can be thought of as similar to integrated circuits or
chips, in that extremely fine features are produced in multi-layers; however,
PIMIC(TM) integrates passive components only, the substrate is ceramic rather
than silicon and active components are assembled onto the substrate in a
separate process. For applications such as cellular/PCS communications where
electrical energy is switched at high RF or microwave frequencies and where
space and performance are important, the Company's thin film circuits are a
desirable alternative to printed circuit boards because they operate at higher
frequencies, are smaller and are more reliable than printed circuit boards.
PIMIC(TM) technology takes this advantage to a higher level by fabricating
passive discrete components in an integrated format, saving space and connection
complexity.
The Company also produces microelectronic modules, which are called
"hybrids" because they combine elements of integrated circuit and printed
circuit board technologies. Hybrids are multi-layered electronic circuits,
containing very small passive and active elements which are mounted and wired
together on a single multi-layered ceramic surface in patterns designed to
perform specific electronic functions, such as amplification, switching, signal
conversion, voltage regulation and decoding of microwave signals. Hybrids
provide
24
<PAGE> 27
many of the advantages of integrated circuits relative to printed circuit
boards, such as miniaturization, increased capability, greater reliability and
environmental stability, but are similar to printed circuit boards in that
hybrids can also be economically manufactured in small quantities. Hybrids are
especially well suited to satellite/telecom systems, aircraft, spacecraft,
missile and industrial applications where space is limited, such as in
navigation equipment, airborne computers, sonar systems, medical diagnostic
instrumentation and computer instrumentation.
The Company has also developed advanced technologies in high speed
stimulus/response measurement systems. The Company's high-speed frequency
synthesis technology is used as the stimulus for automatic test systems which
operate in RF and microwave frequency bands. Frequency synthesis generates
signals which can be switched to frequencies spanning from audio to millimeter
wave while maintaining a high degree of signal purity. Aeroflex's high-speed
frequency synthesizers are used to test systems and subsystems, as well as
components comprising advanced communications products. The Company has
developed high-speed receiver and digital signal processing technology to
support data acquisition and presentation measurement systems.
STRATEGY
The Company intends to become a market leader in advanced microelectronic
module, interconnect and testing solutions for the communications market. The
key elements of the Company's strategy are to:
Continue Expansion into Commercial Markets. The Company, over the past
three decades as a supplier to the defense industry, has developed advanced
technologies, such as thin film interconnect and hybrid microelectronic modules,
used in digital, RF and microwave communications. The Company has also developed
fast switching frequency synthesizers and high-speed testing systems. The
Company will utilize its technologies to further increase its penetration in the
expanding satellite, cellular/PCS and CATV markets. For example, the Company's
thin film technology has applications in the wireless subscriber unit market and
its hybrid microcircuit Data-bus technology, which has been adopted by the
United States Army, Navy and Air Force as a standard, is being used for internal
data communications on the Boeing 777.
Capitalize on the Trend Toward Technology Outsourcing. The Company
believes that manufacturers of communications products are and will continue to
be under pressure to reduce costs. The Company believes that these manufacturers
will focus on their core competencies and increasingly outsource non-core
production of subsystems, components and products. The Company intends to
capitalize on this trend by continuing to provide low cost, high volume
manufacturing by optimizing existing facilities and by integrating the
state-of-the-art equipment and technology it recently acquired from Lucent
Technologies. The Company believes that its supply agreements with Lucent and
Motorola are indicators of the Company's ability to capitalize on this
outsourcing trend.
Increase Value Added Content. The Company intends to continue developing
products with increased functionality while providing the best value to
customers. For example, the Company has integrated advanced imbedded passive
component technology to satisfy customer demand for increased component density
and miniaturization. In addition, the Company believes that by combining its
high-speed automatic test experience and its high-speed instrument capability,
it can develop a family of satellite and communication automatic test systems
and then sell an entire test system, rather than component parts, to users of
such systems.
Maintain and Enhance Technological Leadership. The Company has in the past
been able to, and expects to continue to, leverage the experience gained through
its participation in DOD programs. In addition, the Company intends to maintain
and enhance its technological leadership position by continuing to invest
significant resources in independent research and development of its
microelectronic module, interconnect, instrument, and test and measurement
technologies. The Company believes it is currently one of the largest merchant
suppliers of thin film interconnects and is the leader in high-speed frequency
synthesizer technology.
Continue to Pursue Strategic Acquisitions. The Company has in the past
supplemented its internal growth and product development through the acquisition
of complementary businesses. For example, since
25
<PAGE> 28
1995, the Company has acquired MIC and Lintek. The Company intends to continue
to identify and acquire companies or lines of business which are complementary
to its existing businesses.
PRODUCTS
MICROELECTRONICS
Thin Film Circuits and Interconnects
The Company designs, develops, manufactures and sells passive thin film
circuits and interconnects. Its advanced microcircuit and interconnect
technology is emerging as a key technology for miniaturized, high frequency,
high performance electronic products for rapidly growing markets such as
cellular/PCS and microwave data links. It continues to be an essential
technology in satellite based communication hardware, CATV amplifiers and
leading edge military electronic products.
Thin film products allow dramatic reductions in the size and weight of
electronic circuits and provide superior electrical and thermal performance.
Growth in the use of thin film technology is expected to complement the advances
in semiconductor speed which have occurred in recent years. Thin film removes
limitations imposed by other interconnect technologies for high clock rate
digital circuits. In the digital, analog RF and microwave domains, thin film
allows the production of hybrid integrated circuits with lumped elements at
lower cost than full silicon or gallium arsenide (GaAs) integration while
retaining outstanding performance.
The Company serves both commercial and military markets. Commercial markets
include wireless communications, CATV, fiber optics and digital MCMs. Military
markets include missile Transmit and Receive ("T/R") modules, radar T/R modules
and advanced Electronic Counter Measures.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PRODUCTS APPLICATIONS CUSTOMERS
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Simple Interconnect Avionics Hewlett Packard,
CATV circuitry Hughes, Lucent,
Mobile radio power amplifiers Motorola, Nokia,
Optical data transceivers Ortel, Raytheon
Satellite communications systems
Telephone switching systems
- -------------------------------------------------------------------------------------------
Advanced Interconnect Fiber optic products Lockheed Martin,
Hybrid microelectronics modules Lucent, M/A-Com,
Missile systems Matra-Marconi,
Radar T/R modules Motorola, Nokia,
Wireless handsets Raytheon, Rockwell
- -------------------------------------------------------------------------------------------
High Density Digital High speed processor modules Hewlett Packard,
Interconnect Integrated circuit test
instruments Lockheed Martin,
Test equipment modules Loral, Raytheon
- -------------------------------------------------------------------------------------------
Mixed-Signal Interconnect Missile systems Hughes, Northrop-
Radar T/R systems Grumman, Raytheon,
Satellite avionics Texas Instruments
- -------------------------------------------------------------------------------------------
</TABLE>
In its most basic form, simple interconnect incorporates conductors,
resistors, plated vias and selective high conductivity traces for high-volume,
low-cost, DC, RF and microwave products, including applications such as standard
microwave amplifiers and oscillators, CATV circuitry, A/D converters and
high-power regulation. Advanced interconnect incorporates all passive elements
in solid-state form. Microstrip conductors, resistors, inductors, capacitors,
air-bridges and filled thermal vias are integrated on a single substrate.
Applications include high-performance, low-noise and power amplifiers for use in
commercial wireless products and avionics. To address digital circuit
requirements, high-density digital interconnect substrates offer single or
double-sided, controlled impedance signal routing. These substrates also offer
integrated resistors and solid thermal vias, if required, for improved
performance. Applications include Application
26
<PAGE> 29
Specific Integrated Circuits ("ASIC"), control circuits, high-density memory
modules and digital switching networks. By incorporating features of advanced
interconnect and high-density digital interconnect in a single design, the
Company has created PIMIC(TM)-Mixed Signal Interconnect to address the expanding
use of mixed technologies. This unique PIMIC(TM) process allows integration of
analog and digital functionality for use in leading-edge miniaturized military,
satellite and commercial electronics.
Microelectronic Modules
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
PRODUCTS APPLICATIONS CUSTOMERS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Satellite Commercial and Hughes, Lockheed Martin,
Power Hybrids military satellites Space Systems/Loral,
Multiplexers TRW
Quad Drivers
- -----------------------------------------------------------------------------------------------------
Multichip Modules Military avionics Boeing, Computing Devices,
RISC Microprocessor Family Military computer Honeywell, Lockheed Martin,
Flash and SRAM Missile systems Raytheon
Memory Modules
- -----------------------------------------------------------------------------------------------------
Data-bus Boeing 777 Honeywell, Hughes,
ARINC 629 Military avionics Litton, Lockheed Martin,
MIL-STD-1553 Transceivers Missiles Raytheon, SCI
MIL-STD-1553 Protocol Devices VME boards
- -----------------------------------------------------------------------------------------------------
Application Specific Modules Military avionics Kaiser, Litton,
Video Encoders Lockheed Martin
Quadrant Receivers
64 Channel Multiplexers
- -----------------------------------------------------------------------------------------------------
</TABLE>
Satellite
The Company has been manufacturing hybrid and MCM microelectronic circuits
for space applications for over 15 years. The Company's reputation and expertise
in these areas results from significant experience gained on DOD and NASA
programs such as MILSTAR, Space Shuttle, LANDSAT and most recently, the Cassini
probe to Saturn, as well as various classified programs. The Company's hybrids
have been successfully deployed on commercial programs such as DirecTV(R) and
IRIDIUM(R).
Multichip Modules
MCMs are a further advancement of hybrid microcircuit technology in which
large digital devices such as microprocessors, SRAM and EEPROM memories are
combined with multilayer ceramic packages to form complex digital systems or
subsystems. MCMs perform functions similar to hybrids, except the emphasis is on
miniaturizing and synthesizing digital functions such as microprocessor systems
and mass memories. The Company has been qualified on multiple MCM designs on
both the F-16 and F-22 Advanced Tactical Fighter, V-22, LAMPS, AWACS and AEGIS
Missile and is participating in pre-production and production contracts.
Application specific MCMs have significant market potential in avionics,
workstations, telecommunications and satellites.
The Company has expanded its standard memory module product line with the
addition of 35 new memory modules in the past three years. These products, which
consist of SRAM and Flash memory modules, take advantage of the Company's MCM
expertise. They are designed to be used for a wide range of computer and general
purpose circuit board applications.
27
<PAGE> 30
Data-bus
The Data-bus product line has a particularly broad range of applications.
These microcircuits, which have been adopted by the United States Army, Navy and
Air Force as a standard interface, act as a digital data communication link
between various computer-based equipment. A new commercial Data-bus interface
was developed by Boeing for use on its 777 Aircraft. The Company has production
contracts for the interface and coupler modules which provide the data
communications protocol and interface for all of the electronic systems in each
777 Aircraft.
The Company's microcircuits are used on numerous avionic systems including
the F-14, F-15, F-16 and F-18 aircraft and the Tomahawk-cruise and AMRAAM
missiles. They are also qualified for possible use on upgrades to older
platforms. The Data-bus microcircuits are used in a wide variety of aerospace
and seaboard navigations, and communication systems.
Application Specific Modules
The Company manufactures hybrids for a customer's particular need that
cannot be fulfilled with a standard commercial product. This capability has
historically been utilized to service defense markets domestically and
internationally. The electronic content of the worldwide defense market is
growing as governments determine it is more economical to upgrade existing
aircraft and missiles than to build new aircraft and missiles. This customer
base is faced with continuous retrofits to upgrade the ability of aging
equipment. The Company benefits from upgrade programs by supplying hybrids and
MCMs for the C-130, F-16, F-18 and AWACS aircraft programs, as well as newer
programs such as JAVELIN and AMRAAM missiles.
TEST, MEASUREMENT AND OTHER ELECTRONICS
Instrumentation
Frequency Synthesizers
The Company is a leader in radio frequency and microwave technology used in
the manufacture of fast switching frequency synthesizers, signal generators and
components. The Company's synthesizers operate in a broad frequency range of
10MHz to 40GHz with excellent spectral purity. Their small size and modular
construction allow for easy systems configuration and facilitation of repair.
The Company, together with Hewlett Packard, helped develop the Modular
Measurement System standard which has been selected as the architecture
underlying the RF and microwave sections of a number of automated test equipment
("ATE") systems, including CASS, the United States Navy's next generation ATE.
The CASS program is a high priority United States Navy initiative designed to
end the proliferation of unique ATE and related Test Program Sets for United
States Navy electronics. Historically, each individual weapon system had its own
testing system which required unique operator skills, maintenance and scope of
capabilities. The Company supplies the fast switching frequency synthesizers,
spread spectrum modulators and arbitrary waveform generators for CASS. The
Company's synthesizers also significantly improve the performance and
reliability of existing radars. The Company's synthesizers have been selected by
Westinghouse to upgrade its TPS 63 and 70 series radars. Additionally, the
synthesizers improve the performance of threat simulators, as well as radar
cross section and antenna measurement systems.
High-Speed Automatic Test Systems
The Company is a leading provider of high-speed instrumentation radar
systems and antenna measurement systems. Instrumentation radar systems are used
to measure the radar cross sections of aircraft and other objects using both
scale models and actual examples. These measurements are made in many diverse
environments from factory floor, to laboratory, to flight lines or aircraft
carriers. In addition to the radar system hardware, the Company has developed
various analytical processing and display algorithms to assist in the
interpretation of the radar data. Through expertise gained in high-speed data
acquisition and display techniques used in instrumentation radar products, the
Company produces antenna measurement systems used in the design, manufacturing
and testing of all types of antennas.
28
<PAGE> 31
Motion Control Systems
Stabilization and Tracking Devices
The Company is engaged in the design, development and production of
stabilization tracking devices and systems, including pedestals. Pedestals,
through the continuous balancing action of gyroscopes and servo-mechanical
stabilizers operating in all three dimensions, enable equipment mounted on a
vehicle to remain almost perfectly balanced and motionless. The mounted
equipment can then automatically track or focus on a target as accurately as if
it were on solid ground despite the motion of the vehicle. The Company's
stabilization and tracking devices are used in reconnaissance and weapon firing
control systems and play an important role in high altitude aircraft as well as
in other aircraft, ships and ground vehicles which require precise, highly
stable mounting for cameras, antennae and lasers. In addition to military and
aerospace markets, the Company has delivered commercial units used to stabilize
airborne spectroscopy equipment for terrestrial mapping.
Magnetic Motors
The Company produces a variety of brushless DC motors. Brushless DC motors
differ from conventional DC motors and are well-suited for use under vacuum
conditions, such as outer space where lubricants needed to slow brushwear
dissipate rapidly. They are also well-suited for environments containing
volatile or explosive materials and gases and applications where clean operation
is critical. These motors are utilized in the Company's stabilization and
tracking systems and infra-red scanner modules, as well as other applications
where precise movement is required, such as for positioning antennae, optical
systems, mechanical vanes and valves.
Scanning Devices
Using its expertise gained in over 30 years of manufacturing infra-red
night vision scanners, the Company has developed and started production of the
next generation polygon rotary scanner for the United States Army's thermal
weapons sight, under contract to Hughes Electro-Optical Data Systems Group. This
sight is a low cost, lightweight thermal imaging device that detects targets
based on thermal radiation contrasts with the background and is intended for use
on standard issue United States Army assault rifles and crew served weapons.
Additionally, the Company provides the Common Module Scanner used on the M-1
Tank, Bradley fighting vehicle and Comanche helicopter.
ISOLATOR PRODUCTS
The Company is engaged in the design, development, manufacture and sale of
shock and vibration isolation systems. These devices consist of helically-wound
steel wire rope contained between rugged metal retainer bars, which are used in
defense applications, and off-the-shelf rubber and spring shock, vibration and
noise control devices, which are used in commercial and industrial applications.
Purchasers of isolators are manufacturers or users of equipment sensitive to
shock and vibration who need to reduce shock/vibration to levels compatible with
equipment fragility to extend the useful life of this equipment. Markets for
isolation systems include defense, aerospace, geophysical exploration, aircraft,
communications, transportation and utilities.
CUSTOMERS
The Company has hundreds of customers in the communications, satellite,
aerospace/defense, transportation and construction industries. Except for
Lockheed Martin (13.3%) and Hughes (11.7%), in fiscal 1997, no one customer
accounted for more than 10% of the Company's net sales. The Company is currently
a party to three key strategic agreements:
In July 1997, the Company entered into a strategic agreement under which
the Company will supply Lucent Technologies with film integrated circuits which
are used in communications applications. The agreement expires December 31, 2000
and is subject to annual renewal options. In addition, the Company
29
<PAGE> 32
purchased automatic manufacturing and test equipment, inventory and licenses for
advanced technologies from two of Lucent's microelectronic component operations
which significantly increases the Company's manufacturing capacity to produce
film integrated circuits and MCMs.
In February 1997, the Company entered into an outsourcing agreement with
the RF Semiconductor Division of Motorola under which the Company will supply
virtually all of Motorola's thin film interconnects for its RF semiconductor
product lines, supporting component applications in CATV, cellular/PCS and land
mobile communications. This agreement expires in February 1999 and is subject to
annual renewal options.
In July 1996, the Company entered into a multi-year Volume Purchase
Agreement with Hughes Electronics to supply microelectronic modules for use on
both commercial and military satellites, and missile systems.
MARKETING AND DISTRIBUTION
The Company uses a team-based sales approach to facilitate close management
by Company personnel of relationships at multiple levels of the customer's
organization, including management, engineering and purchasing personnel. The
Company's integrated sales approach involves a team consisting of a senior
executive, a business development specialist and members of the Company's
engineering department. In particular, the use of experienced engineering
personnel as part of the sales effort enables close technical collaboration with
the customer during the design and qualification phase of new communications
equipment which, the Company believes, is critical to the integration of its
product into its customers equipment. The Company's executive officers are also
involved in all aspects of the Company's relationships with its major customers
and work closely with their senior management. In addition, the Company utilizes
manufacturers' representatives and independent sales representatives as needed.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts primarily involve
engineering and design relating to the development of new products, the
improvement of existing products and/or the adaptation of such products to new
applications. The Company's efforts also include developing prototype components
to bid on specific programs. Several of the Company's officers and almost all of
its engineers have been involved at various times and to varying degrees in
these activities. Certain product development and similar costs are recoverable
under contractual arrangements and those that are not recoverable are expensed
in the year incurred. The costs of Company sponsored research activities were
approximately $2.4 million, $1.3 million and $3.3 million for fiscal 1995, 1996
and 1997, respectively.
The Company is currently focusing its research and development on: (i) the
development of high yield, low cost, integrated thin film capacitor processes to
allow for high volume production of advanced interconnect substrates for
portable communication devices such as cellular/PCS handsets; (ii) the
development of a new family of higher performance RISC processor based MCMs
which are compatible with the Company's existing products to allow for
transparent performance-enhancing upgrades of present systems; (iii) the
development of high-speed, high-performance, low cost frequency synthesizers to
be used in automatic test systems for commercial communications applications;
and (iv) the development of an automatic satellite test system based on existing
technology to meet market requirements for high-speed satellite testing.
BACKLOG
The Company includes in backlog firm purchase orders or contracts providing
for delivery of products and services. At June 30, 1997, the Company's order
backlog was approximately $53.3 million, approximately 90% of which was
scheduled to be delivered on or before June 30, 1998. Approximately 65% and 35%
of this backlog represents defense and commercial contracts, respectively.
Generally, government contracts are cancellable with payment to the Company of
amounts expended under the contract together with a reasonable profit, if any,
while commercial contracts are not cancellable. At December 31, 1997, the
Company's order backlog was approximately $66.1 million.
30
<PAGE> 33
COMPETITION
In all phases of its operations, the Company competes in both performance
and price with companies, some of which are considerably larger, more
diversified and have greater financial resources and sales than the Company. In
the manufacture of microelectronics, the Company believes its primary
competitors are NTK, Texas Instruments and ILC/Data Devices Corp. In the
manufacture of instrument products, the Company believes its primary competitors
are Hewlett Packard and Scientific Atlanta. In the manufacture of motion control
products, the Company's believes its primary competitors are MPC Products Corp.
and Schaeffer Magnetics Inc. In the manufacture of isolators, the Company
believes its primary competitors are Barry Controls, Inc., Lord Kinematics and
Mason Industries. The Company also experiences significant competition from the
in-house capabilities of its current and potential customers. The Company
believes that in all of its operations it competes favorably in the principal
competitive areas of technology, performance, reliability, quality, customer
service and price. The Company believes that to remain competitive in the future
it will need to invest significant financial resources in research and
development.
MANUFACTURING
The Company assembles, tests, packages and ships products at its
manufacturing facilities located in Farmingdale, Pearl River and Plainview, New
York; Richardson, Texas; Bloomingdale, New Jersey; Powell, Ohio; and Boca Raton,
Florida. The Company has been manufacturing products for defense programs for
many years in compliance with stringent military specifications. The Company's
microelectronic module manufacturing is certified to the status of Class "K"
(space qualified) of which the Company believes only six other vendors are
currently certified. The Company believes it has been able to bring to the
commercial market the manufacturing quality and discipline it has demonstrated
in the defense market. For example, the Company's Plainview and Farmingdale
manufacturing plants are ISO-9001 certified, as well as certified to the more
stringent Boeing D1-9000 standard.
Historically, the volume of the Company's production requirements in the
defense market was not sufficient to justify the widespread implementation of
highly automated manufacturing processes. Over the last several years, the
Company has expanded the use of high volume manufacturing techniques for product
assembly and testing. Recently, the Company purchased film integrated circuit
automatic manufacturing and test equipment from Lucent Technologies, which the
Company believes was the largest volume manufacturer of thin film integrated
circuits, and the Company is currently expanding its Pearl River facility to
accommodate this equipment. After its completion, the Company believes the Pearl
River facility will have the capacity required to handle additional future
outsourcing by captive suppliers of thin film communications products and the
growing demand for communication interconnect products.
The principal materials used by the Company in manufacturing and assembling
its products are ceramic, magnetic materials, gold, steel, aluminum, rubber,
iron and copper. Many of the component parts used by the Company in its products
are also purchased, including semiconductors, transformers, amplifiers and
bearings. Although the Company has several sole source arrangements, all the
materials and components used by the Company, including those purchased from a
sole source, are readily available and are or can be purchased from time to time
in the open market. The Company has no long-term commitments for their purchase.
No supplier provides more than 10% of the Company's raw materials.
PATENTS AND TRADEMARKS
The Company owns several patents, patent licenses and trademarks. In order
to protect its intellectual property rights, the Company relies on a combination
of trade secret, copyright, patent and trademark laws and employee and
third-party nondisclosure agreements, as well as limiting access to and
distribution of proprietary information. While the Company considers that in the
aggregate its patents and trademarks are important in its operations, it does
not consider that one or any group of them is of such importance that
termination could materially affect its business. See "Risk
Factors -- Limitation on Protection of Proprietary Technology; Risk of Third
Party Claims."
31
<PAGE> 34
EMPLOYEES
As of December 31, 1997, the Company had 815 employees, of whom 416 were
engaged in a manufacturing capacity and 399 were engaged in engineering, sales,
administrative or clerical positions. 226 employees of the Company are covered
by two collective bargaining agreements. The Company considers its employee
relations to be satisfactory.
REGULATION
The Company's activities are subject to various environmental, health and
employee safety laws. The Company has expended resources, both financial and
managerial, to comply with applicable environmental, health and worker safety
laws in its operations and at its facilities and anticipates that it will
continue to do so in the future. The Company does not require any governmental
approval of its principal products or services. Compliance with environmental
laws has not historically had a material effect on the Company's capital
expenditures, earnings or competitive position, and the Company does not
anticipate that such compliance will have a material effect on the Company in
the future.
Because of its participation in the defense industry, the Company is
subject to audit from time to time for its compliance with government
regulations by various agencies, including the Defense Contract Audit Agency,
the Defense Investigative Service and the Defense Logistics Agency. These and
other governmental agencies may also, from time to time, conduct inquiries or
investigations that may cover a broad range of Company activity. Responding to
any such audits, inquiries or investigations may involve significant expense and
divert management attention. Also, an adverse finding in any such audit, inquiry
or investigation could involve penalties that may have a material adverse effect
on the Company's business, results of operation or financial condition.
The Company believes that it is generally in compliance with all applicable
environmental, health and worker safety laws and governmental regulations.
Nevertheless, there can be no assurance that additional costs for compliance
will not be incurred in the future or that such costs will not be material.
LEGAL PROCEEDINGS
Filtron Co. Inc. ("Filtron"), a subsidiary of the Company whose operations
were discontinued in October 1991, was one of several defendants named in a
personal injury action initiated in 1994 by several plaintiffs in the Supreme
Court of the State of New York, County of Kings.
According to the allegations of the Amended Verified Complaint, the
plaintiffs, who are current or former employees of a company to whom Filtron
sold RFI filters/capacitors, and their dependents, are seeking to recover,
respectively, directly and derivatively, on diverse theories of negligence,
strict liability and breach of warranty, for injuries allegedly suffered from
exposure to a liquid substance or material which Filtron incorporated for a
period of time in the RFI filters/capacitors which it manufactured. The
plaintiffs are seeking damages which cumulatively exceed $500 million.
This action is still in the early stages of discovery. Based upon available
information and considering its various defenses, together with its product
liability insurance, in the opinion of management of the Company, the outcome of
the action against its subsidiary will not have a material adverse effect on the
Company.
The Company is involved in various other routine legal matters. Management
believes the outcome of these matters will not have a material adverse effect on
the Company.
32
<PAGE> 35
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and Directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- --------------------------------------- --- --------------------------------------------------
<S> <C> <C>
Harvey R. Blau......................... 62 Chairman of the Board and Chief Executive Officer
Michael Gorin.......................... 56 President, Chief Financial Officer and Director
Leonard Borow.......................... 50 Executive Vice President, Chief Operating
Officer, Secretary and Director
Carl Caruso............................ 54 Vice President -- Manufacturing
Charles Badlato........................ 39 Treasurer and Assistant Secretary
Robert Bradley, Sr..................... 78 Director(1)
Milton Brenner......................... 70 Director(2)
Ernest E. Courchene, Jr................ 66 Director(2)
Donald S. Jones........................ 69 Director(2)
Eugene Novikoff........................ 74 Director(1)
John S. Patton......................... 80 Director(1)
</TABLE>
- ---------------
(1) Member, Compensation/Stock Option Committee
(2) Member, Audit Committee
Harvey R. Blau was appointed Chairman of the Board and Chief Executive
Officer of the Company in October 1991. Mr. Blau had previously served as Vice
Chairman from November 1983 until October 1991 and has been a Director since
July 1980. Mr. Blau is also Chairman of the Board and Chief Executive Officer of
Griffon Corporation and a director of Nu Horizons Electronics Corp. and Reckson
Associates Realty Corp. During fiscal 1997, a subsidiary of Griffon Corporation
purchased products from the Company for an aggregate $530,000 in various arms
length transactions. Mr. Blau has been a practicing attorney in the State of New
York since 1961, and is a member of the law firm of Blau, Kramer, Wactlar &
Lieberman, P.C., general counsel to the Company. The Company has engaged Blau,
Kramer, Wactlar & Lieberman, P. C. in the past and intends to continue to retain
the firm on an ongoing basis.
Michael Gorin has been employed by the Company in various executive
positions since July 1985 and has been President since October 1988, a Director
since August 1990 and Chief Financial Officer since 1991. From 1986 to October
1988, Mr. Gorin was Vice President -- Finance. From May 1980 to July 1985, Mr.
Gorin was Senior Vice President of Republic National Bank of New York. For more
than ten years prior thereto, he was employed by Arthur Andersen & Co., becoming
a partner in April 1973. Mr. Gorin is licensed as a Certified Public Accountant
in the State of New York.
Leonard Borow has been employed by the Company in various executive
positions since November 1989, has been Executive Vice President and Chief
Operating Officer since October 1991, a Director of the Company since November
1992 and Secretary since November 1993. Prior to joining the Company, Mr. Borow
was President of Comstron Corporation, a manufacturer of fast switching
frequency synthesizers and components, which was acquired by the Company in
November 1989.
Carl Caruso has been employed by the Company as Vice President of Aeroflex
Laboratories Incorporated since November 1989 and has been Vice
President -- Manufacturing of the Company since February 1997. Prior to joining
the Company, Mr. Caruso was Vice President of Comstron Corporation.
Charles Badlato has been employed by the Company in various financial
positions since December 1987 and has been Treasurer since February 1994. From
May 1981 until December 1987, Mr. Badlato was employed by various certified
public accounting firms, most recently as an audit manager with Touche Ross &
Co. Mr. Badlato is licensed as a Certified Public Accountant in the State of New
York.
Robert Bradley, Sr. has been a Director of the Company since February 1979.
Mr. Bradley was actively engaged as an employee and executive of commercial
banks for more than 30 years prior to his retirement in
33
<PAGE> 36
1979. He was Executive Vice President of Central State Bank, in New York, New
York and was Senior Vice President of European-American Bank and Trust Company.
Mr. Bradley is also a director of Griffon Corporation.
Milton Brenner, until his retirement in September 1988, had been President
of Aeroflex Laboratories Incorporated, a subsidiary of the Company, for more
than 15 years. Mr. Brenner was previously a Director of the Company from 1973 to
1986 and was again elected a Director in August 1988.
Ernest E. Courchene, Jr. has been a Director of the Company since April
1980. Mr. Courchene served from May 1987 to May 1992 as Vice Chairman and a
director of Digitech Industries, Inc., a manufacturer of data communications
diagnostic equipment. From May 1983 to May 1987, Mr. Courchene was President of
Southport Capital Group Ltd., an investment banking firm and from March 1980 to
November 1985, he was Chairman of the Board of Harbor Electronics Inc., a
manufacturer of cable assemblies for the electronics industry.
Vice Admiral Donald S. Jones (USN Ret.) has been a Director of the Company
since November 1993. Admiral Jones retired from the United States government in
1987 after more than 37 years of service. From March 1988 to March 1990, Admiral
Jones was Vice President for Government and International Affairs for Tracor
Inc., a manufacturer of electronic products and a provider of aircraft service
and repair. Since retirement, Admiral Jones also has acted as an independent
consultant.
Eugene Novikoff has been a Director of the Company since June 1979. Mr.
Novikoff is a professional engineer and during the period from 1972 to 1978 was
a director and Vice President in charge of development and engineering for Knogo
Corporation, a manufacturing and service organization engaged in providing
equipment and devices to libraries and retail businesses to reduce losses from
pilferage. Since January 1979, Mr. Novikoff has been a self-employed consulting
engineer.
Major General John S. Patton (USAF Ret.) has been a Director of the Company
since August 1985. General Patton retired from the United States government in
1978 after more than 36 years of service. Since retirement, he has acted as an
independent analytical technical consultant.
34
<PAGE> 37
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth the indicated information as of February 17,
1998 with respect to the beneficial ownership of the Company's securities by:
(i) all persons known to the Company to be beneficial owners of more than 5% of
the Company's outstanding Common Stock, based on filings with the Commission;
(ii) each Director; (iii) the Company's Chief Executive Officer and the four
other most highly compensated executive officers of the Company; (iv) all
executive officers and Directors as a group; and (v) each Selling Stockholder:
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY STOCK BENEFICIALLY
OWNED PRIOR TO THIS OWNED AFTER
OFFERING(1) SHARES TO BE THIS OFFERING
--------------------- SOLD IN THIS ---------------------
EXECUTIVE OFFICERS AND DIRECTORS SHARES PERCENT OFFERING SHARES PERCENT
- ------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Harvey R. Blau(2).................... 794,001 5.2% 35,000 759,001 4.3%
Michael Gorin(3)..................... 572,850 3.8 25,000 547,850 3.2
Leonard Borow(4)..................... 910,564 6.1 35,000 875,564 5.1
Carl Caruso(5)....................... 139,834 * 15,000 116,530 *
Charles Badlato(6)................... 67,632 * 10,000 51,671 *
Robert Bradley, Sr.(7)............... 37,153 * -- 37,153 *
Milton Brenner(7).................... 152,332 1.0 20,000 132,332 *
Ernest E. Courchene, Jr.(8).......... 110,106 * -- 110,106 *
Donald S. Jones(9)................... 37,666 * 10,000 26,666 *
Eugene Novikoff(7)................... 37,849 * -- 37,849 *
John S. Patton(7).................... 37,166 * -- 37,166 *
All directors and officers as a group
(11 persons)(10)................... 2,897,153 17.6 150,000 2,731,888 14.6
5% STOCKHOLDERS
- -------------------------------------
Deltec Asset Management Corp.(11).... 965,700 6.6 -- 965,700 5.7
FMR Corp.(12)........................ 927,700 6.4 -- 927,700 5.5
OTHER SELLING STOCKHOLDERS
- -------------------------------------
David Chapman(13).................... 153,040 1.0 15,000 138,040 *
Malcolm Hill(14)..................... 141,816 * 10,000 131,816 *
Brian Mitchell(15)................... 218,285 1.5 15,000 203,285 1.2
Fleet Bank N.A....................... 60,000 * 60,000 -- --
</TABLE>
- ---------------
* less than 1%
(1) Ownership represents sole voting and investment power. Includes options or
warrants currently exercisable or exercisable within 60 days.
(2) Includes options currently exercisable or exercisable within 60 days to
purchase 598,333 shares of Common Stock. Also includes 5,450 shares held by
the Blau, Kramer, Wactlar & Lieberman, P.C. Profit Sharing Plan and 136,132
shares owned by his wife, to which Mr. Blau disclaims beneficial ownership.
(3) Includes options currently exercisable or exercisable within 60 days to
purchase 448,333 shares of Common Stock.
(4) Includes options currently exercisable or exercisable within 60 days to
purchase 448,333 shares of Common Stock. Also includes 8,888 shares owned
by his wife to which Mr. Borow disclaims beneficial ownership.
(5) Includes options currently exercisable or exercisable within 60 days to
purchase 78,333 shares of Common Stock. The number of shares of Common
Stock beneficially owned by Mr. Caruso after this offering will be reduced
by the 15,000 shares of Common Stock to be sold in this offering and 8,304
shares of Common Stock used for the cashless exercise of an option prior to
this offering.
35
<PAGE> 38
(6) Includes options currently exercisable or exercisable within 60 days to
purchase 61,667 shares of Common Stock. The number of shares of Common
Stock beneficially owned by Mr. Badlato after this offering will be reduced
by the 10,000 shares of Common Stock to be sold in this offering and 5,961
shares of Common Stock used for the cashless exercise of an option prior to
this offering.
(7) Includes options currently exercisable or exercisable within 60 days to
purchase 36,666 shares of Common Stock.
(8) Includes options currently exercisable or exercisable within 60 days to
purchase 36,666 shares of Common Stock and 25% (14,167 shares) of the
56,666 shares owned by a partnership in which Mr. Courchene is a 25%
partner.
(9) Includes options currently exercisable or exercisable within 60 days to
purchase 36,666 shares of Common Stock. The number of shares of Common
Stock beneficially owned by Mr. Jones after this offering will be reduced
by the 10,000 shares of Common Stock to be sold in this offering and 1,000
shares of Common Stock used for the cashless exercise of an option prior to
this offering.
(10) Includes options or warrants currently exercisable or exercisable within 60
days to purchase an aggregate of 1,854,995 shares of Common Stock.
(11) Based on information contained in a Schedule 13G, which states that the
stockholder has sole voting and dispositive power with respect to such
shares. The address of the stockholder is 535 Madison Avenue, New York, NY
10022.
(12) Based on information contained in a Schedule 13G, which states that the
stockholder has sole voting and dispositive power with respect to such
shares. The address of the stockholder is 82 Devonshire Street, Boston, MA
02109.
(13) Includes options and warrants currently exercisable or exercisable within
60 days to purchase 128,040 shares of Common Stock.
(14) Includes options and warrants currently exercisable or exercisable within
60 days to purchase 126,816 shares of Common Stock.
(15) Includes options and warrants currently exercisable or exercisable within
60 days to purchase 159,285 shares of Common Stock.
36
<PAGE> 39
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 16,884,798 shares
of Common Stock outstanding (assuming no exercise of options or warrants
outstanding at February 17, 1998 except for options to purchase 35,000 shares of
the Company's Common Stock to be sold hereunder). Of these shares, 16,172,232
shares of Common Stock, including the 2,250,000 shares of the Company's Common
Stock sold in this offering will be freely tradable without restriction or
further registration under the Securities Act, except that any shares purchased
by "affiliates" ("Affiliates") of the Company, as that term is defined in Rule
144 ("Rule 144") under the Securities Act of 1933, as amended (the "Securities
Act"), may generally be sold only in compliance with the limitations of Rule 144
described below.
SALES OF RESTRICTED SHARES
The remaining 712,566 shares of Common Stock issued and outstanding are
deemed "Restricted Shares" under Rule 144. Of the Restricted Shares,
approximately 351,532 shares of Common Stock which are not subject to the
lock-up agreements described under "Underwriting" will be eligible for immediate
sale in the public market pursuant to Rule 144(k) under the Securities Act.
Further, the holders of 529,000 shares of the Company's Common Stock are
entitled to registration rights as described below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
Restricted Shares for at least one year is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater of
(i) one percent of the then outstanding shares of Common Stock (approximately
168,848 shares immediately after this offering) or (ii) the average weekly
trading volume in the Common Stock in the over-the-counter market during the
four calendar weeks preceding the date on which notice of such sale is filed. In
addition, under Rule 144(k), a person who is not an Affiliate and has not been
an Affiliate for at least three months prior to the sale and who has
beneficially owned Restricted Shares for at least two years may resell such
shares without compliance with the foregoing requirements. In meeting the one
and two-year holding periods described above, a holder of Restricted Shares can
include the holding periods of a prior owner who was not an Affiliate.
REGISTRATION RIGHTS
Certain securityholders of the Company (the "Rightsholders") are entitled
to require the Company to register under the Securities Act up to a total of
529,000 shares of outstanding Common Stock (the "Registrable Shares"), pursuant
to the terms of their warrant agreements with the Company ("Warrant
Agreements"). The Warrant Agreements provide that in the event the Company
proposes to register any of its securities under the Securities Act at any time
or times, the Rightsholders, subject to certain exceptions, are entitled to
include Registrable Shares in such registration. However, the managing
underwriter of any such offering may exclude for marketing reasons some or all
of such Registrable Shares from such registration. In addition, the
Rightsholders have additional rights, subject to certain conditions and
limitations, to require the Company to prepare and file a registration statement
under the Securities Act with respect to their Registrable Shares. The Company
is generally required to bear the expenses of all such registrations, except
underwriting discounts and commissions.
37
<PAGE> 40
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among the Company, the Selling Stockholders and
CIBC Oppenheimer Corp., A.G. Edwards & Sons, Inc., SoundView Financial Group,
Inc. and Ladenburg Thalmann & Co. Inc., as Representatives (the
"Representatives") of the Underwriters of this offering, the Company and the
Selling Stockholders have agreed to sell to the Underwriters, and the
Underwriters named below have severally agreed to purchase from the Company and
the Selling Stockholders, the number of shares of Common Stock set forth
opposite their names below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------------------------------------------------------------ ---------
<S> <C>
CIBC Oppenheimer Corp. ...........................................
A.G. Edwards & Sons, Inc. ........................................
SoundView Financial Group, Inc. ..................................
Ladenburg Thalmann & Co. Inc. ....................................
---------
Total .................................................. 2,500,000
=========
</TABLE>
The Underwriters propose to offer the shares of Common Stock directly to
the public at the offering price set forth on the cover page of this Prospectus
and at such price less a concession of not in excess of $ per share to
certain securities dealers, of which a concession of not in excess of $ per
share may be reallowed to certain other securities dealers. After this offering,
the public offering price, allowances, concessions and other selling terms may
be changed by the Representatives.
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase Common Stock are subject to certain conditions,
including that if any of the Common Stock is purchased by the Underwriters
pursuant to the Underwriting Agreement, all of such shares must be so purchased.
The Company and certain Selling Stockholders have granted options to the
Underwriters, exercisable within 30 days after the date of this Prospectus, to
purchase from the Company and certain Selling Stockholders up to an aggregate of
346,500 and 28,500 additional shares of Common Stock, respectively, to cover
over-allotments, if any, at the public offering price less the underwriting
discount set forth on the cover page of this Prospectus. If the Underwriters
exercise their over-allotment options to purchase any of the 375,000 additional
shares of Common Stock, the Underwriters have severally agreed, subject to
certain conditions, to purchase approximately the same percentage thereof as the
number of shares purchased by each of them bears to the 2,500,000 shares of
Common Stock offered hereby. The Company and certain Selling Stockholders will
be obligated, pursuant to the over-allotment options, to sell shares of Common
Stock to the Underwriters to the extent such over-allotment options are
exercised.
Certain of the Company's officers, directors and significant stockholders
have agreed that they will not, without the prior written consent of CIBC
Oppenheimer Corp., offer, sell or dispose of any shares of Common Stock or
securities exchangeable or convertible into shares of Common Stock until 90 days
after this offering. Subject to certain limitations, the Company has also agreed
that it will not, without consent of CIBC Oppenheimer Corp., offer, sell or
dispose of any shares of Common Stock, options or warrants to acquire shares of
Common Stock or securities exchangeable for or convertible into shares of Common
Stock until
38
<PAGE> 41
90 days after this offering (except for (i) shares issued pursuant to stock
options and warrants outstanding on the date hereof and (ii) stock options
issued pursuant to employee benefit or incentive compensation plans in effect on
the date hereof).
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act, and to contribute to certain payments that the Underwriters
may be required to make in respect thereof.
The Representatives do not intend to confirm sales of the Common Stock to
any account over which they exercise discretionary authority.
In connection with this offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing the market price for Common
Stock. The Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the offering than
they are committed to purchase from the Company and the Selling Stockholders,
and in such case may purchase Common Stock in the open market following
completion of the offering to cover all or a portion of the Common Stock or by
exercising the Underwriters' overallotment option referred to above. In
addition, CIBC Oppenheimer Corp., on behalf of the Underwriters, may impose
"penalty bids" under contractual arrangements with the Underwriters whereby it
may reclaim from an Underwriter (or dealer participating in the offering) for
the account of the other Underwriters, the selling concession with respect to
Common Stock that is distributed in the offering but subsequently purchased for
the account of the Underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
Common Stock at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph is required, and,
if they are undertaken, they may be discontinued at any time.
39
<PAGE> 42
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed upon
for the Company by Blau, Kramer, Wactlar & Lieberman, P.C., Jericho, New York.
Harvey R. Blau, a member of the firm, is Chairman and Chief Executive Officer of
the Company. Mr. Blau owns 794,001 shares of Common Stock of the Company,
including options to purchase 598,333 shares of Common Stock of the Company
granted pursuant to certain of the Company's stock option plans and 136,132
shares owned by his wife, to which Mr. Blau disclaims beneficial ownership. The
Blau, Kramer, Wactlar & Lieberman, P.C. Profit Sharing Plan owns 5,450 shares of
Common Stock of the Company, 1,836 of which have been allocated to Mr. Blau.
Other members of the firm own an aggregate of 600 shares of Common Stock of the
Company. For the year ended June 30, 1997, the Company paid approximately
$174,000 in legal fees to the firm. Certain legal matters in connection with
this offering will be passed upon for the Underwriters by Fulbright & Jaworski
L.L.P., New York, New York.
EXPERTS
The consolidated financial statements and the related financial statement
schedule as of June 30, 1996 and 1997 and for each of the years in the
three-year period ended June 30, 1997 included in this Prospectus have been
included in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, included herein and upon the authority of said
firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a Registration Statement under the Securities
Act with respect to the Common Stock offered hereby. This Prospectus does not
contain all the information set forth in the Registration Statement and the
exhibits relating thereto. For further information with respect to the Company
and the shares of Common Stock offered by this Prospectus, reference is made to
such Registration Statement and the exhibits thereto. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement for
a full statement of the provisions thereof; each such statement contained herein
is qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained at the office of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's Regional Offices at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511
and 7 World Trade Center, New York, New York 10048. Copies of such material can
be obtained from the Public Reference Section of the Commission, Washington,
D.C. 20549, at prescribed rates, and from the Commission's Web site at the
address http://www.sec.gov. In addition, the Company's Common Stock is listed on
the New York Stock Exchange, and copies of the foregoing materials and other
information concerning the Company can be inspected at the offices of the New
York Stock Exchange at 20 Broad Street, New York, New York 10005.
40
<PAGE> 43
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Company with the Commission
(File No. 1-8037) pursuant to the Exchange Act, are incorporated by reference in
this Prospectus and shall be deemed to be a part hereof:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1997.
(2) The Company's Quarterly Reports on Form 10-Q for the quarters
ended September 30, 1997 and December 31, 1997.
(3) The description of the class of securities to be offered which is
contained in Registration Statements filed under Section 12 of the
Exchange Act (File No. 1-8037), including any amendments or
reports filed for the purpose of updating such descriptions.
All documents filed pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this Prospectus and prior to the termination of
this offering shall be deemed to be incorporated by reference in this Prospectus
and to be part hereof from the date of filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
in this Prospectus shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the documents incorporated by reference (except for
exhibits thereto unless specifically incorporated by reference therein).
Requests for such copies should be directed to the Secretary, Aeroflex
Incorporated, 35 South Service Road, Plainview, New York 11803, (516) 694-6700.
41
<PAGE> 44
AEROFLEX INCORPORATED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of KPMG Peat Marwick LLP, Independent Auditors............................... F-2
Consolidated Balance Sheets at June 30, 1996 and 1997, and December 31, 1997
(unaudited)...................................................................... F-3
Consolidated Statements of Operations for the years ended June 30, 1995, 1996 and
1997, and the six months ended December 31, 1996 and 1997 (unaudited)............ F-4
Consolidated Statements of Shareholders' Equity for the years ended June 30, 1995,
1996 and 1997, and the six months ended December 31, 1997 (unaudited)............ F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1995, 1996 and
1997, and for the six months ended December 31, 1996 and 1997 (unaudited)........ F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE> 45
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Aeroflex Incorporated
Plainview, New York
We have audited the accompanying consolidated balance sheets of Aeroflex
Incorporated and subsidiaries as of June 30, 1996 and 1997 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three year period ended June 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 financial position of Aeroflex
Incorporated and subsidiaries as of June 30, 1996 and 1997 and the results of
their operations and their cash flows for each of the years in the three year
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Jericho, New York
August 14, 1997 (except as to Note 17(b),
which is as of October 6, 1997)
F-2
<PAGE> 46
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
--------------------- DECEMBER 31,
1996 1997 1997
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 661 $ 600 $ 675
Current portion of invested cash........................................ -- 69 118
Accounts receivable, less allowance for doubtful accounts of $354, $417
and $530 at June 30, 1996 and 1997, and December 31, 1997,
respectively.......................................................... 23,336 21,843 18,095
Income tax refund receivable............................................ 926 -- --
Inventories............................................................. 16,916 20,319 28,719
Deferred income taxes................................................... 1,871 2,043 2,113
Prepaid expenses and other current assets............................... 554 743 1,394
------ ------- ------
Total current assets............................................. 44,264 45,617 51,114
Invested cash............................................................. 603 453 312
Property, plant and equipment, net........................................ 14,854 14,487 19,988
Intangible assets acquired in connection with the purchase of businesses,
net of accumulated amortization of $516, $1,224 and $1,608 at June 30,
1996 and 1997, and December 31, 1997, respectively...................... 8,707 8,046 7,962
Cost in excess of fair value of net assets of businesses acquired, net of
accumulated amortization of $2,086, $2,399 and $2,558 at June 30, 1996
and 1997, and December 31, 1997, respectively........................... 10,054 9,903 9,978
Other assets.............................................................. 2,687 2,541 2,710
------ ------- ------
Total assets..................................................... $ 81,169 $ 81,047 $ 92,064
====== ======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt....................................... $ 4,259 $ 4,247 $ 4,928
Accounts payable........................................................ 3,968 5,093 6,831
Accrued expenses and other current liabilities.......................... 8,967 8,564 10,021
Income taxes payable.................................................... 1,770 1,841 2,746
-------- -------- -------
Total current liabilities........................................ 18,964 19,745 24,526
Long-term debt............................................................ 20,337 14,688 16,800
Deferred income taxes..................................................... 172 334 119
Other long-term liabilities............................................... 1,243 1,259 2,773
Senior subordinated convertible debentures................................ 9,981 9,981 --
-------- -------- -------
Total liabilities................................................ 50,697 46,007 44,218
-------- -------- -------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, par value $.10 per share; authorized 1,000 shares:
Series A Junior Participating Preferred stock, par value $.10 per
share; authorized 150 shares; none issued............................. -- -- --
Common Stock, par value $.10 per share; authorized 25,000 shares; issued
12,380, 12,658 and 14,481 shares at June 30, 1996 and 1997 and
December 31, 1997, respectively....................................... 1,238 1,266 1,448
Additional paid-in capital.............................................. 57,820 58,110 67,639
Accumulated deficit..................................................... (28,004) (23,584) (20,746)
-------- -------- ------------
31,054 35,792 48,341
Less: Treasury Stock, at cost (129, 169 and 111 shares at June 30, 1996
and 1997, and December 31, 1997, respectively)........................ 582 752 495
-------- -------- ------------
Total stockholders' equity....................................... 30,472 35,040 47,846
-------- -------- ------------
Total liabilities and stockholders' equity....................... $ 81,169 $ 81,047 $ 92,064
========= ========= ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 47
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
------------------------------ ------------------
1995 1996 1997 1996 1997
------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................................... $71,113 $ 74,367 $94,299 $41,975 $53,210
Cost of sales........................................... 47,542 51,070 63,109 28,440 35,079
------- -------- ------- ------- -------
Gross profit.......................................... 23,571 23,297 31,190 13,535 18,131
------- -------- ------- ------- -------
Operating costs:
Selling, general and administrative costs............. 13,363 14,119 18,175 8,154 10,365
Research and development costs........................ 2,389 1,260 3,279 1,422 2,029
Special charge (note 2)............................... -- 23,200 -- -- --
Restructuring charge (note 3)......................... 1,669 -- -- -- --
------- -------- ------- ------- -------
Total operating costs......................... 17,421 38,579 21,454 9,576 12,394
------- -------- ------- ------- -------
Operating income (loss)................................. 6,150 (15,282) 9,736 3,959 5,737
------- -------- ------- ------- -------
Other expense (income):
Life insurance proceeds (note 13)..................... (2,000) -- -- -- --
Interest expense...................................... 1,464 1,939 2,974 1,551 1,250
Other expense (income) (including interest income
and dividends of $669, $496, $84, $50 and $26)..... (751) (1,075) (93) (61) 74
------- -------- ------- ------- -------
Total other expense (income).................. (1,287) 864 2,881 1,490 1,324
------- -------- ------- ------- -------
Income (loss) from continuing operations before income
taxes................................................. 7,437 (16,146) 6,855 2,469 4,413
Provision for income taxes.............................. 850 1,274 2,435 925 1,575
------- -------- ------- ------- -------
Income (loss) from continuing operations................ 6,587 (17,420) 4,420 1,544 2,838
------- -------- ------- ------- -------
Discontinued operations (note 4):
Gain on disposal of subsidiaries, net of income
taxes.............................................. 462 -- -- -- --
------- -------- ------- ------- -------
Income from discontinued operations................ 462 -- -- -- --
------- -------- ------- ------- -------
Net income (loss)....................................... $ 7,049 $(17,420) $ 4,420 $ 1,544 $ 2,838
======= ======== ======= ======= =======
Income (loss) per common share:
Basic:
Continuing operations.............................. $ 0.56 $ (1.46) $ 0.36 $ 0.12 $ 0.21
Discontinued operations............................ 0.04 -- -- -- --
------- -------- ------- ------- -------
Net income (loss)................................ $ 0.60 $ (1.46) $ 0.36 $ 0.12 $ 0.21
======= ======== ======= ======= =======
Diluted:
Continuing operations.............................. $ 0.52 $ -- $ 0.34 $ 0.12 $ 0.19
Discontinued operations............................ 0.04 -- -- -- --
------- -------- ------- ------- -------
Net income....................................... $ 0.56 $ -- $ 0.34 $ 0.12 $ 0.19
======= ======== ======= ======= =======
Weighted average number of common shares and common
share equivalents outstanding:
Basic................................................. 11,733 11,971 12,446 12,387 13,547
Diluted............................................... 14,052 -- 14,620 14,744 15,557
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 48
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1995, 1996 AND 1997 (AUDITED)
AND THE SIX MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
-------------------- PAID-IN ACCUMULATED --------------
TOTAL SHARES PAR VALUE CAPITAL DEFICIT SHARES COST
-------- -------- --------- ---------- ----------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1994......... $ 39,571 11,799 $ 1,180 $ 56,116 $ (17,633) 58 $ (92)
Treasury stock received from
the employee stock
ownership plan........... (28) -- -- -- -- 7 (28)
Retirement of treasury
stock.................... -- (65) (6) (114) -- (65) 120
Purchase of treasury
stock.................... (355) -- -- -- -- 92 (355)
Stock issued upon exercise
of stock options......... 107 84 8 99 -- -- --
Net income.................. 7,049 -- -- -- 7,049 -- --
------- ------ ------ ------- -------- --- -----
Balance, June 30, 1995........ 46,344 11,818 1,182 56,101 (10,584) 92 (355)
Stock issued upon conversion
of debentures............ 19 3 -- 19 -- -- --
Treasury stock received from
the employee stock
ownership plan........... (285) -- -- -- -- 56 (285)
Stock issued upon exercise
of stock options......... 440 159 16 366 -- (19) 58
Stock and warrants issued to
acquire business......... 1,074 300 30 1,044 -- -- --
Stock issued in connection
with bank refinancing.... 300 100 10 290 -- -- --
Net loss.................... (17,420) -- -- -- (17,420) -- --
------- ------ ------ ------- -------- --- -----
Balance, June 30, 1996........ 30,472 12,380 1,238 57,820 (28,004) 129 (582)
Stock issued upon exercise
of stock options......... 586 278 28 290 -- (69) 268
Purchase of treasury
stock.................... (438) -- -- -- -- 109 (438)
Net income.................. 4,420 -- -- -- 4,420 -- --
------- ------ ------ ------- -------- --- -----
Balance, June 30, 1997........ 35,040 12,658 1,266 58,110 (23,584) 169 (752)
Stock issued upon exercise
of stock options and
warrants................. 586 49 5 324 -- (58) 257
Stock issued upon conversion
of debentures............ 9,382 1,774 177 9,205 -- -- --
Net income.................. 2,838 -- -- -- 2,838 -- --
------- ------ ------ ------- -------- --- -----
Balance, December 31, 1997.... $ 47,846 14,481 $ 1,448 $ 67,639 $ (20,746) 111 $(495)
======= ====== ====== ======= ======== === =====
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 49
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
---------------------------- -----------------
1995 1996 1997 1996 1997
------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................. $ 7,049 $(17,420) $ 4,420 $ 1,544 $ 2,838
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Special charge............................. -- 23,200 -- -- --
Gain from discontinued operations, net..... (462) -- -- -- --
Depreciation and amortization.............. 3,133 3,091 4,322 2,220 2,511
Amortization of deferred gain.............. -- -- -- -- (338)
Gain on sale of securities................. -- (533) -- -- --
Deferred income taxes...................... (13) (461) (10) (144) (285)
Other...................................... (69) (112) 57 12 124
Change in operating assets and liabilities,
net of effects from purchase of businesses:
Decrease (increase) in accounts
receivable............................... (1,965) (2,220) 1,421 4,614 3,624
Decrease (increase) in inventories......... 2,263 (2,654) (3,403) (2,279) (7,265)
Decrease (increase) in prepaid expenses and
other assets............................. (279) (6) 879 774 (1,420)
Increase (decrease) in accounts payable,
accrued expenses and other long-term
liabilities.............................. (1,232) 434 375 (1,301) 1,880
Increase (decrease) in income taxes
payable.................................. (125) 1,189 668 223 1,091
------- -------- ------- ------- -------
Net cash provided by operating activities....... 8,300 4,508 8,729 5,663 2,760
------- -------- ------- ------- -------
Cash flows from investing activities:
Payment for purchase of businesses, net of
cash acquired.............................. (536) (35,190) (162) -- (234)
Purchase of equipment, inventory and
technology rights from Lucent
Technologies............................... -- -- -- -- (4,435)
Net cash provided by discontinued
operations................................. 3,058 -- -- -- --
Capital expenditures.......................... (2,919) (1,687) (2,931) (1,374) (1,348)
Proceeds from sale of property, plant and
equipment.................................. 182 2,318 16 -- 47
Net proceeds from sale of securities.......... -- 533 -- -- --
Decrease in invested cash..................... 194 709 81 22 92
------- -------- ------- ------- -------
Net cash used in investing activities........... (21) (33,317) (2,996) (1,352) (5,878)
------- -------- ------- ------- -------
Cash flows from financing activities:
Borrowings under debt agreements.............. 293 27,250 58 -- 6,232
Debt repayments............................... (5,232) (9,210) (5,719) (4,173) (3,439)
Bank debt financing costs..................... -- (403) -- -- --
Purchase of treasury stock.................... (355) -- (438) -- --
Proceeds from the exercise of stock options
and warrants............................... 107 503 305 226 400
------- -------- ------- ------- -------
Net cash provided by (used in) financing
activities.................................... (5,187) 18,140 (5,794) (3,947) 3,193
------- -------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents................................... 3,092 (10,669) (61) 364 75
Cash and cash equivalents at beginning of
period........................................ 8,238 11,330 661 661 600
------- -------- ------- ------- -------
Cash and cash equivalents at end of period...... $11,330 $ 661 $ 600 $ 1,025 $ 675
======= ======== ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 50
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1997 AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
1.a. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Aeroflex Incorporated and its subsidiaries ("the Company"), all of which are
wholly-owned. The Company has accounted for certain subsidiaries, namely
telecommunication systems services (T-CAS Corp.) and commercial and custom
envelopes (Huxley Envelope Corp.), as discontinued operations. These
subsidiaries have not been consolidated as part of the Company's continuing
operations (See Note 4). All significant intercompany balances and transactions
have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management of the Company make a
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities. Among the
more significant estimates included in the financial statements are the
estimated costs to complete contracts in process. Actual results could differ
from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments having maturities of
three months or less at the date of acquisition to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Financial Instruments
The fair values of all financial instruments, other than long-term debt and
the convertible debentures (see Notes 9 and 10), approximate book values because
of the short maturity of these instruments.
Revenue and Cost Recognition on Contracts
Revenue is recognized based upon shipments or billings. The Company records
gross profit on its long-term contracts using percentage-of-completion
accounting under which costs are recognized on revenues in the same relation
that total estimated manufacturing costs bear to total contract value. Estimated
costs at completion are based upon engineering and production estimates.
Provisions for estimated losses or revisions in estimated profits on
contracts-in-process are recorded in the period in which such losses or
revisions are first determined.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation computed on a straight-line basis over the estimated useful lives
of the related assets. Leasehold improvements are amortized over the life of the
lease or the estimated life of the asset, whichever is shorter.
Research and Development Costs
All research and development costs are charged to expense as incurred. See
Note 2 for a discussion of purchased in-process research and development.
F-7
<PAGE> 51
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangible Assets
Intangible assets are recorded at cost, less accumulated amortization. The
excess of purchase price over the fair value of tangible assets acquired is
being amortized on a straight-line basis over periods ranging from 20 to 40
years except for certain costs allocated to existing technology, workforce
in-place, customer relationships and patents which are amortized over 13 to 15
years, the estimated remaining lives of the intangibles at the time they were
acquired by the Company. The Company periodically evaluates the recoverability
of the carrying value of its intangible assets and the related amortization
periods. The Company assesses the recoverability of unamortized goodwill based
on the undiscounted projected future earnings of the related businesses. As of
June 30, 1997, the cost in excess of fair value of net assets of businesses
acquired consists substantially of $8,666,000 related to the 1989 acquisition of
Comstron Corporation, a manufacturer of frequency synthesizers, subsystems and
components.
Long-Lived Assets
Effective July 1, 1996 the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ", which requires
that long-lived assets and certain identifiable intangibles to be held and used
or disposed of by an entity be reviewed for possible impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The adoption of SFAS No. 121 did not have any impact on the
Company's consolidated financial position or results of operations.
Invested Cash
Invested cash consists of government securities and certificates of
deposit, having original maturities of greater than three months, and is carried
at cost, which approximates market.
Income (Loss) Per Share
For the period ended December 31, 1997, the Company has adopted SFAS No.
128 "Earnings Per Share." In accordance with SFAS No. 128, earnings per common
share ("Basic EPS") is computed by dividing net income by weighted average
common shares outstanding. Earnings per common share, assuming dilution
("Diluted EPS") is computed by dividing net income plus a pro forma addback of
debenture interest by weighted average common shares outstanding plus potential
dilution from the conversion of debentures and the exercise of stock options and
warrants. Income (loss) per share amounts for prior periods have been restated
to conform to the provisions of SFAS No. 128.
Accounting for Stock-Based Compensation
The Company records compensation expense for employee and director stock
options only if the current market price of the underlying stock exceeds the
exercise price on the date of the grant. Effective July 1, 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has
elected not to implement the fair value based accounting method for employee and
director stock options, but instead has elected to disclose the pro forma net
earnings and pro forma earnings per share for employee and director stock option
grants made beginning in fiscal 1996 as if such method had been used to account
for stock-based compensation cost as described in SFAS No. 123.
Income Taxes
In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company
measures deferred tax assets and liabilities based upon the differences between
the financial accounting and tax bases of assets and liabilities.
F-8
<PAGE> 52
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications
Reclassifications have been made to the 1995, 1996 and 1997 consolidated
financial statements to conform to the six months ended December 31, 1997
presentation.
b. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The consolidated balance sheet of the Company as of December 31, 1997 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the six months ended December 31, 1996 and 1997 have been prepared by
the Company and are unaudited. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at December 31,
1997 and for all the aforementioned periods have been made.
The Company's effective income tax rates for the six month periods ended
December 31, 1996 and 1997 are based on management's expectations of the tax
rates for the respective full years.
Results of operations for the six month periods are not necessarily
indicative of results of operations for the corresponding years.
2. ACQUISITION OF BUSINESSES
MIC
Effective March 19, 1996, the Company acquired all of the outstanding stock
of MIC Technology Corporation ("MIC") for approximately $36,000,000 of cash,
300,000 shares of common stock and warrants to purchase 400,000 shares of common
stock (at exercise prices ranging from $7.05 to $7.50 per share). The purchase
price was paid with available cash of approximately $9,000,000 and borrowings
under the Company's bank loan agreement of approximately $27,000,000. MIC
manufactures high frequency thin film circuits and interconnects for
miniaturized, high frequency, high performance electronic products for growing
commercial markets such as wireless communications, satellite based
communications hardware and high technology military electronics. The acquired
company's net sales were approximately $25,000,000 for its fiscal year ended
October 31, 1995.
The Company commissioned an independent asset valuation study of acquired
tangible and identifiable intangible assets to serve as a basis for allocation
of the purchase price. Based on this study, the Company allocated the purchase
price as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Net tangible assets............................................ $ 6,190
Identifiable intangible assets................................. 8,453
In-process research and development............................ 23,200
-------
$ 37,843
=======
</TABLE>
The identifiable intangible assets which include existing technology,
customer relationships and assembled work force are being amortized on a
straight-line basis over thirteen years based on the study described above. The
acquired in-process research and development was not considered to have reached
technological feasibility and, in accordance with generally accepted accounting
principles, the value of such was expensed in the third quarter of fiscal 1996.
Summarized below are the unaudited pro forma results of operations of the
Company as if MIC had been acquired at the beginning of the fiscal periods
presented. The $23,200,000 write-off has been included in the
F-9
<PAGE> 53
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
June 30, 1996 pro forma loss but not the June 30, 1995 pro forma income in order
to provide comparability to the respective historical periods.
<TABLE>
<CAPTION>
PRO FORMA YEARS
ENDED JUNE 30,
--------------------
1995 1996
------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Net sales....................................................... $95,300 $ 90,097
Income (loss) from continuing operations........................ 6,729 (19,392)
Net income (loss)............................................... $ 7,191 $(19,392)
======= ========
Income (loss) per share:
Basic:
Continuing operations...................................... $ 0.56 $ (1.62)
======= ========
Net income (loss).......................................... $ 0.59 $ (1.62)
======= ========
Diluted:
Continuing operations(1)................................... $ 0.52 --
=======
Net income(1).............................................. $ 0.55 --
=======
</TABLE>
- ---------------
(1) Due to the loss in fiscal 1996, all options, warrants and convertible
debentures are anti-dilutive.
The pro forma financial information presented above for the MIC acquisition
is not necessarily indicative of either the results of operations that would
have occurred had the acquisition taken place at the beginning of the periods
presented or of future operating results of the combined companies.
Lintek
In January 1995, the Company acquired substantially all of the net
operating assets of Lintek, Inc. ("Lintek") for $537,000 plus contingent
consideration based on the next five years' earnings to a maximum of an
additional $675,000. Additional consideration of $63,000 and $162,000 was earned
as of December 31, 1995 and 1996 and paid in February 1996 and 1997,
respectively. Such amounts, and any further contingent consideration earned,
will be treated as cost in excess of fair value of net assets acquired. Lintek
designs, develops and manufactures radar cross section and antenna pattern
measurement systems for commercial and military applications, as well as surface
penetrating radars. The acquired company's net sales were approximately
$2,600,000 for the year ended December 31, 1994. On a pro forma basis, had the
Lintek acquisition taken place as of the beginning of the periods presented,
results of operations for those periods would not have been materially affected.
The acquisitions have been accounted for as purchases and, accordingly, the
acquired assets and liabilities assumed have been recorded at their estimated
fair values at the respective dates of acquisition. The operating results of MIC
and Lintek are included in the consolidated statements of operations from the
respective acquisition dates.
3. RESTRUCTURING CHARGE
In March 1995, the Company adopted a plan to consolidate its Puerto Rico
manufacturing operations into its existing facilities in New York and New
Jersey. The Company has ceased manufacturing operations in Puerto Rico. In
connection with this restructuring, the Company recorded a charge to earnings of
$1,669,000 in fiscal 1995, representing costs of abandonment of leasehold
improvements, severance costs for approximately 100 employees, lease termination
costs, write-down of excess equipment and other related costs.
F-10
<PAGE> 54
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Approximately $597,000 of this amount were non-cash costs. Expenditures related
to the restructuring have been consistent in all material respects with the
original charges taken.
4. DISCONTINUED OPERATIONS
In November 1993, the Company sold substantially all of the net operating
assets of its wholly-owned subsidiary, Huxley Envelope Corp. ("Huxley"), for
$5,550,000. Huxley is a manufacturer of specialized envelopes for high-volume
direct-mail users. The sale did not include Huxley's New York City manufacturing
facility which was sold in the fourth quarter of fiscal 1995 for approximately
$2,400,000. The sale of the facility, along with the resolution of certain other
contingencies, resulted in a net of tax gain of $240,000.
Effective June 30, 1991, the Board of Directors of the Company approved a
formal plan to discontinue the operations of its wholly-owned subsidiary, T-CAS
Corp. ("T-CAS"), which was involved in the design and implementation of
telecommunication and electronic systems. The plan called for completion of
existing contracts and an orderly dissolution. As of June 30, 1993, all
contracts were completed.
In May 1995, T-CAS received $170,000 in settlement of a claim against a
former customer. This settlement, together with other unrelated settlements of
claims and adjustments of previously recorded loss reserves, resulted in an
after tax gain of $222,000, which was included in discontinued operations in the
fourth quarter of fiscal 1995.
Huxley and T-CAS have been reported as discontinued operations and,
accordingly, the Company's equity earnings (loss) from these subsidiaries and
the estimated gain (loss) on disposal, sale or discontinuance have been reported
separately from continuing operations.
5. INVESTED CASH
Invested cash represents funds held in qualified Puerto Rico investments
which enabled the Company to take advantage of reduced withholding taxes when
the earnings from its subsidiary in Puerto Rico were repatriated. These funds
are currently invested in government securities and certificates of deposit.
Despite the cessation of operations in Puerto Rico, the funds will be maintained
in such investments for the required statutory periods through the year 1999.
6. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------- DECEMBER 31,
1996 1997 1997
------- ------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Raw materials...................................... $ 9,352 $11,191 $13,265
Work-in-process.................................... 5,301 6,642 10,490
Finished goods..................................... 2,263 2,486 4,964
------- ------- -------
$16,916 $20,319 $28,719
======= ======= =======
</TABLE>
Inventories include contracts-in-process of $2,269,000 and $3,318,000 at
June 30, 1996 and 1997, respectively, which consist substantially of unbilled
material, labor and overhead costs that are or were expected to be billed during
the succeeding fiscal year.
F-11
<PAGE> 55
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land............................................................. $ 725 $ 725
Building and leasehold improvements.............................. 11,370 11,742
Machinery, equipment, tools and dies............................. 17,293 19,583
Furniture and fixtures........................................... 5,070 5,196
Assets recorded under capital leases............................. 2,707 2,392
Transportation equipment......................................... 63 85
------- -------
37,228 39,723
Less accumulated depreciation and amortization................... 22,374 25,236
------- -------
$14,854 $14,487
======= =======
</TABLE>
Repairs and maintenance expense on property, plant and equipment was
$475,000, $481,000 and $1,131,000 for the years ended June 30, 1995, 1996 and
1997, respectively.
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities include accrued salaries,
wages and other compensation of $2,789,000 and $2,874,000 at June 30, 1996 and
1997, respectively.
9. LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------- DECEMBER 31,
1996 1997 1997
------- ------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Revolving credit and term loan agreement(a)....... $22,200 $17,150 $14,359
Equipment loans(d)................................ -- -- 5,977
Capitalized lease obligations(b).................. 2,047 1,536 1,274
Bank loans(c)..................................... 187 187 118
Other............................................. 162 62 --
------- ------- -------
24,596 18,935 21,728
Less current maturities........................... 4,259 4,247 4,928
------- ------- -------
$20,337 $14,688 $16,800
======= ======= =======
</TABLE>
Aggregate long-term debt as of June 30, 1997 matures in each fiscal year as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998........................................... $ 4,247
1999........................................... 12,724
2000........................................... 1,964
-------
$ 18,935
=======
</TABLE>
Interest paid was $1,333,000, $1,584,000 and $2,647,000 during the years
ended June 30, 1995, 1996 and 1997, respectively.
F-12
<PAGE> 56
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(a) As of March 15, 1996, the Company replaced a previous agreement with a
revised revolving credit and term loan agreement with two banks which is secured
by substantially all of the Company's assets. The agreement provides for a
revolving credit line of $22,000,000, which expires on March 31, 1999, and a
term loan of $16,000,000. The term loan is payable in quarterly principal
installments of $900,000 with final payment on September 30, 2000. The interest
rate on borrowings under this agreement is at various rates depending upon
certain financial ratios, with the present rate substantially equivalent to the
prime rate (8.5% at June 30, 1997) on the revolving credit borrowings and prime
plus 0.25% on the term loan outstandings. The Company paid a facility fee of
$200,000 and 100,000 shares of common stock, and is required to pay a commitment
fee of 0.375% per annum of the average unused portion of the revolving credit
line. An additional payment of $125,000 is payable if the term loan is greater
than $4,000,000 at December 31, 1997.
The terms of the agreement require compliance with certain covenants
including minimum consolidated tangible net worth and pretax earnings,
maintenance of certain financial ratios, limitations on capital expenditures and
indebtedness and prohibition of the payment of cash dividends. In connection
with the purchase of commodities for use in manufacturing, the Company has a
letter of credit facility of $1,600,000. At June 30, 1997, the Company's
available unused line of credit was approximately $12,000,000 after
consideration of the letter of credit. The Company believes that the carrying
amount of this debt approximates fair value since the interest rate is variable
and the margins are consistent with those available to the Company under similar
terms.
(b) The Company has various capitalized lease obligations with financial
institutions which have various terms through 2000 and interest rates ranging
from 7.1% to 9.5%.
(c) The Company has loans with a bank bearing interest at rates ranging
from 6.1% to 6.4%. These loans mature at various dates through July 1998 and are
fully collateralized by the invested cash.
(d) (Unaudited) During the six months ended December 31, 1997, the Company
entered into equipment loans with two banks totaling $6,232,000. The loans are
repayable monthly through August 2004 and bear interest at a floating rate 200
basis points above the 30-day London Interbank Offered Rate.
10. SENIOR SUBORDINATED CONVERTIBLE DEBENTURES
During June 1994, the Company completed a sale of $10,000,000 principal
amount of 7 1/2% Senior Subordinated Convertible Debentures to non-U.S. persons.
The debentures are due June 15, 2004 subject to prior sinking fund payments of
10%, 10%, 15% and 15% of the principal amount on September 15, 2000, 2001, 2002
and 2003, respectively. The debentures are convertible into the Company's common
stock at a price of $5.625 per share. The Company may redeem the debentures at a
price of 104.5% of the principal amount, declining by 1.5 points per year
beginning June 15, 1998 to 100% at June 15, 2000 and thereafter. The net
proceeds from the offering were used initially to retire certain bank
indebtedness and for general working capital with excess proceeds placed in
temporary short term bank related investments until ultimately used for the
purchase of MIC. The cost of issuing these debentures, $947,000, included a 6%
fee paid and 100,000 warrants, exercisable at $6.75 per share, issued to the
placement agent. This amount is included in the Consolidated Balance Sheet under
the caption "Other Assets" and is being amortized over the term of the
debentures as interest expense. As of June 30, 1997, $19,000 principal amount of
bonds has been converted into common stock. The Company estimates the fair value
of the debentures as of June 30, 1997 to be approximately $10,430,000 based on
quoted market prices. See Note 17(b) for a discussion of subsequent events.
F-13
<PAGE> 57
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCKHOLDERS' EQUITY
(a) Stock Option Plans
Under stock option plans approved by the Company's shareholders, options
may be granted to purchase shares of the Company's common stock exercisable at
prices equal to the fair market value on the date of grant. During 1990, the
Company's shareholders approved the Non-Qualified Stock Option Plan (the
"NQSOP"). In December 1993, the Board of Directors adopted the Outside Director
Stock Option Plan (the "Directors' Plan") which provides for options to
non-employee directors, which become exercisable in three installments and
expire ten years from the date of grant. The Directors' Plan, as amended, covers
500,000 shares of the Company's Common Stock. In November 1994, the shareholders
approved this plan and the 1994 Non-Qualified Stock Option Plan (the "1994
Plan"). In November 1996, the shareholders approved the 1996 Stock Option Plan
(the "1996 Plan"). The NQSOP, the 1994 Plan and the 1996 Plan provide for
options which become exercisable in one or more installments and each covers
1,500,000 shares of the Company's Common Stock. Options under the NQSOP and the
1994 Plan expire five years from the date of grant. Options under the 1996 Plan
shall expire not later than ten years from the date of grant.
The Company has also issued to employees, who are not executive officers,
options to purchase 275,000 shares of common stock exercisable at $4.00 per
share. Such grants were not covered by one of the above plans.
Additional information with respect to the Company's stock options is as
follows:
<TABLE>
<CAPTION>
WEIGHTED SHARES
AVERAGE UNDER
EXERCISE OUTSTANDING
PRICES OPTIONS
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
Balance, July 1, 1994................................ $ 2.61 1,725
Granted.............................................. 3.89 1,160
Expired.............................................. 3.88 (135)
Forfeited............................................ 2.63 (74)
Exercised............................................ 2.70 (84)
-----
Balance, June 30, 1995............................... 3.11 2,592
Granted.............................................. 3.93 960
Forfeited............................................ 2.98 (68)
Exercised............................................ 2.77 (191)
-----
Balance, June 30, 1996............................... 3.38 3,293
Granted.............................................. 4.47 668
Forfeited............................................ 3.17 (71)
Exercised............................................ 2.04 (570)
-----
Balance, June 30, 1997............................... $ 3.83 3,320
=====
</TABLE>
Options to purchase 1,764,000, 2,092,000 and 2,168,000 shares were
exercisable at weighted average exercise prices of $2.75, $3.06 and $3.61 as of
June 30, 1995, 1996 and 1997, respectively.
F-14
<PAGE> 58
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The options outstanding as of June 30, 1997 are summarized in ranges as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- -----------------------------------
RANGE OF OPTIONS OPTIONS
EXERCISE WEIGHTED AVERAGE OUTSTANDING WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISABLE
PRICES EXERCISE PRICE -------------- REMAINING LIFE EXERCISE PRICE --------------
- ------------- ---------------- (IN THOUSANDS) ---------------- ---------------- (IN THOUSANDS)
<C> <C> <C> <S> <C> <C>
$2.00 - $3.50 $ 2.57 523 1.0 years $ 2.57 523
$3.75 - $5.38 4.07 2,797 4.8 3.94 1,645
----- -----
3,320 2,168
===== =====
</TABLE>
The per share weighted-average fair value of stock options granted during
fiscal 1996 and 1997 was $1.31 and $2.37, respectively, on the date of grant
using the Black Scholes option-pricing model with the following weighted-average
assumptions: 1996 -- expected dividend yield of 0%, risk free interest rate of
5.4%, expected stock volatility of 30%, and an expected option life of 4.3
years; 1997 -- expected dividend yield of 0%, risk free interest rate of 6.3%,
expected stock volatility of 40%, and an expected option life of 7.4 years.
(b) Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which the Company has adopted in
fiscal 1997. The Company has chosen not to implement the fair value based
accounting method for employee and director stock options, but has elected to
disclose the pro forma net income and earnings per share as if such method had
been used to account for stock-based compensation cost as described in SFAS No.
123. The pro forma compensation cost before income taxes, based on the fair
value at the grant date for options granted only in fiscal years 1996 and 1997,
was $429,000 and $783,000 for the years ended June 30, 1996 and 1997,
respectively. The Company's net income (loss) and net income (loss) per share
using this pro forma compensation cost would have been:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------------------
1996 1997
------------------------- -------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net income (loss)..................... $ (17,420) $ (17,772) $ 4,420 $ 3,919
========= ======== ========= ========
Net income (loss) per share:
Basic............................ $ (1.46) $ (1.48) $ 0.36 $ 0.31
========= ======== ========= ========
Diluted.......................... * * $ 0.34 $ 0.30
========= ========
</TABLE>
- ---------------
* As a result of the loss, all options, warrants and convertible debentures are
anti-dilutive.
Since the pro forma compensation cost reflects only options granted in
fiscal years 1996 and 1997, the full impact of calculating stock-based
compensation costs under SFAS No. 123 is not reflected in the pro forma net
income (loss) because compensation cost is recognized over the respective
vesting period and compensation cost for options granted prior to fiscal year
1996 was not reflected.
(c) Shareholders' Rights Plan
In August 1988, the Company's Board of Directors approved a Shareholders'
Rights Plan which provided for a dividend distribution of one right for each
share to holders of record of the Company's common shares on August 31, 1988.
The rights will become exercisable only in the event a person or group
accumulates 20 percent or more of the Company's common shares, or if any person
or group announces an offer which would result in it owning 20 percent or more
of the common shares. The rights will expire August 30, 1998. Each right will
entitle the holder to buy one one-hundredth of a share of a new series of Series
A Junior
F-15
<PAGE> 59
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Participating Preferred Stock of the Company at the price of $25. In addition,
upon the occurrence of a merger or other business combination, or the
acquisition by a person or group ("Acquiring Person") of 25 percent or more of
the common shares, holders of the rights, other than the Acquiring Person, will
be entitled to purchase either common shares of the Company or common shares of
the Acquiring Person at half their market value.
The Company will be entitled to redeem the rights for $0.01 per right at
any time until the tenth day following a public announcement of the acquisition
of a 20 percent position in its common shares.
(d) Earnings Per Share
A reconciliation of the numerators and denominators of the Basic EPS and
Diluted EPS calculations is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED DECEMBER
YEARS ENDED JUNE 30, 31,
---------------------------- -----------------
1995 1996 1997 1996 1997
------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Computation of Adjusted Net Income (Loss):
Income (loss) from continuing operations...... $ 6,587 $(17,420) $ 4,420 $ 1,544 $ 2,838
Discontinued operations....................... 462 -- -- -- --
------- -------- ------- ------- -------
Net income (loss) for basic earnings per
common share................................ 7,049 $(17,420) 4,420 1,544 2,838
========
Add: Debenture interest and amortization
expense, net of income taxes................ 757 * 504 246 103
------- ------- ------- -------
Adjusted net income (loss) for diluted
earnings per common share................... $ 7,806 * $ 4,924 $ 1,790 $ 2,941
======= ======= ======= =======
Computation of Adjusted Weighted Average
Shares Outstanding:
Weighted average shares outstanding........... 11,733 11,971 12,446 12,387 13,547
========
Add: Effect of dilutive options and warrants
outstanding................................. 541 * 400 583 1,227
Add: Shares assumed to be issued upon
conversion of debentures.................... 1,778 * 1,774 1,774 783
------- ------- ------- -------
Weighted average shares and common share
equivalents used for computation of diluted
earnings per common share................... 14,052 * 14,620 14,744 15,557
======= ======= ======= =======
Net Income (Loss) Per Common Share:
Basic:
Income (loss) from continuing
operations............................. $ 0.56 $ (1.46) $ 0.36 $ 0.12 $ 0.21
Discontinued operations.................. 0.04 -- -- -- --
------- -------- ------- ------- -------
Net income (loss)........................ $ 0.60 $ (1.46) $ 0.36 $ 0.12 $ 0.21
======= ======== ======= ======= =======
Diluted:
Income from continuing operations........ $ 0.52 * $ 0.34 $ 0.12 $ 0.19
Discontinued operations.................. 0.04 * -- -- --
------- ------- ------- -------
Net income............................... $ 0.56 * $ 0.34 $ 0.12 $ 0.19
======= ======= ======= =======
</TABLE>
- ---------------
* As a result of the loss in fiscal 1996, all options, warrants, and convertible
debentures are anti-dilutive.
F-16
<PAGE> 60
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options to purchase 63,000 shares at a weighted average exercise price of
$10.38 per share were outstanding as of December 31, 1997 but were not included
in the computation of Diluted EPS because the exercise prices of these options
were greater than the average market price of the common shares.
12. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------
1995 1996 1997
---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.................................................. $307 $1,166 $1,752
State and local.......................................... 454 569 693
U.S. Territory........................................... 102 -- --
---- ------ ------
863 1,735 2,445
---- ------ ------
Deferred:
Federal.................................................. 43 (776) 404
State and local.......................................... (54) 201 (414)
U.S. Territory........................................... (2) 114 --
---- ------ ------
(13) (461) (10)
---- ------ ------
$850 $1,274 $2,435
==== ====== ======
</TABLE>
The provision for income taxes varies from the amount computed by applying
the U.S. Federal income tax rate to income (loss) from continuing operations
before income taxes as a result of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
1995 1996 1997
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax at statutory rate.................................. $ 2,529 $(5,490) $2,331
Non-deductible special charge (Note 2)................. -- 7,888 --
Utilization of net operating loss carryforwards........ (1,702) (1,437) --
State, local and U.S. Territory income tax............. 392 376 184
Officers' life insurance premiums and (proceeds)....... (658) 21 59
Other, net............................................. 289 (84) (139)
------- ------- ------
$ 850 $ 1,274 $2,435
======= ======= ======
</TABLE>
F-17
<PAGE> 61
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities consist of:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable.............................................. $ 139 $ 148
Inventories...................................................... 1,604 1,676
Accrued expenses................................................. 128 219
------- -------
Current assets................................................. 1,871 2,043
------- -------
Other long-term liabilities...................................... 155 --
Unrealized capital loss.......................................... 1,315 1,428
Tax loss carryforwards........................................... 2,972 1,737
Tax credit carryforwards......................................... 2,449 3,477
Capital loss carryforwards....................................... 1,670 1,256
Less valuation allowance......................................... (3,884) (3,569)
------- -------
Non-current assets............................................. 4,677 4,329
------- -------
Property, plant and equipment.................................... (966) (955)
Intangibles...................................................... (3,838) (3,654)
Other............................................................ (45) (54)
------- -------
Long-term liabilities.......................................... (4,849) (4,663)
------- -------
Net non-current assets (liabilities)........................... (172) (334)
------- -------
Total....................................................... $ 1,699 $ 1,709
======= =======
</TABLE>
In accordance with SFAS No. 109, the Company records a valuation allowance
against deferred tax assets if it is more likely than not that some or all of
the deferred tax asset will not be realized. The valuation allowance decreased
by $315,000 during fiscal 1997 primarily as a result of the expiration of unused
capital loss carryforwards. In connection with the acquisition of MIC in 1996
(See Note 2), the Company recorded approximately $3,800,000 of deferred tax
liabilities related to identifiable intangible assets which are not deductible
for tax purposes. Concurrently, the Company reduced its valuation allowance
against its deferred tax assets by the same amount to recognize the net
operating loss carryforwards that can offset these deferred tax liabilities.
At June 30, 1997, the Company had net operating loss carryforwards of
approximately $4,000,000 for Federal income tax purposes which expire through
2006.
For fiscal 1995 and prior years, the earnings of Aeroflex International,
Inc. (the Company's Puerto Rico subsidiary) were substantially exempt from
United States income taxes. These earnings were also partially exempt from
Puerto Rico income taxes. As a result of the consolidation of the Company's
Puerto Rico operations into its domestic facilities (See Note 3), the Company no
longer has this partial exemption from income taxes.
The Company is undergoing routine audits by various taxing authorities of
several of its state and local income tax returns covering different periods
from 1992 to 1995. Management believes that the probable outcome of these
various audits should not materially affect the consolidated financial
statements of the Company.
The Company made income tax payments of $1,004,000, $588,000 and $1,468,000
and received refunds of $16,000, $268,000 and $1,117,000 during the years ended
June 30, 1995, 1996 and 1997, respectively.
F-18
<PAGE> 62
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. EMPLOYMENT CONTRACTS AND LIFE INSURANCE PROCEEDS
In February 1997, the Company entered into employment agreements with
certain of its officers for periods through December 31, 2002 with annual
remuneration ranging from $180,000 to $275,000, plus cost of living adjustments
and, in some cases, additional compensation based upon earnings of the Company.
Future aggregate minimum payments under these contracts are $991,000 per year.
In addition, these officers have the option to terminate their employment
agreements upon change in the present control of the Company, as defined, and
receive lump sum payments equal to three times annual compensation, as defined,
or, in one case, a lump sum payment equal to the salary for the remainder of the
term.
During fiscal 1995, the Company received $2,000,000 of insurance proceeds
on the death of the Company's former Chairman.
14. EMPLOYEE BENEFIT PLANS
The Company had established an Employee Stock Ownership Plan (the "ESOP")
which covered substantially all employees not covered by collective bargaining
agreements and who met certain service requirements. The annual contribution to
the ESOP was determined by the Company's Board of Directors. For the plan years
ended December 31, 1994 and 1995 the Board of Directors did not elect to make a
contribution to the ESOP. During 1995, the Company received a favorable
determination letter from the Internal Revenue Service for the termination of
the ESOP and completed the formal termination of the ESOP in December 1995.
The Aeroflex Incorporated Employees' 401(k) Plan (the "ARX 401(k)") was
established pursuant to Section 401(k) of the Internal Revenue Code. All
employees of the Company and certain subsidiaries who are not members of a
collective bargaining agreement may participate in the ARX 401(k). Each
participant has the option to contribute a portion of his or her compensation.
For each of the 1995, 1996 and 1997 calendar years, the Board of Directors has
elected to provide an employer contribution, which vests immediately, equal to
30% of employee contributions subject to certain limitations. The ARX 401(k)
expense for the fiscal years ended June 30, 1995, 1996 and 1997 was $219,000,
$230,000 and $263,000, respectively.
Employees of MIC Technology, who are excluded from the ARX 401(k), are
eligible to participate in the MIC 401(k) Plan and MIC Profit Sharing Plan (the
"MIC Plans"). In addition to contributing a portion of his or her compensation
and receiving an employer contribution, eligible employees also receive an
allocation of a discretionary share of the MIC Technology profits. The MIC
Plans' expense was $104,000 and $450,000 for the period from acquisition to June
30, 1996 and the fiscal year ended June 30, 1997, respectively.
Effective January 1, 1994, the Company established a Supplemental Executive
Retirement Plan (the "SERP") which provides retirement, death and disability
benefits to certain of its officers. The SERP expense for the fiscal years ended
June 30, 1995, 1996 and 1997 was $347,000, $217,000 and $300,000, respectively.
The assets of the SERP are held in a Rabbi Trust and amounted to $234,000 and
$386,000 at June 30, 1996 and 1997, respectively. The accumulated benefit
obligation was $843,000 and $1,259,000 at June 30, 1996 and 1997, respectively.
No participants are currently receiving benefits.
15. COMMITMENTS AND CONTINGENCIES
a. Operating Leases
Several of the Company's operating facilities and certain machinery and
equipment are leased under agreements expiring through 2007. The leases for
machinery and equipment generally contain options to purchase at the then fair
market value of the related leased assets.
F-19
<PAGE> 63
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments under operating leases as of June 30, 1997 are as
follows for the fiscal years:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998......................................... $1,662
1999......................................... 1,188
2000......................................... 1,070
2001......................................... 1,068
2002......................................... 994
Thereafter................................... 2,444
------
$8,426
======
</TABLE>
Rental expense was $837,000, $790,000 and $1,560,000 during the fiscal
years 1995, 1996 and 1997, respectively.
b. Legal Matters
A subsidiary of the Company whose operations were discontinued in 1991, is
one of several defendants named in a personal injury action initiated in August,
1994, by a group of plaintiffs. The plaintiffs are seeking damages which
cumulatively exceed $500 million. The complaint alleges, among other things,
that the plaintiffs suffered injuries from exposure to substances contained in
products sold by the subsidiary to one of its customers. This action is in the
early stages of discovery. Based upon available information and considering its
various defenses, together with its product liability insurance, in the opinion
of management of the Company the outcome of the action against its subsidiary
will not have a materially adverse effect on the Company's consolidated
financial statements.
The Company is involved in various other routine legal matters. Management
believes the outcome of these matters will not have a materially adverse effect
on the Company's consolidated financial statements.
16. BUSINESS SEGMENTS
The Company's business segments of continuing operations and major products
included in each segment, are as follows:
MICROELECTRONICS:
(a) Microelectronic Modules
(Circuit Technology)
(b) Thin Film Interconnects (MIC Technology)
TEST, MEASUREMENT AND OTHER ELECTRONICS:
(a) Instrument products (Comstron and Lintek)
(b) Motion Control Systems
-- Scanning devices
-- Motion Control Systems
-- Stabilization and tracking devices
-- Magnetic devices
ISOLATOR PRODUCTS:
(a) Commercial spring and rubber isolators
(VMC)
(b) Industrial spring and rubber isolators
(Korfund)
(c) Military wire-rope isolators
(Aeroflex International)
The Company is a manufacturer of advanced technology systems and components
for commercial industry, government and defense contractors. Approximately 74%,
65% and 50% of the Company's sales for the fiscal years 1995, 1996 and 1997,
respectively, were to agencies of the United States government or to prime
defense contractors or subcontractors of the United States government. The only
other customers which constituted more than 10% of the Company's sales during
any year in the period presented were Lockheed Martin and Hughes which comprised
13.3% and 11.7%, respectively, of sales in fiscal year 1997.
F-20
<PAGE> 64
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
---------------------------- -----------------
1995 1996 1997 1996 1997
------- -------- ------- ------- -------
(IN THOUSANDS) (UNAUDITED)
BUSINESS SEGMENT DATA:
<S> <C> <C> <C> <C> <C>
Net sales:
Microelectronics.............................. $24,250 $ 28,414 $48,462 $20,147 $33,046
Test, Measurement and Other Electronics....... 31,357 30,109 28,144 13,895 11,317
Isolator Products............................. 15,506 15,844 17,693 7,933 8,847
------- -------- ------- ------- -------
Net sales.................................. $71,113 $ 74,367 $94,299 $41,975 $53,210
======= ======== ======= ======= =======
Operating income (loss):
Microelectronics.............................. $ 2,075 $ 3,282 $ 6,644 $ 2,301 $ 5,602
Test, Measurement and Other Electronics....... 6,028 4,830 2,762 1,420 491
Isolator Products............................. 2,377 2,150 2,844 1,308 1,275
General corporate expenses.................... (2,661) (2,344) (2,514) (1,070) (1,631)
------- -------- ------- ------- -------
7,819 7,918 9,736 3,959 5,737
Special charge(1)............................. -- (23,200) -- -- --
Restructuring costs(2)........................ (1,669) -- -- -- --
Interest expense.............................. (1,464) (1,939) (2,974) (1,551) (1,250)
Other income (expense)........................ 2,751 1,075 93 61 (74)
------- -------- ------- ------- -------
Income (loss) from continuing operations
before income taxes...................... $ 7,437 $(16,146) $ 6,855 $ 2,469 $ 4,413
======= ======== ======= ======= =======
Identifiable assets:
Microelectronics.............................. $14,430 $ 35,445 $37,741
Test, Measurement and Other Electronics....... 33,625 31,354 28,603
Isolator Products............................. 10,159 9,752 9,700
Corporate..................................... 13,722 4,618 5,003
------- -------- -------
Total assets............................... $71,936 $ 81,169 $81,047
======= ======== =======
Capital expenditures:
Microelectronics.............................. $ 908 $ 766 $ 1,637
Test, Measurement and Other Electronics....... 1,440 597 996
Isolator Products............................. 554 315 293
Corporate..................................... 17 9 5
------- -------- -------
Total capital expenditures................. $ 2,919 $ 1,687 $ 2,931
======= ======== =======
Depreciation and amortization expense:
Microelectronics.............................. $ 691 $ 996 $ 2,230
Test, Measurement and Other Electronics....... 1,697 1,530 1,528
Isolator Products............................. 717 535 532
Corporate..................................... 28 30 32
------- -------- -------
Total depreciation and amortization........ $ 3,133 $ 3,091 $ 4,322
======= ======== =======
</TABLE>
- ---------------
(1) The special charge for the write-off of in-process research and development
acquired in the purchase of MIC Technology is allocable fully to the
microelectronics segment.
(2) Approximately 35% and 65% of the restructuring charge is allocable to the
Test, Measurement and Other Electronics and Isolator Products segments,
respectively.
F-21
<PAGE> 65
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SUBSEQUENT EVENTS
(a) Effective July 1, 1997, the Company's subsidiary, MIC, acquired certain
equipment, inventory, licenses for technology and patents of two of Lucent
Technologies' microelectronics components units -- multi chip modules and film
integrated circuits -- for approximately $4,400,000 in cash. These units
manufacture microelectronic modules and interconnect products for the
communications industry. The Company has also signed a multi-year supply
agreement to provide Lucent with film integrated circuits for use in
telecommunications applications. The purchase price has been allocated to the
assets acquired, based on their fair values, and certain obligations assumed
relating to the agreements.
(b) On September 8, 1997, the Company called for the redemption of all its
outstanding 7 1/2% Senior Subordinated Convertible Debentures at 104.5% of the
principal amount. The Debentures were convertible into the Company's Common
Stock at a price of $5.625 per share through October 6, 1997. As of October
1997, all of the principal amount outstanding was converted. In connection with
the conversions, $599,000 of deferred bond issuance costs were charged to
additional paid-in capital.
F-22
<PAGE> 66
BACK INSIDE COVER
A collage comprised of nine photos showing various manufacturing and
testing operations.
1. Thick Film Wafer Processing (Plainview, NY)
2. Quality Inspection Process (Plainview, NY)
3. Microelectronic Assembly (Plainview, NY)
4. Synthesizer Testing (Plainview, NY)
5. Thin Film Wafer Fab (Richardson, TX)
6. Multi Chip Module Testing (Plainview, NY)
7. Multifunction Module Testing (Plainview, NY)
8. MultiLayer Ceramic Processing (Plainview, NY)
9. Infra-red Scanner Testing (Farmingdale, NY)
<PAGE> 67
============================================================
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED BY THE COMPANY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN SO AUTHORIZED BY THE COMPANY, THE SELLING
STOCKHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
COMMON STOCK REFERRED TO BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO
SELL OR SOLICITATION TO SUCH PERSON IN ANY JURISDICTION TO ANY PERSON TO WHOM
SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY BE MADE. NEITHER DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-looking Statements................. 2
Prospectus Summary......................... 3
Risk Factors............................... 5
Use of Proceeds............................ 10
Dividend Policy............................ 11
Price Range of Common Stock................ 11
Capitalization............................. 12
Selected Consolidated Financial Data....... 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 14
Business................................... 22
Management................................. 33
Principal and Selling Stockholders......... 35
Shares Eligible for Future Sale............ 37
Underwriting............................... 38
Legal Matters.............................. 40
Experts.................................... 40
Available Information...................... 40
Incorporation of Certain Documents by
Reference................................ 41
Index to Financial Statements.............. F-1
</TABLE>
============================================================
============================================================
2,500,000 SHARES
[AEROFLEX INCORPORATED LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
CIBC OPPENHEIMER
A.G. EDWARDS & SONS, INC.
SOUNDVIEW FINANCIAL GROUP, INC.
LADENBURG THALMANN & CO. INC.
, 1998
============================================================
<PAGE> 68
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 9,304
NYSE Filing Fee................................................... 9,000
NASD Filing Fee................................................... 3,654
Blue Sky Fees and Expenses........................................ 3,000
Transfer Agent Fees............................................... 3,500
Accounting Fees and Expenses...................................... 80,000
Legal Fees and Expenses........................................... 150,000
Printing and Engraving............................................ 170,000
Miscellaneous..................................................... 21,542
--------
Total................................................... $450,000
========
</TABLE>
The Company will pay all of these expenses.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under provisions of the By-Laws of the Company, each person who is or was a
director or officer of the Company may be indemnified by the Company to the full
extent permitted or authorized by the General Corporation Law of Delaware.
Under such law, to the extent that such person is successful on the merits
of defense of a suit or proceeding brought against him by reason of the fact
that he is a director or officer of the Company, he shall be indemnified against
expenses (including attorneys' fees) reasonably incurred in connection with such
action.
If unsuccessful in defense of a third-party civil suit or if a criminal
suit is settled, such a person may be indemnified under such law against both
(1) expenses (including attorneys' fees) and (2) judgements, fines and amounts
paid in settlement if he acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the Company, and
with respect to any criminal action, had no reasonable cause to believe his
conduct was unlawful.
If unsuccessful in defense of a suit brought by or in the right of the
Company, or if such suit is settled, such a person may be indemnified under such
law only against expenses (including attorneys' fees) incurred in the defense or
settlement of such suit if he acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the Company except
that if such a person is adjudged to be liable in such suit for negligence or
misconduct in the performance of his duty to the Company, he cannot be made
whole even for expenses unless the court determines that he is fairly and
reasonably entitled to indemnity for such expenses.
The Company and its officers and directors of the Company are covered by
officers and directors liability insurance. The policy coverage is $25,000,000,
which includes reimbursement for costs and fees. There is a maximum deductible
under the policy of $500,000 for each claim. The Company has entered into
Indemnification Agreements with certain of its officers and directors. The
Agreements provide for reimbursement for all direct and indirect costs of any
type or nature whatsoever (including attorneys' fees and related disbursements)
actually and reasonably incurred in connection with either the investigation,
defense or appeal of a Proceeding, as defined, including amounts paid in
settlement by or on behalf of an Indemnitee.
II-1
<PAGE> 69
ITEM 16. EXHIBITS
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement.
2.1 Asset Purchase Agreement dated as of January 14, 1994 between Aeroflex Laboratories
Incorporated and Marconi Circuit Technology Corporation (Exhibit 2 of Report on Form
8-K dated January 14, 1994).
2.2 Common Stock Purchase Agreement dated as of February 13, 1996 and closed on March 19,
1996 among Aeroflex Acquisition Corp. (as assignee of the Registrant), MIC Technology
Corporation and the stockholders of MIC Technology Corporation (Exhibit 2 of Report on
Form 8-K dated March 19, 1996).
4.1 Specimen Common Stock Certificate.
5 Opinion of Blau, Kramer, Wactlar & Lieberman, P.C.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Blau, Kramer, Wactlar & Lieberman, P.C. (included in Exhibit 5 hereof).
24 Powers of Attorney (included in the signature pages hereof).
</TABLE>
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended (the
"Act"), each filing of the registrant's annual report pursuant to section 13(a)
or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned Registrant hereby undertakes:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-2
<PAGE> 70
AEROFLEX INCORPORATED
AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN C
ADDITIONS
-------------------------
COLUMN B CHARGED COLUMN D COLUMN E
---------- TO OTHER ---------- ----------
COLUMN A BALANCE AT CHARGED TO ACCOUNTS DEDUCTIONS BALANCE AT
- ------------------------------------- BEGINNING COSTS AND -- -- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended June 30, 1995:
- -------------------------------------
Allowance for doubtful accounts...... $ 434 $ 10 $ -- $ 7(A) $ 437
====== ==== ==== ==== ======
Reserve for inventory obsolescence... $3,478 $968 $ -- $ 66(B) $4,380
====== ==== ==== ==== ======
Year Ended June 30, 1996:
- -------------------------------------
Allowance for doubtful accounts...... $ 437 $(55) $ -- $ 28(A) $ 354
====== ==== ==== ==== ======
Reserve for inventory obsolescence... $4,380 $497 $ -- $617(B) $4,260
====== ==== ==== ==== ======
Year Ended June 30, 1997:
- -------------------------------------
Allowance for doubtful accounts...... $ 354 $ 72 $ -- $ 9(A) $ 417
====== ==== ==== ==== ======
Reserve for inventory obsolescence... $4,260 $100 $ -- $305(B) $4,055
====== ==== ==== ==== ======
</TABLE>
- ---------------
Note: (A) -- Net write-offs of uncollectible amounts.
(B) -- Write-off of inventory.
II-3
<PAGE> 71
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Plainview, New York on the 23rd day of February, 1998.
AEROFLEX INCORPORATED
By: /s/ HARVEY R. BLAU
------------------------------------
Harvey R. Blau
Chairman of the Board
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on February 23, 1998 by the
following persons in the capacities indicated. Each person whose signature
appears below also constitutes and appoints Harvey R. Blau and Michael Gorin,
and each of them, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same,
with all exhibits thereto and all other documents in connection therewith, with
the Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<C> <S>
/s/ HARVEY R. BLAU Chairman of the Board (Chief Executive
- --------------------------------------------- Officer)
Harvey R. Blau
/s/ MICHAEL GORIN President and Director (Chief Financial
- --------------------------------------------- Officer and Principal Accounting Officer)
Michael Gorin
/s/ LEONARD BOROW Executive Vice President, Secretary and
- --------------------------------------------- Director (Chief Operating Officer)
Leonard Borow
/s/ ROBERT BRADLEY, SR. Director
- ---------------------------------------------
Robert Bradley, Sr.
/s/ MILTON BRENNER Director
- ---------------------------------------------
Milton Brenner
/s/ ERNEST E. COURCHENE, JR. Director
- ---------------------------------------------
Ernest E. Courchene, Jr.
/s/ DONALD S. JONES Director
- ---------------------------------------------
Donald S. Jones
/s/ EUGENE NOVIKOFF Director
- ---------------------------------------------
Eugene Novikoff
/s/ JOHN S. PATTON Director
- ---------------------------------------------
John S. Patton
</TABLE>
II-4
<PAGE> 72
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- -------------------------------------------------------------------------- ------------
<S> <C> <C>
1.1 Form of Underwriting Agreement.
2.1 Asset Purchase Agreement dated as of January 14, 1994 between Aeroflex
Laboratories Incorporated and Marconi Circuit Technology Corporation
(Exhibit 2 of Report on Form 8-K dated January 14, 1994).
2.2 Common Stock Purchase Agreement dated as of February 13, 1996 and closed
on March 19, 1996 among Aeroflex Acquisition Corp. (as assignee of the
Registrant), MIC Technology Corporation and the stockholders of MIC
Technology Corporation (Exhibit 2 of Report on Form 8-K dated March 19,
1996).
4.1 Specimen Common Stock Certificate.
5 Opinion of Blau, Kramer, Wactlar & Lieberman, P.C.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Blau, Kramer, Wactlar & Lieberman, P.C. (included in Exhibit 5
hereof).
24 Powers of Attorney (included in the signature pages hereof).
</TABLE>
<PAGE> 1
EXHIBIT 1.1
2,500,000 Shares
Aeroflex Incorporated
Shares of Common Stock
UNDERWRITING AGREEMENT
February __, 1998
CIBC Oppenheimer Corp.
A.G. Edwards & Sons, Inc.
SoundView Financial Group, Inc.
Ladenburg Thalmann & Co. Inc.
As representatives of the several Underwriters
named in Schedule I to the Underwriting Agreement
c/o CIBC Oppenheimer Corp.
CIBC Oppenheimer Tower
World Financial Center
200 Liberty Street
New York, New York 10281
Ladies and Gentlemen:
Aeroflex Incorporated, a Delaware corporation (the "Company"),
and certain stockholders of the Company listed on Schedule II hereto (the
"Selling Stockholders"), propose, subject to the terms and conditions contained
herein, to sell to you and the other underwriters named on Schedule I to this
Agreement (the "Underwriters"), for whom you are acting as Representatives (the
"Representatives"), an aggregate of 2,500,000 shares (the "Firm Shares") of the
Company's common stock, $.10 par value per share (the "Stock"), of which
2,250,000 shares of Stock will be sold by the Company and 250,000 will be sold
by the Selling Stockholders. The respective amounts of the Firm Shares to be so
purchased by the several Underwriters are set forth opposite their names in
Schedule I hereto, and the respective amounts of Firm Shares to be sold by the
Selling Stockholders are set forth opposite their names in Schedule II hereto.
The Company and the Selling Stockholders are sometimes referred to herein
collectively as the "Sellers." In addition, the Company and certain Selling
Stockholders propose to grant to the Underwriters options to purchase up to
an additional 375,000 shares of Stock (the "Option Shares") for the purpose of
covering over-allotments in connection with the
<PAGE> 2
sale of the Firm Shares. The Firm Shares and the Option Shares are together
called the "Shares."
1. Sale and Purchase of the Shares. On the basis of the
representations, warranties and agreements contained in, and subject to the
terms and conditions of, this Agreement:
(a) Each of the Sellers agrees to sell to the Underwriters
the number of Firm Shares set forth opposite the name of such Seller on Schedule
II to this Agreement at $______ per share (the "Initial Price"), and each of the
Underwriters agrees, severally and not jointly, to purchase from the Sellers, at
the price set forth above, the number of Firm Shares set forth opposite the name
of such Underwriter on Schedule I to this Agreement. The number of Firm Shares
to be purchased by each Underwriter from each Seller shall be in the same
proportion (adjusted by the Representatives to eliminate fractions) as the
number of Firm Shares to be purchased hereunder by each Underwriter bears to the
total number of Firm Shares being purchased hereunder.
(b) Certificates in negotiable form for the total number of
the Shares to be sold hereunder by each of the Selling Stockholders have been
placed in custody with the [Company], as custodian (the "Custodian"), pursuant
to the Custody Agreement and Power of Attorney (the "Custody Agreement")
executed by each Selling Stockholder for delivery of all Shares to be sold
hereunder by such Selling Stockholder. Each of the Selling Stockholders
specifically agrees that the Shares represented by the certificates held in
custody for such Selling Stockholder under the Custody Agreement are subject to
the interests of the Underwriters hereunder, that the arrangements made by such
Selling Stockholder for such custody are to that extent irrevocable, and that
the obligations of such Selling Stockholder hereunder shall, subject to
applicable law, not be terminable by any act or deed of the Selling Stockholder
(or by any other person, firm or corporation including the Company, the
Custodian or the Underwriters) or by operation of law (including the death of
such Selling Stockholder) or by the occurrence of any other event or events,
except as set forth in the Custody Agreement. If any such event should occur
prior to the delivery to the Underwriters of the Shares to be sold by the
Selling Stockholders hereunder, certificates for the Shares shall, except as set
forth herein or in the Custody Agreement, be delivered by the Custodian in
accordance with the terms and conditions of this Agreement as if such event has
not occurred. The Custodian is authorized to receive and acknowledge receipt of
the proceeds of sale of the Shares to be sold by the Selling Stockholders held
by each of them against delivery of such Shares.
(c) The Company hereby grants to the several Underwriters
an option to purchase, severally and not jointly, all or any part of up to
346,500 Option Shares at the Initial Price. Certain Selling Stockholders hereby
grant to the several Underwriters an option to purchase all or any part of up
to 28,500 Option Shares at the Initial Price. The number of Option Shares to be
purchased by each Underwriter shall be the same percentage (adjusted by the
Representatives to eliminate fractions) of the total number of Option Shares to
be purchased by the Underwriters as such Underwriter is purchasing of the Firm
Shares. Such options may be exercised only to cover over-allotments in the sale
of the Firm Shares by the Underwriters and
-2-
<PAGE> 3
may be exercised in whole or in part at any time on or before 12:00 noon, New
York City time, on the business day before the Firm Shares Closing Date (as
defined below), and on one or more occasions thereafter within 30 days after the
date of this Agreement, in each case upon written, facsimile or telegraphic
notice, or oral or telephonic notice confirmed by written, facsimile or
telegraphic notice, by the Representatives to the Company no later than 12:00
noon, New York City time, on the business day before the Firm Shares Closing
Date or at least two business days before the Option Shares Closing Date (as
defined below), as the case may be, setting forth the number of Option Shares to
be purchased and the time and date (if other than the Firm Shares Closing Date)
of such purchase. Any partial exercise of the options granted hereby shall be
made on a pro rata basis in proportion to the respective maximum number of
Option Shares to be sold by the Company as certain Selling Stockholder. The
number of Option Shares to be purchased by each Underwriter from the Company
and certain Selling Stockholders shall be in the same proportion (adjusted by
the Representatives to eliminate fractions) as the number of Option Shares to
be purchased hereunder by each Underwriter bears to the total number of Option
Shares.
2. Delivery and Payment. Delivery by the Company and the
Custodian of the Firm Shares to the Representatives for the respective accounts
of the Underwriters, and payment of the purchase price therefor to the Sellers
in Federal or other funds immediately available in New York City shall take
place at the offices of CIBC Oppenheimer Corp., at Oppenheimer Tower, World
Financial Center, New York, New York 10281, at 10:00 a.m., New York City time,
on the [third] [fourth] business day following the date of this Agreement, or at
such time on such other date, not later than 10 business days after the date of
this Agreement, or at such other place, as shall be agreed upon by the Company
and the Representatives (such time and date of delivery and payment are called
the "Firm Shares Closing Date").
In the event the options with respect to the Option Shares are
exercised, delivery by the Company and certain Selling Stockholders of the
Option Shares to the Representatives for the respective accounts of the
Underwriters, and payment of the purchase price to the Company in Federal or
other funds immediately available in New York City, shall take place at the
offices of CIBC Oppenheimer Corp. specified above, or at such other place as
shall be agreed upon by the Company and the Representatives, at the time and on
the date (which may be the same date as, but in no event shall be earlier than,
the Firm Shares Closing Date) specified in the notice referred to in Section
1(c) (such time and date of delivery and payment are called the "Option Shares
Closing Date"). The Firm Shares Closing Date and the Option Shares Closing Date
are called, individually, a "Closing Date" and, together, the "Closing Dates."
Certificates evidencing the Shares shall be registered in
such names and shall be in such denominations as the Representatives shall
request at least two full business days before the Firm Shares Closing Date or,
in the case of Option Shares, on the day of notice of exercise of the option as
described in Section l(c) and shall be made available to the Representatives for
checking and packaging, at such place as is designated by the Representatives,
at least 24 hours prior to the Firm Shares Closing Date (or the Option Shares
Closing Date in the case of the Option Shares).
-3-
<PAGE> 4
3. Registration Statement and Prospectus; Public Offering. The
Company has prepared in conformity with the requirements of the Securities Act
of 1933, as amended (the "Securities Act"), and the published rules and
regulations thereunder (the "Rules") adopted by the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-3 (No.
333-____), including a preliminary prospectus relating to the Shares, and has
filed with the Commission the Registration Statement (as hereinafter defined)
and such amendments thereof as may have been required to the date of this
Agreement. Copies of such Registration Statement (including all amendments
thereof) and of the related preliminary prospectus have previously been
delivered by the Company to you. The term "preliminary prospectus" means any
preliminary prospectus (as described in Rule 430 of the Rules) included at any
time as a part of the Registration Statement. The Registration Statement as
amended at the time and on the date it becomes effective (the "Effective Date"),
including all exhibits (including those exhibits permitted by the Rules to be
incorporated by reference therein) and information, if any, deemed to be part of
the Registration Statement pursuant to Rule 424(b), Rule 434 and Rule 430A of
the Rules, is called the "Registration Statement." The term "Prospectus" means
the prospectus in the form first used to confirm sales of the Shares (whether
such prospectus was included in the Registration Statement at the time of
effectiveness or was subsequently filed with the Commission pursuant to Rule
424(b) of the Rules) or if the Company relies on Rule 434 under the Securities
Act, the "Term Sheet" relating to the Shares, together with the preliminary
prospectus that such Term Sheet supplements. "Term Sheet" means any term sheet
that satisfies the requirements of Rule 434 under the Securities Act.
The Company and each of the Selling Stockholders understand
that the Underwriters propose to make a public offering of the Shares, as set
forth in and pursuant to the Prospectus, as soon after the Effective Date and
the date of this Agreement as the Representatives deem advisable. The Company
and each of the Selling Stockholders hereby confirm that the Underwriters and
dealers have been authorized to distribute or cause to be distributed each
preliminary prospectus and are authorized to distribute the Prospectus (as from
time to time amended or supplemented if the Company or the Selling Stockholders
furnishes amendments or supplements thereto to the Underwriters).
4. Representations and Warranties of the Company and the
Selling Stockholders.
(a) The Company hereby represents and warrants to each
Underwriter as follows:
(i) On the Effective Date, the Registration Statement complied,
and on the date of the Prospectus, on the date any post-effective
amendment to the Registration Statement shall become effective, on the
date any supplement or amendment to the Prospectus is filed with the
Commission and on each Closing Date, the Registration Statement and the
Prospectus (and any amendment thereof or supplement thereto) will
comply, in all material respects, with the applicable provisions of the
Securities Act and the Rules;
-4-
<PAGE> 5
the Registration Statement did not, as of the Effective Date, contain
any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; and on the other dates referred to above,
neither the Registration Statement nor the Prospectus, nor any
amendment thereof or supplement thereto, will contain any untrue
statement of a material fact or will omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading. When any related preliminary
prospectus was first filed with the Commission (whether filed as part
of the Registration Statement or any amendment thereto or pursuant to
Rule 424(a) of the Rules) and when any amendment thereof or supplement
thereto was first filed with the Commission, such preliminary
prospectus as amended or supplemented complied in all material respects
with the applicable provisions of the Securities Act and the Rules and
did not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances
under which they were made, not misleading. Notwithstanding the
foregoing, the Company makes no representation or warranty as to the
paragraph with respect to stabilization on the inside front cover page
of the Prospectus and the statements contained under the caption
"Underwriting" in the Prospectus. The Company acknowledges that the
statements referred to in the previous sentence constitute the only
information furnished in writing by the Representatives on behalf of
the several Underwriters specifically for inclusion in the Registration
Statement, any preliminary prospectus or the Prospectus.
(ii) The documents that are incorporated by reference in the
preliminary prospectus and the Prospectus or from which information is
so incorporated by reference, when they became effective or were filed
with the Commission, as the case may be, complied in all material
respects with the requirements of the Securities Act or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as applicable,
and the rules and regulations of the Commission promulgated under the
Securities Act and the Exchange Act, as applicable, except as amended
and superseded by statements made in the Registration Statement; and
any documents so filed and incorporated by reference subsequent to the
Effective Date shall, when they are filed with the Commission, conform
in all material respects with the requirements of the Securities Act or
the Exchange Act, as applicable, and the rules and regulations of the
Commission promulgated under the Securities Act and the Exchange Act,
as applicable.
(iii) The consolidated financial statements of the Company
(including all notes and schedules thereto) included in the
Registration Statement and Prospectus present fairly the financial
position, the results of operations and cash flows and the
stockholders' equity and the other information purported to be shown
therein of the Company and its subsidiaries, listed on Schedule III
hereto (the "Subsidiaries"), at the respective dates and for the
respective
-5-
<PAGE> 6
periods to which they apply; and such financial statements (including
all notes and schedules thereto) have been prepared in conformity with
generally accepted accounting principles, consistently applied
throughout the periods involved, and all adjustments necessary for a
fair presentation of the results for such periods have been made. The
other financial and statistical information and data set forth in the
Registration Statement and the Prospectus is accurately presented and,
to the extent such information and data are derived from the financial
statements and books and records of the Company and the Subsidiaries,
are prepared on a basis consistent with such financial statements and
books and records.
(iv) KPMG Peat Marwick LLP, whose report is filed with the
Commission as a part of the Registration Statement, is and, during the
periods covered by its reports, was independent public accountants as
required by the Securities Act and the Rules.
(v) The Company has been duly incorporated and is a validly
existing corporation under the laws of the State of Delaware, and the
Subsidiaries have been duly incorporated and are validly existing
corporations under the laws of their respective jurisdictions. Other
than the Subsidiaries, the Company has no subsidiaries and does not
control, directly or indirectly, any corporation, partnership, joint
venture, association or other business organization, except as
described in the Registration Statement and the Prospectus. Each of the
Company and the Subsidiaries is duly qualified and in good standing as
a foreign corporation in each jurisdiction in which the character or
location of its assets or properties (owned, leased or licensed) or the
nature of its business makes such qualification necessary except for
such jurisdictions where the failure to so qualify would not have a
material adverse effect on the assets or properties, business, results
of operations or condition (financial or otherwise) of the Company and
the Subsidiaries, taken as a whole (a "Material Adverse Effect").
Except as disclosed in the Registration Statement and the Prospectus,
neither the Company nor the Subsidiaries own, lease or license any
material asset or property or conduct any material business outside the
United States of America. Each of the Company and the Subsidiaries have
all requisite corporate power and authority, and all necessary
authorizations, approvals, consents, orders, licenses, certificates and
permits of and from all governmental or regulatory bodies or any other
person or entity, to own, lease and license their assets and properties
and conduct their businesses as now being conducted and as described in
the Registration Statement and the Prospectus except for such
authorizations, approvals, consents, orders, licenses, certificates and
permits the failure to so obtain would not have a Material Adverse
Effect; no such authorization, approval, consent, order, license,
certificate or permit contains a materially burdensome restriction
other than as disclosed in the Registration Statement and the
Prospectus; and the Company has all such corporate power and authority,
and such authorizations, approvals, consents, orders, licenses,
certificates and permits to enter into, deliver and perform this
Agreement and to issue and
-6-
<PAGE> 7
sell the Shares (except as may be required under the Securities Act and
state and foreign Blue Sky laws).
(vi) The Company and the Subsidiaries own or possess adequate and
enforceable rights to use all patents, trademarks, trademark
applications, trade names, service marks, copyrights, copyright
applications, licenses, know-how and other similar rights and
proprietary knowledge (collectively, "Intangibles") material to or
necessary for the conduct of their business as described in the
Registration Statement and the Prospectus. Except as disclosed in the
Registration Statement and the Prospectus, neither the Company nor any
of the Subsidiaries have received any notice of, and to their knowledge
are not aware of, any infringement of or conflict with asserted rights
of others with respect to any Intangibles which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or
finding, could be reasonably expected to have a Material Adverse
Effect, and neither the Company nor the Subsidiaries know of any
reasonable basis therefor. Except as disclosed in the Registration
Statement and the Prospectus, to the knowledge of the Company, no
Intangibles of the Company or the Subsidiaries are in dispute or are in
any conflict with the right of any other person or entity and the
Company and each of the Subsidiaries (A) has or will have the right
(subject to applicable agreements, which agreements provide for use to
the extent necessary and desirable for the conduct of its business as
currently conducted and as proposed to be conducted) to use, free and
clear of all liens, charges, claims, encumbrances, pledges, security
interests, defects, restrictions or equities of any kind whatsoever all
licenses and rights to the Intangibles used in the conduct of their
business as now conducted or proposed to be conducted without
infringing upon or otherwise acting adversely to the right or claimed
right of any other person and (B) is not or will not become, as the
case may be, obligated or in any way liable for any payment by way of
royalties, fees or otherwise and to any owner or licensee of, or other
claimant to, any Intangibles with respect to the use thereof or in
connection with the conduct of their business or otherwise, except in
each case as disclosed in the Prospectus and except for any such
payments, claims, uses, liens, charges, encumbrances, pledges, security
interests, defects, restrictions and equities which would not have a
Material Adverse Effect.
(vii) The Company and the Subsidiaries have good and marketable
title to each of the items of personal property which are reflected in
the financial statements referred to in Section 4(a)(ii) or are
referred to in the Registration Statement and the Prospectus as being
owned by them and valid and enforceable leasehold interests in each of
the items of real and personal property which are referred to in the
Registration Statement and the Prospectus as being leased by them, in
each case free and clear of all liens, encumbrances, claims, security
interests and defects, other than those described in the Registration
Statement and the Prospectus and those which do not and will not have a
Material Adverse Effect.
-7-
<PAGE> 8
(viii) Except as described in the Registration Statement and the
Prospectus, there is no litigation or governmental or other proceeding
or investigation before any court or before or by any public body or
board pending or, to the Company's knowledge, threatened (and the
Company does not know of any reasonable basis therefor) against, or
involving the assets, properties or business of, the Company or the
Subsidiaries which, if adversely determined, could be reasonably
expected to have a Material Adverse Effect.
(ix) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, except as
described therein, (A) there has not been any material adverse change
in the assets or properties, business, results of operations, prospects
or condition (financial or otherwise) of the Company or the
Subsidiaries taken as a whole, whether or not arising from transactions
in the ordinary course of business; (B) neither the Company nor any of
the Subsidiaries has sustained any material loss or interference with
its assets, businesses or properties (whether owned, leased or
licensed) from fire, explosion, earthquake, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or any
court or legislative or other governmental action, order or decree; and
(C) since the date of the latest balance sheet included in the
Registration Statement and the Prospectus, except as reflected therein,
neither the Company nor any of the Subsidiaries has (x) issued any
securities (other than options or shares issued pursuant to exercise of
employee stock options or warrants described in the Registration
Statement and Prospectus) or incurred any liability or obligation,
direct or contingent, for borrowed money, except such liabilities or
obligations incurred in the ordinary course of business, (y) entered
into any transaction not in the ordinary course of business or (z)
declared or paid any dividend or made any distribution on any shares of
its stock or redeemed, purchased or otherwise acquired or agreed to
redeem, purchase or otherwise acquire any shares of its stock.
(x) There is no material document or contract of a character
required to be described in the Registration Statement or Prospectus or
to be filed as an exhibit to the Registration Statement which is not
described or filed as required. Each agreement listed in the Exhibits
to the Registration Statement is in full force and effect or has
terminated in accordance with its terms or by amendment and such
amendment has been filed as an Exhibit to the Registration Statement or
has otherwise been provided to the Representatives and, if not so
terminated, is valid and enforceable in all material respects by and
against the Company or the Subsidiaries, as the case may be, in
accordance with its terms, assuming the due authorization, execution
and delivery thereof by each of the other parties thereto, except as
the enforceability thereof may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
the enforcement of creditors' rights generally and (ii) indemnification
provisions under Federal and state securities laws; and that the remedy
of specific forms of equitable relief may be subject to equitable
defenses and the discretion of the court before which any such action
may be brought. Neither the Company, the
-8-
<PAGE> 9
Subsidiaries nor to the Company's knowledge, any other party is in
default in the observance or performance of any term or obligation to
be performed by them under any such agreement, and no event has
occurred which with notice or lapse of time or both would constitute
such a default, in any such case which default or event would have a
Material Adverse Effect. To the Company's knowledge, no default exists,
and no event has occurred which with notice or lapse of time or both
would constitute a default, in the due performance and observance of
any term, covenant or condition, by the Company or the Subsidiaries of
any other agreement or instrument to which the Company or the
Subsidiaries are a party or by which they or their properties or
business may be bound or affected which default or event would have a
Material Adverse Effect.
(xi) Neither the Company nor the Subsidiaries is in violation of
any term or provision of their respective Certificate of Incorporation
and By-laws, in each case as amended to the date hereof, or other
governing documents, or of any franchise, license, permit, judgment,
decree, order, statute, rule or regulation, where the consequences of
such violation would have a Material Adverse Effect. Except as
described in the Registration Statement or Prospectus, neither the
Company nor any of the Subsidiaries intends to amend its Certificate of
Incorporation and By-laws.
(xii) Neither the execution, delivery and performance of this
Agreement by the Company or the Subsidiaries nor the consummation of
any of the transactions contemplated hereby (including, without
limitation, the issuance and sale by the Company of the Shares) will
give rise to a right to terminate or accelerate the due date of any
payment due under, or conflict with or result in the breach of any term
or provision of, or constitute a default (or an event which with notice
or lapse of time or both would constitute a default) under, or require
any consent or waiver under, or result in the execution or imposition
of any lien, charge or encumbrance upon any properties or assets of the
Company or any of the Subsidiaries pursuant to the terms of, any
indenture, mortgage, deed of trust or other agreement or instrument to
which the Company or any of the Subsidiaries is a party or by which it
or any of its properties or businesses are bound, or any franchise,
license, permit, judgment, decree, order, statute, rule or regulation
applicable to the Company or any of the Subsidiaries or violate any
provision of the Certificate of Incorporation and By-laws of the
Company or any of the Subsidiaries, except for such consents or waivers
which have already been obtained and are in full force and effect or as
would not have a Material Adverse Effect. No consent, approval,
authorization, order, registration or qualification of or with any
United States court or governmental agency or body is required for the
issue and sale of the Shares or the consummation of the other
transactions contemplated by this Agreement, which have not been
obtained prior to the date hereof, except the registration under the
Securities Act of the Shares, and such consents, approvals,
authorizations, registrations or qualifications as may be required
under state securities or Blue Sky laws
-9-
<PAGE> 10
in connection with the purchase and distribution of the Shares by the
Underwriters.
(xiii) The authorized, issued and outstanding capital stock of
the Company and the capital stock reserved or committed for issuance is
as set forth under the caption "Capitalization" in the Prospectus. All
of the outstanding shares of Stock have been duly and validly issued
and are fully paid and nonassessable, none of them was issued in
violation of any preemptive or other similar right and, to the
Company's knowledge, since 1991, none of them were issued in violation
of any Federal or state securities laws. The Shares, when issued and
sold pursuant to this Agreement, will be duly and validly issued, fully
paid and nonassessable, none of them will be issued in violation of any
preemptive or other similar right, any contractual right, including,
without limitation, rights of first refusal, and, since 1991, none of
them were issued in violation of any (subject to compliance with
Section 1(c) hereof), Federal or state securities laws. Except as
disclosed in the Registration Statement and the Prospectus, there is no
outstanding option, warrant or other right calling for the issuance of,
and there is no commitment, plan or arrangement to issue, any shares of
Common Stock of the Company or any security convertible into, or
exercisable or exchangeable for, such shares of Stock. The shares of
Stock conform in all material respects to all statements in relation
thereto contained in the Registration Statement and the Prospectus. The
Company has a sufficient number of authorized but unissued shares of
Stock to enable the Company to issue, without further stockholder
action, or approve all the Shares to be sold by the Company.
(xiv) As of the date hereof, and as of each Closing Date, all of
the outstanding shares of capital stock of the Subsidiaries are duly
and validly authorized and issued, are fully paid and nonassessable and
are and will be owned by the Company and there is and will be no
outstanding option, warrant or other right calling for the issuance of,
and no commitment, plan or arrangement to issue any share of capital
stock of the Subsidiaries or any security convertible or exchangeable
or exercisable for capital stock of the Subsidiaries, except as
otherwise described in the Registration Statement and Prospectus.
(xv) Except as set forth in the Registration Statement and
Prospectus, no holder of any security of the Company has the right to
have any security owned by such holder included in the Registration
Statement or to demand registration of any security owned by such
holder during the period ending 90 days after the date of this
Agreement. Each Selling Stockholder and each director and executive
officer of the Company has delivered to the Representatives his written
agreement that he will not, for a period of 90 days after the date of
this Agreement, offer for sale, sell, distribute, grant any option for
the sale of, or otherwise dispose of, directly or indirectly, or
exercise any registration rights with respect to, any shares of Stock
(or any securities convertible into, exercisable for, or exchangeable
for any shares of Stock) owned by him, without the prior written
consent of CIBC Oppenheimer Corp.
-10-
<PAGE> 11
on behalf of the several Underwriters, or is bound by comparable
restrictions pursuant to an existing agreement with the Company.
(xvi) All necessary corporate action has been duly and validly
taken by the Company to authorize the execution, delivery and
performance of this Agreement and the issuance and sale of Shares to be
sold by the Company and the sale of the Shares by the Selling
Stockholders. This Agreement has been duly and validly authorized,
executed and delivered by the Company and constitutes and will
constitute a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except
(A) as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
the enforcement of creditors' rights generally and by general equitable
principles and (B) to the extent that rights to indemnity or
contribution under this Agreement may be limited by Federal and state
securities laws or the public policy underlying such laws.
(xvii) Except as set forth in the Registration Statement and
Prospectus, neither the Company nor any of the Subsidiaries is involved
in any labor dispute nor, to the knowledge of the Company, is any such
dispute threatened, which dispute could have a Material Adverse Effect.
Except as set forth in the Registration Statement and Prospectus, to
the Company's knowledge, neither the Company nor any of the
Subsidiaries has violated any applicable safety or similar law
applicable to its business relating to discrimination in the hiring,
promotion or pay of employees.
(xviii) No transaction has occurred between or among the Company
or any of the Subsidiaries and any of its officers or directors or any
affiliate or affiliates of any such officer or director that is
required to be described in and is not described in the Registration
Statement and the Prospectus. All transactions between the Company and
its Subsidiaries or affiliates are completely and accurately described
in all material respects in the Registration Statement and the
Prospectus.
(xix) Neither the Company nor any of the Subsidiaries has taken,
nor will any of them take, directly or indirectly, any action designed
to or which might reasonably be expected to cause or result in, or
which has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of the
shares of Stock to facilitate the sale or resale of any of the Shares.
(xx) Neither the Company nor any of the Subsidiaries has ever
been denied a license, permit or authorization material to the present
operation of its business, and the operating practices and procedures
of the Company and to the Company's knowledge, the Subsidiaries are in
material compliance with all applicable laws, rules and regulations,
except where such denial or failure to comply would not have a Material
Adverse Effect, and except for applicable Federal and state securities
laws in connection with this offering.
-11-
<PAGE> 12
(xxi) The Company and the Subsidiaries have such licenses,
permits and other approvals or authorizations of and from governmental
or regulatory authorities ("Permits") as are necessary under applicable
law to own their respective properties and to conduct the Company's
business in the manner now being conducted and as described in the
Registration Statement and the Prospectus except for those Permits
which the failure to have individually or in the aggregate would not
have a Material Adverse Effect; and the Company and the Subsidiaries
have fulfilled and performed all of their respective obligations with
respect to such Permits, and to the Company's knowledge, no event has
occurred which allows, or after notice or lapse of time or both would
allow, revocation or termination thereof or result in any other
material impairment of the rights of the holder of any such Permits
except such Permits which individually or in the aggregate would not
have a Material Adverse Effect.
(xxii) The Company and the Subsidiaries have timely filed all tax
returns which are required to be filed through the date hereof, or have
received extensions thereof, and have paid all taxes shown on such
returns and all assessments received by them to the extent that the
same are material and have become due. The Company has no knowledge,
nor any reasonable grounds to know, of any tax deficiencies which would
have a Material Adverse Effect; the Company has paid all taxes which
have become due, whether pursuant to any assessment, or otherwise, and
there is no further liability (whether or not disclosed on such
returns) or assessment for any such tax, and no interest or penalties
accrued or accruing with respect thereto, except as may be set forth or
adequately reserved for in the financial statements included in the
Registration Statement and the Prospectus; the amounts currently set up
as provisions for taxes or otherwise by the Company on its books and
records are sufficient for the payment of all its unpaid taxes accrued
through the dates as of which they speak, and for which the Company may
be liable in its own right, or as a transferee of the assets of, or as
successor to any other corporation, association, partnership, joint
venture or other entity.
(xxiii) The Company and the Subsidiaries are insured by insurers
against such losses and risks and in such amounts as are customary in
the businesses in which they are engaged; and neither the Company nor
any of the Subsidiaries has any reason to believe that it will not be
able to renew such existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as
may be necessary to continue the Company's business at a cost that
would not have a Material Adverse Effect.
(xxiv) The books, records and accounts of the Company and the
Subsidiaries accurately and fairly reflect, in reasonable detail, the
transactions in, and dispositions of, the assets of, and the results of
operations of, the Company and the Subsidiaries. The Company and each
of the Subsidiaries maintains a system of internal accounting controls
sufficient to provide
-12-
<PAGE> 13
reasonable assurance that (A) transactions are executed in accordance
with management's general or specific authorizations; (B) transactions
are recorded as necessary to permit preparation of financial statements
in conformity with generally accepted accounting principles and to
maintain asset accountability; (C) access to assets is permitted only
in accordance with management's general or specific authorization; and
(D) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(xxv) The Shares have been duly authorized for listing on the New
York Stock Exchange.
(xxvi) The Company is not an "Investment Company" within the
meaning of the Investment Company Act of 1940.
(xxvii) Neither the Company nor the Subsidiaries nor, to the
Company's knowledge, any employee or agent of the Company or any of the
Subsidiaries has made any payment of funds of the Company or received
or retained any funds in violation of any law, rule or regulation,
which payment, receipt or retention of funds is of a character required
to be disclosed in the Registration Statement and Prospectus. Neither
the Company nor any of the Subsidiaries, nor to the Company's
knowledge, any director, officer or employee of the Company or the
Subsidiaries, has, in the course of his actions for, or on behalf of,
the Company and the Subsidiaries, used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expense
relating to political activity or made any direct or indirect unlawful
payment to any foreign or domestic government official or employee from
corporate funds, and neither the Company nor any of the Subsidiaries,
nor to the Company's knowledge, any director, officer, employee, agent
or other person acting on behalf of the Company has, in the course of
his actions for, or on behalf of, the Company, violated or is in
violation of any provision of the Foreign Corrupt Practices Act of 1977
or made any bribe, rebate, payoff, influence payment, kickback or other
unlawful payment.
(b) Each Selling Stockholder, severally and not jointly, represents and
warrants to each Underwriter as follows:
(i) Such Selling Stockholder has duly executed and delivered a
Custody Agreement appointing [___________________________,] and each of
them, as attorneys-in-fact with authority to execute and deliver this
Agreement on behalf of such Selling Stockholder and to take certain
other actions with respect hereto, and all authorizations and consents
necessary for the execution and delivery by such Selling Stockholder of
this Agreement and the Custody Agreement on behalf of such Selling
Stockholder have been duly given and received.
(ii) Such Selling Stockholder has and at the applicable Closing
Date will have the sole right to dispose of the Shares to be sold by it
hereunder and
-13-
<PAGE> 14
good and valid title to the Shares to be sold by such Selling
Stockholder on the applicable closing Date hereunder, free of any
liens, encumbrances, equities and claims, and full right, power and
authority to effect the sale and delivery of such Shares pursuant to
this Agreement, and good and valid title thereto, free of any liens,
encumbrances, equities and claims, will be transferred to the several
Underwriters. Such Selling Stockholder will have paid all shares
transfer and stamp taxes which are required to be paid in connection
with the sale of the Shares.
(iii) This Agreement and the Custody Agreement have been duly and
validly authorized, executed and delivered by or on behalf of such
Selling Stockholder and constitute the legal, valid and binding
obligation of such Selling Stockholder, enforceable against such
Selling Stockholder in accordance with their terms, except as the
enforceability thereof may be limited by (A) bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and (B) indemnification
provisions under Federal and state securities laws; and that the remedy
of specific forms of equitable relief may be subject to equitable
defenses and the discretion of the court before which any such action
may be brought.
(iv) Neither the execution, delivery and performance of this
Agreement or the Custody Agreement by such Selling Stockholder nor the
consummation of any of the transactions contemplated hereby or thereby
(including, without limitation, the sale of the Shares) will give rise
to a right to terminate or accelerate the due date of any payment due
under, or conflict with or result in the breach of any term or
provision of, or constitute a default (or an event which with notice or
lapse of time or both would constitute a default) under, or require any
consent or waiver under, or result in the imposition of any lien,
charge or encumbrance upon any properties or assets of such Selling
Stockholder pursuant to the terms of, any indenture, mortgage, deed of
trust or other agreement or instrument by which such Selling
Stockholder is a party or by which such Selling Stockholder is bound,
or of any order, rule or regulation applicable to such Selling
Stockholder of any court or of any regulatory body or administrative
agency or other governmental body having jurisdiction except for
applicable requirements under the Securities Act and state Blue Sky
laws.
(v) Such Selling Stockholder has not taken, nor will it take,
directly or indirectly, any action designed to or which might
reasonably be expected to cause or result in, or which has constituted
or which might reasonably be expected to constitute, the stabilization
or manipulation of the price of the shares of Stock of the Company to
facilitate the sale or resale of any Shares.
(vi) All information in the Registration Statement or the
Prospectus, or any amendment or supplement thereto, relating to such
Selling Stockholder (including, without limitation, the information
relating to the Selling Stockholders which is set forth in the
Prospectus under the caption "Principal
-14-
<PAGE> 15
and Selling Stockholders"), and all representations and warranties of
such Selling Stockholders in the Custody Agreement are true and correct
in all material respects and do not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the information in light of the
circumstances in which presented not misleading. The sale of the Shares
by such Selling Stockholder pursuant hereto is not prompted by such
Selling Stockholder's knowledge of any material information concerning
the Company or the Subsidiaries which is not set forth in the
Prospectus or the documents incorporated by reference therein.
5. Conditions of the Underwriters' Obligations. The obligations
of the Underwriters under this Agreement are several and not joint. The
respective obligations of the Underwriters to purchase the Shares are subject to
each of the following terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 6(a)(i) of this Agreement.
(b) No order preventing or suspending the use of any preliminary
prospectus or the Prospectus shall have been or shall be in effect and
no order suspending the effectiveness of the Registration Statement
shall be in effect and no proceedings for such purpose shall be pending
before or threatened by the Commission, and any requests for additional
information on the part of the Commission (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been
complied with to the reasonable satisfaction of the Representatives.
(c) The representations and warranties of the Company and the
Selling Stockholders contained in this Agreement and in the
certificates delivered pursuant to Sections 5(d) and 5(e) shall be true
and correct when made and on and as of each Closing Date as if made on
such date, and the Company and the Selling Stockholders shall have
performed all covenants and agreements and satisfied all the conditions
contained in this Agreement required to be performed or satisfied by
them or it at or before such Closing Date.
(d) The Representatives shall have received on each Closing Date
a certificate, addressed to the Representatives and dated such Closing
Date, of the chief executive officer and the chief financial officer of
the Company to the effect that the signers of such certificate have
carefully examined the Registration Statement, the Prospectus and this
Agreement and that the representations and warranties of the Company in
this Agreement are true and correct in all material respects on and as
of such Closing Date with the same effect as if made on such Closing
Date and the Company has performed all covenants and agreements and
satisfied all conditions contained in this Agreement required to be
performed or satisfied by it at or prior to such Closing Date.
-15-
<PAGE> 16
(e) The Representatives shall have received on each Closing Date
a certificate, addressed to the Representatives and dated such Closing
Date, of each Selling Stockholder selling Shares on such Closing Date
(or, if such Selling Stockholder is not a natural person, an
authorized officer thereof) to the effect that the representations and
warranties of such Selling Stockholder in this Agreement are true,
correct and complete in all material respects on and as of such
Closing Date with the same effect as if made on such Closing Date and
that such Selling Stockholder has performed all covenants and
agreements and satisfied all conditions contained in this Agreement
required to be performed or satisfied by such Selling Stockholder at
or prior to such Closing Date.
(f) The Representatives shall have received on the Effective
Date, at the time this Agreement is executed and on each Closing Date a
signed letter from KPMG Peat Marwick LLP addressed to the
Representatives and dated, respectively, the Effective Date, the date
of this Agreement and each such Closing Date, in form and substance
reasonably satisfactory to the Representatives, confirming that they
are independent accountants within the meaning of the Securities Act
and the Rules, that the response to Item 10 of the Registration
Statement is correct insofar as it relates to them and stating in
effect that:
(i) in their opinion the consolidated financial statements
and the consolidated financial statement schedules included in
the Registration Statement and the Prospectus audited and
reported on by them comply as to form in all material respects
with the applicable accounting requirements of the Securities Act
and the Rules;
(ii) on the basis of a reading of the amounts included in
the Registration Statement and the Prospectus under the headings
"Summary Financial Data" and "Selected Financial Data," carrying
out certain procedures, including a reading of the latest
available interim financial statements of the Company and the
Subsidiaries (but not an examination in accordance with generally
accepted auditing standards) which would not necessarily reveal
matters of significance with respect to the comments set forth in
such letter, a reading of the minutes of the meetings of the
directors of the Company, and inquiries of certain officials of
the Company who have responsibility for financial and accounting
matters of the Company as to transactions and events subsequent
to the date of the latest audited financial statements, except as
disclosed in the Registration Statement and the Prospectus,
nothing came to their attention which caused them to believe that
(A) the amounts in "Summary Financial Data" and "Selected
Financial Data" included in the Registration Statement and the
Prospectus do not agree with the corresponding amounts in the
audited consolidated financial statements from which such amounts
were derived; and (B) during the period from December 31, 1997 to
a specified date not more than five days prior to the date of
such letter there was any change in the consolidated capital
stock or consolidated debt of the Company and its
-16-
<PAGE> 17
Subsidiaries, or any decrease in the consolidated current assets
or consolidated total assets or consolidated stockholders' equity
of the Company and its Subsidiary, each as compared with the
amounts shown in the balance sheet as of December 31, 1997
included in the Registration Statement or any decrease from
January 1, 1998 to the specified date, on a proportional basis
with the fiscal quarter ended December 31, 1997, in net sales,
operating income, net income (loss) and net income (loss) per
common share, except in all instances for changes, decreases or
increases which the Registration Statement and the Prospectus
disclose have occurred or may occur and except for such other
changes, decreases or increases which you shall in your sole
discretion accept; and
(iii) they have performed certain other procedures as a
result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the
general accounting records of the Company) set forth in the
Registration Statement and the Prospectus and specified by the
Representatives agrees with the accounting records of the Company
and the Subsidiaries.
References to the Registration Statement and the Prospectus in this
paragraph (g) are to such documents as amended and supplemented at the
date of the letter.
(g) The Representatives shall have received on each Closing Date
from Blau, Kramer, Wactlar & Lieberman, P.C., counsel for the Company
and the Selling Stockholders, an opinion, addressed to the
Representatives and dated such Closing Date, and stating in effect
that:
(i) The Company has been duly organized and is validly
existing as a corporation and is in good standing under the laws
of the State of Delaware. To such counsel's knowledge, the
Company has no subsidiaries other than the Subsidiaries and does
not control, directly or indirectly, any corporation,
partnership, joint venture, association or other business
organization. The Company is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction
in which the character of the business conducted by it or the
location of the properties owned, leased or licensed by it
requires such qualification, except for such jurisdictions where
the failure to so qualify would not have a Material Adverse
Effect. No proceeding has been instituted by the Secretary of
State of Delaware for the dissolution of the Company.
(ii) The Subsidiaries have been duly and validly
incorporated and are validly existing as corporations under the
laws of their respective jurisdictions of incorporation, and are
duly qualified and in good standing in each jurisdiction in which
the character or location of
-17-
<PAGE> 18
their assets or properties (owned, leased or licensed) or the
nature of their business makes such qualification necessary,
except for such jurisdictions where the failure to so qualify
would not have a Material Adverse Effect.
(iii) The Company and the Subsidiaries have all requisite
corporate power and authority to own, lease and license their
assets and properties and conduct their business as described in
the Registration Statement and the Prospectus; and each of the
Company and the Subsidiaries has all requisite corporate power
and authority and all necessary authorizations, approvals,
consents, orders, licenses, certificates and permits under
applicable law to enter into, deliver and perform this Agreement
and, with respect to the Company, to issue and sell the Shares
(subject to compliance with Section 1(c)) other than those
required under the Securities Act and state and foreign Blue Sky
laws.
(iv) All of the outstanding shares of Stock have been, and
the Shares to be sold by the Company, upon issuance and delivery
and payment therefor in the manner herein described, will be,
duly authorized, validly issued, fully paid and nonassessable,
with no personal liability attaching to the ownership thereof.
There are no preemptive or other rights to subscribe for or to
purchase, or any restriction upon the voting or transfer of, any
shares of Stock pursuant to the Certificate of Incorporation or
By-laws, or other governing documents or any agreements or other
instruments known to such counsel to which the Company is a party
or by which it is bound except as described in the Registration
Statement and the Prospectus. To such counsel's knowledge, except
as disclosed in the Registration Statement and the Prospectus,
neither the filing of the Registration Statement nor the offering
or sale of the Shares as contemplated by this Agreement gives
rise to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any shares of
Stock or other securities of the Company. The Company has all
requisite corporate power and authority to issue, sell and
deliver the Shares in accordance with and upon the terms and
conditions set forth in this Agreement and in the Prospectus. All
corporate action required to be taken by the Company for the due
and proper authorization, issuance, sale and delivery of the
Shares has been duly and validly taken.
(v) All of the outstanding shares of the Subsidiaries are
duly and validly authorized and issued, are fully paid and
nonassessable and, are owned by the Company and, to the
knowledge of counsel, there is no outstanding option, warrant or
other right calling for the issuance of, and there is no
commitment, plan or arrangement to issue any share of capital
stock of the Subsidiaries or any security
-18-
<PAGE> 19
convertible or exchangeable or exercisable or capital stock of
the Subsidiaries.
(vi) Upon issuance and delivery of the Shares and payment
therefor in accordance with the terms of this Agreement, each of
the Underwriters will receive good, valid and marketable title to
the Shares being sold by the Company hereunder, free and clear of
any lien, claim, encumbrance, security interest, restrictions on
transfer, stockholders' agreements, voting trusts and other
defects of title whatsoever.
(vii) The certificates for the shares of Stock to be sold
by the Company and the Selling Stockholders and delivered on each
Closing Date are in due and proper form.
(viii) The Company has all requisite corporate power and
authority to execute and deliver this Agreement and to perform
its obligations under this Agreement. All necessary corporate
action has been duly and validly taken by the Company to
authorize the execution, delivery and performance of this
Agreement, the issuance and sale of Shares by the Company and the
sale of Shares by the Selling Stockholders. This Agreement has
been duly and validly authorized, executed and delivered by the
Company, and this Agreement constitutes the legal, valid and
binding obligation of the Company enforceable against the Company
in accordance with its terms except as the enforceability thereof
may be limited by (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of
creditors' rights generally and (ii) indemnification provisions
under Federal and state securities laws; and that the remedy of
specific forms of equitable relief may be subject to equitable
defenses and the discretion of the court before which any such
action may be brought.
(ix) Neither the execution, delivery and performance of
this Agreement by the Company nor the consummation of any of the
transactions contemplated hereby (including, without limitation,
the issuance and sale by the Company of the Shares) will give
rise to a right to terminate or accelerate the due date of any
payment due under, or conflict with or result in the breach of
any material term or provision of, or constitute a material
default (or any event which with notice or lapse of time, or
both, would constitute a material default) under, or require
consent or waiver under, or result in the execution or imposition
of any lien, charge or encumbrance upon any properties or assets
of the Company or the Subsidiaries pursuant to the terms of any
indenture, mortgage, deed of trust, note or other agreement or
instrument of which such counsel is aware and which would have a
Material Adverse Effect and to which the Company or the
Subsidiaries are a party or by which they or any of their
properties or businesses is bound, or any franchise, license,
permit, judgment, decree, order,
-19-
<PAGE> 20
statute, rule or regulation of which such counsel is aware or
violate any provision of the Certificate of Incorporation or
By-laws of the Company or the Subsidiaries.
(x) The Registration Statement and the Prospectus and their
respective filings with the Commission have been duly authorized
by and on behalf of the Company.
(xi) To the knowledge of such counsel, there are no
contracts, indentures, mortgages, loan agreement, notes, leases
or other agreement or instruments or other documents required to
be described or referred to in the Registration Statement other
than those described or referred to therein or filed as exhibits
thereto. The statements in the Prospectus, insofar as such
statements refer to the Certificate of Incorporation or By-laws
or other governing documents of the Company and contracts,
indentures, mortgages, loan agreements, notes, leases, joint
ventures and other agreements, arrangements or instruments to
which the Company or the Subsidiaries is a party, are adequately
and accurately described in all material respects, and insofar as
such statements refer to statements of United States Federal and
state securities law or legal conclusions, have been reviewed by
such counsel and, in such counsel's opinion, are accurate in all
material respects.
(xii) The Shares have been approved for listing on The New
York Stock Exchange subject to official notice of listing of the
Shares.
(xiii) The statements set forth in the Registration
Statement and the Prospectus describing laws and regulations and
the consequences to the Company and others under such laws and
regulations, including the statements describing law under the
captions "Risk Factors - Anti-Takeover Provisions," "Use of
Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business - Patents and
Trademarks," "Business - Regulation" and "Business - Legal
Proceedings," are fair summaries of the information set forth
therein and are accurate in all material respects. All licenses,
approvals or permits described in the Prospectus as having been
issued by any authority have been duly issued and, to the best
knowledge of such counsel, have not been rescinded or modified
and are in full force and effect; and to the knowledge of such
counsel, no proceedings to rescind or modify such licenses,
approvals or permits have been instituted and are pending or
threatened by any governmental authority.
(xiv) (A) To such counsel's knowledge, the Company and the
Subsidiaries own, possess or have obtained all governmental
licenses, permits, certificates, consents, orders, approvals and
other authorizations and have all requisite corporate power and
authority
-20-
<PAGE> 21
necessary, to own or lease, as the case may be, and to operate
their properties and to conduct their business as presently
conducted, where the failure to so own, possess or obtain would
have a Material Adverse Effect and (B) to the knowledge of such
counsel, neither the Company nor any of the Subsidiaries has
received any notice of proceedings relating to revocation or
modification of any such licenses, permits, certificates,
consents, orders, approvals or authorizations.
(xv) To the knowledge of such counsel, there is no tax
deficiency that has been asserted against the Company that would,
if adversely determined have a Material Adverse Effect.
(xvi) To the knowledge of such counsel, there is no action,
suit, investigation or proceeding, governmental or otherwise,
pending or threatened to which the Company or any of the
Subsidiaries is or may be a party or of which the business or
property of the Company is or may be subject that is material to
the Company and which is not disclosed in the Registration
Statement and the Prospectus or that seeks to restrain, enjoin,
prevent the consummation of or otherwise challenge the issuance
of the Shares or the execution and delivery of this Agreement or
any of the other transactions contemplated hereby, or that
questions the legality or validity of any of such transactions or
that seeks to recover damages or obtain other relief in
connection with any of such transactions, that would have a
Material Adverse Effect.
(xvii) To such counsel's knowledge, the Company is not in
violation of any term or provision of its Certificate of
Incorporation or By-laws or any franchise, license, permit,
judgment, decree, order, statute, rule or regulation, where the
consequences of such violation would have a Material Adverse
Effect.
(xviii) The Registration Statement, all preliminary
prospectuses and the Prospectus and each amendment or supplement
thereto (except for the financial statements and schedules and
other financial and statistical data included therein, as to
which such counsel need express no opinion) comply as to form
in all material respects with the requirements of the Securities
Act and the Rules.
(xix) The Registration Statement has become effective under
the Securities Act, and no stop order suspending the
effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been instituted or to such
counsel's knowledge, are threatened, pending or contemplated; and
any required filing of the Prospectus pursuant to Rule 424(b) of
the Rules has been made in accordance with the provisions
thereof. The Company meets all the conditions necessary for the
use of Form S-3.
-21-
<PAGE> 22
(xx) The Company is not and, upon sale of the Shares and
application of the net proceeds as described in the Prospectus
under "Use of Proceeds" will not be, an "Investment Company"
within the meaning of Section 3(a) of the Investment Company Act
of 1940.
(xxi) To such counsel's knowledge, this Agreement and the
Custody Agreement have been executed and delivered by each of the
Selling Stockholders and constitute the legal, valid and binding
obligations of each of the Selling Stockholders enforceable in
accordance with their terms, except as the enforceability thereof
may be limited by (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of
creditors' rights generally and (ii) indemnification provisions
under Federal and state securities laws; and that the remedy of
specific forms of equitable relief may be subject to equitable
defenses and the discretion of the court before which any such
action may be brought.
(xxii) Each Selling Stockholder has full legal right, power
and authority, and any approval required by law (other than as
required by State Securities and Blue Sky laws), to sell, assign,
transfer and deliver the Shares to be sold by such Selling
Stockholder. Upon delivery by the Selling Stockholders against
payment therefor as provided herein by the Underwriters, the
Selling Stockholders will convey good and marketable title to
such Shares free of any liens, charges, encumbrances, equities or
claims. All share transfer and stamp taxes which are required to
be paid in connection with the sale of the Shares have been paid.
(xxiii) To such counsel's knowledge, the sale of the Shares
to the Underwriters by each Selling Stockholder pursuant to this
Agreement, the compliance by such Selling Stockholder with the
other provisions of this Agreement and the provisions of the
Custody Agreement and the consummation of the other transactions
herein or therein contemplated do not give rise to a right to
terminate or accelerate the due date of any payment due under, or
conflict with or result in the breach of any term or provision
of, or constitute a default (or an event which with notice or
lapse of time or both would constitute a default) under, or
require any consent or waiver under, or result in the imposition
of any lien, charge or encumbrance upon any properties or assets
of such Selling Stockholder pursuant to the terms of any
indenture, mortgage, deed of trust or other agreement or
instrument to which such Selling Stockholder is a party or by
which such Selling Stockholder is bound, or any franchise,
license, permit, judgment, decree, order, rule or regulation
applicable to such Selling Stockholder.
(xxiv) To such counsel's knowledge, the issuance and sale
by the Company of Shares and the sale by the Selling Stockholders
of Shares
-22-
<PAGE> 23
will not violate any right of first refusal or anti-dilution
provision contained in any agreement to which the Company or the
Selling Stockholders are a party or by which they may be bound.
In rendering such opinion, counsel may rely, to the extent such
counsel deems such reliance proper, upon an opinion or opinions, each dated the
Closing Date, of other counsel as to matters governed by the laws of
jurisdictions other than the United States or the States of Delaware or New
York, provided that (i) each such local counsel is acceptable to you and your
counsel, (ii) counsel shall state in its opinion that it believes that it and
you are justified in relying thereon, and (iii) such reliance is expressly
authorized by each opinion so relied upon and a copy of each such opinion is
delivered to you and is in form and substance satisfactory to you and your
counsel. In rendering such opinion, counsel may rely, to the extent such counsel
deems such reliance proper, as to matters of fact upon certificates of officers
of the Company, the Selling Stockholders, and government officials. Copies of
all such certificates shall be acceptable to you and your counsel and furnished
to you and your counsel on the Closing Date.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, the Selling Stockholders, representatives of the Representatives and
representatives of the independent certified public accountants of the Company,
at which conferences the contents of the Registration Statement and the
Prospectus and related matters were discussed and, although such counsel is not
passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement and the Prospectus (except as specified in the foregoing opinion), on
the basis of the foregoing, no facts have come to the attention of such counsel
that have caused such counsel to believe that the Registration Statement at the
time it became effective (except with respect to the financial statements and
notes and schedules thereto and other financial and statistical data, as to
which such counsel need express no belief) contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, or that the
Prospectus as amended or supplemented (except with respect to the financial
statements and notes schedules thereto and other financial data, as to which
such counsel need express no belief) on the date thereof contained or at any
Closing Date contains any untrue statement of a material fact or omitted or
omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(h) All proceedings taken in connection with the sale of the
Shares as herein contemplated shall be reasonably satisfactory in form
and substance to the Representatives and their counsel and the
Underwriters shall have received from Fulbright & Jaworski L.L.P.,
counsel for the Underwriters, a favorable opinion, addressed to the
Representatives and dated such Closing Date, with respect to the
Shares, the Registration Statement and the Prospectus, and such other
related matters, as the Representatives may reasonably request, and the
Company shall have furnished to Fulbright &
-23-
<PAGE> 24
Jaworski L.L.P. such documents as they may reasonably request for the
purpose of enabling them to pass upon such matters.
(i) The Shares to be purchased on Closing Date by the
Underwriters shall have been approved for listing on the New York Stock
Exchange.
(j) Certain stockholders, directors and officers of the Company
shall have agreed in writing, in form and substance satisfactory to the
Representatives, that such person or entity will not, for a period of
90 days after the date of this Agreement directly or indirectly, except
with prior written consent of CIBC Oppenheimer Corp. offer, sell, grant
any option to purchase, or otherwise dispose (or announce any offer,
sale, grant of an option to purchase or other disposition) of any
shares of Stock or any securities convertible into, or exchangeable or
exercisable for, such shares of Stock.
(k) The Representatives shall have been furnished with such
additional documents and certificates as the Representatives or counsel
for the Underwriters may reasonably request related to this Agreement
and the transactions contemplated hereby.
All such opinions, certificates, letters and documents shall be
in compliance with the provisions hereof only if they are satisfactory in form
and substance to the Representatives and to counsel for the Underwriters, in
each case in their reasonable judgment. The Company shall furnish to the
Representatives conformed copies of such opinions, certificates, letters and
other documents in such number as the Representatives shall reasonably request.
6. Covenants of the Company and the Selling Stockholders. (a) The
Company covenants and agrees as follows:
(i) The Company shall prepare the Prospectus in a form approved
by the Representatives and file such Prospectus pursuant to Rule 424(b)
or Rule 434 under the Securities Act within the time period required
thereby following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule 430A(a)(3)
under the Securities Act, and shall promptly advise the Representatives
(A) when any amendment to the Registration Statement shall have become
effective, (B) of any request by the Commission for any amendment of
the Registration Statement or the Prospectus or for any additional
information, (C) of the prevention or suspension of the use of any
preliminary prospectus or the Prospectus or of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or the institution or threatening of any
proceeding for that purpose and (D) of the receipt by the Company of
any notification with respect to the suspension of the qualification of
the Shares for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose. The Company shall not
file any amendment of the Registration Statement or supplement to the
Prospectus unless the Company has furnished the Representatives a copy
for their review prior to filing and
-24-
<PAGE> 25
shall not file any such proposed amendment or supplement to which the
Representatives reasonably object. The Company shall use its best
efforts to prevent the issuance of any such stop order and, if issued,
to obtain as soon as possible the withdrawal thereof.
(ii) If, at any time when a Prospectus relating to the Shares is
required to be delivered under the Securities Act and the Rules, any
event occurs as a result of which the Prospectus as then amended or
supplemented would include any untrue statement of a material fact or
omit to state any material fact necessary to make the statements
therein in the light of the circumstances under which they were made
not misleading, or if it shall be necessary to amend or supplement the
Prospectus to comply with the Securities Act or the Rules, the Company
promptly shall prepare and file with the Commission, subject to the
second sentence of paragraph (i) of this Section 6(a), an amendment or
supplement which shall correct such statement or omission or an
amendment which shall effect such compliance.
(iii) For a period of one year, the Company shall make generally
available to its security holders and to the Representatives as soon as
practicable, but not later than 45 days after the end of the 12-month
period beginning at the end of the fiscal quarter of the Company during
which the Effective Date occurs (or 90 days if such 12-month period
coincides with the Company's fiscal year), an earning statement (which
need not be audited) of the Company, covering such 12-month period,
which shall satisfy the provisions of Section 11(a) of the Securities
Act or Rule 158 of the Rules.
(iv) The Company shall make generally available to its security
holders and to the Representatives as soon as practicable, but not
later than 45 days after the end of each fiscal quarter in each fiscal
year of the Company, a balance sheet of the Company as of the end of
such fiscal quarter and statements of operations and cash flows of the
Company for the portion of such fiscal year ended with the last day of
such fiscal quarter, all in reasonable detail and stating in
comparative form the figures as of the corresponding date and for the
corresponding period in the previous fiscal year, all such material to
be prepared and certified by an authorized financial officer of the
Company.
(v) The Company shall furnish to the Representatives and counsel
for the Underwriters, without charge, signed copies of the Registration
Statement (including all exhibits thereto and amendments thereof) and
to each other Underwriter a copy of the Registration Statement (without
exhibits thereto) and all amendments thereof and, so long as delivery
of a prospectus by an Underwriter or dealer may be required by the
Securities Act or the Rules, as many copies of any preliminary
prospectus and the Prospectus and any amendments thereof and
supplements thereto as the Representatives may reasonably request.
-25-
<PAGE> 26
(vi) The Company shall cooperate with the Representatives and
their counsel in endeavoring to qualify the Shares for offer and sale
under the laws of such jurisdictions as the Representatives reasonably
may designate and shall maintain such qualifications in effect so long
as required for the distribution of the Shares; provided, however, that
the Company shall not be required in connection therewith, as a
condition thereof, to qualify as a foreign corporation or to execute a
general consent to service of process in any jurisdiction or subject
itself to taxation as doing business in any jurisdiction.
(vii) For a period of five years after the date of this
Agreement, the Company shall supply to the Representatives, and to each
other Underwriter who may so request in writing, copies of such
financial statements and other periodic and special reports as the
Company may from time to time distribute generally to the holders of
any class of its capital stock and to furnish to the Representatives a
copy of each annual or other report it shall be required to file with
the Commission.
(viii) Without the prior written consent of the CIBC Oppenheimer
Corp., on behalf of the Underwriters, for a period of 90 days after the
date of this Agreement, the Company shall not issue, sell or register
with the Commission (other than on Form S-8 or on any successor form),
or otherwise dispose of, directly or indirectly, any equity securities
of the Company (or any securities convertible into or exercisable or
exchangeable for equity securities of the Company), except for the
issuance of the Shares pursuant to the Registration Statement and the
issuance of shares pursuant to the Company's existing stock option
plans or stock purchase plan or upon the exercise of currently
outstanding options and warrants. In the event that during this period,
(A) any shares are issued pursuant to the Company's existing stock
option plans or stock purchase plan or (B) any registration is effected
on Form S-8 or on any successor form, the Company shall use reasonable
efforts to obtain the written agreement of such grantee or purchaser or
holder of such registered securities that, for a period of 90 days
after the date of this Agreement, such person will not, without the
prior written consent of the Representatives, offer for sale, sell,
distribute, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, or exercise any registration rights with
respect to, any shares of Common Stock (or any securities convertible
into, exercisable for, or exchangeable for any shares of Common Stock)
owned by such person.
(ix) On or before the Firm Shares Closing Date, the Company shall
make all filings required under applicable securities laws and by the
New York Stock Exchange in order to permit the consummation of the
transactions contemplated hereby.
(x) The Company agrees to pay, or reimburse if paid by the
Representatives, whether or not the transactions contemplated hereby
are consummated or this Agreement is terminated, all costs and expenses
incident to the public offering of the Shares and the performance of
the obligations of
-26-
<PAGE> 27
the Company and the Selling Stockholders under this Agreement including
those relating to: (A) the preparation, printing, filing and
distribution of the Registration Statement including all exhibits
thereto, each preliminary prospectus, the Prospectus, all amendments
and supplements to the Registration Statement and the Prospectus, and
the printing, filing and distribution of this Agreement; (B) the
preparation and delivery of certificates for the Shares to the
Underwriters; (C) the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of the various
jurisdictions referred to in Section 6(a)(iv), including the reasonable
fees and disbursements of counsel for the Underwriters in connection
with such registration and qualification and the preparation, printing,
distribution and shipment of preliminary and supplementary Blue Sky
memoranda; (D) the furnishing (including costs of shipping and mailing)
to the Representatives and to the Underwriters of copies of each
preliminary prospectus, the Prospectus and all amendments or
supplements to the Prospectus, and of the several documents required by
this Section to be so furnished, as may be reasonably requested for use
in connection with the offering and sale of the Shares by the
Underwriters or by dealers to whom Shares may be sold; (E) the filing
fees of the National Association of Securities Dealers, Inc. in
connection with its review of the terms of the public offering; (F) the
furnishing (including costs of shipping and mailing) to the
Representatives and to the Underwriters of copies of all reports and
information required by Section 6(a)(vii); (G) inclusion of the Shares
for listing on the New York Stock Exchange; and (viii) all transfer
taxes, if any, with respect to the sale and delivery of the Shares by
the Company or the Shares by the Selling Stockholders to the
Underwriters. Subject to the provisions of Section 9, the Underwriters
agree to pay, whether or not the transactions contemplated hereby are
consummated or this Agreement is terminated, all costs and expenses
incident to the performance of the obligations of the Underwriters
under this Agreement not payable by the Company pursuant to the
preceding sentence, including, without limitation, the fees and
disbursements of counsel for the Underwriters, except as otherwise set
forth herein.
(xi) The Company will not take, directly or indirectly, any
action designed to cause or result in the stabilization or manipulation
of the price of the Stock of the Company to facilitate the sale or
resale of any of the Shares.
(b) Each Selling Stockholder covenants and agrees with the
Company that:
(i) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Internal Revenue Code of
1986, as amended, such Selling Stockholder shall deliver to you on or
prior to the Firms Shares Closing Date a properly completed and
executed United States Treasury Department Form W-9 (or other
applicable statement specified by Treasury Department regulations in
lieu thereof).
-27-
<PAGE> 28
(ii) Such Selling Stockholder will not take, directly or
indirectly, any action designed to cause or result in the stabilization
or manipulation of the price of the shares of Stock of the Company to
facilitate the sale or resale of any of the Shares.
(iii) Such Selling Stockholder will not, for a period of 90 days
from the date of this Agreement, without the prior written consent of
CIBC Oppenheimer Corp. on behalf of the Underwriters, sell, grant any
option for the sale of, or otherwise dispose of, directly or
indirectly, any shares (or any securities convertible into, exercisable
for, or exchangeable for any shares of Common Stock) owned by such
Selling Stockholder.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act
against any and all losses, claims, damages and liabilities, joint or several
(including any reasonable investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claim asserted), to which they, or any of them, may become
subject under the Securities Act, the Exchange Act or other Federal or state law
or regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus, the Registration Statement or the Prospectus or any amendment
thereof or supplement thereto, or arise out of or are based upon any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading; provided, however,
that such indemnity shall not inure to the benefit of any Underwriter (or any
person controlling such Underwriter) on account of any losses, claims, damages
or liabilities arising from the sale of the Shares to any person by such
Underwriter if such untrue statement or omission or alleged untrue statement or
omission was made in such preliminary prospectus, the Registration Statement or
the Prospectus, or such amendment or supplement, in reliance upon and in
conformity with information furnished in writing to the Company by the
Representatives on behalf of any Underwriter specifically for use therein and
provided further, that the foregoing indemnity with respect to any preliminary
prospectus shall not inure to the benefit of any Underwriter (or any person
controlling such Underwriter) from whom the person asserting any such losses,
claims, damages or liabilities purchased Shares, if a copy of the Prospectus (as
then amended or supplemented if the Company shall have furnished any amendments
or supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been delivered, at or
prior to the written confirmation of the sale of the Shares to such person, and
if the Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such loss, claim, damage or liability. This indemnity agreement
will be in addition to any other liability which the Company may otherwise have.
-28-
<PAGE> 29
(b) Each Selling Stockholder agrees, severally and not jointly,
to indemnify and hold harmless each Underwriter, and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act to the same extent as the foregoing indemnity
from the Company to each Underwriter, but only insofar as such losses, claims,
damages or liabilities arise out of or are based upon any untrue statement or
omission or alleged untrue statement or omission which was made in any
preliminary prospectus, the Registration Statement or the Prospectus, or any
amendment thereof or supplement thereto, in reliance upon and in conformity with
information furnished in writing to the Company by such Selling Stockholder
specifically for use therein; provided, however, that the obligation of each
Selling Stockholder to indemnify each Underwriter (including any controlling
person thereof) shall be limited to an amount equal to the net proceeds received
by such Selling Stockholder from such Underwriter from the sale of the Shares
hereunder. This indemnity agreement will be in addition to any other liability
which the Selling Stockholders may otherwise have.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act, each director of the Company, and each officer of the Company
who signed the Registration Statement and each Selling Stockholder, to the same
extent as the foregoing indemnity from the Company and each Selling Stockholder
to each Underwriter, insofar as such losses, claims, damages or liabilities
arise out of or are based upon any untrue statement or omission or alleged
untrue statement or omission which was made in any preliminary prospectus, the
Registration Statement or the Prospectus, or any amendment thereof or supplement
thereto, with respect to stabilization on the inside front cover page of the
Prospectus and the statements contained under the caption "Underwriting" in the
Prospectus; provided, however, that the obligation of each Underwriter to
indemnify the Company or a Selling Stockholder (including any controlling
person, director or officer thereof) shall be limited to an amount equal to the
net proceeds received by such Underwriter from the sale of the Shares hereunder.
This indemnity agreement will be in addition to any other liability which the
Underwriters may otherwise have.
(d) Any party that proposes to assert the right to be indemnified
under this Section will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim is to
be made against an indemnifying party or parties under this Section, notify each
such indemnifying party of the commencement of such action, suit or proceeding,
enclosing a copy of all papers served. No indemnification provided for in
Section 7(a), 7(b) or 7(c) shall be available to any party who shall fail to
give notice as provided in this Section 7(d) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have related and
was prejudiced by the failure to give such notice but the omission so to notify
such indemnifying party of any such action, suit or proceeding shall not relieve
it from any liability that it may have to any indemnified party for contribution
or otherwise than under this Section. In case any such action, suit or
proceeding shall be brought against any indemnified party and it shall notify
the indemnifying party of the commencement thereof, the indemnifying party shall
be
-29-
<PAGE> 30
entitled to participate in, and, to the extent that it shall wish, jointly with
any other indemnifying party similarly notified, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party, and after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof and the approval by the indemnified party of such
counsel, the indemnifying party shall not be liable to such indemnified party
for any legal or other expenses, except as provided below and except for the
reasonable costs of investigation subsequently incurred by such indemnified
party in connection with the defense thereof. The indemnified party shall have
the right to employ its counsel in any such action, but the fees and expenses of
such counsel shall be at the expense of such indemnified party unless (i) the
employment of counsel by such indemnified party has been authorized in writing
by the indemnifying parties, (ii) the indemnified party shall have reasonably
concluded that there may be a conflict of interest between the indemnifying
parties and the indemnified party in the conduct of the defense of such action
(in which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party) or (iii) the
indemnifying parties shall not have employed counsel to assume the defense of
such action within a reasonable time after notice of the commencement thereof,
in each of which cases the fees and expenses of counsel shall be at the expense
of the indemnifying parties. An indemnifying party shall not be liable for any
settlement of any action, suit, proceeding or claim effected without its written
consent.
8. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
Section 7(a), 7(b) or 7(c) is due in accordance with its terms but for any
reason is held to be unavailable, the Company, the Selling Stockholders and the
Underwriters shall contribute to the aggregate losses, claims, damages and
liabilities (including any investigation, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claims asserted, but after deducting any contribution
received by the Company or the Selling Stockholders from persons other than the
Underwriters, such as persons who control the Company within the meaning of the
Securities Act, officers of the Company who signed the Registration Statement
and directors of the Company, who may also be liable for contribution) to which
the Company, the Selling Stockholders and one or more of the Underwriters may be
subject in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other from the offering of the Shares or, if such allocation
is not permitted by applicable law in such proportion as is appropriate to
reflect not only the relative benefits referred to above but also the relative
fault of the Company or the Selling Stockholders on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The relative benefits received by
the Company and the Selling Stockholders shall be deemed to be in the same
proportion as (x) the total proceeds from the offering (net of underwriting
discounts but before deducting expenses) received by the Company and the Selling
Stockholders, as set forth in the table on the cover page of the Prospectus,
bear to (y) the total price to the public of the offering as set forth in the
table on the cover page of the Prospectus, and the relative benefits received by
each Underwriter
-30-
<PAGE> 31
shall be deemed to be in the same proportion as (x) the underwriting discounts
received by the Underwriters, as set forth in the table on the cover page of the
Prospectus, bear to (y) the total price to the public of the offering as set
forth in the table on the cover page of the Prospectus. The relative fault of
the Company or the Underwriters shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact
related to information supplied by the Company, the Selling Stockholders or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company,
the Selling Stockholders and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 8 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this Section 8, (i) in no case shall any Underwriter (except as may be provided
in the Agreement Among Underwriters) be liable or responsible for any amount in
excess of the underwriting discount applicable to the Shares purchased by such
Underwriter hereunder, and (ii) the Company and the Selling Stockholders shall
be liable and responsible for any amount in excess of such underwriting
discount; provided, however, that no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 8, each person, if
any, who controls an Underwriter within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act shall have the same rights
to contribution as such Underwriter, and each person, if any, who controls the
Company within the meaning of the Section 15 of the Securities Act or Section
20(a) of the Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company and the Selling Stockholders, subject in
each case to clauses (i) and (ii) in the immediately preceding sentence of this
Section 8. Any party entitled to contribution will, promptly after receipt of
notice of commencement of any action, suit or proceeding against such party in
respect of which a claim for contribution may be made against another party or
parties under this Section, notify such party or parties from whom contribution
may be sought, but the omission so to notify such party or parties from whom
contribution may be sought shall not relieve the party or parties from whom
contribution may be sought from any other obligation it or they may have
hereunder or otherwise than under this Section. No party shall be liable for
contribution with respect to any action, suit, proceeding or claim settled
without its written consent. The Underwriters' obligations to contribute
pursuant to this Section 8 are several in proportion to their respective
underwriting commitments, and not joint, and the Selling Stockholders'
respective obligations to contribute pursuant to this Section 8 are several in
proportion to the respective number of Shares sold hereunder, and not joint.
9. Termination. This Agreement may be terminated with respect to
the Shares to be purchased on a Closing Date by the Representatives by notifying
the Company and the Selling Stockholders at any time,
-31-
<PAGE> 32
(a) in the absolute discretion of the Representatives at or
before any Closing Date: (i) if on or prior to such date, any domestic
or international event or act or occurrence has materially disrupted,
or in the opinion of the Representatives will in the future materially
disrupt, the securities markets; (ii) if there has occurred any new
outbreak or material escalation of hostilities or other calamity or
crisis the effect of which on the financial markets of the United
States is such as to make it, in the judgment of the Representatives,
inadvisable to proceed with the offering; (iii) if there shall be such
a material adverse change in general financial, political or economic
conditions or the effect of international conditions on the financial
markets in the United States is such as to make it, in the judgment of
the Representatives, inadvisable or impracticable to market the Shares;
(iv) if trading in the Shares has been suspended by the Commission or
trading generally on the New York Stock Exchange, Inc. or on the
American Stock Exchange, Inc. has been suspended or limited, or minimum
or maximum ranges for prices for securities shall have been fixed, or
maximum ranges for prices for securities have been required, by said
exchanges or by order of the Commission, the National Association of
Securities Dealers, Inc., or any other governmental or regulatory
authority; or (v) if a banking moratorium has been declared by any
state or Federal authority, or
(b) at or before any Closing Date, that any of the conditions
specified in Section 5 shall not have been fulfilled when and as
required by this Agreement.
If this Agreement is terminated pursuant to any of its
provisions, the Sellers shall not be under any liability to any Underwriter, and
no Underwriter shall be under any liability to the Seller, except that (A) if
this Agreement is terminated by the Representatives or the Underwriters because
of any failure, refusal or inability on the part of the Company to comply in any
material respect with the terms or to fulfill any of the material conditions of
this Agreement, the Company will reimburse the Underwriters for all
out-of-pocket expenses (including the reasonable fees and disbursements of their
counsel) incurred by them in connection with the proposed purchase and sale of
the Shares or in contemplation of performing their obligations hereunder and (B)
no Underwriter who shall have failed or refused to purchase the Shares agreed to
be purchased by it under this Agreement, without some reason sufficient
hereunder to justify cancellation or termination of its obligations under this
Agreement, shall be relieved of liability to the Company or to the other
Underwriters for damages occasioned by its failure or refusal.
10. Substitution of Underwriters. If one or more of the
Underwriters shall fail (other than for a reason sufficient to justify the
termination of this Agreement under Section 9) to purchase on any Closing Date
the Shares agreed to be purchased on such Closing Date by such Underwriter or
Underwriters, the Representatives may find one or more substitute underwriters
to purchase such Shares or make such other arrangements as the Representatives
may deem advisable or one or more of the remaining Underwriters may agree to
purchase such Shares in such proportions as may be approved by the
Representatives, in each case upon the terms set forth in this
-32-
<PAGE> 33
Agreement. If no such arrangements have been made by the close of business on
the business day following such Closing Date,
(a) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall not exceed 10% of the Shares
that all the Underwriters are obligated to purchase on such Closing
Date, then each of the nondefaulting Underwriters shall be obligated to
purchase such Shares on the terms herein set forth in proportion to
their respective obligations hereunder; provided, that in no event
shall the maximum number of Shares that any Underwriter has agreed to
purchase pursuant to Section 1 be increased pursuant to this Section 10
by more than one-ninth of such number of Shares without the written
consent of such Underwriter, or
(b) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall exceed 10% of the Shares that
all the Underwriters are obligated to purchase on such Closing Date,
then the Company shall be entitled to an additional business day within
which it may, but is not obligated to, find one or more substitute
underwriters reasonably satisfactory to the Representatives to purchase
such Shares upon the terms set forth in this Agreement.
In any such case, either the Representatives or the Company shall
have the right to postpone the applicable Closing Date for a period of not more
than five business days in order that necessary changes and arrangements
(including any necessary amendments or supplements to the Registration Statement
or Prospectus) may be effected by the Representatives and the Company. If the
number of Shares to be purchased on such Closing Date by such defaulting
Underwriter or Underwriters shall exceed 10% of the Shares that all the
Underwriters are obligated to purchase on such Closing Date, and none of the
nondefaulting Underwriters or the Company shall make arrangements pursuant to
this Section within the period stated for the purchase of the Shares that the
defaulting Underwriters agreed to purchase, this Agreement shall terminate with
respect to the Shares to be purchased on such Closing Date without liability on
the part of any nondefaulting Underwriter to the Company or any Selling
Stockholder and without liability on the part of the Company, except in both
cases as provided in Sections 6(a)(xi), 7, 8 and 9. The provisions of this
Section shall not in any way affect the liability of any defaulting Underwriter
to the Company or any Selling Stockholder or the nondefaulting Underwriters
arising out of such default. A substitute underwriter hereunder shall become an
Underwriter for all purposes of this Agreement.
11. Miscellaneous. The respective agreements, representations,
warranties, indemnities and other statements of the Company or its officers, the
Selling Stockholders and of the Underwriters set forth in or made pursuant to
this Agreement shall remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
the officers, directors or controlling persons referred to in Sections 7 and 8
hereof, and shall survive delivery of and payment for the Shares. The provisions
of Sections 6(a)(xi), 7, 8 and 9 shall survive the termination or cancellation
of this Agreement.
-33-
<PAGE> 34
This Agreement has been and is made for the benefit of the
Underwriters and the Company and the Selling Stockholders and their respective
heirs, executors, administrators, successors and assigns, and, to the extent
expressed herein, for the benefit of persons controlling any of the
Underwriters, or the Company, and directors and officers of the Company, and
their respective heirs, executors, administrators, successors and assigns, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include any purchaser of
Shares from any Underwriter merely because of such purchase.
Subject to the provisions of Section 12 hereof, all notices and
communications hereunder shall be in writing and mailed or delivered or by
telephone or telegraph if subsequently confirmed in writing, (a) if to the
Representatives, c/o CIBC Oppenheimer Corp., Oppenheimer Tower, World Financial
Center, New York, New York 10281 Attention: Syndicate Department, (b) if to the
Company, to its agent for service as such agent's address appears on the cover
page of the Registration Statement, with a copy to Blau, Kramer, Wactlar &
Lieberman, P.C., 100 Jericho Quadrangle, Jericho, New York 11753 and (c) if to
the Selling Stockholders to [____________________].
This Agreement shall be governed by and construed in accordance
with the laws of the State of New York without regard to principles of conflict
of laws.
This Agreement (including the Schedules and Exhibits hereto)
constitutes the full and entire understanding and agreement between the parties
with regard to the subjects hereof and supersedes all other agreements relating
to the subject matter hereof.
This Agreement may be signed in any number of counterparts, each
of which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
-34-
<PAGE> 35
Please confirm that the foregoing correctly sets forth the
agreement among us.
Very truly yours,
AEROFLEX INCORPORATED
By________________________________
Harvey R. Blau
Chief Executive Officer
SELLING STOCKHOLDERS LISTED
IN SCHEDULE II
By________________________________
Attorney-in-fact
Confirmed:
CIBC OPPENHEIMER CORP.
A.G. EDWARDS & SONS, INC.
SOUNDVIEW FINANCIAL GROUP, INC.
LADENBURG THALMANN & CO. INC.
Acting severally on behalf of themselves
and as representatives of the several
Underwriters named in Schedule I annexed hereto.
By: CIBC OPPENHEIMER CORP.
By________________________________
Name:
Title:
-35-
<PAGE> 36
SCHEDULE I
Number of
Firm Shares to
Name Be Purchased
CIBC Oppenheimer Corp.............................
A.G. Edwards & Sons, Inc..........................
SoundView Financial Group, Inc....................
Ladenburg Thalmann & Co. Inc......................
-----------
Total: 2,500,000
-36-
<PAGE> 37
SCHEDULE II
<TABLE>
<CAPTION>
Name Number of Firm Number of Option
Shares to Be Sold Shares to be Sold
<S> <C> <C>
Company 2,250,000 346,500
Selling Stockholders: 250,000 28,500
Total _________ _______
2,500,000 375,000
</TABLE>
-37-
<PAGE> 38
SCHEDULE III
Subsidiaries
- ------------
STATE OF
COMPANY INCORPORATION
Aeroflex Laboratories,
Inc. Delaware
Aeroflex Systems Corp. Delaware
Aeroflex Lintek Corp. Ohio
Vibration Mountings &
Controls, Inc. New York
MIC Technology
Corporation Texas
Aeroflex International
Inc. Delaware
-38-
<PAGE> 39
SCHEDULE IV
Patents
[To Be Completed]
-39-
<PAGE> 1
Exhibit 4.1
[LOGO]
NUMBER AR COMMON STOCK COMMON STOCK SHARES INCORPORATED UNDER THE LAWS OF
THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 007768 10 4 AEROFLEX INCORPORATED THIS CERTIFIES THAT IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF TEN CENTS ($.10) PER
SHARE OF THE COMMON STOCK OF
Aeroflex Incorporated transferable on the books of the Corporation by the
holder hereof in person or by duly authorized attorney, upon surrender of this
certificate properly endorsed. This certificate and the shares represented
hereby are issued and shall be held subject to all of the provisions of the
Articles of Incorporation and the By-Laws of said Corporation and any
amendments thereto, to all of which the holder of this certificate by
acceptance hereof, assents.
This certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
In Witness Whereof, the Corporation has caused this certificate to be signed by
its duly authorized officers and its corporate seal to be hereunto affixed.
Dated: PRESIDENT SECRETARY COUNTERSIGNED AND REGISTERED: AMERICAN STOCK
TRANSFER & TRUST COMPANY (NEW YORK, N.Y.)
TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE
[FACSIMILE SEAL] [FACSIMILE SIGNATURE] [FACSIMILE SIGNATURE]
<PAGE> 2
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations: TEN COMN-as tenants in common TEN
ENTN-as tenants by the entireties JT TENN-as joint tenants with right of
survivorship and not as tenants in common UNIF GIFT MIN ACT-Custodian (Cust)
(Minor) under Uniform Gifts to Minors Act (State)
Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and transfer unto PLEASE INSERT SOCIAL
SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE (PLEASE PRINT OR TYPEWRITE NAME
AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) shares of the capital stock
represented by the within Certificate, and do hereby irrevocably constitute and
appoint Attorney to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
Dated
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
This certificate also evidences and entitles the holder hereof to certain Rights
as set forth in a Rights Agreement between Aeroflex Incorporated and American
Stock Transfer & Trust Company dated as of August 19, 1988 (the "Rights
Agreement"), the terms of which are hereby incorporated herein by reference and
a copy of which is on file at the principal executive offices of Aeroflex
Incorporated. Under certain circumstances, as set forth in the Rights Agreement,
such Rights will be evidenced by separate certificates and will no longer be
evidenced by this certificate. Aeroflex Incorporated will mail to the holder of
this certificate a copy of the Rights Agreement as in effect on the date of
mailing without charge within five days after receipt of a written request
therefor. Under certain circumstances set forth in the Rights Agreement, Rights,
which are or were beneficially owned by Acquiring Persons or their Affiliates or
Associates (as such terms are defined in the Rights Agreement) and any
subsequent holder of such Rights, may become null and void.
<PAGE> 1
EXHIBIT 5
February 23, 1998
Securities and Exchange Commission
450 Fifth Avenue
Washington, D.C. 20549
RE: AEROFLEX INCORPORATED
REGISTRATION STATEMENT ON FORM S-3
Gentlemen:
Reference is made to the filing by Aeroflex Incorporated (the "Company") of
a Registration Statement on Form S-3 (the "Registration Statement") with the
Securities and Exchange Commission pursuant to the provisions of the Securities
Act of 1933, as amended, covering the registration of 2,500,000 shares of Common
Stock of the Company, par value $.10 per share (the "Common Stock").
As counsel for the Company, we have examined its corporate records,
including its Certificate of Incorporation, By-Laws, its corporate minutes, the
form of its Common Stock certificate and such other documents as we have deemed
necessary or relevant under the circumstances.
Based upon our examination, we are of the opinion that:
1. The Company is duly organized and validly existing under the laws
of the State of Delaware.
2. The shares of Common Stock to be sold by the Company pursuant to
the Registration Statement have been duly authorized and, when issued will
be legally issued, fully paid and non-assessable.
3. The 250,000 previously issued shares of Common Stock covered by the
Registration Statement to be sold by the Selling Stockholders have been
legally issued, fully paid and are non-assessable.
We hereby consent to be named in the Registration Statement and in the
prospectus which constitutes a part thereof as counsel to the Company, and we
hereby consent to the filing of this opinion as Exhibit 5 to the Registration
Statement.
Very truly yours,
/s/ BLAU, KRAMER, WACTLAR &
LIEBERMAN, P.C.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
The Board of Directors
Aeroflex Incorporated and Subsidiaries:
The audits referred to in our report dated August 14, 1997 (except as to
note 17(b), which is as of October 6, 1997), included the related financial
statement schedule for each of the years in the three-year period ended June 30,
1997, included in the registration statement. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statement schedule based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Jericho, New York
February 19, 1998
